Magna International Inc. (MGA) Q2 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Magna International Second Quarter 2013 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded Friday, August 9, 2013. I would now like to turn conference over to Don Walker, Chief Executive Officer, Magna International. Please go ahead.

Thank you. Good morning, everybody, and welcome to our second quarter 2013 conference call. Also on the line today is Vince Galifi, Chief Financial Officer; and Louis Tonelli, Vice President, Investor Relations. Yesterday, our Board of Directors met and approved our financial results for the second quarter ended July -- sorry, ended June 30, 2013. We issued a press release this morning for the quarter. You will find the press release, today's conference call webcast, our updated quarterly financial review and the slide presentation to go along with the call all in the Investor Relations section of our website at www.magna.com. 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 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, we're very happy with our performance in the second quarter with the best-ever consolidated sales and profits. And each of our North American, Europe and Rest of World segments reported stronger total sales and improved earnings year-over-year. In North America, we continue to have good results with an EBIT percent, excluding E-Car amortization, of 10% for the second quarter. In Europe, our progress is steady with a solid reported adjusted EBIT of $120 million in Q2. It's taken a lot of hard work, and there's certainly more to come, but we are headed in the right direction in Europe. We continue to expect improved earnings for the full 2013 compared to 2012 in our Europe segment. In the Rest of World segment, we reported a small profit for the quarter and expect to be profitable for the year. Asia continues to perform in line with our expectations. And South America, while generating a loss, has shown year-to-date improvement in EBIT compared to 2012. We received 2 notable awards from our customers recently. We were given the Supplier Innovation Award from BMW for outstanding achievements in innovation and development. Specifically, our Cosma operating unit was recognized in the area of lightweight construction for our part made of dye cast aluminum. A number of our operating units have developed and are developing innovations in light-weighting, a key trend that we expect to continue to benefit in the years ahead. And we were also given a top supplier award in the Global Champion category from Volkswagen for outstanding achievements in entrepreneurial performance and swift support from Volkswagen in emerging markets. Magna was acknowledged for its flexibility and fast response times in Russia and for transferring high-quality standards and technologies to markets outside of Europe. I'm pleased with our continued expansion outside of our traditional markets as we bring many of our best-in-class capabilities to these new markets to serve our customers. With that, I'd like to pass the call over to Vince.

Thank you, Don, and good morning, everyone. I would like to review our financial results for the second quarter ended June 30, 2013. Keep in mind that all figures discussed today will be in U.S. dollars. In the second quarter, our record consolidated sales increased 16% relative to the second quarter of 2012 to just under $9 billion. North American production sales increased 10% in the second quarter to $4.3 billion, reflecting in part a 7% increase in vehicle production to 4.3 million units. In addition, the increase is a result of the launch of new programs and acquisitions completed during or subsequent to the second quarter of 2012, including STT Technologies. Partially offsetting these were programs that ended production during or subsequent to the second quarter of 2012, the weakening of the Canadian dollar against the U.S. dollar and net customer price concessions subsequent to the second quarter of 2012. European production sales increased 14% from the comparable quarter, while European vehicle production declined 1% to 5 million units. The increase is primarily a result of the launch of new programs, acquisitions completed during or subsequent to the second quarter of 2012 substantially related to ixetic and the carpet business and the strengthening of the euro against the U.S. dollar. These were partially offset by lower production volumes of certain existing programs. Rest of World production sales increased 38% or $157 million to $572 million over the comparable quarter, primarily as a result of new programs launching, particularly in Brazil and China, during or subsequent to the second quarter of 2012 and higher production on certain existing programs. This was partially offset by the net weakening of foreign currencies against the U.S. dollar, including the Brazilian real and the Argentine peso. Complete vehicle assembly volumes increased 17% from the comparable quarter, and assembly sales increased 23% or $151 million to just under $800 million. The increase largely reflects the launch of the MINI Paceman in the fourth quarter of 2012, an increase in assembly volumes for the Mercedes-Benz G-Class and the strengthening of the euro against the U.S. dollar. These factors were partially offset by lower assembly volumes for the MINI Countryman and Peugeot RCZ and the end of production of the Aston Martin Rapide in the second quarter of 2012 at our Magna Steyr facility in Austria. In summary, consolidated sales, excluding tooling, engineering and other sales, increased approximately 14% or just over $1 billion in the second quarter. The increase reflects higher production sales in North America, Europe and Rest of World, as well as higher complete vehicle assembly sales. Tooling, engineering and other sales increased 43% or $222 million from the prior year to $733 million. The large increase relates to sales on a number of programs. Gross margin in the quarter increased to 13% compared to 12.7% in the second quarter of 2012. The increase in gross margin percentage was essentially due to margins earned on higher production sales, incremental margins earned on new programs that launched during or subsequent to the second quarter of 2012, the closure of certain facilities, lower costs incurred in preparation for upcoming launches and productivity and efficiency improvements at certain facilities. These items were partially offset by an increase in tooling, engineering and other sales that have low or no margins, an increase in complete vehicle assembly sales, which have a higher material content than our consolidated average, programs that ended production during or subsequent to the second quarter of 2012, our larger amount of employee profit sharing, increased pre-operating costs incurred in new facilities, favorable settlement of certain commercial items in the second quarter of 2012, the reacquisition of the carpet business in the second quarter of 2012 and operational inefficiencies and other costs at certain facilities. Magna's consolidated SG&A as a percentage of sales was 4.6% in the second quarter of 2013. That's less than the 4.8% recorded in Q2 2012. SG&A increased $42 million to $410 million in the second quarter of 2013 primarily due to increased costs incurred in new facilities, acquisitions completed during or subsequent to the second quarter of 2012 including ixetic, E-Car and STT, higher incentive compensation, higher labor costs, an increase in reported U.S. dollar SG&A related to foreign exchange, the recovery of due diligence costs in the second quarter of 2012 and a $5 million net decrease in revaluation gains in respect of asset-backed commercial paper. These factors were partially offset by a loss in disposal of an investment in the second quarter of 2012 and lower restructuring and downsizing costs. Our operating margin percentage was unchanged at 6.1% in the second quarter of 2013 compared to the second quarter of 2012. In Q2 2013, EBIT includes $40 million of amortization associated with the E-Car transaction or about $31 million after tax. This amounts to 0.4% on the operating margin percentage for the quarter. Excluding this amortization, our Q2 operating margin percentage was 6.5% compared to the 6.1% last year. This increase primarily relates to the higher gross margin percentage and lower SG&A percentage, partially offset by the higher percent of sales for depreciation. In Q2 2013, our effective tax rate declined to 24.1% from 25.7% in the comparable quarter of 2012. This is primarily due to a decrease in losses not benefited in Europe, partially offset by a change in mix of earnings whereby proportionately more income was earned in jurisdictions with higher tax rates. Net income attributable to Magna increased $66 million to $415 million for the second quarter of 2013 compared to $349 million in the comparable quarter. Diluted earnings per share were a record $1.78 compared to $1.48 in the second quarter of 2012. Diluted earnings per share were negatively impacted by $0.13 as a result of the amortization of the E-Car intangibles. Excluding the E-Car amortizations, diluted EPS would have been $1.91. The increase in diluted earnings per share is the result of an increase in net income attributable to Magna and a decrease in the weighted average number of diluted shares outstanding during the quarter. The decrease in the weighted average number of diluted shares outstanding was primarily due to the repurchase and cancellation of common shares pursuant to our normal course issuer bids and the cashless exercise of options, partially offset by the issue of shares related to the exercise of options and an increase in the number of diluted options outstanding as a result of an increase in the trading price of our stock. During the quarter, we've purchased 5.2 million common shares under our existing normal course issuer bid, which expires in November of this year. We have room to purchase approximately an additional 4.8 million shares under this bid, and we intend to continue purchasing our shares up until November. I will now review our cash flow and investment activities. During the second quarter of 2013, we generated $714 million in cash from operation prior to changes in noncash operating assets and liabilities and invested $12 million in noncash operating assets and liabilities. For the quarter, investment activities amounted to $285 million comprised of $232 million in fixed assets and a $53 million increase in investments and other assets. Yesterday, our Board of Directors declared a quarterly dividend of $0.32 per share with respect to our common shares. The dividend is payable on September 16 to shareholders of record on August 30, 2013. Our balance sheet remains strong with $915 million in cash net of debt as of June 30, 2013. We also have an additional $2.2 billion in unused credit available to us. Now I'm going to pass the call over to Louis.

Thanks, Vince. Good morning, everyone. I will review our updated 2013 full year outlook. I will only provide a summary of our outlook since we covered the details of our revised outlook in our press release. With respect to our vehicle production expectations, we now expect 2013 North American light vehicle production to be approximately 16.1 million units compared to 15.9 million units in our May outlook. We expect 2013 total European light vehicle production to be approximately 18.6 million units compared to 18.4 million in our May outlook. Increases in both our North American and European forecasted light vehicle production substantially reflects the higher-than-anticipated second quarter production. The increased annual North American and European vehicle production assumptions are expected to lead to increased production sales in both markets. Our Rest of World production sales and complete vehicle assembly sales expectations are unchanged from our May outlook. As a result, we expect total sales to be in the range of $33.3 billion to $34.7 billion compared to a range of $32.6 billion to $34 billion from our May outlook. At the low end of the range, this would represent record sales for Magna. We expect our consolidated operating margin percentage, excluding $158 million of amortization of intangibles related to the acquisition of E-Car, to be approximately 5.8% compared to our previous outlook of margin in the mid to high 5% range. We expect our effective tax rate to be approximately 23.5%, down slightly from approximately 24% in our May outlook. And for the full year 2013, we continue to expect fixed asset spending to be approximately $1.4 billion. Lastly, our expected restructuring costs for 2013, which are entirely related to our European operations, are unchanged from our previous communication at $100 million. So substantially all of the restructuring costs will be recognized in the second half of 2013. That concludes our formal remarks. Thanks for your attention today. We'd be pleased to answer any of your questions.

[Operator Instructions] Our first question comes from John Murphy, Bank of America Merrill Lynch.

I just wanted to focus on Europe first just because that was where there was such a tremendous outperformance relative to at least our expectation. I mean, the 14% increase relative to a 1% decline in production is very impressive. I mean, can you kind of highlight in the acquisitions how much ixetic and the carpet business added and how much was sort of more organic outperformance? Can you give us a little bit of clarity there?

Sure. I think when you look at the production sales in Europe sort of year-over-year, the acquisitions accounted for $130 million in additional production sales. About $100 million of that was ixetic, and the balance was substantially all of the carpet business.

Okay, that's great outperformance there. And then just on the margins in Europe, it sounds like obviously a lot of the cost of your restructuring is going to come in the second half of the year, but it seems like you're getting a lot of benefit of other actions you have taken. Are the actions or the cash costs coming in the second half of the year going to result in sort of some additional or incremental near-term benefits that we could expect in the second half of the year or early '14 in Europe?

When you think about the restructuring activities, John, you talked about the cash is going to come in the second half of the year. What we're saying is we think the costs are going to be recognized from an accounting perspective in the second half the year. When we actually are able to effect some of the restructuring and consolidated moves some people have, that may be beyond 2013. Again, there's an accounting recognition principle that we've got to follow when there's a cash outlay and then actually doing the physical things. But I think the benefit of the restructuring -- what we're going to do -- we'll see the benefits of that rolling in. I figure the bigger part of that is going to be '14. There may be some of that trickling in '13. But the improvement we're seeing in '13 relates to some of the things that we've already been doing for some time. Don has been talking about a number of initiatives we've got ongoing, focusing in underperformers, focusing on improving efficiencies, working with our customers to improve the pricing, world-class manufacturing activities we're undertaking. All of that is chipping away at some of the underperformance in Europe, and we're seeing the benefits, and we expect to continue to see more benefits as time goes on.

And we've had some restructuring previously. We had restructuring in the fourth quarter, which is kicking in, in terms of improvements this year.

Okay, and then just a last question on Europe. I mean, you guys have kind of long sort of targeted or pointed us to sort of half the margins -- or EBIT margins that you get in North America is where you might ultimately end up. I mean, at 3.2, you're getting -- I mean, you're not quite there, but you're making much better progress than we would have expected. I mean, is that still your target or could you potentially be better than half your EBIT margins in North America and Europe?

John, what we've said is over the next 3 to 4 years, that we should able to get to about half of where we are in North America on production sales. We clearly have said as well that beyond that, we believe there's still opportunity. But we've been focusing on our business plan cycles. So we've got some pretty clear visibility to that. But obviously, our target is more than half of where we are in North America.

Okay, that's helpful. And then just one last question. If you could just remind us roughly what your dollar content is on the GM trucks, on the new K2XX, and also what you have on the F-150 as far as content?

In terms of the K2XX, we are, on average, about $1,750 in content. And that compares to about $1,500 in the GMT 900. I'd have to dig out -- give me some time to dig up the Ford content. I haven't got that at fingertips right now, John.

John, just one final comment from Don here. In Europe, I think, we're pleased. I won't repeat what Vince has said, but Q2 is seasonally higher as well. So you can look at the seasonality of the earnings as well.

Our next question comes from Steve Arthur, RBC Capital Markets.

Actually, that last point was one of my questions. Just safe to assume that we will see a seasonal slowdown in margins in Europe for the back half this year, but also expect that the types of changes you've been making are pretty entrenched. We should see year-over-year improvements in each of the coming quarters?

That's a good assumption, yes.

Yes, there's going to be seasonality in North America as well, don't forget.

Right, right, okay. And secondly, just CapEx, I think we've seen just over $400 million now year to date. So it looks like a fairly aggressive move to get in the second half towards that $1.4 billion level. Is it fair to assume that some of planned programs are in place to get you there now or might some of that spill over into 2014? And I guess related to that, I don't really expect any numbers, but directionally over the next, say, or 2 or 3 years, you still see lots of opportunities out there and expect CapEx to remain at fairly aggressive levels?

Steve, in terms of committed capital, we look at that on a pretty regular basis. So where we're at today is about $1.4 billion. Historically, there's always been some carryover into the following year. We'll get some better visibility on that as we come to the end of Q3. So at that point, we may have to revise our number down depending on where we are on carryover. I think in the outer years, Steve, we still see and have been awarded some pretty substantial business. Capital is going to be running at, I would say, more elevated levels than sort of what we've been doing over the last, I'd say, 3 to 4 years. I'm not sure whether $1.4 billion is the right number, but we still need to wrap our mind around business plans. But I'd assume that it will be the higher-than-normal level over the next couple of years.

Our next question comes from Rich Kwas of Wells Fargo.

Question on the guidance for Europe. I think, Louis, you mentioned that the upgrade on the production for the full year really reflects Q2 outperformance, the 18.6 million number at least right now looks lower than what IHS has. Are you seeing anything on the production front with schedules that creates greater concern for you as you look at third and fourth quarter?

No, no. I know we're a little bit lighter than IHS. There's nothing natural [ph] about our numbers. We look at what we have internally. We do look at schedules to sort of help us determine where to be. But IHS is going to bounce up and down a little bit more like a moving average. So we're just a little bit more cautious than where they are.

Okay. But you're not seen anything fundamental in terms of inventory corrections or anything on the horizon that causes you greater concern, it's more a level of just being conservative?

Nothing specific.

Okay. And then just on the longer-term outlook for Europe, I know you will update your revenue growth targets probably next year at the Auto Show. But as I recall last year or earlier this year, the longer-term outlook for Europe assumes some deterioration in business. And I know there's some business that's coming off. But now that we're 6 months into '13 and what you've seen macro-wise and then with your own quoting activity, how do you feel about your European production sales outlook going out the next couple of years?

Rich, we'll give you some color rightly so in January. Our focus in Europe, we've got a number focuses, but one is to get our operations running efficiently. And the focus was on profitability, generating a reasonable return focusing on improving what we do through world-class manufacturing. And as we do improve internally our operation and we do become more competitive, what we've been saying is that we think there's going to be opportunities to continue to grow our sales in Europe. And our view remains unchanged.

I'll just add one thing to that. We've been having a number of issues. We had a number of issues where we've underquoted some programs. So when you're going through a lot of discussions with customers to get, at least closer to reasonable pricing, our focus was to -- on the operations but also to get the pricing levels we thought was at least acceptable. For the most part we're through most of that repricing discussion, and we are refocusing now on quoting new business. It's a bit difficult in some situations to be aggressively going after new business when we're also doing the fixed pricing. So I think we've got most of the repricing behind us.

Okay. But is it fair to say that with your -- I think you had a 10% decline in production sales over the -- through '15. Is it fair to say there's potential that there might some upside to that outlook once you get through the numbers into next year?

Rich, it wasn't the 10% decline. It was 10% of the change of $2.2 billion. It was about $200 million that we expected between '13 and '15. I think what we said in January also was that we've been awarded just very recently some business that pretty much filled that gap. So call it, at least on our outlook, flattish sales between '13 and '15. That's the starting point.

Yes, okay. Yes, Louis. That's what I meant but -- okay. And then just last one, launch cost. I know last quarter you said that you expect kind of flattish type launch costs this year. Is that still intact for '13?

Yes, Rich, that's still intact. Overall '13, we're expecting launch costs to be flattish.

Our next question comes from Brett Hoselton of KeyBanc.

I just wanted to ask you briefly about the share repurchase activity. Certainly, it has accelerated. 800 million shares -- or 800,000 shares, excuse me, last year I believe it was and 1.6 million in the first quarter, 5.2 million in the second quarter. You've got, what is it, 4.8 million left through November. So I guess what I'm wondering is as you kind of think about modeling kind of the quarterly run rate into the next year, how would you think about that? Would you be thinking about a run rate of 1.6 million per quarter or 5.2 million per quarter or 4-point -- I mean, how do you think about the pace of share repurchases as you move forward into the next year?

So Brett, you're thinking about 2014, correct?

Yes, yes. Because I'm kind of -- I'm basically, Vince -- I'm kind of basically thinking that you're going to do the remaining of the 4.8 million between now and November.

Yes, well, a couple of -- so I guess in terms of the -- we've got 4.8 million available under our NCIB, which does expire in November. And we talked about it in May at our Annual Meeting, that it was our intent to go out and be active under the NCIB, and we did purchase 5.2 million shares. And we have talked about allocating about $650 million given the price to maybe [ph] buy back stock. And we're going to continue to be active in the market, whether we get to the full 4.8 million, by the time November comes, we'll see. That's a lot of shares to buy. But we will continue to purchase some shares under the bid. I don't know how you'll model that because what we buy on a daily basis is going to change. But I think it's safe to assume that over the quarter, we will be buying some shares and if you want to say on average, we're going to purchase some each and every day, that's probably not a bad assumption. I think as it relates to 2014, Brett, we really haven't turned our mind to that. What we'll do in November is we'll get some visibility certainly to what's happened in '13, what our view on 2014, what our cash requirements are, and we'll make the recommendations to our board as to the level and extent of NCIB for 2014. But that's still to be determined.

And as you think about allocation of capital, can you just remind me your preference in allocation of capital, acquisitions versus share repurchase and so forth?

Our preference is actually, number one, is growing the business organically where you go out and you win some business and you either expand and -- hopefully, you can just fit it into your existing operations or you might have to add some capacity, build a new plant. That's our preferred method of growing. Certainly, we'll be and have looked at acquisitions to supplement our growth. And when we're looking at acquisitions, probably the big focus is technology, what technology is out there that could supplement what we have, complement what we have, advance what we have. We're also looking at acquisitions that could assist us to grow faster in markets that are a priority to us, i.e., emerging markets. And also, we can diversify our customer base. So our primary focus is investing in the business organically or through acquisitions, continuing to pay a quarterly dividend that we'd like to see grow on an annual basis. And when you sit back and look at the cash you generate, your investment opportunities and you say, "Well, if we've got additional cash that we want to return to shareholders, then we'll do that by way of normal course issuer bid, share buybacks."

Your next question comes from Ravi Shanker of Morgan Stanley.

If I can just follow-up on that last topic. You guys have said recently that you're open to maybe adding a turn or more of leverage to the balance sheet, maybe pursuing some selective divestitures. When do you think we can start to see some of those actions? Do you have a timeline placed? Do you think something happens around the Analyst Day, which I think you have scheduled for November?

Don, you want me to attempt that or do you want to try that?

Well, I think we talked about we've been spending a lot of time with the board. We're going to have another session with them to deep dive in September on our product strategy. So what we said in the past is ideally we'd like to make sure we've got really good capability and global coverage in all of our products. So we've looked at a number of different areas where we were not as strong as we'd like to be, and we've considered divestitures. In a couple of cases, we've actually looked at the business plan, worked hard on it. And the business looks pretty healthy going forward, and it wouldn't make sense for us to sell it at this point in time. Others we're still analyzing. We want to make sure we've done everything we possibly can with the business. And going forward, as far as acquisitions are concerned, we had said we will only comment on acquisitions when we're ready to make a comment on it, obviously.

With respect to the capital structure, which was your other question, I think you're saying where's your capital structure is going to end up being. And we certainly, as a management team and the board, are comfortable with the right opportunity with a modest amount of debt. I think what you'll see happening over time is that our net cash balances are going to move to most likely a nil balance. And if good opportunity comes up, where we have confidence and we needed to take on some debt to make a substantial capital investment or an acquisition, we would be comfortable doing that. But we would be cautious in terms of the amount of leverage we would put on the balance sheet. We definitely don't want to have debt that overlevers the company and may result in a credit downgrade for us. So we're very focused on maintaining our high investment credit rating.

Got it. But you have about $1 billion of net cash right now, and you can basically go to 0 and not run up against those constraints. So you'll only do that if you're pursuing a big acquisition, you said?

In an ideal world, we can contain our capital. We've talked about 1.4 billion basically with the ongoing business. So we'd like to try and find the right acquisition that meets all the criteria that Vince just outlined. That would be the logical point where you'd see our cash utilized. We'd rather do that. If it turns out we just don't think that we can come up with anything in the short term, then we can obviously continue to buy back our shares. But as Vince just outlined, that's not our first choice, but we will reanalyze that and give an update where we -- where our thoughts are in January.

Understood. Just on Europe, not to beat that horse, but have you seen any kind of pull forward of any of the benefits that you expected to see? Because you've been kind of guiding to about 100 bps of margin increase every year. I think you're on track to do a little more than that this year with this pretty strong number in Tokyo. So would you say it's a pull forward or would you say you're just running ahead of your expectations?

Well, Q2 is seasonal, as we talked about it. But you can look at the numbers and see that as well. We're about where -- I'm pleased with the results and maybe slightly ahead of where I thought we'd be. But then, I mean, we've got so many moving pieces over there. It's really hard to be precise. That's why we're saying over a 4- to 5-year period now, over 3- to 4-year period where we think we can get the margins to. I'm pleased with what we've seen in the quarter. But we're continuing -- I don't think there's anything particularly unusual about it. So we just need to keep on plugging away.

There's going to be some seasonality, right? The second half of the year is going to be different than the first half. I mean, we're at the high watermark in Q2. So there's going to be seasonality that's kicks in that's going to have an impact on the overall margin level.

Understood, understood. And just finally, can you remind us again about the cadence of E-Car in the back half of the year? Because you had the amortization kick in, in the third quarter of last year. But will it continue at this $39 million, $40 million rate for the next couple of quarters when you're looking at a year-on-year walk or will it go down to 0 by the fourth quarter?

Ravi, if we're -- in the next 2 quarters, for the amortization of $39 million or $40 million per quarter, remember that last year, in the second half of the year, we actually had E-Car amortization in our numbers in Q3 of 2012. We had $13 million. So if you look at Q3 '12 to Q3 '13, there will be an incremental E-Car amortization amount of $27 million. In Q4, last year, we had full amortization of about $40 million and this Q4 will be about the same. So quarter-over-quarter, there won't be any change of results of the E-Car amortization. The next change is going to take place in Q1 of 2014 when the E-Car amortization goes away. And then when we're comparing Q1 '14 to Q1 '13, we'll have to talk about that Q1 '13, by the way, had $40 million of amortization, so we need to take that into account when we're looking at the costs.

Our next question comes from Itay Michaeli of Citi.

Just I wanted to go back to Europe on the revenue side. It looks like the growth rate was positive, you've certainly had some M&A and currency benefit. But was the outperformance mostly tied to launches or just improved customer and content mix? If you can just talk a little bit about that.

Mostly launches, actually. The biggest chunk of our sales other than -- I mean, there was some foreign exchange. Foreign exchange is about $30 million in the quarter. And we talked about $130 million in acquisitions, and the bulk of the rest was launch activity. So I mean, the Paceman launch for us, Daimler A Class is big, Ford Transit, Ford Kuga. There's a bunch of programs that we had that we talked about in our launch schedules.

Excellent. And then just a question on tying in the new business with CapEx. I mean, it sounds like you're still very pleased with your new business booking activity. CapEx seems like it's running a little bit lower. Are you seeing any shift towards new business in the outyears coming at existing plants versus new plants or maybe just talk a little bit about the mix roughly in the new business backlog between new versus existing footprint?

The new business that we're being awarded is just a whole bunch of business. Part of it is replacement business. We've got existing business that's going to roll off and new programs that are going to come on and we'll take that on. And some of that, as we've done historically, will be at higher content. There will be business where we're going to have to expand some of our operations. And think through the outer years of our business plan, we also have some new facilities coming on for business that's been awarded. So it's a mix of all. But I don't have it summarized in terms how much of it is replaced and how much of it is expansion of existing facilities and how much of that is in new facilities at this point.

Okay, that helps. And then just lastly, there's been some talk about new warranty terms that GM is sort of asking suppliers to take on. Can you maybe talk a little bit about if there's any potential impact to you from that and just maybe the overall OEM pricing environment in general?

I don't know the details. I know we've -- our legal team has had a detailed look at the GM warranty. My understanding is anything we do is on a go-forward basis. And obviously, we just need to completely understand it. What they're trying to do is clarify the warranty, so when we quote depending on what type of business it is, how much engineering we do, and we just need to make sure we completely understand what they're asking for. I don't have the details. We're going to do a lot of discussions about that right now. But I wouldn't think it would change anything substantially because if we -- our products where there might potentially be warranty where I think we have higher exposure, then typically, people will bake that in. But I think it's more of a clarification. But we can always get back to you on more detail associated with that.

Our next question comes from Peter Sklar, NESBITT BURNS.

Don, I wanted to ask you about your outlook for the North American business and really aside -- putting aside the cycle, if you still think there's a good opportunity to grow the North American business given that you already have a very high operating margin. I believe you have very few plants that are underperforming. I think you largely implemented your world-class manufacturing in North America. And also just from an arithmetic point of view, the business is pretty big, so it's hard to have a high-growth rate. So I'm just wondering if you still think there's room to grow your North American business, putting aside the volumes.

Well, I think unfortunately, we still do have some underperforming businesses in North America. We had quite a significant launch issue back in the latter part of Q4, mainly through Q1 and also trickled through into Q2 in our Mexican facilities. So we're still -- need to get that completely turned around. And we do have a number of others. But they're not huge in the overall scheme of things because we are quite large. A previous question on where we're building new plants. In Canada, we've got pretty good coverage. We are seeing a number of opportunities where we're building new plants in the States, and also in Mexico, we're continuing to see lots of quoting activity. So although we do have a lot of facilities there, we are expanding some new plants. Hopefully that gives some more clarity. I don't have it on top of my head. We can give an update probably in January. So I think we have room to grow. We are the largest supplier, but we also have the most diverse amount of products. And as we're bringing new technologies like aluminum die casting, thin wall aluminum die casting. And there are opportunities to grow even in our traditional markets and our stamping area and a few other areas. And so I think we will continue to grow. I don't think there's huge growth in dollar content per vehicle, and to get into that sort of discussion, you'd need to look at who's got what market share, et cetera, et cetera. But I think we have -- the guidance we've given is we can continue to grow our business at a reasonable pace and keep our margins where they are now, then we'll be happy in North America. But we do have a number of new plants going up, and we have a significant amount of our capital still being spent in our Canadian operations, in our U.S. operations and also in Mexico. And the only way we spend the capital is if we've got booked business so we're not building plants or buying equipment unless we've got something we booked there. So I think we'll continue to see pretty healthy business in North America.

And lastly, could you give us an update on the issues in Brazil, which issues have been resolved and what remains outstanding?

In Brazil, we've got -- we bought 2 seating companies, one was in Brazil and one was in Argentina. Argentina continues to give us a significant problem financially. We have high inflation there. We've got -- there's lots of issues on getting parts in and out of the country, labor inflation and very difficult discussions with our customers to get them to pay for the increases. And not just us. I think it's everybody down there. And also the customers are also losing money, most of them. I don't know what they've reported. I haven't listened to what they say, but I think it's a difficult financial situation for all the car companies as well, specifically in Argentina but also in Brazil in a few areas. So as much as we take one step forward and we get one step pushed back because of the economic issues, specifically in Argentina, so we're making headway there, but it's not a short-term fix. We don't think the economy is going to be a short-term fix. Brazil, we've got a combination of a couple of things going on. But some of them are operational, and we're making good headway there. Some of it is pricing because of -- again, because of things that are going on, inflationary or the costs of bringing parts in. So we are continuing to work hard, and we need to see some more substantial improvement in our South American operations. We're still not making money there. We haven't given any forecast. unless you want to add anything, Louis or Vince, maybe we'll talk a bit more in January. But it's an uphill battle, so I don't see us being aggressive and growing our business in a big way in Brazil and Argentina, which -- and most of our facilities are in Brazil. Until we've got a good handle on what we're doing down there, but we're certainly making headway, especially in the operational issues and the launch issues.

[Operator Instructions] And our next question comes from David Tyerman of Canaccord Genuity.

Just a question on the organic growth. So you sort of covered off North America there, Don. And Vince, you said that is your preferred way of growing. Is there an opportunity to grow or accelerate the organic growth sufficient that you could consume a larger proportion of your large and growing free cash?

Yes. I'll take a shot at that. Ideally, we'd like to continue to grow in some of the emerging markets. And emerging markets in my mind would be primarily our focus would be in China and maybe other areas of Asia, Eastern Europe. We're pretty -- we've got quite a bit of operations now in Russia. We're still seeing some opportunities over there. India, we continue to grow, not at a really fast pace. We want to make sure that we can make money there; that we've got the management to digest and then we take on. And there was a question that was asked that we didn't get a chance to answer on, where we are in margin there or pressure from the various OEMs. I'd say, to a large part, at least the customers, our major customers, are profitable. They'd obviously like to make more profit, but I think there's a pretty balanced view on what they want from a technology, from a VAVE sort of engineering cost out rather than just asking us to continue to lower prices. And there's obviously a lot of commercial discussions go on all the time. But it's relatively balanced in the level of discussions. So can we book enough business that we'd be required to spend a lot more than $1.4 billion the next couple of years? Maybe, but right now, our plan shows about that same level of growth. And we certainly want to put the cash to work, but I want to make sure we don't do things that are not wise business decisions in the long term, whether through acquisitions or aggressively going after a business that won't hit our hurdle rates. So I think for the foreseeable future, I don't see any massive shakeouts in the supplier industry. North America is pretty healthy, even -- or even in Europe, there'd be some continued fallout. But things are fairly stable right now, which is a good situation to have. So I would think we'll continue to grow our business at the same rate we've done it in North America and Europe, faster in China, see what's going on in South America, and we'll continue to, again, really give a lot more definition on that.

Sure. Don, let me just add to what you just said. David, your question is are we going to be able to invest the cash we generate from operations organically. I think that's really difficult to do. If you think about that kind of historically, even look at last year, we had record levels of capital, about $1.3 billion. And we made about $600 million of acquisitions and paid some dividends. And when you added it all up at the end of the year, our cash balance didn't change with the $600 million of acquisitions. We've historically -- if you go back a number of years, we've probably put in $300 million, $400 million, $500 million, $600 million a year. So if there aren't any acquisitions, the cash we generate from our business exceeds the amount that we invest in the business and the amount that we pay back in dividends. And that's why you when you sort of sit back and look at NCIBs, we use those sort of as a toggle switch to turn on and off depending on what our cash requirements are going to be.

Okay. So I mean this is a wonderful problem to have. You want to get to your cash balance down to 0, but you're generating more cash. Is it the thought to -- or the board's -- does the board review thinking, geez, we're generating so much cash, we can't catch up, maybe we should review our dividend policy and move beyond the 20% or do they just sort of use that toggle switch all the time in trying to get it down to 0?

We've had a lot of discussions on that. In an ideal world, we'd come up with some really good opportunities for accretive acquisitions that fit all of our criteria that Vince mentioned earlier, including technology. And we're looking at a lot of different things. However, we don't want to rush out and do one we'll regret in the future. So I think eventually, there'll be some things come along that we think are really good opportunities. And I think we would increase our spending on M&A. That would be my expectation. But a lot of discussion at the board. I think we're pretty happy with the dividend yield we've got. And we can always do something. That's why we decided to do more share buyback. We'll reconsider that at the end of the year, as Vince has already said. So I think it's something we have to look at on an ongoing basis.

Okay, fair enough. And then just on South America and for that matter Asia, the whole Rest of World, could you give us some idea of the scope of the issue in South America? Like is this tens of millions of dollars that it's costing you or is it some smaller number? And then on Asia, obviously, the new facility costs are still fairly elevated. Do you have a sense of how that rolls such that you can get toward that 75% in North American margins? Is this like 5 years out? Or any thoughts there would be helpful.

David, in terms of the new facility costs, you just focus on the balance of this year. And we're expecting some -- on a comparable basis, tailwinds in our Rest of World segment. And that's coming both in Asia, as well as in South America. So it's going to help us a little bit in the second half of the year compared to kind of a year ago. With respect to -- when I look at South America altogether, there are some launch costs. There are some new facility costs there. But when I look at the magnitude of losses in South America, they're in the tens of millions of dollars. They're not in the sort of sort of under $10 million. They are more significant, which means that even though we have all these facilities launched in China, that when we look at the Asia Pacific as a region, it is profitable and able to absorb the losses in South America as well as the start-up costs in Asia.

Okay. But is it fair to say that the new facility costs in Asia are still at an elevated level?

The new facility costs in Asia for the first half of this year had been at a pretty high -- pretty elevated level. They'll continue at an elevated level for the second half of the year, but we're seeing that trend downwards in terms of the investment in new facility costs. And it's more or less on track with our expectations.

Our next question comes from Justin Wu, GMP Securities.

Just my first question is just I want to revisit the European kind mid-decade targets. How much of that target is predicated on volumes kind of getting back to more normalized levels? Or do you think you can achieve that based on the current run rate?

Justin, this is Louis. We do have some modest increases in volumes if you look out a couple of years, but really, the improvements are not driven by requirements of higher volumes. It's more driven by things that we're doing internally. So the restructuring that we're doing and new facilities that are growing in Eastern Europe are adding in. It's more stuff that we can control rather than waiting for volumes to come back.

Okay. And I guess it leads to my next question. If you kind of look out in a longer run perspective on Europe, is there any reason why European margins can't get to kind of North American levels? I'm assuming that we get more -- better volumes. Is there something structural within Europe that would prevent you from doing that?

I'm going to say if you look at an average of where the margins are, assuming North America production is high right now and Europe's a bit low right now, but if you look at sort of average over a period of time and we looked at outside studies that say that there's no particular reason why margins in North America would be any higher or lower than Europe and you'd have to look commodity by commodity, in our case, we've been in North America a lot longer. We've got much bigger plants over here, higher capitals. You'd expect the return on that capital to be higher. So there's no fundamental reason why one should be different than the other. But given the history and where we've got our investment and the product lines we're in, et cetera, et cetera, then I think if we can get to the levels we've talked about, that's -- certainly in the next 3 to 4 years, that's a reasonable target. I don't see us getting to the levels for North America unless we make substantially more investment in some really big asset plants.

Justin, just another way to put what Don talked about is if you look at our business in Europe and compare that to North America, on a relative basis, we have more capital-intensive businesses in North America compared to Europe. So even if each one of those business units -- some of our business units are operating at the same operating margins. On a consolidated basis in Europe, our margins would be lower because of the different level of the capital intensity. Keep in mind, too, when we report European margins, in Europe, we also run Magna Steyr. On the assembly operations side, the Magna Steyr business model is one where you buy a lot of the components and you build the vehicle and so there's most components plus your markup and whatever cost you got back from the customer. So you end up with high sales, high cost of sales and lower margins. Decent return on investment. But when you have to put Magna Steyr into the mix of what we're doing in Europe, our margins, our reported margins, will be lower than North America.

Okay, understood. And just in terms of kind of if you look at your backlog or your book of business, can you give us a sense of what the launch activity will be next year, if you expect the launch costs to accelerate or stay flat?

Justin, we really don't look that closely at launch activity in the outyear until we get to our business plan process. We're looking at sales and cadence of new programs coming on stream. And we'll give that guidance, I think, when we get to January in Detroit. We really don't look at it, and it's kind of we need to look at our business plans and our business plans are just -- we're just getting kicked off now.

And our final question comes from Todd Coupland of CIBC World Markets.

I have 2 questions. The first one is on North America. I'm wondering if the strength in the U.S. truck cycle upgrades and average age being up there and housing starts doing well, could that mute seasonality this year with all the new launches that are coming out from some of your major customers?

No, I don't think so. I think overall, if we look at seasonality, quarter-by-quarter, it's not significantly different than what we've seen in the past years. So I wouldn't expect -- I wouldn't make too much of that.

Okay. Second question is I was looking for an update on Magna Steyr. I know that some of the major programs there are up for competitive tender. And I just wanted you to give us an idea on the timing of that. And what is the risk of a loss and/or keeping that business? And what would be the impact if it went away?

We have a number of different customers in Steyr, but the biggest one is with BMW. There's been lots of discussions in the past. And what we've said is we're obviously not going to comment on anything until BMW is comfortable with it and they've made all the decisions they have to make. We continue to have lots of discussions with BMW, and I guess all I can say is they have confirmed with us that they see us as an ongoing strong partner with them, both in vehicle engineering, as well as assembly. However, until we make a decision -- until they make a decision finally what they're going to be doing with the various programs, we can't comment on it. But as soon as we find out, we will let you know. And the programs we've got are multi-year programs, so they run out for a while. But we do need lead time, obviously, to get the new product launch in there. So I'm not going to give a date when we would hope to have something ready. But as soon as we find out and BMW is comfortable, then we'll give everybody an update.

In terms of the bigger programs in there, the Countryman runs until 2016 and the Paceman until 2017.

Mr. Walker, there are no further questions. Sir, I'll turn the call back over to you for any closing remarks.

Okay. Well, I appreciate everybody calling in. As I said at the outset, we're pleased with the quarter and that we've got a lot of good things going on, especially in our initiatives in world-class manufacturing, and we're really focused on product and process innovations. So it's been a key focus. I think we're seeing some of the results come through. It's also nice to see that our customers, the markets, certainly North America, are doing pretty well and the profitability of our customers is good. So it allows the whole industry to be a bit more balanced and make the right long-term decisions that are win-win, especially for suppliers that have the technology and are competitive. So I appreciate everybody's time, and have a great day. Thank you.

Thank you, ladies and gentlemen. That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect all lines. Thank you, and have a good day.