Magna International Inc (MGA) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Magna International third-quarter 2010 results 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, Thursday, November 4, 2010.

I would now like to turn the conference over to Don Walker, Chief Executive Officer.

Please go ahead, sir.

Thank you.

Good evening and welcome to our conference call.

Joining me here in Vienna is Vincent Galifi, Chief Financial Officer, and from Aurora is Louis Tonelli, Vice President, investor relations.

We issued a press release this afternoon, which covers our third-quarter results.

You will find the press release, today's conference call webcast and the slide presentation to go along with the call all at the investor relations section of our website at www.Magna.com.

Today we'll start with some comments in our third quarter and a few other matters, Vince will then review in detail our Q3 results and our revised outlook for 2010.

We'll then open the call to answer your questions.

Before we get started just 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.

Overall I'm pleased with the third-quarter results.

In North America, our operations continued their strong performance of the past few quarters with only a couple of areas of underperformance to address.

In Europe this past quarter Magna Steyr began to launch the last of its major new programs this year, the MINI Countryman, and produced the last BMW X3 drive.

Over the lifetime of the program, Magna Steyr produced more than 600,000 BMW X3's as the sole complete vehicle assembler for the global market.

It was quite an accomplishment.

The Steyr -- as Magna Steyr climbs the launch curve on the MINI Countryman, along with its other new programs, we should see improved operating earnings at Magna Steyr.

I'll have more to say about Europe in a moment.

Rest of the world sales continued to grow in the third quarter and are up 62% year to date as compared to the first nine months of 2009.

And despite the continued business growth and ongoing investment in what are new regions for Magna, we have been able to generate earnings in this segment.

We will see continued growth in our rest of world segment related to increased business opportunities in a number of high-growth and emerging markets, including China, South America, Thailand, and India.

We announced last month we are expanding our presence in South America with our Cosma and Magna Seating operating units, each establishing new production facilities in the Sao Palo area, as a result of new business awards.

Cosma new facility will produce stamped and welded assemblies beginning in early 2011 and Magna Seating will produce complete seats for new General Motors program opening in 2012.

We're also expanding an existing closure systems facility to accommodate new mirrors business.

In addition, earlier this week, we completed a new acquisition in the seating area.

We acquired a Brazilian seat frame Company, named Brazil, with 2010 forecasted sales of approximately $200 million.

Brazil's customers include Fiat, Ford, General Motors, Volkswagen, IVECO and PSA.

We expect this transition to close by the end of this year.

Our newly-awarded business, combined with this acquisition, together paved the way for a more meaningful presence and the opportunity to further increase our business in the growing South American automotive market.

In September, we announced that Ziggy Wolf, with whom I've shared the co-CEO title for the last five-and-a-half years, has decided to leave Magna to take a senior role with Russian Machines.

We still have a lot of ongoing activity in Russia and we believe Ziggy will provide ongoing advice to us in Russia and we expect an ongoing good working relationship with Russian Machines.

Earlier this year we changed our operating structure to global product groups, which has given group management a global mandate and thus full responsibility for all aspects of their business globally.

Our global product group presence, along with strong European group managers, have significant experience in the industry and at Magna.

As a result I believe we have a strong team to profitably grow Magna's European business.

I'm currently in Europe and in the coming months will spend more time here visiting a number of our European operations, some of which have been underperforming, as well as meeting high-level customers at a number of our European customers.

We have indicated over the past quarters that our European business has been underperforming and that some restructuring was necessary.

I would like to provide some more color on our European operations.

We have many operating units that, even at a relatively low production volume, are generating profits and reasonable returns.

We have Magna Steyr, which, as we have said previously, has undergone a complete relaunch of programs with all but the Mercedes G Class being brand new.

Results at Magna Steyr as expected have improved and should continue to improve as we complete the new program launches.

In Russia, we announced this past quarter the opening of three new facilities.

These facilities will start generating sales in 2011 and will ramp up in 2012, so right now we're in investment mode and as you know, we each pens running costs as incurred.

Our electronics business, which has been merged with our powertrain unit, has experienced some launch inefficiencies in its European operations over the past couple of quarters however we expect to make progress with these issues in the next few quarters.

Our largest areas of underperformance in Europe is in our in interiors/exteriors operating unit.

Even within this unit there are some strong performing divisions that generate acceptable earnings and returns, however there are a few facilities that are generating significant losses.

Our interiors and exteriors team is getting a handle on the issues and developed a plan of action for these divisions.

As I said, I will be visiting a number of these plants to better understand the nature of the underperformance and I expect that by early in the New Year we'll have a much better position to articulate the action plan for Europe.

Last quarter, we completed a plan of arrangement with [Estronic] Trust, which resulted in the elimination of our previous dual-class share structure.

As a result, Magna now has only one class of shares, designated as common shares, each of which is entitled to a single vote per share.

In our press release today we outlined a couple of corporate governance matters.

On August 31, 2010, in connection with the elimination of our dual-class structure, Frank Stronach resigned as a member of our nominating committee.

This vacancy was filled today by Louis Lataif, who is an independent Director who joined Mike Harris on the nominating committee.

The nominating committee now comprised entirely of independent directors will undertake a comprehensive review of the board's composition to insure that it has the capabilities to oversee our operations globally.

The committee plans to retain an internationally-recognized firm to assist in its search for potential future board members as part of this review process.

We will be discussing with our board during the upcoming strategy meeting our intention to expand the extent of detail that we provide in our outlook starting in January when we first disclose our 2011 outlook.

And with that I would like to pass the call over to Vince Galifi.

Thanks, Don, and good evening, everyone.

I would like to review our financial results for the third-quarter ended September 30, 2010.

Please note all figures discussed today are in US dollars.

We have restated our segment results to reflect E-Car as a separate segment.

Included in the conference call presentation deck on our website is restated quarterly segment detail for 2010 and 2009.

There were no items that we classify as unusual in the third quarter of 2010 or 2009, however, there were two one-time items that impacted the quarter that are individually significant in size, therefore, I would like to provide detail on them.

Both items are included in our corporate segment.

We recorded a $33 million benefit from a commercial settlement with a customer related to the recovery of previously-expensed engineering and design costs, most of which were incurred during 2010, and we incurred a $16 million stock based compensation charge as a result of modifying option agreements with two former executive officers.

In the third quarter, consolidated sales increased 27% relative to the third quarter of 2009 to $5.9 billion.

North American production sales increased 39% in the third quarter to $3 billion, reflecting a 28% increase in vehicle production to three million units and a 9% increase in North American content to $1,010.

This marks the first time in our history that we have recorded average content over $1,000.

The large increase in vehicle production reflects the recovery in auto sales that we have seen throughout 2010.

North American content increased primarily as a result of new launches, including the Jeep Grand Cherokee, the Ford Fiesta, the GMC Terrain, and the Cadillac SRX, the strengthening of the Canadian Dollar against the US dollar, and favorable production relative to industry volumes and/or increased content on certain programs, including vehicles on GM's Lambda platform, and the Chevy Equinox.

Partially offsetting these were unfavorable production relative to industry volume and/or lower content on certain programs, including the Ford Escape and its variance, programs that ended production during or subsequent to the third quarter of 2009, including the Pontiac and Saturn brands, and ongoing customer price concessions.

European production sales increased $106 million, or 7% from the comparable quarter.

European vehicle production declined 1% to 2.9 million units while European content increased 8% to $571.

Key contributors to the increase in European content include the launch of new programs, including the MINI Countryman, Peugeot RCZ, Porsche Cayenne, and Volkswagen Touareg, Audi A1, Opel Astra and Mercedes Benz SLS, favorable production relative to industry volume and/or content on certain programs, including the Volkswagen Tiguan, Audi Q5, BMW X1, Porsche Panamera, and Ford Transit, as well as acquisitions completed during or subsequent to the third quarter of 2009.

These factors were partially offset by the weakening of the Euro and British pound, each against the US dollar, unfavorable production relative to industry volume and/or lower content on certain programs in the third quarter of 2010, including the Smart fortwo, the Mercedes Benz B-Class, the Honda Civic and the Volkswagen Golf, programs that ended production during or subsequent to the third quarter of 2009 and ongoing customer price concessions.

Rest of world production sales increased 29% to $249 million, primarily as a result of increased production and/or content on certain programs in China and Korea, an acquisition of a Japanese roof systems facility completed in the first quarter of 2010, the launch of new programs during or subsequent to the third quarter of 2009 in China, and the strengthening of the Korean and Chinese currencies.

These factors were partially offset by the sale of our interest in an electronics joint venture in China in Q1 2010.

Complete vehicle assembly volumes increased 41% from the comparable quarter and assembly sales increased 21%, or $91 million to $519 million.

The increase largely reflects sales on the launches of the MINI Countryman, Peugeot RCZ, and Aston Martin Rapide, as well as higher volumes on the Mercedes Benz G-Class, partially offset by the end of production in Graz of the BMW X3 in Q3 2010 and the Saab 93 Convertible in Q4 2009 and Chrysler programs in the second quarter of 2010, as well as the weakening of the Euro against the US dollar.

In Summary, consolidated sales, excluding tooling sales, increased approximately 25%, or $1.1 billion in the third quarter.

The primary reasons for this increase are the significant increase in North American vehicle production, increased average content per vehicle in both North America and Europe, and higher rest of world in assembly sales.

Tooling, engineering and other sales also increased significantly by $172 million from the prior year.

Gross margin in the quarter was 13.6% compared to 11.8% in the third quarter of 2009.

The increase in gross margin percentage was substantially due to the significantly-higher vehicle production in North America, as well as the $33 million benefit of a commercial settlement with a customer related to recovery of previously-expensed engineering and design costs, lower restructuring and downsizing costs, productivity and efficiency improvements of certain facilities, lower warranty costs, and lower costs incurred related to launches or for programs that have not fully ramped up production.

These factors were partially offset by operational inefficiencies and other costs at certain facilities, in particular at certain electronics and exteriors and interiors systems facilities in Europe, employee profit-sharing, as no profit-sharing was recorded in 2009, increased commodity costs, and ongoing customer price concession.

Magna's consolidated SG&a as a percentage of sales was 5.8% in Q3 2010 compared to 6.1% in Q3 2009.

The year-over-year decline is essentially due to higher sales associated with a significant increase in North American vehicle volumes combined with a $16 million accounts receivable valuation allowance in Q3 2009, lower restructuring and downsizing costs and our ongoing efforts to contain costs.

This was partially offset by higher incentive and stock-based compensation, the $16 million stock-based compensation charge highlighted earlier, and a $9 million favorable adjustment in asset-backed commercial paper in the third quarter of 2009.

Largely as a result of the higher gross margin percentage, higher equity income and lower SG&a percentage, our operating margin percentage improved to 5.3% in the third quarter of 2010 from 1.7% in the third quarter of 2009.

Our effective tax rate of 24.8% in the third quarter of 2010 reflects more traditional rates, a result of our return to profitability in most jurisdictions.

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

Net income was $241 million in the quarter compared to $51 million in the third quarter of 2009.

Diluted earnings per share were $2.06 compared to $0.45 in the third quarter of 2009.

The increase in diluted earnings per share is a result of an increase in net income partially offset by an 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 the net issue of shares during Q3 2010 related to the arrangement, and an increase in the number of diluted shares associated with stock options.

I will now review our cash flows and investment activities.

During the third quarter of 2010, we generated $422 million in cash from operations prior to changes in non-cash operating assets and liabilities and invested $57 million in non-cash operating assets and liabilities.

For the quarter, investment activities amounted to $233 million, comprised of $182 million in fixed assets, a $45 million increase in asse -- in investments and other assets and $6 million to purchase subsidiaries.

As noted in our press release, our board today declared a two-for-one stock split of our common shares to be implemented by way of a stock dividend.

The stock dividend will be payable on November 24th to shareholders of record at the close of business on November 16, 2010.

Our board today also increased our quarterly cash dividend, once again, to $0.18 per share post-stock split, or the equivalent of $0.36 pre-stock split for the quarter ended September 30, 2010.

This represents a 20% increase from our previous dividend.

The dividend is payable on December 15th to shareholders of record on November 30th.

The stock split and increased cash dividend reflect our board's confidence in our future.

Finally, subject to approval by the Toronto and New York Stock Exchanges our board approved a normal course issuer bid to purchase up to four million common shares adjusted to eight million shares in a post-stock-split basis.

This represents approximately 3.3% of our outstanding common shares.

The primary purposes of the bid are share purchases for cancellation to offset potential dilution resulting from the exercise of stock options, for purchases to fund our restricted stock unit program and our obligations to our deferred profit-sharing plans.

The program is expected to commence on or about November 10th and terminate one year later.

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

We also have an additional $1.9 billion in unused credit available to us from a credit Facility that extends until July 2012.

Next, I'd like to review our current 2010 full-year outlook.

Please note that we have narrowed the outlook ranges to reflect the fact that three quarters of the year have already been reported.

We've increased our vehicle production expectations in North America and Europe from our outlook in August.

We now expect 2010 North American production to be approximately 11.8 million units compared to 11.5 million units in our August outlook.

We expect 2010 European light vehicle production to be approximately 12.6 million units compared to our August outlook of 12 million units.

These production increases largely reflect a higher level of vehicle production than we had anticipated in the third quarter.

Our North American content per vehicle expectations have increased to between $980 and $995 for 2010 compared to the range of $955 to $985 in our previous outlook.

Improved program mix and a higher average Canadian dollar compared to our previous outlook largely account for the increase in our North American content range.

Content per vehicle in Europe is now expected to be in the range of $545 to $555 compared to our previous outlook range of $520 to $545.

The higher average Euro and British pound compared to our previous outlook and slightly improved program mix account for the increased content range in Europe.

And we now expect complete vehicle assembly sales to be between $2.05 billion and $2.15 billion, up from $1.8 billion to $2.1 billion in our last outlook, due to a higher average Euro than our previous outlook and higher anticipated volumes on assembly programs at Magna Steyr.

As a result of the increased 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 $23.5 billion to $24.0 billion, up from our previous outlook.

And for the full-year 2010, our expectation for fixed asset spending is now $740 million to $775 million compared to the $750 million $800 million range in Q2.

That concludes our formal remarks.

Thanks for your attention this evening.

We will be pleased to answer your questions.

Thank you, sir.

(Operator instructions) Our first question comes from the line of Peter Sklar of Nesbitt Burns.

Your line is open, please proceed.

Peter?

Hi, can you hear me now?

We can now, Peter.

Okay, sorry about that.

You mentioned there's a couple of unusual items.

There's the $16 million stock-based comp and the $33 million recovery of previous engineering design costs.

Would we tax effect those two items?

Peter, no, we wouldn't.

The $33 million was earned in the United States and we have losses there that haven't been benefited so that flows right to the bottom line, and the $16 million is not tax affected, as well, so if you run through the numbers, the EPS impact of those two items was about $0.14 of additional income.

And there was a third item that sounds like it was small though.

You mentioned in the rest of the world segment a write-off of certain assets.

Was that a significant amount?

No, Peter.

I think you're referring to our MD&A.

No, the amount was not significant.

Okay.

And can you just go through -- I'm trying to recall the history of the normal course issuer bid.

As I recall, you've not had a normal course issuer bid before, or at least for a number of years, is that correct?

We haven't had one for a number of years but we did have one -- it's got to go back two or three years.

It was before the -- I believe before the Russian Machines transaction?

After the close of the Russian Machines transaction, 2007, 2008.

Thanks, Louis.

Okay.

And I just -- with the departure of the co-CEO, Ziggy Wolf, I just want to understand how the management of the European operations has changed.

I believe that operating management before was under Ziggy Wolf and not under Don and now with Don being the sole CEO, that would come under his jurisdiction.

Is that how we should think about it?

Yes, Peter, we had changed our operating group so that each group President had global responsibility last April.

A few of them already had global responsibility, we went to global responsibilities for everybody so they have control of the operations, the capital, the quoting, everything.

So at that point in time, the group Presidents really reported to both Ziggy and I.

Ziggy would focus more on what was going on in the European area.

So we haven't changed that, but what we have done is [Gunther Oppalter] and Manfred Eibeck, two long-term Magna managers are both involved in overseeing the region, supporting activities with the -- interfacing with the customers and looking at optimizing the efforts of the group President, So we were already in a transition so this is more just fine tuning.

Right.

And Don, you did make some comments on your thoughts about European operations.

It sounds like the larger element of the loss is in the interiors and plastic exteriors business.

Do you have any thoughts about -- when you look at the European business in aggregate it's really underperforming relative to the North American business in terms of margins, are there any structural issues that would prevent it earning at the same level in North America and do you have any thoughts about how you're going to get there?

Not going to articulate our thoughts particularly today.

We do have a number of issues, which affect the margins.

We have the launch of the programs in Russia.

We had some electronics launch issues, as well as we had some underperforming divisions.

We also have very good operations here, so I'm spending the next month here going through the divisions, the group Presidents have involved, as well, so I can give you more detail at the next quarterly call.

Okay, that's all I have, thank you.

And our next question comes from the line of Itay Michaeli of Citigroup.

Your line is open.

Thanks, good evening.

Wanted to go back to the North America CPUV.

It looks like you'll probably be running about $1,000 or so again in the fourth quarter.

How much of that is just new programs versus mix and then how should we think about that going into 2011?

You think you could kind of maintain in and around that $1,000 level going into next year, as well?

Well, when you think about the balance of this year and you look at Q3, the impact of Q3, some of those are going to carry forward to Q4.

We have benefited from the launch of a number of programs, Louis can name them all, and that should continue to benefit us certainly in Q4.

We did have -- on the mix side we had some programs that helped us positively and there was other programs that worked negatively so overall, mix in the quarter was relatively neutral.

So most of the growth was as a result of launches so I don't see any reason why that's going to change.

And as you look at launches that you're planning for 2011 in North America, is that delta a positive versus 2010 or was 2010 a year with a significant amount of launches for you?

We're going to give you a complete outlook for 2011 in January, so at this point I'm going to refrain from commenting specifically on 2011.

I'm happy to deal with 2010 but we're just about two or three months away before we're able to complete our business plans and give you a little bit more color on 2011.

Sure, and then two quick ones, just financial questions.

One -- Vince, can you help us with just how to think about the tax rate, how that migrates in the next six-to-2 months perhaps?

And then secondly, just a quick cash flow question on working capital, how you're thinking there order of magnitude.

I think we previously talked about a modest use for the year, just wanting to make sure that's still what you're expecting for the year?

Thank you.

Just in terms of tax rate, we've been talking about a tax rate of sort of 20% to 25% for 2010, it really depends on mix of income.

In the quarter, our rate was almost 25% but impacting the rate negatively was the stock-option modification that I talked about.

That was not tax effected.

The impact on a tax rate was just over 2%, so if you look at our tax rate in Q3, backing out that stock-option modification expense, we're at about 22.5% which is consistent plus or minus of Q1 and Q2.

So as you look forward to Q4, again a rate that's going to be somewhere in sort of 20% to 25%, 21% to 24% is probably where I expect the rate to come into.

2011, until we don't get our business plans complete and understand where exactly the mix of income is going to be by legal jurisdiction, I'm not going to have a real good handle on that.

We still have significant losses that have not been benefited from an accounting perspective, so as we start to generate income in some of those jurisdictions we'll continue to see some benefit on the tax rate but it really depends on overall mix.

Again, we'll give you some guidance come January on that to help you better understand what 2011 is going to look like.

That's helpful.

And just on the working capital question, are you still expecting a modest use for the year?

Well, when you look on a year-to-date basis, we've invested about $320-odd million in working capital and if you go back over a number of years.

In Q4 we're usually generating cash from working capital.

So when I think about how much we can generate can we recover the $322 million?

Probably not.

We'll recover a substantial part of that.

Our sales in 2011 -- I'm sorry, in 2010 are significantly higher than 2009 so there is naturally more working capital in the business but we'll recover a big chunk of our investment in the first three quarters of 2010.

Great.

That's very helpful, thank you.

Our next question comes from the line of John Murphy, Banc of America-Merrill Lynch.

Your line is now open.

Good evening, guys.

Hi, John.

Hi, John.

If I back into the fourth-quarter sales number that you guys are implying by your full-year guidance it's $6 billion to $6.5 billion, so it's probably one of the best quarters you're going to -- it is the best quarter it looks like you're going to have on the top line this year.

Just thinking about margins and mix going into the fourth quarter, are there any big swing factors that would take margins up or down in the fourth quarter we should be thinking about?

I think when you back into this fourth quarter, there's a couple things that you need to take into account, John.

Tooling sales are going to be higher in the fourth quarter than they've been for the balance of the -- for first three quarters of this year, so that'll have -- we'll have sales but we're not going to have any pull through on the bottom line so that negatively impacts any of the ratios that you're going to look at.

When you look at currencies, the Euro is strengthening, as been talked about on this call earlier, and North America presently is more profitable than Europe so that'll -- when you think about sales mix that'll have some impact on the numbers.

And generally in Q4, some of the other things that happen on a seasonal basis is the Christmas shut down, and those could be a couple weeks long, maybe a little bit shorter, but that certainly has an impact on our fourth quarter every year for us.

Hope that helped you a little bit, John.

Yes, okay.

And then in North America -- thank you -- In North America, the content per vehicle is bumping up against $1,000 and if you think about it that's a pretty significant content number in every vehicle that's produced in North America.

Are you, at some point,reaching an upper limit of where you can get on this content per vehicle, or is there still a lot of room for you to provide a lot of content -- increase in that content per vehicle, because it's a very high number at this point.

John, we've been talking about some time that when you look at our markets, North America, Western Europe, Western Europe our content is still significant lower than it is in North America, so I think there is more opportunity to grow content in Europe faster than North America.

And we've been saying for some time that the North American growth we've experienced, if I go back three or four or five years ago when we were talking about 18%, 20% compound growth rate, I don't think that's going to be repeatable all the time.

So what we're focusing on is growing our business outside of our traditional markets and Don and I both talked about the growth in the rest of the world segments and the profitability we've also generated in those segments, so you're going to see more growth in those areas.

The other thing that will impact content and it's actually impacting content a little bit in Q3, is our growth in non-automotive sales.

We've talked about sales in this area of our business of plus or minus $300 million to $350 million, most of that is in North America.

And that business, if you look over the next three or four years, we expect it to be the $1 billion plus mark, so that'll -- in our numbers unfortunately today is included in content per vehicle and one of the things that we're looking at is how we better communicate our results and content per vehicle to make it a purer number for you.

That'll be helpful, and then just lastly on E-Car.

Is there some point in the future where you see that turn the corner and it's no longer a drag, and when do you see that turn the corner, do you think?

It's a small number but just trying to understand when it becomes profitable?

We'll have a better idea, I think, after the business plan reviews.

We'll be going through that in a months time so I think when we get into the New Year we'll be able to get you more clarity.

There's still a lot of development work going on there.

All right, thank you very much guys.

Our next question comes from the line of Mike Willemse, CIBC World Markets.

Your line is open.

Thank you.

Just to follow up on the question on E-Car.

When you launch the Ford Focus electric vehicle, would you expect negative margin on that, or do you think you can be breakeven on it?

Well, our target is basically to be breakeven plus or minus and that was the way we intended it going in, so there's still some cost targets we have to hit, but overall I think the program's going quite well from our perspective and from Ford's perspective.

So as we get closer we'll know but I would look at that as hopefully being a better breakeven.

All right, and -- thank you.

And just wondering if there was significant costs, legal costs, advisory costs related to the Stronach transaction over $10 million?

Mike, there was approximately $13 million of costs.

Those costs did not flow through our income statement.

They were costs in issuing the share so its gone through equity.

If you turn to Note two of our financials it'll highlight those costs.

Right, okay, and then just one last question.

The content per vehicle guidance for Europe implies a big jump in the fourth quarter.

Is that mostly currency, or is there some significant launches there, as well.

It's mostly currency, Mike.

Okay, thank you.

And our next question is from the line of Rich Kwas of Wells Fargo.

Your line is open.

Hi, guys, just a handful of questions.

The dec --Vince, the decline in CapEx, what's that attributable to?

That's our best guess at this point in time.

Typically as we get near the end of the year, we have better clarity on it.

A lot of it comes down to timing, whether we -- it falls into December or January, but the range we gave was our best guess.

So there's nothing unusual, just getting more clarity on it.

Okay, and then on electronic components, are you having any issue or added costs procuring electronic components?

There's a lot of other companies that talked about shortages over the last couple quarters.

Are you seeing costs associated with that and if you are, when do you expect to get some relief on that front?

We are seeing very tight supply, like a lot of other people are.

It's not material.

We have had some financial impact on it.

Actually I don't know the amount off the top of my head.

We've been in a couple cases struggling to keep our customers going, but it's not -- unless, Louis, you've heard it, it's not a material amount.

No, I don't think so.

Okay, and then ,Louis, do you have the CPV numbers ex-currency?

Well, the currency impact in North America was about $20 Q3 to Q3 and in Europe, it was negative $51 Q3 to Q3.

Okay, so plus $20 North America and negative $51 in Europe, okay.

Right.

And then last question, in terms of 2011, Vince, I think you talked about discussing -- providing a little more color on guidance going forward.

Should we expect to get some more details?

Historically you've given revenues and CapEx.

Are you thinking about giving a little more granularity on forward guidance?

Yes, we are.

We're still studying in terms of what makes sense for our business but certainly in terms of the amount of guidance we're giving today, both Don and I and Louis are of the view that we need to provide a little bit more clarity to the investment community.

So you'll see some more color on 2011 as we get through our January and the Detroit Auto Show.

Okay, great, that's good to hear.

Thanks.

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

Your line is open.

Good evening, everyone.

It's Pat Nolan on for Rod Lache.

Hi, Pat.

Just had a couple questions.

Just first on the one-time items, just a housekeeping question, where was the $33 million and the $16 million on your income statement?

$33 million was in revenue and I guess that flowed through to margin.

The $16 million was in SG&A.

And can you help us think about how we should think about the CapEx requirements of this business going forward?

Obviously, we're a lot -- you're a lot bigger of a Company than you were five, six years ago but just as a percentage of sales where do you think CapEx should have to move to on a more normalized basis?

Got to think about the percentage of sales.

I would say -- I'm not going to get into percentage, that is up to -- we have to see the business plan to work it out, but I would say the range we're in now is kind of where I expect it to be in.

We're going to continue to see growth but we are currently expanding in a number of new plants, number of new regions so I don't think we'll have a dramatic pick up or a dramatic slowdown.

Last year we were very tight on spending money on payback items and loosen that up a little bit.

We have -- if we've got good payback for a year-and-a-half for long term programs we'll spend it, but I still think we can -- might go up a little bit but I don't -- at this point in time we don't have any better numbers.

We could probably give -- well, we'll give some guidance after we go through the business plan review in January.

Pat, I think when you look at capital, you just can't look at capital on its own, you also need to look at acquisition spending.

Sometimes we're actually making an acquisition to acquire a facility with some business in it and the choice would have been putting up a greenfield site.

So what you're moving --spending from capital to acquisition spending or from acquisition down to capital spending, so it's hard to just take a number and say it's a percentage of sales and it really depends on which business is growing and in which regions.

In an ideal world I would say the capital go up because if we can get good returning business in some of the emerging markets then we'll be happy to spend more on capital.

Just a follow on to the acquisition question.

How are you seeing your available assets out there, the willingness to sell and the overall price, and do you think you can do some more meaningful like these $200 million, $300 million acquisitions as we go through next year?

Well, we talked about one acquisition on the call --

Right.

-- a couple hundred million in sales.

We can't specifically disclose the purchase price but it was just south -- or it was south of $100 million US.

And so we're seeing a number of smaller-type acquisitions, so if we complete two or three or four of these it could add up to $400 million or $500 million.

And I'd say the price expectation has come up a little bit and I would expect there's more money out there, so probably some more people chasing acquisitions.

There's not a lot of take-over business left, nothing material, and there's not fire sales but I do think we're still going to see a number of companies get into financial difficulty, so we might be able to get some good opportunities there.

Got it, and then last just a quick one, on the tooling sales, so they're going to be up again in the fourth quarter, should we think about that as what will be the run rate going forward or could it continue to trend higher?

It varies by quarter and depends on program launches and type of tooling.

Just trying to think historically.

Our tooling sales move up and down, again it really depends on programs, but Q4 do expect it to be higher.

I'm just looking back on some old information and Q4 looks like tooling sales are typically higher.

Yes, they are a little bit higher.

Got it, so maybe it's up a little bit year over year.

Okay, thanks very much, guys.

Have a good night.

Thank you.

And our next question comes from the line of Chris Ceraso of Credit Suisse.

Your line is open.

Thanks, good evening.

Hi, Chris.

So let me just make sure I understand the bridge here from Q3 to Q4 because you've got revenues going up and it sounds like the explanation is FX, higher assembly, and higher tooling may be offset by North America volume that's flat to down, including the GM trucks, which are expected to be flat to down.

Is that -- have I gotten that right?

Well, I think you've got higher tooling, you've got the impact of FX, in terms of assembly sales, could be a tad higher and you've got higher production in Europe and North America with volumes where they are, where we end up on production sales, hard to tell exactly.

It could be flatish, could be up, could be down a little bit.

Okay, and what about on the trucks?

We've heard from some other suppliers that they were particularly strong in Q3, maybe they can't be quite as strong in Q4.

Is that what you're seeing in your releases?

Chris -- Louis, do you have any information on that?

Yes, I'll see what (inaudible).

I'm just trying to look up -- look it up, just give me a second.

I guess what I'm getting at is it sounds like a lot of the things that are supporting the higher revenue are not necessarily your highest margin revenue driver so is it fair to expect, even if revenue is higher, profitability may not be that much higher than Q3?

Chris, there's a number of factors that are going to impact profitability.

We're not going to comment specifically on profitability by program and I'm not going to comment specifically on the profitability in Q4.

Chris, we do have trucks down in Q4.

Okay.

Something that stood out to me in the presentation was in the assembly business where volumes were up about 2X what revenues were up.

Is the revenue per unit on the Countryman a lot lower than what it was on the X3?

Well, it is, right.

It's MINI versus BMW, so there is lower pricing on that.

Is that all there is to it or is there something else happening there?

I'd to look that up, Chris.

I'm not sure (inaudible).

That would be part of it.

I don't understand -- Chris, I don't understand the question.

Well, you're showing that in the quarter, the revenue in the assembly business was up about half what your volumes were up, right?

Volumes were -- assembly volumes were up 40% and revenues were up 20%.

I'm just trying to figure out how that happened and if it's just the difference on the revenue of the Countryman versus the X3.

I think there's that.

The other thing that, Chris, you've got to take into account is movements in FX rates.

Oh, okay.

Yes, FX was negative.

Okay, thank you.

Have a good night.

The next question comes from the line of David Tyerman of Canaccord Genuity.

Your line is open.

Good evening.

I was wondering if you could quantify roughly what kind of losses or at least lower profit you're experiencing in Europe from these underperforming operations and start-up costs -- start-up operations and so on.

Just give us a rough idea of the magnitude of the drag it's putting on your operations.

David, when we look at some of the operations that Don referred to, they're in the red and they're a drag on profitability, but in terms of quantifying that I'm not going to do that for you.

Our focus, as Don talked about, is developing plans to focus on improving overall efficiencies and operating performance and see those operations start to generate some bottom-line results for us.

And the plans are still being worked on.

We're right in the middle of business plans and a number of decisions need to be made from a production standpoint or otherwise.

I think we're going to be in a better position in the next -- I'd say probably next two to three months and the target of giving you an update as we speak through our outlook for 2011.

Okay, fair enough.

The second question, Vince, you mentioned that Canadian dollar was part of the reason you bumped up your CPV guidance for 2010 for North America.

I'm wondering what were you using and what are you using now?

The dollar hasn't moved that much.

Well, the average -- I'm just looking -- trying to look at the chart here.

The average rate in the third quarter was just shy of $0.97 and you look at where the dollar is today, we're almost par and we did our work a few days ago.

We weren't at par, but we're certainly higher than the $0.97.

Okay, so it's back on going to swing.

So just going back to your discussion earlier on CPV, if I understand correctly, it sounds like mix wasn't a huge driver of the surprise in Q3 and won't be going forward?

If it doesn't --

I'm sorry.

You're talking about year over year now?

Well, there was some discussion about mix and whether it was going to continue in Q4 and I got the impression that -- I think Vince said overall the mix was neutral.

The mix was neutral Q3 to Q3.

The expectation is that mix is better old look old for us, old look at it versus new look at it so it is actually positive.

It's one of the reasons we're moving up content in North America.

Okay, okay.

And so that factor presumably can swing both ways, is that the way to think about this?

Like don't count on this going forward?

Well, we've seen it both ways.

We've seen it significantly negative in prior years.

More recently its been neutral to positive and occasionally a pretty small negative, so it can move around, that's for sure.

Okay, and it also sounded like the launches had a good chunk to do with this, too, which would be more sustainable, I would imagine.

Is that fair to say?

Yes, launches year over year, so Q3 to Q3 were a good chunk of our growth, yes.

Right, and that continues into Q4 --

Yes,

-- obviously.

Okay, just last question.

The non-auto sales, can you give us an idea, Vince, that could be $1 billion plus in three or four years, where are they now roughly?

When we're looking at 2010, our run rate's going to be about $350 million by the end of 2010 and whether we're actually going to record the full $350 million but at the end of the year our run rate will be about $350 million.

Okay, that's helpful.

Great.

Thanks very much.

Our next question comes from the line of Himanshu Patel with JPMorgan.

Your line is open.

I had two questions for Don.

Don, you've mentioned in the past that the timeframe for the European margin recovery to what you deem as being normalized is -- I think you sort of suggested about 18 months or so.

Can you talk a little bit more about just the shape of that recovery?

You've mentioned several issues here between some launch cost issues and Russia and Steyr, but just internally as you look at each one of these issues starting to settle down, is it just a gradual ticking up of margins every single quarter,or are there any step changes coming during that 18-month period?

I would say it's more gradual because we've got -- there's so many moving pieces to it, that's probably the best way to look at it, and I would say the 18-month period is probably still as accurate as I can give you right now because we've got a lot of things to look at.

Some of them are poor pricing and it's got to get itself worked out, so it's a variety of things.

We can probably give you a bit more clarity in the next call.

Yes, some things to think about is Russia -- sales really don't start going in Russia until 2011 and wrapping up in 2012, so you need to think about Russia really contributing in 2012 and you could think through the impact on margins 2010 versus 2011 as we move up to launch.

So I need to get back to the group once we get through our business plans.

Steyr, we've been talking for some time that our launch costs peaked Q4 2009, Q1 2010.

They've been coming down and as we get into 2011, we'll see margin expansion in that operation.

And then it's the -- some of the underperformers that Don referred to, so as we get those in place then that will have a positive impact on margin, as well.

And then just on North America, you've done about 8% to 9% or so operating margins for three quarters in a row now.

Can you comment a little bit about the sustainability of that level of profitability?

And I'm particularly interested in thinking about how those margins evolve as the SAR starts recovering more materially.

Should we think about these margins just staying at where they are right now with the additional costs being added back offsetting operating leverage, or could there actually be some operating leverage to take the margins higher?

There's a lot of moving factors, which I'm not going to get into, but I would say that's a pretty safe generalization.

In some places, we have ability to take on more production.

With our fixed-cost area you'd expect some leverage there and some other places we're running a little tighter so we're going to have to have some fixed costs.

So it depends on how all of that blends in.

Okay, great.

Thank you.

Our next question is from the line of Ravi Shankar of Morgan Stanley.

Your line is open.

Thank you.

I actually had to jump off the call for a couple minutes in between so forgive me if this has been asked before, but you announced several corporate actions in this quarter, probably one of the most shareholder-friendly press releases I've probably ever seen, but are you done for now and if so, what's your focus for uses of cash?

Is it primarily M & A?

Well, in terms of are we done for now, we're never done.

We're going to always look at doing things and improving profitability and growing sales in new regions.

When you think about use of cash, what we've talked about is our strategy and then how we want to grow in some of the emerging markets and continue to support our customers in our traditional markets.

So our focus for cash is investing it in the business and that could be in the form of capital.

It could also be in the form of acquisitions if it furthers our strategy to grow in emerging markets, acquire technologies or diversify our customer base with OEMs.

So I think you should think about cash over some period of time being invested in the business.

Got it, and you mentioned price concessions as one of your negative headwinds in the quarter and you've said that for a while now.

Are you talking about standard contractual stuff, or is it OEMs coming back for incremental prices?

It's a combination of both.

Okay, anything that makes you concerned that the pricing discipline is slipping?

No.

Anybody whose in the automotive industry, it's a tough industry.

The customers always expecting price reductions or working the cost models and our task is to make sure we can make improvements to offset that.

I think one of the unknowns will be what happened to the raw material pricing going forwards, anybody's guess, so nothing unusual other than what we normally experiencing year after year.

Great.

Thank you.

Our next question comes from the line of Patrick Archambault of Goldman Sachs.

Your line is open.

Hi, good evening.

Good evening.

I had just on -- wanted to see if we could get a little bit more detail on Magna Steyr.

When -- as we get into 2011, what does the capacity utilization look like in that facility?

Are you going to be fairly ramped up or is there going to be inability to continue to add new business there for some time?

And then how does that factor in the improvement you're expecting for next year?

Is it more just a non-recon's of launch costs or is it better operating leverage or a combination of both?

Just wanted to get a little bit more detail on that.

Well, I think when you think about Magna Steyr and you look at volumes for this year, they are lower than what we think they're going to be for 2011.

Again, we're in the middle of business plans but I think if you think about 120,000 to 125,000 or 130,000 that's probably where we'll end up.

So what benefit we'll see from that is from two things.

It's obviously better operating leverage and elimination of launch costs that we've had significant amounts of in 2009 and 2010.

And at 125,000 vehicles per year, we have room to put more product through there if we get more contracts or if the volume goes up.

What in terms of orders of magnitude could you -- like how far up do you think you could stretch it in terms of how far beyond 130,000?

Well, one time we were producing 250,000 vehicles at Magna Steyr, and so if we're successful in gaining more contracts we can certainly run more volumes in that facility but that's going to mean new programs and new programs aren't going to launch in 2011.

It'll take some time before we ramp those up.

We can run -- the constraint there is the paint shop -- I forget it off the top of my head -- so I think we can run up to about 150,000, 160,000 through the existing paint shop.

If we were lucky enough to get more contracts we would recommission the old paint line, which would be some capital, but I would say we could probably run 150,000, 160,000 without significant new capital.

And how-- just taking the longer-term view, how does the pipeline look like for that business in terms of the interest you're getting from people?

Is -- I suppose right now maybe it's a little quieter because people still have some capacity, but is there a pretty good book of interest and quotes happening beyond what's already going through there in 2011?

Well, the Steyr model is based on engineering, which is a big part of the business and then hopefully get the production, as well, so the main plant we have there is in Graz and we just talked about capacity.

There's not a lot of competitors left in this area and so I think there is opportunity.

It really depends on if the market goes up and our customers want to do some unusual smaller volumes, then I think we can be very competitive in that facility.

There's also going to be some business opportunities for Steyr in some emerging markets to put a similar type plant up but it's always a chicken and egg.

So in that particular facility, I hope we can continue to grow the business, but it really depends on what happens with the market, because a lot of our customers plants are flexible.

They can take production in, however, if it's a unique vehicle, I think we are extremely competitive there on engineering, as well as how we can assemble them.

Great.

Thank you very much.

Our next question is from the line of Justin Wu, GMP Securities.

Your line is open.

Good evening.

My first question is just on capital structure and cash deployment.

I guess, Don, last quarter you'd talked about a comfort level of getting somewhere towards, over the long term, the net debt neutral level.

Is that something you're still comfortable with in terms of capital structure?

Yes, I'd still be comfortable with that.

As long as we see normal business going forward, we're generating cash, so if we had good use of our cash and we knew we were going to continue to build cash back up again, I'd be happy if we had some good opportunities.

I think the board would be, as well.

We'd discuss it at that point in time.

Okay, and in terms of the cash deployment, I see you guys have done a number of smaller-type acquisitions but given the kind of free cash that you're generating, it's obviously difficult to keep up with the -- in terms of deployment.

Are you going to continue to do more of these tuck-in type acquisitions or do you see opportunities for larger nugget-type acquisitions?

Are there any available up there?

I would say typically -- we'd typically do the smaller acquisitions but if we see a good opportunity then we would consider a larger acquisition from a cash cost.

If a company's profitable the cost is high, obviously, for the sales and if it's not profitable you get high sales with low investment.

But we would consider using some of the cash on the balance sheet if we saw a good opportunity with strategic and good technologies.

I just came back from eight days in China.

We've got a lot of opportunities over there, we've got some growth plans.

So if we can be successful in growing the way we want in some of the emerging markets, either through CapEx or acquisitions, then we won't be afraid to use our cash.

Okay, and just my last question is just on your CapEx.

Based on your guidance and what you've spent year to date, it looks like cash -- your CapEx could be somewhere up to the $300 million level in the fourth quarter, which is quite a bit higher than what you've done in the last three quarters.

Are there any specific projects that are getting you to that level or can you comment on that?

I think if you looked historically at capital spending in the year -- and 2009 may have been an unusual year -- but typically fixed asset spending is more in the fourth quarter and you think about the winter shut down, it's an opportune time for our various facilities to add capital.

And there's a whole host of programs that we're investing capital in, some of it's in emerging markets, some of it's for replacing business, some of it's for incremental business.

It's more timing.

We have a number of plants being built, a number of new programs coming on stream.

It's just more timing.

Okay, great.

Thank you very much.

Operator, we'll just take one machine question, if there's one?

Yes, sir, there is, thank you.

It will be again from the line of Michael Willemse of CIBC World Markets.

Your line is open.

Thank you, actually most questions have been answered.

Just one question on the launch costs at the Steyr operations.

Sounded like they were tens of millions of dollars in the first couple quarters, did that continue in the third quarter and should they go away in the fourth quarter?

Hey, Mike, the launch costs were actually higher in Q1, down in Q2, smaller in Q3.

By the time we get into the next year, the launch costs should be all behind us.

So smaller in Q3 versus Q2.

And Q3, was it under $10 million, the launch costs?

I wouldn't -- I don't want to -- I don't have the number exactly in front of me, Mike.

I'm not -- it's also a challenging number to measure given what's been going on at Magna Steyr, but when we look at the overall operating results and we first take a guess at what we think the launch costs are they've been coming down.

Mike, the Countryman is the biggest of the programs there at Steyr, as well, right, so we've only been launching for a couple months now so it's going to take us through the end of the year to get our efficiencies and get the launch inefficiencies taken care of.

Right, right.

Okay thanks very much.

Okay.

Well, I'd like to thank everybody for joining this evening.

It's an exciting time in the industry.

We seem to be seeing some recovery.

There's lots of growth going on and emerging markets continue strong and we've also got a lot of exciting new things happening at Magna.

We get the new capital structure and I think we've got a great management team that's eager to capitalize on the opportunities ahead of us.

So again, thanks everybody for calling in and have a great evening.

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

We thank you for your participation and ask that you please disconnect your lines.

Thank you once again for attending.

Have a great day,