Lear Corp (LEA) 2003 Q4 法說會逐字稿

At this time I would like to welcome everyone to the Lear Corporation fourth quarter and full year 2003 conference call. (OPERATOR INSTRUCTIONS) I would now like to turn the conference over to Mr. Mel Stevens.

Thank you and hello everyone. By now you should have received our earnings release package, including our financial review slides. These materials also have been filed with the Securities and Exchange Commission, and they are posted on our website, lear.com, through the investor relations link.

Presenters on today's call are Bob Rossiter, our Chairman and CEO, who will be joining us from our operations in Europe; Jim Vandenberghe, Vice Chairman; Dave Wajsgras, Senior Vice President and Chief Financial Officer. Also with us to help with questions are Don Stebbins, President and Chief Operating Officer of the Americas; Shari Burgess, Vice President and Treasurer; Bill Dircks, Vice President, and Corporate Controller; and we would like to officially welcome Anne Bork to our team as our new Director of Investor Relations.

Before we begin, I'd like to remind you all that during the call we will be making forward-looking statements that are subject to certain risks and uncertainties. Some of the factors that could impact our future results are described in the last slide of this deck, and they're also included on 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.

If you turn to slide two, here's an agenda for today's meeting. Bob Rossiter will begin and provide a company overview, Jim Vandenberghe will provide an operations review, and then Dave Wajsgras will cover our financial results and our financial guidance. Now if you will turn to slide number four I will hand it over to Bob Rossiter.

Actually, go to right to slide five, if you don't mind. Excuse me, slide four. Thank you very much. I'll start off by giving you an update on the strategic direction of the business.

As many of you know, in the mid-1990s we changed the direction of the business from a seating supplier and went into the acquisition phase and some internal growth to grow our business to become a total interior supplier. We were very successful at that, and in recent years -- namely the last three years -- we have refocused ourselves on our customer. And what we've done is tried to drive the business to be the highest quality producer of products and service in the business because we believe if we take care of our customers our business will continue to grow.

We think that one of the key directions that we've taken really has been our focus on operational excellence and the tools we've put in place -- our lean practices and Six Sigma -- have allowed us to prove our processes and improve the performance of our business. The key to our business in the end game is about performance. I think a couple of the other really key things we want to do is, again, grow our business profitably and generate cash to pay down debt, because we did have a huge debt three years ago.

If you go to slide five, today what we've accomplished -- we are the world's largest automotive interior supplier. In fact, we will be supplying the first-ever total interior on a major North American produced vehicle next year on GM's new luxury and large car line. So, a first in the industry.

Our operating fundamentals are stronger than they've ever been. In fact, we are getting better and better every day. Our drive to quality and our drive to operational excellence is changing the business forever.

We've had seven consecutive quarters of records in sales and are steadily improving our financials overall. Again, we continue to generate very strong cash flow. We've reduced the leverage of our business and we've improved our investment grade at Standard & Poor's and Fitch, and we're hoping to add Moody's to that this year.

Also, along with that, we've added our first dividend ever and started paying that in January this year. And we're sporting the best backlog we've ever had in this business.

If you go to slide six, talk about where we're taking the business going forward. We're going to leverage our leadership position in North America. We have an excellent to position there. It is the strongest part of our business. We're going to continue to focus on quality and operational excellence to improve profitability and grow our business in North America.

In Europe we have a plan and it's working. We're improving the business structure overall in Europe. Things are picking up for us. And the growth for the future really is going to come from our Asian customers and Asian market. We see significant growth there.

If you go to slide seven -- so how are we going to utilize our cash going forward? Again, we generated significant cash flow; we're going to invest internally in high return programs. We're going to look at strategic acquisitions that make sense for us going down the road; maintain our strong balance sheet for sure.

What we do during the year, depending on market conditions we could pre-fund some pensions or we could increase our dividend to our shareholders or even institute a share repurchase program. So we've got a lot of options available to us because of our ability to generate cash. The drive in this business is to take care of its customer. We feel by doing that we will deliver excellent value for our shareholders.

With that, I will turn it over to Jim Vandenberghe.

Moving to slide number nine, I want to start with a look at the full-year results for 2003. I think the key take away is that similar to 2002, the Company delivered on our commitments. Lear grew its business and posted record net sales of 15.75 billion, up 9 percent from 2002; with net income of 555 per share, up 19 percent. Return on invested capital increased 70 basis points from 2002 levels to 10.6 percent at the end of 2003. Our free cash flow was strong, exceeding 500 million. And we reduced our net debt to cap ratio to just under 46 percent, the lowest level since the company went public in 1994.

Overall a very solid year from an operating standpoint. We also implemented a number of manufacturing and efficiency actions that will maintain our competitive cost structure going forward. I will comment more on these actions and their financial impact a little bit later.

Moving to slide ten, last month we announced our three-year sales backlog increased to 3 billion and our five-year sales backlog increased to 4.4 billion. Major new business includes new cockpit and interior programs, new seating business with Korean auto makers, additional electrical and electronics systems, and added content on replacement programs. Our backlog supports continued growth and sales diversification for Lear and reinforces our believe that if you provide your customers with the best possible quality and service, the reward will be new business.

Slide number 11 shows the 30 best-selling vehicles in North America. Lear has content on 28 of these vehicles. We believe this is significant because it shows the broad scope of product offerings, the diversity of our customer base, and indicates that we're providing products where consumer demand is high.

Slide 12 highlights our key 2004 product launches in North America. Significant programs coming on line this year are the Cadillac Seville, Chevrolet Cobalt, Dodge Dakota and Jeep Grand Cherokee. With Ford we have the F-150, the Ford 500, the Freestyle and the Mustang; the Honda Pilot, the Mazda 6, the Subaru Legacy, and the Toyota Tacoma.

As we outlined earlier this month, our net backlog for 2004 is 750 million worldwide, with approximately 100 million in North America. Looking ahead to 2005, we have a record backlog of 1.2 billion coming on line, and two-thirds -- or about 800 million -- of that will be in North America.

Turning now to Western Europe on slide number 13, we have content on 23 of the 30 top-selling vehicles. And worldwide you can find Lear content on more than 300 nameplates globally.

Outside North America 2004 is a significant year in terms of sales backlog coming on line. Slide 14 highlights our key 2004 international launches which are the BMW 3 Series, PSA 107 (ph) and 407, Mercedes SLK, Audi A6, Porsche 911, and the Hyundai Tiburon (ph).

Moving to slide number 15, I would like to provide some details and perspective regarding our ongoing manufacturing capacity reduction and efficiency actions. I am pointing this out here because there was a significant impact on our fourth quarter results, and these costs continue into the first half of this year at a higher than normal level before moderating in 2005.

In the fourth quarter we initiated significant consolidation actions impacting three facilities. Cost for actions related to those three facilities was 26 million out of the total facility related costs in the fourth quarter of about 37 million. Costs for the three major facility actions will continue into the first half of 2004, adding about 25 million worth of costs. And total facility related costs in the first half of 2004 are estimated at about 45 million.

We believe it is important to continually evaluate our facilities worldwide to align our business with the changing needs of our customers and to maintain a competitive cost position. While these actions are in the normal course of doing business, we're highlighting the recent activity because the costs are at a higher level than our typical experience.

Before I turn it over to Dave I would like to briefly comment on the production environment in the fourth quarter. In North America, industry production was about flat with the Big Three down four percent. Our content per vehicle of 594 was down three percent from the prior year period, but up two percent sequentially. The decline from a year ago reflects primarily the phase-out of the Ford Windstar and the GM small car platforms.

In Western Europe industry production was down one percent, but Lear's top five customers were collectively down about three percent, those being the Ford Group, the GM Group, BMW, Fiat and PSA. Despite the lower production we were able to grow our Western European content per vehicle by $365, up 15 percent after adjusting for the impact of currency and up 10 percent sequentially.

The euro, as a point of reference, was 18 percent stronger than a year ago.

At this point I will turn it over to Dave who will take you through a review of our financials.

Today I will review our fourth quarter financial results and provide our initial first quarter guidance for 2004.

Back on January 8th we outlined our full-year 2004 financial guidance. At that time we hadn't yet closed out the financial records for 2003. As a result of some unanticipated timing differences, we're making minor revisions to our forecast for capital expenditures and cash flow which I will address toward the end of my formal remarks.

If you will now move to slide 18. Here's our fourth quarter financial scorecard. Despite the lower production levels for Lear's major customers, as well as costs associated with planned capacity reduction and efficiency actions, we were able to deliver solid financial results overall. Worldwide net sales were a record 4.26 billion, up just under 500 million or about 13 percent. Income before interest, other expense and income taxes -- which we believe represents our core operating earnings -- was 236 million, down roughly $11 million or 4 percent from a year ago.

On the next slide I will review the major factors impacting our sales and core operating earnings. Our margin was down slightly more than one percentage point, reflecting primarily the impact of costs for facility related actions and currency exchange. As a percentage on net sales SG&A was 3.4 percent, in line with a year ago. Interest expense was 43 million, downed $8 million, reflecting both lower debt balances and interest rate related actions within our debt portfolio. Other expenses -- $11 million, down about 8 million from the same quarter last year, primarily reflecting improved earnings from non-consolidated joint ventures, including the Toyota Sienna program in North America.

If you would now move to slide 19. This slide addresses the approximate impact of the more significant drivers of our change in net sales and a directional indication of the impact on core operating earnings for the quarter. The increase in net sales of 495 million was impacted by favorable foreign exchange, offset in part by lower industry production and unfavorable platform mix. The new business backlog came in very strong at 275 million, driven by our international operations.

As for core operating earnings, results were down slightly from a year ago, reflecting the platform mix in North America and costs associated for facility consolidation actions. These were partially offset by overall performance improvements, the positive impact of foreign exchange and the addition of new business globally.

The negative mix in North America reflected lower production volumes on key Lear platforms, including the Taurus Sable, GM's mid-size cars, the Explorer, and the Bonneville LeSabre. The currency impact on our earnings reflects the net effect of a number of different currency movements against the US dollar with the strengthening euro and other European currencies being the major positive driver. The addition of new business globally was also slightly positive as we continued to successfully launch a number of new programs.

If you would now move to slide 20. Free cash flow was a positive 173 million for the fourth quarter and 509 million for the full-year. Our results here were stronger than anticipated. We did continue to officially convert on record net sales. However, the timing of customer collections and reimbursable engineering and tooling were the most notable changes from our earlier expectations. Capital spending also was higher, largely due to the timing of expenditures between the fourth quarter of 2003 and the first quarter of 2004, as well as the stronger euro. I will addressed our latest estimates for 2004 cash flow and capital spending in just a minute.

If you would now move to slide 21. We continued to utilize cash flow to strengthen our balance sheet and reduce our overall financial leverage. We ended 2003 with a net debt to cap ratio of about 46 percent, down 12 percentage points from 2002 and the lowest level in about ten years.

Moving to slide 22, the next five charts summarize our financial guidance for 2004. Beginning with this slide on vehicle production, in North America we see about 16 million units being produced, roughly equal to last year. Our first quarter production estimate is 4.2 million, also about the same level as a year ago. In Western Europe we estimate industry production for the full-year of approximately 16 million units, also in the same range as last year. For first quarter production we estimate about 4.2 million units, down slightly from the first three months of 2003.

Moving to slide 23 -- our worldwide net sales are forecast to grow from 15.7 billion to about 16.2 billion. There are a number of moving parts to explain the increase, but by far the biggest driver is the addition of approximately $750 million from our new business backlog. Our first quarter net sales guidance is roughly 4.3 billion, up better than 10 percent from the comparable period in 2003.

Before moving to the next slide, let me comment here on our outlook for content per vehicle in the first quarter. In Western Europe we see continued strong growth in our CPD, even after adjusting for currency. In North America, however, CPD is still being impacted by the phase-out of the Ford Windstar and the GM small car platforms, as well as forecasted unfavorable platform mix.

If you would now move to slide 24. Our capital spending plan calls for approximately $300 million to be invested in 2004. Adjusting for the timing differences that I mentioned earlier, total spending for 2003 and 2004 would be about equal to the guidance we provided back on January 8th. Depreciation over the 2003 and 2004 period will be roughly at the same level of capital spending over the same two-year period. It is notable that of the planned capital spending, roughly two-thirds is to support new programs.

We expect free cash flow this year to be in the 300 to $350 million range. This is down from our January 8th guidance, reflecting the timing of collections activity that I also explained earlier. In addition, I'd like to point out that our cash outflows to support efficiency actions does impact these estimates. One final comment on cash flow -- over the two-year period 2003 and 4 the average annual free cash flow is expected to exceed $400 million. Interest expense is forecasted to decline and should be about $175 million for the year.

Moving to slide 25 -- before moving to earnings per share, two important items to speak to here are the outlook for both the corporate tax rate and shares outstanding. The decline in our corporate tax rate from 33.5 percent in 2002 to an estimated 28 percent in 2004 reflects primarily our proactive strategy to achieve maximum tax efficiencies, as well as our improving mix of non-US earnings. As I previously indicated, the present tax rate is sustainable and there may even be some further opportunity for improvement over time.

Turning now to shares outstanding, our full-year financial guidance is based on 70.3 million shares, up 600,000 from the average shares outstanding in the fourth quarter of 2003. On a separate note, there's some potential dilution that exists related to the accounting impact for our convertible debt. The trigger price -- the price Lear stock must equal or exceed for a period of time -- is about $68 currently and does increase continuously over the life of the bonds. Given our current earnings outlook dilution could be two to three cents a share in the first quarter, and about four percent for the full-year. This dilution is not considered in the current guidance.

Moving to slide 26 -- we estimate our full-year 2004 earnings per share to be in the range of 585 to 625. For the first quarter we see a range of about $1.10 to $1.20. Again, and importantly, this includes significant costs for our planned manufacturing capacity reduction and efficiency actions.

With that, we would be happy to take any questions.

(OPERATOR INSTRUCTIONS) Steve Girsky, Morgan Stanley.

Just a few quick questions. What's your appetite to sort of buy back stock to offset the dilution?

Today, we don't have any direct plans to offset the dilution. But like any other initiative, over time we will consider various alternatives.

Do you have any authorization to buy stock or no?

Yes we do.

How many employees are in these facilities and of the 92 million how much is cash and how much of that cash went out in the quarter versus first quarter?

In all the facilities between 2003 and 2004 there's about 2,200 employees. The cash related to all of these actions is between 60 and 80 million. And the balance is the impairment of assets.

When did that cash go? Does it match the charge or is it mostly next year?

Almost all the cash is 2004.

Do you just have an FX impact on earnings or no?

Regarding margins for the full-year 2003, it hurt us for about 15 basis points.

What about the fourth quarter?

For the fourth quarter it was roughly five basis points, not too significant in the fourth quarter.

Thanks guys.

Mike Bruynesteyn, Prudential Equity Group.

Could you comment on the likely distribution of earnings throughout the year and what the drivers are of that timing?

Are you talking on a quarterly basis, Mike?

Yes I am. Thanks.

Other than the first quarter guidance, we're not going to provide quarterly guidance. We will update that every time we have a quarterly conference call.

Okay, but could you just talk about what the influencers of the pace of your earnings through the year in more general terms?

It's typical seasonality; it's no different than in prior years. In the first half -- and Jim, I think, spoke to this during the formal presentation -- we are pretty significantly impacted by these facility actions. Those costs are split about half and half between the first quarter and second quarter from a forecasting standpoint.

Than talking about this facility action, what base which you consider normal? You said these are above the sort of normal run rate of consolidations and facility impact. Or should we take the whole number that you're showing?

I think a normal number would be about 15 to 20 a year.

Great. Finally, the CapEx you mentioned two-thirds is for new programs; is that any difference than you would expect?

In prior years the average was really between 50 and 55 percent, and now it's upwards of 60 to 70 percent.

What is this being achieved by? A lot of reuse? Or is it simply you have just a lot of new programs?

We're utilizing capital much more efficiently and we do have new programs, that's right.

Thanks very much.

Rod Lache, Deutsche Bank.

A couple things on the cash flow. What are the cash taxes expected for 2004?

Cash taxes are roughly in line with our effective tax rate.

And working capital, maybe a 50, 60 million drag, something like that?

Actually, it's going to be a little bit more. It's closer to 80 or 90 million (multiple speakers) seeing now.

And then in addition to that you've got the -- if I understood your answer to this cash cost of restructuring question correctly, the cash cost of restructuring is going to rise by 60 to 80 million in '04 versus '03?

The cash associated with these actions are going to be about 60 to 80 million in '04. In '03 they were pretty minimal.

What's the benefit in terms of earnings from these charges? What kind of savings on an annualized basis would you expect?

At this point we really don't feel it's appropriate to get into that. These actions are really -- there's two drivers behind these actions. One is the phase-out of business and the other is to reduce capacity and make our overall manufacturing footprint more efficient. And I think other than that we'd rather not comment on the financial impact.

Lastly, the ABS program at year-end was zero?

Zero.

Thank you.

Ron Tadross, Banc of America Securities.

On the first quarter production schedules, are you guys expecting them to be revised up? Maybe I'm missing something here, but I'm showing that the Big Three, based on their schedule, is down almost four percent now and the market, I think, down like 1.5 with the transplants up (ph). Are you seeing something different? Or are you expecting it to be revised up?

No. For the first quarter we we're seeing North America in total up about one percent, and we do see our key customers being down in sort of the two to three percent range for the first --

So you're seeing the market -- so the Big Three kind of down, but the market is still 4.2?

That's right.

And also you're saying -- in one of the slides -- in North America you're insuring a competitive footprint. Can you just elaborate on that? What are you doing to do that? Is that internal or is there something external you need to do in terms of acquisitions?

I think Dave touched on it already. It's really just -- obviously as we got into lean manufacturing and Six Sigma, we've reached the point where we have more capacity than we need because we're much more efficient than what we were, and also there's been a phase-out of some of the older programs and the new designs are far more effective from a cost standpoint. So basically it's just making sure that our manufacturing operations are operating on a competitive cost standpoint and getting our capacity in line (multiple speakers)

So it's a cost thing, it's not a product thing really?

Right.

Last thing on currency, you're up 320 million on currency. Is that all Europe?

It's primarily Europe.

Because Europe you're saying is an 18 percent help, so that's -- so you're up 200 of the 300 about?

No, Europe is more like 250, plus or minus.

Thanks a lot.

Jackie Weiss, Merrill Lynch.

This is John Casesa and Jackie Weiss. I wanted to ask you about the use of excess cash. Aside from the financial trade-off between buying back stock and paying down debt, isn't this decision a lot to do with how you think about the Company as to whether it's a growth company or a mature company, what opportunities you have? And therefore, why would you be considering buying back stock, except to offset dilution, if you still feel that you have good growth opportunities? What's really your orientation toward the Company's strategy and therefore how you would use cash in '04?

First off, I think as you know, our company has the ability to generate cash and grow at the same time. So with that in mind, as I think Bob touched upon at the start, we're focused on investing in profitable growth and we're looking at strategic acquisitions. Those, as we have said in the past, could be in the area of niche acquisitions in electronics in the Asia-Pacific. We are pursuing a number, none of them, I would say, as significant as some of the acquisitions we've done in the past, but we continue to stay focused on those. We have a disciplined process that we're going through to make that happen. We've been close to some and they haven't come through and we will continue to focus on those types of things. But first off, that's our primary initiative, and failing that -- or maybe in addition to that -- we would also look at other ways to reward the shareholders.

Jim, I'm not being -- does that mean that paying down debt is no longer your primary initiative? That's the change, is that correct?

I assume these questions are coming from Jackie, so I will address them to her as well. The chart that Bob spoke to -- I think it was slide seven -- we really tried to prioritize on the slide what we were planning the on doing in the nearer and intermediate term with the cash flow. Specifically with respect to repurchasing shares, or even issuing equity, those decisions are made based on the capital requirements of the Company as they relate to this overall strategy.

Just lastly -- I think less controversial -- how are you growing your European content per vehicles 15 percent ex currency? And what will your expectation be for '04, '05?

Content for vehicle, the biggest driver for us in Europe is really the backlog, I guess most simply put. The majority of the backlog that came on in 2003, as well as 2004, is with our European operations.

Would you say within Europe we should we should expect the European content per vehicle to grow at an above average clip for the foreseeable future -- '04, '05?

Yes. We see solid double-digit growth, at least in '04. And it's probably a little early to comment on '05.

Dave, just briefly why is depreciation up 15 percent '03 to '04?

It's the timing of when the assets were put in place and the level of investments for new programs.

And the new programs -- those things get amortized faster than plants and stuff, right? So if the tooling (multiple speakers)

That's right. There's different depreciations scheduled for different types of equipment.

Thanks very much.

As long as someone's talking, I can't talk. It is this European phone. I was trying to answer it and everybody else was talking.

I thought they were just trying to protect you from yourself, Bob.

No, I'm actually trying to answer and I keep saying something and nobody's listening to me. I've got to wait until everybody stops talking. I don't know -- it's some kind of a protection on the phone over here.

Thanks very much guys.

Richard Hilgert, Oppenheimer.

On the guidance that you provided for the first quarter -- the $1.10 to $1.20 -- I was wondering if you could break out a little bit what kind of effect we're getting from the euro in the first quarter. I would assume that your European operations, the margins there are still lagging behind North American operations, so we ought to have some kind of a dilution in the percentage of margin, but overall the absolute dollar amount of operating income in should still be higher. I was wondering if you might be able to put a little bit of quantification behind that.

That's a great question. Let me sort of walk through this. We pegged the euro for guidance purposes at 1.20 to the dollar. So with that as a backdrop, in the first quarter the euro is roughly 12 percent stronger than it was in the first quarter of last year. The sales should be impacted by around 200 million and there is a five kind of plus or minus basis point impact on the margins. The biggest margin impact for the first quarter is by far these plant actions that we've addressed earlier.

The five number again, Dave, what was that?

The impact of the currency exchange on the first quarter is about five basis points.

Okay.

Negative.

Right. Okay. And then on the front of the restructuring actions, to what degree are you focusing on the European operations and to what degree do you think that those margins in Europe might eventually begin to look more like the North American operations?

Let me answer the second part first. We have stated publicly that our objective is to exceed three percent margins in Europe, and we believe that is -- we're closer to achieving that objective now than we were six or nine months ago, and in all likelihood that would happened in 2004.

With respect to the restructuring actions, Doug Delgrosso and his team have taken a tremendous amount of cost out of our European operations, consolidating facilities, both on the manufacturing side and on the administrative side. We've implemented a fairly comprehensive Low Country cost strategy, and the result of all that is what's really driving the margin profiles for Europe.

Thanks.

Darren Kimball, Lehman Brothers.

I'm just trying to understand how much cash severance is incremental to your January 8th forecast because it seems like you're only about 30 to $40 million off of your prior cash flow forecast if I net the $50 million reduction in CapEx against the 80 to 90 million negative timing on the working capital. Just curious how I get all the way down into that 3 to 350 range.

The low end at the 300 level would be right in line with the guidance we provided on January 8th. We did take a harder look at some of the timing of receipts and payments in the back half of next year and feel comfortable with a range of 3 to 350 today.

Okay.

With respect to the severance actions, nothing has really changed since we were talking on January 8th.

Okay. Just the other question I would ask, which has been partially asked already -- Western European production, according to your estimate, was down one percent. I think earlier you thought it was going to be down as much as seven percent. You had very strong content growth. I'm just wondering what you can say about your profit performance in the quarter.

In the quarter European margins adjusted for foreign currency were up, as were -- North American operating margins were up as well when adjusted for these plant actions.

Thanks.

Dominic Martilotti, Bear Stearns.

Just a couple of questions. First, looking at the pension -- you guys talked about possibly pre-funding that. What is your pension expense going to be '03 to '04?

Actually, I'm going to have Shari Burgess, or Treasurer, handle that question.

Pension expense in '03 was about $54 million and we expect it to be around $60 (ph) million in 2004.

That is 50 for '04 -- 50?

53.

Secondly, looking at possible dilution, is there a threshold looking at options, given your share price appreciation where we could see some dilution in '04?

Is there a threshold? Yes, the maximum dilution that we could see in '04 would be about four percent with our current guidance. And in the first quarter could be two the three cents.

And that is for the convertibles, not necessarily for options? Or is that combined?

The guidance we gave with the 70.3 million shares took most of the expected option dilution into account.

Thanks.

Chris Ceraso, CSFB.

Dave, I know you don't want to get into too much detail on the effect of these actions, but maybe you can help us frame it this way -- if you're talking about upwards of 80 or 90 million or so for the actions over this period, should we assume like a one year payback on that? Is there additional leverage where some of these businesses that you're consolidating, were they sub-par margin? Can you help us think about it that way?

Yes. For the actions that are purely to improve our capacity profile, the payback is roughly 12 to 18 months.

So as we get into '05 it doesn't seem like a huge bonus from these actions, given the size of the cost. There must be additional leverage in there. Can you give us an idea --?

There is improvement from these actions as we look to 2005, and it's sort of what we were addressing when we gave our original guidance on January 8th. But we'd rather not get specific as to how much it is.

Thanks, Dave.

Gary Lapidus, Goldman Sachs.

Please, I want to guys in Southfield to hold back so Bob gets a chance to answer this. On page 23 on the sales walk, Dave, could you just help -- or Bob -- could you just help us out? The 15.7 to the 16.2 from '03 into '04, you talked about 0.8 billion a new business and then you mentioned 0.2 billion of currency in Q1. There's probably a little more using that $1.20 in Q2. Maybe it's a little negative in Q3 and 4, we will see. But I guess if I just add the 15.7 plus the backlog, and you mentioned production is flat, could you just -- what's going on there? Because I would think that the backlog includes business that's rolled off.

I will try to handle that, Bob. The driver here is really the production and mix estimates we have for the year. And I guess that's really the short version for the answer -- it's driven by our mix estimates for the year.

So it is -- because the production is flat and issues like the Windstar are part of the so-called backlog, right, because it's a net?

That's right. That's all netted out.

So it's really a production mix?

It is production mix on, obviously, our individual platforms that (multiple speakers) have content on it.

Are there any platforms that you would call out, other than the Aztek, that maybe is what's -- it seems like a lot of the backlog is being mitigated significantly by mix. I'm just curious if there's any vehicles that you would point to.

No, there's a whole --- literally there is a whole spectrum of vehicles that we could spike out here. But we go through a very detailed planning process for the year on every vehicle that we have content on and there is no one particular driver.

Some of those assumptions may be our own assumptions and may not be shared by the general industry as well.

It might not be a good idea to name vehicles on this call.

Right.

I knew you wouldn't. I just thought I'd throw it out. On this pension thing, when I saw that bullet point I guess what I wrote down was "why"? Are these PBGC or RISA type contribution requirements? Or what would cause you to want to make those contributions? Or are these contributions you need to make?

I'll let Shari handle the question, other than to say that occasionally it makes economic sense to pre-fund some amount of your under-funded position. As an example, we allocated about $25 million into the pension last year.

The question that was asked me was the expense as opposed to (multiple speakers)

Understood, but would these -- these contributions are voluntary; these are not RISA or PBGC-driven?

This year we had (technical difficulty) that was minimum. We put in about 25 million more. Next year (technical difficulty) that we have a much lower minimum because of that.

Next year being '04?

'04.

This year, right -- '04.

Just lastly, on this dilution, you mentioned your full-year guidance doesn't include it. I guess your Q1 doesn't as well -- is that right?

That's correct.

Even though the stock is already at the 68 rough level?

It doesn't include it.

Since your target price presumably is above -- I have to assume you'd like to see dilution. I know Bob would.

On behalf of our shareholders, we all would.

So would you like us to put dilution in?

The formula to calculate the dilution is fairly complicated and is outlined in the public filings.

But it is basically 68 for 20 days per quarter?

Yes, but there is some nuances. I would really urge anyone that is interested in looking at the dilution effect to read the public filings. And then either Shari Burgess or Mel Stevens or myself could help you out with some of the details.

Thanks.

Kirk Ludtke, J.P. Morgan.

I just had a follow-up to Gary's question. It sounds like that pre-funded pension bullet is going to be a small number. Is that fair to say?

Yes.

Secondly, with respect to your production forecast for Europe of 4.2 million units in the first quarter, could you just give us a sense for which manufactures you expect to be up year-over-year and which manufacturers you expect to be down?

Okay. Within the 4.2 million for the first quarter, okay. Here we go. We do see Volkswagen being slightly up; PSA looks to be down in the low teens; Fiat is strong, kind of offsetting the PSA impact; and BMW looks fairly strong, up about 10 percent.

And the Big Three affiliates?

The Ford and Ford-related companies in Europe overall look to be up about five percent and GM/Opel/SAAB in Europe look to be up about two percent.

Thank you very much.

Thomas Crawley (ph), Putnam Investments.

Just a real quick question. What percentage of your revenue now -- can you split it out between the Big Three, European and Asian?

Percent of revenue -- Yes, hold on. Big Three in 2003 are roughly 63 percent; Asian is roughly 6 percent and the balance is European.

Finally, the CapEx number? What is your sort of run rate going forward over the next couple of years? I know there were some timing issues between '03 and '04.

Yes, it would be in the $350 million range.

Thank you.

Rob Hinchliffe, UBS.

Most of mine have been answered, just one quick one. When you are talking about capacity actions, you list costs for three major facilities. Have you named which facilities those are?

No we haven't. Actually, they are all in various stages of negotiation.

Are the facilities for the Windstar and Lordstown for the Cavalier, are those part of those three? Or are those still to come?

No.

They're not included?

They're not included.

Thanks guys.

Brian Zinser, Merrill Lynch.

Maybe just to ask the balance sheet question just a little bit differently, if we look at the slides that you've presented on net leverage -- net debt continuing to go down for the past several years -- when you look at 2004 do you expect that trend to continue?

Our target net debt to cap is kind of the low 40 percent range. So the short version is that we plan on continuing to strengthen the balance sheet throughout the year.

When you're thinking about it then in terms of gross debt versus net debt you're going to focus more on the net debt side?

That's right.

Effectively are you running out of options in terms of what debt you can pay down?

It's always dependent on what you include. We still have roughly 70 to $75 million on a receivables program, as well as other things that people may classify as debt, for example the pension obligation.

Fair enough. Thank you.

David Leiker, Robert W. Baird.

The facility costs, are those running through SG&A or cost of goods sold or is it split?

It's almost fully running for cost of goods sold.

Great. And then what is the value on the balance sheet of the converts at the end of the quarter?

280 million.

It is just slightly under that.

Just slightly under 280 million.

And then if we could go look at '03 full-year numbers, and on slide 19 you do the revenue walk there -- it's a 1.3 billion. How much that is currency and how much is new business?

I'm sorry --

For the full-year.

For the full-year --

The revenue contribution from currency and new business.

For the full-year it's about $1 billion -- new business is about $1 billion.

And currency is how much?

I'm sorry, currency is about one billion and new business is about one billion.

They both are. Okay, wonderful. Thank you.

Brett Hoselton, McDonald Investments.

I think a little earlier in the call I heard -- or I thought I heard -- you say that the normal efficiency actions you have, you incurred about 15 to 20 million in annual costs. If that's correct, is it fair for me to assume that as we move into the back half of this year that the back half we're going to incur somewhere between 7.5 to 10 million in facilities costs, down from 45 million in the first half of the year?

That's about right.

Secondly, as we look at your future revenue growth a lot of it is in Europe. Normally you have lower margins in Europe, so is it reasonable to assume that that is going to put a little bit more compression, let's say, or pressure on your margins going forward?

Well, in 2004 -- notwithstanding everything that we talked about on the call -- we do see margins slightly up on an absolute basis. And as we move into 2005 we continue to see margins improving.

Finally, you mentioned or talked about growth with Asians. My question would be are we talking about primarily the transplants or are we also talking about business in Korea and Japan? And then how should we think about growth in China? Is that mostly joint ventures, and therefore not consolidated in your earnings or revenues?

I think, to answer the first part of the question, it's all of the above. I didn't actually mean that one to be funny. But it is, it's a combination of both transplants and business in Asia.

With respect to China, we have most of our joint ventures there are consolidated in. And we do see that business growing well in excess of $0.5 billion over the next four to five years.

Great. Thank you very much, gentlemen.

Adrienne Dell (ph), CIBC.

I have just a few things here. First of all, with respect to the 70 to 75 million on the receivables program, is that part of the European program or is that in North America?

It's part of the European program.

So the North American is a zero balance, correct?

That's right.

What is your revolver ability?

Revolver availability -- well, let me put it to you this way -- at the end of the year we had under $50 million committed on our revolver. The availability, we have close to $2 billion today.

And finally, with respect to an upgrade from Moody's, have you spoken to them following the announcement of the SEC inquiry and has that changed their thinking at all in the process?

We notified them of the inquiry and they have not told us of any issues they may have yet.

They have not gotten back to you on that?

No, they indicated they did not have any issues.

Okay. So, have they given you any specific criteria for what exactly you need to meet in order to get that official upgrade?

No, but if they tell you, you could let us know.

Thank you very much.

At this time there are no further questions. Gentlemen, are there any closing remarks?

Bob, did you want to say anything?

Goodbye.

Thanks everybody for the call and we will be around all day. Thank you.

This concludes today's conference. You may now disconnect.