Lear Corp (LEA) 2004 Q1 法說會逐字稿

Good morning, my name is Lynn. I will your conference facilitator today. At this time I would like to welcome everyone to the Lear first quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Miss Borg, you may begin your conference.

Thanks, Lynn. Good morning, everyone. I'd like to thank you for joining our first quarter 2004 earnings call.

By now you should have received our earnings release and financial review package. These materials have also been filed with the Securities and Exchange Commission and they are posted on our Web site, Lear.com, through the Investor Relations link.

Our Chairman, Bob Rossiter, is traveling in Asia this week meeting with customers and working on new business opportunities. Joining me on the call today are Jim Vandenberghe, our Vice Chairman and Dave Wajsgras, Senior Vice President and Chief Financial Officer. Also with us are Don Stebbins, President and COO of the Americas, Shari Burgess, our Treasurer, Bill Dircks, our Corporate Controller and Mel Stephens, Vice President of Investor Relations and Corporate Communications.

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.

Slide number two shows the agenda for today's review. First, Jim Vandenberghe will provide an operating review, then Dave Wajsgras will review our first quarter 2004 financial results and update our 2004 financial guidance.

Now please turn to slide four and I'll hand it off to Jim Vandenberghe.

Thanks, Anne and good morning.

Slide four summarizes our first quarter highlights.

Obviously overall industry conditions and customer requirements remain challenging. In this environment, the Lear team delivered record first quarter net sales of $4.5 billion and net income per share of $1.30.

I'd like to point out that the timing of facility consolidations favorably impacted first quarter net income by about 10 cents per share. As some of the related costs initially anticipated to be incurred in the first quarter have slid now into the second quarter.

We also announced that we had reached an agreement to acquire Grote & Hartmann, a high-quality manufacturer of electrical components based in Germany. This acquisition will strengthen our position in electrical distribution systems as well as provide an avenue for growth and customer diversification.

The bottom line in the first quarter is that despite the challenges, the Lear team delivered solid first quarter results and our full year net income per share guidance remains unchanged.

Turning to slide five, I'd like comment on several developments in our business.

First, I'll talk about our steady progress in Europe. Second, I'll provide some strategic perspective on the acquisition of Grote & Hartmann. Third, I'll discuss how rising commodity prices are impacting Lear. And then finally, I'll update you on the progress of our total interior integrative program with General Motors.

Moving to slide six.

As you know, Douglas DelGrosso and his team have been focused on continuing the improvement of our European operations. Our European content per vehicle has been increasing steadily over the past three years. This quarter, we reached an all-time high of $357 in content per vehicle.

In the second quarter, we see continued strong growth in our CPV on a year-over-year basis. This strong sales performance combined with our focus on improving operating fundamentals is driving improvement in our financial results. In the first quarter, our financials improved compared with a year ago and we are on track for the second consecutive year of improvement.

Now turning to slide seven, we'll talk about the acquisition of Grote & Hartmann.

As you know, electrical distribution systems are an integral part of the automotive interior and a significant global opportunity for us. The wire harness market, including terminals and connectors is about $18 billion. If you add body electronics, mecatronics, safety electronics, audio, infotainment and other electronics, the total market potential is nearly $45 billion.

That basically explains our interest in Grote & Hartmann. Adding terminals and connectors capability improves our overall competitiveness in the electrical distribution segment. It will provide us an avenue for growth and improves our customer diversification.

This acquisition is attractive to us because they have a reputation for very high quality and technical expertise that we can leverage globally. Dave will give you additional insight into this business a little later on.

Now, turning to slide eight.

Major concerns to all auto suppliers has been rising commodity prices, particularly steel. At Lear, our raw materials are up, as well. However, we do not see this having a material impact on our earnings.

While material costs represent about two-thirds of our sales, commodity costs represent a relatively small portion of our total material costs. Key commodities in our business include resins, leather, steel and diesel fuel. However, no single commodity cost is dominant in our material buy.

Commodity prices were up slightly in the first quarter. However looking at our costs in total, we've been able to offset much of the increase through other forms of cost reduction. For the full year, we expect that the increases will be containable within our full year guidance range.

Slide nine.

Our first-ever total interior integrator program with GM is progressing well. The first prototypes have been completed and shipped to GM. The Lear team is working in tandem with General Motors to harmonize total interior designs with the overall vehicle aesthetics.

GM's 2006 large and luxury cars will be the first to showcase Lear's innovative spray polyurethane [cath] skin technology on the instrument panel. This technology enables precise fits and finishes for superior craftsmanship.

In addition, Lear has developed a lightweight acoustical package, which provided all of the acoustical benefits found in today's vehicles with substantial reductions in mass and weight. Also, both vehicles will utilize Lear's flexible seating architecture, which provides premium performance at competitor prices.

Ongoing research continues to confirm that consumer appeal remains on target throughout the development process. Bottom line is Lear is on target to track and deliver world class interiors for these premium vehicles.

Now I'll turn it over to Dave for a review of the financials.

Thanks, Jim.

If everyone would please move to slide eleven.

To set the stage for the financial review, I'd like to first briefly comment on the business conditions in our major markets. As most of you know, we face a number of challenges in the automotive industry, including overcapacity on a global basis, aggressive competition for customers as well as slow growth and demand in both North America and Europe.

Today, the consumer is in the driver seat. The best evidence of which is the lucrative incentive programs in North America and the escalating pricing pressures in Europe.

Every major automaker has aggressive new product development plans to expand their market share. To meet this challenge, the automotive OEMs are aggressively pushing for measurable improvements in quality, cost and delivery to strengthen their competitive position going forward.

If you move to slide twelve. Here's our first quarter 2004 financial results, a solid scorecard overall.

We posted record net sales $4.5 billion, up 15% from 2003. Net income per share was $1.30, up 29%. As Jim mentioned earlier, the timing of certain facilities consolidation costs amounting to about 10 cents a share has shifted from the first to the second quarter.

Income before interest, other expense and income taxes, which we believe represents our core operating earnings was $179 million, up roughly $17 million or 11% from a year ago. Our margin was down 20 basis points, primarily due to the facility consolidation costs that were incurred during the first quarter.

As a percentage of net sales, SG&A was 3.7%, down 10 basis points from a year ago and in line with our guidance. Interest expense was $39.1 million, down $13.3 million, reflecting both interest rate-related actions and lower debt balances within our debt portfolio. Other expense was $14.1 million, also in line with our previous guidance.

If you'd now move to slide thirteen. This slide helps to explain the impact of the significant drivers of our change in net sales and core operating earnings for the quarter.

The increase in net sales of $593 million was primarily driven by the impact of currency exchange and global new business. Production and mix changes had a negligible impact overall.

Core operating earnings were up $17 million from a year ago, reflecting operating efficiencies, the addition of new business globally and the positive impact of foreign exchange. These positives were partially offset by a number of other factors, including customer pricing agreements, facility consolidation actions and higher commodity prices.

Moving to slide fourteen and looking at our North American content per vehicle.

In the first quarter, CPV was down compared with last year. As I've mentioned previously, our North American CPV is being negatively impacted in 2004 by the phase-out of the Ford Windstar and GM's small car platforms. In addition, most of this year's sales backlog is outside of North America.

For these same reasons, our CPV outlook for North America is down for the rest of the year, but returns to a solid growth position in 2005 as a record backlog of new business comes online.

Moving to slide fifteen. Before speaking to our European content per vehicle, I'd like to make some clarifying comments.

For the European market, we've moved to a broader definition to now include Eastern Europe. For the next couple of quarters, we'll show both total Europe and Western Europe in order to provide clear historical reference points.

Our European CPV was $357 in the first quarter, up 7% from a year ago when adjusted for the impact of currency. In Western Europe, our strong backlog of new business allowed us to grow our content per vehicle by 9% versus the first three months of 2003. And during the quarter, the euro was 17% stronger than a year ago.

Moving to slide sixteen.

Free cash flow for the quarter was $50 million. Strong earnings were offset in part by negative overall working capital. Capital spending and depreciation were essentially offsetting.

As some of you may recall, at year-end 2003 we converted a significant amount of commercial receivables into cash that had been planned for collection in January. This accelerated collection more than explains the negative working capital position at the end of the first quarter.

Moving to slide seventeen I'll begin discussing our financial guidance.

Our full year production estimates are roughly in line with 2003 and remain unchanged from our prior guidance of 16 million units in North America and 18.2 million units in Europe. For the second quarter, production in both markets is essentially flat with a year ago.

Moving to slide eighteen.

Our second quarter at net sales guidance is roughly $4.3 billion, up about 5% from the comparable period in 2003. This primarily reflects the assumed favorable impact of currency exchange and the addition of new business globally.

Our full year sales guidance is now $16.6 billion, compared with $15.7 billion last year. The increase reflects the addition of new business globally and the estimated second half impact of the Grote & Hartmann acquisition.

The net impact of industry production changes and unfavorable platform mix is expected to be largely offset by favorable currency exchange.

Moving to slide nineteen.

Our capital spending forecast is approximately $350 million. This is an increase of $50 million from our prior guidance and now includes estimated spending for Grote & Hartmann as well as some accelerated expenditures for major new programs and our low cost country strategy.

Depreciation of $375 million is roughly in line with capital spending. We expect free cash flow this year to remain in the 300 to $350 million range consistent with our prior guidance. Interest expense is forecast to be about $170 million for the year.

Moving to slide twenty, looking at our earnings guidance.

For the second quarter, we see net income per share in the range of $1.55 to $1.65. Again, this includes about 10 cents in costs that we had previously anticipated incurring in the first quarter.

I think it's important to point out that this cost shift to the second quarter is incremental to the cost originally planned and still expected to be incurred. Our full year guidance remains unchanged at $5.85 to $6.25 per share.

On the final few slides, moving to slide twenty one, I'd like to provide some perspective on our growth strategy as well as some additional insight on our planned acquisition of Grote & Hartmann.

We have a solid record of delivering profitable growth and we have a comprehensive plan in place for maintaining our sales momentum. Our growth initiatives include converting on our strong sales backlog, continuing our joint venture strategy, primarily related to business with Asian automakers, commercializing new product innovations, furthering our position with total interior integrator programs as well as pursuing strategic acquisitions.

Moving to slide twenty two.

As Jim mentioned earlier, we executed a definitive purchase agreement to acquire Grote & Hartmann, a Germany company in the electrical distribution space which primarily produces terminals and connectors and junction box. The total value of the transaction is about $220 million, including the assumption of debt and all related integration costs.

The acquisition supports the regional, product and financial strategy we've been talking about for the past couple of years. We anticipate closing the deal by mid year and the acquisition is expected to be slightly accretive to earnings in 2005.

On slide twenty three, we provide a perspective on just how important terminals and connectors are to a wire harness assembly and how we see the acquisition being a key element of our overall electronic strategy.

Presently we purchased about $500 million annually in terminals and connectors from competitors. This is significant because terminals and connectors make up about 40% of the value of a wire harness. By adding the technical capability to design and produce these components in-house, we believe that the overall value proposition in this product area will be enhanced substantially.

I'd now like to turn it back over to Jim for some closing comments.

Thanks, Dave.

As we mentioned earlier in the call, Bob Rossiter is traveling but he did want to pass on his thanks to the entire Lear team for the performance so far this year. We also want to remind everybody about what drives our success.

At Lear we believe we are well-positioned to consistently deliver all the important traits shown here on slide twenty four. A superior culture, superior organizational capability and superior competitive advantage. Focusing on automotive interiors and working in close partnership with our customers to consistently deliver high quality products and services and the best value is what we're all about.

We'll now open it up for questions.

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

Good morning, everybody. Can you hear me?

Sure can, Steve.

Just a couple of quick questions. You said the favorable impact was 10 cents, these facility actions was favorable on 10 cents in Q1. That's versus guidance, right?

That's versus guidance.

So, were there facility actions in the quarter versus year ago or no?

Yeah, Steve, if you recall on the last call we talked about roughly $45 million in first half costs related to facility actions. We still anticipate roughly $45 million, we incurred 11 or $12 million in the first quarter. The balance will be incurred in the second quarter.

Okay. And can you talk to the margin outlook, you said material price is not an issue this year. Is there anything out there that sort of messes with margins next year?

Well, let me step back for a minute. The biggest impact on margins in the second quarter is clearly these plant closure costs. If you look at the second half of the year, margins do improve year-over-year and there is gradual improvement as we look into 2005 and 6. Commodity costs do hurt us somewhat in each one of the quarters but overall on the year it looks to about, again, all commodity costs, about 8 to 10 cents.

But the absence of plant closures next year aids margins and then you've got ongoing margin improvements in your businesses, right?

Yes, the plant closures will improve our overall competitiveness and will have a favorable impact on the margins.

Okay. And the last thing is on the interest expense, you had 13-plus favorable in the quarter and you think you're only going to be 17 favorable for the year?

Right. Maybe Shari Burgess our Treasurer wants to take that question.

For the full year we're looking, we include the impact of Grote & Hartmann, offsetting some of the debt reduction and we're looking at a rising interest rate environment on the short-term side, slightly each quarter with about only 55% of our portfolio fixed.

Great. Thank you.

All right.

Your next question comes from Mike Bruynesteyn with Prudential Equity Group.

Hey, solid quarter, guys.

Thanks, Michael

Can you quantify some of those drivers of revenue? Why are you not doing that as you've done in the past?

Because we wanted to get the questions. No! [ Laughter ] I can walk through them with you. I had them in the script, I just sort of walked over them. Currency exchange in the quarter was about $300 million and the balance was largely our new business backlog at about $250 million. There was a little bit of volume and mix improvement there.

Great. And pension and OPEB, a lot of people were seeing favorable impact there. You didn't talk about that. How does that affect you?

There is no significant change from what we had talked about on the last call. We still see about a $60 million expense on the year, cash contribution will approach about $40 million. It is up from last year, last year we had a pension expense of about $54 million so it's up slightly.

OPEB is down somewhat, our OPEB expense is down about 4 or $5 million on the year. Again, it's consistent with what we had talked about a few months ago and driven largely by the results of some of these plant closures.

Great. And then the sold receivables, what is the balance on that? And what's your outlook for what you're going to do with that?

Right, at quarter-end we had about zero on our ABS facility and we also had no factoring at quarter-end. Going forward, we'll utilize the ABS facility during the quarter, but likely at quarter-end don't expect to have any material balance.

Okay, great. And then finally, can you go over this convertible debt trigger details?

The details. Well --

Not details, but just update us on where that stands?

Sure, if we were, I think you're asking what the dilution effect may be?

Yes.

Okay. Well, the formula is spelled out in our 10-K but potentially the good news story would be if we end up in a dilution situation, it could amount to about 3 cents during this quarter and on a full year basis, about 16 cents.

Okay. Thanks a lot, Dave.

All right.

Your next question comes from Himanshu Patel with J.P. Morgan.

Hi, good morning.

Good morning.

Just a quick question on European margins, you've talked about I think about a 3% target longer term. Just wondering if you could update us just directionally how things evolved in the quarter year-on-year? And also more broadly speaking, some of your peers have talked about a notion that maybe the gap between European and North American margins doesn't need to persist and you could bring both up parity. And I'm just wondering what your thoughts on that are?

Okay. In the first quarter we did have improvement as expected in the margin in Europe and, you know, given the starting from last year I would say it was impressive improvement, but still quite a bit below our North American margins. On the year, we stated publicly that our target would be to exceed a 3% margin and we're on track to do that.

With respect to the gap closing between North American margins and European margins, we still see over time a difference between those two, just given the nature of the markets and the nature of our business in Europe versus North America.

Is that just because the market there is just much more fragmented with the Tier Two supply base or is there something Lear-specific there?

I think that's the answer. It is far more fragmented than here so it's harder to get the leverage on your global capabilities.

Right.

But that aside, there is no difference why, there's no reason why they shouldn't be much closer.

Okay. And then I think the last quarter you were talking about, when you're thinking of acquisitions, you were looking closely at Asia. Any develops there?

Nothing we can talk about right now, but again, if you rolled the reel back just a couple of years, we've been talking about niche or strategic acquisitions in Asia and in Europe. Grote & Hartmann is good evidence that we're proceeding along that path. Second half of the year, hopefully we can talk about something else that's positive, but again, it will be very consistent with everything we've talked about.

Okay. Thank you.

Your next question comes from Mike Heifler with Deutsche Bank.

Hi, everyone.

Hi, Mike.

Hey, Dave, you mentioned previously that raw materials affected you in the quarter. I was wondering if you can give us just a bit more detail in terms of the puts and takes on the margins in the first quarter?

Let me just be very direct here. On the quarter, we had our overall, kind of raw material basket that Jim spoke to earlier, impact us for about close to 4 cents on the quarter. On a full-year basis, we expect that to be in the kind of 10-cent plus or minus range with roughly half of it or close to half of it being steel.

Okay. Was there anything else in the quarter that might have been a drag on the margins? Because looking at what we were expecting versus where you came in, I just kind of thought, you know, given the 10 cents moving into the second quarter, maybe the margins would have been a little bit richer here.

Yes, Michael, there are two big drivers on the margins. Facility consolidation costs hit the margins for over 20 basis points, actually closer to 25 basis points. And when you take the impact of the strong euro, which, again, was up about 17% on the quarter, on a consolidated basis that impacted our margins negatively about 15 basis points.

Okay. And can you update us, Dave, on how you're seeing the restructuring actions pan out and the savings expectations?

Well, the restructuring actions, are you talking about the --

The facility closures.

Well, we're in discussions now with the local unions and they're proceeding. It would be inappropriate to comment much further than what we already have. With respect to the savings, like I said going forward, second half of this year and as we move into next year, we do see our overall competitive positions from a cost standpoint improving.

Okay. And just lastly on the backlog, you mentioned that new business was $250 million in the quarter.

Yes.

And that was mostly in Europe?

Right, about $180 million of it was in Europe.

Okay. So, for the balance of the year, the $750 million that you have in backlog, you know, how does that pan out in terms of North America?

Right. North America is just under $100 million, Europe is about $580 million and the balance is rest of world.

Okay. Thanks.

All right.

Your next question comes from Scott Merlis with Thomas Weisel.

Following up on European margins. With the large backlog coming online in Europe, to what extent are start-up costs higher in Europe this year compared to next year?

Start-up costs this year overall for the company will be pretty much in line with last year on a global basis, sort of in the high $50 million range. It is weighted slightly toward Europe but again, not significantly because it's not only the absolute dollar amount of the launches, it's the complexity and the number of plans involved. So, there's not a significant change in the way the start-up costs are hitting the regions.

So, but next year do you expect lower or flat start-up costs in Europe as you try to exceed the 3% operating margin?

You know, that's a good question. It's interesting. I've looked at this over the past few years and typically our start-up costs have always run sort of in the high 40 to high $50 million range.

And if you want to put this in perspective, the way we look at it is we have 200 launches this year with basically 80 products affecting 70 different plants and again, every year, it's really the number of plants that are affected, which is why we've concluded that the start-up costs are generally remaining in the same range.

And sticking with margins in Europe, as assembly plants move to Eastern Europe, and you move some of your plants to the Bulgarias and the Transylvanias, and also does that help your structural costs or is it neutral? Also, is there opportunities to move any old UTA wiring harnesses, businesses or any Grote & Hartmann businesses to Eastern Europe because they're labor intensive, I believe, and it seems like you can capitalize on lower labor costs here.

Yeah, that's another good point you're making. We, a few years back, began implementing a global strategy to move to low cost labor regions all over the world, not just Eastern Europe. We're proceeding along that path and that will be the case for the next few years.

And could begin to help next year?

It should help next year and you're right, some of the UTA facilities that we acquired, we are moving out of Western European countries into low cost labor regions.

We're in Hungry, Poland, Romania and Morocco, Tunisia.

Morocco and Tunisia. Good place for an analyst meeting! Thank you very much.

[ Laughter ] Okay.

Your next question comes from Chris Ceraso with CSFB.

Good morning, everyone.

Hi, Chris.

A couple of questions. First, if we're talking about your full-year sales expectation being higher than it was previously, but your earnings per share expectation is not higher. Is it that material costs are higher than expected? Or is it all sort of headwind on the profit level from Grote & Hartmann, or is it something else?

Let me walk through this. The first quarter we were about $200 million better than what we had expected. The split there is about half of it is FX and about half of it was favorable mix, primarily in the North American truck market which made up about 72%, 73% of our revenue in the first quarter versus roughly 69% in the first quarter of last year. So, and that also did have a positive impact on our CPV in North America. So, taking that 200 as a starting point, that obviously flows through for the year.

In addition, the back half of this year we have Grote & Hartmann, which is 125 to $150 million in sales and then we see a less negative platform mix in the back half of the year. So, taken altogether it's about a $400 million increase in our top line.

There's a number of moving parts with respect to earnings, part of which is commodity costs, a little bit of an increase in depreciation, Grote & Hartmann is slightly dilutive, the back half of this year. So, taken altogether we are very comfortable with the guidance but don't see any need to change at this point.

Okay. You brought up another question that I had here mix and trucks in North America. Have you been positively surprised by the mix on the F-150, is that giving you more income than you expected?

Yes, it was favorable to what we had expected in the first quarter and we see that continuing for the balance of the year.

Okay. And then last question. One of the strategies behind the Grote & Hartmann as you've explained is that you can sort of instead of buying outside for your terminals and connectors you can now do it yourself. How much of the Grote & Hartmann business, how much can that satisfy of your total buy on outside terminals and connectors?

The process with terminals and connectors is that you need to have your customer approve the terminal before you use it, then you can include it in your quotation or you can switch over. Now, Grote & Hartmann has historically dealt with three customers. Primarily the German customers, but they also have serviced them around the world.

So, in answer we expect to start working on getting these approved. We think it will make us more competitive when we bid on electrical distribution systems and also we expect to spread that technology in North America and also in Asia Pacific.

Okay. So not an immediate benefit, but over time you'll be able to buy internally.

Yes.

Okay, thanks.

Your next question comes from Brett Hoselton with Key Bank Capital Market.

Can you hear me?

Yes, we can.

Okay. Great. A couple of quick questions here. Other expense, given that you've got a fairly significant exposure to Asia through some joint ventures and so forth, that I think flow through the other expense, I was a little surprised that it was down a little bit. Can you talk a little bit about that?

Well, we're making quarter-over-quarter and the outlook for year-over-year is both our joint ventures that we consolidate are improving from an earnings standpoint and that's a negative with respect to the other line because of minority interests.

Got it. Okay.

And also our equity investments are also improving fairly substantially quarter-over-quarter and year-over-year. It's a slight negative in the first quarter, driven really by the minority interests.

And then secondly, as far as the, I mean you've been into this total interior integrator program for a while. I don't know where you're at as far as the sourcing of the products at this point in time. What I'm curious to find out is what, as you compare this new program, this total interior program to a prior program, what is different in terms of the sourcing of componentry on the new program in terms of your responsibilities versus what you had previously? What's your level of control?

This is Don Stebbins. The level of control, I guess on a previous program would be that the customer would source each of the individual components in the interior individually versus us working with the customer to source the components as they package. So, the value proposition is a lot different, we have the ability to make trade-offs in terms of where to provide value to the ultimate consumer inside the cockpit, or inside the car versus under the old system, you didn't really have that ability to do that.

So, if I understand you correctly, Don, what I hear you saying is that under the old system you basically had very little input. Under the new system, you were kind of let's say providing some input into where or what is sourced or who is sourced?

It's absolutely a partnership and working with General Motors on who is going to provide the component, absolutely.

But with our, we are taking the engineering lead on it so we are also proposing processes and products that we think fit the needs of our customer and basically that's led to opportunities for us.

Excellent. Thank you very much.

Your next question comes from Richard Hilgert with Oppenheimer and Company.

Good morning, everybody.

Good morning.

How dilutive is G&H is the second half of the year?

It would be in sort of the mid-single digit range. We're still finalizing the deal structure, I'm not trying to punt on the question, but until we finalize the buckets on the intangible assets it's hard to tell. But it's sort of the mid-single digit range.

Okay. And the 75% European, that's predominantly the German customers?

That's right.

Where is the other 25%?

Primarily German customers in other parts of the world.

Right.

Okay.

And they also, a portion of their business is with white goods, as well.

Okay. So the other 25%, since that's with German customers in other parts of the world, is G&H shipping their product from European locations to other parts of the world or do they have any manufacturing facilities anywhere else? In any other regions?

The answer would be both. Yes, they have manufacturing, primarily they distribute it from Europe, but they also have manufacturing facilities in Mexico and also the Asia Pacific.

Okay. Dave, you mentioned that you had, what was it, 15 basis points negative on the operating margin because of the currency effect?

That's right.

What's your assumptions for the rest of the year look like for currency effect and operating margin?

Okay. Let me put this in perspective because I noted on the last few calls that a number of folks were asking about currency. We do business globally in close to 45 different currencies. So, kind of blanket statements in some cases, may not answer the full question.

The euro is obviously the biggest impact to us. With respect to the euro, we had a 1.25 to the dollar in Q1. We have 1.23 on average for the second quarter and then $1.20 in the back half of the year. For a full year average of about $1.22.

And overall currency for the year should be favorable about $450 million, pretty much offsetting the unfavorable mix on a global basis that I spoke about earlier.

Okay. Now, on the second quarter guidance, the swing from the $1.55 to $1.65, the range there, is that predominantly your assumptions on what industry volumes could do in North America and in Europe?

No, no, there's, you know, we put book ends around us because it's not an exact science, but, you know, we're still in negotiations with the unions, like we had said before, commodity costs, we have certain assumptions may or may not turn out this way. We have mix assumptions.

Generally we're correct but sometimes we are, you know, it's more favorable or less favorable than we anticipate. So what we're trying to do is just take all that into account and set some reasonable book ends for people to model with.

Okay. Great. Thanks, everybody.

Your next question comes from John Casesa with Merrill Lynch.

Thank you very much. Two quick ones. Dave, could you just recap the facility consolidation actions you've taken in the last say six months in North America, in particular? And then secondly, what's your estimate of North American production in the second quarter, up or down how much?

Okay. The facility consolidation actions last year impacted about six different facilities and overall costs were in the neighborhood of about $40 million, principally $38 million of it was in the fourth quarter. This year it's a little bit narrower, we're looking at roughly 4 or potentially 5 facility actions this year, again, consistent with everything we've been talking about at the end of 2003 and on the fourth quarter earnings call. We expect full year this year at, you know, the costs related to these actions to be in the 50 to $55 million range on a full-year basis.

Production for the second quarter is, from North American standpoint is roughly flat to, yes, it's roughly flat. In Europe it would be slightly down and for our largest customers we see it flat to maybe slightly down in the second quarter.

Thanks very much. Appreciate it.

Okay.

Your next question comes from Darren Kimball with Lehman Brothers.

Good morning.

Hi, Darren.

With regard to the $50 million in extra Cap Ex, you said that part of that was Grote and part of it I think you said was incremental footprint. A couple of questions there. One, I'm just curious, does that, assuming a chunk of it is for Grote, does that apply there's good growth coming down the pike if you could say something about their backlog? I'm also curious why you're able to spend an extra $50 million in Cap Ex and guide to the high end of your free cash flow guidance, what's going right in terms of the free cash flow outlook?

A couple of things. One is, with respect to Grote & Hartmann, a little over a third of the capital expenditure increase relates to the acquisition. There's obviously a healthy book of business that comes with Grote & Hartmann and we'll get into the specifics when we update the backlog.

With respect to the balance of the increase in capital expenditures there's some recently won conquest business. We are doing similar to prior years, we're accelerating some spending for major programs to safeguard critical launches and it takes us to about $350 million in total.

We are holding our, our guidance with respect to cash flow. As a result of some improvement that we now anticipate in working capital.

Can you get anymore specific on that working capital issue? Because I know there have been a few things moving around there?

No. The first quarter, like we said, I spoke with during the call, there was some slight improvement over what we had expected and as we went through the outlook process for the balance of the year, there's not one thing in particular, it's really just management of the traditional working capital items. So, there's not one item just to spike out.

Okay. And if I can just ask a follow-up, I thought slide seven was interesting in terms of the electrical/electronics global markets opportunity. I mean traditionally Lear is sort of automotive interiors first and I'm just wondering, you know, if that's changing, I mean obviously your most recent pending acquisition is in the other side of the business and is it more likely that you pursue the kind of growth opportunities that are present on slide seven than putting more capital into automotive interiors at this point?

Again, I think our goal has always been to control the architecture of the products, whether it be the interior or whether it be the electrical distribution system. And so with the acquisition of Grote & Hartmann, we obviously pick up terminals and connectors capability. We have RKE technology today. We have the smart junction box technology and we have the ability to add on some of these other products onto the electrical distribution systems that we have. So, I guess the short answer is we expect to package those and sell those to the customer.

Thanks, guys.

Your next question comes from Rob Hinchliffe with UBS.

Good morning. Just a couple of quick ones. Dave, the second quarter revenues, what are the main drivers just pushing those down a couple hundred million versus Q1?

Second quarter revenues, we see foreign exchange, let me just walk through them briefly, foreign exchange at about $150 million, we saw our net global backlog at about $120 million and it's offset by some unfavorable mix assumptions.

Okay. And you talked about commodity expenses, not a big deal. Any risk from your sub suppliers, anything to be concerned about there?

For the most part we have contracts that protect us on the subset pars so we think we're in good shape there.

Those primarily last until the end of the year?

Well, yes, they cover it, I mean they all vary but we've looked at it, we feel comfortable there and obviously the other aspect we have is the ongoing cost reduction, which helps us in the process, as well.

Okay. That's all I have, thanks, guys.

Okay, thanks.

Your next question comes from Dominic Martilotti with Bear Stearns.

Good morning, guys.

Good morning.

Just one question, looking back at backlog, I know you're not going to adjust that assumption there, but can you give us an idea of the magnitude of business you guys are quoting out perhaps into '06, I know '05 is probably pretty firm independent of G&H.

Sorry, you're talking about our total --

The magnitude of business that we're quoting?

Yes.

Oh, it's, quite frankly I don't even know with we gather that --

In any given year, $7 billion.

So...

So, around $10 billion you said?

I would say in any given year it's probably, you know, 5 to 6 to $7 billion.

Okay.

But I mean depending what that definition is.

Can you give us an idea of the kind of backlog G&H is looking at?

I think we said we'd comment on that the next time we update the backlog. Obviously they do have some growth built in there.

Okay. Thank you.

Your next question comes from Yu Liu with Goldman Sachs.

Hi, Dave. Could you give us some update on the '05 backlog with regard to the breakdown between Europe and North America? And also if you have any information into '06?

Sure. With respect to '05, we've talked about $1.25 billion, about 70% of that, close to 70% of that is in North America. Slightly under 24%, 25% is in Europe and the balance is in primarily in Asia.

And as you look at '06 of the roughly $1.1 billion, there's about $650 million that will come online in North America, about $350 million in Europe and the balance in the rest of the world.

Okay. And you mentioned you expect some gradual improvement in the overall margin. Does mix of the backlog, you know, the fact that it's coming from [inaudible]of higher margin in North America, is that what's helping the overall margin? Or is it the kind of improvement across the regions?

Well, it's a combination of a number of factors. The single biggest driver is our focus on controlling and improving our cost structure.

Okay. Thank you.

Your final question comes from Brett Hoselton with Key Bank Capital Market.

Brett?

I'm a little confused.

[ Laughter ] So are we! You want to ask another question?

Well, yeah, can we go to Morocco? [ Laughter ] Anyway...

Okay, all right!

Commodities cost, I heard 8 to 10, 8 to 9 cents for 2004 and I heard 10 plus cents for 2004. I'm wondering which --

It's -- you know, we -- it's a range. It's sort of 8 to 10 cents in total for the year.

Okay. And then the second question I have is as I think about the Grote & Hartmann acquisition, your interiors business, you've traditionally thought about that as being your system integrators, you're not going to be heavily vertically integrated, yet I hear with the Grote & Hartmann acquisition, well, look, we need to be more, it sounds like more vertically integrated and I'm wondering what is different about this than maybe your traditional stance toward vertical integration?

Yeah, I think the difference is when you quote a wire harness, electrical distribution system, about 40% of the cost is in terminals and connectors. And basically the people we compete with have the capability to provide those terminals and connectors, the Delphi's and so forth. So again, I think it gives us a competitive advantage in terms of understanding what that cost is and also taking that technology and growing it around the world.

Okay. Excellent. Thank you very much, gentlemen.

Thanks, Brett.

Just in closing, I want to thank everybody for joining us. We will be around all day, thank you.

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