Earnings Call: Q2 2016

Aug 5, 2016

Ladies and gentlemen, thank you for standing by. Welcome to the Second 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 Friday, August 5, 2016. I would now like to turn the conference over to Louis Tonelli, VP of Investor Relations. Please go ahead. Thanks. Hello, everybody, and welcome to our Q2 2016 conference call. With me today are Don Walker, Chief Executive Officer and Vince Galifi, Chief Financial Officer. Yesterday, our Board of Directors met and approved our financial results the Q2 ended June 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. The slide package accompanying our call today includes a reconciliation of certain key financial statement lines between reported results and results excluding unusual items. There were no unusual items recorded in the Q2 of 2016. In the Q2 of 2015, we recorded a gain on the disposition of our battery pack business. This increased operating income by 57,000,000 dollars net income attributable to Magna by $42,000,000 and EPS by $0.10 Our quarterly earnings discussion today excludes the impact of these unusual items. And now I'll pass the call over to Don. Thank you. Good morning. The Q2 of 2016 was another successful quarter for Magna. We posted records for total sales as well as North American and European production sales. At our Investor Day back in March, one of our key messages was around the consistent outperformance of sales growth relative to light vehicle production across product areas and across regions over a number of years. We articulated how the sales outperformance relative to the market is expected to continue. Today, sales grew 16% over the Q2 of 2015. Our organic sales growth excluding net acquisitions and adjusting for movements in foreign exchange rates was 10% in the quarter. This compares to about 4% growth for global light vehicle production. So our global organic sales outperformance relative to market was 6% in the Q2. Similarly, North American production sales grew 6% organically, excluding foreign exchange movements. This compares to about 2% growth for North American light vehicle production. So we grew 3 times faster than the market growth in North America. European production sales grew 14% organically compared to 6% for European light vehicle production. This represents 8% outperformance compared to the market of Asian production. This represents 16% outperformance, almost 4 times the growth in the Asian market. In addition to our strong sales performance, we posted a record in EBITDA going over $1,000,000,000 the quarter and record EBIT net income and earnings per share. Let me turn to our segment results for a moment. In North America, we generated another solid EBIT margin of 10.2% despite continued significant launch and new facility activity underway. In Europe, EBIT margin reached 5.6% for the quarter. This was the highest adjusted EBIT margin percent since we started reporting quarterly European segment results going back to 2,003. This result was achieved despite the Getrag acquisition, which negatively impacted European margin by about 0.4%, largely due to launch costs for new transmission programs and purchase price amortization. Segment results were strong again in Asia with an EBIT margin of 8.2% for the 2nd quarter despite ongoing investment activities on the continent. And we continue to contain losses in South America despite the challenging operating environment there. Our EBITDA loss was $5,000,000 in the Q2 of 2016 compared to $8,000,000 loss last year in Q2 and an $11,000,000 loss just last quarter. Lastly, we recently received considerable industry recognitions for high quality innovation. In the past couple of months alone, we have won awards for excellence from General Motors, Ford, Honda and PSA. We've also recently honored for innovations related to carbon fiber on hoods for Cadillac and proceed innovations on the Chrysler Pacifica. These recognitions reflect our close customer relationships and how we bring forward world class manufacturing innovations to support them. With that, I'll turn the call over to Vince. Thanks, Don, and hello, everyone. I would like to review our financial results for the Q2 ended June 30, 2016. All figures I'm going to discuss today are in U. S. Dollars. In the second quarter, our consolidated sales increased 16% or $1,300,000,000 relative to the Q2 of 2015 to a record $9,400,000,000 Reported North American production sales increased 7% in the second quarter to $4,900,000,000 Excluding the impact of foreign currency translation, North American production sales increased 9% while North American vehicle production increased 2% to 4,600,000 units. The North American production sales increase is a result of the launch of new programs, the acquisition of Catragg and higher production volumes on certain programs, partially offset by the weakening of the Canadian dollar against our U. S. Dollar reporting currency, the Bestop equity accounted joint venture and new customer price concessions. Reported European production sales increased 36% from the comparable quarter, while European vehicle production increased 6% to 5,800,000 units. This increase was primarily the result of net acquisitions, the launch of new programs and higher production volumes on certain existing programs. These were partially offset by net customer price concession. Asian production sales increased 28 percent or $109,000,000 to $499,000,000 from the comparable quarter. This was primarily as a result of the launch of new programs, particularly in China, higher production volumes in certain existing programs and acquisitions. These were partially offset by the weakening of the Chinese and South Korean currencies against the U. S. Dollar and net customer price Rest of world production sales declined 14% or $18,000,000 to $107,000,000 for the 2nd quarter, primarily as a result of the weakening of the Argentine peso and Brazilian real against the U. S. Dollar and lower production volumes in certain existing programs. These were offset by the launch of new programs and net customer price increases subsequent to the Q2 of 2015. Complete vehicle assembly volumes declined 9% from the comparable quarter, while assembly sales increased 7% to $652,000,000 Higher volumes of the Mercedes Benz G Class and the higher euro against the U. S. Dollar together more than offset a decline in assembly volumes on the mini programs and the end of production of the Peugeot RCZ during the Q3 of 2015. In summary, consolidated sales excluding tooling, engineering and other sales increased approximately 15% or $1,100,000,000 in the 2nd quarter. Tooling, engineering and other sales increased 33 percent or $198,000,000 from the comparable quarter to $797,000,000 EBIT margin in the quarter increased to 8.4% from 8.3% in the Q2 of 2015. The EBIT margin was positively impacted by lower commodity costs, including higher recoveries associated with scrap steel, a lower proportion of complete vehicle assembly sales and productivity and efficiency improvements at certain facilities. These factors were partially offset by a higher proportion of tooling to total sales, higher launch and new facility costs, a higher amount of employee profit sharing, operational inefficiencies at certain facilities and the acquisition of contract in the amount of 0.2%. Interest expense increased 14,000,000 dollars to $22,000,000 in the Q2 of 2016, largely related to the increase in debt associated with the purchase of GoodRAC. In Q2 2016, our effective tax rate was 26.9% compared to 26.3 percent in Q2 of 2015. This largely reflects an increase in nondeductible foreign exchange adjustments related to the remeasurement of financial statement balances at certain foreign subsidiaries. Diluted EPS from continuing operations was $1.41 a record compared to $1.19 in the Q2 of 2015. The increase in diluted earnings per share was a result of higher net income and a lower weighted average number of diluted shares outstanding for the quarter, primarily due to the repurchase and cancellation of common shares pursuant to our normal course issuer bids. Let me review our cash flows and investment activities now. During the Q2 of this year, we generated $864,000,000 in cash from operations prior to changes in operating assets and liabilities and invested $151,000,000 in operating assets and liabilities. This investment includes an increase in tooling amounts and is consistent with the typical buildup of other working capital in the first half of the year. We expect to recover a substantial amount of the first half investment by the end of the year. For the quarter, investment activities amounted to $543,000,000 including $409,000,000 in fixed assets, dollars 103,000,000 increase in investments and other assets and $31,000,000 for acquisitions. We also repurchased 7.8 1,000,000 common shares for $308,000,000 pursuant to our normal course issuer bid and paid $98,000,000 in dividends in the quarter. Our balance sheet remains strong with $597,000,000 in cash as of June 30, 2016, an additional $2,190,000,000 unused credit available to us. Next, I'm going to cover our revised outlook. Our light vehicle production assumptions are unchanged in North America and it increased about 100,000 units in Europe for 20 16, reflecting higher Q2 volumes than previously anticipated, partially offset by some anticipated softening in the 2nd part of the year relative to our previous expectations. $37,200,000,000 Our North American production sales range was tweaked down very slightly from our previous outlook, reflecting changes to certain program volumes. This was offset by our complete vehicle assembly sales range, which was increased slightly, mainly reflecting our higher expected sales for the Mercedes Benz G Class. Our Europe, Asia and Rest of World production sales ranges are all unchanged from our previous outlook. We increased our expected EBIT margin for 2016 to approximately 8% from high 7% range, reflecting continued strong execution and better results in Europe. We increased our income tax rate outlook to approximately 26% from the 25% to 26% range, reflecting a change in income mix and higher expected nondeductible foreign exchange adjustments as we experienced in Q2. Our interest expense and capital spending ranges are both unchanged from our previous outlook. Lastly, we made two changes to our expected segment EBIT expectations. We moved Europe up to approximately 4.5% from approximately 4%, and we narrowed the range in Asia to 7.5% to 8% from our 7% to 8% previous range. These reflect expected 2016 operating performance better than previously anticipated. This concludes our formal remarks. Thanks for your attention today. We'll be pleased to answer your questions at this time. And our first question comes from the line of John Murphy with Bank of America Merrill Lynch. Please go ahead. Good morning, guys. Just a first question and we always appreciate all the detail you give us on the programs on the positive and negative as you go by region. But I was just wondering if you could talk more broadly about the benefit of mix as we're seeing a greater and greater portion of sales, vehicle sales both in North America and China and to some degree Europe moving to crossovers and in some of these markets to trucks and how much of that you think is cyclical and structural? Because it seems to be coming your way. I'm just trying to understand that. When I look at the overall production sales changes sort of year over year, quarter over quarter, In North America, we've benefited from stronger volumes on existing programs, we're hearing about what's kind of launched. So we have been benefiting from the shift towards SUVs, CUVs and light trucks in North America. Yes. We have I mean, we're most of you know our top 10, we're pretty heavy on trucks. And in the Q2, our top 10 volumes alone were up about 7% versus the market at 2%. So we've certainly been benefiting from the shift towards trucks and crossovers in the North American market. Our view on the volumes are probably going to be much different than IHS or anybody else out there. I think if oil prices stay low, there seems to be a big demand for the vehicles. The automakers like to sell them because they're probably make higher margins on average smaller cars. So unless something drastic change in oil price, I would expect to continue to see strong sales in those areas. Okay. Thanks. And then just a second question on China and the Asia segment. I'm just curious as you look at this, there's a lot of concern about how the market is shifting maybe away from the international players in China or the market may even slow down. So there's a lot of concerns in China. As you look at your business, how reliant are you on market? And maybe more importantly, how reliant are you on your backlog of business just building and coming through with your partners over there? Hey, John, I think when you look at China, our business mix is changing and that's primarily as a result of the acquisition of GoodRx. First thing, GoodRx results are not showing up on our consolidated sales number because they're equity accounted, but obviously it impacts bottom line results. And contracts business with the domestic OEMs in China is a more substantial percentage than our overall Magnum business because Magnum business is probably about 85 ish percent with our international OEMs, so the North Americans or the Europeans and 50% is domestic. That's been growing on the domestic side. But if you take the managed sales and you look at a couple of years, including contract sales, the sales through our the domestic OEMs has been growing. But when I look at kind of the growth in what we're expecting in China, the biggest part of that growth is not coming from volume changes, but in fact by launching new programs. And that's going to contribute to sales growth. So we're not as dependent on changes in volumes, but more dependent on the launch of those programs and the success of those programs. Okay. That's helpful. And then just lastly, as we look at Europe, I mean, the guidance for sort of a 4.5 percent EBIT margin there seems a little bit conservative given what you just put up in the Q2 at 5.6%. Is there something you're seeing in the second half of the year that kind of gives you pause on where the margins will go? Or is that really just a bit of conservatism in your outlook? I think there's 3 factors you need to take into account in the second half of Europe. When you look at overall production, we're about like you referenced, about $11,500,000 in the first half. And we did talk about moving our guidance up by $100,000 but essentially that was generated in the first half. We're actually taking second half down and we're looking at kind of overall volumes being about 9.9 in the second half. So you've got volume declines sort of impacting overall if you think about sales. Second thing is you've got the summer and Christmas shutdowns. And in particular to our businesses, when I look at these facility costs in the second half of this year, they're ramping up. And the investment in launches is also ramping up compared to the first half of the year. And a big part of that is in Getrag in terms of launches. So those are kind of a number of factors that are negatively impacted margin in the second half over the first half. But as you launch those programs, as you wrap up with new facilities, that will come back to us. So as I look at first half performance in Europe on an EBIT perspective, I'm pretty pleased with the progress that we've made. I mean, it's been a tough slug for the last 5 or 6 years, and we started with a loss in 20 11 and got some pretty decent margins right now. I would just add that Magna Steyr, remember, is coming to the end of life on its higher volume programs and has an impact on margin at the back half of the year. Got you. That's helpful. And really just one last housekeeping. As we think about the share buyback, the current normal course issuer bid expires, I believe, in November or at the end of November. And as you get through that, would you expect probably getting another authorization so you have the flexibility going forward? Just trying to understand where that program ends and what we might think about going forward. Hey, John, I guess, I mean, it's going to be up to 4 foot. Our Don and I thinking on all this is we're comfortable with the capital structure kind of went to 1.5x and we continue to generate free cash flow. So unless our capital spending substantially ramps up or doing acquisitions, we'll continue to generate some cash. And our stated philosophy is to be in that range. So that implies that we're going go on the board with another authorization when this one expires. Okay, great. Thank you very much. Our next question comes from the line of Steve Arthur with RBC Capital Markets. Please go ahead. Great. Thank you. Just following up quickly on that European comment. I understand the pressures in the back half, but Q2 was still stronger than we'd thought. And it sounds like the contribution wasn't from Gutrag, that was more of a headwind. Was there anything kind of one time in nature in the first half or in Q2 in particular? Or is that really just the many little things you've been doing in the traditional business to drive that improvement? Good morning, Steve. When I look at Europe and Elixir quarter to quarter, so Q1 to Q2 kind of were 5% Q1 and 5.6% in Q2. And I'm looking at kind of what's sort of gone on. There's a little bit of benefit from commodity costs and launch costs were a little less in Q2 versus Q1. But that was offset pretty well by higher warranty. And then when I kind of the other two impacts in the quarter was we had pure tooling sales, so that would imply a little bit higher margin or make margin on tooling. And the rest is essentially pull through on higher sales and operating efficiency. So there's nothing there that's fixed out as being an unusual item, a plus or minus in the quarter. Overall, pretty clean quarter and we still got a lot of launches going on. So I'm pleased with the progress we're making in Europe. Sounds good. Back on North America, I realize you don't report content per vehicle any longer. But if we use your production numbers, it looks like something around $10.60 for North America for the first half. And your full year outlook implies kind of $20 to $50 higher than that for the second half of the year in terms of CPV. That seems a big jump. Is that just a function of mix? Or are there any particular program launches or things that you can point to that might explain the increase in the back half? There's lots of launch activity going on. I mean, the Pacifica is still launching. The Acadia just started in April. We have higher content on the new one versus the old one. The Cadillac XT5 is still launching. That's higher content compared to the SRX. Linkedin Continental just started with a huge content on that one. So it's mainly I don't know whether mix is going improve H2 versus H1, but certainly we still have a lot of launch activity going on this year. And if you look at production, implied production for the second half of the year in North America, it's down compared to the first half. If you take the midpoint of our outlook on production sales, we're implying growth, which means that just like you talked about, save higher content per vehicle in the second half of the year compared to the first half of the year. And the final one, just more generally, in the opening comments of the press release, Don, there was a comment about remaining highly focused on innovation and strengthening positioning of Car of the Future. I probably got the quote wrong. But that seems to be a key focus. It was the focus of your Investor Day 4 or 5 months ago. I guess since then, any changes to your thinking on the focused technology areas for Magna or the level of investments, the nature of the investments you're making there? Not really. We're spending a lot of time on it just trying to really understand and have a good estimate of how fast things like electric vehicles penetrate, how fast the ADAS penetrate, what's going to be impact of ridesharing etcetera, etcetera to make sure our product strategy is aligned with what mobility and cars would be like in the future, looking at new people who might be involved in the industry. But from an innovation standpoint, we're continuing to put a lot of focus on it. We just had a tech show with 1 of our big customers last week, really good feedback from the customers in a lot of different areas. So it's just it continues to be a focus. We're making good headway in what we've been working on world class manufacturing. And I think the we're going to continue that obviously, but the big focus right now in the company has been and will continue to be on new product and process innovation. So a lot of activity there. Okay. Thanks for the comments. Our next question comes from the line of Colin Langan with UBS. Please go ahead. Great. Thanks for taking my question. Sorry if I missed it. Any update on the 3 North American plants that were having issues and a lot are having issues? Are those issues passed or is it still a challenge? I think you mentioned that there might be more launches in some of those facilities. Collyn, if I look at kind of sequentially at the 3 operations sort of Q1 to Q2, that's been a positive impact to operating results in Q2 versus Q1 as we continue to make progress there. Yes, when I look at those three operations, there's a lot going on. We're still watching some business in a couple of facilities. 1 of the larger facilities are watching quite a bit of business. It's a higher volume on certain programs. We certainly didn't see some efficiencies improvements. The scrap prices have also moved around a little bit. And I kind of sit back and say, well, how much of the improvement is due to what, how much of it is launch or how much of it is higher volumes, how much of it is efficiencies. We still have some inefficiencies on outsourcing and expedited freight and over time. But I look at all three divisions combined and kind of the run rate for the first half of the year. They're absolutely in line with where we thought they were going to be at the beginning of the year. And when we look at where we think we're in line to what our expectations were. And year over year, that should be a positive to operating results for North American as well as consolidated. And most of the launches in one division is actually back to it's where we expected it would be. The other 2 divisions, most of those launches will be through by the end of this year. Got it. And you actually mentioned scrap, which is actually my other question. I mean, can you remind us the impact of commodities? I remember a couple of quarters ago, it was actually a bit of a drag. So is that turning in the second half of the year? How should we think about commodity exposure with the movement sale price? Yes. When I look at kind of first half of the year, I guess, the quarter, I guess, Q2 to Q1, we did see some positive benefits from a combination of commodity and scrap. And as I look at Q3 and Q4, steel prices remain where they are. That should be a tailwind, so positive for the second half of the year. Got it. All right. Thank you very much. It's Our next question comes from the line of Fritus Golar with BMO Capital Markets. Please go ahead. Thanks. Don, now that you've had good drag under your belt for a couple of quarters, just wondering if you're if there's anything you're seeing unanticipated in either Europe or Air Asian operations and just overall, how you're feeling about the track now that you've had the opportunity to jump into it a little bit more? Yes. The integration has been going well and working together on synergies in a number of different areas. So I think the overall we just reviewed this with the Board yesterday. The integration is going as well. The operational results are where we expect them to be. We have looked at the launch status, the products and it's all what we expected to be. They do have a lot of launches, but we're not expecting any we haven't seen anything unusual there. So overall, pleased with the acquisition, pleased with the progress. We will be updating our business plan in time a lot of details and we'll have a better idea, I guess, what the results will be going forward compared to what we expected when we bought it. But right now, there's no real concern. I'm actually quite pleased with the way things are going. Yes. Peter, if I can just add some comments on Getrag. I look at overall operating performance for the quarter, even the first half of the year, CIGATRAC is ahead of our expectations and what we have built into our forecast. And part of that is sort of timing where there's going to be some launch activity in engineering that we thought would take place in the first half, which is going to take place in the second half of the year. But a big part of it is just better operating performance a little bit stronger on the volume side. So from an operations standpoint, bottom line results in 2016, we're pleased and we're ahead of where we thought we were going to be. Okay. And I take it that structurally Getrag has a lower reported margin than Magnus traditional businesses because you're doing the whole assembly of a transmission. Is that correct to assume? I think right now, Peter, when you look at the margins are certainly lower than Magnus, because there's a number of things. One is we had a whole bunch of purchase price amortization that's impacting the contract results. And as we've been talking about previously, there's a tremendous amount of launch activity in Catragg. But I think if you move forward and you get through all that, given the level of capital intensity in this business, the margin profile I could track should be accretive to Magna's margins. It's a big selling price for the unit, but they have a lot of added values and it's a high technology. So we certainly expect the margins to be higher. Okay. And then just one last question. Recently, Ford has gone out of its way to be cautionary in terms of the vehicle demand outlook for the second half of this year in the U. S. And I'm just wondering, if you've seen any weakness yet in the release schedules from your customers? Not to this point, Peter. I mean, we haven't really we haven't changed our outlook for North America all year. We've been at $1,000,000 and we've been coming in pretty much close to our forecast. And we look at releases as part of reviewing the remainder of the year, at least in the next quarter, and we don't see any concerns at this point, but overall, it's worth calling. Okay. Thanks, Louis. That's all I have. Our next question comes from the line of Rich Kwas with Wells Fargo. Please go ahead. Hi, good morning everyone. Just I wanted to ask about Europe, a little longer term question. So I think John had asked about margins here for the balance of the second half. But I think your longer term guidance is in the mid to high 4s and you're tracking above that. So in the out years, I realize that maybe you're not prepared to update that figure at this point. But just directionally, what are the puts and takes around margin in Europe in the out years, particularly as it would seem like the trod gets more traction and probably helps margin in 2017 2018. Just want to get your thoughts there. Yes. Rich, just to come we talked about margins for this year being 4.5%, not 4% to 4.5%, but 4.5%. So it's just moving up from our previous outlook. Anyway, just to answer your question, there's a number of things you need to take into account when you look at overall longer term European margins. You're going to have a hard portion of assembly sales as we move out to kind of the 2018 timeframe. We'll talk about 2018 timeframe. And as we talked about before, the MagnaStyres assembly business is a lower margin business, a decent return on capital business, but that's kind of hurt margins as we move out to 2018. What's going to help grow margins in Europe, I'd say, are really three items. I think the biggest contributor is going to be the launch of the Cataract business. And as we get up to 2018, Cataract's margins are going to be accretive to European margins. We've been over the number of years, the last several years, been a lot more disciplined on scoring the new programs. So as new programs start to come in, the contribution from those new programs is expected to be accretive to overall margins. And we continue to work on improving operating performance. And even though we've talked about where we are from a restructuring standpoint over a number of years, the last part of the restructuring and getting out of our last facility that we planned is kind of 2018 timeframe. So all that should be accretive to overall margins. So trending as we look at kind 2018, the market should be moving up, not down. Okay. That's helpful, Vince. And just on Getrag, I think this year you're saying it's trending a little bit better than expected. So is there any I think originally there was thought to be very, very little accretion of more or less nothing for this year in terms of earnings. So is that because of purchase accounting and whatnot? So as we think about right now, is that adding a little bit to earnings this year versus expectation? And then next year, is there any change to how we should think about contribution for Getrag? Yes. Rich, I mean, I would have if you would have asked me last quarter or 6 months ago, we said that the track with purchase price accounting would have been fairly neutral for 2016 sort of plus or but close to 0. If you ask me right now, I'd say that it should have a positive impact on earnings per share accretive. But again, you think we've got 400,000,000 shares outstanding. It's not going to stand out as a big number. But our expectation is for 2017 and we need to update our business plan, which we're working on right now, was that it was going to be more accretive in 2017 versus Okay. Yes. So And so you purchase price accounting, certainly get TRAG is more accretive in 'sixteen and even larger in 'seventeen. Right, right. Okay. And then just last one, Don. So there's reports that Samsung's interested in Magneti Marelli and looking an outsider looking to get more involved in the auto business. I know you kind of alluded to looking strategically at what the landscape is looking like going forward with outsiders and then the core automakers. What's your view in terms of active safety infotainment, more software oriented product portfolio and whether I know you're investing internally there, but in terms of external investment, where would you classify that as a priority? Yes. I heard rumors of Samsung as well. I can't comment on it because I don't know anything about what's going on there. I think there's a LG, Samsung, they and other people are looking at what parts of a vehicle they would like to participate in. We are certainly spending a lot more time looking at ADAS, building our software capability, looking at new products, either by developing them ourselves or potentially partnering or buying people that would have capability in those areas. I mean, there's going to be a lot of change in the next 3 to 4 years and who the winners and losers are. But there's a lot more content going into the vehicle. So I guess to answer your question, simply high focus area for us. We would consider acquisitions. We'd have to be in an area we want. We're not really looking at getting into the infotainment, but more things, whether it's vehicle to vehicle or security. We've got investment with an Israeli company, cameras, basically any type of sensor that would help our the automakers and autonomous driving is what we're focused on. So we have a lot of focus on it right now. We'll keep you advised as we go forward, but we're looking a lot of different things. Okay. Thank you. Thanks for the color. Our next question comes from the line of Ryan Brinkman with JPMorgan. Please go ahead. Hi, good morning. Thanks for taking my question. I'm finding that some investors are increasingly worried about supplier pricing right now, just given, I think, amongst other factors, some of the commentary on the board call, including outlook for 6% lower automaker prices to consumers in China. And then the fact that incentives have ticked up in the U. S. So far there is, I don't know, take your pick, maybe plateauing or perhaps declining a little. So I'm just curious if you're seeing anything differently in terms of annual customer price reductions, if there's anything there that could impact your margin? No, I wouldn't say that anything different. The good news is most of our customers are very profitable right now, which is always good. But even when they're profitable, their engineering and purchasing people are always looking at how to take cost out this competitive market and they're always looking at the supply base for price reductions and how to redesign product and optimize it through VABE. So really no change because there's always lots of pressure and ultimately it comes down to who's competitive. That's why we've put so much emphasis on our world class manufacturing initiatives and who's got what technology out there. I think one of the opportunities in the industry generally is with all of the changes in the vehicle, whether it's due to regulation, fuel economy, autonomous driving features, there's lots of changes. So if you've got the technology, you can continue to win business and should be reasonable margin business if there's if you've got something unique there. So no more pressure, no less pressure and I wouldn't expect it to change much. And even if there is in China, there's a lot of request for pricing pressure, but there's also not a lot of weakness in the supply base over there. So I don't expect to see things change dramatically. Okay. That's helpful. And then just last question. Obviously, you had very strong results in Europe this quarter and you're raising the outlook there for the year. I'm curious though if you've done any work to try to estimate the impact of Brexit on your operations there and whether that could have any kind of an impact on your target or normalized margin in Europe. I think you gave some outlook at your Analyst Day for 2018 margins. Is all that pretty much still intact you think or does that need to be revisited? Brian, I think at this point, it's very true and to tell and to look at sort of the activity in the UK. We do have about $600,000,000 $500,000,000 of annual sales in the UK. A big part of that product is exported to the UK and we also export from the EU into the UK. I think it's too early to really tell because it's kind of part of what our customers do. When we look at European volumes for 2016, Initially before Brexit, we were more bullish on European volumes. And our most recent outlook for volume and growth reflects a reduction as a result of, I guess, uncertainty in consumer confidence particularly in the UK. Okay. Thanks, Jeff. Everybody is going to happen there. But if you look at the number of vehicles that are exported from the UK to Europe and back, I think it would be a lose lose if they do anything on trade negotiations in the upcoming years. That's going to hurt that trade in a strange way. The U. K. May be able to end up entering other trade deals, will take a number of years, I'm sure, and export more vehicles. So I wouldn't expect anybody to make any big changes right away. And with the lower pound, I don't think it makes much difference because we ship most of our product, most of our costs are in local currency and we ship it. But that may make the producing parts more competitive long term. But I think we have to wait a year, see what happens, see what happens with trade deals. I don't think it has any real impact other than translation, if you can. Maybe sales, as Vince just said, in the U. K, but I don't see it as being a big deal. Very helpful. Thank you. Our next question comes from the line of David Tymon with Cormark Securities. Please go ahead. Yes. Good morning, guys. First question is just on the equity earnings line. It was up quite a bit sequentially in the quarter. Is that just get Trog and can you give us some thoughts on how we should think about that going forward? Yes. So equity income sequentially was up $12,000,000 trying to see what we're going into. A big part of that was in North America, if it's part of North America. So that wouldn't be good track. I think if you look for the balance of the year, David, thinking about Asia, Detroit is going to be more of a I would say a negative in the second half particularly in Asia. There's a lot of launch costs that are going to be occurring as a result of the ramp up. I'm not sure how that all bounces out, but launch costs certainly stands out for me in Asia in the second half of the year. Okay. That's helpful. And I guess that just brings me to my second question, Getrag and launches. Where do they peak? Is it the second half of this year? Or do they continue to the launch costs continue to accelerate for sometime in 2017? Yes. David, my recollection was that launch costs are pretty heavy in 2017 as well. But starting to back off in 2018, I just don't recall right off that what happens to Martha. I believe Martha continues to move on in contract as we move on to 'seventeen versus 'sixteen. But again, there's a whole bunch of things going on in there. We'll give you some David some outlook, some better feedback once we get to our business plan. And we'll have some more color on that. Certainly more launch, less engineering costs in the back half of this year relative to the front half. Okay. So it sounds like the anticipated better margins from GoodRx in 2017 would really be you're starting to get benefits from stuff done this year, partially offset by still heavy launch costs? Yes, that's right. Because we are expecting overall based on our cost to contract, it's going to be more accretive to earnings in 2017 versus 2016. Got it. Okay. And last question. Sorry? David, the big step up in Ouroborigatraga is going to be 2018 2019 margin. Right. Okay. And the last question I had, just generally on M and A right now, any thoughts, Don, you mentioned ADAS and areas like that. Is there is this an area that's attractive to you relative to buying back stock or any thoughts on that side? Yes. I think it's an attractive area of growth. One of the things we want to make sure is we have a good view as to how fast these various things happen, whether it's autonomous driving to level 4, how fast things will be penetrating, whether it's electric vehicle penetration to make sure whatever we're doing, we're not building a business case around something that may not happen as fast as many people think it's going to happen. There is still a lot of different opportunities out there, but we're trying to have a good balance between growing the company properly for the long term and also is it better to repurchase shares because we think our share price is low. So it's an ongoing dialogue with the management team and also with the Board. The right opportunity comes along, we'd certainly move on it. We're not anticipating a big downturn. We're also conscious that things go in cycle. So we don't want to be buying at the peak of the market either. So a lot of different factors we're looking at. Super, that's helpful. Thank you. Our next question comes from the line of Richard LaFrancois, Private Investor. Please go ahead. Yes. I'd like to know how come I wasn't available. I wasn't able to print the Q2, Q2 2016 report. I tried doing it by WVU MagnaPointComm and the other ways I even tried on my email box, never got anywhere. How come this happened? I tried yesterday night, I tried this morning before the conference, nothing going, couldn't get anything for Q2 2016. You tell me which era I did or what I should have done to be able to be able to print the Q2 16 for Peter O'FOUR? This is Louis here. If you call 905 726-2462. If I call what, will you repeat that? 905 726-2440. You said it too fast again. If I call what? 905. 905. 726. 726. 2,462. 264. 2, 4, 6, 2, 6, 2. Yes. And ask for Louis Canelli. Louis Canelli. And we will get somebody to help you with printing. Yes. Okay. It's 890572624 and after it's 85 or 65? 62. 62? Yes. So I repeat, 905-626-24-6662? Yes, that's right. Is that 62462 at the end? 246 2. 62, that's the end. The name of the person is Lou what? Louis. The name of the person you say he's talked to. If you just wish for Louis, l o u I s. Louis. They will put you through the right person. Okay. Thanks a lot. Have a nice day. Thank you. And there are no further questions on the no further questions on the phone lines at this time. Okay. Thanks everybody for dialing in. As I said, we're happy with the results the last quarter. There's a lot of things going the right way. So I appreciate your time and have a great day. Thank you. Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.