Lear Corp (LEA) 2004 Q3 法說會逐字稿

Good morning. My name is Allison and I will be your conference facilitator today. At this time I would like to welcome everyone to the Lear Corporation third-quarter 2004 earnings call. (OPERATOR INSTRUCTIONS) I will now turn the call over to Ms Bork. Ma'am, you may begin your conference.

Thanks Allison. Good morning everyone. We'd like to thank you for joining us on our third-quarter 2004 earnings call. Our earnings press release and it slide deck can be found on our website, www.lear.com. And we've also filed them with the Securities and Exchange Commission.

Today you'll be hearing from Bob Rossiter, our Chairman and CEO; Jim Vandenberghe, our Vice Chairman; and Dave Wajsgras, Senior Vice President and Chief Financial Officer. Also joining us today are Doug DelGrosso, President and COO; Bill Dircks, our Corporate Controller; and Mel Stevens, our Vice President of 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 are 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 slide labeled "Use of non-GAAP Financial Information", also at the end of this presentation.

Now I will go over the agenda. First, Bob Rossiter will review Lear's game plan and go over our third-quarter highlights. Next, Jim Vandenberghe will provide an operating review. And finally, Dave Wajsgras will review our third-quarter 2004 financial results, update our 2004 financial guidance, and then also provide a directional outlook for 2005. Now I would like to turn it over to Bob Rossiter. Go ahead and turn to slide 4.

Before we talk about the third quarter, though, I'd like to discuss how we approach the business.

No matter what the external conditions might be at Lear, we understand why we're in business, and that is to serve our customers. We believe that if we're truly partners with our customers in good times and in bad, our shareholders will be winners.

This is a very challenging market right now. I don't have to overemphasize that. It's times like these when relationships are truly tested. No more now than ever, it is extremely important for customers and suppliers to work closely together in a true spirit of partnership. We know our customers have to overcome these external challenges to be successful, and that it is our job to help them to eliminate waste. We will and have continuously improved our operating fundamentals in both quality, cost, products and services. That's what allows us to deliver high value-added to our customers. Our global business is growing, and we are optimistic about the future going forward.

On slide 5, as you know, steel, raw material and energy prices had continued to escalate. And the mix of vehicle production is less than favorable. In this environment our quality and customer satisfaction have continued to improve. Our strong sales backlog is supported by another quarter of record sales and our overall financial results remain strong. Operating margins, however, were down, reflecting the higher raw material prices. Jim and Dave will provide more color on that.

Despite the more challenging conditions, we continue to support our customers. At the same time, we've been working extremely hard with our suppliers to minimize the adverse effects of external factors. And we plan to work with our customers in upcoming negotiations to find new solutions to mitigate the impact of raw material prices.

In Europe we turned in solid financial results and we are on track for continued improvement. Also, the integration of our terminals and connector acquisition is proceeding well.

Slide 6 -- the fourth quarter -- compared to last year we see our financial performance being impacted in three key areas -- lower Big Three production in North America; and unfavorable mix in Europe; the impact of higher raw material costs and capacity changes related to customer actions. These factors have been considered in our guidance for the fourth quarter.

Regarding the impact of higher material costs, we continue, as I have said, to work with our suppliers and customers to offset these costs. However, even with these challenges we expect record sales and earnings for 2004.

Looking ahead to 2005, we're optimistic. We will continue to work hard to reduce costs. That's our job. Higher material costs will be factored into our customer and supplier negotiations. We have record sales backlog, new business coming downstream for 2005 and beyond. I give you my personal assurance that the Lear team is focused on meeting the needs of our customers and delivering value to our shareholders no matter what the challenges are.

I'd like to turn it over to Jim to talk about operations.

Thanks, Bob, and good morning. Turning to slide 8, I'd like to start off with a review of the major factors which affected the sector and more specifically Lear in the second half.

Overall vehicle demand in North America and Europe was relatively stable in the third quarter and is now projected be slightly down in the fourth quarter. Key vehicle platforms with significant Lear content have experienced weaker demand and lower production. With the intense competitive pressures in the market, we continue to work closely with our customers and suppliers to improve quality and reduce costs.

Since the first quarter we've seen a rapid increase of key raw material and energy prices that has occurred in the global marketplace. Going to slide 9, you can see that most commodities have experienced unprecedented price increases this year. In our business each manufacturer and supplier is impact differently, depending on its usage and company-specific purchasing policies. Steel has the most significant financial implication on our supply base.

Although the effect on our direct buy has not been significant, our indirect buy, which includes seat frames, tracks and mechanisms, is much larger. We also use a significant amount of resins, plastics and copper in our business. We have been able to mitigate the near-term effects due to the agreements that we have in place. However, going forward we expect to feel the impact of higher prices in our commodities. Rising energy costs have affected transportation and utility costs, but so far the financial implication has not been severe.

Because of the unprecedented and sustained nature of commodity price increases this year, we have targeted the entire value chain for efficiencies to mitigate higher material costs. At Lear we have a long history of working pro-actively with our customers to eliminate waste and improve the value of the parts and services we provide. We have become even more aggressive in our cooperative cost reduction efforts up and down the supply chain, particularly with our supply base. We're also accelerating the consolidation of our supply base and are selectively in-sourcing components where we have available capacity. And we are looking inwardly for consolidating administrative functions and reviewing all of our administrative costs. We continue to pursue low cost country sourcing and engineering as well.

Slide 11, I'd like to talk about our CTO centers. We now have in place formal tear down and evaluation and competitive bench-marking facilities in all of our major markets. This allows us to accelerate the pace of manufacturing and engineering solutions with all of our customers and suppliers using our cost technology optimization, or CTO, practices.

CTO is an attribute-driven, fact-based analysis for removing the traditional quotation process and replacing it with a target-driven price. We used CTO in conjunction with other tools such as Six Sigma and lean manufacturing, as well as physical property tear down and J.D. Power data. The end result is that the CT process uses a combination of bench-marking and reverse-engineering to ultimately drive the best overall value for both Lear and our customers.

We believe that this process will continue to provide significant opportunities. It's been well received by our customers and we are now using it with our supply base. We also believe we do this better than anyone in the industry.

Slide 12 highlights our efforts to date in low cost countries. We currently have 16 Maquila facilities where we manufacture wire harnesses and seat trim for the North American market. We have 8 plants in Central Mexico which produce seats and interior products. We are in fact the largest -- or 1 of the largest non-government employers in the country.

We've expanded our footprint in Honduras. We expect to go from 3 facilities and about 4000 employees in 2004 to 5 facilities and 7000 employees in 2006.

In the rest of the world, our low cost strategy has grown in the last several years. And we now have 14 facilities spread over 6 countries in Eastern Europe, 7 facilities in Africa and 4 in the Philippines.

In regards to engineering, in Asia we currently have 4 engineering centers in low cost countries supporting our global business.

Now let's turn to the integration of our recent terminals and connectors acquisition (indiscernible). We've evaluated the manufacturing footprint and consolidation actions are underway. We're also importantly leveraging the acquired technical expertise throughout the rest of Lear's electronics division. We're working hard to expand our relationships with non-traditional customers. And we're also looking at selectively in-sourcing on an ABC basis where we're taking the easiest products, obviously, to in-source quickly. And some of the others may require some work with our customers or some design changes in order to get them implemented. We are pleased with our progress; there's more work to do.

Going to slide 14 for an operations recap, external factors have become increasingly challenging this year, primarily the rapid escalation of raw material and energy prices. Despite the challenges, the Lear team has remained true to our operating philosophy that the customer comes first no matter what. We have continued to improve our quality and customer satisfaction ratings this year. We are working aggressively to minimize the adverse impact of rising commodity prices. Our efforts to reduce costs, coupled with the net impact of any cost changes, creates the basis of productivity discussions with our customers and suppliers. And at the same time we're continuing to invest in growth opportunities worldwide.

I'd now like to turn it over to Dave to take you through the specifics of the third-quarter financials and our outlook.

Thanks Jim. If everyone would please move to slide 16.

Starting with a look at the production environment during the third quarter, North American production was down 1 percent versus last year. Big Three was down 4 percent, which translates into an adverse mixed impact on the quarter. Some of our key platforms that were down include the Ford Explorer, the GM Yukon and Tahoe and the Dodge Ram.

In Europe, production was up about 3 percent while Western European production was about flat. Similar to North America, key Lear platforms experienced production declines. These include the Fiat Stilo, the Opel Vectra and the Saab 93.

Moving to slide 17, here we summarize the third-quarter financial results. We achieved record third-quarter net sales of 3.9 billion, up about 12 percent from 2003. Our core operating earnings were down $4 million from last year, resulting in a 60 basis point decrease in our operating margin. The decline reflects primarily the less favorable production mix I just mentioned and the higher raw materials pricing environment.

Our net income per share was $1.32, which includes a 22 cent benefit of a tax settlement relating to prior years. The result was a reported effective tax rate of about 13 percent.

SG&A as a percentage of net sales was 4.1 percent, in line with last year. Interest expense, 43.3 million, also about equal to the third quarter of 2003. And other expense of 10 million was in line with our expectations.

Moving to slide 18, this chart further explains the financial impact of the more significant financial drivers on the quarter. The increase of 406 million in net sales reflects primarily new business coming online, the favorable impact of foreign exchange, as well as our acquisition of the terminals and connectors business. A partial offset was the overall vehicle production mix.

Our core operating earnings were down $4 million, with improved net operating performance and the profit contribution of new business globally being offset by the unfavorable mix of production, and again the impact of rising commodity costs. The costs to acquire many of our key commodities, most notably steel and resins, continued to rise since the year. The financial impact was more significant than we had previously anticipated.

Moving to slide 19, looking at our free cash flow where we generated about $41 million in the quarter, putting us just over $230 million year-to-date. Capital expenditures of 91 million about offset depreciation. The positive cash flow reflects pre-tax earnings in line with last year, offset in part by negative working capital. Our use of working capital increased in the quarter, primarily due to seasonality, the start-up of new vendors in China, and the launch of major programs in North America.

Looking at slide 20, we will now review the outlook for the fourth quarter and the impact on full-year results. Several key factors have changed over the past several weeks. Vehicle production cuts have occurred globally. In North America a broad inventory correction was implemented. And in Europe demand weakened across several brands, including Jaguar and Opel. A number of vehicle platforms that are highly contented with Lear products were directly impacted.

In addition, the magnitude and duration of the cost increases for key commodities, together with the resulting impact on our supply base, will have a more significant affect on our fourth-quarter financial results than previously thought. In light of the production cuts announced by our customers and the more challenging industry environment, we're now implementing actions to realign our cost structure in both Europe and North America.

A final comment on the raw material pricing situation. This is a fairly complicated subject that's difficult to quantify with precision. In addition, there are ongoing commercial discussions, and as a result we're unable to comment on the specific financial impact.

If you would now move to slide 21. With that as a backdrop, these next 2 slide outline our fourth-quarter and revised full-year guidance. For the fourth quarter we now see industry production in our major markets essentially flat with a year ago -- 3.9 million units in North America and 4.7 million units in Europe. The Big Three are expected to be down about 3 percent. This production assumption is reduced by roughly 200,000 units compared with our prior guidance.

We estimate fourth-quarter net sales to be around 4.1 billion, down 3 percent from the fourth quarter of 2003, reflecting lower Big Three vehicle production in North America and a less favorable vehicle production mix in Europe.

Our fourth-quarter effective tax rate is expected to be about 24 percent, which includes the favorable impact of legislation reinstating the R&D credit worth about 2.5 percentage points in the quarter.

We see net income per share in the range of $1.70 to $1.80, reflecting lower net sales, the impact of rising commodity costs, and the investment in the structural cost reductions addressed earlier.

These forecasted results bring our full-year guidance to between $5.97 and $6.07 per share.

Before leaving this slide I wanted to point out these per share estimates do not include the dilutive impact of the new accounting requirements for our convertible debt.

Looking at slide 22, our full-year capital spending forecast is about 400 million, and depreciation is expected to be around 365 million. We see free cash flow at about approximately $300 million, including some anticipated funding to avoid disruption in our supply of key raw materials, as well as the cost to implement the strategy we spoke to earlier to further mitigate rising raw material prices. Interest expense is estimated at around 165 million.

Moving to slide 23, I'd now like to comment on 2005. We anticipate that many of the challenges we are now facing will continue next year. These include both higher energy and raw material prices, as well as aggressive customer demands for cost reductions. In addition, several major automakers have changed payment terms which will have a negative impact on our reported cash flow next year. However, our daily overall average cash flows and liquidity are expected to remain very strong. Despite these challenges we believe Lear is well-positioned for a solid year in 2005. We will benefit from earlier and continued actions to improve our cost structure. And as many of you know, we have a record sales backlog coming online.

On slide 24, we outline our directional outlook for 2005. Starting with sales, we see our top-line up in the 5 to 7 percent range, again supported by our record backlog. And operating earnings are expected to increase by somewhere between 5 and 10 percent. We will provide more detail of our 2005 guidance in January.

On slide 25, before I turn it back over to Bob, let me revisit how we view various uses of our available cash. We will continue to invest in high-return programs and pursue strategic acquisitions. Other options include increasing the dividend and further pursuing our share repurchase program. This year, we have purchased almost 1 million shares and we continue to consider our current valuation to be an attractive investment opportunity.

Now I will turn it back over to Bob for closing comments.

To sum it up, the Lear team has always worked pro-actively to deliver great value to our customers and our shareholders. Despite the challenges, we remain focused on serving our customers and profitably growing our business worldwide. I'd like to say thank you to the Lear team for their hard work, dedication. And now we will open it up to questions.

Allison, we are ready to take questions.

(OPERATOR INSTRUCTIONS) Ron Tadross, Banc of America Securities.

Thanks a lot. Good morning everyone. In regards to the third-quarter results, correct me if I'm wrong, but it seems like it is the first time where you're saying or maybe the magnitude of the margin hit from customer mix is somewhat material. It is that a fair statement?

The mix obviously impacted the quarter. I believe Bob, Jim and I all spoke to it. It's not the first time that we've talked about the mix impacting the margin. That wouldn't be correct. But it did impact the quarter.

But is it getting harder to -- because I -- because I think in the past you have been able to offset it by really doing a little more on the cost reductions. Is it getting harder to offset the customer mix effect on the margin?

Well, specifically what we're referring to when you talk about margins is the phasing-in of our strong backlog, not only in 2005, but also in 2004, the backlog is coming in stronger than we had originally anticipated. It's well over 900 million this year. And as we have talked about in the past, the phase-in the of new programs, the launch phase, say 12 to 18 months, the margins are typically lower than the run rate margins after you have been in the program for a while.

You're saying that is having a bigger effect than customer mix or as big?

It's on par with customer mix, yes.

And then, are you willing to share with us at least maybe your total raw material buy, maybe including direct and indirect or some idea of how big raw materials are?

We spoke to that during the formal part of the presentation. And we're really not able to comment on any specifics. But I do believe it's more important to think through, or to understand, how we're managing the situation. I think Jim outlined during his part of the presentation how we were able to overcome what's happening from an industry-wide standpoint. We're addressing further consolidation of our supply base. We're working with our customers and suppliers. We are continuing to review in-source opportunities. And we're also reviewing other actions we can take internally.

Just finally, on the '05 guidance, what does operating earnings mean? Does that mean you're going to exclude some tax benefits or some charges? And then does that guidance include the dilution from the convertible bonds?

That's a good question. We didn't want to address the year-over-year increase in net income because we're still going through the planning process. We put a range out on top-line growth of the 5 to 7 percent. It is our operating income; what we call our core operating earnings, which we see up in the range of 5 to 10 percent next year. The only impact from the dilution of the convertible bonds would be on the bottom-line, which is our earnings per share.

So things that go below the line could be like the bonds, tax rates, things like that -- big changes?

Yes. And in addition to the -- and I spoke to it on my last slide. We continue to see the valuation of our stock being a fairly attractive investment for the Company.

Thanks a lot.

Steven Girsky, Morgan Stanley.

So 24 percent, should we just assume that for '05? Or what is -- or do you consider 24 unusual?

We have continued to implement some very focused actions from a tax planning standpoint. And if you look back over the last few years, our effective tax rate has continued to improve. At this stage I think if we assume sort of the 25 percent range from an effective tax rate standpoint, you're not going to be materially off.

And the fourth quarter guidance, I'm trying to think back. Last year had some pretty significant restructuring charges embedded within it. Is that fair?

Yes, that's right. It was roughly 37, $38 million associated with 2 large actions we took in the fourth quarter of last year. This year obviously we don't have actions that are that large. But we are implementing cost reduction actions that are costing us in the 12 to 14 cent range in the fourth quarter related to the recent customer announcements.

And I missed the mix or maybe I didn't get it. How much of the margin problem is geographic mix type stuff; the fact that Europe is growing faster than the US, that kind of thing?

Europe has continued to perform well throughout the year. Just from a pure margin perspective, every quarter this year has been improved over every quarter last year from a margin perspective. We spoke to earlier this year at a strategic target of being over 3 percent in Europe. And we believe today we will be achieving that. Europe having a lower overall margin profile does have a drag on the consolidated margins.

But it wasn't the biggest factor here?

It was not the biggest factor, but it was a factor.

And is Europe -- when we think about the backlog going forward, how big is Europe? Is like this going to continue to weigh on margins?

Well, as you look 2005, roughly two-thirds of the backlog is in North America and the balance is split between both Europe and Asia.

And if the country mix wasn't -- or geographic mix wasn't the biggest factor, what sort of was the biggest factor here -- product mix, production mix?

Again, there's a number of moving pieces here. We've talked about commodity prices. We've talked about our response to what our customers have implemented. There are some mix issues because of the strength of backlog. I think you have to look at all of those as 1 group.

When you talk mix, you're talking Company mix? You're talking cars versus trucks? Are you talking mix within the mix; instead of XLTs they are buying SL, that kind of thing?

Yes, that's (multiple speakers)

All of the above?

It's also a good question. Typically when we're addressing mix we're looking at platform mix and not specifically the products that we put on those platforms.

Just the last thing, on inventory. You're buying forward. Are you protecting yourself? What's going on there?

Well, the build in inventory is 3 things happening. There's a seasonal build, typical to -- which is in line with the last few years. There's roughly $40 million of additional inventory related to Grote & Hartmann. And the balance is the launching of platforms. We spoke on the last quarter about the Audi A6 program in China. And there's an inventory build associated with that start-up.

So there's no sort of buying forward to protect yourself on raw material kind of thing?

No.

Thanks Dave.

Rod Lache, Deutsche Bank Securities.

Good morning everyone. It's Mike Heifler for Rod. Dave, you talked about the cost mitigation issues in the fourth quarter. Are you expecting those to carry forward into 2005?

We will address 2005 in more detail in January. The actions that we spoke to were obviously unplanned a few months back. As we look at 2005, we will have to see the way things play out from a customer standpoint. And we will do whatever we need to do to achieve the directional outlook that we've put out there.

You also talked about the change in payment terms by the OEMs. What do you think the impact will be from that?

What's actually happening is some of our customers have changed payment terms, which moves the receipt of our receivables, the cash in the door, from a few days before quarter end to a few days after quarter end. So from a reported standpoint, we will see a decrease, again, in our reported cash flow. But from an economic standpoint our overall daily average balances will remain strong next year. I'll address the specifics when we have completed our planning process, which will be in around January.

Lastly, the foreign exchange in the quarter; the contribution to revenue and profits?

The foreign exchange was between 140 and 150 million. And the associated OI was worth about $5 million.

Thanks.

Chris Ceraso, Credit Suisse First Boston.

Thanks. Good morning everybody. A few things. First, directionally are you expecting materials to be worse or the same in '05? What's implied in your operating guidance?

Our planning assumption -- obviously we don't really forecast the market, but our planning assumption is that the key raw material prices are estimated roughly where they are today.

You said that in the fourth quarter North America you expect to be down 3 percent for production. But GM and Ford are both down about 8 percent. Have you sort of taken that into account in terms of what that's going to do to your mix?

Yes we have.

So you'll feel it worse than 3 percent?

No. I'm not following what you're saying.

If 2 of your big customers are down 8 percent, even if overall North America -- or Big Three is down 3 percent, it sounds like the effect on Lear will be worse than what 3 percent sounds like.

The effect on Lear may be slightly worse. But again, it is our mix of products within what the Big Three is actually going to produce. There's a platform mix issue and a product mix issue. So it's not necessarily a 1-for-1 correlation.

And then on the converts, have you said that you were going to -- is this on the contingent converts and the effective dilution? Is Lear going to settle those in cash? Or I thought you had talked about that which would avoid the dilution then.

No. We issued the convert in 2002. And there's been some changes in the way some of the supporting documentation addresses these contingent convertible securities. What we're going to do is potentially address something next year, but it's a little too early to talk about that. The dilution, like we said during the formal part of the presentation -- it actually was on one of the slides -- is expected to be about 26, 27 cents.

Thanks.

John Casesa, Merrill Lynch.

Dave, are your customers extending payment terms? Is that what's happening? Or if it's just a timing difference will there be no effect? You weren't clear to me whether you are saying there is no effect from an economic standpoint.

No, from an economic standpoint, payment terms are being moved by a few days. So essentially from an average cash flow standpoint there's no economic change. In other words, if we were going to receive money before quarter end, we're now going to be receiving it slightly after quarter end. It's a shift of 3 or 4 days, and it is the customer changing terms.

So very slight. Okay. Secondly, on Grote & Hartmann, what's the consolidation underway for? I wasn't sure that you were -- I wasn't aware that you were planning to consolidate these plants that were required. Or was that the plan all along?

There were a number of operations within Grote & Hartmann, and some of the more not necessarily core. There was a business in Mexico, a business in France that weren't necessarily core to us. They had a portion of their business related to commercial products, which isn't core to us. So there's a number of these kind of actions basically that we are either divesting or consolidating these facilities, and then obviously tying that in with what we do as well.

Okay, so that was all part of the plan from the beginning.

Right, and obviously administration is always a key whenever we do any kind an of acquisition.

Dave, back on free cash flow. I wasn't quite sure what you said about the impact of your purchasing strategy on the free cash flow for the full year. What were you trying to say about your free cash flow target for '04?

For '04 what we were addressing specifically is the stress on the supply base -- not obviously the entire supply dates, but with some of our suppliers. And in some cases there is support that they're going to need. And to not interrupt production or supply into Lear we're obviously having to support the supply dates more so than we had anticipated earlier.

Okay. And finally, to be clear, the tax rate for the fourth quarter is 24 percent, and also for the full year?

That's right. And, John, this is a good point. There's 2 things happening in the tax rate. There's the settlement in the third quarter, which we spoke about. And there was also a delay in implementing the R&D credit. The bill (ph) didn't pass until the fourth quarter, and there was a shift essentially in our tax rate between the third and fourth quarter.

So the third-quarter tax rate, if you run through the math, will be a little over 28 percent, excluding the settlement. And the fourth-quarter tax rate is going to be about 24 percent. Again, the shift quarter-to-quarter is the R&D credit impact hurting the third quarter about 2 to 2.5 percentage points; helping the fourth quarter 2 to 2.5 percentage points.

Okay. I understand. Thank you Dave.

Darren Kimball, Lehman Brothers.

Good morning guys. First of all, just wondering if you could talk a little bit more to sales in the fourth quarter. If I look at the new business you have coming on, plus the effects of acquisition, that in itself puts your sales up about 8.5 percent. And it looks like you're suggesting they will be down 3 or 4 percent. I'm just not sure that production bridges that gap. Is there something else involved in (multiple speakers) down comp?

Yes, you'll recall that we don't close on a calendar quarter-end. There were a couple of extra production days, and as a consequence sales days from a Lear perspective, in the first quarter. And there's 3 days less in the fourth quarter. So that's also an impact.

And in response to Steve's questions about the year-on-year facilities cost issue you talked about an offset of 12 to 15 cents in costs you'll have in the fourth quarter. What was that? Was that more facilities actions or was that a reference to some of the negative second-half factors like Grote dilution, preproduction costs in China, Mazda business, raw materials? Was that a reference to that cost in the fourth quarter or something else?

No, we were looking at the 12 to 14 cents in isolation. And it's our response to the recently announced customer actions. And it's primarily related to severance actions on a global basis.

So incremental fourth quarter actions. And could you just give us an update on what you think those 4 other factors -- Grote, preproduction in China, Mazda start-up and raw materials -- add up to as far as a 4Q drag?

Go through those 4 again.

These are the 4 items that were talked about in the second-quarter call -- Grote dilution --

Right. Grote dilution for the fourth quarter will be about breakeven. So there's not a real impact. The business (multiple speakers)

I don't want you to answer each piece specifically, because then you're not going to answer the fourth one. Maybe sort of an estimate of Grote, the preproduction costs in China, the Mazda start-up and the raw materials issue. Those are -- kind of together what's the drag on the fourth quarter?

The drag on the fourth quarter taken as a whole is about 10 to 15 cents.

Plus another 12 to 15 for your cost actions?

That's right.

Okay. Let me see. And lastly, on the in-sourcing, could just comment on what makes sense from an in-sourcing standpoint now that didn't sort of before? Obviously the business was tough. Maybe it's getting tougher. And I was wondering if you could also comment on some good example of some of the actions that you're contemplating now when you talk about looking up and down the supply chain.

I think relating to some of the in-sourcing actions, one specifically comes to mind. We have had some suppliers come in and demand price increases on molded parts, injection molded parts. And basically we found we had capacity within and we took it in-house. So that's 1 and we're looking at other operations like that in terms of stampings or else bundling those stampings with another supplier to create an opportunity for them.

Brett Hoselton, KeyBank Capital Markets.

Good morning. Dave, I guess I'm just not clear on what you're expecting to do with the convertible debt next year. You have cited about 26 to 27 cents impact for next year and operating earnings increase of 5 to 10 cents -- or 5 to 10 percent. Are you suggesting that there may be a possibility that 25 or 26 or 27 cents may not occur next year because you may resolve it by doing something along those lines? How do we deal with that when we --?

There's alternatives out there. I think for planning purposes, assume it's going to be dilutive.

As then far as the share repurchase program, can you just give an idea of where we're at with the share repurchase program? What do we have as far as authorization? And what are the expectations there? And when do you see yourselves getting aggressive and so forth?

Again, we see our valuation today as a very good investment opportunity from our perspective. We have remaining 2.3 million shares from an authorization standpoint. And going forward we obviously can go back to the Board of Directors at any time.

I apologize. Did you repurchase shares in the third quarter?

Yes we did. On a full-year basis we're just under 1 million shares at an average cost of about $54.

Thank you very much.

Michael Bruynesteyn, Prudential.

The weak production from some of your key platforms or key customers looks to be a bit of an Achilles heel for Lear sort of compared to the industry. Can you comment on the transition of that customer platform mix as your backlog rolls on next year and the year after?

Sure. As you are well aware, a number of platforms have not performed as well in 2004 relative to 2003, in particular some of our key truck platforms in North America and also some of our higher content platforms in Europe. Now as we look into 2005, I think we've talked a lot about the backlog. And there's some very strong programs coming online. We have the BMW 3 and 1 Series, which we spoke to on the last call. We have the total interior program, which will launch sometime around mid-year. We've talked about the Hyundai Sonata program for a while now the also launches next year. The Audi A6 I spoke to. There is a number of platforms that are coming online next year that we feel very good about.

Coupled with the full-year impact of Ford 500 and the Freestyle as well.

So basically, do you feel more or less exposed to programs that may be weakening in the next couple of years?

I think the strength of the platforms that we're on for 2005 and 6 will bode very well for the Company.

And then could you talk a little bit about SG&A? In absolute terms the value did go up materially. Can you explain what's going on there and what --?

More than half of it is related to the integration of Grote & Hartmann or the consolidation of Grote & Hartmann. In addition, and I think Darren was talking about this earlier, with respect to our preproduction engineering, that also impacted us on the quarter, which essentially makes up the balance.

Thanks a lot.

Himanshu Patel, J.P. Morgan.

It is actually Shah Kidwei (ph) for Himanshu Patel. I had 2 questions. First, can you just confirm on European margins where they're running right now versus your kind of long-term 3 percent target? Are we there now or are we kind of above that target? And second, on the backlog for 2005, you mentioned that it was more kind of centered towards North America. Could you give us an idea of the '06 split between North America and Europe?

Sure. On your first question, our margins performed -- the European operations performed substantially better in the third quarter of this year versus third quarter of last year. Margins were up again materially from our standpoint. On a full-year basis we will exceed the 3 percent target that we spoke about roughly a year ago. With respect to 2005 backlog, again, about two-thirds of it is North America. And looking at 2006, that drops to around 50 percent.

Thanks.

Domenic Martilotti, Bear Stearns.

I want to go back to Darren's question and see if you will actually answer the fourth part of the question, which was the raw material component.

Like we said, again, during the formal part of the presentation, we're really unable to comment on any financial specifics.

Is this going forward or can you not sum it up for the third quarter? Or are you just reluctant to do so?

I think we have said all we want to say about it.

So looking at the raw material issue kind of in the context of the whole industry, and I think this is part where I think companies are having challenges, what is the impact -- in the squeeze of the Tier 1 I think you are going to see the OEs kind of push back on pass-throughs and you're going to have to probably take in some cost hits from the Tier 2s, Tier 3s. Can you give us some color on kind of where that stands and maybe how you look at that going into next year?

We negotiate with our customers every year. Obviously the basis for those negotiations are what we feel we can achieve from a productivity standpoint, what we feel we can achieve by this cost optimization process that we have, and also the nature of the cost that we are faced with. So basically, our negotiations are a function of what we can achieve, and that's how they will be laid out next year.

I think we've had similar situations where we've had to incur significant amounts of engineering costs and we've baked those into our negotiations as well in past years. So that's just the nature of how we deal with our business. And the same process -- we work with our suppliers in the same manner.

Would you say that you are seeing a little push back from the OEs in terms of their willingness to absorb some of this raw material pressures?

I think you've probably heard publicly that many of our customers have acknowledged that this is an issue. And we expect to deal with them on this issue. And we deal with each one on a different way.

Thanks.

We have time for one final question. John Rogers, Smith Barney.

Dave, one of the things you said in your formal comments was that indirect steel pressures were more significant than direct. Can you just give us a little bit more color on why that is? Is that because of the shape that your suppliers are in?

Yes. I think basically I think what we said is if you looked at the amount of steel in the product we buy versus the actual raw material steel, there's a greater amount in the indirect piece. And that's your seat frames and seat mechanisms. And obviously there is a push back because of many of our suppliers do not have the ability to absorb these costs, so they've come to us and we've tried to work through solutions with them over the last quarter.

Just finally, as you talk about strong cash flow next year, can you just talk to how you'll sort of balance -- we've talked a lot about share repurchases. But is there a dividend increase? And how would you sort of prioritize repurchases versus increasing the dividend?

There's a couple points, quickly. The first 1 is we review our recommendation for a dividend change every year as part of the budget process with the Board of Directors. And we will do that again this year. There is not an unlimited pool of funds. We believe it's in the investors', our shareholders' best interests to have a very strong balance sheet. So what we do with share repurchases and dividends will be balanced off against other investment opportunities.

Okay, thank you.

I think that will do it for the third-quarter conference call. We want to thank everybody for participating.

This concludes today's Lear Corporation third-quarter 2004 earnings call. You may now disconnect.