Louis B. Tonelli - Magna International, Inc. Donald J. Walker - Magna International, Inc. Vincent J. Galifi - Magna International, Inc..

Itay Michaeli - Citigroup Global Markets, Inc. (Broker) Samik X. Chatterjee - JPMorgan Securities LLC John J. Murphy - Bank of America Merrill Lynch David Tyerman - Cormark Securities Peter Sklar - BMO Capital Markets (Canada) Michael Glen - Macquarie Capital Markets Canada Ltd. Rich M.

Kwas - Wells Fargo Securities LLC Mark Neville - Scotia Capital, Inc. (Broker).

Ladies and gentlemen, thank you for standing by, and welcome to the Magna International Third Quarter 2016 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 conference is being recorded Thursday, November 3, 2016.

I would like to turn the conference over to Louis Tonelli, VP of Investor Relations. Please go ahead, sir..

Thank you. Hello, everybody, and welcome to our third quarter 2016 conference call. Joining me today are Don Walker, Chief Executive Officer; and Vince Galifi, Chief Financial Officer. Earlier today, our board of directors met and approved our financial results for the third quarter ended September 30, 2016.

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 www.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 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.

As we review financial information today, please note that operating results for the interiors operations that we sold in 2015 are presented as discontinued operations, and this review of results will address continuing operations only. Please also note that all figures discussed today are in U.S. dollars, unless otherwise noted.

In the Appendix to our slide package accompanying the call today, we include a reconciliation of certain key financial statement lines between reported results and results excluding unusual items. There were no unusual items recorded in the third quarter of 2016.

In the third quarter of 2015, we recorded a gain on the disposition of a portion of our Bestop business and recorded net restructuring charges related to our European exteriors business. The net of these increased operating income by $124 million, net income attributable to Magna by $68 million, and EPS by $0.16.

Our quarterly earnings discussion today excludes the impact of these unusual items. And now, I'll pass the call over to Don..

Thanks, Louis. Hello, everyone.

Some of the quarter highlights we'll cover off today include our continued strong organic growth, our record Q3 results, and Vince will take you through the quarter details, the return of $288 million to shareholders in the form of share repurchases and buybacks, our recent acquisition of BÖCO, which strengthens our Closures business, and Magna Steyr's celebration last month of the successful run, producing the MINI Countryman and Paceman.

And Magna Steyr is already preparing for new program launches over the next couple of years that are expected to significantly increase assembly sales. We've been highlighting the consistent outperformance of our sales growth relative to light vehicle production. Our strong growth continued in the third quarter of 2016.

In the quarter, total sales grew 16% over the third quarter of 2015. Our organic sales growth, excluding net acquisitions and adjusting for movements in foreign exchange rates, was 9% in the quarter. This compares to about 3% growth for global light vehicle production.

So our global organic sales outperformance relative to the market was 6% in the third quarter. Similarly, North American production sales grew 10% organically, excluding acquisitions and foreign exchange movements. This compares to about 1% growth for North American light vehicle production, which represents 9% outperformance compared to the market.

European production sales grew 11% organically, compared to a decline of 2% for the European light vehicle production. This represents 13% outperformance compared to the market. And Asian production sales grew 44% organically, excluding acquisitions and foreign exchange movements, compared to 8% for Asian production.

This represents a full 36% outperformance, more than five times the growth in the Asian market. In addition to our strong sales performance, we posted third quarter records in EBITDA and adjusted EBIT, net income from continuing operations and earnings per share from continuing operations.

Part of what's driving organic growth is our success in bringing innovations to our customers. Accelerating innovation remains one of our top priorities and a key element to Magna strategy.

We've highlighted a number of our technologies recently, for example, our Trailer Reverse Guidance System, our vision-based ADAS product that's featured on the 2017 Ford Super Duty pickup truck.

The all-new Alfa Romeo Giulia all-wheel drive sports sedan is powered by our transfer case and front axle drive, and our innovative recliners and seat tracks are enabling our EZ Entry 2nd Row vehicle seats that are equipped on a newly launched vehicle, and that has growing interest from other customers.

We also recently announced that we had celebrated the production of our 500,000th Liftgate for the Nissan Rogue launched in October of 2013. It is the North American industry's first all-thermoplastic, fully recyclable liftgate module.

Magna has since been awarded business from other customers for this liftgate technology, and we have additional interest from other OEMs. Many of our innovations have also gained industry recognition. We received top honors from the Society of Plastic Engineers, both in North America and in Europe.

These awards covered a number of our products, including our active grille shutter, which improves vehicle aerodynamics, as well as our carbon fiber hood for the Cadillac ATS-V and CTS-V. The hood weighs roughly 27% less than the aluminum version and is the first of its kind in mass production.

On the M&A front, we recently announced we've agreed to acquire BÖCO, a supplier of latches, hinges, and strikers. With one facility in Germany and one facility in China, BÖCO complements Magna's Closures manufacturing and engineering capabilities and strengthens our technology leadership position in the global closures systems market.

Lastly, we announced this past quarter we will be assembling the BMW 5-Series beginning in 2017. Our MINI assembly business ended production in early October, having produced over 606,000 Countryman and Paceman models for markets worldwide.

Magna Steyr is now busy preparing for the launch of the 5-Series, as well as the launch of programs for JLR, which will begin in the second half of 2017. Our Graz assembly facility is expected to reach approximately 200,000 units per year by 2018, compared to about 76,000 units this year. With that, I'll pass the call over to Vince..

Thank you, Don, and good morning, everyone. I would like to review our financial results for the third quarter ended September 30, 2016. In the third quarter, our consolidated sales increased 16%, or $1.2 billion, relative to the third quarter of 2015, to a third quarter record of $8.8 billion.

Reported North American production sales increased 13% in the third quarter to $4.8 billion, a third quarter record, while North American vehicle production increased 1% to 4.3 million units.

The North American production sales increase is a result of the launch of new programs and the acquisition of Getrag, partially offset by lower production volumes in certain programs, the de-consolidation of Bestop, and net customer price concessions.

Reported European production sales increased 29% from the comparable quarter to $2.2 billion, a third quarter record, while European vehicle production declined 2% to 4.7 million units. This increase was primarily the result of net acquisitions and the launch of new programs.

These were partially offset by the weakening of the British pound against the U.S. dollar, lower production volumes on certain existing programs and net customer price concessions. Asian production sales increased 58%, or $202 million from the comparable quarter to $548 million. This is an all-time quarterly record.

This was primarily as a result of the launch of new programs, primarily in China, and acquisitions. These were partially offset by the weakening of the Chinese RMB against the U.S. dollar, and net customer price concessions.

Rest of world production sales increased 7% or $8 million to $119 million for the third quarter, primarily as a result of the launch of new programs, substantially in Brazil, and new customer price increases subsequent to the third quarter of 2015.

These were partially offset by lower production volumes on certain existing programs and the net weakening of South American currencies against the U.S. dollar. Complete vehicle assembly volumes declined 19% from the comparable quarter, while assembly sales declined 4% to $503 million.

The decline in assembly volumes on the MINI Countryman and Paceman, as these programs neared the end of production, and the end of production of the Peugeot RCZ during the third quarter of 2015, were partially offset by higher volumes on the Mercedes-Benz G-Class.

In summary, consolidated sales excluding tooling, engineering and other sales increased approximately 18% or $1.2 billion in the third quarter. Tooling, engineering and other sales decreased 7% or $47 million from the comparable quarter to $658 million. The adjusted EBIT margin in the quarter increased to 8.1% from 7.4% in the third quarter of 2015.

The adjusted EBIT margin was positively impacted by productivity and efficiency improvements at certain facilities, a lower proportion of tooling and other sales to total sales, lower commodity costs, a lower proportion of complete vehicle assembly sales, and lower new facility costs.

These factors were partially offset by operational inefficiencies at certain facilities, including one body and chassis operation in North America, higher warranty costs, the acquisition of Getrag, a higher amount of employee profit-sharing, higher severance costs, and lower recoveries associated with scrap steel.

Interest expense increased $14 million to $23 million in the third quarter of 2016, largely related to the increase in debt associated with the purchase of Getrag. In the third quarter of 2016 (11:55) effective tax rate was 25.7%, compared to 27.9% in Q3 of 2015.

This largely reflects a decrease in non-deductible foreign exchange adjustments related to the re-measurement of financial statement balances at certain foreign subsidiaries, an increase in R&D credits in North America, and an increase in equity income. These were partially offset by a change in our reserve for uncertain tax positions.

Diluted EPS from continuing operations was $1.29, a Q3 record, compared to $0.97 in the third quarter of 2015.

The increase in diluted earnings per share was a result of higher net income from continuing operations and a lower weighted average number of diluted shares outstanding for the quarter, primarily due to the repurchase and cancelation of common shares pursuant to our normal course issuer bids.

Let me review our cash flows and investment activities now. During the third quarter of 2016, we generated $796 million in cash from operations prior to changes in operating assets and liabilities, and invested $139 million in operating assets and liabilities.

For the quarter, investment activities amounted to $556 million, including $390 million of fixed assets and a $166 million increase in investments and other assets. The increase in investment and other assets includes an $84 million loan to one of our equity-accounted joint ventures.

In the third quarter, we also invested a $180 million in short-term restricted cash deposits. These deposits were security for a $165 million drawn on a euro credit facility that includes a netting arrangement with the bank that provides the legal right of set-off.

We also repurchased 4.7 million in common shares for a $191 million and paid $97 million in dividends in the quarter. Year-to-date, we have repurchased 19.8 million shares for $799 million.

Our board-approved, subject to approval by the Toronto and New York Stock Exchanges, a new normal course issuer bid to purchase up to 38 million of our common shares. This new bid would expire in November 2017.

Our balance sheet remains strong with $364 million in cash as of September 30, 2016, and an additional $2.1 billion in unused credit available to us. I'm going to now cover our revised outlook. We've lowered our light-vehicle production assumption in North America by 200,000 units.

This reflects a shortfall from expectations in Q3 production, as well as expected lower production in Q4 relative to our previous expectations. We've increased volumes approximately 100,000 units in Europe for 2016. This increase relates to an adjustment to previously reported vehicle production in the first half of 2016.

Note that our reported light-vehicle production include some estimates that are updated as actual volumes are reported. In short, our expectations for European production in the second half of 2016 are essentially unchanged from our previous outlook. Our total sales range for 2016 has been narrow, but is largely unchanged at the midpoint.

Our outlook is $35.8 billion to $37 billion. Our North American production sales range was reduced from our previous outlook, reflecting the lower light-vehicle production expectations and an expected lower Canadian dollar.

Our European production sales range was narrowed and raised from our previous outlook, reflecting improved program mix and a stronger average euro in the second half of 2016. Our Asian production sales range was narrowed, but largely unchanged, and rest of world was tweaked up very slightly compared to our previous outlook.

Our complete vehicle assembly sales range was narrowed, but is essentially unchanged from our previous outlook. Implicit in our total sales outlook is an approximately $200 million increase in tooling, engineering, and other sales on which we earned low or no margin. Our adjusted EBIT margin outlook for 2016 remains at approximately 8%.

Our income tax rate and interest expense outlook ranges are both unchanged from our previous outlook. Our capital spending range has been reduced slightly to the range of $1.8 billion to $1.9 billion for 2016. Lastly, with respect to segment EBIT expectations, we moved the range up in Asia to 8% to 9% from the 7.5% to 8% range in our last outlook.

This reflects better than previously anticipated performance. In summary, we continue to significantly outgrow vehicle production in the third quarter. We posted a number of Q3 records this past quarter and our most recent outlook is in line with our previous outlook. This concludes our formal remarks. Thanks for your attention today.

We would be pleased to answer your questions at this time..

Thank you. One moment please for the first question. Our first question comes from the line of Itay Michaeli with Citigroup. Please proceed with your question..

Great. Thanks. Good morning, everybody. Just maybe a first question on kind of thinking about the margin in the fourth quarter. I think typically sequentially you do get a little bit of a bump-up in the margin Q4 versus Q3.

Just curious, I know with some of the production adjustments in North America, how are you thinking about the fourth quarter versus typical seasonal patterns?.

Yeah. Good morning. I think when you look at overall Q4, this quarter, I guess I'm looking at sort of expectations in Q3 versus expectations now. I think there's been a couple of kind of moving pieces that may impact kind of reported Q4 margins.

The first is the drop in North American sales and part of that is production, part of it is a little bit of exchange, and an increase in European sales. So, when you think about the margin profiles in North America and Europe by having a bigger proportion in Europe, that's going to have a negative impact on overall reported margin.

The other thing to keep in mind is that we are expecting higher tooling, engineering, and other sales over previous expectations, that's going to fall into Q4, so that increases sales. You don't really have a lot of pull-through on the bottom line on that. So, again, on a reported basis, that has a negative impact to margin.

I think the other sort of change from our prior expectation to now relates to my formal comments on one operation in North America that launched a substantial program in the third quarter. We've incurred some launch costs more than what we'd expected and we expect that that's going to continue to impact us negatively in Q4.

But when you kind of put that altogether, and there are a lot of moving pieces, a lot of other good things going on in the company, we're very comfortable holding our margin guidance intact at the approximately 8% for the year..

That's very helpful. And then just maybe a follow-up beyond 2016. I know it's early to talk about details for 2017. I think a few suppliers have talked about a flattish global auto production environment next year.

I'm just curious to kind of – your latest thoughts on, relative to your Investor Day, both about the overall market growth globally, as well as just Magna's outgrowth relative to the market. If you can update us on that, that'd be helpful..

Sure can. IHS has been lowering sort of their estimate of production for some of the outer years and we kind of look at our overall business plan for 2017 and beyond. Our expectations are a little more muted than what they would have been eight months or nine months ago in terms of production growth in the major markets that we operate.

But having said that, we're still thinking that production is going to be flatter or flatter up in our most important markets, continue to grow in China and we'll land on an exact number by the time we get to January.

In terms of kind of our prospects on overall sales, again, we're in the middle of business plan time, but it – at this point, I don't see any reason why we should be changing kind of our overall outlook.

We'll have to think about volumes and what that does to overall sales, but pretty comfortable in the business that we talked about back at Investor Day. And we continue to make progress on booking new programs, which should certainly help to firm up sales, especially in the outer years..

That's very helpful. Thanks so much..

Our next question comes from the line of Ryan Brinkman with JPMorgan. Please proceed with your question..

Hi. This is – good morning, this is Samik on behalf of Ryan.

Just following up on Itay's question there and not looking to get any point guidance on 2017 yet, but in addition to the volume leverage you'll have from growth and production and revenues next year, can you sort of help us with what are the other drivers for margin expansion that we should keep in mind going into 2017?.

Yeah. I think when you sort of start thinking about – and I'm not going to get into 2017 or numbers at this point in time. I think some of the things that are going to help us drive margin is going to be Getrag, in particular.

We talked about Getrag in the middle of a number of launches in Europe and in Asia and as those move along, I don't remember exactly the cascade of that, but that should help us continue to grow margins in Europe and in Asia. When you think about Getrag and the impact in North America, the Getrag business is going to wind down in North America.

I think it's completed at some point in 2018. But I'm not sure that's going to have a significant impact at all in North America. We continue to focus on, overall, improving efficiencies in Europe, and if you go back over a number of years, we had a plan in place to move up margins. I think we've been very successful in doing that.

We're still focusing on continuing to improve gross margins as some of those unprofitable programs, if we still have some, unwind and new business starts to ramp up. That should be positive. I think you've got to also take into account the impact that Magna Steyr may have.

Again, I don't have Magna Steyr's numbers for 2017, but Magna Steyr's also going to be in a ramp up in 2017. So to the extent that sales are, on a relative basis, smaller in 2017 versus 2016, that could have some sort of impact on reported margins..

Got it. And just staying on margins here, just a quick follow-up.

Was there, and maybe I missed this, was there any inefficiency at the plant level in North America? The three plants that we've been monitoring for a while, was there any sort of drag on the North America margins from those plants?.

In my formal comments, when I talked about kind of the puts and takes in overall margins, I talked about – one of the negatives in the quarter on a year-over-year basis was one of those underperforming operations. We're in the middle of a pretty significant launch in Q3, and we incurred costs that were higher than what we were anticipating.

And I think that's going to spill into Q4..

Okay..

Which is our overall forecast. With respect to the other ones, as we talked about on the call last quarter, we're on track. We're seeing the improvement. We continue to be on-track this year in improvement. As far as we're concerned, we kind of want to not deal with those, all of these underperforming plants.

I think we've got a good plan in place to move forward..

Got it. And just a final question if I may. You talked in your comments, you mentioned about the growth outlook for 2017 having moderated a bit compared to what it was a few months or a year ago.

Are you seeing any change in the customer price concessions that you've been asked for in relation to production outlook moderating?.

No. I think the price reduction requests are happening all the time. They continue to happen.

I think it's good news that a lot of our customers are healthy and they've got good financial results so they can take a long-term view of total cost of a product rather than doing short-term actions that maybe not wise, but they'd be forced to if they weren't doing well. So we really haven't seen any difference and everybody wants price reductions.

So I doubt things will change. They're not expecting a huge downturn, but I think for the most part, the suppliers around today have a pretty good idea of what their costs are and what they can give back, and most of them are trying to engineer it out through product design or continuous improvement, but there's really no change..

Okay. Great. Thanks for taking my question. Thank you..

Operator, is there another question?.

Operator?.

Mr. Murphy, your line is open. Please proceed..

Hello, guys.

Can you hear me?.

Yes, go ahead..

Yes, we can..

I apologize. I got on the call late but just on Steyr, as we think about the drag that you're seeing as production is winding down there on the outgoing products, and then the ramp back up of the 5-Series.

Just curious how we should think about the cadence of that drag and then that relaunch or ramp in production, Vince, as we think about next year, the end of this year and the beginning...?.

Yeah, John, you probably didn't hear Don's formal comments, but what Don talked about is the MINI Countryman and Paceman ended production in, I think it was the first or first or second week in October, so that's behind us. So as you look at Q4, certainly Magna Steyr's sales are going to be impacted as a result of that.

In terms of the 5-Series, it's ramping up in the first half of 2017, I'm not sure exactly when that is. I don't have it handy with me, but it will start to ramp up. So we'll see obviously if you look on a year-over-year basis, sales being negatively impacted at Magna Steyr until we start to ramp up this program..

Okay.

And it should be additive as we get through the second half of 2017 on a year-over-year basis then I would assume?.

John, you know what, let's (28:32)..

Okay..

Let's get through our business plan. I just want to look at all the volumes on the ramp up and we'll give you some, certainly some color in January..

Okay. And then just a second question on cap allocation. I mean, obviously, you guys have reauthorized your share buyback. There's a lot of different theories that are flying around right now as far as cap allocation, as far as conserving cash, or there's some of your peers making acquisitions that are levering up.

I'm just curious, as you think about cap allocation here, Vince, is this a period where you might pull back your horns on share buybacks and look at other opportunities, or preserve cash? There's a lot of different strategies and changes that are going on here..

Yeah. That's a really good question, John. I think we've debated it a lot at kind of the board in terms of authorizing (29:29). In terms of our overall strategy, it hasn't changed. It's been consistent for a very long time.

We do generate a tremendous amount of cash each and every year and what we like it is that cash invests in the business for the right opportunity, whether that's organic or through M&A. And we've got a very disciplined approach to our M&A strategy.

We look at things that fit our overall product strategy which align us better for car of the future which advance our technological capability. We're, at the end of the quarter, our adjusted debt to adjusted EBITDA was about 1.26 times, kind of in the mid-range of 1 times to 1.5 times.

So as I think about 2017 and capital allocation, it's still – we're going to invest in the business and capital's still going to be a pretty significant number in 2017. We're going to pay dividends and as net income goes up, we can probably – shouldn't be surprised if the dividend increases in Q4.

And then based on essentially opportunities we see on the M&A side, we'll look at buybacks and M&A, or a combination of the two. But I think when you're sitting at a 1.25 times leverage ratio, we have a tremendous amount of flexibility on the balance sheet, even if we're doing some buybacks if the right opportunity comes along to pull the trigger..

Okay. That's helpful. And then just lastly, there's also been some divergence in where schedules are going with some of your big customers in North America pulling back on production and some adding.

I'm just curious what you're seeing in releases in the 30 day to 60 day timeframe and if there's been any major shifts? Or the announcements are made and they largely stick to them. I'm just trying to gauge the volatility in production schedules in the near term..

Vince, you want to add anything to that?.

Yeah. Not a lot of change in the – I mean we've seen declines. Q3 was less than we'd anticipated, Q4 we brought our production down reflecting some of those shut – production cuts. Nothing really volatile in the releases at this point, but it's something that obviously the divisions are monitoring on a regular basis..

Great. Thank you very much..

Our next question comes from the line of David Tyerman with Cormark Securities. Please proceed with your question..

Yes. Good morning, gentlemen. First question is just on North American plant that's having the issues.

Are the issues large enough that they're actually moving the margin in a meaningful way in North America?.

I'd say they're negative impacts. Overall, margin, I'm not sure, David, how I would characterize it in a meaningful way. When you look at overall margins in North American, still got some pretty healthy margins. Q3 we're at 10% for the quarter. But it isn't negatively impacting.

When you look at a quarter, there's a whole bunch of things that go in and out. You look at warranty costs, you look at commodity costs, so..

Yeah..

You got incremental sales and all that. But it has negatively impacted our reported margin in North America..

I guess another way of asking it, Vince, is if you get this plant out to normal operations and I would think you would want to, would the margins, say, next year be different in North America, like would they be a half point higher or something because of this or is it really not in that kind of magnitude?.

Not that sort of magnitude, David..

Okay..

Certainly, it would be accretive to, everything else being identical to what it was in Q3, it would be accretive. But, again, you need to understand launch guys, new facility count, all the normal things we look at..

Right..

But everything else being equal, it would be the (33:33)..

Right. And then just on the Q4, you mentioned a bunch of factors that are going to affect the margins in Q4, production, European sales being up, higher tooling, et cetera. Everything you mentioned sounded like they were dragged.

Is there anything that's going to help in Q4 since you kept the guidance for the year?.

Sure. I mean, I think we've raised our guidance in Asia from a margin perspective and I think you've got to think about, we've got a number of operating divisions so we highlighted some things and we're talking about approximately 8%. That doesn't mean it's 8.000%, it could be approximately.

There's a little bit of a range there, so we're comfortable kind of where we were in Q3 and where we expect to be in Q4 based on everything we see that we're still in that target range..

Since Vince is talking about the back half, old forecast, old outlook to new outlook, so some of that's coming through in the third quarter. I mean Asian pull throughs was pretty strong in the quarter as well. So that's a positive for the full-year change in outlook..

Okay. That's helpful. And then just on the launch profile at Steyr, you talked about the 5-Series.

The two JLR programs, what's the launch profile on those?.

Our – I think it's going to have a pretty insignificant impact, David, in 2017. I think you're looking more in 2018..

Yeah. It launches late in 2017..

Okay. And last question. The warranty was quite a lot higher in the quarter.

Is there any particular reason? Or is this just normal volatility we see?.

There is a warranty item, a particularly larger claim in one of our groups that dates back to a high volume program for a previous generation program that hit us in the quarter. But other than that, it's just – it's how we – when you find about something and when you book it other than for that one larger type item..

Okay. Okay. Good enough. Thank you very much..

Thank you..

Our next question comes from the line of Peter Sklar with BMO Capital Markets. Please proceed with your question..

This insurance recovery that you mentioned in Europe, there was a net insurance recovery.

Vince, can you give us an idea of what the magnitude was in terms of financial impact?.

Sure, Peter. I can. I think when I sit back and look at the overall quarter, there's always sort of pluses and minuses. David had just asked about warranty. Warranty was sort of year-over-year a $20 million additional cost. We had some other things that are plus and minuses that pretty well net to zero.

The insurance proceeds that we – net insurance proceeds that we booked was less than the increase in the warranty costs in the quarter, so less than $20 million. But I think when you put the warranty and you take fire – the insurance – fire insurance recovery and everything else, it pretty well nets to zero..

Okay. Got it. Also you mentioned higher severance costs during the quarter. I'm just wondering what that relates to.

Were there some restructuring activities being undertaken somewhere?.

No. Peter, you know what, it's just ones and twosies in a number of places; it's normal course. But I think when you look at it for the prior period, it was something that was a little higher. So nothing out of the – nothing from an unusual perspective, kind of the normal course of business..

Okay. And then just lastly, back to China.

As you know, the Chinese – I guess it's a sales tax or exemption, ends, I believe, at the end of December and I'm just wondering what you're hearing in terms if the government is going to have some programs to replace that or do you anticipate that there'll be some slowdown because of the pull forward effect of that tax exemption?.

Peter, our internal view is that there's going to be probably some form of continuation of a tax incentive into 2017, probably be less than where it is today, but we expect there'll be something. Having said that, our view is also that there is some pull forward of demand into 2016, which probably negatively impacts 2017.

In terms of the magnitude of that, we'll just have to wait and see when we get through Q4 and whether there's further priority on the tax incentive and when that priority is put in place..

Okay. Thank you..

Our next question comes from the line of Michael Glen with Macquarie Securities. Please proceed with your question..

Hi. Thanks for taking the question. Just in terms of your assembly, there's been quite a bit of press recently about you guys potentially expanding assembly.

Can you just speak to how we should think about that, where you might look to do that? What kind of capital outlay you might see there? The structure of the deal and the return on capital we should expect to see from that?.

Hey, Michael. We've been asked a lot about whether we like our complete vehicle assembly operation and the (39:42) that's associated with that and it's a good business for us. It allows us early visibility of OEM strategy. We're working from an engineering perspective. I think it helps not only Magna Steyr, but the rest of our company.

We've been asked, if there is an opportunity, would you put up more capital, and our view has always been, we like the business. If there was a right opportunity or opportunities, we'd consider putting more capital in place to support the business.

How much that could be, where it could be will depend on the size of the opportunity and where the opportunity or opportunities lie..

Yeah. If we get to the point where we've booked something we'd obviously announce, so we're out of capacity in the out years. We're at capacity in Graz in Austria, so one of the things we're looking at is how would we get some additional capacity if we could take on extra programs. So, we are looking at our options there..

Okay. And can you comment at all on what kind of – if you were to do something along those lines, what sort of return on capital profile you would look from that investment..

More than our cost of capital..

I mean .....

It would have to meet our hurdle rates, and again, depending on where our plant would be, what the profile of the contracts or contract would be, we've set a hurdle rate based on that. So....

Okay. And just in terms of the Iris (41:25) product, you've put out a couple of press releases on that. Can you just speak to your growth expectations on that product in particular and maybe some of the conversations you're having with customers.

Is there a lot of interest getting developed there?.

There's certainly a lot of development in new technologies coming to the market when you're talking about autonomous driving vehicles, and that can be in a lot of different areas. In our electronics business, we've got – we're very big in cameras and also the software and converting the image you get into something useful in a vehicle.

So we can give up the guidance in January when we talk about the overall business and how we're progressing. But we're still on track from what we talked about at our last investor meeting in our A dash (42:20) products.

I still think that the entrance of fully autonomous vehicles into the market anywhere is quite a ways out, but the penetration of vision-based technologies for assisted driving continues pretty well in line with what we thought it would be..

Okay. Okay. I'll leave it there. Thanks..

You bet..

Our next question comes from the line of Rich Kwas with Wells Fargo Securities. Please proceed with your question..

Hi. Good morning, everyone. As it relates to Getrag, as we think out longer term, I'm just looking back at your presentation back in January. And there's a ramp in revenues expected in 2018 and 2019. Either Vince or Don, could you just comment on how we should think about the leverage coming off of those revenues, revenue growth in 2018 and 2019.

Is that going to more or less mimic traditional Magna, or is there anything that we should think about in terms of incremental margins and how Getrag would differ potentially or be in line with traditional Magna?.

Generically if we look at the powertrain product area, it's pretty high capital. We always look at – we don't look at margins. We're looking at what's the return on invested capital. So you would expect that margins in high capital products would give us higher margins.

That's the only way you can get to – our hurdle rates on our return on invested capital, and there – I don't remember off the top of my head, but the sales growth are in consolidated sales because a part of it's through joint ventures and a part of it is wholly-owned, but we're seeing significant sales growth in Getrag.

When we bought the business, we obviously looked at what we thought would be the sales growth and the margin growth and the execution of the product and the launches, and right now it's performing well..

Yeah, Rich, you also got to keep in mind when you think about the Getrag organization is essential part of the business is equity-accounted. All the growth is going to take place, in particular, in China. So equity-accounted is because we report it as equity income.

So that'll increase – as long as we're making money and we expect to make money will increase reported margins, because we don't have any sales, but we have income. So you got to keep that in mind. And as we look at the business from a management perspective, again, we're looking at the managed business.

We ignore kind of equity income and look at sales and profitability and returns on the capital that's employed in the business..

Okay. That's helpful. And then when we think about 2017, is it going to be pretty similar in terms of, I think, the expectation was it was going to be pretty neutral this year for 2016.

Should we think about similar along those lines for 2017 before the ramp up in 2018? Is that a reasonable way to think about things right now?.

Yeah. Rich, we're just running through our business plans and Getrag will be the first years (45:42) running through our process. So I don't have today an update on kind of 2017 and 2018, but if I go back to our initial presentation, we were expecting that Getrag would be accretive in 2017.

And as you said earlier, neutral to maybe a little bit positive in 2016. I can tell you based on year-to-date performance in Getrag that they are performing better than expected. So that's helpful from an earnings per share standpoint in 2016.

But, again, we'll give you some more color as we complete our business plan and we'll talk about that in January..

Okay. And then just two quick ones. Just to clarify on the Magna Steyr.

So in terms of the programs that have been announced that you've won, that are going to launch, does that get you – does that absorb your existing capacity? And then if you want additional programs, then you'd have to think about adding? Is that the – I just wanted to clarify some of the comments from earlier..

So, yeah, Rich, I think when you look at the BMW and the GLR programs that we've announced, that gets us pretty close to, depending on what you're looking at, pretty close to capacity. I think there's still some – these guys are pretty creative at Magna Steyr.

I think there's probably some room to squeeze in a small program in there, but we're pretty close to capacity. So if the right opportunity comes along and it's a more substantial program, as we talked about earlier in the call, it would require an investment in a new facility..

Okay. And then just the last one on steel. Was that a good guy here, right – for the quarter and then, I think Vince you talked about eventually being a potential headwind in 2017.

I know, I realize you're still going through the process, but was it helpful so far? And then should we think of it more in terms of a headwind next year, at least big picture (47:44)?.

When you look at overall commodity costs, they were on a year-over-year basis little accretive, and that's coming from, I think, about the quarter. It's resin. I think overall scrap was a little negative on a year-over-year basis.

But we're monitoring steel prices and if steel prices were moving up, we're pretty well protected, from a resale perspective, on steel, but obviously the sale of scrap impacts us, but steel prices were moving up and more recently they've been coming off a bit. So, I don't have a clear view on what's going to happen in 2017.

Once we get, again, closer to January, we'll give you a view on where we think commodity costs may be for 2017 compared to 2016..

Okay. Thank you..

Our next question is a follow-up question from the line of David Tyerman with Cormark Securities. Please proceed with your question..

Yes. Quick question for Don. Don, I think you've said in the past, I think it's industry consensus that electric drivetrains will be, and maybe even hybrids, fairly small part of the market for quite a long time, maybe even through the middle of next decade.

I've been reading quite a few articles recently and I'm quoting people from places like Daimler saying that things are progressing pretty fast, include in terms of densities and costs and so on.

I'm wondering if you have any changed view on that at this point?.

I don't think we're going to see the penetration of electric, pure electric vehicles, to be substantial in the next foreseeable future out to 2025. So whether – do they get from 3%, 6%? I've seen numbers out there that are substantially higher than that. I just don't see it happening, based on the battery technology out there.

I do think that the – for a number of reasons, what happened with the Dieselgate, what's happening with legislation and technology, I do think that you're going to see a faster penetration of hybrids and there's various implications.

But if you look at a hybrid, actually from a Getrag standpoint, it's good, because they've got some really interesting technology out there that lends itself to hybrids. So we're actually working on a paper, which we haven't got it done yet. I'm trying to get the input from the OEMs.

On what do we think, what's the consensus on the penetration of electric vehicles? What's the penetration on full autonomous driving vehicles or what time period, ride share and things like that? But, so I think specifically to your answer, EV is not a huge – pure EV is not a huge change, although General Motors is coming out with – had just come out with a new fully electric vehicle.

It would be interesting to see how it's received by consumers. But I do think hybrids will continue to penetrate..

Okay. Thank you. I look forward to your paper..

Our next question comes from the line of Mark Neville with Scotia Capital. Please proceed with your question..

Hi. Good morning. I guess just the North America, your raw production number's down a little bit. Some of your customers were talking about bringing production on in Q4.

I'm just curious in year-end, is there anything that you guys have done at this point to maybe protect margins a bit, for lack of a better word I guess, whether it's in-sourcing work or whatever it is, or is it still too early sort of to maybe make some of those changes?.

Every one of our divisions would have to look at what their particular products are, who their customers are, and make decisions on what actions they'll take once they see it. I haven't seen a lot that would indicate we're going to – production is going down.

We just came from a big supplier conference from General Motors, and they're still pretty bullish I think on what they're doing from their market share and their production. However, depending on what the product is, we will typically outsource some of our production.

So if there is lower margins we can in-source, we'll be looking at carrying some temporary labor people, but it really is specific plant by plant. And we'll have to wait and see what happens.

I think, in many cases, we're seeing the exact opposite, where we're seeing customers pull over their recorded volumes and we're running hard to stay up with it..

Okay. That helps. Just on Getrag, you did mention integration. I think it was performing a bit better than expected.

Is it just integration-type stuff? And then I'm just curious longer term, it's been about a year now, have your views on the business changed at all incrementally, more positive, more negative, or just how you feel about it after almost a year?.

Yeah. Overall I'm pleased. They were having some operational issues when we took them over, and they've done a good job in getting over those. Launches seem to be going well. I haven't heard of any major issues. They've brought the DC team, not – the 300 (53:12) to market in many different areas. So there's always be specific things you have to work with.

But overall, it seems to be going well. Their product is well-aligned with what we see the market requiring in the future. I think it's a lot of people focused on fuel efficiency and the DCTs are good in that area on hybrids. They've got some really interesting technology in those areas.

We're looking at what their strategy is for electrification and what we're doing in powertrain. So I think there's some good opportunities there. There'll be a lot of changing technologies. The operational improvements really haven't come from synergies at this point in time because we're still working on that.

But we can in-source what they can in-source where we can leverage purchasing. So we're seeing some of these synergies. But I think that will be more in the out-years..

Okay. Thanks a lot..

Mr. Walker, we are showing no further questions at this time. We will turn the conference back over to you..

Okay. Well, thanks to everybody for dialing in. It was a good quarter. We've still got some opportunities ahead of us. But overall, things are going well. So, I guess, the next time we'll be seeing many of you will be in the Detroit show in January where we'll look on to our business plans, and we'll be giving you an update on our outlook.

So thanks to everybody for your time..

Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines..