Ladies and gentlemen, thank you for standing by and welcome to the Magna International Second Quarter 2018 Results Conference Call. During the presentation, all participants will be in listen-only mode. Afterwards, we'll have a question-and-answer session. As a reminder, this conference is being recorded today, Wednesday, August 8, 2018. And now it's my pleasure to turn the conference over to Louis Tonelli, VP, Investor Relations. Please go ahead.

Thank you. Good morning, everyone, and welcome to our second quarter 2018 conference call. Joining me today are Don Walker, Chief Executive Officer; Vince Galifi, Chief Financial Officer; and Swamy Kotagiri, Chief Technology Officer. In addition, Eric Goldstein and Jim Floros from the Investor Relations team are here. Yesterday, our board of directors met and approved our financial results for the second quarter ended June 30, 2018. We issued a press release this morning for the quarter. You'll find the press release, today's conference call webcast, the slide presentation to go along with the call, and our updated quarterly financial review, all in the Investor Relations section of our website at magna.com. Before we get started, just as a reminder, the discussion today may contain forward-looking information or forward-looking statements within the meaning of applicable securities legislation. Such statements involve certain risks, assumptions and uncertainties, which may cause the company's actual or future results and performance to be materially different from those expressed or implied in these statements. Please refer to today's press release for a complete description of our Safe Harbor disclaimer. As we review financial information today, please note that all figures are discussed in U.S. dollars, unless otherwise noted. We've included in the appendix reconciliations of certain key financial statement lines for Q2 2018 and Q2 2017 between reported results and results excluding unusual items. Our quarterly earnings discussion today excludes the impact of unusual items. And now I'll pass the call over to Don.

Thanks, Louis. Hello, everyone. Today I will review Q2 highlights, including our record second quarter results, our agreement with BJEV to jointly engineer and build premium electric vehicles in China, the recently announced deal to acquire European-based lighting supplier OLSA, a brief update on our partnership with Lyft, and our estimate of the impact of recent tariffs put in place. Let's start with our second quarter. We posted second quarter records for sales, adjusted EBIT and diluted earnings per share. We also returned $844 million to shareholders in the form of share repurchases and dividends, bringing our six-month (sic) [year-to-date] (03:02) total return to approximately $1.1 billion. Our Body Exteriors & Structures segment reported higher sales, adjusted EBIT and EBIT margin percentage year-over-year in the second quarter. Excluding the impact of the fire at Tier 1 supplier Meridian Technologies, which disrupted vehicle production in a number of our customers, adjusted EBIT margin was in line with our internal expectations. Excluding the impact of Meridian, our Seating segment was also in line with our expectations. Our Complete Vehicle segment experienced lower Mercedes-Benz G-Class production at our assembly operations, partly as anticipated due to changeover to the new G-Class in the second quarter and partly due to two unrelated supplier issues on the program's launch. The lower G-Class volumes and the associate increase in launch and other costs negatively impacted this business in the second quarter. Our Power & Vision segment posted higher second quarter sales, adjusted EBIT and EBIT margin percent compared to Q2 2017. Our consolidated Power & Vision operations were in line with our internal expectations for the quarter. However, equity income at GETRAG, while being higher year-over-year, was lower than our expectations. This was mainly the result of a write-down of inventory and receivables and an expected commercial…

Thank you, Don, and good morning, everyone. Overall, we posted strong second quarter consolidated results, despite some of the challenges Don mentioned. Second quarter records include consolidated sales of $10.3 billion; consolidated adjusted EBIT of $803 million, which is up 6% over the second quarter of 2017; net income attributable to Magna of $590 million, up 7% from Q2 of 2017; and adjusted diluted EPS of $1.67, which is up 15% year-over-year. We also returned $844 million to shareholders through share repurchases and dividends. Lastly, we made several changes to our outlook for the year, including reducing our sales and net income outlook. I'll cover each of these in my financial review. Our consolidated sales were $10.3 billion, an increase of 12% over the second quarter of 2017. Excluding foreign currency fluctuations and the net impact of acquisition and divestitures, consolidated sales rose by 9%. The Meridian fire impacted our sales by about $70 million or slightly less than 1% during the quarter. We delivered sales growth in each of our operating segments. The higher sales largely reflect the launch of new programs, particularly in our Body Exteriors & Structures and Complete Vehicle segments, and a $359 million positive impact from foreign exchange translation. EBIT margin percent declined to 7.8% in the second quarter from 8.3% in the second quarter of 2017. This decline was driven entirely by the increase in the proportion of sales generated by our Complete Vehicle segment, which operates at lower margins than our consolidated average. Body Exteriors & Structures and Power & Vision, each drove slight improvements in EBIT margin percent, offset by Seating Systems and Corporate. Note that Corporate included $22 million in higher unrealized foreign exchange losses year-over-year related to the translation of net deferred tax assets. Overall, adjusted EBIT increased 6% to…

Thank you very much. Your first question is from Itay Michaeli with Citigroup. Please go ahead.

Great. Thank you. Good morning. Maybe just I'll start off with a couple housekeeping. Vince, the $2 billion free cash flow that was confirmed, that excludes the higher CapEx? And also, are you sticking with, I think, the $6 billion free cash flow outlook through 2020?

Yeah. So, with respect to 2020, our outlook was greater than $6 billion. So we are still sticking with that. With respect to 2018, we're expecting about $2 billion and that excludes the $200 million for the purchase of two facilities from Granite. When I think about the $200 million, from an accounting perspective, it's shown as a fixed asset expenditure. But if you really think about this, this is just a refinancing. We had a debt obligation on our books and we're converting it now – sorry, we had an obligation not in our books because it was a lease obligation and now we're putting it on our books of debt. So, to me, it's just a wash. So, that's why I'd still prefer to the greater than – but the $2 billion of cash flow for 2018, excluding the $200 million on those two properties.

Great. That's very clear. Thanks, Vincent. And then, just on the equity income revision, maybe just a little bit more detail around what was assumed in terms of penetration rates and the volume, what assumed now, and just how are you feeling about the latest projections and the level of kind of confidence in how you arrived at sort of the new level for now and through 2020?

Well, when you look at the equity income line, and I'd ask Swamy and Don to pipe in at some point, but let me just run through some of the numbers first. If I compare kind of where we thought GETRAG was going to be in the quarter and where we ended up on the equity income line, we're about $25 million short on the equity income line. And I'd tell you it was really three components in the quarter. Part of it was just volumes and other, which accounted for probably about 5% of that shortfall. But the two bigger items that impacted the shortfall versus expectations was an inventory obsolescence provision that we took, we rolled out some receivables, and that all related to one customer that we're dealing with from a commercial settlement standpoint, as well as some additional warranty based on experience on transmission that's in the field. But volumes are ramping down. So, again, I don't expect that to continue going forward. And that was about 40% of the shortfall versus expectation. The balance, around kind of 50% to 55%, related to kind of something going back to 2017 where we talked about putting in some capacity, volumes were short, and we were discussing with a customer obtaining some relief for the capital that we put in place and the expenses that we incurred. While discussions are ongoing and we expect that to recover something, I think as we got through the end of the quarter and we assessed what we had built into our forecast for that, we thought it'd be more prudent to remove it from our forecast. So we've taken that out of our numbers for the second half of the year, but we're expecting to recover something. As I look at the second half of the year, and we did reduce our equity income for the year, $65 million to $70 million, so part of it was already a shortfall in Q2. The balance of the shortfall, again, related to entirely (26:40) GETRAG and say about two-thirds of that relates to shortfall in volumes versus previous expectations. And a third of that relates to what we had built into our outlook with respect to expected commercial settlement with our customers. So, hopefully, that still comes along, but we've taken that out of our forecast for the balance of this year. Swamy, do you want to talk about the take rates, or volumes...

Yeah.

...or what's going on in the market?

Yeah. I think a couple of points. In addition to what Vince mentioned is the take rate in terms of the manual transmissions, more specifically in China. We see that in Europe too, but in Europe the transition is happening to the DCT, which are positively affecting us with various customers. In China, it seems to be a little bit more influx, as to the product mix and the appropriate transmission that's going in, whether it's manual, or CVT, or planetary automatic, or DCT. So, that seems to be a little bit in influx. And we continue to monitor that, besides volume, the take rates of the different types of transmissions that are affecting what we're talking about today.

Yeah. Swamy, just wanted to clarify just from an accounting perspective. So, when you look at Europe on the manual transmissions, it's down. But I think if you look at our consolidated entities...

Right.

...we don't do a lot of manual transmission work in what we consolidate. So, if I look at our European operations, I think versus expectations, they're in line, maybe a little bit better.

Yeah.

It's really our joint venture business where the manual transmissions are in Europe as well as in Asia. And the switch over to away from manual transmission, it's harder than expect. So, that's negatively impacting our managed sales in Europe as well as in Asia...

As well as our...

...as well as our equity income.

That's very, very helpful. Maybe just a quick last one on the tariff impact and the impact on 2020, is that just being kind of absorbed in the new margin rate because I think the only change was on the JVs? Or are you expecting to offset that over the next couple of years?

Itay, you'll recall we typically would not update three years going out. The only update we did to our three-year outlook related to GETRAG. So we haven't adjusted for volumes and we haven't certainly made any assumption as to the impact of tariffs, commodity costs or exchange rates. So we'll update that, I mean our complete outlook for 2020, when we complete our business plans and we talk to the market in January of 2019.

As far as what's going on with all of the tariff activity, it's certainly influx. Internally, it's extremely complicated to just get our arms around everything. There is directed buy, there is Tier 2, there's probably about four or five categories where we're tracking things coming in and out of the U.S. and various countries. So we outlined what we thought the impact is liable to be for the back half, where we would hope to offset everything but, being realistic, there's always negotiations and there's timing issues. So, that's our best guess for this year. As far as what happens with tariffs long-term, it's anybody's best guess. I would hope that eventually we will get to the point where we have got an agreement on NAFTA, in which case I think everything between Canada, U.S. and Mexico I presume at that point gets resolved, and then we'll just have to see what happens longer-term between the U.S. and China. So...

Great. That's...

...to the extent that we or that our customers think it's going to be a longer-term, then we and our customers will be trying to take actions to mitigate any impact.

Great. That's very helpful. Thanks, everybody, for all that detail.

And the next question is from John Murphy, Bank of America Merrill Lynch. Please go ahead.

Good morning, guys. Just a first question, there wasn't much discussion about this, maybe some sort of mention of recoveries on scrap steel or scrap metal. But just wondering how raw materials are impacting the business now? Any change in the relationship of how those are passed on or dealt with, with your customers and how you kind of see them impacting the business going forward?

While I'd say there's no change in how they're passed on, with the steel resale that's pretty clear. To the extent there is directed buys and that supplier – so directed buys, the customer tells us what supplier to use, but they're directed to supply to us. Those I would expect our customers will pay us for, where we're buying this deal and we would hopefully pass it on. But quite frankly, we're having discussions with every customer. And some of them I think are still trying to figure out what they're going to do and how they're going to do it. They'd like to try and offset it. I think the ability to pass extra costs onto the end consumer is something they have to determine based on competitive nature of the business. But I think it's too early to tell. And I think everybody is taking a little bit of a wait-and-see because we don't want to panic and over-stress relationship with our customers. But if it's going to continue to go on then we're going to have to – somebody's going to have to come up with a conclusion. But it's pretty complex right now. I would say nothing fundamentally has changed because, any time there's ever an issue, there's always a lot of negotiations within the business.

And John, if you look at Q2 2018 versus Q2 2017, if I look at our both steel, resin, our recoveries on scrap, it was fairly neutral, a little bit of a cost in the second quarter on a comparative basis. But as we move into Q3, Q4, what we're seeing in terms of commodity pricing, we're expecting some more headwinds, more than what we certainly experienced in Q2 for the second half of the year. And that's been factored into our most recent outlook for 2018.

But would it be fair to characterize sort of your current relationship with the automakers, particularly on new business bids and contracts, being very similar to what we saw in the last five years, as far as how raw mats are dealt with? Is that a fair characterization?

Yes. I'd have to ask. I assume that to the extent where our divisions think that they're going to have more exposure to it, they'll either get it clarified in the quote. I haven't heard of anything different. I mean, it's...

I haven't heard anything different as well, Don.

Okay. And then just a second question, I mean, as we think about the (34:08) ramp at Steyr, I mean, is there something going on with the launch process? I mean, it sounds like it's a little bit delayed. Or is Daimler being just hypersensitive and making sure they get this product out 115% correct with you, just given it's a major changeover for this first time in a couple of decades? Just want to understand the ramp there and why it seems it's like a little bit slower?

Well, I think the ramp would have gone okay, except there's two supplier issues. And one is behind us. The other one is still ongoing and impacting. So I wouldn't say they're being supersensitive. Obviously, it's a critical product and they want to make sure they get it right and so do we. But right now they've got a shortage of supply and they're still dealing with it. So we can't make the vehicle. So that's the current status.

Okay. And then just lastly, I mean, if we think about consolidation in the supply base, it seems like there's two critical areas that you're in where there's opportunity; first, on the ICE powertrain side; and then second, on Seating. I mean, what are you seeing out there as far as acquisitions and the potential to either be the consolidator or contribute assets to what might be a larger entity on the powertrain side or on the Seating side. I mean, just on both those segments, I mean how are you thinking about consolidation?

Well, on Seating, you know the Seating players well. We continue to grow business. So our Seating business, we are pretty pleased with the ongoing book of business and the ongoing business. As far as any consolidation, I can't really comment. I mean there's not a huge number of suppliers. There could be a bit more consolidation, but I wouldn't have much more to comment on that. As far as I think two areas quite frankly, the powertrain and the trend towards more electrification in that area, and ADAS, which is again a lot going on there with new technology, new players, there's a lot of players in there. I would expect over time you're going to see more consolidation, fewer suppliers, the people with the technology, and who are competitive will probably continue to win business. So we continue to look on the powertrain side where the technology is required to have a competitive price on a systems approach. If you really want to be a big winner here, you're going to have to be a supplier that can give pretty big solutions to a powertrain system. And that's why we put together – that's why we bought GETRAG, that's why we're building up our electronics expertise along with their driveline expertise. And we continue to focus pretty heavily on what are the building blocks we need to be one of the best in the world in that area.

So, maybe, Don, just one follow-up to that. I mean, so you basically are looking at sort of smaller acquisitions to build up the portfolio and go at this a little bit more organically as far as winning business over time, as opposed to any kind of larger acquisitions that have kind of been rumored out there in the markets. Is that a fair statement?

Yeah. Right now, I'd say we did – when we bought GETRAG, that was a big acquisition. I think we've got good handle and have integrated that pretty well. We're tending to look more at technologies and making sure we've got full capability from an engineering software standpoint. However, we certainly have the balance sheet. If we want to do a bigger acquisition, we can do it. So we're looking at all options.

Great. Thank you very much.

The next question is from Peter Sklar with BMO Capital Markets. Please go ahead.

Thanks. Vince, you've called out a couple of items that I don't think you excluded from adjusted earnings that appear to be non-recurring. One, I think it was $22 million of foreign exchange costs related to a deferred tax balance, and then there was the fire at the Meridian plant. Are there other items – I mean, there was a lot of puts and takes during the quarter, so are there other things that you would highlight as unusual?

Yeah. I think you've got certainly the deferred tax item and that relates to pure translation of deferred tax assets and denominated in local currency, where the functional currency is different than the local currency. It's essentially Mexico. And you said $22 million, about $0.04, and Meridian was about $0.04. When I look around the various sort of results for the segment, I think just puts and takes everywhere and they probably all kind of bounce out. Those are the two most substantial, but certainly we hadn't taken into account some of the other things that even took place in the quarters, things we were anticipating.

Okay. And Don, I wanted to ask you too just about, putting aside the issue of tariffs, how Canada is unfolding as a jurisdiction for manufacturing by Magna's – are any of Magna's divisions still deploying capital in Canada or is your growth in other jurisdictions?

Well, we've said for a number of years, I don't anticipate adding any more divisions in Canada. I mean, never-say-never, there could be – if you need a seats (40:04) facility or something like that, that has to be stand-alone. We've got pretty good coverage in Canada. So we wouldn't be adding divisions. But we have been spending at the rate of, like, an average over the past three years about CAD 300 million in our existing divisions. Quite frankly, with what was happening with the previous government in Ontario, that was pretty public, I didn't understand what they were doing or why they were doing a lot of things which was going to make it more uncompetitive for manufacturing in Ontario. So it'll be interesting to see what the new government does, but they certainly seem to be more interested in doing the things that are required to allow us to be competitive in Ontario. I haven't seen a re-cut this year of the capital or the forecast. We'll see that in the fall. So I'm certainly more optimistic we can be competitive here, excluding any long-term impact on tariffs. I think the federal government clearly understands how serious this issue is and most of the governors I think in the northern states also understand it. So I'll go on the assumption that at some point in time NAFTA gets agreed to and we're back to normal. It'll be interesting to see what happens in any renegotiated NAFTA between the U.S. and Mexico to see whether – because I think the whole thrust here is to try and slow down the movement of assembly plants down to Mexico. But that's going to require hell of things. I think it's going to have to have free trade outside of the U.S. to other areas like Europe I think because that's a benefit that Mexico has right now. And we'll see what happens with the Mexican labor rates. I doubt anything drastic happens there. But there may be some mechanism put in place that will make it less attractive to put assembly down there so the substitute would come as (41:58) to the extent that new plants go to Mexico, that means probably the U.S. and maybe Canada has more of a shot to get some of the newer assembly plants.

Okay. And lastly, Vince, on the acquisition of the properties from Granite, I mean, they do own quite a few Magna properties. Can you talk a little bit about which properties are important or significant for Magna to buy back and should we expect future acquisition of properties?

Peter, we have long-term arrangements with Granite on our (00:42:38) significant properties and in a lot of them we have right of first refusals. So, what ended up happening was that Granite had secured a buyer for these two facilities in the United States. We had the right of first refusal. They presented what the price was going to be. We had some analysis on it. We looked at what our financing costs were, how key these properties were. And kind of when you look at the debt obligation through the lease versus going out and financing ourselves in the market longer-term, it was actually a little bit positive for us from an earnings perspective. We gained complete control of those properties. So we decided to go ahead and do it. I mean, there's cases in the past where some are right of first refusal where we have passed on the properties. So I think, if you look forward, and the same situation applies, I think we have to look at it case-by-case. Going out and buying these properties does not impact our leverage ratio. We take into account lease obligations in our calculation, so it's neutral. In fact, as we get into 2019, with the change in the way you account for leases, it's not going to impact at all even the balance sheet.

Okay. Okay. Thanks very much.

And our next question is from Rich Kwas, Wells Fargo. Please go ahead.

Hi. Good morning.

Hey, Rich.

Wanted to just ask further on tariffs with regards to China 301, any impact there in terms of components that you may bring into the U.S., any meaningful impact?

Yeah. We're still analyzing. They've got three groups of products. So we've got a pretty good analysis done of the first round. It's not material, but there are some products that we're bringing in. The biggest one is the wire harnesses. They're not big wire harnesses, they're smaller ones. So, to the extent we think it's going to continue, we'll probably look at moving some of those things. The, quite frankly, analysis on what's happening in China is ongoing just because we're in the last list with so many parts, but we're looking at what the impact could be on things like tools long-term and other things. So, at this point in time, it's not material but every time anything causes anything then obviously we're concerned about it. We'll try and figure out what to do. In the case of what's happening in Canada, I think the Canadian Government has been very responsible in what they're doing to make sure that our competitiveness is not being hurt. To the extent things happen where we're paying duties out of China then I would expect, if there's nothing to resolve between the U.S. and China, then that could go on a lot longer and we'll just have to figure out what our options are.

So, Rich, with respect to China, there's a number of lists. One list is already in place. And Don talked about there is an impact to Magna on that first list that's already in place. And we have factored in that impact into our guidance, the $30 million impact, for the second half of 2018.

Okay. So, basically, the $30 million for the second half includes the first list for China. And then, Don, what you were referencing was this proposed $200 million that could go into effect that you're working through the numbers, it's not material, but still kind of working through (46:36)

Well, I don't think they're material but we're still working through because quite frankly...

Okay.

...I'm not sure – we've got a pretty experienced team in this, and I'd say probably the most experienced in the industry quite frankly, and we're working closely with the government both in the U.S. and Canada. But I'm not sure if they've come to a final analysis of that full list because it's a long list.

Right. But the stuff that's in place right now is included in the outlook for the second half.

Yes. Yeah. What we know about it.

Okay. Right. Okay. Okay. And then, as you think about with DCT with the volumes, so we haven't heard anything from one of your peers, competitors over there, with regards to – they have a pretty good size DCT business and they've been growing pretty nicely there. And it doesn't seem to have been an issue for them here at least in the recent quarters. So, just curious, what's changed. I mean I know it's changed, but I mean with regard to – are you using IHS volumes, take rates? Have you made your own assumptions based on what you're seeing in the field, on the ground, et cetera? I mean, how conservative is this outlook as we look out not just obviously this year, but beyond 2018?

Hi, Rich. Good morning. I think we continue to see, according to our expectations, the growth of the DCT market, as we have talked about in the last two or three years. And we also see the proliferation of the DCT into the hybrid side, we call the hybrid dual-clutch transmission. And we are seeing good progress in Europe as well as some discussions in China, but significantly in Europe. We are actively engaged in two or three substantial programs, both from North American as well as European OEMs, more specifically to European market right now, but we continue to see very optimistic roadmap in line or actually maybe even a little better than what we had thought when we did the GETRAG acquisition.

And we're going to take a step back too, Rich, because we talk about GETRAG and lowering the numbers. We lowered the numbers versus expectation. But even with lowered numbers, we're seeing increased sales...

Yeah.

...in DCTs. As we look at what we consolidated in Europe, we're seeing DCT sales continue to grow and what we're finding there is people are moving away from manual transmissions faster than we anticipated. We're benefiting then from a net perspective in our wholly-owned operations. When we look at our joint ventures, which is where we reduced guidance, year-over-year just in the second quarter, sales are up 18% on a managed basis. If I look at full-year outlook, again, even though we brought down our numbers, we're still expecting 7%, 8%, 9% growth on a year-over-year basis. And even up to 2020 compared to 2018, we're looking still at 8% to 10% growth. So I'd say versus expectation, the slope of growth has kind of come down a bit, but the business is still growing. It's a good product, a good technology, it's fuel-efficient and it's in greater demand by our customers. And so we expect continued growth in this area of the business.

And I think the hybridization aspect that we talked about, DCT being the right architecture and providing the improvements in CO2 is being validated by the programs that we're seeing in the hybrid side.

I think the one – you asked question what somebody else may not have seen the same thing. Pretty well everything we've talked about here is impacting between us and one specific customer on an older transmission and some volumes going forward. So, if they're not supplying that customer, they may not have seen it. So it's a pretty specific situation.

Okay. And then, are you working scoring (50:43) business with this customer? I mean, you had to write-down some stuff. I mean, how do you look at this customer going forward? I mean, I know it's a sensitive topic, but I mean I guess, is this customer – is this sort of thing going to be a risk going forward?

There's always issues. I mean, there was an issue with quality issues. So we have had some tough discussions. But I still think that we have a reasonable business relationship with them and I think they'd still be a good customer going forward. And we're looking at what type of transmission they want and we have the right technology. So it's not like it's broken, but I think everything else is a tough discussion.

Okay. And...

But we always find a good balance, short-term and long-term.

Right. Okay. Okay. Great. And just real two quick ones. Vince, did you say Meridian was worth $0.04 for the quarter?

Yeah. About $18 million bottom line, but $0.04.

Okay. Okay. And then the CapEx, the guide up was a net $100 million, but that includes the $200 million for the facilities, right? So it's like a net. It's $100 million lower on a apples-to-apples basis, is that the right way to think about it?

That's right, Rich. I think just a couple of moving pieces. So, one is we're at above $1.8 billion. Add $200 million to that, that gets you to $2 billion. What brings it down are two things. One is foreign exchange translation. We talked about foreign exchange translation...

Yeah.

...impacting the income statement. It's going to impact capital. And also as we look at kind of timing of expansions, those type, some of the capital that we thought we were going to spend in 2018 and probably will be pushed into 2019. And that's all.

Okay. Great. That's great. I appreciate the color. Thank you.

And the next question is from Chris McNally, Evercore. Go ahead.

Thanks, gentlemen. And happy to be on my first Magna conference call. So, thank you. I'll leave some of the fiscal year detail to my peers and I just wanted to ask a couple of strategic questions about Auto 2.0 and mobility for Steyr. So, we saw May Mobility and you have the announced JVs with BAIC. Just two questions. Could you help us understand the financial requirements Steyr would need to sign up a new tech entrant, as traditionally you've worked with more established and mature OEMs? And I guess the second, as we think about the scale for Steyr to grow over time, how would we think about the possibility of potentially doing a mega program, something in the six-figure-type volume product? Obviously, understanding it would require maybe an additional facility but if the ROIC EBIT metrics made sense. Just thoughts around Steyr would be very helpful.

Well, Steyr runs like a business unit inside Magna. So they obviously have to meet the same metrics and the target return on invested capital, et cetera. We have been assessing for years now what should be the next step that we would want to take to be able to offer Complete Vehicle engineering, which we have been doing in China already quite frankly, but on a bigger scale, as well as assembly. It's a good chicken and the eggs because it's always a big decision. In this particular case, it's electric vehicles, it's in China, it's in a good location, it's with a customer that has been pretty successful on EVs. It's got the license. It also allows us to develop a new product with them sort of from ground up that we could offer to other people, which we think might be attractive to other OEMs or entrants that would be interested in that platform. We can build it there. So it gives us a growth opportunity in China, which is a pretty important market, especially for electric vehicles. And we'll continue to look at what the opportunities are, given Steyr, I think they've got unprecedented capability for vehicle engineering and assembly and program management and sourcing. And there's other potential new entrants coming in that might also be interested in some of these opportunities. So we did a lot of analysis on this. It's a new product so you have to make sure you get the product right and the marketing right. We're very responsible for that, but we'll be very interested in making sure that they can sell the vehicles as well.

Thank you. And just with respect to a very large volume program because, obviously, you've been on basically a product-line-by-product-line basis. Could you just discuss maybe the considerations you would have to have and would you ever consider basically creating a separate facility if the economics made sense on a much larger program?

Sure. Yeah. That'd be something that we'd be interested in. I think, long-term, it'll depend on a number of different things, do you have new entrants that's coming that don't really – that want to have a vehicle, whatever the vehicle may look like, and they don't have the expertise, don't want to develop the expertise to engineer, develop and build a vehicle. If their primary interest would be more getting data or interface with the consumer, that's a possibility and we could do any volume quite frankly and we'd be pretty capable of doing that. I'd also be interested to see the existing OEMs at some point in time that they want to keep deploying their capital into assembly, when they could give it to us. And we're seeing more and more customers looking at using us for smaller volumes, 20,000, 30,000, 40,000, 50,000, 60,000 because they – would they be interested in doing it for a higher volume? I believe they will as they look at where they want to deploy their capital. And then we basically have a pricing model that says, it's a lot of capital that they have to cover our risk if the volumes aren't there, so.

Yeah. Chris, I think what you'll kind of like, I think, of our Magna Steyr model and opportunities, and we said even in Graz or (57:05) facility in Eastern Europe, there's three big buckets that I look at. One is, engineering, particular program, how we recover the engineering. I'd like to have quite a bit of degree of confidence that we can recover the engineering regardless of volume. Will there be specific capital requirements for that particular program? Again, I want to have a high degree of confidence that we're going to recover all that. And it is going to be capital that we put in place that will be applicable for a number of programs, including an investment in the paint facility. And what I'd be looking for is how I will recover my allocated cost of that paint facility, regardless of volumes or even capacity reservation charges. And that's kind of the way we have modeled things today at Magna Steyr. So the way I kind of look at the return metrics for Steyr and what I'm looking for is a little different than our other business, where I'd say on capital we'd probably take on more risk and on engineering we'd probably take on more risk than the specific Magna Steyr model.

Thanks, guys. Appreciate the detail.

And the next question is from Dave Tyerman with Cormark Securities. Please go ahead.

Yes. Good morning. My first question is just on the tariffs. So the $60 million annualized impact, is that entirely China or is there stuff from Canada, Mexico, et cetera?

That's everything including China.

Would it be concentrated in one area or the other geographically?

Well, just trying to – we have a pretty complicated chart where we're tracking everything from every country with the customers responsible for where we think we'll get coverage, whether it's going to be negotiations, is it primarily...

So, yeah, David, when you look at it, the most significant component is costs for U.S. operations.

Sorry. Could you say that again, Vince?

Yeah. So our operations that are impacted are plants. Most of the costs relates to our U.S. plants, with some smaller impact to Mexico and smaller impact to our Canadian plants.

Okay. And so, when you say most of it's on U.S. plants, how would their costs have been elevated? Could be higher steel prices or...?

It's primarily steel, aluminum, and little bit of aluminum and some things that are on the 301 list coming out of China into the U.S.

Okay. That's helpful. Thank you. And then, on the transmission JV challenges. So, if I understand what you've been saying correctly, it sounds like it's mostly bringing the guidance down, particularly for 2020 due to the manual transmission declining. And the DCT sounds like it's pretty much as expected or even better. Is that the way to think of it?

I think when you look at 2020, so as we look at equity income, the impact is certainly manual transmission's take rate. Some of it's volume. When we look at the type of transmissions, we've got dry clutch transmissions, wet transmissions. There's certainly growing interest and demand for wet clutch transmissions on the dry clutch transmission, which is another program. Volume's a little softer than what we think and we expected them to come off (1:01:19) lesser than what we've anticipated. So, that's impacting 2020.

Okay. So it's a combination of both the manual and the dry clutch DCTs.

Yeah.

For a specific program essentially.

It is the softening of a older product line.

Right.

(1:01:37) on the dual-clutch transmission with a low-torque dry clutch. And it's coming up faster than what it was supposed to be. But if you look at the current product and the next generation, whether it's a DCT300 with a wet clutch with a broad range of torque, as well as HDTs, I think we would see a definite recovery.

Okay. So this sounds like it's kind of a temporary thing and, as your newer products come on, they'd fill the gap. And then just with the electric vehicle project, can you just sort of sketch out how this launches? Like, you have 180,000-unit capacity. It sounds like it starts in 2020 to begin to impact you. You'll lose money initially and then it ramps up to whatever kind of target possibility there is over two or three years, is that the idea?

Yes. So there's two joint ventures. The one, they are paying the engineering joint venture to engineer the vehicles. So, that should be a reasonable business because it's engineering ops. We have the normal margins on that. There's going to be – just trying to think what we've said publicly but there's...

I think, David, when you start looking at the volume ramping up, the bigger impact is going to be in 2021 versus 2020, and starts to ramp up. And we haven't given a lot of guidance in terms of the impact on results. We're still working through all the details with the joint venture.

Yeah. I'm just trying to remember what we said publicly. But there's a number of vehicles that's just going off of a couple of platforms and so we are going to make these under contract and sell them to our customer. Our joint venture partner is our customer. So there's not a lot of startup costs. And it's beyond – we start the production in 2020 and then it sort of ramps up from there. So it'd be further up by the time we get to any substantial volume.

Okay. Okay. That's helpful.

The assembly facility is not consolidated as well. So you're picking up on equity income, not 100% of it.

Right. Yeah. No, I got that part. Okay. And then, just the last question. Your counterpart, Don, over at Linamar commented on NAFTA the last night and I thought she was somewhat positive and that it sounded like there's a possibility that the content stuff is getting resolved. I guess, there's other general things like dispute settlement and sunset that are still out there. What's your view on where we are in all this and timing?

It's hard to say. That sounds probably pretty accurate. I know Linda has been heavily involved – has been heavily involved, but I haven't had a discussion with anybody in the last week on it quite frankly. I think I got the impression that we're pretty close on some of the content discussions and there was the other issues you just mentioned that are probably the block side. I'm not sure what the issues are, quite frankly, between the U.S. and Mexico. I know they're having discussions. So, logic would say everything is happening here to try and put pressure on to get a final negotiation on NAFTA. But the longer this goes on, and I think everybody is aware of this, the worse it is for NAFTA, including the U.S. And I think they understand that as well. So I am hoping that they'll get over whatever the discussions are, and there's some pretty tough issues there and I would hope that we do see some something in the next few months. But I would have said that a few months ago to, so it's hard to say. I think eventually we have to get it resolved or else it's just going to be a big lose for everybody.

Right. Okay. That's very helpful. Thank you.

And our next question is from Michael Glen with Macquarie. Please go ahead.

Hey. Just a follow-up on the equity income line. Can you identify – the forecasts that you've given for the GETRAG, can you break that down by customer concentration? Like, are there some customers in there that make up the vast majority of that line item?

Yeah. Multiple customers...

You mean, in terms of the reduction? Sorry, Michael, can you – in terms of what, the change in outlook?

Just the whole number. Is it highly diversified or are there some large buckets customer in there?

In our GETRAG business, we have a number of customers that we supply manual transmissions and DCTs. Some of them are European customers – a number of European customers, a number of Asian customers, so it's pretty diverse.

Okay. And the...

I don't have the numbers in front of me on how that splits up between kind of what that GETRAG was (1:06:55) consolidated.

You're talking about the volume decline as opposed to the commercial issues or...

Maybe talking about our business in total.

I mean, the one customer that you're sort of flagging that created a bit of an issue this quarter, do they represent a meaningful portion of that equity income line in terms of the projection going forward?

They are a fair size in China. And most of the issue in this quarter has been try and wrap everything up that we've got going on in discussions with them.

Yeah. I would say that going forward that they represent a part of our sales, a number but not a meaningful number. Again, it's (1:07:44) in Asia.

Okay. So the issues that you saw this quarter related to that customer, they are very much concentrated in this quarter. You don't see that as impacting the future business with that particular customer?

Yeah. In China, we had some of it in the joint venture in Europe as well, but in China that's what primarily it was.

Yeah. And I think as we're looking at some take rate, there's other customers as well that are being impacted in a way from manual transmissions and we talked about the dry clutch. So there are some other customers from a volume perspective but they just impacted in the quarter and, even for outlook, well, (1:08:30) in the quarter was with that one particular customer which will impact us for the second half of the year as well.

Okay. And just a clarification, in terms of the steel and aluminum tariffs, is there a change in the way the OEMs are asking you to maybe absorb a bit of this price inflation? Has that conversation changed at all?

Yeah. It's all over the map and I think it's too early to tell I think whatever our customers are seeing. Let's try and track the cost, let's figure out where this is going to go. They'll all want to try and offset it somehow, and if we can help offset something, we're happy to do that. Some customers have already made adjustments, others are in the process, some are still analyzing it. And so it's too early to tell. I don't think – this doesn't fundamentally change anything. And quite frankly, every time anything happens in the industry, we'll have a lots of tough negotiations. But at the end of the day, the supply industry can't absorb this. We either have to offset it or pass it on and I don't think the car companies can predict that either. So then they'd have to do figure out what to do with the pricing.

Okay. That's all my question. Thanks.

And gentlemen those are all the questions we have for today. And I'll turn it back over to Mr. Walker.

Okay. Well, I appreciate everybody for dialing in and listening today. And we certainly had some headwinds this quarter, but even with that, we posted a good quarter and we will continue to work hard to continue to generate strong operating results. So, thanks for your interest. And everybody have a great day.

And ladies and gentlemen, that concludes our conference call for today. We thank you for your participation. Everyone have a great rest of your day. And you may disconnect your line.