Lear Corp (LEA) 2006 Q2 法說會逐字稿

At this time, I would like to welcome everyone to the Lear Corporation's second-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).

I would now like to turn the call over to Mel Stephens, Vice President, Investor Relations. Sir, you may begin.

Good morning, everyone, and thank you for joining us for our second-quarter earnings call. By now, all of you should have received our press release and our financial review package. These materials have also been filed with the Securities and Exchange Commission and they are posted on our website, Lear.com, in the Investor Relations section.

Our presenters today are Bob Rossiter, Chairman and CEO; Jim Vandenberghe, Vice Chairman and Chief Financial Officer; and Doug DelGrosso, President and Chief Operating Officer. Other members of the Lear management that are participating in the call are Dan Ninivaggi, Senior Vice President and General Counsel; Shari Burgess, our Treasurer; Jim Murawski, our Controller; Matt Simoncini, Vice President of Global Finance; and Bill McLaughlin, Vice President of our taxes.

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 that could impact our future results are described in the last slide of this deck and 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," and these are also included at the end of the presentation.

If you turn to slide 2 -- summarizes our agenda for today's review. Jim will cover our second-quarter financial results and then update our full-year financial outlook. Next, Doug will discuss how we're doing relative to our operating priorities. And finally, Bob will add his perspective on the business and discuss the outlook. And lastly, we will be happy to take all of your questions.

So now, if you will please turn to slide number 4, I will turn it over to Jim Vandenberghe.

Thanks, Mel, and good morning. We are going to start it out talking about the second-quarter highlights. I think the key thing is despite the fact that Lear saw increased headwinds of higher raw material and energy prices, our second-quarter financial results improved compared with a year ago.

Also, based on our current vehicle production and raw material price forecast, we're holding our full-year 2006 earnings guidance. This reflects our favorable first-half performance, including solid improvement in Seating, continued growth and margin improvement in Asia, ongoing operating efficiency actions and increasing net benefits from our restructuring actions.

Turning now to our other progress relative to our strategic initiatives, last week we signed a definitive agreement to contribute substantially all of our European carriers business to the joint venture with WL Ross & Co., which already owns the European interiors business of Collins & Aikman. Lear will retain a 34% equity in the venture, subject to adjustment. And we estimate to record a loss on the sale of about 40 million when this transaction closes, which is expected in the third quarter. I will provide more color on our strategy on the Interior business in a little bit.

Consistent with the Lear culture, we continue to focus on quality and customer satisfaction. We also continue to expand our business in Asia and with Asian manufacturers globally. Doug will take you through our successes in a little while.

Now let's turn to the details of our second-quarter financial results, starting on slide 5. Here is a summary of the environment in the second quarter. In North America, industry production was about 4.1 million units, down 1% from a year ago. Big Three were also down 1% and our top 15 platforms were down 2%. Launch activity in North America remained at a high level in the first half, but it is expected to moderate in the second half.

In Europe, industry production was about 5 million units, down 4% from a year ago, but production for our top five customers in Europe was only down 2%. The euro, which averaged $1.25, was about 1% weaker than a year ago.

A major challenge during the second quarter was increasing raw material and energy prices. The average prices of our two major commodities, steel and resins, as measured by polypropylene, were up about 6%. Copper also increased significantly with a 35% rise during the quarter. And energy prices, as measured by crude oil, were up 11%.

Over the last 12 months, price increases were even greater, ranging from 20 to 30% for resins and crude oil to over 100% for copper. While we do have some pass-through agreements in place for much of the copper we use, some copper components such as terminals and connectors are not covered. In addition, when prices increase rapidly, there can be gaps between the adjustments.

Slide 6 provides our financial scoreboard for the second quarter. Starting with the top line, we posted record net sales of 4.8 billion, up about 400 million or 9% from last year. This increase was driven by the addition of new business globally.

Our income before interest, other expense and income taxes was 110.3 million compared to 30 million a year ago. The improvement reflects the increase in net sales, operating improvements and lower costs for restructuring actions and other special items. On a pretax basis, our results improved from a loss of 50 million last year to a profit of 31.5 million this year. We did report a net loss of 6.4 million, or $0.10 per share.

I think it is worth noting that our tax expense and our effective tax rate is higher than normal this year, reflecting our mix of earnings by country. While we continue to be profitable and pay tax in many countries, we have losses in our U.S. legal entities which provide no current tax benefit because of the valuation allowance that was recorded last year.

Looking in SG&A as a percentage of sales, it was 3.6%. This was down from a year ago; however, last year did include the Seton litigation settlement costs. Interest expense was 53 million, up 5 million from last year. This reflects primarily higher interest rates and also the effect of the recent financings. Depreciation and amortization was 104 million, up 8 million from a year ago.

Other expense was about 26 million in this quarter compared with 32 last year. Adjusting for nonrecurring items, other expense was also up and primarily driven by the adverse foreign exchange impact on our balance sheet of a weaker peso in Mexico and a stronger euro against several other currencies.

Slide 7 summarizes the impact of the restructuring actions, impairments and other special items on our reported results. Reported income before interest, other expense and income taxes was 110.3 million. This included costs for restructuring of 18.9 million and impairments totaling 10.1 million in the Interior segment. Excluding these items, core operating earnings were 139.3 million compared with 87.1 million a year ago.

Our reported pretax income was 31.5 million. This included restructuring costs of 14.9 million, asset impairments of 10.1 million in the Interior segment and a gain related to the final settlement terms on the prior sale of a JV interest. Excluding these items, our pretax income would have been 55.5 million. This compares with a pretax profit of 29.1 million a year ago.

To clarify these special items and how the impact our financial statements, we have indicated the impact by category on the right-hand side of the chart. Before we turn the page, though, I do want to mention that the reported tax loss of $0.10 per share after adjusting it for special items and one-time tax items, really equates to about $0.24 per share of profit.

Slide 8 summarizes the impact of the major performance items on our second-quarter sales and margin compared with a year ago. As you can see, the major positive factor for both the change in sales and margin was strong new business as major new programs that were launched last year are ramping up and other major launches come online this year.

Net operating performance also was positive, reflecting improvements in our core businesses. Unfavorable net volume, platform mix and pricing factors partially offset the sales increase. Partial offsets to our margin improvement were the adverse impact of net volume, platform mix, pricing factors and commodity costs.

In slide 9, we show what is happening with our product segments. Segment earnings shown are as reported and include costs for restructuring as well as other special items. To help understand what is happening with the underlying performance, we've provided an adjusted margin, which excludes the restructuring and other special items.

As you can see, our underlying Seating margins continued to improve from 3.2% to 5.7% on an adjusted basis. Underlying operating performance reflects the addition of new business globally, improved profitability in Asia -- and South America, I might add -- as well as cost improvements and operating efficiencies from fewer launches and more stable production schedules.

In the Electronic and Electrical segment, our margin was down 1.7 points on roughly flat sales. The majority of the margin contraction reflects higher copper prices. Some electrical components such as terminals and connectors are not covered by the pass-through price agreements. For those components that are not covered, there's some lag in our ability to pass through higher prices.

Other adverse factors were a combination of competitive pricing pressure and costs related to the transition to low-cost locations. We do not see these as long-term issues. We believe that the copper will be resolved -- I might add that terminals and connectors account for about 20% of our buy -- and that we also believe that our final moves to low-cost countries will offset the pricing on a longer-term basis.

In the Interior segment, our losses widened. This reflects insufficient pricing, continued high raw material prices and inefficiencies related to capacity utilization and major high-volume launches. Our top operating priority is to address this underperforming segment of our business. And I will talk more about our strategy in a few minutes. I might add, however, that performance was substantially improved from the first quarter and will continue to improve in the second half.

Slide 10 shows free cash flow, which was positive by 0.8 million in the quarter, with ongoing restructuring investments being funded through our operations. Our net loss and slightly negative net working capital was more than offset by positive net spending, with depreciation and amortization of about 104 million versus CapEx of about 92 million.

Looking at slide 7 (sic), these are our key assumptions for the full year, and they remain basically unchanged, with the exception of the forecast for the euro. In North America, we still 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.

It is important to note that our Top 15 platforms are expected to be down 7% in the second half compared with a 2% decline in the first half. Launch activity remains at a high level, and the key launch that we have coming up in the second half will be GM's launch of the large -- of the new pickups. But our launch activity is down from last year's peak.

In Europe, we see industry production of about 19 million units, roughly equal to a year ago. Production for our top five customers in Europe is expected to be about flat. And overall launch activity will be moderate. As for the euro, we're now forecasting a rate of $1.25 for the euro versus $1.20 in our prior guidance.

Also, our 2006 financial projections include the addition of 1.8 billion sales coming from our backlog. And finally, our financial guidance includes all existing operations for the full year.

When we look at the second half, slide 12 shows some of the key factors impacting our outlook. Given our current visibility, production in North America turns less favorable. Our prior guidance assumes a general pattern of stronger production in the first half, tailing off in the second half.

Recent schedule reductions have resulted in second-half production being even less favorable than we had originally assumed. Presently, we see industry production down 3% in North America. This compares with a 2% increase in the first half. Our Top 15 platforms in North America are now expected to be down 7% versus a 2% decline in the first half.

In Europe, the second-half production environment is roughly flat with a year ago, which is similar to what occurred in the first half. Another second-half headwind is expected to be the continuation of the current high material and energy prices, but we do expect them to stabilize. On a positive note, as I mentioned before, our launch costs are expected to decline and the net benefits from restructuring are expected to increase.

Given these assumptions for industry production, Lear's platform mix and foreign exchange, we are forecasting net sales of about 18 billion. The sales increase from 2005 reflects the favorable impact of new business this year, offset in part by unfavorable platform mix. The increase from our prior guidance reflects primarily the stronger euro assumption.

Our core operating earnings, or earnings before interest, other expenses, 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 expected to be in the range of 220 million 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 guidance is adjusted to exclude estimated pretax restructuring costs of between 120 million and 150 million compared with 103 million last year.

Looking at the cadence of the second half, we believe that the volume and commodity cost impact will be greater in the third quarter. As compared to a year ago, we see third-quarter core earnings down -- should be flat or down slightly, with the fourth quarter returning to a favorable comparison.

Turning now to slide 14, 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 overall 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 spending of 400 million this year, roughly half is in Seating and the balance is split between Electronic, Electrical and the Interiors product group. Capital spending in 2006 as a percent of sales is 2.2%, roughly in line with our spending levels in the 2001 to 2004 period. We see depreciation and amortization in the range of 410 to 420 million this year compared with 393 million last year.

Turning now to our outlook for the year's free cash flow, we are forecasting positive free cash flow of between 50 to 100 million for the year. Again, this improves -- as we said in the first quarter, improved earnings, lower capital spending, reduced tooling and engineering, and improved net working capital, offset in part by the higher cash costs for restructuring.

Finally, turning to slide 16, here is our strategy for the Interiors business. We are continuing to implement the previously announced global restructuring plan with the actions in this segment focused on improving low-return programs and minimizing excess capacity.

We recently announced that we've signed a definitive agreement to contribute our European Interiors business to International Automotive Components Group's debenture organized by WL Ross in return for a 34% equity interest. We expect, again, this transaction to close by September 30.

As far as our North American Interiors business, we expect cash flow in the second half to be neutral. This is significant because this business was a use of cash of 190 million for the first half of 2006, and over the last 12 months has been a use of cash of over 300 million. This has been driven by the losses, coupled with the CapEx, engineering, tooling and working capital required for the new business. Doug and the Lear ISD team have worked hard to reduce the cash drain and we believe the worst is behind us.

As we restructure this business, we are continuing to evaluate strategic alternatives to put the business on a more solid footing for the future. While the cash flow use has eased, we remain committed to providing definitive direction for this business by year end.

We believe that a combination with the Collins & Aikman North American assets provides the most upside potential for Lear's shareholders, and continue our discussions with WL Ross. Unfortunately, we cannot impact the timing of the Collins & Aikman resolution. We have, however, reduced the cash requirements and are better positioned to consider alternatives.

Now I will turn it over to Doug for his perspective on operations.

Thanks, Jim. Shown here on slide 18 are the key operating objectives for Lear. This is the basic operational roadmap we put in place last year and we are continuing to follow this year. Our top priority is to retain the core values that have been the hallmarks of our success. These include superior quality and customer satisfaction.

Next, we know we must be competitive and deliver operational excellence. This means continuously evolving our manufacturing footprint and cost structure, driving efficiencies in our supply chain, following a proactive labor strategy to ensure long-term competitiveness, and flawless launch execution.

Lastly, we have a continued customer focus approach to growing our business, further diversifying our sales. I will provide more details on each of these items on the next few slides.

Slide 19 summarizes some of the major recognition we received during the second quarter for our performance in these critical success factors. During the course of the entire year, we typically receive recognition from all of our major customers. What is gratifying about the second-quarter list is the diversity of recognition we received.

In addition to awards from GM and Ford, we were also recognized by Toyota, Mazda and Volkswagen. This tells me we're keeping our focus where it should be, on quality and the fundamentals of our business. We are achieving success in deploying our key product development and process improvement tools around the world.

Despite the challenging external factors, our internal focus continues to be on improving quality and customer satisfaction levels. Our internal measures indicate we are making steady progress. Shown on slide 20 are the latest JD Power seat quality squares scores, which validate the quality improvements we have been making.

This year, we were able to maintain a low level of things gone wrong in our seating systems. This measure has improved 35% since 1999. We also continue to rank as the highest quality major seat manufacturer and we hold the highest quality ranking in two of the report's five major vehicle segments -- [that's like] truck seat quality and best European seat quality.

In an effort to mitigate some of the short- and long-term structural changes to our business, we are implementing a global restructuring plan. Slide 20 shows a summary of this year's restructuring activities. On the left panel, you can see that we expect to incur costs of 120 to 150 million this year, with most of this being a direct cash impact. This will fund additional plant closures, census reductions and restructuring of multiple other facilities and administrative offices.

We have also put in place more streamlining global organization structure and rationalized administration functions. And we continue to evolve our manufacturing footprint to improve future competitiveness.

We continue to pursue our low-cost global footprint strategy shown on slide 22. Mexico has been a major low-cost manufacturing base for Lear for some time. Recently, Lear has expanded low-cost manufacturing and engineering capabilities to 23 countries and we plan to continue expanding in Honduras, Mexico, Poland, Romania and the Philippines.

About 30% of the components originate from low-cost locations. And our restructuring plans will accelerate this move. Our target is to have 40% of those components produced in these regions by 2010. We are also leveraging our low-cost engineering capability with engineering centers in China, India and the Philippines supporting our global business.

Operational excellence also means we must execute all of our launches flawlessly. Shown here is the magnitude of launches expressed in percent of our North American sales in launch mode that we have been managing. As we have indicated previously, last year we experienced peak launch activity, but significantly higher than normal launch-related costs. This year, we have had a number of import launches, but our overall launch activity is lower.

Our launch-related costs are returning to more normal levels. In the America, we are launching several high-volume, high-content programs. These include the GM T900, Hyundai Santa Fe, Toyota Tundra, Nissan Versa and Sentra, as well as the Chrysler Caliber. Internationally, major launches include the VW Cabrio, Peugeot 207, Hyundai [Eon SUV], Ford Galaxy, Fiat Stilo and the Range Rover.

A key factor to our success in the ability to further grow our sales and supporting our margins is to offer innovative product solutions that meet or exceed customer expectations. In April, we opened a new global innovation and technology center on our Southfield campus in Michigan. This center is the lead facility for developing, integrating and showcasing new product concepts and technologies, as well as our central location for consumer research, benchmarking, craftsmanship and advanced design activity.

Also, earlier this year, we introduced our new core dimension product strategy. And during the second quarter, we launched a new advertising campaign to communicate just how important innovation is to our product development efforts.

Lear continues to be an industry leader by participating in changing needs of the automakers, especially when it comes, of course, to responding to consumer preferences. Connecting these consumer preferences with Lear innovation forms the basis of our seven-dimension product strategy.

One of the key innovative solutions that is gaining momentum in the market is our family of Car2U wireless products. This year, Lear launched the Car2U home automation system, a universal transmitter that includes two primary features -- a garage door opener and a platform for remote activation of devices within the home.

The Car2U system garage door opening function replaces the common handheld opener with a three-button transmitter that is integrated into the interior of the vehicle. In addition, the Car2U system transmitter can be programmed to operate lighting, gates and other home devices. Our home automation system will be included in about 1.1 million General Motors vehicles beginning this year. And these include the new GM T900 platform and several large and luxury car platforms. Additional customers are in the process of evaluating this system.

Turning now to the progress we are making in growing our Asian business, further diversifying our customer base is one of the Company's strategic priorities. I am pleased to report we are continuing to make great progress in this area. Our success in this area is driven by the progress we are making on the rest of the business fundamentals I just reviewed -- superior quality, customer service, cost competitiveness and new product innovation.

During the second quarter, we announced the opening of a joint venture facility in Sunderland, UK to support future business with Nissan in Europe. This is our third global joint venture facility with Tachi-S, the leading Japanese seat supplier, as our partner.

In Asia, we continue to win new programs. We recently added several new programs in China, primarily seating and electronic business, with customers such as Nanjing, BMW, Nissan and numerous other Chinese automakers. We are also growing in markets like India, where we have just won our first seating business with Tata Motors.

Now I will turn it over to Bob Rossiter for his perspective on the business and some closing comments.

Thanks very much, Doug. If you turn it over to slide 28, please -- I think Jim and Doug did an excellent job discussing our second-quarter and first-half results. What I want to add is my perspective on the business conditions and how the Lear team is responding to the longer-term outlook.

The pressures, as Jim said, did not let up in the second quarter. Industry production was down in North America and Europe. Production for Lear's top platforms in major customers also were down. Prices also for key commodities and energy prices increased from already-high levels. Even with these external challenges, the Lear team kept their focus on the fundamentals and delivered superior quality, great customer service and improved operating results.

I am extremely proud of what they have accomplished. Earlier this year, we said that our results would improve, and they have. Looking ahead, we expect lower production on our key programs compared to a year ago. We see launch activity and costs moderating in the second half. Also, capital spending returned to more normal levels following peak spending last year. We are forecasting positive free cash flow for the year.

Full-year operating earnings, based on what we see now in production schedules for raw material prices, means we are holding our prior earnings guidance unchanged for now. Our first-half performance provides positive momentum as we enter the remainder of the year. Importantly, we see continued growth in our Asian sales and margin improvement also in Asia.

The team has done an excellent job offsetting costs and improving operating income globally. And the benefit of restructuring will increase in the second half. The team has worked hard to improve our operating results, and we intend to do everything possible to sustain favorable operating performance.

If you'll move now to slide 29 -- the Company is focused on improving our global competitiveness, and that is taking place. As Doug said, we intend to continuously improve our quality and customer satisfaction levels. This is a core value at Lear and, I believe, one of our major competitive advantages. The restructuring actions that have been implemented are intended to improve our near-term operating efficiency and better position the Company to compete in the future.

One key aspect of our global strategy is to further increase our sourcing and engineering from the most cost-effective locations. We have in place a very effective global network in low-cost sources and we are continuing to grow our manufacturing and sourcing footprint to best position Lear to be truly globally competitive. Also, we have several major engineering centers in low-cost locations.

Lear is a very capable global supplier with a long history of doing whatever it takes to support or customers. In terms our of our internal focus and strategic direction, we are now managing the business on a product line basis. We intend to continue to leverage our global scale, expertise, our common architecture strategy to provide the best product solutions and highest quality levels at the most competitive prices. In return, we continue to work with our customers to ensure that every program provides a fair return to Lear for the value we provide.

On slide 30, in summary, our operating results are improving, and we are making solid progress on our strategic priorities. Performance in our Seating business is improving. The operating performance in our Electronic and Electrical business is solid. And we have plans in place to maintain our strong competitive position and margin profile.

At the same time, we are making progress in our two important strategic priorities. First, we are aggressively working to improve our financial results in the Interior business. I think Doug and his team have done an outstanding job. And we've put in place a new and more efficient sustainable business model for this segment.

We recently completed a positive step toward this goal by contributing our European Interiors business to International Automotive Components Group in return for 34% equity interest. This transaction places the European portion of our Interiors business into a framework that can achieve significant operating efficiencies. Our priority focus is now on putting our North American Interiors business into a similar strategic position to achieve significant operating efficiencies.

Our second strategic priority is sales growth and diversification of our customer base. Here, we are continuing to make solid progress in Asia and with Asian manufacturers globally.

Lastly, I truly believe that as major automakers and suppliers restructure their global operations, this will lead to a better industry structure. While many challenges remain, and we have a long way to go, I am encouraged by the progress.

And lastly, I would just like to thank the Lear teams for the job they have done in the first half of this year, and I'll just try to make everybody feel comfortable that we are on track and we are doing a damn good job. So thank you. Turn it over now for questions.

(OPERATOR INSTRUCTIONS). Brett Hoselton, KeyBanc Capital Markets.

First of all, Jim, I was hoping you could kind of give a sense of the cadence of earnings, again, in third quarter and fourth quarter. I know you haven't changed your core operating earnings guidance of 400 to 440. It sounds like year over year, third quarter may actually be down. Fourth quarter looks to be up. Can you talk to that again?

Yes. Basically, the third quarter, with the way we see the production schedules right now and the impact on commodity, we think it could be -- it is going to be flat to slightly down. And we expect to recoup that back in a favorable position in the fourth quarter.

And as you think about '07, your expectations -- let me take a step back -- when you've talked about Seating in the past, you've talked about a return to historical levels, 6%-ish, by 2008. And can you talk a little bit about the cadence of improvement you expect in your Seating operations in terms of margin expansion, going forward through 2007 and 2008? What are your expectations these days?

Well, I think it is going to be a measured improvement, Bret. I think we'll just need steady improvement getting back to that 6% level by 2008. I mean, I think we will see significant improvement this year and then, move March, I guess, to the 6% by '08.

And the Electronics -- timing expectations in terms of margin improvement -- is this a one quarter, or is this a couple of quarters? Is the one-year timeframe to see an improvement in the electronics margins?

I think -- well, we believe it will be back on track by '07. The key here is the copper recovery and about 70% of our -- 75% of our copper exposure we recover. But typically, when it rises rapidly, there is a lag. So it is going to impact us this year. We expect to have that corrected by the fourth quarter, the copper element of it that relates to wiring. We expect the other piece to be corrected in '08, as well as the balance between our move to low-cost countries and the competitive pricing pressures.

And then finally, the restructuring -- the 120 to 150 million -- that is incremental to what was announced last year, correct?

No, I think we are still on the same --

So this is just that amount, or this portion. Okay.

Right. Well, the basic 250 that we talked about a year ago.

Himanshu Patel, JPMorgan.

Can you talk a little bit about the T900 SUVs in the quarter? What was the mix? Did it come in much stronger than what you guys had thought, or was it pretty much in line with where you guys had planned for the quarter?

It was basically in line with what we had planned in the quarter. I don't think there was a significant uptick in either direction.

I think in volume, it was, what, up 9%?

Yes.

So volume was up 9% on a quarter-over-quarter basis. You've got to remember, the [pet] quarter a year ago was pretty ugly, I mean, in terms of shutdowns and the complete instability in terms of schedule. So that helps a lot.

But overall, the launch from GM has gone I think pretty much in line with what they anticipated. Consequently, it's the same with us.

And you guys mentioned launch costs were expected to recede in the second half. Is that mainly a reflection related to the T900 that, related to the pickup trucks, most of that is behind you now in terms of ramp-up costs?

That is a component of it. I wouldn't say the pickup truck launch is behind us. What I would say is the severity of that launch compared to the SUV is significantly less. Another element of the launch costs that is significant on a year-over-year basis or first half -- we are tailing off on the common architecture that supports a lot of the program. That is pretty much in place. And a lot of the spending that we had in the first half was related to some of the Interior programs that are now up and running. And the launch costs are now starting to subside on those programs.

And if I could shift gears to Europe, just broadly speaking, it seemed like the French OEMs had a particularly tough first half in terms of production. The Germans did very well. But maybe in the second half, that starts shifting a little bit the other way. How does that sort of affect you guys in terms of your customer exposure and platform exposure out there?

I guess what I would say, relative to our business with the French OEs, it's primarily PSA, and it is primarily on low-end vehicles. So the shift isn't significant -- isn't as significant as a shift on the European -- most of our European/German-based customers are on the high-end vehicle side. Our expectation is they're going to be relatively steady in the second half of the year. So if the French improve, that is good for us. But we don't see a significant upside to that.

Robert Barry, Goldman Sachs.

Just a few questions. Is it fair to assume that the focus may have shifted to fixing the Interiors business rather than the strategic alternatives, just given the way things have been progressing on that front?

I think we've always said that we were on a dual path and that we were working hard to fix the business -- as Doug mentioned, getting a lot of these launches behind us. The first-quarter improvement is primarily driven from efficiencies and the use of the capacity we have in place. So we are focused on improving this business and cutting the drain from it, if you will. But strategically, we still don't believe it fits within our portfolio, and we are still looking for alternatives.

But just given the progress since you first announced that initiative, I mean, is it fair to say that maybe the fixing option has stepped up or the dual path --

The fixing option was always the primary focus. You always work on that first. And I think the guys have done an outstanding job working through those issues. I think the first- and second-quarter improvements that they have made are going to bear out in the third and fourth quarter.

Like Jim says, longer term, we don't see that as a fit with our strategic direction and we are looking at alternatives. The primary alternatives with WL Ross & Co., which is what we intended to do all along, is to combine that asset with the Collins & Aikman asset. And once they close on that deal, this will happen very quickly. My opinion.

And then a question on the free cash flow. Could you give us a little bit more granularity on what might cause it to accelerate into the second half, given your guidance is flat and the year-to-date performance is, I think, still negative?

Improvement?

In the free cash flow into the second half?

A lot of it is driven by working capital. Working capital has been unfavorable for the first six months, again, partially driven by launch activity and the spending. The other thing that is -- similar spending for restructuring and CapEx was a little higher in the first half. So basically, now that we'll have most of these launches behind us, we will be using our working capital primarily in the areas of tooling, engineering and the type of things that you invest in up front in the program and then recover once the program is launched.

So it sounds like maybe you have pretty good visibility on that working capital improvement. It's not necessarily tied to getting more favorable payment terms or--?

No, absolutely not.

And then just a last one on -- is it possible to give us some sense of what the Interior segment would have looked like kind of pro forma for this European sale, or even directionally, what kind of impact it will have?

I think what we said in the past is it's not going to have a significant impact either way. And I think we are just going to hold off on any real detail. Actually, when we roll this in, from a sales standpoint, it's about 700 million in sales on an annual basis. And I think we said from an operating income standpoint it was basically neutral to marginally profitable. And again, when we do divest of this business, we will retain an ownership in a larger enterprise and we will continue to record the benefits of the consolidated business.

Rob Hinchliffe, UBS.

Back in the first quarter, you alluded to maybe that commodity cost recoveries -- maybe the automakers were easing up a little bit, becoming more understanding. Can you give us an update? How do things look right now and for the balance of the year, do you think?

I'm not sure I recall that statement, but I can say that we are continually engaged with our customers. Our major customers have a tremendous amount of financial pressure on them as well. So those are pretty difficult negotiations. They are really not easing up. I will say that they are opening up to the full range of cost opportunities to help mitigate that. But there is no direct relief on commodities.

Following up on the Interior business question, sounds like the JV with WL Ross is still the Plan A. You've talked about Plan B in the past with maybe divesting the business either as a whole or in parts. Is that very much still a Plan B, or is that moving up the ladder at all?

Well, I think it is still very much a Plan B. I think what -- the key to this, as Bob mentioned, is really the timing of [commonization]. I think it is basically what our expectation is for when that will get resolved. And we think -- we are hopeful that will get resolved here very soon. We are prepared to go to a Plan B. And we think there may be other buyers in the space with some of the other assets that are out there for sale right now. So we have to keep our options open, obviously. But again, we have always believed that a combination of our business with another business would yield the most favorable results for our shareholders.

I think the good news is that we've got the cash drain behind us. That still doesn't mean it's a great business. It's not a financial well-performing business. But I think it gives us a little more latitude to find the best options.

And actually, when the customer changed direction on buying complete interiors, the reason why we went into the business no longer made sense. But there seems to be an impression out there that -- our primary focus was never to fix the business. Our business wasn't that we had any major structural problems inside of our Company. The problem we had was we had significant material cost increases and launch costs from new products that caused the situation that happened.

And I think the team has constantly worked on this, and my opinion is they've pretty much got that behind them. So in terms of fixing the business, we've done an excellent job doing that. Now looking for the strategic partner for that business going forward, we think we could operate this business if we had to. But that is not our primary focus. We think the right thing would be to combine it with some other business and put together a better global footprint for that Company and those multiple companies, and then service our customers on a better basis. And I think longer term it will be an excellent business for somebody.

It sounds like Delphi is putting some similar assets up for sale, too. Does that make what you're trying to do easier or harder, do you think?

I didn't know Delphi was, but no, I don't think that changes anything we're doing.

It's another business out there vying with ours. So I think it creates -- I think there's going to be some opportunity for us over the next few quarters to -- I think at this point there would be more alternatives out there -- again, assuming that we can't bring our A strategy home.

And then just lastly, looking at the second half of the year, guidance is the same. Q3 looks tough. How much room for error do you guys think you have in the guidance? What if inventory levels stay high and sales are tough in the fourth quarter, too? Are your costs and cost savings and restructuring benefits -- is that the big driver in the Q4 increase year over year? Or is new business the driver? How should we look at that?

I think Q4, we are still going to benefit from the new business that we launch compared to a year ago. Overall volumes are down. We've got a big launch coming up with the GM pickup trucks. But I think really the key is that we expect the third quarter to be down markedly from the third quarter a year ago. We don't expect the fourth quarter -- the fourth quarter will also be down fairly significantly.

And I think the key for us is, one, if the situation worsens, obviously that is not a benefit to us. And if commodity costs take off again like they did in the second half of last year, that's going to be a problems as well. I think we are comfortable with the situation we see in terms of the schedules out there and our view of the fourth quarter. And our view of the fourth quarter is not a rosy one in terms of production. But in terms of our ability to carry out our actions, we are comfortable.

Ron Tadross, Banc of America.

I guess I am looking at slide 8. And you guys, I know this is sales, but you had about a $50 million EBIT improvement year over year, and it looks like your platform mix was a negative. So in other words, it looks like this global new business is coming in at, like, a 10% margin. And I'm wondering what I'm missing because I can't -- and why else you would have such a big EBIT improvement, or is that coming in around a 10% margin?

Well, I think, again, when you are looking at new business, and a year ago we were launching this new business, and basically you are [on an] inefficient. You are basically in a startup mode, in a launch mode. In some cases, you are probably just beginning the launch. And now we're dealing with plants that are up and running and producing at full capacity. So I think you are going to see the variable impact of those increased sales, given that we had the infrastructure in place a year ago.

But wouldn't that mean -- were your startup costs down year over year? Were they flat? Wouldn't that mean they would be down?

Compared to--?

Last year?

Yes, they were down compared to last year.

The startup costs were down?

Right.

Can you give us an idea how much, or--?

About 20 million.

So of that 645, though, I guess I'm just trying to understand how much of that is mix versus volume, because it seems like, just given that number, you would be running ahead of your full-year run rate on new business. Is a portion of that maybe mix, which might be coming in at a higher margin?

No. I think what we have always said is the -- when we launched all this new business last year in the second half, basically the benefit of that occurred kind of in the fourth quarter of last year, but were really in the first half of this year. Basically, these are programs that have been launched and now they are accelerating into full volume, and so we are really getting the sales benefit. And that global new business on a year-over-year basis, that favorable variance will drop as we get to the second half of the year.

With the launch costs, that was down 20 million year over year, or that was the absolute number this year?

That was down year over year.

20 million?

Right.

And just one other thing on the mix. You said the GM SUVs volumes were up 9%. Is there a kind of trim level mix benefit here, too, where maybe your revenues could be up more than 9% because GM's building a very high mix of trim on that program?

Well, there is content differences and so forth. There may be something to that. It is really hard to say, Ron.

So it is not material, Jim? It's not, like, double? It's just --

That's usually a pretty rich mix in that segment. I think when they first launch, they probably populate the dealerships with the high-end vehicles. But that regulates pretty quickly.

Jonathan Steinmetz, Morgan Stanley.

A few questions. First, on the walk on the EBIT on Seating -- on slide 9, it looks like your EBIT, if I adjust out for the restructuring, went up by about 84 million year on year. Sales were up about 216. So that's about a 40% variable margin. You mentioned lower launch costs of 20 million. I guess some of it is in that area.

Can you just talk about, among some of the other things you mentioned, volatility, less volatility, a restructuring benefit, mix -- maybe try and give some kind of walk or at least priority as to what was the driver?

Well, again, it has to do with several programs coming onstream -- the Hyundai program was new to us; the Cadillac DTS and the Buick Lucerne were new, and now we're benefiting from that. And really, if you will recall, I think there were -- trying to remember the number, but weren't there like 50 down weeks or something of production in primarily Lear-driven vehicles in the second quarter of last year while they were balancing the inventories?

So we've really got the benefit, really, of lower volume on the Explorer because now we're doing it with one plant instead of two plants, and really all the trucks were hammered more so in the second quarter a year ago because of these rapid scheduling adjustments they were making. That has an impact in our component operations in terms of our capacity and our efficiency, and that is a huge driver.

Turning to cash flow, free cash flow was -- I guess on the slides you have a slight source -- about $1 million. When I look at net debt, though, it looks like it went up. Is there something in the investing line below this free cash flow calculation that is causing it, or what would be accounting for that discrepancy?

I think it dealt with the new financings. Shari, do you want to --

[indiscernible] due to the escrow. It might have [put that trend] under the new financing to take out some convertibles in '08 and '09, as well as the closing costs related to [the planning].

And lastly, on the Interiors business, you talked about improvement in cash flow. Are you basically cutting off CapEx to a very bare-bones level as you sort of pursue these parallel paths over the next few months, anyway? Is that the driver of improving the cash flow?

No. We run it as a normal business.

Again, we have just gone through an extraordinary level of new business launches over the past 12 months. And again, we've invested a lot of capital in there. We now go through more of a maintenance mode. And then the other important thing is that we start recovering some of the tooling and engineering that we have had on the books. And so we start benefiting from that. Part of it is lump sum, part of it is just piece price. But we get now a favorable provision of depreciation over CapEx and really just a collection of the tooling and engineering and also an improvement in working capital as well.

Chris Ceraso, Credit Suisse.

A few questions. On the pickup trucks, the new ones at GM, can you give us a feel for whether or not your content on the 900s is any richer than what you had on the 800s? Are they planning more leather, more features, anything like that?

Content is pretty similar on a year-over-year basis between 800 and 900. No significant change there.

And how do the pickups compare to the SUVs? Is it 50% of the value in terms of your content?

I would say pickups are about 60% of the value, rough number.

Another one on the Asian business -- can you just catch us up on what your mix is today, Asian business, of the total, and where you see that by, say, 2008?

This is in North America, or globally?

Globally.

It's about 10% of our business today.

And based on your backlog, where do you see that going?

We see it increasing a couple of points a year.

15 to 20%.

15 to 20% by '08?

Based on what we know today.

I think we are probably looking more like an '09 timeframe.

The other expense on the income statement was higher than normal. What was in there? Anything unusual?

The biggest hit there was there was about 10 million related to the translation of -- well, actually, the weakening of the peso and also the strengthening of the euro versus some lower-cost country currencies in Europe.

And then last one, on page 8, where do the new SUVs fall? I don't see it listed here under global new business, and you don't reference it under industry platform mix.

Well actually, it is just continued business. So it wouldn't fall into the industry production platform mix, net pricing. And as we've said, the net-net of our Top 15 platforms is unfavorable.

So it's part of that first category?

[multiple speakers] favorable elements within there.

Rich Kwas, Wachovia Securities.

Just wanted to check in on content going forward. As North America shifts to passenger cars, what are you thinking in terms of how this affects your content and your margins over the next few years?, assuming passenger cars represents a bigger percentage of the overall market?

Well, if there is a dramatic shift, obviously the content per vehicle will go down. If small cars significantly increase in market share, that would have an impact. It is difficult to quantify right now. But yes, SUVs, luxury SUVs have a fairly significant amount of content on them.

So how are you preparing for that? How are you thinking about adjusting for that type of an environment?

Well, I think one area that we are focused on -- I tried to touch on it during the presentation -- is to focus a little bit more on a product strategy that is more technology based, more proprietary technology based. Our view is if we can grow there, we think we can grow that profitably. And that would begin to offset some of that mix change if it occurred.

Rich, also, while there has been some moderation in trucks in favor of cars, really the fastest-growing segment in the North American market is what is in the middle of the market, the crossover vehicles or utility-type vehicles. And there, we have significant opportunity for content.

And how much less, just roughly, how much less is a cross-utility versus a full-size SUV in content when you look at just seating, say? What is the dollar change?

In terms of percentage, it is probably -- a full-size SUV has got a fair amount of content on it. I'd say it is probably a 25 to 30% reduction versus a full -- the full-size SUV is kind of a unique vehicle. I think pickup trucks, yes, could bear some of the impact here. And we don't believe they are going to sell as many full-size SUVs as they did two years ago. But we do think there's room for them in the market. We think there is a need for them in the market.

And I guess that was our last question. So just again, I'd like to thank the team for the excellent performance in the last quarter and actually the first half of the year. You guys have done an outstanding job. It hasn't been easy. There's been a lot of rumors out there, all of which are unfounded. And the Company is strong. And we're looking for our strong close to the year. So thank you all for your job. Appreciate it.

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