Magna International Inc (MGA) 2014 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the fourth-quarter and year-end 2014 results conference call.

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

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

(Operator Instructions)

As a reminder, the call is being recorded Wednesday, February 25, 2015.

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

Please proceed.

Thank you.

Hello everybody, and welcome to our fourth-quarter and year-end 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 fourth quarter and the year ended December 31, 2014.

We issued a press release this morning for the quarter.

You can find the press release, today's conference call webcast, our updated quarterly financial review, and the slide presentation to go along with the call all in the Investor Relations section of our website, at www.magna.com.

Before we get started, just a reminder the discussion today may contain forward-looking 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.

Q4 was another very strong quarter for Magna, our best quarter of 2014 in terms of adjusted earnings, and a strong finish to a record year.

In North America our operations continued to perform well overall.

Adjusted EBIT percentage was 10.6% for Q4, and for the full year we posted 10.1%.

In Europe, we've made further strides in improving our footprint and operating results.

We reported adjusted EBIT of $99 million in Q4.

For the full year of 2014, adjusted EBIT in Europe increased for the third consecutive year to $434 million.

This represents an adjusted EBIT of 3% for 2014.

In Asia we continued to invest in our business to support future growth.

Despite this investment, we reported improved adjusted EBIT of $52 million for the fourth quarter, and for 2014 we reached $162 million, an increase of 91% over 2013, to a margin of 8.2% for the year.

Lastly, in rest of the world, which is essentially South America, through a combination of productivity and efficiency improvements, together with some restructuring and down-sizing, we reduced losses by more than half during 2014 to a $35-million loss, including only a $5-million loss in the fourth quarter.

All in all, a very strong 2014 for Magna.

Looking forward, the recent strengthening of the US dollar is expected to continue to impact our reported results.

However, we're very excited about the significant amount of new business we are launching over the next three years on new programs and new facilities around the world.

This new business should contribute meaningfully to consolidated sales and earnings in the future.

Lastly, on Monday of this week we signed an agreement to sell our battery-pack business to Samsung.

This transaction reflects further fine tuning of our product portfolio to focus on businesses where we have strong or growing market positions.

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

Thanks Don, and good morning everyone.

I would like to review our financial results for the fourth quarter and year ended December 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 fourth quarter of 2014, we recorded restructuring charges entirely related to our European exteriors and interiors businesses and an impairment charge related to fixed assets at an interiors operation in the United States.

Together, these reduced operating income by $24 million, net income attributable to Magna by $17 million, and EPS by $0.08.

In the fourth quarter of 2013, we recorded restructuring charges entirely related to our European exteriors and interiors business, impairment charges, a release of income tax valuation allowances, and a deferred tax benefit associated with the elimination of the Mexican flat tax.

These together reduced pre-tax by $90 million, net income attributable to Magna by $11 million, and EPS by $0.05 in the fourth quarter of 2013.

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

In the fourth quarter, our consolidated sales increased 2% relative to the fourth quarter of 2013 to $9.4 billion.

North American production sales increased 8% in the fourth quarter to $4.7 billion, largely reflecting a 5% increase in vehicle production to 4.2 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 volumes in certain programs, net divestitures, and net customer price concessions.

European production sales declined 8% from the comparable quarter, while European vehicle production increased 3% to 5.1 million units.

The decrease is the result of the weakening of the euro and Russian ruble against the US dollar, lower production volumes of certain existing programs, a decline in content on certain programs, in particular, for the Mercedes-Benz C-Class, programs that ended production during or subsequent to Q4 of 2013, and net customer price concessions.

These factors were partially offset by the launch of new programs.

Asian production sales increased 13%, or $52 million, to $451 million over the comparable quarter, primarily as a result of higher production volumes of certain existing programs, and the launch of new programs, primarily in China.

These were partially offset by the weakening of the RMB against the US dollar, and net customer price concessions.

Rest of World production sales declined 10%, or about $19 million, to $169 million for the fourth quarter, primarily as a result of the weakening of the Brazilian real and Argentine peso against the US dollar, programs that ended production, lower production volumes in certain existing programs, and decreased content on certain programs, including the Mercedes-Benz C-Class.

These factors were partially offset by the launch of new programs and net customer price increases.

Complete vehicle assembly volumes declined 10% from the comparable quarter, and assembly sales declined 9% to $721 million.

The negative impact of the weakening euro against the US dollar and lower assembly volumes for the Mini Paceman and Peugeot RCZ were partially offset by an increase in assembly volumes on the Mercedes-Benz G-Class.

In summary, consolidated sales excluding tooling, engineering, and other sales increased approximately 1%, or $77 million, in the fourth quarter.

The increase reflects higher production sales in North America and Asia, partially offset by lower production sales in our Europe and Rest of World segments, and lower complete vehicle assembly sales.

Tooling, engineering, and other sales increased 17%, or $145 million, from the comparable quarter to $986 million.

Gross margin in the quarter increased to 14.1%, compared to 13.9% in the fourth quarter of 2013.

The increase in gross margin percentage was primarily due to margins earned on higher production sales, incremental margin earned on new programs that launched during or subsequent to the fourth quarter of 2013, productivity and efficiency improvements at certain facilities, a decline in complete vehicle assembly sales which have a higher material content than our consolidated average, and lower warranty costs.

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

Magna's consolidated SG&A as a percentage of sales was 4.7% in the fourth quarter of 2014, in line with Q4 2013.

SG&A increased $14 million to $442 million in the fourth quarter of 2014, as a result of higher incentive compensation and higher new facility costs, partially offset by the weakening of currencies against the US dollar.

Our operating margin percentage was 7.5% in the fourth quarter of 2014, compared to 7% in the fourth quarter of 2013, excluding E-Car amortization from last year.

This increase substantially relates to the higher gross margin and lower depreciation percentages, as well as higher equity income, partially offset by higher interest expense.

In Q4 2014, our effective tax rate was 25%, compared to 22.5% in the fourth quarter of 2013.

The increase was mainly the result of lower favorable auto settlements in Q4 2014 as compared to Q4 2013, an increase in permanent items, and a change in the mix of earnings.

These were partially offset by a reduction in losses not benefited.

Net income attributable to Magna increased $57 million to $526 million for the fourth quarter of 2014, compared to $469 million in the comparable quarter.

Diluted EPS increased 21% to $2.52, compared to $2.08 in the fourth quarter of 2013.

Diluted earnings per share were negatively impacted by $0.14 in the fourth 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 fourth quarter of 2014, we generated $881 million in cash from operations prior to changes in non-cash operating assets and liabilities, and an additional $118 million in non-cash operating assets and liabilities.

For the quarter, investment activities amounted to $716 million, comprised of $670 million in fixed assets, $23 million to purchase subsidiaries, and a $23-million increase in investments and other assets.

For the full-year 2014, we invested a record $1.6 billion in fixed assets to support the significant amount of new business we are launching over the next few years.

Our balance sheet remains strong, with $225 million in cash net of debt as of December 31, 2014.

We also have an additional $2.3 billion in unused credit available to us.

Yesterday our Board of Directors approved a two-for-one stock split, and an increase in our quarterly dividend with respect to our common shares.

Our quarterly dividend of $0.44 per share, which is $0.22 per share on a split adjusted basis, is a new record and represents an increase of 16% over the Q3 dividend.

The dividend is payable on March 27 to shareholders of record on March 13, 2015.

The stock split will be effective on March 25, 2015.

Lastly, we disclosed early last year that our Board and Management are committed to utilizing our balance sheet.

To this end, during 2014 we invested $1.8 billion in fixed assets, acquisitions, investments, and others assets.

We paid out $316 million in dividends; and as I mentioned earlier, we once again increased our dividend rate in respect of our fourth quarter to a new record level, and we repurchased 17.5 million shares, returning an additional $1.8 billion to shareholders.

We have approximately 17.6 million shares, or 35.2 million shares after giving effect to the stock split, available to repurchase under our current normal-course, issuer bid that expires in November of this year.

We will continue to invest in our business and return capital to shareholders in order to reach our adjusted debt to adjusted EBITDA target range of 1 to 1.5 times, together with a reduction in our cash balances.

Now let me pass the call over to Louis.

Thanks, Vince.

Hello everyone.

I'll review our updated 2015 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 now expect 2015 North American light vehicle production to be approximately 17.4 million units, up from about 17.3 million units in our January outlook.

In Europe, we're now expecting 2015 total European light vehicle production to be approximately 20.4 million units, up from about 20.3 million units in our January outlook.

Due to the continued strengthening of the US dollar since the beginning of 2015, we are also now assuming a lower Canadian dollar and a lower euro relative to our January outlook.

We've lowered our North American production sales range, largely driven by the negative impact of the assumed lower Canadian dollar, partially offset by the higher North American vehicle production assumption.

We've lowered our European production sales range, largely due to the assumed weaker euro, partially offset by the impact of higher assumed light vehicle production.

We slightly lowered our production sales range in Asia, reflecting the assumed weaker RMB relative to the US dollar.

The net result of these factors is the lowering of our consolidated production sales range to $28.2 billion to $29.5 billion.

Our expected assembly sales also declined, reflecting the lower euro assumption.

Implicit in our total sales outlook is a slight decline in our expected tooling, engineering, and other sales compared to our previous outlook.

This is also related to assumed weaker currencies relative to the US dollar.

Our total sales range is now $33.1 billion to $34.8 billion, down $1.3 billion at the top and bottom of the range from our previous outlook.

We now expect our consolidated operating margin percentage for 2015 to be in the low- to mid-7% range for 2015, compared to the low-7% range in our previous outlook.

Note that our operating income for Magna represents pre-tax income before unusual items.

The higher margin range largely reflects slightly improved expectations in certain of our operations, and the impact of currency movements, in particular the weakening of the euro, which results in a smaller proportion of lower-margin European business relative to our consolidated forecast.

We expect our income tax rate to be in the 25% to 26% range, unchanged from our January outlook.

All in all, lower sales outlook, improved margin outlook, and no significant impact on bottom line as a result of these changes.

For the full-year 2015, we expect fixed-asset spending to be in the $1.4-billion to $1.6-billion range.

This is a decline from the $1.5-billion to $1.7-billion range in our January outlook, due entirely to currency movements.

Lastly, we expect restructuring costs for 2015, which are entirely related to our European operations, to be approximately $40 million before tax.

This concludes our formal remarks.

Thanks for your attention today, and we'd be pleased to answer your questions.

(Operator Instructions)

Our first question is from the line of Dan Galves from Credit Suisse.

Please proceed.

Hi, good morning.

Thanks for taking my question.

I think you basically said it, but it seems like the currency impact to the revenue guidance was significantly more than the net impact.

What caused you to raise the production expectations for North America and Europe?

Is it fair to say that there's really no impact to the bottom line from the change to the revenue guidance?

Dan, it's Vince.

We looked at our most recent forecast for production compared to our January outlook.

We tweaked them up a little bit.

There were some mix changes.

But it's not a big significant change in overall vehicle production in both markets.

The biggest impact to our income statement or our outlook for 2015 relates to two things.

One is foreign exchange.

If I look at the US-Canadian exchange, between our January outlook and where we are today, there's been a further decline of about 8% in the Canadian dollar.

Again, if I look at the euro, the decline's been about 8%, as well.

That's had a downward impact on US dollar reported sales.

Got a little bit of a benefit from increased production.

But I think the good news is when we look at overall margins, we're a little bit more confident that we're going to be able to achieve higher operating margins in a number of markets, North America and Europe in particular.

When you do all the math, lower sales, higher margin, different mix between Europe and North American sales based on overall consolidated sales, bottom-line results is our January outlook bottom line and our February outlook bottom line are about the same.

Okay, got it.

On the Europe margin running around 3%, I think your guidance for this year is low 3% range, what are the significant things that need to happen for you to get into that 4.25% to 4.75% guidance range for 2016?

If you could give us any detail of how much of a drag this UK interiors facility is, in terms of launch costs right now?

Dan, what's going to move us up is a number of things.

One is we've embarked on a restructuring consolidation plan in Europe, and that's primarily based on our exteriors and interiors group.

We've taken some impairment charges and restructuring costs in 2013.

We took some more in 2014.

They're all related to our exteriors and interiors operations.

Based on our outlook today, we've got about another $40 million of charges to take in 2015.

But remember, even from an accounting perspective, even though we're recognizing these costs as an expense, those actions that lead to improvements in operations come a little later.

As we work through the passage of time, we'll see the benefits of that restructuring.

We see some of that benefit already for sure in 2014.

We also have some business that continues to roll off, some under-performing contracts; and our continued focus on world-class manufacturing efforts to improve operating efficiencies.

We're seeing that having an impact on overall margins.

As new business rolls in at more appropriate pricing, that has a positive impact on margins.

When you sum all that up, we're on track.

I think when you look at 2014 and where we ended up, we're probably a little bit behind because of what was going on in the UK.

We incurred losses in the UK in 2014.

We're going to continue to incur losses in 2015 as more business is ramping up in that facility.

But we're encouraged with the trend we're seeing from an operating performance, and the losses are being reduced in 2015 versus 2014.

It's Don here.

To hit the numbers we projected a couple years ago, it's really just to continue to execute on the plan.

We still have a lot of launches in the UK plant.

They're in much better shape than they were last year, but we still need to launch all the business.

For the most part, our losing divisions are about exactly where we wanted them to be, so we're making good headway there.

Thanks, guys.

Appreciate the color.

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

Please proceed.

Thanks very much.

Don, you spoke in previous quarters that there were some North American plants that had significant launch issues.

I think you've talked a little bit about it through the quarters of 2014.

Can you give us an update specifically on how those plants are doing?

I think you expected the drag from those plants to start to get -- start to come down in the early 2015 quarters.

I'm wondering if you saw the benefit of that in the fourth quarter?

Yes, we had three interiors plants we had some significant issues last year.

One down in Mexico, we're through the problem, so it's back to slight profitability.

We had another one which has got some launches to finish this year, but we're in pretty good shape there as well.

We saw some losses, but that will be -- I think it's by the end of the second quarter.

We're in pretty good shape there, back into profitability.

We still have one plant that we're seeing some fairly significant losses.

It's not out of control operationally.

We have some launch and we have some cost issues as well.

That will continue to be a drag through this year.

But they're not material.

So we're in pretty good shape in all three of them.

Peter, of those three plants, one of those plants resulted in an impairment of fixed assets that we booked in Q4, $18 million, which we felt that was an unusual item.

Right.

I assumed that was the case.

The other question I had, on the sale of the battery pack business, I'm just a little confused.

What is left now of the original e-car business?

I remember the original e-car business I think had three components to it.

There was the power train, the battery pack, and there was some other businesses you were involved with.

Can you talk about what's left and what aspects of e-car you'll be pursuing?

Just a reminder for everybody else, we bought the 27% share that the Stronach Group owned a couple of years ago you now.

The value of the whole Company at that point in time was about $280 million.

We had -- there was a very small R&D facility for cells, which we rolled into a joint venture, so we own a very small percentage of equity, but it was losing money.

I didn't want to keep on funding it, because we don't really want to be strategically in the cell business.

There's some major players there.

The reason we bought it -- the biggest reason we bought it was for the technology, electronics, and the power train.

That was by far and away the most interesting part, and continues to be the most interesting part for us.

That is now integrated into the electronics business of our power train group.

We also had a battery pack business, which basically takes the cells that other people would make and puts it in a pack which has to be heated, cooled, managed.

We still have maintained the ability to integrate a cell into a vehicle in Magna Styre, but we had a relatively small group that was actually designing and building packs.

The reason we decided to get out of it was we do not intend to get into making our own cells, and a lot of the big cell suppliers -- LG, Panasonic, Samsung -- they are all moving into having the capability of putting packs around their cells.

Some of our customers have decided they're going to do their own packs, they see that as being core.

Long term I think we would have been squeezed.

We were investing in this business.

It was still losing a little bit of money, and it really wasn't core for us.

As we looked at our product strategy, we just determined it was a good time to sell it.

Okay.

The last question I had is in the presentation, you highlighted in your comments that Magna's won a significant amount of new business launching over the next three years.

I'm just wondering if you're able to elaborate on where it is geographically, and which business segments that you're seeing these good wins?

It's really across all of the business areas.

As you know, we track the businesses by our group.

We have about -- of the numbers we talked about, which is about $5 billion, 45% of that's coming in North America, 35% in Europe, and 20% in Asia, approximately.

Okay.

Thanks very much.

Our next question is from the line of John Murphy from Bank of America Merrill Lynch.

Please proceed.

Just a first question on North America.

Certainly there's great debate as to where the market ultimately will go this year.

But by our numbers, it looks like you're being conservative by as much as 5% on volume.

Just curious if we do see that kind of upside in the market, where you are in capacity utilization, and whether you'd be able to handle something like that, or would that create some deterioration in margin.

I'm just trying to understand if you could get some big incrementals, if there's upside to North America.

It really depends where it's going to be, by what product area.

Off the top of my head, I can't think of anything where if the market went across, up 5% across the board, where we would have a capacity problem.

It might be a couple plants, but generally if it's up 5%, that's very good news for us.

Okay.

Then just a second question.

We've heard from a lot of other suppliers that the pull-back in raw material costs might be a significant or fairly material offset to the headwinds of ForEx.

I'm just curious what you're seeing on that side.

John, it's Vince.

From a commodity cost standpoint, we would have started the year with probably the view that the commodity costs were going to be a headwind.

Our most current view at this time is commodity costs are probably a tailwind, and should benefit us year over year.

That's part of the change in operating margin is due to the change in commodity cost expectations for 2015.

Okay.

Lastly on the buy-back issue here, obviously it's good news that you guys are being very aggressive in the market.

Just curious, Vince, as we think about the pace of buy-backs, is that something you look at as smoothing out through the course of the year, or could that be the kind of action that could be accelerated, given where the stock price is right now?

It's always challenging to know when you buy back the stock.

What we've been doing is buying it fairly consistent across the years.

That's our current thinking on that.

I guess we'll have to assess, if the stock takes a dramatic move one way or the other, what we do.

The course of action at this point in time is to smooth it out over the course of the year.

Lastly on Magna Styre, there's been some rumors that you have entertained some potential new customers at Magna Styre.

Is there any comment on that, or is there any opening for new customers at Magna Styre?

We never comment on any we're working with.

But we have talked about some of the programs rolling off in Magna Styre, the production unit over in Graz, Austria.

We've got some replacement business.

As far as announcing any more work we've won, we will wait until the customer talks about it before we say anything.

Great.

Thank you very much.

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

Please proceed.

Thanks for taking my call.

Congrats on the quarter.

Can you talk a little about your manufacturing footprint within North America?

Do you manufacture your products disproportionately in Canada at all relative to where the vehicles are produced?

I know the strength in the US dollar generally hurts you; for example, with translation from the euro, and you talked about that.

I'm just curious if you see any transaction benefit from shipping from Canada to the US with the change in the currency, or for that matter from Mexico to the US?

Anything we need to think there relative to North America margin in our models?

I can't remember the sales off the top of my head, but we have -- if you look at the number of employees, we have just under 20,000 employees in Canada.

We've got just over 20,000 in the states, and we've got a few more in Mexico than we do in the states.

We are over-weighted in Canada compared to where production is, for sure.

In the short term, it does have a negative impact to us when we translate sales and profitability.

The long term, with the Canadian dollar being down, it should give us the ability to be more competitive and win more business out of Canada.

Ryan, you look at Canadian-based sales are about plus or minus $7 billion.

If you look at our guidance this morning, we're $17.5 billion to $18 billion for the year for 2015.

It's more than a third of our sales are in Canada.

Where you can actually find that is if you go to our, in terms of quality statements and you look at our segment note, which is Note 18, it will show that last year our total sales were $6.8 billion.

Okay, that helps.

Thanks.

Do you have any sense so far as to how gas prices, lower gas prices are impacting SAAR or vehicle mix in North America?

How might that impact Magna?

Historically allow that you're maybe disproportionately on full-sized trucks.

I don't know if that's still the case.

Can you update us there?

Some of the change that we made in our outlook reflects a bit of a mix shift between cars and trucks.

We're up about 100,000 units plus or minus, but there's certainly a mix shift.

Programs like the K2XX are higher in our current forecast compared to our plan.

Certainly there's an impact based on what we're seeing in releases, and what we have in our forecast.

I really can't comment on SAAR at this point, but certainly impacting some of how we're looking at programs and mix.

Okay, great.

Thanks.

Appreciate the color.

Our next question is from the line of [Etai McCalley] from Citigroup.

Hi, guys.

This is actually Justin Barell on behalf of Etai.

How's everything going?

Pretty good.

A quick question with regards to the (inaudible) environment.

Maybe give us some color on what you're seeing, and maybe the implied growth rate that you guys have for 2015 for that segment?

Can you repeat that again?

The first part of your question?

Yes.

With regards to the active safety environment, what you're seeing through the quoting and the annual growth rate for the business segment in general that Magna's seeing right now for 2015 guidance.

Well, we don't really, Justin, give specific guidance on a particular product area, but I will give you some color.

The business has been growing.

We continue to expect it to grow.

We continue to expect it to grow faster than our overall growth in production sales in North America.

We've been investing to grow that business, and we're starting to see the light at the end of the tunnel with growth and profitability -- bigger growth and some profitability.

Perfect.

That's great.

Thanks so much.

Any chance you can give us some color on the 2015 quarterly cadence, what we should expect relative to 2014?

We don't really talk about details on volume or margin or sales by quarter.

We only give full year, so can't really help you too much on that.

Generally, you have your typical seasonality, and that doesn't change that much from what we've seen in the past.

But we don't provide a lot of detail on quarters, so I can't help you there.

Okay, perfect.

Then one last one.

You mentioned before the upward revision to the operating margin targets a bunch of different futures.

You mentioned commodity cost.

You also mentioned slightly improved expectations.

Can you give us some color as to where you're seeing the improvements like region-wise, segment-wise, and then maybe give us the beneficial impact that you're seeing as a result of this recent steel pricing?

In terms of which segments we're seeing some improvements over our previous outlook, we're certainly seeing improvement in North America as well as Europe, and those are the two biggest drivers.

Asia's still relatively small overall, and Rest of World is pretty small.

How much of that is commodity cost, it's included in that number.

But a big part of that is just improved outlook on operating performance in both regions.

It wouldn't be steel, because most of our steel is locked up early in the year.

Despite what may be happening to spot prices, it's not going to have as much impact on us.

Perfect.

That's great.

Thank you guys so much.

Our next question is from the line of David Lim from Wells Fargo Securities.

Please proceed.

I wanted to look at John Murphy's question in a different way.

When we look at Magna Styre, in theory if a new OEM entrant or what have you approached you guys, do you guys have enough ample capacity to accommodate, let's say, incremental new business in the 5,000 to 8,000 unit range?

I'm not going to comment on any particular customer who's in the business.

As far as we have two businesses, one is engineering, which we -- we're fairly full on engineering, but that's very cyclical.

You try and manage the business so we're always running it at full capacity.

As far as manufacturing, we do have open capacity in our plant in Graz, which is the only place we have manufacturing footprint at this point in time.

If we were able to win more business, then we can fit it in, but there's a limit, usually dictated by our paint shop.

In the future, we're looking in pretty good shape there.

David, just to give you some facts.

Last year volumes at Magna Styre were about 135,000 units.

As you think about the days when we were producing the X3 in Austria, our production was over 200,000 units.

We did shut down one paint line.

What we've commented about in the past is that existing capacity is 160,000-ish to 170,000-ish range.

Got you.

Great.

Thanks for the color on that.

That's very helpful.

Then I know with the Canadian dollar you mentioned a little earlier strengthening US dollar gives you a better position to win.

I just wanted to understand from your Canadian plants, what is the drive time to an OEM plant that you guys are willing to bid on?

Is it more like a two-hour drive time by truck, or can that be a little longer?

Can you give us some addition color on that, if you would?

Completely depends on what we're shipping.

We actually make parts in some of our Canadian plants where we're shipping to China.

It depends on what's the cost, what's the labor content, how many parts you can get in a shipping container.

Typically what our customers look at is what's the total landed cost at their facility, and that takes into account transportation.

We ship things from Mexico to Canada and the US.

We ship things from Canada down to Mexico, around the world.

Typically if you look at large metal stampings or big welded assemblies or big painted fascias, you want to be within a reasonable shipping distance.

But we even ship some very large parts long distances, if we have installed capacity that's open.

It really depends.

Got you.

My final question, I wanted to touch upon active safety a little bit more.

Can you remind us what products you do in active safety?

Obviously as that business grows, will you separate that line item?

Curious on active safety front, is that more in your vision the Magna Donnelly business, or can you give us a little more color there, please?

Thank you.

Our active safety business for us really is cameras.

We would call it driver assistance systems.

It's cameras and the ability to detect things using camera technology or other technology which we may be buying.

As an overall part of our business, it's relatively small.

It's within our electronics business, which is part of our powertrain group.

Our mirrors group also has some technology, but most of it is in the electronics business in the powertrain.

Great, thank you.

In terms of how we're going to disclose that, obviously we report on segments, North America, Europe.

What we do once a year with the financials, we actually also show overall sales on a product basis.

But our driver assistance business historically has been lumped with our vision and electronics systems product area.

You won't be able to see that on its own.

Got you.

Thank you.

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

Please proceed.

Good morning, everyone.

It's actually Pat Nolan on for Rod.

Hi, there.

Most of my near-term questions have been answered.

Don, I wanted to ask more of two longer-term questions.

The first is about -- I know you guys continuously examine your product portfolio, what makes sense to keep, what makes sense to potentially sell.

Could you give us an update on that process, either in terms of do you see potential to still sell off some businesses that maybe are not the size you want to be, and are there buyers out there for that currently?

We started a fairly in-depth process a couple of years ago with the Board, and we've been focused on a lot through 2014 as to where we think the growth will be by product area in future cars.

We look at what we call car of the future, and we have been selling off small businesses.

We are looking at things.

There's lots of opportunities out there now, but make sure we buy some that's a good fit, it's going to be at the right price.

But I think you can never tell if we're going to buy or sell anything.

Our intention would be to continue to fine-tune our product offering.

We're the most diversified from a product standpoint now, and there's no pro or con to that, quite frankly.

However, we can't be the best in technology and global footprint and as good of growth opportunities in everything equally.

We do continue to look at that.

We don't comment on what we're going to do specifically, but we are continuing a lot of focus on it.

From a high level, would you expect that the pluses and minuses of selling off some businesses, taking in businesses, to be use-of-capital neutral, or potentially a source of cash over the next couple of years?

Well, we'd rather be growing the Company than making it smaller, so it depends on the timing, obviously.

We may have a business unit that we think would be better in a joint venture or potentially selling it, but it depends on whether we think we can he grow in a region, we can find a good partner, whether it's better to divest of the whole thing.

My expectation would be we would be using cash a lot more than generating cash, but it depends on the timing.

That's very helpful.

If I could ask one more, just going back to your expected revenue growth between 2015 and 2017, what you outlaid last month was about $5.1 billion of revenue growth.

Could you maybe talk about which businesses you expect to encompass the largest portions of that growth?

We don't disclose it, but we're typically seeing reasonably good growth in most of our product areas.

If there's an area that doesn't see good growth for whatever reasons, those are the ones we'll look at, whether we don't have to -- they're not in a growing segment, we don't have the right technology, we're not competitive because of our footprint or whatever.

If that's the case and we don't think we can get efficient enough that we're going to be able to grow the business, that's something we would hook at potentially doing something with.

But we're seeing pretty good growth across most of our groups.

Just to be clear, that $5 billion is growth between the end of 2015 and 2017.

So it's over the two-year period.

Thanks very much, guys.

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

Please proceed.

Yes, good morning.

First question's on the Mini.

Could you let us know when the replacement is on those vehicles, or when they leave?

Yes, the Mini Countryman and Paceman are slated to end their current production in 2016.

2016, okay.

How much of the Magna Styre or the assembly sales would they account for, ball park?

Well, they're the biggest two programs in there, for sure.

We've got the RCZ is a relatively low-volume program.

The G-Class is between 15% and 20%, and the rest is MINI Countryman and Paceman.

Okay.

The anticipation still is that there's something that's going to come to replace the Minis, is that the idea?

Yes, we have business actually that's coming on.

David, it's Vince.

We've actually previously disclosed that we do have replacement business.

We have not been able to identity what that replacement business is.

Okay, that's helpful.

On the Asian side, the margins were very strong.

In fact, I think they were above your target range in Q4.

Was there anything unusual there, or is there the possibility that the Asian margins could actually go above the target range you had?

You're talking about the outer years for 2016?

When you look at 2014, we're 8.2%.

I'm thinking Q4, Vince.

You got to think that there's a lot of moving pieces.

We don't have a big sales base in Asia, so if you have an accrual or you have inventory items, it could move the margins one way or another.

I sit back and look at where we are in 2014, where we think we're going to be in 2015.

And 2015 kind of flattish, but still being able to grow by the time we get to 2016 to the 8.75% and 9.75%, subject to -- going to keep on saying this -- if we are able to win substantial business.

That means investments for new capacity or putting up some equipment, that could delay that ramp-up in margins.

But that's a good news story of growing sales faster.

Right.

Okay, sure.

That's fine.

Then on Rest of World, is the intention still to improve that loss roughly cut it in half again this year, and what would drive it?

Correct, that's our plan.

There's a lot of moving pieces down there, as well.

But we wanted to cut about in half from 2013 to 2014, which we did.

We want to cut it in half again from 2014 to 2015 That's our expectation.

Don, is it mostly just more of what you were doing in 2014?

Basically the same thing, some operational improvement, some pricings.

It really depends on where the commodity prices go up dramatically, it's offsetting inflation.

The operations are running relatively well down there.

Now we have a few improvements we can make; but assuming things are relatively the same as they are now, then we hope to cut it in half.

Okay, thank you.

The last question, just on this due bill trading you talked about in the release, does this have any practical implication for when the stock starts trading effectively on the split basis?

Starts trading on a split basis on the 26th.

Okay.

So what does the due bill thing do?

David, we're going to have to get back to you on that.

My understanding is that your existing shares, there's no waiting, it just converts it two-for-one.

If you hold the share at the time the dividend's paid you get the $0.22 per share.

But we'll have to get back to you.

I'll follow.

I'll give you a call, David.

Okay, that's fine.

Thank you.

Our next question is from the line of Richard Hilgert from Morningstar.

Please proceed.

I wanted to ask a little bit about the sensitivity in the industry on recalls.

It seems like things have kind of died down a little bit.

We still see some recalls coming through.

Don't know if that's due to the heightened sensitivity at this point, or if it's just a matter of the normal course of business that we would see routine recalls anyway.

Wondering what has been Magna's experience in this, and where do you think we're standing right now on the sensitivity?

Boy, that's a tough question.

From our perspective, we wouldn't have any more insight than I think anybody in general.

Certainly, I think all of the car companies have been taking a real close look at if there's a problem out there, make sure it gets you addressed.

I think some of these things from an engineering standpoint are very difficult to determine; but I know that most of the car companies have full-time groups looking at this.

If there's a question I would suspect they're probably being more cautious than less cautious.

I would think that a lot of the work has already been done.

However, there's -- I don't really know, because I'm not in the car company, but I would hope that we're getting back to more normal levels of recall.

People are very focused on safety issues, so you would hope as has been the trend over the past 10 years or so that in the next 10 years people will continue to be really cautious and looking at different failure modes and through the program management, just doing as an effective engineering job.

You would hope over a period of time that recalls would go down.

I think the wave -- hopefully, the big wave in them has already been identified.

Richard, if you think about yes, where do we stand in all of this, we look at warranty expense.

If I looked over the last three years, we're $47 million in 2014 and $40 million in 2013, $43 million in 2012.

We've been pretty consistent, the $40 million to $50 million mark for the last several years.

Okay, great.

Thanks, guys.

Appreciate it.

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

Please proceed.

Thanks.

Good morning, everyone.

Vince and Don, if I were to follow up on something you said earlier on the Mini business, do you expect the he replacement win to completely offset the Mini volume loss?

More or less.

Okay, thanks.

Helpful.

Also, is there any update to the Chrysler Windsor production you shut down, in terms of either a change of timing or in terms of any color around building up any inventory ahead of that?

Because I believe in your guidance you aren't really accounting for any (inaudible)?

Chrysler minivan?

Yes.

Q4 was a pretty strong quarter for the minivan, but we haven't really changed anything in 2015.

Timing's the same.

We're shut down right now for the 14 weeks, and we do have significantly down volumes this year versus last.

Our back-of-the-envelope calculation is the minivan shutdown, $250 million to $300 million in sales in 2015, negative impact.

Got it.

Finally on the CVA discussion from earlier, while we probably can't mention the A word on the call, can you just remind us what Magna Styre's capabilities are?

If I were to just come to you and say I want to make a Ravi Shanker branded automobile, can you just do everything for me, or what is it that Magna Styre can do or not do?

Well, from a manufacturing standpoint, we have a complete assembly plant over there, which is the body shop, it's the paint shop, and general assembly, which we do multiple vehicles in.

From an engineering standpoint, Magna, as well as some other companies out there, can engineer complete vehicles.

That's our business model over there.

Do you have design capabilities, as well.

I think for the Qoros car, you guys did the design as well?

Typically, I'm not going to comment on any car, but typically our customers will do the design.

We can always do -- we can always work on design, but typically our customers do the design of the exterior, the interior, and once that's defined, then we'll do the engineering portion of it.

Got it.

Finally, has there been any thought on expanding Magna Styre's production footprint into North America or Asia?

Over the past we've looked at it various times.

It's like a chicken and egg.

You almost need to have several customers to get it to critical volume.

We have nothing that we're certainly announcing at this point in time.

Got it.

Thank you.

Our next question is from the line of Brett Hoselton from KeyBanc.

Please proceed.

First on complete vehicle assembly sales, I think what obviously everybody's grappling with here is how do we think about complete vehicle assembly sales in 2016 and 2017.

This year you're down that low- to mid-$2-billion range.

In 2014 obviously you're much higher than that.

What are your thoughts?

How would you, if you were us, how would you model complete vehicle assembly sales beyond 2015 into 2016 and 2017.

Would you model them down from 2015 levels?

Would you model them up?

Would you model them significantly up?

What are your thoughts there?

In 2016 I would only be modeling up, because if you think about we don't have any new programs coming in 2016.

You have a natural life cycle of vehicles.

That's going to be driven by the customer if they want to load on incentives or whatever, that can have an impact on their sales and our production.

Typically, just as we're seeing this year, the vehicles are a year older, and so you have some decline in the program.

In 2016 I don't think I'd be modeling up versus 2015.

2017 we really can't comment on.

We haven't given any guidance on 2017 volumes.

Hopefully as we get closer, we're going to be able to disclose something related to the programs and the cadence at Magna Styre.

But at this point we really can't say anything about 2017.

Can you give us any sense of your confidence level of gaining some follow-on business in those out years?

Well, we're confident that -- well, we know we're going to have business in there beyond the current programs, and the G-Class -- the Peugeot ends this year.

The G-Class runs until -- into like 2020-plus.

We're not worried about the G-Class, and we do have business with BMW that comes in after the Mini.

It's a high degree of confidence because we've won.

It's been awarded, Brett.

We've got -- I guess you're asking just on the business model of our Styre operation.

We've done a lot of work in the past couple of years on improving our efficiency over there, driving our costs down.

I'm pretty optimistic about the future of our business unit in our assembly business in Graz.

You don't necessarily see anything from a customer standpoint that causes you to believe that they would pull back from that business model?

No.

This debate goes on for long periods of time.

I think long term if we're competitive, and we've done a lot for our competitive, then low-volume vehicles make a lot of sense for we call it peak shaving under the vehicle assemblers.

Unless there's a huge down-turn that they expect to have over a longer period of time, then typically our customers will be looking at what they want to source internally, externally over a five- to seven- to 10-year period.

Short term impacts really don't impact that, because if we're going to do all the tooling and put something in there, then typically we have some guarantees on where the volume's going to go.

We have a -- we can't -- we're not going to talk about what we're doing in 2016 and 2017 in any detail, but we have a lot of visibility out into -- typically out to 2019, 2020, 2021 in this business unit.

Certainly, some of the sales decline is volumes on the Mini programs.

But a lot of it is currency.

Just remember that when you're looking at the overall decline in sales 2015 versus 2014.

Then capital deployment, as we think about capital deployment beyond 2015, obviously you generate a lot of free cash flow after CapEx and so forth.

Should we generally anticipate that you're going to look to maintain that 1 to 1.5 debt to EBITDA range, and then deploy the excess capital in the form of dividends, share repurchases, and an occasional M&A opportunity?

Brett, the 1 to 1.5 sort of range is something that we feel comfortable operating in, subject to macroeconomic conditions.

You've got extremes.

I think from an ordering perspective I'd change the order of how you said things.

I'd say we're committed to obviously paying a dividend and growing that over time as profits grow.

Our main focus is to grow the business, if we can do that in a very profitable, value creating way.

To the extent we've done all that and we're still not in that sort of comfort zone, then we'll use cash to buy back stock.

Great.

Gentlemen, thank you very much.

Thanks, Brett.

(Operator Instructions)

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

Please proceed.

Yes, good morning, everyone.

I wanted to ask about tooling.

It was up dramatically sequentially, and very strong absolutely.

Wondering what that hints to in the upcoming quarters?

Tooling, Todd, is -- it moves around quite a bit quarter to quarter.

If you go back over the last three years, tooling in Q4 has been higher, the highest quarter in each quarter.

I think it's just the timing of recognition of revenue.

I think what you should take out of this is that we've talked about pretty substantial sales growth in the coming years in tooling as reporting.

It's being impacted negatively by currency to support (inaudible - background noise).

Okay, that's helpful.

Just one quick follow-up, if I could.

Lots of questions around what might or might not happen at Styre.

My question relates to Styre and/or e-car capability.

Is your electric powertrain commercially available to be designed in at this point in time?

The electric powertrain typically is made up of all sorts of different components.

It's a motor, it's an inverter.

It can be a rear-axle drive.

It's a lot of different things.

It's not like you have one unit that you say you're going to throw into a vehicle and that's your electric drive system.

We have lots of those pieces, and there's other suppliers that have lots of those pieces.

Certainly from a capability of designing and making the components for an electric vehicle, we have a lot of capability.

That's ready for customers that want to move to commercial levels, rather than the R&D phase that it might have been in with an e-car when you bought it?

Absolutely, yes.

There's a lot -- they're very low volumes right now in pure electric vehicles and hybrids, but there's a lot of componentry and systems out there today, so the capability certainly exists.

Thanks a lot, guys.

Our next question is from the line of David Lim from Wells Fargo.

Please proceed.

Just a quick follow-up.

On that $5 billion from 2015 to 2017, what's the FX assumption that's underpinning that?

Thank you.

We gave that at the beginning of the year.

The rate that we had back then was $0.87 Canadian and $1.25 for the euro.

But that's a change in sales.

So if the rates move around, it's going to be more or less flat.

Got you.

Okay, great.

Thank you.

There are no further questions from the phone lines.

Great.

Well, thanks everybody for joining us today.

Q4 was a good quarter, and a very strong ending to the year for us.

Despite the impacts of currency, we're very optimistic about 2015 and beyond.

We have lots of good things going on at Magna.

We appreciate you calling in.

Enjoy the rest of your day.

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

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

Thank you.