Magna International Inc (MGA) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Magna International second-quarter 2013 results conference call.

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

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

(Operator Instructions).

As a reminder this conference is being recorded Friday, August 9, 2013.

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

Please go ahead.

Thank you.

Good morning, everybody.

Welcome to our second-quarter 2013 conference call.

Also on the line today is Vince Galifi, Chief Financial Officer, and Louis Tonelli, Vice President Investor Relations.

Yesterday our Board of Directors met and improved our financial results for the second quarter ended June 30, 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 on 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.

Overall, we're very happy with our performance in the second quarter with the best ever consolidated sales and profits.

In each of our North American, Europe and Rest of World segments reported stronger total sales and improved earnings year-over-year.

In North America, we continued to have good results within EBIT percent excluding E-Car amortization of 10% for the second quarter.

In Europe, our progress is study with a solid reported adjusted EBIT of $120 million in Q2.

It has taken a lot of hard work and there is certainly more to come but we are headed in the right direction in Europe.

We continue to expect improved earnings for the full 2013 compared to 2012 in our Europe segment.

In the Rest of World segment, we reported a small profit for the quarter and expect to be profitable for the year.

Asia continues to perform in line with our expectations and South America, while generating a loss, has shown year-to-date improvement in EBIT compared to 2012.

We received two notable awards from our customers recently.

We were given the Supplier Innovation award from BMW for outstanding achievements in innovation and development.

Specifically our [COSMA] operating unit was recognized in the area of lightweight construction for a part made of diecast aluminum.

A number of our operating units have developed and are developing innovations in light weighting, a key trend that we expect to continue to benefit in the years ahead.

We were also given a Top Supplier award in the global champion category from Volkswagen for outstanding achievements in entrepreneurial performance and swift support from Volkswagen in emerging markets.

Magna was acknowledged for its flexibility and fast response times in Russia and for transferring high-quality standards in technologies to markets outside of Europe.

I am pleased with our continued expansion outside of our traditional markets as we bring many of our best in class capabilities to these new markets to serve our customers.

With that, I would like to pass the call over to Vince.

Thank you, Don, and good morning, everyone.

I would like to review our financial results for the second quarter ended June 30, 2013.

Keep in mind that all figures discussed today will be in US dollars.

In the second quarter, our record consolidated sales increased 16% relative to the second quarter of 2012 to just under $9 billion.

North American production sales increased 10% in the second quarter to $4.3 billion reflecting in part a 7% increase in vehicle production to 4.3 million units.

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

Partially offsetting these were programs that ended production during or subsequent to the second quarter of 2012, the weakening of the Canadian dollar against the US dollar, and net customer price concession subsequent to the second quarter of 2012.

European production sales increased 14% from the comparable quarter while European vehicle production declined 1% to 5 million units.

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

These were partially offset by lower production volumes of certain existing programs.

Rest of World production sales increased 38% or $157 million to $572 million over the comparable quarter primarily as a result of new programs launching particularly in Brazil and China during or subsequent to the second quarter of 2012 and higher production on certain existing programs.

This was partially offset by the net weakening of foreign currencies against the US dollar including the Brazilian real and the Argentine peso.

Complete vehicle assembly volumes increased 17% from the comparable quarter and assembly sales increased 23% or $151 million to just under $800 million.

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

These factors were partially offset by lower assembly volumes for the MINI Countryman and Peugeot RCZ and the end of production of the Aston Martin Rapide in the second quarter of 2012 at our Magna Star facility in Austria.

In summary, consolidated sales excluding tooling, engineering and other sales increased approximately 14% or just over $1 billion in the second quarter.

The increase reflects higher production sales in North America, Europe and Rest of World as well as higher complete vehicle assembly sales.

Tooling, engineering and other sales increased 43% or $222 million from the prior year to $733 million.

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

Gross margin in the quarter increased to 13% compared to 12.7% in the second quarter of 2012.

The increase in gross margin percentage was substantially due to margins earned on higher production sales, incremental margins earned on new programs that launched during or subsequent to the second quarter of 2012, the closure of certain facilities, lower costs incurred in preparation in preparation for upcoming launches, and productivity and efficiency improvements in certain facilities.

These items were partially by an increase in tooling, engineering and other sales that have low or no margins, an increase in complete vehicle assembly sales which have a higher material content than our consolidated average, programs that ended production during or subsequent to the second quarter of 2012, our larger amount of employee profit-sharing, increased pre-operating costs incurred at new facilities, favorable settlement of certain commercial items in the second quarter of 2012, the reactivation of the carpet business in the second quarter of 2012, and operational inefficiencies and other costs in certain facilities.

Magna's consolidated SG&A as a percentage of sales was 4.6% in the second quarter of 2013.

That is less than the 4.8% recorded in Q2 2012.

SG&A increased $42 million to $410 million in the second quarter of 2013 primarily due to increased costs incurred at new facilities, acquisitions completed during or subsequent to the second quarter of 2012 including Ixetic, E-Car and STT, higher incentive compensation, higher labor costs, an increase in reported US dollar SG&A related to foreign exchange, the recovery of due diligence costs in the second quarter 2012 and a $5 million net decrease in revaluation gains in respect of asset-backed commercial paper.

These factors were partially offset by a loss on the disposal of an investment in the second quarter of 2012 and lower restructuring and downsizing costs.

Our operating margin percentage was unchanged at 6.1% in the second quarter of 2013 compared to the second quarter 2012.

In Q2 2013, EBIT includes $40 million of amortization associated with the E-Car transaction or about $31 million after tax.

This amounts to 0.4% on the operating margin percentage for the quarter.

Excluding this amortization, our Q2 operating margin percentage was 6.5% compared to the 6.1% last year.

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

In Q2 2013, our effective tax rate declined to 24.1% from 25.7% in the comparable quarter of 2012.

This is primarily due to a decrease in losses not benefited in Europe partially offset by a change in mix of earnings whereby proportionately more income was earned in jurisdictions with higher tax rates.

Net income attributable to Magna increased $66 million to $415 million for the second quarter of 2013 compared to $349 million in the comparable quarter.

Diluted earnings per share were a record $1.78 compared to $1.48 in the second quarter of 2012.

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

Excluding the E-Car amortization, diluted EPS would have been $1.91.

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 and the cashless exercise of options partially offset by the issue of shares related to the exercise of options and an increase in the number of diluted options outstanding as a result of an increase in the trading price of our stock.

During the quarter, we purchased 5.2 million common shares under our existing normal course issuer bid which expires in November of this year.

We have room to purchase approximately an additional 4.8 million shares under this bid and we intend to continue purchasing our shares up until November.

I will now review our cash flow and investment activities.

During the second quarter of 2013, we generated $714 million in cash from operations prior to changes in non-cash operating assets and liabilities and invested $12 million in non-cash operating assets and liabilities.

For the quarter, investment activities amounted to $285 million comprised of $232 million in fixed assets and a $53 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 September 16 to shareholders of record on August 30, 2013.

Our balance sheet remains strong with $915 million in cash net of debt as of June 30, 2013.

We also have an additional $2.2 billion in unused credit available to us.

Now I'm going to pass the call over to Louis.

Thanks, Vince.

Good morning, everyone.

I will review our updated 2013 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 2013 North American light vehicle production to be approximately 16.1 million units compared to 15.9 million units in our May outlook.

We expect 2013 total European light vehicle production to be approximately 18.6 million units compared to 18.4 million in our May outlook.

Increases in both our North American and European forecasted light vehicle production substantially reflects the higher than anticipated second-quarter production.

The increased annual North American and European vehicle production assumptions are expected to lead to increased production sales in both markets.

Our Rest of World production sales and complete vehicle assembly sales expectations are unchanged from our May outlook.

As a result, we expect total sales to be in the range of $33.3 billion to $34.7 billion compared to a range of $32.6 billion to $34 billion from our May outlook.

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

We expect our consolidated operating margin percentage excluding $158 million of amortization of intangibles related to the acquisition of E-Car to be approximately 5.8% compared to our previous outlook of margin in the mid to high 5% range.

We expect our effective tax rate to be approximately 23.5%, down slightly from approximately 24% in our May outlook.

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

Lastly, our expected restructuring costs for 2013 which are entirely related to our European operations are unchanged from our previous communication at $100 million.

Substantially all of the restructuring costs will be recognized in the second half of 2013.

That concludes our formal remarks.

Thank you for your attention today.

We will be pleased to answer any of your questions.

(Operator Instructions).

John Murphy, Bank of America Merrill Lynch.

Good morning, guys.

I just wanted to focus on Europe first just because that was where there was such tremendous outperformance relative to at least our expectation.

The 14% increase relative to a 1% decline in production is very impressive.

Can you kind of highlight in the acquisitions how much Ixetic and the carpet business added and how much was sort of more organic outperformance?

Can you give us a little bit of clarity there?

Sure.

I think when you look at production sales in Europe year-over-year, the acquisitions accounted for about $130 million in additional production sales, but $100 million of that was Ixetic and the balance was substantially all of the carpet business.

Okay.

That is great.

Great outperformance there.

And then just on the margins in Europe, it sounds like obviously a lot of the cost of your restructuring is going to come in the second half of the year but it seems like you are getting a lot of benefit of other actions that you have taken.

Are the actions or the cash costs coming in the second half of year going to result in some additional or incremental near-term benefits that we could expect in the second half of the year or early 2014 in Europe?

When you think about the restructuring activities, John, you talked about the cash is going to come in the second half of the year -- what we are saying is we think the costs are going to be recognized from a [calendar] perspective in the second half of the year when we actually are able to affect some of the restructuring and consolidate or move some people in.

That may be beyond 2013 and there is an accounting recognition principle we've got to follow when there is the cash outlay and then actually doing the physical things.

I think the benefit of the restructuring -- what we are going to do, we will see the benefits of that rolling in.

The bigger part of that is going to be 2014.

There may be some of that trickling in in 2013.

But the improvement we are seeing in 2013 relates to some of the things that we have already been doing for some time.

Don has been talking about a number of initiatives that we have got ongoing focusing on underperformers, focusing on improving efficiencies, working with our customers to improve pricing of world-class manufacturing activities we are undertaking.

All of that is chipping away at some of the underperformance in Europe and we are seeing the benefits and we expect to continue to see more benefits as time goes on.

And we have had some restructuring previously, we had restructuring in the fourth quarter which is kicking in in terms of improving this year.

Okay.

And then just a last question on Europe.

You guys have kind of long sort of targeted or pointed us to half the margins or EBIT margins that you get in North America is where you might ultimately end up.

I mean at 3.2, you are getting -- I mean you are not quite there -- but you are making much better progress than we would have expected.

Is that still your target or could you potentially be better than half your EBIT margins in North America in Europe?

John, what we have said is over the next three to four years that we should be able to get to about half of where we are in North America on production sales.

We clearly have said as well that beyond that, we believe there is still opportunity.

We've been focusing on our business plan cycle so we have some pretty clear visibility into that but obviously our target is more than half of where we are in North America.

Okay, that is helpful.

Then just one last question, if you could just remind us roughly what your dollar content is on the GM trucks on the new K2XX and also what you have on the F150 as far as content?

In terms of the K2XX, we are on average about 1750 in content and that compares to about $1500 on the GMC 900.

Give me some time to dig up the Ford content, I haven't got that at my fingertips right now, John.

Okay, great.

We will follow up on that.

Thank you very much, guys.

John, just one final comment from Don here.

On Europe I think we are pleased -- I won't repeat what Vince just said but Q2 is seasonally higher as well so you can look at the seasonality of the earnings as well.

Okay, still a great performance.

Thank you very much.

We are pleased with it.

Steve Arthur, RBC Capital Markets.

Great, thank you.

Actually that last point was one of my questions.

Just safe to assume that we will see a seasonal slowdown in margins in Europe for the back half of this year but also expect that the types of changes you have been making are pretty entrenched and we should see year-over-year improvements in each of the coming quarters?

That is a good assumption, yes.

There is going to be seasonality in North America as well don't forget.

Right, right.

Okay.

Secondly, just CapEx, I think we have seen just over $400 million now year to date.

So it looks like a fairly aggressive move to get in the second half towards that $1.4 billion level.

Is it fair to assume that some of the planned programs are in place to get you there now or might some of that spill over into 2014?

And I guess related to that, don't really expect any numbers but directionally over the next say two or three years, do you still see lots of opportunities out there and expect CapEx to remain at fairly aggressive levels?

In terms of committed capital, we look at that on a pretty regular basis so where we are at today is about 1.4.

Historically, there has always been some carryover into the following year.

We will get some better visibility into that as we come to the end of Q3 so at that point we may have to revise our number down depending on where we are at on carryover.

I think in the outer years, Steve, we still see and have been awarded some pretty substantial business.

Capital is going to be running at more elevated levels than sort of what we have been doing over the last three to four years.

I am sure that whether 1.4 is the right number.

We still need to wrap our mind around business plans.

But I would assume that it will be the higher than normal level over the next couple of years.

That makes sense.

Thank you.

I will pass the line for now.

Rich Kwas, Wells Fargo.

Good morning.

A question on the guidance for Europe.

I think Louis, you mentioned that the upgrade on the production for the full-year really reflects Q2 outperformance.

The 18.6 number at least right now looks lower than what IHS has.

Are you seeing anything on the production front with schedules that creates greater concern for you as you look at third and fourth quarter?

No, I know that we are a little bit lighter than IHS.

There is nothing magical about our numbers.

We look at what we have internally.

We do look at schedules to help us determine where to be but IHS is going to bounce up and down a little bit more.

We are a little bit more like a moving average so we are just a little bit more cautious than where they are.

Okay, but you are not seeing anything fundamental in terms of inventory corrections or anything on the horizon that causes you greater concern?

It is more a level of just being conservative?

Nothing specific.

Okay.

And then just on the longer-term outlook for Europe, I know you will update your revenue growth targets probably next year at the auto show.

But as I recall last year or earlier this year, the longer-term outlook for Europe assumed some deterioration in business and I know there is some business that is coming off.

But now that we are six months into 2013 and what you have seen macro wise and then with your own quoting activity, how do you feel about your European production sales outlook going out the next couple of years?

We will give you some color and rightly so in January.

Our focus in Europe, we have had a number of focuses but one is to get our operations running efficiently and the focus was on profitability, generating a reasonable return, and focusing on improving what we do through world-class manufacturing.

And as we do improve internally our operation and we do become more competitive, what we have been saying is that we believe there is going to be opportunity to continue to grow our sales in Europe and our view remains unchanged.

Okay.

Let me just add one thing to that.

We have been having a number of issues.

We had a number of issues where we under quoted some programs.

So when you were going through a lot of discussions with customers you get at least closer to reasonable pricing.

Our focus was to -- on the operations -- but also to get the pricing levels we thought was at least acceptable and for the most part, we are through most of that repricing discussion and we are refocusing now on quoting new business.

It is a bit difficult in some situations to be aggressively going after new business when we are also going to fix pricing.

So I think we got most of the repricing behind us.

Okay.

But is it fair to say that with -- I think you had a 10% decline in production sales over the -- through 2015.

Is it fair to say there is potential that there may be some upside to that outlook once you get to the numbers into next year?

Richard, it wasn't a 10% decline.

It was 10% of the change $2.2 billion.

It was about $200 million that we expected between 2013 and 2015.

I think what we said in January also was that we have been awarded just very recently some business that pretty much filled that gap.

So call it at least in our outlook flattish sales between 2013 and 2015.

That is the starting point.

Okay.

Louis, thanks for the clarification, that is what I meant.

Okay.

And then just last one, launch costs, I know last quarter you said that you expect kind of flattish type launch costs this year.

Is that still intact for 2013?

Yes, Rich, that is still intact.

Overall 2013, we are expecting launch costs to be flattish.

Okay.

Great.

Thank you.

Brett Hoselton, KeyBanc.

Good morning, Don, Vince, Louis.

Just want to ask you briefly about the share repurchase activity.

Certainly has accelerated -- 800 million shares or 800,000 shares excuse me last year I believe it was and 1.6 in the first quarter, 5.2 in the second quarter.

You have got what is it 4.8 left through November.

So I guess what I am wondering as you kind of think about modeling kind of the quarterly run rate into the next year, how would you think about that?

Would you be thinking about a run rate of 1.6 million per quarter or 5.2 million per quarter or I mean how do you think about the pace of share repurchases as you move forward into the next year?

So, Brett, you are thinking about 2014, correct?

Yes, yes.

Basically, Vince, I am basically thinking that you are going to do the remaining of the 4.8 between now and November.

So I guess in terms of the -- we have got 4.8 million available under our NCIB which does expire in November and we talked about it in May at our annual meeting that is was our intent to go out and be active under the NCIB and we did purchase 5.2 million shares.

And we had talked about allocating about $650 million given the price in May to buy back stock and we are going to continue to be active in the market.

Whether we get to the full 4.8 million (inaudible), we will see there is a lot of shares to buy but we will continue to purchase some shares under the bid.

I don't know how you model that because what we buy on a daily basis is going to change but I think it is safe to assume that over the quarter we will be buying some shares and if you want to say on average we are going to purchase some each and every day, that is probably not a bad assumption.

I think as it relates to 2014, Brett, we really haven't turned our mind to that.

What we will do in November is we will get some visibility certainly to what has happened in 2013, a clearer view on 2014, what our cash requirements are and we will make a recommendation to our Board as to the level and extent of NCIB for 2014 but that is still to be determined.

And as you think about allocation of capital, can you just remind me your preference and allocation of capital acquisitions versus share repurchase and so forth?

Our preference is actually number one, is growing the business organically where you go out and you win some business and you either expand -- hopefully you can just put been it into your existing operations or you might have to add some capacity, build a new plant.

That is our preferred method of growing.

Certainly we will be and have looked at acquisitions to supplement our growth and we are looking at acquisitions.

Brett, a big focus is technology, what technologies are out there that could supplement what we have, complement what we have, advance what we have.

We are also looking at acquisitions that could assist us to grow faster in markets that are a priority to us, i.e., emerging markets and also if we could diversify our customer base.

So our primary focus is investing in the business organically or through acquisitions, continuing to pay a quarterly dividend that we would like to see grow on an annual basis.

And when you sit back and look at the cash you generate, your investment opportunities and you say well, if we have got additional cash that we want to return to shareholders then we will do that by way of our normal course issuer bid share buybacks.

Thank you very much, gentlemen.

Good quarter.

Ravi Shanker, Morgan Stanley.

Thanks.

Good morning, everyone.

If I can just follow up on that last topic, you guys have said recently that you are open to maybe adding a turn or more of leverage to the balance sheet, maybe pursuing some selective divestitures.

When do you think we can start to see some of those actions?

Do you have a timeline in place?

Do you think something happens around the analyst day which I think you have scheduled for November?

Don, do you want me to attempt that or do you want to try that?

We talked about, we have been spending a lot of time with the Board and we are going to have another session with them, the deep dive in September on our product strategy.

What we have said in the past is ideally we would like to make sure we have got really good capability and global coverage in all of our products.

So we've looked at a number of different areas where we were not as strong as we would like to be and we have considered divestitures and in a couple of cases, we have actually looked at the business plan, worked hard on it and the business looks pretty healthy going forward.

And it would it make sense for us to sell it at this point in time.

Others we are still analyzing; we want to make sure we have done everything we possibly can with the business going forward.

As far as acquisitions are concerned, we will only comments on acquisitions when we are ready to make a comment on it obviously.

With respect to the capital structure which was your other question, I think you were saying where is your capital structure going to end up being?

And we certainly as the management team and the Board are comfortable with the right opportunity with a modest amount of debt.

I think what you will see happening over time is that our net cash balances are going to move to most likely a nil balance and if a good opportunity comes up where we have confidence and we need to take on some debt to make a substantial capital investment or an acquisition, we would be comfortable with doing that.

But we would be cautious in terms of the amount of leverage we would put on the balance sheet.

We definitely don't want to have debt that over levers the Company and may result in a credit downgrade for us.

Very focused on maintaining our high investment credit rating.

Got it.

But you have about $1 billion of net cash right now and you can basically go to zero and not run up against those constraints so you will only do that if you are pursuing a big acquisition you said?

In an ideal world, if we can contain our capital we've talked about $1.4 billion and basically the ongoing business, so we would like to try and find the right acquisition that meets all of the criteria that Vince just outlined and I think that would be the logical point we would see our cash utilized.

We would rather do that.

If it turns out we just don't think that we can come up with anything in the short term, then we can obviously continue to buy back our shares, but as Vince just outlined, it is not our first choice but we will reanalyze that and give an update to where our thoughts are in January.

Understood.

Just on Europe not to beat that horse but have you seen any kind of pull forward of any of the benefits that you expected to see?

Because you have been kind of guiding to about 100 basis points of margin increase every year.

I think you are on track to do a little more than that this year with this pretty strong number in Tokyo.

So would you say it is able forward or would you say you are just running ahead of your expectations?

Q2 is seasonal as we talked about it but you can look at the numbers and see that as well.

We are about where -- I am pleased with the results and maybe slightly ahead of where we thought we would but we've got so many moving pieces over there it is really hard to the precise.

That is why we were seeing over a four- to five-year period, now over a three- to four- year period where we think we get the margins to.

I am pleased with what we have seen in the quarter but we are continuing.

I don't think anything particularly unusual about it so we just need to keep on plugging away.

There is going to be some seasonality.

The second half of the year is going to be different than the first half.

We are at the high watermark in Q2 so there is going to be seasonality that kicks in that is going to have an impact on the overall margin level.

Understood, understood.

Just finally, can you remind us again about the cadence of E-Car in the back half of the year because you had the amortization kick in in the third quarter of last year.

But will it continue at this $39 million, $40 million rate for the next couple of quarters when you are looking at a year-on-year your walk or will it go down to zero by the fourth quarter?

Ravi, in the next two quarters, the amortization of $39 million or $40 million per quarter, remember that last year in the second half of the year, we actually had E-Car amortization in our numbers.

In Q3 of 2012, we had $13 million.

So if you look at Q3 2012 to Q3 2013, there will be an incremental E-Car amortization amount of $27 million.

In Q4 last year, we had full amortization of about $40 million and this Q4, it will be about the same.

So quarter-over-quarter, there won't be any change as a result of the E-Car amortization.

The next change is going to take place in Q1 2014 when the E-Car amortization goes away and then when we are comparing Q1 2014 to Q1 2013, we are going to have to talk about that Q1 2013 by the way had $40 million of amortization so we can take that into account when we are looking at the comps.

Thank you very much.

Itay Michaeli, Citi.

Great, thanks.

Good morning, everyone.

Just wanted to go back to Europe on the revenue side.

It looks like the growth rate was positive.

You certainly had some M&A and currency benefit but was the outperformance mostly tied to launches or just improved customer and content mix.

If you could just talk a little bit about that.

Mostly launches actually.

The biggest chunk of our sales other than -- I mean there was some foreign exchange, foreign exchange was about $30 million in the quarter and we talked about $130 million in acquisitions and the bulk of the rest was launch activity.

So the Paceman, for us Daimler A Class was big, Ford Transit, Ford Kuga.

There's a bunch of programs that we have that we talked about in our launch schedules.

Excellent.

Then just a question on tying in the new business with CapEx.

I mean it sounds like you are still very pleased with your new business booking activity.

CapEx seems like it is running a little bit lower.

Are you seeing any shift towards new business in the out years coming at existing plants versus new plants or maybe just talk a little bit about the mix roughly in the new business backlog between new versus existing footprint?

The new business that we are being awarded is just a whole bunch of business.

Part of it is replacement business.

We've got an existing business that is going to roll off and new programs going to come on and we will take that on and some of that as we have done historically will be at higher content.

There will be business where we are going to have to expand some of our operations and as I think through the outer years of our business plan, we also have the new facilities coming on for business that has been awarded.

So it is a mix of all of it.

I don't have it summarized in terms of how much of it is replacement, how much of it is expansion of existing facilities and how much of that is new facilities at this point.

Okay, that helps.

Lastly, there has been some talk about new warranty terms that GM is sort of asking suppliers to take on.

Can you maybe talk a bit about if there is any potential impact to you from that and maybe just the overall OEM pricing environment in general?

I don't know the details.

I know we our legal team has a detailed look at the GM warranty.

My understanding is anything we do is on a go forward basis and obviously we just need to complete the understanding of what they are trying to do is clarify the warrantee.

So when we quote depending on what type of business it is and how much engineering we do, we just need to make sure we completely understand what they are asking for.

I don't have the details.

We are going to do a lot of discussion about that right now but I wouldn't think it would change anything substantially because if we -- our products where there might potentially be warranty where we think we'd get higher exposure then typically people will bake that in.

But I think it is more of a clarification but we can always get back to you on more detail associated with that.

Absolutely.

That is very helpful.

Thanks so much, guys, and congrats.

Peter Sklar, Nesbitt Burns.

Don, I wanted to ask you about your outlook for the North American business and really putting aside the cycle if you still think there is a good opportunity to grow the North American business given that you already have a very high operating margin?

I believe you have very few plants that are underperforming.

I think you have largely implemented your world-class manufacturing in North America.

And also just from kind of an arithmetic point of view, the business is pretty big so it is hard to have a high growth rate.

So I am just wondering if you still think there is room to grow your North American business putting outside the volumes?

Well, I think unfortunately, we still do have some underperforming businesses in North America.

We had to put a significant launch issue back in the latter part of Q4 mainly through Q1 and also trickled through into Q2 in a Mexican facility.

So we still need to get that completely turned around and we do have a number of others but they are not huge in the overall scheme of things because we are quite large.

Previous question on where we are building new plants.

In Canada, we have got pretty good coverage.

We are seeing a number of opportunities where we are building new plants in the states and also in Mexico, we are continuing to see lots of quoting activity.

So although we do have a lot of facilities there, we are expanding some new plants.

Hopefully that gives some more clarity.

I don't have it on top of my head we can give that an update probably in January.

So I think we have room to grow.

We are the largest supplier but we also have the most diverse amount of products and as we are bringing new technologies like aluminum diecasting, thin-walled aluminum diecasting and there are opportunities to grow with even our traditional markets in our stamping area and a few other areas.

So I think we will continue to grow.

I don't think there is huge growth in dollar content per vehicle and to get into that sort of discussion, you need to look at who has got what market share etc., etc.

But I think we have with the guidance we have given is if we can continue to grow our business at a reasonable pace and keep our margins where they are now, then we will be happy in North America.

But we do have a number of new plants going up and we do have a significant amount of our capital still being spent in our Canadian operations, in our US operations, and also in Mexico and the only way we spend the capital is if we have got booked business, because we are not building plants or buying equipment unless we've got something we have booked there.

So I think we will continue to see pretty healthy business in North America.

Lastly, could you give us an update on the issues in Brazil, which issues have been resolved and what remains outstanding?

In Brazil, we bought two seating companies, one was in Brazil, one was is in Argentina.

Argentina continues to give us a significant problem financially.

We have high inflation there.

There's lots of issues on getting parts in and out of the country, labor inflation and very difficult discussions with our customers to get them to pay for the increases and not just us.

I think it is everybody down there.

And also the customers are also losing money -- most of them.

I don't know what they have reported.

I haven't listened to what they say but I think it is a difficult financial situation for all of the car companies as well specifically in Argentina but also in Brazil in a few areas.

So as much as we take one step forward and we get one step pushed back because of the economic issue specifically in Argentina so we are making headway there but it is not a short-term fix.

We don't think the economy is going to be a short-term fix.

Brazil, we've got a combination of a couple of things going on, some of them are operational and we're making good headway there.

Some of it is pricing because of again, because of things that are going on inflationary or the cost of bringing parts in.

So we are continuing to work hard and we need to see some more substantial improvement in our South American operations.

We are still not making money there.

We haven't given any forecast unless you want to add anything, Louis or Vince, where you maybe talked a bit more in January.

But it is an uphill battle so I don't see us being aggressive in growing our business in a big way in Brazil and Argentina -- and most of our facilities are in Brazil -- until we have got a good handle on what we are doing down there but we are certainly making headway especially in the operational issues and the launch issues.

Okay, thank you very much.

(Operator Instructions).

David Tyerman, Canaccord Genuity.

Good morning.

Just a question on the organic growth so you have covered off North America there, Don, and Vince, you said that is your preferred way of growing.

Is there an opportunity to grow or accelerate the organic growth sufficient that you could consume a larger proportion of your large and growing free cash?

Yes, I will take a shot at that.

Ideally we'd like to continue to grow in some of the emerging markets which in the emerging markets my mind would be primarily our focus would be in China and maybe other areas of Asia, Eastern Europe.

We have got quite a bit of operations now in Russia.

We are still seeing some opportunities over there.

India, we continue to grow not in a really fast pace.

We want to make sure that we can make money there.

We have got the management to digest and then we take on.

And there was a question that was asked, we didn't get a chance to answer it on where we are in margin or pressure from the various OEMs.

I would say to a large part at least the customers, our major customers are profitable.

They would obviously like to make more profit but I think there is a pretty balanced view on what they want from a technology, from a VAVE sort of engineering cost out rather than just asking us to continue to lower prices.

There's obviously a lot of commercial discussions go on all of the time but it is relatively balanced in the level of discussions.

So can we book enough business that we would be required to spend a lot more than $1.4 billion in the next couple of years?

Maybe but right now our plan shows about that same level of growth and we certainly want to put the cash to work.

But I want to make sure we don't do things that are not wise business decisions in the long-term either through acquisitions or aggressively going after business that won't hit our hurdle rate.

So I think for the foreseeable future, I don't see any massive shakeouts in the supplier industry North America.

It is pretty healthy or even in Europe (inaudible) some continued fallout.

But things are fairly stable right now which is a good situation to have.

So I would think we will continue to grow our business at the same rate we have done it in North America, Europe, faster in China.

See what is going on in South America and we will continue to -- can't really give a lot more definition than that.

Let me just add to what you just said.

Your question is -- are we going to be able to invest the cash we generate from operations organically?

I think that is really difficult to do.

You think about that historically, even look at last year, we had record levels of capital of $1.3 billion and we have made about $600 million of acquisitions and paid some dividends.

And added it all up at the end of the year, our cash balance didn't change with $600 million of acquisitions.

We have historically had to go back a number of years where we probably put in $300 million, $400 million, $500 million, $600 million a year.

So if there aren't any acquisitions, the cash flow we generate from our business exceeds the amount that we invest in the business and the amount that we pay back in dividends and that is why we can sort of sit back and look at NCIBs.

We use those as sort of a toggle switch to turn on and off depending on what our cash requirements are going to be.

Okay, so I mean this is a wonderful problem to have.

You want to get to your cash balance down to zero but you are generating more cash.

Is it the thought to or -- the Board's review thinking we are generating so much cash we can't catch up.

Maybe we should review our dividend policy and move beyond the 20%?

Or is it just you use that toggle switch all of the time and try to get it down the zero?

We have had a lot of discussions on that.

In an ideal world, we come up with some really good opportunities for accretive acquisitions that fit all of our criteria that Vince mentioned earlier including technology.

And we are looking at a lot of different things.

However, we don't want to rush out and do one we will regret in the future.

So I think eventually there will be some things come along that we think are really good opportunities and I think we would increase our spending on M&A, that would be my expectation.

But a lot of discussion at the Board.

I think we are pretty happy with the dividend yield we have got and we can always do something.

That is why we decided to do more share buyback and we will reconsider that at the end of the year, as Vince already said.

So I think it is something we have to look at on an ongoing basis.

Okay, fair enough.

And then just on South America and for that matter Asia, the whole Rest of World, can you give us some idea of the scope of the issue in South America?

Like is this tens of millions of dollars that it is costing you or is it some smaller number?

And then on Asia, obviously the new facility costs are still fairly elevated.

Do you have a sense of how that rolls such that you can get to where that 75% of North America margins is this like five years out or any thought there would be helpful?

David, in terms of the new facility contributions focused on balance of this year, we are expecting some -- on a comparable basis some tailwinds in our Rest of World segment and coming both in Asia as well as South America.

So it is going to help us a little bit in the second half of the year compared to kind of a year ago.

With respect to -- when I look at South America all together and there are some launch costs or new facility costs there -- but when I look at the magnitude of the losses in South America, they are in the tens of millions of dollars.

They are not in the sort of under $10 million, they are more significant.

Which means that even though we have all of these facilities launched in China that when we look at Asia-Pacific as a region, it is profitable and it is able to absorb the losses in South America as well as start-up costs in Asia.

Okay, but is it fair to say that the new facility costs in Asia are still at an elevated level?

The new facility costs in Asia for the first half of this year had been at a pretty elevated level.

They are continuing at an elevated level for the second half of the year but we are seeing that trend downward in terms of the investment in new facility costs.

Okay, thank you.

More or less on track with our expectations.

Okay, perfect.

Thank you very much.

Justin Wu, GMP Securities.

Good morning.

Just my first question is I want to revisit the European mid-decade target.

How much of that target is predicated on volumes kind of getting back to more normalized levels or do you think you can achieve that based on the current run rate?

Justin, we do have some modest increases in volumes if you look out a couple of years but really the improvements are not driven by requirements of higher volumes, it is more driven by things that we are doing internally so the restructuring that we are doing and new facilities that are growing in Eastern Europe are adding and it is more stuff that we can control rather than waiting for volume to come back.

Okay, I guess that leads me to my next question which is if you kind of look out in the longer run perspective on Europe, is there any reason why European margins can't get to kind of North American levels assuming that we get better volumes?

Is there something structural within Europe that would prevent you from doing that?

If you look at an average of where the margins are assuming North America production is high right now and Europe is a bit low right now but if you look at average over a period of time, we looked at outside studies, it would say that there is no particular reason why margins in North America would be any higher or lower than Europe.

And you would have to look commodity by commodity.

In our case, we have been in North America a lot longer.

We have got much bigger plants over here, higher capital.

So you would expect the return on that capital to be higher.

So there is no fundamental reason why one should be different than the other.

But given the history and where we've got our investment in the product lines we are in etc., etc., then I think if we can get to the levels we have talked about, that is certainly in the next three to four years, that is a reasonable target.

I don't see us getting to the levels we are in North America unless we make substantially more investment in some really big assets, plants.

Justin, just another way to put what Don talked about is, if you look at our business in Europe and compare that to North America on a relative basis, we have more capital intensive businesses in North America compared to Europe.

So even if each one of those business units -- some of our business units are operating at the same operating margins on a consolidated basis in Europe, our margins would be lower because of the different level of capital intensity.

Keep in mind too, when we report European margins in Europe, we also run (inaudible) on the assembly operation side, the Magna (inaudible) business model is one where you buy a lot of the components and you build a (inaudible) and most components plus your markup or whatever cost you have got back to the customer.

We end up with high sales, high cost of sales and lower margins -- a decent return on investment but when you have to put Magna Star into the mix of what we are doing in Europe, our margins, our reported margins will be lower than North America.

Okay, understood.

Thanks for the color.

Just in terms of if you look at your backlog or your book of business, can you give us a sense of what the launch activity will be next year if you expect the launch cost to accelerate or stay flat?

Justin, we really don't look that closely at launch activity in the out years until we get to our business plan process we are looking at -- sales and cadence of new programs coming on stream and that and we will give that guidance when we get to January in Detroit.

But we really don't look at it -- we need to look at our business plans and our business plans are -- we are just getting kicked off now.

Okay, thank you.

Todd Coupland, CIBC World Markets.

Good morning, everyone.

I have two questions.

The first one is on North America.

I am wondering if the strength in the US truck cycle upgrades and average age being up there and housing starts doing well, could that mute seasonality this year with all of the new launches that are coming out from some of your major customers?

No, I don't think so.

I think overall if we look at seasonality quarter by quarter, it is not significantly different than what we have seen in the past years so I wouldn't expect -- I wouldn't make too much of that.

Second question is I was looking for an update on Magna Steyr.

I know that some of the major programs there are up for competitive tender and I just wanted you to give us an idea on the timing of that and what is the risk of a loss and/or keeping that business and what would be the impact if it went away?

Thanks very much.

We have a number of different customers in Steyr but the biggest one is with BMW.

There has been lots of discussions in the past and what we have said is we are obviously not going to comment on anything until BMW is comfortable with that and they have made all of the decisions they have to make.

We continue to have lots of discussions with BMW and all I can say is they have confirmed with us that they see us as an ongoing strong partner with them both in vehicle engineering as well as assembly.

However, until we make a decision, until they make a decision finally what they're going to be doing in various programs, and we can't comment on it but as soon as we find out we will let you know.

And the programs we have got are multiyear programs so they run out for a while.

But we need lead time obviously to get the new product launch in there.

So I'm not going to give a date when we would hope to have something ready but as soon as we find out and BMW is comfortable, then we will give everybody an update.

In terms of bigger programs in there, the Country runs until 2016 and the Paceman into 2017.

Thank you, that is it.

Thank you.

Mr. Walker, there are no further questions.

Sir, I will turn the call back over to you for any closing remarks.

Okay, well I appreciate everybody calling in.

We are, as I said at the outset.

We are pleased with the quarter.

I think we've got a lot of good things going on especially in our initiatives in world-class manufacturing we are really focused on product and process innovation.

So it has been a key focus.

I think we are seeing some of the results come through.

It is also nice to see that our customers, the markets certainly in North America doing fairly well and the profitability of our customers is good.

So it allows the whole industry to be a bit more balanced and make the right long-term decisions that are win-win especially for suppliers of the technology and are competitive.

So I appreciate everybody's time and have a great day.

Thank you.

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 all lines.

Thank you and have a good day.