Magna Intl Earnings Call Insights: German Interiors Plant & N. America

On Thursday, Magna International Inc. Class A (NYSE:MGA) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what executives shared with investors and analysts.

German Interiors Plant

Peter Sklar – BMO Capital Markets: On the German interiors plant that you’re buying back, I was quite surprised to see that given that you just paid $100 million last summer, last fall to get rid of it. So I’m just wondering if you could elaborate a little more on why you’re doing it, what you’re getting in return, and you also indicated that notwithstanding that you’ve gotten repricing, you do expect ongoing losses for three years. If you could give some order of magnitude of what the loss rate is

Vincent J. Galifi – EVP and CFO: Peter, I think both Don and I will try to attempt to answer your question. Just in terms of the numbers, $109 million that we expensed last year related essentially assets that we transferred to the business including cash and the assumption of certain liabilities. And subsequent to that we did reach a commercial settlement with one customer essentially to cancel a program, and those costs were significant and the facility was (experiencing) significant losses. It was ramping up some new business and there was a whole bunch of issues including some pricing matters. As Don talked about in his formal comments, to make a long story short, it’s been reacquired and we do expect some losses going forward. We’re going to focus on trying to minimize those losses and get them as closest to breakeven as possible, but there are some changes that have taken place. First is, the contract that was canceled last year where we had to reimburse the customer, that contract is gone. We’re not going to continue production of that contract in the facility that we’re reacquiring. In terms of working with our customers, I think just some realization that pricing was inadequate and we’re having some price relief on a number of programs. We’re hoping to (attain) some more. But when you add all that up we are expecting some losses and we’re going to continue to plug away at that and improve operations and try to reduce the losses over time.

Donald J. Walker – CEO: Peter, it’s Don. It was a carpet business. It wasn’t strategic. Carpet is not strategic for us for any one area. It didn’t really have any real technology. So we sold it to a competitor who was interested in the business, who’s in the carpet business, and we thought would be a good choice to continue with that production. At the end of the day they run into financial difficulties. Customers approached us to look at taking it over again, which wasn’t our first choice. However, we don’t want to be letting our customer down and we don’t want them to be disruptive with supply. So we tied in a lot of discussions – we’ve had a lot of discussions in a number of areas on pricing over there; this product and other product. So, we came to conclusion on a number of areas and as part of that we agreed to take it back. I don’t have an accurate estimate of the losses quite frankly, because we’re just getting back into it now. I know what the pricing improvements are in that division. Some of the pricing improvements are in other divisions. Some of the pricing improvements are in other divisions, and we need to just get on top of where we are operationally. So, we’ll have a better viewpoint, I would say, in the next couple of months. Certainly, it’d be less than it was before though.

Vincent J. Galifi – EVP and CFO: Peter, our revised outlook that we disclosed earlier on today reflects the reacquisition of this facility at some point in the second quarter.

Peter Sklar – BMO Capital Markets: And I know, Don, you just said you’re not in a position to talk about the loss rate, but can you give – and – like I mean, is this going to be tens of millions of dollars a quarter, or you have any kind of boundaries on this?

Donald J. Walker – CEO: Yeah, we had talked about in the past how much we’re losing there. It wasn’t the biggest loser of three. We were (crocking). It was losing money. It’s going to be less than we were losing before, and obviously, we’ll reconsolidate this whenever we take it back in Q3, Q4. We need to get in and just understand the complete impact of the price increases, where we are on restructuring, what they’ve done with labor. So, we have a pretty good view on it, but I don’t know exactly, yeah, where it’s going to be, but it’s not going to be – it’s not going to be a huge loser over there, but it’s going to lose money until we get our arms around it.

Vincent J. Galifi – EVP and CFO: Peter, just to clarify, we’re expecting to reconsolidate this in Q2 of this year.

Peter Sklar – BMO Capital Markets: Okay, and what’s the effective date? You get a full quarter of this or a partial quarter?

Vincent J. Galifi – EVP and CFO: Yeah, well, we’re still waiting for antitrust approval; I believe in one jurisdiction. We have some antitrust (indiscernible) receive. So, it really depends on timing of that. So, we’re kind of in the middle of – almost the middle of May, and we don’t have that yet. So, maximum might be a month and half.

Donald J. Walker – CEO: Yeah, but by Q3 it will be fully in.

Peter Sklar – BMO Capital Markets: Okay. Just moving on to another issue, in your guidance, as you pointed out, your operating margin guidance improved. And I’m just wondering, what’s underlying that, was it volumes, was it mix, there’s a more or less tire volume going on. Can you talk about what underlies the improvement in the guidance on margin?

Vincent J. Galifi – EVP and CFO: There’s going to be a number of moving pieces that are going to impact margin, one of its going to be volumes and mix globally, the other is going to be the improvements in underperforming operations sort of where we think we’re going to be now versus where we before. Launch costs for new programs, when you add it all up we’re expecting for the balance of the year improve operating margins, which is reflected in our latest outlook this morning.

Peter Sklar – BMO Capital Markets: And then just lastly, I wanted to ask you about the outlook for your rest of world segment. It did report a small operating loss during the quarter. I know you’re launching a lot of businesses there. Well, things really seem to have fallen off in Brazil in terms of the auto industry volume. So, is the outlook there for continuing losses as we proceed through the year?

Vincent J. Galifi – EVP and CFO: I can talk of the situation in Q1. We’ve got a number of new plants, which we’re launching in Asia, primarily China, so that’s obviously – we’ve still got some very good operating divisions over there, but we’ve got to get to the launches. In Brazil, a couple things happened. We’re launching a number of greenfield (indiscernible) and made an acquisition in seating last year. So we’re having some issues in Argentina, just getting the inflation and discussions with the customers about getting reimbursement for those, which historically been the case. We’ve also got some new plants been launch and seeding and we acquired ThyssenKrupp, and we’re just digesting that as well. So, I’m disappointed in what I see quite frankly in Brazil in the quarter. We’ve got lot of actions in there, but what we’re seeing over in Asia is the expected growth slowing down a little bit from what we expected to be, but overall we’re sort of we’ve got a really good plan over there.

Donald J. Walker – CEO: Peter, we overall for rest of the world segment, we’re – our (best estimates) show that we’re going to be profitable or expect to be profitable in that region for 2012. So given our results in Q1, our expectations have come down versus where they were (a year ago), but we’re still expecting the number to be in the block.

Content per Vehicle in N. America

John Murphy – BAS-ML: A couple of questions to follow up on Peter’s inquiries (indiscernible) business. I mean in some ways we can interpret the situation as you being tethered to these underperforming businesses and not being able to get away, but you could also interpret it as the automaker is seeing you as a really strong partner and that nobody else can operate it the same way as you can. So it seems like your could kind of push this in one direction or the other as far as the interpretation. How would you guys view this situation? Do you feel this like you’re coming in and really kind of saving the say for the customer or you just can’t get away from this tough business? I’m really just trying to understand how to interpret this.

Donald J. Walker – CEO: Actually it’s a probably a good interpretation. I’d say it’s a bit of both. As I said, it’s not a strategic product area for us because we’re not big in (carpeting). However we were giving to somebody who we thought would be able to do better than us and didn’t turn out that way. I don’t really know what happened to operations. We weren’t part of it and at the end of the day we don’t want to be seen by our customers as saying we’re just going to give business away to somebody who can’t support it. That was not the intent here. It was a carpeting supplier. There’s not that many people who are that healthy quite frankly in the carpet business, so it’s part of these dialogs. We were – as for the customer, would we consider taking it back. They are looking at this and saying, we should be getting fair prices because we’ve underpriced products, they recognize that, there’s some raw material increases. And in fact, we need to figure when we do long-term about – a couple of them have asked where we actually increased, what we’re doing in the carpet because they want a good healthy supplier which we’re evaluating right now. If we do, we obviously need to make sure we can make money at that. So, I’d say it’s a little bit of both. We have to make money where we’re producing product; however, we want to have a good relationship with our customers and we don’t want to leave them hanging either and that’s not our intention. If we were going to exit a business it’s got to be to a good supplier which will look after our employees and look after the contracts as well.

John Murphy – BAS-ML: That’s helpful. Second question just on the content per vehicle in North America; looks like it was down about 6% to about $900 or just under a $1,000. So just curious, is that purely because of mix or was there something else going on there; just trying to really understand why we saw that content per vehicle go down?

Louis Tonelli – VP, IR: John, it’s Louis here. You know, we don’t really measure content per vehicle any more, but if you’re doing the calculations for content, it was essentially a negative mix; negative mix and the balance-out of some programs that drove content down.

John Murphy – BAS-ML: Is that because of the Japanese where the bulk of the increase or increased more, or was there something going on in the…?

Louis Tonelli – VP, IR: Yeah. No, that’s exactly what it is. It’s a mix of our customers.

Vincent J. Galifi – EVP and CFO: John, I think when you look at our top programs in North America, the volumes, as we talked, it was over 17% quarter-over-quarter, but when you look at our top programs on a revenue basis or a unit basis. They were only up 10%. Again, depending on what content we have and all that. That means we had negative mix, and the Japanese had a strong quarter year-over-year. We understand why that’s the case. The Europeans had a very strong year. (The European OEMs) had very strong quarter and so the (indiscernible). But GM and Ford year-over-year were down.

John Murphy – BAS-ML: Okay, and then on the SG&A, the $13 million that’s coming in for the two smaller acquisitions, is that the kind of cost that you believe that you can work down and would be pretty good; synergies, or is this $13 million incremental in SG&A a real sticky number that we should be modeling in?

Vincent J. Galifi – EVP and CFO: Well, I think you need to model in some additional SG&A as a result of the acquisitions. We are acquiring facilities, we do have sales, we do have some overheads, we’re hoping over time that as we start to better integrate these acquisitions that we’re able to reduce overall SG&A cost, but there will be incremental cost as a result of adding more facilities via acquisitions.

John Murphy – BAS-ML: Okay, and then lastly, I just wonder if you guys could quote, you talked about the new business quoting and if you’re seeing a real pick-up there because it seems like there’s a lot of new product launching, you’re getting into new markets; just curious how quoting activity is in general relative to last year or the last couple of years?

Vincent J. Galifi – EVP and CFO: John, when we look at business awards in the quarter, it was at a pretty healthy cliff. I wouldn’t say it was – I’m not sure it was at a record level. It really depends on the timing of programs, but as we look (forward) to programs that we were actively pursuing, there is a tremendous amount of activity.

Donald J. Walker – CEO: Yeah, it’s a lot of outstanding quotes right now. There’s a lot of activity.

John Murphy – BAS-ML: And I mean is that a lot more than last year or the last couple of years or is it similar to sort of prior peaks? Just trying to gauge the relative activity?

Donald J. Walker – CEO: I can’t remember specifically, but I know right now, if you look at our outstanding quotes, it’s higher than it was in this quarter last year. I can’t remember…