Magna International Inc (MGA) 2014 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the first-quarter 2014 results conference call.

(Operator Instructions).

As a reminder, this conference is being recorded Thursday, May 8, 2014.

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

Please go ahead, sir.

Thank you.

Good afternoon and welcome to our first-quarter 2014 conference call.

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

Yesterday, our Board of Directors met and approved our financial results for the first quarter ended March 31, 2014.

We issued a press release this morning for the quarter.

You will find the press release, today's conference call webcast and our updated quarterly financial review and the slide presentation to go along with the call all at 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 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.

Since many of you have listened in to our shareholders meeting earlier today, I am going to keep my comments short and allow more time for question-and-answer.

Overall, we are pleased with Magna's performance in the quarter with first-quarter records for sales and earnings.

In North America, we posted record sales for any quarter of $4.4 billion, up 9% from the first quarter of 2013.

We posted a strong adjusted EBIT percent of 9.5% despite a few challenging launches in the quarter.

We anticipate an EBIT margin percent between 9.5% and 10% in North America for the full-year 2014.

In Europe, another good quarter.

We reported adjusted EBIT of $127 million in Q1, up from $72 million in Q1 of 2013.

Our adjusted EBIT percentage increased to 3.4% this quarter from 2% in the comparable period.

We have now had nine consecutive quarters of increased year-over-year adjusted EBIT in Europe.

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

We continue to expect a modestly improved adjusted EBIT percent for the full-year 2014 compared to 2.5% that we recorded in 2013 in our Europe segment.

In Asia, we reported first-quarter adjusted EBIT of $29 million for a 6.3% margin.

This compares to $11 million in EBIT and a 3% margin we recorded in the first quarter of 2013.

In 2014, EBIT margin in Asia should benefit from lower new facility costs and additional contribution margin on our growing sales.

This is despite the fact that we are still investing heavily for growth in the region.

We expect a higher adjusted EBIT margin percentage in 2014 in Asia relative to the 5% we posted in 2013.

In our rest of world segment, substantially all of which is South America, we posted an adjusted EBIT loss of $13 million for the first quarter, roughly in line with Q1 of 2013.

We remain highly focused on reducing our losses in South America over the next couple of years by addressing commercial challenges and reducing operational inefficiencies.

We expect a lower adjusted EBIT loss in 2014 in rest of the world than the $76 million recorded in 2013.

We disclosed back in January that our Board and management are committed to utilizing our balance sheet.

In the first quarter, we demonstrated this commitment through our share buyback program, repurchasing 2.7 million common shares.

In fact, the entire 2.7 million were repurchased in March as we were in blackout for January and February.

And subsequent to the first quarter, we bought back an additional 1.4 million common shares.

In total, we have repurchased $377 million worth of Magna shares since early March of this year under our current normal course issuer bid, which terminates this November.

And we announced today that, subject to approval by the exchanges, our Board has approved an increase in the maximum number of shares that may be purchased under our current NCIB.

We intend to increase the bid from 12 million to 20 million common shares.

If approved, we will be able to purchase an additional 13.4 million shares up until November of this year.

All in all, a good start to 2014.

With that, I will pass the call over to Vince.

Thanks, Don and good afternoon, everyone.

I would like to review our financial results for the first quarter ended March 31, 2014.

Please note all figures discussed today are in US dollars.

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

In the first quarter of 2014, we recorded restructuring entirely related to our European exteriors and interiors business and a charge to income taxes resulting from tax reform in Austria.

These together reduced pretax income by $22 million, net income attributable to Magna by $52 million and EPS by $0.23 in the first quarter of 2014.

In the first quarter of 2013, we recorded restructuring charges substantially all related to our European exteriors and interiors business.

This produced pretax and net income attributable to Magna by $6 million and reduced EPS by $0.02 in the first quarter of 2013.

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

In the first quarter, our consolidated sales increased 7% relative to the first quarter of 2013 to $9 billion.

North American production sales increased 9% in the first quarter to $4.4 billion, reflecting in part a 4% increase in vehicle production to 4.2 million units.

In addition, the increase is a result of the launch of new programs and these factors were partially offset by the weakening of the Canadian dollar against the US dollar and net customer price concessions.

European production sales increased 8% from the comparable quarter, in line with the 8% increase in European vehicle production to 5.1 million units.

In addition, the increase is a result of the strengthening of the euro against the US dollar and the launch of new programs.

These factors were partially offset by a decline in content on certain programs, in particular the MINI Cooper on which we lost interior assembly business and net customer price concessions.

Asian production sales increased 25%, or $76 million, to $381 million over the comparable quarter, primarily as a result of higher production volume and the launch of new programs.

This was partially offset by net customer price concessions.

Rest of world production sales declined 26%, or $54 million, to $157 million for the first quarter, primarily as a result of the weakening of the Brazilian real and Argentine peso against the US dollar and lower production volumes in certain programs.

Complete vehicle assembly volumes declined 5% from the comparable quarter and assembly sales increased 2%, or $15 million, to $813 million.

The increase largely reflects the strengthening of the euro against the US dollar, an increase in assembly volumes in the Mercedes-Benz G class and MINI Countryman.

These factors were partially offset by a decrease in assembly volumes for the MINI Paceman.

In summary, consolidated sales, excluding tooling, engineering and other sales, increased approximately 7% or $585 million in the first quarter.

The increase reflects higher production sales in North America, Europe and Asia, as well as higher complete vehicle assembly sales partially offset by lower production sales in our rest of world segment.

Tooling, engineering and other sales increased 3% or $15 million from the comparable quarter to $569 million.

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

Gross margin in the quarter increased to 13.4% compared to 12.5% in the first quarter of 2013.

The increase in gross margin percentage was primarily due to productivity and efficiency improvements in certain facilities, a decrease in complete vehicle assembly sales, which have a higher material content than our consolidated average, lower restructuring and downsizing costs and lower warranty costs.

These items were partially offset by operational inefficiencies and other costs at certain facilities, increased operating costs in (inaudible) facilities, a larger amount of employee profit-sharing, higher costs incurred in preparation for upcoming launches and an increase in tooling, engineering and other sales that have low or no margins.

Magna's consolidated SG&A as a percentage of sales was 4.7% in the first quarter of 2014, higher than the 4.4% recorded in Q1 of 2013.

SG&A increased $58 million to $425 million in the first quarter of 2014 primarily due to higher labor and other costs to support the growth in sales, as well as the impact of translation.

Our operating margin percentage was 6.7% in the first quarter of 2014 compared to 6% in the first quarter of 2013, excluding E-Car amortization from last year.

This increase substantially relates to the higher gross margin and lower depreciation percentages offset in part by higher SG&A as a percent of sales.

Please note that as of the end of fiscal 2013, the intangibles related to the E-Car acquisition were fully amortized.

In Q1 of 2014, our effective tax rate increased to 26.4% from 19.4% in the comparable quarter of 2013.

The increase was mainly the result of favorable audit settlements and the benefit of permanent items both recorded in the first quarter of 2013.

Net income attributable to Magna increased $70 million to $445 million for the first quarter of 2014 compared to $375 million in the comparable quarter.

Diluted earnings per share increased 25% to $1.99, a Q1 record compared to $1.59 in the first quarter of 2013.

Diluted earnings per share were negatively impacted by $0.13 in the first quarter of 2013 as a result of the amortization of recurring tangibles.

The increase in diluted earnings per share was the 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 partially offset by the issue of common shares related to the exercise of stock options and an increase in the number of diluted options outstanding arising from an increase in the trading price of our stock.

I will now review our cash flows and investment activities.

During the first quarter of 2014, we generated $671 million in cash from operations prior to changes in noncash operating assets and liabilities and we invested $197 million in noncash operating assets and liabilities.

For the quarter, investment activities amounted to $271 million comprised of $217 million in fixed assets and a $54 million increase in investments and other assets.

Our balance sheet remains strong with $1.1 billion in cash net of debt as of March 31, 2014.

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

As well, during the first quarter of 2014, we filed a short form base shelf prospectus with the Ontario Securities Commission and a corresponding shelf registration statement with the United States Securities and Exchange Commission.

The filings provide for the potential offering in Ontario and the US of up to an aggregate of $2 billion of debt.

At our AGM today, I spoke about the continued evolution of our capital structure.

We have bought back 4.1 million shares to date this year and today announced that we are seeking exchange approval to increase our current NCIB to 20 million shares.

These actions together with our shelf prospectus and registration statements are important steps to us reaching our adjusted EBITDA to adjusted debt target range of 1 to 1.5 times by the end of 2015.

Now I will pass the call over to Louis.

Thanks, Vince.

Good afternoon, everyone.

I will review our updated 2014 full-year outlook.

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

With respect to our vehicle production expectations, we expect 2014 North American light vehicle production to be approximately 16.8 million units, up about 100,000 units from our March outlook.

In addition, the Canadian dollar has strengthened modestly against the US dollar since our last outlook.

In Europe, we expect 2014 total European light vehicle production to be approximately 19.5 million units, higher than the 19.3 million units from our previous outlook.

As well in Europe, we are assuming a higher euro relative to our previous outlook.

The increased North American and European vehicle production, together with the higher expected euro and Canadian dollar relative to our previous outlook, are the biggest drivers of increased expected sales in these regions.

Our production sales ranges in Asia and rest of the world are unchanged from our previous outlook.

As a result of our higher production sales ranges in North America and Europe, our higher assembly sales ranges and an increase in expected tooling and other sales, our total sales for 2014 are now expected to be between $34.9 billion and $36.6 billion.

At the low end of this range, we would exceed last year's record sales.

We now expect our consolidated operating margin percentage to be in the mid to high 6% range, up from the mid-6% range in our previous outlook.

And for the full-year 2014, we expect our effective tax rate to be approximately 24.5% and fixed asset spending to be approximately $1.4 billion, both consistent with our March outlook.

Our expected restructuring costs for 2014, which are entirely related to our exteriors and interiors operations in Europe, are expected to be approximately $75 million before tax.

This concludes our formal remarks.

Thanks for your attention today.

Charlene, we would be pleased to answer any questions.

(Operator Instructions).

Mark Neville, Scotia.

Hi, good afternoon.

In looking at Q1 results, would it be safe to assume that the increase in margin guidance is because of Europe or are you feeling more positive about North America and Asia as well?

When you look at our overall Q1 margin and our outlook for entire 2014, there is a lot of moving pieces.

So we are expecting in North America to again get into a margin range of kind of 9.5% to 10%.

And we see some pretty good results in Europe, as well as in Asia.

And when you start adding up all the divisions across the board and you look at different currencies and different mix, we are comfortable moving up our margin outlook for the entire 2014 compared to our previous outlook that we gave in February.

Okay.

I guess on Europe, aside from I guess any normal seasonal variations, I mean should we use Q1 as a base to build from or is there maybe a reason to think it could step down just because it was so strong in Q1?

I think if you look at our business and you have got a couple of typically slower quarters in the year, you have got your summer shutdown and your Christmas shutdown, but not always a good assumption to use Q1 as a proxy for what is going to happen in the balance of the year.

In terms of -- as well launches and when they occur.

Typically a lot of the launches take place after the summer shutdowns.

So the Q1 margin, although directionally is stronger than where we were last year and we are guiding overall European margins to be higher in 2014 versus 2013, I don't think using Q1 as a proxy is the right thing to do because there is seasonality in our numbers.

I guess what I was getting at was Q1 this year is a lot stronger than last year.

Your guidance was for sort of a modest increase.

That is our best guess right now.

We can take a look at it after Q2, as Vince said.

We have got a lot of things going on there.

I was pleasantly surprised with Q1 results.

We will have to get an update later in the year if we think it is going to change from the range we have given.

Okay.

And maybe just a question on the NCIB.

You have amended that so now you can purchase up to 20 million shares.

I mean is there any reason to think that you wouldn't max that out just given your existing cash, the intention to take that to zero and just given the fact that you are generating so much free cash and have access to a lot of debt to fund growth outside of planned CapEx?

Well, we are generating a lot of cash and our capital spending, although it is at high levels, we are still generating excess cash.

And as we look at our overall targets to get to kind of 1 to 1.5 times by the end of 2015, our existing NCIB had allowed us to buy 12 million shares.

It would have been exhausted next quarter given the rate we are buying back stock.

So we needed to move that up to give us more flexibility.

So we will see how the year progresses, but certainly it is our intention to continue to buy back stock and achieve the leverage targets that we've clearly stated over and over again.

The only thing that would change it probably is if we do a fairly sizable acquisition.

If we were going to do that, then we would slow it down.

Sure.

Okay, thank you very much.

Colin Langan, UBS.

Great, thanks for taking my questions.

When you look at North America, if you take out the E-Car amortization margins, it looks like they would have fallen even though sales rose.

So any color on why the slight underlying weakness in the core North America business when you pull out the E-Car year-over-year benefit?

Let me just give you those numbers and then we can respond to your question.

So if you remove E-Car amortization in North America in Q1 of 2013, we would have reported a 9.7% margin and in the first quarter of 2014, we reported a 9.5% margin.

So on a year-over-year basis ex-E-Car amortization, there is a slight decline.

And when you look at the factors for that -- the primary factor for that is launch costs so to with some new program launches and inefficiencies at probably about four plants in launching new business in Q1 of 2014.

That would have negatively impacted our overall profitability and margins in the first quarter.

So most of those hit us -- well, they all hit us in Q1, but most of them, we have got a handle on them and it is coming down.

We are going to have some of it spill over into Q2, but we are in much better shape now than we were in the first quarter.

Okay, but the E-Car benefit will continue through the rest of the year when we look at it year over year, right?

Yes, the E-Car amortization is absolutely done and when we quote our operating margins and even when we refer to where we were last year, we typically back out the E-Car amortization.

So for example, in the last year, for the full year, ex-E-Car, our operating margin on a consolidated basis was 6.3% and today's guidance is sort of mid to high 6% range.

Those are the numbers you should be comparing to.

Okay.

And when we look at Europe, I believe you have indicated that you should have been hit by MINI, some of the business rolling off and walking away from some unprofitable business, but your overall sales were in line with the market.

So is it just -- anything unique in the quarter that drove this maybe a bit stronger-than-expected mix or is the timing of some of the business that rolled off is going to roll off more later in the year?

Any color there?

A bit is currency and some of it is timing.

I think when you look at the -- on a quarter-over-quarter basis in Europe, and we were at just over $2.4 billion last year and we are just over $2.6 billion this year, sort of the single biggest change year over year is foreign exchange, so with the strengthening of the euro against the US dollar.

But we also benefited from new programs and launches offset by some programs that balanced output.

All in all, that was a plus and we certainly benefited from the change in volumes.

Okay.

And just one last question.

Last week, Visteon announced the sale of their interiors business.

It looks like JCI is considering possibly considering divesting theirs.

Any color on how you are currently thinking about the business?

Is that something that you are still focused on fixing or does some of the recent transactions actually change your view in terms of how you would look at the timeline for that business?

No surprise on what is going on in the market in the interiors business.

We have separated our interiors business from our exteriors business, which they were separate a couple years ago; we are just trying to get a closer focus on it with a global president.

We are continuing to focus on the profitability, on continuing to win profitable business.

It is still a challenging business unit, but there is lots going on.

We have had a number of discussions with various customers about what their interest level is.

I still see this as being a challenging business going forward, but we are still analyzing what is the best thing to do and right now, we have got our heads down just trying to run it as efficiently as possible and look where the technology is going and win profitable business going forward.

Okay, thank you very much.

John Murphy, Bank of America Merrill Lynch.

Good afternoon, guys.

Just a first follow-up question on the interiors, Don.

The business you said now was separated from the exteriors.

How tied is that to sort of the quoting activity in the rest of your business and I'm just trying to understand maybe what the cost of exit would be there before because in the past you have tried to get out of underperforming businesses and then had to get back in them just at the request of the customer.

Is this separated enough that you might be able to exit that business at sometime down the road through divestiture or closure?

Yes, I think we have got pretty good segregation between interiors and exteriors and most of our businesses are pretty segregated.

We have got a few plants that have multiple products in them.

The business you are talking about that we exited and we reacquired was the carpet business and it had substantial losses in it.

We sold it to somebody who we thought was -- well, they were a carpet supplier.

We thought they would be capable and quite frankly, they didn't execute very well.

So the customers wanted us to take it back and we did.

On the interiors business, I don't know exactly where we are going to end up because we are still looking at it and hopefully it will be a good business going forward.

If we decided that we are going to do something with it -- whenever we are going to do anything with the business, we want to make sure it would be in the hands of a competent buyer because we do a lot of business with our customers, we don't want to let them down.

But it really is a standalone business, so like any other business unit in Magna, if we decide we want to do something with it, I think we have the ability, but we can't just give it to somebody who is going to fail in launches and supporting the customer obviously.

Okay.

And then sort of a second follow-up on the European margins.

Was there anything in the quarter or what you are seeing right now in Europe that would lead you to a different outcome of saying that your European margins would be basically half what they would be in North America?

Because it seems like you are performing much better.

Might, down the line a couple years, you sort of be in the 5% to 6% range as opposed to the 4% to 5%?

There is nothing that, John, we are seeing that would indicate that what we've talked about for Europe is any different.

And just to be absolutely clear, what we've talked about in Europe is, including our assembly operations, we should be getting to 4.25% to 4.75%, which is slightly less than kind of half of North American margins.

And again, the European margins are being diluted by the Magna Steyr assembly operations.

We haven't updated where we think we can get to.

We had a five-year plan.

I guess we are three years into that or are almost three years into that, 2.5 years and I am pleased with the progress we are making.

We are slightly ahead of where I thought we would be, but I still think we will achieve what we said.

I would want to probably wait another six months and take a look at next year's business plan.

There is no fundamental reason why we should be operating at different margins, but the fact of the matter is we are for a number of reasons.

I think once we get through the final restructuring, which we have got a very good plan right now, we are getting through most of it this year and we are working on our footprint, we are working on efficiencies in the plant.

So we can update later, but there is no fundamental reason that says we would always be at half the margins.

Okay.

And then two just specific questions.

First on the outlook, you kind of alluded to currency as being a big driver of the reason that you raised your sales guidance, but your operating income guidance is going up substantially as well because you are raising the range on the margin on a now higher base of sales.

Is there any impact of ForEx in the operating margin guidance or is the rise in the operating margin guidance really a function of performance in the first quarter and what you expect for the rest of the year because without -- with that inflation in revenue because of ForEx, it makes that increase in your operating margin actually that much more impressive.

John, there's a couple things that are going on and impacting our sales guidance.

The first is certainly foreign exchange.

Our current outlook is based on a higher Canadian and euro exchange rates versus the US dollar.

We have also moved up our guidance for production in both North America and Europe.

So it is the combination of currencies and higher volumes that's generating the higher sales.

So just higher production volumes generally.

If you are looking at pullthrough being closer to contribution margin as opposed to average margins, that is going to help to move your operating margin up.

And those would be the biggest factors impacting both sales and operating margin.

Okay, so it is fair to say that the operating margin was not changed around at all by ForEx; it was really the revenue line that had the impact?

That's correct.

Then just lastly on the amortization, I know obviously E-Car dropped off as we got to the second half of last year, but the step-down from Q4 to first quarter on D&A from $284 million to $217 million is a big drop-off when you look at Q4 to Q1.

Is there anything that is seasonal, what is going on in D&A or something else that is going on there that would drive that drop-off sequentially?

John, sorry, just wanted to point out that the amortization for E-Cars did not drop off in the middle of last year.

It dropped off in the fourth quarter of last year.

So what you are seeing between Q4 and Q1, I think there's about $39 million or $40 million that related to E-Car amortization.

So it was almost the entire change.

Okay.

So the $217 million that we saw in the first quarter is a decent run rate quarterly going forward?

Is that --?

That is (multiple speakers).

(multiple speakers) capital coming in.

As we get into (multiple speakers) capital spending and the $1.4 billion and that will most likely move D&A up as we move through the course of the year.

Okay, great.

Thank you very much.

Ravi Shanker, Morgan Stanley.

Thanks.

Good afternoon, everyone.

A few follow-ups.

First, on the divestitures, Don and Vince, you have both said in the past that you are going to be taking a look at the portfolio of business that you guys have at Magna and you maybe had a few businesses that you consider to be non-core.

Is there any update on how you are thinking about those businesses?

Any way to quantify just how much of revenues may actually come from these non-core businesses?

Not really any update.

We reviewed it with our Board yesterday actually and we don't want to talk publicly because if we are going to do something, it obviously impacts our customers and our employees.

But we are in no panic and some of the business units that we were looking at as being not strategic, we have actually made some pretty good improvements in it.

Long term, we may still think the best thing to do from a value creation and quite frankly for the business unit itself is if we don't think we are going to be big enough on a global basis, we may want to joint venture or sell it to somebody who is a strategic in that area.

But I don't have anything to update and I just had the question on interiors.

That is a significant segment of Magna.

Anything else that we had any discussions on is not -- some of them are -- it may be hundreds of millions of dollars, but it is not like it is material to the Company.

Got it.

On North America, I apologize if I missed this, but did you quantify the launch costs in the first quarter that were a headwind?

No, we didn't quantify it and some of them were quite frankly unexpected.

We had a capacity issue.

In one plant, we had some other quality issues.

So we haven't quantified it and we will be getting back to -- when you look at the margins, the guidance we have given, I think we are going to have some spill -- we will have some spillover into Q2, but it's already in Q2, but I think you could -- there is really no way I guess to model it, but I don't want to get into the specifics on how much it was.

Got it.

And just finally on the NCIB, it's frankly a fairly staggering number of shares that you guys have to buy back now in the next couple of quarters.

But just looking ahead, would you see this as a one-time event or do you think given the cash flow you generated and the state of your balance sheet, even at the end of this, that this is something you can maybe continue on a sustainable basis for a couple of years at least?

The size of the NCIB I mean.

If you look at our target, kind of 1 to 1.5 times, and if you run what that would mean at the end of March of 2014, to get to our target capital structure, we have got deploy cash of between $1.7 billion to $3.2 billion.

So if we are not investing in acquisitions or if our capital spending is not growing in a very substantial way, we are going to continue to generate excess cash between now and the end of 2015.

So if you kind of run the math on the assumption that there is no acquisitions and capital may go up, but it is not going to double, we are going to continue with the buyback until the end of at least 2015.

If we come across an opportunity that makes a lot of sense and it consumes some cash then we may scale down on the buyback.

But past 2015, we will reassess where we are with the balance sheet and what our targets are going to be, but we have got a game plan at least certainly for the next seven quarters.

Very good.

Thank you.

Rod Lache, Deutsche Bank.

Hi, everybody.

Just a few things.

In North America, you mentioned these launch costs for the new programs and the inefficiencies in the four plants.

Are these at what you would characterize as unusually high levels right now?

So all things being equal, if we are thinking about next year on a year-over-year basis, they should become tailwinds?

I can't think what we got next year, if we got more or less launches.

We have got some greenfield plants going up, but these launch inefficiencies were not expected and I would say they are unusually high.

Whenever we have a launch of a program, you expect costs and we have that built into our business plan, but (inaudible) in the first quarter in these three or four divisions was unexpected.

So thinking about what your run rate of profitability was -- last year, you did around 10% ex-E-Car in North America.

Is that something -- is that a level that you would characterize as a reasonable base?

Yes, I think, Rod, in terms of the guidance that we have given for North America specifically is 9.5% to 10% for 2014 and we have talked about that sort of target being appropriate for the next couple of years.

We look at Q1, we are at the low end of that range and Don has talked about some issues that we have had.

There is also seasonality in North America.

Again, we talked about -- if you look at the summer shutdown at Christmas, so even though we are a little bit behind where we thought we could be for Q1, we are still confident we are going to get into the range that we have talked about for the balance or for the full year of 2014 in North America.

Right, no (multiple speakers).

I would have to calculate some numbers.

To get to 10%, I don't know if we would be there or not, but it is certainly -- 9.5% is certainly below where we should have been in Q1.

Right.

But if you -- just sort of squaring something, if you were doing 10% ex-E-Car last year and that was at -- that is at the high end of your long-term range, you have got something like $1.6 billion of top-line growth that you are expecting in North America through 2016.

What are the factors that would mitigate the operating leverage from what we saw last year in North America, if any?

Well, I guess, Rod, to the extent that we are putting in additional capacity, i.e., new plants, then you look at a margin of a new plant, it is going to be more at the average margins as opposed to incremental margin.

If you are increasing throughput on an existing plant and you are adding another shift or you are adding more employees because the capacity then -- you will probably pull through at a number that is higher than your average margin.

And then you have got business coming in, going out, you have got the changes in mixtures.

There's a lot of moving pieces, Rod.

You have got a give-back feature, you are trying to offset all that.

So we sit back and look at our business plan, our forecasts for 2014 and 2015.

The 9.5% to 10% range is something that we are comfortable with, but we are striving to beat, to exceed that, but we are saying that is a reasonable range to be in over the next couple years.

Okay.

Just kind of separate issue on North America.

A number of automakers are struggling with let's say an elevated level of recall activity, a lot of sensitivity to that kind of thing.

And do you think that that situation that exists today has any implications for you as a supplier in any way?

Does that maybe mitigate your ability to affect VAV to mitigate pricing or anything along those lines?

No, it's certainly a concern.

If you look at what is going on in the industry, at the OEM level and obviously quite a few of those root costs come from the supply base, we have always had this issue to deal with and that is why we are focused so heavily on our program management, on our failure mode and effect analysis.

When you are going through your product development process, you look at what possible things can go wrong with the product, what possible things go wrong with the process and if we were following what we were trying to really live by in our world-class manufacturing, in theory, you eliminate any potential issue and there is always issues.

You can come up with a variety of factors in a vehicle or environmental factors that we didn't anticipate during test.

So I don't think anything has fundamentally changed.

I think the governments are certainly more focused on issues and there is more sensitivity around them.

So it worries me that the fines that are being levied to companies, and I don't know the root cause of these issues and I am not close enough to it, but I think as long as people look reasonably at these things and look at the facts reasonably, I don't see anything fundamentally changing for us, but it just reinforces our focus on making sure we really understand what potential things could go wrong in the product design, the tooling and the process.

So you don't see any friction in your ability to implement engineering changes to take costs out to get approval for that to mitigate productivity?

I don't think so.

And again, there is always a couple of factors.

One, I am sure if it is a safety critical part, they are going to be very careful in what they are going to approve; they go through testing.

But my experiences, they have always been very -- they really look at this closely and for anybody to think that the car companies don't take really serious look at recalls and what they are going to do, if it is a field action, my experience is they have always really taken a hard look at this and there's a lot of scrutiny.

So I know it is in the paper a lot more.

So if it was a safety critical part, you might be right; they may be a little bit more skeptical of making a change unless there is a really good payback.

On the flipside, I think the car companies are all highly motivated to continue to reduce cost and for the most part, they understand that the best way to do that is rather than arguing with us and squeezing it out of our margins is to come up with a change in something where we can take cost out, whether it is through transportation, whether it is through a product design or an improvement in some area.

So I think on balance it is about the same.

Okay.

And just lastly, can you remind us what your Eastern Europe versus Western Europe exposure is and would you characterize Eastern Europe weakness as something that could be material for you or no at this point?

I don't know.

Louis is looking it up here.

I think, Rod, when you look at Eastern Europe and in particular sort of you might be referring to Russia, when you look at our overall sales in Russia for 2014 -- $450 million in 2013.

$450 million?

Yes, $450 million.

I think there is going to be some impact for sure on what is going on over there in sales; no doubt about it.

We just talked briefly about it at our annual meeting.

We have got reasonable presence there in some of our product areas and I still think it is going to be a good long-term place to do business, but I am sure the car companies are going to be very reluctant to be forging ahead with anything right now until they see what happens.

And I think on the supply base, we are basically the same.

It just means there is higher risk; we need to have more certainty on what the returns would be and mitigate our risk somehow if we decide to continue to invest there.

So I think the next few months will be very interesting to see where things shake out.

Great, thank you.

Peter Sklar, BMO Capital Markets.

Thank you.

I just wanted to have a better understanding of where you are getting the pickup from in Europe over the next few years as you achieve that target margin guidance you are providing.

Like if you look at what you have done so far, there has been a significant amount of operational improvement, restructuring, pricing discipline.

So I am just wondering like what gets you to the next level?

Is it more of the same or is it moving your footprint?

I'm just wondering if you can talk a little bit about what is going to happen over the next couple of years.

It is basically more of the same.

We still have some significant losing divisions over there.

We have got -- 2014 is a big part of finishing the restructuring that we have already identified.

Some of it will spill into other years, but we are really getting through the bulk of it.

I think we have got some good initiatives and good headway in operating efficiencies over there.

We have renegotiated some pricing, but some of it, quite frankly, we still have losing contracts which will fall off over the next couple of years.

We will only get to replace the business if it is properly priced.

We are not doing a massive change in our footprint, but we are growing in Eastern Europe and we have already -- part of the restructuring is making sure that we are getting to a point where we can be making money.

There was a little bit of surprise from the market, I think, when we gave guidance on where our sales were going to be in Europe in the next couple of years.

I don't think there should have been because I have said, and specifically in our exterior and interior group but a little bit in some other areas, when you are going through some restructuring and talking with the customer about getting recovery on some of the losses.

And it is very difficult to get new business and, quite frankly, we weren't aggressively pursuing new business in all of our product areas.

We are over that now.

I think we have got good relations.

We are winning more business.

So I think it is just getting -- continuing to do what we are doing and getting to steady-state.

Peter, on some of the other restructuring activities, you know we have booked some costs in the quarter of $22 million.

We are expecting costs for the full year to be about $75 million.

But there is typically a time lag from the time that you actually book the expense and you undertake the activity.

And that lag could be three, six months; in some cases, it could be a year and a half.

So a lot of their restructuring initiatives and expenses that we have taken, we have seen benefits and we will continue to see benefits.

But some of the activities, the benefits we are not going to see until 2015 and 2016.

So that will continue to add to overall operating performance improvement in our European segment.

Okay.

And what about the footprint?

Are you satisfied with the footprint of your facilities, or is there kind of an overexposure in Western Europe and there has to be a gradual migration into lower-cost jurisdictions?

Well, if we were starting with a clean sheet of paper, I'm sure we would end up with a different footprint than we have now, but we have got some (inaudible) where we think we are really challenged to be able to grow it and make profit and get rates of return.

We have dealt with most of them.

There's a couple of other divisions that are probably not optimally located.

But as long as we are going to make profitable and we can make a reasonable return, we may not be heavily capitalized in future programs.

So it is very similar to what we have been doing over the last 15 years in North America.

We had to move some facilities.

Some of them were relocated because they should've been down in Mexico or the South, but it is not as if we have to do a massive shuffle from our footprint standpoint.

I think it will be gradual, and a lot of it quite frankly will be dictated by whether we continue to win business or not.

And if we don't, it is sort of a natural evolution that we will have plants quoting each other and see who wins the business.

Right.

But the assembly plants for the most part aren't moving, and there still is a big footprint of assembly plants over there.

And a lot of the parts we make are big, bulky, hard-to-ship parts, so hopefully we can be competitive where we are.

Right.

Okay, thank you.

(Operator Instructions).

Ryan Brinkman, JPMorgan.

Hi, thanks for taking my question.

I know you are a lot more diversified in North America than in the past, but I think that the GMT900 or K2XX platform is still very important to you.

So presumably, you incurred some inefficiencies there as they transitioned the last of the vehicles over to the new program.

Would it be fair to say that this could drive a decent sequential tailwind in 2Q relative to 1Q, just cycling past that changeover and enjoying the higher volumes?

And maybe update us on how material that program is for you these days.

The K2XX is our largest program; we are about $2000 on average of content.

And we are expecting higher volumes in Q2 versus Q1, [agreed].

A launch usually takes more than one quarter.

I think we are launching the SUVs right now, so it is going to continue to affect us I think going forward.

But in terms of volume, certainly we are higher in Q2 than Q1.

In one of the plants we had some launch issues was for this program as well.

So certainly as they get to steady-state in their volumes and we get through the launch, it helps.

Okay, that's helpful, thanks.

And then maybe just comment on the incremental margin in Europe in the quarter.

It looks like really strong 25% at the EBIT level.

Obviously to get to the kind of margins you are talking about there, you have to generate strong incremental margins, but was there anything unusual driving that?

How should we think about the cadence of incremental margins there throughout the remainder of the year?

When I look at Europe looking Q4 to Q1, let me just get my piece of paper here and kind of run through it.

From Q4 to Q1, we had reduced warranty costs from Q4 to Q1, which benefited the bottom line.

Launch costs were a little less in Q1 versus Q4, but besides that, the substantial change was just operating performance.

Again, going forward, when you think about Europe, you have got to keep in mind, and I talked about this already before on the call, about the seasonality as you get into Q3.

We are expecting that margins are going to be pressured as a result of just lower volumes in that particular quarter.

But I think as you look throughout the entire year, we believe and we expect that margins in 2014 will be higher than 2013.

But they are going to move around quarter to quarter depending on production volumes and as we get out into Q3 as we start to launch some newer programs in Europe, that will have a negative impact until those programs start to launch.

Okay, great.

And then last question from me.

I know you are engaged in a longer-term effort to increase your exposure to growth in your emerging markets, but presumably you also feel pretty good these days about your relatively smaller footprint in South America compared to many other suppliers.

Have events there caused you to reconsider maybe the amount of capital that you would allocate to organic growth in the region?

Absolutely.

I covered it very briefly at the annual meeting today.

Obviously we are looking at a lot of different geographic regions, but if you looked at Brazil, which is primarily Brazil for us -- in fact, I was just down in Brazil -- we also have some operations in Argentina.

Argentina is very challenging for lots of reasons, from the rules down there, inflation, currency, but our bigger presence is in Brazil.

I still think Brazil long term will probably be a good place to do business.

It seems to go through cycles.

We have got some very good plants.

We have a few plants we made through an acquisition, which we still have to make some improvements operationally in, but we are having significant challenges on FX issues, inflation issues, raw material costs, which the customers, because they are struggling, they don't want to recognize and if we don't get recognition or help from our customers on things that we think are valid then we obviously won't put any more capital down there.

Many of our customers are working with us on that.

A few are really difficult right now, so we will only make new investments if we think we understand the risk, we are going to have a mechanism to handle it with our customers and we are going to hit acceptable returns.

And we look at places like Brazil or India because of some of the issues either politically or FX or inflation-wise then we have a higher hurdle rate.

So right now, we are not putting a lot of new capital in Brazil or India or for obvious reasons in Russia.

Okay, thanks for all the color.

David Tyerman, Canaccord Genuity.

Yes, a quick question on South America.

Don, in the last call, I think you said there was a possibility of cutting the losses in half there.

You obviously didn't make progress in Q1.

Do you think that is still possible or is there going to be a slower process of improving?

Vince is just looking at the numbers.

I haven't updated it, but we did say we were going to cut them in half and as you mentioned, we are still at the same level as we were in Q1.

We have made progress in a number of areas.

I think a lot of it will depend on whether we can get the recoveries that we think are reasonable and we think we will get from our customers.

It really depends on what happens to a lot of the factors outside of our control and whether we are able to offset them with the customers.

So our target would still be to hit sort of -- cut it in half.

If we miss that by a little bit, it wouldn't surprise me that much, but I really haven't had a real good look to see where we are for the rest of the year.

David, keep in mind that we lost $27 million in Q3, $21 million in Q4.

So sequentially we have made progress.

Yes, but I think we will have to see what -- at the end of the year, we go through our conclusion on where we end up in commercial issues.

David, first of all, if we look at where we tracked in Q1 versus our budget, we are tracking pretty well on track.

They may be a little bit better, but again just what happens in price and price recovery, but if we continue to meet our budgeted numbers, we should see that loss just about shrink in half in 2014 versus 2013.

Quite frankly, if we can hit that, I will be pleased given where I think we stand from a realistic standpoint.

But there is a lot of discussion going on and I think the customers, even though they don't want to recognize some of these costs, they realize that if they don't offset the costs, they won't have a supply base down there long term.

So I think they are coming to the conclusion that they want to work with us and at least be reasonable.

Right.

Okay.

Just to clarify then, Vince, you said you are on track versus the budget.

Are there a number of factors for the remainder of the year that are outside your control that you need to have happen to continue on that budget track?

Yes, the biggest unknown is what is going to happen with inflation.

Does that have an impact on raw material, is there going to be FX changes that we don't expect right now and can we get the commercial negotiations to sort of the mid-level where we expect them to be with their customers or whether they draw a real hard line, which will give us short-term pain, but long term would this lower our investment down there.

Sure.

Okay, fair enough.

From an operational standpoint, we are pretty well on track with what we want to do.

Okay.

Second question was just on the tax rate.

You reiterated the guidance.

Does that include the impact of the 32.5% in Q1?

Sorry, the impact on the Austrian tax reform, that is excluded from our 26.5% rate that we have booked in the first quarter, David.

Our guidance of 24.5% is on operating income ex-unusuals and we are still expecting to get to 24.5% for the year.

As you look at kind of the tax rate quarter by quarter, it may bounce around.

It was a little higher than the average rate for 2014.

Part of that just relates to some permanent items and timing events that will reverse themselves as the year progresses.

So I look at the quarter at 26.5% versus 24.5%, 2% on our numbers means about $0.05 per share, which should come back in the balance of the year.

Okay, fair enough.

And then just on the depreciation and amortization, I hear what you say year over year, but this thing came down a lot sequentially.

When we are thinking about modeling D&A, is there something else that drives the level in quarters because it is kind of all over the place.

Yes, David, there is going to be -- what drives depreciation is a couple things.

Clearly, for the balance of 2014, when you look at a comparable quarter, the E-Car intangible, which was $39 million or $40 million a quarter, is going to be a difference.

We are going to have additional depreciation as it relates to new capital spending, including spending for new facilities.

The other thing that impacts depreciation on a quarter-by-quarter basis is exchange rates.

Those exchange rates move down or move up compared to the previous quarter.

The Canadian dollar was lower in the first quarter of 2014 versus the fourth quarter of 2013.

That is going to reduce the amount of depreciation we record in US dollars.

It may not impact the Canadian dollar depreciation, but certainly the US dollar depreciation.

So those are the moving pieces.

There is nothing in the depreciation line that is unusual.

Right.

Okay, that's very helpful.

So keep an eye on FX.

And then just a last question I had, is there a minimum cash balance that you like to keep?

Yes, David, as you look through where we operate in the world and where we have got -- it's difficult to get cash in and out and when you look at payables and receivables and the margin inflows and outflows, we calculate we need about $750 million to run our business.

Again, it depends on what time you measure that too.

If you have got a huge receipt at the end of the quarter, that $750 million may be higher.

If you've got a huge outflow of payables, that may be lower.

But roughly about $750 million to run this business.

Okay, perfect.

That's helpful.

Thank you.

Todd Coupland, CIBC World Markets.

Good afternoon, everyone.

So two quick questions for me, if I could.

Firstly, on the NCIB, of the 12 million, how much have you bought back so far?

Yes, so we have got -- of the 12 million, we bought back just over 6.6 million shares and that is to May 2, 2014.

So just in Q4 last year, we bought 2.5 million; in Q1, we bought 2.7 million and in the month of April and I guess the first couple of days in May, we bought an additional 1.4 million.

Okay, great.

My second question is I just want to make sure I have the European messaging from you guys correct.

It seemed like you were saying it is a bit better than plan.

Obviously you had your plan for restructuring and you are working your way through that.

But the volumes have surprised you and that has been the biggest driver to the margin coming in higher than what you thought it might have.

So I guess my question -- if that is correct.

So my question is you guys kind of have a flat outlook for Europe.

Europe has actually been coming in better than that.

So our readthrough is if these volumes continue to do better than flat in that region then your margins should continue to be better than your plan.

Is that a right interpretation?

Yes, let me answer.

I'm going to ask Louis just to chime in at the end specifically on the German 3 volumes.

When I say we are slightly better than plan, going back, I forget the year now, I think it was 2012 we started, we said over a five-year period we would go from basically breakeven or losing a bit of money, I think as we were back then, we would get to half the margins excluding assembly sales that we were in North America.

So that is what I said, that is the plan we are tracking.

Last year, we were slightly ahead of plan, so I am pleased with some of the efforts we are doing specifically in operational efficiencies.

The volume really hasn't -- Louis may contradict me here, but my view is that volumes really haven't made much impact because most of our sales are to BMW and Mercedes, Volkswagen, Audi.

JLR actually is pretty good as well.

So we are not getting a huge pickup from volumes on those customers, so it's about where we expect and I don't -- it depends on if the volumes increase what customers they will increase with.

Do you have the volumes there?

I think when you look at our full-year forecast, our recent guidance in Europe is that volumes are up by about 1% over where we were last year.

And when I look at some of our internal assumptions on the mix of business, the German 3 where we have the most exposure, they are up 1%.

So they are moving along with the market.

But just to reiterate what Don said, the improvement in operating margins in Europe is a result of what we are doing to deal with operations whether it is restructuring activities, world-class manufacturing effort, (inaudible) positions that we receive that certainly benefit us in 2013 that continue to benefit us in 2014.

It isn't volumes.

Certainly if volumes for the German 3 pickup and we are on those programs, that should be able to help us as we should be generating some positive contribution margin on those additional sales.

Great.

Thank you.

Thank you for the clarification.

And there are no further questions at this time.

I will turn the call back over to you.

Great.

Well, thanks, everybody, for joining us today.

It is always good to get to the annual meeting and be able to talk about the full year.

I think we have got a lot of good things ahead of us, so we expect to continue with our strong performance for the remainder of the year and hopefully the economy stays up.

We will be tracking a lot of things, the events that are going on around the world, but we are pleased with what we see coming forward.

So thanks very much for your time and attention and we will talk soon.

Bye.

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

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