Magna International Inc. (MGA) Q3 2010 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Magna International third quarter 2010 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 today, Thursday, November 4, 2010. I would now like to turn the conference over to Don Walker, Chief Executive Officer. Please go ahead, sir.

Thank you. Good evening and welcome to our conference call. Joining me here in Vienna is Vince Galifi, Chief Financial Officer, and from Aurora is Louis Tonelli, Vice President, Investor Relations. We issued a press release this afternoon, which covers our third quarter results. You will 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 website at www.magna.com. Today I will start with some comments on our third quarter and a few other matters. Vince will then review in detail our Q3 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. Overall, I’m pleased with the third quarter results. In North America, our operations continued their strong performance of the past few quarters, with only a couple of areas of underperformance to address. In Europe, this past quarter, Magna Steyr began to launch the last of its major new programs this year, the MINI Countryman, and produced the last BMW X3 (inaudible). Over the lifetime of the program, Magna Steyr produced more than 600,000 BMW-X3’s as a sole complete vehicle assembler for the global market. It was quite an accomplishment. As Magna Steyr claims the launch curve on the MINI Countryman along with its other new programs, we should see improved operating earnings at Magna Steyr. I have…

Thanks, Don. And good evening, everyone. I would like to review our financial results for the third quarter ended September 30, 2010. Please note all figures discussed today are in US dollars. We have restated our segment results to reflect E-Car as a separate segment. Included in the conference call presentation deck on our website is restated quarterly segment details for 2010 and 2009. There were no items that we classify as unusual in the third quarter of 2010 or 2009. However, there were two one-time items that impacted the quarter that are individually significant in size. Therefore, I would like to provide detail on them. Both items are included in our corporate segment. We recorded a $33 million benefit from a commercial settlement with a customer related to the recovery of previously expensed engineering and design costs, most of which were incurred during 2010. And we incurred a $16 million stock-based compensation charge as a result of modifying option agreements with two former executive officers. In the third quarter, consolidated sales increased 27% relative to the third quarter of 2009 to $5.9 billion. North American production sales increased 39% in the third quarter to $3 billion, reflecting a 28% increase in vehicle production to 3 million units and a 9% increase in North American content to $1,010. This marks the first time in our history that we have recorded average content over $1,000. The large increase in vehicle production reflects the recovery in auto sales that we have seen throughout 2010. North American content increased primarily as a result of new launches, including the Jeep Grand Cherokee, the Ford Fiesta, the GMC Terrain, and the Cadillac SRX; the strengthening of the Canadian dollar against the dollar; and favorable production relative to industry volumes and/or increased content on certain programs,…

Thank you, sir. (Operator instructions) And our first question comes from the line of Peter Sklar of Nesbitt Burns. Your line is open. Please proceed.

Peter? Peter Sklar – Nesbitt Burns: Hi, can you hear me now?

We can now, Peter. Peter Sklar – Nesbitt Burns: Okay. Sorry about that. You mentioned there is a couple of unusual items. There is a $16 million stock-based comp and the $33 million recovery of previous engineering design costs. Would we tax effect those two items?

Peter, no, we wouldn’t. The $33 million was earned in the United States, and we have losses there that haven’t been benefited. So that flows right to the bottom line. And the $16 million is not tax effective as well. So if you had gone through the numbers, the EPS impact of those items was about $0.14 of additional income. Peter Sklar – Nesbitt Burns: And there was a third item that sounds like it was small though. You mentioned in the rest of the world segment a write-off of certain assets. Was that a significant amount?

No, Peter, it was – I think you’re referring to potential MD&A. No, that was not significant. Peter Sklar – Nesbitt Burns: Okay. And can you just go through – I'm trying to recall the history of the normal course issuer bid. If I recall, you’ve not had a normal course issuer bid before or at least for a number of years. Is that correct?

We haven’t had one for a number of years, but we did have one that’s got to go back two or three years before the – I believe, before the Russian Machines transaction.

(inaudible) the close of the Russian Machines transaction, 2007, 2008.

Thanks, Louis.

Okay. Peter Sklar – Nesbitt Burns: And I just – with the departure of the Co-CEO, Sigi Wolf, I just want to understand how the management of the European operations has changed. I believe that operating management before was under Sigi Wolf and not under Don, and now with Don being the sole CEO, that would come under his jurisdiction. Is that how we should think about it?

Yes. Peter, we had changed our operating group so that each group president had global responsibility last April. A few of them already had global responsibility. We went to global responsibility for everybody. So they have control of the operations, the capital, the quoting, everything. So at that point in time, the group presidents really reported to both Sigi and I. Sigi would focus more on what was going on in the European area. So we haven’t changed that. What we have done is (inaudible) to long-term Magna managers are both involved in overseeing the regions according to the activities with the – (inaudible) with the customers and looking at optimizing the efforts of the group presidents. So we were already in a transition. So this is more of just fine-tuning. Peter Sklar – Nesbitt Burns: Right. Don, you did make some comments on your thoughts about European operations. It sounds like the larger element of the losses in the interiors and plastic exteriors business. I mean, do you have any thoughts about – when you look at that European business in aggregate, it’s really underperforming relative to the North American business in terms of margins. Are there any structural issues that would prevent the earning at the same level in North America? And then do you have any thoughts about how you are going to get there?

Not going to articulate their thoughts particularly today. We do have a number of issues, which affect the margin. We have the launch of the programs in Russia. We had some electronics launch issues, as well as we have some underperforming divisions. We also have some very good operations here. So I’m spending the next month here going through the divisions. The group presidents have involved as well. So I can give you more detail, I think, at the next quarterly call. Peter Sklar – Nesbitt Burns: Okay. That’s all I have. Thank you.

And our next question comes from the line of Itay Michaeli of Citigroup. Your line is open. Itay Michaeli – Citigroup: Yes, thanks. Good evening. I wanted to go back to the North America CPV. It looks like you’ll probably be running about $1,000 or so again the fourth quarter. How much of that is just new programs versus mix? And then, how should we think about that going into 2011? Do you think you can kind of maintain in and around that $1,000 level going into next year as well?

When you think about the balance of this year and you look at sort of Q3, the impact of Q3 is some of those are going to carry forward to Q4. You have benefited from the launch of a number of programs, and Louis can name them all. And that should continue to benefit us certainly in Q4. We did have – on the next slide we had some programs that popped us positively and there are other programs that work negatively. So the overall mix in the quarter was relatively neutral. So most of the growth was as a result of launches. I don’t have a reason why that’s going to change. Itay Michaeli – Citigroup: And if you look at launches that you are planning for 2011 in North Americas, is that delta a positive versus 2010 or was 2010 idea was significant amount of launches for you?

We’re going to give you a complete outlook for 2011 in January. So at this point, I’m going to refrain from commenting specifically on ’11. Happy to deal with 2010. We’ve got just about two or three months away before we’re able to complete our business plans and give you a little bit more color on ’11. Itay Michaeli – Citigroup: Sure. And then two quick ones, just financial questions. One, Vince, can you help us with just how to think about the tax rate, how that migrates into next six to 12 months perhaps? And then secondly, just a quick cash flow question on working capital, how you’re thinking there, order of magnitude? I think we’ve previously talked about a modest use for the year. I just wanted to make sure that’s still what you are expecting for the year. Thank you.

In terms of the tax rate, I’ve been – we've been talking about a tax rate of 20% to 25% for 2010. It really depends on mix of income. In the quarter, our rate was almost 25%. But impacting the rate negatively was the stock option modification that I talked about. I thought it was not tax effective. The impact on a tax rate was just over 2%. So if you look at our tax rate in Q3, backing out that stock option modification expense, we are 22.5%, which is consistently plus or minus with Q1 and Q2. So as you look forward to Q4, again, a rate that’s going to be somewhere sort of 20% to 25%, 21% to 24% is probably where we expect the rate to come into. 2011 – until we don’t get our business plan complete and understand where it’s likely, the mix of income is going to be by legal jurisdiction. I’m not going to have a real good handle on that. We still have significant losses that have not been benefited from an accounting perspective. As we start to generate income in some of those jurisdictions, we will continue to see some benefit on the tax rate, but a really good as an overall mix. So again, we’ll give you some guidance come January on that to help you better understand what 2011 is going to look like. Itay Michaeli – Citigroup: That’s helpful. And just on a working capital question, are you still expecting a modest boost for the year?

When you look on a year-to-date basis, we have invested about $320 odd million in working capital. And if you go back over a number of years, in Q4, we’re usually generating cash from working capital. So when I think about how much we can generate, can we recover the 322? Probably not. We’ll recover a substantial part of that. Our sales in ’10 are significantly higher than 2009. So there is actually more working capital in the business. We will recover a big chunk of our investment in the first three quarters of 2010. Itay Michaeli – Citigroup: Great. That’s very helpful. Thank you.

And our next question comes from the line of John Murphy of Bank of America-Merrill Lynch. Your line is open. John Murphy – Bank of America-Merrill Lynch: Good evening, guys.

Hi, John. John Murphy – Bank of America-Merrill Lynch: If I back into the fourth quarter sales number that you guys are implying by your full year guidance at $6.0 billion to $6.5 billion, so it’s probably one of the best quarters you are going to get, the best quarter, it looks like you’re going to have on a top-line this year. Just thinking about margins and mix going into the fourth quarter, are there any big swing factors that would take margins up or down in the fourth quarter we should be thinking about?

I think when you sort of back into the fourth quarter, there is couple things that you need to take into account, John. Tooling sales are going to be higher in the fourth quarter than they have been for the first three quarters of this year. So that will have – we will have sales, but we would not have a pull-through on a bottom line. So that negatively impact any of the ratios that you are going to look at. When you look at currencies, the euro is strengthening. As we talked about on this call earlier, North America presently is more profitable than Europe. So that will – when you think about sales mix, that will have some impact on the numbers. And generally, in Q4, some of the other things that happen on a seasonal basis is the custom shutdowns. Now those could be couple weeks long, maybe a little bit shorter. But that certainly has an impact on our fourth quarter every year for us. Hope that helps you a little bit, John. John Murphy – Bank of America-Merrill Lynch: Yes. Okay. And then in North America – thank you. In North America, the content per vehicle is bumping up against $1,000. And if you think about it as a pretty significant content number in every vehicle in North America, I mean, are you at some point reaching an upper limit of where you can get on this content per vehicle, or is there still a lot of room for you to provide a lot of content – increase in that content per vehicle? Because it’s a very high number at this point.

We’ve been talking about sometime that when you look at our markets, North America, Western Europe, Western Europe, the content is still more than what it is in North America. So I think there is more opportunity to grow content in Europe faster than North America, and we’ve been saying for some time that the North American growth we’ve experienced, if I go back three or four or five years ago, when we were talking about 18%, 20% compound growth rate, I don’t think that’s going to be repeatable all the time. So what we are focusing on is growing our business outside of our traditional markets. As Don and I, both talked about the growth in the rest of the world segments and the profitability we’ve also generated in those segments. So you’re going to see more growth in those areas. The other thing that will impact content that’s actually impacting content a little bit in Q3 is our growth in non-automotive sales. We’ve talked about sales in this area of our business, plus or minus it seems sort of $300 million to $350 million. Most of that is in North America. And that business, if we look over the next three or four years, we expect it to be the plus $1 billion mark. So that – in our numbers unfortunately today is included in content per vehicle, and one of things that we’re looking at is how we better communicate our results and content per vehicle to make it a pure number for you. John Murphy – Bank of America-Merrill Lynch: That will be helpful. And then just lastly, on E-Car, is there some point in the future where you see that turn the corner and it’s no longer a drag? I mean, when do you see that turn the quarter do you think? I mean, it’s a small number, but just trying to understand when it becomes profitable.

Well, the better idea, I think, of the business plan review is we will be going to that in a month’s time. So I think when we get into the New Year, we’ll be getting more clarity. There is still lot of development work in there. John Murphy – Bank of America-Merrill Lynch: All right. Thank you very much, guys.

Our next question comes from the line of Michael Willemse, CIBC World Markets. Your line is open. Michael Willemse – CIBC World Markets: Thank you. Just a follow-up on the question on E-Car. When you launch the Ford Focus electric vehicle, would you expect negative margin on that or do you think you can be breakeven on it?

Our target is basically to be breakeven plus or minus, and that was the way we intended as going in. So there are still some cost targets we have to hit, but overall I think the program is going quite well from our perspective and from Ford’s perspective. So, as we get closer, we will know. But I would look at that as hopefully being about a breakeven. Michael Willemse – CIBC World Markets: All right. Thank you. And just wondering if there were significant costs, legal costs, advisory costs related to the Stronach transaction over $10 million?

Mike, there was approximately $30 million of costs. Those costs did not flow through our income statement. They were costs in issuing the shares that gone through equity. If you turn to note few of our financials, it will highlight those costs. Michael Willemse – CIBC World Markets: Thanks. Okay. And then just one last question, the content per vehicle guidance for Europe plays a big jump in the fourth quarter, is that mostly currency or is there some significant launches there as well?

That’s mostly currency, Mike. Michael Willemse – CIBC World Markets: Okay. Thank you.

And our next question is from the line of Rich Kwas of Wells Fargo. Your line is open. Rich Kwas – Wells Fargo: Hi, guys. Just a handful of questions. Vince, the decline in CapEx, what’s that attributable to?

That’s our best guess at this point in time. Typically, as we get near the end of the year, we have better clarity on it. A lot of it comes down at timing, whether it falls into December or January, but the range we gave was our best guess. So there is nothing unusual, just getting more clarity on it. Rich Kwas – Wells Fargo: Okay. And then on electronic components, are you having any issue or added costs procuring electronic components? There is – a lot of other companies have talked about shortages over the last couple quarters. Are you seeing any cost associated with that? And if you are, when do you expect to get some relief on that front?

We are seeing very tight supply like a lot of other people are. It’s not material. We have had some financial impact on. And I’d say, don’t know that – the amount off of the top of my head. We’ve been in a couple of cases struggling to keep our customers going, but it’s not unless you heard that it’s not a material amount. Rich Kwas – Wells Fargo: Okay. And then Louis, do you have the CPV numbers ex-currency?

Well, the currency impact in North America was about $20 just Q3-to-Q3. And in Europe, it was negative $51 Q3-to-Q3. Rich Kwas – Wells Fargo: So plus-$20 North America and negative $51 Europe?

Right. Rich Kwas – Wells Fargo: Okay. And then last question, in terms of 2011, Vince I think you talked about discussing providing a little more color on guidance going forward. Should we expect to get some more details? Historically you’ve given revenues and CapEx. Are you thinking about giving a little more granularity on forward guidance?

Yes, we are. We are self-studying in terms of what makes sense for our business, but certainly in terms of the amount of guidance we are giving today. Both Don and I and Louisa are to view that we need to provide little bit more clarity to the investment community. So you will see some more color on ’11 as we get through our January in the Detroit Auto Show. Rich Kwas – Wells Fargo: Okay, great. That’s good to hear. Thanks.

The next question is from the line of Rod Lache of Deutsche Bank. Your line is open. Pat Nolan – Deutsche Bank: Good evening, everyone. It’s Pat Nolan in for Rod Lache.

Hi, Pat. Pat Nolan – Deutsche Bank: Just had a couple of questions. Just first on the one-time item, just a housekeeping question. Where was the $33 million and $16 million on your income statement?

$33 million was in revenue, and I guess flows through to margin. The $16 million was in SG&A. Pat Nolan – Deutsche Bank: And do you think about how we should think about the CapEx requirements of this business going forward? Obviously, you are a lot bigger company than you were five, six years ago. But just as a percentage of sales, where do you think CapEx should have to move to on a more normalized basis?

The thing I’d say on percentage of sales, I wouldn’t say – I'm not going to get into percentage. That is up to the business plan to work it out. But I would say the range right now is kind of where we expected to be in. We are going to continue to see growth, but we are currently expanding a number of new plants, number of new regions. So I don’t think we’ll have a dramatic pickup or dramatic slowdown. Last year, we were very tight on spending money on payback items and at least not up a little bit. We have – if we’ve gotten good payback for a year and a half or long-term programs we’ll spend it, but I still think we can – might go up a little bit, but I don’t – at this point in time, we don’t have any better numbers. We could probably get – we'd give some guidance after we go to the business line of view in January.

Pat, I think when you look at capital, you just kind of look at capital on its own. You also need to look at acquisition spending. Sometimes we’re actually making an acquisition to acquire a facility with some business, and the choice would have been putting up a Greenfield site. So what you are moving spending from capital to acquisition spending or from acquisition then to capital spending. So it’s hard to just take a number and say it’s a percentage of sales, and it really depends on which business is growing and which regions.

In an ideal world, I would say the capital go up because if we can get good return in business in some of the emerging markets, then we’ll be happy to spend more on capital. Pat Nolan – Deutsche Bank: Just a follow-on to the acquisition question. How are you seeing the available assets out there, the willingness to sell on the overall price, and do you think you can do some more meaningful, like these $200 million, $300 million acquisitions as we go through next year?

We talked about one acquisition on the call. A couple hundred million in sales. We can’t specifically disclose the purchase price, but it was sort of $100 million. And so we’re seeing a number of smaller type acquisitions. So, if we complete two or three or four of these, it could add up to $400 million or $500 million.

I’d say the price expectation has come up a little bit, and I would expect there is more money out there. So probably some more people are chasing acquisitions. There is not a lot of takeover business left. Nothing material and there is not buyer sales. But I do think we’re still going to see a number of companies getting into financial difficulties. So we’ll not be able to get some good opportunities there. Pat Nolan – Deutsche Bank: Got it. And then last, just a quick one, on the tooling sales, are they going to be up again in the fourth quarter? Should we kind of think about that as what will be the run rate going forward, or could it continue to trend higher?

It varies by quarter and depends on program launches and type of tooling. Just trying to think historically. Our tooling sales move up and down, and it really depends on programs. But Q4, we do expect it to be higher. I’m just looking back at the old information. And Q4 looks like tooling sales are typically higher on many other – Pat Nolan – Deutsche Bank: Got it. Maybe it’s up a little bit year-over-year. Okay. Thanks very much, guys. Have a good night.

Thank you.

Thank you.

And our next question comes from the line of Chris Ceraso of Credit Suisse. Your line is open. Chris Ceraso – Credit Suisse: Thanks. Good evening.

Hi, Chris. Chris Ceraso – Credit Suisse: Let me just make sure I understand the bridge here from Q3 to Q4, because you’ve got revenues going up. And it sounds like the explanation is FX, higher assembly, and higher tooling, maybe offset by North America volume that’s flat to down, including the GM trucks, which are expected to be flat to down. Is that to tell I’ve gotten that right?

No, I think you’ve got higher tooling. You’ve got the impact of FX in terms of assembly sales, could be a tad higher. It’s got higher production in Europe, and in North America with volumes where we end up on production sales. How to tell exactly? It could be flattish, could be up, could be down a little bit. Chris Ceraso – Credit Suisse: Okay. And what about on the trucks? We’ve heard from some other suppliers that they were particularly strong in Q3, maybe they can’t be quite as strong in Q4. Is it what you are seeing in your releases?

– :

Yes (inaudible). I’m just trying to look that up. Just give me a second. Chris Ceraso – Credit Suisse: I guess what I’m getting at is it sounds like a lot of the things that are supporting the higher revenue are not necessarily are highest margin revenue drivers. So is it fair to expect even if revenue is higher, profitability may not be that much higher than Q3?

Chris, there is a number of factors that are going to impact profitability. We’re not going to comment specifically on profitability by program. And I’m not going to comment on the profitability in Q4.

Chris, we do have trucks down in Q4. Chris Ceraso – Credit Suisse: Okay. Something that stood out to me in the presentation was, in the assembly business where volumes were up about 2X, what revenues were up? Is the revenue per unit on the Countryman a lot lower than what it was on the X3?

Well, it is. But it’s MINI versus BMW. So there is lower price on that. Chris Ceraso – Credit Suisse: Is that all the ways to it or is there something else happening there?

I have to look at it, Chris. I’m not sure. That would be part of it.

Chris, I don’t understand the question. Chris Ceraso – Credit Suisse: Well, you are showing that in the quarter the revenue in the assembly business was up about half what your volumes were up. Right? Volumes were – assembly volumes were up 40% and revenues were up 20%. I’m just trying to figure out how that happened and if it is just a difference between the revenue on a Countryman versus the X3.

I think is that – the other thing that, Chris, you got to take into account is movements in FX rates. Chris Ceraso – Credit Suisse: Okay.

Yes, FX was negative. Chris Ceraso – Credit Suisse: Okay. Thank you. Have a good night.

Next question comes from the line of David Tyerman of Canaccord Genuity. Your line is open. David Tyerman – Canaccord Genuity: Good evening. I was wondering if you could quantify roughly what kind of losses or at least lower profit you are experiencing in Europe from these underperforming operations and startup operations and so on. Just give us a rough idea of the magnitude of the drag it’s putting on your operation.

David, when we look at some of the operations that Don referred, they are in the red and a drag on profitability. But in terms of quantifying, I’m not going to do that for you. Our focus, as Don talked about, is developing plans to focus on improving overall efficiencies and operating performance and see those operations start to generate some bottom line results for us. And the times are still being worked on. We’re right in the middle of business plans and a number of decisions need to be made from a production standpoint or otherwise. I think we’re going to be in a better position in the next – probably next two, three months, and the target of giving you an update as we speak through our outlook for 2011. David Tyerman – Canaccord Genuity: Okay, fair enough. The second question, Vince, you mentioned the Canadian dollar was part of the reason that you bumped up your CPV guidance for 2010 for North America. I’m wondering what were you using and what are you using now. Dollar hasn’t moved that much.

The average – I'm just trying to look at the target. The average rate in the third quarter was just shy of $0.97. And you look at where the dollar is today, we’re almost – we did our work a few days ago, we were at a par, but we’re certainly higher than $0.97. David Tyerman – Canaccord Genuity: Okay. So that’s going to swing. So just going back to your discussion earlier on CPV, if I understand it correctly, it sounds like mix wasn’t a huge driver of the surprising Q3 and won’t be going forward. I’m sorry?

You’re talking about year-over-year now? David Tyerman – Canaccord Genuity: There were some discussion about mix and whether it was going to continue in Q4, and I got the impression that – I think Vince said, overall the mix was neutral.

The mix was neutral Q3-to-Q3. The expectation is that mix is better for us old look at it versus new look at it. So it is actually positive is one of the reasons why we are moving up content in North America. David Tyerman – Canaccord Genuity: Okay, okay. And so that stature presumably can swing both ways is that the way to think about this? Like, don’t count on this going forward?

Well, I mean, we’ve seen it both ways. We’ve seen it significantly negative in prior years. More recently, it’s been kind of neutral to positive and occasionally a pretty small negative. So it can move around. That’s for sure. David Tyerman – Canaccord Genuity: Okay. And it also sounded like launched had a good chunk to do with it too, which would be more sustainable, I would imagine. Is that fair to say?

We have launched year-over-year. So Q3-to-Q3 were good chunk of our growth, yes. David Tyerman – Canaccord Genuity: Great. And if that continues into Q4?

Yes. David Tyerman – Canaccord Genuity: Obviously. Okay. Just last question, the non-auto sales, can you give us an idea, Vince said that could be a plus $1 billion in three or four years. Where are they now roughly?

When we’re looking at 2010, run rate is going to be about $350 million by the end of 2010, whether we’re actually going to record the full $350 million, but I shouldn’t – at the end of the year, the run rate will be about $350 million. David Tyerman – Canaccord Genuity: Okay. That’s helpful. Great. Thanks very much.

Our next question comes from the line of Himanshu Patel with J.P. Morgan. Your line is open. Himanshu Patel – J.P. Morgan: Hi. Questions for Don. Don, you’ve mentioned in the past that the timeframe for the European margin recovery to what you deem as being kind of normalizes, I think you sort of suggested around 18 months or so. Can you talk a little bit more about just the shape of that recovery? I mean, you mentioned several issues here between – some launch cost issues and Russia and Steyr. But just internally, as you look at each one of these issues starting to settle down, is it just sort of a gradual ticking up of margins every single quarter, or are there any step changes coming during that 18-month period?

I would say it’s more gradual because we’ve got – there is so many moving pieces to it. That’s probably the best way to look at it. And I would say, they came on to carry this probably still as accurate as I can give you right now, because we’ve got a lot of things to look at. Some of them are poor pricing and that’s got to get job worked out. So it’s a variety of things. We can probably give you a bit more clarity in the next call.

Some things I think about is, Russia, sales really don’t start going in Russia until 2011 and wrapping up in 2012. So you need to think of it, Russia really contributing in 2012 and you can think through the impact on margin, 10% versus 11% as we move up to launch. So I need to get back to the group once we get through our business plans. Steyr, we’ve been talking for some time that our launch costs peaked Q4 ’09, Q1 2010, they have been coming down. And as we get into 2011, we’ll see margin expansion in that operation. And then it’s the – some of the underperformers that John reported to. So we get both in place and that will have a positive impact on margins as well. Himanshu Patel – J.P. Morgan: And then just on North America, you’ve done about 8% to 9% or so operating margins for three quarters in a row now. Can you comment a little bit about the sustainability of that level of profitability? And I’m particularly interested in anything about how those margins evolve as the Steyr starts recovering more materially. Should we think about these margins sort of just staying at where they are right now with additional cost being out back offsetting operating leverage, or could there should be some operating leverage to take the margins higher?

There is a lot of moving factors in there, which I’m not going to get into. But I would say that’s probably a pretty safe generalization.

In some places, we have ability to take on more production with the fixed cost area. You would expect some leverage there and some other places that will bring a little tighter. So we have to have some fixed cost. So it depends on all that blends in. Himanshu Patel – J.P. Morgan: Okay. Great. Thank you.

Our next question is from the line of Ravi Shankar of Morgan Stanley. Your line is open. Ravi Shankar – Morgan Stanley: Thank you. I had to jump off the cost for a couple of minutes in between, so forgive me if this has been asked before. But you announced several corporate actions in this quarter, probably one of the most shareholder-friendly releases I’ve probably ever seen. But are you done for now? And if so, what’s your focus for uses of cash, primarily M&A?

In term of are we done for now, we are never done. We are going to always look at doing things and improving profitability and growing sales in new regions. When you think about use of cash, what we’ve talked about is our strategy and then how we want to grow in some of the emerging markets and continued support of customers in our traditional markets. So our focus for cash is investing it in the business, and that could be in the form of capital. It could also be in the form of acquisitions if it further reserve our strategy to grow in emerging markets, acquire technologies or diversify our customer base with OEMs. So I think you should think about cash over some period of time being invested in the business. Ravi Shankar – Morgan Stanley: Got it. And you mentioned price concessions as one of your negative headwinds in the quarter and you’ve said that for awhile now. Are you talking about standard contractual stuff or is it OEMs coming back for incremental prices?

It’s a combination of both. Ravi Shankar – Morgan Stanley: Okay. Anything that makes you concerned that the pricing discipline is slipping?

No. If anybody who is in the automotive industry, it’s a tough industry. The customers always expecting price reductions or looking at cost, models and our cash as to make sure we can make improvements to offset that. I think one of the unknowns will be what will happen to the raw material pricing going forward. Anybody’s guess. So it’s nothing unusual other than what we normally experiencing year-after-year. Ravi Shankar – Morgan Stanley: Great. Thank you.

And our next question comes from the line of Patrick Archambault of Goldman Sachs. Your line is open. Patrick Archambault – Goldman Sachs: Hi, good evening.

Good evening. Patrick Archambault – Goldman Sachs: I have – just on – wanted to see if we could get a little bit more detail on Magna Steyr. When – as we get into 2011, what is the capacity utilization look like in that facility? Are you going to be fairly ramped up or is there going to be an ability to continue to add new business there for some time? And then how does sort of factor in the improvement you are expecting for next year? Is it more just kind of a non-recurrence of launch costs or is it kind of better operating leverage or a combination of both? Just wanted to get a little bit more detail on that.

I think when you think about Magna Steyr, look at bonds [ph] for this year. They are lower than what we think they are going to be for 2011. We’re getting right in the middle of business times, but I think if you think about sort of 120 to 125 or 130, that’s probably where we will end up. So what benefit we will see from that is from two things is, obviously that our operating leverage and elimination of the launch costs that we’ve had significant amount of in 2009 and 2010.

And at 125,000 vehicles per year, we have room to put more product through there if we get more contracts or if the blind goes up. Patrick Archambault – Goldman Sachs: What – like, in terms of orders of magnitude, could you – like, how far off do you think you could stretch it in terms of – you know, how far beyond the 130?

At one time we were producing 250,000 vehicles at Magna Steyr. If we’re successful in gaining more contracts, we could certainly run more volumes in that facility. But that’s going to mean new programs, and new programs aren’t going to launch in 2011. It will take some time before we wrap those up.

We can run. The constraints there is the paint shop because they are on the top of my head. I think we can run up to about 150,000, 160,000 through the existing paint job if we were looking out to get more contracts, we would re-commission the old paint line, which would be some capital. But I would say we could probably run 150,000, 160,000 without significant new capital. Patrick Archambault – Goldman Sachs: And how – I mean, just kind of taking the longer term view, how does the pipeline look like for that business in terms of the interest you are getting from people? I mean, if – I suppose right now maybe it’s a little quieter because people still have some capacity, but is there a pretty good book of interest and quotes happening beyond what’s already going through there in 2011?

The Steyr model is based on engineering, which is the big part of the business. I’m hopeful we get to production as well. So the main plan we have there we just talked about the capacity. There is not a lot of competitors left in this area. So I think there is opportunity. It really depends on if the market goes up and our customers want to do some unusual smaller volumes, then I think we can be very competitive in that facility. There is also going to be some business opportunities for Steyr in some emerging markets to put a similar type plant up, but it’s always a chicken and egg. So in that particular facility, I hope we can continue to grow the business, but it really depends on what happens with the market, because a lot of our customers’ plans are flexible. They can production in. However, it’s the unique vehicle. I think we are extremely competitive there on engineering as well as how we can assemble them. Patrick Archambault – Goldman Sachs: Great. Thank you very much.

Our next question is from the line of Justin Wu of GMP Securities. Your line is open. Justin Wu – GMP Securities: Good evening. My first question is just on capital structure and cash deployment. I guess in the last quarter you guys talked about a comfort level of getting somewhere towards over the long-term the net debt neutral level. Is that something you are still comfortable with in terms of capital structure?

Yes, I’d say we’re comfortable with that as long as we see normal business going forward, we’re generating cash. So if we had good use of our cash and we knew where we’re going to continue to build cash back up again, I’d be happy if we had some good opportunities. I think the Board would be as well. We’d discuss at that point in time. Justin Wu – GMP Securities: Okay. In terms of the cash deployments, you guys have done a number of smaller type acquisitions. But given the kind of free cash that you are generating, obviously it’s difficult to keep up with in terms of deployments. Are you going to continue to do more of these tuck-in type acquisitions or do you see opportunities for larger nugget-type acquisitions? Are there any available out there?

I would say typically we typically do the smaller acquisitions. But if we see a good opportunity, then we would consider a larger acquisition from a cash cost. I mean, if a company is profitable, then the cost is high obviously for the sales. And if it’s not profitable, you get high sales with low investment. But we would consider using some of the cash in the balance sheet if we saw a good opportunity with strategic and good technologies. I just came back from eight days in China. We’ve got a lot of opportunities over there. We’ve got some growth plans. So if we can be successful in growing the way we want in some emerging markets either through CapEx or acquisitions, then we won’t be afraid to use our cash. Justin Wu – GMP Securities: Okay. And just my last question, just on your CapEx, based on your guidance and what you’ve spent year-to-date, it looks like cash – your CapEx could be somewhere up to $300 million level in the fourth quarter, which is quite a bit higher than what you’ve done in the last three quarters. Are there any specific projects that are getting you to that level, or can you comment on that?

I think if you look historically at capital spending in the year, and 2009 may have been an unusual year. But typically, fixed asset spending is more in the fourth quarter. And I think that’s through the winter shutdown. It’s an opportune time for various facilities to add capital. And there is a whole host of programs that we’re investing capital in. Some of it is in emerging markets, some of it is for replacing business, some of it is for incremental business.

It’s more on timing. We have a number of plans being built, a number of new programs coming on stream. It’s just more timing. Justin Wu – GMP Securities: Okay. Great. Thank you very much.

Operator, we’ll just take one more question if there is one.

Yes, sir. There is. Thank you. It will be again from the line of Michael Willemse of CIBC World Markets. Your line is open. Michael Willemse – CIBC World Markets: Thank you. Actually most of my questions have been answered. Just one question on the launch cost at the Steyr operation. It sounded like they were tens of millions of dollars in the first couple quarters. Did that continue in the third quarter? And should they kind of go away in the fourth quarter?

Mike, the launch costs were actually higher in Q1, down in Q2, smaller in Q3. By the time we get into next year, the launch costs should be all behind us. Smaller in Q3 versus Q4. Michael Willemse – CIBC World Markets: In Q3, was it under $10 million, the launch cost?

I don’t have the number exactly in front of me, Michael. It’s also a challenging number to measure given what’s being going on at Magna Steyr, but when you look at the overall operating results and look at a guess at what we think the launch cost (inaudible) coming down.

Mike, the Countryman is the biggest of the programs there at Steyr as well. Right? So we have always been launching I think for a couple of months now. So it’s going to take us through the end of the year to get our efficiencies and they get the launch efficiencies – or launch inefficiencies taken care of. Michael Willemse – CIBC World Markets: All right. All right. Okay. Thanks very much.

Okay. I’d like to thank everybody for joining us this evening. It’s an exciting time in the industry. We seem to be seeing some recovery. There’s lots of growth going on and the emerging markets continue strong. We’ve also got a lot of exciting new things happening at Magna. We get the new capital structure. And then we got a great management team that’s eager to capitalize on the operations that’s ahead of us. So thank you, everybody, for calling in. And have a great evening.

Ladies and gentlemen, that does conclude the conference call this evening. We thank you for your participation and ask that you please disconnect your lines. Thank you once again for attending. Have a great day.