Magna International Inc (MGA) 2011 Q2 法說會逐字稿

Good morning, ladies and gentlemen, thank you for standing by, and welcome to the Magna International second 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, Friday, August 5, 2011.

I would now like to turn the conference over to Don Walker, CEO.

Please go ahead.

Thank you.

Good morning, everyone, and welcome to our second quarter 2011 conference call.

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

Yesterday, our Board of Directors met and approved our financial results for the second quarter ended June 30, 2011, and this morning we issued our press release.

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

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

I wanted to comment on our second quarter results, Vince will get into the details later on.

We are generally pleased with our results in North America.

We generated a good margin overall despite being faced with higher commodity costs.

We continue to invest in new facilities and programs which have a negative, short-term impact on earnings.

We also incurred costs associated with the integration of an acquisition, as well as due diligence costs for new and potential acquisitions.

Substantially all of our operations are running well in North America.

Our Rest of World segment also performed in line with our expectations.

As we continue to grow, we are further investing in new facilities which are hampering operating results in this region in the short term.

However, most of our established facilities are running well in Rest of World.

Our Europe segment under performed again in the second quarter, missing our internal forecast for the quarter.

The exteriors and interiors facilities that lost approximately $50 million in the first quarter, lost even more in the second quarter on higher sales.

In addition, certain other exteriors and interiors operations struggled in the quarter.

Improving results at our underperforming divisions in Europe remains our number-one priority and we are taking appropriate steps to address the issues.

Specifically, we announced today that we reached an agreement to sell one of these 3 remaining facilities, one of these three significant underperforming exterior and interior operations.

The purchaser will assume the business effective July 1, and we will incur a charge of approximately $100 million in the transaction.

The sale is expected to close later this quarter.

The year-to-date sales of the operation to be sold were over $100 million, and the year-to-date loss amounted to approximately $25 million.

Having dealt with this operation and while we expect continued under performance in Q3, we anticipate that our losses related to this significant losing division, losing exterior and interior division as highlighted last quarter will be in the $20 million to $25 million range in the fourth quarter of 2011.

Getting our operating results near up to acceptable levels will be a multi-year process.

However, we are confident that we will get there and will demonstrate progress along the way.

On a very positive note, we had a significant amount of new business awarded in the quarter including a contract signed with BMW Group for the development and production of all the new MINI Paceman.

The MINI Paceman concept, a sport activity coupe, debuted at the Detroit auto show earlier this year.

This represents the second new vehicle program produced by Magna Steyr for MINI and will be produced on the same assembly line as the MINI Countryman.

In general, our new business awards in a number of regions around the world are driving a significant investment in new facilities.

We expect to add more than 30 new facilities by the time we come to the end of 2013.

As I said earlier, there is a short-term cost of these new facilities but they are necessary to drive long-term growth in sales and earnings.

On the M&A front, we completed two transactions recently.

We expanded our footprint in China through the establishment of a three-party joint venture including Magna at 51%, Changshu Automotive at 34%, and Cherytech at 15%.

The assets of the joint venture consist of an injection molding and painting operations in southeastern China.

The 300,000 square-foot manufacturing plant, with 2010 sales of over $40 million, supplies its primary customer, Chery Auto, with front and rear fascias.

This represents our first investment in China for our exteriors business.

In late May, we also completed a transaction which require Continental Plastics.

Continental's 2010 sales are approximately $80 million, mainly in interiors.

We will invest to restructure and consolidate facilities, including $5 million which we incurred in the second quarter of 2011.

Lastly, we announced in July that we have renewed our global credit agreement.

This new $2.25 billion four-year agreement, which matures in July 2015, together with our substantial cash balance gives us tremendous flexibility to grow our business.

With that, I will pass the call over to Vince.

Thanks, Don, and good morning, everyone.

I will review our financial results for the second quarter ended June 30, 2011.

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

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

In the second quarter of 2011, the only unusual item was a gain on disposal from the sale of our 40% non-controlling interest in an equity account of investment which increased operating income and net income by $10 million and diluted earnings per share by $0.04.

Note that our investment generated $14 million in equity income in the first half of 2011.

In the second quarter of 2010, we recorded restructuring and rationalization charges which resulted in a $24 million reduction in operating income, a $20 million reduction in net income, and a $0.09 reduction in diluted earnings per share.

These charges related to the plant closure of our power train systems facility and 2 body and chassis facilities in North America.

The latter 2 facilities have been closed, the power train facility is expected to close in mid-2012.

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

In the effective quarter, consolidated sales increased 24% relative to the second quarter of 2010 to $7.3 billion.

North American production sales increased 20% in the second quarter to $3.5 billion despite essentially level vehicle production at 3.1 million units.

The increase is primarily a result of the launch of new programs, the strengthening of the Canadian dollar against the US dollar, an increase in production volumes on certain existing programs and an increase in content on certain programs.

Partially offsetting these were programs that ended production during or subsequent to the second quarter of 2010, and net customer price concessions subsequent to the second quarter of 2010.

European production sales increased $548 million, or 32%, to approximately $2.3 billion from the comparable quarter.

Western European vehicle production increased 2% to 3.5 million units.

Other factors contributing to the increase in European production sales include the launch of new programs, the strengthening of the euro against the US dollar, an increase in production volumes in certain existing programs, and acquisitions completed during or subsequent to the second quarter of 2010, including Erhard & Sohne.

These factors were partially offset by programs that entered production during or subsequent to Q2 2010, and net customer price concessions subsequent to the second quarter of 2010.

Our Rest of World production sales increased 48% or $109 million to $335 million in Q2 2011, primarily as a result of acquisitions completed during or subsequent to the second quarter of 2010, consisting of Resil and Pabsa, programs launching in China and Brazil during or subsequent to the second quarter of 2010 and the strengthening of the Brazilian and Chinese currencies, each against the US dollar.

Complete vehicle assembly volumes increased 57% from the comparable quarter, and assembly sales increased 23% or $138 million to $728 million.

The increase largely reflects sales related to new vehicle launches including the MINI Countryman, the strengthening of the euro against the US dollar, as well as higher volumes for the Mercedes-Benz G-Class and Peugeot RCZ.

These factors were partially offset by programs that entered production during or subsequent to the second quarter of 2010 including the BMW X3 and the Chrysler 300 and Jeep Grand Cherokee and lower volumes for the Aston Martin Rapide.

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 25% or $1.4 billion in the second quarter.

The primary reasons for this increase are the higher production sales in all regions and increased assembly sales.

Tooling, engineering and other sales increased 14% or $61 million to $484 million from the prior year.

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

Gross margin in the quarter was 11.7% compared to 14% in the second quarter of 2010.

The decline in gross margin percentage was substantially due to operational inefficiencies and other costs of certain facilities.

In particular, at certain exteriors and interiors facilities in Europe, an increase in complete vehicle assembly sales, which have a lower gross margin than our consolidated average, favorable settlement of certain commercial items in the second quarter of 2010, pre-operating costs incurred at new facilities, increased commodity costs, higher costs related to launches in our components business, higher employee profit sharing, an increase in tooling and other sales that have low or no margin, and net price concessions subsequent to the second quarter of 2010.

These factors were partially offset by increased gross margin earned on significantly higher production sales, lower costs incurred related to launches at our complete vehicle assembly operations and productivity and efficiency improvement at certain facilities.

Magna's consolidated SG&A as a percentage of sales was 4.9% in the second quarter of 2011 compared to 5.3% in Q2 2010.

The decline is substantially due to our efforts to contain costs while sales have increased and lower executive and stock-based compensation, partially offset by due diligence costs related to completed and or potential acquisitions and higher group and additional incentive compensation.

Our operating margin percentage declined to 4.8% in the second quarter of 2011 from 6.6% in the second quarter of 2010.

Lower gross margin percentage, partially offset by the lower SG&A percent of sales, led to the decline in operating margin.

Our effective tax rate increased to 22.7% for the second quarter of 2011 compared to 19.4% in the second quarter of 2010.

The increase primarily relates to an increase in losses not benefited in Europe and an unfavorable mix of the earnings partially offset by the higher utilization of losses in the United States that were previously not benefited.

Net income declined $43 million to $272 million for the second quarter of 2010 compared to $315 million in the comparable quarter.

Diluted EPS were $1.11 compared to $1.39 in the second quarter of 2010.

The decline in diluted earnings per share is the result of the decline in net income and an increase in the weighted average 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 associated with stock options, partially offset by the effect of the repurchase and cancellation of common shares pursuant to our normal course, [issue or bid].

Next I would like to elaborate on Don's comment related to our segments comparing the second quarter of 2011 to the first quarter of 2011.

In North America, production sales declined $30 million.

However, foreign exchange contributed about a $25 million increase in production sales, and pulled through at our average margin.

Excluding foreign exchange, production sales declined approximately $55 million which led to a reduction in EBIT.

In addition to the impact of the lower sales, we incurred more costs related to acquisitions including integration and due diligence, higher launch and commodity costs, as well as costs for new facilities, which together, contributed to the $30 million reduction of EBIT in North America.

Nevertheless, our EBIT margin on total sales in North America was an acceptable level of 9.5%.

In Europe, production and assembly sales increased by $130 million sequentially, although approximately $140 million relates to currency translation.

The profit impact on the translation is close to zero given our current lack of profitability in Europe.

New facilities and commodity costs also negatively impacted Europe's results.

The largest factor negatively impacting our EBIT sequentially was the under performance of certain facilities, particularly in our exteriors, interiors businesses.

The 4 identified last quarter lost approximately $50 million in Q1 and about $60 million in Q2.

The sale of the underperforming operations disclosed today, combined with the facility closure disclosed last quarter are evidence that we are working to address the situation.

I will now review our cash flows and investment activities.

During the second quarter of 2011, we generated $485 million in cash from operations prior to changes in non-cash operating assets and liabilities and invested $170 million in non-cash operating assets and liabilities, a large part of which is related to tooling for upcoming program launches.

Year-to-date, we have invested $778 million in non-cash operating assets and liabilities and expect the recovery of some portion of that in the second half of 2011, in line with typical seasonal patterns of working capital.

For the quarter, investment activities amounted to $285 million, comprised of $226 million in fixed assets, $45 million increase in investments in other assets and $14 million to purchase subsidiaries.

Our Board of Directors yesterday declared a quarterly dividend of $0.25 per share with respect to our common shares.

The dividend is payable on September 15 to shareholders of record on August 31, 2011.

Our balance sheet remains strong with $1.6 billion in cash net of debt as of June 30, 2011.

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

I will now pass the call over to Louis.

Thanks, Vince.

Good morning, everyone.

I'd like to review our updated 2010 full-year outlook.

We have reduced our vehicle production expectations for North America, largely reflecting a slower recovery of production by Japanese OEMs in North America, as compared to our view in early May.

We now expect 2011 North American vehicle production to be approximately 13 million units compared to 13.2 million units in our May outlook.

Our expected 2011 European light vehicle production volumes continues to approximately 13.6 million units.

We've increased our North American production sales expectation to between $13.2 billion and $13.7 billion for 2011 compared to our previous range of $13 billion to $13.5 billion.

A higher average Canadian dollar relative to our prior outlook, the recent completion of the interiors acquisition in the second quarter and improved program mix account for the overall increase.

European production sales are expected to remain in the range of $8.3 billion to $8.6 billion.

Rest of World sales are expected to be in the range of $1.3 billion to $1.5 billion, up from our previous outlook of $1.2 billion to $1.4 billion.

This is primarily a result of higher production volumes than previously anticipated.

Our complete vehicle assembly sales range remains in line with our previous outlook at $2.6 billion to $2.9 billion.

As a result of the increased expectations for production sales in North America and Rest of World, we now expect total sales to be in the range of $27.5 billion to $28.9 billion.

This is up from our previous outlook of $27.1 billion to $28.5 billion.

We expect our consolidated operating margin percentage to be approximately 5%.

Our prior outlook was the low- to mid-5% range.

The reduced margin outlook relates entirely to our under performance in Europe, including the second quarter under performance.

Our effective tax rate has been increased slightly to approximately 21%, reflecting the under performance in Europe, where we are unable to tax benefit the losses.

And for the full year 2011, or 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 morning.

We would be pleased to answer your questions.

Thank you.

(Operator Instructions).

Our first question comes from the line of John Murphy from Bank of America Merrill Lynch.

Please proceed with your question.

Good morning, guys.

Just wanted to follow-up on the European interiors and exteriors business, just wondering strategically as you think of those in the coming years, if those are businesses that you want to remain in or maybe would those be businesses that in addition to these plant closures, that you might look to shave off the Company in aggregate and refocus on other businesses?

Good question.

We have some good operations over there.

The one business unit where we made the deal to sell is for non-strategic products.

It was in the carpet business which has not been strategic to us for quite a while.

Some of the other business is quite healthy in other areas of the world and we'd like to be a global player.

But we are doing a high level review of all of our products.

We have set a target for ourselves.

We want to be a profitable, dominant, being in the top three or four position globally in each of our product areas, so we are open to looking at all options.

But I am confident we can get the business unit back to profitability but we are willing to take the actions as we've done already, closed the one facility, sold the other one.

We have to have all of our plants back to profitability or we will take the actions to get them there.

Okay, does that mean that you are actually sort of -- there's a strategic review going on in interiors or other parts of the businesses might not be part of your core strategy in the coming years?

We have always -- we always look at what product lines we are in.

Magna is the most diversified of all suppliers as far as our product lines are concerned.

And we are sitting on a fair amount of cash and generating cash.

So as Vince said, we have spent some money on some due diligence in the last quarter.

And we are looking to strengthen our position in areas that we can be in really good position in globally and in other areas we will consider taking action if it's not strategic long term.

I'm not going to say specifically what we are looking at or what areas, but we have been looking at in the past and we are doing a pretty thorough review right now.

Okay, then second question, just on the 30 new facilities you said that you would open through 2013, I'm just curious if there's been another period of big growth like that you could highlight where you opened a lot of these facilities and executed?

Because it sound like it's a big ramp-up in facilities, just curious what that is relative to history?

It is probably not that unusual.

I'm just trying to think of the number we launched in 2010.

I think it was ten facilities.

Let's see if we've got it handy here, we have sort of a master -- and we are averaging about ten going forward anything that at the -- actually was nine in 2010.

We have about 13 coming on-stream in 2011 and sort of a balance around ten in the next couple of years.

It's pretty well consistent, I would say, with what we've done in the past.

We are seeing a real push to grow in South America, being Brazil, primarily, and also in other regions, we've seen a lot of growth in China and Asia.

And some facilities in India.

So it is pretty well in line with what we want to do from a geographic footprint standpoint in growing the emerging markets and it's not an unusual number.

John, I sort of think of it when you look at where the greenfields are going in, they are spread out through a number of our product areas, so it's not just in sort of one group that has these new facilities.

So in terms of execution when you look at the 30-plus facilities that we talked about and you sort of divide that by the number of product groups that we have, although on a consolidated basis it is a big number, by group, it is an insignificant.

So from an execution standpoint historically the number is big, we probably haven't done that big of a number over a short period of time but if you look at groups historically and one group is launching two or three or four of them, historically a group would've launched two or three or four of them and would've been successful at it.

So we're confident that as these facilities ramp-up in production we're going to see a couple things.

The first is certainly a growth in sales, especially as Don talked about, in emerging markets which we've been focusing on, a reduction of our investment for new facility costs and an incremental profit going along with the sales.

Okay, that's helpful, and just one last question on the Chinese JV that you guys formed in the quarter, you had a 51% -- it looks like a 51% controlling stake.

Is that correct?

And that's kind of unique relative to what the Chinese government is enforcing for new supplier entrants over there, I mean, to getting a majority stake and potentially controlling stake, is not the norm for new entrants, I'm just trying to understand how you were able to achieve that?

And if you can't achieve that going forward as you open and increase business in China?

A lot of our facilities are 100% wholly-owned so I think that may be the case in very large operations, if you are looking at assembly operations, but from the parts side, we have a lot of facilities where we've got the majority or we've got 100%.

So I don't think it is that unusual.

Okay, great, thank you very much.

Thank you.

Our next question is from the line Richard Kwas from Wells Fargo Securities.

Please proceed with your question.

Hi, guys.

Good morning.

How are you doing?

When you think about the second half of the year with T900 production coming down, Vince, how should we think about impact on margins?

I know you revised the full year outlook for operating margin, but I know that has a lot to do with Europe.

So as you think about the North American piece, do you expect margins in the second have to be as strong as they were in the first half given likely lower mix?

I think when you look at the second half of the year, traditionally margins are impacted just due to lower volumes.

But if I look at, specifically out three regions and what we have been discussing over a number of quarters, in terms of North America our view was that between sort of 10% and 11%.

Margins would be kind of flattish and our view hasn't changed at all in that respect.

We still continue to expect for all of 2011 North American margins to be flattish.

And the Rest of the World we've talked about the significant investments that we are making between sort of 2010 and 2011 we expect margins to be impacted negatively.

We still expect that, but I think, when I look at kind of where we were last quarter and this quarter, a little bit more optimistic that the negative is going to be a little bit smaller but keep in mind, Rest of the World segment is still a pretty small segment.

The deterioration in margin from sort of our prior outlook to where we are today is attributable entirely to Europe.

Don talked about that in his comments, I talked about in my comments.

So we are on track with North America, Rest of the World, and as we work on gaining or making improvements in Europe, that will lead, I believe, to margin expansion and improvement in Europe, but that is going to take us some time.

Okay, that's helpful.

And then, Don, could you just a little more color on Europe?

Just as we think about it with the interior and exteriors business.

How much of this is related to supplier issues?

How much of it is related to just bad pricing with the contracts that were signed a few years back?

And then, how much -- it sounds obviously like there's some issues with the operations, the core operations, but if you could just kind of break out the buckets of what's impacting you the most over there?

I won't even try and do it by dollars but the biggest impact is, in the downturn, there was an effort to -- rather than aggressively restructure was to try and keep our plants full, and I won't go through the reasons why but we've got some under priced product in a number of our plants.

So that's the number one reason.

And then we've got some raw material increases which doesn't help.

We've also, because the market came back faster and stronger than people had anticipated a couple of years ago, we've actually got a couple of plants where we've got more than 100% capacity and they are mainly in the couple of plants that --painting.

So we've had some quality problems, we haven't been able to meet the expectations of some customers and that's driven a downward spiral.

So if you have quality issues getting containment, containment, mean we have outside people checking the parts, you have two or three people looking at it which means scrap rates go up, which means you have to repaint, throws your schedule off.

We've had to outsource because of that, that's a very expensive piece price standpoint and transportation standpoint, extra handling.

So in a paint job, you're either sort of continually improving or going in a downward spiral.

We've been in a downward spiral in a couple of our facilities.

I think we are getting our arms around it.

We're having a lot of discussion with customers, looking at battery samples, trying to reduce the logistics, trying to [insort,] get the product back inside our plants and it's a staggering amount of money and a lot of extra people, so that is the biggest single factor in the major facilities we've been talking about.

Okay, so on the pricing piece, though, I thought you said pricing was number one?

Or was it more kind of the inefficiencies with the excess capacity utilization?

Well, it probably depends on what month we are talking about I would say the pricing is probably the big one of the long term because that takes a while to get through.

Shorter term, the last month or two, it's been probably the last three or four months it has been more operationally driven.

But they are both significant.

Okay.

And then, just on the pricing -- lease contracts were signed during the downturn, so you really got another two or three years of kind of suffering through this before you really gets better right?

Is that the way to think about it?

In theory, yes, but I think him at the same time, we need to be able to sit down and have discussions with our customers because customers understand pricing as well.

So if we have made a mistake in pricing they don't want to have the discussion, obviously, but they are asking for price reductions where we make improvements and where we aren't keeping, coming close to our expectations should be then we need to have those discussions as well.

But it does take -- it's typically longer to resolve those issues than if you can get your arms around operational issues and fix them.

Right, right.

Okay, thank you.

Thank you very much.

Our next question is from the line of Peter Sklar from Nesbitt Burns.

Please proceed with your question.

Good morning.

You did a roll forward looking at your North American operations, Q2 versus Q1.

And, Vince, you provided calculations showing that revenues were down quarter-over-quarter.

But at Detroit Three, if you look at Detroit Three productions, Detroit Three production was up in the second quarter versus the first quarter.

So what's going on there?

Are there some negative mix issues?

Yes, ultimately, that's what it is.

We didn't lose the business, Peter.

I know if you look at the top ten or 20 programs and that might show one thing, but it's based on total sales and all programs combined.

So it wasn't -- like I said, it was some negative mix working against us but there wasn't -- we didn't lose the business along the way.

Okay.

So nothing unusual in that?

No.

Also, you talked about -- there was a recovery of design and engineering costs.

I forget which line it went through, maybe the SG&A line?

I can't remember.

Was that a significant amount?

You're looking at our MD&A?

Yes.

No, it wasn't a significant amount, Peter.

Last year there was a significant amount in the second quarter.

It was a recovery of some amounts from a customer that was pretty significant, $30-plus million in Europe.

I'm just trying to recall whether there was some recovery -- there may have been, Peter, but I just call it nothing at this point.

Okay.

And just back on your, your description of the European issues, I'm just a little confused on the number of divisions involved.

I think last quarter you said that there were four divisions accounting for the under performance but I believe you've now closed one and announced the sale of one so does that mean we are down to two or down to three?

I'm just a little confused-- can you just go through the count?

Sure, Peter.

There was four last quarter.

We talked last quarter that we were going to close one.

That took place in Q2, so that made it three.

So at the end of Q2 we are at three now.

We're announcing today that we are going to dispose of one of those three.

So by the time -- I guess that's effective July 1, so as we get through Q3, there's only two of those four that are left.

Peter, just to clarify, we were trying to put some clarity last quarter on what was going on over there.

So there were four significant losing divisions in the exterior and interior, so Vince just talked to those.

We do have some other challenges but they are not at the same level so there is some under performance in some other divisions.

So we are also working them concurrently, but we are just giving you clarity to the four biggest divisions that were having an impact.

Okay, so of the two remaining plants, are these the paint facilities that Don was referring to?

That's right.

Mold and paint.

Okay.

And just lastly, can you talk a little bit about the outlook for the E-Car and the losses?

I noticed they did stay at the loss level, did stabilize versus the first quarter, what is the outlook?

I believe there was an ownership change, what does that relate to and how is the funding of the E-Car system and when does it run out of cash?

From a financial results standpoint that we had talked about -- Q4 we had it was a significant loss, Q1 it was lower, Q2 was in the same range and we had said last quarter you can expect that, plus or minus, that each quarter would be relatively the same going forward.

I would expect to see in Q3, Q4 the results start to improve as we start to get closer to launching some business.

There's been a lot of work going on, there has been some good progress in winning some business and as they win business they're going to have expense the engineering going forward.

But I still thing the overall -- the amount of loss will go down quarter-over-quarter.

I'm not sure you said there was in ownership change?

What was that?

Peter, there's no ownership change in E-Car, it remains consistent with what it was last quarter, 77% for Magna and 23% for the Stronach Group.

There was in ownership change in the minority that --

Yes.

It's another equity account investment, Peter.

It wasn't E-Car.

Okay.

Peter, I just want to come back.

I don't want to create any confusion on your first question on design and engineering costs.

If you turn to our MD&A at some point you'll get to it.

But we're sort of talking about sort of what's happened in the quarter, we specifically talk about two things.

One is that we had a favorable set of uncertain commercial items in the second quarter of 2010, and that was over $30 million.

So that was added to income in 2010 and that was in Europe.

So we don't have the item this year.

We did say that we did recover some previous expense, engineering and design costs, but, again, that's a really insignificant number.

And that was recovered Q2 2011.

As far as, you asked also the question about the cash position in E-Car.

They certainly have enough cash, I think the amount of cash expenditure has been going down, but as they are winning business then that may ramp up again.

Frank has been extremely focused, I think we've got a pretty good team in E-Car with some interesting technology there.

I'm not going to get into when the cash will run out, obviously, Frank is looking at it very carefully and if it does run out on the latter part of next year, we'll have to make a decision on what's going to happen, but the options are fairly obvious.

It is what we can do to get outside financing to fund some of the projects that they've going.

Frank can put more money in, we can put more money in, but if it comes to that point, obviously, that would have to be something that the Board would look at really, really carefully I would expect.

Okay, so up to this point, no one has provided any further capitalization for the company?

No.

No.

Okay.

That's all I have, thank you.

Yes.

Thank you.

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

Please proceed with your question.

Thank you, good morning.

Hi, Chris.

A couple of items.

These first two kind of go together.

I'm hoping you can just revisit your expectations about the change in the loss profile.

You made some comments last quarter and now you've got an additional facility that is going to be exiting your profile.

So what do you expect will be the delta in the losses that you're making there between now and the end of the year?

Well, in the quarter, we look at those -- there was only three facilities -- well -- four we closed once, so we're down to three.

In the second quarter, those three facilities lost about $60 million.

In the fourth quarter, we expect that we are going to sell one, right?

So we will be down to two, and those two are expected to lose somewhere in the range of $20 million to $25 million.

Now last quarter, we talked about -- about $25 million for three facilities, so that the loss has gotten a little bit bigger.

We are expecting, compared to last quarter, that third quarter is going to be impacted by more losses in these facilities.

And that's going to sort of spill over into Q4 as well.

But having said that, we do see a meaningful step-down in the operating losses in these divisions from Q2 to Q4.

Okay, so relative to your prior comment, it sounds like now, by Q4 you'll be losing $35 million to $40 million.

Previously you thought it was $25 million, do I have that right?

No, no, previously it was $25 million and now it is $20 million to $25 million, but remember, we sold -- we are going to sell one of those divisions.

One of those divisions was included in last quarter's $25 million, let me back track.

The division we are disposing of lost about $25 million in the first half of the year.

So there is expected improvement in Q4 in that division, but that division was included in our $25 million number last quarter.

Okay.

You've got to take that away from the $25 million, and then we expect to be $22 million to $25 million.

So in fact, I think the number's gotten a little worse when you look at the remaining two divisions.

Okay.

Overall, $20 million to $25 million is what we expect in Q4.

At the remaining two facilities?

That's correct.

Okay.

And then, just, not to kind of take on numbers here, but I understand you changed your guidance to approximately 5% from low- to mid-5%, but you just did 4.3% in the quarter, the change in Europe is relatively small, 4.3% in a quarter where you probably had the best production and possibly the best mix that you're going to see all year.

So I'm just wondering if that approximately 5% maybe still sounds optimistic?

When you look at, we talked about those two divisions or three divisions, but remember in Europe we also have under performance in some other exteriors and interiors divisions overall because when you sort of look at Europe quarter-over-quarter and you look at the change in the EBIT, there's more than just the $10 million impact of those four under performing divisions in exteriors and interiors.

There was other under performance.

So we are expecting that to improve as the year progresses.

We will see some improvement as we talked about in those two remaining divisions.

But when we sort of look at, overall, our outlook for the remainder of this year, the approximately 5% is where we are going to be.

Chris, we were about 4.8% in Q2.

On a normalized basis.

Okay.

Operating margin.

Okay, I must not have adjusted the items.

And then, just lastly, you mentioned that there was some launch cost at Steyr in Q2.

What is the magnitude of that?

Is that part of what you're talking about here that will also be better by Q4?

No, we actually, in our comments somewhere, either in our MD&A or in our comments today, we basically said the launch costs at Magna Steyr have improved year-over-year.

They have been improving because remember last year we were launching these programs.

But that's been offset by other launch costs in other European facilities.

So on a net basis, launch costs are probably still a little negative in Europe Q2 to Q1.

But Magna Steyr has been positive.

Okay.

So it's launches elsewhere?

Okay, thank you.

Thank you.

Our next question is from the line Michael Willemse from CIBC.

Please proceed with your question.

Thank you, good morning.

Sorry, I have another question for Europe.

So just so I have it right, the EBIT in the first quarter was about $29 million, that dropped to a loss of $13 million in the second quarter.

The losses at the four under performing facilities went from $50 million to $60 million, but one of those facilities is sold in the quarter.

And then the rest of the drop was just more, I guess, problems at some of the other interiors, exteriors facilities?

Is that about right?

No.

You're missing -- let me take you through it.

We went -- you're right, we went from $29 million to minus $13 million, so that's a swing of about $40 million.

So the first thing that we've had is overall, reported sales are up and that's due entirely to translation.

If you back out the impact of the impact of the euro sales actually came down.

So sales coming down, that has a little bit of a negative impact, depending on where the sales are coming up.

As they are coming up profitable, the division is going to negatively impact earnings.

We had, Q2 to Q1, additional costs for new facilities.

And, as Don talked about, all the new facilities that are ramping up.

That was negative in the quarter and we expect that the new facility costs should ramp down in Q3 and Q4.

But in Q2 that was (inaudible.) We are also impacted Q2 to Q1 by higher commodity costs in Europe.

And we are also impacted by $10 million on those three facilities that we talked about.

The balance of it relates to under performance, primarily at other exteriors and interiors facilities.

Okay, that's helpful, thank you.

Just moving on to more Company overall could you give a sense of major launches that you are involved with in the second half of this year and that will be ramping up next year?

Sure, Louis is just pulling out his binder, Mike.

In North America, obviously, even the impact of the X3 continuing to launch is a positive for us.

The Chevy Cruze launching, we've got lots of content on that.

The Durango, we have the seats on the new Durango.

The new Ford Explorer, of course, you know the Volkswagen Passat continues to launch and that will have an impact on the second half of the year.

And the Mercedes-Benz M-Class where we have a lot of content as well.

Okay, thank you.

Thank you.

Our next question is from the line Itay Michaeli from Citigroup.

Please proceed with your question.

Hey, guys, it's Chris Reenock for Itay.

How's it going?

Good.

First question is just on the European plant closure, did you quantify the cash component of the charge?

That charge is essentially cash.

Okay.

Some of it is going to be paid over time, but the impact in 2011 will be the full, approximately $100 million -- it won't be the full $100 million, it's going to be spread over a couple years because there will be an impact, all cash, over the next couple of years.

Okay, great.

Can you update us on M&A and what you're seeing out there as far as opportunities?

Does any region in particular stand out as more attractive right now?

It's kind of difficult to answer.

All we can say is that in the quarter we have been pretty active looking at a number of things.

And we've incurred costs, obviously, in looking at them and that's impacted us, but specifically what we are looking at or where we are looking at, until we don't have something to announce I'm just going to keep it that way.

Okay, great.

And just two more modeling questions.

First, is the Q2 equity income a good run rate to use going forward?

And, second, how should we think about the tax rate for the next few years?

I will answer your second question first.

In terms of the overall tax rate, there's a couple of moving pieces.

One, in the United States, we have losses that haven't been benefited for from an accounting perspective.

So we continue to receive benefits as we are generating income in the US.

Whether it's Q3 or Q4, I suspect by the time we get to the end of 2011, the remaining losses that haven't been benefited, we're going to have to set up as an asset, as a reversal of the valuation allowance.

So that has the impact of increasing our effective rate.

Not changing our tax -- cash tax liability but (inaudible) tax the way we record income tax expense.

The other significant items impacting taxes is losses not being benefited in Europe.

So as the losses in Europe diminish in some jurisdictions, where we're not benefiting losses.

That will have the impact of reducing our overall effective rate, but all in all, I'd expect the rate to move up in 2012 or still in 2011.

We will give you a little bit more visibility as we complete our business plan and provide guidance on 2012.

But at this time I would just say, yes, I think you should move the rate up a little bit.

Okay.

In terms of equity income run rate, recall that we sold one of our equity investments and so that will result in a lower equity income in the back half of the year relative to the run rate in Q2.

Okay, great, thanks a lot, guys.

Thank you.

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

Please proceed with your question.

Yes, good morning.

On the E-Car, I was wondering once you get into production, which it sounds like your first stuff really comes next year, will you actually be in a position to get this business to break even?

Or does it continue to make losses for a persistent period of time?

It partially depends on how much business they continue to win.

So they just recently won some business that will cost money to get to production.

So I would -- I don't want to make a projection on it, but I don't think we are going to see it getting to positive cash flow for the foreseeable future, being this year and probably next.

Okay.

Okay, that's fine.

And on the Rest of the World sales and margins, the growth in the Rest of World excluding FX and the acquisitions, it looks like it was about 7%.

I'm wondering when that ramps up because it sounds like you've got a lot of facilities coming, but they don't seem to be having a huge effect on sales growth yet in the region?

Yes, I think you're going to see some ramp-up, David, starting in 2012.

Okay.

2013 will be a bigger year for us.

Keep in mind we said that we'd increase Rest of World sales by $1 billion between 2011 and 2013.

Right.

Okay, so the biggest hit is in 2013, but 2012 is also decent.

And in terms of margin does that imply that the margins probably really stay [lowish] because you've got a lot of pre-launch costs going on until these launches really get going?

I think when we look at the new facility costs in Rest of the World, we see them declining from 2011 to 2012 as facilities start to ramp up.

But there still is a pretty significant amount of investment in 2012.

Okay.

(Inaudible) in 2013.

But, David, you've got to keep in mind, this is sort of a moving target when you look at China, India and Brazil.

They are growth targets for us, we are winning business each and every quarter.

We are continuing to improve new facilities in those regions so those targets are going to move as we continue to win business.

So it's a good story/bad story.

Good story, we're growing.

Bad story, we're investing.

And that's going to impact us short term.

But by the end of your we can give more clarity on where sales will be in the out years, but we had a very good quarter as far as winning new business which I was pleased with.

Okay, that's great.

And then just finally on commodities and mentioned quite a few times in all the different regions as a hit, is there any way to quantify that?

Can you quantify that at all in terms of what it's doing by region?

We traditionally have not quantified commodity costs other than it was sort of negative, certainly, year-to-year and negative quarter-to-quarter.

Okay.

And just maybe more broadly then, were they material?

Or are these sort of -- any sense at all?

I don't know what your definition of materiality is?

I can't answer that, I'm in a void.

There was an impact, David, certainly when I look at the impact on a consolidated basis, new facility costs or commodity costs.

The new facility costs in order of magnitude were higher than the impact of commodity costs quarter-over-quarter, I'm sorry, Q2 to Q1.

The impact of commodity costs Q2 to Q2 would have been obviously more significant.

Okay.

Okay, that's great.

Thank you.

Thank you.

Our next question is from the line of Himanshu Patel, JPMorgan.

Please proceed with your question.

Hi, good morning, guys.

You've been discussing potential acquisitions for a few quarters now.

I'm curious if you guys would let us know, would you consider sacrificing an investment grade credit rating if it was temporary to make such a deal happen?

No.

We are happy to have our investment upgraded by (inaudible).

We recently received a Moody's grading at high-quality investment grade and we'd like to maintain that.

Even within that credit rating, theoretically, there is lots of opportunity there if we chose to do so to raise debt and still maintain our ratings.

So I guess the message here is you wouldn't rule out a larger acquisition than some of the ones you've done so far?

But you'd want to keep it sort of inside a turn and a half of leverage or so at most?

Is that sort of a fair bracketing?

Well, certainly, we would consider, and are looking at acquisitions that are largely the ones that we have done historically.

But remember, you called the 1.5 times, I'll use your number, if you are making an acquisition and there's actually EBITDA on a target that actually creates additional room for you.

Sure.

Okay.

The -- I guess without getting too much into 2012, just directionally as you look at your sort of business plan over the next few years in terms of Asian start-up costs or expansion plants, new platforms that you are launching, can you just give us an initial peek on kind of the direction of controllable structural costs for 2012?

Do you sort of view that directionally as being materially higher than what you incurred in 2011?

Materially lower or kind of steady state?

On a consolidated basis or are looking at it regionally?

If you have region by region color that would be great but even kind of a global view is useful.

Structural costs, I'm interpreting that to be fixed cost.

Certainly, if I think about the Rest of the World segment, our fixed costs are going to be moving up.

We are making significant investments for new facilities so as we continue to invest and we are expecting a pre-operating cost but we're also capitalizing our fixed costs.

Our fixed assets.

And we're adding direct, indirect SG&A that's direct (inaudible) is structural cost.

I would interpret that to be fixed costs.

And in some of the other -- and North America is more mature.

We do have some new facility costs but I don't really have a firm view of that that I'd like to talk about today.

I guess, Vince, I guess I should've been clear.

I'm speaking more about the rate of change.

So when you think about new facility costs, presuming you've got a lot of running through the P&L in 2011.

Does that rate of increase go higher next year or lower?

And I'm talking a little bit more broadly when I say structural cost, I'm also trying to include engineering cost in there as well.

Let me give you some color on these facility costs, I can give you in terms of the broader question, I'm not prepared at this point to deal with that.

But the new facility cost is sort of a good barometer of fixed cost we are adding to the system.

We're expecting our new facility costs, as we even move to 2011, the last of this year, to be less than a run rate in Q1 and Q2.

That should be incremental.

And in terms of where we think it's going to be in 2012, we expect the investment for new facilities costs will be less in 2012 versus 2011.

And we look at it by -- let me give you some color on new facilities by region as well.

We do have losses in North America right now in our new facilities and that loss is going to get significant less in 2012 and it will be contributing to overall profitability by the time we get to 2013.

In Europe, it's kind of the same story.

Pretty significant drop in 2012 and profitability in 2013.

And Rest of the World, again, drop in 2012, profitability in 2013.

But Rest of the World is still a moving target, as I talked about earlier in another question.

It is a region that we are focusing on, it is a region that we continue to gain significant new business.

I know even just in this quarter that we've approved some new facilities in the Rest of the World, facilities that weren't even approved in Q2.

I'm sorry, Q1.

Okay.

And then, I don't know if you would be prepared to offer some color here, but just based on kind of the prevailing production schedules that are out there from some of the third-party data vendors, do you have a view on how program mix evolves for you guys next year?

Is it kind of a tailwind or a headwind?

Himanshu, it's really too early to talk about 2012.

We haven't really looked at it in any detail.

So hazard a guess.

Okay, great.

Thank you.

And our last question is a follow-up question from Michael Willemse from CIBC.

Please proceed.

Thank you.

Most of my questions are answered, just one more follow-up on E-Car.

When we look at this business and once it kind of ramps up and, lets say, matures, even though that could be a while yet.

Should we look at it as similar to the Steyr business in that it's going to be a low margin kind of assembly-type business?

Or do you think it will be more similar to your traditional kind of parts business?

I think it depends on what product lines you're looking at.

They've got some business on components and that should be similar to our parts business.

They do have a business unit that is looking at batteries, although there's no contracts in the foreseeable future, but battery packs, I'd have to go in and look at how they are going to account for that because whether they are going to be Tier 1 to a battery supplier is being Tier 2, whether the battery supplier is direct.

So I would say it should be similar to our parts business.

I'd just have to wait and see how the orders shake out on the battery pack business.

And just to review, you've got the Ford Focus Electric ramping up at the end of this year.

You've got another European OEM electric vehicle next year and the now you've recently won another one that will start next year?

Is that right?

They've won some other business.

I'm not going to say what the business is but it will be business that is coming out in the future.

There's lots of activity going on in, obviously, the hybrid and electric space.

So I'm not going to give much more clarity on the E-Car.

Okay, thank you.

Thank you.

Thank you.

There are no further questions from the phone lines at this time.

I'd like to turn the conference back to you.

Okay, well, I appreciate everybody joining us this morning.

It's been -- with everything going on in the markets, I'm sure there's lots of other things to be focused on.

I just want to reiterate, it was a tough quarter for us in Europe.

We've got a lot of people focused on it.

We do have a lot of very good operations and a lot of very good people in Europe as well.

So we will continue to address the under performers and we expect to improve our results in Europe going forward.

So thank you, everybody, and have a good weekend.

Thank you.

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

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

Thank you, everyone, and have a good day.