Magna International Inc (MGA) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Magna International first quarter 2012 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, May 10, 2012.

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

Don Walker, Chief Executive Officer.

Please, go ahead, Sir.

Thank you.

Good afternoon and welcome to our first-quarter 2012 is call.

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

Yesterday, our Board of Directors met and improved our financial results for the first quarter, ended March 31, 2012.

We issued a press release this morning for the first quarter of 2012 prior to our annual shareholders meeting.

You'll find the press release, today's conference call webcast, our updated quarterly financial review, and the slide presentation to go along with the call all in our 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.

Since many of you may have listened into our shareholders meeting earlier today, I'm going to keep my comments short to allow more times for question-and-answers.

Let me start by welcoming Scott Bonham, Peter Bowie, and Peter Harder to our Board.

Each was elected to our Board this morning and we are happy to have them with us.

In addition, following the AGM, our Board convened a meeting and has selected Bill Young as Chairman.

So, we are pleased to have Bill in that capacity as well.

Overall, we are satisfied with our Q1 financial results.

A record quarter in total sales and earnings, production sales in every segment increased year-over-year.

I noted earlier today at the Annual General Meeting that we have started -- or plan to start up 30 new facilities over the next three years spanning North America, Europe, Asia, and South America.

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

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

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

I want to point out that we are making progress in improving underperforming operations and in improving the overall level of profitability in a number of plants.

As we have said previously, generating better margins in Europe will be a multi-year process and I believe we are currently on track.

Many of you will recall that during the third quarter of 2011, Magna sold and underperforming interior systems operation located in Germany and recorded a loss on disposal of $129 million.

Under the terms of the sale, Magna agree to fund the buyers an estimated $109 million in the form of cash, working capital, and the assumption of certain liabilities.

Simultaneously, we reached a commercial agreement with one of the facility's customers regarding the cancellation of certain production orders whereby Magna reimbursed the customer costs of $20 million.

Subsequent to the disposal, the business continued to incur significant financial losses.

By the end of the first quarter 2012, the business was experiencing severe liquidity issues.

And, although Magna had no legal obligation to do so, in light of the customer relationship issues and other relevant considerations, in April 2012, we reached an agreement with the buyers to re-acquire the business for a nominal amount.

As part of the acquisition, Magna was able to obtain some pricing concessions from the majority of our business customers.

However, the businesses still budgeted to incur losses over the next three years.

Closing the transaction is subject to standard regulatory approvals which are expected to be received in the second quarter this year.

Finally, we announced earlier today that we have signed a memorandum of understanding with Nissan's Infiniti brand to assemble Infiniti's new entry-level vehicle.

That will be in Europe.

Currently, we are working with Infiniti on engineering the vehicle, production of the vehicle is expected to begin in 2014.

Additional details will be announced at a later date.

We are very excited about this new award with an important new assembly customer.

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

Thanks, Don, and good afternoon.

I would like to review our financial results for the first quarter ended March 31, 2012.

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

The slide package accompanying our call this afternoon includes a reconciliation of certain key financial statement lines between reported results and results excluding other expense items.

In Q1 of 2012 there were no other expense items recorded.

In the first quarter of '11, the only other expense item was a write-down of real estate which reduced operating income and net income by $9 million and diluted earnings per share by $0.04.

The following quarterly earnings discussion excludes the impact of that other expense item.

In the first quarter, consolidated sales increased 7% relative to the first quarter of 2011, to a record $7.7 billion.

North American production sales increased 10% in the first quarter to $3.9 billion, reflecting a 17% increase in vehicle production to 3.95 million units.

In addition, the increase is a result of the launch of new programs including the VW Passat and Chevy Sonic acquisitions completed during, or subsequent to, the first quarter of 2011.

Partially offsetting these were a decline in content on certain programs including the Ram pickup programs that ended production during, or subsequent to, the first quarter of 2011, including the Chevy HHR, the weakening of the Canadian dollar against the US dollar, and net customer price concessions subsequent to the first quarter of 2011.

European production sales increased $140 million, or 6%, to $2.3 billion from the comparable quarters.

Even though Western European vehicle production declined 7% to 3.4 million units.

This reflects a strong production of certain of our customers, particularly customers with significant export sales.

The increased European external production sales also reflects the launch of new programs including the Range Rover Evoque, and acquisitions completed during, or subsequent to, the first quarter of 2011 including the BDW.

These factors were partially offset by the weakening of the euro against the US dollar, the disposition of an interior systems operation in 2011, lower production volumes in certain existing programs, and net customer price concessions subsequent to the first quarter of 2011.

Rest of world production sales of $408 million increased 29%, or $92 million over the comparable quarter.

Primarily as a result of acquisitions completed during, or subsequent to, the first quarter of 2011 including ThyssenKrupp Brazil and new programs launching in Brazil and China during, or subsequent to, the first quarter of 2011.

These factors were offset by the net weakening of foreign currencies against the US dollar including the Brazilian Real.

Complete vehicle assembly volumes declined approximately 3,400 units from the comparable quarter and assembly sales declined 11%, or about $75 million, to $599 million.

The decline reflects a reduction in assembly volumes for the Peugeot RCZ, the MINI Countryman, and Aston Martin Rapide, and the weakening of the euro against the US dollar.

These are offset by an increase in assembly volumes for the Mercedes-Benz G-Class.

Please note, that currently all complete vehicle assembly programs are accounted for on a fully constant basis.

So, in summary, consolidated sales excluding tooling sales increased approximately 8%, or $509 million, in the first quarter.

The primary reasons for this increase are higher production sales in all regions, offset partially by lower complete vehicle assembly and tooling, engineering, and other sales.

Tooling, engineering, and other sales declined 7%, or $32 million, from the prior year to $422 million.

The decline related to sales on a number of programs in addition to the weakening of the euro against the US dollar.

Gross margin in the quarter increased to 12.9% compared to 12.2% in the first quarter of 2011.

The increase in gross margin percentage was substantially due to lower costs incurred in preparation for upcoming launches, the disposition of an interior systems operation in the third quarter of 2011, a decrease in complete vehicle assembly sales which has a higher material content than our consolidated average, a decrease in tooling sales that had low or no margins, and productivity and efficiency improvements at certain facilities.

These factors were partially offset by a larger amount of employee profit sharing, increased pre-operating costs incurred at new facilities, operational inefficiencies, and other costs at certain facilities, and net customer price concessions subsequent to the first quarter of 2011.

Magna's consolidated SG&A as a percentage of sales was 5.3% in the first quarter of 2012, compared to 4.8% in Q1 2011.

We incurred additional expenditures in SG&A for hired labor including wage increases at certain operations, and other costs to support the growth in sales.

$13 million related to acquisitions completed during, or subsequent to, the first quarter of 2011, including BDW, and the operations in Brazil acquired from ThyssenKrupp.

Increased costs incurred at new facilities.

These factors were partially offset by a decrease in reported US dollar SG&A due to the weakening of the euro and Canadian dollar each against the US dollar, the disposition of an interior systems operation in the third quarter of 2011, and lower stock-based compensation costs.

Our operating margin percentage was 5.7% in the first quarter of 2012, which was level with the first quarter of 2011.

The higher gross margin percentage was completely offset by the higher SG&A percentage, higher depreciation expense, lower equity income, and higher interest expense.

Our effective tax rate increased to 22.3%, in the first quarter of 2012 compared to 19.1% in the first quarter of 2011.

The increase primarily relates to a reduction in the utilization of losses not previously benefited in the US partially offset by favorable settlements related to prior taxation years and by permanent items.

Net income attributable to Magna increased $12 million to $343 million for the first quarter of 2012 compared to $331 million in the comparable quarter.

Diluted earnings per share were a record $1.46 compared to $1.34 in the first quarter of 2011.

The increase in diluted earnings per share is a result of an increase in net income attributable to Magna and the decrease in the weighted average number of diluted shares outstanding during the quarter.

The decrease in the weighted average number of diluted shares outstanding was due to the repurchase and cancellation of common shares pursuant to our normal course issuer bids and the net decrease in the number of diluted shares associated with stock options.

We're going to discuss incremental margins now in North America and Europe for the first quarter of 2012, relative to the fourth quarter of 2011.

In North America, excluding foreign-exchange, total production sales increased $420 million.

Q1 EBIT improved approximately $70 million.

This represents an incremental margin percent of approximately 17%.

In Europe, excluding foreign-exchange, production and assembly sales increased $219 million while EBIT improved $66 million.

The increase to EBIT largely reflects improved operating results at a number of facilities as well as the pull through on the increased sales.

I'm going to now review our cash flows and investment activities.

During the first quarter of '12, we generated $531 million in cash from operations, prior to changes in non-cash operating assets and liabilities, and invested $302 million in non-cash operating assets and liabilities.

This investment largely reflects the increase in production activities at the end of the first quarter of 2012, compared to the end of 2011.

For the quarter, investment activities amounted to $326 million, comprised of $250 million in fixed asset spending, $42 millions to purchase subsidiaries, any a $34 million increase in investments and other assets.

Our Board yesterday declared a quarterly dividend of $0.275 per share with respect to our common shares.

The dividend is payable on June 15, to shareholders of record on May 31.

Our balance sheet remains strong, with $884 million in cash net of debt as of March 31, 2012.

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

I'm going to review our updated 2012 full-year outlook at this point.

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

With respect to our vehicle production expectations, we've increased North America and lowered Western Europe as compared to our outlook in February.

We now expect 2012 North American vehicle production to be approximately 14.4 million units compared to 13.8 million units in our February outlook.

We expect 2012 Western European light vehicle production to be approximately 12.7 million units, impaired to our February outlook of 13 million units.

As a result of the increased expectations for production sales in North America, as well as Europe, and higher complete vehicle assembly sales, we now expect total sales to be in the range of $29 billion to $30.5 billion.

At the low end of this range, this would represent a record year for sales for Magna.

This is up from our previous outlook of $28 billion to $29.5 billion.

We are now expecting our consolidated operating margin percentage to be in the low 5% range, which is up from the approximately 5% range in our previous outlook.

We expect our effective tax rate to be approximately 25% which is down slightly from approximately 26% in our previous outlook.

The tax rate revision is largely due to the favorable settlements and permanent items that positively impacted Q1.

And, for the full-year 2012, we expect fixed asset spending to be approximately $1.5 billion as compared to our previous outlook of between $1.3 billion and $1.5 billion.

The increase primarily reflects new business awards.

This concludes our formal remarks.

Thanks for your attention this afternoon, and we will be pleased to answer your questions.

(Operator Instructions) Peter Sklar, BMO Capital Markets.

Good afternoon.

On the German interiors plant that you are buying back.

I was quite surprised to see that, given that you had just paid $100 million last summer, last fall to get rid of it.

So, I'm just wondering if you could elaborate a little more on why you're doing it?

What you're getting in return?

And, you also indicated that not withstanding that you've gotten repricing you do expect ongoing losses for three years.

If you could give some order of magnitude of what the loss rate is going to be in that facility?

Peter, I think both Don and I will attempt to answer your question.

Just in terms of the numbers, the $109 million that we expensed last year related to essentially assets that we transferred to the business including cash and the assumption of certain liabilities.

And, subsequent to that, we did reach a commercial settlement with one customer essentially to cancel a program.

Those costs were significant and the facility was incurring significant losses.

It was ramping up for new business and there was a whole bunch of issues including some pricing matters.

As Don talked about in his formal comments, to make a long story short, it's been re-acquired.

And, we do expect some losses going forward.

We're going to focus on trying to minimize those losses and get them as close as to break even as possible.

But, there are some changes that have taken place.

First, is the contract debt was canceled last year where we actually had to reimburse the customer and that contract is gone.

We are not going to continue production of that contract in the facility that we are re-acquiring.

In terms of working with our customers I think there's some realization that pricing was inadequate.

And, we have obtained some pricing relief on a number of programs are hoping to obtain some more.

So, when you add that all up, we are expecting some losses.

And, we are going to continue to plug away at that and improve operations and try to reduce the losses over time.

Peter, it's Don.

It was a carpet business, it wasn't strategic.

Carpeting is not strategic for us for any one area.

It didn't have any real technology.

So, we sold it to a competitor who was interested in the business, who is in the carpet business and we thought would be a good choice to continue with that production.

At the end of the day, we -- they were running into financial difficulties.

Customers approached us to look at taking it over again which wasn't our first choice.

However, we don't want to be letting the customer down.

And, we don't want them to be disrupted with supplies.

So, we tied a lot of discussions -- we've had a lot of discussions in a number of areas on pricing over there.

This product and other products.

So, came to a conclusion on a number of areas and as part of that we agreed to take it back.

I don't have an accurate estimate of the losses, quite frankly, because we're just getting back into it now.

I know what the pricing improvements are in that division.

Some of the pricing improvements are in other divisions.

And, we need to just get on top of where we are operationally.

So, I will have a better viewpoint I would say the next couple of months.

Certainly, it would be less than it was before though.

Peter, our revised outlook that we disclosed earlier on today reflects the re-acquisition of this facility at some point in the second quarter.

Okay, and I know, Don, you just said you're not in a position to talk about the loss.

But, is this going to be tens of millions of dollars a quarter or can you give us any kind of boundaries on this?

No, not per quarter.

We had talked about, in the past, how much we were losing there.

It wasn't the biggest loser of the three we were tracking.

It was losing money.

It is going to be less than we were losing before.

And, obviously we will reconsolidate this whenever we take it back being Q3, Q4.

We need to get in and just understand the complete impact of the price increases, where we are on restructuring, what they've done with labor.

So, we have a pretty good view on it.

But, I don't know exactly yet what it's going to be.

It's not going to be a huge loser over there.

But, it's going to lose money until we get our arms around it.

Peter, just to clarify, we are expecting to reconsolidate this in Q2 of this year.

Okay, and what is the effective date?

Did you get a full quarter of this or a partial quarter?

We are still waiting for antitrust approval, I believe, in one jurisdiction.

We have some antitrust approval already received.

So, it really depends on the timing of that.

So, we are in almost the middle of May and we don't have that yet.

So, maximum might be a month-and-a half.

By Q3 it will be fully in.

Right, okay.

Just moving on to another issue, in your guidance, as you pointed out, your operating margin guidance improved.

And, I'm just wondering what is underlying that.

Was it volumes?

Was that mix?

Was it more or less dire volume going on?

Can you talk about what underlies the improvement in the guidance on margin?

Peter, there's going to be a number of moving pieces that are going to impact margin.

One of it's going to be volumes and mix globally.

The other is going to be the improvements in underperforming operations, where we think we are going to be now versus where we were before.

Launch costs for any new programs.

When you add it all up, what we are expecting for the balance of the year is improved operating margins which is reflected in our latest outlook this morning.

Okay.

And then just lastly I wanted to ask you about the Outlook for your rest of world segment.

It did report a small operating loss during the quarter.

I know you're launching a lot of business there.

While things really seem to have fallen off in Brazil in terms of the auto industry volumes.

So is the Outlook there for continuing losses as we proceed through the year?

I can talk about the situation in Q1.

We've got a number of new plants which we are launching in Asia, primarily, China.

So we still got some very good operating divisions over there but we've got to get through the launches.

In Brazil, a couple things happened.

We're launching a number of greenfields.

We made an acquisition last year so we are having some issues in Argentina just given the inflation and discussions with the customers about getting reimbursement for those, which they historically have been the case.

We've also got some new plants being launched in Seating.

And we acquired ThyssenKrupp and we just are digesting that, as well.

So, I'm disappointed in what I see, quite frankly, in Brazil in the quarter.

We've got a lot of actions and there.

But what we are seeing over in Asia is to be expected.

Growth slowdown a little bit from where we expected to be.

But overall we've got some really good plans over there.

Peter, overall for the rest of world segment, our latest estimates show that we're going to be profitable, we expect to be profitable in that region for 2012.

Given our results in Q1, our expectations have come down versus where they were (inaudible).

Thanks for your comment.

John Murphy, Bank of America Merrill Lynch.

A couple of questions, to follow up on Peter's inquiries about the interiors business.

In some ways we can interpret the situation as you being tethered to these underperforming businesses, and not being able to get away.

But you could also interpret it as the automakers seeing you as a really strong partner and that nobody else can operate it the same way you can.

So it seems like you could push this in one direction or the other as far as the interpretation.

How would you guys view this situation?

Do you feel that you are coming in really saving the day for the customer?

Or you just can't get away from this tough business?

I'm really just trying to understand how to interpret this.

Actually it's probably a pretty good interpretation.

I would say it's a bit of both.

As I said, it is not a strategic product area for us because we're not big in carpeting.

However, we were giving to somebody who we thought would be able to do better than us, and it didn't turn out that way.

I don't know, really, what was happening in operations.

We weren't part of that.

But at the end of the day, we don't want to be seen by our customers as saying we're just going to give business away to somebody who can't support it.

That was not the intent here.

It was a carpeting supplier.

There's not that many people that are that healthy, quite frankly, in the carpet business.

So as part of these dialogues, we were asked by the customer would we consider taking it back.

They are looking at this and saying we should be getting fair prices because we have underpriced product.

They recognize that.

There's been raw material increases.

And in fact, we need to figure out what we're going to do long-term.

But a couple of them have asked, will we actually increase what we're doing in the carpet business because they want a good healthy supplier.

Which we are evaluating right now.

If we do it, we obviously need to make sure we can make money at that.

So I'd say it's a little bit of both.

We have to make money where we are producing product.

However, we want to have a good relationship with our customers, and we don't want to leave them hanging, either.

And that is not our intention.

If we are connected with a business it's got to be to a good supplier which will look after our employees and look after the contracts, as well.

Okay, that's helpful.

Second question just on the content per vehicle in North America.

It looks like it was down about 6% to about $900, or just under $1,000.

I was just curious, is that purely because of mix or was there something else going on there?

I'm just trying to really understand why we saw that content per vehicle go down.

John, it's Louis, here.

We don't really measure content per vehicle anymore.

But if you are doing the calculations for content, it was essentially a negative mix and the balance of some programs that drove content down.

I'm sorry, is that because the Japanese were the bulk of the increase, or increased more?

Or was there something going on in the Detroit 3?

That is exactly what it is.

It is a mix of our customers.

John, I think when you look at our top programs in North America, volumes, as we talked about, we are up 17% quarter over quarter.

But when you look at our top programs on a new unit basis, they were only up 10%.

Again depending on what content we have in all of that.

That means we had negative mix.

The Japanese had a strong quarter year-over-year.

We understand why that is the case.

The Europeans had a very strong quarter, and so did Chrysler.

But GM and Ford year-over-year were down.

Okay.

And then on the SG&A, the $13 million that is coming in for the two smaller acquisitions, is that the kind of cost that you believe that you can work down and would be pretty good synergies?

Or is this $13 million incremental in SG&A a real sticky number that we should be modeling in?

I think you need to model in some additional SG&A as a result of the acquisitions.

We are acquiring facilities, we do have sales, we do have some overhead.

We are hoping over time that, as we start to better integrate these acquisitions, we are able to reduce overall SG&A costs.

But there will be incremental costs as a result of adding more facilities through the acquisitions.

Okay.

And then lastly, I just wondered if you guys could, you talk about the new business quoting, if you're seeing a real pick up there.

Because it seems like there's a lot of new product launching, you're getting into new markets.

Just curious how quoting activity is in general relative to last year or the last couple of years.

John, when we look at business awards in the quarter, it was at a pretty healthy clip.

I'm not sure it was at a record level.

It really depends on timing of programs.

But as we look forward to programs that we're actively pursuing, there is a tremendous amount of activity.

Yes, there's a lot of outstanding quotes right down, there is a lot of activity.

Is that a lot more than last year or the last couple of years?

Or is it similar to prior peaks?

I'm just trying to gauge the relative activity.

I can't remember specifically but I know right now, if we look at our outstanding quotes, it's higher than it was in this quarter last year.

I can't remember (inaudible).

Okay, great.

Thank you very much.

Steve Arthur, RBC Dominion Securities.

I just wanted to follow up briefly on some of your European business.

And notwithstanding the German interiors plant that is coming back in, we did see a very nice jump in European margins, up to around 2%.

Is there anything unusual or one-time in there that was contributing?

Or are these sustainable improvements from which point you would expect to build?

Again, backing out the German business.

Good afternoon, Steve, it's Vince.

I will try to deal with that.

There was a couple of things going on.

Number one, we did have, and I'm looking at Q4 to Q1, I'm not sure where your reference is.

But if I look at Q4 '11 to Q1 '12 there was a reduction in warranty costs of about $9 million.

The other thing that we are just seeing is we did have some additional production sales, ex FX.

And all-in-all we're seeing some pretty good pull-though.

Part of that is through pull through on additional sales.

Part of that is through improvement in underperforming operations.

As we look at the balance of this year, we are going to have, I think, some additional headwinds in Europe compared to Q1.

And that is going to relate to primarily two things.

One is, commodity costs.

It looks like they may be a headwind for the balance of the year in Europe.

And the other is launch costs.

We've got a whole bunch of activity that is going to start up in Europe, as well as in North America.

That will be a headwind for the balance of this year.

I would say, if you just take apples to apples on our core operations, I'm quite pleased with the headway we are making.

We've got good delivery, quality.

We're having good discussions with our customers if we've got material issues to deal with or other commercial issues.

But what's in control from our side, I'm quite happy with the management we've got in place, the attention we've got on the divisions over there.

Obviously you're going to have seasonality going Q1, Q2, Q3, Q4, as we always do.

But I feel like we've got some traction in Europe.

Okay, thanks.

And then just related to that, content was up significantly if we did do that calculation in Europe.

Again, anything there that is not sustainable in the business?

That was mix.

We talked a little bit about our customers versus the overall market.

So it's sustainable to the extent that those trends continue.

That's all it is really.

With the Euro being low, a lot of the premium brands we have a lot of content on are exporting vehicles.

And we're seeing a lot of production on those vehicles, if that helps.

Okay, thanks a lot.

I'll pass it along for now.

Rod Lache, Deutsche Bank.

This is Pat Nolan on for Rod.

Just a couple of follow-up questions.

On the European guidance for the full year, it looks like the content per vehicle is moving.

Just if you took your revenue guidance divided by your production guidance, it looks like the average of your vehicle is up about $30 versus your prior guidance.

Is that all mix?

Or how much of it is the business that you brought back?

If you could frame the impact of bringing that business in on the revenue side.

I would say it's more mix than anything.

On an annualized basis that business was about $100 million, on an annualized basis.

And we don't focus on cost per vehicle.

And there's a whole bunch of mix issues.

But there isn't anything there that is moving it up.

I think the reacquisition is going to help a little bit, but it is just mix and launches.

Got it.

And thanks for the quarter to quarter walk for North America and Europe.

Can you tell us the year-over-year currency impact in both regions?

Sure.

Just on the sales volume?

Yes.

Again, it is not that substantial.

In North America, about $30 million allocated to production sales.

And in Europe just on a production sales, ex assembly, it is about negative $60 million.

So translation, about $60 million on the sales line.

That the sequential impact.

Sequential, Q4 to Q1.

Is that what you were looking for?

No.

I think you gave Q4 to Q1.

I was looking for year-over-year.

It is about $100 million in Europe and about $25 million in North America.

That is year-over-year.

Got it.

And I just wanted to circle back to the question on SG&A.

It has been really volatile on a quarterly basis, both on an absolute dollar basis and a percent of sales.

Can you just give us some kind of brackets of where you think we should be modeling it, assumptions for the full year?

Do you have another question while I look it up, Pat?

That was my main question.

Also, I wanted to follow up on the European quarter-to-quarter walk from Q4.

Even factoring in the warranty reversal of about $9 million.

If you were using a 20% incremental on the $219 million production growth you had, there is still a $20 million gap in the results versus Q4 of improvement.

There is nothing else odd there?

Or is that $20 million the real operating improvement you saw in the quarter?

The walk from Q4 to Q1, we've talked about the items.

It really is pull-through and improvements.

Just in terms of your SG&A question, Pat, we are about 5.3% today as a percent of sales, And, you are right, there has been (inaudible) number of quarters.

What drives some of that volatility is foreign exchange, because the exchange currency has been pretty volatile.

So when you start to book a receivable or book a payable, and then you settle two to three weeks or a month later, or 40 days later, you get some gains and losses.

Those gains and losses flow through SG&A, is where we are settling a lot of those amounts.

And if you have a quarter where you had a gain, and the next quarter you had a loss, it's a pretty volatile situation.

Based on our best view, and we're running at 5.3%, we are probably thinking that SG&A as a percent of sales is going to come down a tad.

But again the bulk of this is maybe the result of foreign exchange.

That is helpful.

Thank you.

David Tyerman, Canaccord Genuity.

A quick question on D&A.

It has remained fairly low by your fixed asset base has been climbing.

And based on your CapEx plan it should climb a fair bit more.

I'm wondering, are we going to see an increase in D&A at some point in the year?

And can you give us some sense of how we should be thinking from a modeling standpoint?

D&A will adjust, most particularly with a bigger bump in 2013.

We'll start to see some of that move up in 2012.

But, David, in terms of exactly when this is all going to take place, it is going to depend on program capital, when we spend it, when we put it in place.

And that's really hard to predict.

Okay.

And then a couple of other ones.

The rest of the world sales guidance was lowered.

Is that FX or what is going on there?

It's down 10%.

I think when you look at where our current positions are and where we were a quarter ago, the rate of growth in the rest of the world is slower.

Sorry -- slower?

Slower, yes, just in terms of production units.

That it impacting our overall sales number.

Okay.

So it is just overall industry development, then, largely?

That is correct.

Okay.

And then on the NCIB, you didn't use it at all in the quarter.

Is there any reason for that?

And what is the prognosis?

David, I think in looking at the NCIB, that expires in November of 2012.

We were active not last quarter, but prior to that we were.

Given all our activities going on, given the relative strength of the stock, we said for the quarter that we weren't going to participate.

We will see as the year progresses when we participate or to what extent we participate.

But that is still to be determined.

Okay.

And in South America, with the Seating plants that were called out, I was just wondering what is going on there, and what the prognosis is.

Are we heading down another one of these problem areas, is what I'm wondering.

We don't think that that is the case, David.

Some of it relates to just lower volume expectations.

We're building in capacity so we need to look at matching costs with levels of production.

Second, probably a little slower integration of acquisitions.

Whether it was the TK acquisition or whether even our Seating acquisitions that we made over year ago.

And third is delay, I would say, in price recovery from our customers.

If you think about Argentina, in particular, where there is significant inflation, there is a delay in terms of adjusting your sales price for the higher costs and when you actually incur the costs.

We expect that to subside as the year progresses and we get better matching of cost to revenue.

Okay, fair enough.

And final question, E-Car, what is going on there now?

I think that funding was becoming an issue and so I'm just wondering what you see happening with E-Car and also just with the operational side.

Obviously some improvement in the quarter.

Do we see further improvement going forward?

Yes, we saw improvement, or less losses.

It was announced that Hyundai had also made a decision to invest in the shell business.

Hyundai Heavy Industries.

So if you look at the cash flow standpoint, they still have enough cash flow over the next number of months.

We've had a lot of discussions because we want to come to a conclusion what we're going to do before there is a funding requirement needed.

Because, given the structure of E-Car right now, the Magna Board is unlikely to put more money in without something changing in the structure.

So there's a lot of discussions going on right now and we will keep you posted as to what the next steps are going to be.

Is there any prognosis for profitability?

The losses will continue to go down over the next while because we're getting ready to launch some business.

They've won some very interesting contracts.

So a lot of it will depend on, if they win more contracts where they have to launch it.

But based on the business they've won to date, it will continue to lose money for the foreseeable future.

But certainly getting better.

And it does show profitability once we get up and running in the contracts we've got.

Great, that's helpful.

Thank you.

Rich Kwas, Wells Fargo Securities.

Just a follow-up on the European transaction.

I assume this is a pretty sizable customer or an important customer for you.

From my angle, the practical way of looking at this, potentially at least, is, are you doing this because you want to preserve business, potential quotes that you have in the future, and preserve your ability to win that business?

Or what is the real motivation for taking on this business if it's going to continue to lose money?

It's a combination of a number of things.

It is not one customer.

It's multiple customers, multiple important customers.

We've had a lot of discussions.

And we've had some other commercial issues over there, quite frankly.

So it's not just one thing we're talking about, we're talking about the pricing on that product, that continuity of supply, other issues we've got over there.

So, quite frankly, there's been a lot of discussions tied in together.

I don't have any interest in taking over a business where we're never going to see any profitability.

We are willing to take on the operation again at some loss, but we need to have a path forward to at least break-even and then hopefully profitability in the future.

But there's been a lot of discussions around this.

At the end of the day we've got to make business decisions.

We're dealing with big customers with huge orders going forward.

So, it was the best solution for all parties involved.

Okay, all right.

Second question, Vince, on interest, you had an expense this quarter.

Should we expect interest expense to be at this level going forward?

Usually you having income on that in the quarter, so just curious on that going forward.

Yes, I think you probably should expect some interest expense going forward.

Probably a tad lower than where we are this quarter.

And it relates to the borrowings and negative spread, because we are borrowing in places like China and Brazil and India and Argentina.

It's all part of our overall funding strategy into those regions.

Okay, all right.

So interest expense going forward.

And then on CapEx, does that get revised higher?

If you think about, I know you're not giving 2013 Outlook yet, but if we think about directionally on CapEx, should that come down next year?

Or should we expect that to continue to move up from here?

It's going to be a function of business awards.

We are quoting on a number of programs.

Some of those programs if successful will impact capital in 2013.

So we don't have a final number, yet.

But we do see a lot of activity.

From our perspective, if we're putting capital into the business and generating reasonable returns, that is a good place to be.

We look at a three-year capital exposure, how much we are committing to.

So, if you look at what we have booked now we would expect it to come down.

However, as Vince said, there's a lot of activity in quoting right now.

There's a limit to how much we can launch, quite frankly, from a manpower standpoint.

But we are seeing a lot of opportunity out there, which is a good thing.

So, too early to tell.

I would think it would come down, but we wouldn't have good business and we may stay at these levels.

Okay, great.

I appreciate the color.

Thanks.

Brett Hoselton, KeyBanc.

In looking at your revised guidance -- and maybe you spoke to this earlier and I just missed it -- but the carpet business that you are repurchasing, how much of that is incorporated in your guidance?

Is it incorporated into your sales guidance as well as your margin guidance?

Or not?

I'm thinking that it isn't recorded in your margin guidance because you're not sure what the losses are going to be.

Can you give us a sense of that?

Sure, Brian.

It's incorporated into our guidance in sales and operating margin.

Certainly you have to make an assumption when the acquisition date was going to be, so we could be off, there.

But I don't think it will materially change our guidance.

Okay, perfect.

Thank you very much, gentlemen.

Chris Ceraso, Credit Suisse.

Just a couple of things.

It sounds like you've got increased launches and material cost headwinds, and then of course this business that you're bringing back in.

So is it fair to assume that the margin that you printed in Europe in Q1 is probably the best one you'll see this year?

Chris, I don't have that information in front of me.

But I think you've got to take into account a couple of things.

One, seasonality.

you get into the July/August time frame in Europe, and you get into Christmas, they're typically down quarters.

So you typically have Q1 and Q2.

Generally, given the seasonality, there are (inaudible) being equal.

But I don't have that data.

And we are running at 5.7% in Q1.

And for the full year we're expecting something less than 5.7%.

So on a consolidated basis, certainly we're expecting margins over the next three quarters on average to be bit lower than where we were in Q1.

But the biggest part of that is seasonality.

Right, okay, that's fair.

I was referring to Europe specifically.

Yes, we're not getting into that level of detail, Chris.

We've got some good things going on and we've got some headwinds.

We are not going to predict it by quarter but at least we're going in the right direction.

Okay.

And then what about South America?

How long are these issues going to persist that are generating losses in that region?

Can you repeat that, Chris, please?

The rest of the world margins were negative and I'm just wondering, given the issues that you're having in South America, how long is that going to persist?

Should we expect losses in rest of world on a go-forward basis?

Chris, we had a similar question earlier on.

The answer to our expectations for rest of the world is that we should be in the block for 2012.

Which would imply positive margins for the year.

Okay, sorry, I must've missed that.

And then just lastly, can you clarify.

You mentioned the commercial settlement, the $20 million associated with this business that you sold and then had to reacquire.

Is that something that hit your P&L in Q1, the commercial settlement?

No, that actually took place in 2011, Chris.

So we had overall a loss in disposal of $129 million, which is comprised of two amounts.

The $109 million plus the $20 million.

In Q3.

It was in the back half of 2011.

So none of this will hit our P&L in 2012.

Okay.

All right, thank you.

Itay Michaeli, Citigroup.

Just a couple of follow-ups.

One, going back to CapEx, it looks like you have a number of booking opportunities and activity.

I was hoping you could maybe share roughly what your maintenance CapEx is relative to growth, just so we have a sense of how much of that CapEx will translate into future growth opportunities.

We track it actually, because we track it in seven different categories.

We've got the information.

I just don't know what it is off the top of my head.

And maintenance CapEx, it is difficult because if you're in a tough period you can always delay things and then we look at payback issues.

So, I don't really want to guess.

Sure.

And maybe just a follow-up.

The tax rate, it looks like it's coming in, even in Q1, lower than your full-year guidance.

Can you help us out in term of how to think about the tax rate directionally beyond 2012?

Maybe 2013, 2014 just roughly where that should go?

I think when you look at, we had guided at 26% last quarter.

We're at about 25% this quarter.

I expect longer-term that there is an opportunity for the rates to come down a bit as we start to generate some income, particularly in some of the areas in Europe where we are not benefiting from tax loss as we were experiencing last year in the United States.

But, assuming that doesn't take place, the 25%, 26%, 27% longer-term is probably a rate you should be thinking about from a modeling perspective.

Great, terrific.

That is all I had.

Thanks.

Patrick Archambault, Goldman Sachs.

Yes, my questions have been answered, mostly.

But I wanted to just tie one thing together, trying to just understand the year-on-year cadence of margin improvement.

Unless I have this wrong, I think for this year, year on year, you've got something like 30 bips.

Or from 4.9% to low 5%s baked in, you were flat year on year in the first quarter, which implies that the next couple of quarters will improve from a year-on-year perspective.

Can we just maybe tie some of the themes together?

It sounds like Europe year on year might get a little bit more challenging because of launch cost and this facility.

But it sounds like you expect improvements in rest of world.

What other issues are there that will help you get those improvements?

Maybe North America gets better I'm not sure.

Yes, I think when you look at areas, segments, overall in North America if you look at '12 versus '11 overall margins, we think it's going to be around flattish.

Could be up a little bit, could be down a little bit.

But about flattish with all of the pluses and minuses.

The rest of the world, given where we are in the first quarter on a year-over-year basis, we expect that to be negative.

And in Europe, as we've talked about over a number of quarters, we have action plans in place.

We are making some progress.

We are expecting margins overall in Europe, '12 versus '11, to be better.

So when you add that all up, you end up 4.8% operating margin on a normalized basis in 2011 compared to the guidance we gave this morning for 2012.

When Vince says negative he means down from '11.

Not losses, but down from where we were in '11.

Understood.

That's very helpful.

And last, I don't want to beat the CapEx guidance horse to death here.

But it has been running considerably higher relative to history.

I think it's on track to be 5% this year, or close to it.

\ I just look back and that number used to be in the 3%.

Is this really just a function of just a big backlog which is peaking that you have to get through and it will come back down?

Or is there something maybe structurally different about the business that is maybe more capital intensive that we should be thinking about just a higher rate relative to history?

I think we have a couple of things going on.

We're launching a lot of new plants so obviously that is a lot more capital, typically, if you're launching a brand-new plant than if you are just adding on, like bolting onto an existing plant.

We are seeing more orders coming in.

So obviously we're not going to spend the capital unless we think it hits our hurdle rates.

So the higher amount of capital should indicate that we will continue to grow our sales.

And quite frankly, if I had a choice between greenfield -- so quoting new business, launching new plants -- and buying companies, and there can be good acquisitions out there, I'd rather be doing the greenfield.

We typically have better success on those making money.

You have to have the people to launch them, obviously.

But we are a big company.

We're getting to be a bigger company so I know you're looking at it from a percentage standpoint.

But I would hope that if we got a major push in world-class manufacturing, a big part of that is figuring out how to optimize operations.

So, where we used to spend $1 million of capital in the past, hopefully we can do it for $700,000 or $600,000.

So I'm hopping we're more efficient in our asset turns.

But we are seeing some big opportunities for contracts.

And so I don't think it's anything fundamentally changed in the way the Company operates from a capital standpoint.

So, for me, it's a challenge to launch all the business but it is a good challenge to have.

Okay, great.

That's helpful.

Thank you.

Justin Wu, GMP Securities.

Just one bigger picture question on Europe.

With the kind of slippage we've seen in volumes there, due to weakening economic conditions, are you seeing much in terms of distress within the supply base?

And if you are, do you think that will translate into any kind of opportunistic type acquisitions for you there or potentially some takeover work?

I haven't seen a lot right now.

However, there's a lot going on in the European economy, as everybody knows.

It's going to be interesting to see what happens with some of the political situation in a number of countries.

I would suspect, if it slows down, we're expecting it to go down this year.

If it gets much worse I think you're going to see some suppliers get into trouble.

I don't see a lot right now.

But there was never this shakeout in the supply base in the last big downturn like there was in North America.

So, when we're looking at acquisitions, and we're always looking at a number of acquisitions, we're trying to figure out if the industry is going to slow down, then probably you can buy things at a cheaper price.

But it's going to be interesting.

I don't have a crystal ball but I don't see a lot of failures right now.

But we are seeing a real interest from our key customers over there.

They want to see us healthy, they want to see us good operating plants because we had some hiccups a year or year-and-a-half ago which we're primarily over.

So I'm seeing a lot of interest in us growing our business over there.

I don't know if that is because other suppliers are struggling.

I can't tell.

But I would suspect, if there is a downturn in Europe, then it will be opportunity for us to grow our business faster.

Okay, great, thanks very much.

Neil Forster, Scotiabank.

Just wanted to ask just a quick follow-up on CapEx.

If you look at the run rate in Q1, it came in quite a bit lower than where you guys are guiding to for full year.

So, I'm just wondering for modeling purposes what we should expect, whether it is more back half weighted or if it should be spread evenly among the quarters for the remainder of the year?

And maybe if you could talk about geographically where most of that CapEx is going.

Neil, if you look back historically at our capital, it is typically loaded to the back half of the year.

Which we expect will be the case again this year.

In terms of where capital is being spent, I don't remember what the exact number was but a big part of that capital is moving into the rest of the world.

I think one way to think about it is, when you look at the charts we have on new facilities, there's going to be a correlation in terms of where capital is being spent and new facilities going up.

Our percentage of capital being spent in North America and Europe is coming down and it's growing in China and South America.

And India, as well.

Great, thank you.

And then just on Argentina, you guys mentioned inflation there impacting you.

Are you seeing anything in terms of government legislation, tightening import restrictions, and things of that nature having an impact?

Not really.

I think when you look at what they're trying to do down there, if you look at the Mercosur region, they're trying to make sure that they are supporting their own industry.

And there's talk about what they're going to do in Brazil and Mexico.

We wanted to be down in Brazil to have local production.

We can supply a lot from Mexico so that is open, and that's where a lot of people are shipping products from.

It is a high cost region if you have to import.

So we'll have to see what happens.

But we've had a lot of growth there.

We're looking at a couple more opportunities there.

We'll digest what we've got and we'll see, depending what they do from a trade standpoint, there may be future opportunities.

Things are changing all the time in trade.

It'll be interesting to see what policies they come up with for the next year or two.

Okay, great.

Thanks, guys.

There are no further questions at this time.

Okay.

For those of you who watched our annual meeting, we talked about we have three major priorities.

It was kind of fun this time in our annual meeting.

We had six people working on future technologies talk about those technologies.

We are very focused on the manufacturing side.

We are leaning out operations.

We are sharing best practices.

I'm very happy with the progress we're making.

And I think some of that is translating into improved margin we're seeing over in Europe.

And we do have a real major push on innovation.

It is something, we had a question today about being more open, more communicative with our shareholder base.

We've got some action plans in place.

We're going to continue talk about what we're doing from an innovation standpoint, as well.

I think all of our corporate governance activities are behind us.

We had supporting votes for everything at the annual meeting.

So, I'm looking forward to keeping our head down and growing the Company and focusing on operations and growing the business.

So quite optimistic about the future.

Appreciate everybody listening on the call and we'll talk to you later.

Think you.

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

Thank you for your participation.

And ask that you please disconnect your lines.