Lear Corp (LEA) 2006 Q4 法說會逐字稿

Good morning. My name is Dennis, and I will be your conference facilitator today. At this time, I would like to welcome everyone to Lear Corporation's fourth quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS]

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

Thank you, and good morning, everyone. And thanks for joining our fourth quarter earnings conference call. By now, you should have received our earnings press release and our financial review materials. And these have been posted, filed with the Securities and Exchange Commission and they're also posted on our website, lear.com in the investor relations section.

Bob Rossiter, our Chairman and CEO, is traveling in Asia this week, so he'll be joining us on the phone from Thailand. Other presenters today are Doug DelGrosso, President and Chief Operating Officer, and Jim Vandenberghe, Vice Chairman and Chief Financial Officer. And also with us here in Southfield are Dan Ninivaggi, Executive Vice President and General Counsel, Matt Simoncini, Senior Vice President of Operational Finance, Shari Burgess, our Treasurer, Jim Murawski our Controller, and Bill McLaughlin, our Vice President of Tax.

Before we begin, I'd like to remind you all that during the call, 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 nonGAAP financial measures, additional information regarding these measures can be found in the slides at the end of the deck labeled nonGAAP financial information.

If you'll turn to slide number two, we show our agenda for the call today. First, Bob Rossiter will review our 2006 highlights. Next, Doug DelGrosso will provide an update on operations. Then Jim Vandenberghe will review our financial results and provide financial guidance for 2007. And following the formal presentation, we'll be happy to take your questions. So now if you'll all please turn to slide number four, I'll turn it over to Bob Rossiter.

Thank you, Mel. Good morning, everybody. In the next few slides, I'd like to review our highlights from 2006. Environment last year was difficult but we were able to improve our overall financial results, strengthen our liquidity positions and took steps to reposition the Company for the future. As you know we now manage our business on a product line basis. Our global restructuring initiative has improved our long term competitiveness. These actions have included capacity and census reductions, as well as global footprint actions.

We have also made steady progress in expanding our infrastructure in Asia, and we are growing our business with the Asian producers globally. We further diversified our sales by customer, region and vehicle basis. Lastly, we repositioned our Interiors business for future success, with our agreement to transfer to international automotive components group in return for a minority interest. In summary, I believe we accomplished a great deal in 2006 and a difficult environment. We've improved our financial flexibility and our competitive position.

Now if you'll go to slide five. This slide summarizes our financial results and our strengthened liquidity position. In the top left, you can see our record sales at $17.8 billion. Bottom left, our core operating earnings up 22% to $397 million. On the top right, our free cash flow turned positive to $116 million. And bottom left, we addressed our near term maturity and we successfully completed two rounds of new financing actions. As a result, Lear now has no significant debt maturities until our revolving line of credit comes due in 2010.

Please move now to slide six. We continue to diversify our product mix and sales mix. This slide shows our progress since we went public in '94. In '94, we principally were a North American supplier with a high concentration of North American business. Today, North America represents little over 1/2 our total sales, Europe now at about 40%, and our Asia Pacific business growing rapidly at around 10%. This, as you know, has been a major focus of the Company and we have had excellent progress and we continue to show growth there. I remember when GM and Ford represented 75% of our total sales, today it's about 47%. I want to make sure that people understand that's not to say we don't want their business because we do, but we need to have a more and more Asian business and better balance in our Company.

Now turn to slide seven, please. By all the world's auto makers and have maintained a strong global market position and superior quality in both of our core products and businesses. In Seating, we're number two globally in a market that we estimate to be about 45 to 50 billion in size. This includes a number two position in North America and Europe as well as the number three position in Asia, where we rank number two in China. We also are recognized as an industry leader in quality based on J.D. Power seat quality survey.

In Electrical distribution, we hold a number three position in North America, a number four position in Europe and a number three position in China. In Electronics, we are a niche player with a portfolio of profitable products that compliment our Seating and Electrical Distribution businesses. In both these core businesses, we've been consistently recognized by industry sources and our customers as leaders in quality and customer satisfaction.

Slide 8 we provide a summary of where we stand with respect to repositioning our Interior business. We've now completed a transaction to contribute substantially all of our European business, Interiors business to International Automotive Components group, or Europe in return for 1/3 equity interest. With respect to our North American Interior business, we've reached an agreement to transfer our business to International Automotive Components group North America in return for a 25% equity interest. We expect this transaction to close before the end of the first quarter.

Combined, these initiatives represent significant steps in overall consolidation and restructuring of this troubled segment of the market. We believe substantial operational synergies are possible and a significant operational improvement will be possible over the next 12 to 24 months. Now I'd like to turn it over to Doug for his update on our operations. Thank you.

Okay, thanks, Bob. And good morning, everyone. The last couple conference calls we've touched on the emergence of several key trends impacting our business. I thought now would be a good time to summarize these changes and review how we're responding. The automotive supply base has been consolidating for sometime and we believe that trend will continue. The customers moved away from full service sourcing and today the emphasis is clearly on individual component competitiveness. Auto makers are clearly focused on new product technology and innovation that makes their vehicles more marketable, but only when it's delivered at the best cost-base price.

In response to these trends we're implementing a major global restructuring initiative increasing product line focus and continuing to evolve our low cost footprint. We're also rebalancing our product portfolios to ensure we're providing the highest possible value ad. The strategy involves electively increasing vertical integration levels, increased emphasis on quality and sustained levels of product performance and innovation. We are experiencing an unprecedented period of change within the automotive industry with several major auto makers implementing turn around plans involving significant restructuring of their operations. Our customers have also focused on leveraging common designs particularly at the component level across multiple regions to optimize costs. These major changes have force suppliers to make structural change in their business as well.

We began our restructuring in mid-2005 and we expect this activity to continue this year, as we work to fully respond to the industry changes. On slide 12, we've attempted to summarize the comprehensiveness with the plan we are implementing to improve margins in our core businesses of Seating and Electrical distribution. One of Lear's long standing advantages has been global capability. We serve all the world's auto makers everywhere they do business in all aspects of business. As customer requirements evolve and automotive market conditions have changed, we've also been aggressively adjusting our global footprint as well.

For a perspective of what's happening relative to our footprint, I've shown on slide 13 what we put in place last year and what's planned for this year. I believe this investment outlines the magnitude of change we're making to support future growth and cost competitiveness. As Bob mentioned earlier, aggressively growing our Asian sales to further diversify our mix, to better match overall market composition, has been our top priority. Slide 14 shows the steady progress we've been making in this area. We're growing rapidly in China and India as well as with major auto makers globally. And we're targeting to increase total Asian sales by 25% this year. Now I'll turn it over to Jim Vandenberghe for a review of our financials. Thank you.

Thanks Doug and good morning. I thought before I review the financial results in detail I'd just mention some of the major nonoperating and operating factors that impacted our fourth quarter financials. Some of the major nonoperating factors included the loss on the divestiture of our North American Interiors business, the loss on the [inaudible] refinancing that we did during the quarter and also some of the costs related to our restructuring actions. I might also add that we also closed on a $200 million equity transaction in the fourth quarter as well.

What may be lost in our financials is that excluding special items, our underlying operating results came in above the high end of the guidance range. The improvement reflects higher sales from less adverse Lear platform mix globally, lower depreciation expense due to the asset write downs in our Interior business and favorable cost performance in operating efficiencies. Free cash flow came in about a $100 million higher than we expected, again, reflecting the improvement in operating earnings, lower capital spending and favorable timing on the cash used for restructuring and on favorable commercial recoveries for the pull ahead of commercial recoveries as well. Clearly, there's a lot of complexity in our financials, but we feel good about Lear's underlying performance despite some very difficult industry conditions.

Now let's look at the details to see how we performed for the prior year. Slide 17 talks about the industry environment in the fourth quarter, and as we've all mentioned it's been very challenging. While the overall industry production was about in line with our expectation, Lear's platform mix in major markets was a little less adverse than we had estimated. In North America, industry production was about 3.6 million units, down 8% from a year ago. The big three were down 13%. In Europe, industry production was about 4.7 million units down 1% from a year ago and production for our top five customers was down about 2%.

Commodity and energy prices have moderated somewhat since the end of September, down 7% to 15% on average. However, over the last 12 months, prices for key metals are up. Steel is up 3%, copper's up 72%. Crude oil prices are down 1% and polypropylene is down 8%. 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, we've stated on previous calls. And also, our price recovery formula is impacted by inventory levels in a time line built into the recovery formula.

Slide 18 highlights our financial scorecard for the fourth quarter. Starting with the top line, we posted net sales of $4.3 billion, which we're down $117 million from last year. Decline reflects primarily lower production in North America and the divestiture of Lear's European Interior business. This was offset in part by the addition of new business globally. Operating results also declined reflecting lower production again partially offset by the addition of new business and cost improvements. A reported loss before interest, other expense and income taxes was about $523 million compared with a loss of about $260 million a year ago. The higher loss in 2006 is more than explained by the loss on the divestiture of the Company's North American Interior business. On a pretax basis, we posted, or reported a loss of $636 million and after taxes our reported loss was $645 million or $8.90 per share. These results also included the loss on the divestiture of our North American Interior business.

On the next slide, I'll show these results excluding restructuring costs and other special items, to again highlight the underlying operating performance. SG&A as a percent of sales was 3.6% compared with 3.3% a year ago excluding severance and other costs related to restructuring. SG&A was about flat with a year ago. Interest expense was $52 million, up about $7 million from last year. And that basically reflects the higher rates when the debt was refinanced this year. Depreciation and amortization was $93 million, down from a year ago reflecting acid write downs in the Interior business. Other expense included the loss on the extinguishment of debt in 2006 and the capital restructuring of joint ventures a year earlier. Excluding these special factors other expense was about unchanged from a year ago. Finally, our actual taxes came in lower than guidance reflecting a more favorable mix of earning.

On slide 19, we summarize the impact of the restructuring actions and other items that occurred in the fourth quarter. A reported loss before interest, other expense and income taxes was $522.5 million. When excluding restructuring costs and the other special items, our core operating earnings were $129.6 million compared with $138.5 million a year ago. The lower operating earnings reflect primarily a lower production in North America. A reported pretax loss was $635.9 million, again, adjusting for special items our pretax income on an adjusted basis was $63.2 million, which compares with the pretax income of $77.6 million a year ago. Again, to clarify how these special items impact our financial statements, we've indicated the amount by income statement category on the right hand side of the charts.

Slide 20 summarizes the impact of major performance items on fourth quarter sales and margins compared with a year ago. As you can see, the major adverse factor for both the change in sales and margins was lower production and unfavorable platform mix in North America. The divestiture of our European Interior business also was a factor in our sales decline and higher commodities-- higher commodity costs compared with a year ago also hurt margins. Partially offsetting these adverse factors was the favorable impact of new business and positive foreign exchange. That operating performance also was positive reflecting cost improvements in our core business.

Slide 21 is similar to slide 19. It summarizes the impact of the restructuring actions for the full year. Again, reported loss before interest, other expense and income taxes was $357.9 million, excluding restructuring costs and other special items, core operating earnings were $396.6 million compared with $324.5 million a year ago. The improvement in earnings reflects the addition of new business and the ongoing costs and efficiency actions that we've mentioned. And again, this was offset by the lower production environment in North America. Reported pretax loss of $655 million again when adjusted for the special items adjusts down to $114.7 million and this compares favorably with pretax income of $96.6 million a year ago. And again, we've indicated on the right hand side of the chart how these impact our income statement.

Slide 22 shows what's happening within our product segments. The segment earnings are shown as reported and include cost restructuring as well as other special items. To help understand our underlying operating performance, we've also provided adjusted margins again excluding the restructuring and special items. In Seating, our margins continue to improve from 5.9% to 6.7% on an adjusted basis. Underlying operating performance reflects the addition of new business globally, improved profitability in Asia, as well as cost improvements and operating efficiencies. For the full year, our Seating margin was 5.6%.

In the Electronic and Electrical segment, our fourth quarter margin was down reflecting primarily the impact of lower industry volume, unfavorable platform mix and continuing high copper prices. Think when you look at this segment, the effect of the lower volume was a greater drag on the Electrical business. We also incurred some costs associated with our moving to low cost countries and some inefficiencies that we continue to work on. In the Interior segment, our losses continued but at a lower level. This reflects the unfavorable industry conditions in the segment offset in part by costs and efficiency actions. This segment did benefit from lower depreciation due to the reclass to assets held for sale that took place in the quarter.

Slide 23 shows that free cash flow was a positive $254 million in the quarter, with ongoing restructuring investments being funded through operations. The solid positive cash flow during the fourth quarter reflects primarily the timing of commercial recoveries and lower capital spending. For the full year, cash flow was a positive $116 million as Bob mentioned.

Now I'd like to focus on 2007. Slide 24 lists our key assumptions. In North America, we see industry production of about 15.3 million units, which would be about flat with a year ago. Production for the big three we expect to be down about 2%. In Europe, we see industry production of 19.2 million units, also about flat with a year ago. Production for our top five customers in Europe is expected to be down 3% and we're forecasting the year with $1.30 for the year, which is about 4% stronger than 2006. E commodities began to moderate in the fourth quarter last year and we're assuming that they will remain at present levels or trend slightly lower for the year.

Slide 25 we look at the factors affecting our core segments and we think this is important when you look at what our improvement plan is. Both of our core businesses obviously will be negatively impacted by lower industry volume in North America and unfavorable platform mix. In Seating, we plan to offset the adverse volume factor with the favorable impacts from new business globally, moderating commodity costs, restructuring savings, ongoing cost performance, an increase in low cost sourcing and engineering as well as the benefits from selective vertical integration and the leverage from our proprietary common architecture. In Electronics and the Electrical segment, we plan to offset adverse volume and mix with favorable factors including copper price recovery, restructuring savings, ongoing costs and efficiency actions, increased low cost sourcing and engineering, as well as proprietary new products in technology including our new wireless products, such as our Car2U home automation system. For the year, we expect margins in both of these product segments to be in the 5.5 to 5.6 range.

Going to slide 26, we summarize our 2007 financial guidance for Lear's core businesses. Guidance show excludes the results from Lear's Interior business from the full year. On this basis, Lear expects net sales for 2007 of approximately $15 billion. This is up from last year on a comparable basis, reflecting primarily the addition of new business globally and the positive impact of foreign exchange, which again, is partially offset by unfavorable platform mix. Our core operating earnings or our income before interest, other expense and income taxes, restructuring costs and other special items, is expected to be in the range of $560 to $600 million. Interest expense is estimated to be in the range of $215 to $225 million. And other expense is expected to be flat at about $70 million for the year.

Our forecast for pretax income, again adjusted to exclude the restructuring costs and other special items, is in the range of $270 to $310 million. Our estimate for tax expense is in the range of $100 to $120 million subject to the actual mix of the financial results by country, and we are estimating restructuring costs to be about $100 million. Despite the lower CapEx at the end of 2006, we still see capital spending at approximately $250 million. Depreciation and amortization are expected to be at about $310 million. And finally, we see free cash flow to be a positive $225 million for the year. So to summarize, we had a positive finish to 2006. We expect to improve on our core product segments in 2007. We thank the Lear team for their hard work in 2006, and we know we're ready for the challenges of 2007.

Before we open up for questions, I do want to comment on the first quarter, though. Obviously, a major factor impacting the first quarter beyond the industry conditions is the closing on the North American Interiors transaction. We are on track for closing in the first quarter. As a result of our definitive agreement and the resulting write down of the Interior fixed assets, we are no longer booking depreciation expense. And looking at the fourth quarter of 2006, the Interior's results excluding depreciation, was a loss of approximately $20 million excluding any restructuring costs. We would expect to see further improvement on that performance for the first quarter of 2007.

Upon the final closing on the Interiors transaction, we will incur an additional loss. Our expectation for the total loss is still in the $650 to $675 million range, versus the book loss to data of approximately $690. Excluding the Interior business we see our core operating earnings and sales flat for the first quarter-- or sorry, for the first quarter flat to slightly down based on current production schedules. This implies sales of approximately $3.8 billion, and core operating earnings in the $115 to $135 million range. We'd now like it opened up for questions.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Chris Ceraso with Credit Suisse.

Thanks, good morning.

Good morning.

Couple things. First, just on that last comment, Jim that $115 to $135, that excludes the Interior?

That's correct, Chris.

Okay. The -- can you give us an update on the backlog? You talked about it a little bit in Detroit a couple of weeks ago, but it sounds like you've got a bit of a flat spot coming up on '08/ '09. Is there much you can do at this point to try to fill that in or just maybe give us a little more color on the backlog of business coming on over the next few years?

Sure. Chris this is Doug DelGrosso. Right now, the backlog's just over-- three year backlog's just over 800 million. Most of that's coming in Europe, in Asia. We've got North America down a bit as a result of some roll off programs, I think most of which we've talked about in the past. It's kind of at a significant stage why the backlog may look a little bit flat. It's primarily because we're in the midst of the season of sourcing, if you will. We're pursuing a number of programs. We don't want to quantify that on the call today, but we would expect at least by the, the next update to give you some indication on how successful we are. Most of that activity's in Asia, and a fairly significant amount is in Europe. And we expect to close the gap that exists in North America.

So you're bidding on stuff currently that could flow into '08 or '09 or is this later than that?

It'll flow into, some will be '08. The majority '09 and beyond. And that should occur, like I say, over the next three to six months.

So that 800 million, Doug, can you just remind us how much of that comes in '07, '08, '09?

The majority of it comes on in '07. And it's about 600 million in '07 and another hundred million '08/ '09.

Okay. And then just one more question, if I can, on the margin and the Seating business which closed the year very strong, I would say for the full year '06 was pretty positive. How much of that owes to the good build rate on the new full size SUVs at GM? Would you consider that 5.6% in '06 to be in any way inflated, and do you think that that number maybe has a little bit of risk to the downside in '07 if GM has to dial back on the build of those trucks, or do you have enough going on in other regions to offset it?

I would-- okay, Chris, I'm going to try to get my voice back here. I think the reason for it, clearly, the higher build in the fourth quarter and this past year was an improvement for us on a year-over-year basis. I think the other factors are, we had really some excellent performance in the Asia Pacific and also in South America. And I mean, I think as we look forward to next year, we have the launch of the pickups. We think that's going to be solid. I guess our gut feel is that SUVs probably will not be up and we're really forecasting them to probably be down somewhat. We think the foreign operations will continue to provide some solid performance for us. So we're comfortable with the 5.6%. We think it's sustainable and we're working to improvement with cost efficiencies.

Okay, thanks a lot, guys.

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

Good morning, guys.

Hi, Ron.

Good evening, Bob. Excluding the exterior business -- Interior business, I'm sorry, can you guys just give us an idea of what your gross commodity cost hit was if we strip out that Interior business, just if you can give me a gross number or if you want to give me a net number, rough idea?

We kind of net it out against purchasing overall.

Yes. That's a hard number to come at. I guess what we'd come at is from the standpoint of copper, if you look at the falloff in the Electrical business about half of that was due to the lag on copper recovery.

Okay.

And the other stuff, the other commodity impacts were -- I guess we had about 60 million impact in our Seating business.

Okay. And then-- thanks. And then one other thing on the Electronics business. I mean, you guys mentioned that you are a niche player in that business. I guess I'm wondering is it good or bad to be a niche player in that business? And then where the-- are there any competitive issues that have been a factor in the margins?

To your first question, we think it's good to be a niche player in the Electronics certainly, competing with the big boys in the space, Siemens and Delphi would be difficult to do. We do not invest in the R&D side to the level they do. We find very selective products that complement our other business or where we have very exclusive relationships for the example with BMW, where we're a bit of a captured supplier and they utilize us in our manufacturing, engineering capability to deliver very specific products for them. We think that can continue. We don't really expect to grow tremendously there. We brought on some new products like Car2U that we can sell to the higher volume producers. That will be and continues to be relatively profitable business that helps the overall Electronics Electrical distribution space. So we're comfortable where we're at. We use that to enhance our image on the Electrical distribution side and we'll probably continue that way in the near future.

Okay. And have the competitive issues been a factor in the margins at all?

Not really because it's very technology based in that when you have the right product that the customer wants to introduce into new vehicles, that gives you some ability at least initially if you're the one who developed that technology to price it with reasonable returns on the investment.

Okay. All right. Thanks a lot.

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

Yes, good morning.

Good morning.

Just some clarification on-- you said that mix-- you expect mix to remain tough in '07. Can you just tell us specifically where you see the mix pressures coming from?

Well, I mean, I think if you look at our top 15 platforms, I think if we'd look at it, we probably would say that the GM SUVs, large SUVs will be down on a year-over-year basis. We think pickups will probably be pretty solid. If you look at our Ford business, we think they're forecasting to be down on a year-over-year basis surely in the first half, so we think mid-sized SUVs like the Explorer don't have much traction right now and --

Chrysler on the light truck side as well probably will have a tough first half.

Okay. And then on the-- just along those lines on the Electrical business was impacted more by mix. Is that just because that's a -- you have more content on the higher vehicles or is it technically a higher margin product?

Well there's two things. It's a higher -- the variable margin has an impact because it's more of a manufactured product, but it's, again, if you look at the products, we're down in the fourth quarter and many of them are projected to still be down in the first quarter. We have a lot of content on that. Not necessarily the large trucks but some of the individual vehicles that were off. The Explorer was one, the Durango, I think the Jeep is, we have some content on as well.

That's correct.

And then as we move through the year and if copper prices and resin prices stay where they are today, when do you think that we'll start to see some commodity relief hit the P&L this year?

Well, I think we'll start seeing some of the copper relief probably a little bit in the first quarter and in the second quarter once we roll off the inventory that we have. And as far as the other stuff, it should happen sooner if it's sustainable.

Okay. And then just longer term, Bob, as you move through the final phase of restructuring this year, you're generating a lot of cash flow. Do we go back into kind of a debt reduction story? Is that the main focus for is to shore up the balance sheet with some of the cash flow that you're generating in the out years post restructuring?

Yes. We'll be working the debt side of the issue here starting this year, but we've got opportunities out there that we're looking at for expansion of our business and we've talked about where we want to take the business longer term. We want to strengthen our Seating business globally. We want to enhance our Electrical Electronic businesses again globally. We want to grow in China, and so we're looking at opportunities, and part of the reason why I'm spending time out here is I'm reviewing some of the opportunities that I feel will help enhance that. The investment that was made in Lear not too long ago, a good portion of that money we're hoping to use to add new businesses to our Companies. So a combination of both.

Okay. Thank you very much.

Welcome.

You're next question comes from the line of Scott Merlis with Thomas Weisel Partners.

Good morning, everybody. Good evening in Thailand. Did you mention what percent of your costs in Electrical are non pass through?

On the copper?

Yes.

Yes. It's about 1/3 is not pass through, 2/3 we have agreements with our customer.

And when you look at that business and you just talked about growing it, is it more geographical and global expansion or are there certain niches that are not overly competitive where you're not bumping up against the Siemens?

We think probably to Bob's point, the largest and most significant opportunity to grow is in Asia, particularly in China. We think we can improve upon that number three position that we have, but we still think there's opportunities in North America and Europe as well and we're also continuing to grow in Latin America. And again, where we think we'll be best positioned to grow and really where we're driving is if we can demonstrate the lowest cost, that's fairly significant in that product segment and if we can complement that with some of the new technology, we really didn't talk on this call, but some of our new Smart Junction Box technology, we think we can continue to hold our own, and actually increase our penetration with the Asian, specifically the Japanese OEs.

And how do we think of your capital spending on the-- over the next three years, the average?

Yes, I think we're going to see ourselves in the 250, 300 range. And obviously that's subject to huge business changes, but --

Is a way to think about that also is that a lot of your Asian business is JV, so a lot of the JV partners are contributing to capital spending there to help you finance that growth?

Well, I think that that was true when we first got in Asia, but more and more, we have the majority position are 100% owned positions there. So that's not necessarily a factor, Scott.

One thing we are finding is capital in the region when it's purchased locally is significantly lower than in Western Europe and North America.

And to some extent, are you filling existing plants in Asia or are you-- is there a lot of Greenfield going on still?

No there's a significant amount of Greenfield. It's really not filling existing capacity. It's really Greenfield expansion.

Well you have to be located near the customer, too.

In some cases. I think what you'll see a little bit different than before is it's also investment on the component side as well so we're trying to find the right locations from an overall region so that we can ship to multiple locations and potentially even export back out of the country.

Got you. Thanks for the update.

Your next question comes from the line of Robert Barry with Goldman Sachs.

Hi, good morning.

Good morning.

I wanted to just clarify on slide 25, did you say the margin outlook was 5.5 to 5.6 or 5.5 to 6?

No, 5.5 to roughly 5.6 is kind of where we're at right now.

Okay.

I think a few weeks ago we had -- we said Electrical in the 5.5 to 6 range and Seating at about 5.5. So I mean we're still holding to that.

So nothing particular to read into the slight --

No.

Decline in the Electrical? Okay. And just a couple of questions on cash flow. How much working capital improvement are you expecting to contribute to that cash flow?

In 2007?

Yes.

I think in 2007, we expect working capital to be a use of funds so-- and I think the number is kind of in the 50 to 60 range.

Okay. What was it in '06?

In '06, we were able to generate cash by working capital from working capital. Primarily from the engineering and tooling collections that we had built up on because of all of the start-up activity we had.

Okay. And is there any reason in particular that the D&A is so much higher than the CapEx this year, and is that going to continue? Historically, it's been the reverse.

Yes historically, it's been the reverse. I think we've just come off a few years where we obviously had invested in a lot of capital in our Interiors business. And that was a business that is capital intensive. We've also invested a lot in the common architecture and put that in place, and so we see on a going forward basis a more moderate capital spending level. I think probably a little bit more consistent to where we were maybe three or four years ago.

That's-- and then just finally as we think about the International Auto Components group modeling that impact on the income line. Is there -- is it correct that there's no debt there so there'd be no interest expense?

Well, there's no debt there now.

It's anticipated that they'll have some debt in North America.

Okay. And any color on how we should think about taxes there, or the implications for taxes? Is there a tax benefit there given the losses?

Yes, I mean, at this point, we think it's really too early to talk about the accounting and so forth. In terms of the effect on us, really not much guidance we would give, either, other than to say that our equity investment is in that business is $25 million initially. And again, we expect the results from the core operations to improve from a year-over-year basis accounting issues aside.

Okay. Great. Thank you.

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

Thanks good morning everybody. I guess just a couple lets here. The cadence from margins in the Electrical business. Q4 a little bit low, does it kind of build off that base, weak first half, strong second half? Or is it kind of flat throughout the year?

Yes, I think we're going to -- I think the copper is still going to drag us and the inefficiencies that we have by switching over to low cost countries will continue. So we think in-- the other aspect is from an industry volume standpoint and the mix for that particular business we see them having a stronger second half mix than a first half mix. So we think volume works for them better in the second half, the efficiencies of the business we think will improve substantially second half versus first half. And obviously, we won't have the drag on copper and probably have a little uptick from the copper.

Okay. Just mentioned working capital in '07. Probably a use, is that because of how the commercial recoveries played out here at year end or why the pretty good use of working capital industry?

Well, it's not -- I mean I think this past year we're looking at working capital basically, it's now we're looking at about 33 million hits. Is that what it is?

Next year.

Right. But the 33 million hit, basically it's just we have-- we're assuming our tooling and engineering numbers will come up somewhat. And we see a favorable performance in terms of receivables, payables and inventory relationships.

Okay that's all I have. Thanks guys.

And that's really driven by the new business we're working on and the new business what we expect to pick up.

Okay, thank you.

Your next question comes from the line of Brian Johnson with Lehman Brothers.

Yes. Couple things. On the Seating margins, how many basis points would you ascribe the margin pickup to commercial recoveries and other pricing actions?

Zero to negative.

Okay so when we look at the commercial recoveries and the cash flows, that wasn't repayment-- that wasn't price surcharges or anything you recovered?

When I was speaking to commercial recoveries I'm really talking about the collection of issues that had been resolved already. And so it's really more of a collection issue. And most of that really had to do with tooling and engineering, and we always try to handicap how much the [inaudible] will pull into the fourth quarter versus the first quarter and our team just did a great job.

Okay but so within the margins was there any 4Q true up in income of build amounts, or amounts due or amounts charged?

There was really no benefit from pricing in the fourth quarter. It was really volume-based and again, it had to do with a little bit more favorable platform mix in North America and really our foreign operations going well.

Okay. And the second is, you're about a consensus 53 million in your overall build. CSM has the big three down 4%. We're probably a bit more negative than that. Where do you get your confidence in your 2% big three down number?

Well I think really when we look at it, we look at it more from a model standpoint because obviously that effects us a little bit more. And we think when we look at our individual models we think we're in pretty good shape in terms of where we're projecting the industry.

So we should really interpret that as your big three touch points as opposed to big three overall?

Right.

Okay, thanks.

Your next question comes from the line of Rich Kwas with Wachovia.

Guys, just wanted to follow up on the last question regarding the tooling and engineering. So this is mainly a cash flow issue for Q4 that it hit the margins previously because you had reserved for it?

Well, it didn't affect margins at all. It's basically just a balance sheet issue and it really was just a collection of things that we had on the balance sheet or items that were due us from the customer.

And then how do you look at that for 2007? Do you expect that to trend down in 2007 given that your launch cadence is peaking at this point?

Well I think, I mean part of the collection activity that we had in the fourth quarter cleaned up a lot of that. So when we look at the receivables, payables, and inventory relationship, we expect to generate some cash from that but we expect that our tooling and engineers costs that we put on the balance sheet will probably go up, and that's based upon, if you will, the new queue of business that we expect to win.

Okay. All right, thanks. That's all I have.

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

Good morning, gentlemen.

Hi, how are you doing?

Good morning. Let's see here. Just wanted to think about the Interiors business a little bit more. If I understood what you said correctly, you said that you had a loss of about $20 million excluding restructuring in the fourth quarter and you're going to see some improvement in the first quarter of '07. Was that correct?

That's correct.

Okay. So we take that number and we basically, from a modeling standpoint, have to take that off of our core operating earnings to get down to a bottom line number. If the deal closes at the end of the first quarter, then going forward, I would think that you would then record roughly 25% of a $20 million loss or something maybe a little bit more, something maybe a little bit less depending on how it performs in the second, third and fourth quarter. What would be the upsides and down sides to what I'm thinking?

Well, I think the issue is the number. We don't expect the $20 million loss a quarter that we incurred in the fourth quarter to be the sustained results of how we perform in Q1 and how that business performs going forward.

Okay. So as I think about modeling this into the second, third and fourth quarter, I would think that I would take the $20 million loss, bring that in, in an equity basis but only bring your share of it, roughly 20%. And you're suggesting that it's probably not going to be as much as that it maybe be a little bit less than that. Is there something else that I might be missing in that?

No, I mean I think that's basically the mechanics. If you model the joint venture, yes, we would incur 25% on-- from an equity standpoint up to our investment, which is $25 million.

Okay. And then what are your options if Wilbur Ross decides to go out and buy another business which has a significant loss associated with that business, what are your options and how might we think about that impacting the equity income line for Lear?

Well I think first off, Wilbur isn't in the business of buying companies at huge losses. So that's not a huge concern to us. I think we have the option to participate or not participate and obviously, how we choose to do that could affect whether we get diluted or not.

Okay. And as you think about the Seating margins and the progression of the Seating margins throughout the remainder or throughout 2007, do you see Seating margins being particularly stronger or weaker in the first half or second half of the year, or do you think it'll be just basically fairly consistent?

Well, there is obviously some seasonal impact to it. And there's obviously production impacts to that. So it's really kind of hard to channel that. I think we view it kind of as flat, but as more of these restructuring actions take hold, there'll probably be some benefit in the latter part of the year.

In the low cost country sourcing in the Electronics business, when does that start to positively impact your earnings? Is that a first quarter, second quarter, third quarter impact?

I think you'll see the majority of that start to impact the second half of the year as we get the benefit of the restructuring and actually building and assembling wire harness outside of the higher cost regions.

Okay. Excellent. Thank you very much.

Okay.

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

Hi, good morning guys. Most of my questions have been answered. Just two of them, if you assume a stable raw materials environment, can you just give us your updated sense on what contribution margins are in each of your two businesses going forward?

I hope I understand that question.

Your pickup and profit for every dollar of revenue?

If?

What would be sort of a rough estimate of what contribution margins are in the seating business and in the Electrical business?

Well, in both businesses, we set the incremental impact of a dollar sale up or down. I mean, excluding the impact of when you have the existing facilities in place, it's typically in the 18% to 22% range.

And it's roughly equivalent for both, because I mean I would have thought the Electrical business was a bit more capital intensive and maybe you've got a bit more leverage on that one?

Well it is and it would always come down sometimes to the product mix, too, and if you're more vertically integrated on the seating, that has an impact. So again, as a general rule it's 18% to 22%. And that's probably the best I can give you. On the Electronics piece, it would be probably a little bit higher.

Okay. And then earlier comment, you guys mentioned interest in strengthening the Seating business globally. I'm wondering if you could elaborate on that? Would you be interested in acquisitions in that business or just expanding in certain geographies where you may be a little weaker right now?

I think it's both. When we look at acquisitions, again, we continue to focus on technology or anything that we can do that would be a catalyst for our growth with Asian customers and for that matter, the region in Asia, which is why we put significant focus to Bob's point earlier about spending time there and looking to expand our growth there.

Aside from the four Seating players in Europe and North America that we all know about, are there others in Asia sort of local players that you would be thinking about, or am I thinking about that incorrectly?

No, well you're thinking about it correctly but I think our focus has been more on the component side when we look at acquisition targets, not necessarily companies that do complete Seat or anything along the lines of just in time, where we're primarily interested where they can help us with components and more specifically metals and mechanisms.

Okay. All right. Thank you very much, guys.

Thanks.

Thank you, if there's any more calls, are there any more calls?

Yes, sir, your final question comes from the line of Rod Lache of Deutsche Banc.

Hi, everybody.

Hi, Rod.

Hey, just really quickly on the Electronics, did you say what the magnitude of the copper hit was that you absorbed in '06?

Yes. We said it was about 1/2 of the decline in earnings for the year.

Okay. And there was also if I recall correctly, you guys had provided some pricing in advance of a shift to an L.C.C. on manufacturing in that business. Is there a date or some kind of time frame you can provide on when that shift occurs, and how would that impact the numbers?

Well, the shift is occurring, I think, that the key here is obviously getting up to the efficiencies that you had in the previous operation. So it's a combination of the shift which is going on and then reaching the optimal efficiencies that we have in the past--

When all is said and done, what's the impact of that action?

In terms of -- well, I think it gets our margins closer to historical levels.

That action alone would be a couple hundred basis points in margins?

Well, no that contributes to the, it contributes to it. I mean, obviously, the copper has been a big piece of it, too. So we expect the copper to be resolved by the kind of second, third quarter in terms of the recovery piece. And this move to low cost countries will --

Right. And you said that restructuring wise, you have a 5% head count reduction in total. What's the head count today?

I think about 110,000.

Yes.

I mean that's a little bit somewhat misleading because when you look at the head count reduction, it's probably been substantially higher than that in the high cost countries.

Okay, what was that number, I missed the--?

110,000.

104 at the end of the year.

Okay. The 310 D&A guidance, you had previously said it's 160 in Seating and 100 in Electronics, is the rest in the Corporate? Is that how you get up to the 310?

Are you talking, Rod, depreciation?

Yes.

Yes. More or less.

Okay. What's the Corporate and the other expense pro forma for this transaction? Does it come off of the level you had in 2006?

For what transaction, Rod?

Well, will the Corporate other expense be kind of consistent with the level that you had in 2006, or does it come down meaningfully once this Interior business is divested?

I think we've said it's going to come down somewhat probably over the next-- for over an 18 month period, and we thought it would come down about 10%.

Great. Okay. Thank you very much.

Okay. Just put a wrap-up on this. I know at this point there's usually nobody left on the line especially since there's a customer following us. We saw that at the last analyst thing during the auto show. We had a customer on behind us and about the last five minutes of our speech, everybody got up and walked out. So I'm sure that's pretty much what's happened here, but I just want to add what Jim said, my thanks to the people at Lear for your hard work, effort and for your contributions.

I think whether people believe it or not, we should be really proud of what was accomplished in 2006. It was a heck of a good improvement over 2005. I just want to you focus on the good things. We improved our financials. We got a new equity partner in the business. We had financing actions. We've repositioned the business on the I.S.D. piece. And I want to make sure that everybody understands that we feel bad that that has to go, but we think that the outcome for that division and for those people will be far better if they're combined with another business. And I think the growth with Asia and most importantly, I think our move to improve our competitive position globally is something that we should all be very proud of.

So I want to thank you all for the job and just thank everybody on the call. I appreciate everything you're all doing and stay focused on '07. Thank you.

Ladies and gentlemen, this does conclude Lear Corporation's fourth quarter 2006 earnings conference call. You may now disconnect.