TORONTO - Even though automakers are ramping up production after an extraordinary slowdown this spring, Magna International Inc. (TSX:MG.A) officials say they expect more restructuring at Magna and other autoparts suppliers in the second half of 2009.
The Aurora, Ont.-based company, which is one of the bidders for General Motors' Opel business based in Germany, said Friday it remains financially strong and prepared to take advantage of a recovery even though it lost US$205 million in the second quarter.
Magna co-chief executive Donald Walker said Friday in a conference call with analysts that the automakers, sometimes referred to as original equipment manufacturers or OEMs, want to work with companies with stronger balance sheets and the ability to support product launches as well as research and development.
They also want to avoid having a "gun put to their head" to bail out a weak supplier.
"We haven't seen as many people fail in the last quarter as I would have anticipated," Walker said.
"I still think there's going to be a fairly big fallout in the Tier 2 supply base because there's no backstopping from any government program. And if Tier 1s restructure or go out of business, we're going to see an impact flowing through to Tier 2s. It's hard to tell what's going to happen but I would think by the end of Q3 (which ends Sept. 30), whatever's going to happen will primarily have happened."
He said that as production levels begin to return - following the North America-wide shutdown of Chrysler while it was under court protection from creditors and General Motors' significantly reduced output while restructuring - suppliers will need access to cash.
Magna has taken several measures to protect itself and take advantage of other parts suppliers' distress. It has brought some work in-house, built up inventory so there aren't supply disruptions and has funds for takeovers of weaker companies or their contracts.
The company has also taken numerous actions to get its costs down, including pay cuts, job cuts and plant closures. And it appears Magna plans even more belt tightening in the second half of 2009.
"We have been looking at restructuring our business. It was not competitive on a global business for years now. Obviously, that ramped up pretty dramatically with the downturn we've seen in the market in the first half," Walker said.
"Most of the major restructuring actions that we expect we have to take, we've announced internally and from an accounting standpoint. We have a couple of other consolidations we are implementing right now."
But Magna wants to be able to ramp up quickly once its customers increase production and so it has been reluctant to get rid of buildings or equipment that it may need later, Walker said.
He added that it's relatively easy to hire people but "we don't want to cut too much and then find we have to run overtime or we have to be spending new capital."
Chief financial officer Vince Galifi said Magna has actually done less than half of the restructuring it anticipated at the end of the fourth quarter of 2008, when the company said it expected restructuring would cost US$50 million to US$60 million this year.
"On a year-to-date basis, we've incurred about US$20 million of that $50-$60 million we were expecting for 2009. So, based on things we are discussing and planning today, it's probably safe to assume that we're going to incur another $30-$40 million in restructuring costs in the second half of the year."
Walker said the North America operations are about where they should be if the market turns up as anticipated over the next couple of years but "we may have a little bit of restructuring to do in Europe, but that's going to be completely dependent on where we see the market."
There's some risk that Magna could upset some of its customers if it and Russian lender Sberbank succeed in their attempts to buy a combined 55 per cent stake in Adam Opel GmbH, which employs about 25,000 people in Germany, about half of GM Europe's total work force.
General Motors would retain 35 per cent and Opel employees would own 10 per cent under the Magna-Sberbank proposal, creating a potential conflict with Magna customers that compete with GM.
"We recognize we have to have a complete firewall in place where there's no risk of technology transferring to Opel or Opel to other customers," Walker said.
"I think it's a wait-and-see attitude at this point in time but we recognize it could become an issue, specifically with some customers more than others and we're going to have to make sure the firewall is put in place."
Earlier, Magna announced its loss in the second quarter amounted to $1.83 per share for the quarter ended June 30, compared with a profit of $227 million, or $1.98 per share, a year ago. The company reports in U.S. dollars.
Analysts predicted a loss of $1.01 per share, according to a Thomson Reuters poll. Analysts' estimates normally exclude one-time items.
Sales for the period ended June 30 slid 45 per cent to $3.71 billion from $6.71 billion and were well below Wall Street's estimate of $4.1 billion.
Magna said complete vehicle assembly sales slumped 60 per cent to $423 million, while the average dollar content per vehicle fell 10 per cent in North America and seven per cent in Europe.
The reduced output at GM and Chrysler during the quarter were the primary reason for the Magna's decline in North America and that's expected to be partially rectified in the third quarter.
Its A shares closed Friday up $1.92 or nearly four per cent to C$53.30 on the Toronto Stock Exchange.
