Magna International Management Discusses Q4 2013 Results - Earnings Call Transcript

Mar. 3.14 | About: Magna International (MGA)

Magna International (NYSE:MGA)

Q4 2013 Earnings Call

March 03, 2014 8:00 am ET

Executives

Donald James Walker - Chief Executive Officer and Director

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

Louis Tonelli - Vice President of Investor Relations

Analysts

Peter Sklar - BMO Capital Markets Canada

Mark Neville - Scotiabank Global Banking and Markets, Research Division

Rod Lache - Deutsche Bank AG, Research Division

Richard Michael Kwas - Wells Fargo Securities, LLC, Research Division

David Tyerman - Canaccord Genuity, Research Division

Richard J. Hilgert - Morningstar Inc., Research Division

Todd Coupland - CIBC World Markets Inc., Research Division

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Magna International Inc. Fourth Quarter and Year End 2013 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, Monday, March 3, 2014. I would now like to turn the conference over to Don Walker, Chief Executive Officer. Please, begin, Mr. Walker.

Donald James Walker

Thank you. Good morning, everybody, and welcome to our Fourth Quarter and Year End 2013 Conference Call. Apologize if we cut short anybody viewing the Oscars last night to read our press release at 5 a.m. this morning. Joining me today is Vince Galifi, Chief Financial Officer, and Louis Tonelli, Vice President of Investor Relations. On Friday, our Board of Directors met and approved our financial results for the fourth quarter and year end for December 31, 2013, and we issued a press release this morning. You will find the press release, today's conference call webcast, our updated quarterly financial review and the slide presentation to go along with the call on our investor relations section of our website, www.magna.com.

Before we get started, just as a reminder, that 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 the complete description of our Safe Harbor disclaimer.

Overall, we're pleased with Magna's performance in the fourth quarter. It was a great finish to 2013 with record sales and record earnings. In North America, we posted an adjusted EBIT percent, excluding E-Car amortization, of over 11% for the fourth quarter. For the full year, excluding E-Car amortization, we posted adjusted EBIT percent of 10% in North America, and we anticipate ongoing strong results in North America in 2014.

In Europe, our progress continues. We reported adjusted EBIT of $111 million in Q4 compared to $24 million in Q4 of 2012, and we had about $375 million of profit for the full year. We have now had 8 consecutive quarters of increased year-over-year adjusted EBIT in Europe. We recorded further restructuring charges in Europe this past quarter as we continue to take actions to improve European profitability. For the third consecutive year, we expect improved adjusted EBIT for the full year 2014 compared 2013 in our Europe segment.

Beginning with the fourth quarter of 2013, we have split our former Rest of World segment into Asia and Rest of World to be consistent with the way we look at our business. In Asia, which for us currently includes China, Japan, Korea, India and Thailand, we reported fourth quarter adjusted EBIT of $26 million for a 5.3% margin. In addition, we posted a 5% margin for 2013 compared to a 3.8% for 2012, reflecting, among other things, higher contribution margin on increased sales, driven by recent investments that have now launched. In 2014 in Asia, EBIT margin should benefit from lower and new facility costs and additional contribution margin on our growing sales. This is despite the fact that we are still investing heavily for growth in this region.

In Rest of World, substantially all of which is South America, we posted an adjusted EBIT loss of $21 million for the fourth quarter. For full year 2013, we recorded an adjusted EBIT loss of $76 million in line with our 2012 loss. We have spoken to you previously about some of our challenges in South America, in particular, those relating to inflationary costs and our lack of success in passing all those costs through to our customers. We have reached some recent agreements with our customers [ph], which should reduce the losses this year, and further discussions with our customers on these matters are ongoing.

In 2013, we continued to invest in our business. Capital spending was $1.2 billion, a little less than previously anticipated as some of the spending has been shifted 2014. We also returned a significant amount to shareholders. We paid dividends amounting to $284 million, and we bought back over $1 billion of our stock. We currently have a normal course issuer bid outstanding, which will terminate in November of this year. And under the bid, we can purchase an additional 9.5 million shares.

In late January, we announced that Magna Steyr will continue its collaboration with the BMW Group through a new vehicle manufacturing contract for assembly vehicle -- a vehicle assembly facility in Graz, Austria. The new production program will start following the end of production of the current MINI Countryman and MINI Paceman being assembled at Magna Steyr. At this point, we're unable to provide further details. However, we're very pleased to secure this business in Graz with a very important customer.

To sum up, a very strong 2013 and lots to look forward to for Magna as we look forward. And with that, I'll now pass the call over to Vince Galifi.

Vincent J. Galifi

Thanks, Don, and good morning, everyone. I would like to review our financial results for the fourth quarter and year ended December 31, 2013. Please, note that the figures I'm going to be discussing today will be in U.S. dollars. The slide package accompanying our call this morning includes a reconciliation of certain key financial statement lines between reported results and results excluding unusual items.

In the fourth quarter of 2013, we recorded restructuring charges entirely related to our European exteriors and interiors business, impairment charges, a release of income tax valuation allowances and the deferred tax benefit associated with the elimination of the Mexican flat tax. These together reduced pretax by $90 million, net income attributable to Magna by $11 million and EPS by $0.05 in the fourth quarter of 2013. In the fourth quarter of 2012, we recorded restructuring and impairment charges substantially all related to our European business, a remeasurement gain on the acquisition of STT and the release of income tax valuation allowances. These together reduced pretax by $45 million, increased net income by $48 million and increased EPS by $0.20 in the fourth quarter of 2012. The following quarterly earnings discussion excludes the impact of these items.

In the fourth quarter, our consolidated sales increased 14% relative to the fourth quarter of 2012 to $9.2 billion. North American production sales increased 13% in the fourth quarter to $4.4 billion, reflecting in part, a 6% increase in vehicle production to 4 million units. In addition, the increase is a result of the launch of new programs, an increase in content of certain programs and acquisitions completed during or subsequent to the fourth quarter of 2012. These factors were partially offset by the weakening of the Canadian dollar against the U.S. dollar and net customer price concessions.

European production sales increased 17% from the comparable quarter, reflecting in part, a 5% increase in European vehicle production to 4.9 million units. In addition, the increase is a result of the strengthening of the euro against the U.S. dollar, acquisitions completed during or subsequent to the fourth quarter of 2012 substantially related to ixetic and the launch of new programs. These factors were partially offset by a decline in content of certain programs and net customer price concessions.

Asian production sales increased 29% or $89 million to $399 million over the comparable quarter primarily as a result of higher production volumes, the launch of new programs and the strengthening of Asian currencies against the U.S. dollar. This was partially offset by net customer pricing concessions. Rest of World production sales declined 11% or $23 million to $188 million fourth quarter primarily as a result of the weakening of the Brazilian real and Argentine peso against the U.S. dollar, partially offset by customer price increases and higher production volumes on certain programs.

Complete vehicle assembly volumes increased 17% from the comparable quarter and assembly sales increased 13% or $91 million to $788 million. The increase largely reflects the launch of the MINI Paceman in the fourth quarter of 2012, the strengthening of the euro against the U.S. dollar and the increase in assembly volumes for the Mercedes-Benz G-Class. These factors were partially offset by lower volumes on the Peugeot RCZ.

In summary, consolidated sales -- excluding tooling, engineering and other sales -- increased approximately 14% or just over $1 billion in the fourth quarter. The increase reflects higher production sales in North America, Europe and Asia as well as higher complete vehicle assembly sales, partially offset by lower production sales in our Rest of World segment. Tooling, engineering and other sales increased 16% or $113 million from the comparable quarter to $841 million. The net increase relates to sales on a number of programs.

Gross margin in the quarter increased to 13.9% compared to 12.3% in the fourth quarter of 2012. The increase in gross margin percentage was primarily due to margins earned on higher production sales, incremental margins [ph] earned on new programs that launched during or subsequent to the fourth quarter of 2012, productivity and efficiency improvements at certain facilities, a positive impact of previous restructuring activities, lower preoperating costs incurred at new facilities and improved pricing on certain unprofitable contracts. These items were partially offset by higher costs incurred in preparation for upcoming launches; a larger amount of employee profit sharing; an increase in complete vehicle assembly sales, which have a higher material content than our consolidated average; higher tooling, engineering and other sales that have low or no margins; and operational inefficiencies and other costs at certain facilities.

Magna's consolidated SG&A as a percentage of sales was 4.7% in the fourth quarter of 2013, lower than the 5% recorded in the fourth quarter of 2012. SG&A increased $28 million to $428 million in the fourth quarter of 2013, primarily due to higher labor and other costs to support the growth in sales. Our operating margin percentage was 6.6% in the fourth quarter of 2013 compared to 4.8% in the fourth quarter of 2012. This increase substantially relates to the higher gross margin and lower SG&A and depreciation percentages. In the fourth quarters of 2013 and 2012, EBIT included $40 million and $39 million, respectively, of amortization associated with the 2012 E-Car transaction or the $31 million after tax. Excluding this amortization, our Q4 operating margin percentage was 7% compared to 5.3% last year. In Q4 2013, our effective tax rate increased to 22.5% from 21.8% in the comparable quarter of 2012. This is primarily as a result of changes in income mix, partially offset by lower losses not benefited in euro.

Net income attributable to Magna increased $166 million to $469 million for the fourth quarter of 2013 compared to $303 million in the comparable quarter. Diluted earnings per share were $2.08, a record for any quarter, compared to $1.29 in the fourth quarter of 2012. Diluted EPS were negatively impacted by $0.14 in the current quarter and $0.13 in the comparable quarter as a result of the amortization of E-Car intangibles. The increase in diluted earnings per share was a result of an increase in net income attributable to Magna and a decrease in the weighted average number of diluted shares outstanding during the quarter. The decrease in the weighted average number of diluted shares outstanding was primarily due to the repurchase and cancellation of common shares pursuant to our normal course issuer bids and the cashless exercise of options, partially offset by the issue of shares related to the exercise of options and an increase in the number of diluted options outstanding as a result of an increase in the trading price of our stock as well as stock options issued. During the quarter, we purchased 3.6 million common shares, 2.5 million of these related to recently renewed NCIB. This leaves approximately 9.5 million shares available under our current bid.

I will now review our cash flow and investment activities. During the fourth quarter of 2013, we generated $809 million in cash from operations prior to changes in noncash operating assets and liabilities and $451 million in noncash operating assets and liabilities. For the quarter, investment activities amounted to $506 million, comprised of $463 million in fixed assets, a $34 million increase in investments and other assets, and $9 million to purchase subsidies.

On Friday, our Board of Directors declared a quarterly dividend of $0.38 per share with respect to our common shares. The dividend, a new record and an increase of 19% over the third quarter dividend, is payable on March 28 to shareholders of record on March 14, 2014. Our balance sheet remains strong with $1.2 billion in cash net of debt as of December 31, 2013. We also have an additional $2.2 billion in unused credit available to us.

We disclosed back in January that our board and management are committed to utilizing our balance sheet to create value by moving to an adjusted debt to adjusted EBITDAR of between 1 and 1.5x by the end of next year. In addition, we intend to reduce our cash balance from current levels. These moves, together with our dividend increase, reflect our board's confidence in our business prospects and our commitment to creating further value for shareholders.

Now let me pass the call over to Louis.

Louis Tonelli

Thanks, Vince. Good morning, everyone. I will review our updated 2014 full year outlook. I will only provide a summary of our outlook since we covered the details of our revised outlook in our press release.

With respect to our vehicle production expectations, we continue to expect 2014 North American light vehicle production to be approximately 16.7 million units, consistent with our January outlook. The weakening of the Canadian dollar relative to the U.S. dollar results in a reduced North American production sales outlook. We expect 2014 total European light vehicle production to be approximately 19.3 million units compared to 19.1 million in our January outlook. The small increase in European production volumes drives a modest increase in our expected 2014 production sales in Europe, however, not significant enough for us to change our European production sales range from our January outlook.

Higher anticipated 2014 assembly volumes from Magna Steyr relative to our January view has resulted in an increased full year assembly sales outlook. Our lower North American production sales is offset by the higher European production and assembly sales, leaving our total sales outlook consistent with our January outlook. We expect our consolidated operating margin percentage to be in the mid 6% range and our effective tax rate to be approximately 24.5%, both consistent with our January outlook. And for the full year 2014, we expect fixed asset spending to be approximately $1.4 billion, consistent with our January outlook. Our expected restructuring costs for 2014, which are entirely related to our exteriors and interiors European operations, are expected to be approximately $75 million before tax.

Lastly, many of you will recall that back in January, we disclosed as part of our outlook that we expected 2016 production sales to be approximately $3.6 billion higher than 2014 and provided our light vehicle production assumptions embedded in those numbers. Further, we indicated that approximately 30% of that increase was related to Rest of World. In splitting our former Rest of World segment between Asia and our new Rest of World segment, essentially all the 30%, or approximately $1 billion, of production sales increase is associated with our Asia segment. The growth from 2014 to 2016 is insignificant for Rest of World, which is substantially all South America. These details are included in our slide deck for today.

This concludes our formal remarks. Thanks for your attention. We'd be pleased to answer any of your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Peter Sklar, BMO Capital Markets.

Peter Sklar - BMO Capital Markets Canada

In the results, as you pointed out, your North American business was particularly strong both in revenues and margins. Is there any 1 or 2 things that you can point to? Because it really -- the level of earnings really did jump from what you'd been tracking over the last few quarters.

Vincent J. Galifi

Yes, I think if I -- Peter, it's Vince. I guess, just a couple of things to note in North America. We really did have some strong sales. And when you look at the [indiscernible] from Q3 to Q4, we had a lower amount of tooling sales. Remember, tooling sales margins are 0 or very close to 0. So we had a higher percentage of production sales. With the strong level of production sales, we had some pretty good pull-through at our plants, higher contribution margin than average margin. And so when you add all that up, we ended up with a very, very solid operating margin for the quarter. In terms of their pluses and minuses that it's worth mentioning that the year end is always pluses and minuses. But when you look at them in total, they weren't significant to move the needle up or down in the quarter.

Peter Sklar - BMO Capital Markets Canada

Okay. And one follow-up question then if I may. I'm just wondering, based on what you're seeing in the production schedules, what your outlook is for the GM trucks. Now they are going to have some downtime due to the remodel. But notwithstanding that, that there is some prebuild, it appears that inventories are higher. Are you anticipating any downtime or production cuts or seeing that in the schedules other than what they will be doing for the remodel?

Louis Tonelli

No, Peter. We're not seeing anything like that. Sales have been weak, but it's been weather related. And all it takes is a strong 1 or 2 months of sales to really get those inventory levels back in line. So we're not seeing it in our production schedules at all.

Operator

Our next question is from the line of Mark Neville with Scotia.

Mark Neville - Scotiabank Global Banking and Markets, Research Division

I just want [ph] to give a follow-up on one of Peter's questions. On North American margins, for 2013, you hit the high end of your guidance; for the quarter, you're well above. For 2014, I mean, we're calling for sales to go higher. So how do we think about margins versus your guidance?

Vincent J. Galifi

I think a couple of things to think about. We look at '13 to '14. We still think that commodity costs are going to be a little bit of a headwind for us. When we talked about the range, for 2014, we talk about 9.5% to 10%. Remember, it's a range. Maybe any given period could be at the high end or at the low end or might slightly increase it. So I think based on the performance we had in Q4, if history repeat itself, we'd be more comfortable at the higher end of that range. So we just had a strong quarter with strong sales and lots [ph] of contribution margin falling to bottom line.

Mark Neville - Scotiabank Global Banking and Markets, Research Division

Okay. In our North American sales guidance, the adjustment downwards, is that just currency?

Vincent J. Galifi

All currency. Yes. Remember, when -- in going to Detroit, we were looking at current exchange rates at the time in the Canadian dollar -- the U.S. dollar was at 0.95. It's 0.9 now versus strictly just currency movement downwards.

Operator

Our next question is from the line of Rod Lache with Deutsche Bank.

Rod Lache - Deutsche Bank AG, Research Division

Just to clarify, so your North American long-term margin target is 9.5% to 10%. You did x E-Car 10% for the year, 11% in the quarter. You're posting really strong incremental margins. And going forward, you're expecting still pretty decent growth even from 2014 to 2016. I think it's like $1.5 billion in North America. What would cause the incremental margins to come down to a level that's closer to what your EBIT margins would be in North America to allow that to kind of mathematically happen?

Donald James Walker

It's Don here. We're only a month since -- a little over a month since we gave the guidance. Haven't really had a chance to -- haven't seen, obviously, February results yet. And January we're taking a look at it. We've been spending a lot of time on year end and other issues. I would want to get another quarter behind us to say we're going to change the margin, as Vince said, failing something unexpected, we would expect to be at the higher end for sure. Things are running well, but I'd rather wait to see where Q1 comes in, and we can talk whether we'd change our margin guidance or not.

Vincent J. Galifi

And Rod, remember, if you look at your longer term, we are adding capacity in North America. We are adding to our fixed cost structure. So it takes a view [ph] that every additional dollar for every unit based on contribution margin would be a false assumption. There are fixed costs that are given up as well.

Rod Lache - Deutsche Bank AG, Research Division

And could you just also refresh us on what you're expecting in terms of the European margin trajectory in 2014? What's the benefit from this, the interior and the exterior restructuring? And lastly, just a housekeeping thing, do you happen to have with you the EBIT impact from FX and the acquisitions in the fourth quarter?

Vincent J. Galifi

Can you repeat the last part of that question?

Rod Lache - Deutsche Bank AG, Research Division

The earnings impact of FX and acquisitions in the quarter that just passed. You've historically given us some...

Vincent J. Galifi

We give FX on sales, not on EBIT basis. So I guess, when you -- maybe just in terms of the acquisitions, I'm just trying to look at that, sequentially Q4 to Q4, so that's a question for year-over-year. When I look at the additional sales, and the EBIT contribution is about $125 million of sales. And when I look at net acquisitions, we're probably about close to neutral on that for the quarter on a quarter-over-quarter basis. So it didn't really help on the EBIT side. In terms of trajectory for adjusted EBIT margin in 2014, we closed out the year at 2.5%. When I look at the year prior, we were at 1.3%. We've talked about getting to the end of '16 based on our business plan of somewhere between kind of 4.25% and 4.75%. 2013, we've made pretty significant headway already, probably a little bit ahead of where we thought we were going to be. So when I look at from the end of '13 to '16, we continue to believe and expect that the 2016 numbers I just talked to you about are achievable. And in particular in '14, our view is that we should have higher adjusted EBIT margin percentage relative to 2013. But I'm not sure it's going to be a complete step function. There might be a year that it's a little bit [indiscernible] than the others. But we expect to move that margin up each and every year. Now Rod, I just -- while we're talking about Europe, I just want you to keep in mind one thing. In the fourth quarter in Europe, our adjusted EBIT percent was 2.8%. We've been talking about in terms of looking at our operation in Europe, one of the things we've been doing is coming back to our customers and trying to get some price increases. We were successful in the fourth quarter to get some retroactive price increases, like go back right to the first quarter of 2013. And the impact of that retroactive price increase, which will carry forward, but we booked 3 quarters of retroactive amounts, probably about $15 million or about 0.4% on European margins. So if you were to look at Q4 backing out the retro pricing, margins would have been 2.4% versus the 2.8% that we reported.

Rod Lache - Deutsche Bank AG, Research Division

Okay. Was that the only region where that was a factor, the retroactive pricing adjustments?

Vincent J. Galifi

Yes, the only other region where we had some success, again about $15 million, was in South America. Even though we've got a pretty substantial loss in the quarter, a couple of things happened in there. One, we had $15 million split equally between 2 items. One is related to a purchase price adjustment to an acquisition we made a couple of years ago. And the other relates to, again, ongoing efforts to get price relief for increases in inflation in South America. So we were able to secure some retroactive price increase going back to the beginning of the year, and then some carryforward into 2014. But again, if you look at that segment in Q4, it's about $15 million there that, I would say, is out-of-period income.

Donald James Walker

Now, Rod, just mentioning the sales question or your FX impact, production sales in North America were negatively impacted by about $90 million. In Europe, FX contributed $93 million. This is year-over-year in the quarter. And Rest of World was negative of about $20 million.

Operator

Our next question is from the line of Rich Kwas with Wells Fargo.

Richard Michael Kwas - Wells Fargo Securities, LLC, Research Division

Okay. Just a question, Don, on the Rest of World margins for this year, you said expect improvement, but it sounds like still a loss. Any sense for how we should think about the magnitude of the improvement on the loss for this year?

Donald James Walker

Yes, it's really hard to tell in South America because we've got so many unknowns going on in there. There's difficulties. We have a smaller operation in Argentina, but it does have a certain immaterial impact on what we're doing in that reporting segment. I would guess that we should probably cut the losses in half that we saw in 2013 to 2014. But it depends on a number of factors: what happens in inflation, what happens in raw material, what we -- the relief we can get from our customers. We're having some very difficult discussions down there with almost every customer we've got. You're probably hearing the exact same thing from every other major Tier 1 supplier. But probably we'd just -- that would be my best guess right now just to cut the loss in half. We're making some operational improvements there, and we're looking at doing some restructuring some of our operations, specifically in Argentina.

Richard Michael Kwas - Wells Fargo Securities, LLC, Research Division

Okay. All right. And then on the restructuring in Europe, the interior and exterior ops, are you -- after the $75 million this year, are you going to be pretty much set there? Or is there -- do you expect incremental beyond this year?

Donald James Walker

I would think that $75 million that we expect for 2014 will finish most of restructuring. Some -- we'll still have some left in 2015. I would expect the number to be going down quite a bit. That's what we have on the horizon right now. If we decide to do something else, then obviously that number will change. But that's our view right now.

Richard Michael Kwas - Wells Fargo Securities, LLC, Research Division

Okay. And then last one, Vince, on the -- when you look at the -- there was a mention that on the Austrian tax, which with being -- that you were able to get credit for losses in other jurisdictions and that's going to be a tax hit in the first quarter. I assume that's not part of the 24.5% tax guidance. Is that excluded from that?

Vincent J. Galifi

No, so what happened there was that we had a valuation allowance for some losses in Europe -- in Austria, and we're able to now set up the deferred tax asset on our balance sheet. So we booked income and called it an unusual items in Q4. So as 2014 rolls around and we generate income on that jurisdiction, and I have a tax provision. We wouldn't have a tax provision of 2013, so it moves our tax rate up. But this is already embedded in the 24.5% guidance we've given you.

Richard Michael Kwas - Wells Fargo Securities, LLC, Research Division

Okay. So it's included in the number. Okay.

Operator

Our next question is from the line of David Tyerman from Canaccord Genuity.

David Tyerman - Canaccord Genuity, Research Division

Just one clarification first. On the retroactive price increase, is the $15 million in Europe, or in Europe and South America?

Vincent J. Galifi

There's 2 amounts. So there's $15 million in Europe, and there's about, I think, $7.5 million in South America.

David Tyerman - Canaccord Genuity, Research Division

Okay. And then the second question, and this is one that people have been hinting at on the margins. You significantly exceeded your guidance for the year in Q4. Is there something unusual in Q4 that happened that would cause -- that won't recur in the rest of 2000 -- excuse me, the rest of 2014?

Vincent J. Galifi

David, we talked about approximately $30 million that, on a consolidated basis, impacted us in Q4 positively. That's about 0.3% in the quarter, and it's about 0.1% for the full year. So if you look at full year, if you back out that $30-odd million, you're like 6.2% operating margin x E-Car, and our guidance is mid 6%. So if from 6.2% to mid 6%, depending on how you define mid 6%, is a growth year-over-year. There isn't anything other than pluses and minuses in Q4 that are significant to mention. The $30 million was the most significant items, and we've just talked about those.

David Tyerman - Canaccord Genuity, Research Division

Okay. So just to clarify, the $30 million are the $15 million in Europe, the $7.5 million in South America and something else?

Vincent J. Galifi

Yes, there is a purchase accounting adjustment in South America for about $7.5 million as well. So two $7.5 million is $15 million in South America and an additional $15 million in Europe.

David Tyerman - Canaccord Genuity, Research Division

Okay. And sorry, what is the purchase accounting adjustment?

Vincent J. Galifi

It's all part of the purchase of the [indiscernible]. And as we continue to work through that transaction, there was an adjustment to the purchase price, which we recorded as income in the quarter.

Operator

[Operator Instructions] And our next question is from the line of Richard Hilgert from Morningstar.

Richard J. Hilgert - Morningstar Inc., Research Division

Just wanted to ask a little bit about working capital first. It looks like there's some pretty major swings going on. For the full year number, you've got accounts receivable being off by almost $600 million. But in the quarter then, your payables were down $125 million. Can you kind of walk us through a little bit about what was going on with working capital this year and where you're expecting it to go in '14?

Vincent J. Galifi

Sure, Rich. I can do that. When you look at historically, working capital movements, if you look at production receivables or production payables, days on these production receivables or days in production payables Q4 '13 versus Q4 '12 is consistent. What typically could change on a year-over-year basis is what happens to your tooling inventory or your tooling receivables or tooling impaired. But they don't follow a normal cycle. But from last quarter -- sorry, from last year to this year, that hasn't been much of an impact. So the cash we generate from working capital is just a cycle of our business. You'll notice last year in Q4, we generated lots of cash from working capital. Come Q1 of '13, we invested that pretty well all back into the business. So you can expect in Q1 of '14 that we're going to make a pretty substantial investment in working capital as sales again pick up after the Christmas holidays.

Richard J. Hilgert - Morningstar Inc., Research Division

Okay. On South America, it looks like the losses have been going on down there for a little while now. But you've mentioned in your prepared remarks about working on customer pricing. Just curious, if you're not able to get the kind of pricing that you're looking for, given the size of the operation there, is that some place -- is that a region where you'd be willing to back out of? Or what would you do down there if the customer pricing situation didn't improve for you?

Donald James Walker

Well, I think the customers are also having difficulty, and many of them have talked about it, I think, in their results just because of the financial situation, what's going, in our case, specifically in Argentina, but Brazil has also been a challenge. Supply and demand basically dictates what price we're going to get longer term. As we quote new business, one of the things that we were doing is making sure that we have an agreement upfront with our customers on how we're going to handle things like inflation, wage increases, material costs, et cetera. So we want to build it in going forward on existing contracts. It's an ongoing discussion. And quite frankly, some of the smaller suppliers in South America in the past would have gotten the increases. And if they didn't, they just stop shipping to the customer. We don't want to be doing that. Major Tier 1s don't want to do that. But we're also not in the business to be losing money. So that's why we are restricting any more capital going down there unless we have a balanced contract with our customers. As I said, given what's going on in Argentina, the business climate and a number of other thing, that's not an area we would -- we see as a place we certainly wouldn't be putting more money in there. It would be an area we would prefer not to be working, quite frankly, unless something changes. Brazil, long term, I think will be a good place to do business. It goes in cycles up and down right now. It's a pretty difficult environment. However, longer term Brazil, we'd still be looking it grows on [indiscernible] the proper terms in our contract.

Richard J. Hilgert - Morningstar Inc., Research Division

Okay, good. Since we've got the Fiat Chrysler merger going on or further integration going on and since Fiat has a large operation in South America and you had a pretty good relationship with Chrysler over the years, is there some opportunity there for you in South America?

Donald James Walker

Well, I think there's opportunity with us with a number of different customers. Fiat is obviously big down there. A lot of what we will end up doing will be dependent on what the terms of the contract are -- If we can make acceptable returns, given the risk factors we've got, so I think there's lots of interest by many of our customers for the major Tier 1s like [indiscernible] to grow in South America. But before we do that, we just want to make sure that we can get acceptable returns, which, obviously, right now, you can see by our numbers, we're not there.

Operator

Our next question is from the line of Todd Coupland with CIBC World Markets.

Todd Coupland - CIBC World Markets Inc., Research Division

I just wanted to follow up on one question on North America and one on Europe. First, on North America. So when you were saying you haven't seen any shifts in production in the quarter thus far, you're taking into account the slower sales that we've seen for the first 2 months in -- because of weather. So what you're saying is production will just continue and inventory will catch up over the course of the year. Is that what you're saying?

Donald James Walker

Well, what I'm saying is that our most recent releases don't sort of point towards hitting the brakes on production. Now having said that, next week, things could change. I mean, it depends on -- it's not a static thing. It's dynamic. But we're not seeing any major shifts -- major cuts in production at this point in time. If sales in March are slow, then it will have an impact on obviously inventory levels and production levels. But we're not seeing it right now.

Todd Coupland - CIBC World Markets Inc., Research Division

Okay. And then just on Europe, where you're commenting moving ahead a little bit quicker than you expected. How much of a tailwind is the pickup in the market there? Or is it mostly what you're doing internally? Could you just talk about the sensitivity to the strength in that market over there?

Vincent J. Galifi

Todd, it's Vince. If you kind of think about where we are in Europe on production sales, which will take this assembly up for the time being, our sales were just under $10 billion for 2013. And even though we raised our guidance up for vehicle production in Europe in our most -- in this current release that we issued this morning, our estimate for production sales in Europe are kind of $9.5 billion to $9.9 billion in '14. So we're not expecting -- projecting that it's going to be sales that's driving the improvements in operating margin. I think what [ph] we're talking about some time that what's driving up margin for us is some of the benefits of the restructuring that we've taken place. And we've been moving our manufacturing footprint to lower-cost regions. So Don has got a big push on cost manufacturing [ph]. And we're seeing the benefits of that in Europe, and that's going to continue. We've been exiting certain nonstrategic businesses. And we've had some success with some pricing. So all the things we've said we were going to do, we're doing. And we expect that, that will continue in the next couple of years. And certainly, as we continue to have [indiscernible] supply in the process, as EBIT comes on, we should continue to see higher margins. But again, that's going to be more mid to long term than sort of immediate.

Donald James Walker

I would say, just generally in Europe, we've had a lot of work to do over the last number of years. And in discussions that I've had with our key customers over there, I think we're through most of our pricing issues. Our quality of delivery is good. We've made some operational improvements. We've got a good plan on what we want to do for restructuring. And the feedback I'm getting from our customers is they want to grow with us. They want us to be competitive, obviously. But they see us as a good, solid supplier. And so I think we're through the heavy lifting in Europe, and it's going to be juts continuing to focus on operation excellence, launches. And so hopefully, we can start to see some growth in the outer years again in Europe as our customers are indicating they want to grow with us.

Operator

And we have a follow-up question from the line of David Tyerman.

David Tyerman - Canaccord Genuity, Research Division

Yes, just on the D&A line, that's come down quite a bit -- or sorry, gone up quite a bit as a percent of sales in 2013. I was wondering if you had any thoughts. Like it was 2.6% in '12 and 3.1% in '13. Any thoughts on where we're heading on that line?

Donald James Walker

Sorry. What number, SG&A you said?

David Tyerman - Canaccord Genuity, Research Division

No, D&A.

Donald James Walker

Well, D&A includes the amortization of E-Car in 2013, right?

David Tyerman - Canaccord Genuity, Research Division

Okay. Yes, absolutely.

Donald James Walker

But that's about $106 million incremental [indiscernible].

David Tyerman - Canaccord Genuity, Research Division

Okay. That's good. Okay, that's fine. And then on SG&A, it's been coming down or was down in 2013 anyway. Is that sort of mid 4% level sustainable? Or is really 5% a better number?

Vincent J. Galifi

David, I guess the best thing we could really tell you is [indiscernible] longer term SG&A as a percent of sales continue to come down. But that's all embedded in our operating margin guidance.

David Tyerman - Canaccord Genuity, Research Division

Sure. Okay. And then the last question I had, just on the excess financial resources. Is there any update on how you see that unfolding in the next 1 or 2 years2?

Vincent J. Galifi

Sorry, the balance sheet?

David Tyerman - Canaccord Genuity, Research Division

Yes, the excess financial resources you have.

Vincent J. Galifi

David, I just want to go back to SG&A. There is going to be a step function you realize in 2015 on SG&A. You'll recall it's part of an arrangement that we continue to pay Frank Stronach a consulting fee [indiscernible] in 2014. So we're paying right now for -- well, not [indiscernible]. We are actually paying 2% of pretax profit before profit sharing, and that goes to 0% in 2015. And that 2% is right to the bottom line. We're not giving that 2% and allocating it to others, but just a pure save from a P&L and cash perspective. So that will be a step function starting in 2015. Just with respect to the balance sheet, our views haven't changed at all. As we look at the balance sheet, we want to, I'll call it gap in terms of where we want to get to. We want to get to about a 1 to 1.5x adjusted debt to adjusted EBITDA by the end of 2015. If you sort of look at where we are at the end of Q4 of 2013, we got a gap to get to sort of 1x of $1.7 billion and to get 1.5 is $3.2 billion. So how are we going to close that gap? And there's a couple of ways we're going to do that, David. The first, which is what we prefer to do, is to continue to invest in the business, whether that's through additional capital programs, whether that's through M&A that meets our strategic objectives. We just lift up the dividend. But to the extent that we're unable to deploy that capital in the business in an effective way -- and remember, we continue to generate cash so that number continues to grow. We'll use that cash to buy back some stock under an NCIB. And we've got about another $9.5 million remaining on our current bid. We're pretty active moving up to the quarter, and we'll continue to purchase shares in the foreseeable future.

David Tyerman - Canaccord Genuity, Research Division

So do you think that -- you do generate, as you say, a lot of free cash. So do you think that you can just -- that you can do this under an NCIB? It doesn't seem like you'd be able to.

Vincent J. Galifi

David, when you look at the rules under an NCIB, we've got a proxy to do approximately 20 million shares under an NCIB. So I'm just going to use simple math. But if you use the $100 share price, that's $2 billion a year. And I would be quite surprised if in the next couple of years that we weren't looking at some acquisitions that could continue to grow our business. So it's going to be a combination of things that will get us to the right targets on a capital structure perspective.

Operator

Mr. Walker, this concludes the Q&A session. At this time, we have no other registrants. I'll turn the call back to you.

Donald James Walker

Okay. Great. Well, thanks, everybody, for getting up early and reading our press release. It was a good year. Pleased with what we did in 2013. We still have a lot of opportunities in front of us, so looking forward to another exciting year. So thanks for joining us in the call today, and enjoy the rest of your day. Thank you.

Operator

Ladies and gentlemen, this does conclude the conference call for today. We thank you, all, for your participation. Have a great day, everyone.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!