Lear Corp (LEA) 2002 Q3 法說會逐字稿

Good morning. My name is Judy and I will be your conference facilitator today. At this time I would like to welcome everyone to the Lear third quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, thereby a question and answer period. If you would like to ask a question during this time simply press star followed by the number 1 on your telephone keypad. If you'd like to withdraw your question press the pound key. Mr. Stephens you may given your conference.

Thank you and good morning everyone. Today we'll be reviewing our third quarter results, providing fourth quarter guidance and covering our initial 2003 assumptions. Joining me this morning are Bob Rossiter, president and CEO, Jim Vandenberghe, vice chairman and Dave Wajsgras, senior vice president and chief financial officer. Before we begin the formal review we'll be making some forward-looking statements and these are subject to risks and uncertainties and factors that could be impacting our results are outlined in the last slide. They're also included in our official filings with the SEC. If you'll turn now to slide number two, I'll cover the agenda. Bob Rossiter will begin. He'll provide an overview of the third quarter. He'll turn it over to Jim, who will cover business conditions. And then Dave will review our financial results. So with that, I'll turn it over to Bob Rossiter and please turn to slide number three.

Thank you very much, Bill and thank you for joining us today. As we've stated in the past, and we want our message to be very clear, at Lear we believe that the best way to deliver superior value to our shareholders is to be number one in customer satisfaction. We do that by delivering the highest quality products and services in our industry. To that objective, we as a team are totally dedicated. It is our belief that if we're successful in meeting our goals for our customers, it will result in growth and revenues and improved earnings and our shareholders will benefit. The third quarter was another solid one for Lear. As net sales were up seven percent to 3.3 billion. Earnings per share up to 91 cents or up 42 percent from prior year. And our credit rating has improved over the last year. Our full year EPS guidance now has increased to $4.40, to $4.55 a share. Finally, I'd like to mention that during the quarter Lear received five new gold awards from Daimler Chrysler for superior performance in quality and delivery. And we earned their interior component award for 2001 for outstanding performance in flooring and acoustics systems. We're gratified we've now received formal recognition from every one of our major customers this year. I'd like to turn it over to Jim.

Thanks, Bob, and good morning. Moving to slide four, the slide summarizes what we see in the North American market. As the U.S. economy continues what appears to be a gradual recovery, automotive production has remained strong. In the third quarter vehicle production in the North Americas was up 10 percent. Dealer inventories in general remain at normal levels. And high incentives continue to support sales and production. Although recent economic data has been mixed, we believe the bias for vehicle sales and production in the fourth quarter is positive. Looking ahead, we remain cautiously optimistic for 2003. There are some potential risks, including consumer confidence and fuel prices, but we see North American vehicle production continuing at a healthy rate. Dave will provide more detail on our outlook for'03. Moving to slide five, western Europe, industry conditions continue to be challenging. In the third quarter, industry vehicle production was down one percent. Production was mixed by major manufacturers, with Fiat, VW and PSA down and BMW Ford and GM up in the quarter. Within this mix, many click key platforms for Lear were also down in the third quarter. We see continued industry weakness in the fourth quarter into next year, with key Lear customers and platforms down disproportionately with the industry. For 2003, we see vehicle production in line with this year. I will say we are watching very closely what happens with Fiat during this time period. In this challenging environment we will continue to focus on the fundamentals, strengthening our customer relationships and effectively managing our cost structure and our balance sheet. On slide six we highlight some of our major launches in the second half of 2002 as you can see several of our second hand launches are on high volume platforms and impact Lear facilities. The biggest launch in North America and for our company was GMT800 mid cycle enhancement program and the Lear team has done a great job to date. For Europe our largest launch is GM's the opal Vectra (ph) and the Saub 93. Finally in India we completed a launch for the complete interior for the Hindra sport VO, and all new entry-level sport vehicle in India. On slide seven you can see the key vehicle programs that we're on and the launches we have in 03. We believe these programs will be a source of both sales and earnings growth going forward. Now I'd like to turn it over to Dave for a review of the financial results.

Thanks Jim I'll spend a few minutes reviewing third quarter 2002 financial results. I'll also provide guidance for our fourth quarter and our initial thoughts on 2003. Let me start with the third quarter. With strong vehicle production levels in North America, and continued challenging industry conditions in Europe, we again delivered solid financial results. Net sales of 3.3 billion were a third quarter record. Compared with a year ago, net sales are up 231 million, or seven percent. Operating income of 159 million was up 21 million, or 16 percent on a comparable basis. And our operating income margin improved 40 basis points from 4.4 percent to 4.8 percent. I'll provide some more details on the year-to-date changes in sales and operating income on the next slide. EPS of 91 cents was up 27 cents or 42 percent from a year ago, again on a comparable basis. This reflects both higher operating earnings and lower interest expense. SG&A as a percentage of sales was 3.8 percent in line with our guidance. Lower administrative costs were offset by our expanded marketing efforts, in particular, with the Asian OEMs. Interest costs were 53 million, down 11 million dollars. 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 13.2 million, in line with our guidance. One other item I'd like to comment on is our content per vehicle in North America, which was down slightly in the quarter. The CPV calculation is a macro indicator that is impacted by a number of variables, including the relative OEM production mix -- the production mix for individual platforms, the timing of major launches, as well as content changes for Lear. During the third quarter, deacon testing by the OEMs was not a contributor to our decline in CPV. Factors that did impact CPV include lower relative production by General Motors, our largest customer; the timing of major program launches, such as the GMT800 mid cycle enhancement, and individual platform mix. Here, for example, the Dodge Durango, a high content vehicle for Lear was down while the low content trail Blazer and GMV Envoy were up. Finally it's important to point out that the fastest growing part of our business going forward is sales to Asian OEMs, primarily North American transplants where some of our business is conducted through non-consolidated joint ventures and these sales are not included in the CPV calculation. With all that being said, we do forecast our North American CPV to be up in the fourth quarter. If you'd now move to slide nine. This slide shows the major drivers of improvement in operating income and net sales for the quarter. The 21 million dollar improvement in operating income reflects the impact of worldwide vehicle production, the profit contribution from new business globally, and the favorable net impact from foreign exchange. Although the Euro was up 11 percent on the quarter, this positive impact was offset primarily by the south African ran down by about 25% and the Argentine peso down over 250 percent. Net sales of the quarter of 231 million followed the same patterns operating income reflecting higher vehicle production in North America, the addition of new business globally and favorable foreign exchange. These factors were partially offset by lower vehicle production in western Europe and South America and prior year divestitures. As I mentioned earlier, we increased our operating income margins by 40 basis points to 4.8 percent. Notwithstanding the challenges we continue to face in Europe, those being lower volumes on key platforms, difficult launch issues on several programs, including the Volvo XC 90 SUV the Opal vectra (ph) and Saub 93 and the new Porsche Kian (ph) an operating leverage has allowed us to overcome these factors and improve our margin portfolio. Doug DelGrosso and the Lear team are keenly focused on managing these issues and improving our business in Europe going forward. Let me now provide some specifics on the production environment by region. In North America, vehicle production was up 349,000 units, or 10 percent in total. Key Lear platforms that experienced volume improvement during the quarter include GM's mid-size and luxury cars, the Dodge ram pickup, as well as Ford's Wind Star and Taurus Sable platforms. In western Europe vehicle prosecute deduction was 21,000 units or one percent and several of our platforms experienced even greater volume declines, including the Puget 206 and Sitron Saxo (ph) Ciapunto (ph) and multipla (ph), Audi 806 and Corsa, the Ford Mondo and JAG X type and the Mercedes C-Class. In south American vehicle production was 52,000 units or 11 percent. If you'd now move to slide ten. Before I speak to our cash flow let me first address some of the changes in select balance sheet categories. Compared with a prior quarter end, both accounts receivable and accounts payable were down, primarily reflecting seasonality, that being lower production levels during the summer shut down period. Inventories were up for the period, again to a normal seasonal inventory build in support of model year changeovers. The timing of semiannual interest payments on our bonds resulted in accrued liabilities being up slightly for the quarter. Compared with December 31, 2001, accounts receivable and accounts payable were up reflecting higher production levels and the impact of foreign exchange. Inventories were up as I just mentioned to accommodate model changeover schedules. Accrued liabilities increased as a result of the timing of bond interest payments and as well as the timing of commercial settlements. Utilization of the restructuring accrual partially offset the overall increase. Free cash flow at a positive 21 million was in line with our break even guidance for the quarter. I'd like to point out that in the third quarter of this year, we continued to support our supply base by lowering our trade payables outstanding by about three days, utilizing cash of roughly 90 million dollars. For the first nine months of 2002, our free cash flow of 224 million is up about 40 million dollars, when compared with the same period a year ago. On a final note, although capital spending in the third quarter came in below our guidance, year-to-date spending is up about 15 million dollars when compared with the first nine months of 2001, and our full year forecast remains at around 300 million. If you'd now please move to slide 11. Our restructuring plan is proceeding on track. So far we've closed 14 facilities included in the original plan, with eight facilities closed during the third quarter. We also completed 80 percent of the planned census reductions, many of which were not related to the closure facilities. To accomplish our overall objectives, we will invest about 90 million dollars. In the third quarter, we made cash payments of around 20 million, bringing the year-to-date payments to about 48 million, and the cumulative payments to around 56 million. During the quarter, implementation or period costs were essentially offset by cost savings. As we mentioned previously, net (ph) savings for the full year 2002 will not be significant, again for the same reasons. However, we're on track to achieve annual cost reductions of 50 to 60 million dollars, beginning in 2003. We're now estimating the cost reductions at the higher end of this range. While savings from our restructuring plan will help margins next year, let me also comment on the overall cost and pricing environment. On the positive side, we are seeing more than ever a true partnership approach with our customers in pursuing efficiencies. There really is a comprehensive effort to eliminate waste. At the same time, we are experiencing higher raw material prices and other cost increases outside of our direct control. Risk insurance and health care costs are two good examples. To put the restructuring savings in perspective, we will reduce our cost structure by, say, 55 to 60 million dollars annually beginning next year, which will help offset other cost increases, including customer productivity agreements. Our restructuring plan is one element of our continuing effort to reduce our overall cost base, and to continue to improve our operating margins. If you'd now move to slide 12. Turning now to our outlook for the fourth quarter. There are still a lot of moving parts. Let me comment briefly on the more significant ones before I speak to the guidance. On the positive side, North American production is expected to be up around six percent. We will also benefit from full production on the GMT800 program, where we have added content as part of GM's mid cycle enhancement. In addition, we'll see some positive impact from cost reduction actions. Sales growth from our backlog will be positive for revenue, but compressed margins in the short-term, until post launch efficiencies are realized. Other factors adversely impacting near term results include continuing economic weakness in western Europe, difficult and uncertain business conditions with Fiat. Premium Freight resulting from the longshoreman strike, as well as higher raw material prices. A couple of examples here include higher costs for resins and diesel fuel as a result of rising oil prices and higher steel prices which are up sharply from a year ago. While we continue to make steady progress in improvement in our operating margins going forward, it is likely that in the fourth quarter our margins will be flat to up slightly, reflecting the factors I've just discussed. If you'd now move to the next slide. Turning now to our financial guidance. Given the factors impacting the fourth quarter results discussed on the previous slide, we see earnings per share in the range of a $1.52 to a $1.67, compared with $1.49 last year. Net sales are anticipated to be up from a year ago, reflecting higher vehicle production in North America and the addition of new business globally. Offset partially by lower production in western Europe, from about four million vehicles produced, to a range of between 3.8 and 3.6 million units, down three to seven percent. We see interest expense of 50 to 55 million. Capital spending of 125 million, and free cash flow in the range of 75 to 125 million. For the full year, our expectation for North American vehicle production is about 16.5 million units. In western Europe, our volume outlook is in the range of 15.7, to 15.9 million units. Although production looks to be down four to six percent in western Europe, for some of our key customers, but more importantly for many of our key platforms, production levels continue to be disproportionately down. For the year, we see earnings per share in the range of $4.40, to $4.55 compared to $3.73 a year ago. We forecast interest expense of 213 to 218 million dollars. Capital spending of around 300 million, and free cash flow in the range of 300 to 350 million. If you'd now move to slide 14. Similar to last year's fourth quarter, there's not a clear consensus for North American sales and vehicle production for the upcoming year. Our initial planning assumption for North American vehicle production is about 16 million units. For western Europe and South America, we expect production to be roughly in line with this year. Within this production environment, we see Lear's worldwide net sales growing by about four to six percent, reflecting primarily the addition of new global business from our backlog. Our present sales backlog stands at 3.6 billion. In January, we'll provide an update and we do expect to report additional new business at that time. As I've discussed before, we see operating margins continuing to improve next year. We expect a tax rate of approximately 32 percent for 2003. However, we again see further opportunity with our tax rate, both in 2003 and subsequent years due to the impact of continuous tax planning initiatives, as well as the increased focus on tax efficiencies throughout the entire organization. Average year shares outstanding is expected to increase by about 1.3 million to approximately 68.5 million shares. We forecast capital spending at about 300 million. We see free cash flow next year of about 400 million, which will allow us to continue to pay down our debt. As a result, we see interest expense coming down to around 200 million dollars. In addition, we anticipate more conservative pension plan assumptions, and at the same time see higher employee fringe and health care costs as well as higher overall insurance rates. Lastly, we plan to begin expensing stock options, employee stock options, which is expected to reduce earnings per share of up to seven cents in 2003, assuming a mid-year option grant, consistent with prior years. As for specific 2003 earnings per share guidance, we see growth of 10 to 15 percent, compared with 2002. That concludes the formal part of the presentation today. And we'd be glad to take any questions.

At this time, I would like to remind everyone, in order to ask a question, please press star and then the number one on your telephone keypad. We'll pause a moment to compile the Q&A roster. Your first question comes from Steve Girsky with Morgan Stanley.

Dave, I just had a question on this non-consolidated sales. How big is that number and how fast is it growing?

What I was trying to convey is really looking forward. It didn't have an impact in Q3. But as we look to next year, let me give you some data points. Our consolidated and non-consolidated transplant business is around a billion dollars, growing to about a billion three next year. Within that, the Japanese business accounts for about 600 million this year going to 800 million next year. Now, 30 percent of that is in non -- 30 to 40 percent of it is in non-consolidate business.

Where is the income from that going to show up?

The income from the non-consolidated shows up in our equity earnings which is in the other line. And we will look for ways to convey that information going forward. But what I'm trying to frame up, with respect to the CPV calculations, is there's a number of things in there and it's a very macro statistic.

And this helping out suppliers here, or reducing terms by three days or whatever that was, is that temporary? Is that going to -- is that the way it's going to be going forward?

That's nothing new. We just saw an opportunity to pull some of the trade payables forward a little bit. And we felt it was in the best interests of the supply base in this quarter to do that.

So it's not going to stay this level every quarter?

No. I mean we're continuing to work the days outstanding down. But I think this quarter it was a little higher than usual. For no particular reason, Steve.

Thank you.

Your next question comes from David Bradley with JP Morgan.

Good morning. Congratulations. A couple things. You have a little launch detail. Could you give us a sense of magnitude year-over-year. Did you have higher or lower launch this third quarter versus a year ago? And what do you expect in the fourth versus a year ago?

Are you talking in terms of number of launches?

Launch costs, I guess, overall.

The way we've talked to that in the past is really on the start-up costs. I thought that's what you were getting at. In the third quarter, we ran about nine million dollars higher in costs globally than we did last year. Looking to the fourth quarter, it will run about 15 million, which is similar to where we were last year. And as we look to the full year, we should be at about 55 or 56 million versus 66 million in 2001.

And then for next year versus this year?

For next year we're estimating in the mid 50 million dollar range.

Okay. So about flat?

About flat for this year.

Okay. Rate exposure, we've had rates after falling sharply for a few months tick up in the last week or so. How fixed versus variable are you in going forward, and are you looking to, going forward how do we address that issue?

Our fixed variable ratio is about 70 percent fixed, 30 percent variable, as we continue to pay down on our revolver, the fixed rate bonds become a bigger proportion of our overall debt profile. So just as a result of that, more so than the rising interest rates, the effective rate will go from roughly the high six percent range to the low seven percent range.

But the actual interest payments you're not going to get much of a penalty as rates rise because the short-term is -- the floating is running off quickly?

That's right. There's not much of a penalty there.

Just a little bit on Fiat. Sounds like when you talk about your European customers being down disproportionately I assume you're alluding to Fiat there. Is the Fiat percentage dropping I guess over time and other stuff ramping up so your Fiat exposure is shrinking whore how do you feel about Fiat about going forward.

It's a bit of an unknown at the moment. It's not only from Lear's perspective. We do see volumes down in the fourth quarter. We're thinking through how we're going to react to various scenarios. Over time, our thinking is that the volume, whatever volume shortfalls continue into the future, those will be picked up by other OEs within Europe and we don't see an overall volume decline from Lear's perspective with respect to European sales.

Okay. Thank you.

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

Good morning, everyone. A couple of things. With the volume increase, are you saying that North America was a disproportionate percentage of the total or do you have that number?

Could you be a little more specific.

When you're doing your review of your revenue change you had worldwide lumped together as far as change in revenue.

Sales were up a hundred in North America.

On a pure volume basis, sales were up about 100 million dollars in North America.

Okay. Do you have any guidance at all for some of the regional margins?

Yeah, with respect to regional margins, we were up in North America. We were down in the third quarter for Europe. However, we were marginally profitable in Europe, similar to the last quarter. As we look ahead, we see continued improvement in the fourth quarter, with respect to European margins, as well as in 2003. From what we can see right now for the fourth quarter, margins for Europe should be flat to slightly up, relative to last year's fourth quarter.

Is there a timing -- if I read your backlog right, the way it's going, a disproportionate percentage of your total revenue is going towards interior and electronics of the 3.6. And they both carry higher margins than the seeding, right?

That's right.

Will that start to roll out next year? Is there a specific timing on that or is it a gradual thing that we start to see more interior/electronics content and thus carrying higher margin?

It's really gradual. There's not a big shift next year. It does get slightly positive but I think it's more over the five-year horizon.

The timing on the Ford free style, how big is that for Lear? And has that timing been moved up? You're putting it in a 2003 model year.

It's an 03 -- the free style is going to be built in Chicago, along with the 500. And I believe the launch begins at the end of calendar year 03. With the 500 coming on in 2004. That's my best guess.

For Q03 -- and is that a big program, is it a big trade up from the car Sable.

From a content standpoint it certainly has. I think we have pretty much everything on the interior except the instrument panel and obviously even the seat content will be higher than the traditional Taurus.

With three rows?

Right.

Lastly, the premium freight you alluded to is that just a couple million bucks?

Right now it is. Right now that's about what it is in the fourth quarter, yeah.

That's included in your guidance, though?

Yes, sir.

Thank you very much.

Your next question comes from Gary Lapidus with Goldman Sachs.

Good morning, gentlemen. Bob, we missed you in Europe.

Sorry I couldn't be there.

We were sorry, too. Let's see, a couple things.

But thanks for missing me. My team sure didn't. They had a great time without me.

In 2003, you mentioned improving margins in your baseline 16 million production them betterment. If it were more challenging on the production front, do you think you could still -- could you make adjustments, let's say production was more like 15.6, something like that, could you make adjustments and still stick to that kind of an objective or does that become difficult versus margins.

It's more difficult, obviously, in a lower production environment, because you're not realizing the operating leverage. Even in the mid 15 unit build range for next year, we don't see margins deteriorating versus 2002. Expansion would be more difficult, but I would still guide today to up slightly. Now, over time we do see fairly significant margin improvement over the next two to three years.

Okay. Great. The sold receivables program, could you just remind us where that's at right now in terms of size (ph)?

Our ABS facility is at around 200 -- right around 260 million dollars, down from 275 at prior quarter end.

The accrued liabilities, which have been trailing up, you mentioned a couple of issues. One was the timing of interest payments. Although I note your overall interest expense is coming down. So would we expect then that accrued liability account to start to come down significantly?

It will come down in the fourth quarter. That's accrued interest. It's the non-cashed interest that sits on the balance sheet. That will come down in the fourth quarter as payments start to be made.

When you say timing of commercial settlements, what are we talking about there? I mean versus accounts -

A lot of it has to do with the timing of when purchase orders are changed as a result of productivity discussions with our customers. And that, in general, happens in the fourth quarter, third and fourth quarter. A little bit into the fourth quarter this year.

And was I interpreting your comment correctly that restructuring (ph) benefits in 2003, we're going to be offsetting the negatives of raw materials and pension health care, et cetera. And in fact that would somewhat exceed the negative effects of that hence your margin improvement.

That's absolutely correct. What I was really trying to convey, because I've had some discussions over the last few months on this, is that you can't just take the 16 million dollars in structure improvement, cost structure improvement and drop into the bottom line. There's other things happening here. There's cost increases that are going to be offsetting that. A portion of it, obviously, does help, though, with margin expansion.

Then just lastly on raw materials. So it sounds like there's not a lot of raw material pass-through any more. So in other words, you're essentially -- you're taking the exposure from the bulk of your raw materials, there's no sort of pass-through on anything to the OEs?

Well, typically what we're speaking to is what we see short-term. But typically we renegotiate our pricing arrangement every year with the OEs. And quite frankly we haven't had any significant raw material increases in quite some time. To the extent we had them and we could identify them, that would certainly be part of any negotiation that we have.

And so someone like the big acts, General Motors they don't attack their steel requirements onto them for their steel tab?

No, primarily because we don't buy a lot of steel. We buy steel for seat frames, but it's not a significant buy in terms of -

Of your cost structure.

-- of our cost structure. Obviously it does affect our suppliers, though.

Thank you.

Your next question comes from Wendy Needham with CSFB.

Hello.

Hello.

Dave, I think you mentioned something about difficult launches on several programs or launch problems on several programs. Were they yours or is it other suppliers in the OEMs?

Let me give you a little color on those. On the Opal Vectra (ph) there's a slow ramp-up and lower volumes.

There's a technology issue, it's brand new technology and it's difficult to work with.

Your technology?

Yeah, it's our technology. But it's new and we're working, we're learning. We're getting better every day.

Okay.

On the Saub 93 there's nothing unusual there other than it's a mid-year launch. With respect to the Volvo SUV, it was a delayed launch and volumes are down. And that's really the same situation with the Porsche Kian (ph). And the issue there is as launches are delayed or there's a slower ramp up than anticipated, we are carrying those costs and we're incurring those costs.

Okay. When you say volumes are down, you mean just because the launch is delayed, not that they've changed their sales expectations?

Over time we haven't seen any change in sales expectations for these programs. But they are ramping up slower than we anticipated..

We're in a tougher market.

And net new business for 2003, is that number, what, about 900?

Right, 900 million.

You talked about significant margin improvement a couple of years out. Is that because you start getting to this more electronics and more interiors mix? Is that what's driving that.

There's a couple things happening there. You're right. The product portfolio shift is working in our favor. But I think as importantly -- Doug DelGrosso in Europe and Don Stebbins in North and South America they're executing against a plan and putting things in place today that are going to have significant positive impacts on the company, two, three, four years out. And it's managing the cost structure. It's working closely with the customers that drive value in the overall equation as well as what I initially said, the product shift.

And then the 32 percent tax rate next year, I guess you were saying you think that's at least sustainable at 32 and could go even lower?

Yes, what we plan on doing is in January I'll provide more detailed guidance with respect to those type of things, the tax rate, where we see more specifically on the shares, for example. I will be detailing the pension plan assumptions at that point, which will be quite a bit more conservative than where we are right now. And those type of things. So that's really -- you're right, with respect to the tax rate, we do see some potentially some improvement versus the 32 percent.

But the more conservative pension plan assumptions is in that 10 to 15 percent growth guidance?

Absolutely.

Thank you.

Your next question comes from Ronald Tadrose with Bank of America.

Morning guys. On this content per vehicle issue, I guess some of your programs in the short-term here at least are lagging the market. Do you anticipate taking any additional restructuring actions to get that capacity in line with demand? Have you got tone that point yet?

No we don't see the term in the near term intermediate term or long-term for any further restructuring actions.

I would add one caveat that's pending what happens in Italy.

In your backlog, do you guys make any assumptions on market share changes or do you generally just assume kind of today's market share as going forward, for your customers?

We don't see significant shifts in 2003 versus 2002.

Okay. And then I guess on this 400 million dollar free cash flow number for next year, are you assuming working capital draw down next year, maybe similar to this year, looks like maybe a 40 or 50 million?

Right. That's actually very close to what our model is saying. So there will be some positive impact from working capital but it's not going to be significant.

So you do like 350 this year in line with your 10 to 15 percent growth you get 10 to 15 percent free cash flow growth.

That's right.

Thank you.

Your next question comes from John Rogers with Wachovia Securities.

Could you give us the revolver balance at the end of the quarter.

It was 156 million dollars.

Dave, sort of philosophically, as you look at your debt structure and the maturities that you have coming in the next five or six years or so, I mean when you pay down debt, are you going to pay down that at a premium and take the charge, or are you going to be -- can you give us some color on that?

No, basically our debt terms out pretty favorably for Lear. And in April of 2004 we have a 500 million dollar revolver coming due. If you look to 2005, in early 2005, 600 million dollars in bonds and our larger revolver, the 1.7 billion dollar revolver, will be renegotiated. And then if you look to 2007 you have the convertible bonds, 2008 the Euro bonds and 2009 you have another traunch of bonds of the 800 million bonds. We will not be paying down the bonds early. We don't see the economics wouldn't suggest that we should be doing that. So going forward we will be looking for the most economical use of the cash flow. And it will not be paying down the bonds.

Thank you.

Your next question comes from Rod Lache with Deutsche Banc.

A couple of questions, could you be a little more specific with some estimates on the drags on earnings next year from health care pension and raw materials?

You know, I'd like to wait until January and get more specifics, if you wouldn't mind. It is going up similar to what other large companies are seeing. It is a significant number. But notwithstanding, we feel very comfortable with the guidance we've provided today.

And also what are your expectations on margins in Europe next year in light of the decline in volume? Is there the potential to hold the line there? And do you see a need for a further restructuring in that market?

Again, we don't see a needle for a further restructuring, with the one qualifier, depending on what happens with Fiat. But putting that aside for a moment, we see margins in Europe in 2003 up from 2002, as well as up versus 2001.

Okay. And lastly, can you comment on the -- the incremental margins on the new business that you have coming in, 126 million in the quarter, 5.6 percent contribution margin on that, are you seeing that as probably having a lower average margin or lower average contribution margin or is that just a function of the start up costs?

In general it takes about 18 months to realize your full margins on new programs. So it's not too different today than it was a year or two -- a year or two years or three years back.

Great. Thank you.

Your next question comes from Mike Bernstein with Prudential Securities.

Hi. It's Mike Bernstein here. One comment you made a few minutes ago, if you could clarify for me. If we're structuring benefits don't drop straight to the bottom line and they're being offset by cost increases, then what happens in years without restructuring benefits? Doesn't that imply you have to keep restructuring?

No. It doesn't. We're continually managing the company from a cost structure standpoint to realize the lowest cost structure that we can operate with. And the point I was trying to make is there's a lot of factors that influence the cost side of the equation. And what I found some folks doing was simply taking that 60 million dollars and adding it to the bottom line. Now, that's point one. That's if you're going to do the math that's the right way to do it. But there's other things that offset that. And that's the only point I was trying to make.

Also keep in mind we're forecasting volumes to be down on a year over year basis down from 2003 from 2002.

In theory all else things being equal the restructuring benefits should drop to the other bottom line then there are other issues that may offset.

Right, if absolutely nothing changed from 2002 to 2003, there was no productivity agreement with customers, there was no inflation and the costs, the external costs stayed exactly the same, you're right, that's the way it would work.

But you're going to have productivity costs every year.

That's right we've had them every year. For ten years. And we've also had efficiencies.

Right. Okay.

It's just one element of our whole cost reduction plan.

And then secondly, this is not a huge interest to you guys but is there any interest on your side to contributing to fully funded pension and just match the cash flow that the liabilities and be done with it so that we don't get the fluctuations due to the equity markets moving up and down?

Well, as you know, the pension situation for Lear is really not significant on any measure. We will, as we go forward, we will look at the unfunded situation within the pension plan. And if it's in the best interests of the shareholders, we would consider funding the pension.

Thank you.

We'll only take four more questions.

The next question comes from Darren Kimball with Lehman Brothers.

Good morning. I was wondering if you could comment on the quarterly or the half seasonality in 2003, typically the first half is disproportionately low in terms of the full year profits. And any reason why that seasonality would change or would you want to wager a guess on what percentage of the full year is going to fall into the first half?

Now, the seasonality next year will run similar to the way it has this year and prior years. We don't see any significant change regarding seasonality.

And I was wondering if you could comment on South America or Latin America. Obviously everybody has been hit pretty hard down there. Is that business running south of break even and sort of what might be the plan to get it back or improve the profitability over the next year or so.

Our south American operations taken as a whole are profitable. And in fact we have some improvement year-over-year and expect that to continue into 2003.

You're including Mexico in that.

No South America.

You're making money in -

Marginally.

We are but we are profitable in South America.

You tell people you're going to Mexico you're telling people you're going to South America.

You're saying Mexico is part of North America?

Yes.

Thank you for clarifying that. I only ask that because you include Mexico in rest of world in your segment reporting.

I know.

But let me ask one more. Is there anything else on the divestiture front that you guys are looking at? Are you pretty much done from that standpoint?

I guess the answer would be that we're not necessarily done, but we've got some minor things that we're working on right now. And if we thought we could get fair value out there, we continue to look at it. We still have some businesses that we don't feel we need to be in long-term. So we continue to look for ways to divest ourselves with those assets. Clearly it's a function of the market as well. So we still have opportunity there, but nothing immediate.

Thanks.

The next question comes from Brett Hoselton with McDonald Investments.

Dave, with regard to your deacon tenting comment on the non-impact on CPV. My comment is that the impact is immaterial or is there actually no impact and how do you see that changing going forward, if at all?

Actually, the net impact regarding content on our major platforms or key platforms with our key customers is up. And that's what I was trying to convey. Our Lear's content on a net basis is up. And it's not showing up in the CPV calculation because there's so many other variables.

Great. Bob you made some comments about or I think it was either you or Dave, maybe it was Jim, about working well with your customers in terms of reducing costs and so forth. Can you give us some idea as to specifically what has changed let's say in the past six to nine months with regards to working with customers to reduce your costs?

Actually, that was David that said that.

Right.

I didn't talk very long this time.

I think what's changed I think you probably heard it from our customers too. They're doting more resource to it to make it happen. They recognize that productivity will only provide so much and really the only way to take out unnecessary costs is to take, reduce the material costs. And so I think Ford just recently announced they're adding engineers on top of the 300 they originally committed, and GM has been doing the same thing, and Daimler has been added a little bit longer.

: The reason I ask the question is that many of the suppliers I've been talking to have said that it's progressing very, very slowly and it sounds like you're being quite successful in it.

Overall we've been very successful over the last couple of years. And I think our customers really see the benefit to working that side of the cost equation, because just knocking price out isn't the answer and they know it, too. I think it's a real partnership out there today. There's a lot of concern what the customers are back pushing hard for price reduction. And I haven't seen that quite like that. I actually do see a move more towards partnership in trying to get costs up jointly. And I think it's working. I don't know about the other suppliers, but we have a pretty good relationship with them. We want to continue that. And we've been at this process for many years, too.

Thank you, gentlemen.

Your next question comes from Mike Kinder with Salomon Smith Barney.

I wanted to fill in a couple numbers. On the fourth quarter guidance you gave throughout the PS and free cash flow, I was wondering if you could add the EBITDA translation for that EPS number, what's the EBITDA range.

EBITDA in the fourth quarter should be around 300 million.

What's the working capital assumption that's embedded in that free cash flow number.

Working capital will be slightly up. I mean we're talking in the tune of 25 to 30 million dollars.

Okay. And the other question was on the AR facility, you threw out a number of 260. Was that today or was that as of the end of the quarter.

That's as of the end of the quarter.

Thank you.

Your final question comes from Christopher Miller with JP Morgan.

Kirk Wetkin (ph): Hi. Actually it's Kirk Wetkin (ph) From JP Morgan.

No, you have to get off the phone we want to talk to Chris.

Kirk Wetkin (ph): I was curious about, you mentioned, Jim your backlog is still at about 3.6 billion of net new business. And I was curious if you had noticed a change in the bid activity lately. I understand one of the other integrators out there is struggling financially. I thought you may have seen GM in particular respond to that.

Right. I guess in terms of bid activity, I don't know if it's -- I would say the trend, if you trended it on a year-over-year basis, the bid activity is higher because more of our customers are looking for us to integrate the complete interior. We haven't updated the 3.6 billion because there's some things there we really can't talk about yet. And the increase would not be meaningful. We think it's best to talk about that on six-month intervals. But I think what we have always said is that we believe we'll take on more content, do more for our customers and in terms of the opportunities that we have in front of us, it's up on a year-over-year basis and we expect it to be up as we go forward.

Kirk Wetkin (ph): In the out years I know you mentioned 900 million for 2003. Do you have estimates for the out years?

David C. Wajsgras (?): Sure it's 900 for 2003. It's 875 for 2004. 750 for 2005. 600 for 2006. And then about 500 for 2007.

Kirk Wetkin (ph): You mentioned that the next time you talk about this it will probably be a higher number. Would the contour be roughly the same?

I'd rather address that in January, if you don't mind.

Kirk Wetkin (ph): Okay. And then lastly, your overall forecast for western Europe was flat year over year. And I was curious, one, what the contour of that would be. It seems like the negative trend there is fairly pronounced going into 2003. I'm curious if you expect the first half of the year to be down and if so how much. And then secondly, do you share how much European revenue you have with -

Lastly -

I'm sorry, you lost me a little bit.

Kirk Wetkin (ph): It looks like the rest of rest of four cast for western production is flat in 2003 -

Right in terms of our view, in terms is the first half going to be worse than the second half, quite frankly we haven't thought that far out yet. Basically it's still three months away and our process is typically we look at the whole year and then we don't know of any reason why it would be much different than how this last year played out.

Kirk Wetkin (ph): Then lastly, how much GM and Fiat revenue do you have in Europe?

We don't disclose that type of specificity.

Kirk Wetkin (ph): Thank you very much. Great quarter.

All right. Thank you.

Robert E. Rossiter (?): I'd like to thank everybody for being on the call. Darren I hope you're not mad at me about the south American content. I'm just kidding. I know the only people that are probably left on the call are Lear people. I want to thank you for another solid quarter. We're proud of you. You're doing an excellent job. Stay focused on delivering the outstanding quality and products and service to our customers, as that is our responsibility. And I just think we're going to knock them all dead. So thank you.

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