Lear Corp (LEA) 2006 Q1 法說會逐字稿

Good morning. My name is Janice and I will be your conference facilitator today. At this time I would like to welcome everyone to the Lear Corporation's first quarter 2006 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]. Thank you. I would now like to turn the call over to Mr. Mel Stephens, Vice President Investor Relations. Sir, you may begin.

Thank you and good morning, everyone. By now you should have received our earnings release -- press release and our financial review slides. These materials have also been filed with the SEC and they're posted on our website www.lear.com under the" Investor Relations" links. Today our presenters are Bob Rossiter, our Chairman and CEO; Jim Vandenberghe, Vice Chairman and CFO; and Doug DelGrosso, our President and Chief Operating Officer. There is a couple of other Lear executives with us this morning and I would like to introduce them. Dan Ninivaggi, Senior Vice President and General Counsel; Shari Burgess, our Treasurer; Jim Murawski, our Controller; Matt Simoncini, Vice President of Global Finance.

Before we begin I would like to remind you all that we will be making forward-looking statements that are subject to risks and uncertainties. Some of the factors could impact our future results and they're described in the last slide of this deck and they're also included in our SEC filings. In addition, we will be referring to certain non-GAAP financial measures. Additional information regarding these measures can be found in the slides labeled "Use of Non-GAAP Financial Information," also included at the end of the presentation. If you move to Slide No. 2, here's our agenda for today's review. Jim will cover our first quarter results, then Doug will provide an operating review. Next Bob will add his perspective on the business and cover our outlook, and then the group will be happy to take your questions. Now, if you will please turn to Slide No. 4, I'll turn it over to Jim Vandenberghe.

Thanks, Mel. And good morning. First quarter results did improve compared with a year ago and I'll cover those shortly. I think importantly we want to highlight the fact that yesterday we completed a very successful financing for a 1 billion six-year term-loan facility. Proceeds will be used to finance upcoming debt maturities. And, also, as part of the new debt financing, the covenants were adjusted providing the Company with additional operating cushion, basically to deal with the current industry environment.

Today, also, we are affirming our full year 2006 financial guidance, we are financially sound with improving financial results. Also in Q1 we reached an agreement in principle to contribute substantially all of our interior -- our European Interiors Business to the joint-venture with Wilbur Ross, which already owns the European Interiors Business of Collins & Aikman. On closing, which is expected by mid year, we will retain a minority interest in the venture.

Consistent with the Lear culture, we continue to focus on quality and customer satisfaction. During the quarter we received numerous awards for excellence in quality and service from our customers around the world. And lastly, we continue to expand our business in Asia and with Asian manufacturers globally. I'm going to cover the financing very briefly, and then move on to the first quarter financial results. Later, as Mel mentioned, Doug and Bob will add some comments on our operating results and our outlook.

As I mentioned the recent financing was very successful. This new financing will allow us to address the 2007 debt maturities and also a portion of the 2008 and 2009 maturities. But I also mentioned the amended financial covenants we obtained provide additional flexibility. With this financing now behind us we can continue to focus our energy on improving our operating results and cash flow. Our existing 1.7 billion revolving credit facility remains in place and the new financing [closed end] was funded yesterday.

Now moving to the first quarter, here's a summary of the industry environment that we faced on Slide No. 6. In North America, industry production was about 4.1 million units, up about 4% from a year ago. The big three were up about 2%. But our top 15 platforms were down 2% as we expected. Launch activity in North America remains at a high level on a quarter-over-quarter basis, however, overall launch activity for the year will be down from last year's record levels. In Europe, industry production was about 4.9 million units, which is up 3% from a year ago. Production of our top-five customers in Europe was also up 3%. The Euro, which averaged a rate of $1.20, was 8% weaker than a year ago.

Slide 7 is our financial score card for the first quarter. Starting with the top-line, we posted record net sales of 4.7 billion, up about 400 million or 9% from last year. The increase was driven by the addition of strong new business globally. Our income before interest, other expense, and income taxes was up about 5 million or 11%. On a pretax basis our results improved from a small loss last year to a profit of about 15 million this year. Reported net income was 17.9 million or $0.26 per share. In the quarter I might add we benefited from some favorable one-time tax amountings -- one-time -- favorable one-time tax items amounting to about 8.6 million. SG&A as a percentage of net sales was 3.5% in-line with a year ago. Interest expense was 48 million, up 3 million from last year and this increase reflects higher interest rates and higher debt levels. Depreciation and amortization was 98 million, again, up slightly from a year ago. And "other" income was 8 million in this quarter, compared with an expense of 7 million last year. The current quarter includes the gain from the sales of our interest in two joint-ventures.

Slide 8 summarizes the impact of the restructuring actions and the gains on the sale of the interest in our two joint-ventures. Our income before interest, other expense, and income taxes was 54.2 million. This included costs for restructuring actions of 25 million. Excluding the restructuring costs, core operating results were 79.2 million, compared with 48.8 million a year ago. Our reported pretax income was 14.8 million. This includes cost for restructuring actions of 24.6 million and gains on the sales of the interest in two joint-ventures of 25.9 million. Excluding these special items our pretax income would have been 13.5 million. This compares to a pretax loss of 2.9 million a year ago. To help clarify how these special items impacted our financial statements we've indicated the impact by category on the right-hand side of the chart.

Moving to Slide 9, this summarizes the impact of major performance items on first quarter sales margin compared with a year ago. As you can see the major positive factor for both the change in sales and margin was strong global new business as major new programs that were launched last year are ramping up and other major launches come online this year. Unfavorable net volume, platform mix and pricing factors coupled with the adverse impact of foreign exchange were partial offsets to the sales increase. Partial offsets to our margin improvement were the adverse impact of net volume, platform mix and the combination of pricing and higher commodity costs.

Slide 10 shows what is happening within our product segments. As you can see Seating margins improved significantly from 1.8% to 4.2% reflecting the addition of new business globally, improved profitability in Asia, as well as net cost improvements, and operating efficiencies. In the Electronic and Electrical segment our margin was down slightly on roughly flat sales. While margin in this segment remain at solid levels the slight margin contraction reflects adverse foreign exchange and inefficiencies related to major launches and the transition to low-cost countries.

In the Interior segment, our losses widened. This was coupled by about three factors here. One, is insufficient pricing versus our current raw material cost. Obviously, we have talked about this in the past. Another key contributor was the high launch activity that we had in the first quarter creating inefficiencies related to low capacity utilization and also major high-volume launches. And the third element was a combination of the timing of engineering expenditures and also stand-alone entity costs for the ISD business. The stand-alone entity cost amounted to about 7 million and some of that was offset in our Seating Business. Clearly, most of this performance was anticipated and our top priority, however, is to address this underperforming segment of our business.

We continue to believe that the proposed joint-venture with W.L. Ross & Company is the best solution, and we're working to make this happen. I will give you an indication of how we see this segment on a going-forward basis a little bit later. However, While we're in the event we are not able to reach an agreement and make the joint-venture happen on a timely basis we are prepared to pursue other alternatives.

Going to Slide 11, free cash flow for the quarter was a negative 91 million in the quarter and reflects primarily the seasonal impact on working capital, the launch of GM's large SUVs, and cash investments for restructuring actions. Net income was slightly positive and capital spending was offset by depreciation and amortization. We do expect to report positive free cash flow for the full year. Now, let's look at the key assumptions for the full year. In North America we see industry production of about 15.7 million units, down slightly from a year ago. We continue to see our top 15 platforms in North America being down more than the industry average. Launch activity remains at a high level, however, down from last year's peak, particularly as we move on through the year. In Europe, we see industry production at 18.8 million units, also down slightly from a year ago. Production for our top-five customers in Europe is expected to be down about 2%. And overall launch activity in Europe will be moderate. As for the Euro, we are forecasting a rate of $1.20, which is weaker than a year ago. Our 2006 projections include the addition of 1.8 billion in sales backlog. And lastly, our financial projections include all existing Lear operations for the full year.

Given these assumptions for industry production Lear's platform mix and foreign exchange we are forecasting net sales of 17.7 billion. Sales increase from 2005 reflects the favorable impact of new business this year, offset in part by unfavorable platform mix. Our core operating earnings or income before interest, other expense, tax impairments, restructuring costs, and other special items are estimated to be in the range of 400 to 440 million, compared with 325 million a year ago. Interest expense is estimated to be in the range of 220 to 230 million, compared with 183 million a year ago. Our forecast for pretax income adjusted to exclude impairments, restructuring costs, and other special items is in the range of 120 to 160 million. This compares with adjusted pretax income of 97 million last year. And our estimate for cash taxes is in the range of 80 to 100 million this year versus 113 million last year. Finally, this year's earnings guidance is adjusted to exclude estimated pretax restructuring costs of between 120 million and 150 million, compared with 103 million last year.

Moving to Slide 14, looking at our product segments, for 2006 we see Seating margins showing a solid improvement for the full year. We expect margins in the Electronic and Electrical Business to remain stable. And finally, we expect our Interiors segment business to continue in a loss position comparable to last year. This will be influenced by our ability to offset current commodity costs. However compared to the first quarter results we expect substantial improvements over the balance of the year. These improvements will come from manufacturing and launch efficiencies, also picking up additional volumes as these programs launch to full volume, lower engineering expenses, and also lower payroll expenses.

Moving to Slide 15, as we have indicated previously capital spending this year will be down from last year's peak level. A number of factors contribute to more moderate spending including less launch activity, as well as winding down the spin of our major Commonization Program, which principally was the Lear Flexible Seating Architecture Initiative. Of our total planned spending of 400 million this year roughly half is in Seating and the balance is split between Electronic and Electrical and the Interior products group. Capital spending in 2006 as a percentage of sales is 2.2%, roughly in-line with our spending levels from 2001 to 2004. We see depreciation and amortization in the range of 410 to 420 million this year, compared with 393 last year.

Finally, on Slide 18, here's our outlook for this year's free cash flow. We are forecasting positive free cash flow between 50 to 100 million for this year. This reflects improved earnings, lower capital spending, reduced tooling and engineering, and improved working capital offset in part by higher cash costs for restructuring. I'll now turn it over to Doug for a review on our operations.

Okay, thanks Jim. On page 18 I've summarized here the progress we made in the first quarter relative to full-year operation priorities I outlined on the last conference call. First and foremost, the entire team kept its focus on improving quality and customer satisfaction levels. This effort was recognized by our customers as we received numerous awards during the quarter. In the area of innovation we introduced at SAE World Congress something called "Our Core Dimension Strategy." It’s a customer-focused approach we're taking on product development. Through research and consumer focus groups we have identified seven dimensions where innovation makes a difference. In terms of our other operating priorities, we continued to win new business in Asia, we made further progress on our restructuring initiatives, and we supported several new important product launches. I'll provide more detail on each of these items over the next few slides. The key principle of Lear's operating philosophy is to deliver superior quality and service to our customers. This slide summarizes some of the recognition we have recently received from our performance in these critical success factors. During the course of the entire year we typically receive recognition from all our major customers, but what is gratifying about our first quarter list is the diversity of the customer recognition we received. This tells me we're keeping our focus where it should be on quality and the fundamentals of our business, and we are achieving success in deploying our key product development and process improvement tools around the world.

Turning now on page 20 to our new Core Dimension Product Strategy, our research led us to identify seven dimensions where Lear innovation can make a big difference in customer satisfaction and vehicle interiors. These dimensions are safety, environmental, flexibility, comfort and convenience, infotainment, commonization and craftsmanship. Within each dimension Lear offers consumers numerous innovations from one or more of three Lear product segments, Seating, Electronics/Electrical and Interior products. Core Dimensions will now define how we internally develop and externally promote new product technology in the future at Lear. On page 21, for example, according to recent studies safety has emerged as a key differentiator and vehicle selling point with six of the top-ten features consumers would most likely purchase in their next automobile being safety-related. Buy Lear, offers a number of product solutions within the safety dimension, three key product offerings are shown on page 21, ProTec PluS, Adaptive Front Light System, and IntelliTire.

Over the last few years we have grown our total Asian sales, consolidated and nonconsolidated by an average annual rate of 40%. Asian growth with Asian OEs is one of our strategic priorities and we see strong Asian sales growing continuing. Last year we launched our first North American business with Hyundai, just this quarter we announced the groundbreaking for a new joint-venture facility in Tennessee with Tachi-S to support future Nissan seating business. And we continued to expand our operations in Asia with several major new program wins in China. In just a minute Bob will provide some details on what we have accomplished in terms of new business with Asian customers in Asia over just the last three months.

On page 23, I'll talk briefly about our restructuring implementation status. In an effort to mitigate some of the short-term and long-term structural changes to our business we are implementing a global restructuring plan. This slide shows a summary of this year's restructuring activities. On the left panel you can see that we expect to incur costs for 120 to 150 million this year, with most of this being a direct cash impact. This will fund additional plant closures, expense reductions, and restructuring of multiple other facilities and administrative offices. We also have put in place a more streamlined global organization structure and rationalized administrative functions. And we continued to evolve our manufacturing footprint to improve future competitiveness.

Operational excellence also means we must execute all of our launches flawlessly. Shown here on page 24 are some of our key 2006 product launches. 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 overall launch activity is lower and consequently 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 GMT 900, 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. Now, I'll turn it over to Bob Rossiter.

Thank you very much, Doug. And I'll ask everybody please turn to Slide 25. I believe Jim and Doug did a good job updating you on our financials and our operating results, so I would like to give you my perspective on the challenges and the opportunities that we face. First, this industry, obviously, is going through challenging times. But Lear is financially sound. I want to repeat that, Lear is financially sound.

Just coincidentally last night I was at a charity function, a woman comes up to me, just to show you what rumors will do, and she says, "Ken, we're pulling for you." And I said, “Lady, I don't know what you're talking about, we're fine. And my name is Bob." And she goes, "Bob Way?" So that will tell you what things -- she is pulling for the wrong company. Anyways, the new financing of a billion dollars, six-year term loan facility will allow us to address our 2007 maturities, as Jim said, and begin to address our 2008s and ‘09s.

Our operating results are improving. The Seating Business had a very solid improvement the first quarter and we're on track to restore margins to more typical levels in this business. Our Electronics and Electrical Business continues to perform well and we will be cash flow positive for the year. On the operating front, our internal fundamentals remain strong. We continue to improve our quality and service levels. And the team remains customer-focus positive and despite the challenges believe everything is going to be fine. We know we must put in place a new business model for our underperforming Interiors Business, and that is our top priority. We need to continue to diversify our customer base and we are increasing our business in Asia and with Asian automakers globally. While there's still many challenges we are focused on those things that we can control, that's the way we run our business. We have been effectively managing the risks and we believe there are opportunities for Lear as this industry and supply base continue to restructure and consolidate. There will be significant opportunity and we will participate.

Moving to Slide 26, our first quarter results have improved despite losses in our Interior Business. Importantly, in Seating, we continue to see margin improvements going forward. We are on track to restore our Seating margins to historical levels. The improvement will come from backlog sales that's ramping up to full production, continued diversification both from customers and by product, cost improvements, restructuring savings, and a return to more normal launch cost levels. Our Electronics and Electrical Business continue to perform well. Our plan is to maintain healthy margins by expanding our low-cost country footprint -- and there's significant opportunity for us to do that -- improving our cost structure and restructuring actions, selective vertical integration, and focusing on revenue opportunities resulting from new products and technologies.

Oh, Slide 28, excuse me, oh, he's got -- he wrote me a note here, I'm on the wrong slide number. They must have changed the book. And he's talking about our new model for business, for the Interior segment, this segment and this market continues to be under pressure, everybody knows that. This is truly a tough space, and I'll tell you, everybody is hurting in this space. There's nobody is successful, regardless of what people are saying out there. Despite restructuring actions losses continued this year, but there's more that we can do and we are. Repositioning this business remains our top priority. That new business model is needed. We proposed ideas and I believe that we are moving in the right direction. We signed a Letter of Intent to contribute substantially all of our European business to a joint-venture with W.L. Ross & Company in return for a minority stake and it's on target. And we are aggressively pursuing a solution for North American interiors with Mr. Ross and we have other alternatives in the case that doesn't work, but that is our primary focus today.

Moving to Slide 29, in terms of our Asian business, we have had some recent progress with respect to growing Asian business, and with Asian producers. This is an area of personal interest to me because I've been working this thing since 1983 and I think finally they're starting to like me. We are growing in Asia and we are growing with our Asian customers globally. Earlier this month we announced the groundbreaking of a new joint-venture facility in Tennessee to support new seating business with Nissan. It is our third global joint-venture with Tachi-S, a leading Japanese seat supplier and they are our partner. In Asia, we continue to win significant new programs. Recently we added new programs in China. Seating and electronics for Cherry, for Mazda, and other Chinese automakers to be named later. We're also growing in India where we have increased our Seating Business with Mahindra & Mahindra. All good news and there's more coming. The team out there is doing a terrific job.

Moving to Slide 30, to summarize, Lear is financially sound. Our operating fundamentals continue to be strong and our financial results are improving. We're making solid progress on our strategic priorities and we continue to believe our longer term outlook is positive. So before we take questions I would just like to say one last thing to my team before they leave the phones. You guys are doing a great job. Don't worry about the rumors out there. This team is strong. The Company is strong. We'll get through this. Thank you for your hard work and efforts. Now, we will turn it over for questions.

[OPERATOR INSTRUCTIONS]. Your first question comes from the line of Darren Kimball of Lehman Brothers.

Good morning.

Morning.

A couple things. Just one on the taxes, if you exclude the tax credit you had a tax provision of around $8 million. And I'm just wondering if that's sort of a decent number, can you provide any further guidance on what the tax provision line might look like through the balance of the year?

Well, I think basically what we said is our cash taxes for the year we expect to be in the 80 to 100 million range. And I think really that's going to tie to the flow of earnings from our foreign subs.

So using the cash taxes as sort of the best proxy for what will show up on the P&L, is that what --?

Yes. I mean that basically is -- I mean, we don't expect to be in a cash -- in a tax paying position in the U.S., so it's driven by foreign taxes.

Okay. And on the Interiors Business, I'm just -- I'm not sure -- well, I just if possible would like some greater clarification on whether the losses that you expect are going to be greater, the same, smaller than what you did in 2005 excluding the restructuring costs in both periods?

Yes, I think -- I guess if we look at the first quarter and we look at the swings on a quarter-over-quarter basis from the first quarter a year ago, and we try to bucket those things, I would say about a third of the variance was caused by higher commodity costs. About a third of the variance is caused by efficiency cost and so forth that we expect to get back as we get the operations up and running. Obviously we have a lot of capacity in place, it's not all producing yet. And that will improve and turn positive as the year goes on. And then the final third relates to what I would call some "one-time quarter costs" relating to engineering and some other commercial issues that were taken care of in the first quarter and we would expect those to improve,and basically, go away by the end of the year. So that's kind of the game plan for the full year in terms of the flow of it.

In terms of our guidance for the year, I think right now what we would say is, we're probably at where we were last year in terms of the full-year guidance. And that's going to be a function of our ability to offset the commodity cost to the extent that we can improve on that or that it does slip somewhat more and that's really based within our overall guidance as well, in terms of the swing of outcomes.

Okay. And lastly, your Seating segment margin was substantially better than I expected. And I was wondering if you could just speak a little bit to the improvement on a geographical basis, where is it coming from?

Well, it's coming really from I think in Europe it was down somewhat on a year-over-year basis just because of exchange and also some additional costs we had there. In North America it clearly improved and it’s also improved in the rest of the world, South America and Asia. Asia came up particularly strong.

Thank you.

Your next question comes from the line of Jon Rogers of Citigroup.

Yes, good morning.

Good morning.

Just to kind of follow-up on that, there's been just some talk in the market about the potential for lower price down accruals this year versus last year. Can you just talk about it? If we look on a quarter-over-quarter basis, first quarter compared to first quarter did you accrue for the same level of price give backs this quarter than you did last year at this time.

Well, I think what we accrued is, I mean our process is the same as it always is. It’s that we recognize what the customer's requesting and we kind of measure that in terms of where we are in negotiations. So our accruals or our accounting for accruals is comparable to what we have done in the past. But obviously with the conditions in the market changing it's a product-driven type of process. So the net/net answer is they're probably lower compared to a year ago.

Okay and then just longer term as we look at the Interiors Business is, can you first remind us what the profitability was in Europe and can we assume that just longer term what do you think happens to the Interiors Business in North America? I mean is this a business that fundamentally needs to go offshore? Or can it improve with pricing or lower commodity prices?

I think Bob touched on it. First off, the European Interiors Business was neutral last year. So it didn't affect us. This business, our Interiors Business I think made about 90 million a couple years ago, back in '04. I think Bob touched on it. There's really nobody making money in this business. It's really hard to move this business offshore because of the expense of shipping the product, you're shipping a lot of air, so it really needs to be located in North America. And really it's a problem for everybody in the industry and it needs to be worked out. We need to deal with this commodity issue somehow.

In terms of our specific view of the Interior Business, it's a business that with the change from our customer direction in terms of them not requiring a total interior supplier or not having as much interest in it, this business is really not core to us. We view it more of a commodity business and so that's our reason for seeking a strategic alternative to it.

Great. Thank you.

I would only add one thing to that, Jon, just make sure that we are talking clearly about what interiors business is. Our interiors business, when we classify it, is instrument panels, carpet stores, headliners, and hard trim. Our Seating is separate from that. But our overall Interiors Business itself is not a bad business, it's a good business. And the people that work in it, they do a [expletive] of a good job. The problem is the price formula is all screwed up. The price model is screwed up and needs to be fixed. And I believe that there is a way to do that. And I believe there's a collaborative way to do that. Working with our customers, I think if we sit down we could actually iron this thing out and make it the right business for both, and equation -- right equation for both of us going forward. So I think we just really need to do that.

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

Good morning, everybody.

Morning, Rod.

A couple questions. Just first though as a follow-up on this tax question, the GAAP taxes and the cash taxes have been different for awhile. They were last year, it looks like they were in the quarter. So what happens in Q2 through Q4 that makes the GAAP tax rate go up so much?

The tax rate is significantly affected by the valuation allowance that we provided in the fourth quarter of 2005. And for 2006 we'll not be able to benefit losses in the U.S.

But wouldn't that have been a factor in the first quarter too, though?

Yes, because the effective tax rate for the quarter is driven off of the forecasted income for the year.

Okay. But the run rate of the taxes, you're not profitable in North America and it looks like the run rate of the taxes is considerably lower than this 80 to $100 million in the quarter, right?

Yes, it's primarily driven by the level of the pretax income in the quarter. The effective rate and multiplied by the lower level of pretax earnings is going to give you a lower tax expense for the quarter relative to the rest of the year.

Okay. So quarter-to-quarter the effective rate is going to be all over the place, I guess?

Yes, and it's very sensitive this year because of the evaluation. Small movements in mix of income or income on an absolute basis will dramatically shift effective tax rate quarter-to-quarter.

Okay. And if we exclude the interior plastics business, which obviously had a pretty rough quarter, the rest of the Company would have had like a 3.5% EBIT margin. Can you talk about what was the level of cost savings from the restructuring that you have already occurred in Seating and Electronics, and what is the expectation for the full year?

Well, I think the expectation for the full year, I don't think we have ever necessarily highlighted that number. What we said overall is that the restructuring plan in total was about 250 million, and we were looking at about a 2.5 year pay back. And so I think if you assume like a quarter lag on the implementation of the cash cost that's probably the best way to come about it. But we haven't really pinpointed any of those numbers.

You can't estimate what kind of cost savings you have achieved like on a year-over-year basis at this point?

Well, I mean we haven't disclosed that, Rod.

Okay. Can you talk about just on this divestiture of the Interior Business, when do you expect to have some kind of resolution on that and from a financial perspective would part of the other sort of the corporate costs go away if that business were to be put into this joint-venture?

I'll let Jim answer the corporate cost piece, but in terms of getting this resolution to this, we have said stated that we will have the resolution to our business some time before the end of the year. We stepped up activity on that and we're trying to resolve that quicker, but right now we're just sticking with our statements that before the end of the year we will have resolution.

And coming back to your other question, yes, there would be a reduction in cost from an SG&A standpoint.

Right. And just lastly, can you comment on what the raw material cost headwind was in the quarter and what the outlook is?

Well, I think that the biggest impact was in the plastics business. And we said kind of a third of the swing was caused by, about 30 to 40% of that swing was caused by commodity impact on a year-over-year basis. In terms of our projections --.

And our forecast for the year is we expect that to continue over the remaining three quarters.

So basically flat from what we're experiencing today.

Okay.

It's only -- they moved a percent either way depending on which commodity cost you're talking about.

Great, thank you.

Thank you.

Your next question is from the line of John Murphy of Merrill Lynch Research.

Good morning. I'm just wondering if you could characterize the process of bidding for business and the relationship with the Korean OEMs versus the Japanese OEMs that were both put in that Asian bucket?

What do you mean?

Well, I mean as far as pricing pressure and how they work with you?

You mean, are you talking about how we, when we go after a contract with the Koreans as opposed to the Japanese?

Yes, correct, and what the relationship is like there. It seems like you're getting a fair amount of --.

We have excellent relationships with both customers. And the process that you go through isn't any different than the process you go through here.

Okay.

One, the business is the same. It's really about, bringing in a concept, you sell a concept, you go to work. And we don't have any customers in the world that have that big a difference in terms of how you go about -- (multiple speakers).

I mean is it -- it's generally perceived that the big three are a little bit tougher on pricing right now than the Japanese may be, I was just wondering if there's a difference between what you're seeing from the Korean --.

When you're bidding on a new contract, Tom, the business -- you don't really -- the pricing level is all about the same going in. It's how you work with it after that.

Okay. Then if we think of the backlog and the out years, is there anything that we're seeing in '08 or '09 that's changing or is it -- I mean has the backlog -- have you seen any backlog wins or losses or anything going on out there or is it just status quo?

I think the last time we talked about the backlog it was about 3 billion and we're still holding to that number. I think there's been some pluses and minus to that. We have had some new business wins, but the 3 billion is still the best number we have out there.

You said in the Seating Business you're going to return to historical levels, what were those historical levels, are they significantly better than where we are right now in the first quarter?

Yes, I think if you go go back and look at our 2004 [technical difficulty] seating we expect to kind of be back in that ballpark by 2008 on a global basis.

Got it. And then just one point of clarification, on Slide 10 you said major launches were hurting the Interior Business, but you also cited launch costs sort of easing here in the first quarter. I was just trying to match that up. I mean is there something going on in the Interior Business that you are incurring a lot more launch costs than you are in Seating and Electronics in this quarter?

Well, we are incurring launch costs in seating as well, but interiors we're seeing on a quarter-over-quarter basis. If you compare it against the first quarter last year our launch activity really hadn't started yet. It didn't start until later in the year. And so what we are saying is, is that we are still going through a launch mode, particularly on the GM SUVs right now. We have a lot of capacity in place. It's not running full out yet, it will shortly. We have some inefficiencies on some of the other programs that are normal and expected, and again, we expect those to improve throughout the year. But launch activity in the first quarter for the Interiors Business is significantly unfavorable to a year ago.

And then just lastly on the European JV, on the Interiors Business, I mean what should we point out on the sales line and on sort of on an operating line as we go forward, as we see that completed here?

Yes, I think basically [multiple speakers] we're saying it's kind of a neutral impact, so there will be a sales impact. But we think as we said it was neutral last year, and so we don't think it will make a significant difference. And as we get closer to the transaction we will provide more guidance.

Great, thanks a lot.

Thanks.

Your next question comes from the line of Brett Hoselton of KeyBanc.

Good morning, gentlemen. How are you this morning?

Good morning, Brett.

Pretty good.

A couple questions here. JCI on their conference call last week talked about getting some commodity cost relief from their customers. My question is, are you seeing any similar or hope of any similar commodity cost relief from your customers? They even suggested that a member of the Detroit big three was actually providing some of that relief.

Yes, I think we have been relatively successful on commodity cost relief from all of our customers, quite frankly. It comes in a variety of different forms and it's with implementation of cost reductions and the ability for us to retain the majority of those savings to direct commodity relief from other customers. So it really is the full spectrum and it varies customer by customer and we have been relatively successful. It's been more challenging on the interior side and we're in negotiations with our customer on those issues as we speak.

And I'm not sure if this question is better for you Jim or for you Ken, but the -- you didn't even catch that, did you?

No, we got it. We all got it, yes.

The W.L. Ross deal -- there's some discussion that that could be wrapped up here fairly quickly. The books apparently are out. There's some bidders out in the business and so forth. My question is, What's your take? I mean have you seen the books? Have you looked at the books? Where's the Collins/Aikman assets? What's the profitability of the business look like? What's your expectations in terms of when that might be wrapped up, if any? And then finally, Jim, you mentioned some possible alternatives for the interior assets, what might those alternatives be if the Ross deal doesn't come off?

Oh, you want to know our whole plan?

I will just speak to C&A. Our joint-venture with Wilbur Ross, basically he is handling all the interaction on C&A, and so we really couldn't speak to what -- where we are in that process, where he is in that process, it's best answered by Wilbur. Again, our view has always been that a combination of the two businesses made a lot of sense. Our view is that we would rather get some visibility on what that transaction would look like sooner rather than later. And in the event that we're not able to complete a successful transaction I think we would look at other potential, other potential buyers who have expressed interest. And also I think in any business this is a fairly substantial business, and it's not all losing money.

As in any particular case you have certain programs or certain products that the resin-based products like where you basically have higher plastic content are the ones that are hurting us more so than some of the other businesses within there. And so I think there's a strategy where you could break-up the business, sell off pieces, you could close certain operations. So I mean I think there is some flexibility there in terms of what we do. Again, we think the best answer is to combine it with another business and create really a more competitive business model in this business that will benefit the industry and benefit the supply base. That's our best answer, but the other answer would be to probably look at divesting different pieces of it. And there's no reason to believe right now that what we're doing with W.L. Ross & Company is not the right direction for this business. We believe it is and that's the direction we're moving.

And when you think about the end of the year deadline, the end of the year deadline that you set for yourself is, by the end of the year we will know the direction we are taking with this business. You're not suggesting that you would have the business divested or sold or anything along those lines by that period of time, correct?

I think we can say that we'll be able to quantify what we're going to do with it, yes.

Return to historic levels in the Seating Business I believe it is you have talked about by 2008, so you're feeling like you're pretty optimistic about that?

Yes.

Okay. And then some of the questions that I have been getting, you clearly are optimistic about the outlook for your Company, I mean you've expressed it a number of times. The question I oftentimes get is, Why is it that management does not appear to be buying back or buying stock more aggressively for their own personal accounts if you are as optimistic about the outlook for the performance of the Company as you appear to be?

Well, I think that's inaccurate. Management is buying a lot of stock and we bought it at some fairly high prices. I'll let Jim answer the specifics about it because -- I'll just tell you this. This team is totally committed to this business. And we have made significant investments out of our salaries and bonus structure, this year obviously no bonus, but salary structure and we continue to do it. So I'll let Jim just say -- .

Yes, I think we have always reinvested in the business. I think we're incentivized to do that. I think if you look at our cash compensation over the past four to five years you will find that salary and bonus, Bob has invested well over 50% of his cash compensation back into stock in the Company. I think you can find that I am kind of in the high 30s to low 40s. And even Doug has been a fairly high player at about 30%. So our management team has invested in the Company. We have generally done it through -- on an annual basis through our management stock purchase plan. And just -- so we have a fair amount and we're comfortable with it and it's an important stake for us.

Very good. Thank you very much gentlemen, good quarter.

Thank you, Brett.

Thank you.

Your next question comes from the line of Chris Ceraso with Credit Suisse.

Hi, thanks. A few items. First, back to one of the earlier comments you made about the accrual in Q1 versus last year. Does this change in any way the typical year’s quarterly cadence where you have a very weak first quarter and a much stronger fourth quarter? Will the fourth quarter be a little bit less strong because the first quarter was a little bit better?

No, we're not saying it changes anything in the cadence. I think we did have an improvement on a year-over-year basis because of what we went through in the first quarter last year. But in terms of our accruals and so forth they're consistent with what we have always done and what our outlooks are. I wouldn't expect any change in what we have done in the past.

On the cash flow guidance for the year, maybe you can help me just connect some of the dots here. If I look at the guidance for operating profit of 420, D&A 415, you're looking at EBITDA in the 830 range. You have said interest expense 210 -- or 220, 230. Cash taxes, let's say around 90. Restructuring charges 140 of cash. That leaves me with something a lot bigger then the 50 to 100 million. What are the other pieces, is there a big burn from working capital this year? Are there other pieces that I have to include?

Do you have the restructuring in there, Chris?

Yes, 140 million of restructuring cash.

Well, there is not a burn from working capital, actually working capital is favorable because we expect to collect on some of our tooling and engineering. I guess I would have to go through the math real quick, because generally when you go through that math is comes out the other way.

Okay. I'll follow-up with you offline.

Maybe we can do that offline. But basically there is a benefit from working capital and it's primarily driven by the collection of tooling and engineering really related to the high level of launch activity we have had in the past two years.

Okay. And then the -- I guess another cadence kind of question, the new business was particularly strong in Q1 relative to your full-year guidance. Is that a function of GM building inventory on those new trucks or is there something else? It will presumably slow down through the balance of the year, can you give us a little more detail there?

Well, the new business, again, is prime -- I mean GM is a portion of that, but remember we have always had that program. So it's really driven more so by the benefit of these launches coming on stream, the Cadillac DTS, the Buick Lucerne has come on stream, that's been a big program for us. So as it reaches full volume we benefit from that. The Hyundai programs that we have talked about. Some of the GM car programs.

Yes, we've always had that Chrysler C segment, so there's a fair number. And then there's some incremental business in Europe as well.

But all-in-all then it does look somewhat front loaded?

Well, the new business will be front end loaded because we launched it. So by the time we get to the fourth quarter it will not have as much impact as it does in the first quarter, that's correct.

Right, because part of it launched in '05? I get it.

Right.

Okay. And then maybe the last question about the new business that you're winning and pursuing with the Asian customers, some of the other suppliers have been talking about the importance of the credit rating and looking to be investment grade to help improve their chances to win business with Asian customers. Has this in any way slowed down your pace of wins with Asian customers, the fact that you're not an investment grade rated company any more?

Yes, I wonder who is saying that. No, we actually our business is growing with them and our relationship is excellent.

Okay. I appreciate it. Thanks.

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

Thanks, good morning.

Rob, morning.

I guess sort of another cadence-related question, looking at the numbers to get where your guidance is, clearly a strong second half. How do you view Q1? Is this the low point of the year? Do you expect it will be up from here or kind of lumpy? What's sort of your thinking?

Well, I think Q1 for last year was a difficult quarter for us. And I think even if you look at Q1 this year for us obviously the Interiors Business has taken quite a hit. We see that improving as the year goes on. So I don't think -- I mean if you look at our guidance for the year, I think you will get more of the favorable results in the first half of the year just from a comparability standpoint, but we expect to show positive earnings throughout the year.

Okay. Looking at the seating margin in the quarter, it was quite a bit higher than I thought too. What's the main driver there? Is it the revenue going up; the cost going down? Or getting back to this accruals question, how big of an impact did the accruals play in the seating margin?

Well, I mean, again, remember last year we had a lot of really surprise shutdown activity. And while the overall volume is about the same as it was a year ago I think we just had better scheduling, that's been a positive. It's just given us another year to focus on the commodity cost impact and we have kind of clawed back some of that. And it's just allowed us to right size the business. Also some of these vital facilities are up and producing product now, that's important. We had a Hyundai plant that was empty, we were incurring costs and now it's producing products. So I think it's a combination of this new business coming on stream and starting to see some benefit of the restructuring as well that was on the seating side that was initiated there first compared to some of the other segments as well. We had a ton of lunches last year, which affected our performance as well and those businesses are launching now and (technical difficulty) product.

It sounds like stability plays a big role too versus --?

Yes, it does.

Talking about the top-15 platforms in the presentation. I know the vehicles in that top-15 changes, but as a percentage of the revenues is there a way to characterize how significant those top-15 are?

Top-15?

Do they top 50?

No, they account for more than 50. Yes, I mean I think it would be closer to a two-thirds to 70% impact, Rob, off the top of my head.

Okay. Of North America?

Of North America, that's correct. And in Europe it wouldn't be as great, but --.

Okay. And then I guess the last one, just looking at the interest expense versus last year, with the increase in interest expense. Is that simply from higher rate, higher debt balance or is there any early retirement charge in the numbers. It looks like the rate jumped quite a bit.

Are you talking about the quarter or the year?

The full year, the interest expense guidance for the year?

For the year it's due to three main areas. First would be the refinancing that we just completed yesterday bears interest rates higher than we had incurred last year and that's approximately 20 million of it. Short-term rates have increased substantially year-over-year and are expected to continue to increase this year, I think there's still 35 basis point more increase in the yield curve. So about 40% of our portfolio is variable so that has a similar impact, and then there is a much smaller impact due to debt balances being higher year-over-year.

No charge related to an early retirement of debt with the tender or --?

No, any impact from early retirement debt I don't believe even goes into interest, it would go below the line and we would hope to get that [inaudible].

Okay. Thanks, everybody.

Thank you.

Your next question comes from the line of Jonathan Steinmetz of Morgan Stanley.

Thanks. Good morning, everyone.

Morning.

A few questions. Not to beat a dead horse on this seating margin question, but of the three factors you listed on Slide 10 for the improvement, adding new business, improved Asian profitability, net cost improvements, can you just rank one of them as contributors to the profit walk?

Adding new business is the largest contributor and I think the profitability and contribution from the Asian business are about equal.

Okay.

I'll only add that we're growing again with the Asians. And we're growing in seating, and seating is a really good product for us. It's probably going to affect some other people in this industry. So we're doing pretty well.

Okay. And then just to follow-up on the comments about the Interiors Business, if for any reason you were not able to reach an agreement with W.L. Ross and you did need to walk down a path of closing at least certain portions of that business in the future. Can you just talk about how long the time commitments tend to be on the contracts? How long it would take to do something like that and how costly something like that might be?

Yes, I don't think we really comment on that, but obviously we would look to do it as quickly as possible.

Okay. But I mean is it unreasonable to think that you would have two or three year commitments on some of this stuff before you can walk away.

No, I don't think that's reasonable at all. I mean, generally, we have outs on many of these contracts.

Okay. All right, thank you very much.

Thank you.

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

Yes, hi, it's Mike Bruynesteyn. Thanks for taking my question. Could you talk a little bit more about the free cash flow in the quarter. We have seen the first quarter having positive free cash flow in the last three years prior to the first quarter of '05, so typically I guess it's fair to say it's a solidly profitable or positive quarter for free cash flow. And in this quarter after you back up the restructuring expense it's still fairly negative.

Yes, I think if you look historically, I think six of the last 12 years we have actually had unfavorable free cash flow. So it's generally tied to some seasonal issues. The biggest one affecting us here is you can see that receivables were up substantially. And this really deals with the launch of the GM SUVs and also really the Cadillac and the Buick Lucerne as well. So if you looked at our receivables make-up, which generally are made up of the last two months in the quarter, February/March sales are substantially higher than November/December sales because of, one, you have holiday shutdowns. And two, this new business we're launching had a greater impact in our first quarter than the previous quarter of last year.

Now, with that we also saw an increase in payables as well. But what offset that increase in payables, we had an increase in what I would call production purchase payables. But we saw a decrease in nonproduction in the area of as we paid off some of the tooling, some of the engineering and some of the CapEx from the fourth quarter and early in the first quarter, that's really what affected us. So its a combination of the launches and some seasonality here that's impacting us.

Great, thanks. And then could you comment on the competitive pressure with a growing fourth player in North America and how that might affect your plans for seating margin recovery?

Yes, right now I guess our belief is that is not a serious threat to our North American business. And the reason is we think the North American business has really shifted and what's critical to be successful here in the future. I think the ability with common architecture and on the component level and the infrastructure that we have in place and the cost structure that's associated with it is really going to allow us to defend that position. So -- and we recognize there is a fourth player coming into the market. But think -- we think we're pretty well-positioned to defend that. And I would hold-up to validate that some of our growth with the Asian customers has been substantial in North America at the time that they have tried to penetrate the market.

All right, thanks very much.

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

Hi, this is [inaudible] for Ron. My questions have been answered, thanks.

What's that? Sorry, I didn't hear that.

[multiple speakers]. My questions have been answered, thanks. This is [inaudible] for Ron.

Your next question comes from the line of Brian Johnson of Sanford C. Bernstein.

Yes, on the Seating Business, where is your expectation of foam prices, what did you see first quarter and what do you think you will see the remainder of the year?

Let's see, foam prices were up just marginally over last year. We just concluded our negotiations with our largest supplier and all that was built into not only our first quarter but also our forecast for the year.

Okay. So the increase in segment earnings in the first quarter wasn't due to lower foam prices?

No, we did not see urethane prices go down in the first quarter. We saw a slight dip in January, everything bounced back up in February and March. And we see it flat for the balance of the year.

And on the change -- on the CapEx, the lower CapEx for the year going forward, which I know came out in the earlier earnings guidance, is that due to launch costs or is that due to actually pulling investment away from segments like interior?

Well, it really in the last two years I think we changed over about 70% of our business in North America over -- beginning and the middle of '05 and carrying into the middle of '06. We had a record amount of new business that came on stream in '05 and '06 and that really caused the higher CapEx. On a normalized basis that percentage should hold of about 2.2%.

Okay, thanks.

Thank you.

Your last question comes from the line of Himanshu Patel of JPMorgan.

This is [Nachu Nachiaapan] for Himanshu. Just one last question on the Seating Division. It looks like you converted about a 40% variable contribution margin in the first quarter, which seems fairly high. How much of that was driven by the [T900] mix? And I guess what can we expect in that division going forward, should we expect similar variable margins going forward?

Absolutely not. No, I think what happened, I didn't mean to slam you on that. [Laughter]. I didn't want that to be a headline anywhere either. I think if you look at the variable margin there were a number of factors that influenced that, I think Doug touched on them. You had the combination of the new business coming on stream that was producing. I think on -- the GMT 900 was probably flat versus the 800 a year ago in terms of total output. I mean so that wasn't any kind of a contributor. I think it's getting these launches behind us, starting to generate some income from the new business that we launched. As Doug mentioned, some of the restructuring benefits are flowing to the Seating Division a little bit sooner. And I think those are the factors that contributed. But on a variable margin basis it's probably -- on the new business it's probably going to be kind of in the 5 to 10% range.

Okay. Could you give us an idea of how much launch costs were down year-over-year in the Seating Business, roughly. Dollar amount.

I think, again, it's less of a launch cost issue and more, I mean because the launches really started occurring later in the year for us last year. So launch activity was probably slightly unfavorable even in seating this year, but again, what's happening is that we're getting -- we have all this new business coming on stream. We had empty plants a year ago in Alabama that are producing product. And we're really getting the benefit from those programs.

Okay, thank you.

Thank you, Nachu. Let's wrap it up by saying thanks to everybody being on the call. And thank you to the Lear team for the great job you do. Let's not worry about what the rumors are out there, because this Company is financially sound, this team is strong, we have great products, great customers and we will be successful. And the last thing I want to do is thank the treasury and finance group for getting this financing thing done in such quick order. So thank you all very much and have a nice day.

Ladies and gentlemen, that concludes today's Lear Corporation conference call. You may now disconnect.