Lear Corp (LEA) 2006 Q3 法說會逐字稿

Good morning, my name is Letitia and I will be your conference facilitator today. At this time I would like to welcome everyone to the Lear corporation's third 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 Mel Stephens, Vice President, Investor Relations. Sir, you may begin.

Thank you. And good morning, everyone. And thanks for joining our third quarter earnings call. By now you should have received our earnings press release that was issued earlier this morning in our financial reviews slides that were also issued this morning about 7:00 a.m. These materials have been filed with the Securities and Exchange Commission and they are also posted on our Web site, Lear .com under the Investor Relations link. This morning our presenters are Bob Rossiter, Chairman and CEO, Jim Vandenberghe Vice Chairman and Chief Financial Officer, Doug DelGrosso our President and Chief Operating Officer and the other Lear executives that are joining the call this morning are Dan Ninivaggi, Executive Vice President and General Counsel, Matt Simoncini, Senior Vice President of Operational Finance, Sherry Burgess, Treasurer, Jim Morowski, Controller and Bill McLaughlin our VP of 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 in our SEC filings. In addition, we will be referring to certain non-GAAP financial measures. Additional information regarding these measures can also be found in the slides labeled non-GAAP financial information, and they're also at the end of this presentation. On slide two, we show the agenda for today's review. Bob will open with comments on recent events, and then Jim will cover our financial results, and outlook, and next, Doug will provide an update on our strategy, and review some of our key operating targets and following Doug, Bob will return and provide some summary comments and then we would be happy to take your questions. So if you will all please turn to slide number three, I will turn it over to Bob Rossiter.

Thanks, Mel. I'll start of as as Mel said with some of the recent events, a few comments on them. Last week, as you know, we completed our joint venture with IAC group, and contributed our interiors business to that. We received 33% share of the business. Also on the North American piece, we've made significant progress and concluding those discussions and our direction is still the same. I'm also confident we will conclude these discussions successfully and very soon. As you know, the interior segment is still under huge stress in North America. I think all of the major players are suffering from the same issues. And I'm confident that the direction we're taking will be the right thing for our business.

We're continuing to restructure our North American business. Our plan is being implemented and is on track. We're streamlining our business to become more competitive in the future. And the fact that at the industry conditions are so tough right now, really says that we're on the right track. Recently, also we announced that an agreement to sell stock to one of our major investors, the Icon Group. They see significant value in Lear and we saw an opportunity to improve our financial flexibility and also gives us the opportunity our financial flexibility and also gives us the opportunity to look at opportunities to strengthen our core business going forward. We are growing our business in Asia as we planned, and we're also improving our footprint globally with Asian producers and low cost country sourcing. And on the new technology front, Lear introduced the first solid state smart junction box. It is a new product that enhances functionality and at the same time significantly lowers cost. And now I would like to turn it over to Jim Vandenberghe.

Thanks, Bob. With respect to the strategy for our interiors business, there have been some important recent developments. We have completed an agreement to contribute substantially all of our European interior business to international automotive components group or IAC. In return for a minority equity interest. With respect to our North American interior business, we are working on a similar solution with IAC. Combined, these initiatives represent significant steps in the overall consolidation and restructuring of this troubled segment of the market. We believe substantial synergies and operational improvements are possible over the next 12 to 24 months in this business. Slide six highlights the $200 million recently announced equity transactions.

As Bob touched on the most important part about this transactions that enhances our ability to pursue strategic investments and increases the company's financial and operating flexibility. The increased latitude to pursue opportunities that can strengthen and grow our core businesses without compromising our liquidity position, we feel, is important to Lear and our shareholders. To date, we've had a number of productive discussions with Mr. Icon and his associates and we look forward to working together to increase value for all shareholders. The industry environment in the third quarter was very challenging, as highlighted in slide number seven. In North America, industry production was about $3.4 million units, down 9% from a year ago. The big three were down 13%, and our top 15 platforms were down 14%. Now, just as a means of comparison here, on our last call, we are anticipating our top 15 platforms would only be down about 6% in the third quarter. So you can see the kind of change that has occurred.

In Europe, industry production was about $4.2 million units, down 2% from a year ago, and production for our top five customers in Europe was down about 3%. Although commodity and energy prices have moderated somewhat since the end of September, a major challenge during the third quarter was continuing higher raw material and energy prices. The average prices of our two major commodities, steel and resins, were up about 4% from the second quarter averages. Copper also continued to climb with a 12% increase. Energy prices as measured by crude oil were flat. Over the past 12 months, the price increases have been more significant, ranging from 20 to 25% for steel and resins and over 100% for copper. While we do have 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 are increasing rapidly, there is a time delay prior to cost recovery which is affecting our short-term financial performance. Slide eight provides our financial score card for the third quarter. Starting with the top line, the posted net sales of $4.1 billion, up $83 million, or 2% from last year. The increase was driven by the addition of new business globally, offset in large part by lower production in North America and Europe. Our income before interest, other expense, and income taxes was about $29 million, compared with a significant loss a year ago. The improvement is due to the nonrecurrence of impairments in the company's interior business which were written off last year. On a pre-tax basis, we reported a net loss of $66 million, and after tax - - I'm sorry, we reported a loss of 66 million, and after taxes our reported loss was about $74 million, or 1.10 per share. On the next slide, I will show these results excluding impairments, restructuring costs, and other special items, to highlight the underlying operating performance. SG&A as a percentage of net sales was 3.9%, compared with 3.6% a year ago. The increase reflects the timing of commercial recoveries for engineering as well as infrastructure and development costs in Asia.

Interest expense of approximately $57 million was up about $12 million from last year, and reflects higher short-term market rates and higher rates on the debt that was refinanced earlier this year. Depreciation, amortization was $98 million, and in line with a year ago. Other expense included the loss on the divestiture of our European interior business, excluding this, other expense was lower than last year, reflecting an improvement in the equity earnings of our joint ventures. Before I leave this slide, I want to highlight the footnote. You can see that income tax expense for the quarter was $8.1 million on a reported basis. However, this included a non-recurring benefit of $19.9 million. So on an adjusted basis, income tax expense would be about 28 million for the quarter.

Slide nine summarizes the impact of restructuring action, impairments, and other special items on our reported results. Reported income before interest, other expense, and income taxes was $28.8 million. This included costs for restructuring actions of $17.4 million. Excluding restructuring costs, core operating earnings were $46.2 million, compared with $47.9 million a year ago. Reported pre-tax loss $65.9 million. This included restructuring costs of $17.4 million, and the loss on the divestiture of the European interior business of $28.7 million. Excluding these items, our pre-tax loss would have been $19.8 million. This compares with a pre-tax loss of 10.1 a year ago. To help clarify how these special items impacted our financial statement, we've indicated the amount by income category on the right-hand side of the chart.

Slide ten summarizes the impact of major performance items on our third quarter sales and margin compared to a year ago. As you can see, the major positive factor for both the change in sales of 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. Net operating performance also was positive reflecting improvements in our core business. Unfavorable net volume, platform mix and pricing were large offsets to the sales increase. Those factors also negatively impacted margins as well as higher commodity costs.

Slide seven shows what is happening with our product segments. The segment earnings shown are as reported and include costs restructuring, as well as other special items. To help understand our underlying operating performance, we have provided adjusted margins which exclude impairments, restructuring costs, and other special items. The trends we experienced in the first half continued into the third quarter. In seeding, our margins continued to improve, from 3% to 5.1%, on an adjusted basis. Underlying operating performance reflecting the addition of new business globally, improved profitability in Asia, as well as cost improvements and operating efficiencies from fewer launches and more stable schedules. For the first nine months, our seeding margins stand at 5.2%. In the electronics electrical segment our third quarter margin was down about three points on roughly flat sales. The near term margin contraction reflects primarily higher copper prices, competitive pricing pressures and inefficiencies related to the transition of low cost countries as well as somewhat lower volumes. In the interior segment our losses continue and reflect unfavorable industry conditions in this segment. This include insufficient pricing continuing high raw material prices and inefficiencies related to low capacity utilization.

The recent schedule changes in North America by our three largest customers have a significant impact on the business in the second half. Free cash flow for the quarter was negative by $48 million. With ongoing restructuring investments being funded through operations. The negative cash flow reflects our net loss for the quarter and is driven by cash flow in our interior business. Late schedules also had an impact on our quarter results. However free cash flow for our core businesses was slightly positive for the quarter. In the fourth quarter, the company's free cash flow expected to turn meaningfully positive reflecting primarily seasonal improvements in working capital and the timing of commercial recovery for engineering [inaudible] Now, turning to our key assumptions for the fourth quarter, on slide thirteen, in North America, we see industry production of about 3.7 million units, down 5% from a year ago.

We continue to see production for our major customers and platforms being down substantially more than the industry average. Production for the big three is expected to be down 12% and our top 15 platforms in North America are expected to be down 24%. Again, on our last call, our expectations for the fourth quarter for the top 15 platforms was that they would be down 9%. So again a fairly significant change there. In Europe, we see industry production of about 4.7 million units, down 1% from a year ago. Production for our top five customers in Europe was expected to be down 2%. As for the Euro, we are now forecasting a rate of $1.28 per year over the fourth quarter, which is 7% stronger than a year ago.

Moving to slide fourteen, given these assumptions, the industry production, Lear's platform mix and foreign exchange, we are forecasting net sales for the fourth quarter of about $4.1 billion. This is down about $300 million from a year ago reflecting lower industry production, unfavorable platform mix in North America, as well as the divestiture of the company's European interior business. This is partially being offset by new business globally and favorable foreign exchange. Our core operating earnings or income before interest, other expense, taxes, impairments, restructuring costs, and other special items, are estimated to be in the range of $80 to $110 million. Midpoint of this range is down about 30% from a year ago and reflecting the lower production in North America. Interest expense is estimated to be in the range of $50 to $55 million. Our forecast for pre-tax income is again adjusted to exclude impairments, restructuring costs and other special items is in the range of $15 to $45 million. Our estimate for tax expense is about $40 million. And the subject of the actual mix of the financial results of our foreign operations.

Restructuring costs for the fourth quarter are estimated to be in the range of $50 to $60 million. Finally, cap spending is estimated to be in the range of $110 to $120 million, and we do expect free cash flow of approximately $140 million in the fourth quarter. Now, I would like to talk about 2007. On slide fifteen, we highlight our key assumptions. While we think it is too early to provide specific guidance, we have historically done that at the end of the year, we do want to provide some insight into what we see in '07. The basis for this is we are assuming industry production basically in line with what we are seeing in 2006.

And based on that, we see the following key financials for next year. Within our core seating, electronic and electrical business, we remain on track. We expect to add new business of about $800 million in these core businesses. Seating margins are expected to continue to improve to the mid 5% level. Again, excluding restructuring and other special items. Electronic and electrical margins will improve during the course of the year, to the 5.5 to 6% range, excluding restructuring and other special items. Capital spending for these core businesses is expected to be in the range of $250 to $280 million, about a 10% reduction from this past year. Our current depreciation is about $295 million for these businesses, and this capital spending is more in line with our historical results. Free cash flow is expected to turn solidly positive. Now I will turn it over to Doug DelGrosso for an update on our operating results.

Okay. Thanks, Jim. What I would like to cover today is an update on the company's strategic direction from an operational standpoint. As the company transitions from an integrator of total interiors to a high performance supplier of major automotive systems, such as seating, electronics and electrical distribution, we have to approach the business in a different way. The three most important attributes in supporting our new direction are market leadership, expanding our market boundaries, and maintaining efficient and fully competitive operations. In the last couple of conference calls, I've focused on how we have been managing the business from an operational perspective. Today, I would like to focus more on how we plan to grow our core business.

To help provide a framework for considering our growth plans, I have shown on slide eighteen a summary of our key operating targets over the next few years. First and foremost is to achieve global sales growth of about 5% annually and to further diversify our sales. In this regard, we have to set a target to grow total Asian sales by about 25% annually. Other basic operating targets include continuously improving quality and customer satisfaction, the continued implementation of our core dimension product and technology strategies. These elements are essential to our ability to profitably grow the business. As for specific product segment targets, we're in the process of putting in place a new more sustainable model for interiors business. For core seaming electronic and electrical business, we are [inaudible] to restore their margins to 2004 levels by 2008. And finally, we know we must restore strong free cash flow, pay down our debt, strengthen our balance sheet, as we move forward.

Slide nineteen shows some of our major initiatives to further derive sales growth and diversification. In the North American market, the shifts in customer preference by brand, by product segment, are the most pronounced. These changes are negatively impacting our business in the near term, we're continuing to diversify our sales mix to reduce our reliance on any single customer or product. These actions include fully participating in the fast growing cross over segment. Presently, we are all well represented in this segment with content in about two-thirds of the entries, and a segment market share that mirrors our overall share in North America. We also are continuing to expand our relationship with Hyundai, Nissan and Toyota, and growing our content per vehicle with new safety related electronic products. In addition, we intend to participate in the rapid growth of hybrid vehicles, with our industry-leading high voltage electrical systems. In Europe, our business today is well diversified, and no single customer has greater than a 15% share.

We do, however, see opportunities to further diversify our sales mix in Europe, by growing our business with the Asian manufacturers, as well as Volkswagen. In Asia, China is our fastest growing market. We have aggressive plans to expand in India and Korea. On the next few slides I will provide additional details on our growth plans with key Asian customers, and also our plans to grow in China. On slide twenty, we show some examples of our global business relationships we are building with three key Asian manufacturers. Hyundai, Nissan and Toyota. With Hyundai, we supply 100% seating requirements in North America, and we see solid growth potential as one of their preferred global suppliers. As for Nissan, we have established a strong global relationship through our joint venture partners with [inaudible], a leading Japanese seating supplier. We have been awarded new business on seven Nissan vehicles including the cash KAI compact crossover vehicle which will be launched later this year in Europe. As for Toyota, we also have been developing a relationship.

We believe that continued success of our North American joint ventures supplying seats for the Siena, along with other trim programs, including the new tundra pickup, provide an opportunity for Lear on Toyota's next generation North America seating program. Another avenue of major growth for Lear is China. We first entered the Chinese market in 1994. Since then, we have put in place substantial infrastructure, rapidly grown our sales, and developed plans for significant growth going forward. Today, we have twelve joint ventures in China operating thirteen plants. We also have three wholly-owned foreign entities, including our regional headquarters in Shanghai. We also recently opened up two major engineering centers in Shanghai to support our core seating electronics and electrical businesses in China. We have plans to add five new manufacturing facilities next year. Presently, we are among the market leaders in automotive seating in China and we've supplied nearly 20 automakers on more than 100 vehicle programs in total. Our total sales in China are over $500 million, and China is our fastest-growing market.

Slide twenty-two summarizes our projected sales growth in China. Presently, we have a little over a half billion in sales in China. Our sales outlook for 2007 is $750 million. We're targeting sales growth of 30% annually. Turning now to recent progress we've made in growing our Asian business, during the third quarter, we continue to win several new programs in Asia with Asian manufacturers globally. These awards include new programs in China with several automakers including Cherry, Chen Yang, Donfeng Motors as well as GM and Daimler-Chrysler. We also won important new business in Europe and North America with Nissan, Honda and Toyota.

Slide twenty-four helps to put our growth targets for total asian sales into perspective. For the last few years, we have grown our total Asian sales consolidated and non-consolidated by an average annual rate of 30%. We see strong Asian sales growth continuing at about a 25% rate annually. China represents a major avenue for growth. And the Chinese market will account for a significant portion of Lear's projected total Asian sales by 2010. The estimated composition of our total Asian sales in 2010 by major region is shown in the pie chart on the right. As we've indicated previously, last year, we experienced peak launch activity and significantly higher normal launch-related costs. For the balance of this year, and continuing into next year, we have a number of important launches, but our overall launch activity is at a more normal level. In North America, we're about to launch the all new GMT900 pickups, BMW X5. Chrysler Aspen and DCX minivan, Ford Edge, Jeep Patriot, Lincoln MKX and Saturn VU, as well as several new other Asian programs for Acura ,Honda, Nissan and Toyota. Importantly a number of our new launches in North America are on crossover vehicles which are highlighted by a check mark on the slide.

Now, moving to our upcoming launches in Europe and the rest of the world. In Europe, we will soon be launching the high volume Mercedes C class, a number of new program for major European brands and as I mentioned before, the all new Nissan Q. The rest of the world will also be launching a number of new programs for domestic as well as Asian brands including several new entities in the rapid growing Chinese, Indian, and Korean markets. Now I will turn it over to Bob for some closing comments.

Thanks, Doug. Thanks, Jim. I ask you to turn over to slide twenty-eight, give you a few thoughts. I feel good about where we're going and the things that we're doing. Our core values have not changed. I think it does give Lear a competitive advantage. I have to tell you today, we know that we're the highest quality producer of products in our segments and we also believe that we provide the best customer satisfaction and our goal is to maintain our competitive advantage going forward. From a restructuring standpoint, we have significant things that we have completed already. And we expect to upgrade so that we can compete in the future and this industry is changing and I believe it provides us opportunity, but also the actions we're taking will make us more competitive.

Our strategy to become the low cost producer and provide low cost componentry and change our footprint globally to do that is in place, and as Doug said, it is going very well. Lear is a very capable global supplier. We have a long history of doing whatever it takes to support our customers, and that will not change. I believe we have the best products of the highest quality levels an we do have the most competitive prices, and we are committed to be that low cost producer in every product that we sell. So our strategic direction now managing the business on a product line basis I believe will continue to enhance our advantage. On slide twenty-nine, we talk about progress we're making on a strategic priority, and our performance in our core seating business is improving, as Jim stated. Our electronics and electrical business is solid. And when we deal with the cost issues that we're taking care of right now, things will get back to normal.

We are making progress on our new strategy for our interiors business. I feel confident that that will be complete soon. And if completed, our European joint venture which is the first piece of that, and I feel strong about the second piece which is the North American interiors business being resolved quickly. And we're making solid progress in Asia, with Asian manufacturers globally, as Doug stated, and things are moving as we expected. A major automakers and suppliers are restructuring and I believe a better industry structure will evolve from this, and we plan to participate and be a winner in that change.

The challenges do remain. We have a long way to go. But I'm encouraged by the progress that our company has made during these difficult times. As we stated earlier, we have agreed to sell $200 million of common stock, and I believe that that investment will help us to strengthen our core business. The long term outlook for this business I believe remains very positive and just before we take questions I would like to thank the Lear team who are also listening in for the great job you're doing. Now I will open it up to questions.

(Operator instructions) We will pause for just a moment to compile the Q&A roster. Your first question comes from John Murphy with Merrill Lynch.

It sounds like a lot of the major players including Ross are out of the dead - - the. [ Inaudible ] I was just wondering if that changes your view on what is going on with the potential partnership or JV there if there are other players, and then also a follow-on, you have you a great financial partner right now, you guys are good operators. I mean potentially you could become the consolidators in this interiors business going forward?

Okay, I guess first off, with regards to - - well, with regards to CNA, our belief is that CNA, you know, our original vision with Wilbur of combining the operations of CNA and ours is probably not going to happen in terms of how we envisioned it a year ago. So basically, we have been working towards a stand alone solution for our interiors business, with IAC, and we still feel, based upon the work that we've done together, that's the best alternative. We also, I would suggest, that we're coming to a point out in where -- now where the CNAs and maybe the Delphis, and Fords interior business, the solutions are going to become more apparent, and so we think both sides right now, us and IAC are highly motivated to get some direction on this business, going forward.

We feel like we need to accomplish that very quickly to take advantage of these opportunities. And in the event that we can't, we don't believe that's the case, you know, we could implement our strategic plan with someone else as well. But our focus and we strongly believe that we will get home with IAC.

But the idea that there is a consolidation story out there and that your business - - it's something that you've been talking about for a while, I mean could you do that just internally or do you think it would still be in the form of a JV or another partner?

Well we believe it will be done in the form of a JV because really the initial reason why we chose to exit the interiors business is one that is strategic to us. Our customers really are more interested on buying on a component basis. They weren't interested in the total interior. And so it became really more of a commodity. It has been leveraged against our other businesses, and so we feel like the business has to stand on its own, and to do that, it needs to be in some form of a JV.

And just another question, is there any potential for any other capital transactions with I con?

I don't think we could --

We can't comment on that.

I don't think we could even comment on that.

There is certainly nothing planned.

Right.

But we wouldn't comment -- Why get caught in a Chrysler speculation comment, so.

Just one last question. What is the profitability of your business in China versus your other operations? Ballpark?

Yes, ballpark, it is - - actually, our business in China really is performing at the targeted levels that we want to return our North American and European business to. So China is, you know, the seating is operating roughly in that 6% range, and the electrical, the electronics business, all beet it relatively small - - albeit relativity small relative profitable close to the 7% range.

Great. Thank you very much.

Your next question comes from [Rob Henchless] with UBS

Thanks, good morning, everybody. Thinking of your interior business is now going into this JV with Ross. Any kind of capital you will need to kind of send along with this business to account for the cash that is burning right now?

I don't think we want to comment any more on the transaction, other than to say we're working with him, and obviously, you know, along the lines with the transaction that we completed on the interior business, and I really don't want to get into any more specifics than that, until, you know, until we have -- Until we wrap it up.

Okay. And can you talk about the margin projections for '07? They're a little bit better than this year but not dramatically so and I'm wondering if you can go into the restructuring that you've done so far, and wondering why that isn't contributing more and if are there some offsets next year that are kind of working against you still.

Well, I think the important thing here to remember is the production environment. So when we outlined these guidelines at the start of the year, we are kind of looking at a production environment in the -- kind of in the 58 to 60 million basis on a going forward basis. Really on a steady rate, and now, we're basically just driving off of what happened in '06. So you're looking really at an interesting environment, that is closer to 15.4, you know, the second half we saw a lot of sporadic schedule change, and so again, on a going forward basis, with stable scheduling and so forth, we see some additional improvement in those two product lines, particularly seating.

From a restructuring standpoint, everything we're doing in seating is on target. In the electronic and electrical group, we were impacted somewhat, we were working to capture the follow-on business, the sourcing of that was delayed somewhat, a fairly significant piece of business in our electrical group, and we since have resourced that business so it delayed our restructuring efforts somewhat, because we wanted to make sure that we had the business in full before we went ahead with it. But on balance, we expect to get about 70 to 80% of the restructuring savings that we outlined before, which is about $100 million.

Okay.

So 70, 80% of 100 million.

Got it. And just last one. European seating, can you give a sense of how that is performing? How close to the longer term target?

Well, when we look at the longer term target, historically, the European piece has been lower. And our expectations are that it still would be somewhat lower than our average. I think the expectation is, is that, you know, the business in Asia is probably doing a little bit better than that, and the business in - - the businesses - - we have in other parts of the world are better than that. So the European business has come up but, you know, it is probably short of 6%

Yes, it is short. It is actually performing more at the historic rates, that seating business has performed at, roughly in the mid 3% range.

There you go. Thank you very much.

Your next question comes from Robert Berry with Goldman Sachs.

Hi, good morning. Just a couple of things. The $800 million in new business, was that - - should we read that to imply the approximate 5% annual sales growth that were you targeting that translates into that?

Yes.

Okay. And then I think you mentioned that you see the seating margins and the historical level, same with electronic and electrical, I think you said by '08 is, is that right? That's correct. And what do you think is going to kind of bring them up to that next step, since you're -- as Robin has mentioned - - flattish growth.

Well again, it is some of the restructuring we have. It is - - and just to be clear, when we look at the seating business, and what we did in '04, we don't expect the product that we serve to rebound to '04 levels. And so really, we see North American coming up and improving based on some of the restructuring we've done. Also, having the launches behind us, we still have significant launches going on right now. But getting those launches behind us. And then also the benefit of our foreign operations, and really, if we talked upon Europe, we see Europe improving, but really, I think the rest of the world has improved quite a bit.

Got you.. And can you comment on how the mix has been evolving on the T900 suvs? I know in the last call, you talked about it perhaps starting to ease off a bit, as is normal.

Are you talking about volume or mix?

The mix. The richness of the mix.

From a volume perspective, at this point GM is holding their schedules. We see little or no risk in the balance of the year. And, you know, we're fairly confident that that product will continue to be successful as we look into 2007.

And we really haven't seen anything in terms of the mix of the vehicles, in terms of the options.

And if you look at content and options right now, it is pretty well performing as it historically has been.

Has it fallen off at all from the initial launch? Usually that is the cadence, right?

Yes, perhaps a little bit, certainly the dealer showrooms are filled with high content vehicles, at the beginning, but I think also in that segment, the high content vehicles are really what, you know, predominantly sell on the full size sport utility.

Okay. And then just the last one, is it fair to assume that the icon proceeds will not be used for anything related to the interiors joint venture?

Well --

Or is that a possibility?

Well, there are no restrictions, first off. And basically what we're focused on is, you know, potential increase like the things we talked about, adding some technology and electronics, or expanding our business with Asia, so those are the key priorities, but you know, it is whatever improves shareholder value.

Okay. Thank you.

Your next question comes from Brett Hoselton with KeyBank.

Good morning, gentlemen.

Good morning.

Can you go into greater detail in the electrical, electronics business, specifically the margins? I think coming out of the second quarter conference call, my expectation was that we would see margins improve closer to about 7% level, or recover largely due to copper recoveries, as well as moving I think at least one program to a low cost country sourcing.

Right.

And maybe see that by the first half of '07. I'm wondering, can you go into a little detail, was my perception incorrect? Or has there been things that have changed?

Well, basically, where we are in terms of the copper recovery is on 75% of our copper buy, we basically have protection where there is a lag and so when prices are going up rapidly, there is a lag and that is affecting our short term results. And if we look at what happened in the electrical business on a year-over-year basis, about two-thirds of the hit comes from copper. The other 25% of our copper buy relates to our terminals and connectors business. And so there is no ready solution for that. Typically, we do that when we negotiate our annual contracts, and attempt to offset or get some recognition for that in our productivity agreement.

So we believe again, much like steel and our seating business, we will capture that back, but there will be a short term impact. Long term, we think we claw that back and get it back in our margins. Regarding the restructuring, basically in the negotiations for the follow-on business, we fronted some of the savings from moving to a low cost country, to the customer, to assure that we captured the follow-on business. And in that process, we also delayed the restructuring action until we were certain that we would receive the award. So those things are all behind us now, on a going forward basis, and we intend to move along with that, we haven't made any announcements yet, and so our plan is to get that back, but it will probably occur in the second half of the year.

On the interiors business, and know that that you're a little reluctant to talk about a possible resolution there, but boy, I guess my question is simply, how do we think about the impact on your earnings as some sort of a restructuring in the interiors business?

On a going forward basis or --

Yes, how do we think about the impact - - when we think about the interiors business and the possible outcomes here with IH --

IAC?

How do we think about that's the impact on your company's profitability?

Well, again, our view is that we would separate it off in a joint venture, and again, it would be, depending on what our equity ownership is, it would be treated as an equity transaction. We have a restructuring plan. There's a restructuring plan in place that would greatly improve those results. I think this past year, we have been impacted by launch costs, that we think on a going forward basis come down substantially. So the outlook for next year for that business is better than the year that we're going through. And we think that, based upon, and with all of the other opportunities that are occurring in the automotive business and in that segment, we think it could still be an attractive investment.

When you think about - - let's - - assuming that nothing takes place in the interiors business and I know that you believe that it will, but when we think about the outlook for the business in and of itself, on an adjusted basis, you're running, I don't know, I think your losses are somewhere going to be in that $100 million range or somewhere along those lines, I don't remember exactly, on a year to date basis, as we go forward into next year, when you think about the improvement in that business on a stand alone basis, what kind of magnitude of improvement would you expect to see?

I think, you know, that depends on a lot of things, but we would see -- we would certainly see it as a continued drag on earnings from a cash flow standpoint. We think it would be more neutral.

Okay. Well, thank you very much, gentlemen. I appreciate it.

Your next question comes from Rich Kwas with Wachovia.

Hi, good morning.

Good morning.

Cross utilities, just wanted to ask, in terms of North America, where do you have - - what percentage of that content do you have piece on or what percentage of vehicles and you said you had about two thirds, apply about two-thirds of the vehicles, what percentage of that do you have?

We're going to have to look it up.

And just a bigger picture question, '07 you expect North American production to be flat with this year. What is the risk that you see out there that maybe production - - I mean everybody was expecting kind of high 15s this year and we're ending up at 15.3, 15.4, what is the risk that we go to 15 or below 15 next year? What do you see out there right now?

Well I think you can handicap the risk as well as we can. I think what we would look at is, you know, if volume goes down, obviously it has an impact on earnings. It is hard for us to -- I think most of the reports that we've seen generally have production a little bit higher than where we've pegged it now, and again, we're really giving directional guidance right now, in terms of if things remain the same, '07 versus '06, this is directionally where we think our key products are heading. I'm not - - I don't think we're prepared to handicap production just yet. I think we just really want to give some comfort out there that, that we can react and improve in a lower volume environment.

And then on the $800 million of business, does that include any interiors or is that totally - -

No that is just new business in our core businesses, and really a lot of that is going to occur in Europe and Asia Pacific.

So that doesn't include any interiors?

There is no interior business.

Okay. And then I guess do you have any answer for the cross-utility question?

Roughly, it is a pretty vague definition on cross over, and a lot of people have different definitions but just following - - you know, by ward automotive, roughly cross-over vehicles in North America make up about 10% of the marketplace and our sales reflect that as well. So roughly 10% from our standpoint, as well as crossover vehicles.

Okay. So 10% of your overall revenue.

Right.

Okay. Thank you.

Your next question comes from Ronald Tadross with Banc of America Securities.

Good morning, guys.

Good morning.

Could you just - - a couple of things here, but first, could you just elaborate on the comment that competitor actions are hurting the margins in the electrical and electronic business?

We didn't say competitor actions. We said competitive actions. [ Laughter ]

All right. Then those.

Basically we're producing in a higher cost country and we had to front some of the savings to lower cost country, which typically happens, and we had planned to make the move, but we wanted to make sure we had the contracts before we did that. Brian, you didn't already write your report and send it out that way? And the sourcing was delayed sometime.

No, I didn't, Bob. So are you saying that are you going to get that business?

The business is. There and basically, I guess what we're saying is there is going to be a delay in terms of the move to the lower cost solution, and as a result, there is a little short term negative impact for that, but it will be - - we'll be back on board by the second half of the year. Okay.

And then on the mix, you gave some idea of what you could do with margins for next year. I guess I'm wondering a couple of things. First, what mix are you assuming for next year? It has been pretty negative the past few years, what mix, or what are your top programs doing underlying your guidance? And then also, you said your European margin is about 3% in seating. How do you get to 5 1/2% overall with that?

Relative to mix, I think our projections on mix, you know, are fairly consistent with where the rest of the industry is at. We're a little bit more conservative on the full size sport utility. We expect that to continue to go down. But overall, it is flat on a year-over-year basis. With regard to improving margins in Europe, that's really kind of a two-fold, you know, arguably three-fold strategy.

First, we're very focused on continuing to win business with, you know, the high end Europeans and the Asians. Second, our plan is to increase vertical integration to capture more margin in the value chain than historically in Europe. We've been, you know, basically an assembler and now we're much more involved in design development, on the vertical integration side. And last is we've got a fairly aggressive plan to set up those operations and restructure, you know, the component level side that we have in place into the eastern part of Europe. And we think, you know, that combination, we can make some serious movement in our returns.

So basically, you have to get your margins up to that 5% level for next year just to get to the 5 1/2?

Not necessarily, Ron. I think what we said, for the year, we're talking -- I mean we're at 5.2% for the first nine month, so if you look at it, there is not much ill decline in there. We've got less launches. We've got the benefit of the restructuring coming through. And we do see improvement in the long term in the other areas of the world as well as North America.

Okay. One last thing on the interior business. I guess we have an idea of what the sales are, the margins you kind of give us an idea of the cap ex, is there anything else from a balance sheet standpoint that is not proportionate, you know, to the sales that we should think about, as we think about stripping this business out?

No, not really. I mean other than the material content as a percent of sales is typically lower because it is more capital intensive, but other than that, it is - -

Working capital, accrued expense - -

Of course, all is about the same as our other business.

Okay. Thanks, guys.

Your next question comes from Chris Ceraso with Credit Suisse.

Thanks, good morning.

Good morning.

A few things. First, in your scenario of 2007, with the margins that you have laid out, what would happen to taxes?

Well, taxes, and I know this is frustrating for the analyst community, but we will not be paying taxes in the U.S., because of the carry-over loss position we have. And so I think the view on taxes would be this year on an adjusted basis, we're looking at about 120 million in taxes, and we think that number - - that number is only going to fluctuate by the performance of our foreign operations. And so we believe that using 120 on a going forward basis is probably reasonable for next year and the next couple of years, is probably the right way to go. So if you strip out the interior trim business, you get back to solid profitability, '07 would still be too soon for you to get back to a normal tax position in the U.S.? Yes.

Okay. Similar question. Once you've stripped that interior business, how should we think about the kind of overall corporate cost that has been running around, I guess maybe $250 million, does it come down from there?

I think there is some savings, and again, I think we would - - we're going to hold off on providing any guidance on that until we get closer to the end of the year. But yes, there would be some savings there. I'm not going to handicap whether it is 20%, because there are other things that influence that as well.

Okay. Thinking about the fourth quarter relative to the third quarter, it looks like the volume on your top 15 programs actually will be down a little bit. I know typically the fourth quarter is a good one for Lear with recoveries on pricing and engineering, et cetera. What is the risk this year, and I know people were concerned about this last year, too but what is the risk that you don't get your typical recovery in Q4 and the therefore your expectations are too optimistic for the quarter?

Well, I think we feel good about the fourth quarter. I think, you know, we always have commercial issues there that are solved in the fourth quarter. So I don't - - I wouldn't view the risk this year any different than any other year, and you know, our team is focused on getting it done.

Okay. And just the last one, what are the raw materials expectations baked into your margins expectations for '07?

Well, basically flat. Flat, I would say there is a little draw-back from where we were at the - - I would say more like where we were at the end of the first half. So some slight improvement, but not a heck of a lot.

Okay. Thanks a lot.

Your next question comes from Himashu Patel with J.P. Morgan.

Hi, it is actually Ranjit for Himanshu. Could you provide some color on your Chinese operation, where margins are right now and where you think that're going to evolve over the next two or three years?

I don't think we want to talk about margins on a geographic basis or on a product basis, but I think - - and least from a general standpoint, I mean I think Doug can comment on, that but I don't think we want to get into any real specifics here.

But just overall, I think - - we think our Chinese business is pretty well placed. It is heavily concentrated on seats and electronics. We think we've got a pretty diversified customer profile. We've recently set up our technology center so we can further move more of our engineering activity there. So overall, we're pretty confident that we've put the right structure in place to support that business.

Okay. Just to clarify one thing on your margin assumptions for '07, did you say you expect North American production to be sort of similar level to '06, sort of in the 15.4 million range that we expect this year?

Yes, that's correct.

Okay. All right. And you said you are going to be roughly flat - -

Roughly flat.

Okay. One last question. In terms of the joint venture that you sort of contributed to European business to some - - do you have any views on the profitability of that business in '07? I'm talking about the entire joint venture?

Well it is expecting to be profitable and in our view, we bring that in on an equity basis, but it is not going to have a meaningful impact in '07.

Okay. Thank you.

Your next question comes from Brian Johnson with Lehman Brothers.

Yes, in connection with your Asian growth strategy, can you give us a sense of the current mix between transplants and big three and North America and then how that is going to evolve over the next two or three years?

Between transplants and big three, the vast majority of the business is with - - it is probably split, about a third, between - - or actually a fourth, you have the traditional Europeans - - you have the North American big three, transplants, and then the domestic Chinese automaker is where a significant amount of growth is coming. So I think roughly speaking, you could allocate it, you know, 25% in each one of those buckets.

And then in North America, the transplant production versus the big three production here that you're serving.

Today or --

Today and what your two, three-year goal is.

Consolidated, unconsolidated, I think our Asian transplant is about 10%. And again, we're - - you know, that 25% growth rate probably, you know, applies on a go forward basis.

Okay. Second question is in the seating business, how have you been treating commodity surcharges or price-downs during the course of the year and is it different from the years past, and therefore, when you get to the so-called commercial discussions in 4Q, what needs to happen in those?

Well, I think from an accounting stand point, recognize whatever the income and the expense, when it occurs, when we know it is there, so that hasn't changed. Typically, when we talk about commercial negotiations at the end, it is really just maybe a resolution of some of these agreements, the fine tuning and basically there can be some adjustments either way. Or more importantly, typically we - - they're basically open issues that get resolved. So we typically handicap those, but nothing really unusual. It is no different than any other company, the fourth quarter typically, you know, when you chew up all of your adjustments at the end of the year, you typically - - you're typically somewhat favorable.

So do you recognize price-downs during the course of the year?

Yes.

Okay. Thanks.

Your next question comes from John Rogers with Citigroup.

Yes, good morning. I'm just wondering, as you look to raise your margins in the seating business, and it seems to me that there is a couple of different components, and first and foremost, it looks like volume for the traditional big three customers is going to be down significantly from the prior peak. And I guess, as we look at the mix of product, can you just tell us where - - I know you have almost similar content on some of the cross utility vehicles. Is there a margin difference between a GMT900 suv seat and some of the smaller seats that might go into cross-over vehicles?

I would say typically, you know, the richer the mix of the product, there is typically better margin associated with that.

Okay. And then as we - - I guess as you look to the book of business, how much of the margin improvement do you think comes from new business versus restructuring actions that you might take.

I don't think we believe any of the margin improvement comes from, you know, additional or improved pricing or anything like that. It is really driven by one, you know, in the last couple of years, we've had a tremendous amount of launch costs that occurred at the same time when volumes came down. So basically it is more stable scheduling. It is our customers getting their capacity in line with demand and the restructuring actions that we're taking to get in line with that and that is really what is driving the improvement.

And then just one more question on the interiors business. Are you prepared to - - and obviously, it is a good business, it is ripe for consolidation, but if for some reason you can't sell it, are you prepared to shut it down? And how long will that take?

Well, I think we go through all kinds of scenarios, and so those are the type of things that you would work out with a customer. Again, we have a stand alone plan, that we would implement, and we're prepared to do that, and that's really the plan that we're working off right now with IAC.

And the stand alone plan is to wind that business down?

Not necessarily. I think it is again just to make it more efficient. And to take advantage of some of the things that are going on in the industry right now.

Okay. Thank you.

Our final question comes from Jonathan Steinmetz with Morgan Stanley.

Great. Thanks. Good morning, everyone.

Good morning.

A few questions. First of all, on some of the X impact, do you think of the new GM pickups and do you try to compare that with the GM suvs, can you just talk about year-over-year? Is that a bigger opportunity than it was this year because the volume is bigger or just the per vehicle amount probably being smaller make it less of an opportunity, even though there is more volume?

When you say opportunity, what are we talking about, John?

To improve margins because you get Goodrich mix at the beginning of the product life.

Well, I think over the year, it all balances out. I mean you're in a launch, I wouldn't ascribe too much to that.

Well, there is certainly significantly less content on a pickup than there is on an suv. By virtue of the fact suvs have three rows, and pickups have 1 1/2, if you look at the complete balance of it.

Okay. On the cap ex number, the 250 to 280, should we think about that going forward as a similar percentage of revenue or is there actually an opportunity to keep it level at that amount and improve the capital turnover rate?

Well, again, if you go back to the history of the seating business, and our electrical, electronics businesses, they're typically not capital intensive businesses, and so we think those are kind of at the historical level, it allows us to do some level of vertical integration. We feel like we got a lot of our vertical integration expenses behind us in North America, it includes some actions in Europe that Doug talked about, so we think, you know, it is a good planning number.

Okay. And last question, given the movement away for complete vehicle interior and more door component systems - - models - - Is there any need for the seating and the electronic and the electrics that will be housed in the same company over time? Is there industrial logic of those going together or is it possible that those could be sort of housed in separate corporate entities going forward?

You're talking about, is there any benefit to having both businesses under one corporate umbrella?

Basically, yes. Is there any synergy or any sound reason - -

You always have the customer synergy. They're both global businesses. And so you get a lot of leverage from that. But it is - - they can operate as separate businesses, too but we think there is a lot of synergy to having the two businesses combined.

Okay. Thank you.

So overhead and so forth.

Okay. Thank you.

Thank you.

That was the final question so we would like to thank you all for being on the call and again thank the Lear team for the job you're doing. Goodbye.

Thank you for participating in today's conference. You may now disconnect.