Lear Corp (LEA) 2005 Q1 法說會逐字稿

Good morning. My name is Judy and I will be your conference facilitator today. At this time I would like to welcome everyone to Lear Corporation's first quarter 2005 earnings 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 star than the number two. Thank you. I will now turn the call over to Anne Bork, Director of Investor Relations. Ma'am, you may begin.

Good morning, everyone. Thank you for joining our first quarter 2005 conference call. By now you should have received our press release, financial review package and the dial-in information. These materials have been filed with the SEC and they are posted on our website at www.lear.com. Joining me today on the call are Bob Rossiter, Chairman and CEO, Jim Vandenberghe, our Vice Chairman, and Dave Wajsgras, Senior Vice President and Chief Financial Officer. Also with us today are Doug DelGrosso, President and COO of the Americas, Shari Burgess, our Treasurer, Jim Murawski, our Controller, and Mel Stephens, our Vice President of Communications.

Before we begin I would like to remind you that during the call we will be making some 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 filing. 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 2 outlines the agenda for today's review. First, Jim Vandenberghe will provide an operating review. Next, David Wajsgras will cover our first quarter 2005 financial results, provide second quarter guidance and update our full year guidance. Then finally Bob Rossiter will sum things up with some comments on our strategic direction and the outlook for our business. Then we would be happy to take your questions. Now, please turn to slide 4. Here is James Vandenberghe.

Thanks, Anne. I'll start out with a summary of the first quarter. Q1 2005 was one of the more difficult quarters in our history in terms of industry condition, particularly in North America. Industry production was down in both North America and Europe, but our platform mix was very negative as our top 15 platforms in North America were down 11%. In addition, raw material and energy prices continued at high levels putting stress on the entire supply chain.

In this very challenging environment our sales were down 5%. We posted a loss $.03 per share. Before the benefit of a one-time tax credit, our reported net income was $0.23 per share on a GAAP basis. Free cash flow was unfavorable by 11 million. On the next few slides I'll try to provide a little bit more color on the business environment and the actions that we're taking in response.

Start out looking at the first quarter production environment in both North America and Europe. In North America first quarter production was about 4 million units, which is down about 4% from last year. However, Big 3 production was down 9% and, importantly for Lear, the Big 3 trucks were down 11%. As I mentioned, Lear's top 15 platforms in terms of revenue were down an average of 11% and this was the significant factor in our sales and earnings decline.

In Europe, while the first quarter production was down 3% to 4.7 million units, our top 15 platforms were actually up 2% on a year-over-year basis. Dave will provide more detail on the first quarter production in the review of the financial results. As we stated on our 2004 year-end call, key commodities continue at high price levels, and this is depressing our earnings as well. Major commodities impacting Lear are steel, resins, chemicals, and energy.

Our response is to aggressively implement a wide range of cost-improvement initiatives, including collaboration with all of our customers and suppliers. In this regard, our teams have identified and presented to our customers cost savings worth hundreds of millions of dollars using our cost technology optimization process. Some of these are being implemented and many others are being evaluated. Working with our customers to speed up the implementation of these initiatives is key to our ability to offset the impact of higher commodity prices. Our ability to provide productivity givebacks are a function of the success of these joint efforts with our customers.

Going to slide 7, while we are working with intensity on all fronts, our overall game plan is to focus on the things that we control. Operationally we're focused on implementing efficiencies across all elements of cost while building on our quality momentum and ensuring flawless, successful launches. Longer term, our focus on profitable growth continues. We are driving towards improved diversification and expanding our presence with Asian manufacturers in Asia itself. And we are evaluating repositioning actions to eliminate excess capacity and further improve the competitiveness of our cost structure going forward.

We are entering an unprecedented period of new business coming on-line. And many of our -- our high-volume platforms are also transitioning to new models. From a new business perspective, we have 1.55 billion of new business coming on this year, most of it in North America. Over the next two years we're bringing on 3 billion, and so far we've booked up 3.8 billion over the next three years.

From a mix perspective, 2005 is clearly a transition year for us, as many of our major platforms are undergoing changeovers or major refreshings. In fact, in North America more than half our major platforms are turning over this year, representing 43% of our sales in the region. When you include the GM P900 SUVs at the end of the year, that total is 53%. With many of our high-volume platforms undergoing changeovers this year, we expect our mix to improve in 2006 with the full year impact of these important programs, some of which I'll get into in the next few slides.

Here's some of our major launches in North America this year. First off, our total interior integrator program on the Cadillac DTS and Buick Lucerne will be launched later this year. These vehicles just debuted at the Chicago Auto Show and the interiors were well received. We also provide the electrical distribution system for these vehicles. The Dodge Ram pickup is undergoing a major refreshing later this year, including a all new interior. And Ford is changing over the Explorer and the Mercury Mountaineer.

Going to slide 10, you can also see that many of this year's new products are cars or car derivatives. Chevrolet is launching replacements for the Impala and Monte Carlo. They also have a new entry, the HHR. Ford is launching an all new Fusion, the Mercury Milan and the Lincoln Zephyr. In addition, Hyundai is launching the Sonata at their new plant in Alabama.

Outside of North America we also have significant launch activity. In Europe the high volume BMW 3 series has changed over, as well as the Peugeot 407 coupe. In Asia, Audi is launching the A6 in China and Nissan is launching the new Serena model.

These 12 programs should account for 3.6 billion annually in sales on a going-forward basis, so you can see some of the task in front of us in terms of launching these vehicles successfully.

Going to slide 12, you can see that we’ve continued to diversify our customer base, as you can see from the numbers on the slide. Back in 1994 Lear's customers were mainly the traditional GM, Ford, and Chrysler. Today business outside of this traditional customer base has grown to represent 46% of our business. Our presence in Asia positions us for future growth. We have significant infrastructure in place, including 13 JVs in China, 7 engineering centers in the region and 21 manufacturing facilities.

Several new program wins continue to diversify our customer base. For example, we've established a global relationship with Hyundai. New programs with Hyundai include the seat and wiring award for the Sonata built in Alabama, several electronics awards, including the tire pressure monitoring system in North America, and seats for the Tucson in Korea and China.

For Nissan we have partnered with Tachi-S to provide a global seating program. We also have an electrical distribution program in Europe. For Toyota, in addition to the Sienna, which we have recently launched, we won an interior award for the Tundra, which is built in Texas. We also have seats for the AYGO, which is built by the Toyota PSA JV in Europe. And for VW we have seats and electronic awards in Europe. We also produce seats for the Audi A6 in China.

Before I turn it over to Dave for a more detailed look at our financial results and guidance, I would like to summarize our present assessment of the business. Three key factors adversely impact our near-term results, unfavorable platform mix, lower industry production, and high raw material and energy prices. We see our financial outlook improving the balance of this year and into 2006 as we record new business -- as record new business comes on-line and the transition of several high-volume platforms to new models is completed. We are also continuing to review every element of cost for further efficiency and expect to offset the higher raw material costs throughout the year.

Finally, we are in the process of evaluating our global business to best position Lear for long-term profitable growth. Bob will update you on our strategic direction and outlook at the end of the call. Now I'd like to turn it over to David Wajsgras.

Thanks, Jim. Here's our overall financial score card for the first quarter. Starting with the top-line we posted net sales of $4.3 billion, down about 200 million from last year. Our core operating earnings were down 130 million, resulting in a decrease in our operating margin from 4% to 1.1%. The decline in our operating earnings primarily reflects the unfavorable vehicle platform mix in North America and the adverse net impact of higher raw material costs. Net income per share was $0.23 which includes a one-time tax benefit of $0.26 per share resulting from a tax law change in Poland. SG&A as a percentage of net sales was 3.5%, down 20 basis points from last year. Interest expense was about $45 million, up 5.7 million from last year. The increase reflects higher short-term rates and the higher debt level due to the acquisition of the terminals and connectors business.

Moving to slide 16. As Jim mentioned earlier, unfavorable platform mix, particularly in North America, was a major factor in our lower first quarter sales and earnings. This slide summarizes the change in first quarter production compared with a year ago for our top 15 platforms in North America. It had a significant impact on our sales and earnings. On average, these platforms have Lear content in excess of $1,000 per vehicle.

Moving to slide 17. The approximate impact of all the major drivers on our change in net sales is explained here. The decrease in net sales of 206 million is more than explained by unfavorable platform mix and lower industry production. New business globally, acquisitions, and favorable foreign exchange, primarily the Euro, were partial offsets.

You move to slide 18. Here we show the major drivers impacting our core operating earnings for the quarter. The most significant driver again is the industry production environment. Higher net commodity costs were offset by new business globally and net operating performance. Looking at slide 19, free cash flow was negative $11 million in the quarter reflecting capital spending in excess of depreciation. Net income and slightly positive networking capital were partially offsetting. I'll talk more about capital spending a little later in the presentation.

If you move to slide 20, here we summarize our current thinking on 2005 production. In North America we now estimate full year industry production in the range of 15.5 to 15.8 million units and Big 3 production at 10.9 million units, down 400,000 vehicles from last year. In the second quarter our industry production forecast is about 4.1 million units, down 100,000 units from a year ago, but up that same amount from the first quarter. Our second quarter Big 3 production forecast is 2.9 million units, down 200,000 vehicles year-over-year, but up 200,000 sequentially.

In Europe we estimate full year industry production in the 18.3 to 18.6 million unit range. The second quarter is forecast at about 4.9 million units, down 200,000 units from a year ago but up 200,000 vehicles from the first quarter. If you'd move to slide 21, we now see Lear's worldwide net sales growing from 17 billion last year to a range of between 17.5 and 17.7 billion this year, reflecting the addition of new global business from our backlog as well as a stronger Euro. Partially offsetting these increases are the estimates for our platform mix.

Let me comment a little further on the cadence of our sales this year. Based on present production estimates we see production and mix gradually improving throughout the year. In addition, approximately 40% of our backlog comes on-line in the first half, while 60% is added in the second half. If you'd move to slide 22, our second quarter 2005 guidance is in the range of $0.20 to $0.40 per share. The range is fairly wide reflecting near-term uncertainty with a production environment.

With vehicle inventories on several key platforms at regular relatively high levels, it's difficult to predict what our customers will do in the near-term. Based on how North American production played out in the first quarter, we've concluded that it's prudent to suggest a relatively wide range of outcomes. Our full year 2005 net income per share guidance is $2.75 to $3.25, which does include the first quarter tax benefit resulting from a tax law change in Poland. Also, our guidance excludes the impact of any potential repositioning or restructuring actions.

If you look at slide 23, here we'll explain this year's current outlook compared with last year's results. The decrease in net income per share of $2.77 is more than explained by the unfavorable platform mix and the adverse net impact of commodity prices. New business globally and favorable net operating performance are partial offsets.

In addition to the actions we can control, what Jim spoke to earlier, we are negotiating offsets to raw material prices with our customers. It's difficult to precisely separate the impact of normal pricing in economics from what is going on with commodity inflation. What we have shown here is our best estimate of the directional net impact on our earnings. The gross impact is much larger, but again, we are targeting offsets. The most important of which is part of our customer negotiations.

If you look at slide 24, we'll now turn back to guidance and will summarize other important elements. Driven primarily by lower earnings, we are revising our free cash flow to a range of between negative 50 million and breakeven, which includes the impact of one-time change in customer payment terms, which we spoke to previously. Our ongoing tax rate is about 25%, which excludes the one-time benefit from the tax law change I mentioned earlier.

Our capital spending for the year now stands at 550 million. This is up about 100 million from our prior forecast. Moving to the next slide, the higher capital spending reflects an increase in Lear-owned tooling, continued investment in our Asian infrastructure, new investment in terminals and connectors, as well as new programs and other timing changes. Our free cash flow estimate reflects the lower net income guidance and the higher capital spending forecast.

If you move to page 26, before turning over to Bob, I'd like to summarize why our second half results should improve over the first six months of this year. In the first half we believe North American auto makers are implementing an inventory correction, with overall production down 3% and the Big 3 down 7%. While we are not expecting a large improvement in the second half, the outlook does strengthen.

Our platform mix will continue to be negative but not to the extent experienced in the first half. Also our backlog is more heavily weighted to the latter part of the year.

Finally, the impact of raw materials is expected to moderate as cost offsets are implemented and negotiations are concluded. One final note on this slide. While the current outlook reflects the best information we have available today, we would caution that uncertainty remains, in particular with the estimates regarding platform mix and our ability to mitigate the impact of raw material economics. I'd now like to turn it over to Bob to discuss our strategic direction and our outlook.

Thank you, Dave. If you'll move to slide 28. In the near-term we've faced many challenges, so the strategic direction of Lear is one, to further streamline our organizational structure and reposition our business for long-term profitability. In addition, we will accelerate growth in low-cost manufacturing in engineering locations. At the same time we are evaluating our product portfolio to de-emphasis lower margin non-core products and to assess strategically important acquisitions to best position Lear for the long-term profitable growth.

If you'll now turn to slide 29. The long-term outlook remains positive for Lear. Near-term, our financial results are being severely depressed by lower industry production, as Jim said, unfavorable platform mix, as Dave outlined, and high material cost increases. We are meeting these challenges with aggressive cost reduction actions and we are working with our customers in the Lear-way and we're having success.

We are reviewing our global business to make sure we are positioned properly and we expect the second half of 2005 to improve. And importantly, we see a strong 2006 and 2007. Why? Because our backlog is strong and balanced with good growth from our Asian customers.

Over the next 18 months, there are 77 major launches taking place at Lear. There's many launches going on, so what does this team have to do to be successful in that environment? We can't control everything, but what we can control is our quality, our cost efficiency, our flawless launches, and maintain outstanding service. If we do those things, our results will steadily improve this year. As I stated, the outlook is very good for 2006 and 2007. Our backlog is continuing to grow. Our mix should continue to improve. And as we complete this very significant changeover, our platform structure will be more solid. We've been through these times before. We understand what we have to do. This is an outstanding team and I promise you we will be successful. I'll open it up to questions.

Judy, we're ready for questions.

Yes, ma'am. At this time I would like to remind everyone, in order to ask a question please press star and the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Steve Girsky with Morgan Stanley.

Good morning, everybody, can you hear me?

Yes.

Sort of a one question with three parts or three questions, depending on how you look at it. So, I'm just trying to get my arms around this H2 versus H1. How does this raw material -- these raw material discussions play in it? Are you banking on getting some relief on raw materials in there? The third part is on this customer diversity, does the backlog help you with this, Bob, or do you need to do something strategic to really move this customer diversity number around?

Steve, this is Dave. I'll take the first part and then ask Doug to put some color on the situation with our customers. I mentioned in the formal part of the presentation first half, second half and what's going on with respect to some of the assumptions we use. I'll just restate essentially what I said. There continues to be some level of uncertainty in the back half with respect to platform mix as well as where we ultimately conclude with customer -- with commodity economics. With that being said, we have put in what we would believe are very realistic assumptions and are comfortable with the outlook. I'll let Doug put some color on what's going on with the customers.

Just with regard to the negotiations with our customers, you can imagine it's a pretty difficult environment. We're trying to mitigate the impact of raw material increases by focusing on cost reduction activity. Over the course of the last few months, we've met at all levels with customer and really confronted them with an opportunity well in excess of the raw material increases to take costs out of the system. But as you can imagine, that takes time to implement. So we're faced with pretty difficult challenge, but we think we've got a pretty solid game plan in place to offset the raw material increases.

Is this the kind of thing you're accruing for, though, that at the end of the year we figure out if we guessed right or not?

Let me handle that part, because it sounds like an accounting question. Yes, we're very prudent with respect to the accounting and what we are and are not accruing and are very comfortable with, obviously, with the accounting on first quarter results and also what's in the outlook.

Okay. What about -- what's the -- can Bob talk about customer diversity here?

Yes, I think basically what's you're really asking is what's the plan here or what's going on. And I think we'll just go right into it and just kind of give you a feel for what we're going to do. Overall -- if you don't mind I'll come to diversity at the end, customer diversity and how we're going to do that. But let me just start off with some of the points that I've been -- I picked out of our own pitch here that tells you really what the plan is.

The Company is obviously focused on cost reduction. In times like these, when you're going through difficult times, you look at every little thing inside your company, no matter where it's at, to try to reduce costs. I'll tell you that, we've been doing that. Secondly, we focus on cash. We generate -- we go back to our LBO heritage. We focus on our assets. We look at how we can get -- minimize the impact on our cash forecast.

Number three, we accelerate footprint actions. We have a number of opportunities for consolidation, which we've been working on. We're pushing those forward. We're also going to be announcing some plant closures in the next several months. And it's tough on people, but we have to do what we have to do to save this business.

Number four, our organizational structure. We're looking at how we can streamline this organization, make it more efficient to focus on our core business and do the job. Five, we're going to work on our product portfolio. What is it that we do? What do we want to be? I'll tell you today we know exactly what Lear wants to be. We're going to be in the seat business. We're going to be in the electrical business and we're going to grow. We're going to be in the electronics business, and that is growing. And we're going to be an interior integrator.

I'll add one other product that I think really has strong potential for growth for Lear and that's in the area of cockpits. We think that we can be a major player in that area. However, we don't need to make everything for ourselves. In fact, if we can't resolve the issues with resin-based products and unless we can make these products profitable going forward, we will exit that business.

Number seven, we mentioned it several times. We're looking and speeding up our sourcing in low-cost countries. It's not that we really want to do that, we're forced to do it. And unfortunately, we're looking at that from an engineering standpoint too. How can we be more efficient. How can we be lower cost going forward. So we're accelerating those actions.

And then lastly, really Steve, to hit your point on diversity of customer base. You know we've been working on it for the last couple of years. It's not like we've been sitting around on our hands. We had -- a number of years ago when the Asians came to North America and really started to penetrate Europe, unfortunately Lear was in a leveraged buyout at the time. And the Asian customers looked at us and liked us and liked what we had to offer, but they are risk adverse and they saw a highly leveraged Company as a potential risk.

So we've been trying to make up ground ever since. I think we've done some absolutely fantastic things over the last couple of years. Let's start with some of the customers. In Hyundai, you all believe that Hyundai is a growing company. We have really done an outstanding job with Hyundai. We have their Alabama business. We have their second and third cars in Slovakia. We've got their China business. We are supplying seats, now, in Korea for Hyundai. We're going to also be selling the TPMS globally. And we'll run that here, for Hyundai, out of the U.S.

Secondly, in Korea we picked up the Korean business for Daewoo. So we're also going to be doing business with them. At Nissan we picked up seat business for the U.S., for the U.K. and for China. And we've also had interiors growth business in Mexico and the United States.

So what does the backlog take your diversity -- take your sort of non Big 3 exposure to? Do you have a number like that?

Our backlog with Asian business basically doubles our sales again with them to about 3.6 to 4 billion by a three-year outlook.

Okay.

Just the rest of them. We've got growth in Europe with VW, with Audi in China and obviously, Toyota PSA in the Czech and also other interior and seat business here in North America. So, we diversified our customer base.

I want to make one other point clear, we're not going to turn down any business with our traditional customers. We expect growth opportunities with them as well, but we also know that as the Asians penetrate our market, we need pieces of that action. And then lastly, point number ten is acquisitions. We are looking at strategic acquisitions that will help our core products. We're investigating several of them right now, and I'm telling you we're going to have some acquisitions in the, hopefully, near-term to announce.

So that's the plan, Steve. I hope everybody appreciates what we're going through. This product mix change that took place here in the first half of this year really caught everybody by surprise. We've done everything we can, I think under the circumstances, to mitigate the cost impact to the Company and the Company truly has been working hard. In fact, I told the board the other day that we've worked harder in the last three months than we probably have in the last couple of years. It's that kind of stress in the business, but I think we have the plan. We all agree with it. We believe in it. Our board believes in it. We will be successful.

All right thanks, guys.

Steve, I wanted to come back and clarify the productivity and the raw material things. As we've said before, every year we give our customers back productivity and basically that's on hold. We're not accruing anything for productivity and we're accepting the raw material costs and those are flowing through the system. From an accounting standpoint, there are no issues, there are no accruals or anything else in there that would put anything --

This is all sort of one discussion. I'm just wondering when raw materials go down, do you keep it all or do they ask for it kind of thing?

The answer to the question is they typically ask for it, but we really have to combine productivity and raw materials into one discussion. It's an unusual set of circumstances this year. But I think our customers appreciate our situation. And what they're really looking for is Lear to come through with -- with cost reduction ideas to offset and mitigate raw materials and also support them on reducing costs to their products.

For every dollar of lost revenue here, you lost about $0.60 in income. When we think about the second half, you're saying this is mostly a mix issue?

Yes. It's primarily a mix issue, but you can't -- you can't separate completely what's going on with respect to customer and supplier economics, primarily around commodities. But you're right. It's primarily a mix issue. If you have to -- I guess the most simple way to look at it is I would say it's two-thirds to three-quarters mix and the balance would be the result of unrecovered commodity economics.

Okay, thanks, guys.

Your next question comes from the line of Darren Kimball with Lehman Brothers.

Hi, guys. With regard to the guidance, you talk about the Big 3 production comps being flat in the second half, whereas they were down in the first half. But the volumes in absolute terms are actually down in the second half from the first half. So it's not clear to me at all how you can get to the full year guidance after having made maybe $0.40 in the first half ex the tax credit. I mean, can you just talk a little bit more about that?

Yes, we can. Let me just -- I'm going to actually do something we haven't done in the past. I'm going to give you sort of the specific production estimates we're using around overall Big 3 in general. The first quarter, which we spoke to earlier, was down about 9%. Second quarter we see down about 4.5%, third quarter down about 2%, just under 2%, and the fourth quarter up about 2%. Importantly, within that overall summary, our major platforms follow the same cadence. And we have been, I believe, very careful in how we're forecasting our most important platforms.

Okay. But, Dave, those, again, are the year-over-years?

Right.

The second half numbers, even though the year-over-years are better comps, the second half is lower volume than the first half.

Right. Yes.

So looking sequentially from earning -- taking the top end of your second quarter guidance, ex the tax credit, you earned $0.40 in the first half. I'm not -- trying to understand how that jumps to over $2.00 in the second half, given that there's a sequential, not a year-over-year volume reduction.

Yes, I understand. Within that number, if we isolate mix, it is about twice as negative in the first half as the second half.

Yes. Again, those are year-over-years. I mean, I --

It's not year-over-year, Darren. It's first half versus second half.

The numbers I'm looking at suggest that the GMT at 100 numbers are better comps year-over-year, but they're actually lower than the -- ? Let me just ask -- .

That's right, that's right, we do have -- that's exactly what we have.

So given the importance, I know you wouldn't normally doing this, but given the importance of the 800, can you give us an idea of what volume you're modeling for the year?

Let me frame that. It's obviously a very important platform to us and there are many others that are also very important to us. What I will do is tell you for the combined GMT 800, we are just about between 1.4 and 1.5 million units, much closer to the lower end.

Okay. That's a helpful statistic. Specifically with regard to the second quarter, I mean, the second half obviously there's plenty of uncertainty, but now that they're almost a month into the second quarter, how good is your visibility on the build? Obviously, the first quarter was affected by abrupt shutdowns. How confident are you in this second quarter range?

I tried to hit that specifically. It's a very good question. The reason we have, on a relative basis such a wide range, is given about this same time period in the first quarter is -- we started to realize the affect of production shutdowns. That, obviously, impacted us very significantly in Q1. We feel we are as close to this as anyone, including our customers at the moment, but again, you don't know what is going to happen over the next six to eight weeks. With the range we put out there, at this point today, we are comfortable with the range.

Okay. And I'll make this my last question. Why do you expect the GMT 900 to help your results?

The GMT 900? I think Jim wants to take that question. Why do we expect the GMT 900 to help our results?

I think the biggest issue that the 900 brings is just refresh of the product into the segment, which we think will strengthen the results for GM.

So volume. Is there a mix or content aspect? Is there a margin improvement aspect?

No. We think it's just a brand-new product and the other product is longer in the tube.

Content is approximately the same on a year-over-year basis as you switch in the new model.

Okay. And you think you can hold your margins?

Yes, we believe so.

Okay. Thank you.

Your next question comes from the line of Scott Merlis with Thomas Weisel Partners.

How are you?

Good. How are you?

Just getting back to the cadence of your backlog, the 40% 60%. Could you go a little deeper into the cadence of the earnings from that backlog? In other words, does the 60% in the second half give you much more of a profit contribution in H1 2006? In other words, the start-up for the 60%, this ramp up, there's an acceleration curve?

Yes. The profitability will basically follow the sales cadence, so the -- the majority or close to two-thirds of the profitability is also in the back half of the year.

Okay. A lot of my questions have been answered. They were good questions and good answers, and have a good day.

Thank you.

Your next question comes from the line of Rod Lache with Deutsche Bank.

Good morning, everybody. A couple things. Just relative to the guidance, clearly a lot people are struggling with the back half of the year. Looks like it's kind of flat on a year-over-year basis, and one of the big offsets that you've got is a lot of new business that's coming on-line.

Right.

Can you talk about what the, typically for you guys, the incremental margin is initially on new business versus more mature business with the decremental or incremental margins could be?

Yes. Typically with start-up programs or backlog programs in the first say nine to 18 months in some cases, we'll be running margins anywhere from the low single-digits to the high single-digits. On production programs that are beyond that time frame -- as you know, our overall variable margin for the Company runs at about 20% on average and our higher or more important platforms could run well in excess of that.

Okay. And the new business -- do you have some kind of an quantification or an update on how that new business kind of flows in first half versus second half?

There's no update, there's no change from what we had spoke to earlier.

Okay. And I think Bob alluded to earlier some plant closures and cost reduction actions. Can you talk a little bit about, from a restructuring standpoint or from a cost-savings standpoint, what kind of assumptions you're making or what kind of opportunities you have?

Well, as Dave mentioned, any restructuring actions or significant footprint changes are not built into our guidance, but the type of things that we'd be looking at are obviously building on our low-cost country strategy, making sure that our footprint is competitive. I will say that we did have some headcount reductions in the first quarter that occurred. The other thing is we're looking at our higher-cost facilities and working with those on an individual basis to either fix them or close them, quite frankly. So that's our game plan and unfortunately we can't announce one broad based restructuring statement because we really have to do them one at a time.

What kind of cost savings assumptions have you guys sort of made for the second half?

Cost saving assumptions relative to what?

There's clearly -- if there are plant closures, even if they haven't been specifically identified and you're not taking charges now, but you are clearly planning something and you must have some broad kind of cost savings expectations.

Right. We're not going to speak specifically on that. What I will say is the economics that have been associated with earlier plant closings are being realized this year and into the future and have -- are a positive for the Company. But for the actions we're going to take this year, it's a little too early to speak to that.

Okay. The $100 million increase in CapEx is a pretty big change relative to the base. Could you talk about -- obviously, there's a number of things that you cited as contributing to this, but to what extent is that related to issues with tier two suppliers? Can you give us a little bit of a feel for what is happening just specifically on the CapEx?

That's also an excellent question. Close to half of the overall increase relates to Lear owned tooling, which is the result of the continued stress, financial stress on the supply base. That basically becomes part of our capital expenditure going forward. The balance of which is basically some foreign exchange assumptions as well as some timing of some program changes, most important of which is the pulling ahead of the GMT 900.

Okay. So just to the extent that this stress in the tier two -- I guess it's just kind of hard to imagine that really ending anytime soon. Would you anticipate that for the foreseeable future the Company is going to have somewhat higher capital requirements?

Let me answer it like this. Things are very fluid and we're in a different environment today than we've been in in the past. With that being said, historically, Lear's CapEx relative to sales has run as low as 2% and as high as 4%. From an outlook perspective, I think in the 2.5 to 3% range of sales is the best way to look at it.

Okay. And just lastly, two things that you may have mentioned. I may have missed this. Did you mention the impact of raw materials in the quarter and did you mention whether this tax change in Poland, is that a cash flow benefit relative to your prior guidance or was that sort of a -- related to deferred taxes?

Let me just clarify. With respect to first quarter impact, the change in earnings, approximately 25% of that relates to commodity economics. The balance is really a combination of volume mix, backlog, and the positive impact of performance. Now, with respect to the change -- with respect to the tax credit realized in the first quarter, it's a credit. It's absolutely a cash item that will be realized over the next four years. Basically it's 25% a year.

Okay. Thank you.

Your next question comes from the line of Rob Hinchliffe with UBS.

Just wanted to follow-up quickly on that CapEx question. Does that unwind at all in '06? Big increase this year, how much lower is CapEx next year?

Rob, as we touched on, we have to remember that 73% of our product is -- of our carryover programs are changing over at the same time that we’re bringing on 1.6 billion worth of business here in kind of the '05-'06 time frame. We've had to pull ahead some of that CapEx from 2006 into the end of '05, but certainly we expect it to drop off based on the backlog we have in place for a more normalized situation, as Dave talked to, that would probably be more in line with our depreciation.

So '06 you could be back equal to depreciation?

Yes.

Okay. So it is sort of temporary. How quickly can you -- with regards to the suppliers and you guys taking on more tooling, how quickly can you resource and sort of fix that problem?

Well on the tooling, I mean there's two aspects of it. One, by taking over the tooling we also take over the amortization of that tooling. So from a long-term margin perspective, it doesn't impact us. Clearly, when we look at our supply base, we are looking at consolidating and dealing with stronger suppliers. So our hope is to move that back. But, obviously, I don't think that trend is going to change real soon. The good news is our programs don't changeover as dramatically as they did this year for quite sometime.

Okay. I guess, talking about closing plants and whatever kind of actions you need to take, what kind of roll is the UAW taking here? Are they a hindrance at all? Are they a willing partner, do they get it? Any comments.

I don't think we should comment on that other than to say one thing that we've always maintained an outstanding working relationship with the UAW and all of our people. As I said -- talking about plant closings on an open line is a difficult thing to do, because it's going to affect the lives of a lot of people. But I will say this. Much as we're all working to try to save those plants, unfortunately we're going to have to take some action and the UAW does understand the situation. Obviously, they're working hard for their people, but in the end Lear has to do what it has to do. I really don't want to comment any more on that, because you've got -- people's lives are going to be affected by this. I just don't want -- I really don't want to see it in the headline.

Fair enough. One last one, you're talking about maybe getting out of some component lower margin stuff. The total interiors for the DTS and Lucerne, you're doing a lot of that yourself. Other than the integrator role, is that the kind of -- would you be doing this much of the interiors going forward with sort of the new plan you've outlined?

I think when it comes to total interior and interior integration, it's a customer by customer discussion and each customer has a slightly different philosophy and strategy on that. I think the way we look at it, there are core elements of an interior integrator that we think we need to possess. Bob talked about cockpits. We think going forward, across all our customer lines, that's an opportunity for us. But I think all of our customers expect us to have the technical competency to manage that business, but whether or not we produce every single component part, we think they're very open to a wide range of proposals on that subject.

Okay. Thanks, everybody.

Thank you.

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

I just wanted to ask you guys about this slide 16, these top programs. I guess just looking at like the top 10 programs on that page, which includes a lot of the trucks where I suspect there's more content, does the volume have to be up on these programs next year? I know this was somewhat asked earlier, to get your mix up? Is that the idea, you expect volumes to be up on these top 10 programs or so?

Well, again, some of these programs are changing over, as you are aware. Yes, some of those -- the volumes are expected to be up on a lot of these platforms year-over-year. Now, again, I just want to reiterate that we're realistic about our production assumptions. And when I talk about mix first half/second half, we still have a fairly negative mix in the second half but, again, not to the extent that we're seeing in the first half.

I guess you guys said that you were surprised earlier about the performance of the top programs, but you also said that it was due to the age of the products, which I don't see how you could be surprised about. The other thing is on these programs the inventory was very high and so it was obvious that if you're going through a changeover, you're going to have to cut inventory. So I'm wondering what you were really surprised about?

Well, Ron, I was at an analysts meeting when we talked about our first quarter and our assumptions. Quite frankly, there weren't a whole lot of people in that room. And there were a lot of people in the room that had answers either with regards to these. I think we went into the year and we expected those volumes to drop off, but when you look at down weeks -- this isn't just one product line. This is our top 15 product lines. In the first quarter we had 70 down weeks. That's fairly significant. I don't think we've had 70 down weeks even after 9/11 or in any other situation ever before to my knowledge. We do see that abating in the second quarter. We have 40 weeks of down time in there, so it's still a significant number but it's coming off of the first quarter.

And in the second half, because production is lower in the second half, we have an additional 34 weeks in addition to the normal shutdown time that's baked in there. But I don't think anybody could have foreseen that all these models and productions were going to drop off. I think there was an expectation that inventories were high and there was going to be a leveling off in the first quarter, but quite frankly, if we missed it, then that was our fault. But we did not expect this kind of drop-off.

So, Jim, is it fair to say, though, that the velocity or how quick the change came is more important than the actual delta in the volume?

Let me try to take that, Ron. The answer is no, but it does make up about a third of the impact. Let me just add one thing to what Jim just said. The reason that we have our second quarter guidance -- we put out our second quarter guidance with a relatively wide range as well as the year is because it is difficult if not impossible for us to forecast the -- our customers' strategy with respect to inventory levels. We spoke to that during the presentation, and, obviously, that's the reason we were surprised early in the first quarter.

Like I said, one thing that just -- I look at all this and I guess one thing I'm thinking is if you look out we still have relatively high inventories and GM and Ford, at least, our retail sales have been tracking down 5 to 8% year-over-year, month after month after month. So I'm wondering if you guys are falling in the same trap again by forecasting up production in the fourth quarter. Why don't you just take production down. Say, all right, Big 3 are going to be down 5 to 10% and this is how we're going to run our business. If you don't, you're not going to have the right cost structure to manage through that if and when it happens.

Ron, some of that thinking is taken into account with the full year guidance.

But your fourth quarter number is up 2%.

Ron, I don't think you understand our business. We're capacitized to take care of our customers' volumes. The actions you take -- when our customer builds a truck or doesn't build a truck, you need some kind of advanced notice of that. The risk is too great to be wrong.

Jim, are you saying, though, that you don't think it's realistic to assume -- you can't really do anything even if you assume that the volumes were going to be down?

I think we've assumed that the volumes are going to be down. We just think the mix is going to be better because some of these products, many of them are changing over. It's just not one product.

Right. All right. The only other thing I have is on the productivity, if you're assuming you're not accruing productivity, does that mean you're not going to -- you're assuming you're not going to give price reductions this year?

The thing that the commodity costs offsets the productivity, so there's -- unless we can find new ways to take cost out of the product, that's correct, there will be no productivity production.

You can see on, I don't remember the slide number, but you can see on the year-over-year walk that we are assuming a level of absorbing some portion of the commodities.

Thanks a lot, guys. I appreciate it.

Your next question comes from the line of Michael Bruynesteyn with Prudential.

Good morning, guys. Could you quantify the start-up and the launch costs? With all these new programs coming on, that's got to be a significant year-over-year for you in the first quarter and in the coming quarters?

The cost range between 80 and $90 million. We've reassessed and we're still comfortable with that level of spending in the outlook. The cadence for that follows essentially the backlog.

Okay. Great. Then could you talk a little bit about Europe? The CPV I would have thought would have been up more given that FX was favorable and you have a favorable backlog.

Well, there's obviously an FX impact. I'm not sure how to give you more detail than what's in there.

Well, basically it looks like the FX impact accounts for the full amount and that comes off of an adjusted base which is a little hard to understand as well because you took 25 million out of -- or $25 out of it from the last time you reported that number.

Right. I'm sorry, there's nothing -- it's just -- it's obviously in the math. We have some mix issues that we had spoke to in Europe as well in our overall product portfolio. We do see over -- on a full year basis we do see Europe on a reported basis up about 9% year-over-year. But on an adjusted basis, up at about -- in the 3% range.

All right, thanks a lot.

All right.

Your next question comes from the line of Himanshu Patel with JP Morgan.

Hi, good morning. This is Shasky for Himanshu. I guess just two questions going back to the commodity cost issue. First, in terms of the impact on earnings, what assumptions are you making as regards the cost of kind of helping out the tier two supply base for the balance of this year versus what you saw in Q1? Then secondly, just in terms of kind of customer recoveries, how far are those discussions advanced? Are they nearly done? I'm just trying to get an idea of how much visibility you have on those as we stand right now.

Okay. I think in terms of -- our strategy has been to grant increases on an almost as-you-go basis. So in terms of the commodity cost that we've provided -- recovery that we provided to our suppliers, it's been kind of a pay-as-you-go. Very importantly, we've done it in cases where we had to protect supply and protect a flow to our customer.

In terms of our negotiations with our customer on the commodity, as Doug mentioned, we're in various stages with each one. Basically we have -- and again, it's a three-part process. There's the commodity recovery. There's our customer productivity. And then there's the cost reduction actions that we're bringing forward to take cost out of the product. So those are moving -- with each customer it is different, but we feel confident about where we are and particularly in what we've laid out in terms of our assumptions for the rest of the year.

From a commodity cost increase standpoint, we've seen steel probably come down a little bit here over the last few months. We think maybe resins and chemicals have at least started to level off. So, we feel good about the commodity cost assumptions we have baked in here. And again, as we stated earlier, it's our plan to recover these by the end of the year going into 2006.

Okay, thanks.

Judy, this is Anne. We have time for one more question.

Okay. Our final question comes from Chris Ceraso with CSFB.

Thanks, good morning, everybody. Just a couple. You may have touched on this Dave, but on slide 16 where you look at the relative difference in content per vehicle on some of your big platforms versus the average, is there sort of an equally large difference in the level of operating profit per vehicle?

Well, in absolute terms there would be. The higher content, obviously, will throw off more operating earnings.

But in margin terms?

I think you need to look at a number of things here. You need to look at what products are being delivered from where and there's obviously some level of differentiation with respect to products.

Is that it?

Is that it, Chris? Do you have another one?

Yes. Maybe -- Bob, you've said that '06/'07 should be much better. Maybe you can just -- I don't know if you want to give us some sort of an order of magnitude. I'm thinking back to 2001, 2002 where you went through a pretty severe inventory correction. I would guess that the mix wasn't as severe and you didn't have the material issues. But the following year you had a pretty meaningful snap back. How would you compare that episode with what's happening now?

I don't even know how to answer that. Well, I think as what we've talked about is the recovery of the commodities, okay, that we believe we'll have solved going into next year. And then also the range of mix issues that we have should be substantially less. And plus we'll have gone through the launches of all this product. So, I think if you just look at that, it's got to provide a substantial benefit.

Mel just pointed out, it would be similar to the snap back in '01.

Right.

I hope that answers your question.

Lastly, just the -- I think you said, Dave, the materials were maybe a third of the problem here in the quarter. How did that break down between steel and resin? Was it kind of equal? What do you do about resins going forward? It sounds like if prices don't come down, there's little else you can do other than stop making the stuff that consumes most of the resin. Is that fair?

On the quarter it was slightly weighted toward petroleum-based or resin type of products. I think your last question was just answered by Jim on the go-forward scenario.

As we said, our game plan is to recover the resins on a going forward basis.

Okay. Thanks, everybody.

Thank you.

That was the last question. We'll take no more. The only ones probably still on the line is Lear people. To all of you, I know it's tough out there. We're under a lot of stress, but you guys are doing a great job and I'm really proud of you. We'll get through this thing this year. Thank you all very much.

This concludes today's Lear Corporation first quarter 2005 conference call. You may now disconnect.