Magna International Inc. (MGA) Q2 2010 Earnings Report, Transcript and Summary

Welcome to the Magna International, Inc. second quarter results 2010 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 today, Friday, August 6, 2010. I would now like to turn the conference over to Mr. Don Walker, Co-Chief Executive Officer at Magna International. Please go ahead, sir.

Thank you. Good morning and welcome to our conference call. Joining me today are Louis Tonelli, Vice President, Investor Relations and Vince Galifi, Executive Vice President and Chief Financial Officer. We issued a press release earlier this morning, which covers our second quarter results. You’ll find the press release, today’s conference call webcast and a slide presentation to go along with the call all at the Investor Relations section of our Web site at www.magna.com. Today, I will first comment on our second quarter. Vince will then review in detail our Q2 results and our revised outlook for 2010. We’ll then open the call to answer your questions. Before we get started, just as 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 for a complete description of our Safe Harbor disclaimer. We posted strong second quarter results in a period when vehicle production in our primary markets remained low by historical standards. Light vehicle production in North America and Western Europe improved relative to the second quarter of 2009, representing the third consecutive quarter of such year-over-year increases in both of our principal markets. In North America, light vehicle production increased 75% as compared to the second quarter of 2009 when both General Motors and Chrysler were operating under bankruptcy protection. A sustained level of higher North American auto sales in 2010, as compared to the first half of 2009, as well as dealer inventory levels that remain below long-term historical averages have contributed to improved North American light vehicle production. In Western Europe, light…

Thanks, Don and good mornings everyone. I would like to review our financial results for the second quarter ended June 30, 2010. Please note all figures discussed today 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 second quarter of 2010 and 2009 respectively. In the second quarter of 2010, we recorded restructuring charges which resulted in a $24 million reduction in operating income, a $21 million reduction income and a $0.19 reduction in diluted earnings per share. The restructuring charges relate to activities initiated prior to 2010 at three facilities in North America. In the second quarter of 2009, we recorded restructuring and impairment charges as well as a curtailment gain, which together resulted in $55 million reduction in operating income, $61 million reduction in net income, and $0.54 reduction in diluted earnings per share. The following quarterly earnings discussion excludes the impact of unusual items. In the second quarter consolidated sales increased 63% relative to the second quarter of 2009 to $6.1 billion. North American production sales increased 123% in the second quarter to $3 billion reflecting a 75% increase in vehicle production to 3.1 million units and a 27% increase in North American content to $975. The large increases in vehicle volumes and content in part reflect the low levels of production in Q2 2009 at GM and Chrysler as both operated under bankruptcy protection in that quarter. North American content increased primarily as a result of favorable production relative to industry volumes and/or increased content on certain programs including; GM’s full sized pickups and SUVs, Chrysler-built minivans, Jeep Wrangler, Liberty, Patriot and Compass, Chrysler’s 300 and 300c and Sebring, the Dodge Journey,…

(Operator instructions). Our first question comes from the line of Peter Sklar with Nesbitt Burns. Please proceed with your question. Peter Sklar – BMO Nesbitt Burns: Vince, there are a number of items that surfaced in Europe that you don’t classify as unusual, but may be they could be nonrecurring, the recovery of a receivable that had been provided for a favorable settlement at commercial terms, and it sounded like your warranty accrual kind of changed from the normal pattern, could you just go through those three items, explain what they are and quantify the impact?

Peter, I’ll try to do that and typically I wouldn’t quantify the impact of significant items, but I think the numbers in this quarter need to be discussed. I think we need to look at both North America and Europe and not just Europe. Overall, when I look at the quarter and some of that I call significant items sort of nonrecurring and I wouldn’t put warranty in there, that could be up or down in any quarter, Peter, on a consolidated basis, there is about $20 million of significant items that are added to the bottom line. So a positive impact and that’s broken down into North America and Europe on the following basis; about $15 million of negative items in North America, so I hate the P&L that were significant items. The $15 million essentially relates to some additional downsizing expenses for activities that we undertook prior to 2010 that weren’t classified as unusual items. So that’s nonrecurring. In Europe, overall, net basis, we had about $35 million positive impact to earnings and there is a number of things in there, Peter. One, there is a couple of commercial settlements with customers that were favorable. There was a recovery of some receivables that we have provided for at the end of 2009 and that was partially offset by some downsizing activities and minor restructuring activities in a number of facilities in Europe and those downsizing and restructuring activities were not considered unusual, they were $1 million here, $1 million there, $2 million there, so it all got lumped into significant items. So, net-net, negative impact of $15 million in North America; positive impact of $35 million in Europe. Peter Sklar – BMO Nesbitt Burns: Those are pre-tax impacts you’re talking about, is that true?

That’s pre-tax. I think if you look at the tax rate depending on the items, tax will be a bit differently, but I think if you looked at our effective rate in the quarter which was 21% and apply that to the net 20, that’s to give you an approximation of the impact to earnings per share. Peter Sklar – BMO Nesbitt Burns: Right. What is the outlook for the tax rate? Are we going to stay in these low 20s in the coming quarters?

As I’ve been discussing over the last couple of quarters, we are going to benefit from a lower tax rate. As we continue to generate profit, we are going to have the benefit of losses not previously utilized that had benefited from an accounting perspective. We’ll have income and in prior years there were losses that we couldn’t benefit of. That’s going to go away because we are going to have profits. So I think, at least for the balance of this year if you look at our rate, we were 21% in Q2, 23% in Q1, I think sort of 21% to 25% is probably a rough estimate. It really depends on a mix of income, but that’s a fairly good number that you’d want to use. Peter Sklar – BMO Nesbitt Burns: Just lastly, could you and Don just kind of paint a picture of how Steyr is going to unfold from here on in? Don highlighted Steyr had showed a good quarter-over-quarter improvement. I am not too sure exactly about the ramp down on the X3 and whether that’s going to leave a hole in some coming quarters until you could fill that. Could you just kind of tell us a little bit on how Steyr assembly is going to unfold?

Sure, Peter. I think when you look at Steyr the X series actually start production in Q3 already. It’s planned that the Countryman is going to launch in the third quarter. So volumes are going to ramp up slightly in Q3, continue to ramp up in Q4, and into 2011. Q3 is also going to have summer shutdowns. December has a Christmas shutdown. So as I look at Magna Steyr and I look at Q2 versus Q3 and Q4, Q2 is going to be stronger than Q3 and Q4. From an operational standpoint as we continue to launch the Countryman, sequentially, moving far from Q3 we’ll start to see improvements in bottom-line, but there will be a step down from Q2 to Q3.

Thank you. Our next question comes from the line of Itay Michaeli with Citigroup. Please proceed with your question. Itay Michaeli – Citigroup: Just wanted to get your thoughts. Question on long-term profitability, the EBITDA margin year-to-date is nearly approaching 8.5%. I mean if we were to get back to let’s say 2007 volume in North America and Europe maybe in 2012, let’s say, I mean what would be the biggest headwinds or what would prevent you from getting back to maybe a double-digit type of EBITDA margin? Maybe just talk about how to think about the long-term profitability of the business in light of what we’ve seen in the first half of the year.

You’re looking at the 2012, that’s a long way away. As we think longer term about our business, there’s going to be changes in the structure of our business. We’re generating today the biggest bulk of our sales in our traditional markets being North America and Western Europe. We’ve been discussing for sometime our focus on expanding geographically into energy markets, and we’re doing that today whether you look at Asia, in particularly China, we’ve got growth in Korea. We’ve got growth in Thailand. We’re growing in Russia. We’re going to be growing in South America. So as you invest to grow that’s going to sure negatively impact its operating margins, EBITDA margins. We need to take into account in their traditional markets, capacity utilization and volumes was up to 15 million, 16 million or 17 million. So we have to add capacity even in new regions of North America and what’s the impact of that. I think that’s just too far away to think can we get the double-digit EBITDA, and we’re pleased with our performance in the second quarter. The actions that we’ve taken to reduce capacity; rationalize capacity, try to keep our overheads down even as production volumes increased, I think the team across the organization and our employees have done a very good job and we continue to focus on that. But we are focused on growing our business globally. Our customers continue to work more and more programs on a global basis and we need to expand our global reach. So that, I believe, will have an impact as we’re investing on our margins going forward. How that all equates? I don’t know. Itay Michaeli – Citigroup: That definitely gives us some parameters. Don, if you could talk a little bit more about just what you’ve seen in Q2 around the new business environment coating activity, any conquest business, and just maybe some of your latest observations there?

There has been in the light takeover business opportunities, we saw a rush about last year with people generally. We have had some takeover business but it hasn’t anywhere near the same level. I think we’re back to normalcy. I think one of the general trends which we continue to see is, as the current companies continue to grow their global platforms, as there is not an environment of desperation like it was last year with some of our key customers as given whether they would survive or not, they are taking a look at longer-term who they want in their supply base; are the suppliers they have, do they have healthy balance sheet, are they still good at executing programs having cut off their program management, are they still bringing new technologies to market. So I think we’re going to continue to see the trend of consolidation of the supply base and less likely that customers will take really low unrealistic bids. Some people really don’t know what to do in trying to just build an order book. So, based on that I think as we coat business, we would expect to continue to win a reasonable amount of businesses in the normal amount of coating business going on. As Vince says, we are seeing more opportunities to expand our business in Rest of World segment as we are involved in more global platforms. So, we never try to have a win rate, but I think it’s more normal environment we’re operating in now than as compared to a year ago or even two years or three years ago as we were leading up to the downturn there try to buy business to build an order book.

Our next question is from the line of John Murphy with Bank of America/Merrill Lynch. Please proceed with your question. John Murphy – Bank of America/Merrill Lynch: I was just wondering as we look forward to next Thursday and Friday as we go through this hearing, how this process works or how you understand it’s going to work? Will we get an answer on August 13 or next Friday or will it come out the next week? Is this kind of really the last step or last hurdle in the process to execute this deal or is there some other material event that would occur potentially after that?

John, as you know, the court hearing is set for next Thursday-Friday. First, it’s a commercial court. Our expectation and what I have been told is that the court is going to make a decision in due course. I don’t think it’s going to be the 13. That’s highly unlikely, but it should come in short order after that, pretty short order, and based on that decision, both parties will have the right to ask for an appeal to decision. It’s just going to be an appeal and the court is going to entertain that that will be based on whether there was an error in interpretation of law. I am not a lawyer, so don’t quote me on all of this. But I don’t know where that process could end up or how long that would take, but we do expect sort of a decision short order passed August 12 or 13. John Murphy – Bank of America/Merrill Lynch: And then a second question, it seems like there were some ongoing restructuring particularly in Europe, I was just wondering, as we look through the second half of this year and volumes tend or look like they are going to weaken in the second half in Europe, if there’s any more major restructuring you feel like you need to do in Europe or you’re kind of through the bulk of that, and at this point, it’s writing through the bottom of the design curve there and waiting for the volumes to recover?

As far as restructuring is concerned, in North America, let me answer that first, we are essentially through, we think we need to do just a couple of more facilities we’re looking at, but it’s something further out in the future, there’s nothing eminent right now. In Europe, we have been looking for the last six months what we want to do to improve some of our losing divisions. The sales, as we’ve talked about, have stayed relatively strong. If they taper off, and even if they don’t taper off, we are still analyzing what we need to do just to make sure we’re running at full capacity and we need to do some drastic actions in restructuring. We’re still studying it and we haven’t come to a conclusion yet, so I don’t think there’s going to be a significant amount this year, but as I said, we’re still going through the analysis. John Murphy – Bank of America/Merrill Lynch: And then lastly, Don, you had mentioned sort of a slightly different theory than the company has had in the past on capital allocation going forward and mentioned potentially getting to a net debt neutral, taking on some debt to grow the business over time. Are you still comfortable with that? Do you see opportunities developing out there in the near term to take advantage of that slightly more aggressive capital allocation?

Well, our cash position is strong, has been so in line. We did say when we were out and we’ve said in the past that we’d like to utilize the cash that we have to improve our profitability, so there are a number of potential acquisitions out there where we continue to look at them. We don’t want to make an acquisition for just the sake of making an acquisition. We are seeing pretty strong demand for new capital as well that tends to be over a couple of year horizon as we quote and we win business, and we asked the Board of Directors what we want to do from a debt to equity perspective, but we certainly have some cash available to take advantage of opportunities arising, we’re looking at a number of opportunities right now. So we’re not going to predict what we’re going to do, but we certainly have the ability to take advantage of things we’re looking at. John Murphy – Bank of America/Merrill Lynch: Any particular car parts of the vehicle that makes the most sense or is just really kind of across the board?

It’s really across the board, and we look at each business unit as a separate standalone business and each one of them is looking at how they want to grow globally, and there is lots of opportunity out there, so it’s not any one specific area that we’re targeting. Internally, we certainly have our priorities, and we have made those public.

Our next question comes from the line of Chris Ceraso with Credit Suisse. Please proceed with your question. Chris Ceraso – Credit Suisse: A couple of items. Can you recap maybe at a high level, say over the last couple of year, and let’s say total number of heads that have been reduced and total number of facilities that have been closed, just want to get a feel for the restructuring that’s being completed and how the business model has changed?

In terms of last four years, if I go back to our Investor Presentation, we’re down six to nine facilities globally, Chris., and that’s largely North America. The bulk of those will be North America. Chris Ceraso – Credit Suisse: What about headcount?

I would think about 84,000 couple of years back and we are sitting now at 76,000. Chris Ceraso – Credit Suisse: Okay.

I don’t know the numbers exactly, but I think we went from a peak down to the low point last year about 10,000 people and we are bringing the number of those people back again. Obviously, we’re going to make prudent decisions on how fast we bring people back into the company, but we are seeing opportunities to re-employ some of the people we let go because we are winning new business and the volumes are going up.

It’s Vince, just wanted to add some color to that. We may have closed or consolidated six to nine facilities over the last four years, but we’ve also been investing in low-cost region and emerging markets. I have the same comparison over that same period, but between even 2001 and 2009 we’ve added 50 odd facilities in those regions, between ‘08 and ‘09 we added 14 facilities. So, some of it’s been consolidation and closing and some of it’s been realigning our manufacturing footprint in emerging markets and low-cost regions. Chris Ceraso – Credit Suisse: Vince, what do you think in terms of second half versus the first half on material costs and launch costs?

With respect to commodity costs, we had some headwinds in the second quarter. As I look at the last half of the year, in particular, our two major commodities are steel and resins. Steel, I think we’re pretty well locked in for the balance of this year, so I don’t expect it will be a significant plus or minus on the cost of steel. However, when I look at resins we don’t have everything locked in, we have some of our buy that’s locked in and it really depends on what happens with oil prices and resin prices in the second half of this year. I’m hearing internally that the impact shouldn’t be significant, but there is volatility in pricing. So, there could be some headwind, not significant but some headwind in the balance of this year. Chris Ceraso – Credit Suisse: Just lastly the significant items that you outlined roughly $20 million in total, not a big deal relative to the total company profit, but it does seem to move the needle at least in terms of the margin that you printed in Europe, which would have been a fair amount lower if we took those items out. So you’re still running in the 1% to 2% range. Where does that recover to and how long does it take to get there?

We continue to work on number of things, first of all we’ve been talking about Magna Steyr, some of the significant launch costs that have been incurred there, we continue to invest in electronics in Europe, and we continue to focus on improving operations. So it’s going to be not in the short term. A significant improvement in margin I think is going to be shorter-to-medium term. But I did want to point out one thing, I think if you look at incremental margin in Europe, ex the significant items that were positive to bottom line, the incremental margins quarter-over-quarter was the 28%. So we are seeing some good pull through; that’s a very positive sign for us.

Our next question comes from the line of Michael Willemse, CIBC World Markets. Please proceed with your question. Michael Willemse – CIBC World Markets: Just on the complete vehicle assembly operations in Europe, when do you think you’ll be kind of fully launched? Is that going to be more like first quarter ‘11 or I was just wondering how that would ramp up?

Mike, it’s really end of this year or early next year, we’ll be pretty much at full launch. Michael Willemse – CIBC World Markets: What kind of capacity utilization would you be at there?

Mike, we’ve taken capacity down at Magna Steyr. We are in really good year as we are running at 250,000 units. Capacity is way down there. We don’t expect to get to 250. We can run Steyr at 125ish. That will be good capacity utilization, and so we’ll move close to that target as we move into 2011. Michael Willemse – CIBC World Markets: You’re still looking to add capacity there, I assume?

We’re still having launch discussions, so if we get another contract, we can put more vehicles through there. Michael Willemse – CIBC World Markets: Okay, and then just another question on, earlier you alluded to looking at growth areas, and there was one question on product segments. What about regionally, where would you see potentially putting capital to work over the next couple years?

In an ideal world we would have our sales match what the global production sales are. Realistically, that’s not going to happen, certainly not in the short term. So we are prioritizing growth from a capital allocation point of view in emerging markets because that’s where we think we’ve got the best opportunity for long-term growth. However, if I look at where we have opportunities for winning business, where we have opportunities, we are still seeing some good growth in North America, in Mexico. We’re seeing opportunities in South America as well. We still see opportunities in Europe, so we’re not going to not spend there. We’ve got good customers and we’re winning business. I would think over the next five years, you’ll see a shift in the percentage of our capital going into low-cost regions, which would be Russia, China, South America, India, is a little bit further out, but we’ve got opportunities there as well. Michael Willemse – CIBC World Markets: If you look at China, it’s been a tough market to break into. What do you think you can do in the next five years to break into that market in a meaningful way?

We continue to look at acquisitions, but acquisitions are not inexpensive over there. Most of our groups have now that are put hold over there; there is a couple that are still looking at some opportunities. So our growth has been reasonable. It’s not as much as we realistically could have gotten, but we also don’t want to make acquisitions, if we’re not going to get good returns. We’ve got 15 facilities there now. We can continue to grow our business. We continue to grow management capability. So I think we’ll continue to see our sales growth in China.

Mike, if you look at our Rest of World sales, a good chunk of that is China. We were at about a $0.5 billion in 2008. We’re kind of running at $0.5 billion after half a year, so we’ve been actually growing and we have a lot of success in China.

Our next question comes from the line of Rod Lache with Deutsche Bank. Please proceed with your question. Pat Nolan – Deutsche Bank: It’s Pat Nolan on Rob. I just wanted to follow-up on question about long-term margins, and I wanted to ask it from two points. First, the incremental margin there you guys have been achieving has been above the historical level, it has been running in the mid-20s percent level. Now I know your stance last year was to make sure you had enough capacity for the recovery. But at what point either in the sales level or in industry production level, do you really need to start adding more capacity that’s going to push that incremental margin down?

It’s a real tough question to answer, because we’ve almost got to do it by group and by region. As you can imagine, we’ve got some areas we can go back up to historical levels without adding a lot of new capital, because we haven’t taken a lot out and there’s some product areas where we’ve seen a lot of growth hot stamping is (inaudible) where we’re running at pretty well full capacity. We’ve consolidated some plans in our die casting area. So if the volumes keep running why not we put more capacity in there? And it really depends by region. So I would say for the most part, we can continue to see sales rise up bringing a lot of significant new capital in. But in the few areas we’re already at a point where we’re putting in bit of extra capital and just protect our customers if they can hit the volumes at which we hope they can hit. So it’s not like we’re going to open the floodgates if we raise another million units, but we will start putting some capital back in. In most cases, we will put those in existing facilities, so a lot of the big heavy costs come if you have to put up a new facility, on new building, new management team, hire new people, train them, launch a facility, so for the most part of the incremental capital is in one of the existing divisions. Pat Nolan – Deutsche Bank: On the SG&A side, it’s been pretty volatile over the past couple of quarters. Can you just help us think about on a longer term basis? I know it’s volatile now because of what’s going on and probably bonus accruals and those types of things. But I mean in longer term, what kind of percent of sales is like a normalized range for the company?

I think if you look at our SG&A and you’re saying, it’s pretty volatile, that was pretty stable Q1 to Q2 in dollars; $315 million in Q1 and $333 million in Q2. I think at least for 2010 that run rate plus or minus is going to be representative of our spend through the balance of the year; obviously, it’s kind of a little bit on profitability through the incentive comp. Last year and in 2008, we had a big focus on reducing our cost and our fixed cost structure, we have done that with SG&A and our focus this year is to try to keep a lid on it. So the percentage, it may be moving around, because sales are moving, but in absolute dollars, it’s been pretty consistent with we expected to be for the balance of the year.

In fact, maybe going back to the ‘09, a little bit below 300, and then Q4, of course, has been a noisy quarter. So that’s more of the outlier in Q4, if you’re going to take out some of the significant items lower than that. Pat Nolan – Deutsche Bank: I may have missed this, but can you just give the content per vehicle impact of currency both in North America and Europe in the quarter?

Yes, it’s about $45 in North America, positive, and $33 negative in Europe.

Our next question comes from the line of David Tyerman with Canaccord Genuity. Please proceed with your question. David Tyerman – Canaccord Genuity: Just want to explore the European margins a little bit more. I am wondering where you are in terms of the profit improvement process, whether you are like half way through, where you think you should be in terms of trying to get back to more normal numbers, and what the major drivers would be, is it just simply getting more volumes than Steyr as the programs ramp up or is there a significant restructuring not in Steyr but in other operations that will make a major difference?

We have a number of things in Europe, one of them is we’re launching up our new facilities in Russia, which is having an impact on the margins. We will have some restructuring over there, too early to tell what it’s going to be, but I think we can have some just fine-tuning of the operations. Last year, ourselves for the most part, a lot of the industry felt that the sales would not be coming down, as far as they were in North America, and they didn’t. We didn’t take aggressive actions over there. So I think just looking at a combination of winning new business, streamlining some of the operations, and some of our operations are extremely good over there. Launching the business in Russia, we have been launching some of their programs as well. We’re moving our footprint in some areas to a lower cost regions and lower cost countries. So it’ll be a combination of things, nothing is going to happen as the step function and then we’ll just be continuing to work our way at it. David Tyerman – Canaccord Genuity: The Russia facilities, how long does it take to ramp these things up, like, are they at the start or –?

Dave, the production is going to start in Russia not so late than 2011. So is there going to be wrapping up in ‘11, we really need to look out to 2012, but as you move from even ‘10 to ‘11 or ‘11 to ‘12, even if they are not generating significant or profit at the bottom line, you are reducing your launch cost, so it’ll quarter-to-quarter show positive improvement. David Tyerman – Canaccord Genuity: So that’s sort of through the quarters of 2011 into 2012, what we should be thinking?

That’s right, that’s right, David. David Tyerman – Canaccord Genuity: And then on North America, you’ve been running much, much higher margin for last couple of quarters and I think virtually ever in the recorded history. I’m just wondering is there anything that would suggest that they are not sustainable assuming volumes stay somewhere around where they are now.

I think we had for the most part a reasonably normal quarter. The things would have negative impact is if we launch some new program, launch new plans, but nothing major on the horizon right now. Commodity costs could have something, commercial discussions with our customers. So there’s a lot of different things, but this should be nothing that’s that unusual.

They’ve done a good job with better performance. I mean there have been some big numbers and they’ve done a good job bringing those numbers way down. So that’s a real positive for us. David Tyerman – Canaccord Genuity: Right, okay. And then on the rest of world like the margins there are also very, very high, I get the impression from Vince’s comments that they are probably going to come down from start-up costs and so on, is that the way to think about that or are they running at a reasonably normal level by now?

When you look at our existing facilities, David, they are running at a pretty normal run rate, but we continue to expand in the new regions for us and put the capacity in place, and those start-ups are going to negatively impact the regions markets. So you got to wait for that investment to start to generate a return. Typically depending on what facility it is, it could be two to three years before you start spending money and start to generate some reasonable returns. It could be little longer as well, depending on which product we are dealing with. David Tyerman – Canaccord Genuity: Can you give us an idea of the number of facilities, I believe you said, there are 15 facilities in China, are you going from 15 to 30 over the next couple of years or can you give any kind of progress on that?

You know, David, we’ll give an update or a little bit more detailed update as we give the guidance for 2011, give some more color to that. Yes, we’ve been still working through and we’ve got an initial business plan, that business plan changes as a result of business (inaudible). Probably would be a couple of quarters away before I give you that update.

We still have about 23 facilities in Asia generally. David Tyerman – Canaccord Genuity: Sorry, how many?

23 in total in Asia. David Tyerman – Canaccord Genuity: Last question; your guidance implies for Western Europe production would fall around 18% in the second half. Some of the other numbers I’ve seen out there from other companies is more or like 7% and then maybe how they define Europe. I was just wondering though is there anything that you see that specifically would take you to such a large negative?

We have a bottoms-up approach to come out with volumes. We certainly look at what the industry analysts are saying. Probably our view today is a little more cautious than the industry analysts, David. We only have visibility to releases in Q3, so that’s our best view on Q4. We’re pleasantly surprised on volumes in Q1 and Q2. I’d like to be pleasantly surprised in Q3 and Q4, but I’ve been concerned a bit in Europe as you know for a number of quarters and I still have that concern in terms of macroeconomic conditions.

Our next question comes from the line of Himanshu Patel with JPMorgan. Please proceed with your question. Himanshu Patel – JPMorgan: Can we go back to the balance sheet and cash deployment topic again presuming the dual-class vote share collapse goes through. In addition to acquisitions, would you guys entertain anything else in terms of returning cash to shareholders, whether it’s increasing your dividend or special dividend or a buyback even down the road?

Actually, Rick, where we are right now is we need to get through this proposed transaction that’s been supported by over 75% of the shareholders. As we’ve talked about before, our focus is to employ the cash in our business, whether that’s organic, which is a preferred way of growing, whether it’s the potential acquisitions. As we look through, our business prospects for ‘11 and ‘12, we’ll have to determine to the extent that there is excess cash, what we do with that; whether we move a dividend, whether elect a normal course that should be. There’s a whole bunch of things we could examine. So we need to do some work. We need to understand about this transaction. Whether it gets approved or not approved, it is $300 million that’s going to be going out the door and then go to our board. That’s going to be I will think in the next couple of quarters, not immediate. Himanshu Patel – JPMorgan: Number two, Don maybe you could talk a little bit about lot of discussion about the pace of European margin recovery. Can you perhaps talk a little bit more about the eventual goal on European margins? Do you have a sense on just getting into that business now with some of launches, especially with Steyr getting underway, any chance that this business could eventually reach parity with North America?

You have to exclude Steyr when you look at margins just because of the way we book our sales, and that’s why we report it separately. There is no fundamental reason why the margins in North America or Europe or rest of the world should be different. That’s assuming we have similar sales for end product area, which would be a good assumption long term because different business units will operate at different margins, just because of the amount of capital that has to be deployed in there. So, there is no fundamental reason. We’ve been in business longer in North America. We made some acquisitions, bought them in expensively, and there were some operating issues in Europe. So it takes a while to turn some of those around. So I don’t think we’re going to see margins in the near term the same, but we do have some very good operations in Europe and that run, it’s got a better margins than the average in North American. So there’s no fundamental reason why we can’t get there. Himanshu Patel – JPMorgan: Looking at your revenue guidance, it seems to imply second half revenues are about 5% below first half, just if you take the midpoint. If you just look at production schedules from CSM and J.D. Power for NAFTA and Europe, they’re down about 11% in the second half sequentially versus first half. I’m not adjusting any of that for currency obviously, but I’m just wondering sequentially H2 versus H1, is there a big uptick in the amount of new business that’s on-boarding?

Just couple things that are happening in the second half. There is just volumes. There’s also content per vehicle. If you look at where we are sort of year-to-date on content to North America, we’re at 964, a range of content 955 to 985 in North America for the full year. So depending on where you are in that range, that’s implying, as we discussed, a better mix and some launches that are going to benefit us in the second half year. Again, looking at Europe year-to-date, we’re $513of content for vehicle; full year range right now is 520 to 545. We’re going to benefit from higher content, part of that is mix and part of that is launches, obviously, by translation. The other thing to take into account is what happens to earning in our overall sales, and surely we can have a positive impact on overall sales H2 versus H1. Himanshu Patel – JPMorgan: And then lastly just a housekeeping item. Do you have European sequential revenue growth rate excluding foreign exchange?

No, I don’t have that handy.

Our next question comes from the line of Patrick Archambault with Goldman Sachs. Please proceed with your question. Patrick Archambault – Goldman Sachs: I just wanted to actually dig in a little bit more on the mix issue that Himanshu teased out. You look at the platforms that were significant for you in the quarter in your presentation, lot of clearly full-sized trucks from the big three and clearly, that’s been something that you’ve seen go up in terms of its share of the market over the last several months. Is there a risk that could stabilize and pull back, and I guess the other thing I was going to ask you about is just in terms of the impact of GM, clearly, not avoiding, but clearly they are not shutting down as many plants or they haven’t as they typically would. So, given that that’s a big customer for you guys, is that also a factor that’s potentially driving some of your content assumptions?

We don’t have a crystal ball exactly on what next is going to be and that’s how when we look at our content range, there is $30 range essentially that could move up or down our overall sales and that’s all in Q3, Q4. We don’t know for certain whether new programs are going to be higher or we have production releases certainly some visibility to Q3 and a best look at Q4. I think when you look at production for the second half of the year, I think there is some risk and there could be some opportunities.

I think in our own modeling we are building in some risks for some vehicle volumes there or some vehicle platforms that are big for us, but there is also that are going to be strong relative to where we were in our last program. So if I look at some of those the ones, the truck programs, we’ve got some expectations for some weakness in some and in other areas, we are expecting some improvement. So it’s not weighted towards simply trucks or simply pickups or anything like that. Patrick Archambault – Goldman Sachs: Just in terms of your backlog, how does the launch schedule look like relative to past periods in North America and Europe? Has it picked up nicely? I mean I imagine it has picked up nicely versus last year, but is it something that you see a lot of support from as you get into the back half from the CPV point of view?

Pat, just from our coating perspective, we’re seeing a lot of activity in the coating side which ultimately is backlog and content for vehicle, and the way, we’ve tried to explain backlog is, CPV, personally review, we are not moving beyond 2010 at this point in time. But we will give further clarity to content for vehicle which is helping with backlog later on in 2010. As we do in prior years as we complete our business planning process and add up all the wins, and what’s balancing out, we’ll provide some further clarity for you.

Our next question comes from the line of Richard Kwas with Wells Fargo. Richard Kwas – Wells Fargo: Vince, just to be clear here on Europe, it sounds like you are expect mix is going to be more favorable for you in the second half versus the first half. I know you are saying production is going to be down sequentially. But I am reading that right that second half mix in Europe you’re expecting that to be better in the first half?

Yes, I think we get the benefit of mix, and we’ve got the benefit of some launches as well. Richard Kwas – Wells Fargo: And then Don, a bigger picture question, looks like Ford is in-sourcing some activities from some suppliers, it was announced the other day, and then you had Daimler and BMW working on seats and collaborating there to particularly on frames to save costs. Bigger picture longer term, you see a lot of risk to OEMs, regionally speaking, potentially in-sourcing stuff or are you worried about that?

Yes, I must have missed with Ford announcing whether they’re in-sourcing, I mean there is always discussions both ways and I think you’re going to see more and more customers cooperate on commoditization of product that doesn’t differentiate vehicles, because you can engineer it once, you can test it once, you can tool it an optimal number of tools, anyway you’re producing it globally, and then they get the benefit of volume. I think that’s a logical thing to have happened and I think for the big global suppliers it’s probably a positive, because we can then quote on larger volumes, so it’s a win-win. As far as in-sourcing, everything goes in sort of cycles, but I think long-term you’ll continue to see car companies focus at what their core business is, that’s identifying the end consumer marketing, designing product, bringing it to market, you see there is more and more variance coming to market. I just have a hard time believing that other than short-term labor utilization people are paying for, they have obligations. It doesn’t make a lot of sense to take something what is absolutely proprietary or transportation is a huge factor in the overall costs and have the customers’ in-source it, because you just don’t have the same level of competition. Even if you go to your customers, they depend on this for their survival. That’s my own personal thing and every car company can decide what they’re going to do. So, there has been some discussions on if there is high labor content, if there is open capacity, but I think for the most part you’re going to see assembly plants become leaner and more flexible, more vehicles, and taking into account the cost transportation having more modules brought into plants.

Thank you. There are no further questions at this time. Mr. Galifi, I will turn the conference back over to you and Mr. Walker to continue with your presentation or closing remarks.

Thank you very much. I’d like to thank everybody for joining us this morning. Our operating results have changed a lot since the last year. I think you see that in everybody’s results in the whole industry. So we have more work to do to make our company stronger. Our management team is committed to doing that. It will be interesting to see what happens through the balance of the year, but certainly it’s been much better this year than last. So thanks everybody and have a great weekend.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and we ask that you disconnect your lines. Thank you.