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Magna International, Inc. (NYSE:MGA)

Q2 2007 Earnings Call

August 9, 2007, 8:00 AM ET

Executives

Donald J. Walker - Co-CEO

Vincent J. Galifi - EVP and CFO

Mark T. Hogan - President

Jeffrey O. Palmer - EVP

Analysts

Christopher Ceraso - Credit Suisse

John Murphy - Merrill Lynch

Peter Sklar - BMO Nesbitt Burns

Fadi Chamoun - UBS Warburg

Richard Kwas - Wachovia Securities

Unidentified Analyst - Banc of America

David Tyerman - Scotia Capital Market

Nicholas Morton - RBC Capital Markets

Patrick Archambault - Goldman Sachs

Brett Hoselton - Keybanc Capital Markets

TRANSCRIPT SPONSOR
Wall Street Breakfast

Operator

Welcome to the Magna International Incorporated Second Quarter 2007 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, Thursday, August 9, 2007.

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

Donald J. Walker - Co-Chief Executive Officer

Thank you. Good morning and welcome to our second quarter 2007 conference call. Joining me today are Vincent Galifi our Executive Vice President and CFO, Louis Tonelli, Vice President of Investor Relations, and Mark Hogan, President. Mark is in Traverse City and will have to drop off the call in order to give a speech which is scheduled for 9 AM this morning.

Yesterday, our board of directors met and approved our financial results for the second quarter ended June 30, 2007. A board also increased our quarterly dividend to $0.36 per share payable of September 14, '07 to shareholders of record on August 31. I will have more on that about dividend increase in a minute.

We issued a press release earlier this morning for the second quarter of 2007. You will the find the press release. Today's conference call webcast and a slide presentation to go along with the call all in the Investor Relations section of our website at www.magna.com.

This morning, I will start with some thoughts in the second quarter and then discuss our dividend policy. Finally, I will briefly comment on the proposed transaction with Russian Machines, and some of our initiatives in Russia. Vince will then review our financial results for the quarter and discuss the outlook for 2007. Upon completion of our formal remarks we will be pleased to answer any questions.

Before we get started, just 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 our future results and performance to be materially different from those expressed or implied in these statements. Please refer to today's press release and attached MD&A for a complete description of our Safe Harbor disclaimer.

I would like to start by saying we are pleased with the results for the second quarter particularly given the challenges that continue to exist in the North American automotive markets. While we still have significant work to do significant improvements in certain underperforming businesses, we have benefited from some of our recent restructuring actions and from our efforts to improve some of our underperformers.

Many of the businesses we continue to perform well and we have been able to launch on many new programs without major issues, which have contributed to our results. However, we will remain cautious about the automotive industry particularly in North America. The seasonally adjusted annual rate of our U.S. auto sales has been well below the 16 million units for the past two months and the inventory levels, which had been below normal this spring, as a result of production cuts in the first half of 2007, are now creeping back up relative to normal, particularly for certain of our high content vehicles.

Depending on how sales progress through the coming months, this weakness may have implications on production in the second half of 2007. Many of our largest customers in North America continue to lose market share in a fiercely competitive marketplace and exert pressure on the near supplies base to reduce costs.

Next, I would like to discuss our dividend policy. The dividend policy in our corporate constitution entitles Magna shareholders to dividends equal to 10% of Magna after tax profits for any financial year and on average at least 20% of Magna's after tax profits on a rolling three year basis. Magna has complied with this requirement since 1992 and intends to continue to fully comply with this requirement.

In April, consistent with our dividend policy, we put in place a dividend formula which maintained a constant dividend amount in each of the first three quarters based on the prior year's results. And provided for an adjustment in the fourth quarter to achieve 20% payout of after tax profits for the year. We heard from a number of shareholders regarding our dividend policy and discussions at the board and management level continues about the different formula.

Yesterday, the board rescinded the previously announced dividend formula and re-established a quarterly dividend in line with our past practices. In light of this decision, and considering our financial results for the six month period ended June 30, 2007, we raised our quarterly dividend to $0.36 from the $0.24 that was declared in respect to the first quarter of 2007. The board reserves the right to further modify the dividend at any time and for any reason subject to the requirements of the corporate constitution, particularly in response to financial operating or any relevant circumstances.

Finally, I would like to bring you up date on the status of our proposed transaction involving Russian Machines investment in Magna. Our management information circular and proxy statement was mailed to shareholders last week, and our specialist shareholders meeting is scheduled for Tuesday, August 28. The circular provides detailed information about the transaction. That includes the discussion of our intention to complete, subject to the approval of the plan of arrangement. A substantial issuer bid to purchase up to $20 million of our class A shares at an aggregate price of not more than $1.5-$1.4 billion and the amount received from Russian Machines in connection with this transaction.

As we have indicated to you previously, the Russian automotive market continues to experience significant growth, and we are seeing opportunities aboard both the local Russian OEMs as well as our traditional customers, as they are expanding their presence in Russia.

With respect to the Graz group, we are supporting the launch of a new vehicle program scheduled for 2008. As we have previously disclosed our Magna star unit is working closely with auto parts to develop a new family of C segment cars. Once again numerous Magna operating groups are courting business for these vehicles and we are courting numerous opportunities across a broad range of Magna products with many of our traditional customers in Russia.

Magna's management has also the management of the operating group are excited about the business opportunities in Russia. We believe that Russian Machines proposed investment in Magna will allow us to accelerate our growth in this new market, while minimizing the risks of entry. We look forward to receiving your support in the transaction.

I would now like to turn the call over to Vince Galifi.

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

Thanks Don and good morning everyone.

I would like to review our financial results for the second quarter ended June 30, 2007. Please keep in mind that all figures are in U.S. dollars. Appendix A in the slide package accompanying our today includes a reconciliation of certain key financial statement lines between reported results and results excluding unusual items for the second quarter of 2007 and 2006 respectively.

In the second quarter of 2007, we recorded restructuring and impairment charges resulting in a $36 million reduction in operating income, a $24 million reduction in net income and a $0.21 reduction in diluted earnings per share. In the second quarter of 2006, we reported unusual items related to restructuring charges, the sale of facilities and the future tax recovery as a result of the reduction in future income tax rates in Canada. These items resulted in a $42 million reduction in operating income, a $23 million reduction in net income and $0.21 reduction in diluted earnings per share.

The following quarterly earnings discussion excludes the impact of unusual items. In the second quarter consolidated sales increased 6% to $6.7 billion. North American production sales grew by 5% in the first quarter to $3.4 billion despite of 2% decline in vehicle production from the comparable quarter to 4.1 million units.

North American content was strong increasing 7% to $840 in the quarter. The key driver of the growth in content was the launch of new vehicle programs. An increase in reported U.S. dollars sales due to the strengthening of the Canadian dollar against the U.S. dollar also helped content growth.

New launches contributed to content growth quarter-over-quarter included some of the new CUVs in the marketplace, the Ford Edge, GM's Land Rover platform, and the BMW X-5, as well as GM's new full size pick ups, the Jeep Wrangler Patriot, the Ford F-Series SuperDuty and the Dodge Nitro and Avenger. Partially offsetting these increases were vehicles in the middle of program changeovers. The Chrysler minivan and the Jeep Liberty both of which are launching the next generation.

Also impacting content negatively or high content programs that experienced lower volumes and/or content including the Chrysler Pacifica and PT Cruiser, Ford Fusion, Hummer H3, GM's minivan and full size SUVs and the Chevy HHR and Malibu.

Program that ended production during or subsequent to the second quarter of 2006, in particular the Ford Freestyle, the sale of certain facilities and incremental price concessions also negatively impacted North American content.

European production sales grew to $1.7 billion representing an increase of 20% over the comparable quarter despite a modest 1% increase in European vehicle production to the 4.3 million units. European content was strong increasing 19% to $405. The launch of new programs including the Mini Cooper, Mercedes C class and [inaudible], the strengthening of the Euro and British pound each against the US dollar. The acquisition of two electronic facilities from Pressac in January 2007 and increased production and their content on certain programs including the BMW 3 series all contributed to content growth in Europe.

These positive contributors were partially offset by programs that experienced lower volumes and/or content in the second quarter of 2007 including the Mercedes E-Class, the Nissan Micra to the sell certain facilities and incremental OEM price concession. With the world production sales increased to 49% to 100 million, primarily as a result of increased production sales and/or content on certain programs in Korea, China and Brazil. The launch of new programs as well as the strengthening of the Korean and Chinese currencies each against the U.S. dollar.

Complete vehicle assembly volumes declined 12% over the comparable quarter while assembly sales declined only 1% or 11 million to approximately $1.1 billion. The sales supply was primarily as a result of the end of production of the Mercedes E-Class 4-Matic at our Graz facility in the fourth quarter of 2006 as DaimlerChrysler started assembling this vehicle in house.

As far as lower assembly volumes for the Saab 93 convertible and all vehicles accounted for on a value added basis. Partially, offsetting the declines were the impact of the strengthening of the Euro against the US dollar and higher assembly volumes for the BMW X3 and Mercedes G-Class.

In summary consolidated production and complete vehicle assembly sales increased approximately 8% or $465 million in the second quarter. Global costs in growth and the strengthening of the Euro, British pound and the Canadian dollar each against the US dollar were the primary reasons for the increase.

Tooling, engineering and other sales were $436 million for the quarter, a decline of $103 million from the comparable period. Some of the programs in which we recorded tooling, engineering and other sales in the second quarter for the Ford Flex. Chrysler's minivans. GM's full size pickups, the Cadillac STS and the Mazda 6.

Programs that drove tooling revenues in the second quarter of 2006 included GM's full size pickups and SUVs, the Mini Cooper, BMW Z4, Freightliner P-Class, the Ford Edge, BMW 3-Series and Suzuki XL7. The strengthening of the Euro, British pound, and Canadian dollar each against the U.S. dollar also positively impacted tooling, engineering, and other sales in the second quarter of 2007.

Gross margin in the quarter was 14.6% compared to 13.6% in the second quarter of 2006. The change primarily relates to incremental gross margins earned pm new program launches and as a result of increased production volumes on certain programs.

Productivity and efficiency improvements at certain facilities, including underperforming divisions and the decrease in tooling sales that are low or no margins. These factors were partially offset by costs incurred in new facilities and preparation for upcoming launches and for programs that have not fully ramped up production, operational inefficiencies and other costs at certain facilities, in particular, at our Syracuse Powertrain facility and at an Interior facility in the United States.

The gross margins earned as a result of the decline in production volumes for certain programs, higher employee profit sharing and instrumental customer price concessions. Magna's consolidated SG&A as a percentage of sales increased to 5.6% in Q2, 2007 from 5.4% in the comparable quarter. Excluding the stock compensation costs in the second quarter of 2007 SG&A as a percentage of sales in the current quarter was essentially in line with the second quarter of 2006.

As a result of the higher gross margin percentage and higher interest income earned offset partially by higher SG&A as a percentage of sales, lower equity income and higher depreciation expense. Our operating margin percentage increased to 6.1% in the second quarter of 2007 from 5.1% in the second quarter of 2006.

Our effective tax rate declined to 30.9% in the quarter from 34.6% in the second quarter of 2006. This is a result of a decline in losses not benefited partially offset by a change in the mix of earnings, whereby more profits were earned in jurisdiction with higher income tax rates.

Net income was $286 million in the quarter, a 32% increase from $216 million in the second quarter of 2006. Diluted earnings per share were $2.56, a 31% increase over a $1.96 reported in the comparable quarter in 2006. This increase in diluted EPS was as a result of the increase in net income partially offset by partly higher number of weighted average shares outstanding during the quarter.

I will now review our cash flow and investment activities. During the second quarter of 2007, we generated $522 million cash from operations prior to changes in non-cash operating assets and liabilities. And we invested $240 million in non-cash operating assets and liabilities. The investment in non-cash operating assets and liabilities reflects an increase in accounts receivables, primarily due to higher production sales, and a decrease in accounts payable and accruals, primarily due to the timing of payments to suppliers. For the quarter, investment activities amounted to $147 million comprised of $137 million in fixed assets and a $10 million in other assets.

Next, I would like to turn to our 2007 full year outlook. We have lowered our vehicle production expectation in North America to 15.2 million units, primarily related to softening U.S. auto sales as Don mentioned earlier. We have increased our European vehicle production expectation to 15.7 million units, largely as a result of stronger than anticipated production in the second quarter of 2007. We increased our range for expected North American content per vehicle in 2007. North American content is now expected to be between $820 and $850 for 2007. The increase largely reflects the strength in the Canadian dollar against the U.S. dollar reporting currency as well as better than expected content growth in the second quarter of 2007.

We also increased our range for expected 2007 content in Europe. Content per vehicle in Europe is now expected to be in the range of $400 to $425. The increase mainly reflects the strengthening of the Euro and British Pound relative to our U.S. Dollar reporting currency and better than expected content growth in the second quarter of 2007. We expect complete vehicle assembly sales to be between $3.7 billion and $4.0 billion, unchanged from our previous outlook.

We now expect total sales to be in the range of $24.3 billion to $25.6 billion, up from our previous outlook. This reflects the increased ranges to North American and European content per vehicle as well as increased expectations for European vehicle production, partially offset by lowering of expected production volumes in North America. For the full year 2007, we expect fixed asset spending to be in the range of $800 million to $850 million inline with our previous outlook.

This concludes our formal remarks. Thanks for your attention this morning. We will now open up the call for questions.

Question and Answer

Operator

Thank you. [Operator Instructions].

The first question coming from the line of Chris Ceraso from Credit Suisse. Please proceed with your question.

Christopher Ceraso - Credit Suisse

Thanks. Good morning.

Donald J. Walker - Co-Chief Executive Officer

Good morning Chris.

Christopher Ceraso - Credit Suisse

It looks like most of the strength for the upside, at least versus our expectation came from North America. Maybe you can give us a bit more detail as to how much of that came from some of the restructuring actions that you have done over the past year. How much came from volume and mix? There was a pretty long list of platforms that were down in addition to the once they were up. And maybe how much came from the Canadian dollar?

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

Chris, do you want me to look at the Q2 versus Q1 or Q2 to Q2, how you want me to look at that?

Christopher Ceraso - Credit Suisse

I think year-over-year.

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

Year-over-year?

Christopher Ceraso - Credit Suisse

Yes.

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

Just one second. Year-over-year, when we look at North America, the biggest benefit came from strong volumes in the number of key programs and mix. As you know to the number of launches that are ramping up, the launch curve, the Ford Edge, the F-250, the land vehicles, the X5 and the Wrangler. We also, for a long time have been focusing on underperformance and we are seeing some improvements there, which has added to the bottom-line. And we have been taking some restructuring activities over the last couple of years and we are seeing the benefit some of that restructuring now generates some bottom-line improvement. We also saw the improvements on the T900 we were just launching the pickups last year relative to this year when this were essentially fully launched.

Christopher Ceraso - Credit Suisse

Is the interior business in North America getting any better?

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

The interior business in North America, we are seeing some improvement quarter-over-quarter and year-over-year. But we still have a way to go before we generate some profit from that business in North America.

Christopher Ceraso - Credit Suisse

Okay. Did you guys have to deal with the change in payment terms, is that what drove the payables down?

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

Chris, that is not what drove the days payables down, it was just a timing of payment there was a couple of large payments that were released just prior to quarter-end and that our account payables numbers down, which was a big impact overall on our working capital investment in the quarter.

Christopher Ceraso - Credit Suisse

Okay. Thanks a lot guys.

Operator

Thank you. Our next question coming from the line of John Murphy from Merrill Lynch. Please proceed with your question.

John Murphy - Merrill Lynch

Good morning guys.

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

Hi, John.

John Murphy - Merrill Lynch

If you look at the gross margin in the quarter of 14.6%. I mean it's been that's the strongest it has been in almost three years. And you guys have been working through some restructuring actions or rationalizations and clearly you have pretty good niche in the quarter. If we think about this going forward, I mean, should we thinking about there have been some structural fix in some of the restructuring efforts you have been taking or was it more of market dynamics and mix in the near-term?

Donald J. Walker - Co-Chief Executive Officer

When I look at the sort of second quarter and margin in particular what standouts is certainly the launches, the mix on key programs has been favorable. We have seen the benefits of restructuring, so that just continue and just should improve as those restructuring activities continue to generate some reduce expenses or additional profit for us.

Remember we also benefited from over 200 in the quarter, so that could reverse next quarter and the quarter at there after depending on our overall tooling revenues. But we are seeing across the company, I would say whether we look in North America and Europe, we are starting to see some improvements or just an one area it's pretty walk throughout the whole organization, it just been found as well, but generally we are seeing some upside we were in the company.

John Murphy - Merrill Lynch

Okay. And then if you think about Magna tires, you have some vehicles migrating out there, the biggest one being in the BMW X3, any update on what might be backfilling there and would… I mean this purely just sort of hypothetical, I mean would welcome Jaguar and Land Rover volume into the facility?

Donald J. Walker - Co-Chief Executive Officer

We don't have anything to announce at this point in time, we are working number of different programs where hopefully you can get some replacement, but until we… we obviously can't talked about. I will just say whether it’s anybody, Jaguar, Land Rover or anybody else if they have lower volumes or something unique about the vehicle for real drive or convertible or something that did well under their assembly operations and we can be competitive, especially we can help engineer the vehicle. So we will keep everybody focused on if an when there is something to announce.

John Murphy - Merrill Lynch

And then may be just a last question and little bit more longer-term, if we think about your sort of traditional connection to the Detroit three in particular the GM. I mean that's… you have very strong relationship there and it looks like the Russian deal is… Russian machine deal is an opportunity to grow into that market. But is that possible… you embrace GM Motor a little bit more closely as they grow globally and grow with them more globally in China and the rest of the world and tough to get into Japanese or penetrated Japanese manufactures?

Donald J. Walker - Co-Chief Executive Officer

I would say that all of our key customers we are working with them, specifically on global platforms, they want global suppliers, so they can have one company take the lead on engineering, tooling, optimization of supply. So, whether it be General Motors or Ford, BMW, or Mercedes, or anybody else, we are participating in China already. We have operations in Korea. We are working at continuing to try and get penetration from the Korean based automakers, Japanese based automakers. I think when you look at Russia, that’s a classic example of a lot of customers are going into the market. They typically start with knocked down vehicles and the… as they get more vertically integrated they need a supply base over there. We think there are good opportunities for everybody who we already do business with. We have the capabilities for new programs because it is a very, very undeveloped supply base over there right now.

John Murphy - Merrill Lynch

But Don, for a company even specifically like GM as they move to more of the global platforms. I mean does that create a larger opportunity set for you or addressable market as they head down that road?

Donald J. Walker - Co-Chief Executive Officer

Yes, that’s going to transfer the past many years. If you look at the number of vehicles are produced at that global platforms it has been increased every year. And that’s why when we look at where our footprints to be, we are looking at low cost facilities, so we can provide products globally if they are easy to ship. But we are also looking at depends who our key customers are, where we see them going with the global platforms. They happened to be in Brazil, Thailand, wherever. And then we will try and make sure we have facilities there that can support them in those areas or else develop joint ventures for them.

John Murphy - Merrill Lynch

Great. Thank you very much.

Operator

Thank you. Our next question coming from the line of Peter Sklar from Nesbitt Burns. Please proceed with your question.

Peter Sklar - BMO Nesbitt Burns

Thanks. I know you answered the question about the improvement in the operating performance of your North American operations looking year-over-year. But I was particularly interested in the quarter-over-quarter improvement. Was there any one thing that stood out, that would have caused such significant improvement versus the first quarter?

Donald J. Walker - Co-Chief Executive Officer

I think what stands out when I look at it is the launches and mix of our key programs. The mix was quite favorable for us in the quarter… quarter 2 versus quarter 1 and that… it helped our margin line as well as our bottom line.

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

Peter, if you look at the one… the base program that we are launching out there, allocate pretty strong quarter and I would say we will well cover further down the road in terms of efficiencies and the top program nearly all of them were up pretty strongly Q1 versus Q2.

Peter Sklar - BMO Nesbitt Burns

But you would have taken a big hit on the minivan, wouldn't you relative to the first quarter and that's an important platform for you.

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

That is right. But in terms of quarter 1, the minivan was negative quarter-over-quarter. There is a change overtaking place as we speak. But on that basis, when you look at launches and the mix of programs, overall, it was positive to us in the quarter.

Peter Sklar - BMO Nesbitt Burns

Right. Okay. Can you just talk through the tax rate? The tax rate--?

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

Sure. Do you want the Q2 to Q1, Peter, or other way?

Peter Sklar - BMO Nesbitt Burns

Yes.

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

More relevant. I think when you look at Q1, the rate was 29.1%, and we reported 30.7% in the second quarter. The biggest change, I would say, quarter-over-quarter is two things, one is losses not benefited. We were in a quarter… we were able to benefit more losses to our tax filings. So, that was positive. What hurt us was the mix of earnings and we were generating our earnings. We generated collectively more earnings in North America and higher tax jurisdictions. So, when you blend all of the rates in on a global basis, that just resulted in a higher effective rate.

Peter Sklar - BMO Nesbitt Burns

Thanks. And lastly, I am sure you have seen the reports that Deripaska reportedly has acquired a 5% interest in GM. And I am just wondering how Magna management… what your thinking is about that. Is there any… does that have any impact positive or negative on the potential transaction that you are about to do with him?

Donald J. Walker - Co-Chief Executive Officer

I am not sure what he owns. We were on the same thing, whatever, he has got in there I think he has probably earned it for a while. I don't know whether he is reached the top, but we are not predicting any information. I don't think it has any impact as far as he has got quite a bit of network. I am sure he has got many investments and I don't have a talk to him. So, I don't know what his plans are there. I don’t think it has any effect on our relationship with GM one way or the other, I don’t think it has any relationship on the proposed transaction. What ever you have is not an auto bill.

Mark T. Hogan - President

So, let me add something there, Peter. We think Oleg looks at GM and their potential on their upside and obviously there we have a working relationship with GM in Russia. So, our take at it is because of GM's expanding presence globally including in Russia and they can only see some upside with respect to GM as an investment.

Peter Sklar - BMO Nesbitt Burns

Okay. Thanks very much.

Operator

Thank you. Our next question coming from the line of Fadi Chamoun from UBS Warburg. Please proceed with your question.

Fadi Chamoun - UBS Warburg

Good morning.

Donald J. Walker - Co-Chief Executive Officer

Hi Fadi.

Fadi Chamoun - UBS Warburg

One question perhaps, Don… you have growing cash balance and then a lot of balance sheet to keep up with these, I am wondering if there is more willingness to step in perhaps in new technologies like diesel hybrids to improve the gross prospects.

Donald J. Walker - Co-Chief Executive Officer

Well, we have been looking at a hybrid strategy in hybrid diesel means a lot of different things to a lot of different people. I think the… we expect hybrids as an example to grow. I think there is going to be a lot of new technology. Its whether it be in the tower training side or the battery side like triple electricity generation driving the wheels of… so we are doing a fairly in depth analysis of what we have internally with the new emerging technologies. We think we will be winners. Two potential players are among their jointed partner with potentially looked at buying somebody. So, I would say given our product portfolio right now is an ongoing process we have been focusing on what product we think we are going to increase the most upside going forward. If it’s becoming more and more of a commodity, was it worthwhile just to stay in certain areas and where the growth there is.

So, I think acquisitions are also going to be interesting, a lot of people in the capital markets, looking at buying companies. I think we are in as good a shape as anybody else to actually take on an operation and improve the results. So, we have been focused quite heavily in the past year on, in new launches and in fixed and losing divisions and looking at product strategy hopefully in the next while we can specifically take on the depending outcome of this of the Russian teams. And triple as well I think that gives us some pretty big opportunities and I know that the leg is a picture some big opportunities to grow in some of those areas of Russia and India as well.

Mark T. Hogan - President

Fadi, just wanted to have a perspective and that's an opportunities. Given the tightening in the credit markets globally and our strong balance sheet and that with those who would more the manage looking at acquisitions today versus what we would have been seeing six to seven months ago.

Donald J. Walker - Co-Chief Executive Officer

Ant then one final comment is a bit unrelated. I think, we had a pretty good quarter. However, there is a lot of things going the right way. I think we are making headway in one of those areas. I still think this can be an extremely difficult industry, as a lot of people who were new to the industry, coming in with different strategies. They were getting big and having leverage over the customers which I don’t think that's how it works. I think expectations in value have been coming down to more reasonable levels and I think we are going to continue to see pretty major fall out, some of the suppliers in the industry, which I think will give us some opportunities to either take over the business or buy out assets even cheaper than the candidate.

Fadi Chamoun - UBS Warburg

Okay. Thank you. And on the dividend policy, it looks you went back to the older trend you had there. Is this how the way we should see it? And or is there more on the table is there more discussions that are being, taking place at the board level within maximum as far as where you would go with the dividend policy?

Mark T. Hogan - President

Fadi, as you know. We are… we have been on the road John and I and Louis and we heard from a number of our shareholders regarding our dividend policy and then we have been discussing our dividend policy at the board level. And what the board concluded yesterday was that the practice to move forward as what we were doing, I would say, a year and a half ago or two years ago where we and we set the dividend and growth and as earnings grow, we would promptly move up that dividend, do we have a board level, stream of dividend payments as opposed to a more erratic dividend payment that would have resulted from the dividend from available as we send it. But certainly, as the profits grow, there will be an increase in the dividend rate as accordingly

Fadi Chamoun - UBS Warburg

Okay. Thank you.

Operator

Thank you. Our next question coming from the line of Rich Kwas from Wachovia. Please proceed with your question.

Richard Kwas - Wachovia Securities

Hi, good morning guys. I wanted to ask about the manufacturing footprint in Europe and Vincent, or Mark, if you could, or Don, if you could comment on where you are with your footprint regarding Western Europe versus Eastern Europe and how comfortable you are with the current footprint and where you think you can go?

Donald J. Walker - Co-Chief Executive Officer

Yes, maybe I will address that. We have been over the past three, four, five, six years like everybody else in migrating our new capital investments where the new assembly plans tend to be being built, and where we need to be located for shipping other components into our core operations or into the car companies directly and more so, new investments for core manufacturing have been in low cost countries. So, our footprint in Europe has been moving. We still have liquidity operations in what would be considered high cost regions, both if we are doing assembly work or making large components, instant panels, bumper faces, seats that have to be shifted in adjacent time basis. Those will always have to be relatively close to the assembly plant. So, we are not where we would like to be from a footprint standpoint, but we are making headway. We have been making headway pretty consistently within the past number of years and we will probably continue that way. But I don’t think any… we’ll see any major shares and what we are trying to do is back fill the plants and employees in those what we consider higher cost regions with the bulkier products that have to be local to the assembly plants. But we will continue to see us have a shift in the lower cost footprint.

Richard Kwas - Wachovia Securities

So, Don, how long do you think it will take to get it to where you really wanted to be?

Donald J. Walker - Co-Chief Executive Officer

I think it will be in an evolving process probably forever because I think the next 15 years you are going to see more assembly plants from the current makers move low cost regions. So, as they continue to move with the supply base we’ll have to continue to move to support them. Having already done an analysis, but I would say we probably won’t see an increase in moving to low cost regions, its going to be, we will continue that to restructure some plants and I think most of our new capital for core manufacturing just goes into the low cost regions. So, it will be a gradual shift over time.

Richard Kwas - Wachovia Securities

Okay.

Mark T. Hogan - President

Yes Rich, don’t underestimate the impact of logistics too. I mean, there is a rush to go to low cost country for almost everything done to hit the nail on the head, I mean for most of our largest sub assemblies we want to be just in time and logistics is an ever increasing piece of the cost puzzle. So we are paying closer attention to that as our customers are.

Richard Kwas - Wachovia Securities

Okay. Thanks Mark. And then on… when you look at the rest of the year here, you obviously had a big tale win on the launches here in the second quarter, you’ve got the minivan ramping up and the Liberty as well here in the second half. How do you characterize the launches that really hit in the first half of the year and the momentum that you will see from that, and imbalance that would be with the minivan and the Liberty and some of the other stuff coming out later in the year, how do you think about… how should we think about that?

Donald J. Walker - Co-Chief Executive Officer

Richard, it’s very difficult for us to talk about the balance of this half, but some of the things you should be focusing on is overall volumes certainly in North America as well as in Europe. I think you need to look at our key platforms and what is there out performing or under performing general volumes, and that will give you some indication of where the results should be heading. Other than that I am not in a position to comment further.

Richard Kwas - Wachovia Securities

Okay. And then, finally Louis, on the Chevy Malibu that’s been… is redone here from GM, do you have content on that and if you do, is it higher than the previous version?

Louis Tonelli - Vice-President, Investor Relations

We have content on it. I am just trying to find it there. It’s not a significant program for us, the Malibu and the incremental content is not significant either.

Richard Kwas - Wachovia Securities

Okay. Great. Thank you.

Operator

Thank you. Our next question coming from the line of Ron Tadross from Banc of America. Please proceed with your question.

Unidentified Analyst - Banc of America

Hi, this is Jedon [ph] for Ron. Louis, Don, if you could perhaps give us some kind of due some more details on the European EBIT improvement was like $16 million, I guess just kind of similar improvement you saw in the first quarter. Can you kind of bring it up into like efficiencies in underperforming plants, the production, like what are the major factors?

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

So, I am just going to clarify the second quarter ’06 relative to second quarter of ‘07, I believe that’s your question.

Unidentified Analyst - Banc of America

Yes.

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

And there were a number of contributors, one is it certainly launches its benefited bottom-line year-over-year. We have seen some continued improvement at a number of underperforming facilities which has helped profitability. Some of that has been offset as well by a continued spending investment for electronics. Our cost to growth in Russia, we are spending some money right now on some programs that we are expensing our costs in higher price concessions. We are looking at the performance year-over-year we have seen some improvement in our insurance facility that’s been a high focus for us. But generally there is been growth in every group in Europe. But it launches improvement for performers and just the offset that I talked about.

Unidentified Analyst - Banc of America

Okay. And on your production assumption we have in the whole lot like two or three days we saw GM, Toyota and Ford kind of cut their sales estimate by about probably 300,000, 400,000 units and we are seeing production coming down. Your production has been coming down to 100, is it because you were conservative in the first place or you think that more risk?

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

When I look at North America where we started at the beginning of the year, we were assuming $15.5 million to production. Our most recent outlook is $15.2 million, so we have trimmed overall production estimates by 300, 000. We may have also been just from the start look the market serves it than from the other numbers. But we have been bringing our numbers down as well.

Unidentified Analyst - Banc of America

Okay. And lastly…

Mark T. Hogan - President

We don’t… we do our review based on what we see and what’s been in the sales in the last couple of months and see it some risk there to put a stake in the ground.

Unidentified Analyst - Banc of America

Okay. And lastly on… I know its too early, probably early but the recent management change, as the prices any initial thoughts?

Donald J. Walker - Co-Chief Executive Officer

I would say that there’s been a number of changes in the working levels since the announcement about the sale to service, the most recent one obviously with the in the CEO position. I think it’s too early to tell. Part business is very interesting business. It’s a very long-term; we have short-term pricing pressure in the business. However, it’s not like you have parts that can be moved overnight. We are not like the car comes up and we have been extremely aggressive. You look at the falls supply in the base. It will be interesting to see for all the car communes including Chrysler going forward, who they align themselves with, what’s your strategy for Chrysler into the back half. What their strategy on spending money for new platforms so I think it’s too early to tell. I think we are obviously very supportive of Chrysler and we always have been. We want them to do well like all of our other customers and we think we have got some good technologies.

But that’s a long-term solution, if you have a long-term banker is to spend money in the right platforms, get the right technologies and from a supply base, suppliers are healthy and can provide you with consistent parts and are healthy enough to try and use their energy in the next phase to drive the additional cost to the component. Continual price structure I think we are already squeezing hard as we can from deal everybody. I think there is got to be a better solution going forward.

Unidentified Analyst - Banc of America

Okay. Thank you.

Operator

Our next question coming from the line of David Tyerman from Scotia Capital Market please proceed with your question.

David Tyerman - Scotia Capital Market

Good morning. Since you mentioned the mix in North America was unusually good in the quarter and none of them quoting the rate but something along that line. Do you se that like having off like there was it just a really strangely good in Q2?

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

Hi, I didn’t actually use the word unusually good, I just we had a good mix in the quarter. And if you go back over number of years, some quarters were better than others. And in terms of the mix we talked about the, certainly the 900 pick up. The positive, the 900 SUVs of the negative… I talked about Chrysler Minivan and a changeover that has impacted us negatively. But the F-Series Super Duty for example the Ram pickup. The Impala, the Wrangler that all contributed to positive mix and a lot of that is just launches as well. You are going to have a view as well as to some of our key platforms as to how they are going to do. I will have a crystal ball view of exactly what each one of those units is going to produce in the next 6 months, but we are certainly pleased with the mix we’ve seen in the first quarter and the second quarter this year.

David Tyerman - Scotia Capital

All right. Guess what I am driving out is the 3.7% sequential increase in North American EBIT when tooling is up sequentially as the huge increase and am trying to sort out how much of this is sustainable and how much isn’t.

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

David, keep in mind there are some other things that are impacting the quarter as well. We are seeing some restructuring benefits and that should continue. And some of the launches, the Ford Dodge for example the 250, and land by the X5 and the Wrangler. As we are moving up the launch curve, Don sustain themselves, that should be sustainable.

David Tyerman - Scotia Capital

All right. It sounds like your margins can move very fast which is quite something. Anyway, you did mention two plants still having problems, Syracuse and the U.S. interior facility. I was wondering if you can give us some idea of how big this problem is, what exactly is going wrong in those two plants, and the prognosis.

Donald J. Walker - Co-Chief Executive Officer

Yes. I am not going to give too much detail. In the interiors business we have a couple of…. we have a couple of launch divisions which weren’t particularly pointed a little bit there, once in ramp up and one is just getting ready for launch. It has been hitting the bottom line. We have one facility which we had to make the decision to down size, and basically move the business front and that has been pretty costly for us. But the interiors business, we’ve talked about in the past, is just a very difficult business and nobody is making much money. I don’t see any short-term solution to turning around other than operational improvements, and realigning their actualization. In the power train business, we had a couple of different challenges in the quarter, in the first half, some of the launches. In Cherokee specifically, it’s a very large plant. It’s… it’s got a much higher cost base than other areas we have been working on continuous improvement in there. Looking at streamlining what we are competitive in and what we are not competitive in. They have… there’s a lot of discussions going on with the UAW right now, with the car companies we also have some contracts coming up. So, we have been looking at the overall operations. What we need to do from a purchasing standpoint, from a structural standpoint, from an overhead standpoint and from a benefit standpoint to continue to win business, and we just need to get more business in there. Streamline the operations and realign our overheads. So, Utility is a big focus for us. It… we will keep you posted as to how we are going to… we have lot of continuous improvement activities in that facility as well. It is a very large facility.

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

David, I also wanted to add is that is as part of this review at Syracuse and manufacturing operations we have identified various unrealized machine equipment and that led to the $22 million impairment charge in Syracuse. So it’s an ongoing process that we are undertaking at that facility.

David Tyerman - Scotia Capital

Have both these areas deteriorated in the last year is that the idea here?

Donald J. Walker - Co-Chief Executive Officer

Well, I don’t think the Syracuse facility on a year-over-year basis, I would say that our performance has deteriorated. Sequentially, we are seeing some improvements. There was some launch inefficiencies in the first quarter as we were ramping up for the GMT 900. But quarter-over-quarter there has been substantial deterioration. With respect to the interior facility that Bob mentioned, we are in a restructuring mode. We are moving business around. It’s been costly; it’s going to continue to be costly for the next quarter or so. But, again we should see some benefits with that restructuring at some point in the later part of ’07 or beginning of ’08.

David Tyerman - Scotia Capital

Okay. But last question I had, your corporate and other, it’s down a lot. I know you have to start the compensation thing in there. But even if you add that back you have normally been running $20 million to $25 million a quarter, and then you were closer to $10 million. Is there some change there or was… I am just wondering where we are going on that.

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

There are a couple of… I would say one-time items that impacted us in the quarter. One was the restricted shares which we talked about the stock competition costs which was about $10 million. In the quarter, we also booked some consulting fees as an expense relating to our global purchasing initiative. And that’s certainly been a big benefit of the privatizations as we now work together as one company to leverage our global buy. So, we have fixed that consulting costs in the quarter that hit the corporate line, not the divisional results. So, that should go away or will go away in the third and fourth quarter.

David Tyerman - Scotia Capital Markets

Okay so does that mean you will revert back to more normal then?

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

Right.

David Tyerman - Scotia Capital Markets

Okay. Great. Thank you.

Operator

Thank you, our next question coming from the line of Nick Morton from RBC Securities. Please proceed with your question.

Nicholas Morton - RBC Capital Markets

Good morning. I was wondering if you can talk about the regulatory conditions for the Russian machines investment. I think there is anti trust approval required in Canada and Europe and I was just wondering how that stands now?

Donald J. Walker - Co-Chief Executive Officer

Actually we have Jeff Palmer in the room. Why don’t I have Jeff answer that?

Jeffrey O. Palmer - Executive Vice President

U.S., Nick, there was no issue at all. There was no filing required. In Canada, We received an advanced certificate from the competition authorities, clearing the transaction, confirming that there is no anti-trust issue. And there are a number of filings that have been in Europe and other countries, specific filings. Again there’s no overlapping in the operations between Russian Machine, they are basic elements in Magna. So, there’s no substantive issue that we are expecting that can possibly hold up the deal. But there are routine filings and we expect those more or less to be completed sometime in September.

Nicholas Morton - RBC Capital Markets

Great. Thanks very much. That was my question.

Operator

Thank you. Our next question coming from the line of Pat Archambault from Goldman Sachs, please proceed with your question.

Patrick Archambault - Goldman Sachs

Yes, good morning. Just on the dividend. I just wanted to know how much of the change in dividend policy that you guys put in place was a reflection of better fundamentals going forward you come here… your greater comfort with the cash position or know how much of it was really just reflecting the interests from share holders who wanted you know a different value proposition.

Mark T. Hogan - President

I think it was a number of things, we have come off a disappointing Q3 last year and Q4 and the Board had its discussion I remember that was about in January. There were a lot of discussions about where is the industry going and there was a discussion about where we because we were paying a consistent amount compared to the corporate constitution. We were over paying the corporate constitution because we… because our results were down and there was a lot of nervousness. And the final decision was to reduce the demand and cut it in half. And then going forward, we have talked to, since that time we have talked to a number of different shareholders who encouraged us to go back more to the way we were before. We had a number of discussions at the Board. The results in Q1 were more inline than we would have expected and Q2, you have seen the results there. So, the discussion was, I would say based on comfort level of the results and certainly feedback from shareholders I think.

And on a go forward basis assuming the Russian machine deal is completed we have some new brackets and also have the, I guess the view point of ’08 in there as well with a significant number of shares. I would expect the thought process of somebody who has got that number of shares will probably be more inline with our A class shareholders. So, I think there’s… it’s a combination of a number of different things. And then going forward until the deal gets done we are probably have more decisions that are in line with let’s say the majority class shareholders.

Patrick Archambault - Goldman Sachs

Okay, great. And we have talked a decent amount about the sustainability or potential of sustainability in the North America margins. Just wanted to touch on Europe a little bit more. Obviously you had a pretty substantial increase there. I was wondering about the seasonality issue. We have had a couple of companies really shoot up the lights in that region. Let’s say that you know that seasonal factors in the back half would make it unwise to sort of carry forward the performance from the first half, and just wanted to get your take on that especially seeing as you haven’t really broken it out for a long period of time, so you don’t have much history to go off in that front?

Mark T. Hogan - President

Pat, in fact you look at our global business historically, when you look at the third and the fourth quarters, the margins are depressed. The third quarter in North America typically… typically shutdown in July in Europe. The shut downs are typically July, August and in fourth quarter we have the question of Christmas break. So, that tends to have a negative impact overall on the results. And so it is the typical nature of the business but that’s pretty normal.

Patrick Archambault - Goldman Sachs

Yes. But would you see it as more pronounced in Europe I mean consumers themselves take like almost the entire summer off?

Mark T. Hogan - President

It’s got to depend in part really on the shelves mix, I don’t necessarily have a view on that in our business.

Patrick Archambault - Goldman Sachs

Okay. I will leave at that. Thank you.

Operator

Thank you. Our last question coming from the line of Brett Hoselton from Keybanc. Please proceed with your question.

Donald J. Walker - Co-Chief Executive Officer

Brett?

Brett Hoselton - Keybanc Capital Markets

Good morning gentlemen.

Mark T. Hogan - President

Good morning, Brett.

Brett Hoselton - Keybanc Capital Markets

I apologize I had the mute button on. Syracuse, can you give us sense of at the UAW facility as I understand it, can you give us a sense of the number of employees at that facility? But more importantly when does the contract, or can you talk a little bit about the contract the timing of the contract, when it expires and what your expectations might be, in terms of changes in that contract and so forth?

Mark T. Hogan - President

Brett, just roughly it’s about 3,000 people. It is… it was a master contract plan. We have negotiations going on right now. So, I am not going to comment on it. We had a, I would say a very open and good working relationship with the people in the plant. I think its no secret that there is a lot of restructuring going on, if you look at what’s happen in Delphi, and at the end of the day, if any facility is not competitive and not winning new business, and everybody there, the management, everybody in the shop to understand that. So, we are working well together on continuous improvement ideas and better uptime for equipment. We’re looking to put in some new capital in there. But again today, we need to align our cost with the competitors according to the market place with a lot of expertise there. But I would say generally, we need to make headway in a number of different areas. Some of them are commercial, discussed with their customers, overhead cost in the plants, efficiency in the equipment. So, there is a number of different fronts where working on. Some of those need the leadership and then the decision making from the union. And those are discussions we are having right now, and quite frankly we can make some improvements in how we run some of the operations and plan to work on the. Right, now it’s too early to tell because we are just in the middle of discussions.

Brett Hoselton - Keybanc Capital Markets

So does the contract expire September as does the automakers contract?

Mark T. Hogan - President

Yes, in September, yes. I think I don’t exactly but in September timeframe we are having discussions right now.

Brett Hoselton - Keybanc Capital Markets

And Vince, can you just remind is your non-consolidated sales, just a quick feel for the what the amount is and then kind of the regional mix in non-consolidated sales?

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

Are you in the joint venture sales or the equity kind of sales?

Brett Hoselton - Keybanc Capital Markets

The equity sales?

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

The equity sales are primarily in North America. And just in terms of magnitude of sales?

Brett Hoselton - Keybanc Capital Markets

Yes.

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

Do you know what Brett, let me get back in to our financials of last year, I don’t have the number on my heads.

Brett Hoselton - Keybanc Capital Markets

And then John, just kind of conceptual question for you, we went to a meeting with General Motors yesterday. They were talking about their expansion into Russia, their access into market sounds like through Daewoo their facilities in Korea. Kind of just conceptually if you are tying up with some of these Russian automakers who clearly have a dominant market share in that market for the period you are loosing market share, I guess do you see yourself as tying yourself closely with couple of larger players with out the market share but are likely going to lose market share. Or do you see that potentially limiting your ability to gain market share with the General Motors who are kind of accessing it through Korea and/or Toyota who you obviously have to challenge in turn to giving, gaining market share with. How do you see yourself expanding in Russia with the major players currently there versus the other players growing?

Donald J. Walker - Co-Chief Executive Officer

Actually I don’t see anything exclusive. I actually see the… everybody is looking for a good supply base there. Somebody who has got some… they have to obviously be cost competitive, but somebody who has got good quality, is willing to spend some capital and put some expertise on the ground and management. There are some good suppliers there now but they are… everybody sort of in the infancy while in the venture will pass the supply date. So, our strategy there is that we can get and not content and get facilities built by providing parts and working with BAZ and GAZ these are the two dominant car companies. And I just want to be through engineering new product and helping them get good margins and parts in the market. Once you have got that infrastructure set up everybody’s looking for a good supply base. Like every other emerging company in a new emerging company once the supply base is there you can get some competitive quotes to come through with they will source more and more locally.

So, we have got lot of discussion, we have going to be competitive, obviously. But we believe if we have got a strong partner and help us through all things that we may not be aware of to get setup over there or help us find good management train them and get critical mass in Russia. I would expect to get a very large percentage of the win over large percentage of the quotes that are coming in from all the car companies because they’re only local suppliers. So, I can’t see being with anything other deal that will help us when the sense because they know that we’re there to stay and we’re going to be a big supplier.

Brett Hoselton - Keybanc Capital Markets

Very good. Thank you very much gentlemen.

Donald J. Walker - Co-Chief Executive Officer

Okay. Thank you that was the last question. I would like to thank everybody for joining us today. I said earlier, we are pleased with the second quarter, particularly given the automotive environment in North America. We will continue to focus on things under our control that further improve operations across the Company. We specifically urge all share holders to consider the content on the circular we mailed out last week. And the voting plan of arrangement is an extremely important matter for the future of Magna and all of its shareholders. So, thank you again and enjoy the rest of the day.

Operator

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. Have a great day.

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Source: Magna International Q2 2007 Earnings Call Transcript

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