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Magna International Inc. (NYSE:MGA)

Merrill Lynch & Co., Inc.'s 2013 New York Auto Summit

March 27, 2013 2:10 pm ET

Executives

Donald James Walker - Chief Executive Officer and Director

Vincent J. Galifi - Chief Financial Officer and Executive Vice President

Analysts

John Murphy - BofA Merrill Lynch, Research Division

John Murphy - BofA Merrill Lynch, Research Division

Get settled and obviously, there's some stragglers out back. If you all want to come in, that would be fantastic. Next up on the agenda, we have Magna. Last year at this time, market cap was just about $11 billion. Right now, it's just approaching about $13.4 billion, so that's about a 22% return. So pretty heady return last year versus this time. We think there's a lot more to go in the stock.

Magna is one of the largest global auto suppliers with one of the strongest balance sheets, a little over $1.1 billion of net cash. It's a great story. It's got a lot of strength in a lot of different parts in a car, which it supplies to global automakers really around the world. We do think they're in a great position to capitalize on really the consolidation of the supply base and the globalization of the supply base. So it's really a great company and I think you'll enjoy their story.

Today, we're very lucky to have Don Walker, CEO and Director; Vince Galifi, EVP and CFO; and Louis Tonelli from Investor Relations who also wears many hats and is incredibly helpful to us in the investment community.

With that, I'll turn it over to Don.

Donald James Walker

Thanks, John, and hello, everybody. Thanks for having us here today. Before we get started, please note the presentation and questions-and-answer session today contain forward-looking statements within the meaning of the applicable securities legislation.

So as most of you know, Magna is the fourth biggest auto parts supplier in the world. We have a market cap of just over $13 billion, and we have a solid balance sheet with a debt-to-cap of 4%, that was at the end of December 2012.

We're very diversified. We have a great product depth in all of our product areas. And it's topped off by what I what think is our unique capability in Magna Steyr designing and building complete vehicles under contract for our customers.

And you can see here we are a global company. You can see the number of production sites in red, there are 313. We have about 119,000 employees in 29 countries, so we can service all of our global customers wherever they're located.

We reported our Q4 results on March 1, which included record sales of just about $31 billion and record earnings per share. And we continue to generate very strong returns with -- in 2012, with return in funds employed of 19.8%.

So today, what we want to cover specifically is the -- I'll be covering the key business drivers and then Vince Galifi will be talking about our balance sheet and our outlook.

So there's 5 broad elements that we'll be looking to, to propel the company going forward. The first is a continued expansion of our business in growing regions, further improving our financial results in Europe, implementing our world-class manufacturing initiative across the company, continue to invest in new technology in both product and process, utilizing our strong balance sheet to create value for shareholders. So I'm going to talk about each one of those. Just as a reference point, we are the largest automotive parts supplier by a long shot in North America and we continue to be very strong here.

If you look at the next slide, we are investing in a lot of new facilities. Between 2012 and '15, we're launching 37 new greenfield facilities and most of those are in emerging markets and low cost regions. Looking in closer at a couple of markets, starting with China. The Chinese market, which is already the world's largest market, continues to experience massive growth both in percentage and also in absolute terms. We're relatively well represented in China across almost all of our capabilities. In the past couple of years, we have added a number of new facilities, and we have 4 more greenfield facilities going into production right now. We expect to more than double our sales in China between 2012 and 2015.

In South America, we're also expecting future growth in vehicle production. We have experienced rapid growth in South America over the past few years. We have positions there in a number of our product areas, in seating, in closures and our stamping group. We have a new mirror plant coming onstream as well. We've done 3 acquisitions in South America, and we've launched a number of new greenfield facilities. So we are facing some growing pains, which we've talked about in our conference call, financially there. But we've -- so we're not aggressively trying to grow with new facilities. Right now, we want to digest what we have, but we think is going to be a good area for us in the future.

Again, at Russia, we've established a footprint in many of the key regions in Russia. And we now have a good position in our metalforming group, exteriors and interiors, and we're launching some seating business there. So expect to double our business in Russia by 2015.

India's another market which we're growing in. We're just getting established there. We're expecting sales about $250 million by 2015 and it's led by our metalforming and our seating business. But it's a market we want to participate in. Although we're not being too aggressive at this point in time, we want to just mainly follow provable platforms.

In Europe. We have a lot of questions in Europe, so let me just address it. As a starting point, we've made dramatic year-over-year improvement in 2012 in our European results. The most significant area of improvement has come through the better results in what we were referring to as our underperformers. In particular, the major underperformers that we have highlighted in the past, there was 4 facilities we talked about.

We've also launched a lot of new business there. We've had lower new facility costs in 2012 compared to 2011, which also contributed to our improvement. And we have had some success in achieving price increases at customers. However, our margins in Europe are still not where we want them to be and we have a very solid plan going forward.

So in Europe, we have taken a number of actions to restructure certain operations, that includes the closure or consolidation of some facilities. We will be doing more of that, mostly taking place over the next 3 years. We're still working out plans in this regard. We're not going to get into details today, but we can provide further details as we finalize the plans. Part of our restructuring will be as a result of exiting certain non-strategic businesses that we have in Europe.

We have an improving manufacturing footprint, which will allow us to be more competitive, and most importantly, be more competitive when we quote future business. And we've made great strides in implementing our world-class manufacturing techniques around the world and specifically, in many of the plants in Europe. So we have a lot of great plants over there, but we need to get them all at the same level.

So over the past couple of years, we have improved our quoting discipline and have better alignment of objectives at the divisional level and profitability for all the managers. In the short term, they're leaning to -- we may have a slowdown because we're not aggressively quoting our exterior and interior business, but long term, we'd expect to grow our European sales, and we think it's a very good market to be there.

Lastly, the balance sheet and capabilities, we believe we have the opportunity to capitalize on certain macroeconomic environment there. And possibly, be able to buy some attractive companies, other they have technology or a good footprint or product offerings. So we believe over the next 3 years, we can get our European segment in aggregate to a more acceptable level of return.

Another one of our key priorities is -- we've been focused very hard in this in the last couple of years -- is world-class manufacturing. And when -- our objective basically is when any customer in the world goes into any Magna facility, when you -- when we ask them who the best manufacturer in the world is, they will say a Magna plant. And when they walk in, they'll recognize what we mean by a Magna plant. So it incorporates a lot of things -- don't want to get into everything. But structural manufacturing facilities, our processes and employee engagement, capital optimization and very important is the disciplined program management from quote right through to launch. So the improvements we are making are not subjective. We have very specific measurables and metrics which we can judge and we can see the progress we're making. So I'm happy with what we've been doing so far.

But looking at an example, we have a case study. A 27-year old profitable plant, that a number of years ago, we would have thought was one of our benchmark plants. We spent a lot of time and effort in there. We've brought some outside experts from Japan. We've been working with them for about 5 to 7 years now. And they -- over a 2-year period, they did a lot of things -- modified the plant layout, went to standardized work, employee involvement. And you can see on the chart there the results that are shown in green, and this is a plant that was already considered benchmark plant by not only us, but our customers. So lots of areas for improvement. This particular plant, we actually had outsourced work to China and the customer asked us to bring it back to -- back into North America because of our competitiveness. So a lot of activity there and quite pleased with it.

Another area that we are putting a lot of focus on is innovation. We're accelerating our innovation technology and that's a key priority along with our world-class manufacturing. We have a lot of innovations. We're going to do an Investor Day in November. We'll be talking a lot more in detail, but just a couple of examples. If you look at the frames, an example, using multiple materials and processes, new joining methods and we've been able to take -- frame the next generation and reduce it by over, the mass by over 20% for weight reduction. We also have made acquisitions and done product development in the area of high and low pressure diecasting capabilities to replace a lot of existing products in the body structure. So again, an advancement using mainly aluminum to reduce weight in bodies.

We also won our first thermoplastic composite modular liftgate, which was ever awarded in North America. It's for an Asian-based OEM and we've been awarded a similar liftgate for a German-based OEM in Europe. These painted liftgates offer a significant reduction in mass and assembly complexity for our customer and improved convenience for consumers. So it's really -- it's a new innovation, product and process. It's a win-win-win for ourselves, our customers and the end consumer. And our exterior units also developed various active and passive aerodynamic systems to optimize air around the vehicle to reduce drag and therefore improve fuel economy; won a number of programs in this area as well.

And lastly, in our powertrain group. We're a global leader in transfer cases and we're developing a high efficiency belt drive transfer case that reduces energy consumption while maintaining high standard for dynamic torque transfer. And we've also developed a crankshaft integrated starter generator. Hybrid technology provides improved powertrain efficiency, which captures energy to utilize for peak vehicle performance while maintaining high torque and power density.

So we have a lot of innovations and there's key areas in each of our product areas, which I said we'll get into in a little bit more detail when the -- we have our Investor Day in November.

With that, I'd like to turn it over to Vince Galifi to talk about our balance sheet and review our outlook.

Vincent J. Galifi

Well, thanks, Don, and good afternoon, everybody. I'm going to talk a little bit about our balance sheet and cash flow. We continue to have an excellent balance sheet and we have generated strong cash flow from operations over the past number of years. As of December 31, 2012, we had net cash of about $1.1 billion and $2 billion of unused credit lines.

Now we have been and intend to continue to deploy capital in 3 broad areas: Firstly, organic growth; then acquisitions; and finally, returning capital to shareholders. With respect to organic growth, our capital spending increased in 2011 and 2012 to support growth initiatives in key markets, and capital spending is expected to increase again in 2013. We continue to look at acquisitions whether they're big or small. And finally, we continue to return capital to our shareholders in the form of dividends and share buybacks.

With respect to dividends, we are currently at a record dividend rate. We increased our dividend March 1. We have articulated our objective of having a dividend that is able to grow over time and you should expect a change of dividend once a year as we complete our year end and look forward to our business plan.

We've also purchased 11.7 million shares under normal course issuer bids between November 2010 and November 2012. And our board authorized another buyback program to purchase up to 12 million shares, and that program expires in November of 2013.

In addition to our organic growth, we have made selective acquisitions in the past year that have allowed us to grow in new regions and add key technologies. Our most recent acquisitions, ixetic and STT, together give us a leading position in pumps and a global footprint, with excellent technologies in a high-growth product area.

A number of the key drivers just discussed are helping us to grow our business in key regions. Last year, about 13% of our business was based outside of our traditional markets, North America and Western Europe, compared to just 1% 10 years ago. With our rapid growth outside of our traditional markets, we expect that proportion to grow to 17% by 2015, a significant feat considering the size of the pie.

And finally, we are continuing to rebalance our sales by segment, particularly in North America. We have been seen in the past as a company too exposed to the truck segment. We do have a strong truck content, but we continue to rebalance our mix to be closer to the overall market in North America.

I'm now going to review our 2013 outlook, which we released earlier this month. With respect to key assumptions built into our guidance, we're assuming light vehicle production of 15.8 million units in North America and 11.9 million units in Western Europe. Foreign exchange rates seasonal outlook approximate rates at the start of March 2013. We've used parity for the U.S. Canadian dollar and $1.33 for the U.S.-euro exchange rate. And we haven't incorporated any material unannounced acquisitions or divestitures in our numbers.

For 2013, North American production sales are expected to be between $15.4 billion and $15.8 billion. European production sales are expected to be between $9.4 billion and $9.7 billion. Rest of world production sales are expected to be between $2.2 billion and $2.5 billion. And total production sales are expected to be between $27 billion and $28 billion for 2013. Complete vehicle assembly sales at Magna Steyr are expected to be between $2.6 billion and $2.9 billion. And total sales are now expected to be in the range of $32 billion to $33.4 billion for 2013.

We expect our operating margin to be in the mid-5% range for 2013 and that excludes unusual items and the $158 million of amortization of intangibles related to the acquisition of E-Car that we completed in 2012. Our effective tax rate is expected to be approximately 24.5% and capital spending is expected to be at a record level of about $1.4 billion for 2013.

The spending reflects investments to expand in high-growth markets, as well as continuing investments to support new and replacement business in our traditional markets. Beyond this year, we expect continued strong growth in sales. From 2013 to 2015, we're expecting a net increase in production sales of about $2.2 billion, which is split amongst our 3 reporting segments as follows: 70% of that in North America; 40% in the Rest of World; offset by 10% decline in Europe. And we're anticipating translating the additional sales into strong earnings growth in the future.

We're launching parts in a number of exciting new high-content vehicles this year in North America. These include the Chevy Silverado, Jeep Cherokee, Honda Accord, Nissan Pathfinder, Ford Fusion and the Nissan Rogue. Launches ramping up in Europe in 2013 with high Magna content include the MINI Paceman, Škoda Octavia, Ford Transit, Ford Kuga, Mercedes-Benz CLA and the Volkswagen Jetta. Launches ramping up in other regions this year with high content include the Fiat Viaggio, Audi Q3, the Qoros GQ3 in China, the Chevrolet Celta and the Chevy Prisma in South America.

So why invest in Magna? In summary, we continue to expand in key growth regions. We are executing plans to improve European results. We're gaining traction with world-class manufacturing with a long-standing culture of innovation. We have a strong balance sheet, which we intend to deploy, as well as excellent cash flow generation and our outlook is positive.

Thanks for your attention today. Don, Vince and I are happy to take questions at this time.

Question-and-Answer Session

John Murphy - BofA Merrill Lynch, Research Division

Great. Maybe as we're queuing up, I can kick off. First, I mean, Don, you've mentioned some business, and particularly the interior and exterior business in Europe is -- you're not pushing on quoting right now, and in South America, you're kind of taking a little bit of a pause as well. As you go through that thought process, is there a broader portfolio review that might go on at Magna to figure out if there is business is worth being in or not worth being in or maybe you want to -- you need to expand into or want to expand into, I should say?

Donald James Walker

Sure. Let me just clarify. In Europe, in the exterior and interior business, that's the one we talk publicly about having some significant losses, not in all areas of Europe, but mainly in the continent and a couple of high-cost jurisdictions. And we had some product that was underpriced. So during the time when we're turning it around and we're over a year into that now, we made a conscious decision not to aggressively go after more business. We were -- fix what we had. So we're back in the mode now where I'd say we've got control of the operations, understand their costing and where we can make money, we are quoting again. But there's a lag from that obviously. And in North America, we have a lot underway. Right now, we're launching a lot of new plants. We're launching a number of new product areas. So we're still growing in South America, but we're not going to actively go after more acquisitions or greenfields until we've sort of have a real good handle on what we're doing there. So to answer your question about our product portfolio. Magna's more diversified than anybody else. We show 10 product lines up there but we've got more than 30 what I would say are discrete product areas. So we're doing a pretty deep review as to where we see vehicles being in past year 2020, what's a growing content, what's not a growing content, what's going to be a differentiator, where do we have unique capability? So ideally we'd rather be -- in product lines, we're going to be a leader in innovation, be global, have -- be the best in the process, in the manufacturing process that are required for that, which may mean, if we're not diversified that we can't be all things to all people and be the best in every area. So we are looking at the product portfolio from a value creation standpoint and if we have to shed some product lines, we would. We're not going to go into details of what specifically we will do because it's -- anything is very sensitive obviously with -- we have employees to worry about. We've got to make sure we -- whatever we do is accepted by our customers. But in the future, we want to make sure we have clearly identified the growth areas and then put the R&D efforts, the acquisition efforts and greenfield efforts in those particular areas.

John Murphy - BofA Merrill Lynch, Research Division

Would it be fair to state right now that you'd be more of a buyer than a seller given where valuations are generally perceived in the market? Is that a fair statement?

Donald James Walker

Absolutely. We've got a strong balance sheet. We've got cash we can put to use. So we may be paring some product areas if we feel we can't be a long-term strategic player in there, but we would much rather -- in a growth mode than selling things off this point in time.

John Murphy - BofA Merrill Lynch, Research Division

Questions in the audience? I got a bunch more if we -- Jerry in the back there?

Unknown Analyst

You mentioned that you had -- the growing pains in Latin America and South America. Can you talk a little bit about specific actions you're working on to try and digest the acquisitions you've taken? And when you say that we don't expect any additional greenfield, is that just around those areas of acquisition or is that kind of your assessment that there's not a need for additional, any additional capacity for any of your business in Latin America?

Donald James Walker

We're not -- and down in South America, which for us is primarily Brazil, but we have some seating operations in Argentina. There is room for growth for sure because I think long term, it'll be a good economy. There is some issues. We made 2 seating acquisitions and a metalforming acquisition. So we had some launch issues in the companies we bought. We were also building a number of greenfield facilities; we've still got some going on. So we have a lot of activity right now. We've put a lot of management attention down there. So we just want to get launched -- integrate the acquisition to launch and then we'll look to growth again, beyond what we're already building. Some of the reasons we had some difficulties down there was fairly specific in Argentina. A lot of challenges right now on inflation, on -- you name it, everybody's familiar with what's going on there, which has been a challenge for us financially. And at the end of the day, we need to go back to our customers and if there's huge inflation, we need to be able to get some reasonable pricing, so that's been some of our underperformance financially. However, we had some, as I said, launch issues. But there's also a lot of things going on just getting parts into Brazil. So we had -- so we're looking at localizing parts and there's been a different approach that the government down there has taken to -- duties and -- there's difficulty getting across the border. So we are going to continue to grow. We have rapid growth now. We'll continue to grow down there. But it's not an area where we've got a full steam ahead to keep on growing until we've digested what we've got. But I think Brazil specifically will continue to be a good market.

John Murphy - BofA Merrill Lynch, Research Division

I've got one question. I think it's pretty important right now, on the pickup truck market. Obviously, you're the supplier of the frames on the GMT900, going out to the K2XX, but you've also won a lot of business with Ford on the F-150. I'm just curious, as you look at the iteration of these products, really, what have you been able to deliver to GM on this new frame and what are the improvements there? And as we step forward to the F-150, which is going to launch in the second half of next year -- not saying you have to confirm that necessarily, but that's what we're assuming. What kind of change is going on with their frame? And without putting them really directly back-to-back, if you can, that would be great, but I'm sure you might defer on that. Which one is stepping forward a little bit more than the other, because it sounds like Ford's doing a lot more aluminum in the frame, taking a lot more weight out? I mean, how are you helping both of these customers and where do they stand on these frames?

Donald James Walker

They've both got exceptional frames, great value. They're both great vehicles.

Unknown Executive

From a great supplier, as you know.

Donald James Walker

And they're probably the 2 best [indiscernible] you can buy in the auto show. I'm not going to comment on -- you can ask Joe, I think he's coming here in a couple of -- you can ask him. But if you look just generally, what all of our customers are looking for when they do a product enhancement is obviously, they're looking at fuel efficiency and CO2 emission. So how does that translate? Obviously, for us anyway, for our product areas, lighter weight is a big part of that, less -- restriction losses in the drivetrain is a big part of that. So the good news with all of the competitive demands and the requirements from the government for future vehicles, it's driving a lot of technical changes. It doesn't necessarily mean it's going to be any cheaper for the end consumer, but you're getting better payback, people are buying new vehicles because of the better gas mileage and they are looking for people that have innovative solutions. So if you look at, I'm not going really answering the question, but I guess a different way to look at it is the opportunity for innovative suppliers, either on product or process, is huge because if you're a me-too player, that's not good enough for what our customers need anymore. So between themselves and ourselves, there's a lot of very interesting discussion about how can we have a better product at a lower cost, lower weight. So they're really thinking through a lot of innovation opportunities and they're very open to suggestions right now. So they're definitely improved product; you'll be able to see them.

John Murphy - BofA Merrill Lynch, Research Division

Maybe just specifically on the F-150. Do you have the whole framing contract, or are you still doing half the frames? Or where -- I don't know if you've made that...

Donald James Walker

Have we said -- disclosed that?

Vincent J. Galifi

We haven't gotten into that.

John Murphy - BofA Merrill Lynch, Research Division

You're doing at least half the frames, but the question is -- okay -- whether you're doing all of them, but you're not answering that.

Vincent J. Galifi

We can't comment on that.

John Murphy - BofA Merrill Lynch, Research Division

Okay, got you. Got you. And I think with that then, we can wrap up for the session. Really appreciate the time, guys.

Vincent J. Galifi

Great. Thank you so much.

Donald James Walker

Thanks so much.

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