Lear Corp (LEA) 2002 Q2 法說會逐字稿

Good morning. My name is Anissa, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Lear second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the No. 1 on your telephone key pad. If you would like to withdraw your question, press the pound key. Thank you. Mr. Stephens, you may begin your conference.

Good morning everyone. This morning we're going to be reviewing our second quarter financial results, providing our initial guidance for the third quarter and updating our full year guidance. Joining me on the call this morning are Bob Rossiter, our CFO - our president and CEO. Gave him a promotion there. Jim Vandenberghe, our vice chairman; David Wajsgras, our chief financial officer. And also with us this quarter are Don Stevens (phonetic), executive vice president in charge of the Americas; and Doug Delgroso (phonetic) executive vice president in charge of international. Before we begin I'd like to remind you all that during this call we will be making some forward-looking statements that are subject to risks and uncertainties. Some of the factors that could impact our results are described in the last slide. They're also in our 10-K filing and our other SEC filings if you'll turn to slide No. 2 I'll briefly review the agenda. Bob Rossiter will open with prospective on the second quarter. And then he'll sum up at the end before we all take your questions. Jim and Dave will provide additional details on business conditions in our financial results. So now if you'll turn to slide 3 I'll turn it over to Bob Rossiter.

Thank you very much, Mel, and thank you all for joining us today. I'd like to start off by saying as a team we're very pleased with our second quarter results. I want you to also know that the team is dedicated to our customer focused strategy, and that has not changed. We do feel that that focus is starting to pay off in the form of performance. I think $1.27 per share and up 20 cents is one indication of that. We know our objective to be the highest quality of producer of services and products in our business is paying off. All of our quality is measureable, demonstrates Lear is continuously improving, and Jim will give you data on that. In terms of debt pay down through cash from operations, again, we've had excellent performance. I believe that our asset management past practices is the core of Lear's operating formula and it generated 109 million of free cash flow for the quarter. New business which is the lifeblood of our future is that we again had solid performance as we increased our backlog by over 100 million dollars growing business with Asian producers over the last quarter. We really feel that trend is going to continue. We've raised our full year guidance from 420 to the range of 420 to 450. Now I'll turn it over to Jim.

Thanks, Bob. Moving over to slide No. 4, our strategy at Lear in our competitive advantage is working in partnership with our customers. But I'd like to start out with a summary of the recent recognition we've received. These awards reinforce our beliefs we're delivering customer value. As Bob mentioned we've been a true strategic partner to the worlds automate makers we've earned their confidence by delivering on a time basis. At the same time providing design and profit improvement to take costs out of these vehicles. These industry awards are really a reflection of our focus on the customer. Now looking at business conditions on slide No. 5 in North America, as the U.S. economy continues to recover, automotive production has increased. In the second quarter, overall vehicle production North America was up six percent, the big 3 were up five percent in transplants were up nine percent. While dealer inventories have in general returned to more normal levels, higher incentives and expanded warranty programs continue to support sales. Although recent economic data has been mixed, we still believe that the bias for vehicle sales and production in the second half is positive. Still too early in the year to predict with confidence how things will play out. Accordingly we remain cautiously optimistic as there are still some potential risks out there including consumer confidence high interest rates and fuel prices. Moving over to slide No. 6, industry conditions continue to be challenging in western Europe. In the second quarter industry vehicle production was down one percent. Nearly all of the major vehicle manufacturers are experiencing lower volumes. And Lear models have been hit harder on a proportional basis. At the same time, our customer's revenue and margins continue to be under pressure. We see continued weakness in the second half. In this challenging environment we continue to focus on the fundamentals, strengthening our customer relationships and effectively managing our cost structure. Moving to slide 7, during the quarter, we find new business with Asian OEMs and expanded our present in the Asian Pacific with strategic alliances. We were successful in signing 100 million dollars of new business with Isuzu, Honda, and a joint venture between Toyota and PSA. In addition, we took an equity position in Hanil (phonetic) a seat supplier in Korea. Formed a JV with Nanchang (phonetic), a seat maker in China, and one with Mitsubishi in Japan which will increase our electrical capabilities in this region. Moving to slide 8, it shows the status of the backlog. With addition of new business with the Asian OEMs our total backlog now stands at 3.6 billion, net of cancellations and runoffs. We have a lot of work to do but we expect to announce increases in our salve. I'll turn it over to Dave to cover the financials.

Thanks, Jim. I'd like to spend a few minutes reviewing second quarter 2002 financial results. I'll also provide our initial guidance for the third quarter and update our full year guidance. Let me start with the second quarter. With the steadily improving economic environment in North America and challenging industry conditions in Europe, we again delivered solid financial results. Sales at 3.8 billion were up 183 million, or five percent compared to a year ago. Operating income of 196 million was up 11 million or six percent, and earnings per share of a dollar 27 were up 21 cents or 20 percent from a year ago on a comparable basis. These results reflect the impact of both higher operating earnings and lower interest expense. As in the previous quarter, goodwill is no longer amortized under the new accounting rules. SG and A as a percentage of sales was 3.5 percent in line with our guidance. Lower administrative and overhead costs were offset by our expanded marketing efforts particularly with Asian OEMs. Interest costs were 53 million dollars, down 16 million, or 23 percent. Lower debt, a favorable interest rate environment, and a positive impact of efficiently managing our debt portfolio all contributed to the lower expense. Other expense was about 15 million, equal to a year ago, and again in line with our guidance. You should also note we've completed our analysis of goodwill impairment under the guidelines and criteria contained within financial accounting standard No. 142. And as a result a charge just under 300 million after taxes is reflected in our year to date financial statements as cumulative effect of a change of accounting principle. Now let's move to the next slide, No. 10. Net sales for the quarter were up 183 million reflecting higher vehicle production in North America and the addition of new business globally, which were partially offset by lower vehicle production in western Europe and South America, and prior year divestitures. Let me provide you some color for each of these changes. In North America, vehicle production was up 260,000 units, or six percent in total, with the big three up five percent. Key Lear platforms that experienced volume improvement in the quarter include the GMTA 100 series and GM Cadillac CTS and full-sized cars, as well as Ford's Windstar and Explorer. In western Europe vehicle production was down 52,000 units, or one percent. Seven of our top ten platforms experienced volume decline, including the Peugeot 206 and the Citrone (phonetic) Saxo (phonetic) Fiat Punto (phonetic) and Mulitipla, Ford Mondale and Focus and the Opal Corsa. In South America vehicle production was down 130,000 units and nearly all our platforms experienced lower volume. Net currency changes were slightly positive, reflecting primarily a stronger Euro, which was partially offset by the South African rand, the Canadian dollar and the Argentine peso. Divestiture reflects noncore assets disposed of last year. New Lear business adding 165 million in sales includes the Ram pickup, Jeep Liberty and Ford Explorer in North America, and the Citrone (phonetic) XRA (phonetic) C3 and C5, the Fiat Stelo (phonetic) and the JAG X-type in Europe. We now move to slide 11. The 11 million dollar improvement in operating income reflects primarily the impact of worldwide vehicle production and the profit contribution from new business. With regard to year-over-year margins, overall we increased our operating income margin by ten basis points to 5.2 percent. The improvement was driven primarily by the operating leverage on higher North American production. Western Europe in general remained weak and our major customers were disproportionately down year-over-year. Specifically production for the Ford group was down five percent. The GM group declined nine percent and Fiat fell by six percent. While we continue to focus on the business fundamentals in Europe, our major markets continue to be challenged and as a result have an offsetting impact to the operating leverage we're seeing in north America. Before moving on to cash flow, let me briefly comment on content per vehicle. In the second quarter, CPV in North America was down about 1.5 percent. A number of factors can impact content per vehicle at any point in time. These include customer mix and product mix, series mix and option take rates. For example, third row seats on SUVs and leather trim on luxury cars. In addition, the timing of major program launches can also have an impact. A couple of examples where mixed impacted our CPV in the second quarter include the trail Blazer and-on invoice where we don't have significant content but production was up over 50 percent. Cancellation of the luxury G van where we provided the complete interior and several high volume car lines where we have substantial content that did suffer some volume declines. Here is what we see ahead. Clear content per vehicle will continue to grow over time in the mid single digit range. We expect the U.S. economy to continue to improve. And this should help mix in the second half and going forward. We now move to slide 12. We generated free cash flow of over 100 million dollars in the second quarter, bringing the first half cash flow to about 200 million. Before I speak to some specifics, let me first address changes in select balance sheet categories. Compared with the prior quarter end, both accounts receivable and accounts payable were up, reflecting primarily higher production levels and the impact of foreign exchange. Inventories were flat during the period, as efficiency actions were offset by planned inventory builds to support our restructuring program. Accrued liabilities were basically unchanged. Now, compared to December 31, 2001, accounts receivable and accounts payable were up and inventories were again flat for essentially the same reasons I just mentioned. Accrued liabilities increased as a result of the timing of compensation or payroll related payments for our employees, a government imposed change in the timing of VAT remittances in Mexico. The timing of commercial settlements and again foreign exchange, all of which were partially offset by utilization of the restructuring accrual. As for cash flow performance in the quarter, our intense focus in this area continues to pay off. We have previously provided guidance of 25 million dollars in positive cash flow. Higher than anticipated earnings, better than expected collections in both tooling and engineering, and cost efficiencies along with the timing of capital expenditures, all contributed to the improvement. If you would now move to the next slide. Cash flow generation has allowed the company to significantly reduce its financial leverage. So far this year we have lowered our debt balance by about 244 million, and over the last six quarters by 565 million, or 20 percent. Since the end of 1999, we've reduced debt by about a billion dollars, or 30 percent. If you'd now move to the next slide, slide 14. As you're aware, we've announced a significant restructuring of our operations in the fourth quarter of last year. Implementation commenced in December, and most actions will be taken this year. This slide shows a status of actions completed. So far we've closed six facilities included in the original plan. Two additional facilities were scheduled to close in the second quarter, but due to customer requirements will now close at the end of this month. We also have completed two-thirds of the planned census reduction, many of which were not related to the closure of facilities. To accomplish our overall objective, we will invest about 90 million dollars. In the second quarter we made cash payments of 20 million, bringing the cumulative payments to 36 million dollars. During the quarter, implementation or period costs were mostly offset by savings. As mentioned previously, savings for the full year 2002 will not be significant, again for the same reasons. However, we are on track to achieve annual savings of 50 to 60 million dollars beginning in 2003. We will continue to provide regular updates in the future on our progress and implementing the restructuring plan. If you'd now move to slide 15. Turning now to our financial guidance. In the third quarter we see earnings per share in the range of 75 to 85 cents compared with 64 cents last year. Net sales are anticipated to be up slightly from a year ago reflecting higher production in North America and the addition of new business globally, offset partially by lower production in western Europe. Interest expense should come in at about 55 million, capital spending at 100 million, and free cash flow at around break even. For the full year, our expectations for North American vehicle production are in the range of 15.8 to 16.2 million units. This outlook is up 400,000 units from our previous guidance. In western Europe, our estimates for production remain unchanged at 15.5 to 16 million units. Let me expand a little bit regarding the western European production outlook. Although the industry appears to be down around four to seven percent, for Lear's key customers production levels could continue to be disproportionately down, similar to both first and second quarters. With all this considered, we see earnings per share in the range of $4.20 to $4.50 compared with $3.73 a year ago. For the year we see interest expense of roughly 220 million. Capital spending of 300 million, and free cash flow in the range of 300 to 350 million. On a final note, with respect to earnings guidance. Assuming no further weakening with our more significant European customers and stable North American vehicle production, we expect operating margins to be up slightly for the balance of the year. Now I'll turn it back to Bob for some final comments.

In summary we believe our focus on delivering value to our customers and shareholders is the road map for our success. But we know we have our work cut out for us. Our complete automotive interior capabilities we believe give us an advantage and our diverse customer base also gives us a distinct advantage. And we feel we're well position today grow in our business, especially with the Asians where we've renewed our emphasis and are working very hard. As I said before, our LBO mentality is driving our business. Our cash focus and asset management is going to allow the business to pay down debt. But believe me we're focused and we are a team and I promises you we will be successful. I'll turn it over to questions and I encourage you if you have questions about operations Doug and Don are here to talk about those. Anything on sales we have Bob Seed (phonetic) here. Anything on accounting, Bill Dirks is here. Anything on treasury, Pat Hitchcock is here. We're a team.

At this time I'd like to remind everyone in order to ask a question press star and then the number 1 on your telephone key pad. We'll pause a moment to compile the Q and A Rossiter. The first question comes from Steve Girsky with Morgan Stanley. Please proceed, sir.

Good morning. It's Jonathan Steinmet (phonetic) for Steve. You talked about some example while content per vehicle could decline and discussed about option take rates and that kind of thing. Are you seeing any evidence of any type of deacon tenting on any of the vehicles?

No we took a hard look at this, from Lear's perspective we're not seeing it.

Great. Thank you very much.

Your next question comes from John (Casesa) with Merrill Lynch.

First, Dave, on cap ex timing looks like you spent a little less than you were planning to in the first quarter; is that correct and for the full year does that change what your spending priorities are?

No it's just really timing. We're pretty much aligned the first half of this year with the first half of last year, and we're still looking to spend about 300 million.

And Don, a question for you on the total interior programs at GM. How is that going generally. Do you get any sense that North America this is going to be a trend with the other OEMs?

DON STEVENS (PH) It's going great with General Motors. They clearly want to use us as a strategic partner in the total interior side of the business. I think over the next 90 to 120 days I think you'll hear more and more about that. In terms of the other customers, Ford and Chrysler here in North America, I think it's a little bit slower of a process.

And do you get any sense so far that you're able to actually realize some of the efficiencies you've thought you might realize with this kind of a program?

DON STEVENS (PH) We're more excited now than we've ever been about the opportunities as the OEs go outside with the total interior.

That's not just in the revenue line, you mean on the cost line as well?

Absolutely.

Finally, Doug, in Europe I know you have a very tough customer mix there. For the balance of the year, what do you think is going to happen with your key customers? And if volumes continue to disappoint as things suggest, there's a risk they might, what can you do from a cost standpoint?

From the customer perspective, I mean we expect it to be pretty flat for the balance of the year with the major customers. I think a lot of it is dependent on the success of their launches. Many of these customers are launching new products like the Episilon South 440 and the success of that launch will be an indication of the types of volumes we anticipate. What we're trying to do in Europe is really focus on the cost side. We're in the midst of a fairly major restructuring project with all of our groups and regions within Europe and we're just focused on the execution of that, bring our cost structure down and by continued focus on the launches and support the customer there.

Just where are you finding the cost productions? You guys have been at this a long time.

A big chunk of it right now is we're moving some of our wire harness assembly out of higher cost regions in Europe into lower cost regions, primarily eastern Europe. That's a pretty big undertaking. That's where probably the most significant. The other areas is just focus on SG and A and trying to bring that down in line with where sales are at right now.

Thanks very much, guys

Your next question comes from Michael Ward with Salomon Smith Barney.

Good morning. A couple things. First off can you give us guidance on some of the regional operating performance?

Sure, I can give you some guidance. For North America, obviously margins are up period over period. For South America it's slightly down given the environment in South America. For Europe we're seeing some improvement in Europe on a comparable basis year-over-year. Doug spoke to a number of things that he's working on with respect to managing the cost structure and that's beginning to pay some dividends.

So the margins in Europe were up versus last year?

On a comparable base quarter-over-quarter, that's right.

Second in your outline looks like you bumped up the targeted savings from the restructuring actions. Did I read that correctly?

You read it correctly. It's things are - things are improving even more so and moving a little bit quicker than we had anticipated. So we see savings now in sort of the 50 million plus range.

Okay. Jim, in your presentation you mentioned that you thought you'd be adding to your book of new business over the next couple of months. If I look back two years ago, the business for 2003 was about 500 million. Is that kind of the order of magnitude we're looking at, couple 100 million dollar increments.

We have a lot of things that we're working on right now, Mike. As Don touched on some of them. Really not only in North America but also in Europe and in the Asian Pacific. So I think we definitely will see that bumping up by at least a good 200 million.

Thank you very much

Your next question comes from Wendy Needham of Credit Suisse First Boston.

Good morning. Dave, going back to the mix issue, when you look at production schedules going forward, are you seeing any snap back in the mix on content per vehicle in North America?

In general we have visibility anywhere from, say, six to 12 weeks out. The mix will not impact us as negatively in the third quarter and that seems to be the case for the fourth quarter as well, from a content per vehicle standpoint.

So you're saying that it should be up in the third and fourth quarters; is that what you said, single digit increment.

Right. From what we're seeing today it should be flat to up.

And then on the raw material front, I don't know that you have too much exposure to steel, but maybe could you comment generally on raw material prices and, Bob, I'm wondering how are things with leather these days. Is there still a leather shortage or has that been worked through?

Regarding the commodities I think we've seen some upward pressure in full costs, have seen some upward pressure in steel and resins. We don't think it's material, again because we don't buy a lot of steel directly. So I think we're comfortable that it's imaginable over the rest of the year. Regarding leather - I mean leather actually has -

I wear plastic shoes now.(Laughter)

But leather is not a problem. That market is stable, though. About nine months ago.

Great. Thank you

Your next question comes from David Bradley with JP Morgan.

Good morning. I guess two questions on Europe. First, can you just elaborate on this mix issue? You said industry expect to be down four to seven percent. You would be down more. What is your mix, how does it differ from others. Is this a customer issue or a model issue?

Well, it's a little bit of both. In general, and we talked about this during the formal presentation. Our more significant customers are the Ford group as a whole, the GM group and Fiat. Over 50 percent of our business is windows three customers in Europe. There were some specific platform issues like Doug was alluding to before. So we don't expect that to really worsen in the second half of the year.

And I look at 45 percent of your backlog being Europe. I guess from comments you've made in the past about margins in Europe maybe being a third to lower than North America. Does that mean that I guess two possibilities. One is either average margin comes down as more business ramp-ups in Europe because of lower margins or number two higher volume in Europe is able to give you the operating leverage to pull those margins up. How do you see that interplay going forward?

Obviously overtime we'll be able to realize improved margins through the leverage on sales similar to what's going on in North America. We're also going to be seeing some positive impact from the cost production programs that we're in the middle of right now.

Then lastly, content in South America, is that a customer issue again where - because you had a content drop. Is that a currency issue, mix issue, customer issue?

It is both. But if you just adjust it for the change in currency, it's actually up year-over-year as a result of some launches, not withstanding the fact that volume is really down.

Okay. Thank you

Your next question comes from John Davidook (phonetic) with Goldman Sachs.

Good morning. I have a pair of those plastic shares. They're not very good in hot weather.

But they look good.

They look good until they start melting. (Laughter)

Just a quick question on the restructuring. Is there basically no savings here in 2003 and that 50 or 60 million for next year is all incremental?

On a full year basis, the implementation costs is really offsetting the savings. There's a little bit of pickup in the back half of the year, but it's really not material. The run rate for the savings of 50 to 60 million really takes hold in the beginning to the middle of the fourth quarter.

And if we assume 50 to 60 million for 2003, that should be fine in our models?

Sure.

Because I'm guessing the amount in Q-4 is going to be less than 10 million?

That's correct.

As far as the situation in Europe, should every time we hear that OEs are starting to feel margin pressure, they turn to share suppliers, I know you're always under price pressure, is there anything here that is greater than normal or is it just kind of standard old operating procedures as far as pricing goes?

I would characterize that more as similar to what we've experienced in the past. The key customers I think we mentioned earlier on the call are under extreme cost pressure. They do look to us to help resolve those issues. And we try to take an active approach with them, bring ideas forward on how we can take cost out of the product. But I don't see it being anything particularly unique or something we haven't experienced in the past.

Okay. And just a last question kind of a housekeeping question. What was the securitized receivable balance at the end of the quarter.

275 million. Essentially flat.

And you should also wrap your feet with Saran wrap and carry around a squirt gun on hot days. (Laughter)

That's a good idea. I'll have to remember that.

Your next question comes from David Reicher with Robert W Baird. Two things, first, Dave, do you have the new business contribution number for the revenue (inaudible) for six months.

For six months?

Yeah.

About 300 million on the sales line.

We have about 500 million here for the second half of the year?

That's right.

I can do math, I guess. In terms of debt reduction, if I'm reading this right you've got about somewhere between 10010050 million in the second half of which you'll lose 50 of cash to restructuring; is that right?

No, the numbers on a full year basis we'll have cash flow in the three to 350 range, net of the restructuring.

That's net of restructuring.

Net of restructuring. All the numbers we're giving out are operational generated cash flow net of restructuring.

So you should be able to reduce your debt here another 100, 150 million, most of which would be the fourth quarter?

That's correct.

Great. Thank you

Next question comes from Rob Laish (phonetic), Deutsche Banc.

Can you hear me?

Yes, we can.

First of all, can you talk about what some of the key platforms are included in this big ramp-up of new business in the second half and how is that weighted North America versus Europe?

Just specifically I think the most significant platform in Europe that's in the midst of launching is the Episilon platform which impacts both Volvo and also Saab. We've got tremendous amount of content on both of those vehicle lines that include (inaudible) electronics, interior. So from a European perspective, that's probably the most significant platform that we're dealing with right now.

On the North American side, the biggest is the GMT 100, the mid cycle enhancement where we have new seats and doors. We also are launching the Lincoln Aviator that should be in a couple of months, or in a month. Also the sun fire cavalier also goes through its mid cycle enhancement and then we'll get the benefit of the navigator expeditious that launched about a month ago.

And how is the business weighted? It's roughly in line with the overall backlog, Europe versus North America?

It's slightly weighted on the sales line to western Europe.

Okay. And then based on the 300 to 350 of free cash flow you must be expecting a big uptick of working capital in the second half; is that correct?

No, working capital in the second half will generate 25 to 50 million dollars. A lot of it is generated through operations.

And what were the period costs can you quantify what the period costs were related to the restructuring this quarter?

I'd rather not get too specific on that. It was essentially offset by the savings.

Okay. Thanks a lot.

Your next question comes from Mike Bernstein with Prudential.

Hi guys. Mike Bernstein here. This European customer mix looks like it's a bit of an issue. What do you think going forward? Is there a chance we're going to see a significant change there? Are you going to get other customers than Ford GM and Fiat becoming more substantial? I.e., what's the backlog mix? Is this weighted in the same way?

I think one of the customers we're experiencing the most amount of growth on right now is with Peugeot. They're also a customer launching a lot of new products this year with, the new C 3 (inaudible) 5 vehicles are in the midst of a launch right now. In addition to that we've got growth with VW. Beyond just our Audi business. And that's the Colorado program, which is a joint program that they have with Porsche. So we are looking at fairly significant change in our customer line going forward.

Okay. What is the FX rate you're using in the backlog? Has that changed?

No the FX rate of the backlog is still around 90. We update - we formally update the backlog annually.

And the charge to - with this charge to equity can you still hit the 55 percent debt to calc you were hoping to get I guess for 2003.

No it's going to be a little more difficult now. But for 2003 - I'm sorry I thought you meant for 2002. At the end of 2003 we should be in sort of the mid 50 percent range. That's right. I thought you were asking 2002.

The target had been for mid 2003 is that correct.

Early 2003 (inaudible)

Your next question comes from Ron Tadrose (ph) with Bank of America.

This page 10 here, your change in production, your change in sales of production from North America, western Europe, is that based on industry production change numbers or is it based on your customer production change numbers, the ones that, your major platforms?

It's both. It's really the impact of the volume obviously on Lear, the production changes on Lear.

All right. So it's the North America up six percent, that number equates to 100 million dollars?

That's right. Obviously we do more detailed analysis than what you're looking at, but that's right.

Then on SG and A, going forward, SG and A dollars will this be up or down on a dollar basis?

Year-over-year?

Yeah.

Year-over-year it will be slightly up but nothing of any significance. Just simply as a result there's a lot of cost takeouts. There's offsetting marketing programs that we've talked about. But it will be essentially flat to very slightly up. So we're offsetting a lot of the economics associated with SG and A.

Okay. And then this question is for Don. Don, could you frame for us, if you're willing to, the potential impact of the ACAW strike on Lear? Have you thought about that. I'm sure you've thought about it. I don't know if you're willing to talk about it publicly.

I'd like to pass on that Ron. Thanks for the opportunity, though.

Let me ask the question again, Don.

Try again.

That's fine. All right. Thanks a lot

Next question comes from Darren Kimball with Lehman Brothers.

Do you have, Dave, the base numbers for the backlog by, product and the backlog by customer that you put out in page 8?

Sure. You want me to give them to you?

No, just -

We don't really give out that detail there. I think we're providing a more detailed today than we have ever before and we believe that's sufficient.

I guess what you're saying is enough is enough.

Yeah.

But I thought you guys put at least on the product side you guys - I thought you guys put that out in your fact book or something close to it.

It's on the chart. You mean from a -

When I look at your backlog by, product, 45 percent of your backlog is seats. How much of your current base of business is seats, that's sort of my question.

Oh, okay. Current base of business. I'm sorry, I misunderstood the question. It's about 60 percent. 60 to 65 percent.

Can you kind of fill out the rest of the detail?

About 15 percent is electronics and the balance is interior. I'm sorry, I misunderstood the question.

No problem. Is it possible to do that on a customer base as well? How much of your sales are big three today versus the 50 percent that's in your backlog?

Big three today worldwide is about 90 percent. And it's in North America - I'm sorry, in North America - in North America it's about -

Your next question comes from Richard Hilgard (ph) with Fonstock (ph) and company.

I wondered on the backlog in some of the outlying areas, what kind of production forecasts are you looking at, what kind of unit volumes?

When we do the backlog we hold unit volumes constant at 16 million units in North America and 16 million in western Europe.

Okay. Thanks, Dave.

Next question comes from Brett Hoseton with McDonald Investments.

Can you hear me?

No, we can't. You're really -

Can you hear me now?

Yeah.

Looking at the production forecast, this question is for Dave, I'm looking at North America, and implies based on the numbers I've seen in the schedule in the third quarter or fourth quarter that's down productionwise about one to 11 percent in North America. I'm wondering is that something you're seeing or is that just you being conservative? How should we take that?

Well, for the third quarter we're seeing North American production up about two percent. And for the year up in the two to four percent range. I'm sorry, I may have misunderstood. I thought you said 11 percent.

Taking what we've produced so far through the first six months of the year, plus what the third quarter production schedules look like, and then taking your full year production expectations, it implies, at least according to my data, that your expectations are for the fourth quarter production schedules to be down about one percent to 11 percent in North America.

Actually, North America looks about flat to maybe up slightly in the fourth quarter.

And then the second question, this question is for Don, one of your chief competitors who has had some union issues recently was talking a little bit about the unionization of the plants and that was likely to increase, it seemed. And then also suggested that outsourcing, that was going to be a plus. And I guess I'm wondering whether or not you see union activity in your plants potentially increasing going forward. And then secondly is that a positive or negative in terms of your ability to win new business?

For us we've essentially been a union shop since we started. So that's really not an issue in terms of increasing or decreasing. That's just part of the environment that we've grown up with. And have participated in. And we welcome the union into the number of the acquisitions that we've made into those facilities. So that's always been part of the Lear system. In terms of helping, does it help to win business, certainly it is a tie breaker or we believe it's a tie breaker. And I think our history would show that.

I'd like to add something here. I don't want obviously to say anything bad about any competitors, because it isn't their fault. But we've always had union shops and we've been faced with the cost disadvantage that comes with it. I really and truly believe that's really what makes Lear special, that we've been able to work through that, been able to get along with the unions, been able to fight a cost disadvantage and still been competitive and as profitable as others. So I think it levels the playing field somewhat for us and I truly believe it gives us an advantage going forward.

Great. Thanks very much, gentlemen.

Your next question comes from John Rogers with Wachovia Securities.

My question is on content per vehicle in Europe. I know we talked about the production mix. But can you tell us when currency comes into that. Is that sort of a period of time at the end of a quarter number or do you blend that CPV in for the average?

It's an average. If you take currency into account for western Europe, content per vehicle was up about six percent.

Okay. Great. Thank you.

Your next question comes from Brian Kinap (ph) with Midwest Research.

A quick question here. Was there a business segment that accounted for the goodwill impairment or was it spread evenly among everything else?

It's spread evenly by region.

That's all I had. Thanks.

Your next question comes from Andrew Knutsen of Dresdner.

A quick question looking at the reinvestment ratio it was running it was a low one for a while now. At what point do you start seeing the (inaudible) base to start growing here. Is it at the end of 2003 as some of the write downs come through? How do we see that going forward?

I'm sorry, maybe -

You're talking about our asset base.

Looking at cap ex versus depreciation, it's been run that way for a while.

We don't see any change in the near term. Certainly not for 2002 or 2003.

You keep getting assets out of the business for at least the next 18 months?

That's right.

Thank you.

We have time for one more question. We'll take that from Darren Kimball's line with Lehman Brothers.

I don't know if we got cut off there -

I thought you hung up on us there, you didn't like my answer.

I thought you didn't like my question. (Laughter)

We didn't like the question but we'll still give you the answer.

Should I follow occupy the detail of the call down of backlog, or the base business by customer.

That's fine. Let me clarify. In North America the big three makeup of about 90 percent of our business in our worldwide base is about 75 percent of the business. I think that's where you may have been cut off the line.

Yeah. So the worldwide 75 and your backlog it's 50 so the Europeans and the Asians are picking up. Can you kind of give those numbers? How much of your base today is Europe? Or European manufacturers, I should say.

Europe today is about, from a sales standpoint? About a third of the business, a little bit more.

Okay. So the big change is in the Asian.

Right. About a third of our sales are from Europe. Now, in terms of the European car makers, excluding Daimler Chrysler, again the big three accounts for about 75 percent of our sales globally. Asians account for about five percent and the balance would be the European manufacturers.

Excellent. Now, just a little more detailed question on the backlog by, product. Interior piece, the 35 percent, you've got some growth there. I'm just curious how much of that is in the instrument panel business. Has that business gained critical mass at this point or is that still an area where you need some kind of strategic initiative?

Well, I think it runs across all of our interior products. But there is an instrument panel program in there for the, as part of the GM awards of total interior. I believe it's the H car, which is new to us. No, there is not a big kick up in that backlog due to the addition of instrument panel. That's still an upside thing for us.

Okay. And one last one on your slide on the components of the revenue delta and the income delta. The new business - the income that you're ascribing to the new business, looks like it's about three and a half percent pretax. Is that in line with where you think that should be? Obviously first year programs typically aren't as profitable asthma chewer programs. Is there anything unusual in that number? And I'm also curious if that's net of start-ups.

Okay. It's net of start-ups. Yeah, it's net of start-ups and it's not any different than it has been in the past. You're absolutely right with your thought process. Programs do not start to realize sort of full margin profile until about 18 months out.

Okay. That's all I've got. Thank you.

Just as a wrap up probably not many people are on except Lear employees but it was a solid quarter. I want to thank everyone for that. We have new business so we're continuing to grow in each of the operating divisions and the staff organizations, Lear is truly doing a good job. I think the team is truly deep and solid and across the board this company will perform. So thank you all for calling in. We'll be around the rest of the day. Thank you.