Magna International Inc (MGA) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Magna International fourth-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 Wednesday, February 23, 2011.

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

Don Walker, Chief Executive Officer.

Please go ahead, Sir.

Thank you.

Good evening and welcome to our conference call.

Joining me here is Vince Galifi, Chief Financial Officer, and Louis Tonelli, Vice President, Investor Relations.

We issued a press release late this afternoon, which covers our fourth-quarter and full-year 2010 results.

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

Today, I will start with a recap of 2010 and a snapshot of our focus for the current year.

Vince will then review in detail our Q4 results and our outlook for 2011.

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

Before we get started, just as a reminder, the discussions 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.

2010 was a year of significant change for both the automotive industry and Magna.

On the operations front, after the deep drop in 2009, North American vehicle production rose 39% in 2010, as US auto sales improved throughout the year, and dealer inventories largely remained below long-term historical averages.

In Western Europe, light vehicle production increased 12% in 2010 compared to 2009, reflecting relatively strong vehicle sales in certain European countries, as well as increased exports of European-built vehicles into other markets during 2010, particularly China.

Our 2010 total sales increased 39% over 2009, with production sales in each of our geographical segments, as well as complete vehicle assembly sales, and tooling and other sales all posting increases over 2009.

Our rest-of-world production sales exceeded the $1 billion mark for the first time, increasing 53% in 2010 to $1.03 billion compared to $676 million in 2009.

2010 was our ninth consecutive year of increasing sales in the rest-of-world segment.

Operating income, excluding unusual items for 2010, increased to a record $1.2 billion compared to an operating loss of $320 million for 2009.

Cash flow from operations for 2010 was extremely strong, increasing $1.3 billion to $1.9 billion for the year.

Our strong 2010 financial results reflect the improved level of production in North America and Western Europe, but also the benefit of our efforts over the last few years to restructure, right-size, and reduce costs across Magna, and the benefit of our efforts to improve underperforming operations around the world.

We have talked about our focus on expanding in new regions, and consistent with this strategy, we acquired seating companies Resil in Brazil, and Pabsa in Argentina late in 2010.

These two seating companies combined had approximate sales of $260 million in 2010.

In addition, we acquired a manufacturer of fuel tanks, mainly for commercial vehicles, late in 2010.

2010 was a momentous year for Magna on a number of other fronts.

On August 31 of last year, following approval by shareholders, we completed a court-approved plan of arrangement in which our dual class share structure was collapsed.

We set a termination date and declining fee schedule for the consulting business development and business services contract Magna has in place with Frank Stronach's affiliated entities.

And we established the E-Car partnership with the Stronach Group to pursue opportunities in the vehicle electrification business.

In addition, Magna's articles were amended to, among other things, remove the Class B shares from authorized capital and renaming the Class A subordinate voting shares as common shares.

Since the elimination of our dual class structure, effective August 31, 2010, we have implemented a number of significant corporate governance initiatives, including adoption of majority voting policy, reconstitution of a nominating committee of our Board as a fully independent committee; and initiation of the search for additional independent directors with the assistance of Russell Reynolds, an internationally recognized firm.

As a result of our strong operating performance, we've reintroduced a quarterly dividend in the first quarter of 2010, and our Board increased the dividend in each of the next three successive quarters of 2010, including the fourth quarter just reported.

In November, we completed a 2-for-1 stock split, which was implemented by way of a stock dividend.

Also in November, our Board approved a normal course issuer bid to purchase up to 8 million of our issued and outstanding common shares.

This is adjusted to reflect the stock split.

This represents approximately 3.3% of our outstanding common shares.

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

The normal course issuer bid is in place for one year, expiring this November.

So, 2010 was a very busy and successful year for Magna on many fronts.

Going forward, following a strong rebound in 2010, we expect global light vehicle production to grow further in 2011, provided the overall economic conditions continue to improve.

Our strategy includes continued expansion in high-growth and developing markets; increased investment and innovation to remain at the forefront of the automotive industry; further diversification of sales by customer, by region, and by vehicle segment; and continued support of our existing customers globally.

We expect this strategy to be implemented both through organic growth as well as targeted acquisitions.

We have the balance sheet to execute the strategy and the willingness to put it to use if and when appropriate opportunities arise.

We have a large number of facilities planned or under construction in multiple regions, both in our traditional markets and in new markets.

These facilities will be a drag on earnings in the short-term but will be drivers of future growth in the medium to long-term.

Lastly, as we have stated over the past few quarters, we see a significant earnings opportunity for improving our financial performance in Europe.

We will see some improvements as a result of the actions being taken over the next few quarters, including the closure and consolidation of the facility in the first half of the year.

For some other facilities, for instance, where we have operational inefficiencies and poorer pricing, the fix is going to be longer-term.

However, we are dedicated to taking the necessary steps to achieve continued and steady improvement in operating results in Europe over the next couple of years.

And with that, I'll now pass the call over to Vince.

Thanks, Don, and good evening, everyone.

I would like to review our financial results for the fourth quarter ended December 31, 2010.

Please note all figures discussed today are in US dollars.

The slide package accompanying our call this evening includes a reconciliation of certain key financial statement lines between reported results and results excluding unusual items for the fourth quarters and full years of 2010 and 2009.

In the fourth quarter of 2010, unusual items included long-lived asset impairment charges and restructuring charges related to the closure of a facility in North America.

These items resulted in reductions of $31 million in operating income; $27 million in net income; and $0.11 in diluted earnings per share.

In the fourth quarter of 2009, unusual items included long-lived asset impairment charges, restructuring charges related to the closure of two facilities in Europe, and the loss on the sale of a facility.

These items resulted in reductions of $136 million in operating income; $134 million in net income; and $0.60 in diluted earnings per share.

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

In addition to the unusual items noted above, there were nonrecurring items recorded in the fourth quarter of 2010.

As we typically consider these items to be operating in nature, we do not classify these as unusual items.

In Q4 2010, the net of these items was not significant, and include a recovery of receivables that were fully provided for in 2009 and a gain on sale of an investment, largely offset by restructuring costs pertaining to ongoing operations; a stock-based compensation charge as a result of modifying option agreements and a related contract termination payment; a loss and disposal of assets; and the write-off of certain assets.

In Q4 2009, the magnitude of items was significant, amounting to approximately $130 million, which included downsizing and other restructuring activities, which typically pertain to ongoing operations; an Accounts Receivable valuation allowance; due diligence costs associated with our planned investment in Opal, which terminated in the fourth quarter of 2009; the write-off of uncollectible pre-production costs incurred relating to the cancellation of assembly programs in 2009; costs related to the delay in the start of production of a program; and other losses on disposal of assets.

In the fourth quarter, consolidated sales increased 22% relative to the fourth quarter of 2009 to $6.6 billion.

North American production sales increased 25% in the fourth quarter to $3 billion, reflecting a 7% increase in vehicle production to 3 million units, and a 17% increase in North American content to $1,015.

North American content increased primarily as a result of new launches, including the Jeep Grand Cherokee, the BMW X3, the Ford Fiesta, the Chevy Cruise, and the Ford Explorer; favorable production relative to industry volumes and/or increased content on certain programs, including GM's full-size pickups and SUVs; the Chevy Equinox, the Jeep Wrangler, the Ram pickup, the Ford Edge and Mercedes-Benz MR and GL class vehicles, as well as the strengthening of the Canadian dollar against the US dollar.

Partially offsetting these were programs that entered production during or subsequent to the fourth quarter of 2009, including the Mercury, Pontiac, and Saturn brands; unfavorable production relative to industry volumes and/or lower content on certain programs, including the Ford Flex, the Dodge Avenger, the Chrysler Sebring, and the Lincoln MKT, and ongoing customer price concessions.

European production sales increased $233 million or 14% from the comparable quarter.

European vehicle production increased 7% to 3.5 million units, while European content increased 6% to $553.

Key contributors to the increase in European content include the launch of new programs, including the MINI Countryman, Audi A1, Porsche Cayenne, and Volkswagen Touareg, Mercedes-Benz SLS, and Peugot RCZ; favorable production relative to industry volumes and/or content in certain programs, including the Volkswagen Transporter, the Mercedes-Benz C-Class.

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 fourth quarter of 2010, including the MINI Cooper programs that ended production during or subsequent to Q4 2009, including the BMW X3 and ongoing customer price concessions.

Rest-of-world production sales increased 32% to $292 million, primarily as a result of increased production and/or content on certain programs in China, Korea, Brazil, and South Africa; the acquisition of a Japanese roof systems facility completed in the first quarter of 2010; and the launch of new programs during or subsequent to the fourth quarter 2009 in China and Korea.

These factors were partially offset by the sale of our interest in an electronics joint venture in China in the first quarter of 2010 and ongoing customer price concessions.

Complete vehicle assembly volumes increased 59% from the comparable quarter, and assembly sales increased 19% or $96 million to $608 million.

The increase largely reflects sales on the launches of the MINI Countryman, Peugot RCZ, and Aston Martin Rapide, as well as higher volumes on the Mercedes-Benz G-Class, partially offset by the end of production [in Gras] of the BMW X3 in Q3 2010, and the Saab 93 Convertible in Q4 2009, and Chrysler programs in Q2 2010, as well as the weakening of the euro against the US dollar.

In summary, consolidated sales, excluding tooling sales, increased approximately 21% or $1 billion in the fourth quarter, as vehicle production and average content per vehicle in both North America and Europe, as well as rest-of-world production sales and assembly sales, all posted increases year-over-year.

Tooling, engineering, and other sales also increased significantly by $163 million or 30% from the prior year.

Gross margin in the quarter was 11.7% compared to 10.9% in the fourth quarter of 2009.

The increase in gross margin percentage was substantially due to the higher vehicle production in both North America and Europe, as well as productivity and efficiency improvements at certain facilities, lower warranty costs, and of significant items in Q4 2009.

These factors were partially offset by operational inefficiencies and other costs at certain facilities -- in particular, at our exteriors and interiors systems facilities in Europe; additional losses in E-Car; employee profit sharing, as no profit sharing was reported in 2009; and ongoing customer price concessions.

Magna's consolidated SG&A as a percentage of sales was 5.5% in Q4 2010 compared to 7.1% in Q4 2009.

The year-over-year decline is substantially due to significantly higher sales, the impact of significant items in Q4 2009, and our ongoing efforts to contain costs.

These were partially offset by higher incentive and stock-based 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 3.8% in the fourth quarter of 2010 from 0.2% in the fourth quarter of 2009.

Our effective tax rate of 20.2% in 2010 reflects more traditional rates, a result of our return to profitability in most jurisdictions, and is consistent with the direction we gave throughout 2010.

The effective rate of 8.6% for the fourth quarter of 2010 was favorably impacted by a non-reoccurring favorable adjustment to our Mexican tax provision, amounting to approximately $12 million, and the utilization of losses previously not benefited, largely in the US.

Net income was $243 million in the quarter, compared to a loss of $5 million in the fourth quarter of 2009.

Dilutive earnings per share were $0.99 compared to a loss of $0.02 in the fourth quarter of 2009.

The increase in diluted earnings per share is the 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, an increase in the number of diluted shares associated with stock options and restricted shares, partially offset by the effect of the repurchase and cancellation of common shares in Q4 pursuant to our normal course issuer bid.

I will now review our cash flows and investment activities.

During the fourth quarter of 2010, we generated $415 million in cash from operations prior to changes in non-cash operating assets and liabilities, and another $499 million in non-cash operating assets and liabilities.

For the quarter, investment activities amounted to $445 million, comprised of $305 million in fixed assets, $98 million to purchase subsidiaries, and a $42 million increase in investments and other assets.

Our strong earnings and cash flow generation has enabled our Board to raise our quarterly cash dividend to $0.25 per share for the quarter ended December 31, 2010, representing a 39% increase from our previous dividend, As Don noted, this represents a third straight quarterly dividend increase following the reestablishment of our dividend in May of 2010.

The dividend is payable on March 23, 2011 to shareholders of record on March 11.

Our balance sheet remains strong, with $2 billion in cash net of debt as of December 31, 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 would like to review our 2011 full-year outlook.

We expect consolidated total sales to be between $25.6 billion and $27.1 billion, and expect consolidated production sales to be between $21.7 billion and 22.7 billion, based on light vehicle production of 12.9 million units in North America and 13.3 million units in Europe.

We expect the 2011 production sales to be between $12.7 billion and $13.2 billion in North America; between $7.8 billion and $8.1 billion in Europe; and between $1.2 billion and $1.4 billion in rest-of-world.

Further, we expect complete vehicle assembly sales to be between $2.4 billion and $2.7 billion, and our effective income tax rate to be approximately 20%, excluding the impact of any potential reversal of valuation allowances that may occur in 2011.

All of these ranges are unchanged from our initial 2011 outlook provided in January of this year.

In addition, for the full year 2011, our expectation for fixed asset spending is now between $1 billion and $1.1 billion, up approximately $100 million from our previous outlook.

The increased capital relates partially to an expected pull-forward of some spending from 2012 into 2011, and partially for incremental new business awarded that launches beyond this year.

Lastly, we indicated earlier this year that we would provide an operating margin outlook, starting with the release of our fourth-quarter results.

We expect our 2011 operating margin, excluding unusual items, to be approximately 5%.

That concludes our formal remarks.

Thanks for your attention this evening.

We would be pleased to answer your questions.

(Operator Instructions).

John Murphy, Bank of America Merrill Lynch.

It's actually [John Lavallo] on for John Murphy.

(multiple speakers) A couple of questions here.

In terms of the gross margin, I know you guys outlined a couple of things that were headwinds.

I was wondering if you could bucket those for us and give us an idea of just kind of the size of each?

You're looking at Q4 to Q4?

Or Q3 to Q3?

Yes -- Q4 -- sorry, Q4 to Q4.

Q4 to Q4.

Yes, in terms of, I guess, headwinds, Q4 to Q4, we would have been impacted by commodity costs number one, from last year to this year.

We incurred some additional losses in our E-Car Systems Group in year-over-year.

In 2009, we didn't have any profits so we didn't have any employee profit sharing expense.

But because we're profitable in 2010, we're happy to distribute some profits to employees [but] some additional costs in '10 versus '09.

And we've had some ongoing operational inefficiencies in certain facilities in Europe, particularly at a couple of exteriors and interiors facilities that we have discussed in prior quarters.

So those were the headwinds.

What we have seen as an improvement year-over-year were lower warranty costs, and productivity and efficiency improvements at certain [LE] facilities in North America as well as Europe.

Okay, great.

And how are you guys thinking about raw mats in 2011?

What kind of headwinds do you think that one's going to be?

I think just -- a couple of -- if we look at our key commodities being steel and resin, with respect to steel, we're pretty well locked in to pricing for 2011, whether that's through contracts, whether it's suppliers or with respect to customer resale programs for the purchase of steel.

So once we get into '11, we shouldn't see volatility in steel prices quarter-to-quarter.

But from '09 to '10, based on contracts that we have in place, we actually do see some headwinds from the steel perspective -- sorry, in 2011 versus 2010.

That will be a headwind in '11 compared to '10.

With respect to the resin, we do have some resin on that customer resale program, so we do have some offset.

But from '10 to '11, we're expecting some headwinds on resins.

Given what's happening in the world today, and depending on what happens to oil prices, the headwinds on resins may increase as the year progresses.

But it all depends on what happens from a global perspective with oil prices.

Okay, that's helpful.

And if I could sneak in one more.

How do see the opportunities for takeover business in 2011?

Would you see that picking up any?

Or has that kind of leveled off at this point?

It's pretty well leveled off.

We didn't see much of it in Q4.

I still think we're going to see some difficulties from some of the Tier 2 and Tier 3 suppliers, but I don't -- I'm not aware of a lot of opportunities in the major Tier 1's where people are going under.

Okay.

Thanks very much, guys.

Peter Sklar, BMO Capital Markets.

On the additional guidance you provided for the 2011 operating margin, first of all, can you define operating margin?

Is that earnings before taxes and minority interest?

Is that what we should think about?

That's correct, Peter.

And if my calculations are correct, I think that margin before unusual, what you would characterize as unusual items, was 5.1% in 2010.

So it looks to me that you're looking for about a flat margin in 2011 versus 2010, notwithstanding that your underlying assumptions in your guidance of North American vehicle production will be 1 million units higher.

You're looking for flat production in Europe.

And I believe you're looking for Steyr to continue to improve.

So I would have thought that just the additional 1 million units in North America would have carried you to a higher margin.

There must be some offsets here, considering.

Can you talk a little bit about your guidance and what -- some of those themes I've raised?

Sure, Peter.

Your analysis is accurate in terms of operating margin for 2010 being 5.1% and our guidance being approximately 5% for 2011.

And there's a number of moving pieces in the guidance.

We'll start with North America.

We look at North America in terms of operating margins, just a couple of things going on there.

We will benefit from an incremental pull-through on additional sales, so those will be coming in.

Our expectation is certainly at above our average operating margin in North America, but offsetting that, just a couple of things.

One is headwinds with respect to commodity costs in North America, both steel and resin.

And the other thing is actually new facility costs.

We have a number of new facilities that are in the works globally, and including North America.

So that's a headwind.

So when you look at the pluses and the minuses, North America expecting operating margins between '10 to '11 to be roughly flattish.

In Europe, we have a couple of things going on there.

We're actually overall -- the direction for operating margin is up and we've got a couple things happening there.

One is, we should benefit from additional sales and pull-through on those additional sales.

We've got commodity costs, as we talked about earlier, being a potential headwind in Europe.

But we also have a number of brand-new facilities that are ramping up in Europe, which is going to be a headwind to us.

Certainly, Steyr -- launch costs at Steyr on the complete vehicle assembly side, are going to be less in '11 versus '10.

But I think when you start to think about some of the other launches going on, that may more than offset what's happening at Steyr.

So overall, we've got some actions in place in Europe.

We expect to see some improvement.

I think Europe is going to be step-by-step improvement in margins.

It's not going to happen overnight.

But what we see, at least in Europe, is heading in the right direction.

So that's positive.

Rest of the world -- we do see and expect a significant increase in sales, though when we look at operating margins '10 to '11, directionally, the income is going to go down.

And there's a couple of reasons for that.

Completed a couple of seating acquisitions in December of 2010 and the margins in our seating business generally tend to be lower average compared to our other business.

That's a dilutive impact.

But the bigger impact in the rest-of-the-world is that we've got a number of new facilities that are coming on in '11, '12, and '13 and beyond.

And we're going to start to spend some money.

We've been focusing on diversified geographically; we've been focusing on China, India, Brazil, and Russia.

And we're going to have more significant new facility startup costs in that region, which will negatively, short-term, impact margin, particularly in 2011.

But we'll see the benefits of that in '12 and '13 and beyond.

The final just item impacting margin on a negative basis is our E-Car business, where our costs there in that business are going to ramp up as we start to move towards the launch of the Ford program, the Ford electric vehicle.

One last piece is in one of the notes in the financials, talked about an investment, an equity counted investment, that there is a change of control option to the majority owner of this entity.

That individual has exercised his option to purchase us out.

So that's going to have the impact of reducing equity income probably in the second half of this year.

So that will be a small negative on operating margins year-over-year.

Hopefully, that helps, Peter.

That's good.

That's quite an exhaustive answer.

But you kind of tied into my last question.

The losses on E-Car systems have really jumped to a new level.

I believe that you showed a loss of $37 million in the quarter versus $16 million in the preceding quarter.

So we've jumped to a new level.

So where are we going?

Like, is this the worst?

Or is it going to get a lot worse from here?

Or does it just kind of flatten out here?

Can you lay out how we should look upon these losses and how they're going to unfold?

Well, Peter, I think the E-Car is in a big way still looking at it a number of new areas of investing in technology and engineering.

They're ramping up a number of programs.

So I think what you may want to take from my comments that if we're expecting that E-Car is going to be negative on operating margin year-over-year, that that would indicate that the losses are going to increase in '11 versus '10.

But remember, we're expecting things as we go along; so we're not necessarily surprised with what we see in E-Cars.

It was expected.

And when does the Ford -- I know you're doing that -- I think it's the full power train for the Ford Focus; I believe that's the major program that E-Car has.

If that's true, when does that launch?

And when do you begin to see revenue?

Yes, I don't know what Ford has said publicly, but it's scheduled for the tail end of this year, early next year.

I'm not sure what they've announced.

Okay.

Thanks very much.

Rich Kwas, Wells Fargo Securities.

This is David Lim for Rich.

I guess the question that I have is, we saw a quarter-over-quarter Q3 to Q4 jump in sales in Europe, but your margins were -- the incremental margins from quarter-to-quarter was not exactly what we expected.

Can you provide a little more color surrounding that?

Sure.

When you look at production assembly sales, if you back out tooling and engineering, sales in Europe were up about $390 million.

And the pull-through to the bottom line, there's a number of things that are impacting what's happening.

A couple of things -- one is we've got additional warranty costs, which I think you can track through the notes of the financial statements, in Europe in Q4 versus Q3.

When we start to look at new facilities and launch costs in Europe from Q3 to Q4, we've seen a jump in those costs as we're looking at -- we're launching and ramping up a number of new programs, including facilities in Russia.

We've seen -- so it's been a negative.

The positive has certainly been on the assembly side, as Magna has gone through the launch of them has ramped up production, we've seen positive contribution.

But keep in mind, when I talk about $390 million of additional production assembly sales quarter-to-quarter, the impact of foreign exchange is about $120 million.

So the real growth [until] is $270 million on the $120 million.

Europe is not really generating a lot of bottom line right now, so you can take sales and move them up for translation, but if operating income is $0, it doesn't matter what the currency translation is going to do.

There won't be any change in profitability.

So really the incremental sales ex-translation is about $270 million.

So Steyr is positive on the assembly side, offset warranty and potentially new facility costs and ramp-up of launches.

Got you.

I was also wondering when it comes to -- you mentioned new facilities.

Can we get an idea of how many new facilities are being opened in 2011?

And then essentially, is there like a one or two-quarter lag?

I'm guessing that there was going to be a two-quarter lag until these -- once the facilities are open that they go into full ramp-up mode.

Yes, I don't have the exact number, but in North America, Europe, rest-of-the-world, you have three segments, we've got over 15 new facilities coming onstream.

And they're coming onstream sort of at different times.

Some of them are now, some of them are later in the year.

Most of those we'll be seeing sales in 2012, but there's -- it's sort of blended all over the place.

And so I can assume from these new facilities that there is already contracts in place to begin production within these new facilities?

Absolutely.

Yes.

We don't build anything unless we've got a contract for it.

Got you.

Got you.

And then (multiple speakers) --

(multiple speakers) -- for pending, which we are just making the final decisions on.

Got it.

Got it.

And then when it comes to raw material costs, can you give us a little more color on how the percentage of pass-through versus OEM by versus spot?

Can you give us a little more color surrounding that?

Yes -- Louis here.

On the steel side, we're about three-quarters of our steel buying is resale programs.

And the bulk of the remaining amount is actually under typically one-year contracts.

We have a little bit of spot buy but it's fairly insignificant.

(multiple speakers) The rest of the -- sorry go ahead?

Got you.

So then -- no, no, go ahead.

Sorry, Louis.

The rest aside, I think we're something like about 10% of our resident buys under resale programs and the bulk of it is short-term contracts.

Short-term contracts.

So then on the three-fourths that are steel retail value, so steel prices go up, there is a protection for your gross profit -- the actual gross profit dollars, so there's going to be a natural form of margin compression then?

Assuming they adjust the pricing on the cost and the revenue side, but they don't typically [soften].

I'm sorry?

Assuming -- that's assuming they actually adjust the price.

Yes, yes.

Okay.

But they don't adjust the price on a regular basis.

Got you.

Okay.

Great.

That's all I have.

Thank you.

Michael Willemse, CIBC.

I just wanted to follow-up on an earlier question on -- you mentioned what were some of the impacts on margin fourth-quarter versus last year.

Could you mention the kind of major cost changes versus third-quarter?

Mike, I think the -- let me look see if I can -- I think when you look at Q3 to Q4 -- I don't have that particular analysis but as I think about just segment, which is operating income, I would say that on a quarter-by-quarter basis, what hurt us on a negative basis would have been additional warranty across the organization.

And I'd say a jump in launch activity and launch costs.

And the other impact would have been the E-Car, where, as reported on earlier question, with the operating income in E-Car -- or the operating loss in E-Car increasing by about $20 million quarter-to-quarter.

That would have been most of it in margin.

Tooling was also a lot higher in Q4 versus Q3, which drags the average down.

Okay.

And where there any severance or restructuring costs other than the impairment charges that were taken?

In terms of -- there were some impairment charges which we talked about, including in the unusual items there was $8 million of restructuring costs related to a facility that's winding down in North America.

We'll be out of that facility probably by the end of 2011 or early 2012.

That was an unusual.

In terms of other ongoing restructuring costs and whether there were severance costs, when you look at 2009, we had a number of significant items.

The number was pretty large -- about $129 million just in the quarter.

When we look at Q4 2010, there was a number -- there was items that were plus and minus, some ongoing restructuring of some divisions, some severance costs.

But when you look at the net of all that, it pretty well netted to zero on a consolidated basis.

Okay.

And then just on your given operating margin guidance consolidated and you talked about North America and Europe.

Is it safe to say that North America and Europe operating margins are going to be somewhat similar -- Europe, probably more improvement and a lot of the margin drag is going to be in E-Car?

And rest-of-world.

And rest-of-world, right.

Sorry, can you repeat that for me?

That North America margins about similar; European margins should go up, that's just E-Car and rest-of-world where we're seeing the margin drag next year or in 2011?

That's directionally accurate, Mike.

Okay.

And then just one more question on E-Car.

Should we see the costs start to wind down quite a bit in 2012, as the fusion ramps up?

Or could we see costs continue at a high level in 2012?

I would say it's a little bit too early.

The focus will launch near the end of the year into next year.

We've got another program in Europe that's launching.

We're still finalizing the engineering.

So I think the losses will come down because we're going to start generating some sales, but we're still going through the business plan review.

Okay, thank you.

It depend on what new programs E-Car is awarded in 2011 and the impact engineering costs and start-up costs in 2012.

Remember, it is a young company.

Right.

Okay.

Thank you.

Rod Lache, Deutsche Bank.

I guess there have been a number of questions about this incremental margin guidance, but maybe just to take it a little bit differently -- you're talking about $2.2 billion of revenue growth, if you look at the midpoint of your revenue guidance and your production sales guidance.

Normally, that would give you maybe $400 million of earnings growth but you're talking about $100 million.

So I guess if we were to take that $300 million of difference, can you give us some breakdown between how much of that is raw materials?

How much is the higher E-Car?

And how much is the emerging market investment?

Some sense of what some of these headwinds are and quantifying them.

If I think about my comments of '10 to '11, I think they've been pretty transparent.

I think you're looking at -- if you take the midpoint that you're looking at, you're applying a 20% number to the $2 billion number -- is that what you're doing?

Yes, I'm just looking -- historically, you've been able to convert that kind of earnings on revenue growth.

But obviously, there's some headwinds here.

So we're just trying to get a sense of what they are and in rough order of magnitude, just some brackets around them.

Well, I think if you think through our disclosure on segments and my comments -- I'll start with the segments in North America.

What I did say is we are expecting additional production sales in North America.

The pull-through on that is going to be about -- we expect it to be above our average operating income percentage.

Offsetting that is going to be -- the biggest item is going to be commodity costs year-over-year and startup of new facilities.

But commodity costs by far is the largest part of that equation.

In Europe, we are expecting margin improvement.

We do see pull-through on incremental sales, that's significantly higher than our average EBIT in -- or average operating income in Europe in 2010.

But even when we look at the incremental operating margin in Europe, it's below the pull-through in North America.

And part of that relates to our complete vehicle assembly business, where our margins are lower than our production business, and in part reflects that we still need to focus on improving our operations in Europe.

And offsetting that, the biggest thing there is going to be the additional costs for these facilities in Europe that we're ramping up.

Just looking at the production sales, wouldn't there be operating leverage that is consistent with your historical levels before the commodity costs and things like that?

Wouldn't it be something in excess of 20% -- on the production sales only, not the vehicle assembly?

I think you have to take into account that as production sales come on, fixed costs are going to start to step up.

I think we did a really good job in maintaining fixed costs in 2010.

We continue to do really well.

But we're starting to see some creep on the fixed cost side, whether that's in SG&A or whether that's in overhead costs.

So that will impact our pull-through in North America in particular.

Is your raw material costs headwind, just to put it into context, you had disclosed a number back in 2008.

I think it was around $70 million.

It was a pretty significant inflationary environment for steel, in particular.

Is it worse for some reason now than it was back then?

Or is it sort of along the same lines?

What are your expectations for that specifically?

I think when you look at commodities '11 to '10 -- and we're not talking about a $10 million number -- it's going to be significant.

Exactly where it's going to land, we'll know that as the year progresses, but it is a material number.

I don't really want to discuss what we've got in our plans, but it is a material number.

One of the items you cited as a negative was the exterior and interior businesses.

You mentioned that as a headwind in your prepared remarks.

Are you suggesting that those businesses actually deteriorated in 2010 versus 2009?

What exactly is happening there?

There's a couple of facilities and when you look at them, it's a combination of launch costs; it's a combination of new programs, where pricing is not appropriate.

In Europe.

We're talking about -- so we're talking about Europe, Rod -- a couple of facilities in Europe -- and some inadequate pricing.

We have a bunch of new business coming on, so we're having some operational inefficiencies as we launch those programs.

As a result of that, we're outsourcing some work.

So what the team is focused on right now is to improve the operational efficiencies that flow through into the facilities.

We'll start to insource some of the work, which should help.

And over time, we're going to have to try to deal with pricing.

The pricing situation isn't going to be resolved in the short-term.

It's going to be a longer-term matter to try to deal with that.

Okay.

Thanks.

Just one last thing.

Was there -- you'd mentioned impairment of the receivable that you took last year, but then in the text of your release, there is a recovery of that.

Was that recovery a -- like, a gain, a P&L impact in the fourth quarter?

Or no?

Yes, it was.

It was a positive impact to the P&L, Rod.

But remember I talked about there was a number of items that, first of all, I talked about 2009 and there being $130 million of significant items in Q4 that we spelled out in quite some detail last year.

And when I looked at the basic Q4 2010, there are a number of items.

And when you aggregate the items, they net pretty well to being flat.

One of the positives is a recovery of the receivable but just offsetting items going the other way.

So when you look at the pluses and minuses, I've got a list of a dozen items on this one page that I'm looking at, that pretty well nets to zero.

Okay.

All right.

We'll follow-up on that.

Thank you.

[Etay McKelly], Citigroup.

Maybe a long-term structural profitability question.

You outlined a bunch of investments, particularly in the rest of the world -- new facilities to support, new business.

Is it an unusually large year of a catch-up in terms of these facilities?

And how should we think directionally around 2012 perhaps versus '11, in terms of incremental investments based on your quarter of -- your book of new business?

I think when you look at -- Don talked about sort of 15-plus your new facilities, that it is 15-plus; it's not 15.

When I think of our [facility] in 2008, 2009, and 2010, it's certainly going to be more significant in '11, '12 and '13.

The market continues to grow outside of our traditional markets.

It's a big focus for us.

So I would expect as we continue to work on winning new business, that we're going to continue to put capacity in the rest of the world regions.

And Don talked about earlier, 15-plus facilities and there's a couple of other facilities that we still need to make decisions on, and then all the [types of] customer awards.

So if we're successful there, we will continue to add capital and facilities in that part of the world.

So, I mean, should we think about -- again, understanding that it's too early to provide any guidance, but as we think about new business coming in and global production growth, and some restructuring in Europe being offset by these investments, I mean, is sort of a 5% area the structural profitability range for the next couple of years?

Or do you think that once you get past some of the catch-up in 2011, that maybe you kind of resume a bit of a higher incremental margin?

I'm not going to give guidance on 2012.

I mean, we've gone a lot -- we're talking about 2011 more than what we've done in a very long time.

But I think you can think about my comments in North America.

We're still growing.

Pretty stable.

We've done a lot of restructuring.

Think about Europe as we're taking some steps, and we've talked about earlier and continue to talk about we expect to continue to see improvements in Europe over the next several years.

And rest of the world, it's going to depend in part on how quickly we accelerate our growth in that region and the success we have in winning new business.

So how that all balances out, I'll have a better view once we complete our business planning process at the end of 2011.

Our target is certainly to improve though.

I mean -- but we won't give guidance until we go through an actual plan [within] the year.

No, that's fair.

And then just lastly, you mentioned the CapEx guidance going up a bit because of some new business.

Is this new business won literally since January when you gave the original guidance?

Or just a better assessment of what you have to spend just based on business you had done?

A little bit of both.

A couple of things we had planned to put the capital in, in 2012; based on the volume projections, we're going to pull it -- some of it ahead.

So it's a bit more fine-tuning and pulling some of it ahead into this year.

Okay.

(multiple speakers) some new business has been awarded after completion of our business plan.

Okay.

That's helpful.

Thanks so much.

David Tyerman, Canaccord Genuity.

Just some thoughts -- I was wondering if you could give us some thoughts on deploying cash.

And I guess some of the areas you're looking at or one of the areas is M&A.

I was wondering what you're seeing out there, the potential for deploying in that area and some of the areas you're thinking about deploying in.

David, we're not going to talk about what we're doing, but there's certainly a lot of activity right now.

We're looking at a lot of different things.

So we won't say anything until we're ready to, obviously.

But there's -- we have an interest in making the right acquisitions and we're looking at a number of things.

And if they come to fruition, then we'll certainly let you know what we're doing.

Do you have a time frame or an idea, though, of when you would be able to deploy this cash?

Not really, but we're actively looking at a number of things.

So it just comes down to whether we think the things we're looking at make sense to complete or not.

Okay.

Fair enough.

And then just a question on European content per vehicle, looking at it sequentially, it actually dropped, which kind of surprised me, given that the euro was strong versus the US dollar sequentially.

Is there anything going on there?

Or is this just sort of the normal movement of what was being produced in the quarter and what you were producing and so on?

Yes.

This in Europe, David?

Yes.

You know what, if you went back historically, you'd find that in most Q4's, we dropped in Q3.

Q3 seems to be our strongest content quarter in Europe.

And it was really just mainly mix.

So nothing of real consequence, I don't think.

Is there any reason why Q3 would be particularly strong and should we generally expect that?

In fact, it's a good question.

I've pondered that for a long time.

I think it really just has to do with some of the key programs that we have high content on, just don't tend to have as much fluctuation up and down; the seasonality is different there.

So when volumes drop significantly in Q3, which is always the weakest quarter, usually the weakest quarter, those programs just don't drop quite as much.

Okay.

Fair enough.

Thank you.

David, just -- I wanted to add some more color to your acquisition question.

I know Don provided some feedback as well.

I think when you look at our cash position today, we've got over [$2 billion] of net cash, we certainly have a very healthy balance sheet.

The economy or, I guess, production in our key markets has improved.

We expect it to continue to do well.

So we're a little more comfortable on the use of cash.

And we've had discussion with our Board in terms of what our overall strategies are and our focus is.

And I would say amongst the senior management team and the Board, there's more of an appetite if the right opportunity comes along, that meets everything we're looking for, to use some of the balance sheet to grow our business.

So if things work out, you'll probably see more activity rather than less activity, but we're not in a hurry just to say because we've got the money, we're going to spend it.

We've got to find the right opportunity.

Sure.

That makes sense.

Maybe just one last add-on question to that.

Is there any appetite to make very large acquisitions?

Or is this really you'd like to do more of the types of things you've been doing recently?

Well, it depends on what the definition of large is.

But the ones we've done recently have been relatively small, so we could certainly do larger than we have been doing.

Okay.

Like, would a couple of billion dollars of sales be completely crazy or --?

No, I think a couple of billion dollar sales would be within reach.

It obviously depends on what the acquisition price is.

Sure.

That makes sense.

Okay, that's great.

Thank you.

Chris Ceraso, Credit Suisse.

A couple of housekeeping items left.

First, the $8 million restructuring charge -- I didn't see in the release where that was in terms of NA or Europe, or rest-of-world.

North America.

NA.

Okay.

And then on the taxes, Vince, I think you said the 20% guidance assumes that there's no release or reversal of your valuation allowance.

Is that something that you think may happen in 2011, that you've been profitable enough for long enough that you may have to start to reverse that allowance at some point in '11?

Chris, that may be a possibility.

If you look at the benefit of losses in the United States, we recognized a big benefit in 2010.

We expect that to continue in 2011.

So each quarter, we're going to have to look at to see at what time if it's appropriate to release the valuation allowance on the US losses, as well as potentially losses elsewhere in the world.

And if that happens, if you start to reverse that, would you start to accrue -- would we see the book tax rate at more of like a 30% accrual rate?

Or what -- where does it go back to?

Well, it depends how much we release and in what jurisdiction.

But a 30% rate I would say is too high.

It would be something less than that.

I don't know whether it's going to be in the neighborhood of 27%, 27.5% -- not quite sure; it depends on how we book things and what gets reversed and when.

Is it fair to assume then, Vince, that by 2012, you should be back at that kind of rate -- 27%, 27.5%?

I think it's safe to assume that once we get to 2012, our rate is going to be higher than 20%.

Okay.

And then one last one -- you mentioned the share repurchase during the quarter.

Do you have a share count for 12/31?

What was the year-end share count?

The actual count?

Yes.

The diluted count.

The diluted count for the -- someone is looking it up.

Let me get it to you in one second.

On a diluted basis, 253.7 million shares.

That's the 12/31 count?

12/31 count.

Okay.

Thanks a lot.

(multiple speakers) That (technical difficulty) 100% of the options are (technical difficulty) a diluted basis.

Okay.

Thank you.

Himanshu Patel, JPMorgan.

A couple of questions.

Don, I guess you know on the E-Car business, I think you expressed maybe a little bit less enthusiasm for that business than where Frank was originally.

I'm just wondering, strategically, how do you feel about that business now, just based on, in the past six, 12 months, what you guys have seen in terms of business opportunities and the associated investment costs needed to support those opportunities?

Do you find that business generally more attractive or less attractive than where your thought process was maybe about a year ago?

I think about the same as what I thought it was.

I think getting in the battery business, unless you've got a really unique technology, is a challenge, just because of some of the big players are in there and some of the government funding, et cetera, et cetera.

But I think there's new technologies, so it depends if somebody can come up with a technology breakthrough.

I think on the component side, my view on electric vehicles is it's not going to be huge in the near-term, but I think it's going to continue to keep growing.

Hybrids will continue to grow, micro-hybrids are going to grow.

So I think there's going to be opportunities on the component side.

And there's going to be a lot of changes as we launch new vehicles.

So -- but it's a tough business as well, because the volumes aren't huge yet, but it's going to be a big business.

And then there's other -- so Magna is looking at components.

E-Cars are looking at components.

We're looking at some jointly.

So I still think it's a good business, but it's not an enormous business in the next foreseeable future.

I think whoever wins on the technology side will see good returns.

It's going to have to depend on technology development and execution.

And then, I guess, shifting gears to Europe, I think in the past at various stages, you sort of bucketed your European margin opportunities or, I guess, challenges today in three or four buckets.

And correct me if I'm wrong, but it was sort of launches [at grats] ramping up some of these plants in Russia, eliminating the losses in the interior, exterior facilities.

And I guess more broadly, just kind of fixing some of the footprint inside of the Western European business.

And maybe some of the new facility launches you're talking about today address that.

Could you give us a prospective progress report on where these items will be at 12/31/11?

Meaning as we exit -- we understand your full-year margin commentary on Europe, but how should we think about how these items are exiting 2011 -- to give us a sense on the performance of Europe beyond that.

Okay, I won't talk to margins, but Styre will be through their launches and should be more steady-state, depends on what new business we win and things like that.

Russia will be primarily launched.

We are starting up some new facilities, but I think it's sort of -- I think that's going to be ongoing as we launch the ones we've got going and build new ones.

The biggest opportunities, we still have a number of losing divisions.

We have some inefficiencies [spend] so we have some launch issues.

We've outsourced some work and I think we're getting our arms around that.

By the end of the year, I would hope that, for the most part, we'll have a pretty good handle on them.

Some of them will probably go into 2012, but I think we'll make steady progress through the year.

So, I mean, do we take from that comment that most of the heavy lifting on Europe would be done on an exit rate of 2011?

Or is there still -- I mean, just whatever kind of unofficial normalized European margin target you have in your head.

I guess we're just trying to understand what's the timeframe of getting there?

Is that -- should we think about '12 as getting pretty close to that?

Or is it more of a three-year march to that (multiple speakers) --?

I think -- by the time we're in the middle of '12, we're still going to have a couple of lingering issues, I expect.

But I would think by the middle of '12, we'd probably be able to achieve most of what we wanted to in some of the losing divisions.

Okay.

Understood.

And then one last housekeeping item.

Vince, I think you mentioned warranty costs hurt you in Q4.

Could you just clarify?

Was that kind of a one-time true-up on your warranty reserves that would potentially go back down to a more normal level of warranty expensing in Q1?

Or was that kind of an elevated level of warranty expensing that we should think will be sustained next year?

I think when you look at the warranty expense, it will vary quarter-by-quarter.

I'm just looking at each quarter of 2010 -- it was a $10 million expense in Q1; $11 million in Q2; $2 million of income in Q3 and $14 million in Q4 -- it's just going to vary.

(multiple speakers) It bumps around.

To answer your question in a different way, there isn't any reason in my mind that I need to think about accruing more for warranty expense -- nothing's changed.

Okay.

Great.

Thank you.

Otto Cheung, GMP Securities.

Just a quick question on your North American content per vehicle guidance.

I mean, if oil prices were to remain elevated or inch higher, do you see any risk of content per vehicle potentially going lower due to mix, given your exposure to like CVs and SUVs, in higher content -- which equates to like higher content product?

Well, we haven't actually given content guidance going forward.

We're just giving revenue guidance, but just in terms of mix impact -- sure.

I mean, mix affects us every quarter positively or negatively.

So, to the extent that you get a relative increase in a segment or in vehicles where we have less content, is going to have an impact on our average content, as you compute average content.

But I don't -- it's not something necessarily that we foresee.

And we have more and more content on -- for all segments and it's certainly part of our intention is to continue to diversify it by segment.

So I can't say there's one particular area that's going to be -- if volumes grow in that one area in relative terms, that that's going to have a negative impact on us.

You know, small cars -- we have content on small cars.

We have a lot of content on crossovers.

We certainly have a lot of content, as you said, on trucks.

Okay.

So you're not expecting any significant impact.

Okay.

And maybe just switch gears a little bit, can you maybe talk a little bit about your non-automotive business?

I think in the last call, you mentioned that you may potentially see this business being a $1 billion business in the next four to five years.

Is there any chance or opportunities out there that you can deploy your cash towards acquisitions in this area?

Or are you focusing more on the automotive side only?

I think when you look at the $1 billions of business, I don't think it's four to five years out; I think it's closer than that.

And in terms of deploying cash in that area, that could be a potential opportunity.

If we think about the acquisition that we did with Meridian on some SMC capability that they have, they have automotive and non-automotive applications.

So I wouldn't rule that out as an opportunity for us.

We're still looking at a number of different areas.

Our first priority is to feel comfortable with what we're doing in technology and existing products, and existing regions with customers, but we are looking at -- we can see some opportunities in some of the non-automotive areas.

So we do have some dedicated teams working on that as well.

But again, the things that we'd be looking at are opportunities where we're going to be leveraging either a manufacturing process engineering capability and so on.

Okay.

Great.

That's all I had for now.

Thank you.

Michael Willemse, CIBC.

Just another housekeeping items.

Maybe you mentioned this before, but in corporate and other, you had a loss of $25 million.

Was this the bonus that you talked about that you had to pay out this year?

We had a loss of 25 million --?

In your corporate and other sales division --

Right.

-- in EBIT in the quarter.

There's -- so you look -- we had a $25 million -- there's a number of items in the $25 million.

There's a loss on disposal of some assets.

We've also accrued in there a contract termination payment as well as a stock option modification for a departing executive.

So I think those are the bigger type items that are resulting in a $25 million loss in that segment.

Normally, if you just look over the past few quarters, you get a small profit, single digits of a few million dollars.

If you strip out the cost you mentioned, would that -- would the -- what operating profit, would it have been around a few million dollars like normal?

I think if you strip it out -- we would have still had a loss in the quarter.

There's some cleanup that took place on accruals at the corporate level.

And so accounting technicalities, which would have impacted us negatively in that particular segment.

But it's nonrecurring in nature again.

They're just cleanup.

So we would have still been negative, x those things, but not positive.

Okay.

Thank you.

And there are no further questions at this time.

I'd like to turn the call back over to you, Mr.

Galifi and Mr.

Walker.

Okay.

Thanks, everybody, for joining us this evening.

We're pleased overall with the way 2010 have turned out on a number of different fronts.

We look forward to a, hopefully, a strong economy in 2011.

And from a management team, I think we're -- I can say we're all pretty motivated to get our nose to the grindstone and really focus on the business going forward.

So I appreciate you dialing in.

Everybody have a great night.

Thank you.

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

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