Magna International Inc (MGA) 2012 Q3 法說會逐字稿

Welcome to the Magna third quarter 2012 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)

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

Please go ahead, sir.

Thank you.

Good morning everyone.

Welcome to our third quarter 2012 conference call.

Sorry, we were delayed joining -- Vince Galifi, our Chief Financial Officer and I are in a plant in the Czech Republic and we had some connection difficulties.

Louis Tonelli, our Vice President of Investor Relations is joining us from our Aurora office.

Yesterday our Board of Directors met and approved our financial results for the third quarter ended September 30, 2012.

We issued a press release, this morning, for the quarter.

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 the Investor Relations section of our website at www.magna.com.

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

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

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

Let me start by just saying that I'm very pleased with the results for the quarter.

It's our best ever sales and also our best ever earnings per share for a third quarter.

North America, you can see from the results, continues to put up strong numbers.

In Europe, we had year over year lower volumes and we started to see some weakness in the German based OEMs.

They're down in Q3 from 2011 and we see that continuing in Q4.

However, we remain profitable in Europe for the quarter.

As everybody has heard, some OEMs have announced upcoming plant closures in Europe and there may be similar announcements by others, given what's going on in the general economy and specifically in Europe.

We've also talked about what we're doing to make sure we have a competitive footprint here and the actions we're taking on some losing divisions.

So we continue to look at that very aggressively.

You can see that coming through in the results.

We will continue to do what we need to do here, based on what we're seeing from our customers and the market and may have some impacts in Q4.

We expect the actions we're taking and will continue to take in Europe to yield improved operating results in the future.

That's our main goal.

In the Rest-of-World segment, we have a lot going on.

We're making good headway in China, pleased with the results there.

We have a lot of launches going on there.

We also have a lot of activity going on in Brazil.

In Brazil, we've improved the results in the quarter; however, we're still working through some challenges there and we'll continue to work on that.

But the results in China are right exactly where we expect them to be.

With the completion of the transaction buying out Frank Stronach's ownership in E-Car, we've integrated the component business which is mainly electronics and electrical components for the powertrain into our Magna Powertrain operations.

The battery pack and vehicle integration operations have moved into our Magna Steyr business unit which is where they came from originally.

On the acquisition front, we announced two acquisitions, both in the pump product area, late in the third quarter.

We expect that to close after regulatory approval and that should happen later this year.

I'm very impressed with the technology and the manufacturing plants they have, great management team and that's a growing product area for us.

So it was strategic on a number of fronts.

SGT, it was a joint venture, that's closed and that solidifies our position in North America in their product areas.

So, both acquisitions are a good example of us continuing to put our balance sheet to work to support technology and also strategic product areas.

Finally, we also announced that Frank Stronach has decided to step down from the Board, effective immediately.

That was in our press release.

Frank is involved in a number of other activities, but specifically, he's involved in the political scene in Austria.

I think Frank's point of view is he doesn't want to be confusing what his view may be from Magna's view.

So the one thing, which we're making quite clear inside the Company and also outside, is that Frank made enormous contributions over the many years to the culture and the way we structure our Company, the way we motivate people.

That's not going to change, but he has stepped off the Board.

With that, I'm going to turn the call over to Vince before we open up for questions.

Vince?

Thanks, Don.

Hello, everyone.

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

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

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

In the third quarter of 2012, we recorded a re-measurement gain on our 73% interest in E-Car, arising from the acquisition of the remaining interest in E-Car.

This increased operating income by $153 million, net income by $125 million and diluted earnings per share by $0.53.

As part of this transaction, we recorded intangible assets of $210 million.

This is comprised of an amount equal to the re-measurement gain of $153 million, plus the excess purchase price over book value related to the E-Car interest acquired.

This amount will be amortized over 16 months, commencing in September.

The Appendix outlines the gain and the amortization expense on earnings.

The amortization impact in Q3 was a pretax reduction of $13 million and a net income reduction of $10 million.

Over the next five quarters, the impact will be $39 million on pretax and $31 million after tax each quarter.

This asset will be fully amortized by the end of 2013.

In the third quarter of 2011, we recorded a charge associated with the disposal of our carpet business.

We reached an agreement in connection with the settlement of certain patent infringement and other claims.

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

The following quarterly earnings discussion excludes the impact of the other income and expense items, but includes the amortization related to the E-Car acquisition.

In the third quarter, consolidated sales increased 6% relative to the third quarter of 2011, to $7.4 billion.

North American production sales increased 8% in the third quarter to $3.6 billion, partly reflecting a 15% increase in vehicle production to just under 3.7 million units.

In addition, the increase is a result of the launch of new programs and acquisitions completed during or subsequent to the third quarter of 2011.

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

European production sales declined 2% from the comparable quarter, while Western European vehicle production declined 7% to 2.8 million units.

For the quarter, the weakening of the Euro against the US dollar, lower production volumes in certain existing programs and net customer price concessions, subsequent to the third quarter of 2011, were partially offset by the launch of new programs and acquisitions completed during or subsequent to the third quarter of 2011 including BDW and the carpet business.

Rest-of-World production sales of $493 million increased 35% or $128 million over the comparable quarter, primarily as a result of acquisitions completed during or subsequent to the third quarter of 2011, including ThyssenKrupp Brazil and new programs launching in Brazil and China during or subsequent to the third 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 2,800 units from the comparable quarter.

Assembly sales declined 6% or $43 million to $620 million.

The decline reflects the weakening of the Euro against the US dollar, lower assembly volumes for the Peugeot RCZ and MINI Countryman 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 Mercedes-Benz G Class.

In summary, consolidated sales excluding tooling sales increased approximately 5% or $301 million in the third quarter.

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

Tooling, engineering and other sales increased 27% or $140 million from the prior year to $656 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 11.8% compared to 11% in the third quarter of 2011.

The increase in gross margin percentage was essentially due to lower costs incurred in preparation for upcoming launches, lower warranty costs and productivity and efficiency improvements at certain facilities.

These factors were partially offset by increased pre-operating costs incurred at new facilities, an increase in tooling sales that have low or no margins, the net effect of the disposition during the third quarter of 2011 and subsequent acquisition in June 2012 of the carpet operations, our larger amount of employee profit sharing, operational inefficiencies and other costs of certain facilities and net customer price concessions subsequent to the third quarter of 2011.

Magna's consolidated SG&A as a percentage of sales was 4.7% in the third quarter of 2012, compared to 4.9% in Q3 of 2011.

We incurred increased expenditures in SG&A due to higher incentive compensations, acquisitions completed during or subsequent to the third quarter of 2011, including TK Brazil, E-Car and the carpet business, increased costs incurred at new facilities and higher labor including wage increases at certain operations and other costs to support the growth in sales.

These factors were partially offset by the weakening of certain currencies against the US dollar and a $6 million revaluation gain in respect of asset backed commercial paper.

Our operating margin percentage was 4.7% in the third quarter of 2012, compared to 4.1% in the third quarter of 2011.

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

You should note that E-Car amortization negatively impacted operating margin percentage by 0.2% in the quarter.

Our effective tax rate increased to 24.8% for the third quarter of 2012, compared to 22.2% in the third quarter of 2011.

The increase primarily relates to a reduction in the utilization of unbenefited losses in the US, partially offset by permanent items.

Net income attributable to Magna increased $39 million to $265 million for the third quarter of 2012, compared to $226 million in the comparable quarter.

Diluted earnings per share were $1.13, compared to $0.94 in the third quarter of 2011.

Diluted earnings per share were negatively impacted by $0.04 as a result of the amortization of E-Car intangibles.

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 primarily due to the repurchase and cancellation of common shares pursuant to our normal course issuer bids.

I will now review our cash flows and investment activities.

During the third quarter of 2012, we generated $503 million in cash from operations, prior to changes in non-cash operating assets and liabilities and invested $63 million in non-cash operating assets and liabilities.

For the quarter, investment activities amounted to $363 million, comprised of $279 million in fixed assets, $56 million on the purchase of subsidiaries and a $28 million increase in investments and other assets.

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

The dividend is payable on December 14 to shareholders of record on November 30, 2012.

In addition, subject to exchange approvals, our Board approved a normal course issuer bid to purchase up to 12 million of our common shares.

This new normal course issuer bid is expected to commence on or about November 13 and will terminate in a year's time.

Our balance sheet remains strong with $1 billion in cash, net of debt, as at September 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 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 now expect 2012 North American light vehicle production to be approximately 15.3 million units, compared to 14.8 million units in our August outlook.

A large portion of that increase was reflected in the actual vehicle production for Q3, compared to our previous forecast.

We expect 2012 Western European light vehicle production to be approximately 12.6 million units, in line with our August outlook.

You should be aware that Q3 production in Western Europe also came in higher than our August forecast.

So in effect, we have lowered our fourth quarter expectations for Western Europe versus our prior outlook.

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

In Europe, a higher Euro relative to our previous outlook is expected to contribute to higher European production sales and complete vehicle assembly sales compared to our previous outlook.

As a result, we now expect total sales to be in the range of $30.3 billion to $31.2 billion, compared to $29 billion to $30.5 billion from our August outlook.

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

We expect our consolidated operating margin percentage, excluding $52 million of amortization of intangibles related to the acquisition of E-Car to be in the low to mid-5% range, in line with our previous outlook.

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

For the full year 2012, we expect fixed asset spending to be approximately $1.4 billion.

That concludes our formal remarks.

Thanks for your attention today.

We would be pleased to answer your questions at this time.

(Operator Instructions)

John Murphy, Bank of America-Merrill Lynch.

Just curious on Europe, I mean, the way that you're talking about Europe, you're indicating that the fourth quarter might be a little bit weaker than you expected before.

But we saw a really good performance here in the third quarter.

It doesn't sound like you're talking about the fourth quarter quite as punitively as -- or negatively I should say, as some other suppliers are.

I'm just curious, what you're seeing there?

Also if we do see a decline in volumes, might we see an improvement in profitability, as you have less problems with some of the facilities you've had with historically -- or recently, I should say.

John, when you look at Europe, we're focusing on Western European volumes.

For the full year, we didn't change our guidance, the 12.6 million units.

However, Q3 was higher than what we were expecting, so we're going to get some negative variance compared to our previous forecast on the volume front in Q4.

Recall that about 70% of our business in Europe is with the German three, and they've been pretty well outperforming the market for the first nine months of this year.

But as we look at production schedules for the German three for the fourth quarter, we are seeing some slowdown quarter-over-quarter.

When you sort of add it all up, given where we were in Q3 and what we expect in Q4 and changes in the exchange rate on the Euro, we're expecting overall European sales to move up slightly from our previous outlook.

With respect to, John, to what does that do to operating performance in Europe?

We really need to look at platform by platform, program by program, plant by plant, to see whether that's a help or a hinder to overall margins.

Generally, we do have positive contribution margin on our European sales.

So a reduction in volumes will be a negative to earnings.

Again, we factored in what we see for Europe in the fourth quarter in our full year operating margin guidance that I just spoke about recently.

The only thing I'd add to that is, we've been making pretty good headway, improving the results in some of our underperforming divisions.

We still do have some launches we're going through, so if the volume is going to drop somewhere, we'd certainly prefer it to drop in Europe, rather than North America.

As Vince said, it really depends on what platforms, but overall, I'm pleased with the progress we're making -- in general, in the operations.

But we still have some plants we're having some real difficulties with.

But for the most part, from delivery quality issues and a lot of commercial issues, we've been making some good progress on.

Okay.

Then if we think about Europe longer term, obviously there's a lot of capacity that is being at least shifted around, if not closed.

I'm just curious, as you look at that and those changes are made and capacity is moved, does that create an opportunity for you to potentially win some new, more profitable business in Europe, because you have such strong relationships with lot of these automakers already?

It will be interesting.

There's a couple dynamics going on in Europe.

If there's a big slowdown, it will be interesting to see if there's a bit of a fall out in some of the supply base.

We saw a lot of that in 2009 when there was a big downturn.

It really depends on what customers the suppliers have.

I would say as things shift, it really depends on what they're closing down and where does it shift to.

Obviously, we've been looking at our footprint to make sure it's competitive.

We are starting to focus more again on winning business as we get over a lot of the operational issues.

So it's pretty hard to speculate what's going to happen, but I think it will be good overall for the industry if some capacity is taken out.

I think that will have some sort of ripple effect on the supply base.

I think the consolidation of the suppliers will continue to happen.

That's been happening over the past number of years.

We do have some very good operations here.

So the good news is, we still have identified a lot of areas we can improve in.

Now, we've just got to continue to execute it and we'll see what the -- what happens as far as production.

But you would expect it to shift to lower cost regions from the automotive vehicle assembly.

We've just got to be in position to take advantage of that.

Okay.

Then, just lastly on the raw materials, it looks like they were a very small -- very, very small benefit in the quarter.

Just curious, as we see raw mats costs come down, will that flow through and be a benefit maybe in the fourth quarter or even out into 2013?

Just curious as to why it's not a bigger benefit to date and if that is on the come?

John, there's a couple things you've got to keep in mind with commodity costs.

The biggest commodity we buy is steel and the biggest chunk of that is under customer resale programs.

So we've been saying over and over as prices move up or prices move down, steel's not going to hit our overall operating results as a result of the resale programs.

We do have some steel that we buy under, I would say, short-term contracts, one year or so in length.

It really depends when those were entered into and when they roll off.

How we lock in again.

What impact that has on commodity cost.

In the fourth quarter for 2013, I just don't know at this point in time.

Where we have more exposure is with resin.

There is some resin that we buy in the resale, but there isn't an effective hedge mechanism out there.

So we do see resin prices, as they move, do impact our commodity costs.

There could be a time lag between when the underlying resin inputs change and our commodity costs change.

Where that's going to be in 2013, at this point in time, I'm not ready to share that.

We're in the middle of business plans, John.

So as we talk about our outlook for 2013, in January, we'll give you our latest view on commodity costs at that time.

Okay.

Sorry, just one last question.

Cash is obviously fungible and you've got plenty of it on your balance sheet right now.

I'm just curious, the two acquisitions that you're making, will those be funded directly from cash that's on your balance sheet right now or do you think you might draw down on the revolver to fund those?

No, we're not going to draw down on the revolver.

We're going to use existing cash on the balance sheet to pay for those.

Okay.

When you look at both acquisitions, in the fourth quarter, we're going to be writing a check for about $450 million in aggregate.

Ravi Shanker, Morgan Stanley.

Can you give us an update on the CVA business and the outlook there with the loss of the Countryman contract and the [basemen], how that looks going forward.

Yes.

There was an announcement by Nissan a number of months ago that they intended to do a vehicle.

I won't go into too much detail because it's their product.

They were looking at various options.

They decided to do it in a spot other than in our facility in Graz or a different facility.

So we didn't have the business.

We were working on it and they decided on a different result.

BMW has made some announcements with what they're going to be doing.

I don't want to even say what the specifics are because it's up to BMW, but some of the product that we're manufacturing could be moved to another location.

All we care about at the end of the day is, we have a manufacturing facility, we want to make sure we have the maximum amount of volume at the right pricing to continue to have an operation there.

So we continue to have very good discussions with BMW.

I would expect that, hopefully, they'll continue to see us as a vehicle engineering and assembly partner.

The impact will be out in the 2015 time period for what they're looking at doing with the product that we have today.

So between now and then we just need to see if we can get -- continue to fill our capacity.

The very nature of that business is, products come and go, lower volume, higher volume, their internal capacity.

So they're always trying to balance it.

Right.

With the OEMs in Europe trying to right-size their footprint and close excess facilities, does that help or hurt that business, in terms of -- are OEMs now looking at you as a secret weapon to flex their production or are they trying to fill up their facility as much as they can?

I hope they're looking at to help their production.

I would say, obviously, if they take capacity out of the market, it's better for everybody.

They have more profitability.

It's better consistency in volumes for our parts business.

For our Steyr business, if everybody's running full-out, then there's more likelihood they will offload the peak shaving or unique vehicles or multi-material body vehicles that they may not want to make the investments in that we're quite good at.

So, it can only help if there is a restructuring of the capacity to right-size the OEM production capacity to where the market is.

Got it.

On North America, to get to the midpoint of your revenue guidance range, I think you'll need a pretty big step-up in mix in the fourth quarter.

Are you seeing anything of that or where that is coming from?

Louis, do you want to answer that one?

It isn't mix really.

It's just the impact of volumes.

We saw some of the impact, impact us in the third quarter, but we have higher volumes than we previously expected in the fourth quarter as well.

Mix is not that significantly different.

Understood.

Last question.

On your margins in Europe, I think you did a good job of keeping them positive this quarter.

But they did step down for the first half despite a fairly similar year on year decline in production.

Was there something to do with launch costs that were excessive in the quarter or do we kind of use the same level of decremental for fourth quarter production as well?

I think when you look at Q3, whether that's in North America or in Europe, we're being impacted by the seasonality in our business due to summer shutdowns in the third quarter and there's going to be Christmas shutdowns in the fourth quarter.

We continue to generate positive earnings in the third quarter.

In the fourth quarter, given our most recent volume assumptions for the quarter, we're still expecting to generate positive operating EBIT in the fourth quarter.

To the extent that we book -- may book some accounting reserves or write-offs for restructuring or potential restructuring, overall that may be a negative number, once we determine if there is an amount and how big that amount's going to be.

But from an operating perspective, we're expecting Europe to continue to be profitable in the fourth quarter.

Ryan Brinkman, JPMorgan.

This is actually Amy Carroll in for Ryan Brinkman.

I think you've kind of -- the comments you've given on Europe have been really helpful.

But I wanted to shift the focus a little bit on your long-term guidance for that business.

If you could kind of just update us on which inning do you think you are in terms of the four buckets you've mentioned previously, which is launch, new facility, commodity and underperformers.

If you could kind of bucket that out.

Sure.

Let me -- what we've been talking about is, we've been focusing on improving underperforming operations in Europe.

If you go back to the third quarter of last year, 2011, we started to turn things around in Europe.

We turned positive in the fourth quarter.

What we've been saying is that, it is going to take us some time to move our European operating margins to what we believe are acceptable margins on an overall basis, because there are some operation that's are performing extremely well.

What we've talked about is that, over our business plan period which is a three to five year period, that we expect to move margins out to probably about half of where they are in North America.

So I'm not sure whether you call it what inning we're in, I'm not even sure what base we're on.

I can tell you that we've started to take action.

We're seeing the positive impacts of our actions.

The other important thing is that, as we meet with our business people and they provide us forecasts for the future, they're hitting their targets and they're hitting their forecasts.

So they've got a lot of credibility in their numbers, which gives me a lot of confidence that we're going to continue to see margin expansion in Europe.

But margin expansion's going to be impacted by launch costs, it could be positive, it could be negative, depending on how many programs we're launching and new facility costs.

When I look at 2012 for new facility costs versus 2011 in Europe, it's relatively flat.

So there's no incremental cost in 2012.

As we move into 2013, I expect our new facility costs to come down versus 2012.

So do --

I don't know if that gives you some color.

But I just don't know how else to portray what's happening in our business.

I'd say, just to maybe add one thing.

I would say going back 1.5 years ago we were really fire-fighting in a lot of different areas, some delivery issues, we'd overbooked some plants.

So we had delivery, quality issues, a significant amount of commercial issues.

So I think for the most part in those three areas, we're over the quality, delivery issues.

We've still got a couple of tough launches we're struggling with.

We still have some underperforming divisions.

But we've had a very aggressive world class manufacturing initiative rolled out globally including Europe.

I'm pretty pleased with what I'm seeing.

We would probably need another year to get to the point where we say, we're where we want to be.

Then we still will have to figure out if we can't get a plant to that level what we're going to do with it.

But, we've got a much better handle on what's going on now and a much better view on where we want to get to.

So I won't repeat what Vince said about where we're going to get the margins to happen in North America over what time period.

But I think that's still pretty accurate and I feel pretty comfortable with that.

Okay.

Then, just in terms of like -- I don't think in this quarter, many suppliers have talked about price-downs, but are you guys seeing more pressure there, particularly in Europe?

I won't talk about specific customers but I'd say one thing is, it's nice to see some of our customers coming out with pretty good financial results, certainly better than they were many years ago.

It allows them to take a longer view.

Most of our customers want global suppliers, want us to be competitive.

They always want a lower price, but I think their expectation is, deliver them price reductions without hitting our bottom line.

Yes, we're seeing some extra pricing pressure, but I don't think it's any worse than it was in the past couple years.

I think we're in better shape, quite frankly, to be able to offset it because we're not in such a fire-fighting mode.

If the industry continues to go down, I can't predict what the severity of the price reduction requests are going to be.

However, I think you're going to continue to see a fallout in the supplier base and with the suppliers that know what they're doing, know what their costs, I think people are pretty rational and hopefully you come up to a win-win.

So, it's always a tough business.

But I don't think it's any worse, particularly, across the board than it was in the past.

Okay.

This is the final question.

In China, are you seeing any delays in your book of business?

How are you doing in bookings, new business?

Just give us a sense of what you're seeing amongst your new customers and that market in general.

I'm not aware of any delays.

There could be, but I'm not aware of any.

Most of our customers, quite frankly, are our global customers or the supplied partners they have there, so we know the customers pretty well.

We have a lot of launches going on right now.

As I said earlier, they are hitting our targets.

I'm pleased with the launches we've got going on there, given the amount of activity we have.

We're not going to tell you about how much business we're booking there.

We cannot beat our guidance in -- early in the new year, but I'd say we're pretty well on track where we want to be in China.

If there's a slowdown, I don't think it changes things too much, quite frankly, because we're relatively small in China.

I just still think we have an opportunity to grow, but the market will continue to grow I think, just depends on how fast.

I think we can look at the first time out to this year in China production, it's lower than what we had expected at the beginning of the year.

So that has negatively impacted the rate of growth in our Chinese operations, but we do have substantial growth there.

So it's really just how fast things are growing for us, because we are as Don talked about, putting in a number of new facilities and a number of new programs are launching.

Chris Ceraso, Credit Suisse.

So a few things.

The restructuring that you hinted at in Europe, I guess it's focused on Europe.

Can you give us an idea of the size and the timing and the expected payback and what kind of profit improvement you're expecting to see here over the next year or two as a result of those actions?

Chris, our guys right now are trying to put the final touches on their business plans.

I start to sit down and review some plans as early as next Tuesday.

Typically, as we're looking at markets that are slowing down like they are in Europe, there could be some restructuring activities and from an accounting perspective, we may have to provide for some costs.

It may be as early as Q4, may move into 2013, depending on the business decisions that we make.

In terms of sort of magnitude, that's still to be determined.

In terms of payback, certainly anything that we do from a restructuring standpoint should -- we expect will result in improved performance in Europe.

Okay.

But too early to tell any kind of size?

Yes.

What we're looking at doing here is looking at the long haul.

We need to end up having a competitive footprint, we need to have competitive plants and part of this is going to depend on what announcements if any more there is from the car companies.

Because if they move production, we've got to react to it.

So, obviously there's a payback when you take these actions.

Quite frankly, what I'm more interested in, can we have an efficient plant that will make money?

If we come to the conclusion we can't, then we have to take the actions, because I'm looking at this over the next three to four, five year period.

Okay.

A question about the acquisitions.

I think you said you're going to write a check for about $450 million.

Can you just give us a little more detail on how much revenue you're picking up and what kind of profitability these businesses were running at?

Is part of the increase in your revenue guidance for this year a function of the acquisitions and if so, how much?

There's two acquisitions, Chris.

The first one is STT.

In the case of STT, it was a joint venture or equity accounting.

STT sales, 100% of them are about $150 million a year.

That transaction was completed in the end of October, beginning of November.

So we're going to pick up two months of sales.

So that will be factored into our overall guidance.

Again, that's not going to move the needle in the range of production sales that we gave in North America.

STT is a North American business.

With respect to the bigger acquisition, Ixetic, their sales are about EUR300 million, approximately $400 million less.

We're expecting that this transaction will be completed by the end of this year and we have not factored in any sales in our outlook for Europe.

We just don't know when that transaction's going to close.

If it closes early on in the quarter, then that should be additive to the guidance we give and if it closes December 31, it's going to be neutral to our guidance.

The margin on these businesses, Vince, are they similar?

Yes.

In terms of the businesses, we're going to see some synergies in the Ixetic acquisition and Magna Powertrain operations.

So we expect that both of these transactions are going to be accretive to earnings in 2013.

Okay.

Then just a couple of kind of detail items.

The margin guidance that you said, the low to mid-5%s, you said that excludes the $52 million of amortization; is that right?

But when you report earnings, you're not going to call that out as an unusual.

Do I have that right?

No.

That's right, Chris.

We're going to -- we'll explain it each quarter for the next five quarters and this quarter, but no, we're not going to put it in the unusual.

The additional amount is going to be in depreciation and amortization.

So in this quarter, our depreciation and amortization was $13 million higher because we started to amortize that intangible in the month of September.

Because, remember, the transaction closed at the end of August.

Okay.

Then just the last one, along a similar line.

You had some items in the quarter that were favorable, $13 million in warranty, $6 million on the asset backed CP that you didn't call out.

Were there similar offsetting items that kind of washed those out that you absorbed?

There's a bunch of $1 million here, $0.5 a million there, $2 million there.

I think when you add them all up, Chris, I'd say that overall they were fairly neutral in the quarter, quarter to quarter.

Now, remember, if you look at Q2 to Q3, we also have similar asset backed commercial gain in the second quarter.

I think it was about $6 million as well.

So when you look at Q3 to Q3, it's relatively flat and I think Q2 to Q3 is also relatively flat.

So not significant to operating results.

Rod Lache, Deutsche Bank.

Just wanted to first follow up on just this last question on margins.

How should we be thinking about the decremental margins in Europe now, aside from the normal 25% that you've talked about before?

I think you said that we should be thinking about lower facility costs next year and I also think you said something about a low warranty cost, at least this quarter.

Can you bracket some of those bigger kind of one-time items?

Yes.

In terms of the warranty costs, I think you can actually pick them out through the statements.

The warranty costs versus the prior quarter, they were about $5 million less on a consolidated basis.

The impact to Europe was a $6 million increase to income quarter-over-quarter as a result of lower warranty costs.

But keep in mind a couple of other things that are going on in Europe, Rod.

Don talked about E-Car and the integration of E-Car into our operations.

We continue to invest in E-Car as it gets ready to launch some programs.

So we were, starting in September, recording some losses in Europe with respect to E-Car in our European segment.

We also had some losses in our North American segment that previously were recorded on the equity line and that was in the corporate segment.

So that's a negative versus Q2 of 2012.

The other negative in Europe in Q3, which is going to continue in Q4, was the reacquisition of our carpet business.

Remember, in Q1 we didn't have that carpet business.

We had reacquired that in Q2, so we had a partial impact in the second quarter.

We had a full quarter in Q3 and a full quarter is expected in Q4.

So that's a negative quarter-over-quarter.

Okay.

Can you put any brackets around the launch cost decline that you alluded to for next year?

I was referring to new facility costs, not launch costs.

Sorry, yes, new facility costs.

You know what?

I'm going to give an update on new facility costs in January in Detroit when we give our outlook for 2013.

I'll have a more refreshed view on new facility costs, as I said earlier, we are in the process of completing our business plans.

So I'll have a better view then.

Okay.

I was hoping you could also clarify, because different companies are including different countries in Western Europe, but basically could you talk specifically about what your Western Europe production assumption is for the fourth quarter?

Just hoping you could give us a number and what's the magnitude of the German decline that you're seeing?

Sure.

In terms of Western European production, I'm just trying to find it here in all these pieces of paper I have.

Louis, do you have it in front you, by any chance?

Yes, we're expecting about $2.1 million in the fourth quarter.

It's down about 10% down year-over-year.

The Germans are down slightly less than that.

Okay.

On a sequential basis, are you seeing production flat or down?

It's up a little, to be more like $2.8 million in the third quarter.

Okay.

There was some paper shuffling here.

I didn't get the absolute number that you referred to.

It was $2.8 million in the third quarter and it's going to a little over $3 million.

$3 million.

$3.5 million.

Okay.

Just lastly, how should we be thinking about content per vehicle going forward?

Just given some of the mix shifts that you're anticipating?

Can you just maybe give us a little bit more color on the drivers of the content per vehicle this quarter in terms of maybe just the acquisitions and how that added in and FX for Europe.

For Europe?

Yes.

Rod, I'm just flipping to one of my notes here, but while I find that, when you look at Europe for the quarter or for the nine months, if you back out foreign exchange, so you just look at sales in Euros, our actual sales are up in the nine months, as well as in the quarter.

What's driving that is the launch of some programs, a whole bunch of them, Daimler B Class for example, we've got some work on the Range Rover, we've got some VW work, we've got some BMW work.

So, it's on and on.

So, when you look at the launch and some balancing out end of production, overall that's added to sales.

Volumes generally on our programs had been negative, so that's taken sales away.

Acquisitions have added to sales.

The acquisitions you should think about is the acquisition of BDW Technologies which we completed in February of 2012.

The reacquisition of our carpet business also added to sales quarter-over-quarter.

That pretty well covers the change in sales -- production sales in Europe.

Okay.

Are you not expecting -- some companies are kind of alluding to within their customers, even within the Germans, that there's some pretty significant shifts in mix, just as an example, S Class is going to one shift and maybe C and E Class is not down as much.

Is that not really all that material going forward to you in terms of content per vehicle, those shifts within your customer base?

In terms of the actual vehicle line, I just don't have that data with me.

I can tell you that when we develop our forecast, it's a bottom's-up process where our divisions and plants look at each product line and expected production in the quarter.

So the result of our expectations by product line have been factored into our production outlook for Europe for the fourth quarter of 2012.

There's not a significant change in -- we don't talk about content per se, but if you were to measure content, it doesn't change that drastically from outlook to outlook.

Justin Wu, GMP Securities.

It's actually Otto Cheung calling on behalf of Justin.

I just had one question with respect to Mr Stronach stepping down from the Board.

Can you just please remind us of how his consultancy agreement works and whether that's still in place and when it will end?

As part of the plan of arrangement that was approved by shareholders was the consulting arrangement that was put in place for Frank, which comes to an end December 2014.

As part of that arrangement, Frank is entitled to a percentage of pretax profits.

It started at 3%.

Last year it was 2.75% of profits.

This year it's 2.5%.

It's going to ratchet down to 2.25% next year and 2% in 2014.

Then zero.

So what we're seeing -- what we've already saw in 2012 and 2011 is a reduction in the percentage that we're paying Frank is adding to profitability, ie, reducing SG&A.

So that's going to continue to happen in 2013 and in 2014.

Then once we get to 2015, that 2%s going to be completely eliminated.

Todd Coupland, CIBC.

I wanted to ask a question on Rest-of-World.

I was wondering if in the next few quarters, given the declines in Europe and the improvements in Rest-of-World, both from a top line and EBIT perspective, might we actually see the contribution in those markets be higher than Europe?

Todd, I don't have that -- again, I don't have our business plan for 2013 in place yet.

There's been lots of moving pieces over the last year.

What we said is, we expected Europe to be black this year.

We continue to expect that even in the fourth quarter.

We expect to, over time, continue to improve margins in Europe.

In Rest-of-World -- the biggest impact we've had in the Rest-of-World is a significant investment that we're making for new facilities, particularly in China.

We were just barely in the black in the third quarter and that's as a result of some improvements in South America.

We talked some time ago about us or our view that we would be positive in the back half of the year in our Rest-of-World segment.

We continue to expect to be positive for the back half of the year in that segment.

When we get to, I guess, January and the Detroit Auto Show and our outlook, we'll provide some more color on Rest-of-World.

Again, Rest-of-World profitability improvement is going to depend on how quickly we grow in that region.

As we continue to invest capital for new facilities, there's a time lag from the time we make the investment and generate the profits.

Don talked about performance in China.

If you look at our ongoing operations, they're performing as expected at an appropriate rate of margin, an appropriate rate of return on the capital that we have employed.

But we do have significant costs for new facilities in China.

Just remind us of your long-term Rest-of-World margin, please.

Margin goal, excuse me.

Sure.

Depending on -- our longer term goal on Rest-of-World is to approximate margins that we're generating in North America.

Okay.

When you say long-term, you mean three to five years?

I wouldn't give it a time period on the overall, because we've got different launches.

But once a plant is up and running, then we would expect it to be in the same range of margins as Vince said.

So it really can't tie good with the overall, we're not giving guidance overall.

But if the plants get there and as we keep on launching new plants, obviously, we get more mature and you see the overall margin coming up.

But we're not giving guidance on when that's going to happen.

Itay Michaeli, Citi.

So first, just want two clarifications.

One, Vince, can you share your Euro assumptions for the fourth quarter?

Then the amortization expense in the E-Car acquisition, is that all going to show up in North America?

In terms of the E-Car amortization, right now we have it all in North America.

We need to, I believe, settle up on purchase accounting.

So that may -- part of that may flip into Europe, but right now it's all in North America.

So we've got -- we typically have a year to conclude in our purchase accounting.

We're going to have to do that before then, because at the end of the year, there won't be any more intangibles to amortize by the time we get to the end of 2013.

With respect to our assumption on the Euro, we were using approximate current exchange rates as $1.30 in the fourth quarter.

$1.30, okay.

Then just going back to Europe, kind of round out some of the other questions we've heard.

You've previously been vocal that you expect margins to improve every year going forward.

It sounds like you're making a lot of good progress, but the production and macro environment is getting a bit worse.

We're hearing about launches of other suppliers being delayed beyond 2013.

Is it still the general view that based on the current economic outlook, margins in 2013 Europe still would be higher than what you had come in, in 2012.

I've got to look at a consolidated plan.

I can tell you that we do focus on underperforming operations.

We're seeing improvements in those operations, which have contributed in a big part to the turnaround in our European results.

When you look at Europe for 2013 and 2014 and 2015, we're going to have to run the more recent volume assumptions and mix assumptions to see how quickly margins start to step up.

But I could tell you right now, when I look at the forecast, because we haven't completely locked in on a Western European volume assumption for 2013, the forecasters are down about 4%, about 12 million units in Europe for 2013 versus the 12.6 million in 2012.

By the time we finalize our plan in the next month or so, we're going to have lock in on a Western European volume assumption as well as Eastern Europe.

That will drive a plan.

We'll add some more color in January, once I have the complete data in front of me.

That's fair.

Then just lastly, can you just talk a little bit about the volatility in the schedule that you're seeing into Europe, how much visibility do you have?

Is it still that typical kind four to six weeks or is it a little bit less than that in the current environment?

Just wanted to get a sense what you're hearing from customers and the overall visibility and volatility out there.

I don't know.

I'm just not close enough to know whether it's changed or not.

I'm assuming, we just look at the same releases as we have been traditionally.

But unless, Louis, you know.

I'm just not up-to-date on it.

I'm not aware of any change in the volatility of the releases, no.

Peter Sklar, BMO Capital.

Just one issue I wanted to address.

In your North America segmented reporting, your operating profit came in a little bit weaker than what we were looking for, even after taking into account seasonality and as well the additional $13 million of amortization related to E-Car.

Was there anything unusual that negatively impacted your third quarter or did that come in line with your expectation?

I think when you back out the E-Car amortization of $13 million, our margins in North America were less than what they were in Q1 and Q2.

But, you've got to think about seasonality, Peter.

Q3, typically, is the low point from a margin perspective.

When I look at the role we have on Q2 to Q3 in North America, there's some additional Q2 to Q3 -- new facility costs were a little higher, there was some headwinds on commodity costs, there's a full month of consolidation of E-Car in the month of September where we were equity accounting before and equity income's down and that's just because of, again, our investments.

Typically, they see a slowdown in sales in the third quarter.

Other than that, when I look at decremental margin, nothing sticks out to be abnormal.

There are no further questions.

Okay.

Appreciate everybody dialing in today.

Overall, pretty pleased with our results.

We'll see what happens in the overall economy, but we are making -- I'm pleased with the progress we're making in our operations globally.

Getting our world class manufacturing activities accepted, understood and implemented and we're doing a couple other things which I think are going to be quite good in the products and process innovation.

So we'll be giving an update at the end of the year in January.

Appreciate everybody dialing in.

Sorry we were five minutes late, but we're in Europe and that was a difficulty getting on.

So thanks, everybody.

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.