Magna International Inc (MGA) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the second quarter 2012 results.

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, August 9, 2012.

It is now my pleasure to turn the conference over to Mr. Don Walker, Chief Executive Officer at Magna International.

Please go ahead, Sir.

Thank you.

Good evening everybody and welcome to our second quarter 2012 conference call.

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

Earlier today our Board of Directors met and approved our financial results for the second quarter ended June 30, 2012.

We issued a press release this afternoon for the quarter.

You will find the press release, today's conference call webcast, and our updated quarterly financial review, which is being posted right now, and the slide presentation to go along with call, all in the investor relations section of our website at www.magna.com.

Before we get started just as a reminder that 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.

Overall, we are pleased once again with our second quarter results.

Another record quarter in sales and earnings.

In North America, we had another solid quarter.

Sales were essentially level with the first quarter and EBIT margin remained strong in the 10% range.

In Europe, sales were also similar to the first quarter and our EBIT margin was also in line with the first quarter at 2%.

While we are not happy with the 2% margin in Europe, we have made meaningful progress in the past year and expect to make further progress in the years to come.

As we spoke about last quarter, in June we reacquired the corporate business that we sold at this time last year.

Prior to the acquisition we secured price increases from certain customers.

Some increases are effective immediately, and some our effective January 1, 2013; however, the business is still expected to generate significant losses.

The current business phases out over time anywhere from approximately three to six years from now.

We incurred an approximate $25 million normalized operating loss in these operations in the first half of 2011, and we expect a similar normalized operating loss in the second half of 2012.

Including improvement plans and price increases we expect to reduce those losses in 2013.

In the Rest of World segment we continue to have lots of ongoing -- sorry, lots going on including a number of new facilities under construction or launching in Asia, and South America, and the integration of a recent acquisition in South America.

Our ongoing investments in these key regions are expected to generate future sales and earnings growth.

However, currently they are negatively impacting operating results.

In the Rest of World segment we incurred an adjusted EBIT loss of $16 million in the second quarter of 2012, slightly higher than the $9 million incurred in Q1 2012.

Operational inefficiencies and other costs in certain operations in South America, as well as costs related to new facilities were the primary reasons for the decline in adjusted EBIT in the second quarter of 2012.

We have action plans in place that we believe will improve the operational inefficiencies.

In addition, we expect that our new facilities launch, the financial impact of such facilities will turn from negatively impacting adjusted EBIT to being positive contributors in the future.

Lastly, we announced earlier today that we acquired during the remaining and controlling interest in the E-car business formally owned by a company affiliated with the Stronach Group.

We are pleased to regain control of this business.

As we have stated previously we expect electrification of vehicle powertrains, hybrid and electric vehicle production, and their associated components and systems to continue to grow globally in the future.

And we believe Magna stands to benefit from this trend through e- cars capability.

With that I will turn the call over to Vince Galifi.

Thanks Don, and good evening everyone.

I would like to review our financial results for the second quarter ended June 30, 2012.

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

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

In the second quarter of 2012, there were no other income or expense items recorded.

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

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

In the second quarter, consolidated sales increased 5% relative to the second quarter of 2011 to a record $7.7 billion.

North American production sales increased 11% in the second quarter to $3.9 billion.

Currently reflecting a 28% increase in vehicle production to just under 4 million units.

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

Partially offsetting these were a decline in content of certain programs including the new Ford Escape and Ram pickup, programs that ended production during or subsequent to the second quarter of 2011 including the Ford Crown Victoria and the Chevy HHR.

The weakening of the Canadian dollar against the US dollar and net customer price concessions subsequent to the second quarter of 2011.

European production sales were essentially level with the comparable quarter even though Western European vehicle production declined 7% to 3.3 million units.

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

For the quarter, the weakening of the euro against the US dollar, lower production volumes in certain existing programs, the net effect of the disposition, during the third quarter of 2011 and subsequent acquisition in June 2012 of corporate operations, and net customer price concessions subsequent to the second quarter of 2011.

These were substantially offset by the launch of new programs, including the Range Rover Evoque, Volkswagen up!

and its derivatives, Audi Q3 and Kia Pride and Rio, as well as acquisitions completed during or subsequent to the second quarter of 2011 including BDW.

Rest of world production sales of $415 million increased 24% or $80 million over the comparable quarter.

Primarily as a result of acquisitions completed during or subsequent to the second quarter of 2011, including ThyssenKrupp Brazil, and new programs launching in Brazil and China during or subsequent to the second 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 just under 2,200 units from the comparable quarter and assembly sales declined 11% or $83 million to $645 million.

The decline reflects the weakening of the euro against the US dollar, lower assembly volumes for the Peugeot RCZ, and the end of production of the Aston Martin Rapide in the second quarter of 2012 at our Magna Steyr facility in Austria.

These were partially offset by an increase in assembly volumes for the MINI Countryman and Mercedes-Benz G-Class.

You should 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 5% or $362 million in the second quarter.

The primary reasons for this increase are higher production sales in North America and Rest of World, offset partially by lower complete vehicle assembly sales.

Tooling, engineering and other sales increased 6% or $27 million in the prior year to $511 million.

The net increase related to sales on a number of programs, partially offset by the weakening of the euro against the US dollar.

Gross margin in the quarter increased to 12.9% compared to 11.7% in the second quarter of 2011.

The increase in gross margin percentage was substantially due to lower costs incurred in preparation for upcoming launches, the net effect of the disposition during the third quarter of 2011, and subsequent acquisitions in June 2012 of corporate operations.

Lower restructuring and downsizing costs, a decrease in complete vehicle assembly sales, which has a higher material content than our consolidated average.

Favorable settlement of certain commercial items, and productivity and efficiency improvements at certain facilities.

These factors were partially offset by increased preoperating costs incurred at new facilities, a larger amount of employee profit sharing, an increase in tooling sales that had low or no margins, operational inefficiencies and other costs at certain facilities, including certain facilities in South America, and net customer price concessions subsequent to the second quarter of 2011.

Magna's consolidated SG&A as a percentage of sales was 4.9% in the second quarter of 2012, level with Q2 2011.

We incurred increased expenditures in SG&A due to acquisitions completed during or subsequent to the second quarter of 2011, including BDW and ThyssenKrupp Brazil, higher labor including wage increases at certain operations, and other costs to support the growth in sales, a loss on disposal of an investment, higher incentive compensation, and increased costs incurred in these facilities.

These factors were partially offset by the weakening of the euro and Canadian dollar each against the US dollar.

The recovery of due diligence costs, a $7 million revaluation gain in respect of asset backed commercial paper, and the net effect of a disposition during the quarter -- during the third quarter of 2011 and subsequent acquisition of June 2012 of corporate operations.

Our operating margin percentage was 6.1% in the second quarter of 2012 compared to 4.8% in the second quarter of 2011.

The higher gross margin percentage and higher equity income were partially offset by the higher depreciation expense and higher interest expense.

Our effective tax rate increased to 25.7% for the second quarter of 2012 compared to 22.7% in the second quarter of 2011.

The increase primarily relates to a reduction in the utilization of losses not previously benefited in the United States partially offset by decreases losses not benefited in Europe.

Net income attributable to Magna increased $77 million to $349 million for the second quarter of 2012, compared to $272 million in the comparable quarter.

Diluted earnings-per-share were a record $1.48 compared to $1.11 in the second quarter of 2011.

The increase in diluted earnings-per-share is a result of an increase in net income attributable to Magna and a 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 of the number of diluted shares associated with stock options.

I will now review our cash flows and investment activities.

During the second quarter of 2012, we generated $586 million in cash from operations, prior to changes in non-cash operating assets and liabilities and invested $122 million in non-cash operating assets and liabilities.

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

For the quarter, investment activities amounted to $283 million, comprised of $267 million in fixed asset and a $35 million increase in investments and other assets, offset by a net $19 million recovery on the purchase of subsidiaries.

Today, our Board of Directors declared a quarterly dividend of $0.275 per share with respect to our common shares.

The dividend is payable on September 14 to shareholders of record on August 31, 2012.

Our balance sheet remains strong with $1 billion in cash net of debt as of June 30, 2012.

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

Finally, I would like to review our updated 2012 full-year outlook.

I would 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 have increased North America and lowered Western Europe as compared to our outlook in May.

We now expect 2012 North American light vehicle production to be approximately 14.8 million units compared to 14.4 million units in our May outlook.

We expect 2012 Western European light vehicle production to be approximately 12.6 million units compared to our May outlook of 12.7 million units.

The increase vehicle production is expected to lead to increased sales in North America.

The reduced vehicle production, together with the lower euro are expected to result in lower European production sales and complete vehicle assembly sales.

The increased expectations for production sales in North America is offset by lower European and Rest of World production sales as well as lower complete vehicle assembly sales.

As a result, we expect total sales to be in the range of $29 billion to $30.5 billion, unchanged from our May outlook.

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

We expect our consolidated operating margin percentage to be in the low to mid-5% range, up from the low 5% range in our previous outlook.

We continue to expect our effective tax rate to be approximately 25%.

And for the full-year 2012, we expect fixed asset spending to be in the $1.4 billion to $1.5 billion range, as compared to our previous outlook of approximately $1.5 billion.

This now concludes our formal remarks.

Thanks for your attention this evening and we would be pleased to answer your questions.

(Operator Instructions)

Peter Sklar, Nesbitt Burns.

Looking at your European operating income at the dollar basis -- is that the same level as the first quarter despite the tail off in European production volumes of your customers?

So I'm just wondering what was underlying that performance?

Was it your exposure to the Germans who were doing better?

Or the loss plants that you've talked about for a number of quarters?

Are they continuing to improve?

Combination of both those, Peter.

A lot of our sales go to BMW, Mercedes, and the VW Group; and their sales have held up fairly well.

And we've also been continuing to make improvements in our underperforming divisions over there.

Yes, Peter -- I think when you look at production sales, Q1 to Q2 of 2012, and you back out foreign exchange translation, as a result of the euro, we think, actual sales were roughly within $30 million of Q1 sales.

So, if you think about sales being flat, and our EBIT improved by about $2 million to $3 million, there's a couple of moving pieces in there.

One is lower launch costs in Q2 versus Q1 -- I'm sorry, higher launch costs in Q2 versus Q1 -- offset by improved profitability in a number of operations in Europe.

So pretty well, when I sit back and look at it, sales were roughly in line with Q1 and profitability was in line with Q1.

So -- consistent performance.

Right, okay.

And Vince -- there were a couple of things -- a few things that looked to be unusual.

There was the securitization write-up, which I think you quantified; but there is also a recovery of due diligence costs and a loss on disposal of assets.

Would you be able to quantify those two items?

Yes.

Peter, I think when you look at -- and all of this is in the Corporate segment -- I think when you look at the recovery, the due diligence costs, the revaluation gain on the asset-backed commercial paper, the loss on the sale of the investment -- magically, it all nets to zero.

We have a couple of other items in there, but when you add up all those unusual-type items, they had no impact on EBIT or operating income in the quarter.

Okay.

And then lastly, if I may, I just have a couple of questions on the purchase of the outstanding interest in E-Car.

Does that mean Frank Stronach has no involvement in E-Car?

Yes, sorry.

So Peter, it's Vince.

Well, we are going to own 100% of E-Car's business and assets.

So, Frank will not have any direct involvement at E-Car going forward.

And we are expecting this transaction to close at some point in August of this year.

So the next week or so.

Okay; and I understand E-Car has had a burn, a cash burn, and so, is this something that is going to require additional resources from Magna -- I presume to continue to provide liquidity?

Right -- it's going to be a wholly-owned operation once we complete the acquisition, Peter.

And when you look at the E-Car business line, it is investing for new programs that have been awarded to E-Car.

So like any other operation, as it starts to ramp up production, we're going to be investing, and we will incur some expenses; but once the sales start to come into fruition, the cash situation will change, because it's expected to change.

To just to put some color on the losses in E-Car incurred, Peter -- if you look through, and you probably haven't had a chance to look through our MD&A, which was released quite late this afternoon -- on a operating income perspective -- so not equity income, but operating income perspective -- E-Car had a loss of about $30 million in the first half of 2012.

When we look at the balance of this year -- so the second half of 2012 -- the forecast is for E-Car to lose a little bit less than that.

Where the upside from a profit perspective rests is that once we fold E-Car into Magna, and we expect to achieve certain synergies on the overhead side; so, the overall loss for the second half should be less than the loss that E-Car booked in the first half of the year.

And do you have any idea of the programs that it's launching?

I believe one of the larger programs is the power train on the battery electric Focus?

When do these programs get up and running, so that it seems to be able to stand on its own two feet, at least from an operating cash flow perspective?

In North America, the biggest contract we've talked about is the electrified, that battery electric vehicle for the Ford Focus, which is just launching now, there's no real volume on it yet, but it's launching now.

And then there's a number of component contracts which are going to be launching over the next little while in North America.

In Europe, the biggest contract they have -- which I don't think we've said what it is publicly yet -- it's a pretty big contract and it won't be launching for another -- got to get the start of production date -- I think it's in the latter part of '13.

Is it '13 or '14?

I think it's actually later than that, Don.

What will probably do is get more color out just to people, whatever the customer will let us talk about in the future, and give you a little bit more information as to what the contracts are that they've got.

Right.

Okay, thanks for your comments.

John Murphy, BofA Merrill Lynch.

Good evening, guys.

Just to follow on the question on E-Car -- curious what the rationale was for the timing of this purchase?

And if we think about it going forward, when do you think it could be a positive contributor?

Is this something that is 18 months out, or is it something that is 3 years out before it gets to EBIT breakeven, and presumably, cash flow breakeven at that time?

John, in terms of when does E-Car transaction come together, the Board formed a special committee in February of this year to consider what options we had with respect to E-Car.

It was pretty clear that E-Car had a funding requirement.

We've been talking about that in the public documents.

And as we were considering those options, opportunity came up to purchase the remaining interest in E-Car.

And we think that E-Car rightly belongs within Magna, and I think having E-Car rejoin Magna 100% will create additional opportunities for us going forward.

In terms of when we expect E-Car to be positive on an EBIT perspective, it is going to depend in part on how fast we grow the Business as well.

This is a start up operation.

We are investing in research and development.

We do have engineering to support new programs.

As we run through our business plans, which we expect to do by the end of this year, as Don talked about, we will give you little bit more color on the E-Car operations.

Okay, and then just presumably you wouldn't be launching this with a new French or Italian customer?

Presumably it would be one of the Germans?

That's a pretty good assumption, but I don't want to talk about --

Okay, that's fair enough.

Second question -- just on Rest of World, you guys had been printing a positive EBIT there up until the last two quarters or the first half of this year.

Obviously your launches were pretty well-known.

I'm just curious if that business really is performing on plan, or as you expected?

Or is there anything that's come up more recently in this launch process that really has surprised you, that's driven these bigger losses in the first half of this year?

John, just a couple of things to keep in mind.

When you look at the Rest of World, the biggest pieces are China and South America.

In China, we have quite a bit of activity on the launch side and the new facilities side of our business.

And when we look at that, we see that China is performing as expected, and we knew there was going to be pretty significant expenditures as the Business was growing.

Volumes in China are probably a little bit lower than what we had anticipated in the beginning of the year, but that is not the biggest -- when we look at China, the biggest impact there is launch costs and new facility costs, but they are pretty well on track.

Where we're a little bit behind where we thought we would be, is in South America.

Compared to our expectations at the beginning of the year, production volumes in South America are significantly lower than where we thought they were going to be.

We've also been incurring higher integration costs, integrating some of the more recent acquisitions; and we've been experiencing some higher launch costs and some operating inefficiencies.

In addition to that, there is some commercial matters that we're trying to wrestle with, primarily relating to the recovery of inflation on some of our costs in South America.

And inflation -- think about Argentina in particular, and Brazil, is running at a more substantial level than our other operations.

So we are working with our customers on trying to recover some of that.

As we look towards the back half of this year we are anticipating improvement in South America, which you should see the improvement, obviously, in the Rest of World segment for the balance of this year.

Okay that's helpful.

And then on acquisitions -- there is rumored to be some fairly large assets in play, potentially and specifically coming out of Visteon.

They might have a fairly attractive geographic footprint for you in Asia.

There might be some strategy in acquiring interiors business, although I'm not sure yet you'd you want to do that -- but in Europe, as far as consolidating some interiors operations and really rationalizing that part of the business.

Are acquisitions of large chunks of assets like that on the horizon or potentially something you would consider for the Business?

One, for the geographic diversification; or, two, from the restructuring efforts, possibly in Europe?

We continue to look at a lot of different opportunities in the M&A area.

We are not going to talk about them specifically, obviously.

I would suspect that if the downturn continues in Europe there is probably going to be some opportunities to make acquisitions.

Our preference would be to buy companies that have either got good technology or have a footprint, more in Asia, quite frankly.

However, there may be some good opportunities in Europe and we are continuing to look at smaller ones and bigger ones.

We've got some cash on the balance sheet; we would like to put it to work.

We talked about that in the past, and we're continuing to look what's out there; and if there's an appropriate one, then we wouldn't hesitate to move forward with it.

Okay.

And then just lastly on the Ford -- on the F-Series -- it's been rumored that, that frame may go all aluminum and obviously the light weighting of the structures is what you guys are involved in is sort of a theory that's been out there.

Is there potential change in material an issue, or an opportunity for you?

And how do you see that going forward?

I'm not going to talk about a specific platform.

I would say we have as much capability in alternate materials, including aluminum -- whether it's die-cast, whether it's stamped and welded together -- and we're looking at, we have a composite development center, so we have got a lot of other opportunities.

I think you're going to continue to see major changes in the body structure, which could include the frame and different material choices going forward.

We are heavily involved in R&D in those areas, so is it a net positive, net negative?

Obviously, it depends what we can land, but I would say, we have as much capability as anybody else in those areas, and we also have a lot of capability on the engineering side.

That's helpful, thank you very much.

(Operator Instructions)

Ravi Shanker, Morgan Stanley

Thanks, good evening.

If you can just talk about what we expect to see in the second half -- I think you did raise your overall margin guidance, but you are pointing to a weaker second half than the first half.

Can you talk about some of the moving parts there, and what might be any room for upside on the execution side from where you're guiding to?

Well typically, I think, if you look historically, given the seasonality of our business, the second half, all things being equal, tends to be lower than the first half.

And that's implied as well in our volume assumptions for the balance of this year.

I think when you look through the various regions, the things that we focus on that can impact profitability, outside of margins, are going to be launch costs -- I'm sorry, outside of volumes -- are going to be launch costs, new facility costs, commodity costs, some of our inefficiencies in our operations.

As we look at those things -- in particular, if you look at launch costs, we think that, that is going to be relatively flat for the year on a global basis, but probably a little negative for the second half of the year.

New facility costs -- we continue to invest for growth.

That will continue to be a drag in the second half on a comparable basis.

And we continue to see headwinds on the commodity side, which again, will be a drag on the second half of the year.

So, if there is some relief on the commodity side, that could be an upside.

If volumes are higher than our assumptions are, that could lead to an upside.

Foreign currency as well -- we assume current exchange rates.

So, if the euro moves up or down, or the Canadian dollar moves up or down, that will have a corresponding impact on overall reported US dollar profitability.

Okay.

If I can ask you a few specific follow-ups there -- what is your GMP100 assembly assumption for the year?

Volumes for this year?

Yes.

1 million units.

1 million units, okay.

And I think you had indicated on your previous call that you expect launch costs to herd European margins in the back half ;and you said Q2 stepped up, but you managed to actually improve your margins.

Are we looking at the same 2% margin level?

Or what are we looking for in the back half?

Well, we are expecting launch costs to be negative in the second half in Europe.

Flat year-over-year, but negative in the second half.

For the second half in Europe, we are expecting in aggregate to post positive margins.

But again, keep in mind that, when you look at sales in the second half of 2012 versus the first half of 2012, there is a pretty substantial decline; it has a negative impact on margins, incremental margins.

The other item that is impacting us in Europe in the second half is the acquisition of the corporate operations.

When we look at the corporate operations last year, they lost about $25 million, approximately, in the first half of 2011.

And when we look at that back half of this year, those corporate operations are probably going to have a similar type loss.

So that is a headwind that we're facing in the second half of the year that we weren't facing in the first half of the year.

Understood.

And can you quantify raw materials for the year?

Sorry, we haven't quantified -- you mean fully -- for Magna or for Europe?

Just for Magna, what the raw material headwind might be year-on-year.

We haven't quantified the amount; it's not a massive amount for us.

Okay, thank you.

Steve Archer, RBC Dominion Securities.

Yes, thank you very much.

Just one last clarification on E-Car -- will it still be reported separately, or will it just be bundled in with some of the other operating divisions?

We are going to put E-Car up into the North American segment and the European segment.

E-Car doesn't have any business right now in the Rest of World segment, but it will be split up and reported in those two segments.

Okay.

It won't be separately.

Okay, but it will be part of those two divisions?

Two segments, right?

North America (inaudible) for E-Car and stampings and (inaudible) and so on.

Okay.

Secondly then, just on the capital spending plan -- about six months ago you laid out about $1.5 billion plan, but it seems to be trending down a little bit.

Is there any material change in the way that you are deploying that capital, whether it is regionally or new opportunities?

And then based on what you know now looking out over the next few years, is that a reasonable level to assume, given the opportunities that are out there?

Steve, we lowered our guidance on --essentially on capital.

We were about 1.5, now we're at 1.4 to 1.5, I would say there's essentially two reasons for that.

One is exchange rates.

When you look at where exchange rates were last quarter and where they are now, most of the currencies have devalued against our US dollar reporting currency.

That's it is going to essentially reduce our capital reported in US dollars.

Part of it relates to timing of programs, and we will continue to fine-tune our capital spending; and obviously, our objective here is always to defer capital when it makes sense to do so.

So, I believe there will still be fine-tuning as we move along the balance of this year.

We haven't yet finalized our capital spending for 2013.

We do have some visibility in that.

We do have a lot of quoting activity underway.

And as I said previously, expect our capital spending to be elevated for the next couple of years.

Whether it's going to be the 1.4 or 1.5 mark, I'm not sure -- again, we're not finalized yet -- but it is certainly going to be tracking higher than we had in 2010 and 2011.

Okay, thanks for that.

I'll pass the line.

Chris Ceraso, Credit Suisse.

Thanks -- can you hear me?

Hello, Chris; yes, we can.

Great; thanks.

So just a couple of items -- it seemed that it's a bit of it change of tone on E-Car.

I think in previous calls, Don, you seemed to be maybe a little bit skeptical of the business model, the role of the supplier in the electrification of the car.

So, why the change in tune?

I think you'd also said that you were pretty firm about not putting any extra capital into E-Car.

So what changed here?

Why are you buying this and taking it in-house?

If it needed money, did you think about selling it rather than taking it in-house?

Yes, what I said was, we are not liable to put more money in if it was a cash call under the existing structure.

So, and when we own it 100%, then we are in control of what we're spending our money on.

So that was the comment we made about not putting more cash in.

I've been pretty consistent the last four or five years and I still have the same belief.

I think there is going to be battery electric vehicles out there.

I don't think the battery electric vehicle volume is going to be really high in the next couple of years, because it's got to be driven by government incentives until the battery cost comes down, the power density goes up.

And so I think that will happen -- whether that happens in three years, four years, five years -- it's hard to tell.

The real value to -- and in sales, I'm not a big believer in getting into sales unless we can do R&D and we can come up with a better mousetrap.

The real opportunity in the space we are in, and the real opportunity for Magna, quite frankly, is the component side of the electrification, either in hybrids, or the electrification of power train systems going forward.

We're going to have to see better efficiencies in the power trains, lower weight in the power trains, start/stop systems.

So we have a lot of expertise in E-Car on the component side for hybrids, for electric vehicles, and also for electrification of normal power trains.

And we have a lot of expertise in the software side of the Business, which is going to be good for the Business they're currently in, and quite frankly, it's going to be a real asset to our power train evolution and new product design.

The one other area which we will see where it goes, is the battery pack, which we have a lot of expertise in, and there will be battery pack contracts of size, of reasonable size going forward because hybrids are not going away.

So, my comments have been pretty consistent and I still believe basically in what I've just said.

Okay, that's fair enough.

Couple of other quick ones.

The margins in North America have been strong.

Do you think that those will trend a little bit lower in Q3 and Q4 as GM takes downtime on the full-size truck?

I know that the frame is a pretty nice piece of business for you.

Chris, I think when you look at seasonality, again, margins tend to be lower in our Business in the second half of any given year.

If you look at margins in Q1, they are at 5.7%; Q2 they were at 6.1%.

We did move up our guidance for overall margins for the year, but even though we've moved them up, we are at the low to mid-5% range.

That implies that margins are going to be lower in the second half of this year.

And that will be the case in North America and Europe.

And I don't think you can overstate the impact of one program, it's a big program for sure in North America, but we have lots of big programs and lots of them have impact on margins; so I wouldn't overplay the impact of one program on our results.

Okay and then just the last housekeeping item -- I apologize if I missed this -- but did you give the overall impact of FX on revenue, and also on operating profit?

No we did not.

Just bear with us for a second, Chris.

So the sales impact on North America was about $68 million, in North America, negative; and Europe was negative $260 million; and Rest of World negative $35 million.

Okay, and then what about the impact on operating profit?

We don't disclose that, Chris.

Would you say that it was immaterial, given different cross-currencies?

Or was it bigger than a breadbox, so to speak?

Well the biggest impact was in Europe, and while we are profitable in Europe, the profits aren't anywhere near as big as they are in North America; so it's going to be less impactful because it is in Europe.

Right, okay.

That make sense.

Thank you guys.

Thanks, Chris.

David Tyerman, Canaccord Genuity.

Just on the raised operating margin guidance -- is this just simply a case of the first half coming in stronger than you expected and so you're just bumping the year as a whole> Or did some segment or segments, actually, are they looking better going forward?

Well, David, we update our forecast internally quarterly; there is a whole bunch of moving pieces.

There's -- it's going to be mix or there is going to be change in production volumes; up in North America, down in Europe.

There's translation; we now have the consolidation of E-Car, there's the acquisition of the corporate business.

It's -- there's a whole number of factors that go into where our targets are, but as we look at the business in the first half of the year, we've been pleased with the progress we've been making in our underperforming operations.

So we continue to do better in those areas, and expect that, that will have an impact on overall margins -- but there's a number of matters that are impacting our overall view on margins for 2012.

If I could add one thing.

We had a very focused effort on the operations side in a number of areas including Europe, and I think we're making headway there.

I'm quite pleased with what a number of people have done over there, so that's certainly a big part of the reason.

Okay, so it does sound like things are getting better, and Europe is a big part of this, and that is explaining a lot of it.

Obviously, there's lots of other things that move things around, but that sounds like a fair assessment.

Yes.

Okay.

And then just on Europe for the outlook -- you've talked and you talked again today about your exposure being quite good by automaker, and that's helping you out.

Is there any sign of that breaking down at this point?

Or would that still be your view?

I think it's our view is, we talked about the market, and I think our strong customers seem to be continuing to be fairly strong.

So I would think it will -- would expect it to continue.

David, I think when we look at some of the projections there on overall production volumes in Europe, by customer -- I'm just trying to find the slide -- I think what is built into our sales numbers are that in the back half of the year that the German three, as they've outperformed in the first half of the year, they'll continue to outperform, but I think the gap between the Germans and the non-Germans is going to get closer.

The mix is going to soften a little bit -- the positive mix of these things.

Okay, so still better, but not quite to the same degree as the first half?

Okay and then just last question I had; just housekeeping -- on the equity income, with the shifting of E-Car into the segments, presumably equity income is going to change.

To forecast that, should we just back out the equity income number that you put in your notes, in note 16, from the equity income line in the consolidated statements, to try and get an idea of what the number will look like going forward?

Right, that's correct.

So you're going to back out E-Car; I think our equity income loss in the quarter was $10 million.

So if we would've had consolidated E-Car, our equity income would've been higher by --

Right.

$10 million.

However, our EBIT already would've included approximately 77% of the losses in E-Car.

So we will be picking up additional losses.

Yes.

As a result of consolidating E-Car going forward.

Right.

There still seasonality and seasonal impacts to our equity investment as well, right, which will move income higher or lower depending on the quarter and depending on the time of the year.

Right.

Okay, that is helpful.

Thank you.

Itay Michaeli, Citigroup.

Great, thanks; good evening.

First question, on North America -- the margin was very impressive, both sequentially and year-over-year.

I'm just trying to get a sense of what you think about that margin in two or three years?

I mean if, based on IHSS's production forecast on your incoming backlog, could that 10% start to move higher over time?

Or do you think it's a bit capped just given the growth of the market and the pricing environment?

I'm not going to give a prediction on it, but if you look at the moving pieces, it looks like there's pent up demand.

So our assumption is that the volumes will continue to creep up.

We do have a number of startups which we'll get into production.

We do have some underperforming divisions here -- not that many left in North America -- so those are all areas for improvement.

I think the flip side of that is, our customers are always looking for price reductions and we are negotiating those.

So, I think from an operational standpoint we are doing a good job; we can always improve, but then we have to give some money back.

I think at 10% -- it would be nice to think that we can move it up, but I would be happy if we continue to increase our sales and we keep our 10% where it is.

And it really depends on the different segments as well; it depends on what Businesses we are talking about, how capital-intensive it is.

But overall, I think what we said last time -- if we can keep our margins roughly where they are in North America and we continue to grow the business, then I'll be happy.

Absolutely.

Then back to Europe -- I think you mentioned that you do expect a positive margin in the second half of the year.

Would you also expect a positive margin in the third quarter?

Or is it reasonable, just given the seasonality, of course, that you might be in a loss position in the third quarter?

You know, we're not going to comment specifically on quarters.

Depending on where sales actually fall in third quarter, it's conceivable that we could be in the red in Q3.

But it's hard to really focus on one quarter versus the next, and we've got better comfort when we look at the full six months.

But it's conceivable we could be negative in Q3.

Okay, that's helpful.

And then on E-Car -- now that you have full ownership, should we expect any additional investment, both in R&D and capital, that could have a dent on margins?

Or is it just still going to be way too small to have a noticeable impact on financials going forward?

Just want to get a sense of what kind of investment might we see, or change of investment, now that you have full ownership.

I don't think it's going to be material.

However, I do think there's some good opportunities that we will pursue in technology changes in the traditional E-Car business, and also power train business.

So, we are trying to put a much bigger emphasis, we've talked about on getting all of our operations to world-class levels.

As far as manufacturing, I think we're making good headway, long way to go, but we're making good headway.

We've got a very conscious effort on looking at new product development, increasing our R&D spend, and I think there'll be an increasing amount we probably do in the power train side, just given the amount of opportunity there is there.

So I don't think we have a material impact to the P&L, but I think down the road we, hopefully, will see some good sales growth and profitability growth; and right now we are burning cash, obviously.

Okay, great.

Thanks so much, guys.

And congrats.

Thank you.

Peter Sklar, Nesbitt Burns.

Your equity income was at an unusually high level.

I'm just wondering -- is there anything behind that?

And also, the equity income in terms of your reporting segments -- does it largely fall into Europe or North America?

When you look at the equity account, Peter -- just give me a second to pull up the data.

I believe it was income of $42 million --

We were $42 million in the quarter; we were at $32 million in Q1.

So, $10 million improvement.

A couple of million of that came from E-Car, and the balance was from our equity (inaudible) investments in North America.

And the bulk of our equity income is generated in North America.

Okay; and was there anything unusual, or is it just straight operating performance in North America.

No, not that came that came to my attention, Peter.

Okay.

Thank you.

Thank you.

At this time, gentlemen, I'll turn the call back to you.

Okay, great.

Well I appreciate everybody calling.

I know it's late at night.

All in all, we're very pleased with the progress we are making so far in 2012.

North America is going strong, Europe is improving, with more to come down the road, and Rest of World we have lots of activity going on.

Some work ahead of us in South America.

I'm confident we will get things back on track there as well.

So, overall, quite pleased with what is happening.

We've got a lot of the, I call it noise, that we had in the past is over.

I think it's a good move to get E-Car consolidated back into the Company.

So, appreciate everybody joining us tonight, and thank you.

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

We thank you for your participation.

And ask that you please disconnect your line.