Magna International Inc (MGA) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Magna International first-quarter 2013 results call.

During the presentation, all participants will be in a listen-only mode.

Afterwards, we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded Friday, May 10, 2013.

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

Please go you ahead, sir.

Thank you.

Good afternoon, everybody.

Welcome to our first quarter 2013 conference call.

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

Yesterday our Board of Directors met and approved our financial results for the first quarter ended March 31, 2013.

We issued a press release this morning for the quarter.

You will 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 future results and performance to be materially different from those expressed or implied in these statements.

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

Since many of you have listened in or been at the shareholders meeting that we held earlier today, I'm going to keep my comments short to allow more time for question-and-answer.

Overall, I'm satisfied with our Q1 financial results, a record quarter in total sales and earnings.

Production sales in every segment increased year-over-year, and excluding the $39 million amortization in our North American results associated with the E-Car transaction, every segment reported improved EBIT as well.

We believe our North American EBIT margin percentage will continue to be strong, remaining in the 9% to 10% range, excluding the E-Car amortization.

We continue to expect improved EBIT in Europe this year, despite the decline in overall volumes in Europe.

And we continue to believe we will be profitable in our Rest of World segment in 2013.

This reflects improved results in South America compared to 2012, and lower new facility costs in China as we begin to ramp up some of the facilities that we have had under construction in the past few years.

I highlighted our priorities today at the annual meeting.

You heard me speak about world class manufacturing.

I strongly believe in the importance of having all of our facilities at world class manufacturing levels.

We've made great traction in the past couple years in this area and all of our operating units have embraced the concepts.

However, it's going to take some time before we get to world class standards across all facilities.

I see that as a positive because it means that, despite our strong operating results, margins, and returns, we have room for further improvement.

I also discussed leadership development.

We have a formal system in place now to identify and develop future leaders in our Company.

This is critical, given the amount of expansion we have going on all over the world.

Lastly, I touched on the importance of innovation.

Another key priority for us.

Innovation is a lifeblood of our Company, be it in the product, manufacturing processes, or material innovation.

At the annual general manager meeting today, we showed just a few of the innovations we have developed or are developing.

There are many more, and we'll be hosting an Investor Day in November where innovation will be one of the key themes of the day.

Stay tuned for save the date notice from Louis on our upcoming Magna Day.

With that I'll pass the call over to Vince.

Thanks, Don, and good afternoon everyone.

I'd like to review our financial results for the first quarter ended March 31, 2013.

Please note all figures discussed today will be in US dollars.

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

In the first quarter of 2013, we recorded net restructuring charges, all related to our European business.

These reduced operating income and net income by $6 million, and diluted EPS by $0.02.

The following quarterly earnings discussion excludes the impact of these charges.

You should note that, beginning this quarter, we are reporting total European light vehicle production volumes rather than simply Western European volumes.

This will apply both to actuals, including comparatives, and to our outlook.

We're making this change because our business in Eastern Europe continues to grow and because we believe the reporting of Eastern European volumes has improved recently.

In the first quarter, consolidated sales increased 9% relative to the first quarter of 2012, to $8.4 billion.

North American production sales increased 3% in the first quarter to $4 billion, reflecting in part a 1% increase in vehicle production to 4 million units.

In addition, the increase is a result of the launch of new programs and acquisitions completed during or subsequent to the first quarter of 2012.

Partially offsetting these were lower production volumes of certain existing programs, programs that entered production during or subsequent to the first quarter of 2012, a decline in content on certain programs, the weakening of the Canadian dollar against the US dollar, and net customer price concessions subsequent to the first quarter of 2012.

European production sales increased 5% from the comparable quarter, while European vehicle production declined 9% to 4.8 million units.

The increase was primarily a result of acquisitions completed during or subsequent to the first quarter of 2012, particularly Ixetic and the carpet business, the launch of new programs, and the strengthening of the euro against the US dollar.

These were partially offset by lower production volumes on certain existing programs and net customer price concessions subsequent to the first quarter of 2012.

Rest of World production sales increased 26% or $108 million, to $516 million over the comparable quarter, primarily as a result of new programs launching, particularly in Brazil and China, during or subsequent to the first quarter of 2012.

These were partially offset by the weakening of foreign currencies against the US dollar, including the Brazilian real.

Complete vehicle assembly volumes increased 25% from the comparable quarter and assembly sales increased 33%, or about $200 million, to just under $800 million.

The increase largely reflects an increase in assembly volumes for the Mercedes-Benz G Class and MINI Countryman, the launch of the MINI Paceman in the fourth quarter of 2012, and the strengthening of the euro against the US dollar.

These factors were partially offset by the end of production of the Aston Martin Rapide in the second quarter of 2012, (inaudible) -- in Austria and lower assembly volumes for the Peugeot RCZ.

In summary, consolidated sales excluding tooling, engineering, and other sales increased approximately 8%, or $563 million in the first quarter.

The primary reasons for this increase are higher production sales in North America, Europe, and Rest of the World, as well as higher complete vehicle assembly sales.

Tooling, engineering, and other sales increased 31% or $132 million from the prior year to $554 million.

The net increase relates to sales on a number of programs.

Gross margins in the quarter decreased to 12.5% compared to 12.8% in the first quarter of 2012.

The declining gross margin percentage was substantially due to an increase in complete vehicle assembly sales, which have a higher material content than our consolidated average; an increase in tooling, engineering, and other sales that have low or no margins; increased commodity costs; the re-acquisition of the carpet business in the second quarter of 2012; a larger amount of employee profit sharing, operational inefficiencies, and other costs at certain facilities; and net customer price concessions subsequent to the first quarter of 2012.

These items were partially offset by lower costs incurred in preparation for upcoming launches, the closure of certain facilities, decreased pre-operating costs incurred at new facilities, lower warranty costs, lower restructuring and down-sizing costs, and productivity and efficiency improvement at certain facilities.

Magna's consolidated SG&A as a percentage of sales was 4.4% in the first quarter of 2013, less than the 5.2% recorded in Q1 of 2012.

We incurred lower expenditures in SG&A, primarily due to a decrease in reported US dollar SG&A related to foreign exchange, lower restructuring and down-sizing costs, and a $3 million revaluation gain in respect of asset-backed commercial paper.

These factors were partially offset by acquisitions completed during or subsequent to the first quarter of 2012, including E-Car, the carpet business, and Ixetic; higher labor costs, increased costs incurred in new facilities; and higher employee profit sharing.

Our operating margin percentage was 5.5% in the first quarter of 2013, compared to 5.7% in the first quarter of 2012.

Recall that our quarterly EBIT includes $39 million of amortization associated with E-Car transaction, or about $31 million after tax.

This amounts to 0.5% on the operating margin percentage for the quarter.

Excluding this amortization, our Q1 operating margin percentage was 6%, compared to the 5.7% last year.

This increase primarily relates to the lower SG&A percentage and higher equity income percentage, partially offset by the lower gross margin percentage and the higher percent of sales for depreciation.

In the first quarter of 2013, our effective tax rate declined to 19.4% from 22.3% in the comparable quarter of 2012.

This is primarily due to a decrease in our reserve for certain uncertain tax provisions resulting mainly from favorable audit settlements of prior tax years.

Net income attributable to Magna increased $32 million to $375 million for the first quarter of 2013 compared to $343 million in the comparable quarter of the prior year.

Diluted EPS were a record $1.59, compared to $1.46 in the first quarter of 2012.

Diluted EPS were negatively impacted by $0.13 as a result of the amortization of E-Car intangibles.

Excluding the E-Car amortization, diluted EPS would have been $1.72.

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 bid and the cashless exercise of options, partially offset by options granted and an increase in the number of diluted options outstanding as a result of an increase in our trading price.

In the quarter, we purchased 1.6 million common shares and we purchased for cancellation approximately 900,000 options.

Under our existing normal course issuer bid, which expires in November later this year, we have room to purchase approximately an additional 10 million shares.

It is our intention to fully repurchase remaining shares under the bid.

At current share prices, this amounts to over $600 million.

I will now review our cash flows and investment activities.

During the first quarter, we generated $607 million in cash from operations prior to changes in non-cash operating assets and liabilities, and invested $456 million in non-cash operating assets and liabilities.

For the quarter, investment activities amounted to $242 million, comprised of $194 million of fixed assets and a $48 million increase in investments and other assets.

Yesterday, our Board of Directors declared a quarterly dividend of $0.32 per share with respect to our common shares.

The dividend is payable on June 17 to shareholders of record on May 31, 2013.

Our balance sheet remains strong with $864 million in cash, net of debt, as of March 31, 2013.

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

Now, I'll pass the call over to Louis.

Thanks, Vince.

Good afternoon, everyone.

I will review our updated 2013 full year outlook.

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

With respect to our vehicle production expectations, we now expect 2013 North American light vehicle production to be approximately 15.9 million units, compared to 15.8 million units in our March outlook.

Vince indicated we will now disclose production for total Europe rather than just Western Europe.

We expect 2013 total European light vehicle production to be approximately 18.4 million units, also in line with our March outlook.

Both our March outlook and today's outlook include light vehicle production of 11.9 million units in Western Europe and 6.5 million units in Eastern Europe.

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

In Europe, despite no change to our volume assumptions, a lower euro relative to our previous outlook is expected to contribute to slightly lower European production sales compared to the March outlook.

Our complete vehicle assembly sales expectations have increased reflecting higher production volumes at Magna Steyr, partially offset by the impact of the lower euro.

As a result, we expect total sales to be in the range of $32.6 billion to $34 billion, compared to $32 billion to $33.4 billion from our March outlook.

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

We expect our consolidated operating margin percentage, excluding $158 million of amortization of intangibles related to the acquisition of E-Car, to be in the mid to high 5% range, up from our previous outlook of margin in the mid-5% range.

We expect our effective tax rate to be approximately 24%, down from 24.5% in our March outlook, mainly as a result of the lower than anticipated first quarter tax rate.

And for the full year 2013, we continue to expect fixed asset spending to be approximately $1.4 billion.

Let me give you an update on our expected restructuring costs for 2013.

We previously communicated that we intended to incur approximately $150 million of restructuring in 2013 subject to when we could record the costs for accounting purposes.

Our current view is that we expect to incur approximately $100 million in 2013.

Part of the change is timing; part of the change was an anticipated closure of a facility in which we recently achieved better customer pricing and so we won't be closing the facility; and the remainder reflects better negotiated restructuring settlements than previously expected.

That concludes our formal remarks.

Thanks for your attention today.

We'd be pleased to answer your questions.

(Operator Instructions)

Our first question comes from the line of Chris Ceraso with Credit Suisse.

Please proceed.

Thank you.

Good afternoon.

So just a few things to cover here.

First, you talked about the SG&A and the fact that it was down pretty nicely year-over-year.

I'm not sure if I heard what you said to expect there on a go-forward basis.

Do you have any comments about the sustainability of SG&A at this level?

No, I actually didn't specifically comment on SG&A.

Our comment was on operating margin, which takes into account SG&A, D&A as well as gross margins.

What benefited us this quarter on the SG&A line was a recovery on asset backed commercial paper.

There was a legal settlement and we received about $10 million.

So that impacted SG&A in a positive way in the quarter.

Offsetting that, there was a bunch of other items but not necessarily in the SG&A line.

For example, we took a provision for some assets that we had on our balance sheet related to Fisker.

Most of that hit was on the equity line.

We had some other items.

All in all, from a P&L perspective, the asset backed commercial paper win was offset, but particularly on the SG&A line, SG&A was lower because of the recovery on asset backed commercial paper.

Okay.

So probably not sustainable quite so low as a percent of sales?

We were supposed to [put them] to be fair to you low.

The first half of the year typically have higher sales and your percentage of sales tends to be a little bit lower and it goes a little bit higher in the back half because of the seasonality.

But still expecting pretty low SG&A in total as a percentage of sales for the year.

Okay.

And then maybe a bigger picture question.

There's obviously been a lot of discussion in the market about the yen and a lot of that has focused on the OEMs and pricing and so forth.

But I think some of the more difficult questions to answer seem to be around the implication for suppliers, given that you're so big and broad and have business with most if not all global OEMs.

What are you seeing competitively against Japanese suppliers?

Are they starting to use the currency to their advantage, maybe being a little bit more competitive with customers?

What's your expectation about the competitiveness of your Japanese suppliers that you compete with?

I haven't seen anything yet but I wouldn't necessarily know the details, so nothing that I have been made aware of.

For the most part, if we're competing, it's typically with the people who are in the same geographic region than us.

So I'm sure there's some cases I guess for something to be produced in Japan where the currency would give them an advantage.

I can't really think of it off the top of my head.

A lot of what we compete with would be relatively local competitors.

Okay.

You don't typically run up against component that was sourced out of Japan into Europe or North America?

I can't think of a lot, to tell you the truth.

I'm sure there's some, but I don't really -- I haven't really heard much of it, to tell you the truth.

Okay.

All right.

Thank you.

Our next question comes from the line of John Murphy with Bank of America-Merrill Lynch.

Please proceed.

Good afternoon, guys.

Maybe if I could ask the Japanese question from a different angle.

The Honda Accord, it sounds like it was an important launch for you guys here in the first quarter in North America.

Just curious what content you have on that vehicle and if this is really kind of a pretty strong foothold that you're developing with Honda that might expand over time.

John, the Honda Accord is a program where we're still going to have below average content but the point is that whereas we used to kind of have $100, $75 in a lot of the Japanese vehicles, on the Accord we're getting close to $350 or $400.

We have driver assistance camera systems.

We have the inside and outside mirror.

We have some energy management systems in exteriors, interiors.

We have some business on the stamping side.

In particular, we have the [hot pot hat] business with them which is incremental.

It does signify a pretty significant step forward with Honda then, right.

Definitely, certainly in percentage terms it's a nice movement.

That's why we're calling those out.

Whereas we used to be pretty small.

We're creeping up in terms of the amount of content on some of those vehicles.

Second question on Europe.

The margins are progressing reasonably nice at least in the first quarter of this year.

Was there anything that was unique in this quarter or does north of 2% sound like a reasonable assumption or at 2% plus for the remainder of the year seem reasonable for Europe with potential upside in the out years?

I'm looking through kind of Europe.

Looking at sort of Q4 to Q1, John, or Q1 to Q1?

What are you looking at?

Year-over-year there wasn't that big an improvement.

In the second half of the year obviously the margins were particularly weak.

It seems like we've had a pretty good bounce back here.

I'm just trying to understand what that implies for the remainder of the year.

Just consistent with what we've been saying.

Over the next kind of three to four years, we're expecting steady progression in European margins.

They should get to about half of where North American margins are.

Quarter-to-quarter they are a little bit more difficult to sort of talk about.

Think about the seasonality of the business, you come into the summer slowdown, you come into Christmas shutdown, there will be some impact.

We're pleased with what we see in Europe.

Obviously we want it to be faster but we've got plans in place and the guys are meeting their targets.

We're confident that over the next several years we'll continue to see improvement in European margins.

There was nothing really surprising up or down in the quarter.

When Vince says we're going to get to half the North American markets we're talking over our planning period, so like 2015, '16 time period.

So we're still pretty well on track with what we've been talking about in the past.

And then just lastly on the BDW acquisition, the bulk of the customers there are obviously the German manufacturers but aluminum casting, it sounds like it's something that's taking hold or might be a hot topic with some of your other customers.

Is there the ability to repurpose the technology and the products that you're doing over there in Europe for the Germans to here in North America with some of the Detroit three or around the world with other automakers?

They have a number of customers, Land Rover is a big customer of theirs.

We've actually got some other product that goes into -- we're a Tier 2, so some pretty good product there.

For sure, that product is going to be replicated.

It's high capital, like any you would expect in casting but then you've got to price for it obviously.

We're seeing a lot of interest as you have more use of aluminum in vehicles and especially if it's a casted part, not a stamped part.

That's for sure, that's one of the reasons we bought it.

We'll see some growth opportunities there.

Okay.

Great.

Thank you very much.

Our next question comes from the line of Rod Lache with Deutsche Bank.

Please proceed.

Your line is open.

Sorry.

It's Pat Nolan on for Rod Lache.

I had two questions.

First, I wanted to follow up on your commentary about pricing.

At least on the gross margin line, it looks like -- when I kind of do -- when we do the [walk], there's no change in production, looks like pricing pressure has picked up a bit.

Are you seeing that in the market or is that -- you see no change versus what we've historically seen as far as pricing?

Pricing pressure is always picking up.

I don't think I've ever seen a time other than the great chaos in '08, '09 when everybody was just trying to survive and get parts out the door.

I would say we continue to see pricing pressure, not much of a change.

As far as the financial results, Vince?

I think, Pat, when you -- if you look at the two markets, North America, go back to Q4, operating margins on a normalized basis was 9%.

In the first quarter, ex-E-Car, we're about 9.7% on EBIT.

When I look through some of the items that are impacting us quarter-over-quarter in North America, benefiting a little bit from launch costs, new facility costs, those that have a headwind on commodity costs and warranty costs.

But all in all, it seems pretty normal flow.

There's nothing there on the pricing side that's sticking out.

In Europe, if I kind of look at the same sort of roll, we get some positive some impact on launch costs and headwinds on commodity costs, a little bit of tailwinds on warranty costs and new facility costs.

Everything else seems to be in order.

It's not pricing that's impacting our results in any unusual way.

And if I could ask about your outlook for Europe.

We're hearing that a few automakers are actually adding back shifts, particularly in Germany.

When you look at Europe's production and mix for the balance of the year, are the headwinds getting better for you or are things pretty much playing out as you planned going into the year?

Yes, I think, Pat, when you look at kind of our February outlook for production sales in Europe, our range was $9.4 million to $9.7 million.

Our current range is $9.3 billion to $9.6 billion so we're down about $100 million top end and bottom end, and that's strictly due to foreign exchange.

In terms of where we thought we were going to be back in February and where we think we're going to be today, nothing's changed in any material way.

But even going back to February, we were expecting all in all for the year to have -- for our biggest customers, the German three, to outperform the overall change in the market.

To the extent that it was pretty much in line with the market in the first quarter, it should be pretty decent for us in the remainder of the year.

Got it.

I'd like to just sneak in one last one.

What was the FX impact in North America in the quarter on revenue?

We're just looking it up.

$10 million negative in North America and $10 million positive in Europe and $5 million -- well, it's actually $15 million, $10 million in production sales and $5 million in assembly sales for Europe.

Thank you very much.

Our next question comes from the line of Rich Kwas with Wells Fargo.

Please proceed.

Hi, good afternoon, everyone.

Just had a question on gross margins, following up.

When you look out the rest of the year, you were down year-over-year in the first quarter and I understand the assembly mix was a headwind.

And tooling.

And tooling.

When you look at the rest of the year, you raised the assembly volumes a bit so I assume that's going to continue to be a bit of a headwind.

But how about with new launches, particularly with some of your Detroit three based customers, is that going to be a meaningful headwind as you look through the next couple quarters on the gross margin line?

I think when you look at sort of just launch costs kind of for the balance of the year, overall we're expecting to be flattish, kind of the balance of this year compared to the balance of last year, so not a big sort of swing.

What I think is going to help us on the gross margin line is a reduction in new facility costs compared to the prior year.

That's going to be the biggest factor, and then it will be product mix.

Assembly sales and tooling will impact overall reported margins.

Okay.

And then on E-Car, what's the update in terms of the losses there and what you're running?

Because I know that was -- you had made some improvements second half of last year, was losing less money.

What's the cadence of that right now?

What we've done with our E-Car business that we acquired is we actually deploy that business into a number of different business units.

Part of it is sitting in Magna Steyr, part of it's sitting in powertrain, with a small piece (technical difficulty) corporate.

It's been integrated into the other business units.

We don't have visibility to (technical difficulty).

Overhead's been taken down.

A bunch of different (technical difficulty).

I don't have an exact number.

I would guess that our number has come down but we're launching a big program in Europe so we still have launch costs we're incurring there.

We're doing some R&D.

That would be hitting our bottom line.

The Ford Focus program is now into production but the production is lower than what we had thought.

So the losses would have come down but it still wouldn't be at breakeven levels yet.

Okay.

And then just Vince on the share repurchases, should we assume that when -- you said you're going to get this done by November when it expires but should we think about that cadence kind of similar to how you generate cash?

I think -- no, not necessarily.

I think what you need to think through is kind of by the end of November, you want to utilize entirely that limit that we have of 10 million shares that we continue to buy.

Timing of it is going to depend on market conditions.

It might not be at all tied to how we generate cash.

The biggest thing for us on cash in the quarter which will come back over on the year is working capital.

We had a substantial investment of working capital in the quarter which we have every first quarter.

By the time we get to Q4 a big chunk of that's going to come back.

I just view that as temporary and not necessarily base our share repurchases on cash we generate in any quarter.

Understood.

Thank you.

Our next question comes from the line of Brett Hoselton with KeyBanc.

Please proceed.

So just to clarify on Rich's question on the share repurchase, if I understood what you said correctly, and I apologize, I just got distracted a little bit.

It sounds like what you are saying is your goal is to complete the $12 million share repurchase authorization by November.

Did I hear that correctly?

That's correct.

Is there a possibility that you could actually upsize that?

Certainly you have the balance sheet to do that.

It's always a possibility.

If that were the case, we'd have to reapply to the exchanges to increase our limit.

So that's a possibility.

Okay.

A lot of it will depend on what we have for use of cash.

We know roughly where we're going to be for capital.

It may change by the end of the year.

What we see going into 2014, what we see in the M&A front.

We had a long discussion about this.

So we just wanted to make sure that people understood that we were committed to repurchasing those shares.

Things may change through the year if we want to do more, but we'll reassess it as we get close to the full repurchase and see where we are.

Thank you.

I wanted to ask you a little bit about European margins.

First, my understanding from what you said in the past is that you hope over the next three to four years to see a fairly steady improvement in margins and ex-Steyr you'd like to get up to maybe about half the level that -- half of where North America is, which North America is kind of running around 9% or 10% ex the amortization.

So kind of 4% or 5% margins over the next three to four years ex-Steyr and that's kind of my impression.

And my first question is obviously is that correct?

Feel free to correct me if I'm wrong.

The real question is this, you've got a -- you've been closing plants here and I can see you how that's going to improve your margins.

It already has done so.

What's the plan in kind of year number two or year number three or year number four that's potentially going to drive that improvement?

Are we going to continue to see restructuring dollars closing plants, that sort of thing, or do we switch to something else that allows you to continue to drive that margin improvement?

Combination of a number of things.

Some of it will be restructuring.

That will be the bulk of it this year and next year.

We did have some under-priced products.

So we either are going to get repricing on that or ask our customers to re-source it or those products run out.

We had a number of facility launches so we'll be getting through those facility launches and we have of plants that are already very, very good over there.

They do good in technology, good in manufacturing.

We have a big program under way, world class manufacturing and a lot of it's just to be getting our cost to quality down across the board.

That's why it's basically coming in.

We said a year ago, year and-a-half ago, we'd do it over about a five year time period.

We are pretty well on track.

It's a number of moving parts.

Okay.

Excellent.

And then finally, just on the Rest of the World margins, my impression there is kind of in that similar time frame, three to four years you hope to get into that 75%, give or take, of North American margins.

And you've got China ramping up and then I guess you're basically trying to fix your operations in South America.

Is that the general sense that we should have on Rest of World?

I guess a couple things going on in South America.

One, we're focusing on some operational inefficiencies, but we also are launching some new business, new facilities.

As the business ramps up we should see some improvement in South America; and as business ramps up in China, particularly China, with margin improvement.

Having said all that, to the extent that we continue to accelerate our growth in the Rest of the World segment, in particular places like China and India, that may delay us getting to that sort of three quarters number that we talked about.

It's a good story, bad story.

The more growth we have, the longer it's going to take us to get to the more acceptable margins on a consolidated basis in that region.

Brett, I just wanted to -- you said this word twice, I just want to come back to it.

You keep on saying hope in Europe, hope in rest of the world.

It's not hope.

We actually have plans in place and we've got traction and we're tracking to those plans so it's not hope.

We're going to get there.

One additional thing.

In South America, Vince said we do have some new plants going up.

We've got some operational inefficiencies.

I think we're getting our arms around those.

In Argentina specifically there's a very difficult environment in Argentina, high inflation, high wage rates.

We basically need to get recovery from a couple of our customers we haven't been able to get them yet.

We either have to get that which would be a repricing to take into account the change in our input costs or we will have to get out of those contracts, one of the two.

So it's a combination of a number of things going on down in South America.

Okay.

Thank you very much.

Vince, I didn't mean to imply that you didn't have a plan.

Thank you, gentlemen.

I hope to win the lottery.

Our next question comes from the line of Ravi Shanker with Morgan Stanley.

Please proceed.

Thanks.

Good afternoon, everyone.

Had a few housekeeping questions to follow up on.

Does the European remarketing change between Eastern Europe and Western Europe have any impact on the margin trajectory in either Europe or the rest of the world going forward?

No, it doesn't change sales.

It just changes the volume.

If we were computing content per vehicle, that would be reset, but it has nothing to do with our sales at all.

Nothing to do with our segment reporting.

No, just volume, just how we report volume.

That's all.

Understood.

Understood.

The tax rate was significantly lower than your full year guidance in the first quarter which would imply a rate of about 26% for the rest of the year, although it sounds much higher than your full year rate.

Does that sound about right or do you think the rest of the year will be fairly consistent with that 24% number?

I think overall when we get through the course of the year we'll be about 24%, it might be a little shy of 24%, but about 24%.

Again, it depends on income mix throughout the rest of the year.

But think about 24%, slightly below that for the full year and you can back into Q2, Q3, and Q4 accordingly.

And just finally, I think you had a couple of plant disruptions in the first quarter.

In the second quarter, a couple plant fires, I think.

Can you talk about whether they had an impact in 1Q and maybe 2Q?

Yes, the one you pay be referring to hit the news was a transformer panel that exploded because a grease fitting let go.

I think that's the latest root cause.

It wasn't a big fire so that didn't really have any impact if that is the one you were referring to.

That was a couple weeks ago.

We did have a couple of significant launch disruptions in the quarter.

We're through those.

We're still having some inefficiencies, but at least we have got the product flowing to our customers.

We did have a couple of operating issues, one in North American segment, one in the European segment which we're dealing with.

I presume those are the ones you're referring to.

You're past those now?

In terms of the plant that we had that grease fitting that gave, we're back to full production.

We've been cleared by all the authorities to move forward on production.

Most important thing is we're happy that our employees are all safe.

Understood.

Thanks very much.

Our next question comes from the line of Todd Coupland with CIBC World Markets.

Please proceed.

Good afternoon, everyone.

I was wondering with European outperformance versus the market, what would that have looked like on an organic basis so if we exclude the acquisition contribution?

I think when you look at the acquisition, I'm just flipping to the page, Todd, here in my notes.

So we're -- Europe last year, we were about $2.3 billion and production sales were just over $2.4 billion this year.

$164 million of the change was due to the acquisition.

If you net that out, we're essentially flat.

But still significant outperformance relative to volumes in that region.

Right.

Right.

And that's due obviously to the reasons you mentioned in part content growth.

Can you highlight a couple of the key vehicles where you've been growing content to just give us some color around that?

In Europe specifically?

Specifically in Europe, yes.

Yes.

I think when you look at some of the growth on content, for example, the Kuga program [settled were on a] content.

The Paceman has got additional content on that.

There's the Transit program as an example where content year-over-year has been picking up.

Mercedes-Benz CLA.

We have content under that new program.

Higher content on the Jetta.

Higher content on the Skoda Octavia.

Those are kind of the big drivers.

And one follow-up if I could on North America.

So for the first four months of the year we've seen terrific pickup truck volume and a little bit slower car volume.

How do you guys think about that?

I mean, obviously housing starts is helping a lot in pickup trucks, but below housing starts, do you feel that the North American market is starting to flatten out a bit?

Just your thoughts on that would be helpful.

Thanks a lot.

Honestly, Todd, I haven't looked that closely at the segment stuff more recently so I'm not really in a position to -- let me have a look at the numbers there and I can get back to you on that one.

That's great.

Thanks a lot, guys.

Our next question comes from the line of Peter Sklar with BMO Capital Markets.

Please proceed.

On your guidance revision, you took your guidance up for operating margin notwithstanding that you have higher anticipated assembly sales which I believe dilute the margin.

So you're anticipating -- obviously anticipating some good margin improvement in your core auto parts operations.

Can you talk a little bit where that's coming from?

Is Europe doing better than you expect or is it coming in other regions or other businesses?

Peter, look at our forecast and even though we may have not changed volumes overall for Europe, it's a bottoms up forecast.

We look at mix.

Part of it's mix.

Part of it's better traction on operating performance, there's a whole bunch of things.

Sum it up across the Company, we're comfortable moving up operating margin for 2013 versus our outlook in February.

Okay.

Another question is the $10 million that you recovered on the asset backed commercial paper, that's the amount you recovered but what would be the gain that you recorded for financial reporting purposes?

On asset backed commercial paper there's actually two items, Peter.

We have an asset on our balance sheet that we look at at the end of every quarter and we revalue that to fair market value.

So we've got a $3 million gain related to the revaluation of the paper we hold on our books.

And we've been having revaluations for a number of quarters, $2 million or $3 million each and every quarter.

On a comparable basis, it's significant, the difference.

But particularly in the quarter, we actually received some cash from some legal proceedings that were taking place on asset backed commercial paper, which is about $10 million.

So that was the cash we received and that's been booked to SG&A.

But is that -- that's the cash received but is that the gain?

Remember, there was no cost associated with it.

So the cash was the gain.

Okay.

I understand.

And then you mentioned as well, just kind of sorting through these unusual items, you also had a -- you mentioned something earlier in the call.

Vince, I think you took a charge related to Fisker, did you say?

Yes, Peter.

Particularly you asked me about the asset backed commercial paper, so I commented on that.

The earlier color I gave related to just P&L in general as yes, we did have a $10 million gain on the legal proceeds we received on asset backed commercial paper.

In the course of the quarter there's a number of things that are positive and negative.

We also had some negative items in the quarter which we didn't spell out in particular in our MD&A.

The biggest item was some provisions we took against some Fisker receivables and Fisker inventory and then there were some smaller items.

When I add all that up, the $10 million gain on asset backed commercial paper is pretty well offset with $10 million of other items.

All in all, our P&L wasn't impacted positively or negatively from these other items.

It did have an impact on particular line items, in particular SG&A and equity income.

Okay.

I understand.

Thanks.

And Don, if I could just ask you one last question.

I don't know if you noticed you were quoted in a news wire article about a week ago.

The news wire article addressed the restructuring activities Magna anticipates doing.

The article kind of talked more about restructuring in the US and at Steyr as opposed to your European auto parts operations where I thought the bulk of the restructuring is going to take place.

Is there any change in the restructuring strategy or is it still going to be largely in your European auto parts operations?

No, I definitely noticed it and I don't know where it came from, quite frankly because what I said -- the question was about how much restructuring we're doing in Europe.

I explained what we're doing there.

And what I said was ongoing restructuring in the auto parts industry is kind of common and we've been doing ongoing restructuring in North America as well because if an assembly plant closes, if you do something, whatever.

We're not doing anything other than what we talked about previously.

We're not doing any major restructuring in North America.

And then there was a question about Steyr and again, I don't know where it was.

Nothing's changed on what we talked about previously, Steyr or North America.

Okay.

Thank you.

Our next question is from the line of Ryan Brinkman with JPMorgan.

Please proceed.

Thanks for taking my question.

Congrats on the quarter.

Can you maybe just talk about the glide path to stronger margins in the Rest of World operations?

Is there a specific quarter or maybe even year that you were thinking about when it comes that you can leverage some of the growth related investments that you've been making in emerging markets?

I think it's going to be pretty steady over the next three to four years.

In terms of our Rest of World segment, as you know, we were overall negative for 2012.

For 2013, we're expecting overall profitability to be pretty well flat, not positive, not negative, kind of neutral and showing some profits starting in 2014.

In terms of how that comes out by quarter, I don't have the data with me.

As you're launching new facilities and you're launching programs, sometimes they get accelerated, sometimes they get delayed.

We're more focused on what happens in the course of the year as opposed to what happens in a particular quarter.

(multiple speakers) If you look at South America, we did three acquisitions there.

So I think we can get back to profitability in Brazil.

We do have a plan there.

The situation in Argentina, as I said earlier, is more difficult because there is going to have to be some price relief or unloading some contracts because of the inflation that's happening down there.

So our growth really is focused on China.

We're going to digest what we have in Brazil.

I want to get that back to profitability and then we'll look at continuing to grow where we can get profitability growth.

It's not a big target area until we can get back into profitability.

China is going to be a big focus for us going forward.

It has been.

It really depends on how fast we win new business when we put down new plants, whether we do it greenfield, through acquisitions, so that's a bit more difficult to predict.

But we have said and still pretty comfortable, we can get to North American type margins in China, so it's really going to be dependent on getting a couple of these big plants we're launching up and running.

Okay.

That's very helpful.

Thanks.

And then maybe just to zero in on North America.

Obviously your results there are very good, your margins are very good, and in line with your long-term outlook.

If we were to adjust your 1Q results that are higher to account for the E-Car amortization then it would seem that your earnings rose about $15 million on an underlying basis year-over-year on a $209 million revenue rise for roughly 7% or so incrementals, which may be just a little bit less than we would have supposed had we known you would put that strong revenue.

Can you just talk a little bit about your operating leverage in North America and maybe what might be reasonable to expect going forward?

I think the guidance we've given in the past is still accurate, 9% and 10%.

It depends on so many moving factors.

We did have a launch hiccup in Q1.

That would have had some impact.

I don't think you can really read a trend line in Q1 based on what you're seeing, the pull through margins we had.

Okay.

And then last question.

I think we got some more information in the Q&A here to help explain the very strong Europe revenue that basically FX helped I think $10 million.

And then acquisitions was something like $164 million or so.

I guess the rest is just attributable to the product launches that you have in the slide deck.

How to think about the cadence of launches as the year progresses?

Does it help you more or less in the quarters as the year finishes?

Thanks a lot.

Congrats again.

Ryan, I'll have to do a little bit of work to figure out how it looks for the rest of the year, the launch, and in fact specifically on the rest of the year.

My recollection is it's fairly steady through the year but I'll have to do some thinking there and get back to you.

Thank you.

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

Please proceed.

One question on the assembly.

The sales seems to have ticked up.

Is this a new level with the Paceman?

Or is this like a temporary thing where you are launching something and it will settle back a bit?

The Paceman has been pretty strong.

Both the Countryman and the Paceman has been pretty strong.

We have upped our volumes expectation for the rest of the year and the bulk of that is BMW work there.

Okay.

Fair enough.

(multiple speakers) Foreign exchange going the other way too, David.

Right.

Okay.

And then just a question, the buyback it sounds like you're pretty committed to trying to get it done.

I was just wondering if you could put in context use of capital in terms of buyback versus M&A or anything else at this point in time because it sounds like the focus is on buyback at this point.

Really can't give any more detail.

We're expecting capital to come in $1.3 billion to $1.4 billion.

That's pretty well-known because things don't change that much unless you have push-off in the next year.

You can pretty well tell what our dividend is going to be.

You look at what we talked about, over $600 million for the share buyback.

M&A is -- we can't really predict it because we're working on a lot of different things, does it come to fruition or not, so that comes pretty lumpy.

That's pretty hard to predict.

David, the way I sort of think about it is we invested $1.9 billion in our business last year between fixed assets and acquisitions.

And we generated lots of cash.

Our net cash balance didn't change at all in 2012.

Look at 2013, with improved operating results, our cash generation is going to be higher.

So we have room in there not only to do buybacks, we've got a very strong balance sheet.

But also to use the balance sheet if the right opportunity came up to make the odd acquisition as well.

I think we've got ample room to do all of that if the right opportunity presents itself.

Would you consider increasing the dividend payout ratio at all?

David, we've talked about sort of dividends and our view is that we'd like to move the dividend up on a regular basis.

Regular basis is kind of the end of the year.

We will get 2013 behind us, we will have completed our business plan and at that point in time, we can reassess the dividend rate and whether it makes sense to move it up and by how much to move it up.

I wouldn't count on sort of resetting the dividend in the course of the year.

No, I'm not suggesting that, Vince.

You have the 20% requirement in your constitution.

You pretty much followed it.

Would you ever consider moving beyond that, given the greater maturity of the Company?

I think we're beyond that in 2012, David.

The 20% remember is just the minimum.

Yes.

It's not something we're considering right now.

Ultimately if we do the share buyback, we have our dividend policy, like to put the cash to work to grow the Company profitably.

If we try and we can't do it, we'd consider anything, but it's not being discussed right now.

Okay.

That's helpful.

Thank you.

Our next question comes from the line of Itay Michaeli with Citigroup.

Please proceed.

Good afternoon.

Just a question on the guidance and the cadence.

In the past couple of years, the Q1 operating margin was actually a little bit above the full year.

Looks like this year maybe Q1 will be flatter or even lower than the full year.

Can you talk about what's sort of different this year, what's going better in the business in the next three quarters relative to Q1?

Remember that the margin guidance we gave is excluding the amortization of E-Car.

If you take the Q1 numbers and you back out the E-Car amount we're actually -- we're at 6%.

Right.

Okay.

We're saying mid to high 5% range.

We actually are above in Q1 where we expect to be for the year.

You're comparing that to that.

Okay.

That clarifies that.

Just on CapEx, the Q1 spending, a little bit light relative to the full year.

It sounds like there's maybe a timing issue there.

And then Vince, how do you think about CapEx going forward?

You talked before about capital deployment.

How should we think about CapEx relative to the business you're winning?

Should we think about that as a percentage of sales, perhaps, beyond 2013?

I think when you look at capital traditionally, capital ramps up near the end of the year.

It's tied to product launches which are going to be sort of July, August time frame and Christmas shutdown.

You'll see capital typically ramp up as we move through the balance of the year.

We don't have a target for percentage of sales, quite frankly.

We do a bottom up plan.

People have opportunity to invest capital in our return thresholds and we'll approve the capital.

I think if you're looking at the model, I would keep it $1.4 billion to $1.3 billion over the next few years.

Great.

That's very helpful.

That's all I had.

Thanks so much.

Congrats.

Our final question comes from the line of Neil Forster with Scotia Capital.

Please proceed.

Good afternoon, guys.

My first question was just a clarification in terms of your margin expectations in Europe.

It was said earlier in the call that you expect to be at half the level of North America, excluding Steyr.

Just wanted to double check that.

If that's the case, how does Steyr change the overall picture?

What would the expectations be for Europe including Steyr?

Lower.

Just to your very first question, just to clarify what we talked about is over the next three to four years, which is our planning period, we expect to be -- our margins in Europe expect to be about half of where they are in North America.

North America is kind of 9% to 10%.

Europe ex-Steyr is 4.5% to 5%.

Magna Steyr, we've talked about this for a very long time.

Its margins are below Magna's overall margins.

Magna Steyr purchases a lot of the components and assembles some vehicles and charges a fee for doing that.

Reasonable return on capital but from a margin perspective, it's lower than Magna overall.

It will have a negative impact on --.

Right.

I'm trying to get a sense in terms of how meaningful that impact would be.

I appreciate that.

On the margins you're trying to -- hard to tell because it depends what our sales are going to be.

The sales in Steyr depending what business we get can go way up or way down.

We count the sales in the full price of the vehicle.

I don't know how we --.

Okay.

So it can swing meaningfully one way or the other, depending on what happens at Steyr over the next few years?

Yes.

Okay.

My second question was kind of a broad, strategic question on Europe.

I'm just wondering in terms of what you expect your footprint in Europe to look like over the next 5 to 10 years.

You've talked before in terms of the restructuring, not wanting to be everything to everyone, exiting certain businesses.

So I'm wondering what that business will look like longer term and if you could compare and contrast it to your North American footprint.

Well, North American footprint is growing basically in the southern states, primarily in the southern states and in Mexico, we continue to grow.

Canada we're probably not going to add more facilities because we already cover the place geographically.

We do have some, as we win contracts, we are adding mores facilities in North America even in the north.

If you look at Europe, I think the production levels in England seem to be pretty stable.

We expect them to stay there.

So our footprint in England will probably be pretty consistent.

We don't have too many plants in Spain or France or Belgium so if you look at where our plants are, we've got a number of plants in Austria and we have a lot of plants in Germany.

Most of the expansion will either be in existing plants or in Russia, Poland, Romania, Turkey, so if you look at most of our expansion right now, that's where most of the plants are going up.

And some of the real losing -- big losing divisions have been in Germany, in our exterior, interior divisions.

We might see some change there but it's not drastic.

It will be a slow progression to plants becoming more efficient and continuing business or building in lower cost regions.

But that's over a long period of time.

Okay.

I guess what I'm driving at is what the product portfolio will look like in Europe, and if and how that differs to North America.

We talked a little bit about this at the annual meeting today.

Ultimately we're looking at all the products and most of the products would be considered to be global products.

They may not be sourced globally.

There's always exceptions to the rule.

We're trying to look at where do we have competitive advantages in our product offering, our manufacturing processes in each of our groups, where do we see a pull from the customers, we're going to have to be global in those.

In the areas where we can't make reasonable margins or we're making losses, we either have to fix them or get out of them.

So we're not saying publicly and we haven't come to a conclusion quite frankly on all the product areas anyway but over time, we will probably streamline our product offerings and make sure we're in a very powerful position globally in the ones that we stay in long term and ones where we don't think we are in that position, we're either going to have to buy somebody, merge with somebody, do a joint venture or if we can't then we'd have to look at exiting those businesses.

It's an area we've got our focus on.

We're really not announcing them because whatever we do has an impact on employees, has an impact on customers, but we want to be -- make sure that the products we are in long-term were very healthy.

Would you see anything on as big a scale as perhaps exiting a complete division or would it be more subdivisions of certain --?

I don't want to comment because it starts a lot of speculation.

We typically look at products as a business unit.

So if we do something it would probably be on a global basis.

Okay.

Not all of our product lines are global.

Okay.

And then on the M&A side, seems that there's some sizable assets out there right now but perhaps some of them at least not the right strategic fit for you guys.

I'm just wondering what you're seeing in terms of the landscape of potential companies that you could go out and make a run for and geographically where are they located.

Is there more in Europe?

Are you seeing some opportunities for distressed -- purchases of distressed suppliers there and kind of what is that pipeline looking like?

There are some distressed companies out there.

If Europe stays in a downturn for a longer period of time I think we're going to see more companies get in financial difficulty.

Ideally we're looking for an acquisition that is strategic in product, has some technology and we're obviously very careful about what they're going to have for a footprint.

The more you get some ideal acquisitions, the more it's going to cost.

We want to make sure we can get reasonable returns on it.

If we get something that doesn't hit one of those, then obviously we would expect to buy it at a cheaper price.

There's not a glut of companies on the market right now but I think in general, expectations on valuation are in reasonable levels.

So we're looking a lot of different things but we don't want to do an acquisition for the sake of an acquisition.

We have a strong balance sheet so we can do them.

We want to make sure we do the right ones.

Okay.

That's helpful.

Thank you.

Mr. Walker, we have no further questions at this time.

I'll turn the call back to you.

Thanks everybody for joining us today and for those who also took the time to watch our annual general meeting.

I think we've had a good start to 2013.

We expect to continue strong performance in the remainder of the year.

It will be interesting to see what happens with the economy but we're going to keep focused on the priorities we've got and look at our long-term strategies.

So, thanks very much.

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

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