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Magna International Inc..

A feeble showing at its European unit hampered Magna International Inc. in the second quarter, rattling investors and raising concerns about the auto parts giant's escalating expenses.

Aurora, Ont.-based Magna's second-quarter profit slipped 4 per cent to $282-million (U.S.) or $1.15 a share, down from $294-million or $1.30 a year earlier. Its latest adjusted share profit of $1.11 fell short of analysts' expectations for $1.36.

"Our Europe segment underperformed again in the second quarter, missing our internal forecast for the quarter. The exteriors and interiors facilities that lost approximately $50-million in the first quarter, lost even more in the second quarter on higher sales," Magna chief executive officer Don Walker said Friday during a conference call with industry analysts.

Magna shares tumbled as much as 25 per cent on Friday morning, before regaining some of the lost ground to finish down nearly 12 per cent to $38.80 (Canadian). The cost of goods sold surged $1.4 billion (U.S.), or 27 per cent, to $6.5-billion in the second quarter.

Magna, founded in a Toronto garage in 1957 by Frank Stronach, saw its second-quarter revenue jump 24 per cent to $7.3-billion, but the struggles in Europe – where the company suffered a $60-million loss in its exteriors and interiors business – overshadowed those gains.

"Improving results at our underperforming divisions in Europe remains our No. 1 priority and we are taking appropriate steps to address the issues," said Mr. Walker, who announced a deal to sell one of three subpar operations, with Magna incurring a charge of roughly $100-million. The sale is set to close later in the third quarter, and follows a first-quarter announcement of the shutdown of one of its other laggards in Europe.

In the fourth quarter, the two remaining facilities in Europe are forecast to lose a further $20-million to $25-million, said Magna chief financial officer Vince Galifi.

UBS Securities Canada Inc. analyst Tasneem Azim said the earnings miss "was driven primarily by higher-than-expected costs and weak execution" by Magna.

"Following the Q2 miss and lower margin guidance, we expect consensus estimates/valuation to move lower," she said in a research note.

Mr. Walker said Magna executives are generally pleased with North American operations. "We generated a good margin overall, despite being faced with higher commodity costs. We continue to invest in new facilities and programs, which have a negative short-term impact on earnings," he said.

Magna increased its North American production sales forecast to between $13.2-billion and $13.7-billion for this year, up from its prior range of $13-billion to $13.5-billion.





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