Lear Corp (LEA) 2007 Q1 法說會逐字稿

Good morning. My name is Jennifer, and I will be your conference facilitator today. At this time, I would like to welcome everyone to Lear Corporation's first quarter 2007 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 of Investor Relations. Sir, you may begin.

Okay. Thank you. And thank you, everyone, for joining us for our first quarter earnings call. By now you should have received our press release and our financial review slides. These materials have been filed with the Securities and Exchange Commission, and they are also posted on our website, Lear.com, under the investor relations section.

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

Before we begin, I would 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-- some of these factors that could impact our few results are described in the last slide of this deck, and they are also included in our SEC filings. In addition, we'll be referring to certain non-GAAP financial measures, additional information regarding these measures can be found in the slides labeled non-GAAP financial information, also included at the end of the presentation.

If you'll turn to slide two -- here we show the agenda for today's call. First, Bob Rossiter are cover our first quarter highlights. Next, Doug DelGrosso will provide an update on our operations, and then Jim Vandenberghe will review our first quarter results in more detail and update our financial outlook for 2007. Following the formal presentation, we will be happy to take your questions.

So now if you'll turn to slide number four; I'll hand it over to Bob Rossiter.

Thanks, Mel. Good morning. I'll be briefly commenting on the highlights from the first quarter. Jim give a more detailed information. We did have improved first quarter results and the outlook for 2007 has also improved. We completed the transaction on our North American Interiors business with the divestiture. And we are turning our full attention to strengthening our core Seating, Electronics and Electrical businesses. Superior quality, service and customer relationships will continue to be a major priority for the Lear team, and Doug will report on several honors that the Company has received.

The global restructuring of our business is moving on target. We will enhance our global competitiveness, focusing on our global footprint, vertical integration, optimizing our purchasing priorities to achieve the lowest possible cost of components and driving down our engineering costs, at the same time, developing new innovative solutions for our customers. Also, we're making excellent progress on expanding our infrastructure in Asia and growing our Asia business with Asian producers globally. Lastly, on February 9th, we entered in to an merger agreement with an affiliate of Carl Icahn.

So if you please move to slide five. We don't plan to discuss the merger proposal on the call today, but we have provided on this slide some of the key dates relative to the merger. The merger agreement provided Lear with a 45-day period to actively solicit alternative business. While the solicitation period ended on March 26th, we have had discussions with certain parties that originated during the discussions-- during the solicitation period, as is allowed by the merger agreement. In the event no competing offers are received, the Icahn merger proposal is scheduled to be voted on by stockholders of record on May 14th at Lear's annual meeting, which is set for June 27th. The Board of Director's position in favor of the merger proposal will be set forth in detail in a final proxy, which is scheduled to be distributed to stockholders in mid-May.

Please move to slide six. Before I turn it over to Doug and Jim, I wanted to briefly comment on the strategic path we are on. Following periods of growth, including a number of strategic -- large strategic acquisitions, and then a focus on operational excellence, where we fully integrated our global operations and adopted common operating practices, we are now in the process of repositioning our Company to improve our future competitiveness.

The next slide shows the major elements of the strategic repositioning we embarked on. Please move to slide seven. First, we are managing our business with strict product line focus. We determined that the Interior business was no longer core, and we have now completed the transition of this business to a joint venture with strong partners and have retained a minority interest. Our full attention now is on leveraging our leadership position in Seating, strengthening our capabilities in Electronics and Electrical Distribution System, and expanding our capabilities in value-added components such as foam, mechanisms in Seating and terminals and connectors for Electrical.

In terms of specific operating priorities, we continue to maintain world-class quality and customer service levels. At the same time, we are continuing to implement global restructuring and footprint actions to improve our future competitiveness. We are making steady progress on expanding our infrastructure in the fast-growing Asian region, growing our sales of Asian manufacturers globally, and developing new business opportunities with a focus on product innovation and technology.

Now I would like to turn it over to Doug, who will discuss each of these priorities in more detail. Doug?

Okay. Thanks, Bob. I have summarized here the major progress we made in the first quarter relative to our operating priorities. First and foremost, the entire team kept its focus on improving quality to customer satisfaction levels. This effort was recognized by our customers, as we received numerous awards during the quarter. We made further progress on our global restructuring initiatives. We continued to expand our capability in Asia and one significant new Asian business during the quarter. In the area of innovation, we showcased a number of new products and technologies at the SAE World Congress. I'll highlight a few of these products within our core dimension framework in just a minute. In short, we are well along the path of restructuring our operations and repositioning our products for improved future competitiveness.

Slide 10 summarizes some of the major customer awards we have receive sod far this year. This recognition reinforces the emphasis we placed on delivering superior quality and customer service. What is gratifying is the diversity of the recognition we received. In addition to the awards from large global customers, such as Ford, GM and Toyota, we have also were recognized by several other major European and Asian automakers. In addition, we received some excellent recognition for our premium sound system on the BMW M5 from a leading German automotive magazine.

Now let me briefly comment on the status of our restructuring initiatives. In response to depressed industry conditions, changing market trends, and significant restructuring at our major customers, we launched a worldwide restructuring initiative in mid-2005. Our objectives were to eliminate excess capacity, respond to structural changes within the industry, and accelerate our move to low-cost countries. We estimated the total investment for this program to be about $250 million. As we outlined in January, we now expect to incur approximately $50 million in incremental investments this year, bringing the total restructuring program to about $300 million. The additional restructuring will allow us to take future advantage of low-cost country opportunities, and more fully respond to our customer's actions. We're on track to achieve ongoing, annual savings of about $125 million, as part of our restructuring initiative.

Beyond 2007, we will continue to invest in restructuring actions that are required to respond to structural industry changes and make -- that make economic sense for Lear. Asia-Pacific region is key focus area for the Company. Over the past few years, we have significantly increased our presence there. We now have operations in six key markets; China, Korea, India, Japan, Thailand and The Philippines. In total, we have 41 manufacturing sites and seven major engineering centers. These facilities support the entire product range of our core businesses in the region. In China, we have our largest concentration of infrastructure, a highly diversified customer base, and a broad-based product capability in Asia.

We believe we are well-positioned to grow our market share in Asia to participate in the region's projected growth and support our global operations with low-cost components and world class engineering. Capitalizing on growth opportunities in Asia and with Asian automakers worldwide, continues to be a major operating priority. This slide help us put our progress into perspective relative to this objective. Over the last several years, we have grown our total Asian sales by an average annual rate of about 30%, and we see strong Asian sales growth continuing at about 25% rate, annually. China represents a major annual avenue of growth, and the Chinese market will account for a significant portion of our projected total Asian sales by 2010.

Slide 14 shows the steady progress we're making with respect to rapidly growing our Asian sales. In the first quarter, we were awarded several new programs in Asia, with Asian manufacturers globally. These new awards total about $170 million in annual revenue. The new business is with Nissan globally and a number of Asian automakers, including Nissan, Hyundai, Geely, Mahindra & Mahindra, DongFeng, and Shanghai GM.

Turning now to innovation. Shown here are some examples of the latest Seating products and technologies we featured at the SAE World Congress last week. Seating innovations range from our ProTec Head Restraint System to a number of flexible seating configurations, including those that improve comfort, such as our Reclining Rear Seat, to others that improve -- increase functionality, such as our SmartFold Electronic Seats, to those that provide excellent performance and value, such as our Flexible Seating Architectures. We also introduced our Aventino Collection of premium leather and we highlighted our growing capabilities with alternative, more environmentally-friendly materials such as soy foam. Another seating feature with great consumer interest is our Multifunction Seat Back Panel, which is configurable to a number of user-friendly options, such as enhanced stowage and a variety of multi-media connections and capabilities.

Last but not least, on slide 16 we show some of our examples of Electronics and Electrical innovations. We offer a number of electronic safety products, including our Intelligent Headlight Systems, our family of TouchTec Controls -- provide added convenience. In the environmental area, we offer a wide range of high voltage wiring and connection. We also provide a number of electronic features that enhance the vehicle 's interiors, including Ambient Lighting and Rear Entertainment Systems. The cornerstone of our electrical distribution capability is our Smart Junction Box technology. And our latest innovation in this area is Solid-State Circuitry, which dramatically reduces waste and cost and improves performance. Finally, we offer several utility electronic products, such as power inverters and converters.

This concludes my update on operations. Now I'll turn it over to Jim Vandenberghe. Thank you.

Thanks, Doug. And good morning. If you could move to slide 18, please. Before I review the results, I would like to mention several major factors that impacted our first quarter financials. First off, we closed the North American Interior joint venture transaction, or IAC, on March 31st. The reported first quarter includes North American Interior results. For the balance of the year, we will recognize our minority investment in IAC on the equity basis.

Special items in the first quarter include costs related to the divestiture of our Interior business, costs related to our restructuring initiative, the merger proposal, and a curtailment gain related to the freezing of our U.S. salary pension plan. Excluding these special items, our underlying operating results for the quarter came in above previous expectations. The improvement reflects -- reflects less adverse Lear platform mix globally, coupled with favorable cost performance and operating efficiencies.

Our non-North American operations provided most of the upside benefit due to strong starts in Europe, Asia and South America. North America Seating was also somewhat favorable to our original expectations, as some of the anticipated schedule reductions did not occur. While we are still operating in a challenging environment, we are increasing our full year guidance to reflect the improved outlook for our non-North American operations.

Moving to slide 19. The industry environment in the first quarter remained challenging as expected. Overall industry production was about in line with our expectations, and Lear's platform mix in major markets was a little less adverse than we had estimated. In North America, industry production was about 3.8 million units, down 8% from a year ago. The Big Three were down 12% with a slightly better mix than we had forecasted. In Europe, industry production was about 5.1 million units, which is flat with a year ago, and our top five customers in Europe were also flat with a year ago. Average commodity and energy prices during the first quarter moderated somewhat from the quarter -- from the fourth quarter but ended with an uptick.

Over the last 12 months, average prices for resins and copper are up, polypropylene is up 2% and copper is up 17%, steel is down 4% and crude oil prices are down 9%. Overall, commodity cost changes did not have a meaningful impact to our results in the first quarter.

I'm moving to our financial scorecard on slide 20. Starting with the top line; we posted net sales of $4.4 billion, which is down $272 million from last year. The decline reflects lower production in North America and the divestiture of Lear's European Interior business, is offset in part by the addition of new business outside of North America and favorable foreign exchange.

Operating results improved, reflecting favorable cost performance and the addition of new business, offset in part by lower production in North America. Our reported income before interest, other expense, income taxes was $184 million, compared with $54 million a year ago. Pre-tax income of $82 million and net income of $50 million, or $0.64 per share, were also above year-ago levels. On the next slide I'll show these results, excluding the restructuring costs and the other special items, to highlight the underlying operating performance.

SG&A as a percentage of net sales was 2.9%, compared with 3.5% a year ago. This year's results include the impact of the U.S. pension plan curtailment gain, offset largely by restructuring costs and other special items. Excluding these special items, SG&A costs improved about 10 basis points on a year-over-year basis, reflecting efficiency actions and restructuring savings.

Interest expense was up -- and that came in about $52 million, which is up $4 million from last year, the increase primarily reflects higher rates on debt that was refinanced last year. Depreciation and amortization was $75 million, down from a year ago, and reflects the absence of depreciation in our Interior business. Other expense included a gain on the sale of Lear's interest in two joint ventures in 2006, and a loss related to a joint venture transaction this year. Excluding these factors, other expense was up slightly from a year ago.

Slide 21 summarizes the impact of restructuring actions and other special items on our first quarter results. Reported income before interest, other expense and income taxes was $184.4 million. Excluding restructuring costs and other special items, core operating earnings were $181.4 million, compared with $81.2 million a year ago. The improvement in operating earnings reflects primarily favorable cost performance and the impact of new business outside of North America. Our reported pre-tax income was $82.3 million. Excluding restructuring costs and special items, our pre-tax income was $108.8 million, and this compares with a pre-tax income of $15.5 million a year ago. To help clarify how these special items impacted our financial statements, we have indicated the amount by income statement category on the right-hand side of the chart.

Slide 22 summarizes the impact of major performance items on our first quarter sales and margins compared with a year ago. As you can see, the major adverse factor for the change in sales was lower production and unfavorable platform mix in North America. The divestiture of European Interior business was also a factor in our sales decline. And partially offsetting that was new business outside of North America and the favorable impact of foreign exchange. The margin improvement was largely attributable to favorable cost performance and the benefit of new business, offset in part, again, by the lower production in North America.

On slide 23 we show what is happening in our product segments. Segment earnings are shown, both on a reported basis and an adjusted basis, which excludes cost restructuring and the other special items. To help understand our underlying operating performance, we have also provided adjusted margins. On an adjusted basis, Seating results continue to improve, as did the Interior segment. Results in Electronic and the Electrical business, however, declined, and had -- quarter costs were lower. I'll review of our results for each of these segments in detail over the next few slides.

Slide 24, we show our Seating margins continuing to improve. The improvement reflects the benefit of new business outside of North America, savings from restructuring actions, ongoing cost and efficiency actions, improved earnings in Europe and Asia and the favorable -- slightly favorable net commodity impact, as well. Partially offsetting this favorable performance, again, was the unfavorable volume and mix in North America. Non-North American operations accounted for all of the improved performance. North American operating results were slightly lower on reduced sales of $247 million.

Slide 25, our Electronic and Electrical business margins declined. The unfavorable performance in this segment reflects primarily lower production and unfavorable platform mix in North America. We also experienced unfavorable net pricing. This is really pricing in advance of our restructuring efforts that we talked about on previous calls. Partially offsetting these adverse factors was an improvement in our Asian results.

Moving to slide 26. In our Interior segment, our results improved from a loss to a small profit. This turnaround is explained by elimination of depreciation expense, as all of our assets have been written off. In addition, we have also had ongoing cost reductions, lower new program development costs and commercial recoveries. Partially offsetting the favorable performance was, again, the unfavorable volume in North America. Lastly, our overall headquarters expense for corporate overhead was down, reflecting SG&A efficiency actions and and savings resulting from our restructuring activities.

Turning to cash flow on Slide 27, free cash flow was a negative $32 million in the quarter. This ongoing restructuring is being funded through operations. The negative cash flow during the first quarter is more than explained by unfavorable working capital. This reflects our normal seasonality of working capital, offset in part by lower engineering and tooling. Compared with a year ago, free cash flow improved, reflecting primarily lower capital spending and higher earnings. The Interior business accounted for 100% of the unfavorable cash flow in the quarter. Our core business was at a break-even level from a cash standpoint.

Going to slide 28 and our key assumptions for the 2007 outlook; in North America, we see industry production at about 15.2 million units, which is roughly flat with a year ago. We see production for the Big Three down about 4%. In Europe, we see industry production of about 19.3 million units, also flat with a year ago. Production for our top five customers in Europe is expected to be down 1%. As for the Euro, our forecast is based on a rate of $1.32, about 5% stronger than last year.

Key commodities began to moderate in the fourth quarter last year. With the exception of copper, we're assuming that commodities will remain at present levels or trend slightly lower this year. Regarding the cadence for North American production in 2007, we are more optimistic about our schedules for our key platforms in the first half versus the second half than we were on the last call.

Moving to slide 29. This slide summarizes our 2007 financial outlook for Lear's core businesses. The outlook shown here excludes Lear's Interior business for the full year. On this basis, Lear expects net sales for 2007 of approximately $14.8 billion. This is up from last year on a comparable basis and reflects primarily the addition of new business globally and the positive impact of foreign exchange, partially offset by unfavorable platform mix and volume in North America.

Our core operating earnings, or income before interest, other expense, income taxes, restructuring costs and other special items, are estimated to be in the range of $580 to $620 million. This is up $20 million from our prior forecast, reflecting improved cost performance and favorable overall performance in our international operations. Interest expense is estimated to be in the range of $210 to $220 million.

Our forecast for pre-tax income, adjusted to exclude restructuring costs, and other special items is in the range of $290 to $330 million. Our estimate for tax expense is a range of $100 to $120 million, subject to the actual mix of financial results by country. Restructuring costs are estimated to be about $100 million. Capital spending is estimated to be approximately $250 million. Depreciation and amortization around $310 million. Finally, free cash flow is expected to be positive by approximately $240 million.

Based on our current view of production schedules in North America and Europe, we expect to see year-over-year improvement in our core operating earnings in the second quarter of 10 to 20% versus last year. This number for last year would have been about $165 million. This is -- again is driven by our non-North American Seating business. We see core operating earnings for the second half as flat to slightly down. And our outlook there reflects business roll-offs, coupled with the potential for lower production on key Lear platforms.

That concludes my remarks, I'll turn it now over to Bob.

Okay. Just a few closing comments. There's been a lot going on at Lear. And I want to thank the Lear team for being focused on the business and for the progress that we're making. I especially want to thank the teams in Europe and Asia for their outstanding performance in the last several months, especially the last quarter. Our strategy is on track and we are now focused on our product line results, our customers, our competitive footprint, building our core business -- and we are winning new business all over the world. 2007 will be a challenging year, but the Lear team is on track to deliver improved financial results and position us for future success.

Now I'll open it up for questions.

(OPERATOR INSTRUCTIONS) Your first question comes from John Murphy with Merrill Lynch.

If you think about the business in the longer term and you get beyond the next couple of quarters and maybe hold all else equal; as your Asian business grows as a percentage of the total business, we will structurally just see your margins expand? And how long do you think that expansion, if it were to happen, will continue?

Well, I mean, I think we have -- we have talked in our core businesses -- we've said that we expect Seating to improve. We are seeing that improvement. I think we are ahead of schedule on Seating. I think as we expand in Europe, we think we will see some slight margin expansion from that, but it's going to take some time for that to really have a significant impact. Long-term outlook is we do see Seating margins expanding by the growth in Asia, I think also more so from selective vertical integration that we're looking at.

In the Electrical and Electrical Distribution business, again, we see margins expanding, obviously we have to get through some restructuring activity, probably also have to get our capacity in line with -- where North American production is right now. But again, we would see expansion there as well.

Maybe more specifically on the Asian business; is the mix -- or I'm sorry, is the -- are the margins structurally higher there than what you're seeing in North America, currently? Do you expect that to continue, going forward?

I think long term the margins in Asia are pretty solid, as they are for generally any kind of a developing area. And I think longer term we'll probably see them come down somewhat, but that will be offset by growth.

Okay. And if we think of the bidding process and how the bidding process is changing here, are you seeing better pricing terms when you are bidding on new contracts? Are you getting better raw material pass-throughs? And how are you seeing the bidding landscape change? Because clearly, in Seating and Interiors and even Electrical, there's some pretty good transition going on in that segment of the vehicle. Is there anything that you are seeing that is more favorable or less favorable, as you work through transition and the segment works through transition?

Jim, you want me to take a stab at that one?

Yes.

I think, John, the best way to characterize it -- to me the most significant change is -- we're really not getting into contracts that have multiple years of productivity built in to them that are contractually binding. We have got annual contracts. And each year when we talk about productivity, we take in to account, what is happening in the raw material and commodity markets, what is happening with volumes, and some of the things that have major impacts on our cost structure. If I look at it -- the customers are still looking, and they are very aggressive, at cost reduction, but this is -- this is kind of annual discussion, and the environment is taken in to consideration. I think that's -- at least, really connected costs with -- with price in a little bit more direct way than perhaps we have done in the past. There's still no direct pass-throughs on raw material in a very simple way. It's just taking all of the environmental issues, and having a discussion around price associated with that.

So it is fair to characterize that as -- it's still tough but getting slightly better, and your typical 2 to 3% price downs are no longer in existence?

No, they are -- it's still very tough. I don't want to minimize that. And the pricedowns are still there. I think there's a lot more focus on the cost side. There's certainly a lot more focus on the VAVE and the offsets to productivity, and that's all tied into the overall productivity discussion.

Okay.

As opposed to having to catch up with those issues with contractual, annual productivity agreements that kick in to effect, kind of regardless of the environmental conditions.

So it's more of a productivity and cost discussion as opposed to a pure price discussion?

Yes, that would be a fair way to characterize it.

Lastly on CapEx. You guys were pretty light in quarter, $29 million to $250 for the full year. You still comfortable with that or it is potential to be slightly more efficient in the $250?

We're still looking at $250. We have some things coming on in the back half, some business coming on that --. But we expect to be kind at the $70 pace over the balance of the year over the next three quarters.

Okay. Thanks a lot.

Your next question comes from Chris Ceraso with Credit Suisse.

Thanks, good morning.

Good morning.

I was hoping we would get into, a little bit more, some of your comments about the first half versus the second half. What are you seeing in the outlook that suggests profitability would get weaker relative to Q1? You're looking at $600 million in profit for the full year, you did almost $200 here, in the first quarter. Maybe we can get in to more detail there on the expectation first half versus second half.

It's primarily production. And our view is that -- when we went in to the quarter, we expected to see some additional scheduled cutbacks. We saw some of it, but we really don't see much fall-off in the schedules. Inventory levels remain relatively high. In our view, we're just being prudent. We don't know if production is sustainable, particularly when you look at one of the key models, and obviously one of those key models is the GM pick-up truck. I think we're just being a little cautious in terms of the impact of that. The other thing that impacts us is we have some business rolling off in the fourth quarter. And one of our plants, the GM [Oshawa] plant, goes down for changeover for an entire month and that has an impact on us, as well.

Okay. Can you give us any examples -- if I heard you correctly, mix was a little bit better than you thought in Q1, even in North America? Are there any product lines in particular that you'd single out that held up better than you thought?

Well, I think the GM truck obviously came up faster than what we thought.

On the pick-up side as opposed to the SUV side?

On the pick-up side. And actually the SUVs probably were a little better than what thought going into the quarter. They were down on year-over-year basis, but better than what we had anticipated.

Okay. And then last one on the taxes. It looked like -- almost kind of a normal tax rate. And you had been seeing very high rates because of the valuation allowances there, changed the mix of where your profits are coming from. Is it going to run at kind of a normal rate for the rest of the year?

I think we gave guidance of $100 to $120 million on the tax expense. As the pre-tax income increases, naturally the effective rate goes down. And we did have a strong quarter in Asia, South America, and certain Western European countries.

Okay. Thanks.

Thank you.

Your next question comes from Brian Johnson with Lehman Brothers.

Good morning. Could you give some more clarity around the cash use in working capital? And also whether there were any of the cash contributions from the future -- for the divestiture. I'm not sure when those cash items hit.

You are talking about the quarter, or for the year, now?

Let's talk about the quarter and then roll forward to the year.

The biggest use of cash in the quarter was obviously working capital and it's a seasonal issue. Typically, when you get into the fourth quarter, the end of the year is your strongest position from a cash standpoint, because the customer really hasn't even operated the last 10 days. So there is always a seasonal swing there. And that really accounts for most of it. And that -- that pretty much accounts for it.

Okay. And then the second question is, as we go through the cash for the remainder of the year, how do we think about the cash that you need to send out with the Interiors business? Or is there any change to that, given improved performance, even ex depreciation?

Yes, I think where we're at is that we have the potential for an additional contribution of up to --

It's up to $40 million.

Up to $40 million.

Which has been escrowed.

Okay. And can you just recap the mechanics of that close, in terms of timing?

On the -- ?

North American Interiors divestiture to Wilbur Ross.

It closed on March 31st.

Okay. And so was there cash delivered at close?

Yes, $40 million was put into escrow.

Okay. And does that -- where does that show up in the cash flow statement here?

It doesn't, because it was put up as a letter of credit.

Okay. Thanks.

Your next question comes from Rod Lache with Deutsche Bank.

Good morning, everybody. Can you hear me?

Yes.

Looks like the full year EBITDA that is implied by your guidance is $890 to $930. And you have $125 million of cost savings next year. And it looks like a bunch of that business that you won, based on your slide, looks like it's fairly short lead time. So I -- the question is- - looks like your '08 EBITDA potentially could be $1 billion or more. Is there anything wrong with that logic?

Well, I think you are missing the fact that North American production is down quite a bit and our key platforms are down quite a bit.

I'm asking '08, so the walk to next year from the $890 to $930 this year?

I don't think we're prepared to make any comments on '08 right now.

Okay. You mentioned that you remain in talks with other interested parties. Could you comment on whether they are more in the financial buyer kind of realm, or strategic?

We really can't comment on that.

Can you quantify the backlog -- the incremental backlog that is coming on this year and the update for next year?

Yes, the backlog that we had talked about last year was about $800 million. And I think most of that comes on this year, and I'm scurrying for that slide -- here it is, right in front of me. We have $800 million coming on this year, and that business is all -- pretty much 100% in Seating. And about $700 of it is basically non-North American business.

And next year?

And next year its -- our backlog is $100 million with basically a $200 fall-off in North America -- actually about a $300 fall-off in North America due to programs running off. And obviously, the offset there is non-North American business.

Okay, so that really hasn't moved? It looked like a bunch of these -- the $170 million in new business that you booked, some of them have dates in '07 and '08. That's not material to those?

Let me go back for a second. That's the backlog -- typically we only report on the backlog once a year. Since that time in the last quarter, we picked up about $550 million worth of new business, about half of that will come on over that backlog period. And let me just see what comes on in '07, '08. We have another $120 million coming on in '08.

In addition to that $100 million that you reported previously?

That's correct.

And then, I have been looking at the -- just the historical cadence of earnings for Lear, and I can't really find any occasion where the first quarter represented more than 25% of the full year number. And typically, the fourth quarter is a pretty good number also with -- with the true-ups that typically occur. This year looks like it is different. Would you consider the $580 to $620 conservative? Is that -- it just seems like it's an awfully low number for the rest of the year relative to what you achieved in the first quarter.

Yes, some of the big impact is -- is one, obviously, truck production is a big part of our North American business. And we expect that production will be down in the second half versus the first half. The other things affecting the second half, and really primarily the fourth quarter, is that we have a couple of electrical business that are rolling off, and we also have -- I mentioned, GM is changing over a car plant. Basically, it's two assembly lines for us. And that's occurring in the fourth quarter as well, so we have about four or five weeks of downtime there. So those are the two main impacts, in addition to a lower expectation for production on the trucks.

So you would -- you would characterize this as realistic as opposed to conservative?

Well, I mean, we have a forecast based on 15.2 million units and there are so many trucks in there, and if they build them all in the first half, then there will be less built in the second half.

Yes.

That's kind of what our view is. And I think that's consistent with what we have seen out on the Street as well.

Thank you.

Your next question comes from Himanshu Patel with JPMorgan.

Hi, I just had two quick questions. You mentioned strength overseas, particularly in Europe. Was that at all related to the production environment coming in better than expected? Or was that just internal cost savings at Lear.

I think it was a combination of two. First off, we have launched a lot of new business in Europe over the past year, and we're really getting the benefit from increased volume. We also saw -- in our top five customers, they were flat on a year-over-year basis, but some of the luxury vehicles did better, so that helped us. And then the other thing is, we have a jump on some of the cost reductions that we had factored in there later in the year. And that really -- that accounts for it. I would say about 60% of it was favorable volumes and the rest was cost performance.

Okay. And then getting back to the pricing discussion earlier; we have heard the comment from your competitors as well that the pricing environment seems to be improving. Can you give a little bit more color by product area? Is that improvement primarily visible on the Interior side, or are you seeing it across the board with Seating and others as well?

Doug, you want -- ?

Yes. I think we're seeing it -- shouldn't say I think -- we're seeing it across the board. I think if you look at the way the customers -- they are really not separating Seating from Electrical Distribution, for example. Their approach is the same. I could point to Ford as a very good example. They moved away from what I would call a -- a market-driven pricing cost discussion, more to cost modeling that is built around some fairly detailed breakdowns of the costs. And as a result of that, there's a stronger link between the real cost and the environment and the impact to our cost structure in the ultimate price. So -- to me, it's just a little bit higher level discussion, and it's consistent between Seating and Electrical Distribution.

And the pricing environment remains very tough. It only works -- you can only improve the margins, obviously, if you have the low cost structure. It's not that the customers are getting easier, it's that our cost structure is getting in line.

But it does sound like the days of predetermined annual pricedowns, for several years being written into contracts; it sounds like that's more the exception than the rule now. Is that a fair statement?

Yes, I think that's a fair statement. Certainly, the customers have very aggressive expectations and targets that they put out annually. And your ability to grow and maintain your position with those customers is built around your ability to hit those targets. And our focus has been, as Dan said, on the cost side, and in using our ability to get to a lower cost structure to support that initiative. And it's not just -- contractually obligated without recognition of an offset of how to achieve it.

Okay. And one last question. On the acquisition front, anything out there that you guys would care to chat about? Where -- whether product areas or geographic areas that you are are feeling there are some opportunities that you could maybe tap into in the next 12 months or so?

We are looking at a number of acquisitions, we always do. And unfortunately, I can't share any of that information with you, so we'll just leave it at that.

Is it fair to say most of outside of North American? Or are they North American assets as well?

A combination.

Okay. Thank you very much.

Thank you.

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

Good morning, gentlemen.

Good morning.

First question here, when does the actual vote to approve the Icahn offer take place? Is that the June 27th date?

Correct.

Okay. Second question is; is there a possibility -- and it sounds like what you are suggesting here is that there is; is there a possibility that there could be a competing bid still out there?

There's a possibility. I mean, obviously, we have been in these discussions for quite a while and we haven't received another acquisition proposal. So you'll have to handicap that yourself. But there is a possibility, sure.

And then given that you have had -- what appeared to be good solid first quarter results, is it a possibility that Carl Icahn -- you may be able to negotiate with Carl Icahn for a better offer price of $36?

Obviously, we have a binding agreement with (inaudible). So we'll obviously comply with that agreement. And the real issue is whether there will be a competing proposal.

Got it. Okay. Thank you very much, gentlemen.

Thank you.

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

Good morning, guys.

Hi, Ron.

Just two questions. First, one on the quarter. The gross margins -- did the rich mix of the T900 and maybe the production as well offset the effect of the other lower top programs on the gross margin?

I think really the gross margin was impacted by us really improving our overall cost performance. Our sales were down in North America on a year-over-year basis. We were talking about from -- from mix standpoint, it was favorable to what our expectations were. On a year-over-year basis, really improvement is based upon cost performance. We've -- now that we have launched a lot of these programs, we don't have the support cost to support the launches and so forth. We have cut back on some of our overhead structure. And that really drives the year-over-year performance.

Was -- were the top programs a drag at all, though?

The top programs are a drag, cause our mix is unfavorable on a year-over-year basis. Are you talking about the margin on our top programs?

Yes, I'm saying basically, inside your negative mix, you had some pretty good programs also.

I don't think that's necessarily material. I think, really, it was driven by -- again, in North America, our margins improved on lower sales primarily from cost reduction activity.

Okay. And then just on this whole merger thing, I guess in a proxy -- on March 20th, you guys filed a proxy, where you lowered your profit guidance for 2008 through 2010, pretty significantly. And now, 30 days later or so, we're raising '07 significantly. So what happened in that last month? And do you rethink that '08 through '10 guidance?

Actually, the '07 numbers in the proxy statement are consistent with our current guidance. It's, I think, $488 million of OI with restructuring of a little over $100 million. So that gets you close to the midpoint of our current guidance range. And again, the longer-term outlook was based on the production outlook, which hasn't really changed materially since January or February -- the longer-term outlook.

So the long-term outlook doesn't change then?

No.

The '08 through '10?

No.

All right. Okay. Thanks a lot.

Your next question comes from Rob Hinchliffe with UBS.

Thanks, good morning, everybody.

Good morning.

I guess a couple of quick ones. You are talking about being a little cautious on trucks for the back half of the year, GM pick-ups it sounded like. Is that -- is the thought there just simply, hey, pent-up demand in the first half or first quarter is sort of already been used up? Or are you thinking there's some regulatory thing or gas prices that are going to impact the second half?

Rob, we're not that smart.

That's what I was wondering about. Okay.

We just -- we forecasted a volume for the year for the trucks, both on SUVs and pick-ups. And we're ahead of the game in the first half. There's obviously a labor negotiation that's occurring in the second half. And inventory appears high. So our view is if there is going to be an inventory correction at all this year, it will probably be in the latter half of the year. If they exceed their volumes, then we'll do better on any one of our key platforms.

And then thinking along those lines, Seating margins, what are the next three quarters look like for Seating margins? Trucks, obviously, play a big role there. Do we hold on to these levels? Or do they start to come down a little bit?

Well, I think overall -- I think, as we mentioned, there's some issues affecting us. I think for the rest of the first half, our margins should be solid. The third quarter, again, probably will be somewhat favorable. In the fourth quarter, we have got some issues with some changeovers and potential inventory corrections. So for the first half we're pretty solid, should be solid through the third quarter. And then the fourth quarter we see -- see it down somewhat on a year-over-year basis.

Okay. That's all I had. Thanks a lot.

Thank you.

Your next question comes from Jon Rogers with Citigroup.

Hi, yes, good morning. I guess that I just want a little bit more color on this mix issue. And it seems -- are there specific platforms that sort of offset the 900? And then I guess as a follow-up, does mix then peak sort of in the second quarter for Lear?

All right. I think we're kind of losing track here. So the improved performance in Lear on a year-over-year basis was driven by our non-North American operations. Okay? They basically accounted for all of the year-over-year improvement. Margins did improve in North America on the Seating business. Again, that was driven by cost reductions. For Europe, we expect Europe to be solid, basically, within the original expectations we had for the balance of the year. In North America, we see basically our programs down on a year-over-year basis. The only exception is, I think trucks we had flat -- we had the -- originally we had anticipated that GM's trucks -- or the pick-up truck would be flat on a year-over-year basis and the SUVs would be down somewhat. The mix -- obviously, we're affected by what happens in the industry. With the GM truck being a little bigger peace of our business, that affects us a little more. But overall, our mix assumptions are pretty much tied in with what is happening in the industry.

But with the new pick-up trucks coming online, that was a favorable contributor to mix, right?

Favorable contributor to mix in the first quarter from the standpoint of -- while the overall industry was down, that product was up.

Okay. Thank you.

Your next question comes from Patrick Archambault with Goldman Sachs.

Hi, yes, good morning.

Good morning.

Just on -- on how to model the Interiors JV going forward, should we consider that potentially loss-making in the remaining quarters, simply because you are not going to have the recurrence of these customer recoveries that you described?

Yes, I don't think we -- I think basically our guidance is we haven't factored anything in there for it. So in our view, there's no impact this year, and we'll provide updates as we know more.

Okay. But I mean, it sounds like, if we stripped out the D&A, it was probably closer to break even. And then I'm assuming that, all things equal, it should probably go back to loss-making if you are not getting the same levels of customer recoveries, right? Like I'm thinking about that the right way at least?

The first quarter is not indicative of the run rate. The depreciation, I think, would have been about $25 million, so it would have had a small loss (inaudible).

Okay. And I guess -- can you tell us a little bit more about your copper exposure in Electronics? And how significantly you have that hedged over the -- I don't know, coming six to 12 months, let's say?

Yes, in copper we buy roughly about 100 million pounds a year. About 75% is -- we have recovery through our customer contracts. That's the wire piece. Typically there is some lag, in terms of the recovery of that. The other 25% that we have exposure on, typically, we negotiate those prices on a year-to-year basis. We have done some protection in terms of advanced purchases and some hedging on that. So we don't think, on that piece of our business, that any further change in copper will have a significant impact on us. There could be impact to us in terms of the lag effect if copper continues to rise, in terms of our recovery with our customers. Don't see copper as a huge -- as a huge issue for this year.

And I guess -- I mean, the other thing that you seem to highlight is obviously pricing pressures having increased in that segment. Can you just tell us a little bit about why you are coming under pressure more now than the previous price givebacks you had traditionally given in the business?

I think the pressure has always been there. What we had to do was, we had to move business from a high-cost country to a low-cost country. It wasn't economical for us to do it right away. So basically we had to front the customer the savings and now we're in the process of basically offsetting that by implementing our restructuring plan and moving the business to a low-cost country. That's one aspect of it. The other aspect is that while copper has increased on the 75% that we don't have hedged, it will probably take us sometime to recover that.

Okay. And I guess lastly, just a housekeeping one. Out of the restructuring that you highlight on slide 11, can you give us a breakout about how much of that is cash?

90% of it.

Sorry, that was 90%?

Yes. We're running about a 90% clip.

Okay. All right. Thanks, guys.

Thank you.

Your final question comes from Jonathan Steinmetz with Morgan Stanley.

Thanks. Good morning, everyone.

Good morning.

A few final ones here. You said currency was neutral to the margin. Do you have a dollar figure on how it impacted EBIT?

We are would say a couple million.

Okay. Is there any reason to think that the seasonality would change this year or be different, other than sort of production issues, in terms of whether -- is there more cost savings in the front half of the year that gets accelerated versus normal year? Or is there more clarity on some of the true-ups that causes you to be able to book things more in the first quarter and less in the fourth quarter? Or would you say it's a normal year, from a seasonality perspective, other than production?

I would say it's a normal year from a seasonality standpoint. I think what happened is, in Europe come of the cost reductions that we had anticipated -- as I said, they got off to faster start than we anticipated.

Okay. Lastly on the GMT 900 program, both the SUV and pick-up side in particular; is mix running richer on the pick-up launch than you expected? And are the SUVs hanging in there better than you expected?

Well, again, remember that we're in a launch phase. So the SUVs are down -- production was down on a year-over-year basis, somewhat. Again, we would say it was probably a little better than what we expected, sitting in this seat 60 days ago. Pick-up trucks are always hard to tell because they are in a launch. The launch came up relatively well. So you'll have toe see what happens over the next few months, in terms of what happens.

Okay. Thank you very much.

Thank you. Just a couple of closing comments, the only people left on the call are probably Lear people. Again, I want to thank the entire team. I want to especially thank the European and Asian teams, because the things that we set up as objectives in Asia and want them to do in Europe are actually taking place. I'm really proud of that.

Lastly, I don't want to minimize the effort for anything that the North American team is doing, it's doing a spectacular job. It's just the market environment is a little bit different for us here and there's a lot of restructuring going on. So you guys are doing a great job, too.

I want to thank you all and look forward to seeing you in the near future. Bye.

This concludes this Lear Corporation's first quarter 2007 earnings conference call. You may now disconnect.