Ladies and gentlemen, thank you for standing by, and welcome to the Magna International Third Quarter 2017 Results Conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this call is being recorded, Thursday, November 9, 2017. I would now like to turn the conference over to Mr. Louis Pirelli (sic) [Mr. Louis Tonelli] (00:36), VP of Investor Relations. Please go ahead, sir.

Thank you. Hello, everyone, and welcome to our third quarter 2017 conference call. Joining me today are Don Walker, Chief Executive Officer; Vince Galifi, Chief Financial Officer; and from Detroit, Swamy Kotagiri, Chief Technology Officer. Yesterday, our Board of Directors met and approved our financial results for the third quarter ended September 30, 2017. We issued a press release this morning for the quarter. You'll find the press release, today's conference call webcast, the slide presentation to go along with the call, and our updated quarterly financial review, all in the Investor Relations section of our website at magna.com. Before we get started, just as a reminder, the discussion today may contain forward-looking information or 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 or 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. As we review financial information today, please note that all figures discussed are in U.S. dollars, unless otherwise noted. We've included a reconciliation of certain key financial statement lines between reported results and results excluding unusual items. Our quarterly earnings discussion today excludes the impact of unusual items. In the third quarter of 2017, we recorded additional restructuring charges at a European powertrain facility in which we initiated restructuring in the fourth quarter of 2016. This reduced EBIT and net income attributable to Magna each by $2 million and EPS by $0.01. There were no unusual items in the third quarter of 2016. And now, I'll pass the call over to Don.

Thanks, Louis. Hello, everyone. Let me start off with some highlights from the third quarter. I was generally pleased with our record Q3 results with some disappointment at GETRAG, and Vince is going to be taking you through those specifics. We've returned $521 million to shareholders in the form of share repurchases and dividends. Other highlights in the quarter include recent Magna activities in ADAS and autonomous driving, a new program award and joint venture associated with our vehicle electrification strategy. I'll highlight a few important Magna technologies in body systems and seating, and an update on Magna Steyr, of which there is significant launch activity going on. Advanced driver assistance and autonomous driving continue to be top of mind for investors right now. And Magna has had a lot of activity in the area over the past couple of months. In August, we announced that we'd made a strategic investment in Innoviz, a solid-state LiDAR developer. Innoviz's LiDAR can provide high-definition, 3D, real-time images of vehicle's surrounding regardless of changing light and weather conditions. This technology expands Magna's overall suite of Level 3, 4 and 5 autonomous driving, sensor solutions. Our Magna Electronics group also recently unveiled our MAX4 autonomous driving platform in Berlin in late August. MAX4 is a fully integrated, customizable and scalable autonomous driving, sensing and compute platform that can enable autonomy up to Level 4 in both urban and highway environments. The platform combines radar, LiDAR and ultrasonic sensors that can be easily integrated with other automakers' existing and future platforms, which allows for continued freedom of design and styling their vehicles. Our Exteriors team did the sensor integration on the MAX4 front- and rear-end modules given the seamless appearance. This is a good example of cross group collaboration. Lastly, we announced last month that…

Thanks, Don, and hello, everyone. Overall, we posted solid third quarter consolidated results, in line with our internal expectations. Consolidated sales were $9.5 billion, a new third quarter record. Net income attributable to Magna was $505 million, up slightly from the third quarter of 2016. Diluted EPS from continuing operations was $1.37, also a third quarter record for us, up 6% and we returned $521 million to shareholders through share repurchases and dividends. I'm going to cover each of these in my financial review. Consolidated sales increased 7% to $9.5 billion in Q3. This increase reflected higher European, Asian and Rest of World production sales along with higher complete vehicle assembly and tooling sales, partially offset by lower North American production sales. In North America, production sales fell 5% on North American vehicle production decline of 7%. The lower vehicle production and the balance out of certain programs were partially offset by the launch of new programs and a $54 million increase due to the year-over-year strengthening of the Canadian dollar against the U.S. dollar. Organically, excluding foreign exchange movements, production sales declined 6%, less than the reduction in North American vehicle production. In Europe, production sales increased 14% compared to Q3 of last year. The increase reflects higher volumes, as production was up 8% in Europe, as well as the launch of new programs, $111 million net increase due to mostly stronger European currencies relative to the U.S. dollar and acquisitions which contributed $33 million to sales. These were partially offset by lower content on the MINI Countryman and Paceman compared to the previous model, which is assembled at Magna Steyr and on which we had substantial production content. Organically, excluding FX movements and acquisitions, our production sales grew 8%, in line with vehicle production. We expect to see…

Thank you. And our first question comes from the line of Ryan Brinkman of JPMorgan. Please go ahead with your question.

Hi. Good morning. This is Samik on for Ryan Brinkman. The first question I had, I just wanted to get a bit more details about when we look at the – you don't disclose your backlog number, but when we look at the different segments, has your expectation changed as you sort of talk with your customers regularly in terms of what the backlog of orders would look like relative to like a ADAS and electrified drivetrains and powertrains products relative to the traditional product segments like seating, et cetera?

Good morning, Samik. We're in the middle of kind of doing our final touches on our business plan and we'll be updating that in January. Couple things to note. I think if you look at where we think North American production is going to be over the next several years and compare that to where we were in January, we're probably going to be a little lower than our previous expectations, so that's going to have some impact, everything else being the same. Foreign exchange rates had moved around, we've been winning business and some businesses may have been pulled forward, some may have been deferred a bit. So, we're just still ramping it up, so I don't have the color right now to give you. The only color I did give during my commentary, in particular, related to GETRAG, and I think my comments were pretty clear on kind of where we see at least in the shorter term that business going over the next couple of years. But having said that, even as I look at GETRAG post kind of next couple of years, we're excited with some of the new business awards that we've been awarded in the course of this year.

Yeah. It's Don here. We'll update this when we get our outlook in January. I think some of the – the penetration rate of some of the awards in terms of ADAS, I think they're going to continue, but they – some of them are being delayed to where the market would have said they were going to be coming in.

Got it. Got it. And just to – second question and the final question on Asia, you've been seeing strong revenue growth and outperformance to the industry as well as strong margin gains over the last few years. And this quarter the margin came in at 11.4%, I think your 2019 target is 12%. But if you could sort of share your thoughts on what you think long-term margins might look like in that business, because it seems like you would sort of go past your 2019 targets as well quite early relative to your plan.

Yeah. I think you can look at Asia in a pretty good quarter. So, we're – we came in at 11%-plus in the quarter. As you look at our overall guidance for Asia, it remains unchanged from our previous expectations and current expectations. I think, as you look at the Asian market, we still have capacity that will continue to sell as (29:18) we're ramping up programs – I think, at places like India, for example, we're ramping up programs and even in China, where we're continuing to fill our plants. So, that's just contributed overall to some margin expansion, and equity income is expected to grow at GETRAG, as I stated in my overall comments. Again, as we get through our business plan, we'll give you a little bit more color come January when we talk about our outlook.

Got it. Got it. Thank you. Thanks for taking our question.

Thank you. Our next question comes from the line of John Murphy from Bank of America. Please go ahead.

Good morning, guys. This is Aileen Smith on for John. Don, can you talk a bit about the joint venture announcement with HASCO in China? Obviously, the new award for the e-drive system with the German OEM is notable. But, is it fair to assume that this JV and the electrified powertrain products that you're going to be offering in addition to a continued ramp in GETRAG in China might also help in gaining a greater foothold with the domestic Chinese OEMs?

Yes. Yes. Certainly, we expect it will. Part of the reason we did the joint venture is because our partner, number one, has some good technical capability that complements what we have. But the clear intention is to – once we get the capacity in place and we've got the technology over there, that we're going to continue to offer that to other OEMs and certainly the interest in all customers, including the Chinese-based OEMs, for this type of a solution is really high. So, we would expect to be able to continue to grow the joint venture.

Great. That's helpful. And then, Vince, if we back into the 4Q North American production sales outlook implied by your full year sales guide, we're getting to an implied year-over-year change of down about 8% to a little better than flat year-over-year, which I think compares to IHS' latest North American production forecast of down about 3% in the quarter. You guys have been pretty consistently growing above market. So, is there some element of conservatism in that outlook or something more core like product launch timing or any exogenous factors that we should be thinking about?

I think it just relates to programs in the quarter, you can't look at one quarter and focus too much on it. Certainly, the minivan is the big program for us, always has been, and we do see some downtime and it was all planned downtime for the minivan in Q4. So, I think it's just mix of programs, but nothing out of the ordinary.

Great. That's very helpful. That's all from me. Thank you.

Thank you. Our next question comes from the line of Mark Neville from Scotiabank. Please go ahead.

Hi. Good morning, guys. Maybe just – I appreciate all the color on GETRAG, but I guess I'm just trying to wrap my head around sort of order of magnitude or sense of magnitude for, I guess, longer-term impacts from these things. I believe you used to or you were sort of guiding to a $6 billion-ish of total sales by, I believe, 2019, if I'm not mistaken. So, again, I don't know if you can update that number or sort of ballpark where you think or if maybe it's still close to that range sort of longer term.

Yeah. Mark, I think if you look kind of longer term – we've been talking kind of three years out previously in GETRAG. I think if you look longer term, we're going to still get to the same number and exceed that because we continue to win business. I think what's going to set us back a little bit in terms of the ramp up of the sales is what I talked about on the call regarding as I look at an acceleration of in-sourcing of a DCT transmission by one of our Chinese customers. We're still currently in discussions with the customer in terms of exactly what that's going to be in terms of volume shortfall. So, at this point, I'm not in a position really to comment about how far-off we're going to be off that $6 billion mark. But we're very, very confident that sales are going to continue to grow off today's base thinking back (33:46).

Okay.

As far as our (33:48) business plan, I'm not sure whether we're going to (33:53) conclude our discussions with our customers, but certainly we'll have more information and more up-to-date information for you come January.

Okay. And was that $6 billion 2019 or 2020, just for my memory.

2019.

2019. Okay. I guess just in terms of short-term profit impacts, again, I guess for the back half, it sounded like...

Mark, sorry, just let me just comment on another thing there.

Yeah.

There's really – there's sales and there's also (34:23) and what's the income to capital. So, if sales are going to be off, there was capital that was going to go in. So, we're going to cut back on capital, I'm sure that's going to be less. And so the overall impact on income is not just decremental margin. So, that's what we're in the middle of trying to just determine where the sales are going, what's the impact on capital, what happens to start-up costs, what happens to margins and so on. That's why we're not able at this point to give you a little bit more color on that.

Okay. I'll wait till – I guess, we'll wait till January to get a little more color. Thanks. I'll get back in queue.

Thank you. Our next question comes from the line of Brett Hoselton of KeyBanc. Please go ahead with your question.

Good morning, Don, Vince, Swamy and Louis.

Good morning.

Good morning.

Yeah. So, in the years that I've covered you, it seems like people underestimate your technological capabilities, and I'm just hoping you could speak to, first of all, autonomous. Can you – and just so we got Swamy there, can you talk to – how does your economist's capabilities do you feel compare to maybe some of the other leaders in the industry, like an Autoliv or a Delphi or Continental or Bosch? How would you compare maybe the number – amount of revenue, your expertise in the area of sensing or thinking or acting, let's say?

Swamy, you want to handle that one?

Yeah, Vince. Good morning. I think you've kind of categorized it well. We were and we are leaders in terms of the vision-based ADAS systems, but not to just constrain only to the vision-based stuff. We provide systems today in production, which handle a lot of fusion, and also the thinking part as you said, a different variance of, I call the ECUs or in future some refer to it as domain controllers. And so, in terms of the software, in terms of the sensor suite, in terms of the fusion, we believe we're addressing the market and it kind of shows in the revenue part and the number of programs we have. We continue to fortify the sensor suite part of it. As Don mentioned, our partnership with Innoviz on the solid-state LiDAR, I think we're not able to give a lot of details, but you'll pretty soon see our product in terms of a high-definition radar, which actually the digital radar with imaging capability. So, with that said, I think we are able to address the feature requirement that will enable autonomy Level 2 and 3. And if you looked at some of the initiatives we are doing, like the MAX4, again that Don mentioned that we are going through the urban and the highway environment for Level 4, is a technology platform that takes the sensor suite, our domain controller with a flexible architecture that can scale both ways. So, Level 2 and Level 4 and Level 5. So, with all of this, we are able to address the market needs today, but we're also kind of pushing the limits on what the technology needs to be for Level 4 and 5.

Excellent, thank you. I think I'll circle back around and ask another question, but thank you Swami.

Thank you.

Our next question comes from the line of Peter Sklar of BMO Capital Markets. Please go ahead.

Vince, do you mind repeating on GETRAG, the factors that had caused the $10 million shortcoming in Europe equity income in the third quarter, and I believe you're saying you're expecting that shortfall versus your prior expectation in the fourth quarter. Can you just go through that again?

Yeah. Sure, I'll go through that again. So, just to start off, Peter, when we look at what we consolidate in GETRAG because we did have some consolidated sales and consolidated operations, they're on track. And we expect that to be the case as well in Q4. When we look at our equity accounting investment, so we got Europe and we have Asia. In Europe, we have couple facilities. And of the two facilities, in one of the facilities, we incurred unplanned and excess launch-related costs in the third quarter. When you look at that facility, the program actually launched in the second quarter of 2017, but as the program started to ramp up and we come a little bit behind and incur some launch inefficiencies, downtime and so on and so on. We've made progress in ramping up over the past few months. We're still incurring some excess launch costs, but we think that's all behind us. But Q4 will be negatively impacted again by these launch-related costs, but to a lesser extent than in Q3. At another – the other equity accounting facility in Europe, we talked last quarter about volume shortfalls at a particular customer program. That continues to be the case, the customer's vehicle has not been selling well and short of customer expectations, which impacts demand for transmissions. Volumes continue to be lower than anticipated. So, that's going to have a negative impact as well on Q4. So, when we just look at Europe alone, compared to kind of where our expectations were at the end of Q2, on the equity income line, we're about $10 million off in Q3, and we're expecting to be about $10 million off our Q2 expectation as well in Q4. So, what impacted us in Q3 was launch and volume, what impacts us in Q4 is launch to a lesser extent, but also volume. Now when we come to Asia, we have a couple of joint ventures in Asia. One is ramping up, and it's on track. The other one, which does have ongoing business and profitability, we saw some volume deterioration in Q3, and we expect that volume deterioration as well into Q4. And it relates to not only one customer, but a number of customer volumes, including the one customer that's impacting us in Europe.

Relative to expectation.

...relative to expectation. So, as we look at kind of where we ended up in Q3 in the joint ventures in Asia compared to Q2 expectations, we're off about $10 million. And we expect in Q4, compared to again Q2 expectations, to be off about $10 million on the equity income line. Having said all that, we continue to see in Asia continued growth in sales and equity income in Q4 versus Q3. And as you look at GETRAG as a whole, our Q4 numbers are expected to be the strongest than any quarter this year, which is kind of – is consistent with what we've been talking about this U shape situation in GETRAG where Q1 was strong, we're going to incur additional launch costs in Q3, as programs are ramping up and then Q4 was going to come in stronger again. It's the same U shape, trajectory has changed a little bit, but we still got that U shape in our results for GETRAG.

Okay. And then the China program that's being insourced, so that's one of the reasons that accounts for the volume deterioration at the second China joint venture, is that correct?

No, Peter, I think that – I think you should think about that impacting us later on in 2018 and 2019 as opposed to any significant impact in 2017.

Okay. So, you haven't felt that yet?

It's just a guess again, at this point, Peter.

Okay. Okay. Then one more question just on a different topic. Regarding all of the NAFTA negotiations and regarding the proposed tax changes in the U.S., just wondering if any of that discussion has caused your OEM customers to change their behavior in terms of where they want you to invest capital, or has that caused Magna on its own initiative to change your thinking on where you're deploying capital.

No, I don't think we've seen anything yet. I think the whole situation in NAFTA is still up in the air. Lots of discussions in the industry and you're aware of what's happening at the government level. We've been fairly engaged in those discussions as well. I think anybody that is contemplating any big investments over the long term is probably either waiting, or they're going to be biased to invest more in the U.S. until there's an outcome here. I can't think of any changes we have made at this point in time, I'm just trying to think, none that I am aware of, but I think we're just waiting to see what's going to happen.

Peter, on the tax changes which were announced kind of last week, and it's pretty fluid at this time, but the proposed changes if they get enacted result in a lower corporate income tax rate, we're profitable in the U.S. So, that's going to be a plus for us. If they accelerate the ability to write off fixed assets and we're investing capital, so that should be a plus from a cash flow perspective, it doesn't really do anything from an effective tax rate perspective. But certainly from a cash flow perspective, it helps you. In terms of interest deductibility and whether that impacts or not, we've got to get our heads around that that may be neutral to a little bit negative. And there's also been some discussion about purchasing goods or services from a non-U.S. affiliate and whether there's an excise tax on that. That's pretty fluid as well, we're looking at that, that could be, depending on what happens there, a slight negative. But, our internal people even with everything they're looking at, their view is that the – what's on the table now is a big plus to – or it's not a big plus, it's a plus to overall Magna's profitability. But it's still pretty fluid. Our guys are looking at it and as we get further clarity, we can give you some comments on the impact that that could have on our bottom line results.

Okay.

You didn't ask (46:25), the other thing we're waiting to see is what happens with Bill 148 in Ontario, I'm not quite sure what the government is trying to accomplish. So, we're just waiting to see – we'll get some clarity on what they do and whether that impacts the productivity that we'd be able to see and our cost in Canada. So, I think we're waiting to see what happens in a few areas, but we're not really making any different decisions right now.

Okay. Thank you.

Thank you. Our next question comes from the line from Michael Glen of Macquaire Securities. Please go ahead.

Hey, good morning. When you talked about the GETRAG, you referenced the customer has done an acceleration in the in-sourcing. Are you seeing this – is this a potential on any other parts of the JVs do you think or can you give some reasoning why they have stepped up that acceleration on the in-sourcing?

Yeah. I think if you look at the DCTs in general, dual-clutch transmissions or you can call them automatic transmissions, where it's sort of used independent – or the same. The volume and the penetration rates are expected to continue to go up. So, every OEM will make a decision on every part of the vehicle quite frankly, what they want to do internally, what they want to buy outside. The designing, developing, and launching a transmission is pretty expensive. One customer decided a while ago that they wanted to have some internal capabilities. So, a combination of the speed at which you're bringing it up and the fact that their volumes are down a little bit is allowing them to project to do more in-house. So, I don't see it in any other area at this point in time, but it's not unusual. We're still trying to see which car companies are going to build various portions of the future e-drives in-house or whether they'll buy them outside and they all have their own strategies.

Okay. And if we're looking at that business, the powertrain business, as a whole longer term, you guys did a recent presentation talking about some of the technology embedded within that powertrain business. Is there a way to – if we're looking at that business, say, five years out – think about how that business might split across, say, traditional transmissions with some of the stuff that's more exposed on the EV or hybrid electric side from a sales perspective?

Yeah. We'll update in January what our expectations are for penetration rates probably in two areas. One will be the penetration rates in various levels of autonomous driving. We showed that chart back in August and we're going to continue to update that. We're also going to be updating what our belief will be in various forms of electrification of the powertrain up to and including complete EVs. We're seeing numbers all over the map quite frankly in people's opinions. What we're trying to do is get a consensus of our customers, outside analysts, people that are pretty intimately knowledgeable. I still personally think the penetration rate of pure EVs will be, maybe, a little bit higher than what we had anticipated before or what we said, but we're going to update it. I don't think it's going to continue or penetrate as fast as many people believe it will. I do think the penetration rate of hybrids will probably increase based on a number of different factors, but we'll update that. And it is a moving target that a lot of it depends on legislation on what's happening with gas prices and it goes on and on. So, we'll continue to update that.

Okay. And then in prior calls, you had alluded to maybe some – I don't know the exact timing of something like this, but maybe some changes in your reporting structure or changes in some information that you disclose to provide us with more insight into some of these parts of your business. Do you have anything else to – do you have any updates there at all?

Yeah. Just, Mike, a quick update. We continue to work through that, and we actually talked to our audit committee and board yesterday in terms of where we're heading. And so you should expect as we give guidance in January that we're based more on a segment – a product segment basis compared to geographic basis. So, that's coming. We've got to work through the business plans and put the information in that process. And certainly, from a segment reporting standpoint, it's got to match what we're doing from a Magna perspective as well if all got aligned.

Okay. That's all my questions. Thanks.

I'd add one thing. I think some people are aware of this, what's just – depending on – you asked the question about the penetration rates, what's happening on electrification of powertrains. We have outlined before and we'll probably update that again next year that, if you look at the potential dollar content from Magna, when you get into hybrid vehicles, it's actually higher than traditional, and that's the area we expect to continue to penetrate. But obviously it depends on how much we win, but just more dollar content in hybrid powertrains. So, hopefully, some opportunities for anybody who's got right technology.

Okay. Thanks.

Thank you. Our next question comes from the line of Rich Kwas from Wells Fargo Securities. Please go ahead with your question.

Hi, good morning, everyone. Wanted to just touch base on autonomous. Delphi said last week that there's a lot of OE interest at the Level 3, Level 3 plus area and from OEMs currently. Are you seeing something similar and, Swamy, if you could comment just on incremental content there and how you see it progressing right now in terms of bidding and quoting activity on that front.

On the Level 3 autonomy, Rich, I think you're right. There seems to be an increasing interest depending upon the definition, whether you call it Level 2 plus or Level 3. But if the building blocks are pretty much similar in terms of being able to address Level 3, it's more the redundance aspect that you have to address. And the other thing that you're looking at is an extended capability of certain sensors, right, whether it is range and resolution of a radar or a camera and so on and so forth. So, yes, we see a lot of activity going in that direction. So, you see some features that are being added to Level 2 and depending on the definition, you can call it Level 2 plus or Level 3, and we are actively participating in most of those inquiries or initiatives by the OEMs.

Okay. And then on your new radar solution that you discussed at the investor dinner a month ago or so, just what's the thought around when that would be commercially available or when you would start offering that out to bid?

The discussions for the offerings are ongoing right now. So, obviously, they'll be targeting programs in the 2020-2021 timeframe, as you know, from a normal automotive cycle. So, we have actually demonstrations and vehicles that are going through the process of the validation, and back and forth communication between our customers and us.

Okay. And then Vince, real quick just – I know you'll give more disclosure for 2018 in January, but just big picture from a margin standpoint, when we think about commodities for 2018, there's been some leveling off here in the last few months on some key commodities. But just as we think about a impact to 2018, what are your initial thoughts?

Yeah. My initial – I don't have some initial thoughts right now. I think we've got to look at a couple things. Think about steel and a big chunk of our steel is under customer resale programs, so there isn't an impact there. And with respect to resin, which is another commodity that impacts us, it depends on a couple factors, we do have some contracts in place, we're entering into new contracts, so it's sort of a year-over-year comparison and that's in the works. I don't have the data with me. But certainly we'll give some update again in January.

But with oil prices where they've moved, that would seem like that's maybe potentially a bit of a headwind on a year-over-year basis or just conceptually.

Yeah. The other piece is what happens to customer recoveries and some of that commodity price inflation and it's hard to tell right now.

There's usually a bit of a delay in this. If I had a crystal ball, I wish I did – it's so hard to tell what's going to happen with oil prices or the impact. There's a lot of moving factors.

Right.

I'm going to be just – I'm going to stay on for one more question and then I've got to take a customer call, but the rest of the people will stay on here. So, it'll be Don Walker stepping out after this next question.

Right. Thanks so much.

Thank you. And the next question comes from the line of Richard Hilgert of Morningstar Please go ahead with your question.

Thank you for taking my questions. Good morning everyone.

Good morning.

Good morning.

I wanted to ask about the CapEx going forward. We had at one point a longer-term guidance there for a little more than 5% this year, a little more than 4% next year. And then slightly – or around a 4% number after that. This year now with the revenue guidance progressing as it has and the CapEx now going to just approximately $1.9 billion, we're coming out at about a 4.8% for the year. You've got the autonomous vehicle, you've got the increase in contract assembly. It seems like the CapEx is coming in lighter than previously anticipated. What should we expect going forward? Are we seeing a decline in the absolute amount of CapEx, or should we continue to expect CapEx to grow? And how is that comparing with the previous expectations that you had?

Yeah. So, Richard, we're still again ramping up business plans, but directionally, I think, you got to kind of keep in mind a couple things. We've moved up sales in the course of the year. So, that isn't necessarily going to impact capital going up or going down. You've got programs that you've got commitments to. You're going to make that capital expenditure, and if sales are up or sales are down a little bit, the percentages may move around, but the absolute level of capital shouldn't change. In terms of what's happened in 2017, and we have been bringing our capital guidance down a little bit, a big part of it is just focus on capital spending and that we need to spend the capital, is there a different way of achieving the same result of putting that fixed cost structure in place? And that's resulted in a little bit of fine-tuning in our capital in 2019. Some of that may move forward a little bit from 2017 to 2018. But I think over the next three years, the overall aggregate capital number should be pretty well what we talked about in absolute dollars. Autonomous vehicles and what we're doing on the ADAS side, when I think about the impact to our income statement and balance sheets, the biggest part of that is engineering expense, it's not really capital. So, we'll have the – as that continues to grow, and we're monitoring that is, what impact does that have on overall R&D and engineering and – a significant amount of year-over-year on our sales base relative to the same. So, again, we're putting all that information together for our business plan as well as to communicate that in January.

We are focused on our percentage of free cash flow. So, that's something we do believe is impacting our stock price. So, we have a big focus internally to all the groups incorporated.

Okay. Just following up a little bit on electrification and the discussion about whether or not battery electric drives are going to be in-house or outsourced. We've got Mercedes telling us that electric drive is going to be pretty much completely outsourced for them, on the other hand, you've got BMW saying it's going to be something that is in-sourced and viewed as a core technology. Do you have a sense at all among the automakers, is there more of a majority that is viewing this as a core technology or is there more of a majority of manufacturers that view electric drive as something that can be outsourced and no longer needs to be powertrain, no longer needs to be the core technology that it once was?

Swamy, you want to answer that?

Yeah, Vince. I think the – you bring a point that, if you look at the engines in the past, you had the same thing, you could have an engine platform, but the differentiation could come in terms of the calibration. So, if you look at the electric drivetrain or powertrain as we want to call it, there is a few pieces or aspects of this, the major building blocks being e-machine or a motor and inverter, a gearbox and obviously the power electronics and software. I think it's not going to be a clear answer to say that it's all going to be outsourced or not. But we feel from the vantage point that we look at, it's going to be – part of it definitely is going to be outsourced, more – the question becomes more to the system. Some OEMs might say they want to have the e-machine or certain aspects of the e-machine internal to them, because it becomes a core, because they have to address either peak power or continuous power and so on. But we believe, we see a definite role for the Tier 1s, as they bring the technical aspects to the table, and bring even economies of scale as we address this more on a platform strategy rather than each individual piece.

Okay. Great. Thank you very much, gentlemen.

Thank you. And our next question comes from the line of Todd Coupland from CIBC World Markets. Please go ahead with your question.

Hi. Good morning, everyone. Thanks for taking my question. My first question is on just ADAS and EV technology, it seems like you are zeroing in on the technology and the pieces needed for systems in both of these areas. Is it fair to say you have what you need there now and don't need to make significant tech acquisitions?

Vince, if you want me to answer this?

Yeah, yeah. Sure. Please go ahead, Swamy.

Yeah. I think, it's a fast-changing field as you know better than us, both in terms of EV. The development cycles of EV might be a little bit more akin to the automotive cycles of the past we're used to. But, on the AV side, from the autonomous side, having a building block in terms of the sensors or the compute power, the most important thing to have an architecture that is modular, reconfigurable and scalable. That aspect, we believe we have the foundation and the basis. But we continue to scan the landscape to see how we need to stay ahead with the changing landscape, right? So, to answer the question very specifically to say is it all done, I think is a very difficult thing to put a pin on, but I would say we have the necessary building blocks and the engineering development continues. But we keep a lookout to see if there is something disruptive coming.

Great. Thank you for that. And then, Vince, directionally it seems like with assembly rising in Europe next year and a flattish outlook for North America that margins are probably going to have to skew a bit lower just from a mix point of view. Is that the right way to think about that?

I think you got to look at all the pieces, Todd, to come to that conclusion. If you think about North America, (01:05:09) production is going to be compared to 2017, if you think about new programs that are launching, new facility costs, continued growth in operating performance and production divisions in Europe. We've been focusing on improving overall margins. We talked about some underperformance that we're working on, so that'll contribute to profitability. We talked about Asia and the growth in Asia, as well we are expecting continued expansion in GETRAG's equity income in the outer years. So, how that all kind of balances out on FX, I don't know at this point in time. But the pieces all look to be going in the right direction, but we need to put it all together.

Thanks you.

We're a couple months early, Todd, before I can give you some real specifics on that. Hello?

Thank you.

Thank you. And our next question comes from the line of Colin Langan from UBS. Please go ahead with your question.

Well. Thanks. Thanks for taking my question. On the joint venture income, it was down $20 million year-over-year, you indicated about $10 million was from GETRAG, what were the other issues sort of in that line item for the quarter?

Yes. I think when you look kind of year-over-year, equity income was down $20 million. And you've got about a $10 million reduction in GETRAG in Europe and about a $10 million reduction in GETRAG in Asia. And there's a lot of moving pieces, but the two big items are GETRAG which in total is $20 million.

And the down $10 million really related to our previous expectations.

Okay. And then when we look at the outlook, full year Europe margin target is about 4%, you're only at 2.9% this quarter, obviously you had a very strong start to the year. What are the key drivers should we think about that kind of get that back closer to the 4% in Q4, is this just seasonality or is there other items as some of those operational inefficiencies in the Europe body and chassis plant actually start to decline?

I mean, we have launch costs for the E-PACE that we actually start to launch and get some contribution on the E-PACE in the quarter. It's also got seasonality, like Q3 is seasonally weaker than Q4. So, we are expecting volumes and sales to increase in the fourth quarter versus the third quarter.

Got it. Okay. And just lastly...

We actually have a fair bit of growth on production sales in Q4 as well.

Got it. And just lastly...

Colin, if I just go back to your equity question kind of you asked, you were looking at Q3 and equity income being down about $20 million, correct?

Yes, year-over-year.

Let me kind of just clarify that, because I may have just confused you with the response. So, on a year-over-year, so Q3 of 2017 compared to Q3 of 2016, our equity income was down to $20 million. And a small piece of that relates to non-GETRAG, which I made some commentary on, which is related to just sales volumes. Substantially, the rest of it relates to GETRAG. And when I look at GETRAG, a big chunk of that was as a result of just the U-shaped results that we were expecting for GETRAG, because they've just got – they got launches. So, we were having additional launch costs, and that was in Europe. When I look at our Asian operations on a year-over-year basis, we're seeing an increase in unconsolidated sales and an increase in equity income. So, the shortfall in GETRAG compared to last year was Europe, and part of that was expected because we were launching programs. Part of it, as I talked about, was unexpected, which related to launch-related costs and a reduction of volumes in a particular program for sales to a Chinese OEM.

Got it. And just lastly, the acquisition of the LiDAR company, any color on where you are targeting the launch, what timing you might launch a product and maybe where the cost target might be eventually to get solid-state, too?

Swamy, you want to take that?

Yeah. I think, we are in active discussions on a few programs from different OEMs. Just like anything, we are not at liberty to speak about the programs right now, but they're addressing, like I said, the 2020-2021 timeframe. From a cost perspective, it becomes difficult until we get a sense of the volumes and the program scope we are addressing. So, I think we'll be able to address that a little bit more in detail in the next two quarters as we get more detail on it, but we're working on programs with OEMs as we speak.

All right. Thank you very much.

Operator, we're going to take one more call.

Perfect. And the final question is a follow-up from Brett Hoselton from KeyBanc. Please go ahead.

Thank you, gentlemen. Second conceptual question which would be assembly. Can you talk a little bit about what your plans are, what you're thinking about demand for your assembly capabilities going forward? Obviously, you're seeing a significant increase and you've already told us where you're going to go revenue-wise over the next few years. What I'm asking is, are you contemplating adding, for example, paint capacity or assembly capacity in any other region of the world than you're currently in?

Brett, we are actually adding today some additional paint capacity in Slovenia, and that operation is not starting up until, I think, that's the end of 2018, beginning of 2019. And kind of the longer-term plans is to continue to add to capacity in Slovenia as programs get awarded. It's a lower-cost region it'll be up to the state of the art (01:12:10) from a technology standpoint, and continue to grow in Europe. And so, that's the first start of it. And we're adding that capacity because based on awarded business today in Magna Steyr Graz, as we get into kind of 2019 timeframe, we're out of paint capacity. So, I see that as kind of the first step to continue growth in our overall complete vehicle assembly business in Europe.

And would you say that beyond 2019 – I mean, the assembly business historically has been fairly cyclical. Would you say that – based on the current demand, would you anticipate beyond 2019 to decline, plateau or increase? I mean, I guess, conceptually I'm asking is, is there a general trend within the industry that you're seeing, which would demand you increase or decrease that capacity?

If I look at kind of Magna Steyr and some of the things that it focuses opportunities, I see a continued opportunity to grow that business.

Okay. Excellent. Thank you very much, gentlemen.

Well, thank you for listening in today to our call. We've got a lot of exciting activities going on in the industry, and Magna continues to be very much involved in that. Thank you again. Have a good day.

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.