Magna International Inc. (MGA) Q3 2007 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you... for standing by. Welcome to the Third Quarter 2007 Results Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded, Tuesday, November 06, 2007. I would now like to turn the conference over to Mr. Don Walker, Co-CEO. Please go ahead.

Thank you. Good morning and welcome to third quarter 2007 conference call. Joining me today are Vince Galifi, our Executive Vice President and CFO; Louis Tonelli, Vice President of Investor Relations; and from Detroit and will be available to answer any questions during the Q&A period is Mark Hogan, Magna's President. Yesterday, our Board of Directors met and approved our financial results for the third quarter ended September 30, 2007. Our board also declared a quarterly dividend of $0.36 per share payable on December 14 to shareholders of record on November 30, 2007. We issued a press release earlier this morning for the third quarter. You will find the press release, today's conference call webcast and a slide presentation to go along with the call, all in the 'Investor Relations' section of our website at www.magna.com. This morning, I will start with some thoughts on the third quarter and then update you on recent activities and then to review our financial results for the quarter and discuss our outlook for 2007. Upon completion of our formal remarks, we will be answered... we will be pleased to answer any questions. Before we get started, just a reminder, the discussion today may contain forward-looking statements within the meaning of applicable securities legislation. Such statements involve certain risks, assumptions and uncertainties, which may cause the company's actual or future results and performance to be materially different from those expressed or implied in these statements. Please refer to today's press release and attached MD&A for a complete description of our Safe Harbor disclaimer. Industry remains difficult particularly in North America where light vehicle production volumes are expected to end the year down for a fifth year in a row. Nevertheless, there continues to be growth in light vehicle production globally and we position ourselves to capitalize on the growth opportunities. Those companies will remain focused and disciplined with strong engineering and efforts on technological advancement, industry can still be rewarding. All in all, we are pleased with the results of the third quarter. Excluding foreign exchange, we still reported sales growth year-over-year as we continue to launch some significant new programs in North America and Europe. And a number of our business units continue to post solid results and we are working hard to address the businesses that are not performing to our expectations. In September, we completed the previously disclosed transaction with Russian machines. We indirectly issued 20 million Magna Class A shares to Russian machines and shortly afterwards completed substantial issuer bid under which we repurchased 11.9 million Class A shares. We previously disclosed our intention upon completion of these transactions to conduct a normal course issuer bid to not eliminate the equity dilution that remained following the substantial issuer bid. To that end, subject to regulatory approval, our board yesterday approved a normal course issuer bid to repurchase up to 9.5 million Class A shares with the bid to commence on or both November 12 and terminate in November of the next year. I would also like to bring you up-to-date on our activities in Russia. With respect to our traditional customers, we are currently coding business with Nissan, General Motors and Ford in the St. Petersburg region and Volkswagen and Renault in the Moscow region. The coding activity covers a number of product, the most significant being stamping, seeding, exterior and interior plastic parts and power train components. With the Gaz Group, Magna continues to work closely with this customer to support the launch of the JR41, the former Sebring vehicle scheduled for next year. A number of our operating units are participating in this support function with Magna Steyr taking the lead position on behalf of Magna. Our Cosma unit is supporting Gaz on the stamping side and will stamp parts on the program within its current capacity in Europe until the stampings can be localized. And Decoma has been awarded the front and rear fascias on the JR41 program. With respect to AvtoVaz and their newly developed platform or C-Segment vehicles, a number of operating units of Magna are currently negotiating for future business. The potential exists for us to have significant content on the platform. We expect to complete these negotiations in the coming months. Magna Steyr has been working with AvtoVaz in the ensuing development of the vehicle on this platform. AvtoVaz announced in May a letter of intent to form a joint venture to jointly produce the new family of C-Segment vehicles in a newly built production facility. Under a letter of intent, the forming of joint venture was conditional upon the completion of a feasibility study to assess the attractiveness of this concept. Following the completion of the feasibility study, AvtoVaz will proceed on their own with Magna Steyr and AvtoVaz working on a contractual basis. The primary reasons for this decision with the existence of capacity in AvtoVaz to produce the vehicles and the short timeline prior to launch in order to construct a new assembly facility. We remain excited about the growth opportunities in Russia and plan to provide the investment community with quarterly updates of our progress there. Last month we announced the signing of an agreement with the Canadian autoworkers known as the framework of fairness or FFA. The agreement represents a new labor model that among other thing preserves the key components of Magna Steyr Enterprise System. The details of the FFA will be introduced to employees in Magna's Canadian manufacturing divisions over a period of several years. These employees will have the opportunity to vote on a secret ballot basis whether they want to approve a new contract under the terms of the FFA and Join the CWA. If the majority workers in the facility vote favored then the plant will be covered by the new Magna CAW National Director Agreement. Key terms and conditions of the FFA include the preservation of our culture and operating principles embodied in our Corporate Constitution and Employee Charter comprehensive no strike, no locker provisions, progressive concern resolution and plant representation mechanisms that preserve our current structure and secret ballot voting in all workplace issues that require vote. We're pleased with new orders [ph] reaching agreement that will allow us to maintain our competitiveness to our entrepreneurial and flexible operating philosophy as we continue to work hard to support our customers and win new business. With that I would now like to turn the call over to Vince Galifi.

Thanks Don, and good morning everyone. I would like to review our financial results for the third quarter ended September 30, 2007. Please note all figures are in U.S. dollars. Appendix A in the slide package accompanying our call today includes a reconciliation of certain key financial statement lines between reported results and results excluding unusual items for the third quarter of 2007 and 2006 respectively. In the third quarter of 2007 we recorded unusual items related to a gain on disposal of land and a building in the United Kingdom. Our foreign currency gain on the repatriation of funds from Europe offset by the loss and disposition of an underperforming exterior facility in Europe, restructuring charges for three facilities to be shut down in North America and the future tax charge as a result of an alternative minimum tax introduced in Mexico that has effected in January 2008. These items resulted in a $23 million increase in operating income, $15 million reduction in net income and $0.13 reduction in diluted earnings per share. In the third quarter of 2006, we recorded unusual items related to restructuring charges for two facilities in North America and one facility in Europe resulting in a $5 million reduction in operating income, a $4 million reduction in net income and a $0.04 reduction in diluted earnings per share. The following quarterly earnings discussion excludes the impact of unusual items. In the third quarter, consolidated sales increased 12% to $6.1 billion. North American production sales grew by 18% in the third quarter to $3.1 billion, as a result of the 3% increase in vehicle production from the comparable quarter to 3.6 million units. North American content was strong increasing 14% to $862 in the quarter. The key driver of the growth in content was the launch of new vehicle program, an increase in reported U.S. dollar sales due to the strengthening of the Canadian dollar against the U.S. dollar and the impact of higher production and/or content on certain programs including the Ford Econoline. New launches contributed to content growth quarter-over-quarter included some of the new CUVs in the marketplace; the Ford Edge, GM's Lambda Platform, the BMW X5, and the Jeep Patriot as well as GM's new full-size pickups, the Ford F-Series SuperDuty pickups, the Jeep Wrangler and the Dodge Avenger and Nitro. Partially offsetting these increases were high content programs that experienced lower volume and/or content including GM's full-size SUVs, the Chrysler Pacifica and PT Cruiser, the Ford Explorer and Focus and the Dodge Charger. Programs that ended production during or subsequent to the third quarter of 2006 including the Saturn ION, the Ford Freestar, Buick Rendezvous, and Ford Taurus negatively impacted content. Incremental price concession and lower Chrysler minivan production volume has resulted the changeover for the next generation vehicle in July 2007 also negatively impacted North American content. European production sales grew $1.7 billion representing an increase of 27% over the comparable quarter in a period when European vehicle production increased 5% to 3.5 million units. European content was strong increasing 22% to $479. The key contributors to content growth in Europe were the launch of new programs including the Mercedes C-Class, the MINI Cooper, the smart fortwo and the Land Rover Freelander, the strengthening of the euro and British pound, each against the U.S. dollar, the acquisition of two electronic facilities from Pressac in January 2007, and increased production and/or content on certain programs including the Honda Civic. These positive contributors were partially offset by programs that experienced lower volumes and/or content in the third quarter of 2007, including the Mercedes E-Class, and incremental OEM price concessions. Rest of World production sales increased 47% to $100 million, primarily as a result of the launch of new programs increased production and/or content on certain programs in Korea, China, and Brazil; as well as the strengthening of the Korean and Chinese currencies each against the U.S. dollar. Complete vehicle assembly volumes declined 25% over the comparable quarter, and assembly sales declined 16% or $158 million to $859 million. The sales decline was primarily as a result of the end of production of the Mercedes E-Class 4MATIC at our Graz facility in the fourth quarter of 2006, as Mercedes started assembling this vehicle in-house. In addition lower assembly volumes for the BMW X3 and all vehicles accounted for on a value-added basis reduced assembly sales. Partially offsetting the decline was the impact of the strengthening of the Euro against the U.S. dollar and higher assembly volumes for the Mercedes G-Class and Saab 9(3) Convertible. In summary, consolidated sales excluding tooling sales increased approximately 14% or $692 million in the third quarter. The primary reasons for the increase are global content growth and a strengthening of the Euro British pound and Canadian dollar each against the U.S. dollar partially offset by lower assembly sales. Tooling, engineering and other sales were $375 million for the quarter, a decline of $39 million from the comparable period. Some of the programs for which we reported tooling, engineering and other sales in the third quarter were the Ford F-Series SuperDuty, the Audi A4, Chrysler's Minivans, GM's full-size pickups and the Ford Flex. Programs that drove tooling revenues in the third quarter of 2006 including GM's full-size pickups and SUVs, the Ford Escape, the MINI Cooper, the Land Rover/Range Rover, GM's Lambda Platform, the Freightliner P-Class, and the BMW X3. The strengthening of the Canadian dollar, euro and British pound each against the U.S. dollar also positively impacted tooling, engineering, and other sales in the third quarter of 2007. Gross margin in the quarter were 13.2% compared to 11.8% in the third quarter of 2006. The change primarily relates to incremental gross margin under the new program launches and as a result of increased production volumes for certain programs, the end of production of the Mercedes Benz E-Class 4MATIC at our Graz assembly facility which had a lower gross margin than our consolidated average gross margin, productivity and efficiency improvements at certain facilities, including underperforming divisions and a decrease in tooling and other sales that are in low or no margins. These factors were partially offset by a favorable revaluation to warranty accruals during the third quarter of 2006, substantially within Europe, costs incurred at facilities in preparation for upcoming launches or for program that have not fully ramped up production, operational inefficiencies and other cost of certain facilities in particular at certain Powertrain and interiors facilities in the United States; lower gross margin earned as a result of the decline in production volume for certain programs, higher employee and profit sharing and incremental customer price concession. Magna's consolidated SG&A as a percentage of sales increased to 5.9% in the third quarter of 2007 from 5.5% in the comparable quarter. Higher employee profit sharing and incentive compensation cost, a lower proportion of both tooling and assembly sales and the provision against our asset-back commercial paper or ABCP were the primary reasons for the increase year-over-year. As a result of the higher gross margin percentage and higher interest income earned offset partially by higher SG&A as a percentage of sales, lower equity income and higher depreciation expense, our operating margin percentage increased to 4% in the third quarter of 2007 from 2.9% in the third quarter of 2006. Our effective tax rate declined to 30.3% in the quarter from 39.7% in the third quarter of 2006. A high reflective income tax rate in 2006 is primarily due to an unfavorable Supreme Court of Canada ruling against the tax payer which restricts deductibility of certain foreign exchange losses. The $23 million impact of these ruling was partially offset by change in mix of earnings whereby more profits were earned in jurisdiction with higher income tax rates. Net income was $170 million in the quarter, a 73% increase from $98 million in the third quarter of 2006. Diluted earnings per share were $1.51, a 68% increase over the $0.90 reported in the comparable quarter in 2006. This increase in diluted EPS was a result of the increase in net income, partially offset by an increase in the number of weighted average shares outstanding during the quarter. The increased number of shares is a result of the 20 million Class A subordinate voting shares issued for the arrangement with Russian Machines and shares issued on the exercise of stock options and stock appreciation right partially offset by the 11.9 million Class A subordinate voting shares repurchased on the substantial issuer day.

I'll now review our cash flow and investment activities. During the third quarter of 2007, we generated $300 million in cash from operations prior to changes in non-cash operating assets and liabilities, and invested $83 million in non-cash operating assets and liabilities. The investment in non-cash operating assets and liabilities reflects an increase in production inventory in North America associated with the launch of the next generation price of Minivans as well as the general increase in production inventory after the summer shutdown. An increase in tooling and other inventory in Europe in preparation for upcoming launches, a decline in accounts payable and accruals primarily due to the timing of payments to suppliers and an increase in income taxes payable primarily due to an increase in cash flow income in certain jurisdictions resulting in our income tax payable growing in excess of our income tax installments which are based on prior year's income. For the quarter, investment activities amounted to $319 million comprised of $174 million in fixed assets and $145 million increase in investments in other assets. The increase in investments in other assets relates primarily to $130 million investment in ABCP. These investments mature in the third quarter of 2007, so as a result of a liquidity issues on the ABCP market did not settle all maturity. As a result these are reclassified as long-term investments. We also recorded $7 million impairment on the value of our investment in this commercial paper. Next, collective turn to our 2007 full-year outlook. We have lowered our vehicle production expectation in North America to 15.1 million units, primarily requesting adjusted production schedules for the fourth quarter of 2007. We have increased our European vehicle production expectation to 15.8 million units, largely as a result of stronger than anticipated production in the third quarter of 2007. We increased our range for expected North American content per vehicle in 2007. North American content is now expected to be between $845 and $875 for 2007. The increase largely reflects the strengthening of the Canadian dollar against our US dollar reporting currency as well as better than expected content growth in the third quarter of 2007. We also increased our range for expected 2007 contents in Europe. Content per vehicle in Europe is now expected to be in the range of 410 to $435. The increase mainly reflects the strengthening of the euro and British pound relative to our US dollar reporting currency. We expect complete vehicle assembly sales to be between 3.8 and $4.1 billion once again reflecting the strengthening of the euro relative to our US dollar reporting currency. We now expect total sales to be in the range of 25 to $26.3 billion, up from our previous outlook. This reflects the increased ranges for North American and European content per vehicle, increased assemble sales and increased expectations for European vehicle production partially offset by lowering of expected production volumes in North America. For the full year 2007 we expect fixed asset spending to be in range of $775 million to $825 million. This is down slightly from our prior outlook, largely due to our continued focus on expenditures across the Company. This concludes our formal remarks. Thank you all for your attention this morning. We'll now open the call for questions. Question And Answer

Thank you. [Operator Instructions]. The first question comes from the line of John Murphy with Merrill Lynch. Please proceed with your question.

Good morning guys.

Good morning John.

A quick question on the change in philosophy in... with labor here and whether it's really actually that large a change. I mean do you see the union becoming more sort of like minded with you in their view on how labor should be paid or should we view this more as you've seen a larger opportunity set with unionized labor in your plans and you might be able to conquest more business?

Yes, I'll answer that. We've had very good relationship both with CAW and the UAW over the past number of years and we've voluntary brought the union in a number of facilities specifically some interiors facilities in seating. We've had what we've referred to as a model agreement over the last number of years that basically allowed us to continue to operate the way we had in our facilities with employee advocates, fairness committees, etc. We've been having a lot of discussions with the CAW over the past many years about coming up with a more progressive model that will allow plants to be competitive but still having input from the employees to super-ballot votes and basically be able to do... continue to win business. I think we are competitive quite frankly when we we will get the business regardless whether we are represented by CAW, UAW or anybody else because of the car companies, primarily they need to have the best technology and the best price they can afford to pick and choose; I think having the relationship with the shade of UN Canada, certainly doesn't hurt anything, I think this is a probably next law to go staffing and working with them. I don't think it will make us any less competitive; when you read the agreement it's fairly progressive. In some cases if we have the opportunity to do some business whether it's required by --because the outsourcing which is based on the latest contracts may not be happening a lot anymore. And in some cases the car company's access to how a contract before taking business out of their plant or for taking business over from a unionized competitor with a complete seat. So this gives us opportunity to have a working relationship already. So it really does... I don't think it has a muck of an impact one way or the other from our profitability standpoint. Employees get to look at it and make a decision whether they want to bode on each on bringing the [indiscernible] into each location going forward. So I don't anticipate if they change one way or the other, and I think pretty encouraged that the CAW recognizes the fact that they also have to change... we want to maintain our competitiveness in North America.

Okay. And then secondly... and I missed the... pardon me, I missed the first few minutes for the call, we are talking about your Russian opportunities. Did you guys mention how much business you are currently quoting on in Russia right now?

John, it's Vince. No we didn't mention how much business we were quoting on. It's just a quite substantial... the amount of business opportunities in Russia. We're working, as Don talked about in the call, closely with Gaz on the JR41 and we do have a number of awards there, and we have a number of programs that we are currently working with, with AvtoVaz on a new C-Segment vehicle. It looks promising but we still need to work through volumes, we still need to work through capital we still to work through pricing and so on. So a number of announced but... so our opportunities there and hopefully some of them are going to materialize in the next quarter or so for us.

Okay. And then lastly just on your frame business or your structure business inside of Cosma, do you see any growing opportunities as we are seeing an increasing push to hire fuel standards here with the light-weighting of the vehicle and your hydroform technology?

I am not sure... Mark, do you comment. I think the number of framed vehicles, number of pickups will... it's probably not going to particularly increase. I think we are probably the healthiest and strongest from a technology standpoint. So I think we have opportunities to conquest more business. I think lighter weight vehicles is definitely going to be attractive, I mean looking at hybrid strategy, doing some... whether it be hybrid Drivetrain or going to offer our customers some opportunities or some innovations in hybrid vehicles, electric vehicles, we have got quite a push on from our vehicle group and no matter what technology wins with this electric, hybrid, diesel, fuel economies can be a major change and light weight is a big part of that. So whether it's hydroforming or some other technology, I think we will be able to continue to win business based on technology we are developing.

But not specifically [multiple speakers], on the space range, yes right?

On things like the space range, we could talk for hours and where it's most applicable on every carton, we have a different opinion but there is definitely some application there.

Okay.

John, just in particular, when you think of both structures and some of the things we have talked about, they are working on some hybrid structures which is a combination of hydroforming and aluminum. And what we are able to achieve is weight reduction across the measure for our customer compared to a traditional cast of aluminum part. So there are a number of areas that we are focused on to minimize rate and make products more cost competitive for our customers.

Great. Thank you very much guys.

Our next question comes from the line of Fadi Chamoun with UBS Warburg; please proceed with your question.

Thanks. Good morning guys.

Hi Fadi.

My first question is as we look into 2008, can you sort of walk us through some of the key launches that you have this year that will continue to payoff in '08 and maybe through few of your launches that you expect in '08 as well?

Fadi, it's Louis. In terms of losses for '08, we haven't gone through that process collecting data through our business plan prospect but clearly the launches that we had this year, the Lambda Platform, the Avenger, the Liberty, even the F-Series SuperDuty which is still ramping up, Chrysler Minivan is being a big on the front right now in North America. All those are going to have full volumes next year, so they continue to be kicked in for next year and I'd say the same thing applies to Europe with our major launches in Europe, C-Class for instance, the Mini at Toyota, some of those Land Rover Freelander, those ones are going to be processed through 2008 as well.

Okay. The other question is if you can walk us through a little bit as well the... if there is any implication from the recent contract between the OEMs and UAW on your situation at new process gear. Is there... does it open any area for you to improve the situation there with the labor?

Yes, we are going to contract negotiations there right now. So I am not going to make a lot of comments on it. But it... and I haven't seen the final documentation on the Chrysler deal. But definitely it has the impact because of the slow rates and the other issues which we will work through and new venture gear. Obviously if you look at the cost base of the OEMs, they seem to have made a pretty significant move into becoming more competitive and we are still analyzing what the impact would be on the supply community and also on what assembly plans will stay open long-term because it's our number one issue is which plants will be producing vehicles which have been moving offshore obviously we can't go after the content in our existing plants. In the Chrysler's case with new venture gear, we need to get overall cost down and remain competitive. We are looking at making some future capital investments there if we can get the... our cost in line with competition. So it's too early to say but it definitely does have an impact because of the employees 11 option, what they want to do and we need to get our cost down in a fairly significant way there to deal with and win new business going forward.

Okay and a last question just in... just for Vince. Do you expect the working capital to reverse in Q4; is this sort of timing issue?

Sorry, I do expect some recovery in the working capital in the fourth quarter. Again it's pretty seasonal to discuss in my formal notes, the build-up in the inventory in the third quarter. So that should improve with that. We do expect some recovery in the fourth quarter.

Okay, thank you.

Our next question comes from the line of Chris Ceraso with Credit Suisse. Please proceed with your question.

Thanks. Good morning.

Good morning Chris.

I know you spend a fair amount of time on this Don, but I just want to clarify because I am not exactly clear. With regard to unionizing in the plants, if the car companies are going to pick whichever supplier gives them the best price regardless of who they are sponsored by, whether it's a union or not, what exactly is the incentive? What spurred you to go down this path with the CAW?

Well, it's always better to have a cooperative working relationship where we have. We have a number of facilities already in the States and also in Canada that have UAW and CAW respectively represented in them. The contracts which we are offered to our employees to vote on really preserves... or everything we have got in our plants now. So it's not going to make us less competitive. And --

But do you get anything out of it?

I don't think we get anything particularly positive out of it. I don't think we get anything particularly negative out it. I think it's... the CAW and UAW obviously are going to continue to push for representing the employees in Magna and rather than going to a knockdown drag-them-all fight which is a lose-lose for both... for everybody, the employees, the company and the union quite frankly. They are willing to work on a modern contract with the flexibility we have in our existing plant then. There's no downside to us in my opinion. So, I don't know whether on a go-forward basis the car companies will give a positive recognition to somebody who has a... an organized work force or not. I haven't seen a lot of that happen in the past just because you said earlier, you guys be competitive anyway, but if it's an equal playing field and we are winning business from unionized... other unionized facilities certainly having ability to have a contract or having a contract in manufacturing plant, what helped, I don't think it... they will give us extra sourcing because of it. But they certainly... in the case of a tie, I guess, and that would be a consideration to have the CAW, the UAW pushing forward one of our plans.

Okay. All right, that's helpful. You mentioned also in your comments, Don, about outsourcing and maybe there is a change relative to the new contract, something that Mark has talked about for a while now is the expectation and the car companies will outsource more Powertrain work. Has that changed or do you think that that's still an opportunity for Magna?

Well, it's certainly shown an interest, Chris, and continuing to outsource transmission work. And we don't see any change in that trend; transfer cases also tend to be a very important outsourced item. And certain Powertrain or energy components have given us opportunities that we are traditionally done inside the Powertrain divisions of the OEM. So I haven't seen any trend of way to suggest that what we've spoken to in the past is going to change. Only time will tell now that the contracts are settled and we will see the specifics on how they are played out. But I don't see the trend changing.

I think in general you got to look at... we have to see the final details of the contracts before GM and Chrysler. But if they are trying to lower their wages and protect some level of employment, you would expect the first thing that they would go after would be whether there's lot of jobs and things like assembly that is... that's got to be close to assembly plants anyway, that they have the space to bring in inside, they could bring it inside, and it's not a heck a lot of technology there if they can be competitive. In Powertrain, in a lot of new manufacturing processes or new products where technology's a big driver on cost and weight, etc., or performance, I think you are going to continue to see that new towards whoever has got the best technology and who is competitive. I think the... the securing by the big 3 of assembly plants long-term in Canada and the States is good to the supply community because often about moves... everything moves with it and transportations can be more and more of a cost factor, especially for bigger components. So I think where technology is involved they will continue to go where they can get the best product.

That makes sense. Last question about the outlook for Q4; some of the other suppliers that have reported have commented that not only is volume kind of flat to down versus Q3 but also the schedules look a little bit volatile. Are you seeing the same thing and could you conceivably earn less in the fourth quarter than you did in the third?

Chris, it's Vincent. We are not going to give specific guidance on the quarter of the event. The guidance we have given for overall content and sales, or I guess tomorrow if you just compare kind of third quarter and the fourth quarter, I'm just personally concerned a lit; macroeconomics and also the impact that that could have on the overall... our industry. But that's a personal concern, not necessarily a company concern.

And then the schedules, Vince, are they looking rougher than what you saw in the third quarter?

I guess when you look at our overall implied volumes at 15.1 rate, you'll have volumes for the fourth quarter implied about roughly the same bonds in the third quarter in North America anyway.

Okay. Thank you very much.

Our next question comes from the line of Peter Sklar with BMO Capital Markets. Please proceed with your question.

Hi Peter.

Hi David. As you know there is that language in the UAW/GM agreement about a moratorium on outsourcing and as well I've noticed in your release this morning you've added an additional risk about the potential for GM, Chrysler and Ford to, I guess, in-source work that was... that's currently being done by Magna. So, it seems like there's something happening here, I'm just wondering if you can elaborate a little bit further. And what you think about language in the agreement?

I think well it's probably too early for us to really understand. We have to adjust guide some of the wording out of the first agreement from General Motors, haven't seen others yet, and I think we got to look at and talk to the car companies. If you look at what they want to in-source, you would think that the first people they would go after would be weak suppliers around and financially will help anyway and they want to get the business out of there. They got to begin internally, they can market test it. So, I think in some cases it may have an impact and that's a potential they have got open capacity, depends what plants they are going to shut, stamping is one that we referred that they may want to look at. So the main source there... I think they are also will be taking to some capacity out of this system as well. So it's too early really to judge the impact. I personally think long-term this is a personal opinion that the car companies if they want to compete they will get more flexibility to run different models through their assembly plant, get more throughput with the given footprint and given number of people and we will probably continue to try and have as much flexibility as possible. The question there about Powertrain earlier, I think we are going to continue to outsource Powertrain, whoever has got the best technology. So we typically look at sourcing two to three years in advance and... when the contract last for three years. So we will see... love to see what the car companies actually do. At the end of the day whoever has got the best technology or whoever is the most competitive and competitiveness is not just made up of labor rate, it's made up of a lot of factors internally, in transportation, and packaging and efficiency, and work rules and everything else. So it's a big business, there's a lot of weak suppliers out there So hopefully if they decide they do want to in-source product, they will take it from the weaker players.

Okay. My last question is, I just want to talk about this accelerated pace which the Canadian dollar is appreciating here. It seems to me that it's putting your Ontario domiciled manufacturing facility, is that a disadvantage when it comes to quoting new business and I am just wondering if you have some thoughts surrounding that?

Peter, it's Vince. Certainly our... some of our Canadian plants have come under pressure and the result so far has been... unfortunately shut down some facilities in Canada with the move into other jurisdictions including Mexico, the United States as well as Asia. I think we have to consider what type of programs they are there. If they are big programs, transportation costs that are expensive and the assembly plants are in Ontario, logistic costs of moving products from the United States to Mexico and to Canada may be very expensive. So those facilities should continue to operate provided the car companies assemble vehicles in Ontario. However to the extent that there are lighter-type products where transportation isn't a big cost component, we've seen some pressure and we've seen pressure on pricing and we reacted to that by moving the test production down in to Mexico or United States.

Okay, that's all I have. Thank you.

Our next question comes from the line of Himanshu Patel with J.P. Morgan. Please proceed with your question.

Hi, thanks. This is actually Ranjit on the line for Himanshu. I actually wanted to delve into some of your segments a little bit closer. You saw a nice level of margins in North America, 5.3%, according to my calculation. The Europe still seems to be a little weaker than that about 2.3%. How would you characterize margins in these two divisions, where is the opportunity? What sort of a normal trend rate that we... you can get back to and I noticed you also sold a underperforming facility in Europe; wondering if that has any implication for margins there, could you comment please?

Sure. Keep in mind when you look at North America and Europe that the businesses are not identical. Remember in Europe in the quarter sales were about $2.6 billion; and complete vehicle production sales and assembly sales. Assembly sales accounted for about $850 [ph] million and Magna Steyr where we did a complete vehicle, a lot of those contracts are forecasted contracts for repurchase of the inventory and we... basically we saw that back with a profit including our cost back to the customer and we have already said that Magna Steyr on average operates on lower margins than the rest of Magna. So that has a negative impact from overall margins. That's why we focus internally on internal plants employees as opposed to just EBIT margin or gross margin. With respect to the exterior facility that we disposed off in the quarter, it was an underperforming division; it's been an underperforming division for sometime. And supposing it has a... has a positive impact on profitability going forward.

Okay. So, I mean I guess my question on Europe gross margins were down even on a year-on-year basis even though your sales and revenues were up. So is that largely a function of the decline in CVA volumes?

Now remember in the third quarter of 2006 we had some warranty reevaluation and it's just booked in our notes in the financials. We have got a warranty reevaluation of about $40 million. That was substantially all in Europe. So if you reverse that warranty accrual reversal in 2006 our income would have been about $40 million less. So you are really looking at on a normalized basis to $30 million to $60 million in 2007. So EBIT doubled while sales have increased by about $200 million.

Okay that's helpful. Just wanted to revisit where you were on M&A and just what do you see out of there, what are some areas which you think the increasing focus at Magna, for example, are axels part of that, could you comment?

We don't have any major acquisitions that are imminent; we are continuing to look at a lot of different areas, we are going through all of our products, we typically do this in annualized basis, but we are taking on a particularly closer look at it this year, what product areas we think we need to grow in, what areas are not as strategic, we've been looking at growth in specific areas and electronics Powertrain is a growth area to us. There is a lot on the arcade right now. I think the valuation expectations are reasonable than they were a couple of years ago, so it's continuing to look at opportunities, but we have nothing to report on it now.

Okay, thank you.

Our next question comes from the line of Michael Willemse with CIBC; please proceed with your question.

Great, thank you. I just wanted to go back to the opportunities in Russia. First on this JR41 program with Gaz, when would this program start?

They targeted to start having the first sale will be across next March, April time period.

And what kind of volumes are they... what kind of volumes are we expecting on that platform?

I don't want to comment because I don't know if they have said anything publicly or not. I don't want to comment on their volumes, but it's... for Gaz it's a new product area to modern vehicles in this sort of C-size. So there won't be huge volume to start with but they certainly are using this as an opportunity to grow into that market.

And the content for vehicles for Magna, if you combine the stampings, the fascias or the launch support, is it going to be pretty mean for content per vehicles like hundreds of dollars?

I just want to... JR41, yes it would be. I think when you look at all the programs that we are looking at today, the opportunities, I think it will be safe to assume that the average content per vehicle on those programs we're focused on would be higher than what we are seeing typically on programs in North America and Europe on average.

Would they be similar to the content per vehicle you suggested back when you put up the presentation on the Russian transaction in the first place, I think you are saying $1000 in metal forming, 150 to 250 in plastics?

Mike, certainly those are, what we talked about on the road show with respect to the Russian Machines transaction, it's still applicable. As we say, we are still looking at a whole bunch of opportunities. It's premature at this point to come up with definitive numbers. We will continue to update our shareholders and the investment communities every quarter as we get more visibility as to opportunities and contracts awarded in Russia.

If you remember, Mike, when we did... when we prepared that presentation in that slide, we were talking about the maximum capabilities that we had in all our product areas. So wasn't necessarily suggesting we are going to get that amount in each of those product areas but that was what our capabilities have reflected.

Okay, it's a good point. And just one more question on Russia, the C-Segment with AvtoVaz, when would that start?

2009, I think is what we are targeting.

2009?

Yes.

Okay. And then also there was a contract dispute with one of your steel suppliers that started... that was initiated in the end of 2004 and the last update suggested that that dispute would go to arbitration in the fall of 2007. So should we get a result from that arbitration, is that going to be this month or December?

Mike, actually the arbitration hearing was a result... it was disclosed... we probably haven't had a chance to look at it in the MD&A.

Okay.

So it was favorably resolved in the quarter for us.

Okay. And so... but there was... because it was resolved in your favor, there wasn't any impact on your results this quarter?

Any quarter of any point of time, we are going to have accruals for a whole bunch of things and to the extent we had some accruals relating to this, they would have been brought back into income. Mike, there wouldn't have been any material amounts.

Okay. And then one last question. The BM [ph]... there was some reports in the press that Magna might be in a position to win the complete vehicle assembly for the mini sports activity vehicle for BMW. If that were the case, I guess, when would that contract announcement be awarded if Magna was the winner?

Mike, we are not going to comment specifically on contract other than if they are material contracts and they have been awarded, we will make an announcement to our shareholders.

Okay. Thank you.

Our next question comes from the line of Rich Kwas with Wachovia. Please proceed with your question.

Hi, good morning guys. How are you?

Good.

Just wanted to follow-up on the Chrysler announcements here. What are you thinking here over the next two years on their model reductions and what you are thinking on their ability to replace that with new products. Have you thought longer-term about the ramifications in the intermediate term for you?

Look it's hard to say because obviously some of the announcements weren't a big surprise to us, look at the sales volume and they are trying to get their overhead costs in line and their capacity through to plant and things like that. As far as new vehicles coming to market I am sure they are working on some new vehicles and platform strategy and international sales, we are cooperating and giving some ideas for some op... we think some good ideas how they can increase some of their international sales in places like Russia. Hard to comment on until we hear specifically and becomes public knowledge what they are working on for future vehicles. But I don't think it's a big surprise that they are trying to streamline their overhead with what they think their future sales are going to be.

And then do you view Chrysler as a more significant opportunity with the new ownership in terms of outsourcing opportunities and content per vehicle?

Probably remains to be seen and one thing that I would like to take a look at before I make a comment would be, whatever language they will have finalized in the... in their agreement with the UAW, I suspect they are going to try and continue to make the decisions that any car company would whatever is the most profitable for them. I think we have a lot of technology and typically the supply base is more competitive. So I think we... there's good opportunities there for the whole supply base. It will depend on what the commercial terms are and what their working relationship is.

Okay. And then Vince what was the... I don't if I missed this, but what was the currency benefit for revenues in the quarter and then operating income or net income?

The best I can give you in sort of flavor on content per vehicle, it's... and I get it's just an estimate, it's really difficult to come to grips with the impact of currency in North America because we do have foreign exchange contracts in Canada to the extent that we are selling in U.S. dollars. But if you look at content growth in North America, last year our content was $756, our growth in content $29... approximately $29 was due to translation. Again that's an approximation that could be higher or lower and content growth which we could identify was about $77 or about 10% and I commented during my formal comments and where that content growth came from. With respect to content growth in Europe you will recall last year we were at $394. The acquisition of Pressac in January of 2007 added about $11. Real content growth that we could identify was about 10% or $38 and the impact of translation which is easy to measure on Europe because it's primarily Euro translating into US dollars was $36.

Great. And then what was the... do you have a number for the net income contribution this quarter?

For currency?

Yes.

No I don't... look as I said it's easy to take Europe and France and look at the impact of translation, the U.S. dollars. And if you look at Canada, we have a substantial amount of business in Canada, it's much more difficult due to the foreign exchange contracts we have either on the revenue side, on the comp side and purchases. But certainly translation would have been positive for sales and progress in the quarter.

Okay. All right, thanks so much.

Our next question comes from the line of Dave Tyerman with Scotia Capital Markets, please proceed with your question.

Good morning.

Good morning David.

Hi David.

Question on the corporate another line. Aside from the ABCP, were there unusual items in there on the compensation side, or one-off type things?

On the... let me just... with the asset backed commercial paper.

Right.

Which was in there for $7 million.

Right.

There was overall a reduction of inner company fees, as a result of profits being lower. I am at looking at third quarter, second quarter. I don't know what your comparison is, I am just looking Q2 and Q3.

Sure.

And the incentive compensation would have been higher in the quarter.

Okay, let me put it another way. You guys used to run let's say for round number $20 million a quarter plus. If you back out... if you add back the ABCP, you are up to low single digits, has something happened there, you are not running at that old $20 million level going forward or is there some... is the compensation the reason and it's kind of a one-off?

I would say that we did have... the asset backed commercial paper was unusual in the quarter. A big part of it's going to be inner-company fees and incentive compensation. We have been adding generally the head count as we are building infrastructure both in North America and Europe as we look at expanding globally. But nothing comes to mind as sort of substantial other than what I mentioned.

Okay. So it sounds like it should be at a... it's going to be at a lower level going forward.

Yes.

On the normal course issuer but you guys have had these things before and haven't typically executed on them very much. Is this different this time because of the fact that you want to neutralize the Russian machines share issue?

David, I think when you look at the Russian Machines transaction we talked a bit, minimizing and eliminating dilution. We did complete a substantial issuer bid. We did buyback these shares. But there is still additional 7.9 million shares outstanding. We did discuss our intention to announce a normal cost issue bid to at least eliminate dilution and that's our current intention. We have got a year under the normal course issuer bid to do that. If we are successful, we can actually purchase up to 9.5 million shares, so we can more than offset the dilution from the Russian Machines transactions. So it's our intent to proceed with that, David, in the course of the year.

Okay, that's fine. And then I was just wondering if you could comment on the underperforming assets. What kind of losses are you guys running right now there or low profit whatever it is and what's your thought on prognosis for those operations?

Let me give you specific numbers, unless Vince already disclosed a bit. The biggest area of underperformance is in the interiors business and that's pretty well global. I think we're making pretty good headway in Europe. We got to do some launches, I think we've got an action plan in place to deal with a lot of the issues there. North American interiors continues to be a underperformer; we are going through a number of launches right now. Some of them where we had a difficult launch in the third quarter which was costly. We are now in normal production mode there and we do have some other launches which we are going through right now. We've got some pricing issues on that. But if you look at the raw material impact, the difficulty in passing that through to our customers. So, we will improve in my opinion in the interiors area in North America. I don't think we have a solution. The other big area which has been a big underperformer has been in the Syracuse operation, and we're going to contract negotiations there, we're looking at having discussions with our customers. We're also looking at taking down some overhead costs there, some operating efficiencies. So, that's another one that we need to make some headway on to get out of the loss situation we're in.

David, just with respect to some other underperformance that we talked about in the past, and we talked about under-performance in our exteriors group particularly Valplast and they would have been another facility which we disposed it in the quarter. We don't talk about Valplast anymore, we talk there about operational inefficiencies, if the plants all running well now, we have good business coming in. So, we've taken that off our radar screen and that plant has starting to see some positive outlooks. On the exterior side, the other facility we have talked about in the past is our Decostar. We continue to struggle there with just the volume of business. So we are focused on getting business in that facility but it currently is in the red.

I'd say generally we have got... we've had a number of... we always track with our underperformers. We have made a lot of headway in a lot of areas as Vince says. We're not out of the woods in all areas yet and specific areas in our interiors business both in Europe and in North America, we are making some good headway, but it's... we still have some issues to deal with.

Okay, great. Thank you.

Our next question comes from the line of Nick Morton with RBC Dominion Securities. Please proceed with your question.

Good morning. I wondered if you could talk about your tax rate, what's likely to be next year and just perhaps expand a little bit on the Mexican tax change.

Nick, I'm not going to comment on 2008. Let me just talk a little about the Mexican tax change. On September 28th, the Mexican government announced the introduction of an alternative minimum tax. It's 17.5% and it's effective January 1, 2008 and the AMT is calculated independently of income taxes. So under Canadian GAAP we met the rules for substantial enactment, so we have the look at our deferred tax items on the balance sheet to see if there was an impact. We looked at our deferred tax assets and the deferred tax assets substantially relate to in some cases tax losses and some other cases deductions that we have taken from an accounting perspective and not yet from a tax perspective and based on the new tax as we look forward we are not going to be able to recover $40 million of the deferred tax assets. And so we have taken a write-down on that. Now we are going to look at between now and December 31st whether we can mitigate this impact because the introduction of this tax was really punitive. There's no relief for items that are on the balance sheet. So we are trying to figure out a way around this but it came up very suddenly at the end of the quarter and we haven't had time to completely understand the tax and had to try to minimize the impact for us and going forward.

Well thank you for that answer. Is there any broader implication for doing business in Mexico? Is it still an attractive place to locate new plants?

It's still an attractive place. The alternative minimum tax is almost a cash-based tax. So we are going to have to spend a lot more time focusing on cash balances and cash transactions. Again we are just focused on accrual accounting like we do in the rest of the world. So we just have to figure out a way to minimize the impact of the alternative minimum tax.

Thank you very much.

Operator, we will just take one more call. I think there is another conference call going on but we take one more call and wrap it up.

So our last question comes from the line of Patrick Archambault with Goldman Sachs. Please proceed with your question.

Hi, yes, good morning.

Hey Pat.

Hi Pat.

Just wanted to get a sense... in terms of contract reprising in interiors, how big of a driver has that been in the quarter for you in terms of improvement within interiors and sort of what inning are you in terms of how much that could improve the outlook just as more... better economics get priced into the newer contracts as they roll on?

There hasn't been much of an impact in the last quarter that I can recall. I think quite often we can go back in hardship cases and some customers will take a look at it and verify the pricings. So I think that has some impact. I think the bigger impact is on... is on the new contracts bid, and I think a lot of the very weak players are now out of the interiors business have gone bankrupt or moved on, so I think they are bringing at more realistic pricing going forward. So typically we have to wait it out, but in some areas we would expect we are going to get some pricing concessions from some customers where we are underwater.

But in general like some of these large launches you talked about for the quarter, I take a margin improvement will occur just on the back of those becoming a higher percentage of your overall revenue basis. Is that correct?

While in the quarter we had some launch inefficiencies, so as we get in normalized production we typically get back to normalized margins. In a couple of the areas we do have some pricing issues on a go-forward basis, we are having discussions with the customer right now.

And on new stuff you are negotiating in general are people open to potential escalators if raw material prices should begin to increase a lot again?

Not typically. In specific cases we can discus it but typically you make your best estimates on where they are and try and get efficiencies going forward. The difficulty always is that there's people who are desperate to build an order book and if they are doing flip [ph] to business, they will under-quote. And sometimes we get caught in chasing that. But I think most of the players now are... I think taken a more realistic view of what pricing should be. I think many of the customers also have understood that if they get unrealistic prices from somebody who is not a strong supplier, they would under and then they have a huge issue to deal with and I think the car companies are getting smarter and even understand who they are doing business with.

Okay. And I just had one question on cash. Obviously your cash balance is pretty significant here. You probably have at least a few $100 million of that that can be taken up by the issuer bid for the 9.5 million shares. But beyond that that would still leave your cash well above I think what you have said you needed to be for operating levels. Just wanted to hear about what your plans might be for that cash in the future?

Well if you look at the normal course issuer bid, if you were to purchase 9.5 million shares at roughly today's price, we will need $900 million to do that. So it's more than just a couple of $100 million, it's almost $1 billion. And when you look at the debt that we have on our books, on a pro forma basis, at the end of the quarter, we'd have about $1 billion of net cash. So taking that $900 million off our balance is a big chunk of cash.

So we are going to continue to look at growing globally, look at new market areas, look at acquisitions, trying to make the best decisions for utilizing the cash but at same time we also want to maintain a healthy balance sheet.

Okay great, thanks a lot.

Okay, I would like to thank everybody for joining us today. Once again we are pleased with the third quarter and remain focused on further improving operations across the company in global growth. Thanks for calling in.

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.