Magna International Inc (MGA) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Magna International Inc second quarter results 2010 conference call.

During the presentation all participants will be in a listen-only mode.

Afterwards we will conduct a question-and-answer session.

(Operator Instructions).

As a reminder, this conference is being recorded today, Friday, August 6, 2010.

I would now like to turn the conference over to Mr.

Don Walker, Co-Chief Executive Officer at Magna International.

Please go ahead, sir.

Thank you, good morning welcome to our conference call.

Joining me today are Louis Tonelli, Vice President of Investor Relations and Vincent Galifi, Chief Financial Officer.

We issued a press release earlier this morning which covers our second quarter results, you will find the press release, today's conference call webcast and a slide presentation to go along with the call all at the investor relations section of our website at www.

Magna.

com.

Today I will first comment on our second quarter, Vincent will review in detail our Q2 results and our revised outlook for 2010.

We will then open the call to answer your questions.

Before we get started just as a reminder the discussion today may contain forward-looking statements within the meaning of applicable securities legislation.

Such statements involve certain risks, assumptions, and uncertainties which may cause the Company's actual or future results and performance to be materially different from those expressed or implied in these statements.

Please refer to today's press release for a complete description of our Safe Harbor disclaimer.

We posted strong second quarter results in the period when vehicle production in the primary markets remain low by historical standards.

Light vehicle production North America and Western Europe improved relative to the second quarter of 2009 representing the third consecutive quarter of such year-over-year increases in both our principal markets.

In North America, light vehicle production increased 75%, as compared to the second quarter of 2009 when both General Motors and Chrysler were operating under bankruptcy protection.

A sustained level of higher North American auto sales in 2010 as compared to the first half of 2009, as well as dealer inventory levels that remain below long-term historical averages have contributed to improved North America light vehicle production.

In Western Europe, light vehicle production increased 13%, over the second quarter of 2009.

While we have been concerned about the potential negative impacts of vehicle sales pulled forward as a result of vehicle scrappage programs in place in Europe during 2009, and early 2010, as well as recent macro economic factors impacting certain European countries, vehicle sales in a number of European markets remain relatively strong in the second quarter as have imports of European built vehicles in to North America.

Beyond the improved level of light vehicle production North America, Western Europe which drove our higher sales, our strong second quarter results reflect, among other things, the benefit of our efforts over the past few years to restructure, right size and other wise reduce costs across the organization and the benefit of our efforts to improve under performing operations around the world.

With respect to Europe specifically, recall we expected our Magna Steyr business to improve as we move towards the end of the launches of new vehicles in Graz.

Magna Steyr improved sequentially in Q2 from Q1 as the Peugeot RCZ and Aston Martin Rapide continue to ramp.

Graz is beginning the launch of the MINI Countryman this quarter.

We should see further improvements in Magna Steyr's results as we continue to ramp.

Additionally, our European business exes.

Magna Steyr improved in Q2, 2010, relative to Q1.

We continue to focus on improving our overall operating results in this region.

Given Magna's continued profitability and higher expectation for vehicle production in our key markets, our Board of Directors yesterday increased our quarterly dividend to $0.30 for Class A Subordinate Voting or Class B share and respect of the second quarter of 2010.

This dividend is payable on September 15, to shareholders of record on August 31.

Finally we announced on May 6, 2010 that we entered into a transaction agreement with Stronach Trust in which our shareholders were to be given the opportunity to decide whether to eliminate the dual class share capital structure.

More than 75% of the minority holders of the Class A Subordinate Voting shares approved the proposed transaction at a special meeting of Magna shareholders held last month.

A fairness hearing on the proposal is scheduled in Ontario Superior Court for next week, August 12, and 13.

With that I will pass the call over to Vincent Galifi.

Thanks Don.

Good morning everyone.

I would like to review our financial results for the second quarter ended June 30, 2010.

Please note all figures discussed today are in US dollars.

Appendix A in the slide package accompanying our call today includes a reconciliation of certain key financial statement lines between reported results and results excluding unusual items for the second quarter of 2010, and 2009 respectively.

In the second quarter of 2010, we recorded restructuring charges which resulted in a $24 million reduction in operating income, a $21 million reduction in net income, and a $0.19 reduction in diluted earnings per share.

The restructuring charges related to activities initiated prior to 2010 at three facilities in North America.

In the second quarter of 2009, we recorded restructuring and impairment charges as well as curtailment gain which together resulted in a $55 million reduction in operating income, a $61 million reduction in net income and a $0.54 reduction in diluted earnings per share.

The following quarterly earnings discussion excludes the impact of unusual items.

In the second quarter, consolidated sales increased 63%, relative to the second quarter of 2009, to $6.1 billion.

North American production sales increased 123%, in the second quarter to $3 billion, reflecting a 75% increase in vehicle production to 3.1 million units and a 27% increase in North American content to $975.

The large increases in vehicle volumes and content in part, reflect the low levels of production in Q2, 2009, at GM and Chrysler, as both operated under bankruptcy protection in that quarter.

North American content increased primarily as a result of favorable production, relative to industry volume and or increased content on certain programs including GM's full size pick ups and SUVs, Chrysler built mini vans, Jeep Wrangler, Liberty, Patriot and Compass, Chrysler 300, and 300C and Sebring, Dodge Journey, Charger, Nitro, Ram and Avenger and a Chevy Cobalt.

New launches including the Chevy Equinox, GMC Terrain, Cadillac SRX and Ford Fiesta, the strengthening of the Canadian dollar against the US dollar and acquisition of several facilities from Meridian in the second quarter of 2009.

Partially offsetting these were unfavorable productions relative to industry volumes and or lower content on certain programs including the Ford Fusion, Edge and Escape along with Variance and Chevy Impala.

Programs that ended production during or subsequent to the second quarter of 2010, including Saturn Vue, Sky and Aura, and Pontiac Solstice, G5 and G6 as well as ongoing customer price concessions.

European production sales increased $331 million, or 23% from the comparable quarter.

European vehicle production increased 13%, to 3.5 million units, while European content increased 8%, to $506, Key contributors to the increase in European content include the launch of new programs including the Porsche, Panamera and Cayenne, Volkswagen Touareg, Peugeot RCZ, Mercedes-Benz SLS, Opel Astra, Skoda Yeti.

Acquisitions completed during or subsequent to the second quarter of 2009 including Cadence, favorable production relative to industry volume and or content on certain programs including Mercedes-Benz C Class, Volkswagen Transporter, BMW X1 and the Honda Civic.

These factors were partially offset by the weakening of the Euro and British pound each against the US dollar, unfavorable production relative to industry volumes and or lower content on certain programs in the second quarter of 2010, including the smart fortwo, the Volkswagen Caddy, the MINI Cabrio and BMW X3, programs that ended production during or subsequent to Q2 2009 and ongoing customer price concession.

Rest of World production sales increased 69%, to $261 million primarily as a result of increased production and or content on certain programs in China, Korea, Brazil and South Africa, acquisition completed in the first quarter of 2010 in Japan, the launch of new programs during or subsequent to the second quarter of 2009, in China and Japan, and strengthening of the Brazilian real against the US dollar.

Complete vehicle assembly volumes increased 69% from the comparable quarter and assembly sales increased 39% or $167 million, to $590 million.

Increase largely reflect sales on the launches of the Aston Martin Rapide and Peugeot RCZ as well as higher volumes on the BMW X3 and Mercedes-Benz G Class and partially offset by the weakening of the Euro against the US dollar and the end of production in Graz of the Saab 93 and certain Chrysler programs.

In summary, consolidated sales excluding tooling sales increased approximately 67% or $2.3 billion in the second quarter.

The primary reasons for the increase are the significant increases in vehicle production and content per vehicle in both North America and Europe, and higher Rest of World and assembly sales.

Tooling, engineering and other sales also increased by $75 million from the prior year.

Gross margin in the quarter was 14.6% compared to 7.5% in the second quarter of 2009.

The increase in gross margin percentage was substantially due to the significantly higher vehicle production as well as the benefit of restructuring and downsizing activities and cost saving initiatives that were undertaken during or subsequent to the second quarter of 2009, favorable settlement of certain commercial items in Europe, productivity and efficiency improvements in certain facilities, lower costs associated with restructuring and downsizing activities, lower cost incurred related to launches or for programs that have not fully ramped up production and acquisitions completed subsequent to the second quarter of 2009.

These factors were partially offset by employees profit sharing as no profit sharing reported in 2009, increased commodity costs, higher warranty costs, higher development and launch costs in our vehicles electrification business and ongoing customer price concessions.

Magna's consolidated SG&A as a percentage of sales was 5.5% in Q2 2010 compared to 7.4% in Q2, 2009.

The year-over-year decline is substantially due to higher sales associated with the significant increase in vehicle volumes combined with the recovery of receivables previously provided for and our ongoing efforts to contain costs.

This was partially offset by higher incentive compensation.

Largely as a result of the higher gross margin percentage, higher equity income and lower SG&A percentage, our operating margin percentage improved to 6.6% in the second quarter of 2010, from a negative 4.9% in the second quarter of 2009.

Our effective tax rate of 21.4% in the second quarter of 2010, reflects more traditional rates, a result of our return to profitability in most jurisdictions.

In addition, the effective rate for the second quarter of 2010 was favorably impacted by the utilization of losses previously not benefited.

Net income was $314 million in the quarter, compared to a loss of $144 million in the second quarter of 2009.

Diluted earnings per share were $2.78, compared to a diluted loss per share of $1.29 in the second quarter of 2009.

The increase in diluted earnings per share is a result of an increase in net income partially offset by increase in the weighted average number of diluted shares outstanding during the quarter.

The increase in the weighted average number of diluted shares outstanding was primarily due to increase in number of diluted shares associated with restricted stock and stock options since such shares were anti dilutive in the second quarter of 2009.

I will now review our cash flow and investment activities.

During the second quarter of 2010, we generated $463 million of cash from operations, prior to changes in non-cash operating assets and liabilities and $74 million in non-cash operating assets and liabilities.

For the quarter, investment activities amounted to $187 million comprised of $164 million in fixed assets and a $23 million increase in investments and other assets.

As Don noted, the Board moved up our dividend to $0.30, representing a 67% increase from the first quarter, when we reinstated our dividend.

This positive action reflects the confidence our Board has in our ability to generate strong earnings going forward.

Our balance sheet remains strong with $1.5 billion in cash, net of debt as of June 30, 2010.

We also have an additional $1.8 billion in unused credit available to us from a credit facility that extends until July 2012.

Next I would like to review our current 2010 full year outlook.

We have increased our vehicle production expectations in North America, and Europe from our outlook in May.

We now expect 2010 North American vehicle production to be approximately 11.5 million units, compared to 11.2 million units in our May outlook.

We expect 2010 European light vehicle production to be approximately 12 million units compared to our May outlook of 11.6 million units.

Note, that we continue to be cautious about the European economy and on the impact of the end of scrappage programs in Europe.

While we increase full year vehicle production expectations in Europe, that increase is due to stronger second quarter production volumes than we expected.

We have, in fact reduced expectations for the second half of the year compared to our previous outlook.

Our North American content per vehicle expectations have increased to between $955 and $985 for 2010 compared to the range of $940 to $970 in our previous outlook.

Improved program mix, partially offset by lower average Canadian dollar compared to previous outlook account for the overall increase in our North American content range.

Content per vehicle in Europe in now expected to be in the range of $520 to $545, slightly better than our previous outlook range of $515 to $540.

Improved overall mix largely offset by the impact of the lower average Euro and British Pound compared to previous outlook account for the increased content range in Europe.

We expect complete vehicle assembly sales to be between $1.8 billion and $2.1 billion, up from $1.7 billion to $2.0 billion in our last outlook, due to higher volumes of certain programs assembled at Magna Steyr, partially offset by the impact of lower average Euro in our previous outlook.

As a result of the increase expectations for vehicle production and content in both North America and Europe, as well as higher vehicle assembly sales, we now expect total sales to be in the range of $22 to $23 billion, up a $1 billion from our previous outlook.

For the full year 2010, our expectation for fixed asset spending is unchanged from our previous outlook at $750 million to $800 million.

That concludes our formal remarks.

Thanks for your attention this morning we will now be pleased to answer your question.

(Operator Instructions).

Our first question comes from the line of Peter Sklar with Nesbitt Burns.

Good morning.

There were a number of items that surfaced in Europe that you don't classify as unusual but maybe they could be nonrecurring, there is the recovery of a receivable that had been provided for, a favorable settlement of commercial terms and it sounded like your warranty accrual kind of changed from the normal pattern.

Can you just go through those three items, explain what they are and quantify the impact?

Peter, I will try to do that and typically I wouldn't quantify the impact of significant items but I think the numbers in this quarter need to be discussed.

I think we need to look at both North America and Europe and not just Europe.

Overall when I look at the quarter and some, I call significant items, non recurring and I wouldn't put warranty in there.

That could be up or down in any quarter, Peter.

On consolidated basis there is about $20 million of significant items that added to the bottom line.

A positive impact and that's broken down in to North American and Europe on the following basis, about $15 million of negative items in North America so a hit to P&L that were significant items.

Those -- the $15 million essentially relates to some additional downsizing expenses for activities that we undertook prior to 2010 that weren't classified as unusual items.

So that's non reoccurring.

In Europe, overall, net basis we had about a $35 million positive impact to earnings and there is a number of things in there Peter.

One, there's a couple of commercial settlements with customers that were favorable.

There was a recovery of some receivables that we had provided for at the end of 2009.

And that was partially offset by some downsizing activities and minor restructuring activities in a number of facilities in Europe.

Those downsizing and restructuring activities were not considered unusual.

There was $1 million here, $1 million there, $2 million here, so it got lumped in to significant items.

So net-net, negative impact of $15 million North America; positive impact of $35 million in Europe.

Those are pretax impacts you are talking about, is that true?

Pretax.

If you look at the tax rate, depending on the items, taxes a little bit differently.

I think if you looked at our effective rate in the quarter, which was just above 21% and applied to it the net 20%, that's giving an approximation of the impact to earnings per share.

What is the outlook for the tax rate?

Are we going to stay in these low 20s in the coming quarters?

As I have been discussing over the last couple of quarters, we are going to benefit from a lower tax rate.

As we continue to generate profits we are going to have the benefit of losses on previously utilized that had been benefited from an accounting perspective and we will have income.

And in prior quarters there were losses -- in prior years there were losses that we couldn't benefit.

But that's going to go away because we are going to have profits.

I think -- at least for the balance of this year, if you look at our rate, we were 21% in Q2, 23% in Q1, I think sort of 20%, 21% to 25%, is probably a rough estimate.

It really depends on the mix of income.

But that's a fairly good number.

Okay.

Just lastly, could you and Don just kind of paint a picture of how Steyr is going to unfold from here on in?

You -- Don highlighted specifically that Steyr had showed a good quarter over quarter improvement.

I'm not too sure exactly about the ramp down on the X3 and whether that's going to leave a hole in some coming quarters until you could fill that.

Could you tell us a little bit on how Steyr assembly is going to unfold?

Sure, Peter.

I think when you look at Steyr the X3 has actually stopped production in Q3 already.

And we are expecting -- or the -- it's planned that the Countryman is going to launch in the third quarter.

So volumes are going to ramp up slightly in Q3, continue to ramp up in Q4 and into 2011.

Q3 is also going to have summer shut downs, December has a Christmas shut down.

So as I look at Magna Steyr, look at Q2 versus Q3 and Q4, Q2 is going to be stronger than Q3 and Q4.

But from an operational standpoint as we continue to launch the Countryman, sequentially, as we go forward from Q3, we will start to see improvements in bottom line.

But there will be a step down from Q2 to Q3.

Okay.

Thank you.

Thank you.

Our next question comes from the line of Itay Michaeli with Citigroup.

Great, thanks.

Good morning.

Just wanted to get your thoughts -- a question on long-term profitability, EBITDA margin year-to-date is nearly approaching 8.5% if we were to get back to let's say 2007, volume in North America and Europe, maybe in 2012 let's say, what would be the biggest head winds or what would prevent you from getting back to a double-digit type of EBITDA margin?

Maybe just talk about how to think about the long-term profitability of the business in light of what we've seen in the first half of the year?

You are looking out to 2012 that's a long way away.

As we think longer term about our business there is going to be changes in the structure of our business.

We are generating today the biggest bulk of our sales in our traditional markets being North America and Western Europe.

We have been discussing for sometime our focus on expanding geographically into emerging markets and we're doing that today whether you look at Asia, in particular China, we've got growth in Korea, we've got growth in Thailand, we're growing in Russia, we are going to be growing in South America.

But as you invest to grow, that's going to short-term negatively impact your margins, whether it is operating margins, EBITDA margins.

We need to take into account in our traditional markets capacity utilization and volumes move up to 15 million, 16 million or 17 million we have to have capacity -- we have that capacity and then new regions in North America and what's the impact of that.

I think that is just too far away to say can we get to double-digit EBITDA.

We are pleased with our performance in the second quarter.

The actions that we've taken to reduce capacity, rationalize capacity, try to keep our overheads down even as production volumes increase I think the team across the organization and our employees have done a very good job, and we continue to focus on that.

We are focused on growing our business globally.

Our customers continue to award more and more programs on a global basis.

We need to expand our global reach.

That I believe will have an impact as we are investing on our margins going forward.

How that all sort of equates, I don't know.

That definitely gives us some parameters.

Don, maybe can you talk a little bit more about what you've seen in Q2 around the new business environment, quoting activity any conquest business and just maybe some of your latest observations there?

There hasn't been a lot of takeover business opportunities.

We saw a rash of that last year with people (inaudible).

We have had some takeover business but it hasn't been anywhere near the same level.

I think we're sort of back to normalcy.

I think one of the general trends which we continue to see is as the car companies continue to grow their global platforms, as there is not an environment of desperation like there was last year with some of our key customers just getting whether they would survive or not, they are taking a look at longer term who do they want in their supply base.

Are the -- the suppliers they have, do they have healthy balance sheets, are they still good at executing programs, so having cut out their program management, are they still bringing new technologies to market.

So I think we are going to continue to see the trend of consolidation of the supply base and less likely that customers will take really low unrealistic bids from people that really don't know what they are doing, trying to just build an order book.

Based on, we've seen that to last certainly last number of quarters.

So based on that I think the -- as we quote business we would expect to continue to win a reasonable amount of business.

There is the normal amount of quoting business going on.

As Vince says we are seeing more opportunities to expand our business in some of the rest of the world segment as we are involved in more global platforms.

So we never talk about win rate but I think it's a more normal environment we are operating in now as compared to a year ago or even two or three years ago as we're leading up to the downturn.

Everybody was in there trying to buy business to build an order book.

That's very helpful, thank you, guys.

Thank you.

Our next question is from the line of John Murphy with Banc of America Merrill Lynch.

Please proceed with your question.

Good morning, guys.

I'm just wondering as we look forward to next Thursday and Friday as you go through this hearing how this process works or how you understand it is going to work?

Will we get an answer on August 13, or next Friday or will it come out the next week, and is this really the last step or last hurdle in the process to execute this deal or is there some other material event that would occur potentially after that?

John, as you know, the court hearing is set for next Thursday, Friday, it's a due date plus it is a commercial court.

Our expectation and what I have been told is that the court is going to make a decision in due course.

I don't think it's going to be the 13th.

That's highly unlikely.

But it should come in short order after that.

Pretty short order.

And based on that decision, both parties would have the right to ask for an appeal to the decision.

If there is going to be an appeal, and of course we're going to entertain that, that will be based on whether there was an error in interpretation of law.

I am not a lawyer so don't quote me on all of this.

I don't know where that process could end up or how long that would take.

We do expect a decision in short order past August 12th or 13th.

Got you.

Then the second question, it seems like there was some ongoing restructuring particularly in Europe, I was just wondering as we look through the second half of this year and volumes tend -- or look like they are going to weaken in the second half in Europe, if there is any more major restructuring you feel like you need to do in Europe or if you're through the bulk of that, at this point it's riding through the bottom of the volume curve there and waiting for the volume to recover?

As far as restructuring is concerned, in North America, let me answer that first we are essentially through what we think we need to do.

There is a couple of more facilities we are looking at but it's something further out in the future.

There's nothing imminent right now.

In Europe, we have been looking for the last six months at what we want to do to improve some of our losing divisions.

The sales as we've talked about have stayed relatively strong, as they taper off, and even if they don't taper off we are still analyzing what we need to do just to make sure we're running at full capacity and we need to do some more drastic actions in restructuring.

We are still studying it and we haven't come to a conclusion yet.

I don't think there is going to be a significant amount this year but as I said we are still going through the analysis.

Lastly, Don, you had mentioned sort of a slightly different theory than the company has had in the past on capital allocation going forward and mentioned potentially getting through net debt neutral and taking on some debt to grow the business over time.

Are you still comfortable with that, and do you see opportunities developing out there in the near term to take advantage of that slightly more aggressive capital allocation.

Well, our cash position is strong as Vincent outlined.

We did say when we were out and we said in the past that we'd like to utilize the cash that we have to improve our profitability so there is a number of potential acquisitions out there we continue the look at them, we don't want to make an acquisition for just the sake of making an acquisition.

We are seeing fairly strong demand for new capital as well.

That tends to be over a couple of year horizon as we quote and we win business.

It will be up to the Board of Directors what we want to do from a debt to equity perspective but we certainly have some cash available to take advantage of opportunities arising and we are looking at a number of opportunities right now.

We are not going to predict what we are going to do but certainly have the ability to take advantage of things we are looking at.

Any particular parts of the vehicle that make the most sense or is it just really kind of across the board?

It's really across the board.

We look at each business unit as a separate stand alone business and each one is looking at how they want to grow globally, and there is lots of opportunity out there.

It's not any one specific area, that we are targeting.

Internally we have our priorities but we have not made those public.

Thank you very much.

Thank you.

Our next question is from the line of Chris Ceraso with Credit Suisse.

Please proceed with your question.

Thank you.

Good morning.

A couple of items, can you recap maybe at a high level say over the last couple of years, the let's say total number of heads that have been reduced and total number of facilities that have been closed.

I just want to get a feel for the restructuring that's being completed and how the business model has changed.

We are definitely in terms of last four years -- go back to the investor presentation, we are down 6 to 9 facilities globally.

Chris

69?

6 to 9 global.

6 to 9, okay.

That's largely North America.

The bulk of those would be North America.

What about head count?

Head count I think we peaked about 82 -- 86 -- I was thinking about 84,000 a couple of years ago, and we are sitting at about 76,000.

Okay.

I don't know the numbers exactly.

But I think we went from a peak down to the low point last year about 10,000 people and we are bringing a number of those people back again.

Obviously we are going to make prudent decisions on how fast we bring people back into the Company but we are seeing opportunities to re-employ some people we let go because we are winning new business and the volumes are going up.

Okay.

Vince, are you what are you thinking in terms--?

Sorry, it's Vince, I just want to add some color to that.

We may have closed or consolidated 6 to 9 facilities over the last four years, but we've also been investing in low cost region and emerging markets.

Have the same comparison over that same period, between even 2001 and 2009, we've added 50 odd facilities in those regions.

Between '08 and '09, we've added about 14 facilities.

It's been -- some of it's been consolidation and closing and some of its been realigning our manufacturing footprint in emerging markets in low cost regions.

Okay.

Vince, what do you think in terms of second half versus the first half on material costs, and launch costs.

With respect to commodity costs, we had some head winds in the second quarter.

As I look at the last half of the year, in particular, our two major commodities are steel and resins.

Steel I think we are pretty well locked in for the balance of the year.

So I don't expect there to be a significant plus or minus on our cost of steel.

However, when I look at resins, we don't have everything locked in.

We have some of our buy that's locked in.

So it really depends on what happens with oil prices and resin prices in the second half of this year.

I'm hearing internally that the impact is often -- shouldn't be significant.

But there is volatility in pricing so there could be some headwind, not significant but some headwind in the balance of this year.

Okay.

Just lastly, the significant items that you outlined roughly $20 million in total, not a big deal relative to the total Company profit but it does seem to move the needle at least in terms of the margin that you printed in Europe, which would have been a fair amount lower if we took those items out, so you are still running in the 1% to 2% range, Where does that recover to, and how long does it take to get there?

It's -- as we continue to work on a number of things, first of all we've been talking about Magna Steyr and some of the significant launch costs that have been incurred there, we continue to invest in electronics in Europe and we continue to focus on improving operations.

So it's going to be not in a short-term a significant improvement in margin.

I think it's going to be shorter to medium term.

But I did want to point out one thing.

I think if you look at incremental margin in Europe, ex the significant items that were positive to bottom line, the incremental on margins quarter over quarter, was about 28%, so we are seeing some good pull through.

That's a very positive sign for us.

Okay.

Thanks, Vince.

Thank you.

Our next question is from the line of Michael Willemse with CIBC World Markets.

Please proceed with your question.

Thank you.

Some of the complete vehicle assembly operations in Europe, when do you think you will be kind of fully launched?

Is that going to be more like first quarter 2011 or I was just wondering how that would ramp up.

Mike, really end of this year or early next year, will be pretty much the full lines.

What kind of capacity utilization would you be at there?

Mike, we have taken capacity down in Magna Steyr, in the really good years we were running at 250,000 units.

Capacity is way down there, we don't expect to get to 250,000 if we can run Steyr at 125,000, 125,000ish, that would be good capacity utilization, so we will move closer to that target as we move into 2011.

But you are still looking to add capacity there?

I assume.

We are still having lots of discussions so if we get another contract we can put more vehicles through there.

Okay.

And then just another question on -- earlier you alluded to looking at growth areas, there is one question on product segments, what about regionally where would you see potentially putting capital to work over the next couple of years?

In an ideal world we would have our sales match what the global production sales are.

Realistically that's not going to happen, certainly not in the short-term.

So we are prioritizing growth from a capital allocation point of view in emerging markets because that's where we think we've got the best opportunity for long-term growth.

However, if I look at where we have opportunities -- we are winning business and we have opportunities we are still seeing some good growth in North America, in Mexico, we're seeing opportunities in South America as well, we still see opportunities in Europe but we -- so we are not going to not spend there if we've got good customers and we're winning business.

But I would think over the next five years you will see a shift in the percentage of our capital going into low cost regions which would be Russia, China, South America, India is a little bit further out but we've got opportunities there as well.

If you look at China it's been a tough market to break in to, what do you think you can do in the next five years to break into that market in a meaningful way?

I would, we continue to look at acquisitions but acquisitions are not inexpensive over there.

Most of our groups have now got a foothold over there.

There are a couple that are still looking at some opportunities.

Our growth has been reasonable.

It's not as much as we realistically could have gotten but we also don't want to make acquisitions if we are not going to get good returns.

We've got 15 facilities there now.

We continue to grow our business, we continue to grow management capabilities so I think we'll continue to see our sales go up in China.

If you look at our rest of world sales a good chunk of that is China.

We were at about $0.5 billion in 2008, we are running at $0.5 billion after half a year.

We have actually been growing in these -- a lot of success in China.

That's true.

Thank you.

Thank you.

Our next question is from the line of Rod Lache with Deutsche Bank.

Please proceed with your question.

Good morning, everyone, it's Pat Nolan on for Rod.

I just wanted to follow up on the question about long-term margins and wanted to ask it from two points.

First, the incremental margin that you guys have been achieving it's been above the historical level.

It's been running in the mid 20% level.

Now I know your stance last year was to kind of make sure you had enough capacity for the recovery, but at what point either in a sales level or an industry production level do you really need to start adding more capacity that's going to push that incremental margin down?

It's a real tough question to answer because we almost got to do it by group and by region as you can imagine.

We've got some areas we can go back up to historical levels without adding a lot of new capital because we haven't taken a lot out.

There's some product areas where we've seen a lot of growth --- hot stamping is an example where we are running at pretty well full capacity.

We've consolidated some plants in our die casting area.

If the volumes keep on going up we put more capacity in there.

And it really depends by region.

I would say for the most part we can continue to see sales rise without putting a lot of significant new capital in, but in a few areas we are already at the point where we are putting in a bit of extra capital just to protect our customers if they can hit the volumes which we hope they can hit.

So it's not like we were going to open the flood gates if we raise a million units but we will start putting some capital back in.

Got it.

That's helpful.

For the most cases we put those in existing facilities so a lot of the big heavy costs come if you have to put up a new facility.

So a new building, new management team, hire new people, train them, launch the facilities so for the most part it will be incremental capital in existing divisions.

That's helpful.

On the SG&A side it's been pretty volatile the past couple of quarters.

Can you help us think about on a longer term basis, I know it's volatile now because of what is going on, probably bonus accruals and those types of things.

But I mean longer term, what kind of percent of sales is like a normalized range for the Company?

I think if you look at SG&A and you are saying it's pretty volatile, that was pretty stable Q1 to Q2.

We were at $315 million, in dollars, $315 million in Q1 and $333 million in Q2.

I think about at least for 2010, that sort of run rate plus or minus, it's going to be representative of our spend for the balance of the year.

Obviously it will depend a little bit on profitability to the incentive comp.

We, last year and in 2008, we had a big focus on reducing cost and our fixed cost structure and we have done that with SG&A, and our focus this year is to try to keep the lid on it.

The percentage of -- it may be moving around because sales are moving but in absolute dollars it has been pretty consistent and we expect it to be for the balance of the year.

If you went back to '09, you're $300 million, a little bit below $300 million, and then Q4 of course has been a noisy quarter so that's more the outlier is Q4 if you take out some of the significant items it is a lot lower than that.

Okay.

I may have missed this but can you just give the content per vehicle impact of currency both in North America and Europe in the quarter?

It was $45 in North America, positive and $33 negative in Europe.

Thanks very much.

Thank you.

Our next question is from the line of David Tyerman with Canaccord Genuity.

Good morning.

Just wanted to explore the European margins a little bit more.

I'm wondering where you are in terms of the profit improvement process whether you are like halfway through where you think you should be, in terms of trying to get back to more normal numbers and what the major drivers would be.

Is it just simply getting more volumes in Steyr as the programs ramp up or is there significant restructuring in other operations that will make a major difference?

We have a number of things in Europe.

One of them is we are launching a number of new facilities in Russia which is having an impact on the margins.

We will have some restructuring over there, too early to tell what it's going to be but I think we can have some just fine tuning of the operations.

Last year ourselves and other -- for the most part a lot of the industry felt that the sales would not be coming down as far as where North America and they didn't but we didn't take as aggressive actions over there.

I think just looking at a combination of winning new business, streamlining some of the operations and some of our operations are extremely good over there, launching the business in Russia.

We have been launching some other programs as well, we are moving our footprint in some areas to lower cost regions and lower cost countries.

It will be a combination of things.

Something is going to happen, as a step function and we will just be continuing to work away at it.

The Russia facilities, how long does it take to ramp these things up?

Like are they at the start or whenever?

Dave, the production is going to start in Russia on those facilities in 2011.

So they are going to be ramping up in 2011.

We really need to look at 2012, but as you move from 2010 to 2011, 2011 to 2012, even if you're not generating significant or profit at the bottom line, you are reducing your launch cost, so it'll quarter to quarter show positive improvement.

That's sort of through the course of 2011 into 2012 what we should be thinking?

That's right, David.

Then on North America, you have been running much, much higher margins the last couple of quarters than I think virtually ever in the recorded history.

And just wondering is there anything that would suggest that they are not sustainable assuming volumes stay around where they are now?

I think we had for the most part a reasonably normal quarter.

The things that have negative impact is if we launched some new programs -- launched new plans, because there's nothing major on the horizon right now, commodity costs could have something -- commercial discussions with our customers.

There is a lot of different things.

There is really nothing that is that unusual.

We've done a good job with under performers.

We've always had some that have been big numbers and we've done a good job bringing those numbers way down.

That's been a real positive for us.

Right.

Then on the rest of world like the margins there are also very, very high.

I get the impression from Vincent's comments that they are probably going to come down from start up costs and so on.

Is that the way to think about that or are they running at a reasonably normal level there now?

When you look at our existing facilities, David, they are running at a pretty normal run rate.

But as we continue to expand in those newer regions for us, put capacity in place, those start ups are going to negatively impact the regions margins.

We've got to wait for that investment to start to generate a return.

Typically depending on what facility it is, it could be two to three years before you start spending money and you start to generate some reasonable returns, could be a little longer as well depending on which product we are dealing with.

Can you give us an idea of the number of facilities, I think you said there were 15 facilities in China.

Are you going from 15 to 30 over the next couple of years or can you give any kind of parameters on that?

David, we are -- we will give an update, a little bit more detailed update as we give guidance for 2011 we will give some more color to that.

Everyone is still working through when we got initial business plans, that business plan changes as a result of business for us.

Probably be a couple of quarters away before we give you that update.

We're still maybe about 23 facilities in the East, generally.

Sorry, how many?

23.

15?

23, in total in Asia.

Okay.

Last question, your guidance implies for Western Europe production would fall around 18% in the second half, but some of the other numbers I've seen out there from other companies is more like 7% and then maybe how they define Europe.

I was just wondering though, is there anything that you see that specifically would take you to such a large negative?

Well, we have a bottoms up approach to coming up with volumes.

We certainly look at what the industry analysts are saying.

We are -- probably our view today is a little more cautious than the industry analysts, David.

We only have visibility to releases in Q3, those are best view on Q4.

We have been pleasantly surprised on volumes in Q1 and Q2.

I would like to be pleasantly surprised in Q3 and Q4, but I have been concerned about Europe as you know for a number of quarters and I still have that concern.

In terms of macroeconomic conditions.

That's helpful.

Thank you.

Thank you.

Our next question is from the line of Himanshu Patel with JPMorgan, please proceed with your question.

Good morning, guys.

Can we go back to the balance sheet and cash deployment topic again.

Presuming the dual class vote share collapse goes through, in addition to acquisitions would you guys entertain anything else in terms of returning cash to shareholders, whether it's increasing your dividend or a special dividend or a buy back even down the road?

Where we are right now is getting through this proposed transaction that's been supported by over 75% of shareholders.

As we talked about before our focus is to employ the cash in our business whether that's organic, which is a preferred way of growing, whether it's potential acquisitions and as we look through our business prospects for 2011 and 2012, we'll have to determine to the extent that there is excess cash what we do with that, whether we move the dividend, whether it's like a normal coarse issuer bid.

There's a whole bunch of things we could examine so we need to do some work, we need to understand where this transaction -- whether it gets approved or not approved there's $300 million that's going be going out the door and then go to our Board.

But that's going to be I would think in the next couple of quarters not immediate.

Okay.

Number two, Don maybe you could talk a little bit about, a lot of discussion about the pace of European margin recovery.

Can you perhaps talk a little bit more about the eventual goal on European margins?

Do you have a sense on just getting into that business now with some of the launches, especially at Steyr getting underway?

Any chance that this business could eventually reach parity with North America?

We have to exclude Steyr when you look at margins just because of the way we book our sales and that's why we report it separately.

There's no fundamental reason why the margins in North America or Europe or rest of the world should be different.

That's assuming we have similar sales per -- in product area which would-be a good assumption long-term because different business units operate at different margins just because of the amount of capital has to be deployed in there.

There is no fundamental reason we have been in business longer in North America.

We made some acquisitions, bought them inexpensively and there was some operating issues in Europe so it takes a while to turn some of those around.

So I don't think we are going to see the margins in the near-term the same but we do have some very good operations in Europe and that run as good or better margins than the average North America.

So there is no fundamental reason why we can't get there.

Okay.

Looking at your revenue guidance it seems to imply second half revenues are about 5% below first half just if you take the midpoint.

But if you just look at production schedules from CSM and JD Powers for NAFTA and Europe they are down about 11% in the second half sequentially versus first half So is there, I'm not adjusting any of that for currency obviously, but I'm just wondering sequentially H2 versus H1 is there a big uptick in the amount of new business that's onboarding.

Just couple of things that are happening in the second half, there is volumes, there is also content per vehicle.

And our guidance, if you look at where we are year-to-date on content in North America we're at 964, our range on content 955 to 985 in Europe, I'm sorry, North America for the full year.

So depending on where you are in that range, that's implying as we discussed better mix, and some launches that are going to benefit us in the second half of the year.

Again, looking at Europe, year-to-date, we're at $513 of content per vehicle; full year range right now is $520 to $545.

We are going to benefit from higher content, part of that is mix, part of that is launches obviously by translation.

The other thing, you got to take into account, is what happens in tooling in our overall sales.

Tooling could have a positive impact on overall sales H2 versus H1.

Okay.

Lastly just a housekeeping item, do you have European sequential revenue growth rate excluding foreign exchange?

No.

No, I don't.

Don't have it handy.

Thank you.

Thank you.

Our next question is from the line of Patrick Archambault with Goldman Sachs, please proceed with your question.

I just wanted to actually dig in a little bit more on the mix issue that Himanshu kind of teased out.

You look at the platforms that were significant for you in the quarter in your presentation, a lot of clearly full size trucks from the big three, and clearly that's been something that you have seen kind of go up in terms of its share of the market over the last several months.

Is there a risk that that could stabilize and pull back?

And I guess the other thing I was going ask you about is just in terms of the impact of GM, clearly they're avoiding, not avoiding but clearly they're not shutting down as many plants or they haven't as they typically would.

So given that that's a big customer for you guys is that also a factor that's potentially driving some of your content assumptions?

Well, we don't have a crystal ball exactly on what mix is going to be.

And that's why when we look at our content range there is a $30 range potentially that could move up or down our overall sales and that's all in Q3, Q4.

We don't know for certain whether programs are going to be higher.

We have production releases, certainly some visibility to Q3.

Our best look at Q4.

I think when you look at production for the second half of the year I think there is risk and there could be some opportunities.

I think in our own modeling we are building in some risks for some vehicle volumes or some vehicle platforms that are big for us but there's also others that are going to be strong relative to where we were in our last go around.

If I look at some of those on the truck programs we've got some expectations for some weakness in some and in other areas we are expecting some improvement.

It's not weighted towards simply trucks or simply pick ups or anything like that.

How, just in terms of your backlog, how does the sort of launch schedule look like relative to sort of past periods in North America and Europe.

Has it picked up nicely?

I imagine it has picked up nicely versus last year but is it something that you see a lot of support from as you get into the back half from a CPV point of view?

Pat, just from a quoting perspective we are seeing a lot of activity in the quoting side which ultimately leads to backlog and content per vehicle and the way we've tried to explain backlog is CPV.

Fortunately for you, we are not moving beyond 2010 at this point in time.

But we will give further clarity to content per vehicle which should help you with backlog later on in 2010.

As we do in prior years as we complete our business line process, and add up all the wins, and what is balancing out we will provide some further clarity for you.

Okay, great.

Thank you very much.

Thank you.

(Operator Instructions) Our next question is from the line of Rich Kwas with Wells Fargo.

Please proceed with your question.

Good morning, guys.

Vince, just to be clear here on Europe, it sounds like you are expecting mix is going to be more favorable for you in the second half versus the first half I know you are saying production is going to be down sequentially.

Am I reading that right the second half mix in Europe you are expecting better than the first half?

Yes.

I think we get the benefit of mix and we got the benefit of washes as well.

Okay.

And then, Don, a bigger picture question.

Looks like Ford is insourcing some activities from some suppliers was announced the other day, and then you had Daimler and DMW working on seats and collaborating there to, particularly on frames to save costs, bigger picture longer term do you see a lot of risk to OEM's regionally speaking, potentially insourcing stuff, or are you worried about that?

I must have missed what Ford announced, I didn't know they were insourcing.

There is always discussions both ways and I think you are going to see more and more customers cooperate on commonization of product that doesn't differentiate vehicles because you can engineer it once, you can test it once, you can tool it an optimal number of tools.

Any way you are producing it globally.

And then they get the benefit of volume.

I think if that's a logical thing to have happen and I think for the big global suppliers it's probably a positive because we can then quote on larger volume so it's a win-win.

As far as in sourcing, everything goes in sort of cycles but I think long-term you will continue to see car companies focus what their core business is, identifying the end consumer, marketing, designing product, bring it to market, you see there's more and more variance coming to market.

I just have a hard time believing that other than short-term labor utilization if they have people that are paying for they have obligations it doesn't make a lot of sense to take something unless it's absolutely proprietary or transportation is a huge fact in the overall cost and have the customers insource it.

Because you just don't have the same level of competition than if you go to customers that depend on this for their survival.

That's my own personal opinion; every car company can decide what they are going to do.

There have been some discussions on if there is high labor content, if there is open capacity.

But I think for the most part you are going to see assembly plants become leaner, more flexible, more vehicles and taking into account the cost of transportation having more modules brought into plants.

Okay.

Great, that's helpful.

Thanks so much.

Thank you.

(Operator Instructions) There are no further questions at this time.

Mr.

Galifi, I will turn the conference back over to you and Mr.

Walker to continue with your presentation or closing remarks.

Thank you very much, I would like to thank everybody for joining us this morning.

Our operating results have changed a lot since last year, you see that in everybody's results in the whole industry.

We have more work to do to make our Company stronger and our management team committed to doing that.

It will be interesting to see what happens the balance of the year but certainly it's been much better this year than last.

Thanks everybody and have a great weekend.

Ladies and gentlemen, that does conclude the conference call for today.

Thank you for your participation and we ask that you disconnect your lines.

Thank you.