Magna International Inc (MGA) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Magna International Incorporated third 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, Thursday, November 3, 2011.

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

You may proceed, sir.

Thank you.

Hello everyone and welcome to our third 2011 quarter conference call.

We held our Board of Directors meeting earlier today here in China for the first time ever.

Given the importance of China to the automotive industry and the amount of growth we have going on here, we decided to show the Board some of our operations and activities in this very dynamic market.

Joining me today from here in China is Vince Galifi, Chief Financial Officer, and from Aurora, Louis Tonelli, Vice President, Investor Relations.

Earlier our Board approved our financial results for the third quarter ended September 30, 2011, and earlier we issued our press release.

You'll 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, the discussion today may contain forward-looking statements within the meaning of applicable Securities legislation.

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

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

I will start with some comments on our third quarter results, and Vince will elaborate after that.

In North America, we experienced some deterioration in margin relative to what we had posted in the second quarter of the year.

That is, in part, due to a lower contribution margin as a result of a reduction in sales as well as higher commodity costs, higher launch costs, and some underperformance in a few divisions.

All in all, we will continue generating strong margin in North America, but some of these factors will continue into Q4 of 2011.

Our Rest of World segment continues to perform essentially in line with our expectations as we continued to invest in a number of new facilities in different regions around the world.

The investments are negatively impacting results in the short term.

In general, our established facilities continue to run well and profitably in the rest of the world.

Our Powertrain unit recently announced the construction of a new Greenfield manufacturing facility in Tianjin.

The facility will supply VW and Audi with rear axle drives and power take-off units.

Assembly of the first units is expected to commence next year.

This is an example of a program that wasn't even in our business plan a year ago but we are currently investing for.

As many of you know, our Europe segment has been underperforming, particularly in our Exteriors and Interiors unit.

We closed a transaction in the third quarter that saw us dispose of our non-core carpet business, incurring a total charge of $113 million.

We have 2 significantly under-performing divisions remaining in our Exteriors and Interiors.

Although those 2 facilities lost $37 million in the third quarter, this was in line with our expectations and showed some improvement over the second quarter.

We expect these 2 operations to reduce this loss from Q3 to the range of $20 million to $25 million combined in the fourth quarter of 2011, consistent with our expectations of the end of the second quarter.

At this time, we won't provide detail with respect to the anticipated results for these divisions in 2012 other than to say action plans are in place to further reduce the losses next year.

Our results in Europe were also hampered in the third quarter by increased commodity costs and warranty costs as well as lower contribution due to lower sales in Q3 relative to Q2.

Finally, we continue to focus on a number of other underperforming operations in Europe.

These operations are substantially the reason for our reduced margin outlook.

Improving results in Europe remains our top priority, and we will continue to take steps to address our under-performance in this region and are making headway in many plants.

I would like to comment briefly on our use of the balance sheet.

We have indicated throughout 2011 that we intend to utilize our strong balance sheet in order to invest in the Business, either through organic growth or through acquisitions.

That strategy is unchanged today.

We will also put in place a year ago a normal course issuer bid, the primary purpose of which was to offset the dilutive impact of stock option exercises.

Due primarily to macro concerns, our stock price along with the stock prices of a number of peers has declined significantly in 201.

We believe our stock is significantly unvalued.

As a result, in August, we began aggressively buying, taking up 5.5 million shares in the third quarter and nearly exhausting our limit under the normal course issuer bid, which expires in the next week.

In addition, our Board approved today, subject to the TSX and New York Stock Exchange approval, another normal course issuer bid to purchase up to 12 million of our common shares.

This new issuer bid is expected to commence on or about November 11 and will terminate 1 year later.

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

Thanks, Don, and good morning, everyone.

I will review our financial results for the third quarter ended September 30, 2011.

Please note all figures discussed today are in US dollars.

First, note that we modified our disclosure somewhat, adding an other expense income line to the income statement to capture any unusual items that impact our results.

Adding this line keeps costs of goods sold, depreciation and amortization, and SG&A clean of such items.

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

We had 2 items in other expense income in Q3, 2011 and 1 in Q3, 2010.

In the third quarter of 2011, we recorded a charge associated with the disposal of our non-core carpet business, and we reached an agreement in connection with the settlement of certain patent infringement and other claims.

These items together reduced operating income and net income by $124 million and diluted earnings per share by $0.52.

In the third quarter of 2010, as a result of deconsolidating the E-car partnership, we recorded an investment in the partnership at its fair value and recognized a $16 million gain in operating income and net income, and a $0.07 increase in diluted earnings per share.

The following quarterly earnings discussion excludes the impact of other expense and income.

In the third quarter, consolidated sales increased 21% relative to the third quarter of 2010 to $7 billion.

North American production sales increased 15% in the third quarter to $3.4 billion while North American vehicle production increased 8% to 3.2 million units.

The increase is primarily a result of the launch of new programs during or subsequent to the third quarter of 2010; an increase in reported US dollar sales due to the strengthening of the Canadian dollar against the US dollar; an increase in production volumes in certain existing programs; an increase in content on certain programs; acquisitions completed during or subsequent to the third quarter of 2010; and an increase in sales for nontraditional markets.

Partially offsetting these were programs that ended production during or subsequent to the third quarter of 2010; a decrease in content on certain programs; and net customer price concessions subsequent to the third quarter of 2010.

European production sales increased $452 million or 28% to approximately $2 billion from the comparable quarter while Western European vehicle production increased 4% to 3 million units.

Other factors contributing to the increase in European production sales include the launch of new programs during or subsequent to the third quarter of 2010; an increase in reported US dollar sales as a result of the strengthening of the euro against the US dollar.

An increase in production volumes in certain existing programs; acquisitions completed subsequent to the third quarter of 2010, including Ehrard & Sohne; and an increase in sales for nontraditional markets.

These factors were partially offset by programs that ended production during or subsequent to the third quarter of 2010 - - the dispositions of our non-core carpet business during the third quarter of 2011 and net customer price concessions subsequent to the third quarter of 2010.

Our Rest of World production sales increased 73% or $154 million to $365 million in Q3, 2011 primarily as a result of acquisitions completed during or subsequently to the third quarter of 2010.

Including Resil and Pabsa, which positively impacted sales by $88 million, an increase in production volumes in certain existing programs, the launch of new programs during or subsequent to the third quarter of 2010 in China and Brazil and an increase in reported US dollar sales as a result of the strengthening of Chinese, Brazilian, and Korean currencies against the US dollar.

Complete vehicle assembly sales increased 28% or $144 million to $663 million for the third quarter of 2011 compared to $519 million for the third quarter of 2010 while the assembly volumes increased 55% or 11,275 units.

The increase largely reflects sales related to the launch of new assembly programs during the third quarter of 2010, including the MINI Countryman; an increase in reported US dollar sales as a result of the strengthening of the euro against the US dollar; and an increase in assembly volumes for the Mercedes-Benz G-Class.

These factors were partially offset by the of the end of production of the BMW X3 in the third quarter of 2010 and a decrease in assembly volume for the Aston Martin Rapide.

Please 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 23% or $1.2 billion in the third quarter.

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

Tooling, engineering and other sales were essentially level with the third quarter of 2010.

Gross margin as a percentage of total sales decreased to 11% for the third quarter of 2011 compared to 13.1% for the third quarter of 2010.

The decrease in gross margin as a percentage of total sales was substantially due to operational inefficiencies and other costs at certain facilities, in particular at certain Exteriors and Interiors systems facilities in Europe.

The $33 million benefit related to the recovery of previously expensed engineering and design costs in the third quarter of 2010.

Pre-operating costs incurred at new facilities; increased commodity costs; an increase in complete vehicle assembly sales, which have a higher material content than our consolidated average.

Higher warranty costs; higher costs related to launches in our components business; and net customer price concessions subsequent to the third quarter of 2010.

These factors were partially offset by the disposition of our underperforming non-core carpet business in the third quarter of 2011, the elimination of launch cost at our complete vehicle assembly operations, productivity and efficiency improvements at certain facilities and lower employee profit sharing.

Magna's consolidated SG&A as a percentage of sales was 4.9% in the third quarter of 2011 compared to 5.7% in Q3 2010.

Of more relevance, SG&A as a percentage of sales was in line with the 4.9% in the second quarter of 2011.

Our operating margin percentage declined to 4.1% in the third quarter of 2011 from 5.4% in the third quarter of 2010.

The lower gross margin percentage was substantially the reason for the decline in operating margin.

Our effective tax rate was 22.2% for the third quarter of 2011, compared to 19.9% in the third quarter of 2010 and compared to 22.7% in the second quarter of 2011.

The year-over-year increase primarily relates to an increase in losses not benefited in Europe.

Net income declined $26 million to $224 million for the third quarter of 2011 compared to $250 million in the comparable quarter.

Diluted earnings per share were $0.94 compared to $1.07 in the third quarter of 2010.

The decline in diluted earnings per share is a result of the decline in net income and 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 Class B share arrangement 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 issuer bid.

Next, I would like to elaborate on Don's comments related to our segments, comparing the third quarter of 2011 to the second quarter of 2011, in each case excluding other expense and income items.

In North America, production sales declined about $150 million.

Foreign exchange amounted to about $20 million of that.

Excluding foreign exchange, production sales declined approximately $130 million, which led to a reduction in EBIT.

In addition to the impact of the lower sales, we incurred higher launch and commodity costs as well as some operating inefficiencies associated with the launches.

In Europe, production and assembly sales declined by almost $280 million sequentially, although about $70 million of the decline relates to currency translation.

The remaining reduction in production and assembly sales, excluding foreign exchange, led to a decline in operating income.

Warranty, commodity costs, and the underperformance of certain facilities also negatively impacted Europe's results.

Offsetting these declines were the positive impact of the disposal of our underperforming non-core carpet business and the sequential improvements in the 2 remaining significant underperforming Exteriors and Interior operations.

We expect continued improvements in the fourth quarter in these 2 divisions, and as Don said, we are highly focused on making improvements elsewhere in Europe.

I will now review our cash flows investment activities.

During the third quarter of 2011, we generated $393 million in cash from operations prior to changes in non cash operating assets and liabilities and invested $148 million in non cash operating assets and liabilities.

We expect the recovery of some portion of the year-to-date investment in working capital in the fourth quarter of 2011 in line with typical seasonal patterns of working capital.

For the quarter, investment activities amounted to $383 million comprised of $338 million in fixed assets, a $40 million increase in investments and other assets, and a $5 million to purchase subsidiaries.

Our Board of Directors yesterday declared -- or, actually I should say, our Board of Directors today declared a quarterly dividend of $0.25 per share with respect to our common share.

The dividend is payable on December 15 to shareholders of record on November 30, 2011.

Our strong balance sheet has $1.1 billion cash net of debt as of September 30, 2011.

We also have an additional $2.1 billion in unused credit available to us.

I will now pass the call over to Louis.

Thanks, Vince.

Good morning, everyone.

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

We have trimmed our vehicle production expectations slightly in North America as compared to our view in early August.

We now expect 2011 North American vehicle production to be approximately 12.9 million units compared to 13 million units in our August outlook.

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

We have modestly increased our North American production sales expectation to between $13.6 billion and $13.9 billion for '11 compared to our previous range of $13.2 billion to $13.7 billion.

European production sales are expected to be in the range of $8.5 billion to $8.7 billion from our previous outlook range of $8.3 billion to $8.6 billion.

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

Our Complete Vehicle assembly sales range is $2.6 billion to $2.8 billion compared to $2.6 billion to $2.9 billion from our August outlook.

We now expect total sales to be in the range of $28.1 billion to $28.9 billion.

This compares to our previous outlook of $27.5 to $28.9 billion.

We expect our consolidated operating margins percentage to be approximately 4.75%.

Our prior outlook was approximately 5%.

The reduced margin outlook substantially relates to our underperformance in Europe, including the third quarter underperformance.

Our effective tax rate has been increased slightly to approximately 22%, largely reflecting the underperformance in Europe where we are unable to tax benefit the loss.

And for the full year of 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 morning.

We'd be happy to answer any questions that you have.

Thank you.

(Operator instructions) Peter Sklar from BMO Capital Markets.

You may proceed, sir.

Good morning.

First on the operating margin guidance, where you lowered the guidance from approximately 5% to approximately 4.75%.

In your comments, you just mentioned that the downward revision had to do with the underperformance in Europe.

But I believe, although Europe is underperforming, it's performing in line with your expectations.

So I'm just wondering if you could flush out a little bit more why you took the guidance revision and if any of it had to do with the strengthening of currencies.

Peter, good morning.

It's Vince.

There's a couple of factors to keep in mind relative to our expectations on full-year margin guidance.

As you know, last quarter we talked about margins being approximately 5% for the year, and now as you stated, we revised that to about 4.75%.

So really I think we've got to look at the impacts of Q3 and Q4.

And in both quarters, based on previous expectations, in Q3 we saw margins lower than what we expected, and our anticipation is that's going to continue into Q4.

Now, specifically as we look at Q3 and we look at North America, we are launching a number of programs in North America, and in some of those launches, we incurred launch costs in addition what we were anticipating.

So that negatively impacted us in comparison or in relation to our expectations and our guidance.

So that has an impact for the full year, and we're expecting that obviously to turn around real quickly as they were related to launches.

In Europe, we talked specifically about the four underperforming operations in Exteriors and Interiors.

Remember, Peter, we had a loss of about $50 million in Q1, $60 million in Q2.

We talked about expecting a loss of $20 million to $25 million in Q4.

We expect that to still be the case.

In Q3, those underperforming operations came in significantly less than the $60 million, but above the $20 million, $25 million, in line with our expectations, so we have seen improvements there.

And we will continue to see improvements in Q4.

However, when we look at some of our other operations in Europe, again, we're launching a number of new programs, and we incurred costs greater than our anticipated launch cost.

So that negatively impacted us in Q3.

We expect that to negatively impact us as well a little in Q4, and we've got a couple of operations where we're experiencing higher volumes, and unfortunately higher volumes impact us negatively, because we're outsourcing some work.

We have got plans in place to increase capacity, at least in one of those facilities.

So as we move into 2012, we see that turning around.

So underperformance, a little bit to expectation in Q3, expected underperformance compared to our previous guidance in Q4, results in overall, our margins for the year declining from approximately 5% to approximately 4.75%.

Okay.

And the interior facility that you sold, the carpet business, what was the effective date of the divestiture with respect to your accounting?

Was it the first day of the quarter?

Yes, July 1.

Okay.

First day of the quarter.

Okay.

And just one last thing, just an accounting thing.

On the unusual item that amounted to $0.52 a share after tax.

Can you tell us the pre-tax and the post-tax dollar charge?

What I'm really getting at, I just want to know how much tax is related to this?

Sure.

It's an easy question because the pre-tax and the net income are identical.

There's no tax recovery on those items.

Right, okay.

You remember that the bulk of that is in Europe relating to the disposal of our non-core carpet business, and we're not benefiting losses right now in Germany, and the other item related to our US operations.

So there was no tax provision provided against that either.

It's on the slide Peter, as well.

Sorry, Louis.

I didn't hear you.

It's on the slide accompanying the conference call on the web.

Okay.

Right.

And sorry, Vince.

One last question.

You mentioned that your warranty costs -- I can't remember if you mentioned it or it's the MD&A were $19 million higher than what they were year-over-year versus Q3 '10.

How would the warranty costs have compared to the immediately preceding quarter, Q2?

Was Q3 still an unusually high warranty number when you look at it sequentially?

When you look at it sequentially, there was an additional $9 million of warranty cost in Q3 compared to Q2.

Okay.

That's all I have.

Thank you.

John Murphy, Bank of America, Merrill Lynch.

Good morning.

First on Europe, you had a pretty good step-down in the losses in the underperforming assets there, taking care of some of the -- the sale of the carpet business, as you mentioned.

And just curious, we're seeing a similar step-down in your guidance for the fourth quarter.

Should we think about sort of that cadence or that step-down going through next year, so by mid next -year, this problem will be largely a net neutral and by the second half of the year, we might actually see some kind of a benefit?

And also is this volume-dependent, meaning if European volumes declined dramatically next year, which is, I think, a lot of people's fear, would this potentially be a bigger loss next year?

So cadence under normal terms and how volume-dependent is it going forward?

I would say if volumes go down in those two particular plants probably help us, because we have got outsourced product, and we're not giving guidance yet.

We'll update that in 2012 after we see the business plan.

We'll continue to see improvement; but I would say, if we get them back to break-even by the end of the year, I'll be happy.

But we'll give an update once we go through the business plans on those two particular divisions.

Okay.

So if volumes go down, you actually think you would do better?

On those two particular facilities.

On those two plants.

Okay.

Then the second question on the long-term margins, I mean obviously you tweaked down your margins for this year; but as we step forward out in the future is there anything structurally that's changed in the Business as far as capacity or necessary investments that should lead us to believe that this 4.75% or the high 4% range is a real ceiling at this point, or once volumes normalize, capacity is put in place, that could potentially get higher than that?

John, I think, when you look at your European operations and the lack of margin currently, as we do a couple things, 1 is we're launching our new facilities in Europe as well as in the Rest of World where we have a number of them and some in North America and our action plans start to show some real positive impact on the bottom line, that implies margin expansion, not margin contraction, or margin remaining constant.

We had a number of cases in the quarter both in North America and in Europe where volumes were higher than we anticipated.

We have got new capacity coming on line, but we got into premium freight; and once we get the new capital in place and running, it's going to help on the premium freight in the overtime as well.

Okay.

But there's nothing structurally in the Business that you view that's changed really in the course of this year.

There's a couple of hiccups but otherwise we should think about things sort of normal course on operating leverage going forward?

All right.

That's a correct assumption.

Okay.

Again, other than we're expecting and planning for improvements in Europe over where we are today.

Okay.

Lastly, Don, there's a lot of speculation out there that there's some big assets for sale.

Obviously you highlighted once again your significant amount of dry powder here.

Is there anything that you would highlight as something that you would go after, either regionally or by product line, or have you seen a lot more books coming through as far as bidding on assets?

Just curious on the acquisition front if there's a lot more activity out there that you might be interested in?

There is quite a bit of activity.

I wouldn't say it's increasing, because there has been for a while.

We're looking at a number of different things.

There's -- and you can read the news as well as we can -- but there's some potential big things going on.

Nothing we're commenting on now.

We have a lot of activity ongoing that's actually costs a bit of money when we're doing the due diligence.

We're not going to comment on it, but we certainly have a lot of activity, and we're looking at a lot of different things.

And you look at a region, it really depends.

The obvious area we would like to grow in is in the rest of the world.

For us it's outside of North America and Europe, but there are some good technologies that were impressive as well.

Okay.

Great.

Thank you.

Michael Willemse with CIBC.

You may proceed, sir.

First, Vince, can you comment on the recovery and design and engineering costs?

I think it was $33 million.

What does that relate to?

That was a 2010 item, Mike.

We were expensing design and engineering costs for a program.

And in the third quarter of 2010, we entered into an arrangement with the customer that essentially guaranteed the design and engineering cost that were previously expensed.

So we were able to capitalize costs and book a receivable on the account, and that resulted in a $33 million pick-up for costs had expensed prior to Q3 of 2010 last year.

Okay.

So that had no impact on Q3 2011?

No.

It didn't but if you try to roll sort of our operating income from 2010 to 2011, you just got to take into account that there was an unusual item of $33 million of income in Q3 2010.

Okay.

It wasn't an unusual item, per se.

Okay.

Okay.

That's fair.

And then just on the share buyback.

Don, you mentioned that in August, you thought the stock was cheap, so you decided to be more aggressive there.

Does that mean that Magna is kind of moving away from the policy of just offsetting the dilution and will be more aggressive going forward, or just can you comment more there?

Well, we had a lot of discussions about what's the best use of our cash and obviously if we can put it to work in the Business, then that's our preference.

However, if the stock stays low from what we expect it will be, then we'll be doing more than just offsetting the dilution, which is what we did in the last quarter.

I think how much we'll do will be very dependent on how much we spend in acquisitions.

Mike, just to elaborate a little bit on that, the new normal course issuer bid, which again is subject to both TSX and New York Stock Exchange approval, the purpose of it is, 1, to purchase shares for stock-based compensation plan, [assuming if it's a] profit-sharing plan as well as for cancellation.

So the purpose of this is much broader than the normal courses issuer bid that we had in place last year.

Okay.

That's good to hear, and then just one last question.

The tax rate guidance is up a bit obviously related to the higher losses in Europe.

Any sense of tax rate going into next year?

I guess, is there still lots of opportunity to recoup tax loss carry-forwards in Europe?

Mike, we're going to look at Europe.

I don't have an answer on that.

It really depends on where we start to generate more income in Europe.

So that's a potential there for some recovery of tax losses in Europe that we hadn't benefited in the account.

But I just want you to be aware that we have been benefiting a significant amount of tax losses related to our US operations, and as we complete our business plan, it's likely that we're going to have to look at our evaluation allowance on our US tax losses and record those back on the balance sheet as an asset.

The remaining one, and just to help you out a little bit, the benefit of the US losses this year on our tax provision is about 7.5%.

So if our US losses were already on our balance sheet for 2011, our tax rate would have been about 7.5% higher than what we're showing now.

Okay.

That's good to know.

Thank you.

Tanseem Azim from UBS Securities.

You may proceed, sir.

Hello, good morning.

It's [Mary] actually but that's okay.

Good morning.

So I wanted to ask you a quick question about the remaining two underperforming divisions going into Q4.

You said that those divisions basically had losses of about $37 million; is that correct?

That's for Q3?

That's about right.

For those -- okay.

So if we were to compare the losses made by those two divisions in the first half of the year, not for the four that you started with but just those two, how has the run rate progressed through the year for those two divisions?

Has it gotten worse versus what you saw in Q1, Q2?

Well, what we saw in Q1, the losses increased in Q2, as volumes picked up, and we saw a reduction in Q3 versus Q2.

Okay.

And as we've talked about, we expect a further reduction Q4 versus Q3.

And so that's specifically for those two divisions, you're saying?

That's correct.

That's correct.

Okay.

Okay.

So you are seeing an improvement.

So I guess going forward, just in light of the reduction in your margin guidance, it would seem to be -- it seems that the increases that you're seeing as far as your warranty costs and your commodity costs are concerned, as well as the related launch costs as well, are likely going to be offsetting these improvements over the next couple of quarters.

Is that fair?

I mean, what it would seem like is that there is going to be an overhang in your European margins for a while, at least for the next couple of quarters, I would imagine?

Well, I think you have got to think of a couple of things.

I'm not going to give specific guidance on 2012, because we're again, as Don indicated, we're in the middle of business plans.

But what we've talked about specifically in Europe, when we look at our investment in new facilities in Europe, and we have seven or eight facilities underway right now.

Actually, we have more than that, but the investment we're making to start up at these new facilities is pretty significant in 2011.

We're still expecting to invest in these facilities in 2012 as some of these places are going to start to ramp up.

But that's going to be a pretty substantial reduction in the investment we're making in new facilities in 2012 versus 2011.

So that is going to be an improvement to operating margin in Europe.

With respect to launch cost, I don't know yet -- again, we're in the middle of business plan time.

So I can give you some clarity as we give guidance in January.

In terms of commodity costs, I'm not sure which way that's going to go.

We're currently in discussions with a number of customers on commodity cost recovery in Europe and in a couple of other regions as well.

So to the extent we have success on that, that will have a positive impact essentially in 2011 and in 2012.

And where sort of commodity costs are going to be in 2012, we'll give you a view in that in January but as far as we're seeing things right now, at least on the two primary commodities of steel, prices have been pretty stable for a while, and the same thing generally on the resin side.

So if that continues that should be good for us.

As if things do slow down in the economy and prices come down, that should benefit us [on all bases].

Okay.

And [pad let me] warranty bounces around, so it's hard obviously to predict what's going to happen on the warranty side.

Okay.

Okay.

Fair enough.

And just lastly on your balance sheet in terms of the different uses of cash that you have, do you still have a potential increases in the dividend as an option going forward or is it kind of the NCIB kind of the route you're going to take if you do see the share price staying low at these levels?

Our strategy on dividends is we want to try to have a pretty steady progression.

We are going to review it.

We typically review it after the fourth quarter, and we will be giving guidance what we want to do going forward, but we do realize if we can get the yield higher, that also benefits stock price.

So it will be a combination of both.

Okay.

Fair enough.

Thank you very much.

Himanshu Patel from JPMorgan.

You may proceed.

Hello.

Good morning, guys.

Good morning.

Couple questions.

I know you can't comment too much on the anti-trust case, but can you at least tell us, have you guys launched a internal investigation, and if it has been concluded, what was the outcome of that?

We don't comment on pending regulatory matters and as we stated publicly, we are cooperating with the Department of Justice.

Magna and the entire team over here takes these matters very seriously, and we're cooperating fully with the Department of Justice.

Okay.

I wanted to just talk a little bit more about Europe.

It sound like there's a lot of cross-currents that have perhaps changed in the last 3, 5 months.

You've got, European production schedules are diverging with the French OEM is weakening faster than some of the others.

It looks like you've got some new launch issues outside of the exterior plastics facilities you guys had talk about.

You sold a carpet business that was underperforming.

I'm curious if you guys could just -- without giving explicit specific guidance in '12, could you just talk to the cadence of improvement on European margins that you guys are expecting over the next whatever, 3, 6 quarters?

Should we think about it as being fairly lumpy as it sort of has been for the last few quarters, or have we have sort of hit a stride now where you sort of expect linear improvements from here?

I'm not going to give guidance, obviously, but I would say we've been struggling all year on a number of issues.

Some of them are losing divisions and what we're doing for launches.

We had quality problems which was delivery problems.

I think we have a pretty good handle on what the issues are.

We're pretty well on top of all the quality issues and the delivery issues.

We still have -- in the quarter we did have some premium freight, more associated with some good operations.

The customers were drawing the product faster than we could make it.

So they are asking us for higher volumes.

I'm relatively comfortable that we understand what the issues are, we put the team in place to try and deal with these, we have got a lot of action plans going forward.

We will give some guidance when we -- in early January once we have finished the business plan review.

I am confident we're making headway.

We are not over all of the issues yet, but I hope we're through the worst of it at this point in time.

Okay.

And then I'm wondering, just to help us think through the Business over next 12 months, can you give us a little bit more color on your intra-Europe customer mix?

Louis, you want to take a stab at that one?

Yes.

Himanshu, about two-thirds of our European business is with the German OEM.

So we're obviously pretty heavy with Volkswagen, Audi, BMW, Mercedes work.

Great.

Thank you.

Steve Arthur from RBC Dominion Securities.

You may proceed.

Yes.

Thanks very much.

Good morning, and good evening over there in China.

Just one more specific on Europe, I noticed in the notes a warranty charge of $15 million.

Was that something related to the plants that were sold or closed?

And if not, is it more of a one time thing or should we see things at that level in Q4 and maybe beyond?

The overall consolidated warranty costs were $17 million in the quarter.

And a year ago, we had a recovery of $2 million so the net change is $19 million year-over-year.

In terms of specifically Europe, let me just pull the number, how much it is.

We're looking at it in MD&A.

I just don't remember it off the top of my head.

But the warranty costs are lumpy in nature.

They don't necessarily -- [definitely] were accrued for.

And these items are isolated.

If the gut -- the problem resolved and pretty well accrued for in Q3.

Okay.

It's hard to predict what happens for the [one thing] -- if there's an issue on a warranty item or a potential deal action we'll have the discussions with the customer.

So it goes up and down.

We had quite a few this quarter in Q3.

Right.

But those ones weren't specifically related to plant that you sold or the other one that was closed?

No.

None of it was related to that.

Okay.

Secondly and final question, just in terms of putting the cash to work, the other option is organic development and growth.

When you look through the balance of 2011 and out to 2012, '13, are the opportunities growing there or greater there than you might have expected previously?

Is it still primarily in Asia or shifting priorities there?

We'll give an update in January; but I'm actually quite pleased with the amount of business we've been winning over the past few quarters, and it's in pretty well in all of our regions.

We're seeing good growth in outside of North America and Europe.

We're seeing some good wins in North America.

We're seeing good wins in Europe.

I won't get into specific regions but we have a lot of new divisions being launched now and if you look at our capital guidance, we have been saying we'll be a $1 billion, $1.1 billion.

The ideal way for us to spend our capital, quite frankly, is on Greenfield opportunities or expanding our existing plants.

So we're assessing our capital right now but we have been winning a lot of good business, and we certainly anticipate that our capital can still be put to good use in the next foreseeable future.

Okay.

Thanks very much.

Itay Michaeli from Citigroup.

You may proceed.

Great.

Thank you.

Good morning.

Just wanted to mention the margin guidance for the year of 4.75% with the revenue range in your new guidance.

It looks like at the mid-point of the range it does imply a pretty significant sequentially incremental margin, even if you take out some of the European improvements you're expecting.

So is it fair to say you might need the higher end of the revenue guidance range to make the margin outlook?

Can you maybe help me out in terms of thinking about that?

Well, I think, when you look at the overall revenue guidance, we've narrowed the guidance.

We've only got one quarter to go.

And I'm not going to get specific in terms of where we may end up, but that's why we're saying approximately 4.75%.

Part of that is going to depend on overall revenues and mix between North America and Europe.

There's a whole bunch of factors that come into it.

I think you just need to step back a bit and say they're pretty narrow ranges, pretty decent sort of color on operating margin and prepare your modeling accordingly.

Okay.

That's helpful.

And maybe back on the balance sheet and cash uses, 1, how are you weighing M&A versus share buy backs?

I mean, maybe the stock stays at these levels, and B, can you share any updated thinking around minimum cash balances you'd like to have or leverage targets in the Business going forward?

Sure.

When we sit back and think about what our priorities are for the Business and investing the balance sheet.

Our number 1 priority is using the cash in the balance sheet to generate the adequate returns in our business and grow the business, and that growth can come in a couple of ways.

Our preferred way of doing things is organically, and you can tell we've got a number of new facilities underway.

We can set up the operation the way we want it, employ and train the people, bring in the management system and culture.

It's a lot less risk doing it that way.

Second is through acquisitions, and acquisitions do make sense in a lot of respects.

We could be looking at acquisition as some technology and give us a lead, complements our existing technology, or a way to maybe expand more rapidly in a developing market, and we've done some of that, for example, in South America last year with a couple of seating acquisitions.

Over and above that, we still do generate a significant amount of cash.

We don't have any leverage on the balance sheet today.

We certainly do need some cash to run the business.

But with our credit facility and the amount of cash we have, and the cash we're generating, we also have the opportunity to take advantage of an undervalued stock and buy back some stock on a normal course issuer bid.

Ideally we want to maintain a high investment grade rating for flexibility standpoint.

Even maintaining that, we still have the ability theoretically to raise a significant amount of debt.

So when you look at the cash in the balance sheet, cash we're generating, the ability to raise some debt, we have a tremendous amount of liquidity, and how we split that liquidity up is going to, in part, depend on the acquisition opportunities as well as some of the organic growth opportunities.

But I think we've got enough to do all at this point.

Based on what the last part of your question about how much cash you want, if we have good use for the cash, we would be quite comfortable in using the cash we have.

I don't think we're going to do a lot of debt, unless there's a really strategic acquisition, which we would consider it.

Who knows what is going to happen with the economy?

We don't want to be sitting with a ton of debt going into a downturn.

And if there is a downturn, there is probably some really good opportunities to make some acquisitions.

But based on our cash generation and the uses of cash in acquisitions, if we put the cash we have to work, then I think that would be our first choice.

Great.

Thanks for the detail.

And just quickly, lastly any impact at all from Thailand in the fourth quarter?

Maybe if you can give us a little bit of color on what you're seeing from that situation?

Yes.

I had been over here in Asia for the past 2 weeks and to tell you the truth, I haven't been watching a lot of the news; but certainly several of the customers specifically in Japan have got a lot of sourcing of components out of that region.

They can speak to what the impact is going to be.

I have not had a chance to talk to the North American or the European based customers.

I haven't heard of a lot of the impact.

We ship a little bit into Thailand, but I don't think it has much of a material impact in us.

Great.

Thank so much, guys.

Rich Kwas from Wells Fargo.

You may proceed.

Just a quick question.

Vince, on the $60 million from Q2 and then how that compares to the $37 million, does the $60 million hit from Q2, does that include the carpet business?

It did.

Yes

Okay.

Do you have an apples-to-apples change Q3 to Q2?

Or vice versa, going from the $60 million to $37 million?

I assume that the $60 million number was a lower number on kind of a apples-to-apples basis?

Yes.

We struggled with both divisions early in Q3, and we're seeing improvements through the latter part at the end of Q3.

So we made slight improvements in the two facilities we were talking about from Q2 to Q3.

Not a lot.

I think we're going to start seeing -- I have more confidence as we get into Q4, we're going to start seeing some improvements.

So the guidance we gave, $20 million to $25 million from $37 million, I think is accurate.

We didn't see a huge improvement Q3 to Q2 as we had an army of people in there, quite frankly.

Okay.

That's really helpful.

And then just broadly speaking, either Don or Vince, how are you thinking about cost structure in Europe?

I mean, obviously you've had these headwinds -- there's some question around production.

Are you using a greater number of temp workers now versus prior to the downturn, and how flexible do you think the cost structure is for the entire business in Europe?

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

I would say we have more temps than we did.

I have to get the specifics on that.

I'll answer it in a different way.

We've got a number of very good divisions in Europe.

We've got some very good businesses in Europe.

Like North America, we going to see a shift over time in lower-cost regions where there's high labor and easy-to-ship product.

We dealt with the one plant when it was not a strategic product line for us, and the other divisions we're just going to allocate capital to try to make sure we have a competitive footprint going forward.

So how flexible are we?

In some countries it's extremely difficult to close plants and expensive and in other countries it's a bit easier.

Our first goal is to try to get the operations running extremely well and we have got some pricing issues, and those we need to go back and get the pricing fixed or let the contracts run out.

Okay.

And then just quickly, the cost structure, when you look at -- Louis mentioned two-thirds of the revenue coming from the Germans.

Is the cost structure kind of similarly set up from a plant base?

Just trying to think off the top of my head.

We've got -- we've launched -- I can't remember the number of divisions.

We've got five plants and the Russia ones are very small.

So those are coming on stream.

We have got a number in Poland, Czech Republic, Slovakia.

I would guess off the top of my head, probably about two-thirds of our facilities are in traditional areas of Europe, and the rest would be in low-cost regions.

However, a lot of the facilities have to be close to our either very large facilities -- I'm sorry, very large parts are shipped into the assembly plants or [GI] plants.

So we have a number of facilities in England that will have to be in England.

We have some in Spain that have to be in Spain.

So there is specific ones we need to look at make sure they're going to be competitive long-term.

If they're not, we'll deal with them just like we've been doing over the past number of years and the same thing we've been doing in North America.

Okay.

Thank you.

David Tyerman from Canaccord Genuity.

You may proceed, sir.

Yes.

Good evening.

First on the comment that Don made, some of the factors in North America will continue -- that affected Q3 will continue into Q4.

I was wondering if you could give us some idea of what those factors are and any idea what kind of magnitude we're talking about?

I'll tell you what the factors are top of my head.

We had one launch division for a new product that we had difficulty launching, and it was significant overtime in premium freight for a couple of months.

We're pretty well over that one.

We've got another launch of product from Canada, and their releases have gone through the roof into Mexico and unfortunately we've got them on air shipment.

So that was costing us a lot of money.

I don't know if we're out of it yet.

But we certainly if we aren't this week, we will be in the next couple of weeks.

We have got over capacity in one facility, it's a large stamping plant down south, and we have a new press line that's coming in November; but right now we're -- we have a lot of product which is running overtime, and we've had to move product around.

So there's a number of different factors.

None of them are long-term, we can get over them all; but we're already at the end of October, so we're going to see some lingering impact of some of these in Q4.

One other facility we had was the hot stamping line.

We had some down time, and we have had to get into premium air freight there and outsource some work.

So it was a number of different issues, but none of them are something we can't fix.

Okay.

And so if those things get resolved, which it sound like most of them are or will be, would you be back to the same kind of margin rates that you saw, say, in Q1 and Q2 in North America, assuming the same volumes?

Would you expect that kind of return?

David, again, there's going to be a bunch of moving pieces getting into 2012.

We're going to see, first of all, some benefit of reduced new facility investments, which is going to help us.

We need to look at where commodity costs are going to be plus or minus.

Just price give backs

Right.

Just productivity improvements.

We're going to be in a better position once we get the business plan done, which we're just in the middle of trying to complete.

So we'll give you some more color come January.

Okay.

Fair enough.

I'll wait for then.

Just on the tax rate, Vince, you talked about the impact of the benefiting of the US income, 7.5% benefit to the tax rate in 2011.

So am I to interpret that to be that basically that swing is likely to occur in 2012, and then I guess what happens in Europe matters, too; but is that how I should be thinking?

That's probably not a bad conclusion, David, on your part.

And again it's all going to depend on mix of income and jurisdiction and Europe.

Right.

But everything else being constant and -- the income was generated -- or losses were generated in the same way as they were in 2011.

You would be looking at about a 7.5% income tax rate increase.

But again, that's a bunch of moving pieces.

Yes.

So we need to take into account Europe in particular and all that.

And I don't have all those pieces put together yet.

Right.

Okay.

That's fair enough.

And the last question is on Europe.

You guys have nearly as much invested in Europe, at least based on the fixed asset data that you provide, as you have in North America, and yet your margins are so much lower, and I know you've had this question many times over the years, but where are we going here ultimately?

The swings you're talking about in terms of the underperforming plants wouldn't get you remotely close to getting toward North American levels.

I don't know.

Maybe the new facility costs are gigantic, and I don't know $100 million range or something like that.

And maybe that's part of the answer, but it doesn't seem like you're going to get anywhere close to returns that you're getting in North America.

Can you provide some thought on all of that?

Yes.

We've talked a little bit about that in the past.

North America, I'm pleased with our operations.

We've really focused on being what I'll call world class manufacturing, it's an internal term we use that's defined.

We've had some hiccups in the last quarter, but you always have some, we've got some launches going on.

A number of things going on in Europe.

We have got Steyr has gone through a number of launches, and we've been -- I'm pleased with what I see happening in Steyr.

The roof business we've bought over there has not performed particularly well.

We've talked about the Interior Exterior plants that haven't performed very well but they're still pretty heavy capital plants.

We have got a number of new facilities coming on stream that were a lot of capital in Russia.

So I can't give you a specific answer, but I would say I'm anticipating next year in Europe, we certainly get back to profitability.

We'll give more guidance on that, and then we'll continue to improve, but I don't expect we're going get same Return in Funds Employed, which is our internal measure, which is the margins you expect based on the same capital as we have in North America.

Interestingly enough, we seem to be seeing similar type returns as we get into our Rest of World segment.

We've had some challenges in South America this past quarter.

We've got a lot of launches going on there.

We are digesting a couple of acquisitions.

But in the Rest of World segment, I think we can be the same margins.

So it's our opportunity and challenge to really get our footprint right and really focus on the operations we've got there and reduce the cost to capital and get the margins up.

But I don't anticipate us getting there in the foreseeable future, but we're certainly going to move in that direction.

So does this actually destroy value for the Company, then, but it's required just to be a global competitor?

No, it's not required.

We believe in most of our product areas, we need to be global.

That's why we went to a global structure.

There's been some growing pains, I'd say, whenever you change the structure, but we're firmly got the groups that are global in areas like mirrors, closure, seating, power train, our Cosma group, they are run by our customers globally.

They have global platforms, so we need to be global, however it doesn't mean we have to be investing in any area of the world for poor returns.

So it's not a necessity to have operations that are not performing as long as we have healthy intelligently competition, we should be able to get the same sort of returns anywhere in the world.

David, I just wanted to point out that you're drawing some conclusions on a consolidated number in Europe.

And when you look at the consolidated numbers, I can see why you come to that conclusion.

However, there are number of business units or groups in Europe that are doing quite well.

And we unfortunately have, in particular one group, our Exteriors and Interiors group that isn't doing that well.

So went you blend it all together, you don't end up with a very nice picture.

We are impacted significantly by new facility costs Europe.

But I just want to reiterate again that there are a number of groups in Europe that are doing well.

And we believe that they're going to continue to do well.

And we have a lot of good technologies over there, so it's a combination of things.

Okay.

That's helpful.

Thank you.

Chris Ceraso from Credit Suisse.

You may proceed.

Thank you.

Good morning, and good evening.

Can we come back to the full year margin guidance?

I want to make sure I'm doing the math right here.

What do you show as the year-to-date operating margin?

On what basis are you calculating this 4.75%?

Yes.

Chris, do you have another question, and in the meantime we'll look that up.

Or -- unless Louis has it handy?

Yes.

On a normalized basis, 4.9% year-to-date, operating margin.

You're at 4.9% year-to-date?

Right.

Okay.

Well, I'll follow up with you off line.

You can explain how you calculated that.

Sure.

Can you give us any details around some of these other items that hurt you in the quarter, put some dollar amounts around it?

You talked about the warranty but how much was the commodity headwind year-to-year?

Can you sort of dimension the dollars around the underperformance in North America that you experienced in the quarter?

Chris, we haven't historically talked about the direct dollar impact of commodity costs or the underperformance in operations.

We did highlight four facilities in Europe.

The numbers -- on the underperformance in North America, I don't know how to put some color on it without giving you exact dollar number.

I think when you look at the detrimental margin in North America, because sales were actually lower on the production side, that was certainly impacted by some of the issues that we talked about.

And commodity costs that have impacted us -- they're double digit in both regions.

Okay.

And then just one last housekeeping item.

What was the share count as of September 30?

The share count as of September 30, I think was about 239 million, but I'm looking it up.

It's 236.8 million.

Okay.

Thank you.

Ravi Shanker from Morgan Stanley.

You may proceed.

Thank you.

A question on North America.

I know you guys don't formally give content per vehicle numbers anymore but if we did the math it did look like your CPV in North America declined quite a bit sequentially.

But I think it usually picks up in 3Q.

So was there something mix-wise that hurt you in the quarter?

Yes maybe I'll answer that one.

Q2, if you recall because of the issues with the Japanese OEM is we saw a huge spike, if you're looking at content per vehicle in North America in Q2.

So I think Q3 is more getting back to a more normal level.

So if you went Q1 to Q2 to Q3 you'd see it really moved up significantly in Q2 and dropped back to a more normal level in Q3.

Got it.

It and if I can speak in a couple on the antitrust issues, did you have any legal costs in the quarter, and do you anticipate getting any going forward?

And also there's a line in your press release that says the tooling program for which a subsidiary unit of ours acted as a tier 1 supplier.

So can you clarify if it's just that subsidiary being investigated or if it's the entire tooling division?

In terms of our disclosure, I guess it's pretty clear, once you go back to the press release we issued.

We're not going to give any additional comments.

As I said earlier, we're cooperating with the Department of Justice with respect to an ongoing antitrust investigation of the tooling industry.

Can you say we had legal costs in the quarter?

They weren't significant.

Okay.

Thank you.

They weren't significant.

Operator, it's quite late here in the part of the world that we're in.

So we're happy to take one more call, and then we're going to call it a night here.

We have no further questions at this time, sir.

All right.

Okay.

Well, that worked out well.

Okay.

Well that concludes our formal -- I would just like to thank everybody for joining us today.

We continue to wrestle with some of the operational issues we talked about.

It's going to take sometime to turn around, but I'm confident we're making headway on those.

As I said earlier, I'm still pretty confident -- I'm pleased with some of the operations certainly I've seen over here in China, Japan, and Korea and what we're doing.

And we're making good headway as far as winning new business, and we have got a lot of activity on, and we need to obviously deploy our cash.

And if we can continue to make the operational improvements, and we'll give a lot more update and detail going into the early part of next year.

So thanks, everybody for calling in.

Good night.

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

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

Have a great day, everyone