Don Walker - CEO Vince Galifi - CFO Louis Tonelli - VP, IR.

John Murphy - Bank of America Merrill Lynch Peter Sklar - BMO Capital Markets Ravi Shanker - Morgan Stanley Brett Hoselton - KeyBanc Todd Coupland - CIBC World Markets Pat Nolan - Deutsche Bank Patrick Archambault - Goldman Sachs David Tyerman - Canaccord Genuity Colin Langan - UBS Richard Hilgert - Morningstar.

Welcome to the Third Quarter 2014 Results Conference Call. (Operator Instructions). I would now like to turn the conference over to Don Walker, Chief Executive Officer. Please go ahead, sir..

Thank you. Hello everybody and welcome to our third quarter 2014 conference call. Joining me today is Vince Galifi, our Chief Financial Officer and Louis Tonelli is also on the phone, Vice President of Investor Relations. Earlier today our Board of Directors met and approved our financial results for the third quarter ended September 30th, 2014.

We issued a press release this morning for the quarter. You'll 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 our investor relations section of our website at www.magna.com.

Before we get started just 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 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.

Q3 was another strong quarter for Magna, each segment reported improved adjusted EBIT and EBIT percentages relative to the third quarter of last year. In North America, we reported higher sales and an adjusted EBIT of 9.8% for the quarter which compares to 9.2% ex E-Car amortization in Q3 of 2013.

In Europe, we reported our 11th consecutive quarter of improved year-over-year adjusted EBIT at $83 million or 2.4% of sales. We continue to make progress in improving our European operations and results, although we continue to incur launch costs at certain interiors facilities in the UK.

In Asia, we’re benefiting from the launch of new facilities and business. We reported adjusted EBIT of $39 million or 7.9% of sales in Q3, and in rest of world which is substantially South America; we have reduced the run-rate of our losses despite lower sales. Our Q3 EBIT loss was $6 million compared to a loss of $27 million in Q3 of 2013.

We've also highlighted through news releases in recent months some of our activities that are bringing more innovation to our customers.

In addition to the North American industry's first all thermoplastic plastic fully recyclable liftgate module for the 2014 Nissan Rogue that we discussed last quarter, we have also launched a modular liftgate using composite structures in Europe on the BMW i3.

On the BMW i8 we're supplying two innovative industry firsts, outside mirrors with hidden turn signals and SmartLatch, an electronic side door latch system. The unique design of the outside mirrors includes a hidden turn signal that is fully integrated, so that the mirror housing and turn signal lens are one in the same.

The signal is invisible when not in operation which allows for styling improvements and improved aerodynamics with no additional gaps or incremental wind noise. SmartLatch electronic side door latch requires no cables, rods or moving handles in the door.

The benefits include significant weight savings and a reduced number of components, the flexibility to be used in any type of car or truck and improved safety, sound quality and craftsmanship and last month our PureView seamless sliding window was chosen as a finalist in the product category for the 2015 Automotive News PACE Awards.

The PureView seamless design conceals the vertical seams that mark the edges of a conventional pickup truck sliding rear window creating a smooth opening when viewed from the outside.

The first to market design debuts on the 2015 Ford F-150 and sets a new trend for power sliders by reducing component needs and improving overall functionality and manufacturing efficiency. These are just a few of our many activities across Magna that provide increased value to the automotive industry.

Lastly certain of our facilities were recently recognized for demonstrating excellence. 18 Magna divisions across six countries received General Motors Supplier Quality Excellence Awards for demonstrating the highest value of quality performance over the past 12 months.

Such awards recognized our ongoing efforts to strive for product excellence and high quality in support of our customers. With that I'll pass the call over to Vince..

Thank you, Don and hello everyone. I would like to review our financial results for the third quarter ended September 30th, 2014. Please note all figures discussed today are in U.S. dollars.

The slide package accompanying our call today includes a reconciliation of certain key financial statement lines between reported results and results excluding unusual items.

In the third quarter of 2014, we recorded restructuring charges entirely related to our European exteriors and interiors businesses which reduced operating income by $7 million, net income attributable to Magna by $6 million and EPS by $0.03.

In the third quarter of 2013, we recorded net restructuring charges entirely related to our European exteriors and interiors businesses. Fees reduced operating incomes by $48 million, net income attributable to Magna by $33 million and diluted EPS by $0.14. The following quarterly earnings discussion excludes the impact of unusual items.

In the third quarter our consolidated sales increased 6% relative to the third quarter of 2013 to $8.8 billion. North American production sales increased 10% in the third quarter to $4.4 billion, largely reflecting an 8% increase in vehicle production to $4.2 million and the launch of new programs.

These factors were partially offset by the weakening of the Canadian dollar against the U.S. dollar and net customer price concessions. European production sales decreased 1% from the comparable quarter, while European vehicle production increased 4% to 4.7 million units.

The decrease is a result of a decline in content on certain programs, in particular the MINI Cooper on which we lost interior assembly business and the Mercedes-Benz C-Class, lower production volumes in certain existing programs and net customer price concessions. These factors partially offset by the launch of new programs.

Asian production sales increased 13% or $47 million to $406 million over the comparable quarter primarily as a result of higher production volumes in certain existing programs and the launch of new programs in China. These were partially offset by net customer price concessions.

Rest of world production sales declined 17% or $36 million to $179 million for the third quarter, primarily as a result of lower production volumes in certain existing programs and the weakening of the Argentine peso against the U.S. dollar. These factors were partially offset by net customer price increases.

Complete vehicle assembly volumes declined 5% from the comparable quarter and assembly sales increased 9% to $740 million. An increase in assembly volumes to the Mercedes-Benz G-Class was partially offset by a decrease in assembly volumes on the MINI Paceman and Peugeot RCZ.

In summary, consolidated sales, excluding tooling, engineering and other sales, increased approximately 6% or $458 million in the third quarter. The increase reflects higher production sales in North America and Asia and higher complete vehicle assembly sales partially offset by lower production sales in our Europe and rest of world segments.

Tooling, engineering and other sales increased 3% or $24 million from the comparable quarter to $719 million. Gross margins in the quarter increased to 13.4% compared to 12.8% in the third quarter of 2013, reflecting improvements in all reporting segments.

Magna's consolidated SG&A as a percentage of sales was 4.6% in the third quarter of 2014 lower than the 4.9% reported in Q3 2013. SG&A declined $4 million to $407 million in the third quarter of 2014 mainly reflecting the impact of translation.

Our operating margin percentage was 6.8% in the third quarter of 2014, compared to 5.7% in the third quarter of 2013, excluding E-Car amortization from last year. This increase substantially relates to the higher gross margin and lower depreciation percentages.

Note that at the end of fiscal 2013, the intangibles related to the E-Car acquisition were fully amortized. In the third quarter of 2014 our effective tax rate was relatively level at 20.3%, compared to 20% in the third quarter of 2013.

The slight increase was mainly the result of lower favorable audit settlements in Q3 2014 as compared to the third quarter of 2013, a valuation allowance released in the third quarter of 2013 and a change in the mix of earnings. These were partially offset by a reduction in losses not benefited and non-credible withholding tax recorded in Q3 2013.

Net income attributable to Magna increased $124 million to $476 million for the third quarter of 2014, compared to $352 million in the comparable quarter. Diluted earnings per share increased 45% to $2.22, compared to $1.53 in the third quarter of 2013.

Diluted earnings per share were negatively impacted by $0.14 in the third quarter of 2013 as a result of the amortization of E-Car intangibles. The increase in diluted earnings per share was a 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 partially offset by an increase in the number of diluted options outstanding as a result of an increase in the trading price of our stock and the issue of common shares related to the exercise of stock options.

I will now review our cash flows and investment activities. During the third quarter of 2014 we generated $737 million in cash from operations prior to changes in non-cash operating assets and liabilities and invested $18 million in non-cash operating assets and liabilities.

For the quarter investment activities amounted to $365 million, comprised of $315 million in fixed assets and a $50 million increase in investments and other assets. Our balance sheet remains strong with $360 million in cash net of debt as of September 30, 2014. We also have an additional $2.2 billion in unused credit available to us.

Today our Board of Directors declared a quarterly dividend of $0.38 per share with respect to our common shares. The dividend is payable on December 12 to shareholders of record on November 28, 2014. Lastly, we disclosed back in January that our Board and Management are committed to utilizing our balance sheet.

In the third quarter, we continued to demonstrate this commitment through our share buyback program, repurchasing 5.7 million common shares. Subsequent to the third quarter, we bought back an additional 1.1 million common shares.

In total we’ve repurchased $1.5 billion worth of Magna shares this year under our current normal course issuer bid which terminates next week. In addition, subject to exchange approvals our Board approved a normal course issuer bid to purchase up to $20 million of our common shares.

This new normal course issuer bid is expected to commence on or about November 13 and will terminate one year later. These actions are important steps to us reaching our adjusted debt to adjusted EBITDA target range of 1 to 1.5 times together with a reduction in our cash balances by the end of 2015. Now I'll pass the call over to Louis..

Thanks, Vince. Hello, everyone. I will review our updated 2014 full year outlook. I'll only provide a summary of our outlook since we covered the details of our revised outlook in our press release. Note that we’ve narrowed certain ranges reflecting the fact that we have three quarters of actuals included in our outlook.

With respect to our vehicle production expectations, we expect 2014 North American light vehicle production to be approximately 17 million units, up about 100,000 units from our August outlook.

In Europe, we expect 2014 total European light vehicle production to be approximately 20.2 million units, higher than our 19.8 million units from our previous outlook. We're also now assuming a lower Canadian dollar and a lower euro relative to our previous outlook.

The increase in our North American production sales range is largely driven by the higher North American light vehicle production assumption, partially offset by the negative impact of the assumed lower Canadian dollar.

The lower European production sales range is largely due to the assumed weaker euro partially offset by the impact of higher assumed light vehicle production.

We’ve narrowed our production sales range in Asia and we have reduced the rest of world production sales range largely reflecting assumed lower Brazilian and Argentinian exchange rates against the U.S. dollar.

The net result of all these factors is a lowering of the top end of our consolidated production sales range to $29.8 billion to $30.7 billion largely reflecting the weakening of a number of relevant currencies against our U.S. dollar reporting currency.

Our expected assembly sales range increased slightly reflecting higher expected assembly volumes partially offset by the lower euro assumption. Implicit in our total sales outlook is an increase in expected tooling, engineering and other sales compared to our previous outlook.

Factoring all this in, our total sales range of $35.8 billion to $37 billion has narrowed, but is approximately in line with our previous outlook. We now expect our consolidated operating margin percentage to be approximately 6.9% for 2014, narrowing the range from the high 6% range in our previous outlook.

For the full year 2014 we expect fixed asset spending to be approximately $1.4 billion, our effective tax rate to be approximately 24.5% and restructuring costs which are entirely related to our exteriors and interiors European operations to be approximately $75 million before tax all consistent with our May and August outlooks.

This concludes our formal remarks. Thanks for your attention. We would be pleased to answer any of your questions..

Thank you very much. (Operator Instructions). Our first question comes from the line of John Murphy with Bank of America Merrill Lynch. Go ahead..

Just a first question on the outlook, if we look at the fourth quarter numbers relative to what you've done year-to-date relative to the outlook that you provided for the full year it looks like you're operating income will be flat to only slightly up at the midpoint of the range.

I'm just curious if there's anything changing in the fourth quarter relative to what's happened year-to-date just because the year-to-date numbers have been so strong year-over-year? It looks like the fourth quarter is going to be closer to flat..

John, I think you've got to consider where we're in the year. Third and fourth quarter typically are impacted by the summer holidays in July and August, weather in North America, Europe and Christmas and December. So we typically have -- all things being equal, the first couple of quarters in the year are going to be stronger quarters for us.

Just due to the nature of production in the industry. So there isn't anything that we see in the fourth quarter that's unusual. It's sort of business as usual for us in Q4..

But Vince, I'm sorry, if we look on a year-over-year basis the operating income looks like it would be about flat at the midpoint of the range. That's a year-over-year comparison, not a sequential. Is there anything that's --.

I think if you recall back when we talked about Q4 results in 2013, we had North American operating margins ex E-Car just over 11%.

When we look at what we're tracking so far in North America we're not going to get to 11% for the year, and we talked last year about a number of things that worked in our favor including mix that helped us increase overall operating margin in the fourth quarter of 2013..

With all respect that's pretty high, John, expecting a pretty high tooling number in the fourth quarter and that's going to drag our average margin down..

And then as we think about the acquisitions versus buyback dilemma that you’ve here because you have a lot of excess capital obviously the big focus on buybacks which is very welcome.

I'm just curious what you're seeing on the acquisition front? And Vince, if you're may be looking at smaller acquisitions for technology or could there still be big acquisitions out there if something gets very attractive?.

We have done a couple of smaller acquisitions, one was a technology one was a small operation we bought in closures product area, actually sold off a small operation as well. So we're continuing to look at some different size acquisitions. We would consider doing bigger ones. We do have a lot of things we're looking at right now.

We're obviously not going to comment on anything until we have it done, but as we've done in the past if something comes up we prefer to make a good strategic acquisition for all the right reasons. But in the meantime we're generating a lot of cash. So we'll continue on the buyback unless we can execute on one of them..

Okay.

So there is a definitely toggle between the two?.

Absolutely, I think the way you should think about capital deployment is we'll continue to pay dividend that should increase over time. I have talked about Q4 as the right time to think about a dividend change.

Invest in the business organically or through acquisitions to the extent that we still have call it a gap between where we want to be from a capital structure standpoint and where we're.

We will deploy that cap by buying back stock through our normal course issuer bid and with the $20 million that we announce today subject to regulatory approval, if we were to execute on the full $20 million call it $100 a share. We're just under that right now from a U.S. perspective, that's $2 billion of cash that we deploy just on the NCIB.

So it will move us towards the targets that we've talked about..

Okay. And then just lastly there has been some concern from auto makers about tightness in capacity in the supply base, and from what we've heard it sounds like there's real pinch point might be around casting and forging and machining. And you guys are obviously great metal formers.

I'm just curious what you are seeing as any issues in the supply base that you deal with or any capacity constraints you might have? And maybe any opportunities to really take advantage of this shortness in capacity to grow the business or make acquisitions?.

We have I would say normal cases where we're tight in capacity for various reasons, but nothing that's too significant. We do have some product lines that are running at good releases which is a good problem to have. I'm not aware of any specific constraints we've got in our supply base, nothing that's come to my attention anyway.

I think the general trend of consolidation in industry though towards big global suppliers will continue. Not necessarily driven by short term capacity problems, so I think the industry's running pretty hard in North America, but it's a good situation to have..

Our next question comes from the line of Peter Sklar with BMO Capital Markets. Go ahead..

I noticed in your MD&A discussion that you again referenced higher launch costs at interiors facilities both in North America and the UK. Now I think you have been talking about a higher level of launch costs in North America since Q1.

And the issue in the UK came up I believe last quarter in the second quarter, so my question is are these additional launch costs that you're incurring at other facilities? Or are these the same launch costs that you referred to in previous quarters?.

Peter, we talked about four before, they're the same four. There are three of them in North America. We didn't get into the numbers, but they're reasonably high. The combination of some sub-supplier capacity issues, our capacity issues and some launch issues on quality.

The three divisions in North America in Q3 were running about the same loss as they were in Q2, expect to see that coming down in Q4 and then continue to improve in 2015. We are on top of all three of those.

There is one big facility in England which is launching a lot of new business and we have had some significant launch problems there for a number of reasons. We had some tooling issues; we had some capacity issues, some equipment issues.

So it was actually a little bit higher -- it lost a bit more money in Q3 than it did in Q2 and I suspect we're going to have still a pretty high loss in Q4 and it will start coming down in 2015. However, in that particular facility we're still going through some significant launches of new business.

So it will be losing money next year as well, but more what we sort of expect as we're launching a big new facility..

Don, why does it always seem to be interiors? Is there something inherent in that business or is it just coincidence?.

I wish I knew. We’ve had some launch issues in the past couple years in some other areas. So we do seem to have an unusually high number recently in the interiors business, but we've had it in exteriors and couple of other products as well.

Interiors is a difficult product line, we tend to have different processes quite often when you launch new products. There are Class A services, it's very visual. So no good reason for it, but it's more coincidence we're having these problems and all four of them are interiors divisions right now..

Okay. My next question is I notice that your warranty costs were higher I believe in North America. They were $16 million higher in the quarter versus last year and in Europe they were $5 million higher.

Is there anything structural change in the industry or the relationship with your customers that's causing you to accrue these higher warranty reserves?.

There isn't anything structurally that's changed in the industry. It's really just the timing of when things come up and when we need to book a liability. If you go back to 2011, 2012 and 2013 and you look at our annual warranty expense and looking on a consolidated basis we're $46 million, $43 million and $40 million respectively.

Year-to-date we're $37 million, so it's pretty well in line with what we've experienced over the last three years and remember our business has been growing so it's just in line. Nothing there that is structurally different this year versus other years..

Okay, and then my last question is on South America where you seem to have made significant progress reducing the losses.

I'm just wondering how you were able to achieve that? Did you get some price relief or are you restructuring? Or is the depreciation of the currency helping you because when you translate your translating into smaller losses? I'm just wondering how you're driving such a big improvement..

Peter, I think if you just look at Q3-to-Q3, you'll see that there is a very significant reduction in the losses. I don't think that's the way you should look at it.

I think you should look at it on a year-to-date basis and the reason I say that is in Q3 of 2013, as we were diving into the financial reporting in South America; we did some balance sheet clean up. So there are costs that were incurred in Q1 and Q2 but got booked in Q3.

So there is an overstatement in Q3, understatement in Q1 and Q2, on a year-to-date basis it was well represented. So if you look at the first three quarters, the loss in rest of world segment which is primarily South America has been reduced by about 50%. And there is a number of things that have contributed to that.

One is continued focus on operating efficiencies. We've been launching some business; we’ve been successful in getting some pricing relief from our customers. FX has also helped us a little bit.

So if you add all that up we've seen about a 50% reduction which is consistent with what I think, Don indicated on the first quarter call when he was asked where does he see South America for 2014 and he indicated at that point in time that we think we'll be about half of the loss in 2014 that we had in 2013..

Our next question comes from the line of Ravi Shanker with Morgan Stanley. Go ahead..

Vince, if I can just follow up on your comment in Latin America. This Brazil investigation, is there any way you can dimension what a maximum level of find could be? Because a pretty small operation for you and you don't even make much money there.

So I can't imagine this being a big issue, but is there any way you can dimension that?.

Ravi, at this point in time we’ve no update, everything we've known we've disclosed publicly on Brazil. I've got no update for you at this point in time. If you think about our business in Brazil is pretty small compared to what we do in the rest of the world..

And one housekeeping question, the royalty income that goes near corporate other income line has been running in the mid to high teens for the last four quarters.

Is that a good run-rate to go into 2015?.

I think as you get into 2015 we're going to look at our -- we call it a management -- we call it an affiliation fee to our various operating groups and we're going to be resetting that rate and it's going to be reduced. So the amount of income that gets recorded at corporate going forward starting in 2015 will be lower.

So it's a net nothing on a consolidated basis, it will be a little bit of a positive impact in our segments with a reduction in corporate..

So net neutral to EBIT?.

Yes. Ravi, just one other point I wanted to make sure, there will be an overall net reduction in corporate which ultimately gets passed on indirectly to the segments and that's because the fee that we're paying Mr. Stronach goes away at the end of this year.

And right now he's entitled to 2% of pretax profit sharing, so that's going to be a complete incremental add-on to our income in 2015..

Finally on the buyback, just want to clarify that this 10% NCIB for 2015, as for our map that doesn't get you quite all the way to your full leverage target.

So just wanted to clarify are you guys leaving some kind of dry powder for M&A? And if you aren't done with M&A by this time this year, do you expect to really up the buyback with the next NCIB as well? And also you have a little bit left over in your 2014 NCIB.

I think 2.5 million shares, is that something that has to get done before the expiry by November 13 or can that be carried over to the next one?.

Ravi, to the extent that we don't eat into the existing $2.5 million authorized under the existing bid which expires early next week that's lost. So we will fall under the new NCIB and that will expire in November of 2015. If you fast forward to November of 2015, we will have the ability to announce another NCIB at that point in time if we're short.

But when you think about capital structure and you think about our targets, the 1 to 1.5, I get asked a lot about where you're going to going to be? Are you going to be at 1? Are you going to be at 1.5? Or are you going to be somewhere in between all that? It really depends on the opportunities, in particular acquisition opportunities, and the way I position us is if we're active with some acquisitions, I expect that we're going to be at the higher end of that ratio because we've strengthened our company done some things from our product portfolio standpoint.

But if we don't do any acquisition, I'll take you to an extreme, we're probably going to be at the lower end of that range and keep some more powder to pursue growth in the business and part through acquisition.

So with the buyback we just announced again depending on where the stock price is, we should be able to get ex-acquisition to low end of that range that we've been disclosing over and over quarter by quarter..

You guys have been very clear with your strategic plan for the last two years and you've been executing very well against it, so well done..

Thank you..

Our next question comes from the line of Brett Hoselton, KeyBanc. Go ahead..

Just a quick follow-on to Ravi's question here, it sounds like your expectation is you can get to the one times ratio with the $20 million authorization plus using whatever you’ve currently leftover.

Am I hearing that correctly?.

Yes. Well with the $20 million and we also have the ability to do another NCIB a year from now and you have half of the month of November and part of December to continue to buy back stock. So in theory between now and the end of 2015, we could buy back more than 20 million shares..

Okay, and then just thinking about margin progression by geographic region. My understanding is that you're thinking North America; you can probably tread water at around a 10% EBIT margin. So if I'm incorrect there, please clarify, can you talk about your expectations? My notes here have 4.25% to 4.75% range by 2016.

Can you talk about what your expectations are in Europe and are you on track to achieve that in your opinion?.

We are right in the middle of business plans right now. So we'll certainly have more up-to-date information by the time that I guess we talk in January at the Detroit Auto Show, but what we've been saying is that in North America 9.5% to 10% is a range that we think is doable over the next couple of years.

What we've been seeing in Europe is by the end of 2016 being 4.25% to 4.75%. In terms of where we're in that progression we look at our performance in 2013 and 2014. I would say that in 2013 we're probably a little bit ahead of where we thought we were going to be.

In 2014 if we back out the issue that Don talked about in England I would say that we're at or maybe a little bit ahead of where we thought we would be, but we're certainly being impacted negatively by the losses -- the launch costs in our English facility. And again, we expect that those issues will substantially be diminished in 2015.

So, we expect to continue to see margin expansion in Europe next year, but again we will give you an update once we got our business plans completed in January..

And then as we think about your Asian operations growing quite nicely and I think you also had expectations that you were going to see some margin expansion there.

Is there anything that is causing you to believe that you are maybe ahead of pace or a little bit behind your expectations?.

Again, I haven't focused a lot on 2015 and 2016 because we're in the middle of the business plan. So I want to get the numbers refreshed. But as I looked at the numbers last quarter which I looked more closely at 2015 and 2016, our guidance that we gave last quarter should still hold valid.

The only headwind that we might get in Asia is continued growth, and we've talked about that as a good thing/bad thing. Good because we're growing, but it could push out the margin expansion a year in terms of what we talked about where we might be in 2016.

But again, as we update where we're in Asia and if we do gross sales faster than what we originally thought we will communicate that to the market in January..

Our next question will come from the line of Todd Coupland, CIBC World Markets. Go ahead..

I'm just wondering, Vince, are you able to disclose what the euro margins would be ex the launch costs in England?.

No Todd, we're not going to back out the English numbers that back into an adjusted European EBIT. We're still looking at -- you look at Q3 of 2014 and you compare that to where we were last year. We're still ahead so we're making progress even though we're fighting some launch issues in England..

Okay.

And have you disclosed what platform or vehicle that is in England that you're launching?.

No, we haven't Todd..

Our next question comes from the line of Dan Galvez, Credit Suisse. Go ahead..

Just wondering if you could clarify the comments on Asia headwinds from investments in growth, do you see that as a kind of a drag on the current level of margin? Or more just a drag on what the potential incremental margins on your growth could be if you weren't investing as much?.

Okay let me clarify this, and again, we go back some time because we're updating our business plan and we talked about the growth that we expected in Asia based on substantially book business we had back in January of 2014.

And so based on those set of assumptions, we saw growth in Asian margins to the end of 2016, the 8.25% to 8.75% that we've talked about.

My comments just say that if we double our sales in China and we're making substantial investments in 2015 and 2016 and these are incremental sales to what we had in January 2014 that could delay the margin expansion as we put new capacity in China to support the new sales. Could come on in 2016 and 2017, so I just said it's a what if scenario.

But we'll have to --.

Just to be clear, if we double our sales over our expected growth, because we do expect to double our sales in China between 2013 and 2016. So if incrementally from there we even grow more than we originally expected that's what he's talking about specifically..

And just a housekeeping question, sorry if I missed it in the release but could you tell us what your current leverage level is as of the end of Q3 the way you calculate it?.

0.86..

0.86. All right. Thanks very much..

And our next question comes from the line of Rod Lache, Deutsche Bank. Go ahead..

It's actually Pat Nolan on for Rod. I had just two questions for you. So just taking a step back and simply looking at your incremental margin performance adjusted for E-Car, the past two quarters you've been running somewhere close to the mid-20% range, if you look at your change in operating profit versus your change in revenue.

Historically, that number has been more like a mid-teens number.

Should we be thinking about the past two quarters as an aberration based on just really strong mix and cost performance and going forward that number should look like more like the mid-teens incremental margin historically? Or should we be thinking that it should be higher going forward?.

Pat, I don't have the incremental margin numbers with me in Q1 and Q2. Maybe Louis has them, we're in different locations. But when you think about incremental margin there is going to be a couple things that are going to impact quarter-by-quarter. One is the mix of business and where that's coming.

If more of the incremental sales is coming from a higher capital intensity business, you would expect your incremental margin to be higher. If the sales increase is coming as a result of putting in new capacity and we're putting in new capacity in North America in several plants, then that incremental margin is not going to be your variable margin.

It's going to be closer to your average margin and we've been commenting for some time that we're putting capacity in North America. So as you start thinking forward, the incremental margin as a result of that new capacity should be smaller..

Can I ask one housekeeping question? The 2% of pretax payment, what line item does that flow through in the P&L?.

SG&A..

Our next question comes from the line of Patrick Archambault with Goldman Sachs. Go ahead..

Just two from my end, number one is on the content growth.

Obviously this year has been a very strong content quarter for North America, given the product cycle that you’ve, how do you see that playing out? I know for instance GM trucks has been sort of a big probably boost this year, so my first question is on the product cycle and if you've got some thoughts you want to extend to Europe as well? Understanding there is a lot of puts and takes, that would be helpful..

Content growth has been strong in North America as you pointed out and we expect that to continue through the rest of this year. We haven't really looked at 2015 versus 2014 so we will have to wait until January to give you some color on our expectation for content growth going forward.

In Europe we've been talking for some time about the fact that we're letting some business roll off or not quoting on future business because of the price of the business. That's going to have some impact on our average content and we have seen that. So we have seen some situations where we have lower content on the next generation of a vehicle.

So I would say for the most part what we've seen this year in Europe is very much as we've been talking about for the last couple of years, I expect, over the next couple of years we're going to see something similar where we won't see a lot of content growth in Europe..

Yes, that was going to be my follow-up, and just one separate one. Not to beat a dead horse on Latin America, but obviously there has been some big improvements that you highlighted there in the call especially on a nine-month basis.

Now are you through what you guys can do and is the rest to volume and FX to stabilize and recover to see improvements there? Or are there still operational levers that you guys think you can pull?.

We've made some substantial improvements, but we still have some operational improvements we can make there. It's really a moving target; it depends on what the customers are willing to pay us for inflation and wages and various things and that seems to be discussed every quarter or every two quarters or back at it because things keep on moving.

We’ve made some improvements, as I said and we're going to continue to make some improvements, but it's a really difficult environment to work in and we don't really know what's going on with currencies and a number of other things.

So we’ve some more things we can control and many of them are still going to be dependent on discussions with our customers..

The next question comes from the line Rich Kwas with Wells Fargo. Go ahead..

Just two questions Vince, in terms of 2015 I know it's early stages, but just broadly speaking how are you thinking about restructuring spending for 2015 related to Europe? Should it be lower next year? And then for CapEx you had to step up this year.

Should we expect a similar increase in percentage terms next year or is it going to stabilize at this level in your view?.

In terms of restructuring, we have a three-year plan, there was substantial restructuring costs in 2013. There was substantial in 2014, we're expecting about $75 million this year. But I don't think we get through the loss of the cost until 2015 based on the plans that we have.

So again we'll have to update those numbers for more timely data, but the expectation is that 2015 restructuring costs are going to be significantly less than 2014. I will give you some color once we get through January. From a capital standpoint, our business plans again are in place.

I can tell you that we're winning business and we're winning replacement business, we're winning incremental business, that all requires capital. And when we're looking at $1.4 billion of capital for 2014, does some of that get carried forward into 2015 that may impact 2015? But I don't see capital coming down in any significant way.

I think there is probably more bias that capital moves up rather than it goes down..

I would agree with that..

It could be that we see -- we can give you an update in January, but I suspect it will probably go up based on the amount of business we're winning..

And then just on the North America margin, you got the insurance recovery this quarter, I think it was $10 million but then the fire was a $25 million headwind last quarter.

So is there still more insurance recovery coming through in North America?.

I think there is going to be some more coming in, Rich. I didn't think that we were going to get the $10 million when we got it. We may pick a little bit up more in Q4 maybe Q1 or Q2 of next year, but we're expecting a little bit more recovery, but we won't recover the full $25 million..

Okay.

So something less than $15 million going forward in terms of contribution?.

Yes..

Our next question comes from the line of David Tyerman, Canaccord Genuity. Go ahead..

My question is on the interiors in North America.

Are the dollars big enough there that they could actually move the margins for North America?.

The dollars are -- if you look at the impact on a year-to-date basis they would move the margin, but again its decimal points, David..

Okay.

Are we talking like something like 0.5%, that type of thing?.

David, I haven't calculated it. Half a point is a big number. It'll move it but I'm not sure it's half a point, David..

Our next question comes from the line of Colin Langan, UBS. Go ahead..

First question, any color on how much FX impacted your guidance for this year?.

Yes. It's about $400 million if you look at it forecast-to-forecast..

It was about what was that? $400 million?.

That’s outlook to this [ph], they are both $400 million..

Okay. And does the FX change have a year-over-year impact on your margins? Or is it fairly neutral when we think about it? When thinking about the Q4, sorry..

I guess relative to when we started the year, the euro has declined. So the margins in Europe are less. So that would be sort of a positive mix to margin. In respective Canadian operations there are a bunch of hedging programs that we enter into.

So I'm not really sure what impact that's going to have on overall consolidated margin, but I don't see that impact being very significant, Colin, overall on consolidated --.

Okay so and when we think about Q4 year over year it's still kind of the answer of tough comparisons and mix from prior year as the main driver of flattish outlook?.

Year-over-year in Q4? I think you're talking specifically about Europe?.

Just overall..

I think we've had -- it's hard to in isolation say tough comparison. We had some good things going on in Q4 last year particularly in North America. This year we're being challenged a little bit by the insurer situation both in Europe and North America.

There is a lot of moving pieces and when we think about where the full year's going to be in North America we're pleased with the progress we made and ex-England we're pleased with the progress we've made in Europe as well..

Okay, just one last question. The beginning of the year your guidance for North America growth is about $1 billion lower. So you're looking like you're coming in $1 billion better. You also gave a 2014 to 2016 outlook that indicated another $1.6 billion of growth.

How should we think about the outlook following this year now that you've come in so much better this year? Is that all still incremental on top of your better 2014? Or have you kind of seen some of that $1.6 billion growth already this year?.

You would have seen some of it. Don't forget when we give that guidance we give you explicitly the volumes that we're expecting in the current year, the volumes that we're expecting in the 2016 year and so all those things I expect to change.

So how much has changed? We won't know until we do some analysis, but for sure they will have changed just because even volumes changed from where we started the year. And probably 2016 will change from what we expected..

Our next question comes from the line of Richard Hilgert, Morningstar. Go ahead..

We've got some background noise in the room that Don and I are in. So I'm going to put you on mute and come back on to answer your question, but ask your question, please..

Just looking at the guidance and the performance on margins so far this year, if I'm assuming a 6.9% for the full year that means that your fourth quarter consolidated adjusted EBIT could be flat or lower versus the prior year.

I'm wondering if that guidance of 6.9% is just being conservative for the guidance sake or is there something in the fourth quarter that is causing year-over-year degradation in margin? Because for the past few years your fourth quarter has been higher on profitability than your third quarter and this time around it doesn't look like it's going to be..

Richard, I think I kind of addressed that similar type question earlier. There are things that we were favoring in Q4 last year, some good mix in North America. I think we talked about some accruals in Q4 last year. This year we're being impacted by some of the interior issues that Don talked about.

This is kind of our outlook based on the information we have today and hopefully as we move through October and November and December we get a better mix and we can communicate better results, but given everything we have got today that's kind of where we see ourselves landing for the full year of 2014..

Okay. And then looking at the regions, the revenue by region which includes the tooling, engineering and assembly, the Asia EBIT margin looks like pardon me, the Asian year-over-year increase in revenue slowed down quite a bit in the third quarter compared to the growth rates that we've seen for the past few quarters being high teens, low 20%s.

This quarter came in 4.6% increase.

Was just curious what was going on there with the revenue?.

Richard, I don't think there's anything to be overly concerned about. We've talked about quite substantial growth that we expect in Asia, specifically in China over the next couple of years. So you're going to have quarters where the rate changes, but I wouldn't extrapolate from that that there is some sort of slowing in our growth.

Obviously, the numbers are getting bigger so the growth rate's going to be impacted by that, but we still have substantial growth expected in Asia. So I wouldn't make too much of it..

Okay. And then on the margins by the geographic regions North America great increase, 150 basis points versus last year, Asia, great margin performance, up 420 basis points. Europe is still lagging there. It looks like we kind of reversed course a little bit.

Is that going to continue that trend into the fourth quarter in Europe?.

Yes. We don't give margin guidance, quarterly margin guidance by segment. So I am not going to get into what we expect for the fourth quarter specifically. We started the year saying that we expected a modest improvement in our European operations not to the extent that we've seen over the last couple of years. So I'd say that's pretty much in line.

And Vince alluded to the issues that we've had in the UK on the interior side. So I think it all hangs together with what we've seen so far this year..

Richard, if you look at where we're in Europe we disclosed it in the MD&A but I think this is kind our 8th or 9th or 10th or 11th quarter-over-quarter sequentially of margin growth in Europe. Even you look at Q3 of 2014 in Europe we're at 2.4%, we were at 2.1% a year ago. Last quarter we were 3.3% a year ago, in Q2 we were at 3.2%.

So we're showing improvement. And as I did comment and Louis did mention again, the margins in Europe would have been higher if we didn't have those additional launch costs in that English facility..

Yes. Okay and then final question, more of a strategic one. You have talked about acquisitions on this call.

And I was curious other than the obvious of A, you want this to be something profitable strategically what kind of an acquisition fits in with Magna? What are you looking for customer, for geographic representation, for product? How do you think about those kinds of things?.

We've outlined in the past what we're looking for.

In an ideal world you get a great technology that is complementary to one of the products which we see as a good growth area in the future with customers that were either underrepresented with or somebody that we think is going to be on some strong platforms and in geographic regions which we're trying to grow in and that primarily would be China quite frankly because we're already strong in other North America and Europe.

So it's a combination of a number of different things and it really depends on what's out there. At the end of the day it's got to be something that we think is strategic and also is going to be a good financial deal..

Thanks very much, operator. Vince and I have to leave because we're going to miss a plane here. So I want to thank everybody for joining us today. Another strong quarter and we're expecting continued strong performance for the rest of the year.

We still have a lot of work to do in several areas, but I'm confident we will continue to make further progress in each of the regions. And with that, I appreciate everybody calling in and enjoy the rest of your day. Thank you..

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation. Have a great day everyone..