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. At that time, if you have a question, please press the one followed by the four on your telephone. If at any time during the conference you need to reach an operator, please press star zero. As a reminder, this conference is being recorded Friday, August 5th, 2016. I would now like to turn the conference over to Louis Tonelli, VP of Investor Relations. Please go ahead.
Thanks. Hello, everybody, welcome to our second quarter 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 for the second quarter ended June 30th, 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 slides 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 second quarter of 2016. In the second quarter of 2015, we recorded a gain on the disposition of our battery pack business. This increased operating income by $57 million, net income attributable to Magna by $42 million, and EPS by $0.10. Our quarterly earnings discussion today excludes the impact of these unusual items. Now I'll pass the call over to Don.
Thank you. Good morning. The second quarter of 2016 was another successful quarter for Magna. We've 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 second quarter 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. Our global organic sales outperformance relative to market was 6% in the second quarter. Similarly, North American production sales grew 6% organically, excluding foreign exchange movements.
This compares to about 2% growth for North American light vehicle production. We grew three times faster than market growth in North America. Our European production sales grew 14% organically compared to 6% for European light vehicle production. This represents 8% outperformance compared to the market or more than twice the market growth. Our Asian production sales grew 22% organically, excluding foreign exchange movements compared to 6% for Asian production. This represents 16% outperformance, almost four times the growth in the Asian market. In addition to our strong sales performance, we posted a record in EBITDA going over $1 billion for 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 2003. 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 second quarter, despite ongoing investment activities on the continent. We continued to contain losses in South America despite the challenging operating environment there. Our EBIT loss was $5 million in the second quarter of 2016, compared to $8 million loss last year in Q2 and an $11 million loss this 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 been recently honored for innovations related to carbon fiber on hoods for Cadillac and process 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, hello, everyone. I would like to review our financial results for the second quarter ended June 30th, 2016. All figures I'm going to discuss today are in US dollars. In the second quarter, our consolidated sales increased 16%, or $1.3 billion, relative to the second quarter of 2015 to a record $9.4 billion. Reported North American production sales increased 7% in the second quarter to $4.9 billion. Excluding the impact of foreign currency translation, North American production sales increased 9%, while North American vehicle production increased 2% to 4.6 million units. The North American production sales increase is a result of the launch of new programs, the acquisition of GETRAG, and higher production volumes of certain programs, partially offset by the weakening of the Canadian dollar against our US dollar reporting currency, the de-consolidation to equity account of joint venture, and new customer price concessions.
Reported European production sales increased 36% from the comparable quarter, while European vehicle production increased 6% to 5.8 million 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 concessions. Asian production sales increased 28%, or $109 million, to $499 million from the comparable quarter. This was primarily as a result of the launch of new programs, particularly in China, higher production volumes of certain existing programs, and acquisitions. These were partially offset by the weakening of the Chinese and South Korean currencies against the US dollar and net customer price concessions.
Rest of world production sales declined 14%, or $18 million, to $107 million for the second quarter, primarily as a result of the weakening of the Argentine peso and Brazilian real against the US dollar and lower production volumes from certain existing programs. These were offset by the launch of new programs and net customer price increases subsequent to the second quarter of 2015. Complete vehicle assembly volumes declined 9% from the comparable quarter, while assembly sales increased 7% to $652 million. Higher volumes of the Mercedes-Benz G-Class and the higher euro against the US 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 third quarter of 2015. In summary, consolidated sales, excluding tooling, engineering, and other sales, increased approximately 15%, or $1.1 billion, in the second quarter.
Tooling, engineering, and other sales increased 33%, or $198 million, from the comparable quarter to $797 million. EBIT margin in the quarter increased to 8.4% from 8.3% in the second quarter 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 GETRAG in the amount of 0.2%. Interest expense increased $14 million to $22 million in the second quarter of 2016, largely related to the increase in debt associated with the purchase of GETRAG.
In Q2 2016, our effective tax rate was 26.9% compared to 26.3% 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 second quarter 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 second quarter of this year, we generated $864 million in cash from operations prior to changes in operating assets and liabilities and invested $151 million 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 million, including $409 million in fixed assets, $103 million increase in investments and other assets, and $31 million for acquisitions. We also repurchased 7.8 million common shares for $308 million pursuant to our normal course issuer bid and paid $98 million in dividends in the quarter. Our balance sheet remains strong with $597 million in cash as of June 30th, 2016, an additional $2.19 billion in 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 have increased about 100,000 units in Europe for 2016, reflecting higher Q2 volumes than previously anticipated, partially offset by some anticipated softening in the second part of the year relative to our previous expectations. Our total sales range for 2016 is unchanged from our previous outlook of $35.5 billion-$37.2 billion. 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%-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%-8% from our 7%-8% previous range. These reflect expected 2016 operating performance that is 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.
Ladies and gentlemen, if you would like to register for a question at this time, please press the one followed by the four on your telephones. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and would like to withdraw your registration, please press the one followed by the three. If you're using a speakerphone, please lift your handset before entering your request. One moment, please, for the first question. 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. We always appreciate all the detail you give us on the programs, on the positive and negative as you go by region. 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 vehicle sales, both in North America and China, and to some degree, Europe, moving to crossovers and in some of these markets, to trucks. 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, North America, we've benefited from stronger volumes on existing programs, forgetting about what's kind of launched. We have been benefiting from the shift towards SUVs, CUVs, and light trucks in North America.
Most of you know our top 10, we're pretty heavy on trucks. In the second quarter, our top 10 volumes alone were up about 7% versus the market at 2%. We've certainly been benefiting from the shift towards trucks and crossovers in the North American market.
Our view on the volumes are probably not 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 probably make higher margins on average than smaller cars. Unless something drastic changes in oil prices, I would expect to continue to see strong sales in those areas.
Okay, thanks. Just a second question on China and the Asia segment. 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. There's a lot of concerns in China. As you look at your business, how reliant are you on market? 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 GETRAG. I think GETRAG's results are not showing up on our consolidated sales number because they're equity accounted, but obviously it impacts bottom-line results. GETRAG's business with the domestic OEMs in China is a more substantial percentage than overall Magna business because Magna business is 5%-ish with our international OEMs or the North Americans or the Europeans, and 50% is domestic. That's been growing on the domestic side, if you take managed sales and you look out a couple of years, including GETRAG sales, the sales through our domestic OEMs has been growing.
When I look at 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. That's going to contribute to sales growth. 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. Just lastly, as we look at Europe, the guidance for a 4.5% EBIT margin there seems a little bit conservative given what you just put up in the second quarter at 5.6%. Is there something you're seeing in the second half of the year that gives you pause on where the margins will go? Is that really just a bit of conservatism in your outlook?
I think there's three factors that you need to take into account in the second half of Europe. When you look at overall production, we're about 11.5 million in the first half. We did talk about moving our guidance up by 100,000, but essentially that was generated in the first half. We're actually taking the second half down, and we're looking at overall volumes being about 9.9 in the second half. You've got volume declines impacting overall, if you think about sales. Second thing is you've got the summer and Christmas shutdowns. In particular to our businesses, when I look at new facility costs in the second half of this year, they're ramping up. The investment in launches is also ramping up compared to the first half of the year. A big part of that is in GETRAG, in terms of launches.
Those are a number of factors that are negatively impacted margin in the second half over the first half. As you launch those programs, as you ramp up those new facilities, that'll come back to us. As I look at first half performance in Europe on an EBIT perspective, I'm pretty pleased with the progress that we've made. It's been a tough slog for the last five or six years. We started with a loss in 2011, and we've 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 that has an impact on margin in the back half of the year.
Gotcha. That's helpful. 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. 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 it's going to be up to the board, Don and I's thinking on all this is we're comfortable that capital structure kind of one to one and a half times, and that we continue to generate free cash flow. Unless our capital spending substantially ramps up or do an acquisition, we'll continue to generate some cash. Our stated philosophy is to be in that range. That implies that we're going to go to 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, Q2 was still stronger than we'd thought. It sounds like the contribution wasn't from GETRAG. That was more of a headwind. Was there anything one time in nature in the first half or in Q2 in particular? 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 I look sort of quarter-over-quarter, so Q1 to Q2, we're 5% Q1 and 5.6% in Q2, and I'm looking at 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. That was offset pretty well by higher warranty. The other two impacts in the quarter was we had fewer tooling sales, so that would imply a little bit higher margin on the margin on tooling. The rest is essentially pull through on higher sales and operating efficiency. There's nothing there that sticks out as being an unusual item, a plus or minus in the quarter.
Overall, pretty clean quarter, we still got a lot of launches going on. 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 $1,060 for North America for the first half. Your full-year outlook implies $20-$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. 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. Lincoln Continental just started, a huge content on that one. It's mainly, I don't know whether mix is going to improve H2 versus H1, certainly we still have a lot of launch activity going on this year.
If you look at production, implied production for the second half of the year in North America, it is down compared to the first half. If you take the midpoint of our outlook on production sales, we are implying growth, which means that just like you talked about, see higher content per vehicle in the second half of the year compared to the first half of the year.
A 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. That seems to be a key focus. It was the focus of your Investor Day four or five months ago. I guess since then, any changes to your thinking on the focus technology areas for Magna or the level of investments, the nature of the investments you are making there?
Not really. We are 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 ADAS penetrate, what is going to be the impact of ride sharing, et cetera, to make sure our product strategy is aligned with what mobility and cars will be like in the future. What kind of new people might be involved in the industry. From an innovation standpoint, we are continuing to put a lot of focus on it. We just had a tech show with one of our big customers last week. Really good feedback from the customers in a lot of different areas. It continues to be a focus.
We are making good headway in what we have been working on world-class manufacturing, and I think we are 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. 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.
Oh, great. Thanks for taking my question. Sorry if I missed it. Any update on the three North American plants that were having issues to handle that are having issues? Are those issues past or is it still a challenge? I think you'd mentioned that there might be more launches in some of the facilities.
Colin, if I look at sequentially at the three 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. When I look at those three operations, there's a lot going on. We're still launching some business in a couple of the facilities. One of the larger facilities, launching quite a bit of business. There's been some higher volume on certain programs. We've certainly been seeing some efficiencies improvements. The scrap prices have also moved around a little bit. I 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 volume? How much of it is efficiencies? We still have some inefficiencies on outsourcing and expedited freight and overtime.
I look at all three divisions combined and 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. When we look at where we think we're going to be at the end of the year, it's again, in line to where we thought we were going to be. Again, a lot of activity going on, but 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 Magna consolidated. Most of the launches in one division is actually back to where we expected it would be. The other two divisions, most of those launches will be through by the end of this year.
Got it. You actually mentioned scrap, which is actually my other question. Can you remind us the impact of commodities there? I remember a couple of quarters ago, it was actually a bit of a drag. Is that turning in the second half of the year? How should we think about commodity exposure with the movement in steel prices?
When I look at first half of the year, or I guess the quarter, I guess Q2 to Q1, we did see some positive benefits from a combination of commodity and scrap. 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.
I don't know the amount it's Colin, but it certainly should be beneficial to us.
Got it. Okay. Thanks. Congrats on a good quarter.
Thank you.
Thank you.
Our next question comes from the line of Peter Sklar with BMO Capital Markets. Please go ahead.
Thanks. Don, now that you've had GETRAG under your belt for a couple of quarters, I'm just wondering if there's anything you're seeing unanticipated in either Europe or your Asian operations, and just overall, how you're feeling about GETRAG now that you've had the opportunity to jump into it a little bit more.
The integration has been going well, working together on synergies in a number of different areas. I think the overall, we just reviewed this with the Board yesterday, the integration is going 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 expect it to be. They do have a lot of launches, we haven't seen anything unusual there. Overall, pleased with the acquisition, pleased with the progress. We will be updating our business plan 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. Right now, there's no real concern. I'm actually quite pleased with the way things are going.
Peter, if I can just add some comments on GETRAG, and look at overall operating performance for the quarter, even the first half of the year. I think GETRAG is ahead of our expectations and what we had built into our forecast. Part of that is sort of timing, where there's going to be some launch activity and engineering that we thought would take place in the first half, which is going to take place in the second half of the year. A big part of it is just better operating performance, a little bit stronger on the volume side. 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.
I take it that structurally, GETRAG has a lower reported margin than Magna's 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 Magna because there's a number of things. One is we had a whole bunch of purchase price amortization that's impacting the GETRAG results. As we've been talking about previously, there's a tremendous amount of launch activity in GETRAG. I think if you move forward and you get through all that, given the level of capital intensity in this business, the margin profile at GETRAG should be accretive to Magna's margins.
The 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, 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., I'm just wondering if you've seen any weakness yet in the release schedules from your customers.
Not to this point, Peter. We haven't changed our outlook for North America all year. We've been at 18 million. We've been coming in pretty much close to our forecast, 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. Overall, it's been falling.
Okay, thanks Louis. That's all I have.
Ladies and gentlemen, as a reminder, if you would like to register for a question at this time, please press the one followed by the four on your telephones. Our next question comes from the line of Rich Kwas with Wells Fargo. Please go ahead.
Hi, good morning everyone.
Rich.
Just wanted to ask about Europe, a little longer-term question. 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 fours, and you're tracking above that. 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 GETRAG gets more traction and probably helps margin in 2017 and 2018. Just want to get your thoughts there.
Yeah, Rich, just to comment, we talked about margins for this year being 4.5%. Not 4%-4.5%, but 4.5%. Just moving up from our previous outlook. 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 higher proportion of assembly sales as we move out to the 2018 timeframe. We'll talk about 2018 timeframe. As we talked about before, the Magna Steyr assembly business is a lower margin business, a decent return on capital business, but that kind of hurts margins as we move out to 2018. What's going to help grow margin in Europe, I'd say, are really three items. I think the biggest contributor is going to be the launch of the new GETRAG business.
As we get out to 2018, GETRAG'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 quoting the new programs. As the new programs start to come in, the contribution from those new programs is expected to be accretive to overall margins. We continue to work on improving operating performance. Even though we've talked about where we're
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. All that should be accretive to overall margins. Trending, as we look at 2018, the market should be moving up, not down.
Okay. That's helpful, Vince. Just on GETRAG, I think this year you're saying it's trending a little bit better than expected. I think originally there was thought to be very little accretion of more or less nothing for this year in terms of earnings. Is that because of the purchase accounting and whatnot? As we think about right now, is that adding a little bit to earnings this year versus expectation? Then next year, is there any change to how we should think about contribution for GETRAG?
Rich, if you would've asked me last quarter or six months ago, I would've said that GETRAG with purchase price accounting would've been fairly neutral for 2016, sort of plus or minus, but close to zero. If you ask me right now, I'd say that it should have a positive impact on EPS, so it's accretive. Again, you think we got 400 million shares outstanding, it's not going to stand out as a big number. Our expectations 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 2016.
Okay. Yeah.
Including purchase price accounting, certainly GETRAG is more accretive in 2016 and even larger in 2017.
Right. Okay. Just last one, Don. There's reports that Samsung's interested in Magneti Marelli and 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?
Yeah, I've 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 LG, Samsung, 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 the 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 think there's going to be a lot of change in the next three to four years in who the winners and losers are. There's a lot more content going into the vehicle. I guess to answer your question simply, high focus area for us, we would consider acquisitions, would 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 an investment with an Israeli company. Cameras. It's basically any type of sensor that would help the automakers in autonomous driving is what we're focused on. We have a lot of focus on it right now, and we'll keep you advised as we go forward, but we're looking at a lot of different things.
Okay. Thank you. Thanks for the color.
Our next question comes from the line of Ryan Brinkman with J.P. Morgan. 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 Ford 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. as far there is, I don't know, take your pick, maybe plateauing or perhaps declining a little. 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 there's anything different. The good news is most of our customers are very profitable right now, which is always good. Even when they're profitable, their engineering and purchasing people are always looking at how to take costs out because it's a competitive market, and they're always looking at the supply base for price reductions and how to redesign product and optimize it through VAVE. 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.
If you've got the technology, you can continue to win business and should be reasonable margin business if you've got something unique. No more pressure, no less pressure, and I wouldn't expect it to change much. Even if there is in China, there's a lot of requests for pricing pressure, but there's also a lot of weakness in the supply base over there. I don't expect to see things change dramatically.
Okay, thanks. That's helpful. Just last question, and 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, do you think, or does that need to be revisited?
Ryan, I think at this point, it's really too early to tell. You have to look at the activity in the U.K. We do have about, I think, $500 million of annual sales in the U.K. A big part of that product is exported out of the U.K., and we also export from the EU into the U.K. I think it's too early to really tell, and it's going to depend on what our customers do. When we look at European volumes, even for 2016, initially before Brexit, we were a little more bullish on European volumes than our most recent outlook for volumes in Europe reflects a reduction as a result of, I guess, the uncertainty in consumer confidence particularly in the U.K.
Okay, thanks, Joe.
No one really knows what's going to happen there. If you look at the number of vehicles that are exported from the U.K. 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. It will take a number of years, I'm sure, and export more vehicles. I wouldn't expect anybody's going to make any big changes right away. 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. That may make the producing parts more competitive long term.
I think we have to wait one year, see what happens with trade deals. I don't think it has any real impact other than translation and maybe sales, as Vince just said, in the U.K. No, I don't see it as being a big deal.
Very helpful. Thank you.
Our next question comes from the line of David Tyerman 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 GETRAG? Can you give us some thoughts on how we should think about that going forward?
Yeah. Equity income sequentially was up about $12 million in terms of what we're rolled into. A big part of that was in North America. That wouldn't be GETRAG. I think if you look for the balance of the year, David, and thinking about Asia, GETRAG is going to be more of a negative in the second half, particularly in Asia, since 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 balances out, launch costs are certainly something that stands out for me in Asia in the second half of the year.
Okay, that's helpful. I guess that just sort of brings me to my second question, GETRAG and launches. Where do they peak? Is it the second half of this year, or do the launch costs continue to accelerate for some time in 2017?
Yeah. David, my recollection was that launch costs are pretty heavy in 2017 as well, starting to back off in 2018. I just don't recall right off the bat what happened to margin. I believe margin continued to move up in GETRAG as we move on to 2017 versus 2016. Again, there's a whole bunch of things going on in there. We'll give you, David, some outlook, some better feedback once we get to our business plan.
Okay.
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. It sounds like the anticipated better margins from GETRAG in 2017 would really be you're starting to get benefits from stuff done this year, partially offset by still heavy launch costs.
Yeah. That's right, because what we are expecting overall, based on my earlier comments, the GETRAG is going to be more accretive to earnings in 2017 versus 2016.
Got it. Okay. Last question.
Again.
Sorry.
David, the big step-up in overall GETRAG is going to be 2018 and 2019 margin.
Right. Okay. The last question I had, just generally on M&A right now any thoughts? Don, you mentioned ADAS and areas like that. Is this an area that's attractive to you relative to buying back stock? Any thoughts on that side?
Yeah. 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 up 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 are still a lot of different opportunities out there, but we're trying to have a good balance between growing the company profitably for the long term and also, is it better to repurchase shares because we think our share price is low? It's an ongoing dialogue with the management team and also with the board. If the right opportunity comes along, we'd certainly move on it.
We're not anticipating a big downturn, but we're also conscious that things go in cycles, so we don't want to be buying at the peak of the market either. A lot of different factors we're looking at.
Super. That's helpful. Thank you.
Okay.
Our next question comes from the line of Richard Le Francois, 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 2016 report there. I tried doing it by magna.com and any 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.
Richard?
You tell me which error I did or what I should have done to be able to print the Q2 '16 report.
Richard, it's Louis here. If you call 905-726-2462.
If I call what? Could you repeat that?
905-726-2462.
You said it too fast again. If I call what?
905.
905.
726.
726.
2462.
264-
24
24.
62.
62.
Yeah. Ask for Louis Tonelli.
Louis Tonelli.
We will get somebody to help you with printing.
Yeah. Okay. It's 905-726-246, and after it's eight, five or six, five?
62.
62?
Yeah.
I repeat, 905-626-246662.
Yes, that's right.
That 62462 at the end?
2462.
62. That's it then. The name of the person is Lou what?
Louis.
The name of the person you say to talk to.
If you just ask for Louis, L-O-U-I-S-
Louis
They will put you through to the right person.
Okay, thanks a lot. Have a nice day.
Thank you.
There are 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 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.