Lear Corp (LEA) 2002 Q4 法說會逐字稿

Good morning. My name is Anissa. I will your conference facilitator today. At this time I would like to welcome everyone to the Lear fourth quarter and year end release 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 period. If you would like to ask a question during this time, simply press star and then the number 1 on your telephone key pad. If you would like to withdraw your question, please press the pound key. Thank you.

At this time I would like to turn the call over to Mr. Mel Stephens, Vice President of Investor Relations and Corporate Communications. Please go ahead, sir.

Good morning, everyone. Earlier this morning we sent out our earnings release materials and financial review package. We've also posted these materials on our corporate web site at Lear.com.

This morning we're going to be reviewing our fourth quarter and full year 2002 results and also updating your guidance for 2003. Presenting on the call today are Bob Rossiter, our Chairman and CEO. James Vandenberghe, Vice Chairman and David Wajsgras, Senior Vice President and Chief Financial Officer. Don Stebbins is also joining us, the President and Chief Operating Officer for North and South America. Don's counterpart, Doug Del Grosso can't be with us this morning as he is in customer meetings in Europe.

I'd like to point out that the formal presentation today will take a little bit longer than usual because we are addressing some additional areas of interest in connection with our year end results. I'd also like to remind you that the entire investor relations team will be here all day as well as our CFO to address any questions you might have. Before we begin I would like to make a final reminder that during the call we will be making some forward-looking statements. These are subjects to risks and uncertainties, these factors could impact our future results and they are described in the last slide and included in our SEC filings.

Turning now to slide 2, it shows the agenda for today's call. Bob leads off with our perspective on our strategy and 2002 highlights. Next, Jim will provide additional details on how we are driving our growth and Dave will sum up and review our 2002 financials and 2003 outlook. Now if you will turn to slide number 3, here is Bob Rossiter.

Actually if you will turn to slide number four, I'll begin talking. Thank you very much, Mel, good morning everybody. As you can see here, the company has completely transformed itself since 1994 from a seat manufacturer to a supplier of total interior products. During that time, our industry also went through significant changes and as a result gave us significant opportunity to expand in all those areas, and also to develop our strategy at becoming a total interior supplier.

On slide number 5, you can see the transformation take place from a components manufacturer, seat supplier to what it takes to be a total interior supplier in this business today. I want you to also know that we have that platform for growth.

Page 6 you can look at what we believe the business environment is going to be in the upcoming year. It's been stable. We look to the North American automotive outlook at about 16 million units. I think the important thing really is the opportunity taking place in the industry as all of our customers have announced plans to improve interiors, most recently Ford announced a big push to improve their interiors. And that's going to give us significant opportunity.

If you look at the Lear advantage, I believe the strengths of this company are our management team. We have an outstanding management team that's experienced and highly motivated.

I think the focus of the last couple of years on cash has strengthened our financial position, and certainly your debt position. I think also performance in terms of quality and performance to customers I believe put us in the position to grow this business going forward.

On slide number 7, you can see the focus for 2002. The company really and truly did improve the quality of the products that we supplied our customers. And you will hear more about that from Jim. And I think one of the most important things about the Lear concept, really, is our customer focus. And we rely -- not rely, but our total focus in the business is around our customer. And we believe that the only way to measure that is in strengthening our customer relationships which has happened over the last several years. The other opportunity for Lear in 2002 was to demonstrate that we really and truly could sell a total interior. Jim will take you through a few of those.

Another major focus was to grow our business in Asia we strengthen that position and we continue to strengthen that and see that as significant opportunity for us going forward. But I've got to stress the important things about where Lear is today and where Lear is going to be in the near term future is on performance. And that's improvement in quality, generate cash using that LBO heritage to drive down that and drive value back for our shareholders in this business.

I'd now like to turn it over to Jim and he will take you through the customer focus part of the business.

Thank you, Bob, and good morning. Moving to slide 9, our business strategy is to pursue profitable growth worldwide. In North America, that means leveraging our leadership position in total interiors. For Europe we will continue to improve our business structure and grow our market share. And for the rest of the world we will continue to aggressively expand our business, primarily with the Asian OEMs. On slide ten, we show our strategic road map for leveraging our total automotive interior capability to profitably grow our business. Today I'd like to focus on our growth. First I'll review our major launch this is year, then provide more color on the major areas of growth in our backlog.

Slide 11 shows that many of the auto industry's major 2003 product launches have significant Lear content. On the next few slides I'd like to briefly highlight some of the products. Slide 12 shows the new Cadillac SRX. Cadillac is a resurgent brand led by new products. The SRX was well received at the Detroit auto show and we have significant content on this new luxury entry.

Going to slide 13, Ford is launching an all new F-Series this year. This is the highest volume vehicle in the world. On the new model we have significant content , including seats on about 25% of the total volume, door panels, flooring and also cockpit assembly for the Rouge facility. Slide 14 we highlight the Dodge Durango which is also redesigned this year. Again, we have substantial content on this vehicle and have increased this content with additional electronics.

On slide 15, we show Volvo's all new SUV, the XC-90. This vehicle was voted the North American Truck of the Year at the Detroit Auto Show On this new entry we supply the seats, door panels, electronics, and the instrument panels.

Then on slide 16, I'd like to mention the new Toyota Sienna Minivan This is a significant launch for Lear because it represents our first seating business and our largest program overall with Toyota. These are just a few of the new and exciting products coming to market this year where Lear has significant content. On the next few slides I would like to cover some of the important new business we've recently added to our backlog.

Slide 17. Earlier this month we announced that our five-year sales backlog, this would be for the period from 2003 to 2007, is $4 billion. Major areas of growth included a recently awarded total interior integrated program from General Motors which was highlighted in the Automotive News issue that came out this morning. New cockpit and instrument panel programs, additional electrical and electronic systems and new business with the Asian OEMs. In the next slide I'll provide some examples of our new business within each of those major growth areas.

Total interior integrated program awarded by General Motors is the first ever program where Lear is responsible for design, engineering, sourcing, manufacturing and delivery of the total interior. As you can see from slide 18, we also highlight our business with Asian OEMs additions electronics and instrument panel and cockpit business that provide significant new business for Lear.

Slide 19 shows the differences between being a system integrator and a total interior integrator role or what we call the TI role. With the TI program, the major new areas of lead responsibility for Lear are design, engineering and sourcing. In slide 20, we show that our new TI program with General Motors is on the next generation Buick La Sabre and Cadillac DeVille platform For Lear, this translates into annual revenue of about $825 million for the next year, about half of this sales amount was previously included in the prior backlog.

We will provide the total interior, including the electrical distribution system, and we will produce this content in existing Lear facilities. The design phase of this program is well underway. Presently we are in the process of developing the clay models for the interior. Also, we are now in the process of developing the sourcing matrix for this program. Now I'd like to turn the call over to Dave Wajsgras for the financial review.

Thanks, Jim. Today I'll review our fourth quarter and full year 2002 financial results and provide updated guidance for 2003. I've also included several slides on the composition of our new business including an overview of our strategic alliances. In addition, I'll review our pension funding status and our tax planning initiative. Together, these items should provide a good picture of our present financial conditions as well as the outlook for 2003 sales and earnings. It will also provide some insights into the next few years.

If you could now turn to slide 22. Beginning with a look at full year results for 2002, the most important point to make is that we did deliver on our commitments. We grew the business and posted record sales, earnings increased 25 percent, margins were up 20 basis points, return on invested capital improved by 1.5 percentage points and we reduced our net debt to cap to slightly under 58 percent.

Please move to slide 23. We were pleased with our fourth quarter results. With a strong vehicle production levels in North America and challenging industry conditions in Europe, we delivered solid financial results, overall. Net sales of $3.8 billion were up $355 million or 10 percent. Operating income of 247 million was up 29 million or 13 percent on a comparable basis, and our operating income margin improved 20 basis points from 6.4 percent to 6.6 percent. I'll provide more details on the year to year changes in sales and operating income on the next slide.

Earnings per share of $1.76 was up 27 cents or 18 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 3.4 percent, in line with our guidance. Lower administrative costs were offset by our expanded marketing efforts, in particular, with Asian OEM and by the stronger Euro.

For 2003 we see SG&A as a percent of sales in the high 3 percent range, reflecting our continued investment in developing new business opportunities as well as higher costs for risk insurance and employee-related expenditures. The absolute SG&A dollar amount will also be impacted by higher foreign exchange rates versus the U.S. dollar.

Interest costs were $51 million, down $11 million. Lowered debt, a favorable interest rate environment, and the positive impact of efficiently managing our debt portfolio all contributed to the lower expense. Other expense was $18.7 million, up from a year ago on an adjusted basis and about $4 million higher than our quarterly run rate. The increase is the result of two nonrecurring events.

First, it reflects administrative start-up costs related to the joint venture that is launching the new Toyota Sienna in Indiana. Additionally, we also incurred costs of about $2 million to unwind an unprofitable interior trim joint venture in Mexico. For 2003, we see other expenses in the range of about $14 million per quarter.

If you would now please move to slide 24. Yeah, slide 24. This slide shows the major drivers of improvement in operating earnings and net sales for the quarter. The $29 million improvement in operating income reflects in a large measure the profit contribution from new business globally. Taken together, worldwide vehicle production and mix improved by $6 million. The net impact from foreign exchange also contributed about $4 million. The increase in net sales of $355 million for the quarter reflects the addition of new business globally and favorable foreign exchange. The sales impact of higher production levels in North and South America were more than offset by lower production and unfavorable mix in Europe.

As I mentioned earlier, we increased our operating income margin by 20 basis points to 6.6 percent. In spite of the challenges we continue to face in Western Europe, our operating leverage on higher North American production and more importantly, our cost efficiencies worldwide allow us to overcome these adverse factors and improve our margin profile.

Let me now provide some specifics on the production environment for passenger cars and light trucks by region. In North America, vehicle production was up 105,000 units or 3 percent in total. Some of the key Lear platforms that experienced volume improvement during the quarter include GM's full-sized sport utility vehicles and luxury cars, the Ford Explorer and Mercury Mountaineer. In Western Europe, vehicle production was down 229,000 units or 6 percent and several of our top platforms experienced even greater volume declines, including the BMW 3 Series, the Jag X-type, Peugeot 206 and Citroen Saxo, and the [INAUDIBLE].

In South America, vehicle production was up 65,000 units or 16 percent. Global new business was driven by the GMT 800 mid-cycle enhancement. Cadillac CTS, Hummer H2 and the Ford Expedition and the Lincoln Navigator in North America the Citroen Exarra D3, Opal al Vectra, Ford Focus and VW Torreg and Porsche Cayenne were major contributors in Europe. Net changes were positive reflecting primarily a stronger Euro. Divestitures reflect non-core assets disposed of in 2001.

If you would now please move to slide 25. Free cash flow came in strong at over $170 million for the quarter and $395 million for the full year. You should note that these cash flow figures include the impact of expensing $16 million in the fourth quarter and $64 million for the full year, related to our restructuring implementation. We exceeded our fourth quarter cash flow guidance as a result of converting on higher than expected sales. We were able to accelerate collections on customer engineering and tooling as a result of our effort to drive back office process improvements. We realized some cash benefits from monetizing certain in the money interest rate hedge contracts and also received a small tax refund that was planned for January.

Capital spending was lower than anticipated. A result of operational improvements that further commonize manufacturing processes, equipment rationalization, as well as timing. As for working capital, DSO's for accounts receivables declined by 8 days during the quarter compared with Q3. Part of this improvement was due to receiving payment from a key customer earlier than planned. Compared with the same period a year ago, DSO's improved by three days. This, combined with an improvement in inventory turns of three days versus prior year, allowed us to continue to support our supply base by lowering our trade payable days outstanding by six days in both the fourth quarter and the full year. In summary, we continue to drive efficiencies from focused balance sheet management.

If you would now move to slide 26. Since 1999, we've generated over $1 billion in free cash flow, allowing the company to reduce debt by about $1.1 billion or 33 percent. Our debt to capitalization ratio has fallen 12 percentage points over that same time period representing a significant reduction in our financial leverage.

Now, on slide 27. In the fourth quarter, our content per vehicle growth resumed. As we indicated in the prior two quarters, CPV is a macro indicator that is sensitive to customer mix, platform mix, product mix and major launches as well as content changes. With several major launches now behind us and a richer mix of production from both a platform and customer standpoint, our content per vehicle grew 6 percent in North America.

In Western Europe, our content per vehicle was up 13 percent in the quarter. This increase was driven largely by the favorable impact on net sales of the stronger Euro. Excluding the impact of exchange, our content in Europe grew in the low single digits. A major factor impacting our content per vehicle in Europe continues to be primarily unfavorable platform mix. Some of our major customers, and several of our higher content platforms are experiencing even lower production than the overall industry decline.

If you would please move to slide 28. We have a solid track record of growing our CPV. In 2003, we expect our content per vehicle to grow in the low to mid single digit range, both in North America and Eastern Europe. Looking ahead to the next five years, again, shifts in customer production, platform and product mix, and the timing of major launches will impact CPV comparisons.

More specifically, our reported CPV is likely to be impacted negatively by higher levels of transplant production in North America. While we are growing the business with transplants rapidly, we see much of our business with these customers being conducted through nonconsolidated joint ventures in the near term. Sales for these strategic alliances are not included in our top line, so they are excluded from our calculation of CPV growth.

If you would move to slide 29. As Jim mentioned earlier, Lear now has its highest sales backlog ever. This slide shows the present status of our five year sales backlog, including year by year projections. Backlog additions for this year remain unchanged from the prior backlog status, at about 900 million. For 2004, the backlog is down around 175 million from the prior status reflecting the re-timing of some programs and the resourcing of a seat program by a major automaker. In 2005 and six, we have significant content growth in our backlog attributable to the next generation of Buick La Sabre and Cadillac DeVille total interior integrated program as well as our new business with Asian OEMs.

If you would now move to slide 30. Our new sales backlog represents improved customer, product, and geographic diversification. This slide highlights some of Lear's major growth areas along with a strategic and financial implications for our business. The total interior integrated program validates our leading position in automotive interiors and should improve our return on invested capital.

Electronics is the fastest growing component of the automotive interior and represents a high value add for our customers. IPs in cockpits are a natural growth are that is expected to be neutral growth to our margins. Growing our business with Asian automakers is a strategic priority and this should be achieved with margins similar to the base business in North America. Lastly, our business in the European and Asian regions is growing rapidly. We see margins improving in Europe, which will support overall margins expansion for the company.

Please move to slide 31. Joint ventures are another positive source of growth for Lear. These strategic alliances provide us with access to new markets, new customers, new technologies and new products. Presently we have 29 joint ventures worldwide. We have a majority interest or management control in 13 of these and in the remaining 16 we have a minority interest. Of our nonconsolidated joint ventures 8 are in North America, 6 are in Asia and 2 are in Europe. These ventures serve 11 automakers, including the big three, BMW, Audi, Toyota, Honda, Nissan, Mitsubishi, Isuzu and Hyundai. Our average equity interest in these ventures is about 45 percent.

Please move to slide 32. This slide shows the present status for our nonconsolidated joint ventures as well as our anticipated growth over the next five years. This year we estimate that our nonconsolidated joint ventures will generate sales of $725 million, up 22 percent from 2001. New business over the next five years is about $1.3 billion up $500 million from the previously reported backlog.

Almost all of this improvement strengthens our presence with Asian automakers. As I mentioned a few minutes ago during the CPV discussion, this business is accounted for an an equity basis and as such, the financial results are not included in our sales or operating income.

If you would please move to slide 33. Our restructuring plan is proceeding on track and nearing completion. So far, we've closed 18 facilities included in the original plan of 21 with four facilities closed during the fourth quarter. We have also completed over 90 percent of the planned census reductions, many of which were not related to the closure of facilities. To date, we have invested $72 million, including $16 million in the fourth quarter.

Please move to slide 34. I'd now like to put a little color around Lear's funding status for our defined benefit plans. Our unfunded projected benefit obligation is $177 million. To put this in perspective, it represent only 7 percent of our market cap and about 6 months of our free cash flow. The unfunded position has grown as a result to two principle factors. First, in line with the general market, negative returns on equity have reduced the market value of plan assets. Lear's combined portfolio experienced an approximate loss of 5 percent for the 12 months ended September 30, 2002, our measurement date for purposes of reporting our funding status.

Second, lower interest rates have led to an increase in the discount rate used to calculate the gross pension benefit obligation. Our PBO has increased by $84 million from $313 million in 2001 to $397 million in 2002. Again, lets put this in perspective. Lear has about 2,000 retirees under our defined benefit plan and only 22,000 employees who are covered by these plans, representing about 20% of our workforce.

If you would please move to slide 35. At year end 2002, we reset our key actuarial assumptions in light of current market conditions. The discount rate was reduced by 75 basis points from 7.5 percent to 6.75 percent and the expected return on assets was reduced 125 basis points from 9 percent to 7.75 percent. Benchmark studies performed by our actuaries indicate that a 6.75 percent discount rate is appropriate and the average expected return on assets that we are using is fairly conservative. Both of these assumptions are based off of Moody's long term AA bond index which has declined about 75 basis points from the year ago comparison.

Lear has made cash contributions to our pension fund each year based on minimum contributions required by ERISA. We have generally funded the plan to avoid PBGC, variable rate premiums and expect to make at least the minimum contributions required by ERISA over the next couple of years. Pension contributions and health care benefit payments totaled $45 million in 2002. Cash contributions and payments in 2003 are expected to be around $60 million.

If you would move to slide 36. Another area to address is our corporate tax rate. As part of the process of closing out our year-end financial results we perform a comprehensive review of our deferred tax assets and liabilities to provide a clear prediction of our tax position going forward. We now see our corporate tax rate at about 30 percent down from 35.3 percent last year.

The decline in our tax rate reflects the following: Most importantly, we have a strategic emphasis on tax planning throughout organization. This involves the development of a comprehensive annual tax plan. We also carefully manage our legal entity structure to achieve maximum tax efficiencies. In addition, we have applied a Six Sigma process discipline to our tax planning and analysis on a cross functional basis to take full advantage of tax basis opportunities. And lastly, our mix of non U.S. earnings is improving.

Please move to slide 37. Now to look ahead. Our planning assumptions for 2003 north American vehicle production is 16 million units, down from 16.4 million last year. For Western Europe, we also see 2003 vehicle production in the 16 million unit range, roughly in line with last year. For the first quarter, we expect production to be up 1 percent in North America and down 3 percent in Western Europe.

Please move to slide 38. Given these production assumptions, our initial earnings guidance for the first quarter and our updated guidance for the full year are summarized here. In the first quarter, we see overall net sales of 6 to 8 percent over last year's $3.5 billion and EPS in the range of 906 cents to a dollar. Interest expense is expected to be approximately $50 million and capital spending is estimated at about $100 million. Free cash flow should be in the $50 million range. For the full year, expectations for net sales are approximately $15 billion with earnings ranging from $5.20 to $5.40 per share. Full year capital spending and depreciation are estimated at about $3700 million while we expect interest expense to be around $200 million and free cash flow of about $400 million.

Moving to slide 39. Our 2003 earnings guidance is based on North American industry production of 16 million vehicles, down from 16.4 million last year. While this industry assessment is in line with the consensus, we have considered a scenario where North American industry production is at 15.5 million units. We believe our base 2003 guidance for sales growth, double digit EPS growth, margin improvement, and strong free cash flow reflects our commitment to achieve growth profitably. What this slide shows is that your fundamentals hold up fairly well even if industry production in North America comes in a million units below last year.

Under the scenario, we still see our revenue up from 2002, driven by the strong sales backlog coming on in 2003. We also see our EPS above the $4.65 we earned last year. Importantly, even in this environment we are targeting a operating margin which is roughly in line with 2002. This performance reflects both our low fixed cost structure, as well as ongoing operating efficiencies. At this lower production level, we see free cash flow coming in at about $325 million.

If you would please move to slide 40. So, in summary, we are well positioned for growth in sales margins and earnings. We'll continue to focus on generating free cash flow to pay down debt. We are driven by operational excellence in quality, cost, speed, innovation, and customer satisfaction. The bottom line: We have a leading position in the fastest growing segment in the automotive industry. I'll turn it back over to Bob for some closing comments.

Thank you very much. Right now, as this management team sees it there are no changes planned in the way we operate. The philosophy has not changed. We will keep our plan simple, to the point. It focuses on the customer, on qualities, on service and it's on our responsibility.

We believe, in this market, that it's going to be difficult because our customers are experiencing some difficult times. But we are responsible, we are going to share cost reductions with them and at the same time, we truly believe that we can improve our margins.

So the focus in this business is on performance, performance, performance. And the Lear team is totally dedicated to that. And I'll turn it over to you for questions. Thank you.

Once again, just a reminder. If you would like to ask a question, please press star, then the number 1 on your telephone key pad. We'll pause for just a moment to compile the Q&A roster. Your first question will come from Steve Girsky with Morgan Stanley.

Good morning, everybody. Can you hear me?

Sure.

We can, Steve.

So I understand the backlog, the contract was $800 million and 400 was already in the backlog. But that extra 400, how much of that is Lear content, how much of that is pass-through type stuff?

Well, as Jim said before, we're going through the sourcing matrix right now. So it's difficult to answer that directly. But, you know, I mean, if -- I think it's all Lear content. It's all Lear content one way or the other. The question is how much are we manufacturing in-house and how much are we sourcing outside. Again we are going through that matrix today. But the analysis we have to date, I think this is the point you are getting at, the margins should be about in line with what the margins Margins are today by product.

And are there other products on that platform that you didn't get? Or is GM keeping those in-house or what happened there?

We have the total interior responsibility for that. Obviously, we work with GM when we make those sourcing decisions. But we expect that a lot of that content will produce an important win for us in the electrical distribution system.

I mean, other vehicles off that, if GM decides to do another vehicle off that platform do you get that? Are they keeping that? How does that work?

Steve, it's Don Stebbins. Our expectation would be that we would get that but that's undefined as of yet.

Okay. And, Dave, on slide 24, where do your price reductions go in there and where are the cost reductions from restructuring savings and stuff like that?

Slide 24. That is in the product mix area.

Both of them?

Yes.

Okay. And just on the payables, how bad is the situation with your suppliers? Is it just a few that are getting better terms? Or is it sort of across the board?

It's really across the board. The situation has not improved, and really hasn't deteriorated over the last 12 to 18 months into right. Right. Thanks a lot, guys.

Thank you.

Your next question comes from John Consenta with Merrill Lynch.

Thanks very much. I have two strategic ones and two financials ones. First following on Steve's questions, with the total interior contracts do you set the design theme or how far upstream do you go in this process on the new cars?

John, it's Don. We are working with General Motors on the theme. Clearly, they take the lead, but we are doing the eight clay modeling in our studios. We are working very, very closely with them. The designers -- the GM designers are in our shop every day. So it really is a partnership.

And, Don, therefore does that displace the modeling activity that used to take place at GM? I mean that physically you guys are starting the process at Lear?

Yes, that is correct.

And then the second question, on China. We get a lot of questions about this. How big a deal do you think it will be for your company? Do you think at any point it will be a material contributor to earnings?

I think China, obviously, we are like everybody else. We believe it is a growing market. I think a number of our joint ventures are there.

Seven.

Seven of our joint ventures are there right now. I think from a financial performance we've been pleased with what we've published there. We expect to continue to grow in China and also Korea.

And those, Jim, are -- is it a necessity that in China you have to be in business with a local partner?

Generally speaking, yes.

Two quick financial ones. Dave, can you tell us what are the company specific margin drivers you expect to produce higher margins in 03, forgetting industry volumes and also what do you think DNA will be for 03?

DNA is around $300 million for 03.

Okay.

The company specific drivers for next year are really the -- one is there is a better mix of product in the $900 million backlog than we have had over the past year or two and that's obviously the biggest driver in our top line growth. I think the most important point, though, is our operating efficiencies that we now have in place and are continuing on into 2003.

Okay. And has there been any new outsourcing activity in North America or any improvements in our commercial structure and pricing structure in Europe? Any of those things happen?

Europe? Okay. Europe had a strong fourth quarter. A point to make here is actually the returns in Europe, the margins in Europe, were the strongest fourth quarter performance in three years. As we are looking to next year, year-over-year, we see margin improvement in Europe. That's not only for the full year, but sequentially by quarter.

And what is driving that? Is it cost reduction? Is it restructuring some of your commercial arrangements? What exactly is doing that.

The biggest driver there is the cost reduction and the change in structure that Doug has put in place over the past year.

Okay. And just finally, have you outsourced any product in North America through 02? I know, Don, you said you were sort of look at the portfolio, have you made any changes in that portfolio.?

No, nothing that hasn't been announced. Obviously, we continue to look for -- as we move furtherer upstream as we've said in the past it's not strategic for to us make all the products that we do today. We handle those on an individual basis.

Thanks very much.

Your next question comes from Wendy Needham with CSFB.

Good morning. You gave a little bit of guidance on where the margins were in the fourth quarter. You said Europe was up year-over-year. How about North America and rest of world? Both were slightly up. Congratulations on that.

Thank you.

Your Euro assumption for 03?

Parity with the U.S. dollar.

So actually coming down a little bit from where we are?

Right.

Okay. And then finally the number of launches in 03 or launch costs in 03 versus 02, is that favorable for you, lower costs?

No. In total, we run anywhere between -- if you look at the last couple of years, and even in 2003, anywhere between 55 and 70 launches worldwide a year. And that's also the case for 2003. From a cost standpoint, it ran about a little over $60 million on a full year basis in 2002 and will also be in that range for 2003.

Okay. So that's not a contributor one way or the other?

No.

Okay, great, thank you.

Your next question comes from David Bradley with JP Morgan.

Good morning.

Hi, David.

I was quite impressed by this non JV information. Some really nice numbers there. Just curious. How profitable is that business? And -- because I presume it's flowing through other Income. In giving that it's growing as fast as it is, would you consider breaking that out at some point. And given how big -- you know the other income is still a negative number -- consume, expense.

Right.

Costs excuse me. Does that imply these things aren't very profitable today but you expect them to be down the road. And that that $14 million per quarter run rate might start to kick in over time as these JVs kick in and become more profitable?

Number one is the strategic alliances that Lear enters into are by and large not a financial play. It's really a strategic business decision in order to enlarge our presence primarily with Asian automakers. That's the first thing.

Number 2 is, you have two offsetting events that are combined in that other expense line. You have the minority interest offset, which is a negative from our consolidated joint ventures and you have income from our equity investments. In 2002, we were slightly profitable with our equity investments, and fairly profitable with our non consolidated joint ventures. Looking forward, we see the joint ventures producing a higher level of income. But, again, that will mostly be offset by the minority interest expense. We do break it out as a separate line item on an annual basis in the 10K, and at this point, we don't have any plans to change it.

Okay. So, basically, in aggregate then the consolidated and nonconsolidated.

They are basically offsetting and that's the reason for the overall guidance in other at around14 million next year.

And that will stay in that range or will that change over time as the JVs get more profitable?

Again, there are a few competing things in there. Today they are offsetting. You have the nonconsolidated and the consolidated. Looking out beyond 2003 is difficult. To an earlier point, beginning in 2004 or five, we're going to seriously consider breaking it out on a quarterly base but right now it's still not mature enough.

You say these are mostly Asian. How would that break out between transplants from North America and actual ventures in places like Korean, Japan and China?

We have 29 joint ventures worldwide, 18 of them serve Asian customers we have 7 in China.

Okay. And then in North America?

In North America we have -- I believe the answer is ten. We have ten in North America.

Okay. That's very helpful. One last thing. F-150 pickup, you mentioned good content. Can you compare the dollar amount of your content on the new one versus the old one?

The dollar amount on the new F-150 is slightly higher than on the old one.

Okay. Thank you very much.

All righty.

Your next question comes from Richard Hillgert with Comstock and Company

Good morning. Hi, Richard. Can you tell us what was your customer breakdown percent of revenue, consolidated revenue at the end of 2002?

Yeah. At the end of 2002, the big three made up about 65%, European OEs made up about 25 percent, and the Asian automakers made up about 10 percent. And that's pretty much split between Japan, Korea, and China.

Okay. And on the big three, can you split those out between GM, Ford, and Chrysler?

Yeah. The -- it's all in the 10k from last year just as a data point. But the majority of it was with GM, second was Ford, third was Chrysler.

Chrysler did have quite a few shutdowns during the fourth quarter. And I wondered, you know -- did you do any sensitivity, if there weren't these shutdowns to contend with, and say they had a steady run rate, what kind of an impact that had on EPS during the quarter?

Obviously, it would have been positive on the quarter. But at this stage I don't think we really want to talk the numbers.

Okay. Thanks, guys.

All right.

Your next questions comes from Michael Bruenstein with Prudential Securities.

Good morning, guys. Great quarter.

Thanks, Mike.

A couple of just quickies here. On page 24, one thing -- could you explain with the change in net sales being negative $30 million due to worldwide production and mix, how was the operating income actually boosted in that situation? And second thing is, how sustainable is this 30 percent tax rate? And then finally, are you taking on any GM engineers to do this TII contract .

Okay, let me take the first one. This is really a production mix and operating efficiencies. We had a mix issue on some key platforms in Europe. I guess the important point to make here is that the $30 million mix issue is really primarily Europe. So, that's number 1, generating the operating income through cost efficiencies. Number 2 on the tax rate, we took it down to 30 percent, we are comfortable with that range. The point I want to make here is that it is sustainable and the downward trend from 33.5% to 30% is not a one-time event. I think over the next few years we see it coming down even more. The third one was --

In terms of the engineering for the TI contract, there were a few GM engineers that are -- that we've taken on. The mix probably is some GM guys, some Lear guys, some contract guys. Again, you know, we are working with GM hand in hand with this program, so -- to move forward on it. It is not a big issue for us.

All right. Thanks very much.

Your next question comes from Rob Latch with Deutsche Banc.

Good morning, everyone.

Hi, Rob.

Got a couple of questions. In 03 what is the benefit to operating income that you guys would assume from a Euro at parity?

The benefits to operating income from a Euro at parity. That's a difficult one to answer because we don't talk about operating income on a regional basis. So I would rather consider that question at a later time.

Okay. Could be a significant positive to -- included in the guidance?

I would not call it significant.

Okay. And can you clarify the backlog on this TI contract? Is the $825 million the total value of the interior, which would mean about $3600 per vehicle, something like that?

That's right.

And I was just a little confused by your comment on half of this already being in the backlog. Are you currently providing some of the content on these vehicles?

No. The point was, in the prior backlog number of $3.6 billion, we had already won about $400 million of business related to this program.

Okay. So this is all incremental, all this stuff?

To where we are today.

To where you are today?

Actually, it's not totally incremental to where we are today. We are on both the Le Sabre and the DeVille, coincidentally, about half of it is incremental.

But the backlog of interest what we are trying to do is get to the 425 of incremental, it's not 425 there. There is other Asian business that goes in and takes the backlog from $3.6 billion to $4 billion.

Right, but the 825 is incremental to where you are today, correct?

No.

No.

No. Okay. Because there is some stuff you are already producing on the DeVille and the LeSabre.

Exactly. Because there is some stuff that's in the current production today. That's a piece of it. That's exactly right.

Okay. Great. That clarifies it for me. Thank you.

Okay.

Your next question comes from Ron Tadross with Banc of America Securities.

Good morning, everyone. I guess I should commend you on that 7.75 percent return on asset number. Pretty good.

Thank you.

On the free cash flow, $170 million in the quarter, looks like $50 million went to debt reduction. Where did the rest go?

$50 million went to debt reduction?

Looks like your short-term debt went down sequentially? Where did the $170 million go?

The ABS came down about $70 million. So, I think if you look at the change in net debt in total, it's pretty much in the same neighborhood. We can --

The change in debt was actually 125. And then factoring was another 26. That's 150 plus.

So currency must have an affect a little bit on the balance sheet, then?

Yeah.

Right. Okay. For next year, $400 million in free cash flow, does that include the pension contributions for pension cash expense of $45 million?

It sure does.

It does. And have you assumed any future cash restructuring in there in the $400 million. Maybe something that hasn't been announced?

No, other than we have three facilities remaining that will cost us about $20 million next year. That's also included in the guidance.

No other programs in there baked in?

No.

And Don on this interior program, you guys do you have full sourcing control on that?

We work with General Motors purchasing on the sourcing, yes.

So you have input, then, on every -- you will have input on every tier 2 supplier, kind of?

Correct.

Okay. And then just on Europe. Maybe you can just clarify, Dave, was it true that I heard Fiat was pretty strong in the quarter in Europe in terms of production?

You didn't hear that from me.

No, I know I didn't hear it from you, but were they strong?

No. Fiat actually in the back half of the year, Fiat volumes were down about 20% versus a year earlier. And those are the projections that seem to be -- that seems to be the case going into the first half of 2003 as well.

Okay. And then can you guys give us a North American start-up cost number do you have that, is it down or up from last year?

In total, start-up costs -- for the quarter ran at about $18 million. It was pretty much in line with last year.

Okay, great. Thanks a lot.

Your next question comes from Brett Hoselton with MacDonald Investments.

Good morning, gentleman.

Hi, Brett.

One to one parity with the Euro seems a little conservative given where we are at today. Can you quantify the operating income impact of a weaker dollar, stronger Euro in any way, shape or form?

No, we'd rather not get into that.

Have you ever publicly disclosed your margins in Europe versus North America?

Not until the last few years.

Okay. Let's see. Content per vehicle. In Europe, is there any reason to believe that over the next five years the content per vehicle in Europe could not rise to the level that it's at North America?

Depending on -- we've been impacted by platform mix recently, and we see some of that continuing on in the near term. Over the longer term horizon, we believe we are on the right vehicle, so I don't see too much downside risk with respect to CPV growth in Europe.

Now, you spent a little bit of time talking about content per vehicle, and then went on to talk about JVs. I wanted to be clear here. Are you somehow intimating that content per vehicle, particularly in North America, might actually decline going forward? It doesn't seem to make sense but are you trying to suggest that and hedge a little bit talking about the JVs?

No. What I'm trying to convey is that there are a number of variables that impact this very macro calculation. And very honestly, there is a lot of folks who put a lot of importance on the CPV number and it's as simple as looking at sales and volume and there are a lot of moving parts in the details. So, if anything changes, production, mix by customer, platform mix, launch timing as well as content changes all impact that number.

Now, for us the transplant production is growing over the next few years from what we can see in North America. We are currently conducting a lot of our business through joint ventures. It doesn't take -- that's not taking into account, our growth in joint ventures with respect to the CPV calculation. It's really that simple.

Okay, tra great.

Now, am I signaling some sort of risk? The point is -- and I believe I said this during the formal portion is that the comparisons on a quarterly basis may be difficult, but over the next few years we are comfortable with growth in the mid single digit range.

Thank you very much, Dave.

Yeah. Sure.

Your next question comes from Rob Henchcliffe with UBS Warburg

Hey, Rob.

Good morning, guys. Just a couple of questions to follow with the total interior business. If half the 825 is in your backlog, conceptually, does that mean the balance is in the rest of the interior and you are in the process of determining what you will make and what you will outsource?

The 825 is the award for the total program. We have always had the seats on the the LeSabre. Okay? So, really, the incremental-- and we were awarded some of the components prior to the total interior award. What we are saying is that the total interior award was $425 million incremental to the business that we had provided you or had talked to 3 months ago. And the total program is worth about $825 million.

So, of the new amount that you I guess announced in Detroit then, is that -- you guys are in the process of figuring what Lear will make there and what you will outsource to tier 2s? Is that the right way to understand it or not really?

That's true of any business we have.

Okay.

That's true of any business we have. We have the total interior, an $825 million program. And as with any other product we make, we will choose to make some of the components or may choose to outsource.

Okay. That makes sense. How would you rank the others, Ford and Chrysler in terms of the interiors, are they catching up, are they following GM's lead or is GM out in front here?

I think GM is further out in front in terms of the two other guys. And I think that will change very slowly. I think this is an important program in terms of showing what the value of a total interior can be.

Okay. And then one last one. Dave, on the sensitivity -- earnings sensitivity slide, 39.

Yep.

Cash flow in a 15.5 million environment looks like it gets hit pretty good. That just because Cap Ex is kind of being held steady there, going from 400 to $325 million?

Yeah, that's the biggest driver.

Okay, thanks a lot, guys.

Your next question is from Darren Campbell with Lehman Brothers.

I basically out of questions, but I'll ask you one follow-up on the LeSabre DTS. So what you are saying is that your buy versus make decision process will be comparable to other smaller scale projects? Can you give us a sense of typically how much of the value will be bought versus made? -- in a typical contract?

I don't think we want to go there, Darren. Quite frankly, we haven't made that decision yet. So that's part of our process and we will be making that decision probably over the next 18 months.

But it's fair to say that you guys will source yourselves where you guys think you are the best option?

Absolutely. Sure. Where we are the lowest cost alternative, absolutely.

Can you make sure to tell us which components those are so we understand?

Sure.

Which part of the business you excel in as well.

Sure.

Okay great, thanks.

I think the other point we made is that this work will all be done in existing Lear facilities.

Your next question comes from Jason Cutler with Goldman Sachs.

Good morning. A couple of quick questions. First on the F series. You mentioned that you had 25 percent of the total seats. Is that on -- that based an a timing issue as to when they come on is that different versions of the F series?

It is the Kansas City assembly plant.

The timing of the different plans come on, how will that play out over 03, I guess, versus 04? Can you give us color on that?

It won't change. Johnson controls has the rest of the seating process. We have one of the plants, which we believe accounts for 25% of the production.

Of the seats?

Of the seats. We have all the door panels, and we have probably 20 percent of the instrument panel buildup.

Okay. One other question just on the balance sheet. I noticed that your -- good will recorded went up a little bit sequentially. Was that a currency adjustment?

Currency adjustment.

Thank you very much.

Your next question comes from Robert Licher with Robert W. Baird. Mr. Licher, your line is open, sir.

Can you hear me okay?

Sure.

Sorry about that. Looking at the backlog, Dave, of course, you had talk about the 04 number coming down slightly due to a resourcing out program?

Right.

Give me some color on that?

It's basically the Epsilon seats that have been resourced to Parrisa. That's the biggest driver.

That's all I needed. Thank you much.

All righty.

We've reached the ends of the allotted time for questions and answers. Do you have any closing remarks?

If there are more questions in the queue, we'll take them.

We do have a question coming from Bob Decker with Harris Investment Management.

I just wanted to follow up on the JVs. With the new FASB interpretation 46 for variable entities affect the consolidation of those much? And my second question is how do you normally capitalize those JVs are they 50/50 debt equity or do you leverage them more?

The first one is we don't see the new pronouncement impacting the way we account for JVs today. From a capitalization standpoint, on the second question I'm unclear. You are saying the JV as an entity?

Yes.

Okay.

Do you have a lot of debt at those JVs or is it mostly equity in terms of the balance sheets of those JVs?

In general we run a debt to cap of about 50 percent.

Okay.

It is a minimal amount of debt if you were to add it all together it wouldn't amount to --.

It's not significant to anything.

Okay.

Your next question comes from Brian accident zer with Merrill Lynch.

Just a quick question for you getting back to the cash flow. It looks like you are expecting another fairly strong year in 2003. I guess the question could be, how much of that cash do you expect to be available for debt reduction given your outlooks for any other calls on cash and the like?

Yeah. Well, there is a couple of points. One is -- I want to say the majority of it. That's the first point. Number 2 is we will continue to strategically take positions in joint ventures or strategic alliances. By and large, we see those being funded through the sale of noncore assets during the year. Should amount to about $75 million on both sides.

For the new investment in JVs?

As well as the sale of noncore assets.

Okay, great, thank you.

All righty.

Your next question comes from Camilla Peters with KDP.

Hello. I missed the answer to a previous question. As to the fourth quarter free cash flow, $50 million looks like it was used to reduce balance sheet debt. Where did the rest go?

No, it's not -- if you take all the components of debt, including the ABS facility, and accounting for foreign exchange and other things, the cash flow by and large is basically used to reduce the debt.

All right. And what was the balance on the ABS facility at the end of the year?

It was at the educational background -- at the end of the year it was $189 million down from $260 million at the end of last year.

All right. And what about your revolver facility? What kind of availability do you have on that?

The revolver facility, at year-end, we had over $2 billion of availability. We had drawn $83 million on the facility at year-end and we have a $50 million firm loan.

Excellent. Thank you.

At this time there are no further questions.

Well, that wraps it up. Thank you very much, everybody, for being on the call. And have a great 2003.

This concludes the conference call. You may disconnect at this time.