Magna International Inc (MGA) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Magna International first quarter 2011 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, May 4th, 2011.

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

Please go ahead.

Good afternoon, everybody, and welcome to our first quarter 2011 conference call.

Joining me today are Vince Galifi, CFO; and Louis Tonelli, Vice President Investor Relations.

Yesterday our Board of Directors met and approved our financial results for the first quarter ended March 31, 2011.

We issued a press release this morning for the first quarter of 2011 during our annual shareholders meeting.

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

Before we get started, just a reminder that 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.

Since many of you have listened into our shareholders meeting earlier today, I'm going to keep my comments short to allow more time for Q&A.

Let me start by saying that overall we are pleased with our financial results for Q1, a record quarter in total sales and net income.

Every sales line in our income statement increased year-over-year, aided by higher volumes in a number of markets; in particular, our traditional markets of North America and Western Europe.

Our fastest growing segment once again was the rest of the world, which increased 69%, aided by our seating acquisition in South America, the launch of new programs, and higher production volumes.

I noted earlier today at the Annual General Meeting that we have started, or plan to start up, 23 new facilities over the next 2 years; spanning North America, Europe, Asia, and South America; although the majority of them are in Asia and South America.

We are investing in these start-ups to drive future growth and to continue to strengthen our global footprint.

However, they are, and will continue to be, a drag on earnings in the short-term.

I'd like to take a moment to talk about our European operations.

During the first quarter, we generated increased earnings in our European segment.

Vince will take you through the details shortly, but the macro level, Magna Steyr improved year-over-year reflecting the stabilization of our assembly operations, which launched a number of new programs in 2010, including programs for new assembly customers.

We also had some pull-through and increased sales in Europe.

However, we also continue to have significant underperformance in certain divisions.

Recall that we have indicated that some of the issues in certain of our facilities will not be fixed overnight, but we expect to make steady progress over the next couple of years.

In the first quarter, 4 facilities in our Interiors, Exteriors unit generated a combined loss of approximately $50 million.

1 of those facilities has been closed.

In addition, we expect the run rate of the loss of those facilities to decrease by almost half by the fourth quarter of this year.

Our European results in 2011 are also being negatively impacted by increased commodity costs, as well as a new facility cost I referenced earlier.

We have facilities under way, and we are adding a number of new facilities in Europe over the next 2 years.

We continue to believe our European operating results will steadily improve over the next 2 years, and Vince will elaborate on our European results later.

Earlier today, we announced a new business that we have with our customers, including a contract with General Motors to produce aluminum cast structures which reduce mass.

This program includes global manufacturing, supporting 3 continents and over 12 GM assembly plants.

We are developing a chassis, using our global engineering team.

In addition, we have extended our Dynamax all wheel drive system, first launched on the Kia Sportage, to a Hyundai brand sport utility vehicle.

Magna Exteriors and Interiors has been awarded incremental business on the next-generation Ford Transit program.

Our seating group has been awarded the contract in Brazil to do complete seats, and Cosma has formed a joint venture in China with Guangzhou Automobile Components Group Company to produce major body and chassis components and structural assemblies beginning next year.

Together, this business is worth more than $350 million, on an incremental basis.

Lots of good activity in the award side recently.

Finally, I want to cover off the impact of the earthquake and the tsunami experienced in Japan in March of this year.

First and foremost, our thoughts go to all the people around the world whose lives were impacted by this tragedy.

We are fortunate that none of our employees in Japan lost a family member as a result of the tragedy.

We have two facilities in Japan, neither of which was damaged.

Those facilities have sales of less than $50 million annually, so while production has been disrupted by Japanese assembly plant closures, the impact is minimal, and much should be made up later in 2011.

With respect to our largest customers, we have seen some disruptions in their assembly operations, mainly due to component shortages, and will likely see some more.

However, our expectation is that most, if not all, of the vehicles lost by our largest customers will be recovered in the second half of the year.

As a result, we do not expect a significant impact to our 2011 results from the Japan tragedy.

With that, I'll pass the call over to Vince.

Thanks, Don.

And good afternoon, everyone.

I would like to review our financial results for the first quarter ended March 31, 2011.

Please note, all figures discussed today are in US dollars.

The slide package accompanying our call this afternoon includes a reconciliation of certain key financial statement lines, between reported results, and results excluding unusual items for the first quarters of 2011 and 2010.

In the first quarter of 2011, the only unusual item was a write-down of real estate, which resulted in a reduction of $9 million in operating income and net income, and $0.04 in diluted earnings per share.

In the first quarter of 2010, the only unusual item was a gain on the sale of a facility, which reduced operating income and net income by $14 million, and diluted earnings per share by $0.06.

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

On January 1st, 2011, we adopted US GAAP as our primary basis of accounting.

Note 1-B to our interim financial statement issued today, lays out the rational for our adoption of US GAAP.

In short, we were required to transition either to IFRS or to US GAAP, and having looked at the alternatives, we decided that US GAAP was the most suitable to us.

All of our discussion today will reflect US GAAP reporting.

The most significant change from our previous reporting relates to the principles of consolidation.

Specifically, we have interest in certain entities that we do not control or that are jointly controlled.

Previously, we would have proportionately or fully consolidated such entities, whereas under US GAAP, we now [equity] account for them.

There is no result in change to net income related to this Canadian - US GAAP difference.

However, sales are reduced.

There are a number of other differences that do not impact net income in a significant way.

Overall, the adoption of US GAAP reduced our previously reported 2010 sales by approximately $600 million, and reduced earnings per share by $0.02.

In the first quarter, consolidated sales increased 34% relative to the first quarter of 2010, to $7.2 billion.

North American production sales increased 34% in the first quarter, to $3.6 billion, reflecting a 17% increase in vehicle production to 3.4 million units.

In addition, the increase is a result of the launch of new programs, including the Jeep Grand Cherokee; Dodge Durango; BMW X3; Chevy Cruze, Traverse and Equinox; and the Ford Explorer and Fiesta; the strengthening of the Canadian dollar against the US dollar, and an increase in content on certain programs, including the Chrysler Minivan.

Partially offsetting these, were programs that ended production during or subsequent to the first quarter of 2010, including Mercury brand vehicles, and net customer price concessions subsequent to the first quarter of 2010.

European production sales increased $479 million, or 28%, to $2.2 billion from the comparable quarter.

Western European vehicle production increased 10%, to 3.7 million units.

Other factors contributing to the increase in European external production sales include the launch of new programs, including the MINI Countryman, Porsche Cayenne, and Volkswagen Touareg; Audi A1, and the BMW 5 series; and acquisitions completed during or subsequent to the first quarter of 2010.

These factors were partially offset by programs that ended production during or subsequent to Q1 2010, including the BMW X-3; the weakening of the Euro against the US dollar; and net customer price concessions subsequent to the first quarter of 2010.

Our Rest of World production sales increased 69%, or $129 million, to $316 million in Q1 2011, primarily as a result of acquisitions completed during or subsequent to the first quarter of 2010; consisting of Resil, Pabsa, and a roof systems facility in Japan; programs launching in China and Brazil during or subsequent to the first quarter of 2010; an increase in production of certain programs in China and India; and the strengthening of the Chinese and Brazilian currencies, each against the US dollar.

Complete vehicle assembly volumes increased 85% from the comparable quarter, and assembly sales increased 51%, or $228 million, to $674 million.

The increase largely reflects sales related to new vehicle launches, including the MINI Countryman and Aston Martin Rapide, as well as higher volumes for the Peugeot RCZ, and Mercedes-Benz G-Class.

These factors were partially offset by programs that ended production during or subsequent to Q1 2010, including the BMW X-3 and the Chrysler 300 and Jeep Grand Cherokee.

Note that currently all complete vehicle assembly programs are accounted for on a fully costed basis.

In summary, consolidated sales, excluding tooling sales, increased approximately 35%, or $1.7 billion in the first quarter.

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

Tooling, engineering, and other sales increased 31%, or $108 million, to $454 million from the prior year.

The increase related to sales in a number of programs, in addition to the strengthening Canadian dollar against the US dollar.

Gross margin in the quarter was 12.2% compared to 12.7% in the first quarter of 2010.

The decline in gross margin percentage was substantially due to an increase in complete vehicle assembly sales, which have a lower gross margin than our consolidated average; an increase in tooling sales that have low or no margins; operational inefficiencies and other costs of certain facilities, in particular, at certain Exterior and Interior system facilities in Europe that Don discussed earlier; higher costs related to launches and new facilities; increased commodity costs; pre-operating costs incurred in these facilities; and net customer price concessions, subsequent to the first quarter 2010.

These factors were partially offset by increased gross margin earned as a result of significantly higher vehicle production volumes, lower costs incurred related to launches at our complete vehicle assembly operations, and productivity and efficiency improvements at certain facilities.

Magna's consolidated SG&A as a percent of sales was 4.8% in the first quarter of 2011, compared to 5.6% in Q1 2010.

The decline is substantially due to higher sales associated with a significant increase in vehicle volumes, and higher sales at Magna Steyr, combined with our efforts to contain costs.

This was partially offset by higher group and divisional incentive compensation, and stock-based compensation in addition to cost to support the growth in sales.

Our operating margin percentage improved to 5.7% in the first quarter of 2011, from 4.9% in the first quarter of 2010.

The lower SG&A percentage and depreciation expense, that was essentially unchanged from last year, more than offset the lower gross margin percentage and lower equity and interest income.

Our effective tax rate decreased to 19.1% for the first quarter of 2011, compared to 20.5% in the first quarter of 2010.

The decline primarily relates to reduction in the Canadian statutory rate, and an increase in the utilization of losses not previously benefited, partially offset by the mix of earnings.

Net income increased $121 million to $331 million for the first quarter of 2011, compared to $210 million in the comparable quarter.

Diluted earnings per share were $1.34, compared to $0.93 in the first quarter of 2010.

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 common shares during 2010, related to the arrangement; the issue of common shares related to the exercise of stock options; and an increase in the number of diluted shares facilitated with stock options; partially offset by the effect of the repurchase and cancellation of common shares pursuant to our normal course issuer bid.

Next, I would like to discuss incremental margins in North America and Europe for the first quarter of 2011, relative to the fourth quarter of 2010.

In North America, total sales increased $566 million.

Excluding unusual items in the fourth quarter of 2010, Q4 EBIT improved approximately $110 million.

This represents an incremental margin percent of approximately 19%.

In Europe, total sales increased by $119 million sequentially, while EBIT improved $9 million after adjusting for the impact of the significant items in both the fourth quarter of last year and the first quarter of this year, which more or less offset each other.

This represents a pull-through of about 8%.

Our European results were hampered by higher commodity costs, higher new facility costs, and acquisition integration costs, partially offset by lower launch costs.

So, there is much room for improvements in our European results, but we are making some progress.

One last point about our European business.

While we are not happy about the overall level of operating performance in Europe, the business overall is profitable.

In some business units run at good operating margins and returns on capital, simply getting the underperforming units Don referred to earlier back to breakeven, would add more than a full percentage point to our European operating margin.

In addition, our current operating margin in Europe is being negatively impacted by the significant investments for new facilities.

I will now review our cash flows and investment activities.

During the first quarter of 2011, we generated $496 million in cash from operations, prior to changes in non-cash operating assets and liabilities; and invested $608 million in non-cash operating assets and liabilities.

This investment largely reflects the significant increases in production activities compared to the first quarter of 2010.

We expect to recover a large portion of this working capital by the end of this year.

For the quarter, investment activities amounted to $199 million, comprised of $144 million in fixed assets, and a $55 million increase in investments and other assets.

Our Board of Directors yesterday declared a quarterly dividend of $0.25 per share with respect to our common shares, with dividends payable on June 15th to shareholders of record on May 31, 2011.

Our balance sheet remains strong with $1.4 billion in cash net of debt as of March 31, 2011.

We also have an additional $1.9 billion in unused credit available to us.

Next, I would like to review our updated 2011 full-year outlook.

As previously mentioned, we adopted US GAAP as our primary basis of accounting.

Today's press release.

and in our slide presentation, we included the February outlook as previously disclosed, as well as a revised form of the February outlook reflecting our adoption of US GAAP.

This allows everyone to easily compare our updated outlook to our previous outlook.

I will only provide a summary of our outlook since we covered the details of our revised outlook in our press release.

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

We now expect 2011 North American vehicle production to be approximately 13.2 million units, compared to 12.9 million units in our February outlook.

We expect 2011 European light vehicle production to be approximately 13.6 million units, compared to our February outlook of 13.3 million units.

As a result of the increased expectations for production sales in all segments, lead to higher volumes and the strengthening of certain currencies against the US dollar, as well as higher complete vehicle assembly sales, we now expect total sales to be in the range of $27.1 billion to $28.5 billion.

This is up from our previous outlook of $24.8 billion to $26.3 billion.

We expect our consolidated operating margin percentage to remain in the low to mid-5% range, and our effective tax rate to be approximately 20%.

Both of these are in line with our previous outlook.

And for the full year 2011, our expectations for fixed asset spending are unchanged from our prior outlook, in the range of $1 billion to $1.1 billion.

That concludes our formal remarks.

Thanks for your attention this afternoon, and Don and I and Louis would be pleased to take your questions at this time.

(Operator Instructions).

John Murphy, Bank of America-Merrill Lynch.

Just curious, I mean, you guys ran at about a 5.7% op margin in the first quarter.

And it looks like you're looking for that to fade through the course of the year.

Just curious what the major factors are there or are we splitting hairs?

And is that 5.7% still at the mid-5% range and do you think it might flatten out over the course of the year?

Just trying to understand if you think it's going to fade or if it could stay the same and what are the major factors that would put pressure on that?

I think when you look at the balance of the year, we had a couple of slow periods.

We've got the summer shutdown both in North America and Europe, as well as Christmas break.

And traditionally, when you look at the quarters that those breaks take place, margins have always come under pressure.

So, if you factor that into the outlook and think about where we ended up in Q1, that's going to result in margins on an annual basis fading down as we move into the balance of the year.

There's a couple of other things that are impacting margin as well.

In the last 3 quarters of the year we're certainly going to benefit from incremental pull-through on higher North American sales.

So, we've got a couple of negatives.

Some are good news and some is just the way the numbers work out.

Bad news is that we do expect some additional headwinds on the commodity cost side, more than what we had expected the last time we had a call and talked about 2011 operating margins.

We do have additional new facility costs that we weren't anticipating just a couple of months ago.

And that's a good news story.

We have new business awards that are going to impact us positively in '12 and '13 and later years.

But we're going to have to invest to put up some new facilities.

So that's a negative that is new to our guidance compared to where we were previously.

And then there's 3 items that -- it's just really a numbers game.

The first is, we're expecting higher tooling sales so that -- if you run through the numbers, assuming we're not generating any profits on tooling, has a negative impact on margins.

Doesn't impact overall margin dollars earned, but does impact percentage.

Good news is Magna's tire sales are increasing but Magna's tires overall operating margin is below Magna's consolidated margin, so when you think about mix of earnings, that has a negative impact on the percentage.

Again, not a negative impact on margin, but just a percentage.

And finally, when you look at the European currency versus the US dollar, our view now is that the Euro is stronger than what we anticipated just a couple of months ago.

So that means we're going to translate Euro sales into higher US dollar sales.

Since we're not generating a lot of margins in Europe, sales are increasing but we don't see a lot of pull-through on the bottom line and that has a tendency of reducing our operating margin percentage.

So, all in all, I would say that sales were up since our previous outlook and the margin range is unchanged for the factors I described.

Got you.

Thank you.

And then just a second question on the 23 new facilities.

You said the majority would be Asia and South America.

As we think about the margins and the returns in those facilities as they ramp up over time, sounds like they may be a near term drag.

But is there any reason to believe that you can't get to your normal corporate average on operating margins and good solid 15% plus return on invested capital there?

John, in terms of the negative earnings, we're certainly expecting a negative impact this year and as I said earlier, larger now than what we thought a couple months ago.

But we start to see some benefit of that as early as 2012 in some of the regions.

And thinking about the rest of the world, we continue to invest in those new facilities.

I would say that the margins on those new facilities, we're expecting them to be appropriate.

I guess they're going to vary depending on how much capital we're employing in those facilities and how many components we purchase to assemble in the final product.

We do have hurdle rates internally.

We expect on capital, we expect on acquisitions and our expectations is that our hurdle rates are going to be met.

Okay.

And then just lastly, you guys aren't disclosing content per vehicle any more in your discussions.

Just curious as to why that is and are we at a point where non-auto sales are a big enough slice of the pie that it might be distorting that content per vehicle number and is that why you're not disclosing that anymore?

We have to look at the various regions.

There's a number of reasons.

One is our non automotive business as we talked about, is growing.

Some of that, a big part of that is heavy trucks.

Some of that is in solar products, some of that it is in white goods.

So, that's distorting overall sales which impacts content.

When you move into other regions of the world, as you think about Europe, really should be looking at content and we have to -- we should be including eastern Europe and Western European volumes and we haven't done that and you also have non automotive sales in Europe.

So again, you get a big distortion there.

And finally, our fastest growing segment is rest of the world, and I just don't know how to even start to compute content per vehicle in the rest of the world with volumes in a number of jurisdictions.

So, we thought it's best to go back to a more traditional way of explaining our sales movement.

And we've got some detail on it.

We can talk to you about how sales have moved from Q1 last year to Q1 this year, if you would like.

But we're going to shy away from content per vehicle.

You're going to have the ability to do it anyway, if you like.

But we're not going to publish that and not comment on that going forward.

We do have eastern European volumes, it's just that they're very volatile and they change a lot from quarter to quarter and therefore it's hard for us to report on those numbers and then having to be forced with, should we restate or not because the volumes are coming differently.

That's why we're not doing that.

Okay.

Thank you very much, guys.

Keep it up.

Thanks.

Chris Ceraso from Credit Suisse.

You mentioned in your walk-through of the margin pressure in Europe, commodity costs.

I didn't see that as an issue in North America.

Is there any reason to think that the commodity situation is different for you in Europe than it is in North America and if so, why is that?

I think when you look at North America, the impact wasn't that significant in the quarter.

Keep in mind that we have customer resale programs on steel which is our biggest buy and we did have some headwinds on resins, but it was more significant in Europe than it was in North America.

Is that something that changes in coming quarters?

You said that commodity issue seems to be getting a bit worse.

In future quarters do you think commodities will put more pressure on the NA margins?

Well, let me backtrack.

Sorry.

Let's go back to commodity costs.

Commodity costs actually were negative in North America as well as in Europe.

Let me correct myself.

The impact was larger in Europe than it was in North America.

Going forward, in my comments about the balance of the year, both in North America and in Europe we expect headwinds on the commodity side and that's tied specifically to resin pricing.

Resin.

Can you give us some numbers around what the commodity hit was in Q1 and what you think it might be for the full year?

Chris, we haven't quantified that historically.

I think from a modeling standpoint, it is going to be some more of a headwind, but I wouldn't necessarily view that as a material change in commodity costs from the first quarter run rate but we do expect some headwind.

Okay.

It's hard to really understand accurately what the numbers are, too because you've got it all through the Company.

It's a Tier 1, is it from a Tier 2, what's happening with our customer give back, there's so many moving pieces, it's a best guess.

It's really hard to get an accurate number anyway.

Okay.

Trying to think about the hit to Q2 from down time at your customers or Q2 and Q3, maybe, can you give us a feel for what your total sales into the Japanese OEMs would be, both for vehicles produced in Japan as well as those produced in North America and elsewhere?

Chris, in Japan we have two manufacturing facilities, annual sales are $50 million in aggregate for those facilities.

The impact on Magna is really insignificant on a consolidated basis, and we expect to make up those volumes by the end of '11 or early 2012.

With respect to North America, we've had some disruption, probably be a little bit more disruption in Q2, possibly in Q3.

Again, our expectation is that that disruption is going to be relatively minor and insignificant.

For the total Company, though, Vince, would you say that your sales to Japanese OEMs globally is, what, 10%?

5%?

Can you put a number on it?

Japanese?

About 6% globally.

Our Asian based sales globally last year were 8% and that includes a lot of sales in China.

You take the 8 -- and Korea.

Take that, divide that by -- I'm just guessing here --

--We have very little sales into the plant in Japan.

We can try and quantify it, I guess.

About 5% globally.

Globally.

That's helpful.

Thank you, guys.

Rich Kwas, Wells Fargo Securities.

Couple of quick questions.

On rest of world margins, trending down here.

I know that was somewhat expected.

But is this the low point for first quarter in terms of 4.8% and should we expect it to pick up as the year goes on even with the investment?

Our rest of world segment, even though we had some significant growth in the quarter is still a pretty small segment and there's a number of new facilities that are under way in those regions and there's a number of new facilities that were approved just this quarter in those regions that are going to even an impact our costs in 2011.

So, I don't have the numbers in front of me, but it's so small at this point in time, I think it's not that meaningful to think about where the margins may end up or not.

Okay.

But we shouldn't -- it sounds like we shouldn't expect much of an uptick here, at least this year.

The biggest discussion point about rest of the world is going to be the new contract awards and new businesses coming on and the investment in new facilities.

Remember that we also acquired Pabsa and Resil late last year in South America and the South American market, they shut down, essentially, a big part of first quarter, so that has a negative impact.

So, that will have a positive going forward.

But the offset's going to be new facility costs.

In terms of the guidance for North America, mixed with gas prices where they are.

Had a pretty good first quarter in terms of truck production in North America.

What's kind of the expectation in the guidance for truck mix as we move through the rest of the year?

Rich, I don't know off the top of my head what we're forecasting but we certainly are forecast -- our sales forecast and our volume forecast reflects the change in truck mix.

Okay.

So we should assume that's -- you've got some of that coming off here?

Yes, exactly.

Okay.

And then just a modeling question, equity income, I know you restated some stuff, but equity income, $36 million for the quarter versus $41 million last year.

Is that line item going to stay at this level and is that how we should model, fix our model that way?

I think what you should keep in mind, we disclosed in our annual statements about an investment that we have which has been equity accounted and continues to be equity accounted.

But as a result of the transaction last year, the collapse, the share structure, our partner has the right to call our interest in this entity.

That call has been exercised.

Whether we have a different type of arrangement with this partner or not, we don't know yet.

We're working through some things.

So if that falls through and the option is successfully exercised, would be a reduction in equity income in Q3 and Q4.

Maybe partially in Q2.

But other than that, I think the other item that comes to mind is in one of the equity accounting investments, there was a one-time pick-up from a prior year which won't be reoccurring.

That was in the tune of around $5 million.

So it sounds like first quarter was the peak point to this and we should assume that comes down with this transaction.

That's right.

That's correct.

Okay.

And then a last quick one, on resin contracts, if I recall last quarter you said that 90% are short-term and I think 10% are spot or short-term of some nature.

Is that still the case or have you been able to lock up more in terms of pricing on a longer term basis?

I think the way to think about it is we've got about 10% or 15% of our resin buy under customer resale programs and the balance of our resin is -- a big part of it is under index contracts.

So there's -- and some of it's going to be on spot.

What the index contracts did for you, is a time lag between the change in the price of resin and what we pay but more importantly, it provides transparency to us in terms of where we -- where resin prices are going to go when the underlying input into manufacturing whatever we're purchasing increases or decreases.

Okay.

So most of that, we should think of that as pretty much -- some of it's spot, but more of it's index.

I would think of it as 10% or 15% on resale, so that's a pass-through.

The other 85%, I would think of it as being spot.

We just have contracts that define how you determine what your resin pricing is going to be because it's indexed at certain raw material inputs that are used to manufacture resin.

Okay.

All right.

Thanks so much, guys.

Rod Lache, Deutsche Bank.

Good afternoon everyone.

It's Pat [Nowlan] on for Rod .

Most of my questions have been answered.

I just wanted to follow up about the European business.

Can you talk about your existing book of business and what's the key drivers there to actually fix that business, whether it's cost?

Doesn't appear to be capacity utilization, considering you're launching all these new facilities, so doesn't look like you're going to put new business into existing facilities.

So, is it the fact that we have to close facilities or is it just that we have to reprice existing contracts?

I'm just trying to get a feel for how quick the existing business could improve

We talked about 3 significant underperforming divisions.

We had another one which we've dealt with just in the past month.

The issues are a number of different issues.

One is that we have some business that was under priced so we have the need to go back and fix the pricing or work it out.

Another one of the issues was we were over-booked on production so we have had some difficult launches.

We've had some excess scrap, premium freight, we've had to outsource some business and we're going through some more launches right now and some of those facilities.

So, it's a combination of inefficient operations, higher costs being associated with outsourcing product, high scrap rates, a lot of things that we can get our arms around but doesn't happen overnight.

And some clarity on what the loss were, what we expect them to be at the end of the year.

So, I think from a time line standpoint, Vince already talked about what the loss was in Q1.

We expect to cut that essentially in half by the end of the year.

By next year I would hope by the middle of next year, hopefully we've got them all back to breakeven but I've really only got clarity at this point in time with the action plans we have in place, take us out to the end of this year.

SG&A actually came down sequentially.

Should we be thinking about the run rate in the first quarter as kind of indicative of what we'll see for the remainder of the year?

SG&A?

Yes.

You know what?

I haven't really focused -- I think the way you should think about it is if you look at absolute dollars, it's probably a better indication than just a percentage of sales.

Absolute dollar's going to move around a little bit but probably a better indication than just percentage of sales because that's going to be impacted by a whole bunch of things like what happens with tooling.

We talked about tooling being higher.

What happens with the sales at Magna, remember Magna purchases lots of components but its SG&A as a percentage of sales is significantly lower than the rest of our business.

A bunch of moving pieces.

Absolute dollars is probably a better way to look at it.

You can see that the numbers were about $5 million apart.

Okay.

That's helpful.

Thank you.

Himanshu Patel with JPMorgan.

Hi.

Good afternoon, guys.

I wanted to go back to the Europe question.

If you take the $50 million loss you mentioned in the four interior, exterior facilities and just kind of assume that's breakeven in Q1 that would kind of get the European margins to 2.5%.

I guess the question is, that's better, but definitely still significantly short of North American margins.

Is this really the biggest piece of margin improvement or are there other big buckets that you just haven't quantified but collectively the impact of some of the other items like launch costs or Russia or whatever could still allow the margins to get a lot better than the 2.5% would imply.

I think you're missing a couple of things.

First of all, if you just look at the four operations that Don referred to, one's been closed so we're now left with three.

And as Don indicated I think in his formal comments, we had $50 million of losses.

So, just getting them to breakeven helps us.

Our objective is not to get them to breakeven, it's to generate a positive margin on them.

The next thing that's impacting Europe is new facility costs for a number of facilities.

We have I think just seven or eight facilities, some have been under way in '09 and '10 and are going to be launching at some point, particularly in Russia, in late '11.

Some others are going to be launching in '12 and '13.

So, there is a significant amount of investment for new facilities.

And again, when you look at Europe's profits and you impact that by new facility costs, that's going to have a negative impact.

And finally, you have Magna.

I noted in my formal comments that this year all of contracts right now are on a fully costed basis which means that we had high sales and high cost of sales and lower margins.

That's going to disproportion impact Europe's reported margins versus consolidated margins or North American margins.

But having said all that, when if you can back all that out, European margins right now are less than where they are in North America.

We do have some other divisions that are losing money, some of them are not operational, some of them because of launches.

We do have plans for more than just these three facilities but we're breaking out the three just because of the significant loss but there's other room for movement there.

Just a clarifying point.

The $50 million loss in Q1, was that for all of the four facilities combined?

That's correct.

Okay.

What Don talked about was by the time we get to the end of the year, that we expect that loss to be less than half of that.

And I guess a follow-on question there is what's kind of the game plan for the remaining three plants?

Are those restructuring jobs or could there be some additional sales of one or two or three of those facilities?

I don't want to say too much about it.

Some of it can be operational improvement, getting through some launches, in-sourcing business, reduced premium, freight.

We do have a handle now on the quality and the delivery because we were fighting with that Q4.

So, at least once we get that under control, we're supporting our customer and we can focus on cost optimization.

So, we're looking at the various options but don't want to say too much more at this point in time.

Okay.

Just shifting gears, a question on the corporate segment.

I think the way you account for it now, E-Car losses are included in inside of that now.

Just want to understand, what happened on E-Car.

Did you equity stake percentage in the JV go down in this quarter?

Let me explain what happened.

In Q4, we were consolidating E-Car.

Included in corporate would have been 100% -- we would have separated E-Car.

Our loss was $37 million on the operating line under Canadian GAAP.

Now we moved to US GAAP so we're equity accounting.

So, if you go back and you restate 2010, the equity income loss, and someone's going too look it up for me -- okay.

I'll get you the number in a second.

Equity accounting E-Car right now.

Now, if we look at I guess Q1 to Q1, which is what we've got in the segments for corporate, what we have in Q1 for E-Car is $18 million, which is our share of the loss on an equity accounted basis.

So, E-Car's operating loss on the pre tax line was $25 million.

In Q1 of 2010, E-Car didn't exist as a separate entity.

It was a part of Magna.

So, it was just a regular operating division and in Q1 2010 what we have included in the corporate line is 100% of E-Car's loss which was $18 million.

Coincidentally, the amount included in corporate for E-Car, Q1 '11 and Q1 '10 is identical at $18 million.

Comes out from an accounting standpoint.

From a practical standpoint operationally I think the number was $39 million was the loss, if I'm not mistaken, in Q4 and the run rate of the loss in Q1 for the whole entity was $25 million.

And we would -- I think the next question's going to be what do we expect for the rest of the year.

Best guess I would say for the rest of the year would be $25 million loss in E-Car for the first quarter, I would expect that to be relatively consistent for the next three quarters of 2011 as we're getting through some launches, focus on trying to reduce that but I think that would be our best estimate at this point in time.

And get into launch of some new product later.

That's useful clarification.

There was a footnote on the corporate segment that I made a reference somewhere in the press release about recovery, that the segment had benefited from the recovery of previously expensed engineering and design cost.

Was that material this quarter?

It was Q1 of last year.

It was last year.

Understood.

Great.

Thank you very much.

Thank you.

Peter Sklar, BMO Capital Markets.

The $50 million loss at the four plants you're talking about in Europe, is that the annual loss rate or is that the quarterly loss?

That's what we lost in the quarter.

In Q1?

Right.

Okay.

And then just want to clarify some of the discussion on E-Car.

So, if we look at 100% of the venture, not your proportionate interest, my understanding is if I'm reading the numbers right, it lost $37 million in Q4 '10, and now it's lost $25 million in Q1 '11.

Is that correct?

On 100% basis.

Yes.

That's correct, Peter.

And the fact that the $37 million was reported under Canadian GAAP and the $25 million is reported under US GAAP, is that still an apples-to-apples comparison?

The $35 million -- let's go back to -- sorry, $37 million in Q4, right, we would have had 100%, then we would have had a minority interest recovery.

Right.

So, if we're looking at pretax, we would have had a hit of $37 million.

On a US GAAP basis now, Q4 would be about $26 million on the equity income line.

But I wasn't thinking more how Magna discloses it, but I'm just wondering if its changes the way that the joint venture does its accounting.

No, no.

No, from a joint venture standpoint, Canadian GAAP or US GAAP there's no change in what it's reporting at all, Peter.

It's just the way we take those numbers and either show them gross on a consolidated basis ie, old Canadian GAAP or whether we just show them net on an equity basis like we did in Q1 of this year.

That's clear now.

Sorry, just to clarify.

The $37 million loss on the pretax basis in Q4 is $25 million -- has been reduced by $12 million, so the loss was only $25 million in Q1.

That's 100% of the loss.

Right.

Okay.

Just on your guidance, like on your margin guidance, when you previously provided your margin guidance concurrent with Q4 results, you talked about -- I forget the exact wording but you talked about 5% or approximately 5% range per operating margin.

Now in your new schedule you're talking low to mid-5% range, just kind of if you read into the wording, implies a slight improvement.

Does that all have to do with with the change from Canadian GAAP to US GAAP because you're excluding some of these ventures like E-Car system.

Before our guidance today, what we did in the slide presentation is we took the February guidance which was approximately 5% and sales and all that and we then applied US GAAP, the same set of numbers and the impact of that was to reduce sales because we're not consolidating E-Car and a couple of other entities.

And we recorded the difference on the income statement in equity income.

So, the approximate 5% gets translated to low to mid-5%.

So, that's an apples and apples identical.

Canadian GAAP, one in US GAAP.

The guidance we gave today kept the operating margin range consistent at the low to mid-5%.

Okay.

I have that.

Thank you.

And then one issue you didn't address is previously you had provided some guidance related to the two-year period, 2012 to 2013.

I believe you had said that you anticipated your production revenues to grow $3 billion during that quarter.

Has this changed from Canadian GAAP to US GAAP altered that guidance?

I guess, Peter, if you were to go back and remember, the guidance when we talk about '11 to '13, sales growing by approximately.

Based on our business plan assumptions, foreign exchange rates, volumes and so on.

Again, if you take the same exercise and apply US GAAP to that approximately $3 billion, that number would be reduced by about $400 million.

Again, so we were accounting for entities that we would have proportionately consolidated or are consolidated and now we're equity accounting.

There's no change in earnings but an impact on sales.

Having said that, I don't want to get in the habit of updating where we think 2013 sales may or may not go, but we do have new business awards that were booked in the quarter and that when you look at when those sales are actually going to come in to our consolidated numbers, by the time we get to 2013, coincidentally those new business awards are going to add about $400 million to sales.

Again, it will be higher sales as we get to '14 and '15.

So, you're right, there's a reduction in our February guidance as a result of going to US GAAP.

January guidance.

Sorry, January guidance.

Thanks, Louis.

But we do have some new business awards.

So, when you look at the overall sales lines, draw your own conclusions from that.

It was a good quarter for us in regards to winning new business.

Okay.

And lastly, I'd just like to address one other area.

There has been or there is about to be a change of control at MI developments which is the landlord, your landlord for many of Magna's significant plants.

I believe some of the leases mature -- start to mature over the next few years for some of your significant plants and just wondering if you could talk a little bit about how management thinks about that and how you're going to protect those properties and is it possible one of the use of proceeds for your significant cash balances could be to buy back selectively some of those facilities?

Peter, when you look at our significant facilities, I'm not sure when the lease term comes to an end or not and there are some leases that are going to be expiring, but with our significant facilities when we originally set up MID what we insured was that we had use of those facilities.

So, we have a number of renewal options at our option to exercise for the significant facilities.

Peter, interesting question, because based on where the stock price was before, we probably could have had a good return by buying our real estate back and then spinning out the non-core properties.

But I think the noise in the system based on the fact that there was, raising assets there would have been too much of a hassle.

Now with the transaction, assuming it's going to be done.

Probably more normal evaluation.

So, to me, its just like any of our other landlords, as Vince said, we have some plants coming up for renewal, some of them quite frankly don't need the facility anymore.

We have open dialogue ongoing with MID as well as other landlords.

They know that.

I wouldn't anticipate us going out and spending money, buying back facilities.

I think we have better use for our cash.

I don't imagine that the MID wants to sell facilities anyway.

They're probably in the business to grow.

We've had an arm's length relationship with MID for years now.

I don't expect anything different to happen.

We want to make sure if we got competitive lease rates and they probably want to keep us as a good tenant.

So, I don't think anything's going to change there.

Okay.

Thank you.

David Tyerman, Canaccord Genuity.

Good afternoon.

A few questions.

First, on the European margins, the Magnas Tire facility, would it have been at what you would consider normal run rate margins in Q1 or is there still some more improvement to come from the launches?

David, I would assume that it's running at normal run rates right now.

Okay.

That's helpful.

And then on the equity income, the arrangement, that sounds like the partner's going to buy out the option.

Does that run through the EBIT of some segment, North America, whatever?

Through corporate.

It's in corporate, David.

It's in corporate?

Okay.

Thanks.

And then on the content per vehicle, if I have calculated it correctly and calculated your guidance for the year, it looks like it's going to come down quite a bit in the remainder of the year, maybe about 50 bucks a vehicle.

I'm talking about North America specifically.

Is that all mix or is there anything else?

Yes, it's mix predominantly, David.

Okay.

It was very strong in the first quarter.

Okay.

Fair enough.

And then I notice that you invested $55 million in reimbursable tooling and engineering and one of the areas was complete vehicle engineering and assembly.

Do you have more assembly business you're bidding on?

Or that you have?

The capitalized cost, David, relates to a big part of it for programs that had been awarded in North America and they're production contracts, not assembly contracts.

Okay.

And then finally, on the tax, I notice that there was a statement that $67 million of unrecognized tax benefits, looks like there's a good chance it could be recognized this year.

So, your guidance I think is 20%, roughly, for the year now.

If this went through, would it take it down more like to around 15%?

I don't think that's what the note says, David.

And this is new to us under 10-48.

But what we need to disclose in the note is some of the amount of tax liabilities that we've got on the books, that how much of that do we believe is going to be settled in the course of the year.

And I think our estimate is that there's about $67 million plus or minus of issues that we think will be settled one way or the other in the year.

To the extent they're settled in a more favorable light, then we could potentially have something reversing to the tax line.

If they get settled as we've accrued, there's not going to be any impact on the income statement, just a balance sheet impact.

Okay.

Thank you.

Michael [Alenzy] with CIBC.

Don, just wanted to clarify a comment you made earlier on E-Car.

Was it your thinking that losses at E-Car would be relatively stable for the rest of the year relative to first quarter?

We just finished that business review and the best estimate at this point in time is if you just assume that the $25 million loss in the first quarter stays relatively constant throughout the year, that's based on the programs, based on launch costs, based on everything else.

A lot of activity to scrutinize that number but I think that's our best guess at this point in time.

And then getting into 2013, then we're starting to launch some of the business which we're expensing to start-up right now so that should start improving.

Now, the Ford Focus electric, that should ramp up production either late this year or next year.

Would that entail some additional costs or do you think they're contained in the $25 million in losses you're incurring in quarter right now?

That's all taken into account.

Okay.

And then just going back to Europe.

Looks like there were quite a few issues, you mentioned earlier the poor pricing on some contracts, some overbooked business.

Just wondering in North America coming out of the downturn, you're able to hit some pretty good margins very quickly.

What happened in Europe, from a managerial operational standpoint that these problems weren't recognized earlier and how do we know issues don't come out in 2012, 2013 in a similar nature?

Just any kind of color you can add there.

Okay.

We have a lot of operations in Europe that are quite good, good management teams, they've got good control of their business.

We had a number of divisions that for whatever reason didn't properly quote or book business or get ready for the launch.

I'm not sure whether that's because we cut some of the overhead out to effectively launch this business but we certainly had --we've had some issues.

We've done a pretty deep dive across the plants.

I'll never say never but I'm not anticipating any brand-new issues coming out of the woodwork.

We've been back up.

Production's picked back up for a while now.

We do have a lot of new launches going on which hopefully is good.

So, I don't anticipate anything major beyond what we're already working on there.

As I say, a lot of the divisions are quite good, good technology, they're running well.

So, it's a handful of about 10, 11 divisions that we're really focused on.

We talked about the 3 -- the 4 -- 3 big ones and the 1 that's already been dealt with.

Okay.

Then just last question.

Given your share -- your stock price, you have made up some of the valuation gap that was attributed to the - call it histrionic discount before.

Looks like there's still some more to make up there.

Any discussion at the Board of increasing the share buyback beyond just cancelling share option dilution?

No, we had a good discussion with the Board yesterday on -- we have cash.

What are we going to do with the cash and the various options there.

I think our multiple is still low for a number of reasons.

1 of them was a bit more clarity on E-Car losses and what's going on there, which hopefully we provided.

Another one was what's going on with the under performers in Europe, so we're going to give a bit more clarity on that and we just need to execute and get that turned around and then that translates into our overall margin.

We're trying to give as much detail as we can to explain why the margins are where they are, why they haven't gone up, all the factors there.

So, I would expect if we can execute on the plan, we are winning business, we can show we've got good top and hopefully bottom line growth and we are looking at a lot of opportunities for greenfield operations and putting capital in existing operations because we have got some good wins and we're looking at some other areas and we are still looking at acquisitions.

We're not going to talk about anything unless we get it done.

But there's no serious talk about saying we don't have a good use for our cash to get good returns on it.

But we talked before, we want to have a good, consistent dividend policy so nothing major has been discussed or anticipating we change in the short-term.

Thank you.

Next question comes (technical difficulties) Citigroup.

Please proceed.

Thanks.

Good afternoon.

Just want to make sure I'm clear on the accounting again for E-Car.

So, if it's $18 million in equity income, that means that the equity income ex-E-Car in the quarter was about $54 million, just 36 plus 18?

That's correct.

Okay.

And then the entity that the majority holder may buy back, that did about $23 million of equity income last year, that same entity.

That's correct.

Okay.

And then can you maybe just talk about regionally where some of these equity interests are spread around globally, just any bit more color on that?

They're spread globally.

Canada, North America I should say, Europe, and rest of the world.

Okay.

So there isn't one region, okay, that has a predominant share.

Okay.

And then last quarter on margins, I think Vince you talked about North America being about flattish this year versus '10.

Is that still what's embedded in your latest guidance?

I'd say flattish is still the right term.

Talked earlier about I think the benefit in North America is going to be incremental pull-through on additional volumes and some headwind on commodity costs but I think flattish is still the right way to look at it.

We still have launch costs, new facilities costs in North America in 2011 that are impacting results.

And then lastly, just one more on commodities.

You mentioned that the headwind has increased since you last gave guidance in the beginning of the year.

Can you maybe share order of magnitude of how much that increase was, in terms of percentage or dollar numbers, 10%, 15% higher than you thought or something even higher than that?

Well, you know what, it's a hard number to completely understand.

Things are pretty volatile in that market and so it really depends where resin pricing ends up in the course of the year, as well as how successful we are in offsetting some of that through discussions with customers on give backs or potentially some compensation for increased commodity costs.

So, it's not a straightforward number that I can give you, it's X percent or Y percent, it's pretty complicated.

Okay.

That's fair enough.

Thank you.

[Semil Akhatar], Sentinel Investments.

Yes, thanks.

Just trying to understand your guidance on 2011 outlook.

You increased the number of units for North America and Western Europe, but your total sales outlook went much higher than the increase in units?

Could you help me reconcile those, what are the puts and takes on that?

I think just a couple things that are impacting overall sales.

Our revised outlook.

One is increased outlook for production volumes and traditional markets of North America and Western Europe.

Additional sales at Magna's Tire.

Additional assembly volumes and additional sales.

Then there's two other additional sales in the rest of the world and the other component that's impacting sales is going to be translation as a result of the strengthening of the Euro and the Canadian dollar in particular, against our US dollar reported currency and one other thing that's impacting the growth in sales from our last outlook to this outlook is additional tooling sales.

Okay.

I understand that there is no increase in content per vehicle.

There was a question asked about reduced content per vehicle.

Is that a sign that you -- somewhere your content is decreasing or you're losing some of the wins that you had in the past?

Well, we're not giving guidance on content going forward, but just generally without losing business, just the mix of business, the mix of programs that are being run relative to the average can drive negative mix and content and we said that's what we're expecting in the back half of the year relative to the first quarter.

Can I go back for some clarification.

Was your question why are sales -- can you account for why sales are going up from our last guidance to this guidance or are they going down.

What was your question, I'm sorry?

The question was basically related to the number of units going up.

Your sales guidance is going up much higher than what the unit sales are going up by.

You did answer that basically.

Okay.

Do you hedge any of the commodities?

Do we hedge any of the commodities?

Yes.

Do you -- steel is the biggest commodity.

For resins, any of the things that you use, it has a negative margin impact as the commodity cost continues to rise, so do you enter into hedges for those, any kind of long-term contracts so you can better control the cost?

In terms of steel, either on customer resale programs or fixed contracts for a year or so.

There's got a hedge there on steel.

When you look at some of the other commodities, I think we've got some hedges in place for copper.

Resin, we don't hedge.

And one of the reasons, we're trying to see whether we can get some perfect correlation with something and resin pricing and we haven't been able to find a pretty good correlation.

So no, we're not hedging on the resin side.

Okay.

Thanks.

Operator, if there are any more calls we'll take one more question and then we'll end it.

Peter Sklar, BMO Capital Markets.

Vince, I just got lost in some of the arithmetic with respect to the equity income for the quarter.

So, reported equity income of $36 million, that was net of $18 million loss that you would have brought in with respect to E-Car services, so the equity income prior to E-Car systems was $44 million.

And then the question is of that $44 million, how much of equity income how much relates to the entity that could be taking -- could be taken from you through the exercise of the option?

Peter, actually the 36, if you back out E-Car, comes to 54, not 44.

36 plus 18.

Right.

I'm not good at adding in my head, but I agree.

That's okay.

Just make sure when you get a target out for our stock price that you add correctly and get the right number.

Okay.

Just in terms of the entity that I talked to you about, I don't really want to specifically talk about income in the quarter.

I think a good reference point, Peter, go back to our 2010 statements on a Canadian GAAP basis because the equity income was substantially all related to this one entity we're talking about.

That gives you kind of a feel for what the annual equity income was from that entity in 2010.

Okay and when could this transaction close?

Or be effective from a financial reporting?

If it closes, it will be completed by the end of Q2.

Okay.

That's all I have.

Thank you.

Great.

Well, I would like to thank everybody for joining us this afternoon.

I think we've had a good start to 2011.

And in addition to the long-term strategies which we're working on putting in place, we're going to have a top priority to continue to focus from an operations standpoint on turning around the underperforming divisions and I think we've made good headway and we've got more room to go.

Thank you, everybody.

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

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