Magna International Inc. Q1 2010 Earnings Call Transcript

Jun.10.10 | About: Magna International (MGA)

Magna International Inc. (NYSE:MGA)

Q1 2010 Earnings Call

May 6, 2010 7:30 a.m. ET


Don Walker - Co-Chief Executive Officer

Siegfried Wolf - Co-CEO

Vince Galifi - EVP and CFO

Louis Tonelli - VP, IR


John Murphy - Bank of America

Chris Ceraso - Credit Suisse

Rich Kwas - Wells Fargo Securities

Himanshu Patel - JPMorgan

Rod Lache - Deutsche Bank

Itay Michaeli - Citigroup

David Tyerman - Genuity Capital Markets

Michael Willemse - CIBC


Welcome to the Magna International first quarter results 2010 conference call. (Operator Instructions)

I would now like to turn the conference over to Mr. Don Walker, Co-Chief Executive Officer.

Don Walker

Thank you. Good morning and welcome to our conference call. Joining me today are Siegfried Wolf, Co-CEO; Vince Galifi, Executive Vice President and Chief Financial Officer; and Louis Tonelli, Vice President, Investor Relations.

We issued two press releases earlier this morning. The first release covers our first quarter results. The second release announced an important proposed transaction that shareholders have been asked to consider and ultimately vote on. You'll find the press releases, today's conference call webcast and the slide presentation to go on with the call on the Investor Relations section of our website at We'll post our remarks relating to the proposed transaction on our website later.

Today we'll comment first on the quarter and then elaborate on the proposed transaction. We'll then open the call to answer your questions.

Before we get started, just a reminder the discussion today may contain forward-looking statements within the meanings 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 both today's press releases for a complete description of our Safe Harbor disclaimer.

We'll keep our quarter-related comments brief today, as we want to discuss the proposed transaction and since we're making presentation later this morning at our Annual Meeting.

We're pleased with the first quarter results, which were achieved in a period when vehicle production in our principal markets remains relatively low compared to historical levels.

In North America, we continued to experience a recovery in the auto industry. Auto sales continued to show improvement, and as a result, North American light vehicle production increased for the fourth straight quarter in Q1.

Given the rapid decline in vehicle production during the last half of 2008 and the first half of 2009, along with some of the actions taken by our customers in North America, we restructured and rightsized our capacity and reduced overheads. And we have tried to remain disciplined on the cost side, as volumes in North America are recovering. These efforts go a long way to explain the improvements of the results in North America.

I'll let Ziggy make a few comments on our European business. Ziggy?

Siegfried Wolf

I'm happy with the progress we have made over the past couple of quarters in Europe. We have been very focused on improving underperforming divisions. And as a result, our operations outside of Magna Steyr have shown improvements in profitability.

As you all know, the crisis started months later in Europe than in North America, and we are well underway to improve our margins in Europe, and we are quite sure that we will be in the same level what we had before. There is more work to do, and we are moving absolutely in the right direction.

With respect to Magna Steyr, we have said in the past that this unit is undergoing a complete turnover on its business in 2010. The three new customers and the upfront cost of new assembly programs are significant, and that has impacted our overall profitability in Europe. However, we are right now launching the Peugeot RCZ Group and the Aston Martin Rapide, and costs are declining. Magna Steyr's results should continue to improve as it begins to launch the MINI Countryman starting this summer.

We are concerned about the macroeconomic environment in Europe as well as the (buoyed) back of the vehicle scrappage programs that has been in place since 2009, which will come to an end. On the positive side, the recent weakening to the euro provides an opportunity for European OEMs to export more vehicles, particularly into the recovery in North American market. Daimler and BMW, those large markets of Magna, should benefit from this trend.

With that, I will hand over to Vince.

Vince Galifi

I would like to review our financial results for the first quarter ended March 31, 2010. Please note all figures discussed today are in U.S. dollars. In the first quarter, consolidated sales increased 54% relative to the first quarter of 2009 to $5.5 billion.

North American production sales increased 75% in the first quarter to $2.7 billion reflecting a 57% increase in vehicle production to 2.9 million units, and a 5% increase in North American content to $953. Excluding the effect of foreign exchange, our average dollar content per vehicle declined primarily as a result of unfavorable production relative to industry volumes and/or lower content on certain programs including GM's full-sized pickups and SUVs, BMW X5 and X6, Ford F-Series, the Dodge Ram, and the Mercedes R, M and GL Class.

Programs that ended production during or subsequent to the first quarter of 2010, including the Pontiac G5 and G6, and net customer price concessions subsequent to the first quarter of 2009. Partially offsetting these were new launches, favorable production relative to industry volumes, and/or increased content on certain programs, including the Ford Fusion, Edge and Flex, the Chevrolet Traverse and Cobalt, the Dodge Journey, and Chrysler-made minivans, and acquisitions completed during or subsequent to the first quarter of 2009 including several facilities from Meridian.

New launches contributing to content growth quarter-over-quarter include the Chevy Equinox and its variants, the Cadillac SRX, and the Chevy Camaro. Given what an unusual quarter Q1 2009 was in North America, perhaps a better comparison is between North American content and Q1 versus Q4 2009. Content increased 10% from $868 in the fourth quarter of 2009 to $953 in the first quarter of 2010.

The biggest driver of this increase in content was improved mix, as a number of high content vehicles outperformed the increase in overall production volume over the same period.

European production sales increased $609 million, or 53% from the comparable quarter. European vehicle production increased 33% to 3.4 million units, while European content increased 15% to $521. Key contributors to the increase in European content include, acquisitions completed during or subsequent to the first quarter of 2009, including Cadence, and the strengthening of the euro and British Pound, each against the US dollar.

The launch of new programs, including the Porsche Panamera, the Opel Astra, the Mercedes Benz E-Class, and the Audi A5 also helped content. These factors were partially offset by unfavorable production relative to industry volumes and/or lower content on certain programs in the first quarter of 2010, including the smart fortwo, the MINI Cooper, and the BMW 3-Series, programs that ended production during or subsequent to Q1 2009, and net customer price concessions subsequent to the first quarter of 2009.

Rest of world production sales more than doubled to $229 million, primarily as a result of increased production and/or content on certain programs, particularly in China, Korea, and Brazil, the launch of new programs during or subsequent to the first quarter of 2009 in China and Japan, and the strengthening of the Brazilian and Korean currencies.

Complete vehicle assembly volumes increased 49% from the comparable quarter, and assembly sales increased 11% or 45 million to $446 million. The increase largely reflects sales on new vehicle launches, as well as a strengthening of the euro against the US dollar, partially offset by lower volumes on certain assembly programs.

In summary, consolidated sales excluding tooling sales increased approximately 60% or $1.9 billion in the first quarter. The primary reasons for this increase are the significant increases in vehicle production in both North America and Europe, higher rest of world and assembly sales, and increased content per vehicle in our primary markets.

Tooling, engineering and other sales declined modestly by $9 million from the prior year. Gross margin in the quarter was 13.5% compared to 6.8% in the first quarter of 2009. The increase in gross margin percentage was substantially due to the significantly higher vehicle production volumes, as well as lower costs associated with restructuring and downsizing activities, productivity and efficiency improvements of certain facilities, the benefit of restructuring and downsizing activities, and cost saving initiatives that were undertaken during or subsequent to the first quarter of 2009, acquisitions completed subsequent to the first quarter of 2009, and a decrease in tooling sales that earned low or no margins.

These factors were partially offset by higher cost incurred in preparation for upcoming launches, primarily in Europe; employee profit sharing, as no profit sharing was recorded in 2009; higher electric vehicle development costs; higher cost incurred to develop and grow our electronics capabilities; an increase in complete vehicle assembly sales, which have a lower gross margin than our consolidated average, and net customer price concessions subsequent to the first quarter of 2009.

Included in SG&A was $14 million gain on the sale of a facility in the first quarter of 2010. The positive impact of the gain was also $14 million on net income and $0.12 on earnings per share. The following discussion excludes the impact of the gain.

Magna's consolidated SG&A as a percentage of sales was 5.7% in the first quarter of 2010, compared to 8.4% in Q1 2009. This decline is substantially due to higher revenues associated with the significant increase in vehicle volumes, combined with our deliberate efforts to contain cost. This was partially offset by higher incentive and executive compensations.

Largely as a result of the higher gross margin percentage and higher equity and interest income and lower SG&A percentage, our operating margin percentage improved to 4.9% in the first quarter of 2010 from negative 6.4% in the first quarter of 2009. Our effective tax rate of 23.4% represented a return to a more normal level in the first quarter of 2010 as a result of our return to profitability in most jurisdictions.

In addition, the effective rate for the first quarter of 2010 was reduced by losses that were previously not benefited.

Net income was $209 million in the quarter, compared to a loss of $200 million in the first quarter of 2009.

Diluted earnings per share were $1.85 compared to a diluted loss per share of $1.79 in the first quarter of 2009. The increase in diluted earnings per share is a result of an increase in net income, partially offset by an increase in the weighted average number of diluted shares outstanding during the quarter. The increase in the weighted average number of diluted shares outstanding was primarily due to an increase in the number of diluted shares associated with restricted stock and stock options, since such shares were anti-dilutive in the first quarter of 2009.

I would like to discuss incremental margins in North America and Europe for the first quarter of 2010 relative to the fourth quarter of 2009. In North America, total sales increased $300 million, of which $326 million relates to production sales.

Excluding unusuals and removing the impact of the fourth quarter significant items discussed last quarter, Q1 EBIT improved approximately $106 million. This represents an incremental margin percent on production sales of approximately 32%.

In Europe, external sales declined by $208 million sequentially, while EBIT improved $28 million after removing the impact of the significant items in Q4. The increase in EBIT in Europe, despite lower sales, reflects both the reduction of launch costs particularly at Magna Steyr, as well as our efforts in turning around underperforming operations.

I will now review our cash flow and investment activities. During the first quarter 2010, we generated $395 million in cash from operations prior to changes in non-cash operating assets and liabilities, and invested $339 million in non-cash operating assets and liabilities.

This investment largely reflects the increase in accounts receivable, inventory, accounts payable, accrued salaries and wages, and other accrued liabilities in the first quarter of 2010, which was primarily due to the increase in production activities compared to the first quarter of 2009.

The increase in income taxes payable was primarily due to a higher tax provision resulting from increased earnings, combined with reduced installment requirements.

For the quarter, investment activities amounted to $166 million, comprised of $133 million in fixed assets, a $31 million increase in investments and other assets, and $2 million to purchase subsidiaries.

Given our return to profitability, our Board of Directors yesterday voted to reinstate a quarterly dividend with respect to our Class A subordinate voting shares and Class B shares. A dividend of $0.18 per share is payable on June 15 to shareholders of record on May 31, 2010.

Our balance sheet remains strong, with $1.2 billion in cash net of debt as of March 31, 2010. We also have an additional $1.8 billion in unused credit available to us from a credit facility that extends until July 2012.

Next, I'd like to review our current 2010 full-year outlook. We've increased our vehicle production expectations in North America and Europe from our outlook in February. We now expect 2010 North American vehicle production to be approximately 11.2 million units, compared to 10.5 million units in our February outlook. We expect 2010 European light vehicle production to be approximately 11.6 million units compared to our February outlook of 11.4 million units.

Note that we continue to be cautious about the European economy, and on the impact of the end of scrappage programs in Europe.

While we increased full-year vehicle production expectations in Europe, that increase is due to stronger first quarter production volumes than we expected. We have in fact reduced expectations for the final three quarters of the year compared to our previous outlook.

Our North American content per vehicle expectations have increased to between $940 and $970 for 2010, compared to the range of $895 to $925 in our previous outlook. Higher volumes of certain key programs that are launching; a strengthening Canadian Dollar and slightly improved mix altogether account for the improvement.

Content per vehicle in Europe is now expected to be in the range of $515 to $540, slightly below than our previous outlook range of $510 to $535. And we expect complete vehicle assembly sales to be between $1.7 billion and $2 billion up from $1.5 billion to $1.8 billion in our last outlook, due to higher volumes in certain programs assembled at Magna Steyr.

As a result of the increased expectations for vehicle production and content in both North America and Europe, as well as higher vehicle assembly sales, we now expect the total sales to be in the range of $21 billion to $22 billion, up $2 billion from our previous outlook. And for the full year 2010, our expectations for fix assets spending are unchanged from our previous outlook in the range of $750 million to $800 million.

I'm now going to pass the call back over to Don to discuss our proposed transactions.

Don Walker

Thanks, Vince. Earlier today, Magna announced proposed transactions that management believes should unlock significant value from Magna shareholders by reducing or eliminating the discount at which Magna currently trades relative to its peers, broadening the market for Magna shares, and establishing a joint venture to pursue our opportunities in the Vehicle Electrification business.

As outlined in the press release issued earlier today, management believes that proposed transactions also respond to shareholder concerns by eliminating Magna's multiple-voting share structure and more closely align the interest of Magna's founder with those of the company's public shareholders.

I would like to provide some background to the proposed transaction. I'll then ask Vince to walk you through the terms and potential benefits. Ziggy will offer some closing remarks and then will be happy to take your questions.

Magna's multiple-voting share structure was put in place in 1978 to ensure that Magna's management could make decisions based on the best long-term interests of the company. In a decade following the conversion to multiple-voting structure, Magna adopted the first and only corporate constitution of its kind, expanded its business, and grew revenues tenfold to $1 billion per year.

Thirty years later, Magna has reported peak sales of over $26 billion per year and is one of leading automotive suppliers in the world with approximately 74,000 employees and operations in 25 countries.

In light of this growth, and with a seasoned management team in place of the executive group in divisional levels, Frank has turned his attention to issues of succession, leadership, and how best to position Magna for continued and long term success. At the same time, and for some time now, management and the Board have been considering ways of closing the valuation gap between Magna and its peers and addressing concerns of Magna's share structure.

It was in this context that we and the executive management approached Frank with the conceptual proposal that included conversion to a one-vote one share structure. Well, Frank has always regarded this Stronach Trust control block as an intergenerational asset and remains satisfied with the status quo. He can affirm that management should feel free to explore alternatives that could enhance long-term shareholder value while preserving the Magna culture, which we all agree has been a cornerstone of Magna's success.

He also made it clear to us that any proposal would have to be approved by a majority of the Class A shareholders, a voluntary but binding condition of the transaction we are proposing today. In order to explore opportunities for a win-win proposal, executive management presented a concept to the Board, which established a special committee of independent Directors to review and consider possible terms for proposal of our discussion with the Stronach Trust, and if acceptable to the Trust, for consideration ultimately by our public shareholders. The proposal announced today is a result of this process.

Before I turn it over Vince to walk you through the proposal, it is important to reiterate that Frank is comfortable with the status quo at Magna. He is also supportive of the proposal, so long as the majority of Class A shareholders approve it. If shareholders decide not to support the transaction, Magna's Board, including Frank as Chairman and the executive management team will continue as we have been, running what we believe is a very successful and growing automotive business.

With that I'll turn it back over to Vince.

Vince Galifi

Thanks, Don. As you have seen from our press release, executive management has proposed, and Frank, companies under his control, and the Stronach Trust, have agreed to accept an exchange of the Class B shares for Class A shares, plus cash in a transaction with the following terms, all of which are subject to majority approval by Class A shareholders. All Class B shares held by the Stronach Trust would be repurchased, cancelled, and deleted from Magna's authorized capital. Magna would issue $9 million Class A shares from Treasury and pay $300 million in cash to the Stronach Trust.

Magna's consulting arrangements with Frank and companies associated with him would be amended to extend the term to December 31, 2014, after which the arrangements would be terminated, and reduce the percentage of pretax profits used to calculate the fees payable over the remaining contract term on a declining scale basis as detailed in the press release.

And Magna and Frank would establish a joint venture that we believe should accelerate Magna's hybrid electric vehicle strategy, while mitigating our investment risks. If shareholders approve the transaction, Magna will be a one share one vote company, no longer controlled by the Stronach Trust.

Management believes the proposed transaction should enhance shareholder value in the following ways. First, it should reduce or eliminate the valuation discount on Magna's shares attributable to our multi-voting share structure. We believe one reason Magna's shares trade at a discount to our peers is our share structure. We have heard it from many of you for a number of years. Our proposed new share structure will unlock value for all shareholders. I will put some potential numbers around this point in a minute.

Second, this transaction should enhance the liquidity and marketability of Magna's shares to investors. A simplified capital structure, more consistent with our key competitors and more typical of companies trading under New York Stock Exchange should attract investors that as a matter of preference or policy do not invest in companies with multiple-voting share structures.

Third, it will provide clarity into the future of our consulting arrangements with Frank and affiliated entities, which we know have long been on the minds of shareholders. Under the proposal, the arrangements would have a fixed term that ends on December 31 2014, prior to which the percentage of profit payable declines each year. During this time, Magna will continue to benefit from Frank's leadership, vision, and relationships across the global automotive industry.

Fourth, the transaction will allow all equity holders proportionate voting rights on a one share one vote basis, unifying the economic and voting rights of Magna's shareholders.

Fifth, as it stands today, the holders of Magna's Class B shares have the right to sell to the control state without any consideration being paid to holders of Magna's A shares. This right will be eliminated under the proposed new capital structure.

Sixth, Magna will hold a 73% equity stake in a new vehicle electrification joint venture with the Stronach Trust that we believe is a good way for Magna to pursue an opportunity that has significant growth potential, but which is also not without risks. If the proposed transaction is approved, the Stronach Trust will own approximately $9 million common shares or approximately 7.5% of Magna.

Let's turn to the potential value of this transaction for Magna's shareholders. As many of you know, our historical financial performance has been in line with, or better than our peer group and we fully expect to continue to deliver strong performance going forward, as our earnings today indicate.

We are successfully diversifying our sales and reducing reliance on Detroit's Big Three, and we have one of the strongest balance sheets in the industry, which has allowed us to weather the storm while many of our peers filed for bankruptcy and destroyed shareholder value. Yet, despite all this, Magna's shares have historically been valued at a significant discount through our U.S. industry peers.

Enterprise value to EBITDA, or Earnings before Interest, Tax, Depreciation and Amortization is one of the metrics most commonly used by the automotive analyst community to assess relative value. For the purposes of the following discussion, we have used March 31 2010 U.S. share price and EBITDA numbers, as this was quarter end and prior to U.S. peers reporting the first quarter results.

From 2001 to 2007, on average, Magna traded at a 1.4 times discount to its peers on a forward EBITDA basis. Based on consensus 2010 EBITDA, we currently trade at a discount of 2.4 times compared to those same peers.

As Don said, Magna believes the elimination of the multiple voting share structure and other elements of today's proposed transaction should reduce or eliminate that discount.

Allow me to show you the potential of an improved Magna multiple on our share valuation. The Street's 2011 consensus estimate for Magna's EBITDA is approximately $1.64 billion. This implies that we were trading at an enterprise value to EBITDA multiple of 3.6 times 2011 consensus EBITDA. Our peers on average were trading at 5.4 times 2011 consensus EBITDA.

If our multiple increases only modestly by 0.4 times EBITDA to 4 times 2011 consensus EBITDA, the proposed transaction would be neutral to our share price. If we close the gap by about 60% to a multiple of 4.7 times 2011 consensus EBITDA, our pro forma share price would increase by 15%. If our multiple moves to 5.4, the average of our peer group, the pro forma share price would increase by about 30%. And obviously, an above average EBITDA multiple would drive even greater share price appreciation.

Given that our business performance has been in line with or better than our peers, we believe our EBITDA multiple should also be in line with or better than our peers under our one share one vote share structure. We believe the potential for this kind of increase in trading value combined with a one share one vote structure going forward is a compelling combination. Another, the smaller part of the value equation is the proposed joint venture.

Hybrid and electric vehicles have been getting a great deal of attention recently in the automotive industry and among policymakers around the world. We have no doubt that the market for hybrid electric vehicles is going to grow, although the rate and timing of that growth is very difficult to estimate. The proposed joint venture is a way for us to pursue this opportunity under Frank's visionary leadership, but with shared investment risks.

Under the terms of the proposed joint venture, the JV would involve the engineering, development, and integration of electric vehicles of any type, the development, testing and manufacturing of batteries and battery packs for hybrid and electric vehicles, and all ancillary activities in connection with electric vehicle technologies.

Magna would invest 220 million for a 73% interest. The Stronach Group would invest 80 million in cash for a 27% stake in the joint venture. Magna's contribution would include the assets of Magna's recently established E-car systems, vehicle, electrification and battery business unit, certain other vehicle electrification assets, and the balance in the cash.

Among other operations, Magna E-car includes the 4 battery electric vehicle integration program that launches next year, and a talented collection of people that Frank has pulled together from across the organization. The JV would be governed by a 5 member Board comprised of three members appointed by the Stronach Trust and two by Magna.

Magna will have legal rights in certain business matters, such as and including related party transactions. Magna would not be restricted in any way from competing against the joint venture, neither party would be obligated to provide any future funding or financial assistance beyond their initial contributions, and Magna's operating groups will have a preferred opportunity to supply contracts and products to the joint venture on competitive terms.

This new group will benefit from a strong and visionary leader who is able to drive this business forward in much the same way that Frank drove Magna through its own startup and early growth years.

So that addresses the terms of transaction, the potential benefits for our shareholders and the proposed joint venture. Let me speak briefly about the mechanics, and then Ziggy will close, and we will open the call to questions.

The principal mechanics of the proposed transaction are contained in the press release and will be described more fully in a proxy circular for a special meeting of shareholders to be called to consider the proposal. But by way of summary, the transaction would be effected through a court-approved plan of arrangement under Ontario law.

In addition to the requirement for court approval, through not required by law, the plan will only proceed if it is approved by majority of the votes cast by disinterested Class A shareholders. Completion of the proposed transaction is also subject to finalizing definitive documentation and customary closing conditions.

Siegfried Wolf

Thank you, Vince and Don. This has been a long call, so I will be brief. As Don and Vince have outlined, management believes this proposal has several potential benefits for Magna shareholders.

The proposal also preserves two things that have very important to Magna's success. The first is that the proposal doesn't compromise the company's financial strengths; and second, it leaves Magna's culture intact and the care of the management team that believes in the Magna culture and lives it everyday.

To close, we believe this transaction should unlock significant value for Magna shareholders, and create a strong foundation for the company's continued and long-term success. The decision for shareholders is either to approve the transaction or maintain the status quo.

Frank's management and our Board are all committed to serving the best interests to the company and its shareholders, and whichever outcome prevails.

That completes our formal remarks. Thanks for your attention this morning. We would be pleased now to answer your questions.

Question-and-Answer Session


(Operator Instructions) And our first question is from the line of John Murphy from Bank of America.

John Murphy - Bank of America

Jeff, first question is, why the timing of this transaction now? I think shareholders have had this concern for a really long time. I was just curious, why now? Is there an impetus to really drive this change in the shareholder structure?

Don Walker

John, we've been asked for years now about what options do we have to try and get our multiples closer to our peers. We discussed it internally for a long time. I can't answer for Frank why he's open to the suggestion right now, but we've had a number of discussions over the past several years.

Vince, Louis, and I are answering questions on a continual basis about the various aspects of what drives our share price. And we sat around a table, talked about it, made a proposal to Frank, and Frank said, well, he would consider it if it's something the shareholders would consider.

So we've talked to the Board, the Board's considered it, gone to a special committee, and Frank's willing to consider at this point in time.

So I can't speak for Frank, but it's something we have been looking at for many years now.

John Murphy - Bank of America

And then second, just on Europe, I mean the EBIT loss was about $6 million in the quarter. Obviously you have had some problems in Europe as far as profitability for a while now. Just curious, as we go forward through the rest of the year, is there any incremental steps you'll be taking there or is it more blocking and tackling?

And with the potential decline in volumes in Europe, could there be significantly more pressure than even what we saw in the first quarter?

Don Walker

John, there's a number of things that are taking place in Europe. If you think about where we were sort of Q4 of 2009 and Q1 of 2010, we've made substantial progress; we made substantial progress in a number of areas and we've been focusing on underperforming divisions as Ziggy talked about.

We've been looking at reducing our cost burden and doing some right-sizing. And the slowdown in Europe's taken place in a few quarters, 2, 3, 4 quarters after the North-American slowdown.

But the biggest impact in Europe over the last two to three quarter has been the significant launch cost we've incurred. We talked about Magna Steyr and essentially when you look at Magna Steyr, its complete sales base and programs is switching over. That's not going to be complete really until the end of 2010. So, sequentially we've been improvements and I've talked about that in the past and what we see at Magna Steyr is consistent or better than what we were expecting.

We've also had some launch costs in other areas of our business. I talked about our roof business in the past where we've had some substantial launch costs. There's been a substantial reduction in those costs as those programs start to ramp up.

So going forward, what I would say is that we're going to continue to see the benefit of the launches at Magna Steyr and other divisions and reduced cost. There maybe some headwind with reduced volumes, but our team has a plan in place and I think that we're going to be tackling if there is short fall of volumes straight off.

John Murphy - Bank of America

And just lastly, Vince, I missed all of the commentary that you had on the incremental margins in North America, 32% sequential as you highlighted here. I was just wondering as we step forward through the course of the year, do you think that is a reasonable number to be using or will we see raw materials and costs creep and potentially erode that margin? Just trying to get an idea if that is a good number to use going forward?

Vince Galifi

It is a number of things that impact margins. One this is going to be mix and we certainly have our estimate of mix, but that could change as the court progresses. With respect to commodity costs, we're pretty well locked in for 2010, so that's not going to have a positive or a negative impact in any significant way for the balance of the year.

With respect to residence, there is more volatility there. I think that's going to be a little bit of headwind going forward. How big that's going to be, not sure, but it's not something that is going to be very significant in any way.

So you're just going to have to wait and see where the margin's turn out to be, but as Don's talked about the thing he's talked about, we've been restructuring and downsizing this company. We have taken fixed cost out of this system. Our SG&A is down, our overheads are down and our task is to ensure that those costs don't creep up too fast as volumes start to pick up.


Our next question comes from the line of Chris Ceraso from Credit Suisse.

Chris Ceraso - Credit Suisse

Along the lines of the discount in the stock that you are trying to unlock I think one other item that probably took a backseat to the two class structure, but still something that people talk about, is the large cash balance. Does anything here in the new structure maybe open up your thinking to doing something a little bit more aggressive with the balance sheet using that cash, putting it to work rather than sitting on such a large balance?

Don Walker

Let me try and address that. Frank, as you know has been very conservative and wants to maintain a very strong balance sheet that goes back to when we went through the restructuring back in 1991. If we complete the transaction, I think Frank has always been focused on shareholder value and employees and everything else. He's certainly going to be completely aligned on shareholder value until he will be essentially the largest shareholder.

I don't think Frank's opinion would change on whether we want to take on a lot of debt and I don't think the management would be comfortable in taking on a lot of debt, but I personally have been of the view that we could use the cash and the balance sheet, maybe sort of stay in a neutral amount.

So, no net debt no net cash to take advantage of opportunities whether it's through acquisitions moving into green fill areas. But on a go-forward basis, it'll be the decision of the board. So I think we'll always maintain a strong balance sheet, but we've been extremely conservative in the past and everybody has different views that I think we can take advantage of, of some of the cash we've got there.

Chris Ceraso - Credit Suisse

Okay. So that sounds somewhat encouraging. The second question, I am not sure I understand why the need for the JV. It's a pretty small business for Magna at the moment, but maybe one with some promise. Why set yourself up this way? And then also what are the current losses that that JV is generating that you will run through now?

Don Walker

I'll let Vince talk about the financial situation there. Part of the decision Frank is making here is a very personal one and he feels Magna is part of his blood and he feels that he has done a very good job as an entrepreneurial visionary in setting up the culture, the structure. On a go-forward basis, he is a very big believer in the future of electric vehicles, which would include hybrids as well. Everybody has got there own opinion on how large that market is going to be. I believe that it will be an evolving market. I think there are still challenges to get the volume up.

Frank has been heading up our newly formed E-Car group; its batteries, its pack, did a bit of testing and also looking at doing vehicle conversions. It has not been making money; I think it will be a challenge, but there is a big opportunity there. Frank wants to keep engaged, and from Magna's perspective a lot of the benefit on getting into electric vehicles is the spin-off on lot of components, and we still have that. So on a go-forward basis, anybody is open to compete, which has always been Frank's philosophy, but we still will have the majority. Frank is going to devote his full time and attention on this.

And I think with Frank putting his own cash in, on a pro rata basis he will be completely aligned with what Magna wants to do. I agree with your comment. It's not a huge business unit for us now. I don't think it's going to be a huge business unit for years and years to come.

If Frank can be successful in that area as he has been in Magna, then it will be a big benefit to Magna. But I don't think it is something that we are walking away from or giving up. I think Frank has assembled a pretty good team; some people internally, but a lot of people externally. And there are still a lot of unknowns there. But it's part of this transaction, and in my view it's a relatively minor part of it.

Vince Galifi

And Chris, I just want to add to that. Really, in a new startup, you really do need someone that's going to drive this going forward, have that vision. And Frank in my view is the best person to be able to do that. This unit is pretty small within the organization. If you look back to sort of the first quarter of last year, the spending in this area really wasn't significant at all; it was less than $10 million. And to put things into perspective, if you look over the last couple of quarters, spending has been somewhere in the range of kind of $10 million to $15 million.

The biggest part of that is for customer programs where we have some sales and sales coming online. So it's not a significant unit, but if the joint venture is successful and growing in this new market area, and I don't know how big that market is going to be and how quickly, it will create some value for everybody.

Chris Ceraso - Credit Suisse

Last question. When you introduced the concept here about the change in the structure, you mentioned that Frank was starting to have thoughts about succession planning. What is Belinda's current role in the Company, and is there anything else that is going to be put in place or steps that will be taken that start to formalize the succession plan for Frank?

Don Walker

Chris, Belinda currently is a Director; she's also Executive Vice Chairman. She is involved on a day-to-day basis with our business. With this transaction, nothing's going to change. She is going to continue to be involved in our business. She will sit at the pleasure of shareholders presumably on the Board. When we in our comments talked about Frank and succession planning, I think the way you should think about that is, succession planning with respect to the ownership of Magna, the control of Magna within the Stronach Trust.

So what this transaction does, it provides clarity to the control of Magna. So if shareholders approve this transaction, the Stronach Trust will no longer control, it will be a public company as it is today, widely held with not one shareholder being able to elect the majority of the directors.

In terms of succession planning within the company, Don and Ziggy have a tremendous amount of succession planning in place, and the Board has considered obviously what to do with respect to Don and Ziggy as well from the succession planning standpoint.


Our next question comes from the line of Rich Kwas from Wells Fargo Securities.

Rich Kwas - Wells Fargo Securities

Vince, with the JV, how should we think about these electric vehicle costs that you have incurred here over the last year or so and your expectations for that going forward? Does that all get transferred to the JV or how much of that stays? How much of that gets shared with Frank going forward?

Vince Galifi

Well, going forward it's going to be shared, based on our ownership interest. So it's going to be 73%/27%. Just couple of things; we are going to be looking at these bundle of assets, we are going to be transferring them to the joint venture at fair value. So our contribution is going to be $222 million in cash less the fair value of the assets being contributed. Frank is going to put in $80 million. So this $300 million package of assets is going to be a JV. We are going to consolidate it, and there will of the minority interest expense or minority interest recovery depending on the results of that business unit.

But when we look at the size of this business, guys, think about it, we have a $20 billion company. This is a start-up operation; it's not going to have any significant impact on our results. More importantly, we've got to make sure that we continue to drive sales and profitability. That's what's going to drive results and cash flow in our company.

Don Walker

One last comment. What we have got in E-car is pretty well defined. So the Board has asked outside advisors to take a view of what's in there, what's the value. It's almost complete. We still have the few fine-tuning to go through. But that will be something the Board decides on what the dollar value is.

Rich Kwas - Wells Fargo Securities

And then just staying on that, in terms of the Board with Frank having three and Magna having two, what was the rationale for that with the investment being made by Magna?

Don Walker

The rationale, Rich, goes back to the foundation of Magna. When Frank had the multiple voting share structure approved by shareholders, he was of the view, and rightly so, that he needed the authority to make the decisions for the long term interest of the company, whether that dealt with management, whether it dealt with capital investments, whether it dealt with the even capital structure. And if we look back over the number of years since the structure has been put in place, clearly we have grown from a company of about a $100 million to one of the largest in the world, operating in 25 countries.

So, as we look at this joint venture and Frank today for getting this proposed transaction, Frank is a driver of our key cost strategy, electrification strategy today. And to drive this forward is exactly the same principle. It's a start-up. Frank wanted to drive this, wanted to have the day-to-day control to make decisions that may not necessarily result in the best profits today because he is going to make investments for the long-term. So hopefully he is able to replicate what he did with Magna with E-Car.

Rich Kwas - Wells Fargo Securities

And then on margins rest of the world, and then when you think about Europe on mix going forward, rest of world very strong margin here. Is the 11.5% sustainable? And second, European mix, been hearing that good mix over there with CD&E production. What is your expectation for the rest of the year?

Vince Galifi

Just in rest of the world, we did talk about a gain of $14 million in the quarter that was in the rest of the world segment. With respect to margins going forward, rest of the world I don't have that number handy. I wouldn't give you the guidance if I had it in any event. And with respect to Europe, I think that both Ziggy and I have given you some flavor on this call in terms of sort of reduced launch cost, improved efficiencies, reduction of costs, and that should imply that there should be margin expansions going forward in Europe.

Rich Kwas - Wells Fargo Securities

But do you think mix is going to continue to get better over there as it has here in the first quarter? - Top-line. I guess the way to ask it, were you surprised in the first quarter with mix? I know volume was a surprise, but have you been surprised by mix?

Don Walker

Really not surprised by mix, but more surprised by volumes. We have been saying, Rich, all along that we didn't really benefit in a substantial way with the scrappage programs in 2009. And with the scrappage programs coming to an end in 2010, we think it was going to be as big of an impact because if you look at where we have most of our content, it's going to be on the more luxury segment.

Siegfried Wolf

I can comment on this. With the scrappage program going to an end, people are starting to buy more those cars where we have a bigger stake on it. A lot of new cars are starting where we have a lot of content, let's say the Audi A1; very nice, good looking car, small segment and I am quite sure that the mix will go in our benefit.


Our next question comes from Himanshu Patel from J.P. Morgan.

Himanshu Patel - JPMorgan

Do you envision in the future any sort of major capital contributions into the electric JV? And the reason I ask is could one of those transactions result in the 73%/27% split between Stronach Magna shifting dramatically down the road?

Don Walker

Well, we started off with whatever the assets are and a lot of cash. So nobody's obliged to put more cash in. If there is a requirement for more cash then both parties can make their own decision, there is no imminent requirement for a large amount of cash. So I think that will be a couple of years. I would suspect that the couple of years down the road at the earliest even have to consider doing that. And ultimately, it will be a business decision, but this gives them plenty of cash to operate the business for a while.

Vince Galifi

I think what you've got to keep in mind too is with the joint venture, we don't have any obligations but additional capital needed at the Stronach Trust. But as this business unit grows and successful, and it does require additional cash, there is always the opportunity to raise cash from third party. And if that was the case, then if we didn't do a proportionate contribution or the Stronach Trust interest, if they didn't do their proportionate contribution, would be diluted.

Siegfried Wolf

On the other hand, if you really look on this electric vehicle, I think Europeans driving this, more the politician than the carmaker itself. It will take next couple of years. We will need let's say to team up with the one or the other OEM to go in the right direction. First priorities at the OEM level at the time is the hybrid, and after its electric vehicle, but we should get positioned, we should get very clear in line with the customer expectation. And I am quite sure the whole electric hype is a very strong one, but will take couple of years before you see profits there as well.

Himanshu Patel - JPMorgan

And then I guess on a somewhat related note, Frank has obviously shown an interest in acquiring an OEM in the past. I am wondering, is this JV strictly in its commercial sense a JV around electric vehicle technology, or could this be a vehicle that eventually morphs itself into being part of a larger carmaker down the road?

Don Walker

The terms of the joint venture arrangement, this material's going to be available at some point to the public documentation. Its focus is entirely on a the electrification of a vehicle, that could be working on trucks, could be working on buses, could be working on bikes, the passenger vehicle, but the focus is the entire sort of hybrid electrification of transportations, I think that's sort of a broadcast to think about that. If the JV were to pursue a business outside that defined term, then Magna would have a veto right over that decision.

Himanshu Patel - JPMorgan

The $220 million of contribution for Magna and to that JV, have you determined what the cash portion to that's going to be yet?

Don Walker

Not yet. We're working with our financial advisers and our special committee, but I don't expect that to be any more than, sort of, $50 to $70 million.

Himanshu Patel - JPMorgan

And then just the earlier comment on the balance sheet. I think the message was, we still want to maintain a strong balance sheet, but maybe we would be more willing in the future to use some of the cash for acquisition. Did I hear correctly that you would consider basically, sort of, a zero net debt position as sort of the optimal capital structure down the road?

Don Walker

Well, it was me, Don answering that. I think we'd all have opinions. I've given you my personal opinion, but as a management team, we have talked about what's the best return on our invested capital. Obviously, keeping cash in the bank is not good return. So I can't speak for everybody in the management team, but I would say the Board and the management would be comfortable with sort of getting to that level, and we are looking at that number of acquisitions, nothing big is imminent, but I think in the past Frank has been very, very conservative. We want to invest the cash, we get the good return.

Vince Galifi

I just want to clarify just one thing. Patel, you asked about the cash portion moving into the joint venture. I was referring to the fair value of the electric vehicle type assets, and that's 50 to 70, so the cash is going to be 220 less the fair value of assets that's being transferred. Just wanted to clarify that.

Himanshu Patel - JPMorgan

And then last question on that acquisition comment. That does kind of potentially free up a decent amount of money to be used for acquisitions if you wanted to go down that route. Just where is the landscape right now? Are there two or three things that you are looking at that are kind of bolt-on in nature which collectively could add up to several hundreds of millions of dollars in potential acquisition spending, or is there nothing like that on the horizon right now?

Don Walker

We're always looking at a basket of acquisitions. There's a lot of opportunities out there. We don't comment on what we're going to do. But I think it's safe to assume. We did three acquisitions last year; we recently bought Karmann, the Japan operation. It's up to the regulators whether we can buy the rest of the European assets or not. That will come out on a go forward basis. But there are lots of opportunities out there. We are looking at growing emerging markets, we're looking at technologies, and sort of ongoing part of the business.


And our next question comes from line of Rod Lache from Deutsche Bank.

Rod Lache - Deutsche Bank

Just first of all can you review your FX assumptions for this year? And what does your content per vehicle basically imply for year-over-year changes ex currency for the year?

Vince Galifi

Our FX assumptions are pretty close to where rates are today. We've got the Canadian dollar just under $0.99, and we have the euro at about $1.33 for the full year.

Don Walker

Currency was $68 in North America and $32 in Europe in the quarter. It's quarter-over-quarter, Rod.

And Rod, I think if you look at sort of Q1 rates and the current rates for the full year, we sort of got Q1 content, we also have given you full year guidance. Our average rates for Q1 and forecasted rates for the balance of year that we built into our assumptions, they are relatively close. So, what you're seeing and moving from Q1 to full year estimates is change in mix and content changes.

Rod Lache - Deutsche Bank

Can you just address maybe, for the core Magna how should we be thinking about the organic growth profile prospectively and where do you see the growth focus becoming? It seemed like although the (NYSE:EV) program was still pretty small, it seems like that was a significant part of what you expected to drive organic growth in the future over the long run. So how does that change now for the core of Magna going forward?

Don Walker

Yes, I don't necessarily agree that that was going to be a big part of our growth. In our E-car we're looking at battery cells, battery packs. I think it's a challenging business. We will be looking at new technologies. And then we have looked at sort of developing a rolling chassis. We've got a couple of contracts. The one that we've talked about is Ford, and there's other potential ones. I think the real growth opportunity for Magna quite frankly is looking at the trends in the industry. So emerging markets is a huge opportunity for us.

Changes in powertrain technology, another big area for us. Improvements in either emissions or reducing weight across all of our groups to get better mileage is being driven by the public and by governments. So there's a lot of shakeout in the supply industry. I suspect that will continue. There's global platform, so every group that we talk about inside Magna has got a growth plan that they are pursuing with technologies. We'll talk a little bit about it at the annual meeting. I think it's important in the overall perspective of this deal. There's a transaction that Frank has agreed to that changes the B share.

And there's a financial part of that transaction which people have to look at and ultimately decide, is this going to be positive or negative, the share price, short-term and long-term. There's going to be a lot of discussion I suspect based on the questions we're getting here on E-car. E-car is a very, very small part of this. If it is successful, and I hope it is, then Magna benefits with 73% ownership. Every dollar that's invested, Frank's going to look at it very carefully, since it's his money. So we're going to be intimately involved with what's going on, like we have been in the past.

But the big growth area is going to be in our core groups, and that's what's going to drive us forward.

Rod Lache - Deutsche Bank

Can you give us, Don, just a sense of the backlog-driven growth that you have visibility on over the next few years? Any kind of quantification of what that would look like so that we can gauge it relative to the production changes?

Don Walker

Rod, we haven't given more forward guidance beyond 2010. We'll continue to update guidance as we get to the end of 2010. We'll get some clarity in 2011. But we've stayed shy of that for a number of years doing that.

Rod Lache - Deutsche Bank

And just lastly, do you have an estimate for the fixed cost reduction in Europe that you have achieved at this point so we can kind of gauge the leverage impact as production comes off a bit from the levels we saw in Q1?

Vince Galifi

I don't have that handy. Don't have it on the top of my tongue, and it's something truthfully I really didn't want to share in terms of fixed cost structure, North America or Europe or rest of the world. All I can tell you is, when you look at the results, whether you are looking at Q3, Q4, or Q1 that you are seeing some improvements, and it's coming from two sources. One is, reduced launch cost as I've talked about, and one is incremental margin, sales as well as reduction of costs.

Don Walker

Just one comment I guess as far as where we stand on some restructuring. We've made some very good headway during the downturn on our losing divisions which is coming through in North America. And we also took the time to focus on sort of driving efficiency through our operations. I think if the market continues where we expect it's going to continue, we've done most of the restructuring required in North America. There's always fine tuning going forward, just as we've had for the last decade and will continue to have.

Depending in what happens in Europe, we may see requirement for some more restructuring. As Ziggy pointed out earlier, it's a couple of months behind. It will depend on what happens with the economy over there and the market. So that's I think directionally where we are from having to take restructuring actions.

Siegfried Wolf

But on the other hand, you have to see as well, we had a very strong start now within Magna Steyr. Two successful launch of two new products with the new customers. In summer, we have the next big change of a program to support Mini Countryman. There, you have to hold some management in advance, and I think this will be a very clear balance between North America and Europe in the next two, three months.


Our next question comes from the line of Itay Michaeli from Citigroup.

Itay Michaeli - Citigroup

Just curious if you have spoken with some of our major customers yet about the proposed transaction and maybe if you have received any feedback on it yet?

Don Walker

We haven't. We just had the internal conference call before this one to talk to our employees. This won't have any impact, I don't think on our customers. So we have a communication going out if they ask. First of all, we won't know for a month-and-a-half whether the transaction goes through or not. Second of all, the management that they deal with doesn't change; the structure doesn't change, the culture doesn't change.

And E-car we talked about is a very small part of our business with only a couple of contracts. So we'll communicate the change in Frank having a direct ownership. But they already know that Frank is intentionally interested in this. So I don't think it has any impact on our customers.

Vince Galifi

I think the way to think about this is, we proposed a change in the share structure, which we as management believe can unlock significant value for our shareholders. But below the share structure, when you think about the Board and our management and our employees and our customers, it's business as usual. Nothing's going to change tomorrow, or nothing's going to change in a year-and-a-half. We're all going to be focused on growing our business and looking at new technologies, focusing on emerging markets. And hopefully we make the right acquisitions going forward, which is good opportunities. So its business is usual in our organization

Don Walker

There has been a few questions because of the Opel situation a while ago, where a couple of customers were concerned. We talked about in the past about what's Magna's long-term strategy. This will make it 100% clear, and we told them anyway that Magna is a parts company.

Itay Michaeli - Citigroup

And then just back to Europe again, can you maybe talk about just the longer-term EBIT margin potential there? I think you were kind of in the 2.5% to 3% EBIT margin range back in kind of '05, '07. How do you view those margins in the context of what you could potentially get to in the next couple of years; better, same, maybe a little bit lower? Any help there would be helpful.

Vince Galifi

Sure. I'm not going to give you a lot of help. I'm not going to answer questions sort of about going forward. I think you have got to draw your own conclusion based on our comments. I would focus in particular on launch cost declining. We're having ramp up to Magna Steyr, which is a key contributor to sales and profitability in Europe. And we have taken some restructuring actions, we have reduced costs in Europe and that should all benefit us.

Itay Michaeli - Citigroup

Then just one last quick one and I might have missed this, but can you share what your assumption is for Detroit's three market share in the latest North America CPV guidance?

Vince Galifi

I don't have that handy. We could probably get that to you though, I think.

Don Walker

I'm not sure if this is what you are getting at. Historically, there has been some concern with Magna's exposure to the Big Three, specifically with the amount of sales to them in North America. And obviously it's been declining in the last couple of years, but it's been in the 50 plus range for Magna's total sales to Ford, GM and Chrysler in North America. That number the last year is just over one-third. So it's going the right direction.

We obviously want to keep our capacity full. We're still anxious to do business with all of them in North America. But I think the big opportunity, and I think we are making headways to continue to work on global programs with Ford and GM, as they've got some great products coming out, global platforms. We want to continue to support them on new technologies and gain business in those emerging markets with them.


Our next question comes from the line of David Tyerman from Genuity Capital Markets.

David Tyerman - Genuity Capital Markets

A quick question on the European margins. Vince, you said that based on the factors you described, margins should improve going forward. Is that with the current forecast that you are thinking of for Europe in terms of volume?

Vince Galifi

David, we've brought down our numbers, as in my comments, a little bit down for Q2, Q3. But that may have a dashing impact, I would say on margins. But overall, we're still expecting margins to improve for the things that I mentioned.

David Tyerman - Genuity Capital Markets

That's helpful. Then just a quick question on Don's comment about you redeploying the cash and perhaps getting to a roughly no net debt situation. Under some calculations, you'd already be at that. In particular, I would cite the operating leases. And if you consider those debts, which I would consider them, you are probably at no net debt now. So the implication that you would be thinking in a holistic sense of going to like 10% or 15% net debt to cap?

Vince Galifi

Dave, I'm going to answer the question for Don. From our perspective, we believe that as management it's important to have a conservative balance sheet. And you can take operating leases to capitalize those and come up with your own number. But end of the day, if you look at our balance sheet today, we have $1.2 billion of debt.

The question for Don was the $1.2 billion of cash. I think the way to think about our balance sheet is, as things start to improve, generally in the economy, we've seen that in North America and we'll hopefully see that in Europe we assume.

I think we'll be more inclined to use our cash and reduce our cash resources, because we're comfortable that the North American economy is getting stronger, Europe is going to stabilize. And we've had a lot of cash to weather the downstorm. And you can look at a number of our peers that didn't have the cash balances, what's happened to them.

So I think as a function of just the economy changing, the macroeconomic conditions, I think management is going to be supportive of looking at our cash balances and putting that more to use in the business.

David Tyerman - Genuity Capital Markets

Okay, that's fair. And then the last question I had, can you give us any kind of broad brush as to how you arrived at the numbers with respect to shares and cash and so on in the deal that is being voted on by the Class A shareholders?

Vince Galifi

That's a really good question. And particularly Jeff Plamer and I, and to a lesser degree Don, we sort of see with bankers and private equity firms and so on, a tremendous amount of ideas about what the Class B shareholder can do with the shares.

We've had that in the back of our mind. And the numbers are significant, or have been significant. And as we talked about during the Russian Machines transaction that we disclosed in our proxy, there was actually a transaction on the table that was going to create substantial value for the B shareholder.

We all thought we had a great idea, and Frank made it absolutely clear to us that he was not supportive of that transaction, even though he was walking away from a lot of value. And the reason he wasn't supportive of that is that he wanted to ensure that Magna had a strong foundation that didn't have a lot of debt because a lot of these transactions create debt transactions.

We moved to the Russian Machines transaction, and if you look at that transaction, there is essentially $1.5 billion injected into the joint company. The Stronach Trust potentially had 50% of that. There was a $150 million of cash that was paid on that transaction. And that actually did go ahead. The Stronach Trust did not give up until they joint control.

So as we sat back and looked at this, we said, well, we've got to come up with a concept that ultimately works for two groups; one is the Stronach Trust, because without the Stronach Trust agreeing to the transaction, we wouldn't be here discussing this proposed transaction; and two, one that's fair to all shareholders.

So as we've played and modeled and had discussions and continue to have discussions, management came up with a proposal that we thought worked for everybody. And as Don's talked about in his formal remarks, we went to Frank, and Frank said, why don't you go ahead and continue to explore that? We convened a Board meeting, struck a special committee. There was lots of deliberation on the special committee. We had lots and lots of meetings and lots and lots of financial people looking at this transaction, and we ended up where we are today.

David, I know you from a long time. I know what your views on our multiple is, and how we're undervalued compared to our peers.

A multiple bump that doesn't even get us to our peer group, that moves itself by 1.1, you know, we're trading at substantially below that unlocks about 15% share price appreciation for our shareholders. And we think that's really good. And I think that's a real conservative investment. There's no reason why we should be trading at less than our peers; in fact I think we should be trading at more than our peers.

So there's a lot of value here to unblock, trading value; we think this transaction does that. And ultimately we're going to have the shareholders decide whether they want to proceed with this or remain with the status quo. It's a decision that's ultimately in the hands of shareholders.

David Tyerman - Genuity Capital Markets

That's very helpful. I'm extremely pleased to see this happen. I never believed I would see it.


Our next question comes from the line of Michael Willemse from CIBC.

Michael Willemse - CIBC

The launch costs in Europe in the first quarter, are we still talking tens of millions or were we lower than that in the first quarter?

Vince Galifi

Mike, they were tens of millions. Have you been to Austria to see our facility there? And if you look at that huge facility, where we have capacity once everything starts to run, 125 plus units, it's a major job shutting down that facility and re-launching it. And Magna Steyr is really good at doing all that. They've done that historically, they're going to continue to do that. But the numbers are significant.

Siegfried Wolf

Look, we expand all the engineering and we brought three new complete vehicles in production. I'm talking about the Mercedes Benz SLS AMG, where we have second-to-none technology and know-how build up in aluminum bodies. This is really an expertise what we need for the future, especially going in those niche vehicles.

Peugeot RCZ Coupe, complete new car, complete new direction. There's a lot of involvement, it will be a masterpiece of demonstrating Magna Group's involvement in a complete vehicle. And the next program, the Mini Countryman, new car as well, new platform compared to the BMW X3. That means three complete new types of vehicles, three new customers.

And I just would like to say, it's a very good performance what we have in trucks. Just last (days), they were announced as the best performing car, was the BMW X3 on a total lifecycle of the cars, seven years, best-performing compared to all other cars produced in Germany. And this was a huge step forward. And building on this, we invested a lot as we said, lot of millions. Expands all the engineering, and looking forward to be where we have been.

Vince Galifi

Operator, we'll take one more question.


Our next question comes from the line of (Andrew McKendry) from BMO Capital Markets.

Unidentified Analyst

Just wondered if you could speak to the timing and what are the events, timing with respect to this transaction? I think you talked about a shareholder meeting in June/July but when could we expect to see the proxy circular and when would these transactions be expected to close?

Vince Galifi

Andrew, it's Vince, I'll answer that question. What our immediate plans are is, starting on Monday, we're going to get on the road, Don and I and Louis and talk to our shareholders. So we'll probably be on the road for a couple of weeks. The lawyers are going to be busy with paperwork and putting a proxy together that has to be known to shareholders. That's probably two to three weeks away, depends on how particular the lawyers are in drafting all this. We'll then convene shareholders, though that's going to be typically 35 days away, five weeks. Once the votes in place, it's going to close today or that day or the day after, very surely day after.

So in theory, we could see the transaction completed by the end of our second quarter.

Don Walker

Okay. I would like to thank everybody for calling in. Sorry we had to cut off the Q&A, because I'm sure there's lots more questions, but we've got to get ready for the annual meeting coming up here.

There has been a lot of discussion at the Board level. Vince and Jeff and the advisors have spent a lot of time over the last little while. David, you said you never thought you'd see this day. I've been here for 23 years and I think I would echo your comments.

I think Frank, he's comfortable either way with this. We're going to get out and we'll explain it more detail to all of our major shareholders over the next couple of weeks. But from a management point of view I'm happy that we at least get to come back to shareholders with something we have been asked about for years now. With the proposal, I think the shareholders have a one time decision to make. And believe me, this has been debated back and forth and negotiated.

So we'll make it clear; we'll clarify the process, we'll bring everybody up to date, and I think it'll be great to have the shareholders have an option just to see what they want to do. And life carries on either way. From a business standpoint I think everybody's comfortable either way, but I am personally very pleased that we've been able to bring something that's acceptable to Frank and I think will be very good for shareholders.

So thanks very much for calling in today, and I'm sure we'll see a couple of you at our annual meeting coming up. Thank you.


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

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