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Executives

Don Walker – Co-CEO

Vince Galifi – EVP and CFO

Louis Tonelli – VP, IR

Analysts

Peter Sklar – Nesbitt Burns

Itay Michaeli – Citigroup

John Murphy – Bank of America-Merrill Lynch

Michael Willemse – CIBC World Markets

Rich Kwas – Wells Fargo

Pat Nolan – Deutsche Bank

Chris Ceraso – Credit Suisse

David Tyerman – Canaccord Genuity

Himanshu Patel – J.P. Morgan

Ravi Shankar – Morgan Stanley

Patrick Archambault – Goldman Sachs

Justin Wu – GMP Securities

Magna International Inc. (MGA) Q3 2010 Earnings Call Transcript November 4, 2010 6:00 PM ET

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Magna International third quarter 2010 results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator instructions) As a reminder, this conference is being recorded today, Thursday, November 4, 2010. I would now like to turn the conference over to Don Walker, Chief Executive Officer. Please go ahead, sir.

Don Walker

Thank you. Good evening and welcome to our conference call. Joining me here in Vienna is Vince Galifi, Chief Financial Officer, and from Aurora is Louis Tonelli, Vice President, Investor Relations.

We issued a press release this afternoon, which covers our third quarter results. You will find the press release, today’s conference call webcast, and a slide presentation to go along with the call, all at the Investor Relations section of our website at www.magna.com. Today I will start with some comments on our third quarter and a few other matters. Vince will then review in detail our Q3 results and our revised outlook for 2010. We’ll then open the call to answer your questions.

Before we get started, just as a reminder, the discussion today may contain forward-looking statements within the meaning of applicable securities legislation. Such statements involve certain risks, assumptions and uncertainties, which may cause the company’s actual or future results and performance to be materially different from those expressed or implied in these statements. Please refer to today’s press release for a complete description of our Safe Harbor disclaimer.

Overall, I’m pleased with the third quarter results. In North America, our operations continued their strong performance of the past few quarters, with only a couple of areas of underperformance to address. In Europe, this past quarter, Magna Steyr began to launch the last of its major new programs this year, the MINI Countryman, and produced the last BMW X3 (inaudible).

Over the lifetime of the program, Magna Steyr produced more than 600,000 BMW-X3’s as a sole complete vehicle assembler for the global market. It was quite an accomplishment. As Magna Steyr claims the launch curve on the MINI Countryman along with its other new programs, we should see improved operating earnings at Magna Steyr. I have more to say about Europe in a moment.

Rest of the world sales continued to grow in the third quarter and are up 62% year-to-date as compared to the first nine months of 2009. And despite the continued business growth and ongoing investment and what are new regions for Magna, we have been able to generate earnings in this segment. We will see continued growth in our rest of world segment related to increased business opportunities in a number of high growth and emerging markets, including China, South America, Thailand and India.

We announced last month that we were expanding our presence in South America with our Cosma and Magna Seating operating units, each establishing new production facilities in Sao Paolo area as a result of new business awards. Cosma new facility will produce stamped and welded assemblies beginning in early 2011, and Magna Seating will produce complete seats for new General Motors program opening in 2012. We are also expanding on existing closure systems facility to culminate new mirrors business.

In addition, earlier this week, we completed a new acquisition in the seating area. We acquired a Brazilian seat frame company named Resil with 2010 forecasted sales of approximately $200 million. Resil’s customers include Fiat, Ford, General Motors, Volkswagen, IVECO, and PSA. We expect this transition to close by the end of this year. Our newly awarded business combined with this acquisition together paved the way for a more meaningful presence and the opportunity to further increase our business in the growing South American automotive market.

In September, we announced that Sigi Wolf, with whom I have shared the Co-CEO title for the last 5.5 years, has decided to lead Magna to take a senior role with Russian Machines. We still have a lot of ongoing activity in Russia, and we believe Sigi will provide ongoing advice to us in Russia and we expect an ongoing good working relationship with Russian Machines. Earlier this year, we changed our operating structure to global product groups, which has given group management a global mandate and thus full responsibility for all aspects of their business globally.

Our global product group presidents, along with our strong European group managers, have significant experience in the industry and at Magna. As a result, I believe we have a strong team to profitably grow Magna’s European business. I’m counting on Europe, and in the coming months, will spend more time here visiting a number of our European operations, some of which have been underperforming as well as many high-level customers at a number of our European customers.

We have indicated over the past quarters that our European business has been underperforming and that some restructuring was necessary. I would like to provide some more color on our European operations. We have many operating units that even at a relatively low production volume are generating profits and reasonable returns. We have Magna Steyr, which, as we have said previously, has undergone a complete re-launch of programs with all but the Mercedes G-class being brand new. Results at Magna Steyr is expected to have improved and should continue to improve as we complete the new program launches.

In Russia, we announced this past quarter the opening of three new facilities. These facilities will start generating sales in 2011 and will ramp up in 2012. So right now, we are in an investment mode, and as you know, we expense running costs as incurred. Our electronics business, which has been merged with our powertrain unit, has experienced some launch inefficiencies in its European operations over the past couple of quarters. However, we expect to make progress with these issues in the next few quarters.

Our largest areas of underperformance in Europe is in our Interiors/Exteriors operating unit. Even within this unit, there is some strong performing division to generate acceptable earnings in returns. However, there are few facilities that are generating significant losses. Our Interiors and Exteriors team is getting a handle on the issues and developing a plan of action for these divisions. As I said, I will be visiting in a number of these plants to better understand the nature of the underperformance that I expect it by early in the New Year will have a much better position to articulate the auction plan for Europe.

Last quarter, we completed a plan of arrangement with the Stronach Trust, which resulted in the elimination of our previous dual-class share structure. As a result, Magna now has only one class of shares, designated as common shares, each of which is entitled to a single vote per share. In our press release today, we outlined a couple of corporate governance matters.

On August 31, 2010, in connection with the elimination of our dual-class structure, Frank Stronach resigned as a member of our Nominating Committee. This vacancy was filled today by Louis Lataif who is an Independent Director, who joined Mike Harris on the Nominating Committee.

The Nominating Committee now comprised entirety of independent directors will undertake a comprehensive review of the Board’s composition to ensure that it has the capabilities to oversee our operations globally. The Committee plans to retain an internationally recognized firm to assist in its search for potential future Board members as part of this review process.

We will be discussing with our Board during the upcoming strategy meeting our intention to expand the extent of detail that we provide in our outlook, starting in January when we first disclose our 2011 outlook.

And with that, I would like to pass the call over to Vince Galifi.

Vince Galifi

Thanks, Don. And good evening, everyone. I would like to review our financial results for the third quarter ended September 30, 2010. Please note all figures discussed today are in US dollars. We have restated our segment results to reflect E-Car as a separate segment. Included in the conference call presentation deck on our website is restated quarterly segment details for 2010 and 2009.

There were no items that we classify as unusual in the third quarter of 2010 or 2009. However, there were two one-time items that impacted the quarter that are individually significant in size. Therefore, I would like to provide detail on them. Both items are included in our corporate segment. We recorded a $33 million benefit from a commercial settlement with a customer related to the recovery of previously expensed engineering and design costs, most of which were incurred during 2010. And we incurred a $16 million stock-based compensation charge as a result of modifying option agreements with two former executive officers.

In the third quarter, consolidated sales increased 27% relative to the third quarter of 2009 to $5.9 billion. North American production sales increased 39% in the third quarter to $3 billion, reflecting a 28% increase in vehicle production to 3 million units and a 9% increase in North American content to $1,010. This marks the first time in our history that we have recorded average content over $1,000. The large increase in vehicle production reflects the recovery in auto sales that we have seen throughout 2010.

North American content increased primarily as a result of new launches, including the Jeep Grand Cherokee, the Ford Fiesta, the GMC Terrain, and the Cadillac SRX; the strengthening of the Canadian dollar against the dollar; and favorable production relative to industry volumes and/or increased content on certain programs, including vehicles on GM's Lambda platform and the Chevy Equinox. Partially offsetting these were unfavorable production relative to industry volumes and/or lower content of certain programs, including the Ford Escape and its variants; programs that ended production during or subsequent to the third quarter of 2009, including the Pontiac and Saturn brands; and ongoing customer price concessions.

European production sales increased $106 million or 7% from the comparable quarter. European vehicle production declined 1% to 2.9 million units, while European content increased 8% to $571. Key contributors to the increase in European content include the launch of new programs, including the MINI Countryman, Peugeot RCZ, Porsche Cayenne, and Volkswagen Touareg, Audi A1, Opel Astra and Mercedes-Benz SLS; favorable production relative to industry volumes and/or content on certain programs, including the Volkswagen Tiguan, Audi Q5, BMW X1, Porsche Panamera, and Ford Transit; as well as acquisitions completed during or subsequent to the third quarter of 2009.

These factors were partially offset by the weakening of the euro and British pound, each against the US dollar; unfavorable production relative to industry volumes and/or lower content on certain programs in the third quarter of 2010, including the Smart fortwo, the Mercedes Benz B-Class, the Honda Civic, and the Volkswagen Golf; programs that ended production during or subsequent to the third quarter of 2009; and ongoing customer price concessions.

Rest of world production sales increased 29% to $249 million, primarily as a result of increased production and/or content on certain programs in China and Korea, an acquisition of a Japanese resistance facility completed in the first quarter of 2010, the launch of new programs during or subsequent to the third quarter of 2009 in China, and the strengthen of the Korean and Chinese currencies. These factors were partially offset by the sale of our interest in an electronic joint venture in China in Q1 2010.

Complete vehicle assembly volumes increased 41% from the comparable quarter, and assembly sales increased 21% or $91 million to $519 million. The increase largely reflects sales on the launches of the MINI Countryman, Peugeot RCZ and Aston Martin Rapide, as well as higher volumes on the Mercedes-Benz G-Class, partially offset by the end of production in class of the BMW X3 in Q3 2010 and the Saab 9-3 convertible in Q4 2009, and Chrysler programs in the second quarter of 2010, as well as the weakening of the euro against the US dollar.

In summary, consolidated sales, excluding tooling sales increased approximately 25% or $1.1 billion in the third quarter. The primary reasons for this increase are the significant increase in North American vehicle production, increased average content per vehicle in both North America and Europe, and higher rest of world in assembly sales. Tooling, engineering and other sales also increased significantly by $172 million from the prior year.

Gross margin in the quarter was 13.6% compared to 11.8% in the third quarter of 2009. The increase in gross margin percentage was substantially due to the significantly higher vehicle production in North America as well as the $33 million benefit of a commercial settlement with a customer related to recovery of previously expensed engineering and design costs, lower restructuring and downsizing costs, productivity and efficiency improvements of certain facilities, lower warranty costs, and lowered cost incurred related to launches of the programs that have not fully ramped up production. These factors were partially offset by operational inefficiencies and other costs of certain facilities, in particular, at certain electronics and exteriors and interiors systems facilities in Europe; employee profit sharing, as no profit sharing was recorded in 2009; increased commodity costs; and ongoing customer price concessions.

Magna’s consolidated SG&A as a percentage of sales was 5.8% in Q3 2010 compared to 6.1% in Q3 2009. The year-over-year decline is substantially due to higher sales associated with the significant increase in North American vehicle volumes combined with a $16 million accounts receivable valuation allowance in Q3 2009, lower restructuring and downsizing costs, and our ongoing efforts to contain costs. This was partially offset by higher incentive and stock-based compensation, the $16 million stock-based compensation charge highlighted earlier, and the $9 million favorable adjustment in after-tax commercial paper in the third quarter of 2009.

Largely as a result of the higher gross margin percentage, higher equity income, and lower SG&A percentage, our operating margin percentage improved to 5.3% in the third quarter of 2010 from 1.7% in the third quarter of 2009.

Our effective tax rate of 24.8% in the third quarter of 2010 reflects more traditional rates, a result of our return to profitability in most jurisdictions. In addition, the effective rate for the third quarter of 2010 was favorably impacted by the utilization of losses previously not benefited mainly in the US. Net income was $241 million in the quarter compared to $51 million in the third quarter of 2009.

Diluted earnings per share were $2.06 compared to $0.45 in the third 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 the net issue of shares during Q3 2010 related to the arrangement and an increase in the number of diluted shares associated with stock options.

I will now review our cash flows and investment activities. During the third quarter of 2010, we generated $422 million in cash from operations prior to changes in non-cash operating assets and liabilities and invested $57 million in non-cash operating assets and liabilities. For the quarter, investment activities amounted to $233 million, comprised of $182 million in fixed assets, a $45 million increase in investments and other assets, and $6 million to purchase subsidiaries.

As noted in our press release, our Board declared a two-for-one stock split of our common shares to be implemented by way of a stock dividend. The stock dividend will be payable on November 24th to shareholders of record at the close of business on November 16, 2010. Our Board today also increased our quarterly cash dividend once again to $0.18 per share post stock split, or the equivalent of $0.36 pre-stock split for the quarter ended September 30, 2010. This represents a 20% increase from our previous dividend. The dividend is payable on December 15th to shareholders of record on November 30th. The stock split and increased cash dividend reflect our Board’s confidence in our future.

Finally, subject to approval by the Toronto and New York stock exchanges, our Board approved a normal course issuer bid to purchase up to 4 million common shares adjusted to 8 million shares on a post stock split basis. This represents approximately 3.3% of our outstanding common shares. The primary purposes of the bid are share purchases for cancelation to offset potential dilution resulting from the exercise of stock options, for purchases to fund our restricted stock unit program, and our obligations to our deferred profit sharing plans. The program is expected to commence on or about November 10th and terminate one year later.

Our balance sheet remained strong with $1.5 billion in cash net of debt as of September 30, 2010. We also have an additional $1.9 billion in unused credit available to us from a credit facility that extends until July 2012.

Next, I’d like to review our 2010 full year outlook. Please note that we have narrowed the outlook ranges to reflect the fact that three quarters of the year have already been reported. We have increased our vehicle production expectations in North America and Europe from our outlook in August. We now expect 2010 North American production to be approximately 11.8 million units compared to 11.5 million units in our August outlook. We expect 2010 European light vehicle production to be approximately 12.6 million units compared to our August outlook of 12 million units. These production increases largely reflect the higher level of vehicle production than we had anticipated in the third quarter.

Our North American content per vehicle expectations have increased to between $980 and $995 for 2010 compared to the range of $955 to $985 in our previous outlook. Improved product mix and a higher average Canadian dollar compared to our previous outlook largely account for the increase in the North American content range.

Content per vehicle in Europe is now expected to be in the range of $545 to $555 compared to our previous outlook range of $520 to $545. The higher average euro and British pound compared to our previous outlook and a slightly improved program mix account for the increased content range in Europe. And we now expect complete vehicle assembly sales to be between $2.05 billion and $2.15 billion, up from $1.8 billion to $2.1 billion in our last outlook, due to a higher average yield in our previous outlook and higher anticipated volumes on assembly programs 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 total sales to be in the range of $23.5 billion to $24.0 billion, up from our previous outlook. And for the full year 2010, our expectation for fixed asset spending is now $740 million to $775 million compared to the $750 million to $800 million range in Q2.

That concludes our formal remarks. Thanks for your attention this evening. We will be pleased to answer your questions.

Question-and-Answer Session

Operator

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

Don Walker

Peter?

Peter Sklar – Nesbitt Burns

Hi, can you hear me now?

Don Walker

We can now, Peter.

Peter Sklar – Nesbitt Burns

Okay. Sorry about that. You mentioned there is a couple of unusual items. There is a $16 million stock-based comp and the $33 million recovery of previous engineering design costs. Would we tax effect those two items?

Vince Galifi

Peter, no, we wouldn’t. The $33 million was earned in the United States, and we have losses there that haven’t been benefited. So that flows right to the bottom line. And the $16 million is not tax effective as well. So if you had gone through the numbers, the EPS impact of those items was about $0.14 of additional income.

Peter Sklar – Nesbitt Burns

And there was a third item that sounds like it was small though. You mentioned in the rest of the world segment a write-off of certain assets. Was that a significant amount?

Vince Galifi

No, Peter, it was – I think you’re referring to potential MD&A. No, that was not significant.

Peter Sklar – Nesbitt Burns

Okay. And can you just go through – I'm trying to recall the history of the normal course issuer bid. If I recall, you’ve not had a normal course issuer bid before or at least for a number of years. Is that correct?

Vince Galifi

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

Louis Tonelli

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

Vince Galifi

Thanks, Louis.

Louis Tonelli

Okay.

Peter Sklar – Nesbitt Burns

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

Don Walker

Yes. Peter, we had changed our operating group so that each group president had global responsibility last April. A few of them already had global responsibility. We went to global responsibility for everybody. So they have control of the operations, the capital, the quoting, everything. So at that point in time, the group presidents really reported to both Sigi and I. Sigi would focus more on what was going on in the European area. So we haven’t changed that. What we have done is (inaudible) to long-term Magna managers are both involved in overseeing the regions according to the activities with the – (inaudible) with the customers and looking at optimizing the efforts of the group presidents. So we were already in a transition. So this is more of just fine-tuning.

Peter Sklar – Nesbitt Burns

Right. Don, you did make some comments on your thoughts about European operations. It sounds like the larger element of the losses in the interiors and plastic exteriors business. I mean, do you have any thoughts about – when you look at that European business in aggregate, it’s really underperforming relative to the North American business in terms of margins. Are there any structural issues that would prevent the earning at the same level in North America? And then do you have any thoughts about how you are going to get there?

Don Walker

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

Peter Sklar – Nesbitt Burns

Okay. That’s all I have. Thank you.

Operator

And our next question comes from the line of Itay Michaeli of Citigroup. Your line is open.

Itay Michaeli – Citigroup

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

Vince Galifi

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

Itay Michaeli – Citigroup

And if you look at launches that you are planning for 2011 in North Americas, is that delta a positive versus 2010 or was 2010 idea was significant amount of launches for you?

Vince Galifi

We’re going to give you a complete outlook for 2011 in January. So at this point, I’m going to refrain from commenting specifically on ’11. Happy to deal with 2010. We’ve got just about two or three months away before we’re able to complete our business plans and give you a little bit more color on ’11.

Itay Michaeli – Citigroup

Sure. And then two quick ones, just financial questions. One, Vince, can you help us with just how to think about the tax rate, how that migrates into next six to 12 months perhaps? And then secondly, just a quick cash flow question on working capital, how you’re thinking there, order of magnitude? I think we’ve previously talked about a modest use for the year. I just wanted to make sure that’s still what you are expecting for the year. Thank you.

Vince Galifi

In terms of the tax rate, I’ve been – we've been talking about a tax rate of 20% to 25% for 2010. It really depends on mix of income. In the quarter, our rate was almost 25%. But impacting the rate negatively was the stock option modification that I talked about. I thought it was not tax effective. The impact on a tax rate was just over 2%. So if you look at our tax rate in Q3, backing out that stock option modification expense, we are 22.5%, which is consistently plus or minus with Q1 and Q2.

So as you look forward to Q4, again, a rate that’s going to be somewhere sort of 20% to 25%, 21% to 24% is probably where we expect the rate to come into. 2011 – until we don’t get our business plan complete and understand where it’s likely, the mix of income is going to be by legal jurisdiction. I’m not going to have a real good handle on that. We still have significant losses that have not been benefited from an accounting perspective. As we start to generate income in some of those jurisdictions, we will continue to see some benefit on the tax rate, but a really good as an overall mix. So again, we’ll give you some guidance come January on that to help you better understand what 2011 is going to look like.

Itay Michaeli – Citigroup

That’s helpful. And just on a working capital question, are you still expecting a modest boost for the year?

Vince Galifi

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

Itay Michaeli – Citigroup

Great. That’s very helpful. Thank you.

Operator

And our next question comes from the line of John Murphy of Bank of America-Merrill Lynch. Your line is open.

John Murphy – Bank of America-Merrill Lynch

Good evening, guys.

Don Walker

Hi, John.

John Murphy – Bank of America-Merrill Lynch

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

Vince Galifi

I think when you sort of back into the fourth quarter, there is couple things that you need to take into account, John. Tooling sales are going to be higher in the fourth quarter than they have been for the first three quarters of this year. So that will have – we will have sales, but we would not have a pull-through on a bottom line. So that negatively impact any of the ratios that you are going to look at. When you look at currencies, the euro is strengthening. As we talked about on this call earlier, North America presently is more profitable than Europe. So that will – when you think about sales mix, that will have some impact on the numbers. And generally, in Q4, some of the other things that happen on a seasonal basis is the custom shutdowns. Now those could be couple weeks long, maybe a little bit shorter. But that certainly has an impact on our fourth quarter every year for us. Hope that helps you a little bit, John.

John Murphy – Bank of America-Merrill Lynch

Yes. Okay. And then in North America – thank you. In North America, the content per vehicle is bumping up against $1,000. And if you think about it as a pretty significant content number in every vehicle in North America, I mean, are you at some point reaching an upper limit of where you can get on this content per vehicle, or is there still a lot of room for you to provide a lot of content – increase in that content per vehicle? Because it’s a very high number at this point.

Vince Galifi

We’ve been talking about sometime that when you look at our markets, North America, Western Europe, Western Europe, the content is still more than what it is in North America. So I think there is more opportunity to grow content in Europe faster than North America, and we’ve been saying for some time that the North American growth we’ve experienced, if I go back three or four or five years ago, when we were talking about 18%, 20% compound growth rate, I don’t think that’s going to be repeatable all the time. So what we are focusing on is growing our business outside of our traditional markets.

As Don and I, both talked about the growth in the rest of the world segments and the profitability we’ve also generated in those segments. So you’re going to see more growth in those areas. The other thing that will impact content that’s actually impacting content a little bit in Q3 is our growth in non-automotive sales. We’ve talked about sales in this area of our business, plus or minus it seems sort of $300 million to $350 million. Most of that is in North America. And that business, if we look over the next three or four years, we expect it to be the plus $1 billion mark. So that – in our numbers unfortunately today is included in content per vehicle, and one of things that we’re looking at is how we better communicate our results and content per vehicle to make it a pure number for you.

John Murphy – Bank of America-Merrill Lynch

That will be helpful. And then just lastly, on E-Car, is there some point in the future where you see that turn the corner and it’s no longer a drag? I mean, when do you see that turn the quarter do you think? I mean, it’s a small number, but just trying to understand when it becomes profitable.

Don Walker

Well, the better idea, I think, of the business plan review is we will be going to that in a month’s time. So I think when we get into the New Year, we’ll be getting more clarity. There is still lot of development work in there.

John Murphy – Bank of America-Merrill Lynch

All right. Thank you very much, guys.

Operator

Our next question comes from the line of Michael Willemse, CIBC World Markets. Your line is open.

Michael Willemse – CIBC World Markets

Thank you. Just a follow-up on the question on E-Car. When you launch the Ford Focus electric vehicle, would you expect negative margin on that or do you think you can be breakeven on it?

Don Walker

Our target is basically to be breakeven plus or minus, and that was the way we intended as going in. So there are still some cost targets we have to hit, but overall I think the program is going quite well from our perspective and from Ford’s perspective. So, as we get closer, we will know. But I would look at that as hopefully being about a breakeven.

Michael Willemse – CIBC World Markets

All right. Thank you. And just wondering if there were significant costs, legal costs, advisory costs related to the Stronach transaction over $10 million?

Vince Galifi

Mike, there was approximately $30 million of costs. Those costs did not flow through our income statement. They were costs in issuing the shares that gone through equity. If you turn to note few of our financials, it will highlight those costs.

Michael Willemse – CIBC World Markets

Thanks. Okay. And then just one last question, the content per vehicle guidance for Europe plays a big jump in the fourth quarter, is that mostly currency or is there some significant launches there as well?

Louis Tonelli

That’s mostly currency, Mike.

Michael Willemse – CIBC World Markets

Okay. Thank you.

Operator

And our next question is from the line of Rich Kwas of Wells Fargo. Your line is open.

Rich Kwas – Wells Fargo

Hi, guys. Just a handful of questions. Vince, the decline in CapEx, what’s that attributable to?

Vince Galifi

That’s our best guess at this point in time. Typically, as we get near the end of the year, we have better clarity on it. A lot of it comes down at timing, whether it falls into December or January, but the range we gave was our best guess. So there is nothing unusual, just getting more clarity on it.

Rich Kwas – Wells Fargo

Okay. And then on electronic components, are you having any issue or added costs procuring electronic components? There is – a lot of other companies have talked about shortages over the last couple quarters. Are you seeing any cost associated with that? And if you are, when do you expect to get some relief on that front?

Don Walker

We are seeing very tight supply like a lot of other people are. It’s not material. We have had some financial impact on. And I’d say, don’t know that – the amount off of the top of my head. We’ve been in a couple of cases struggling to keep our customers going, but it’s not unless you heard that it’s not a material amount.

Rich Kwas – Wells Fargo

Okay. And then Louis, do you have the CPV numbers ex-currency?

Louis Tonelli

Well, the currency impact in North America was about $20 just Q3-to-Q3. And in Europe, it was negative $51 Q3-to-Q3.

Rich Kwas – Wells Fargo

So plus-$20 North America and negative $51 Europe?

Louis Tonelli

Right.

Rich Kwas – Wells Fargo

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

Vince Galifi

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

Rich Kwas – Wells Fargo

Okay, great. That’s good to hear. Thanks.

Operator

The next question is from the line of Rod Lache of Deutsche Bank. Your line is open.

Pat Nolan – Deutsche Bank

Good evening, everyone. It’s Pat Nolan in for Rod Lache.

Don Walker

Hi, Pat.

Pat Nolan – Deutsche Bank

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

Vince Galifi

$33 million was in revenue, and I guess flows through to margin. The $16 million was in SG&A.

Pat Nolan – Deutsche Bank

And do you think about how we should think about the CapEx requirements of this business going forward? Obviously, you are a lot bigger company than you were five, six years ago. But just as a percentage of sales, where do you think CapEx should have to move to on a more normalized basis?

Don Walker

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

Vince Galifi

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

Don Walker

In an ideal world, I would say the capital go up because if we can get good return in business in some of the emerging markets, then we’ll be happy to spend more on capital.

Pat Nolan – Deutsche Bank

Just a follow-on to the acquisition question. How are you seeing the available assets out there, the willingness to sell on the overall price, and do you think you can do some more meaningful, like these $200 million, $300 million acquisitions as we go through next year?

Vince Galifi

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

Don Walker

I’d say the price expectation has come up a little bit, and I would expect there is more money out there. So probably some more people are chasing acquisitions. There is not a lot of takeover business left. Nothing material and there is not buyer sales. But I do think we’re still going to see a number of companies getting into financial difficulties. So we’ll not be able to get some good opportunities there.

Pat Nolan – Deutsche Bank

Got it. And then last, just a quick one, on the tooling sales, are they going to be up again in the fourth quarter? Should we kind of think about that as what will be the run rate going forward, or could it continue to trend higher?

Don Walker

It varies by quarter and depends on program launches and type of tooling. Just trying to think historically. Our tooling sales move up and down, and it really depends on programs. But Q4, we do expect it to be higher. I’m just looking back at the old information. And Q4 looks like tooling sales are typically higher on many other –

Pat Nolan – Deutsche Bank

Got it. Maybe it’s up a little bit year-over-year. Okay. Thanks very much, guys. Have a good night.

Don Walker

Thank you.

Vince Galifi

Thank you.

Operator

And our next question comes from the line of Chris Ceraso of Credit Suisse. Your line is open.

Chris Ceraso – Credit Suisse

Thanks. Good evening.

Don Walker

Hi, Chris.

Chris Ceraso – Credit Suisse

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

Vince Galifi

No, I think you’ve got higher tooling. You’ve got the impact of FX in terms of assembly sales, could be a tad higher. It’s got higher production in Europe, and in North America with volumes where we end up on production sales. How to tell exactly? It could be flattish, could be up, could be down a little bit.

Chris Ceraso – Credit Suisse

Okay. And what about on the trucks? We’ve heard from some other suppliers that they were particularly strong in Q3, maybe they can’t be quite as strong in Q4. Is it what you are seeing in your releases?

Vince Galifi

ChrisLouis, do you have any information on that?

Louis Tonelli

Yes (inaudible). I’m just trying to look that up. Just give me a second.

Chris Ceraso – Credit Suisse

I guess what I’m getting at is it sounds like a lot of the things that are supporting the higher revenue are not necessarily are highest margin revenue drivers. So is it fair to expect even if revenue is higher, profitability may not be that much higher than Q3?

Vince Galifi

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

Louis Tonelli

Chris, we do have trucks down in Q4.

Chris Ceraso – Credit Suisse

Okay. Something that stood out to me in the presentation was, in the assembly business where volumes were up about 2X, what revenues were up? Is the revenue per unit on the Countryman a lot lower than what it was on the X3?

Louis Tonelli

Well, it is. But it’s MINI versus BMW. So there is lower price on that.

Chris Ceraso – Credit Suisse

Is that all the ways to it or is there something else happening there?

Don Walker

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

Vince Galifi

Chris, I don’t understand the question.

Chris Ceraso – Credit Suisse

Well, you are showing that in the quarter the revenue in the assembly business was up about half what your volumes were up. Right? Volumes were – assembly volumes were up 40% and revenues were up 20%. I’m just trying to figure out how that happened and if it is just a difference between the revenue on a Countryman versus the X3.

Vince Galifi

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

Chris Ceraso – Credit Suisse

Okay.

Don Walker

Yes, FX was negative.

Chris Ceraso – Credit Suisse

Okay. Thank you. Have a good night.

Operator

Next question comes from the line of David Tyerman of Canaccord Genuity. Your line is open.

David Tyerman – Canaccord Genuity

Good evening. I was wondering if you could quantify roughly what kind of losses or at least lower profit you are experiencing in Europe from these underperforming operations and startup operations and so on. Just give us a rough idea of the magnitude of the drag it’s putting on your operation.

Vince Galifi

David, when we look at some of the operations that Don referred, they are in the red and a drag on profitability. But in terms of quantifying, I’m not going to do that for you. Our focus, as Don talked about, is developing plans to focus on improving overall efficiencies and operating performance and see those operations start to generate some bottom line results for us. And the times are still being worked on. We’re right in the middle of business plans and a number of decisions need to be made from a production standpoint or otherwise. I think we’re going to be in a better position in the next – probably next two, three months, and the target of giving you an update as we speak through our outlook for 2011.

David Tyerman – Canaccord Genuity

Okay, fair enough. The second question, Vince, you mentioned the Canadian dollar was part of the reason that you bumped up your CPV guidance for 2010 for North America. I’m wondering what were you using and what are you using now. Dollar hasn’t moved that much.

Vince Galifi

The average – I'm just trying to look at the target. The average rate in the third quarter was just shy of $0.97. And you look at where the dollar is today, we’re almost – we did our work a few days ago, we were at a par, but we’re certainly higher than $0.97.

David Tyerman – Canaccord Genuity

Okay. So that’s going to swing. So just going back to your discussion earlier on CPV, if I understand it correctly, it sounds like mix wasn’t a huge driver of the surprising Q3 and won’t be going forward. I’m sorry?

Don Walker

You’re talking about year-over-year now?

David Tyerman – Canaccord Genuity

There were some discussion about mix and whether it was going to continue in Q4, and I got the impression that – I think Vince said, overall the mix was neutral.

Louis Tonelli

The mix was neutral Q3-to-Q3. The expectation is that mix is better for us old look at it versus new look at it. So it is actually positive is one of the reasons why we are moving up content in North America.

David Tyerman – Canaccord Genuity

Okay, okay. And so that stature presumably can swing both ways is that the way to think about this? Like, don’t count on this going forward?

Louis Tonelli

Well, I mean, we’ve seen it both ways. We’ve seen it significantly negative in prior years. More recently, it’s been kind of neutral to positive and occasionally a pretty small negative. So it can move around. That’s for sure.

David Tyerman – Canaccord Genuity

Okay. And it also sounded like launched had a good chunk to do with it too, which would be more sustainable, I would imagine. Is that fair to say?

Louis Tonelli

We have launched year-over-year. So Q3-to-Q3 were good chunk of our growth, yes.

David Tyerman – Canaccord Genuity

Great. And if that continues into Q4?

Louis Tonelli

Yes.

David Tyerman – Canaccord Genuity

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

Vince Galifi

When we’re looking at 2010, run rate is going to be about $350 million by the end of 2010, whether we’re actually going to record the full $350 million, but I shouldn’t – at the end of the year, the run rate will be about $350 million.

David Tyerman – Canaccord Genuity

Okay. That’s helpful. Great. Thanks very much.

Operator

Our next question comes from the line of Himanshu Patel with J.P. Morgan. Your line is open.

Himanshu Patel – J.P. Morgan

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

Don Walker

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

Vince Galifi

Some things I think about is, Russia, sales really don’t start going in Russia until 2011 and wrapping up in 2012. So you need to think of it, Russia really contributing in 2012 and you can think through the impact on margin, 10% versus 11% as we move up to launch. So I need to get back to the group once we get through our business plans. Steyr, we’ve been talking for some time that our launch costs peaked Q4 ’09, Q1 2010, they have been coming down. And as we get into 2011, we’ll see margin expansion in that operation. And then it’s the – some of the underperformers that John reported to. So we get both in place and that will have a positive impact on margins as well.

Himanshu Patel – J.P. Morgan

And then just on North America, you’ve done about 8% to 9% or so operating margins for three quarters in a row now. Can you comment a little bit about the sustainability of that level of profitability? And I’m particularly interested in anything about how those margins evolve as the Steyr starts recovering more materially. Should we think about these margins sort of just staying at where they are right now with additional cost being out back offsetting operating leverage, or could there should be some operating leverage to take the margins higher?

Don Walker

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

Vince Galifi

In some places, we have ability to take on more production with the fixed cost area. You would expect some leverage there and some other places that will bring a little tighter. So we have to have some fixed cost. So it depends on all that blends in.

Himanshu Patel – J.P. Morgan

Okay. Great. Thank you.

Operator

Our next question is from the line of Ravi Shankar of Morgan Stanley. Your line is open.

Ravi Shankar – Morgan Stanley

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

Don Walker

In term of are we done for now, we are never done. We are going to always look at doing things and improving profitability and growing sales in new regions. When you think about use of cash, what we’ve talked about is our strategy and then how we want to grow in some of the emerging markets and continued support of customers in our traditional markets. So our focus for cash is investing it in the business, and that could be in the form of capital. It could also be in the form of acquisitions if it further reserve our strategy to grow in emerging markets, acquire technologies or diversify our customer base with OEMs. So I think you should think about cash over some period of time being invested in the business.

Ravi Shankar – Morgan Stanley

Got it. And you mentioned price concessions as one of your negative headwinds in the quarter and you’ve said that for awhile now. Are you talking about standard contractual stuff or is it OEMs coming back for incremental prices?

Don Walker

It’s a combination of both.

Ravi Shankar – Morgan Stanley

Okay. Anything that makes you concerned that the pricing discipline is slipping?

Don Walker

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

Ravi Shankar – Morgan Stanley

Great. Thank you.

Operator

And our next question comes from the line of Patrick Archambault of Goldman Sachs. Your line is open.

Patrick Archambault – Goldman Sachs

Hi, good evening.

Don Walker

Good evening.

Patrick Archambault – Goldman Sachs

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

Vince Galifi

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

Don Walker

And at 125,000 vehicles per year, we have room to put more product through there if we get more contracts or if the blind goes up.

Patrick Archambault – Goldman Sachs

What – like, in terms of orders of magnitude, could you – like, how far off do you think you could stretch it in terms of – you know, how far beyond the 130?

Vince Galifi

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

Don Walker

We can run. The constraints there is the paint shop because they are on the top of my head. I think we can run up to about 150,000, 160,000 through the existing paint job if we were looking out to get more contracts, we would re-commission the old paint line, which would be some capital. But I would say we could probably run 150,000, 160,000 without significant new capital.

Patrick Archambault – Goldman Sachs

And how – I mean, just kind of taking the longer term view, how does the pipeline look like for that business in terms of the interest you are getting from people? I mean, if – I suppose right now maybe it’s a little quieter because people still have some capacity, but is there a pretty good book of interest and quotes happening beyond what’s already going through there in 2011?

Don Walker

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

Patrick Archambault – Goldman Sachs

Great. Thank you very much.

Operator

Our next question is from the line of Justin Wu of GMP Securities. Your line is open.

Justin Wu – GMP Securities

Good evening. My first question is just on capital structure and cash deployment. I guess in the last quarter you guys talked about a comfort level of getting somewhere towards over the long-term the net debt neutral level. Is that something you are still comfortable with in terms of capital structure?

Don Walker

Yes, I’d say we’re comfortable with that as long as we see normal business going forward, we’re generating cash. So if we had good use of our cash and we knew where we’re going to continue to build cash back up again, I’d be happy if we had some good opportunities. I think the Board would be as well. We’d discuss at that point in time.

Justin Wu – GMP Securities

Okay. In terms of the cash deployments, you guys have done a number of smaller type acquisitions. But given the kind of free cash that you are generating, obviously it’s difficult to keep up with in terms of deployments. Are you going to continue to do more of these tuck-in type acquisitions or do you see opportunities for larger nugget-type acquisitions? Are there any available out there?

Don Walker

I would say typically we typically do the smaller acquisitions. But if we see a good opportunity, then we would consider a larger acquisition from a cash cost. I mean, if a company is profitable, then the cost is high obviously for the sales. And if it’s not profitable, you get high sales with low investment. But we would consider using some of the cash in the balance sheet if we saw a good opportunity with strategic and good technologies. I just came back from eight days in China. We’ve got a lot of opportunities over there. We’ve got some growth plans. So if we can be successful in growing the way we want in some emerging markets either through CapEx or acquisitions, then we won’t be afraid to use our cash.

Justin Wu – GMP Securities

Okay. And just my last question, just on your CapEx, based on your guidance and what you’ve spent year-to-date, it looks like cash – your CapEx could be somewhere up to $300 million level in the fourth quarter, which is quite a bit higher than what you’ve done in the last three quarters. Are there any specific projects that are getting you to that level, or can you comment on that?

Vince Galifi

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

Don Walker

It’s more on timing. We have a number of plans being built, a number of new programs coming on stream. It’s just more timing.

Justin Wu – GMP Securities

Okay. Great. Thank you very much.

Don Walker

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

Operator

Yes, sir. There is. Thank you. It will be again from the line of Michael Willemse of CIBC World Markets. Your line is open.

Michael Willemse – CIBC World Markets

Thank you. Actually most of my questions have been answered. Just one question on the launch cost at the Steyr operation. It sounded like they were tens of millions of dollars in the first couple quarters. Did that continue in the third quarter? And should they kind of go away in the fourth quarter?

Don Walker

Mike, the launch costs were actually higher in Q1, down in Q2, smaller in Q3. By the time we get into next year, the launch costs should be all behind us. Smaller in Q3 versus Q4.

Michael Willemse – CIBC World Markets

In Q3, was it under $10 million, the launch cost?

Vince Galifi

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

Don Walker

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

Michael Willemse – CIBC World Markets

All right. All right. Okay. Thanks very much.

Don Walker

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

Operator

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

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