Magna International Inc (MGA) 2014 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Magna International second-quarter 2014 results conference call. (Operator Instructions). As a reminder, this conference is being recorded today Friday, August 8, 2014.

It is now my pleasure to introduce Don Walker, Chief Executive Officer at Magna International. Please go ahead, Mr. Walker.

Thank you. Good morning everybody and welcome to our second-quarter 2014 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 second quarter ended June 30, 2014. 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 that go along with the call on our 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.

Q2 was another strong quarter for Magna. Each segment reported improved adjusted EBIT and EBIT percentages relative to the second quarter of last year. In North America, we reported higher sales and adjusted EBIT of 10.5% for the quarter compared to 10% ex E-Car in Q2 of 2013.

In Europe we reported our 10th consecutive quarter of improved year-over-year adjusted EBIT at $125 million or 3.3% of sales. We are generally pleased with our progress in improving European operations and results although we have recently incurred significant unanticipated launch costs at a certain interiors facilities in the UK.

In Asia, we are benefiting from the launch of new facilities and business. We reported adjusted EBIT of $42 million or 8.6% in Q2. In Rest of world, which is substantially South America, we have reduced the run rate of our losses despite lower sales in South America. Our Q2 EBIT loss was $11 million compared to $17 million in Q2 of 2013.

We received two notable awards from our customers recently. Our powertrain business was one of a small group of suppliers to receive Volkswagen's Top Supplier award, the Volkswagen Group award for playing a key role in Volkswagens global growth. One of our metal forming operations has received a Fiat Qualitas award for achievements in quality, innovation, competitiveness and service in support of Fiat in South America.

We have highlighted through news releases in recent months some of our activities that are helping our customers meet their need for improved fuel economy. We are in current production in North America with a first all thermal plastic, fully recyclable liftgate module for the 2014 Nissan Rogue. The full liftgate assembly is 30% lighter than comparable stamped steel systems and we have launched a modular liftgate using composite structures in Europe with a European customer.

Together with Ford we have unveiled a multi-material light-weight vehicle structure concept that uses advanced material solutions to achieve a nearly 25% weight reduction in the vehicle body compared to the current production vehicle. The concept is based on the production version of the 2013 Ford Fusion. The concept reduces weight on the Fusion to that of a 2013 Ford Fiesta making it two vehicle segments lighter.

The concept vehicle is part of the US Department of Energy's Lightweight Vehicle project portfolio addressing future CAFE legislation.

Lastly, our all-wheel-drive system on the Mercedes-Benz GLA which was jointly developed with Daimler features a highly integrated design that results in approximately 10% lower mass and lower CO2 emissions making this a benchmark for all-wheel-drive systems.

These are just a few of the many activities across Magna that are addressing key industry trends.

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

Thank you, Don, and good morning, everyone. I would like to review our financial results for the second-quarter ended June 30, 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 segment lines between reported results and results excluding unusual items.

In the second quarter of 2014, we recorded restructuring entirely related to our European exteriors and interiors business which reduced pretax income by $11 million, net income attributable to Magna by $10 million, and EPS by $0.05 in the second quarter of 2014. There were no unusual items recorded in the second quarter of 2013.

The following quarterly earnings discussion excludes the impact of unusual items. In the second quarter, our consolidated sales increased 6% relative to the second quarter of 2013 to $9.5 billion. North American production sales increased 10% in the second to $4.7 billion largely reflecting a 3% increase in vehicle production to 4.4 million units and the launch of new programs. These factors were partially offset by the weakening of the Canadian dollar against the US dollar, lower production on certain existing programs and net customer price concessions.

European production sales increased 4% from the comparable quarter while European vehicle production increased 2% to 5.3 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 the Mercedes-Benz C-Class, lower production volumes on certain existing programs and net customer price concessions.

Asian production sales increased 23% or $74 million to $402 million over the comparable quarter primarily as a result of higher production volumes in certain existing programs and the launch of new programs primarily in China. This was partially offset by net customer price concessions.

Rest of world production sales declined 33% or $81 million to $163 million for the second quarter primarily as a result of lower production volumes on certain programs and the weakening of the Argentine peso and Brazilian real against the US dollar. These factors were partially offset by net customer price increases.

Complete vehicle assembly volumes declined 11% from the comparable quarter and assembly sales declined slightly to $793 million. A decrease in assembly volumes for the MINI Paceman was largely offset by the strengthening of the euro against the US dollar and an increase in assembly volumes on the Mercedes-Benz G-Class and MINI Countryman.

In summary, consolidated sales excluding tooling, engineering and other sales increased approximately 7% or $538 million in the second quarter. The increase reflects higher production sales in North America, Europe and Asia partially offset by lower production sales in our rest of world segment and lower complete vehicle assembly sales.

Tooling, engineering and other sales declined 5% or $36 million from the comparable quarter to $697 million. Gross margin in the quarter increased to 13.8% compared to 13% in the second quarter of 2013. Among other items, gross margin was impacted by costs related to a fire during Q2 of this year at a facility in North America.

Magna's consolidated SG&A as a percentage of sales was 4.6% in the second quarter of 2014 which was in line with Q2 of 2013. SG&A increased $23 million to $433 million in the second quarter of 2014 primarily due to higher labor and other costs to support the growth in sales, higher incentive compensation, the impact of translation and increased costs at these facilities.

Our operating margin percentage was 7.4% in the second quarter of 2014 compared to 6.5% in the second quarter of 2013 excluding E-Car amortization from last year. This increase substantially relates to the higher gross margin and lower depreciation percentages. Note that as of the end of fiscal 2013, the intangibles related to the E-Car acquisition were fully amortized.

In the second quarter of this year, our effective tax rate increased to 26% from 24.1% in the comparable quarter of 2013. The increase was mainly the result of favorable audit settlements recorded in the second quarter of 2013. Net income attributable to Magna increased $105 million to $520 million from the second quarter of 2014 compared to $415 million in the comparable quarter.

Diluted earnings per share increased 33% to $2.37, a new record compared to $1.78 in the second quarter of 2013. Diluted earnings per share were negatively impacted by $0.13 in the second quarter of 2013 as a result of the amortization of the E-Car intangibles. 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 an increase in the number of diluted options outstanding as a result of an increase in the trading price of our stock and the issue of common shares related to the exercise of stock options.

I will now review our cash flows and investment activities. During the second quarter of 2014, we generated $748 million cash from operations prior to changes in non-cash operating assets and liabilities and invested $148 million in non-cash operating assets and liabilities. For the quarter, investment activities amounted to $432 million comprised of $384 million in fixed assets and a $48 million increase in investments and other assets.

Our balance sheet remains strong with $658 million in cash net of debt as of June 30, 2014. We also have an additional $2.2 billion in unused credit available to us.

We disclosed back in January that our Board and management are committed to utilizing our balance sheet. In the second quarter, we continued to demonstrate this commitment through our share buyback program repurchasing 5.7 million common shares. Subsequent to the second quarter, we bought back an additional 1.5 million common shares. In total, we have repurchased $975 million worth of Magna shares this year under our current normal course issuer bid which terminates this November. 7.6 million shares remain outstanding under the current bid.

In June, we issued $750 million of 10-year fixed-rate senior notes at 3.625%. These actions are important steps to us reaching our adjusted EBITDA to adjusted debt target range of 1 to 1.5 times together with a reduction in our cash balances by the end of 2015.

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

Thanks, Vince, and good morning, everyone. I will review our updated 2014 full-year outlook. I will only provide a summary of our outlook since we covered the details of our revised outlook in our press release.

With respect to our vehicle production expectations, we expect 2014 North American light vehicle production to be approximately 16.9 million units, up about 100,000 units from our May 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 19.8 million units higher than the 19.5 million units from our previous outlook. We are now assuming a slightly lower euro relative to our previous outlook. The increased North American and European vehicle production together with the higher expected Canadian dollar partially offset by the weaker euro, all relative to our previous outlook are the biggest drivers of the increased expected production sales in these regions.

Our production sales ranges in Asia and rest of world are unchanged from our previous outlook. As a result of the higher production sales ranges in North America and Europe and our higher assembly sales range, our total sales for 2014 are now expected to be between $35.6 billion and $37.3 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 high 6% range, up from the mid- to high 6% range in our previous outlook.

For the full-year 2014, we expect fixed asset spending to be approximately $1.4 billion, our effective tax rate to be approximately 24.5% and restructuring costs which are entirely related to our exteriors and interiors European operations to be approximately $75 million before tax, all consistent with our May outlook.

This concludes our formal remarks. Thanks for your attention. We would be pleased to answer any of your questions.

(Operator Instructions). John Murphy, Bank of America Merrill Lynch.

Good morning, guys. A first question on the operating margin guidance in the high 6% range. That is great, that is very strong but when we look at what you have done so far in the first half of the year at about 7.1%, it does indicate some level of deterioration through the second half of the year. I am just curious what concerns you have out there or that is just seasonality?

John, we don't have any concerns. It is pure seasonality. If you look at second half implied production sales and you look to the midpoint of our guidance and production sales in the first half of this year, the second half is going to be lower than the first half and you factor in that lower sales are not going to translate at an average operating margin, we are probably at a higher margin, decremental margin. The numbers kind of makes sense. So it is seasonality, nothing that is giving us concern in the second half of this year.

Okay. And then a second question also around margins in Asia. There was a big step up to 8.6%. What is going on there and is that the kind of number we should be expecting in the near future and is there opportunity to go significantly higher as your capacity utilization in Asia improves?

Again, John, I think you need to think about seasonality, what benefited us in the second quarter is the full (inaudible) [transitional] sales in particular at our new facilities as they ramp up. As we look at Asia in particular and we think about overall margins, last year we were at 5% overall and we are going to be up in 2013. But as we continue to ramp up to new facilities, we look to kind of 2016 and we look at a full-year run rate, we are expecting margins in the range of 8.75 to 9.75.

Whether that gets a little higher or a little lower is going to depend on how quickly these facilities come on, to the extent that new business awards, the extent that investments from these facilities. So we are positive about what we see in Asia. We have been investing in a substantial way in particular in China and we are starting to see the benefits of our investments as expected.

Okay. And then just lastly on capital allocation, Vince, obviously there is a lot of things moving in the market right now as far as asset sales and bids. I am just curious if you have changed your view on where ultimately capital might be allocated post your aggressive buyback now and if you might get more aggressive on purchasing other assets out there in the market and what you might consider looking at?

Really haven't changed what we are focused on. We continue to look at acquisitions. Capital, we have given the outlook in the range that is probably not going to change too much. If we can find the right acquisition and we were looking at all lot, various sizes some smaller, some medium-size so we are not going to be more aggressive just for the sake of being more aggressive but that is still our preference. Capital -- we have given the guidance, that is the number one priority. M&A would be number two and we've got excess cash given where we want the balance sheet to get to so to the extent we don't spend the money on the first two, then we will be looking at continued buyback.

If you look at our target capital ratios of the 1 to 1.5 times, if you look at the June, total deployable capital to get to 1 times rates or 1.4 or 3 billion in the 1.5 range, so there is just plenty of capacity on the balance sheet to continue with the buyback and if the right opportunity comes to employ that through acquisitions. So we are very fortunate we have gotten the flexibility and putting our balance sheet to work.

And then I am sorry, just one last one. Is there any insurance recovery on that $25 million for the fire in the quarter, potentially in the third quarter or is that cash out the door?

The approximately $25 million we talked about actually had a small insurance recovery already factored into that, John. We are expecting to recover more from the insurance company. That may fall into Q3, Q4 even Q1 of next year but we do expect to recover a substantial part of that $25 million.

Great. Thank you very much.

Peter Sklar, BMO Capital Markets.

Just on the fire issue again, is any of the disruption going to carry over into Q3? And the $25 million cost, does that kind of capture kind of the total cost to the Company including lost production as well as direct costs?

Yes, Peter, that is basically everything. So we had a fire in our wax plant. I won't get into all the details but it wasn't a significant amount of damage to the plant but we couldn't ship the frames obviously without waxing them so we were shipping product all over the place so a lot of it was logistics. We got through it, great assistance by the way from our customer, General Motors, in helping us get through it but that is essentially all done in Q2 and we don't anticipate anything in the future. The plant is back up and running full capacity.

Peter, there may be the odd pretty minor amounts trickling into Q3 as you kind of look at last minute items but it is really going to be very insignificant if anything in the third quarter.

Okay. The other thing I wanted to ask about is your North American margin was particularly strong. As I recall on the Q1 call, you discussed that there were a number of North American facilities that were incurring unanticipated ramp costs. So I am just wondering as those issues wind their way out, did that contribute to the improvement in the Q2 margin above and beyond seasonality?

And in terms of those underperforming plants that you referred to last quarter, have they largely worked their way out or is there still more work to be done in the coming quarters?

We had talked about I believe it was three plants again, they were in our interiors segment, they were all related to launches and we had charged in Q1, we had a similar amount charged in Q2 and it will be declining in Q3 and Q4. But we are still seeing some launch costs that were above what we anticipated, some efficiencies. I think we will be pretty well through them by the end of this year but it didn't have any positive impact on the margins we saw coming through.

Peter, as we kind of look through sequentially on the quarter in North American kind of pluses and minuses, if I look at things such as launch costs or commodity costs or facility costs, they ramped at close to zero, really, really insignificant. The biggest contributor was just increased (inaudible) pullthrough on that and likely the mix of business as well with [sales] but it is incremental margins on additional sales.

Okay. Thank you for your comments.

Ravi Shanker, Morgan Stanley.

Thanks. Good morning, everyone. So there has been a question on rest of the world margins and a question on North American margins so I think I will ask about Europe. Your 2Q European margin sequentially step up versus Q1 but this time it went down. You had referenced unusual launch costs in the quarter. Can you give us a little more color there and how that looks over the next couple of quarters?

You look sequentially and -- 3.4% in operating margin in Q1 and we are at 3.3% in Q2 so it is roughly the same on essentially identical sales. The difference I would say from Q1 to Q2 is additional unanticipated costs at our certain interior facilities in the UK and the costs were more substantial in Q2 versus Q1 that have a negative impact on overall reported European margins.

As we kind of look through the balance of this year, our anticipation is that those additional costs are going to decline. They won't be eliminated by the end of this year kind of looking at 2015 before we get into some normal type operations.

The facilities we're talking about in the UK are ramping up and launching a substantial amount of business and the cost we are incurring were just more than what we had anticipated and budgeted for.

Got it. Just stepping back a little bit, I mean we are seeing a really robust North American cycle maybe hitting 17 million SARS in the odd month. We are looking at almost 17 million production for the year. Where do you guys see the North American cycle going? Are you concerned about a peak at all or any deterioration like in the quality of production or sales or do you think the OEMs still have very robust schedules and it is green lights everywhere?

It is hard to say. There is nothing that seems to be driving production beyond what the market is absorbing. Who knows what is going to happen to interest rates. Our view is interest rates will remain low. To some economic shock or some political shock somewhere it can always have an impact on the economy. But if you look at inventory levels and incentives and pent-up demand and you can look at different analysis in there, it seems to be real so hopefully we will continue to see a robust production number based on what the demand is in sales.

Part of the production increase obviously is capacity additions in North America that have been transplanted from other markets so that is certainly helping production side. But yes, sales were strong, agreed.

Great. Just last couple of follow-ups for Vince. One is on the tax rate; you held your guidance for the year at 24.5% despite a slightly elevated tax rate in this quarter. Does that mean you will be doing below that 24.5% run rate for the second half?

Also on the buyback, you need to step up your pace quite meaningfully to get your NCIB target or the authorization by November. Do you have confidence that you will be able to complete it barring M&A or something else that comes up?

In terms of the tax rate, we are still holding our guidance at approximately 24.5%. We are about 26% for the first half of the year so we are anticipating that the rate is going to step down in the second half. Part of that is due to income mix, part of that is due to the timing of some tax benefits that we are expecting to be able to book in the second half of this year.

With respect to the buyback, we have 20 million shares that were authorized and that bid expires in November of this year. And if you look at not only what we bought in the quarter but what we have purchased subsequent to the quarter, we've got about 7.9 million shares that we can still buy under the bid. If you think about the timing that we have got, we've got roughly three months and we purchased 6.9 million in the last three months so we have got enough days available to complete that buyback subject to other things that may be going on.

Great. Thanks so much. Very helpful.

Steve Arthur, RBC Dominion Securities.

Great. Thanks very much. Just one further clarification on your 2014 outlook. I'm looking at North America production volumes increasing by about 100,000 but production revenue by about 500 million and I assume part of that is currency but it also seems to imply an increase in overall content levels in North America. Any other color behind that if there are specific customers or programs that are contributing more?

I think actually second-half content versus first-half content is going down slightly and there is a little bit of mix there.

So the $500 million increase then is primarily a function of currency?

It is volumes and it is currency

Okay, thanks a lot.

Brett Hoselton, KeyBanc.

Good morning, Don, Vince, Louis. I wanted to touch on margins a little bit to begin with. So it sounds like excluding E-Car that North American margins on a year-over-year basis, the primary driver for the improvement was just increased revenue on increased production. Is that a fair assessment?

Year-over-year?

Yes, I apologize. Year-over-year.

That is correct.

Did you say that is correct? I apologize.

Yes. That is right.

So my question then as I kind of look out over the next year or two years or three years, if I am anticipating that production is going to continue to increase, what might prevent you from continuing to get maybe similar operating leverage on that increased production, increased revenue and so forth? In other words, in the past you kind of talked about margins kind of stagnating or plateauing in that let's say 10% range or something along those lines. Could it possibly go beyond that?

When you think about over the next couple of years, we are adding additional capacity in North America to deal with additional sales. As you add on capacity, you are adding on at average margin as opposed to incremental margin so is there a possibility that we could get top the 10% range? I think that is a possibility depending on where the sales are and what we do on our world-class manufacturing efforts to improve efficiencies and throughput. There is a whole bunch of moving parts just programs coming in, programs going out. There is price give backs. There's new facilities coming on. But I wouldn't rule it out. It could exceed the top end of that range.

And then switching gears and thinking about Europe, it sounds like the UK facility was a particular headwind on margins on a year-over-year basis as well as a bit on a sequential basis. If you were to kind of characterize the primary puts and takes for the European margins again, it seems like the UK is at the top of the list, were there any other material drivers? I can read your list. You've got a long list of the puts and takes here but I'm asking you to kind of prioritize and maybe quantify possibly the major puts and takes.

When you look at whether you are looking at it sequentially or you are looking at it year-over-year, when we talked about Europe that we had some significant improvements in 2013 and we still expect 2016 to get to about 4.25% to 4.75% overall margins in Europe and we are on track on that. But we did say that 2013 was probably a little bit better than what we had anticipated in terms of improvement that we continue to expect margins in Europe to be better in 2014 versus 2013. But it might not be completely linear. So as I look at Q2, the most significant thing that impacted margins in a negative way would have been our UK operations on the interior side.

Overall things in Europe are continuing to go as we wanted other than this extra cost and the significant launch -- the amount of business we are launching there. So I think the answer to your question is really nothing unusual and I am pleased with what we are doing and think our reputation with the customers continues to improve. We are getting more interest in winning more business so overall pleased with Europe and I think we will still hit the numbers we talked about from a margin standpoint.

Keep in mind there is pretty significant seasonality second half to first half particularly in European volumes in sales.

Very good. And then finally in your share repurchase in your leverage targets, my understanding is that you hope to achieve those leverage targets by the end of 2015. Is my understanding correct and do you still anticipate achieving that target?

Yes, Brett, the targets that we've said is by the end of 2015 to get to that 1 to 1.5 times range and our expectations are that we are going to be in that range.

Remember to get there, what that implies is one, we are going to have to take on some more debt at some point and we will go back in the [market] -- we raised $750 million last quarter. And the cash that we have on the balance sheet at Q2, we've got about $1 billion more than what we need to run the business. We need about $750 million plus or minus to run the business. Cash balances are high obviously because of the debt issue and from the cash we are generating.

So those two things if we deal with a little bit of debt, reduce our cash balances to the levels we require, we should be able to get to our target range and we will get there. Just to make it clear, Brett, it will be most likely a combination of investing in the business whether it is capital or acquisitions and buybacks so it is all going to be buybacks.

Thank you Vince, Don, Louis. Appreciate it.

Rob Lache, Deutsche Bank.

Good morning, everyone. It is actually Pat Nolan on for Rob. Good quarter. I wanted to ask the M&A question a different way, Don. There seems to be some pretty good amount of interest in the space right now on the M&A front. Have you thought at all about -- I know at one point you were thinking about going through kind of a portfolio analysis and seeing which businesses make sense to stay in. Is there any rationale to think about pruning some of the businesses that maybe don't make sense to be with the company long-term, why there is interest in the M&A front today?

Yes, we continue to be a high priority with the management team and the Board as to what our long-term product strategy should be and where we are positioning ourselves. We just did actually one small divestiture in the last quarter, it was about $150 million in sales. It was an SMC business that was all in North America and it was roughly a breakeven business so we sold it for roughly what the book value was.

So we continue to look. We don't have any rush to sell things off. If we believe we can have -- we are creating value by running the business and improving margins but we do continue to look at -- are we going to be in the top one, two, three in all of our product areas globally which would be based on footprint, competitiveness, technology, etc., etc.? Our preference would be to take the product lines we are in and make sure we are global and we are successful.

But with the most diversified from a product standpoint now and we are not opposed to changing our product offerings to our customers if it makes sense and if we focus more on where we are getting the best creation of value that makes sense to be -- we continue to look at pruning the odd area.

As far as acquisitions, we prefer to be buying things and expanding our business obviously rather than selling it but I think you can expect to see us continue the analysis and executions we talked about in the past.

That is helpful. If I could just sneak in just one housekeeping question. Louis, can you give us the FX impact in North America in the quarter and the FX impact in Europe in the quarter on revenue?

Actually negative $105 million in production sales in North America and positive $105 million in Europe in production sales quarter over quarter.

Okay, got it. Thank you very much.

Rich Kwas, Wells Fargo.

Good morning, everyone. Just a quick question on North American margin, just with Q2 production mix being pretty favorable, Vince, your discussion around potentially exceeding the 10% rate longer-term, does that assume a more stable production mix? Obviously truck mix was very favorable in Q2. Just wanted to get some clarification around that. Thanks.

Rich, the question was that Brett asked the question whether it is possible that we could be over the top end of the range, and what I said is as production continues to grow at capacity, that additional capacity is going come in at average margins depending on which business unit it is. But to the extent that we can add incremental sales to existing businesses and we should be generating margins that possibly are higher than average margins so when you sum it all up, it could be possible that we exceed the top end of the range. But as we are looking at it three years, Don and I are comfortable that kind of 9.5% to 10% range is kind of a normal type range. It appears we could go above that. It appears we might go below that but overall, that is a reasonable target for us to have in the company for North America.

We are going through our business plan cycle as well and depending on what we do with our products if we do sell a business and we are adding a number of new plants also in North America, so we can update if we believe the guidance is going to change. What Vince just said, we can update that in the fall.

Okay. So it sounds like you have a stable mix in there, nothing overly aggressive either way.

No, it doesn't imply a major shift in segment mix, no.

Okay. Alright, great. Thank you.

Brian Morrison, TD Securities.

Good morning. Just looking at the South America or rest of world, there was a little internal debate last quarter on the ability to cut the losses in half this year and it looks like you have had some ongoing progress this quarter. So Vince, can you just update us on where you stand on achieving this target and potentially any outlook on returning to break even?

Just secondly on that front with the lower production volumes year to date, it looks like some pretty decent sequential growth to achieve the revenue target for the year so perhaps can you talk about what is driving that?

Yes, just in terms of losses for the year, we are tracking a little bit better our budgets in South America (inaudible) efforts throughout the organization in our South American operations so we are seeing some improvements from an operation standpoint. We have benefited from some of the price increases that we've had in the last year and some of them kicked in early this year.

So I think getting to about half of the losses we had last year, this year I think is still in striking range but we've still got six months to go and it is still pretty volatile from an inflationary standpoint and we are still trying to go after recovery of commodity costs with our customers. Just risk in achieving that but I think it is possible.

With respect to revenue, I think we are up a little bit in terms of where we thought we would be from a budget perspective and two reasons for that. One is just FX and the other is a little less volumes in certain programs. When you look at the rest of the year, we are giving our guidance certainly our best view at this point in time. Again given foreign exchange rates, given what may happen to volumes that could move overall revenues up or down a little bit.

Thank you.

David Tyerman, Canaccord Genuity.

Good morning. Vince, could you repeat the Asian margin target you had?

Sure. So we talked about, David, that by 2016 we should get into the 8.75% to 9.75% range.

Okay, and that is up I think from your old guidance quite a bit. What has changed?

No, all we did was we decoupled rest of world. Asia and rest of world used to be combined so we used to say approximately three-quarters of North American levels. But when we broke it out we gave more details on the Asian chunk which was about 8.75.

Okay. Could you talk to the seasonality, I am not really familiar with the seasonality in Asia. How seasonal is it? You mentioned Q2 was helped by seasonality. Is it very similar to North America and Europe or is there some differences?

I would have to look at it, David, more closely. There certainly is seasonality sort of first-half to second-half in terms of sales but I'm not sure in terms of when shutdowns happened. I can find that out. I haven't got the details.

Okay, fair enough. Then just on -- you highlighted a couple of wins and one of them interesting was the Fusion. I guess the question is does this actually turn into new business for you or is this more a demonstration of stuff that is going to happen piecemeal here and there and generally help the metal business over time?

It is not a win. It was a demonstration vehicle where we believe working with Ford and that is the US Government as well what would be the optimum application of technology in a vehicle and that was the size of the vehicle we used just to say where would you use aluminum, where would you use other high-strength steels or boron or whatever. So it doesn't give us any business. I believe that we are better than any other metal forming supplier in the world quite frankly as far as understanding technology application of technology joining. So it is more just showing what is possible and working with our customers to try and work on future platforms way up front to try and make sure that we are off to the best technology to get the best body. So again, it is more advanced engineering work than award at this point in time.

And a station of capability.

Right. Okay. Fair enough. And then just lastly, the MINI Cooper interior loss, what is involved there and what happened?

We used to do the complete integrated interior, a lot of assembly, and basically what happened was BMW took that in-house so we have maintained a lot of the core components but we lost the assembly business. So it is high sales, low margin but it does obviously impact our sales level pretty significantly. It is about $225 million annually.

We talked about that I think a year ago. That actually is the same plant where we have won other content so hopefully from a margin standpoint or from a [ROPI], which is what we look at, we can still be quite successful. That is the plant though that is launching a lot of new business. The sales in that plant will actually be going up quite significantly over the next couple of years.

Okay. Fair enough. Thank you.

Ryan Brinkman, JPMorgan.

This is (inaudible) on behalf of Ryan Brinkman. Congrats on the quarter. So my first question was primarily on your revenue guidance which you are raising by $700 million at the midpoint versus your prior guidance. And just wanted to simplistically get a sense of how much of that relates to Q2 sort of performing better than your expectation and how much of that is basically a better outlook for 3Q and 4Q?

It is a bit of a combination. We did exceed the numbers in Q2 even on volume so it is a bit of both, the strengthening on the back half and a pretty strong Q2.

And then some of the offsets there are -- some positives as a result of the Canadian dollar strengthening a little bit versus the US dollar offset by weakening in the euro versus the US dollar.

Okay. So the next thing that I wanted to touch upon is primarily on the restructuring you were mentioning earlier on the call, that is primarily focused on your European business. Based on where European volumes stand right now and what your outlook is for the industry production, do you think you need to engage in further restructuring in that business?

The restructuring costs relate to our exteriors, solely to our exteriors and interiors group in Europe if not throughout Europe. It is something that we have been sort of focused on for the last couple of years. I think once we get through 2014, I think there is still going to be some costs we are booking in 2015 but our current expectations are they are going to be substantially less than what we are going to be booking in 2014.

A lot of what you book in a year versus another depends on when you can recognize that liability from an accounting perspective. It may not necessarily mean when we are doing the restructuring because some of the things that we have already booked and accrued for from an accounting perspective, restructuring activity is going to be taking place over the next couple of years at the plant. There is a timing difference between booking something and actually doing the restructuring.

We are still pretty well exactly on target where we thought we would be for this year. As Vince says, we will continue to have bits and pieces of restructuring in all segments around the world but the bulk of the restructuring we had identified in Europe is well underway and at the end of this year we will have not a lot left.

Great. Just lastly a quick question, just trying to get a sense of what you are seeing in terms of the summer shutdowns in both North America and Europe and whether that impacts 3Q comparisons year-over-year at all?

Sorry, I missed.

The summer shutdowns in both North America and Europe and whether that will impact year-over-year comparisons in 3Q at all?

Nothing out of the ordinary. I don't think it changes that much -- the direction of volumes is not that different from what we've seen in the past.

Great. Thanks for taking my questions. Thank you.

Itay Michaeli, Citigroup.

Just a big picture question on revenue. I know in January you outlined an outlook for 2016 for about $3.6 billion of growth in production revenue from 2014. I think your 2014 production guidance, production revenue sales now is about $1.2 billion above where it was back in January. By my math only maybe half of that is tied to just the production volumes. Is it fair to say that you are running ahead of that $3.6 billion target for 2016 for the production sales?

The $3.6 billion becomes stale because it is a look at change in sales given volumes that are already assumed in plants. We give our volume expectations for 2014 and 2016 so if you assume that 2016 is going to continue to grow or outgrow our plan the way 2014 has, then you may be right but it is really just difficult to say. We will have to sort of see where we are in January and update that guidance but it is a point in time based on the volumes.

Sure. That is helpful. Then just on the North America margin, you talked about adding some capacity as you go on. Can you talk about which business segments particularly are going to be adding the most capacity in North America in the next couple of years?

It is a real mix across our various businesses. We've got -- going into a lot of details, we have got an interiors plant, lighting plant, aluminum casting plant, stamping plant, Asia plant. So it is really just going by the top of my head but those are greenfields. We've also got some other plant expansion so it is really not in one specific area.

Okay, great. So it is diverse, great. Lastly and I apologize if I missed this before, Don, but did you quantify the UK launch cost in the second quarter? Then maybe also what you are expecting any residual impact there to be in the second half of the year?

We haven't quantified it. It will come down slightly in Q3 and Q4 from where it was in Q2 but we are still going through the details. We have a plan but we just haven't got into the details. We haven't publicly announced the details of the losses or what it is going to be going forward. It should be less going forward but it will still be an issue in Q3.

Okay, great. Thanks so much and congrats.

Colin Langan, UBS.

Great. Thanks for taking my question. Can you just clarify for us, the $25 million in costs associated with the fire, that was not pulled out as a one-time items or was that a special item?

No, it wasn't pulled out as a one-time items so if you think about the unusual items, they are only in Europe. The $25 million was included in the cost of sales and operating margin.

And any thoughts why it is not one-time? It seems like an unusual event. That is only reason I asked.

We kind of look at unusual as being kind of restructuring. If we get gain -- a substantial gain on a sale of something, we just view that as regular operating income. As we get insurance proceeds, it is going to come in on the other side. It was big enough that we thought that we would just disclose it as a significant item but not an unusual item.

That is how we defined unusual really, we try to stay pretty strict on that.

Okay. And you were talking earlier about M&A. Can you clarify again what your product areas you would be the most focused on in terms of acquisitions, where you see the biggest opportunities in those product areas?

We haven't really out in a lot of detail but if you look at our core product areas, we have many of them where powertrain is a growing area. We are interested in electronics in a number of different areas. We have got strength in there now. We are very strong in the stamping area. We probably don't need to do a lot of acquisitions to grow our footprint. We are already global but if something came up there that was of interest either geographically, customer-wise, or footprint, we would look at it. Exterior business, we are already very big in mirrors and closures but if there was a good opportunity -- so it is really across the board in the areas that we feel are going to be long-term product areas for us.

A lot of what we are looking at quite frankly are smaller technology companies but we have our eyes open on a few other bigger areas.

And what about -- there is always a lot of chatter around seating and you mentioned earlier you would like to be a top one to three player and I think you are a bit lighter on that. Is that an area that you would consider acquisitions in or not?

Yes, we would consider it. Seating is a good business for us. We are much smaller than some of our competitors but we continue to see growth there and we have very good technologies there. So it would really depend on how big it is, what is the footprint. We would have to do an analysis in there but I wouldn't rule that out either.

Okay. Just one last one again sort of on the strategic front but we had recent transactions in interiors with JCI doing a JV and Visteon selling their business. Has that changed your view of the segment or has that even changed the interest from a strategic perspective in the segment?

Hasn't really changed our view on interiors. Interiors continues to be a very difficult business. It is a key part of the vehicle, it is a key differentiator. It is very important to our customers. However, not very many people make much money in it. Launches can be difficult based on different materials and there are complicated products. So it is an area we have publicly said we struggled with from a profitability standpoint so we are continuing to look at what is happening, what are the key players doing.

I don't think it changes the view of the industry on interiors as being an important area and very financially challenging and I don't see any major changes out there at this particular point as far as a major consolidation. It is just sort of changing players.

Okay. Thank you very much.

Richard Hilgert, Morningstar.

Thank you for taking my questions and good morning, everybody. All of my questions really have been asked. The one thing that I did want to explore a little bit with you guys, weight reduction for Magna is a big deal and global architectures. With increasing legislation, the 2025 CAFE Standard coming up here in the US, the CO2 legislation in Europe, your automaker customers are going to be looking for better ways to bring down the weight of vehicles to improve the fuel efficiency.

And what I am wondering is with your expertise in this area, are you running into much debate with your customers on what would be the appropriate things to reduce engineering-wise and physics-wise and what inappropriate things would be to do with the vehicle? And how are you differentiating and coming up with ways to approach this differently than your competitors?

I can't really comment on what the competitors are doing but I can tell you what we are doing. We have got a lot of products which are big, heavy products in the vehicle. There is big opportunities for weight reduction in the body, in the exterior components, the powertrain for sure, the seating, you look at the structures if seating. So if you added up the weight of all of our products, there is big opportunities there and there is huge interest with advanced engineering on all of our customers' parts to say what can we do that will -- they are always looking for a cost reduction which will continue to be a priority. Weight reduction is a big one.

You can look at drag efficiencies in the powertrain system as well because that will also help with the CO2 emissions. So we are doing, I am very pleased with what we are doing on the innovation front. It is one of our three big priorities. I am happy with the progress we are making.

I'm also very happy, we have restructured ourselves, we have got one coordinated approach to our customers at the engineering level and advanced engineering level. We are having some really good discussions and so I don't know what other suppliers may be doing but we have got some really interesting ideas. And there is a lot of interest on all on the car makers as you say for looking at what they can do in the advanced vehicles especially the global platform so they can really leverage the application of the ideas.

So it is an ongoing discussion and it is not all based on price, it is based on safety, new attributes that the end consumer wants. Weight reduction is a combination of things but there is a lot of open discussion and appetite by our customers to really take a look at what is available.

Great. Thank you very much.

And with that, speakers, we have no further questions at this time. I will return the call back to you. You may continue with your closing remarks.

I appreciate everybody dialing in today. We've had a good first half of 2014. We expect continued strong performance for the remainder of the year. We still have some work to do but I am really pleased with the progress we are making in world-class manufacturing and innovation. We are still having some launch issues but I guess we can expect it unfortunately when we are so big and where we are operating around the world but quite pleased with the progress we have made.

So again thanks for calling in and enjoy the rest of your day.

Ladies and gentlemen, this does conclude the conference call for today. We thank you all for your participation today. Have a great weekend, everyone.