Lear Corp (LEA) 2003 Q3 法說會逐字稿

At this time I would like to welcome everyone to Lear Corporation third-quarter earnings call. All lines have have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer period. (OPERATOR INSTRUCTIONS) Mr. Ninivaggi, you may begin.

Good morning, everyone I'd like to thank everyone for joining our third-quarter earnings call today. Due to unforeseen circumstances Mel Stephens, our Vice President of Investor Relations and Corporate Communications, is unable to join us on the call today. Mel will return to the office next week and will be reachable during normal business hours. By now you should have received our third quarter earnings release and financial review package. These materials have also been filed with the Securities and Exchange Commission and they're posted on our Website, Lear.com, through the Investor Relations link.

Joining me on today's conference call are Bob Rossiter, our Chairman and CEO; Jim Vanderberg, our Vice Chairman; Dave Wajsgras, our Senior Vice President and Chief Financial Officer; and Don Stebbins, our President of North and South American operations. Before we begin I'd like to remind you that during the call we will be making forward-looking statements that are subject to risks and uncertainties. Some of the factors that could impact our future results are described in the last slide of this deck and also in our SEC filings. In addition we will be referring to certain non-GAAP financial measures, additional information regarding these measures can be found in the slides labeled use of non-GAAP financial information also at the end of this presentation.

Turning to slide 2, the agenda for today's review. First, Jim will review our third-quarter operating results, then Dave will review our third-quarter financial results and financial outlook. Finally, Bob will provide a summary and closing remarks, and now we'll turn to slide 3, and here's Jim Vanderberg.

Thanks, Dan. In the third-quarter the Lear team continued to work on the basics, which we have discussed in the past and are going to again reemphasize today. The third-quarter operating results reflect us meeting our earlier expectations coupled with the benefit of a timing delay on some upfront productivity costs which Dave will discuss later in the presentation. However, in a challenging environment with industry production down and intense competitive pressures in both of our major markets, the Lear team remains focused on delivering high value to our customers, improving quality and service, aggressively reducing our costs, and successfully launching new products. Our performance on quality and cost improvements have allowed us to meet aggressive cost reduction targets from our customers and also deliver value to our shareholders.

Moving to slide 4, our value add proposition starts with strong customer relationships combined with our ability to deliver total interior systems making us a true partner rather than a supplier. As a world leader in seat systems and total interiors, we can leverage our economies of scale and use common architecture strategy to deliver a better value proposition. We also work proactively with our customers to develop ongoing cost savings through various initiatives which we've discussed in the past such as VAVE, lean manufacturing, Six Sigma. With increased industry focused on the interior, we work closely with all the automakers to deliver an improved level of interior harmony and craftsmanship.

If we move to slide 5 we can see our quality performance. We believe our commitment to quality is a competitive strength for Lear. For the nine months completed in 2003, we have continued to improve our quality with a 27 percent improvement in our parts per million defective compared with the same period a year ago, and I might add that improvement goes across all of our global operations. We recently received DaimlerChrysler's interior excellence award. We have now been recognized for excellence in quality and service by all of our major customers, again strengthening our relationship.

In slide 6 we talk about our launch activity. Several of our second half launches are on high-volume platforms and impact numerous Lear facilities. The major lunches in North America are the F-150 and the Dodge Durango. In Europe it's the Opel Vectra wagon and the BMW X3. As I just mentioned, we work in partnership with our customers and we are continuing to improve our launch efficiency.

Before I turn it over to Dave for a review of the financials, I'd like to provide an overall perspective on our strategy and operating results. As we have said many times before, supporting our customers remains our top priority. We will continue to drive cost and quality improvements throughout the company, so we can meet our ever-increasing customer needs. Now I'd like to turn it over to Dave Wajsgras.

Thanks, Jim. Before I review our third-quarter financial results, I'll briefly comment on the production environment. In North America, industry production was down 5 percent, with the Big 3 down 10 percent. Our content per vehicle of $582 was about even with a year ago and consistent with our guidance. In Western Europe, industry production was down 5 percent. The impact to Lear, however, was more significant because several of our key platforms were again down more than the industry average. Despite the combination of both lower industry production and unfavorable platform mix, we were able to grow our European content per vehicle to $331, up 10 percent when adjusted for the impact of currency. The euro was 14 percent stronger than a year ago.

If you'd now move to slide 8. Worldwide net sales were a record $3.5 billion, up 154 million or 5 percent. Income before interest, other expense and income taxes, which would believe represents our core operating earnings, was $163 million, up 3 percent from a year ago. Our net income per share was $1.10, up 21 percent when compared to the last year's third-quarter. In both of our major markets, North America and Western Europe, our margins were up from a year ago. On a consolidated basis, however, our overall operating margin was down 10 basis points. This reflects both a higher proportion of sales in Western Europe where our absolute margins are lower than in North America and the impact of foreign exchange.

As a percentage of net sales, SG&A was 4 percent, up 20 basis points from a year ago. The higher SG&A costs reflect our investment in new programs and our efforts to develop new business opportunities globally, higher health care and other employee related costs as well as the impact of foreign exchange. In the fourth-quarter we see SG&A in the range of 4 percent. Interest expense was $45 million, down 9 million from a year ago reflecting both (technical difficulty) and lower interest rates. Other expense of $13 million was equal to the same quarter last year. In the fourth-quarter other expense is expected to be in the range of $12 to $15 million.

If you'd now move to slide 9. This slide showed the approximate impact of major drivers on our net sales and a directional indication of the related impact on our core operating earnings for the quarter. The increase in net sales of $154 million is primarily the result of new business globally. Lower industry production and unfavorable platform mix was largely offset by favorable foreign exchange. Core operating earnings were up slightly from a year ago reflecting the net profit contributions of performance improvement activities, the addition of new business globally and the positive impact of foreign exchange. These were partially offset by lower industry production in both our major markets and negative platform mix in Western Europe. Let me provide a little more detail on each of these profit drivers.

Favorable net operating performance of about 16 million was the major contributor consisting of ongoing quality and productivity improvements, the benefits lean manufacturing initiatives as well as improved capacity utilization. The addition of new business globally was positive as we continued to successfully launch a number of new programs. The net currency impact on our earnings was not significant and reflects a number of different currency movements against the U.S. dollar. Industry production was down 5 percent in each of our major markets and mix was slightly negative in Europe where some of our higher content platforms were down more than the industry average. The Peugeot 206 was down 22 percent while the BMW 3 series and Opel Vectra were each down about 13 percent.

Before moving ahead, I'd like to reiterate what I said on our last earnings call related to our financial outlook. The prior third-quarter and full year guidance included the up front implementation costs of our ongoing efficiency and manufacturing productivity actions including selected facility closures. We will continue to evaluate individual facilities on the basis of cost competitiveness. To be a little more specific, in addition to the 2001 restructuring plan, over the last seven quarters we've closed or sold 10 facilities and have opened more than 20 new locations in an effort to satisfy various customer requirements in the most efficient way. The point here is that all the implementation costs associated with opening and closing facilities are considered and included in our financial guidance. Some of the actions we had thought would start in the third-quarter did not occur as planned. We do, however, expect these to begin before year-end.

If you'd now move to slide 10. Free cash flow was $77 million for the third-quarter. We exceeded our previous guidance of breakeven due primarily to the timing of certain customer payments, specifically in Europe, and the retiming of capital spending from the third-quarter to the fourth. The fourth-quarter has historically been Lear's strongest quarter from a free cash flow perspective. Given the timing issues I just mentioned, however, we are currently forecasting our fourth-quarter at approximately $75 million. Our full year free cash flow guidance remains unchanged at slightly above 400 million.

If you'd now move to slide 11. During the quarter we utilized our cash flow to continue to pay down debt. At the end of September our net debt to cap ratio improved to just under 50 percent, the lowest level in five years. We plan to utilize our future cash flow to further pay down debt and improve our balance sheet flexibility, as well as support other initiatives that will further drive shareholder value.

If you'd now move to slide 12. Our steady progress in strengthening the balance sheet combined with our global market leadership and total interior product portfolio has recently been recognized by the credit rating agencies. This quarter Standard & Poor's upgraded Lear to a BBB- investment-grade rating, and Fitch initiated coverage on Lear also with an investment-grade rating. Just this week Moody's raised Lear's rating outlook to positive from stable. In Standard & Poor's press release they indicated that "the ratings upgrade reflects Lear's reduced debt leverage, solid financial performance amid challenging industry conditions, and a more disciplined growth strategy following a period of rapid consolidation". Moody's indicated in their press release that "continued progress in meeting and/or exceeding current expectations could result in further positive rating developments in the near-term".

If you'd now move to slide 13. This slide summarizes our production outlook for the remainder of the year. For the fourth-quarter we see industry production up 2 percent in North America. The Big 3, however, are expected to be down about 3 percent. In Western Europe industry production is forecasted to be down 7 percent.

Moving to slide 14. As I mentioned earlier, some of the facility actions that were planned to begin in the third-quarter have been retimed and will now start during the fourth-quarter. Accordingly our earnings guidance for the fourth-quarter takes into account these costs as well as other planned actions that had already been considered in our prior guidance. In the fourth-quarter we see net sales of about $4 billion, up 7 percent from last year. The increase from a year ago reflects the addition of new business globally and stronger European currencies offset in part by lower industry production in Western Europe. Net income per share is expected to be in the range of $1.75 to $1.85. Capital spending is forecasted to be around 100 million and free cash flow is expected to be about 75 million. For the full year we expect net sales to be approximately 15.5 billion with net income per share ranging from $5.40 to $5.50. We see free cash flow slightly above 400 million and capital spending is expected to come in around 315 million.

One final comment on margins. While the fourth-quarter margins will be impacted by implementation costs for facility and other efficiency actions, these steps are prudent and necessary as we continue to improve our competitive position going forward. Over time, or more specifically over the period represented by our backlog, we continue to see expansion in our overall margin profile. I'll now turn it over to Bob for some closing comments.

Next if you look at slide 16 and 17 because they pretty much say the same thing. From a Lear standpoint strategically nothing has changed. Our focus on customer, you've heard it on every call and every meeting, that Lear is dedicated to our customer. We believe that's the way to turn our business around. Totally dedicated to improving quality and service, and from that standpoint our drive for operational excellence is actually working. Our combination Six Sigma, lean practices have now developed a new program we call Quality First, and we're moving forward with that to develop even stronger bonds with our customers and improve the bottom line. Asset management will always be a focus here at Lear as we drive our business for cash for debt repayment. In terms of acquisitions, as we've said in the past, if an opportunity came up in Asia that looked good for Lear we would consider it, or possibly some additions to our electronics capability. Otherwise the cash will be used for debt repayment.

In terms of growth and where we're going, our customer relationships are the strongest ever. We really and truly feel that the business is growing today and will continue to grow. We are under tremendous price pressure by all customers, but I think the great thing about the Lear team is we know that's part of our responsibility, we work every day with our customers to find solutions to the problems and have been able to maintain and improve margins at the same time we're offsetting customer price demand. Today the team at Lear is understands very well that we still have a lot to do to complete the year, but this is truly the best team in the industry and I know that we'll succeed. So, thank you very much and now we'll open it up for questions and answers.

(OPERATOR INSTRUCTIONS) John Casesa with Merrill Lynch.

Just a handful of questions. First, Dave, on North America mix, what happened in the quarter that held the content per vehicle flat? And what would you expect to happen in the fourth-quarter given what you know about schedules?

In the third quarter on mix specifically, comparing it to last year, as I said on the call, the production was down about 5 percent. Lear's major platforms were down about 8 percent taken as a whole. The DMT 800 series though performed very well, up between 8 and 15 percent depending on the platform. F series performed better than we had originally anticipated, and the Ram pickup also performed quite well.

But the big falloff was the Windstar.

What do you think happens going forward, fourth-quarter '04? I mean, assuming that the 800 and the Ram can sort of hold their own, I mean do some of these things that have hurt the mix reverse themselves?

We see CPV in the fourth-quarter to be in line sequentially with the third but down from last year. And as Jim just mentioned, the primary driver there is the falloff of the Windstar program.

The Durango was another thing we're in launch right now for.

That will hurt you but that will help you next year presumably.

Right. Or it will work itself out in the next quarter.

And then secondly, Dave, you seem to have been very specific on the possibility of a dividend. Did you have any change of view here because you're talking about strategic growth opportunities and you're returning capital shareholders in light of these opportunities. Does this make it less likely that you'll take a dividend proposal to the board?

No, it's not less likely. We've been talking about this since the beginning of the year. This will be discussed at the next board meeting which is during the fourth-quarter. And following that board meeting we will make public whatever comes out of that discussion.

And just lastly, why was the restructuring -- some of these restructuring actions delayed? Is it just sort of what happens in Europe or what happened that pushed it back in the third quarter to the fourth-quarter?

John, that's a great question. This is not --.

I know you have a great answer.

This is not a restructuring action. And I think I said this during the formal comments. As we continue to implement Six Sigma programs and lean manufacturing programs, just improve our overall manufacturing efficiency we free up capacity utilization -- I'm sorry, capacity utilization improves and we free up overall capacity. So in line with that, from a business perspective, from an operating perspective going forward it's really a net positive. So we've, like I said before, closed or sold globally about 10 facilities in the last seven quarters and we've opened north of 20 facilities over the last seven quarters. Now there were three facilities that were contemplated to begin a closedown during the third quarter, but due to unforeseen circumstances have now split into the fourth, and that's really all we're talking about. The impact from a financial perspective was about 10 cents, so it's really a timing from the third quarter into the fourth quarter. You'll also note that our full year guidance has essentially remained unchanged on the top end and we've closed up the bottom end. So we are now looking at $5.40-5.50.

Okay, thank you.

Rod Lache with Deutsche Bank.

Just, first of all to clarify your comment, Dave. Did you just say that the impact from the deferral of these actions was 10 cents in the quarter?

It's about a 10 cent timing between the third and the fourth quarter. But, Rod, this is important. This was all -- and I talked about this on the last earnings call, this was all contemplated in our guidance and it's just a shift between the two quarters.

I understand. Can you comment more specifically about the impact of currency on the operating income? What would margins have done excluding the impact of currency?

They would've been about flat.

Okay. And what was the -- and that's largely because of the shift towards more growth in Europe?

Yes, Europe -- most of the growth in Europe -- most of the growth for the company came from Europe during the third quarter, that's right.

What about the mix of businesses -- seating, interiors -- is that a favorable factor right now or unfavorable?

It's -- overall it's favorable from a product perspective, and Europe, again, performed quite well in the quarter and was noticeably improved from a margin perspective versus last year's third quarter.

Okay. And can you comment on -- your comment on margin expansion long-term, is that something that you're anticipating in 2004 -- I guess adjusted for currencies of course?

Right. Regarding 2004 we are still in the planning process and we're not prepared to talk about any specifics with respect to guidance. But given that there are a wide range of economic and industry assumptions that are out there today, it's difficult to get too specific for 2004. Let me answer your question specifically and then let me get back to where I was going here. Your question pacifically with respect to margin, I was really referring to the five-year backlog horizon and given the mix of business within that backlog horizon. Now, back to where I was going with 2004. We will provide some detailed guidance either on our fourth-quarter earnings call or sometime prior once we complete the planning cycle.

But from an overall perspective, we said in the past that we see a 5 percent top line growth over the next few years, and that's -- again from a very high level seems to be the case for 2004 assuming roughly a 16 million unit production in North America and something in that range for Western Europe. From an earnings standpoint we've said in the past we see earnings over time in the 5 to 10 percent range, and that seems to be the case again for 2004. I guess the short version is we don't see any big surprises as we look to the next fiscal year, but the important point here is that we have not completed the planning process and this is not the official guidance.

All right, thank you.

Gary Lapidus with Goldman Sachs.

It looks like your operating margin, your global operating margin is up every quarter this year, maybe not in Q2 but Q1 and Q3, unless I'm doing the math wrong quickly. But it looks like Q4, even if you exclude the effect of this non restructuring or streamlining, it looks like the global operating margin would drop maybe 40 basis points year-over-year. Could you just talk about what's the cause of that? Is that just the mix of Europe and currency, or is there something happening in North America?

Gary, there's nothing in particular happening in North America and you sort of answered it. It is what's going on in Europe and it is currency.

Right, but what I'm saying with Europe, excluding those costs -- in other words, your EBIT is about 9.5 -- the EBIT impact is about 9.5 million if it's 10 cents. So if you add that back it looks like the global operating margin is still falling.

Well, the significant growth in the fourth-quarter, and even as we begin to look at next year, is in our European operation.

So it's the mix issue of higher Europe revenue and just the lower margin in Europe?

That's exactly right. But, Gary, I said this a minute ago for another question. It is important to note that in particular in the third quarter, and it's the same if you take out some of the things I was addressing earlier, margins have been up in both regions, but it's just driven by FX and the proportion of sales in Europe --.

It's just this mix thing.

That's exactly right.

You'd probably help the story if we could start breaking those margins out again.

I appreciate that input, Gary.

Because then people wouldn't have to do guesswork to see that the margins are actually doing okay.

But then you wouldn't feel good about your paycheck.

Well, I don't feel good about that anyways. And then I guess what your view would be is, look, we did $1.10, strip away the dime, that's a buck, that's right in the middle of the original guidance, and the full year guidance is sort of at the high end kind of thing. I mean, is that the way you're looking at it?

Well, we've closed up the bottom end of the full year and we feel comfortable at 540 to 550.

I think it (indiscernible) but the 10 cents that's sliding from the third quarter to the fourth quarter, the fourth quarter already had some amount baked in there.

Right, it was .95 to $1.05 if I remember correctly, right? So in other words, excluding the dime, yes, you're right.

We're saying the fourth-quarter already included some of these costs as well.

Right, there's other actions in the fourth-quarter that are still timed before the fourth-quarter when we originally started speaking to this.

So that big revenue number in Q4, and you're saying a lot of that is Europe, is that new programs, is it the mix getting better on some of these vehicles that you said caused you some grief in Q3?

It's driven primarily by the backlog and essentially the FX impact is offset with production. Mix is seemingly starting to turn the corner in Europe and becoming more favorable over time.

Great. And give our best to Mel.

We will do that, thank you.

Darren Kimball with Lehman Brothers.

I was wondering if you could just talk about the offsets from a currency standpoint to the euro affects because with your profits strengthening in Europe you'd think this would've been a bottom-line positive. You said that overall currency wasn't meaningful at the bottom-line?

I'm sorry, Darren, repeat the first part again.

In the third quarter, if currency wasn't meaningful, but you should've had a profit benefit from the euro, is there another currency than offset that?

No, no, overall from an operating earnings standpoint currencies helped us around $5 million on the quarter, 5 to 6 million.

Pretax.

Yes, from an operating earning standpoint pretax, right.

Okay. And can you, on the cash flow side, can you give any range around the customer payment timing issue?

Yes, I guess the short version there, there was roughly $70 million that, because of a timing -- we close on a 4-4-5 quarter, many of our customers close on a calendar quarter and as a result of that we received about $70 million in payments that were originally scheduled for the fourth-quarter from our forecasting perspective.

Okay, so the pull ahead, if you will, is maybe about 25 million, 30 million on the CAPEX side, so 100 million in total? In other words, the fourth quarter might've been 175 instead of 75 without those two items?

That's about right -- that's right.

And historically you've done even better than that, so it's -- possibly you're being conservative here?

Well, I don't know, you can reach your own conclusions there. Last year in the fourth quarter I think we posted about 170 million of free cash. The fourth-quarter and year 2001, I can't recall, but I think there were some onetime events there as well that made it fairly positive.

But quite frankly, in the fourth-quarter at year end everybody works very hard to cleanup loose issues and so fourth, Darren. And sometimes we exceed our expectations. Generally it's a pull ahead somewhat. But that's typically the --.

But I am -- I wouldn't say I'm necessarily being conservative. It's going to be -- cash is very, very difficult to forecast down to the dime, but I certainly don't see us falling below 75 million if that's what you're asking.

Okay. That's helpful. And lastly, do you guys see any implications coming out of the Master UAW contract as far as interiors? Outsourcing, was this a good thing, a bad thing, or just sort of a nonevent?

I think from our viewpoint it was business as usual. We don't think that the concessions granted to Visteon or Delphi are going to put them in any more superior competitive position to us. We're continuing to work on quality and the basics and we think if we do our job there we'll be fine.

And I think just to add to that, our relationship with the unions has always been outstanding. Customers have always looked at sourcing business outside to union suppliers when they're competitive, and we believe we're competitive. So we expect to continue to grow.

That's great, thanks.

Michael Bruynesteyn with Prudential.

Could you step back and give us an update on China? What's going on there with Lear? How much of your rest of world revenues are coming from there? Are you ahead or behind the competition?

Okay, our operations and China this year will be -- it's not significant to the Company, let me start out by saying that, today. But we are strategically focused on growing in that part of the world. Today we'll have about $120 million in revenues coming out of our operations there. We have nine locations, nine operating locations in China. We are continuing to win business. As a result of a number of the OE joint ventures that have been initiated. We will talk at length about that when we update next year and we update the backlog. We see it as a true growth opportunity over the next two to five years for the company, but today it's just not a significant -- it's not a significant portion of our operations.

But from a purchasing standpoint longer term our customers want to see more componentry coming out of China for balance of trade issues. We're exploring opportunities there to expand in China also with our customers forming their relationships out there, the opportunity for Lear to grow with our traditional customers in China is very positive. In terms of our competitors, we're all in about the same boat from that standpoint and feel like we're in a pretty damn good position going forward.

And just to clarify, that 120 is an annual number?

That's right.

And that doesn't show up in your -- let's say your rest of world revenue because it's JV related?

No, actually most of it does because they're consolidated joint ventures.

Great. And then this PPM charge that you show, of course, it looks impressive, but can you quantify the impact of that? What is the actual financial benefit to Lear or is there any?

When you're measuring the financial benefit of quality it's always hard to judge. This is basically is data that comes from our customers, and so basically it reflects where quality is on an outgoing basis to our customers, and how our customers measure us or one of the ways they measure us. And I think any time you have improved quality you have improved efficiency as the basic for quality is the highest quality is the lowest cost producer. We believe that and that's what we're focused on.

That's why we're driving towards quality.

I think also that the internal numbers inside our facilities are actually more impressive than the external ones. And so in terms of the reduction in scrap and, as Jim mentioned, the efficiency, that clearly driving our operations here and some of the improvements.

Do the customers pay you a bonus back if you achieve or exceed their quality goals, anything like that?

Each customer has a different program in terms of quality and warrantee, etc. I think on the last call we announced that we did receive a check from Ford for beating their warrantee targets. So yes, I mean each customer has their own program.

But quality performance is measured in your growth.

Thanks a lot.

Rob Hinchliffe with UBS.

I guess a couple of quick ones here. With regards to a dividend, is there any kind of a covenant or anything that you need Moody's to upgrade you to investment grade as well?

No, there's not. And we've discussed this with Moody's and S&P and Fitch as to what our intentions are, and there's no issues there.

In terms of debt, you've talked about continuing to pay down, you've turned down a lot of it. What debt can you pay down, sort of what are your targets there?

What Bob was referring to is we still have receivables programs out there with the ABS facility and our factoring (ph) program together are about $170 million at the end of the third quarter. Part two of your question is we may, and we likely will, begin to build cash reserves. So when he referred to debt he's talking about the net debt balance.

Okay. And then I guess, lastly in terms of interest expense, any guidance for next quarter? It was down pretty good this quarter.

Yes, it should be in line with the third quarter. But let me just address one other thing on your first question. When we talk about our net debt to cap ratio, we are offsetting -- the net is the cash balance is netted against our outstanding debt. So even given that going forward we still see our net debt to cash approaching the low to mid 40 percent range mid next year.

Thank you, Dave.

David Bradley with J.P. Morgan.

Great results. Depreciation spiked up about 5 million versus last quarter and more than that year-over-year. Is there any kind of an asset write down or something in there.

No asset write-downs, this is just the timing of when the capital assets are put on the books and the related appreciation lines. We do see it also in the fourth-quarter going up another 4 or 5 million, and then that would be essentially the run rate as we look into 2004. There's nothing peculiar about that other than the timing of the assets.

So 4 or 5 million sequentially from Q3 so we go up to 87 or something?

Right. About 87, and we'll be in that 85 to 87 range next year. Again, we're in the process of going through the planning, but we're looking at that now.

Okay. And then content per vehicle I guess took a little bit of a hit in North America, or didn't grow as it had been growing because of mix I think you pointed out. Is that likely to carry in to Q4?

Q4, what we're seeing today will be in line or slightly up relative to Q3, but when comparing to last year's fourth quarter it looks to be down, again primarily driven by the Windstar program and the Durango and some other smaller mix issues.

So your content on the new free store, is it higher or lower than the old Windstar?

Substantially lower, we lost the seat program and then Durango is in launch right now.

And Durango will be a plus for you once it's launched?

Yes.

And will that be enough to offset the Windstar launch or not?

No, it won't. We had a lot of content on the Windstar.

Thank you very much.

Scott Merlis with Thomas Weisel Partners.

Looking at '04 versus '03 what are the greatest cost saving opportunities at this point and cash opportunities? For example, are there less restructuring or more restructuring charges? Is there -- it looks like there could be less startup but I'm not sure. And what can you do on the cash side? For example, one of your competitors is focusing on reducing changeover costs, they're moving other interior components into the seat plants, and just -- you've cut costs so much already, what's left on the table here?

Okay. Scott, it's a great question. Unfortunately the first part relates to some details around 2004 that we're not prepared to go into on this call. But like I said earlier, we will in the next let's say six to 12 weeks, likely prior to our fourth-quarter call. With respect to our continuing cost reduction efforts, as we continue to become more and more efficient and really become a world-class manufacturing organization with the implementation of further Six Sigma and lean manufacturing programs cost will continue to come out of the business. We have major initiatives with respect to resourcing business to low-cost countries that is ongoing. We've spoken in the past about our Honduras operations and our Eastern European operations. We are gearing up from a sourcing standpoint, as Bob mentioned earlier, in the Asia-Pacific region, and these will continue for the next number of years.

But the fact that you've put other componentry in the seat plant is nothing new or novel, we've been doing that for a number of years.

And are there some cash opportunities out there as well? I mean --.

Scott, there's no question we can improve our launches year-over-year, we've done it this year, we expect to do it next year. We'll continue to utilize the freed up space that we're creating in our factories so that will continue. The use of common parts across platforms is another major initiative that we have going on. Low-cost country sourcing, we talked a little bit about China, the Philippines, etc. We'll continue to utilize our India engineering center and our Philippines engineering centers to drive cost out of the product. And then as we spoke earlier, just about driving quality inside the facilities, that also is a significant cost savings.

Just to add to it, for anybody to think there isn't significant opportunity to reduce costs going forward or that the well has dried up is crazy. I mean if you look at supposedly the best manufacturers in the world, they are constantly looking for cost opportunities. I think most people recognize the Japanese as pretty good manufacturers, and they are continually and constantly working on improvements in their operation. So we believe that there is still significant waste in the system. It is a combination of waste between the suppliers in the whole chain and the customers, and we think there is significant opportunity for improvement.

Let me just close out your question with one last comment from a financial perspective. From a working capital viewpoint as we grow the business, we do not see a lot of opportunity from an absolute dollar basis with respect to working capital. Notwithstanding that, we will continue to hold working capital relatively breakeven as we improve on our overall operating metrics.

Thank you, good rundown.

Chris Ceraso with CSFB.

Could you give us maybe a feel for the regional breakdown of your new business you reported as 193 million in the quarter, even just roughly?

Yes, it was principally from Western European operations and other foreign locations. North America was essentially in line with last year.

Is there more new business from North America in Q4?

No, that pattern continues on through Q4.

I thought you said earlier, I just wanted to clarify, that Europe down 7 percent in Q4 but maybe some of the mix issues that you had in the third quarter get a little bit better. So you don't expect to necessarily be worse than that 7 percent?

We may be worse than the 7 percent but not -- the spread, for lack of a better term, will not be as large as it had been in the past. And as we look into next year, we do see continuing improvement in our major platforms.

Did you say what content per vehicle should look like in Europe in the fourth quarter versus the third?

No, I didn't, but it will be up in the fourth quarter.

Then maybe just a bigger picture question. You said that your margins over time would improve as your backlog comes on. Maybe just a few key points on what is it in the backlog that helps your margin? Is it more programs with three rows of seats or more seats versus other elements of the interior? Maybe just a couple of bullit points on that topic?

Sure. The drivers there are really in the electronics and electrical area. We see margin opportunity there as we continue to relocate facilities to low-cost regions. We also are continuing to focus on the cost side of the equation with respect to our components business, and as we grow those product areas, we're seeing margin improvement in there as well.

Okay, thanks a lot.

Monica Keaney (ph) with Morgan Stanley.

I was just wondering if -- just a clarifying point on the European content per vehicle. When you say up next quarter is that excluding FX benefits.

Excluding FX it will be up. It will be up on a constant dollar or a constant currency basis.

And then could you talk a little bit about just what you're seeing in the market overall in Europe? Do you think that we're sort of at the bottom in terms of the production year-over-year being down? Are you seeing any kinds of an inflection point overall in Europe, particularly in Germany?

I think for Europe we see as pretty much flat to slightly down next year, so we don't see any real improvement there.

From an overall industry perspective.

Right. Okay. Then in terms of your uses and priority for free cash flow, I know there's obviously debt pay down potential for some Asian or electronic acquisition dividend payments, maybe pension you had mentioned in the last conference call. Maybe you could give us just a ranking of how you would most likely use your free cash flow.

There is no ranking. It always depends on the facts and circumstances of the economics at the time these decisions are made. But there is a menu of opportunities, none of which are mutually exclusive, ozone or they're not necessarily mutually exclusive. Bob spoke to some strategic or niche acquisitions that we could potentially do next year. We've talked about a dividend, possibly repurchasing shares. We've talked about prefunding the pension or building cash reserves. All of these are kind of high-class issues to deal with and we'll make the right decision and do what's in the best interest of the shareholders at any given point in time.

In terms of acquisitions, they are niche or bolt-on in nature, is that a proper characterization?

Bob said earlier, we're potentially looking to expand our electronics business in Europe or --.

Expand our business with Asian customers.

Exactly.

So they don't have to be bolt-on in nature, depending on if it's the right price and if it fits with the overall strategy?

That's right.

And then the last question is, year-to-date do you have the returns on your pension? It's obviously not very underfunded, but I'm curious if you have that.

Year-to-date the returns on the pension have run at -- actually our treasurer is in here as we speak and I'm looking across the table at her.

Year-to-date the returns on the pension from January are about 14 percent.

About 14 percent, if you didn't hear.

Great, thank you.

Brett Hoselton with McDonald Investments.

First of all, when is the Board of Directors meeting in the fourth-quarter?

It's in the second week.

Second week of November, okay. And then secondly, contributions to the pension, did you make any contributions in '03? I don't think you have, but I just wanted to check.

Yes, we did.

You did?

In September.

And how much was that?

For the entire year globally it's about 54 million.

54 million? Okay. And then, it sounds like -- a number of sources have talked about the Freestar launch as being a little bit more difficult -- delayed. It sounds like you may have experienced the same thing in the third quarter. The question I have is, is that correct? And then secondly, how's the launch doing now? Is it back on track or is it still kind of below expectation at this point?

I think our comment was that we lost a lot of our content on the Freestar. So we really wouldn't comment on it.

Okay. And then finally, as far as just new business backlog and that sort of thing, the backlog table is not in the press release, I'm assuming that there's no major changes to the backlog. Fair assumption?

Right, there's no major changes that we can talk about today. We will update the backlog in the near future. What I can tell you is that what we're seeing today is it will be in excess up the $4 billion that we (technical difficulty) talk about earlier this year.

And then, Bob, kind of a conceptual question here. Certainly General Motors, Bob Lutz in particular, has talked a lot about interiors. My question to you is as you look out at the contracts that you're bitting on, future contracts and so forth, have you seen any meaningful change in let's just say General Motor's willingness to spend more money on interiors?

I'll led Don Stebbins answer that one because he's talking to them every day.

I think clearly the win for the 222, 272 shows that General Motors is focused on the interiors, and I think what that gives us the ability and General Motors the ability to do is shift money around to where we feel and where they feel the benefits for the customer are. So it's not necessarily spending more money, it's spending money smarter that gets you a lot of benefit.

So just I guess conceptually you upgrade the leather but you don't paint the seat track?

That's a good example. I think also even on programs that aren't let's say total interior programs I think also an important step that General Motors has made is aligning the purchasing group with engineering. We have the capability, and I'm sure our competitors do as well, to talk to let's say purchasing and engineering at the same time to really drive change in the interior products.

Excellent. Thank you very much, Don. Thanks, gentlemen.

Richard Hilgert with Oppenheimer.

Is the backlog over in Europe, the new business that's coming on, is it the same degree in '04 as we're seeing here in the third quarter and in the fourth-quarter?

That's correct. Most of the backlog that comes online next year is in our foreign operations. Now, this is important. As we look to 2005 the proportion of the backlog of North American versus foreign operations, again, reverses back to where it had been traditionally, and we see 2005 as a very strong backlog year.

Is much of that backlog that's going on in Europe, is much of that pass-through business?

No, it's not.

So it's stuff that's being sourced internally?

Well, it's stuff being sourced through Lear as the -- yes, I mean Lear sources it either internally or we outsource it to other Tier 2's, but Lear is controlling the sourcing matrix.

Okay. Historically the European margins have been worse than the North American margins, but is there anything else that you can work on over in the European region to get those margins a bit more like the North American margins that you're able to get?

I think that in terms of the different businesses over there in the electrical and electronics there really is no significant difference. In terms of the seating, seating we've -- we have plants over there that do just as well as over in North America. We've had some tougher contracts there and we're working through those, but -- and we've taken on some new business that had aggressive margins on it. So we're working through that and there's opportunity for improvements there. The big drawback there is our interior systems group, it does not perform in Europe like it performs in North America. It's a fragmented business and that's really the primary area for focus and opportunity in Europe right now.

Given the context of the shift in mix with the European regions, should we expect to see the operation or the operating margin seasonality that we normally see where the first quarter next year is going to be the lowest of the year and then it improves successively?

Again, Richard, we can address that when we talk more specifically about 2004. Very honestly, it's just too early. We have not gone through that level of detail yet.

The seasonality is primarily driven by the timing of your price reductions versus -- kind of a step-by-step approach on cost reduction activity.

And overall that --.

That still applies, right?

Right, that still applies. Yes, if that's what you're asking that still applies. sure.

On your PPM chart, very nice improvement. It would be helpful to know, though, are you improving from 375 to 300 PPM or are you improving 125 to 100 PPM? What's the number?

We're not prepared to discuss that because those are between us and our customers.

Is there one particular area of the business that you're making gains in, or is it across the board? And is Europe an opportunity also for PPM improvement given your earlier comments about the operations over there?

I think it's across the board, across all productlines, be it Europe, Asia, South America, North America. Each region, each product group has shown significant improvement over the last couple of years and we continue to drive it.

Okay. It would seem to me like your financial benefit from not only the standpoint of helping improve your customers' warranty expense and then achieving some bonus money, you're real financial benefit would be more from the standpoint of operating leverage, gaining more efficiently as you get more repeatability and less discrepancy you'd wind up having a better operating margin, right?

We absolutely agree with your analysis.

Okay. There was no mention of FIN 46. It looks like you haven't either adopted that or that none of your JV's meet the definition of a variable interest entity? Which is it?

The adoption has been shifted to the fourth-quarter. Right now we have a number of joint ventures that we are looking at, but none of them have met the criteria that we would be in a position to have to bring them on as a variable entity.

Okay.

That was our controller, Bill Dircks. By the way, let me introduce Shari Burgess who is our Treasurer, I didn't mention her name earlier either.

Hi, Shari. Hi, Bill. On the earlier comments about the union environment, since you're already in good stead with the union, had good relations with them, and it looks as though the union is wanting to do more recruiting and organizing efforts more so at some of your competitors, doesn't this give you somewhat of a competitive advantage as some of that transition occurs?

Again, I think our focus is really on the basics. It's operating excellence, we've competed against them -- against out competitors for years with the UAW, with the CAW and with different unions, and we really see no change in that. So what happens with our competitors, we're focused on what we do, and that's operational excellence.

Okay, great. Thanks, everybody.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers. Gentlemen, are there any closing remarks?

The only thing we have to say is that we've got a lot of work to do to close out the year. Let's everybody work hard and keep up the work. Thank you all very much.

This concludes the Lear Corporation's third-quarter earnings call. You may now disconnect.