Lear Corp (LEA) 2007 Q2 法說會逐字稿

Good morning. I will be your conference facilitator today. At this time I would like to welcome everyone to the Lear Corporation second 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). I would now like to turn the call over to Mel Stephens, Vice President of Investor Relations. You may begin.

Thank you. Good morning, everyone. Thanks for joining our second quarter earnings call. By now you should have received our press release and our financial review package. These materials have been filed with the Securities and Exchange Commission and are also filed on our website under lear.com at the Investor Relations site. Today's presenters are Bob Rossiter, Chairman and CEO and Jim Vandenberghe, Vice Chairman and Chief Financial Officer and also participating here in Southfield with me on the call are Doug DelGrosso, our President and Chief Operating Officer; Dan Ninivaggi, Executive Vice President and General Counsel; Matt Simoncini, Senior Vice President of 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 could impact our future results are described in the last slide of this deck and also 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 at the end of the slide presentation. Turning to slide number two, here we show the agenda for today's review. Bob Rossiter will provide an overview of the company including the current business environment and Lear's business plan for the future. Then Jim Vandenberghe will review the second quarter results and update our financial outlook for 2007. And following the formal presentation, we'll all be happy to take your questions. Now if you'll please turn to slide number four, I'll hand it over to Bob.

Thank you, Mel. I think we'll start off with what does the share vote for against the AREP merger proposal mean. Lear's shareholders obviously have voted and we respect their decision. At a time of the merger proposal we had a clear strategy and business plan for the future. We will continue to operate that and I feel that we can continue to be successful. After the -- after the proposal is made, the board was obligating to evaluate the offer, which they did, the special committee did and then the full board acted on it and made a recommendation to the shareholders. The following comprehensive and objective review, we felt that the offer was fair under the circumstances and during these times and the issues we were facing coming up to it and what we saw going forward, we thought it was a fair offer and felt we had to present it to the shareholders. Things have changed, obviously since Icahn came in last May. Things settled down. Again when he made the second investment, things changed. It also allowed us to do bank refinancing, helped us to get the interiors out from underneath Lear. It helped solve a lot of the customer concerns about our financial conditions.

I think all of those were very positive for the shareholders. All of which, did not weigh into the decision we made on whether or not to present this to the shareholders. We believe that there were benefits to the transaction, but we also believe that the company as a stand-alone company today, as it's structured with the debt financing behind us, we feel very strong and positive about it. So we can continue as a publicly traded company and believe there's a positive long-term outlook. The board and management team are focused on executing our strategic plan that we have in place. I think it's very aggressive and I think that the things that the team has done to restructure the business over the last two years has been outstanding and I think it's -- I think it bodes well for the company going forward.

If we go to slide five, obviously Auto sector valuations have increased significantly. The Big Three production in the first half was relatively stable, somewhat stronger than we had in the forecast and our other areas of the world are doing quite well for Lear. The stress on the supply chain has moderated but I tell you we're always on the lookout. It doesn't take much of a tip to send that going the wrong way. There were no laborer disruptions in the auto sector and I think the Delphi agreement with UAW really gives everybody a general feeling that the cooperation level between companies and the unions going forward is a positive. So, I feel pretty good about that, so does the team.

Our second quarter operating results obviously look very good. I think the team has done an outstanding job of structuring -- restructuring the business, taking costs out, operating like an LBO. In fact, I had a board member say at one point, what would you do different under Icahn that you wouldn't do without Icahn? I said I really don't think we'd do anything, because we've always operated like an LBO. And I think Doug and his team have done an outstanding job over the last year reinstalling that in Lear and I feel very comfortable with the operating philosophy of the company going forward.

If you go to number 6. If you look at the near term business assessment, conditions -- obviously continuing priority and focus on our quality and business fundamentals. That isn't going to change. The company has not changed, we will not change going, on a go-forward basis. We are going to become more aggressive in the marketplace. We think there are opportunities out there for us. I've heard a few competitors say that the supply base has weakened and they're going to go after the weaker suppliers business. Well, it's obviously not us. So we're going to do the exact same.

Seating business is performing quite well globally. I feel very confident that we have got a good product there. And on a go-forward basis, I think there's significant opportunity for us. I think there's opportunity to grow our Electronics and Electrical business. And we're looking for opportunities there to do that as well. But we are in the process of restructuring and that will take us a couple years. Further restructuring and volatility is expected in the marketplace. Obviously substantial progress on restructuring has been made by Lear, but also our customers and we continue to diversify our sales both in Asia, both with Asian customers in North America and globally. If you look at the success, I think the Asia-Pacific group of Lear is doing a spectacular job. Lou and his team doing an outstanding job growing the business, just since the last call, over $100 million annually and really $270 million up from the quarter. We're adding new customers, a number of new customers, Cherry, Geely. Obviously our business with Hyundai in North America is very strong, Mitsubishi. I think things are really starting to move out there and we're going to continue to focus on that.

On a go-forward basis, what do we see in our plan? Continue to execute our customer-focused business plan. We're going to grow and we are going to keep our customers first. We'll focus on our product lines. I think that has really changed the business and helped us to improve our operating margins, especially in Seating. We'll focus on our strengths. Our leadership position in Seating, we're going to strengthen our product offering and our operating margins in Electric and Electronic segment. I think there's continued opportunity for us there. We'll expand our capabilities and value-added components to make us even stronger on a go-forward basis. Operating priorities will deliver world class quality and customer satisfaction. We're going to continue to implement our global restructuring and footprint actions to be the low cost producer in our business. We will continue to aggressively pursue Asian business with both Asians here and abroad. That's taking place and will continue. And we'll continue our product innovation. We have got a number of new products I believe are coming out in the next several years that will put Lear ahead of the others. So I'll turn it now over to Jim.

Thanks, Bob, and good morning. Moving to slide ten. Before I review our financial results and outlook, I'd like to mention the major factors that are impacting our business. In the second quarter, special items including costs related to restructuring, to our restructuring initiatives, the merger transaction and the divestiture of our Interior business. Excluding these special items, core operating earnings in our Seating and Electrical and Electronic segments came in at $229 million, an increase of $65 million from a year ago. The solid improvement reflects favorable cost performance, operating efficiencies and a stable production environment in North America, improved operating performance in Europe and Asia and the benefit of new Seating business mainly outside North America. For the full year, our outlook for core operating earnings is slightly favorable. We now expect earnings to come in at or near the high end of $600 million to $640 million range we last provided. While first half operating performance is positive, the second half production outlook is less certain, particularly in North America. We do see our free cash flow forecast improving to $275 million, basically reflecting lower capital spending.

These are the highlights, now let me review the details. Going to slide 11. The industry environment in the second quarter remained challenging in North America, but again it was relatively stable and somewhat more favorable than we envisioned back in April. The North America industry production was about 4 million units, which was down about 2% from a year ago. Within this total, passenger cars were down 6% and light trucks were flat. The Big Three were down 7% and our top 15 platforms were down about 6%, in terms of unit volume. In Europe, industry production was about 5.2 million units which is up about 1% from a year ago and production from top five customers in Europe was also up 1%. Average commodity and energy prices during the second quarter were higher than the first quarter, but down somewhat from a year ago, with the exception of copper. Commodity cost changes didn't have a meaningful impact on our results in the second quarter. Commodity impact was somewhat positive in the Seating segment for steel and pretty much neutral in the Electrical and Electronics segment.

Moving to our financial score card for the second quarter on slide 12, starting with the top line. We posted net sales of $4.2 billion, which is down $655 million from last year. The decline reflects primarily the divestiture of Lear's Interior business and lower production in North America, offset in part by the addition of new business, primarily outside North America, and favorable foreign exchange. Operating results improved, reflecting the divestiture of the Interior business, favorable cost performance and again the benefit of new business offset in part by lower production in North America. Our reported income before interest, other expense and income taxes, was $195 million compared with $113 million a year ago. Our pretax income of $144 million and net income of $124 million or $1.58 per share also reflects solid improvement from year ago levels. On the next slide, I'll show these results excluding restructuring costs and other special items to highlight the underlying operating performance. SG&A as a percentage of net sales was 3.4% compared with 3.6% a year ago. Interest expense was about $51 million, down slightly from last year. Depreciation and amortization was $76 million, down from a year ago, again reflecting the absence of the Interior business.

Other expense was about break even and a significant improvement from a year ago, due primarily to favorable foreign exchange and improved equity earning in nonconsolidated joint ventures. Income taxes were low in the second quarter due to a favorable mix of country source of income and an adjustment for the Interior business. Our full year tax expense is still expected to be approximately $120 million. Moving to slide 13. This slide summarizes the impact of restructuring actions and other special items on second quarter results. Reported income before interest, other expense and income taxes for Seating, Electrical and Electronic business was $195.4 million. Excluding restructuring costs and other special items, core operating earnings were $229.3 million compared with $164.7 million a year ago. The improvement in operating earnings again reflects primarily favorable cost performance and the impact of new business globally. To help clarify how these special items impacted our financial statements, we indicated the amount by income statement category on the right-hand side of the chart.

Moving to slide 14, we summarize the impact of major performance items on our second quarter sales and margin compared with a year ago. As you can see, the major adverse factor for the change in sales was the divestiture of the Interior business and lower production in North America. Partial offsets were the new business primarily outside North America and the favorable impact of foreign exchange. Margin improvement was largely attributable to favorable cost performance and the benefit of new business, offset in part by the lower production in North America. Moving to slide 15 we take a look at our product segment results. Segment earnings are shown on both a reported basis and an adjusted basis, again which excludes cost of restructuring and other special items. To help understand our underlying operating performance, we've also provided adjusted margins. I should note, however, that our restructuring related initiatives which began in 2005, are expected to continue beyond the current year. We believe they are key to maintaining our long-term competitiveness. On an adjusted business, Seating segment results continue to improve. Results in the Electrical and Electronic business, however, continue to be under pressure. And our headquarter costs were lower.

I'll now review the results for major segments in more detail on the next few slides. Moving to slide 16, Seating margins continued to show solid improvement with all major regions up from a year ago. This reflects primarily favorable cost performance from restructuring, ongoing efficiency actions, margin improvement actions, selective vertical integration and the benefit of new business outside of North America as well as a slight net commodities impact in the quarter. Partially offsetting this favorable performance was lower production in North America, although truck production was flat. In Asia we benefited from our richer product mix and enhanced overall Seating margins. For the second half, we see margin impacted by lower truck production and program phase-outs in North America, a normalization production product mix and potentially higher steel costs.

Moving to slide 17. Looking at our Electrical and Electronic business, the margins were lower. The cause -- the decline was primarily caused by one-time litigation costs and other commercial items. Some other unfavorable factors in the segment were a very competitive net pricing environment, lower industry production in North America and really the beginning of the roll-off of two programs in North America. Net commodity costs were roughly neutral. Partially offsetting these factors was an improvement in our Asian results. For the second half, we see flat margins versus a year ago, as improved European results will be offset by the roll-off of significant programs in North America, causing unfavorable backlog of $120 million in the second half, coupled with the cost of launching replacement business that will come on stream in the 2008 timeframe.

Slide 18. Corporate headquarters expense. Our central overhead was down, reflecting SG&A efficiency actions and savings resulting from our restructuring activities.

Free cash flow on slide number 19 was positive by $204 million in the quarter, with ongoing restructuring investments being funded to operations. The positive cash flow during the second quarter reflects improved earnings, lower capital spending and favorable working capital.

Going to slide 20. These are the key assumptions for the balance of the year. In North America we see industry production of about 15.1 million units, which is down slightly from a year ago. Production for the Big Three is expected to be down about 4%, with our top 15 platforms forecasted to be down 7%. Impact on top 15 platforms will be more adverse in the second half, as revenue will be down approximately 15% for these products versus what we experienced in the first half. In Europe we see industry production of about 19.7 million units, which is up about 3% from a year ago. Production from our top five customers in Europe is expected to be up about 2%. As for the euro, we are forecasting a rate of $1.34 for the year, about 6% stronger than [last] year. With the exception of copper, we're assuming that commodities will remain at present levels or trend slightly lower this year.

Going to slide 21. 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, we expect net sales for 2007 to be approximately $15 billion. This is up about $200 million from the prior outlook and reflects primarily a stronger euro and increased production outside 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 $600 million to $640 million. This is unchanged from our latest update. But we now see full year earnings come in -- coming in at or near the top end of this range. Interest expense is estimated to be in the range of $210 million to $215 million. Our forecast for pretax income, adjusted again to exclude restructuring costs and other special items is in the range of $335 million to $375 million and reflects improvement in our interest expense outlook of about $5 million and lower other expense of about $10 million.

Our estimate for tax expense, as I mentioned earlier, is about $120 million and is subject to the actual mix of the financial results by company -- by country. Restructuring costs are estimated to be about $100 million. Capital spending is expected to come in about $235 million, which is down $15 million from our prior forecast. Depreciation and amortization are still pegged $310 million and finally free cash flow, as I mentioned earlier, is expected to be approximately $275 million. We see core operating earnings for the second half down slightly from a year ago and the second half outlook reflects primarily business roll-offs coupled with the potential for lower production on key platforms for Lear in the second half.

Going to slide 22, to summarize where we are. Lear is financially sound and our first half results are solid and will contribute to a solid year. We are making significant progress on our strategic priorities. While the North American industry outlook remains challenging, particularly for the second half, we will continue to implement actions to strengthen our long-term competitiveness. We'll now open it up for questions.

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

If we think about the long-term view that you have in the context of your view that the near term environment's gotten better and think about what you presented to shareholders on the -- in the merger proposal, on I think it was slide 33. The long-term plan came down significantly from the long-range plan in July to May of this year. I'm just wondering what we should be thinking about in that long-term plan and how significantly better the numbers may be?

Well, this is Jim, relative to that long-term plan, that plan was put together in at this time about a year ago. I think the major differences are two things. First off, the euro has appreciated from $1.20 to $1.35. That's added significant revenue, although the contribution to the bottom line is a little less than that because margins are typically lower in Europe. The other aspect that happened is that the overall outlook for industry production has come down relatively consistently since July and really since the second half of last year when our major customers in North America all announced some type of major restructuring initiative. So our view of the company on a going forward basis is we have some programs rolling off. Our backlog, we're working hard to build up our backlog. So we think our sales are going to be flat to modestly down over the next year. We see us offsetting that again through restructuring initiatives, so we see improvement in our core operating earnings on a going forward business and again we'll continue to work on the Asian business and so forth. But the plan we put together basically modified for industry conditions we think is still a very valid plan and we think addresses what we see out there in terms of production of the key products we're in.

So it would be fair to characterize those EBITDA forecasts that were down pretty significantly year-over-year as pretty conservative at this point.

When you say they were down pretty significantly year-over-year, I don't think that was accurate. I think we show that there's steady improvement there and that did include some piece for restructuring as well.

But if you look at slide 33, the EBITDA numbers are down $100 million year-over-year from your previous plan. They're improving going forward, but what I'm saying is that severe reduction that you had in that forecast for EBITDA, it seems like those numbers are fairly conservative considering what you just printed.

The forecast that we showed in there included restructuring. Whereas in the core operating earnings that we presented, we've excluded restructuring. So it just depends on what your viewpoint is.

Okay. If we think about this other line going forward, there was a big swing in the quarter. How should we think about that? I know it's tough going forward to forecast that line. Just round house, there was a pretty good improvement there.

We benefited to the tune of about $20 million due to foreign exchange. That's currency related. So you really can't take that on a going forward basis. Our outlook is in the 25 to 30 range in the second half.

Okay, and if we think about slide seven, the programs that you guys have won in Asia, it's pretty impressive. Just wondering if you could ballpark the range of content per vehicle on those programs. I know it's tough to give us specific numbers there, but sort of the high end of the range and the low end of the range.

Yes, typically in programs in Asia, the content for vehicles down -- or is significantly less than North America and Europe. I think, on average you can look at Seating and Electrical in that $200 to $600 per vehicle range.

And lastly, is there the potential that you guys would consider instituting a dividend here? And is there any sort of onerous restricted payment covenants in your debt covenants right now?

I'll let her answer the questions, Miss Shari, but I think right now we're trying to settle in after -- we've had actually a couple of tough years here and went through some difficult times in the marketplace, not us personally, but our customers have. We went through major restructuring and went through launch of all the programs, we've had to take the dividends out, we've had a proposal, a merger proposal by a company, we've had a lot of things happen here. We have got a company we feel is under control. We feel very positive about the future. We think there's quite a bit of risk out there in the near term, all of which you all see as well. And I think we're going try to operate through that in the environment and as we settle into 2008, we'll sit down and talk to our board about what the future is. Shari, you want to go ahead.

I'd just add to the credit agreement, we have some ability to do dividends, but it's limited over the next couple years and depends on our earnings.

Okay, thanks a lot guys.

Quit sending those slides out early, will you?

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

Hi guys, good morning.

Good morning.

I just wanted to clarify your answer to one of the last questions. If I'm interpreting correctly, it sounds like given weaker industry production and a stronger euro that helps revenue but not the bottom line, the outlook versus the latest long-term plan is worse, is that right?

No, that's not true. Well, the long-term plan anticipated the reduction in volume. The long-term plan that was posted in the proxy anticipated the lower industry. The quote adjustment management made to those July numbers basically reflected the lower industry production outlook that was basically envisioned by JD Power and all the major services that -- and including the analyst community. So that is still a solid game plan. We're in the process of updating that, but again, we see pretty much flat sales over the next couple of years, based upon the business that we have in-house and the business that we know is rolling off and based upon our belief that our traditional products will probably not improve in terms of production and we expect to offset that through intensifying our restructuring initiatives that will allow us to be a more competitive company. So we see improved earnings on basically flat sales, if we had to peg it for '08. You know, we're obviously working on -- very aggressively to build our book of new business as well.

Okay, is there a backlog number that you can give us now? A latest backlog?

The backlog as it rolls up right now is, over the next three years, is about $1.3 billion.

And how does it break down by year?

Well, I think about 800 of it is in 2007.

Right, yes, just over $330 in 2008 and--

Okay.

And 72 -- I'm sorry, 450 in 2008, 72 in 2009.

Okay, and then just finally, I think you mentioned that --

I might add on that, the backlog was about $800 million for that same three-year period back in January. So we have picked up $500 million worth of business for the '08 and '09 time period and we've also picked up business outside that range as well.

Okay, and then just finally, I think you said in the back half, Electrical margins would be about flat year-over-year, is that right? And what would it be for Seating?

For Seating, they also down again because of the lower production. Couple things, obviously lower production in North America and I guess more stabilized margins in Asia we think will bring that down. So overall we see margins in the Seating business kind of in the mid-6s for the year.

Okay, thank you.

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

Hi, good morning guys. Jim or Bob, could you comment on acquisitions? What your approach is right now. You're generating pretty good free cash flow. The balance sheet seems to be stabilized at this point. What is your approach and what would be the magnitude of acquisitions you're looking at?

I think really nothing's changed there from that standpoint. Obviously we've got a stronger balance sheet today that helps us quite a bit. But we're continuing to look for opportunities with Asian producers, things to grow that side of our business and we're looking to try to grow our Electrical and Electronics business. I think we've got several opportunities out there, all of which we're working on. I can't give you any indication of what's going to happen. I don't when it's going to happen or if it's going to happen. Just want you to know that we're focused on that piece of the business. Although we don't look at that as primary focus, we're looking for opportunities that will help us grow in Asia.

Okay, and Jim, how do you look at CapEx going forward beyond 07?

Yes, I think what we've stated is again, with the business backlog we have in place, we see CapEx in the $250 million to $300 million range this year. Coming off all the launches we had it'll be a little bit lower. We're spending some money in the back half of the year in low cost country sourcing and so forth and that will continue in '08. We're looking in the $250 million to $300 million range below depreciation and amortization.

And finally, with the Ross joint venture, where is the contribution from that land, does that land in other and how much hit this quarter?

Actually it is in other and it really didn't have much of a significant impact in the, in the second quarter and probably a little bit more unfavorable in the second half because of the same conditions that our other businesses are faced with. But overall I think it will be slightly unfavorable for the year.

Thank you.

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

Relentless is back.

You mean you're on the phone?

I'm looking forward to seeing you and your whole European management team in Frankfurt.

Great.

On the restructuring, I just want to get caught up here, you guys, I think you spent about $200 million on restructuring in '06 and you said the pay back would be about 2 1/2 years. I had $100 million in the model for '07, is that still kind of what we're thinking on the restructuring?

No, the numbers are a little bit off. To date we spent $250 million and we had $50 million in the first half of 2007. Last year in 2006, we had about $100 million. And so our thinking for the original program was $250 million, we expanded to $300 million in the first quarter call and--

Right.

-- we expect it to be about $100 million this year.

In savings. And so you still expect the full $300 million? You expect 100% pay back over 2 1/2 years?

No what we said was we think that it would be about a 2 1/2 year pay back when we initiated. We're on track, actually slightly ahead -- slightly ahead of that, but we're still tracking to that.

Okay, so what did you do, what have you done year-to-date in savings?

Well it's really, I mean, I don't think we capture that--

Yes, if you look at year-to-date savings, you project out through the end of this year, that number comes in around $160 million.

I'm sorry, the one -- oh, including '06.

Yes, that's including '06. So, you know, that's to date for the restructuring.

Okay, thanks. And then just one thing on the Electronics business. What do you guys need to do to strengthen that business? Are the markets that you're in too fragmented?

Yes, I would say, if we look at the Electronics, really the issue in our mind is electrical distribution and I think there's two components that we need to execute to strengthen that business. One, we need to grow our market share, both in North America and Europe, and we've got a plan in place to do that and some of the backlog business that Jim referred to is a result of the execution of that plan. I think the other piece is growth in Asia, where we think it's a pretty level playing field and we think there's significant opportunity for us to expand our business in that region. Leveraging our relation with the customers on the seat side, where we've had fairly significant and profitable growth. The only other point I would add to it that is part of our plan, is we're continuing to invest, as we are in Seating on the vertical integration back to the business. Trying to strengthen our position in terminal connectors and expanding that manufacturing footprint outside of Western European, North American markets into the lower cost regions. I mean, essentially that's our plan on the wire. On the Electronics side, which is the smaller piece of the business, we're just continuing to look for niche opportunities to sell what we think are good electronic products that our customers want and not really competing on a market share basis.

Okay and then, distribution is the boxes and the wiring, right?

Right.

Okay, so, in terms of, when you need to grow share, is it easy to do it organically or does it make sense to consolidate the markets?

We think there's an -- we can do it organically, it's a question of speed or how quick we can accomplish it. We think there may be an opportunity to do it via acquisition.

All right, thanks guys.

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

Most of my questions have been answered, but (inaudible) would any of the assets within that company have been interesting to you guys?

Some of them would. Yes, I think there was, it's obviously a high-end electronics company. And certainly there were pieces of it that would fit, but not whole scale.

And on the same thought, when you look at the portfolio right now in terms of acquisitions, I know you've done some vertical integration already, anything more we should think about that you guys may want to do, assuming the balance sheet remains relatively healthy over the next few years in terms of either products or geographies?

It's nothing more than what we said. It's Asia, electronics, and anything we can do to strengthen our Seating business.

Okay, and separately, any way to help us quantify the, sort of the typical, I guess, margin impact we should see from just the normal mix cadence that we'll see on the T900. The SUV's I guess next year are going to move into the third full year, the pick-ups in the second year. I know you guys have talked about expecting core operating earnings to up next year from the restructuring savings, but it seems like that would -- the platform mix deterioration in '08 should be a fairly material negative there, that it would be helpful to try to understand how to model that.

I thought you said all your questions were answered? I think in general we look at it again from a short-term fluctuation, the impact is generally 20 to 25% because we can't take out the fixed costs. I think clearly, you know, if our customers take down their capacity, we can take down our capacity as well. You've seen them take out a shift already at one of the plants and so to the extent we can do that, we can cut that down to more of a 5 to 10% range long term.

I'm sorry, 20 to 25%, that was a contribution margin?

Is a short-term impact if they take units out or go down for a week. Again, if they adjust their production or if we have the ability longer term to adjust our production, we can get that impact down closer to 5 to 10% range.

That's helpful. And lastly, maybe I'm just looking at this a little too closely, on the guidance, I noticed the range was left unchanged, but you kind of are suggesting you'll go to the upper end of the core operating earnings range, presuming the prior implication was kind of the midpoint, but I notice the free cash flow didn't really move up more than the CapEx improvement. So is there some offset there on the free cash flow, like greater drain from working capital maybe in the second half than you previously thought?

Not really. I'd say the greater issue, the reason why we increased our guidance the last time was, we increased it in the quarter, it was primarily driven by higher North American production for the quarter, but for the year, our outlook for North America remains roughly the same. So overall, the net increase is really driven by our foreign operations and our foreign operations basically will use a little bit more cash in terms of getting those earnings. So we won't see it yet this year.

Okay, great. Thank you guys.

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

Good morning. Just want to follow up on the question about incremental savings. Did you guys say that there's $300 million in total savings for the whole program, that's through '08? And you've done $160 million so far so $140 million in '08, did I understand that correctly?

That's a cumulative number so basically what we said is our restructuring actions typically have about a 2 1/2 year pay back. To date, we've completed about $250 million of our restructuring so we're on track kind of at about a $100 million pace and probably doing better than that right now.

Okay, so you're not, can you comment on what the incremental savings you would expect for 2008, what kind of ballpark you're looking for?

Well, the good news is we're going to do more restructuring, so we're going to save even more. We have another, we have some actions we're taking in the second half, and again, are about $50 million, and I think next year again we've stated that over the next couple years we see another $200 million and probably will be a little bit heavier in 2008.

Right, I think you said about $100 million in '08.

I think that's probably on the low side.

And then just to this original long-term plan, you originally talked about $13.9 billion of revenue in '08 and now it's kind of flat, so it's $1 billion higher. It sounds like half of that is FX.

Probably 3/4 of it is FX.

Okay, what kind of, when we think about the contribution to FX, to the segment operating income, can you give us, how significant is that? Obviously it's not the full translation.

Primarily euro.

What's that?

Primarily driven by the euro.

Right, but is it like a 6% kind of benefit for every dollar incremental from FX or is it lower?

We're not -- I don't think we can really disclose that. You'll have to take your best shot at that.

All right, but is it basically translation or are there some transactional negatives that offset the benefit from translating the higher rest of world profits?

There really is no significant negative or positive from the transactional piece of it. It's really all translation, and again, historically our European Seating markets have been the less than elsewhere.

Is that still the case?

Historically they have been yes.

Can you give us the backlog break down between Seating and Electronics businesses right now?

We'll dig that out. Give us a second to dig it out.

One other data question, do you have a figure for what your off balance sheet securitization was at the end of the quarter?

There was nothing in AVS and in factoring, we had $269 million.

269. Okay.

For '07, the backlog is practically all Seating with minor amount in Electrical and we had some growth in international operations offset by some lost businesses in the U.S., North America. Over a three-year period, it's about $1 billion of it is in Seating. About $200 million of it's in Electrical

Your next question comes from the line of Brett Hoselton with Key Bank Capital Market.

The backlog numbers that we're talking about, just so I got them correctly, I was thinking 800 million '07, 450 million in '08, and about 75 in '09, are those roughly correct?

Yes, that's about right.

Is that consolidated or unconsolidated?

Consolidated.

Can you give us the tax impact of the unusual items in the quarter?

I think the difference between the tax expense on a reported and adjusted basis is about $19 million.

Okay. And then the Electronics business, you talked about some litigation costs, two questions there. Can you quantify the litigations costs and secondly, is that a second quarter event only or is that also potentially carrying over into the third or fourth quarter?

I think we would characterize it primarily as a one-time issues. There could be some slight carry forward on a going forward business and that's probably as much as we would comment on.

And but yet, you said it was probably the majority of the impact in the quarter?

Well, it, it contributed to, obviously there's a lot of pluses and minuses there, but it obviously was fairly significant.

It wasn't only litigation, there were several items.

Okay. Thank you very much.

Thank you.

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

Thanks, good morning.

Good morning.

I hate to keep coming back to this, but I'm looking at your slide presentation that you made to ISS at the end of May where the $13.9 billion revenue figure for '08 showed up. You're saying that that number was at $1.20 euro even though at that time the exchange rate was like $1.35. So that was kind of an outdated number?

Yes, but remember, that was the plan that was included in the proxy statement that was first developed in January. Which was essentially an adjustment to a plan that was done in July of '06. So the numbers in there were really dated even at that point.

Okay, but so to be clear, the current expectations for '08 now is for revenue to be flat versus '07.

Flat to down somewhat because of the program rollouts. If we look at it, I think backlog is a slight positive and then industry volume, we see is a potential risk there.

Okay, what are those two electronic programs that are rolling off?

There's a GM program and a Daimler-Chrysler program. The DTS and Jeep Liberty.

Okay, the Seating margin in the quarter, you did comment that it will be a bit softer in the second half. It's in the 7% range is that kind of a high water mark for that business even as we look out into the future?

Well, yes, I believe some things click for us in terms of all the restructuring and we had fairly stable production and we actually wound up with some increases in terms, in releases from Ford and Daimler. So I think absolutely, it's high water mark. Not only there, but also as I mentioned in Asia, we think we had a richer product mix in the quarter and Europe did fairly well as well. So they all contributed to it.

Okay, I know that you don't report this, but maybe you can give us an idea of, on a regional basis, North America, Europe, Asia, how operating margins are trending. Are you still well ahead of where you are in Europe, in North America and where are the rest of the world margins these days. Just some ballpark numbers would help.

We're not really going to get into that. I think what we said was back in 2004 when our margins were at the 6% level, basically our game plan was is that we thought we could reduce or get back to that 6% level primarily driven by our work on a global basis, improving the margins in Europe, also in Asia and also in South America. We have been able to do that and that's contributed to really the -- our coming back. European margins have bounced back somewhat as well because of the more stable production, getting some of the start-ups behind us. But it's really the global mix I think that has helped us as much as anything.

Last one. Typically Lear's seasonal cadence has the fourth quarter as your best quarter from a margin perspective. Is there any reason to expect that that is different now because of actions you've taken or businesses that you've exited or should we expect better margins in Q4 than in any other quarter?

I would say no, and the reason is again, we continue to believe that truck production will be down in the second half versus the first half and we don't know if that's going to occur in the third quarter, the fourth quarter or be spread out or even if it's going to happen at all. What things are happening in the second half is that we see our mix in Asia returning to a more normalized level. We also have some new programs there for the business that we won that will increase our expenses somewhat in the second half and particularly in the fourth quarter. We also have our customers are -- we've got some programs rolling off, actually Seating has a net business backlog in the second half is a negative $20 million and it's a little greater than that in the fourth quarter, so we have some programs rolling off. Some will roll back on in 2008. So those factors really will I think drive lower margins in the fourth quarter than the second quarter. There's always a balance. The second quarter and the fourth quarter are typically the strongest. Our concern is that they're -- we're going to face lower production in the fourth quarter.

That's helpful.

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

Thanks good morning.

Good morning.

Just another balance sheet question here. The others I think have been answered. With the Icahn deal, you're willing to take on quite a bit more debt. And now you've commented on dividends and M&A, so what do you need to see before you're willing to put the strength of the balance sheet to work? Will we see a share buy back? What are the plans here?

I think, let's set something straight here, in terms of our business we believe we need to strengthen our balance sheet and improve our credit rating. That was our game plan before the Icahn transaction came along and that's still our game plan. I think we were willing to consider a more leveraged transaction with a sole equity partner because that equity partner had the same interest we had and was going to be in for the long-term. Obviously as a public company, you know, with our stock bouncing around a fair amount, the different news that comes and goes, it's less reliable. So our answer is, we are less inclined to take on more leverage right now. We believe we really need to strengthen our balance sheet than we would have under a going private transaction.

Thanks, that's all I had.

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

Great, thanks. Good morning everyone.

Good morning.

Just a few questions to start on slide 14. Your walk here. First of all, on the FX translation, you said sales change $143 million margin impact neutral, do you have the dollar EBIT impact? And is that separate, I assume it's separate from the other income benefit that you talked about I guess maybe on the hedging side. Could you just clarify that?

Well, I think really, again, primarily that's related to the euro and as we said, we haven't really given our margins on a geographic basis. So Jonathan, you're going to have to take your best shot on that.

All right. I can do that math, but to clarify it is separate from that $20 million benefit you talked about?

We're saying from a margin impact overall for the company, it was neutral. It didn't swing it one way or another. It will be comparable to what our average margin is for the company. We're fairly close to that, which I think was about 4% for the quarter.

And this slide, we're talking about the operating margin as opposed to pretax earnings. The other that was impacted is outside the operating margins.

Okay I got it. So these are separate items.

Correct.

On the global new business, I would imagine the GMT900 is probably the most beneficial of these programs. Could you discuss what the next most beneficial is because that seems like a positive contribution on your walk.

The GMT900, remember we had that program before.

I understand. It's a refresh.

Only other thing we would include there is the incremental content which wasn't that great. About $50 million of that and really the rest is just --

The Range Rover --

I would say out of that list, the (inaudible) is probably the most significant contributor in the business.

Okay, I guess finally, and other the people have hit on this, but it seems like there may be some element of conservativism in your guidance here. Certainly the last time you did this much EBIT was '04 and you ended up with numbers significantly better, granted the industry's a lot different the second half than it was in '04. Are you embedding in sort of very rapid production changes into your outlook, some sort of buffer or increase commodity prices or is this just sort of normal course declines in production due to slow sales in the industry that you're thinking about?

Well, I think our main concern is if there is a production cut back how will that happen? If you kind of go back to the 2005 timeframe, it happened relatively quickly. Again we expect lower production. If production comes in where we had, where we have it pegged today, which is again lower for top 15 platforms, again we should be in the top end of our guidance if we're -- comes in better, obviously we have upside and it works the other way as well. So it's primarily driven by our concerns about potential production corrections and really just being cautious about the second half.

Okay. So if we saw schedules released next month that had a 4Q cut, that wouldn't be so terrible as compared to one of these where they call you up on Friday and tell you to take things down for Monday.

Right.

Thank you very much.

After the questions, the only ones left on the call probably are Lear people. I want to thank you for the job you've done. I think operations overall has done an exceptionally good job. So thank you. Thank the Asian team for the growth and the things that are happening out there, and I rarely say it about Europe, but you guys are doing a spectacular job as is South America. I never say anything about the corporate team. They're doing a heck of a job. Dan, you and your team killed yourself with this AREP merger proposal, but I really appreciate everything you've done. Overall I want to thank everybody. I want everybody to know I feel good. I think Jim feels good. Doug feel good. Dan feels good. And there's nothing to celebrate right now, we've got a tough year ahead of us still I believe. But I feel confident in the company, I feel confident in the team and I really feel confident in the future. Thank you all very much for the job you do and I look forward to the next earnings call.

This concludes the Lear Corporation second quarter earnings conference call. Thank you for your participation. You may now disconnect.