Lear Corp (LEA) 2005 Q4 法說會逐字稿

Good morning. My name is Lee and I will be your conference facilitator today. At this time, I would like to welcome everyone to Lear Corporation's fourth quarter and full year 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. (OPERATOR INSTRUCTIONS)

I would now like to turn the call over to Anne Bork, Director of Investor Relations.

Good morning, everyone. I would like to thank you for joining our fourth quarter and full year 2005 earnings call. By now you should have received our earnings press release and financial review package. These materials have also been filed with the SEC and they are posted on our website, lear.com, through the Investor Relations link.

Our presenters today are Bob Rossiter, Chairman and CEO; Jim Vandenberghe, Vice Chairman; Doug DelGrosso, President and COO; and Dave Wajsgras, Executive Vice President and Chief Financial Officer. Also with us are Shari Burgess, our Treasurer; Jim Murawski, our Controller; and Mel Stevens, our VP of Communications.

Before we begin, I'd 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 filings.

In addition, 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 2 outlines the agenda for today's review. First, Jim Vandenberghe will review 2005 highlights; next, Doug DelGrosso will cover our operating priorities; then Dave Wajsgras will review our fourth quarter 2005 financial results and provide a directional outlook for 2006. Lastly, Bob Rossiter has some closing comments before we take your questions. And this time, we kindly ask that we limit our questions to one per person.

Now please turn to slide 4 and I will turn it over to Jim Vandenberghe.

Thanks, Anne. Before I talk about the 2005 highlights, just a short comment about the quarter. Obviously, with the financial release that we issued today, there is a lot of complexity in the reporting due to impairments, restructuring, and other special charges.

We want to point out that from an operating standpoint, pretax income was within the range of our expectations that we outlined on the last call, despite the fact that we did see additional production cuts and higher commodity pricing in the quarter.

Now going over to slide 4 and the full year 2005 operating highlights. We achieved record full-year sales of 17.1 billion, which was just slightly ahead of the 17 billion that we posted in 2004. Dave will cover our complete financial results in just a few minutes.

Needless to say, it was a very challenging year for margins, net earnings, and cash flow, but we did continue to make progress on a number of key operating fronts. Importantly, we launched a comprehensive global restructuring initiative to improve our competitiveness on a going-forward basis.

We also continued to expand our infrastructure in Asia and we grew our total sales with Asian manufacturers by approximately 25%. We also increased our low-cost [country] manufacturing engineering capability.

The key success factor for Lear is our strong customer focus and our commitment to quality. We are pleased that we remained the highest quality seat producer among our peers in the independent J.D. Power survey for the fifth consecutive year.

Also during the year, we pledged that we would find a better business model for our Interior Products group. With that end in mind, we are aggressively working to restructure this business and we have signed a framework agreement with Wilbur Ross to form a joint venture.

Moving to slide 5, we list really some of the major changes that occurred in the industry (indiscernible), particularly this past year, and some of the initiatives and competitive strengths that are helping Lear meet those challenges.

The trend towards total interiors, which led us to develop Total Interior capability, is no longer the mainstream strategy of many of our customers. As a result, we are refocusing our strategy for each productline. Seating, we plan to build on our leadership position. In Electrical Distribution and the Electronics business, we are targeting profitable growth. And for our Interior Products business, as I just mentioned, we are putting in place a viable stand-alone business model.

The composition of global marketshares is continuing to change. Accordingly, we are targeting to further diversify our sales with a priority emphasis on new Asian business. Also, while the full-sized SUV and pickup segments in the U.S. have been very significant for Lear, we are working to increase our content across all vehicle segments. We presently have content on two-thirds of the fastest-growing crossover SUVs.

In response to rising energy and raw material prices, we've developed affordable cost standards. We are also selectively increasing our vertical integration where it makes economic sense to do so. And we are accelerating our move to low-cost countries as well as utilizing our benchmark capabilities to reduce costs.

Throughout the industry, there are major automakers in financial distress, the supply base is under stress and there is intense focus on all participants for cost reduction. Lear's proactive culture and our leading practices, such as cost technology process, are helping to eliminate waste and reduce costs. We also are in the process of implementing global restructuring initiatives to improve our cost competitiveness on a going-forward basis.

Moving to slide 6, this slide shows where we are in 2005 regarding the diversification of our sales. Last year, nearly half of our global sales were outside of North America. And we are continuing to achieve a more balanced book of business among the world's major automakers. Asian OEMs now represent 8% of our consolidated worldwide sales and this is the fastest-growing customer group. European automakers represent more than a third of our sales and the traditional Big Three make up the balance.

Shown on slide 7, the ranking of our largest customers by major market. While the Big Three continue to rank as our largest customers in North America, we are continuing to win new business with European and Asian manufacturers. In the other two regions, Europe and the rest of the world, no single manufacturer is dominant and our overall sales are well diversified by manufacturer.

One final comment before I turn it over to Doug, and that is earlier this week, DaimlerChrysler and Lear agree to drop all legal actions. We will mutually resolve our issues as we always have in the past.

Now I'll turn it over to Doug, who will review our operating priorities.

Thanks, Jim. Shown here are the operating objectives for Lear. This is the basic operational roadmap we put in place last year and we're continuing to follow this year. Our top priority is to retain the core values that have been the hallmarks of our success. These include Quality First and superior customer satisfaction.

We also must refocus our plan to align Lear with our customer sourcing strategy. This means utilizing collaborative approaches to cost reduction, featuring systems where we can provide true value-added to our customers, and offering new products and technologies that are important to consumers.

As Jim mentioned, we have made steady progress in diversifying our sales on a customer and regional basis. Over the next few years, our new business supports continued growth and diversification of our sales.

Lastly, we know we must deliver operational excellence. This means continuously evolving our manufacturing footprint and cost structure, driving efficiencies in our supply chain, flawless launch execution, and following a proactive labor strategy to ensure long-term competitiveness. On the next several slides, I'll provide more details on each of these items.

The key principle of Lear's operating philosophy is to deliver superior quality and customer satisfaction to our customers. This slide summarizes some of our achievements last year in these critical success factors.

Quality First is our top operating priority. Last year, our internal measures of defects per million showed double-digit improvement. One key external measure we have is the annual J.D. Power seat quality report. There, we improved 6% from the prior year and achieved our lowest level of things gone wrong ever. We also achieved the best quality rankings in four high-volume vehicle segments and we retained our leadership position as the highest quality seat producer among all major manufacturers.

In addition, we received numerous awards from our customers and have listed some of them here. Of note is our recent recognition from GM for excellence in launch execution on the GMT900 platform. As you all know, this is a critically important launch this year and I'm pleased to report that it is off to a great start.

We also are refocusing our plan by better aligning our Company with our customers' sourcing strategy. For Lear, that means collaborative cost reduction initiatives and focusing on feeding electrical distribution and electronics systems, as they represent high-priority items for consumers.

In addition, to our ability to increase the value-added proposition in these products is high. By offering the best quality and lowest cost, including the use of collaborative practices, value engineering, and selective vertical integration, we can deliver the best possible value to our customers.

We are also working to offer new products and technology that address specific consumer needs and wants. These focus areas include added convenience and safety features, as well as expanded info and entertainment options.

Importantly, while consumers are demanding ever-increasing levels of features on their vehicles, they are also looking for the most cost-effective new features. On the next couple of slides, I'll show some of the examples of new products and technologies we are featuring to better align our offerings with those areas of our customers' emphasis.

Shown on page 12 are a couple of the new Seating products we are featuring. ProTec Plus represents our second generation of self-aligning head restraints. This feature has been shown to significantly reduce whiplash injuries.

We also are working with our customers to provide more flexible seating options, including new power capabilities. We offer these unique seating features with high quality and excellent value thanks to the investment we have made in our common seating architecture.

Consumers are ever increasingly seeking added flexibility with seating systems, particularly with second- and third-row configurations, where ease of movement and efficient out-of-the-way stowage is a plus. To meet this demand, we have been working on numerous flex and stow seating systems.

The stadium slide seat shown here is one of our manual systems that can be utilized in minivans, station wagons, SUVs, and multipurpose or crossover vehicles. In the new GMT900 SUV, we offer an industry first power second row seating option that efficiently moves out of the way and back into a normal seating position.

In the Electronics area, Lear is the leader in wireless control systems. We are expanding our offerings to include additional features embedded in our keyless fob, such as the status of the vehicle, location of the vehicle, the ability to remotely control the engine, door locks, climate controls, and more. This capability offers consumers a great level of safety and convenience.

Another safety-related feature that is rapidly growing is tire pressure monitoring systems. We have an industry-leading product and expect to achieve strong growth over the next several years as installation in new vehicles in the U.S. is mandated by the federal government.

In response to growing demand for new info and entertainment systems, Lear offers a multimedia rear seat entertainment unit that packages neatly and offers a full range of options.

Shown here on page 14 is a profile of our expected sales mix over the next three to five years based on projected production trends, new business we have coming online, and additional growth we are targeting. As you can see, we plan to continue our efforts to diversify our sales, particularly geographically and by major customer.

Geographically, over half of our future sales mix is expected to be outside of North America. And we're planning to achieve a better customer mix with significant growth with Asian OEMs. In total, including nonconsolidated joint venture sales, our seating and Electrical and Electronics sales in Asia and with Asian OEMs globally were approximately 1.8 billion in 2005. We see this continuing to grow in excess of 15% over the next three years and approaching 3 billion by 2008.

Slide 15 shows our basic principles with respect to pricing. Given the intense focus on cost reduction, we fully support taking a new approach to productivity agreements based on joint cost reduction efforts. In our view, this does not diminish the automakers' ability to achieve annual productivity adjustments. Rather, it places more emphasis directly on eliminating waste and reducing cost. It also provides an incentive for both suppliers and automakers to work proactively and collaboratively to attack cost.

In addition, this more rational approach supports reasonable margins over time for Lear and our customers.

Internally, we also are very focused on ensuring that all future programs can meet our pricing, cost and probability targets.

The restructuring initiative we announced last year is a major element in improving our operating efficiency and manufacturing cost structure. Specifically, the restructuring was intended to eliminate excess capacity, improve our manufacturing footprint, and streamline our global organization structure. In total, we expect to invest about 250 million, with a payback of 2.5 years. Net savings are expected to be realized the beginning and the second half of this year.

Our restructuring is now well underway. Major 2005 actions included closure of seven manufacturing facilities and the implementation of a streamlined global organization structure with fewer reporting levels.

Another important element of our drive for operational excellence is efficient supply chain management. Our approach has a number of key elements. These include a realignment of our purchasing organization to place purchasing personnel on operational teams. In addition, we have a dedicated cross-functional team that is working to assess high-risk supplier situations and respond accordingly. We have a similar team that is dedicated to supplier quality.

In this regard, we have established numerous quality metrics, as well as best practices, that are readily shared with the supply base. Our initiatives include the establishment of affordable cost standards based on extensive benchmarking activities and competitive cost information and the extension of our cost technology optimization process to the supply base.

Lastly, we are in the process of establishing multiyear supply contracts for those specific partners that have demonstrated the best overall capability.

Operational excellence also means we must execute all of our launches flawlessly. Shown here on page 18 are some of the key 2006 product launches. As we have indicated previously, last year we experienced peak launch activity and significantly higher than normal launch-related costs. This year, we have a number of important launches, but our overall launch activity is lower and our launch-related costs also returned to more normal levels.

In the Americas, in addition to significant 2005 programs coming online this year, like the Cadillac DTS and the Buick Lucerne models with our total interiors, we also are launching several high-volume, high-content programs. These include the GMT900, Hyundai Santa Fe, Nissan Versa and Sentra, and the Chrysler Caliber.

Internationally, major launches include the VW Cabrio, Peugeot 207, Hyundai EN SUV, Ford Galaxy, Fiat Stilo and Range Rover.

Finally, a critical factor in maintaining our competitiveness is the full cooperation of our workforce. Here, we have a long and productive history of working together with our labor partners. We also have a proactive strategy to maintain a positive working relationship that realistically addresses issues as well as opportunities.

Key to our success in this area is frequent and open communication. We regularly provide candid assessments of the business outlook, including both the challenges and opportunities. It is our desire to achieve a labor framework that is competitive and fair for all parties.

In all our discussions, we are seeking to work together in the best long-term interests of all parties. We have invited a number of our union partners to listen in on call today to hear firsthand our assessment of our 2005 results. We have upcoming meetings with key labor leaders to further discuss the business outlook, including areas that we need to address to remain competitive, as well as opportunities for added employment to support new business.

Now I will turn it over to Dave to cover our financials.

Thanks, Doug. If everyone could please move to slide 21. Let me start by talking about the production environment during the fourth quarter. As you can see on the slide, production in our two major markets was mixed -- up 3% in North America, but down about 1% in Europe. The euro was 8% weaker than a year ago.

When we provided our outlook for the fourth quarter, we indicated that platform mix could continue to be negative and we forecasted higher raw material prices, given the effects of the Gulf Coast hurricanes. We also indicated that continuing distress throughout the supply chain was likely, exacerbated by these conditions. We also saw the potential of lower production schedules than what was being anticipated. In summary, these turned out to be essentially the business environment we faced in the fourth quarter.

If you move to slide 22, our reported financial results this quarter take into account several factors in addition to what I just mentioned, including impairments, restructuring, and other special charges. We also recorded a valuation allowance with respect to our net U.S. deferred tax assets.

To help put our results on a comparable basis with the prior year, we have identified the impact of each of these on the next chart, but before I leave this slide, I'd like to comment on a couple of items. SG&A as a percent of revenue was 3.3%, down slightly from the year earlier and in line with our guidance.

Other expense of 41 million includes the loss of about $30 million related to the capital restructuring of two minority-owned joint ventures and also a gain of approximately $4.5 million related to a facility sale in connection with our restructuring actions.

If you move to slide 23, this is a fairly busy slide, but it is key to understanding what transpired in the fourth quarter. The first point of reference is our GAAP reported results, which show a loss of $8.88 per share, or 597 million after taxes and 340 million before taxes.

These results included a number of special items. The first of these relates to a onetime tax charge. As we previously disclosed, in light of recent financial performance in our U.S. legal entities, which includes global interest expense as well as a number of special charges, and current industry conditions, we have been assessing whether Lear should set up a reserve against its U.S. deferred tax assets under generally accepted accounting principles. We have now completed the analysis, which is heavily weighted on historical results and, in our case, principally 2005.

A valuation allowance was provided against our net U.S. deferred tax assets during the fourth quarter. As a result of this decision, Lear recorded a tax charge totaling $298 million. The valuation allowance effectively eliminates our ability to tax effect our U.S. results in the financial statements and, consequently, the calculation of the effective tax rate is not meaningful.

Given this, we have decided to show the remaining items on a pre-tax basis. A few weeks ago we filed an 8-K fully explaining the goodwill and fixed asset impairments, as well as the capital restructuring of two joint ventures.

As we did during these calls in 2005, we have also isolated the full cost of our restructuring actions. Our fourth quarter pre-tax income adjusted for these special items is $84 million. While we returned to profitability, we were down 50% from a year ago, which implies slightly better operating performance and the directional floor we indicated on the third quarter conference call.

If you move to slide 24, here I will explain the change in our sales and operating margin for the fourth quarter. Excluding all the special items that I just addressed, our operating margin declined to 3.3% from 5.1% a year ago. Overall, sales were up $117 million, driven by the addition of new business, primarily in North America, which was somewhat offset by unfavorable platform mix. The strong U.S. dollar versus European currency makes up nearly the entire change in European sales, which were down about $160 million.

Margins were depressed as a result of the unfavorable platform mix, as well as the higher commodity costs. Our full-year results were impacted by these same operating factors.

Goodwill and fixed asset impairments, along with the restructuring activities, had an extremely negative effect on our GAAP reported net earnings.

Moving to slide 25, here I will summarize the full year. Again, we start with our GAAP reported results. The first adjustments are the valuation related charge against our U.S. deferred tax assets and the onetime tax benefit of 18 million, which was booked during the first quarter of 2005. In addition, there are several before-tax adjustments, including charges for the goodwill impairment in our Interiors business, fixed asset impairments, again in our Interiors business, restructuring actions totaling 103 million, litigation charges of just under 40 million, and the sale and capital restructuring of three joint ventures.

In total, these items reduced our reported pre-tax income by approximately $1.3 billion. Excluding these items, our adjusted pre-tax income was 103 million. This compares with pre-tax income of 550 million in 2004.

If you move to slide 26. Free cash flow was positive $46 million during the fourth quarter, bringing the year-to-date amount to a negative 419 million. We had positive free cash flow of 87 million in the fourth quarter of 2004 and positive 317 million for the full year 2004. As I have indicated on past calls, the change in General Motors' payment terms did have a significant onetime impact on our reported free cash flow in the 2005 reported results.

Our full-year cash flow was further impacted by the upfront investment required to support our near-term launch schedules. We spent substantially more on capital, tooling, and engineering during 2005 than in the year prior to support new business and we also incurred the necessary funding for the first leg of our global restructuring actions. Cash for restructuring last year totaled about $72 million.

If you'll move to slide 27, Doug spoke to this earlier, but let me just add a couple of comments. Our restructuring is now well underway. Last year, we invested just over $100 million, and again, the cash impact was about 72 million. This year, we plan to invest about $130 million, with about 20 million now expected to be incurred very early in 2007.

It is difficult to forecast the exact timing of expenditures. These actions are complex in nature and often involve lengthy discussions with the labor unions, as well as local and regional government entities.

Moving to slide 28, before I leave our 2005 results, I would like to review where we ended up in our global Interiors business. As we've indicated previously, our financial returns in this segment have been declining over the past few years. Our results here reflect the broader industry trends. These include overcapacity, a fragmented supply base with numerous players, and negative economics, as competitive pressures have resulted in a commodity-like pricing environment for many of these products, combined with the unparalleled and sustained high level of raw material costs.

We have now written off all the goodwill for the Interior segment. This impairment was determined following an independent valuation of this business using the criteria specifically outlined in FAS 142, or in other words, under generally accepted accounting principles.

As we have been discussing for some time, the unacceptable results in this business combined with the structural challenges of the market have led us to seek an improved business model for this group.

Looking at slide 29, here we summarize our current thinking for 2006 production. In North America, we estimate full-year industry production to be approximately 15.7 million units. In the first quarter, our production forecast is about 4.1 million units, up 85,000 units from last year. Total weight truck production is flat compared to relatively low levels a year ago.

In Europe, we expect full-year industry production in the 18.7 to 19 million unit range. The first quarter's forecast to be about 4.9 million units. Production for Lear's top five customers in Europe is roughly flat with a year ago.

Moving to slide 30, as we previously indicated, capital spending this year will be down from last year's peak levels. A number of factors contribute to [more] moderate spending including less launch activity, as well as the winding down of the spend for our major [commonization] programs, principally the flexible seating architecture initiative.

Of our total planned spend of 400 million this year, about half is in the Seating group and the balance is split between Electrical and Electronics and the Interior Products group.

If you move to slide 31, let me start out by repeating what I said earlier this month in Detroit at the Auto Show. While overall production is expected to be roughly in line with a year ago, there continues to be uncertainty with respect to specific platform mix. Also, a number of high-volume new products that were launched last year and other key models are just now entering the market.

In addition, the direction of raw material prices and the impact of ongoing distress throughout the supply base are very difficult to forecast. And given all these factors, we've concluded that providing formal financial guidance for 2006 at this time is just not appropriate.

Also, on January 12, we provided a directional financial assessment for 2006. Today we are adding a directional assessment for the first quarter. We intend to resume providing more detailed guidance when key external variables stabilize and, very importantly, when our visibility improves.

In addition, the valuation allowance we recorded last year with respect to our U.S. deferred tax assets precludes us from tax affecting the results of our U.S. operations, at least in 2006. As a result, we will experience effective tax rates that are just not meaningful. Accordingly, our directional earnings assessments are based on pre-tax earnings.

For the full year, we see an improvement in pre-tax earnings year-over-year, excluding any restructuring and special charges. We also see capital spending trending -- fairly significantly trending lower, and we see positive free cash flow, a significant improvement when compared with 2005.

For the first quarter, we expect to post higher pre-tax results, again excluding restructuring of special charges, when compared with a year ago.

One final comment on the sales backlog before I turn it over to Bob. We intend to update our three-year backlog later this year to reflect any meaningful changes in production assumptions, the recently announced resourcing of the new Dodge Ram replacement business, as well as any other new program wins or losses, primarily in 2008.

Now let me turn it over to Bob for some closing comments.

Thanks, Dave. I believe Jim, Doug, and Dave did a good job of summarizing the results and our operating priorities. Before we open it up for questions, I would like to give you some of my perspective.

2005 was a difficult year for Lear. We had record sales, but we also had with that unprecedented launch activity, bringing on $1.6 billion of new business, our largest capital spending ever. Unfortunately, we faced a shift in production mix on our key platforms and incurred unprecedented increases in our key commodities.

We are not satisfied, obviously, with our financial results. They certainly were unacceptable by our normal standards. What is important in 2005 is that, despite the challenges the faced, the Lear team kept its focus and delivered superior quality and value to our customers.

In the latest J.D. Power seat quality survey, Lear ranked as the highest quality major seat supplier for the fifth consecutive year. We continue to receive recognition from our customers for quality, customer satisfaction, and innovation, including recognition from General Motors for Best-in-Class launch execution and breakthrough technology for the remote second row seat on the new GMT900 sport utility vehicle.

While it is not evident in our financial results, our operating fundamentals remain strong, particularly the spirit of the Lear team and the productivity in our plants. In the face of changing market conditions, we are restructuring and repositioning this Company to regain financial success.

We are diversifying our sales. We have a turnaround plan in place based on a product strategy. We have initiatives in place to improve our global competitiveness and we are working closely with our customers to increase value for the consumer through innovation and cost control, but we must do it jointly.

While the tone of many press reports remains negative about the prospects of the auto industry, we feel positive steps are being taken. While the short-term effects are difficult to absorb for our customers, Lear and the supply chain, a longer-term cooperative approach will emerge, as will a more competitive business model. We will remain focused on our core values. 2006 will be a year of improvement for Lear, and we believe our longer-term outlook is solid.

Now I would like to open it up for questions.

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

One question here. The fact that you guys took the U.S. tax charge now and that the Interior business is losing only $70 million leads me to wonder how profitable the core U.S. seating business is. So maybe you can address that and also what the cash taxes could look like on a go-forward basis.

Okay, yes. A couple of things, Ron. First of all, the rules around the calculation to value out deferred tax assets is weighted heavily on historical results, basically looking three years back. Given what transpired in 2005, both operationally and from a nonoperational standpoint, what we're categorizing as these special charges, sort of compelled us into a position that forced us to put up the reserve against the tax asset.

It is not necessarily any indication of future profitability in any segment, although you do have to take a view of what is going on in 2006.

Now, one of things I did want to point out on the taxes in order to maybe help some folks out with respect to how to look at the Company, there's a couple of things. From a cash tax standpoint, in 2004, cash taxes were about 140 million, in 2005, about 115 million, and in 2006, we are currently projecting about 80 million, but 20 to 25 million of that relates to prior years or future years. So just to kind of put it in perspective. So that is point one.

Point two is if you take all the noise out of what has happened over the past -- let's say in 2005 and you go back to what we're saying a year, 1.5 years ago, with respect to looking at the effective tax rate, we are on record saying sort of a mid 20% range from an effective tax rate standpoint is reasonable into the future. So if you're looking for something to work with, again, we are on record as saying that a year, 1.5 years ago.

Just to follow up, though, is it fair to say your seating business is fairly close to breakeven?

Ron, you'll note very specifically that we did not address that in the answer.

All right, thanks.

Brett Hoselton, KeyBanc Capital Markets.

I just wanted to talk -- we are only allowed one question here -- foam, foam costs. As you look at your foam costs moving through 2005, do you think it fundamentally is going to be higher or lower than it was -- excuse me, in 2006 -- higher or lower than it was in 2005? And can you specifically give us an idea of how much it impacted fourth quarter by?

Okay, this is Doug DelGrosso. Urethane costs in 2005 did have a negative impact on us, but they moderated in the fourth quarter, and we did not have a substantial incremental impact in the fourth quarter.

As we look to 2006, we are anticipating some increase that is built into our financial model, and we are actually in the midst of negotiations with our urethane suppliers to finalize that amount.

Let me just add one thing to that in a broader context. We had anticipated higher resin or oil derivative related product pricing in the fourth quarter as a result of the Gulf Coast hurricanes, and that did occur and impacted the quarter in the neighborhood of $20 million.

Okay. Thank you very much, gentlemen.

Rich Kwas, Wachovia.

Actually this is Stephen (indiscernible) with [Luxor Research]. A couple of questions. What would you say the risks are moving forward for your major raw materials and what are some of the raw materials that still concern you for 2006?

As Dave mentioned in the earlier question and I also commented on, anything that is crude oil-based we think has the risk in 2006 to further increase. So that is resin, that's urethane-based chemicals for our foam products.

In addition to that, we think steel will probably stay flat, though it is up significantly from 2003 levels -- I think roughly 50%. So it still has a huge impact of the overall profitability of our business. That really defines, I think, the two major.

I think the third element that we have look at is how that is impacted with the Tier 2 and Tier 3 supply base, where we buy subsystems and components. And we are in the process of negotiating with those suppliers on how we deal with their raw material impact and then, ultimately, it is how we complete the negotiations with our customer and deal with the issues in our overall product pricing.

You are working more fully with the Tier 2, Tier 3 suppliers on those initiatives?

I think we're actively engaged with our customers at finding solutions to mitigate the impacts of raw materials. And that comes in a number of different forms.

You talked during the call regarding --

Excuse me. We're limiting this to one question. And I do want to add one comment to what Doug was just saying. From a financial perspective, again, for planning purposes, generally speaking, we are assuming a similar raw material cost environment in 2006 as compared to 2005. So I think we need to move to the next question.

John Murphy, Merrill Lynch.

On slide 28, you guys showed the CapEx for the Interior segment, and it looks like that was up pretty significantly from '04 to '05, about 104 million. And that seems to explain a lot of the increase in your CapEx in '05.

I was just wondering what the rationale was for investing in that business considering the lack of margins and returns there, and if the major drop-off we're seeing in '06 is really just a pull-back in CapEx in Interior spending.

That's a good question. A couple of things. Number one, as I am sure you aware, it is our most capital intensive business. Number two is the backlog that came on last year had a significant amount of Interior's business related to it that is now in production toward the back half of last year and as we go into 2006. And we are continuing to produce these products in a high-quality fashion and serving our customers just as we have in the past.

With all that being said, that is one of the financial drivers in thinking through how we may move forward with this business and why, given the financial structure of Lear Corporation, it would likely make sense to in some way, shape or form move this segment out of Lear Corporation.

Just to add to that, really, up until this past year when we were competing for business with the intention that most of it would be setting us up to be a Total Interior supplier for the future, when a couple of our customers changed direction, it really put us in a different situation.

And the investments that we were making there longer-term, although we will continue to support them until we make final disposition, that is just the situation we were in.

Thank you very much.

Chris Ceraso, Credit Suisse.

Just one quick clarification and then a question about new business coming on this year. The directional guidance that you have given, that assumes the existing current Lear structure, correct?

That's right.

Now the question about new business. I guess both the 1.7 billion or 1.8 billion of new business that comes on this year, part of that from the T800, can you give us a feel for what kind of a contribution you expect from that business? I noticed in your slide deck that the new business that came on in '05 you said was modest, but it seemed to be positive. Should we expect a positive contribution from the new business in 2006?

Yes, we do expect, obviously, a positive contribution. I think it might be a little more relevant to talk to the largest program that we have in, which is the Total Interiors program, which on an annual basis will impact the backlog -- actually, it's about a third of the backlog.

The only other comment I'd add is it's typically in the second year of production that the positive contribution from a margin comes into play. So it is really the business we launched in 2005 we expect to add positive contribution, although the 2006 new business is also expected to be profitable from a margin perspective.

And you said there was a total of what? 1.6 billion that came on in '05?

In '05? That's right.

Thank you.

Himanshu Patel, JPMorgan.

Dave, just a bit more clarity on Q1. I know you guys don't want to give a range on earnings. But just look at the top line, what is your sense on how production will evolve Q4 to Q1 for your major North American and European platforms? And related to that, how should we think of mix directionally between the fourth and the first quarter?

Okay, let me give you a couple of data points that we're fairly comfortable with. In general, volume and mix is going to be slightly negative in North America. That is point one. Point two is we do expect the backlog to come in from a top-line standpoint of between 5 and 600 million. And just as a footnote to that, we expect about two-thirds of the backlog to affect our sales in the first half of the year.

Getting back to the first quarter, we do see overall the Big Three up between 1 and 2%. Again, it is not firm, but that is what we are currently anticipating. But within that, we see light trucks down 1 to 3%.

This is up year-over-year or sequentially?

I'm sorry -- it's up year-over-year. Sequentially, we see light trucks in the first quarter pretty much in line with the way production went in the fourth quarter of 2005.

Okay, so, you did about a 3% EBIT margin, I guess north of 3% in Q4. And I guess the first quarter 2005 number was a lot lower. Is there a reason to think that first quarter '06 margins would be dramatically lower than fourth quarter 2005 margins?

There absolutely is, but I am not going to trip into a guidance discussion. The only point I'm going to make on this -- and it's the last point I'm going to make -- is there is definitely seasonal factors in our business. You can go back and look at the last 10 years of results, and you can see the cadence of how earnings play out quarter-over-quarter. And we see that same -- again, it's very preliminary, but what we're seeing right now, it's the same cadence for 2006.

Thank you.

Darren Kimball, Lehman Brothers.

First on CapEx, it sounds like your spending as a percentage of sales would be about 2.2% in '06, down from 3.3% in '05. I'm just wondering what you think the normalized level is. Is it somewhere between or is it the new 2.2.?

Darren, look, we have not provided guidance for the full year, which includes sales. So that is number one. Number two is historically we have talked about CapEx being normalized in sort of the mid 2% range versus sales.

Okay. And secondly, I wanted to ask a question about the Interiors business. It sounds like you had a negative 2% EBIT margin ex items, just using that $71 million figure. And I'm just wondering, given all the puts and takes, if you expect to improve on that in '06.

The answer is that we do expect to improve on that in '06.

Okay, and lastly --.

Darren, we were limiting questions.

You have to move on, okay. Thank you.

There's a lot of people in queue here. Thanks.

Robert Barry, Goldman Sachs.

Maybe just to summarize here, I wanted to think about what were the key drivers of why the pretax income would be better in '06. It sounds like production is flat, raw materials is neutral, pricing continues to be a headwind. So is it really the new business and some restructuring gains and lower launch costs? Is there anything else we should be thinking about?

Exactly.

We're all shaking our heads.

I think the only thing we add to that is we don't see raw materials necessarily flat versus the way they were in '05. We kind of see them as how they ended in '05, okay? Which would be up. So there is some headwind on raw materials, but that will be offset by lower launch costs and the benefit of the backlog.

Okay, great. You said, I think, in the past that the normal level of the launch cost is in the 50 to 60 million range. Is that --?

That's right. And last year, we closed out at about 115 million. That's right.

Okay, great. Thank you.

Mike Bruynesteyn, Prudential.

Could you talk about the key drivers of your positive free cash flow, including what you expect from working capital for this year?

Yes. That's a good question. Let me first summarize essentially what happened full year 2005 versus 2004, and then I think it will become a little more evident as to how we move forward.

If you take earnings 2005 versus 2004, we were down about 450 million pretax, excluding these special items. We had higher capital spending in tooling and engineering, as I indicated earlier in the presentation, of about $220 million. We had restructuring of just over $70 million. And we said this a few times last year -- the impact from the GM payment terms change on a full-year basis was about a -200 million.

So that essentially accounts for the swing year-over-year, 2005 versus 2004. Now looking ahead into 2006, we see earnings improving. We see lower capital, as shown in one of the slides, also lower tooling in engineering, and obviously the GM payment terms is a onetime impact. So taking that all together -- by the way, the GM payment terms is in receivables, so by definition, you see a significant improvement in working capital -- when taken all together, we do see a significant swing in cash flow year-over-year.

Thank you.

Jonathan Steinmetz, Morgan Stanley.

Just some questions around the recent Ford restructuring announcement -- really two parts. One is when you think about the restructuring that you've talked about, does that restructuring bake in some things related to this in terms of cash spend going forward? Or does stuff like St. Louis require another cash outflow down the line? And I guess part and parcel with that, do you expect a production impact on stuff like Explorer from this restructuring?

Okay, I think what we have stated in the past is that we believe these capacity reductions are in our best interest on a going-forward basis. We have not addressed any of the Ford recently announced plant closings in our numbers. I think in the case of probably any of them, we would probably have a relatively rapid payback, just because our plants are operating relatively inefficient today.

I think in our volume projections, there really is no difference. I think they talked about the St. Thomas plant going to one shift, and in essence it has operated as one shift for the last six months. We think St. Louis, while it would be a difficult thing for our employees, actually it would be preferable from financial viewpoint if that plant closed sooner rather than later.

Okay. Can I read that thought as that it might require an additional upcoming announcement and some modest amount of cash spend as compared to being in the previously announced number?

That is correct.

Keep in mind what Jim just said -- the payback on that is going to be quite a bit improved versus the global restructuring that we're currently in.

Okay, thank you.

Jon Rogers, Citigroup.

Dave, if we just look at the fourth quarter -- and I know that seasonally that is a fairly strong quarter for you guys -- if we sort of compare it to the year, it looks like if I just talk about gross margins, they are up over 100 basis points versus, say, the second quarter this year.

Can you give us how much of that improvement was maybe a benefit from restructuring charges that would be recurring versus some onetime accruals that may have hit in the fourth quarter?

Yes, that's fair. We did begin to see some level of savings from the restructuring in the fourth quarter, but it was not significant. We are still upside-down from a cash and income standpoint. In the back half of 2006, that does turn positive. In other words, we do start to see net savings from the overall restructuring actions.

The other drivers versus earlier quarters were the more -- I would put a couple of ways. Typically in the fourth quarter, we are finalizing discussions with suppliers, with customers, and that is pretty similar to what we have done in prior years. Again, when we went into the fourth quarter, we anticipated a floor from an earnings standpoint that, given everything, we were able to do slightly better than.

Thank you.

We have time for one more question. Are there anymore left?

Rob Hinchliffe.

I guess just a couple of follow-ups, really. CapEx, in '05 a lot of the increase you were talking about was also from sort of bailing out or paying for some of the troubled suppliers' CapEx. How comfortable are you with the '06 forecast given what you're saying about the supply base?

Then also another follow-up. With the restructuring plan benefit in the second half, what kind of savings are you looking for, Dave?

With respect to CapEx, overall we are comfortable with the 400 million that we spoke to earlier. There is a piece of that that is related to restructuring in general. That is roughly 25 million in round numbers in 2006. And there is also an element of the 400 million that is related to the distressed supply base. Pretty much in line with what we saw in 2005.

I'm sorry, your second part of your question was --?

Restructuring benefits in the second half of '06.

Restructuring benefits, we don't want to get more specific than we have in our public filings or on the previous calls. Again, we are comfortable with a 2.5-year payback overall, and we did incur a little over $100 million in costs during 2005.

I guess the readthrough would be all things being equal, Q4 '06 should be stronger than Q4 '05, given what you're saying, because of the restructuring?

The restructuring will definitely have a favorable impact on earnings in 2006.

Okay. Thanks, Dave.

Just as a wrap, since there doesn't appear to the any more questions, I know there's very few people left on the line except for probably Lear employees, and I want to thank you all for the effort you put in last year. It was a tough year for everybody, and I think you guys hung tough and did a great job under the circumstances.

There was a lot of uncertainty last year and it is still pretty uncertain out there. However, I feel that the Company is in good hands. I think the Company is moving in the right direction. I believe we have the right fundamentals. So let's just keep our spirit going, believe in what we're doing, work hard, honest, and together with our customers, and we'll all be successful. So thank you all for being on the call.

Ladies and gentlemen, that concludes today's presentation. Again, thank you for participating. You may all now disconnect.