Lear Corp (LEA) 2007 Q3 法說會逐字稿

Good morning. My name is Louanne, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Lear Corporation third quarter 2007 earnings conference call. All lines have been placed on mute to prevented any background noise. After the speakers' remarks there will be a question and answer period. (OPERATOR INSTRUCTIONS)

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

Thank you, and good morning, everybody. And thanks for joining our third quarter earnings call. By now you should have received our press release and our financial review package. These materials have also been filed with the Securities & Exchange Commission, and they have been posted on our website at Lear.com under the Investor Relations link. Today's presenters are: Bob Rossiter, our Chairman, CEO and President, he's joining us from Asia, and here in Southfield, Jim Vandenberghe our Vice Chairman, and Matt Simoncini, Chief Financial Officer, are our other presenters. Also presenting here in Southfield in the call are: Daniel Ninivaggi, Executive Vice President, Raymond Scott, Senior Vice President and President of our North American Seating Group, Shari Burgess, Treasurer, Jim Murawski, Controller, Bill McLaughlin, Vice President of Tax, and John [Trafal], our Vice President in Finance.

Before we begin I would like to remind you that during the call we will be making forward-looking statements that are subject to certain risks and uncertainties. And some of the factors that could impact our future results are described in the last slide of this deck, and also in our SEC filings. In addition, we will be referring to certain nonGAAP financial measures. Additional information regarding these measures can be found in the slides labeled nonGAAP financial information also located at the end of the presentation.

If you turn to slide two, here we outline the agenda for today's review. Mr. Bob Rossiter will provide an overview of the Company, then Jim Vandenberghe will provide an update on business conditions, and next Matthew Simoncini will review our financial results and the outlook for the business. And following the formal presentation we will all be happy to take your questions. Now if you'll turn to slide number four, I will turn it over to Bob Rossiter.

Thank you very much, Mel. I would like to start off by talking about the industry trends and our response to those trends. Since mid-2005 we've been restructuring our operations. We implemented a number of actions to increase shareholder value and improve our overall competitive position for now and the future. We still face many challenges, but we continue to improve our operating financial results. Our Seating business is performing well globally. Our Electronic and Electrical business needs further improvement. The business is in transition as we relocate to lower-cost countries and a lower-cost operating structure.

Today there is a -- the market itself is a fiercely competitive environment, and in this segment -- and I tell you right now it is extremely tough to play out there. We are undergoing consolidation and restructuring, and we know there is opportunity both organically in growth and through acquisition to strengthen these businesses. In terms of diversification of our sales, Asia offers us the best opportunity, and the team there is doing an outstanding job and had significant success in Asia in the first nine months and recently in this last quarter both in Asia and globally. We've made many changes in the company over the last year, but the one thing that remains the same is the force that drives the company, and that's our customer. Quality, service, and our relationship are key to our growth.

If you'll turn now to slide five. On slide five we've implemented a number of actions to improve shareholder value. Number one, the implementation of our global restructuring initiative. That will improve our long-term competitive position. We've accelerated our global foot actions and have reduced man power to match, and we've actually went deeper than that. Number two, we've refinanced our 2007 through 2009 debt maturities and divested of our interiors business to IAC in Europe and North America, and we renewed our focus on growth. This is a priority for me. It is for the entire company, and I am personally committed to that. Collectively these actions have significantly improved our operating result at the same time making us more competitive.

If you move now to slide six. Slide six we start the strategic assessment of our business group. Our seat systems business is still an excellent business, and it is globally and it is core and central to the company overall. From a market environment standpoint Lear has a very strong competitive position globally. We will maintain that, and we're looking for ways to enhance it. And the businesses overall performing well in every area of the world. Our core strategy's, to leverage our global leadership and systems integration, to achieve the lowest cost global footprint, and I think we're fast underway doing that. I think the actions we've taken over the last year-and-a-half to two years have really put us out front, and we also want to expand our capabilities and our value-added component. We want to enhance those through growth internally, through developing new products and also through acquisitions but more importantly moving those out of the high-cost areas. And we also further want to grow our sales and diversify. We see Asia as the opportunity for us to grow, but I will tell you in all areas of our seat business there is significant opportunity for the company to grow, and from a business outlook standpoint our core strategies do support our leading competitive position globally in all our components and our growth opportunities as we go forward.

Now move to slide seven. We'll talk about our electrical electronics segment. As I mentioned, it is going through difficult times, but still very profitable. There is significant opportunity out there for us, but there is fierce global competition that is depressing the margin. We think that a lot of the opportunities are coming up -- are coming from consumer demand shifts for more electrical content in vehicles such as safety-related features, infotainment, and obviously our strong position in power equipment. The core strategies obviously are to further develop our systems integration capability in that area. I think we really do have a strong control over the interior electrical architecture in that product. I think that that's going to give us an advantage going forward and also to achieve again the lowest cost global footprint.

Today we're under pressure. We still have a number of operations that are in the process of being relocated. We capitalize on emerging technologies in our power distribution systems and also value-added electronics product. If you look at the business outlook, there is significant margin pressure obviously in the current near term, because the industry and also the restructuring consolidations taking place, and also significant new business coming online over the next few years has got us in a pretty good position, but again it has been very difficult, and it has a solid future I think opportunity by strengthening our global position in the power distribution in growing the electronics business.

If you move now to slide eight, we'll talk about IAC. Since the joint venture's been formed IAC has provided opportunity for future success in our interiors business. We play today in both areas of the world that we think are significant. Industry consolidation, restructuring, and I think the business integration in this segment is on track, and I think the IAC group is well ahead. Lear is positioned to participate in improving business fundamentals. IAC Europe is about $1 billion in sales, and we have a 34% minority interest in that business. In North America about $3 billion in sales, just recently completed acquisition of Collins & Aikman's soft trim business, where Lear contributed $32 million to that and will own a 19% share of the business, but it is on track and moving forward.

In terms of growth in Asia, talk about that specifically. We'll update our backlog of business in the first quarter next year, but overall for the year we've had over $530 million in new business added in the first nine months and just $245 million in the last quarter alone. I think more importantly the number of the business and how broad based the customers are are really selling to everybody out there in Asia, and that's one of the reasons why I spend a lot of time out here as well. But it is personally something that I think has significant growth potential for us. I think we have an absolutely outstanding team in place here today and doing a fantastic job, and I see more and more success as we go forward.

If you look at slide 10, you see also a number of the major customer awards, and that's been important to us, awards in terms of quality, look at the different opportunities there, but the customer base, the number of Asian producers, Toyota, Mazda, the number of European producers, Chinese producers, that is a measure of your performance, the measure of your relationship, and it always -- also leads to growth. I would like to turn it over to Jim Vandenberghe for the business conditions.

Thanks, Bob, and good morning. We're going to start out moving to slide 12 and go over the present business conditions. Starting out with the macroeconomic factors in the U.S., the outlook is mixed. Positive factors include lower interest rates and moderating commodity prices. The risks include consumer credit, a weak housing market, and high oil prices. And capital markets remain volatile. Sorting through all the data, we still see fairly steady overall demand in the auto sector, and that is exactly what we've been experiencing this year. Certain important segments of the market such as full-sized pick-ups and large SUVs continue to be under pressure. In Europe overall demand is also relatively stable at a healthy level, and in Asia industry growth in major markets continues.

As for specific industry developments, supplier consolidation and industry restructuring are continuing. Also importantly the UAW has reached a new pattern labor agreement with the domestic auto makers. We'll comment on these trends and developments over the next few slides. Moving to slide 13, about two-thirds of Lear's revenue in North America comes from light trucks, and this is concentrated among full-sized pick-ups and full-sized SUVs. These large utility vehicles steadily increased in population in 2000 until 2004. The growth in these vehicles was driven by moderate fuel rises and increased functionality. However, since early 2005 the North America vehicle market has become increasingly more challenging, and higher fuel prices have led to a shift in consumer preference away from full-sized pick-ups and SUVs. At the same time there has been a rapid growth in cross-over vehicles that are more fuel efficient and offer similar attributes as their full-size counterparts. As a result, North American production for high interior content, full-sized pick-ups and SUVs has been on a slightly downward trend. While production for full-sized pick-ups and SUVs is up slightly this year, reflecting new pick-up entries from GM and Toyota and increase in some spending, projected production for 2008 is down about 9% according to the CSM production outlook, it's basically been factored into our outlook as well.

And moving to slide 14, Bob talked about to offset lower production on key truck platforms in North America we are aggressively pursuing growth opportunities in Asia and with Asian auto makers on a worldwide basis. Over the last several years we've enjoyed strong growth in total Asian sales. Going forward, we see this growth moderating somewhat, but we're still targeting significant revenue growth. China continues to represent a major avenue of growth, and the Chinese market will account for a significant portion of our projected total Asian sales in the next few years.

Turning to slide 15, give you an update on our restructuring. As Bob mentioned in response to challenging industry conditions, and shifting market trends, significant restructuring by our customers as well, we launched an initiative back in mid-2005 that affected our operations on a worldwide basis. Our objectives were to eliminate excess capacity, respond to the structural changes within the industry, and accelerate our move to low-cost countries to improve our competitive footprint. We have been implementing a $300 million overall restructuring plan. This has provided funding for a substantial realignment of our global manufacturing footprint. We now expect to incur an additional $25 million this year, bringing the total restructuring program to about $325 million. The additional restructuring will allow us to take further advantage of low-cost country opportunities and more fully respond to customer actions. We are on track to achieve annual savings of $125 million this year and ongoing annual savings of $150 million. Beyond 2007 we'll continue to invest in restructuring actions that are required to respond to the structural changes and make economic sense for Lear. These investments could be significant.

Moving to slide 16, obviously, a very important recent development for the North American auto industry has been the successful negotiation of new labor contracts between the UAW and the domestic auto makers. Importantly, these agreements were reached without significant production disruption. Nearly all the press reports and analyst opinions have indicated that these agreements will support improved competitiveness for the auto makers and preserve union benefits. The implications for major tier one suppliers like Lear has been less clear. Some reports speculate that this contract will result in significant insourcing of business by the auto makers and a loss of competitiveness for major suppliers. We do not believe this is the case. While we are still in the process of evaluating the major provisions of the contracts, our initial reaction is that first we fully intend to maintain a competitive wage and benefit structure at all of our facilities as we negotiate new agreements.

And, second, while auto makers may bring some contract work and other noncore functions back in-house, we do not see a fundamental change in overall sourcing patterns for our core products. At this point I would like to turn it over to Matthew Simoncini, Chief Financial Officer for Lear Corporation.

Thanks, Jim, and good morning. Please turn to slide 18. Before I review our financial results and outlook, I would like to mention the major factors that are impacting our business.

In the third quarter special items included: costs related to our restructuring initiative, the merger transaction, the settlement of transaction-related items for the divesture of our interiors business. Excluding these special items, core operating earnings came in at $170 million, an increase of $70 million from a year ago. The solid improvement reflected favorable cost performance and operating efficiencies that savings from our restructuring initiative, and a benefit of new business outside of North America. For the full year we are increasing our outlook for core operating earnings to the range of $680 million. We're also increasing our free cash flow forecast to the $350 million range reflecting the higher earnings and lower capital spending. These are the highlights. Now let me review our results in more detail.

The industry environment in the third quarter was generally in line with our expectations. In North America industry production was 3.5 million units, up 4% from a year ago. The Big Three were up 1%, and our top 15 platforms were down 1%. In Europe, industry production was about 4.3 million units, up 2% from a year ago. Production for our top five customers in Europe was also up 2%. Compared with the prior quarter, average steel prices were down 6%, while copper prices were flat and crude oil prices were up 16%. Compared with a year ago steel prices were down 15%, copper was down 1%, and crude oil was up 7%. Commodity cost changes did not have a meaningful impact on our results in the third quarter on a year-over-year basis.

Slide 20 provides our financial score card for the third quarter. Starting with the top line, we posted net sales of $3.6 billion, down $495 million from last year. The decline reflects the divesture of our interiors business. Net sales in our core businesses were up $259 million from a year ago, primarily reflecting the addition of new business outside of North America and favorable foreign exchange, offset in part by unfavorable platform mix in North America. Operating results improved, reflecting the divesture of the interiors business, favorable cost performance, and the benefit of new business outside of North America offset in part by favorable platform mix in North America. Our reported income before interest, other expense and income taxes was $108 million compared with $29 million a year ago. Our pre-tax income was $60 million, a net income of $41 million or $0.52 per share also reflected solid improvement from losses a year ago.

On the next slide I will show these results excluding restructuring costs and other special items to highlight underlying our operating performance. SG&A as a percentage of net sales was 4.5% compared with 3.9% a year ago. The increase in SG&A reflected costs related to the AREP merger proposal. Excluding special items, SG&A was down from a year ago. Interest expense was about $48 million, which is down 9% from last year primarily reflecting lower net debt balances. Depreciation and amortization was about $71 million, was down from a year ago as well reflecting the divesture of the interiors business. Other expense was about $18 million compared with $9 million a year ago. The increase in other expense reflects an increase in minority interest expense resulting from improving performance in several of Lear's joint ventures and favorable -- unfavorable equity earnings in our nonconsolidated JVs.

Slide 21 summarizes the impact of restructuring actions and other special items on our reported third quarter results. Reported income before interest, other expense and income taxes for our Seating, Electrical and Electronics business was $108 million. Excluding restructuring costs and other special items, core operating earnings were $170 million compared with $100 million a year ago. The improvement in operating earnings primarily reflects favorable cost performance and the impact of new business outside of North America. To help clarify how the special items impacted our financial statements, we indicated the amount by income statement category on the right-hand side of the chart.

Turning to page 22, this slide summarizes the impact of major performance items on our third quarter sales and margin compared with a year ago. As you can see, the major diverse factor for the change in sales was the divesture of the interiors business. Partial offsets were new business outside of North America and the favorable impact of foreign exchange. The margin improvement was other more than explained by favorable cost performance, the benefit of new business and a divesture of interiors. Slide 23 shows what is happening within our core product segments. The segment earnings shown are on both a reported and an adjusted basis, which excludes costs for restructuring as well as 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 basis Seating segment results continue to improve.

Results in our Electrical and Electronic business however continue to be under pressure. Headquarter costs were lower, primarily reflecting the divesture of our interiors business and other cost reduction actions. On a run rate basis we would expect quarterly headquarters costs to be in a range of $50 million to $55 million. I'll review our results for each of the major business segments in detail on the next two slides. Our Seating margins continue to show solid improvement with major regions up from a year ago. This reflects favorable cost performance from restructuring and ongoing efficiency actions, margin improvement actions, including the selective vertical integration, and the benefit from new business outside of North America. In our Electrical and Electronics businesses margins were lower. The decline reflected a very competitive net pricing environment and a roll-off of several key programs in North America. We have recently been awarded some new Electrical and Electronics programs, and these programs will begin coming online over the next couple of years. Net commodity costs were slightly positive, reflecting a recovery of prior-period copper cost increases.

Please turn to page 26. Free cash flow was positive $91 million in the quarter with ongoing restructuring investments being funded through operations. The positive cash flow during the third quarter reflects our solid earnings and favorable networking capital. We have generated approximately $500 million of free cash flow over the last four quarters. Turning now to our key assumptions on this year's outlook, in North America we see industry production of about 15 million units which is down 2% from a year ago. Production for the Big Three is expected to be down about 6% with on our top 15 platforms forecasted to be down 8%. In Europe we see industry production of about 19.7 million units, up about 3% from a year ago. Production for our top five customers in Europe is expected to be up 3% as well. As for the Euro, we're forecasting a rate of $1.35 per Euro for the year. This is about 8% stronger than last year. Key commodities have not had a material impact on our '07 outlook. Steel prices have moderated, while copper is up somewhat this year, the net impact is being offset by prior period recoveries.

Slide 28 summarizes our 2007 financial outlook for Lear's core businesses. The outlook shown here excludes Lear's Interiors business for the full year. On this basis we're expecting net sales for 2007 of approximately $15 billion. This is unchanged from the prior outlook. Our core operating earnings, or income before interest, other expense, income taxes and restructuring costs and other special items are now estimated to be in the range of $680 million. This is up from our prior outlook, reflecting lower production risk and more favorable operating performance.

Interest expense is estimated to be approximately $200 million. Our forecast for pre-tax income adjusted to exclude restructuring costs and other special items in the range of $430 million. Our estimate for tax expense is about $135 million, subject to the actual mix of financial results by country. Restructuring costs are estimated to be about $125 million. Capital spending is estimated to be approximately $200 million, which is down $35 million from our prior forecast. Depreciation and amortization are estimated at about $300 million. Lastly, free cash flow is expected to increase to approximately $350 million.

We see core operating earnings for the fourth quarter down from a year ago, reflecting the roll-off of some major programs and lower production on key platforms. Q4 2006 was a relatively solid quarter for our core businesses as we saw operating margins return to more normal levels. This reflected a relatively stable production environment on our key platforms, lower launch costs and increased savings from restructuring. This year we are forecasting lower production on our key platforms driven by plant down time by our customers with a risk for further cuts. Also our Q4 results this year include one-time costs associated with new business development and growth in our sales backlog. In Electrical and Electronics business we see Europe approving normalized production while North America and Asia are down reflecting a roll-off of North American programs as well as increased development costs.

Slide 29 shows our preliminary outlook for 2008. With respect to our core seating, Electrical and Electronic businesses, we estimate that we will add net new business of about $300 million next year. In addition, we see industry production in North America generally in line with our 2007 outlook and Europe up slightly from '07. North America we are forecasting moderately unfavorable platform mix reflecting lower production of high content, full-sized pick-up trucks and large SUVs. We're also assuming an exchange rate of $1.40 per Euro. Based on these assumptions we forecast net sales before operating earnings excluding restructuring-related costs to be roughly in line with our 2007 outlook. With respect to our three-year sales backlog covering the 2008 to 2010 period, our present status is about $600 million, reflecting the addition of significant net new business since our last formal update in January. We have also recently been awarded significant new business beyond the backlog period in 2011 to 2012. We will update our three-year sales backlog and provide more detail on 2008 outlook in January.

To summarize, Lear is financially sound, and our financial results are on an improving trend. As Bob mentioned, we're actively pursuing initiatives to strengthen our core businesses. Our recent financial performance has given us the flexibility to pursue strategic opportunities and at the same time preserve a strong balance sheet. We're also making solid progress on operating priorities, including restructuring of our global operations and identifying further sales growth and diversification opportunities. And while the industry outlook remains challenging, we're continuing to implement actions to strengthen our long-term competitiveness. As a result, our preliminary financial outlook for 2008 is in line with 2007 despite lower forecast production of full-sized pick-up trucks and large SUVs. Now we would be happy to take your questions.

(OPERATOR INSTRUCTIONS) We'll pause for just a moment to compile the Q&A roster. Your first question comes from Himanshu Patel with JPMorgan.

Hey, guys, a couple questions. The production volume decline that you guys have assumed for the T-900 platform for 2008, could we get that?

Actually, we're going along with what CSM has, and they're down about 10% to 11%, I believe.

Okay. And then the core operating profit guidance is flat year-over-year. What would be sort of the incremental restructuring savings that we should think about for 2008 versus '07? Is it about $25 million or so?

Exactly right. Original guidance was about $25 million, which we said was on average 2.5-year payback. We expanded it and pulled ahead some of the restructuring costs, and that's going to provide about $25 million of incremental savings on a year-over-year basis.

Okay. And then just conceptually, the -- I know you don't break it out this way, but the margins in the North American business versus the European business, any directional comments you could give us on how that's been trending in the latest quarter?

It has been pretty consistent with what we've seen so far through the three quarters. Europe is a little bit ahead of schedule, but all in all, all regions are doing fairly well.

Fair to say, is North America more profitable than Europe still?

Yes. North America is more profitable. Part of it is the level of vertical integration that we have mainly in our Seating business, and versus the directed content that we have in Europe. All in all, historically Europe's margins have been fairly lower than North America, and that continues, but improving.

And lastly, what sort of negative contribution margin should we be thinking about for the business, not necessarily for the next quarter, but just longer term now that you've gotten through most of the restructuring?

I am not sure I fully understand the question. We do see --

In the sense that you're expecting your revenues or your production volumes to come down. If we were just trying to model the impact of that separately, what sort of negative contribution margin would we apply to that?

I think it is roughly the same. On a short-term basis it is still kind of in that low 20% range. It depends on if our customer takes the actions that allow us to take them, we can mitigate that somewhat. As they take out a shift, that helps us. If they take a facility out, that helps us as well.

Okay. And one last one if I could sneak it. I know CSM has got a pretty conservative T-900 forecast for next year, but have you gotten any indication from GM so far directionally about what they're thinking for '08 volumes on that, and is that consistent or inconsistent with what CSM is saying?

I think what we've done, we've taken the neutral parties perspective, and I think we'll get a better view of what the customer's plans are really for all three of them probably in January.

Okay. Great. Thank you.

Your next question comes from Chris Ceraso with Credit Suisse.

Thanks. Good morning.

Hi, Chris.

A couple of things. Can you comment, maybe just directionally, on the profitability of the new business in Asia relative to the full-size truck business in North America? Is it less profitable, more profitable, the same?

Overall, the businesses in Asia are performing fairly consistent with the segment earnings overall. It depends on really what platforms over there are growing. Where we're seeing growth is on some of the regional car makers, Chris, and obviously there is going to be less content on an entry level vehicle than there is on a three-row large North American SUV.

Okay. The three-year backlog, can you just give us a feel how that $600 million breaks down, roughly '07 -- roughly '08, '09, and '10?

We'll be giving a complete update in January and the cadence on it. $300 million, though, Chris, is in '08, which is an increase from about 2 -- of about $200 million from the last time we gave a formal update in January, and the rest of it's spread over '09 and '10. Some of it is impacted by timing of how these programs roll off, too, it's sometimes a little bit gray. We're fairly comfortable with the '08 guidance, though.

I think on the last call you said that '09 was maybe about $75 million of new business. Was that a net number and do you have a comparable update?

Right now in '09 I think what we were getting at on the call before and it was directional, there was a lot of confusion on it, it was probably talking more about business wins at that point and what have you. Really would rather wait until January to give the complete cadence of how the stuff is going to roll out, but all in all, $600 million with $300 million coming in next year and the rest of it spread over the next two years.

Okay. And then lastly, there has been clearly a significant leg up in crude prices in the last couple of months. Have you factored in the potential for higher resin costs in your '08 outlook?

Since we've had the divesture of the Interiors business, the impact of resin on our business really hasn't impacted us as dramatically as when we obviously had interiors interiors which was a huge user of resin. Right now we don't buy raw resin in any real quantities whatsoever, and it is really more of an impact on our supply base and we're keeping on eye on it and managing with them.

What about as it relate to say the chemicals and the foam for the seats?

We're working with our foam providers to help offset the increase on it. We have factored some level of it into our thinking for '08. We're also looking at engineering solutions to try to mitigate the impact. But all in all we have factored a lot of that in.

Okay. Thank you very much.

Your next question comes from Brian Johnson with Lehman Brothers.

Hi. Have you adjusted your backlog, that $300 million, is that down from $400 million and some a few months ago, and if so what were the drivers of that?

Okay. No. I think there was again some confusion on what we were talking about last call. The number $450 million was really talking more about what we've seen as business wins, and the cadence was a little bit off in that we've actually pulled a little bit into this year on the parallel program roll-offs, and the reality is the backlog has increased not decreased. I just think that was a number that got away from us a little bit in the conversations, so all in all it has not come down at all.

Okay. And second, if we're to think about a currency neutral CPV in Europe, can you give us guidance in terms of how much of your seating in Europe is currency driven versus production driven versus content driven?

Well, this year we're seeing a currency impact in the quarter. If you take the quarter -- excuse me, let me put it this way. Our European sales for the year are about $7 billion. So if you run the math and you take it and extend it out, that's probably three quarters -- want to say three quarters Seating, two quarters or one quarter Electrical and a rough breakdown, so if you run the math and the sensitivities on the Euros you should get pretty close.

Okay. Thanks.

Your next question comes from Rob Hinchliffe with UBS.

Thanks. Good morning. Hey, taking the updated guidance for the year and what that implies for the fourth quarter, looks like Q4 may be down a little bit here. Surprise to see that given just seasonality and all. Any comments there?

Yes. It is coming in kind of how we discussed back in the second quarter where we saw the second half being much softer than last year where we actually saw a stronger second half. Some of the key things driving it is right now in our key platforms we see about a 10% North America, a 10% reduction on the volumes with customers scheduling some plant shutdowns. In addition we have roll-off business in the Electrical business segment as well as we're starting to ramp up the program expenditures on the new business backlog wins, and we're investing in some infrastructure in Asia. Those are probably the key drivers on the fourth quarter.

Okay.

We are taking a conservative view on production in terms of we have baked in additional down time that we don't know about yet.

Okay. Okay. The $600 million backlog again, I know you're going to wait till the first quarter for more detail, but does that incorporate some of the changes at Chrysler that we're seeing? I know they're talking about moving the Durango out of Delaware and back to Michigan, and there is talk about Ford looking at their product portfolio as well.

It's -- it incorporates everything to date that's been publicly announced. There is a lot of speculation on their car lines, but everything to date that's been announced we've incorporated it into there.

Okay. And then I guess the last one, on the UAW contract, given the tier two or the noncore wages at the Big Three now, does how you define a competitive wage for your own business change at all or is the current wage still competitive in light of what's gone on here?

I mean, I think in some cases it is, but clearly we'd have to look at what kind of contracts are being awarded to other seat makers, other competitors, and then also what the impact is on this two-tier wage with, not only the auto makers, but also a couple of significant tier one suppliers Visteon and Delphi. We have to maintain our competitiveness, and the UAW has always worked with us on that.

Okay. Thanks a lot, guys.

Your next question comes from Jonathan Steinmetz with Morgan Stanley.

Good morning, everyone. Can you hear me?

Yes.

Really quickly, on the guidance for next year, you're talking about flat, I guess. You talked about $25 million of restructuring, and you talked about the impact of production cuts. Should we think about those largely offsetting each other or is there some other factors like new business wins or [raw mats] or FX that you would care to kind of at least directionally talk about?

There is a lot of factors that are going into it. Besides the restructuring savings year-over-year, we have other vertical integration benefit as we continue to look for opportunities to invest in our components and drive margin. So overall cost reductions, FX is also helping us on a year-over-year basis although it doesn't convert at the same amount as downward production numbers.

I want to clarify one thing though, you mentioned $25 million in restructuring. The $25 million in restructuring that Matt referred to was basically higher restructuring expense that we will take in 2007. We have not commented on 2008, but there will be restructuring in 2008, probably comparable to 2007.

Okay, but the $25 million I was referring to was I think the benefit you had talked about from past restructurings rolling into 2008. Is that a correct number or is it bigger than that?

That's correct.

Okay. Switching to the backlog, when you think out over time here, can you have this growing Asian business roll on and keep your CapEx at a $200 million type level, or do you need to grow the CapEx meaningfully to accommodate it, or will we more see sort of a shift among regions?

I think overall, if you look at our historical capital spend rate, it was always in that 1.6% to 1.8% ever since the UTA acquisition when we brought on the Electrical business. And that's specifically to Seating and Electrical because the numbers were somewhat SKUd by Interiors, which was a heavy user of capital. We're comfortable that we can maintain that 1.7% to 1.8% type range of capital spending and still do the type of things that we want to do. Now it's important to note that when we are investing in Asia, we seem to be able to do that a little bit less expensively than in the more mature markets in western Europe and North America. So all in all, we're comfortable that we can remain in the range of 1.8% of sales on a capital spending and still do the things we have outlined in the plan.

Okay. And last question related to the backlog. Someone else I think tried to get at this. But if you think about it relative to the company-wide margins, should we think about it flowing in at a similar type of level, or do you sort of have to win business by being reasonably aggressive on price and then get the benefits as you sort of experience it over a couple of life cycles?

I think it would be comparable with our overall average margins that we have in our businesses. I mean, obviously, in Electrical it would be probably more normalized margin.

Okay. Alright. Thank you very much.

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

Good morning, gentlemen and ladies.

Hi.

I don't know who to say hi to there. You've got a whole army there. Anyway, the corporate expense, Matthew, in the fourth quarter, what are your thoughts?

I think it is a little bit lower in Q3 than a normalized run rate. We see that in $50 million to $55 million range on quarterly, and we should be smack dab right about in the middle of that for Q4.

Okay. And then as you move into the fourth quarter, your expectations for Seating margins margins, are they going to deteriorate materially or primarily going to takes place in the Electrical systems business?

We actually see Seating coming back -- pulling back a little bit, Brett, based on the North American market, and we see about a 100 basis points improvement from Q3 in Electrical business driven largely by the normalized production in Europe where the margins are a little bit higher in that segment.

And then with the backlog, if I understood you correctly, you were talking about $600 million over the next three years on a consolidated basis?

Yes.

Now does that include the $245 million of new business that you talked about here today?

Adding -- the $245 million that we talked about today, Brett, includes both consolidated and nonconsolidated, so a portion of that would have been included in it, but it is important to note on the backlog, when we define it, we define it net of any business roll-offs for a three-year period only, and it is just awarded business that's consolidated. So when you look at it, on the $245 million that would include nonconsolidated as well, and it may be outside of the portion that's going to be outside of the three-year window.

I think the point we're trying to stress on the backlog is that when we started the year, we had some business rolling off in this timeframe, and we actually had our backlog was unfavorable by $300 million at the beginning of the year, and we basically have won $900 million worth of business that we will have revenue on over the three-year period. So it shows that we have been able to pull some business into this area, and we think we can still do more.

Okay. And I assume I've got a tax expert there in the room, and so I am wondering the $135 million in taxes this year, if you look into '08 and '09, what are your thoughts in terms of your tax expense and then cash tax as you move through '08 and '09?

I think what we see on a preliminary basis for 2008 is we should be in the low 30% range on an effective tax rate basis, and we probably will be in the $100 million to $120 million cash tax range next year.

Okay. And then, finally, as far as the IAC, can you talk a little bit about what are your expectations in terms of profitability of IAC in Europe, IAC in North America as you look at 2008 and 2009? Is there an expectation for material improvement in profitability in those operations?

Well, they still have a lot of consolidation and restructuring to go through 2008. They're on track, but we wouldn't expect to see a meaningful improvement in profitability until beyond that, 2009 or beyond.

Great. Thank you so much.

You're welcome.

Your next question is from Rod Lache with Deutsche Bank.

Good morning, everyone.

Good morning.

Your core earnings in the quarter, up $70 million on this $259 million in sales, I am just trying to get at the drivers of that 27% incremental margin. Did you give us what the raw materials did overall in the quarter on a year-over-year basis?

We did have some good luck -- or good news on the supplier and material costs, Rod. We did not give that number specifically. We also saw a timing issue -- timing difference on our engineering spending where some of it is going to be pushed into Q4, and our headquarters costs were a little bit lower than the normalized run rate. The other thing about the production is the environment through Q3 was very stable, there was no shifts -- no late minute shifts in production other than the GM strike which actually in duration was a little bit shorter than we were anticipating. So all in all we had a pretty stable environment from a production standpoint, not only in North America, we had pretty good mix in Europe and in Asia. The last thing is, we continue to see benefits from our --- pull ahead benefits on a restructuring savings and our vertical integration strategy.

Okay. The chart that you'd given on the cost savings from the restructuring showed like a $55 million incremental benefit for the year. Should we just sort of level load that over the course of the year or was that more back half weighted?

No. It is coming to its conclusion. There is a slight benefit in Q4, but for the most part it's level loaded.

Okay. And I imagine that you were able to offset pricing, it looks like, price deflation with [VAV] or others initiatives internally.

In Seating that would be true. Electrical we didn't quite cover the pricing environment.

Okay. And the $15 billion sales guidance for the year, that excludes the Interiors business?

Yes, it does.

Okay. So that you're implying $3.5 billion in sales roughly for the fourth quarter, kind of similar to the quarter, I am just not understanding the full year EBITD guidance of $680 million implies a pretty sharp drop-off since you're close to $570 million through the nine months.

Again, a lot of it, Rod, comes down to what we see in North America between the customer down side and the volumes our key platforms along with the risk for further production cuts as a lot of these guys are starting to align their production needs with their sales numbers. We've also had infrastructure improvements that we're making in Asia to support our growth there and also to support our move to low cost country as well as program expenditures.

So it seems like an unusually high cost quarter?

Yes. I think we have one-timers in there related to new business development that Matt had mentioned in his earlier comments.

Okay. And lastly, could you give us a little bit more color on the plan for turning around the Electronics business?

Yes. I think there is a few things on this. One of the issues they're facing this year, Rod, is they have a trough in sales that they rolled off some significant North American programs, and we're chewing up the ramp-up starting in Q1 on a new business backlog, and in the meanwhile, we have got somewhat in-efficient operations in North America. In Europe what we see is some of the programs that we restructured and moved into lower-cost locations experienced volume reductions simultaneous with the move, and it has taken us a little bit of time to work out the inefficiencies and realign our footprint in combination with some of our outside service providers there in our temporary cost structure. Finally, we -- we've established a center in China which allows us to take advantage of lower-cost program expenses and right now we're incurring a little level of redundancy in order to improve the footprint going forward. For next year we see probably in the range of about 100 basis points improvement getting it closer to the '06 or in the range with the '06 margins in that segment.

Great. Okay. Thank you.

Your next question comes from Rich Kwas with Wachovia Capital Markets.

Hi. This is David Lim for Rich. Most of my questions have been answered, but just wanted one clarification on the prepared remarks you mentioned something about being awarded significant business in the 2011 to 2012 time period. If so, can you provide more color on that?

Yes. Really don't want to get into providing full detail on the backlog right now, but if we took it out through the five-year period as we see it right now, would probably be about the $1 billion range of backlog.

Got you. That's it. Thank you very much.

And your final question comes from Robert Barry with Goldman Sachs.

Hi, guys. Good morning.

Good morning.

Just a couple quick ones. Did you mention of the $245 million of wins in Asia how much of that was in the Electronics business?

Overall, for the year, if you look at the business that we mentioned in Asia and Asia-related awards, it would be slightly over $500 million. And of that it is probably in the ballpark of two-thirds seats of incurred Electrical.

Okay. So that's of $500 million of the $900 million you mentioned earlier is in Electronics?

I want to be really clear on this point. Every quarter we've been updating our Asian business awards, and that includes consolidated and nonconsolidated, and it is Asian-related which could be production in Asia and Asian manufacturers in North America. And when you tally it all up, it is about $500 million if you tally the first three quarters of this year, and of that amount about I would say two-thirds of it is Seating and about a third of it is Electrical.

Okay. And then just a follow-up on the question earlier about CapEx from the depreciation perspective. Clearly cash flow is getting a real boost here from this sub one-times ratio of CapEx to D&A. Just as we look out, how long do you think that will continue?

Well, I think it will continue in the near term. I think the GAAP will become less. Part of the benefit of this year's capital spending is thrifting and just reducing the cost reductions. But part of it is timing of the capital recognition and some of that will push into next year. We're still comfortable in that ballpark of 1.8% give or take a touch here and there, so if you compare that to our run rate on competition and amortization of $300 million, you should get pretty close.

So as we look out over the next three to five years, we would see the ratio drip to CapEx to D&A back towards 1% and maybe over 1% slightly given the growth?

Well, it is hard to give guidance beyond a three-year window, but right now it would be hard to see it going above 1%, that's for sure.

But directionally getting back up towards 1%?

Right.

Okay. Thanks a lot.

You're welcome.

I think that was the last question, so I just want to stop and finish here and thank the entire Lear team for the great quarter. Remember, we've got a year to finish out here. We have got restructuring to complete. We have got 2008 to look forward to. Things aren't going to get any easier, but I think really (inaudible) I'm really pleased with Matt's performance on his first role as CFO of the company.

Thanks, Bob.

And, Jim, this wasn't your last one, you would be on much more of a great job. (inaudible) I want to thank everybody around the Company every where you go things really good things are happening (inaudible) had recently with new products and showed some (inaudible) new businesses coming out of Asia, the team is out here in South American and good things are happening in Europe, and (inaudible) just want to thank everybody for the job and I want to thank everybody also for the attitude. The attitude is fantastic. Let's keep it that way and keep the Company moving forward. Thank you all very much.

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