Magna International Inc (MGA) 2013 Q3 法說會逐字稿

Welcome to the Third-Quarter 2013 Results Conference Call.

(Operator Instructions)

As a reminder, this conference is being recorded Wednesday, November 6, 2013.

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

Please go ahead.

Thank you.

Good morning and welcome to our third-quarter 2013 conference call.

Joining 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 third quarter ended September 30, 2013, and 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 as a reminder, the discussion today may contain forward-looking information or 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 happy with the performance in the third quarter.

In North America, we once again had strong operating performance with an adjusted EBIT percent excluding E-Car amortization of 9.2% for the third quarter.

In Europe, our progress continues with solid reported adjusted EBIT of $72 million in Q3 compared to $13 million in Q3 of 2012.

This marked the 7th consecutive quarter of increased year-over-year adjusted EBIT.

We recorded restructuring charges this past quarter, as we continue to take actions to improve European profitability.

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

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

Year to date, Asia has performed better than our expectations.

And South America, while showing a year-to-date improvement in EBIT compared to 2012, has reported less improvement than we had anticipated to come into the year.

We have plans in place to improve our South American business from the loss positions that we are currently in.

We recently announced the opening of a number of new facilities, including the powertrain facility in China; a seat component facility in Serbia; a facility in Turkey that will support our exteriors and mirrors capabilities; and two facilities in Mexico -- one for interiors and one for metal forming.

The launch of these new facilities all over the world demonstrates our continuing activities to expand our footprint and business globally to support our customers wherever they are building vehicles.

Lastly, certain of our facilities were recently recognized for demonstrating excellence.

11 Magna divisions across four countries received General Motors Supplier Quality Excellence awards for demonstrating some of the highest levels of quality performance over the past 12 months.

And, according to JD Powers 2013 Seat Quality and Satisfaction study, Magna-made seats on the Chevrolet Equinox and GMC Terrain ranked highest and second highest, respectively, in the mass-market compact CUV and MPV vehicle segment.

These awards recognize our ongoing efforts to strive for product excellence and high quality in support of our customers.

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

Thanks, Don, and good morning.

I will review our financial results for the third quarter ended September 30, 2013.

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

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

In the third quarter of 2013, we recorded restructuring charges entirely related to our European exteriors and interiors business.

These reduced operating income by $48 million, net income by $33 million, and diluted EPS by $0.14.

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

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

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

In the third quarter, our consolidated sales increased 13%, relative to the third quarter of 2012, to $8.3 billion.

North American production sales increased 11% in the third quarter to $4 billion, reflecting, in part, a 4% increase in vehicle productions to 3.8 million units.

In addition, the increase is a result of the launch of new programs, acquisitions completed during or subsequent to the third quarter of 2012, including STT technologies, and an increase in content on certain programs.

These factors were partially offset by the weakening of the Canadian dollar against the US dollar, programs that ended production during or subsequent to the third quarter of 2012, and net customer price concessions.

Relative to our previous outlook, we also had better-than-anticipated mix of ongoing programs, which drove average content up in the third quarter of 2013.

European production sales increased 18% from the comparable quarter, while European vehicle production increased 1% to 4.4 million units.

The increase is primarily a result of the launch of new programs; acquisitions completed during or subsequent to the third quarter of 2012, which substantially related to ixetic; and the strengthening of the euro against the US dollar.

These factors were partially offset by lower production volumes at certain existing programs and net customer price concessions.

Rest of World production sales increased 16%, or $81 million, to $574 million over the comparable quarter, primarily as a result of the launch of new programs, particularly in China and Brazil.

This is partially offset by the net weakening of foreign currencies against the US dollar, including the Brazilian real and Argentinian peso, and net customer price concessions.

Complete vehicle assembly volumes increased 16% from the comparable quarter and assembly sales increased 10%, or $60 million, to $680 million.

The increase largely reflects 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 lower assembly volumes for the Mercedes-Benz G-Class.

In summary, consolidated sales, excluding tooling engineering and other sales, increased approximately 13%, or just under $900 million in the third 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 6%, or $39 million from the comparable quarter, to $695 million.

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

Gross margin in the quarter increased to 12.8% compared to 11.7% in the third quarter of 2012.

The increase in gross margin percentage was primarily due to margins earned on higher production sales; incremental margins earned on new programs that launched during or subsequent to the third quarter of 2012; lower commodity costs; and productivity and efficiency improvements at certain facilities.

These items were partially offset by higher costs incurred in preparation for upcoming launches; our larger amount of employee profit-sharing; increased pre-operating costs incurred in these facilities; an increase in complete vehicle assembly sales, which had a higher material content than our consolidated average; higher tooling, engineering, and other sales that have low or no margins; programs that ended production during or subsequent to the third quarter of 2012; and operational inefficiencies and other costs at certain facilities.

Magna's consolidated SG&A as a percentage of sales was 4.9% in the third quarter of 2013, higher than the 4.6% recorded in Q3 2012.

SG&A increased $67 million, to $411 million in the third quarter of 2013, primarily due to increased costs incurred in the facilities; an increase in reported US dollar SG&A related to foreign exchange; acquisitions completed during or subsequent to the third quarter of 2012, including ixetic, E-Car, and STT; a $6-million revaluation gain in respect of asset-backed commercial paper in the third quarter of 2012; and higher labor costs and other costs to support the growth in our sales.

Our operating margin percentage was 5.3% in the third quarter of 2013 compared to 4.7% in the third quarter of 2012.

In Q3 2013, EBIT includes $39 million of amortization associated with the E-Car transaction, or $31 million after tax.

In Q3 2013, this amounts to 0.4% on the operating margin percentage for the quarter.

By comparison, in Q3 2012, EBIT included $13 million of amortization associated with the E-Car transaction, or $11 million after tax, reducing the operating margin percentage by 0.2% in Q3 2012.

Excluding this amortization, our Q3 operating margin percentage was 5.7% compared to the 4.9% last year.

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

In Q3 2013, our effective tax rate declined to 20% from 24.8% in the comparable quarter of 2012.

This is primarily as a result of favorable audit settlements of prior taxation years and a valuation allowance release, partially offset by non-credible withholding tax on the repatriation of funds to Canada.

Net income attributable to management increased $87 million, to $352 million for the third quarter of 2013 compared to $265 million in the comparable quarter.

Diluted earnings per share were a Q3 record of $1.53 compared to $1.13 in the third quarter of 2012.

Diluted earnings per share were negatively impacted by $0.14 in the current quarter and $0.05 in the comparable quarter as a result of the amortization of E-Car intangibles.

Excluding the E-Car amortization for both years, diluted EPS would have been $1.67 for Q3 2013, an increase of 42% over $1.18 for Q3 2012.

The favorable tax rate in Q3 2013 benefited us by approximately $0.07 in the quarter.

The increase in diluted earnings per share was 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 cash 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, as well as stock options issued.

During the quarter, we purchased 3.7 million common shares.

Subsequent to the third quarter of 2013, we repurchased the remaining 1.1 million common shares under our current NCIB, completing the repurchase of the entire 12 million common shares authorized.

I'll now review our cash flow and investment activities.

During the third quarter of 2013, we generated $574 million in cash from operations prior to changes in non-cash operating assets and liabilities, and invested $110 million in non-cash operating assets and liabilities.

For the quarter, investment activities amounted to $347 million, comprised of $280 million in fixed assets and a $67-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 December 13 to shareholders of record on November 29, 2013.

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

This new normal course issuer bid is expected to commence on or about November 13 and will terminate one year later.

The Board's decision to approve a new share repurchase program reflects their confidence in our business prospects, our desire to maintain financial flexibility, and our objective to provide increased value to shareholders.

Our balance sheet remains strong with $723 million in cash net of debt as of September 30, 2013.

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

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

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 continue to expect 2013 North America light-vehicle production to be approximately 16.1 million units, unchanged from our August outlook.

We expect 2013 total European light-vehicle production to be approximately 18.8 million units, compared to 18.6 million units in our August outlook.

This increase to our European forecasted light-vehicle production substantially reflects the higher-than-anticipated third-quarter production.

As Vince noted earlier, in North America, for the third quarter, production mix on existing platforms outperformed our expectations, driving a high implied-average content per vehicle.

We expect the fourth quarter implied-average content and product mix to be closer to the levels seen in the first half of the year.

The increased European production assumption is expected to lead to increased full-year European production sales relative to our August outlook.

Higher-than-anticipated Q3 assembly sales and a stronger euro have resulted in an increased full-year assembly sales outlook.

And weaker currencies in South America, relative to the US dollar, have resulted in a reduced Rest of World production sales outlook.

As a result, we expect total sales to be in the range of $33.9 billion to $34.8 billion, compared to the range of $33.3 billion to $34.7 billion from our August outlook.

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

Implied in our total sales for Q4 -- sorry, is Q4 tooling, engineering, and other sales in the range of $800 million to $900 million, which is higher than our year-to-date run rate and higher than our previous expectations.

We expect our consolidated operating margin percentage, excluding $158 million of amortization of intangibles related to the acquisition of E-Car, to be approximately 5.9% compared to our previous outlook margin of approximately 5.8%.

The increase reflects better-than-expected operating margin in the third quarter of 2013, partially offset by the higher tooling, engineering, and other sales in Q4.

We expect our effective tax rate to be approximately 22.5%, down from approximately 23.5% in our August outlook.

The decline reflects the lower Q3 tax rate, as articulated earlier.

In the full-year 2013, we expect fixed-asset spending to be approximately $1.3 billion, down slightly from approximately $1.4 billion in our August outlook.

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

As of the year-to-date third-quarter 2013, we've recognized $54 million in restructuring charges.

That concludes our formal remarks.

Just a reminder to everyone that we will be holding an investor day in New York City on November 21.

We believe it will be an informative day for investors and analysts, and I encourage you to register and attend the event.

Any questions, please feel free to call me.

Thanks for your attention today.

We'd be happy to answer any of your questions.

(Operator Instructions)

Peter Sklar, Nesbitt Burns.

Although you took up your operating margin guidance, based on the year-to-date performance, your Q4 operating profit looks a little bit weaker than expectations.

Are there any negative developments in the fourth quarter that could have a negative or could be a headwind for your anticipated results for the quarter?

It's Vince.

Louis tried to address that during his formal remarks.

I think the way to analyze it is, if you look at North America and Europe and production volumes, implied in our guidance, North American production volumes, the implied number for Q4 is about 4 million units, which is a little higher than where we are in Q3.

In Europe, the implied volumes for Q4 are almost identical to Q3.

But a couple things to note -- one, we had, I'd say, pretty good mix in Q3 and we had some good implied content per vehicle.

We see our content per vehicle moving more to the normal type range as in the first and second quarter of the year.

The second thing to note is that, when you look at implied complete vehicle assembly sales or implied tooling and engineering sales in Q4, they're higher than where we were in Q3.

In fact, at the midpoint of our ranges, the vehicle assembly sales, tooling, engineering, and other sales are higher than any of the quarter we had in the year.

When you put that all into perspective, and say, we've got North America stronger volumes, content lower than Q3, overall, Europe, even though production's about the same, implied production sales are higher, part of that is due to exchange.

Again, European margins are less than consolidated margins, that's a negative on a consolidated margin standpoint.

When you look at tooling and engineering sales where we make little or no margins and higher complete vehicle assembly sales and put that all into the mix, that's going to imply a lower operating margin in Q4.

That explains the change, but we don't foresee at this point, Peter, any negative surprises in the quarter.

Okay.

When you talk about your mix reverting to what was typical, what we saw in the first half of the year, are you talking about North America and Europe or just North America?

No.

North American program mix is what we're talking about.

Okay.

Which is going to be implied in the content per vehicle.

Right.

Okay.

I have just one other question on a different matter.

You've deployed a lot of capital in the Rest of World over the last few years.

Can you review where you are in the ramp so that capital, in terms of the plants that you've greenfield, particularly in China and Russia, and any other jurisdictions that you feel are significant?

I'm just trying to get a feel for where we are on the ramp curve.

Yes.

I can't remember the numbers exactly, Peter.

This is Don here.

We still have a number of plants coming onstream, especially one very big powertrain plant in China so it's just starting to ramp up now.

We're still having some start up costs in China, but if we exclude those, our operations in China are performing about where we expected them so good results.

We have a number of issues in South America.

Some of them are product launches, but most of the issues we have down in South America are related to commercial recovery inflationary issues in Argentina, also in Brazil.

A lot of them are commercial discussions we're having.

Peter, if you look at the three reasons that we operate, through North America, Europe, and Rest of World, when you think about these facility costs, in 2013, expect this trend is going to continue in 2014 as well.

In both North America and Europe, on a year-over-year basis, new facility costs are less in 2013 versus 2012, so that's the tailwind to operating margins as these facilities starts to ramp up and produce the sales.

We're seeing some benefits in 2013 and that's just continuing in 2014.

The one place that on a year-over-year basis is negative is still the Rest of the World segment.

It's primarily China and India, where we're seeing some substantial growth.

I need to see the business plans that we're putting together to just see exactly one that turns around.

I'm not, at this point, sure whether China and India continue to be a drag in 2014 based on new programs and new launches or what they're worth it to some benefits.

I'll be able to update that in January at the Detroit Auto Show for you.

Right.

Okay.

Thank you for your comments.

John Murphy, Bank of America Merrill Lynch.

First question, on North America, when we looked at the growth that you had in the quarter up 11% versus production on four that was pretty impressive and you're citing mix as a big positive in the quarter.

As we look at this, GM's still ramping up on its large pickups, it's got its HDs launch early next year, you've got the Ford F-150 in the second half of next year.

It seems like there's a pretty good runway of positive mix for you in North America, at least through the end of 2014.

I'm just curious why you are really pointing out that mix in North America might revert to something less favorable than what we saw in the quarter, because it looks like it will it be a lot more favorable than what we saw in the first half of 2013 going forward?

John, the comment really refers to Q4, not into 2014.

While we did have part of the mix on some programs, in the [case of excess] was kind of below the overall decline Q2 to Q3 and we do expect that to get a little bit better.

But there's some positive and negatives from things going in the opposite direction, things like the Grand Cherokee and (inaudible) were very strong in the quarter, so it's more referring to Q4.

We really haven't given any indication, in fact, we don't really have a role, if you will, of 2014 looks like.

I think when we get to January, we'll have a lot better view of content growth and what we're expecting for 2014 versus 2013.

My comment is really related to what we expect in Q4 versus Q3.

Okay.

That's helpful clarification.

As we look at CapEx going from $1.4 billion to $1.3 billion, should we be reading anything into that or is that just good efficiency and thrifting or was there anything that was delayed in any customers because of -- resulting in that?

What it is that, obviously, we have a bottoms up approach to looking at capital and as we get close to the end of the year and you look at how much capital's been approved, we're just not going to spend it all.

That's not our view.

It's just being pushed into 2014.

It's timing.

Remember, we're a pretty big company, we have a lot of businesses out there in every division, estimates off by $200,000, $300,000, $400,000, $500,000 it adds up to quite a bit of money on a consolidated level.

The other thing we've been doing is part of world-class manufacturing initiative, which we've got a lot effort on.

We have been looking very carefully at program capital to try and figure out how we can do things.

We have more flexibility, spend less money, but it's not required.

We've been doing cardboard factories and all that has a benefit of giving us probably better production facility at slightly lower capital, so it's a combination of things but there's no concerns there.

Okay.

That's encouraging and then Vince, on the amortization of E-Car, that is done as of the first quarter of 2014.

When does that roll off?

No.

It's done in December 30, 2013, John.

Yes.

It's done as of 2014, we're not going to have it in our numbers, correct?

Yes.

Unfortunately, John, in Q1 2014, when we talk about Q1 2014 versus Q1 2013, we're going to have to then readjust Q1 2013 to bring everything in line, but we won't have any more charges in 2014 related to that amortization.

Okay.

That's helpful.

On capital allocation, obviously, you're getting a little bit more aggressive on buying back shares.

Once again with, it looks like, the new authorization.

I'm just curious, are you seeing less opportunities on the M&A horizon and that's why you're looking at your shares?

Or is it just because your shares are inexpensive and it seems like a good time to buy them and it's a good use of capital?

I'm just trying to understand how you're balancing this out and why you're getting so much more aggressive.

It's an encouraging thing, I'm just trying to understand your thought process.

A long discussion, again, at the Board meeting yesterday about cash, where we want to be from a net cash position.

As we said in the past, our preference would be to spend the money on new programs greenfield or adding to existing facilities because we know exactly what we're getting, we have [Dakota] and we've always had pretty good results with that.

Second priority would be to spend it on acquisitions.

Our view and who knows -- but our view is, the economy seems to be going along pretty well in North America.

It seems to have hit bottom in Europe.

We still are looking at the number of acquisitions, but things aren't at a fire sale.

We're looking at some technologies, so we're going to look at a normal course issuer bid, again, of 12 million shares.

The intent would be if we don't come up with acquisitions that we would -- if we do come up with some great opportunities for acquisitions, then we might cut back as we're looking at where we want to end up from a cash balance standpoint.

But if we don't have money, if we don't find good acquisitions, I don't want to rush into an acquisition for the sake of doing an acquisition, then we'll be buying back shares.

There's -- I wouldn't say a whole lot of things out there we're aggressively pursuing, but we are looking at a number of different opportunities out there.

It's hard to tell, we'll just have to track and see how things go.

John, just to add a little bit more color we've talked about evolving our balance sheet over time.

We've completed the 12 million shares under the last bid.

You sit back and look at our business and Don talked about stable economic environment, we do generate quite a bit of cash from operations.

We are investing in the business through CapEx.

We have the ability to continue to buy stock.

How quickly we do that's going to depend on opportunities that come our way, whether it's capital or acquisitions or just a change in the macroeconomic environment.

It's a good position to be in.

We'll move on the year buying back stock and adjusting that based on opportunities that we see.

Great.

Just one follow-up on this, it's about horseshoes and hand grenades, it's about $1 billion depending on where the stock is.

Should we think about that $1 billion being allocated out to either share buybacks or incremental growth investment or an acquisition?

You're looking in those three buckets, but it is $1 billion, roughly, that you're saying outside of what you're doing right now, as far as operating the business, that will be used for incremental value creating events to shareholders.

Is that a fair characterization?

You're going to have to figure out exactly how that goes depending on market conditions, but it's $1 billion?

Is that correct?

I think it's a good way to look at it.

I wouldn't have classified it that way, but I think it's probably a good way to look at things.

If something changes dramatically in the economy, we may change our view, but assuming our view of the world and everybody else's view of the world, I think, is pretty similar assuming that is what happens, I think that's a good way to look at it.

Okay.

Thank you very much.

Rod Lasch, Deutsche Bank.

It's Pat Nolan on for Rod.

First, on the European mix impact, was that primarily just because a lot of the new programs came out with a really strong mix or is there some other -- something else going on as far as customer mix is in the quarter?

It wasn't European mix.

It was the North American mix that I was referring to.

Okay.

In that case, the European content per vehicle is up pretty nicely.

Was that primarily currency or is that is a mix impact as well?

I think it content was pretty much in line with the second quarter.

Yes.

I think when you look at it, Pat, year-over-year, there are a number of things.

We benefited from a number of program launches from a year ago.

Acquisitions have also added to sales in a year-over-year basis.

Remember, we completed the acquisition of Ixetic in the fourth quarter of 2012.

Another impact was foreign exchange on a year-over-year basis, but the biggest impact would have been new program launches and acquisitions.

Got it.

Just a housekeeping, what was the FX impact in North America and Europe in the quarter?

Negative $60 million in North America and positive $98 million in Europe.

Got it.

The equity income seemed to pick up a little bit sequentially in the third quarter.

Was there anything extraordinary there?

Is this the run rate we should be thinking about going forward?

It was up about $5 million sequentially.

Yes.

Nothing comes out our mind as unusual, just pretty normal operations sequentially.

Okay.

Thanks very much.

Rich Kwas, Wells Fargo.

Commodity cost, Vince, you talked about that being a benefit to gross margin.

What was the magnitude of benefit this quarter?

It was really insignificant.

When we try to look at rolling sequentially, operating income, quarter-to-quarter, there was a number of, if I look at it, consolidated -- a number of things that impacted us.

There was a little bit less warranty cost sequentially.

We were hit by additional launch cost, particularly in Europe.

(inaudible) costs, primarily Rest of World, and then, the last thing I've got in there was commodity costs and that's the smallest of impact of all the items I just mentioned.

It's really insignificant.

Okay.

On the launch cost, you just mentioned launch costs, if I recall, for the full year, it was going to be flat or roughly flat.

Is that still the case for 2013?

Yes, it is.

Okay.

South America, the year-over-year improvement or the improvement this year is not quite as good as what was expected.

I assume you're still on a loss position there?

What's the update there as we think about moving forward into 2014 and the expectations for improvement and the timeline for that?

Rich, South America is loss position, still, in 2013.

We are we have seen improvements over the loss in 2012.

So you look at the Rest of World segment, we're positive and that's because we're generating income in China.

We still have some facility costs in India, so India is negative, but overall, China's bringing the segment up.

Just in terms of progression, we're still dealing with come commercial issues and trying to recapture, recoup inflationary adjustments to our costs.

We have continued dialogue with our customers, so part is going to depend on how successful we are with our customers.

We are making headway in terms of new facility costs and we're making headway in terms of operational inefficiencies.

But I think the thing that's going to move us the quickest is going to be our success with customers on trying to cover inflationary adjustments to our costs.

I assume that's going to take some bit of time?

We've been having intense discussions for quite a while now.

I haven't listened to what other suppliers have been saying in their conference calls.

I suspect everybody else is in the same situation.

Our customers realize how difficult it is with our input costs going up and if they don't want to do something to offset that, then the long-term solution is, we give the contracts back, we get out of the contracts.

But I think you'll be hearing that from most people who are operating down there, so it's not like we're just starting discussions.

These have been going on for six to nine months, extremely intensively, so I would hope we're going to get some sort of resolution here over the next quarter.

You can never tell, but that's my expectation.

Okay.

Great.

Thank you.

(Operator Instructions)

David Tyerman, Canaccord Genuity.

Just a question on the European margins and where we're going.

You seem to be running somewhere on the low 2% range right now, EBIT at this point for 2013 and I think you're going to 4% to 5%, you said, over maybe three years or so.

Is that still the expectation?

Can you give us some idea of where you are in terms of, is it getting more difficult, so this is going to be a more challenging process or there's a lot on the near-term horizon that will help you?

What are the drivers that would move you toward that level?

David, maybe I'll start off and then hand it over to Don.

We've talked about, actually for quite some time, that we're going to consistently focus on improving margins and it was going to take us some time to move margins up.

What we talked about, go back a year ago, we said it would probably be four years away.

This year, we talked about three years away, getting to about half of North American EBIT margins.

If I look at Q3, year-to-date margins in Europe, I look at adjusted EBIT, so I'm backing out restructuring costs, last year for the first nine months, your are margin was 1.5% for the nine months.

This year, we're at 2.5%.

Over that nine-month period, we've been able to increase operating margins by 1%.

As I look forward into 2014 and 2015, our plans are, and we have plans in place, to continue to improve that overall margin.

Some of the restructuring we're doing and it's painful, because it's costing us money today, will help, in part, improve overall margins.

I would answer your question, where we are (inaudible) pretty well on, slightly ahead of where I would have predicted two years ago, but pretty well on track.

I still think we're on track going forward and Vince has said that we've got a number of losing divisions we need to get back to breakeven.

We've got some operational improvements, but overall, I'm pretty happy with where I see we have gotten to and where I think we can over the next couple of years.

To clarify then, do you expect it to be kind of a linear process over the next three years or so?

Linear being year-over-year?

You obviously have the fluctuations quarter over quarter, but yes, I would say relatively linear.

Okay.

Great.

Thank you very much.

We can give an update.

We're going to have our business plans coming through, so we can give an update where we think we would expect things to be in the new year.

Todd Coupland, CIBC World Markets.

Firstly, just to follow-up on the European margins, it looks like you're about halfway through your restructuring target for 2013.

What are the things you need to do in Q4 on that?

There's a couple things, Todd.

One is what you do from an accounting perspective and what you do from an operational perspective.

Some of the charges that we booked in Q3 related to a facility that's not going to be completely shut down until the first quarter of 2015, but we're able to record those costs on our income statement because we've met the required tests.

Again, in Q4, we're expecting additional restructuring charges to the same facility, again, because we expect to meet some of the accounting requirements.

As I look at into 2014, based on some of the operational plans that we already have, we'll continue to have some additional restructuring costs in 2014.

I think they're going to be lower than where we are in 2013, probably significantly lower, but there's going to be continued costs.

Accounting and operational are different and I think it's going to take us two to three years from an operational standpoint to completely sit back and say, we've done the heavy lifting.

We've done that, but in our business, there's so many operations globally, we're always going to be looking at our manufacturing footprint and spot tuning it based on business opportunities and business needs.

Great.

That's helpful.

My second question, stepping back from the quarter, earlier in the year, you had talked about trying to focus where Magna can be the leader and then maybe some of the businesses that don't make sense.

Is that something we should anticipate an update on at the analyst day in New York?

I don't think we're going to have much new.

As we make decisions on product areas, we'll let everybody know, but it's a very sensitive issue.

Obviously, it impacts employees, it has a big impact in customers, so we're not going to be giving much flavor until we make final decisions.

We continue to spend a fair amount of time on our product strategy.

We are finishing our business plan, so we'll have good visibility into the cash flow and profitability of each of the business units over the next three years, so we have that in about another month.

In some cases, we continue to make reasonable returns on business that maybe long-term we either need to expand or do something or get out of that business area.

But right now, we're seeing some pretty good results and we're not in need of any cash, so we're not in any panic to do things.

But we're not going to give much update until we actually make final decisions.

Okay.

Okay.

Should our take away be we'll see these ad hoc decisions on where you're positioning and not expect a big rollout of a grand reworking plan?

That's right.

Okay.

That's great.

Thanks a lot.

There are no further questions at this time.

Okay.

I appreciate everybody taking the time to dial in.

Overall, as I said, we were pleased with the quarter.

We've got a lot of great things going on with some of our internal initiatives, so I'm hoping to see many of you at our Magna investor day in New York on November 21.

Thanks again for dialing in.

Enjoy the rest of your day.

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.

Have a good day, everyone.