Magna cautiously optimistic about NAFTA; raises profit forecast

(Reuters) - Magna International’s chief executive said on Thursday he was “cautiously optimistic” that talks to renegotiate NAFTA would result in a competitive trade deal, after the Canadian auto parts maker raised its full-year sales and profit forecasts.

Canadian, Mexican and U.S. officials have been locked in intense negotiations for more than eight months to modernize the North American Free Trade Agreement (NAFTA) but rules around automotive industry content have emerged as a key sticking point.

To be exempt from duties, the U.S. has argued that autos should be composed of 75 percent North American auto content, up from the current 62.5 percent. [L1N1SF0XQ]

While a higher North American content would benefit Magna as the region’s largest auto parts supplier, negotiators must also weigh carmakers’ needs, CEO Don Walker said.

“In theory, Magna is the biggest beneficiary because we’re the biggest supplier here,” he said. “But if it goes too high, that means the car companies say I can’t meet it.”

Walker told the company’s annual general meeting in Ontario that he was “cautiously optimistic” the talks would lead to a deal “that’s not too bureaucratic” and “keeps NAFTA competitive.”

Earlier, Magna reported higher-than-expected quarterly profit and raised its full-year sales target to $40.9 billion to $43.1 billion, up from its previous forecast range of $39.3 billion to $41.5 billion.

It forecast 2018 net income of $2.4 billion-$2.6 billion, slightly higher than its previous projection of $2.3 billion-$2.5 billion.

The company expects more than $6 billion in free cash flow between 2018 and 2020 amid higher revenues and lower capital expenditures, Magna Chief Financial Officer Vince Galifi said.

Magna shares were up 3.8 percent at C$81.13 in afternoon trading, while the benchmark Canada share index was up 0.5 percent. The stock has risen 13.6 percent this year, compared with a 1.8 percent fall in the benchmark index in the same period.

Magna expects to grow sales faster than vehicle production through 2020 as it launches new programs, such as its autonomous car agreement with Lyft, even as demand is expected to soften in the key North American market this year.

Sales at the business that assembles cars under contract from manufacturers rose more than three-fold to $1.66 billion in the first quarter ended March 31.

Reporting By Allison Lampert in Montreal and Ahmed Farhatha in Bengaluru; Editing by Saumyadeb Chakrabarty and Bernadette Baum