Lear Corp (LEA) 2007 Q4 法說會逐字稿

Good morning. My name is Dennis, and I will be your conference facilitator today. At this time I would like to welcome everyone to Lear Corporation's fourth quarter 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 it turn the call over to Mel Stephens, Vice President Investor Relations.

Okay. Thank you and good morning everyone. Thanks for joining our fourth quarter earnings call. By now you should have received our fourth quarter earnings press release and our financial review package that we intend to review on the call today. These materials have also been filed with the Securities & Exchange Commission and they are posted on our website at Lear.com through the Investor Relations link. Our chairman, Bob Rossiter, is travel in Asia today and so he won't be joining our call.

The presenters for today's review are Matthew Simoncini, our Chief Financial Officer; Dan Ninivaggi, Executive Vice President, and Jim Vandenberghe, our Vice Chairman and also here in South Field participating on the call are Shari Burgess, our Treasurer, Wendy [Foss], Controller, Bill McLaughlin in Tax, John [Trithol] , Vice President of Business Planning and Analysis. Before we begin I would like to remind you all that during the call we will be making forward-looking statements subject to risks and uncertainties. Some of the factors that could impact our future results are described in the last slide of our deck and also included in our SEC filings. In addition, we will be referring to certain non-GAAP financial measures. Additional information regarding these measures can also be found in the slides labeled non-GAAP financial information which is at the end of our presentation.

If you'll turn to slide number two, here we show an agenda for today's review. Matthew Simoncini will begin and review our fourth quarter and full year 2007 financial results and then discuss our outlook for 2008. Next Daniel Ninivaggi will outline our strategic objectives by product line and then review our electrical and electronic business in more detail. Finally, Jim Vandenberghe will provide an overall assessment of our business and an outlook for the Company, and following the formal presentation we'll be happy to take your questions. Now please turn to slide four, and I will hand it over to Matthew

Thanks, Mel, and good morning. We had a strong finish to close 2007 with net sales in our core businesses up 6% and core operating earnings up 11% in the fourth quarter compared with the year ago. Free cash flow was a solid $171 million. These results were better than the guidance we provided on our last conference call primarily reflecting stronger than expected production schedules in North America, continued strong operating performance and the benefits of restructuring actions. These are the highlights, and I will cover the fourth quarter results in detail over the next several slides.

For the full year we posted our second consecutive year of overall improvement. Net sales in our core businesses were up 5%, and our core operating earnings were up 34%. Free cash flow improved to $434 million. This is our best performance since 2003. Consistent with our sales diversification strategy we were able to increase our total Asia related sales by 31% to $2.9 billion. This includes both consolidated and nonconsolidated operations. Lastly, we have implemented aggressive actions to improve our cost structure since the middle of 2005. Savings from our restructuring initiative along with our ongoing cost and efficiency actions were the major favorable factors supporting our improved financial results. Industry and production in North America continued to be challenging, representing a major hurdle to overcome.

Slide number five of the presentation breaks down the industry environment in the fourth quarter. In North America industry production was 3.6 million units. This is up 1% from a year ago. The domestic three, however, were down 2%, and our top 15 plat forms were down 7%. In Europe industry production was about 5 million units, up 5% from a year ago. Production for our top five customers in Europe was up 4%. Commodity cost changes did not have a meaningful impact on our results in the fourth quarter on a year-over-year basis. Slide number six provides our financial score card for the fourth quarter in more detail. Starting with the top line, we posted net sales of $3.9 billion which is down 422 million from last year. The decline reflects the divesture of our interiors business. Net sales in our core businesses were up over $200 million from a year ago, primarily reflecting favorable foreign exchange and the addition of new business outside of North America offset in part by unfavorable platform mix in North America. Our reported pre-tax income was $45 million, and net income was 27 million or $0.34 per share. These levels represent solid improvement from losses a year ago.

On the next slide I'll will show our results excluding restructuring costs and other special items to highlight underlying operating performance. SG&A as a percentage of net sales was 3.8% compared with 3.6% a year ago. Interest expense was about $49 million, down $3 million from last year primarily reflecting lower net debt balances. Depreciation and amortization at about $76 million was down from a year ago reflecting the divesture of our interiors business. Other income was $10 million compared with an expense of $61 million a year ago. Last year other expense included a loss of about $49 million that was related to the extinguishment of debt. This year other expense was impacted by purchase accounting adjustment made by IAC and favorable results of nonconsolidated joint ventures. Slide number seven summarizes the impact of restructuring actions and other special items a reported fourth quarter results. Reported income before interest, other expense, and income taxes was $86.6 million. Excluding restructuring costs and other special items, core operating earnings was $178.6 million. This compares with $161 million a year ago. The improvement in operating earnings primarily reflects increased savings from restructuring actions, favorable cost performance and the impact of new business outside of North America. I'll clarify how these special items impacted our financial statements, we've indicated the amount by income statement category on the right-hand side of the chart.

Slide eight summarizes the impact of major performance items our fourth 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 and unfavorable platform mix in North America. Partial offsets were the favorable impact of foreign exchange and new business outside of North America. The margin improvement was more than explained by favorable cost performance to benefit a new business and a divesture of the interiors business. Turning to slide nine, this starts breaking down our performance by product line. Our seating business continued to perform well in the fourth quarter with a 6.7% adjusted margin. This is equal to a year ago. For the full year our adjusted seating margins improved from 5.6 to 7%. The full year improvement in our seating margins reflect favorable cost performance from restructuring and ongoing efficiency actions, margin improvement actions, including selective vertical integration and the benefit from new business globally. For 2008 we are forecasting our seating margins to be in the mid-6% range. This is down slightly from 2007 reflecting the adverse impact of lower industry volume and unfavorable platform mix in North America. In our Electrical and Electronic business fourth quarter adjusted margins remained below target but were up slightly from a year ago reflecting favorable net commodity costs. For the full year our adjusted Electrical and Electronic margins were down from 4.9% to 3.6%. The decline reflected a very competitive net pricing environment and the roll off of several key programs in North America.

We have been taking actions to restructure our business including footprint moves and increasing our low cost country capabilities. In addition, we have recently been awarded significant new programs. These programs will begin coming on line over the next couple years. Accordingly, we expect our margins will improve about 100 basis points this year to the mid-4% range in 2008. Free cash flow was a positive $171 million in the quarter with ongoing restructuring investments being funded through operations. For the full year free cash flow was $434 million, an improvement of over 300 million compared with a year ago and our strongest cash performance since 2003. The year-to-year improvement reflects improved earnings in our core business, the divesture of the interiors business and lower capital spending offset slightly by higher costs for restructuring.

Turning now to our key assumptions for this year's outlook, in North America we're expecting industry production to decline to about 14.4 million units. This is down 4% from a year ago. Production for the domestic three is expected to be down about 9% with our top 15 platforms forecasted to be down 12%. In Europe, we see industry production of about 20 million units roughly flat with last year. Production for our top five customers in Europe is expected to be down about 2%. As for the Euro, we're forecasting a rate of $1.45 per Euro for the year. This is about 6% stronger than last year. Commodity costs are not expected to have a material impact on our 2008 outlook.

Slide 13 summarizes our 2008 financial outlook. We are forecasting net sales for 2008 of approximately $15 billion. This is unchanged from the prior outlook. Our core operating earnings are estimated to be in the range of $660 million to 700 million, interest expense estimated to be between $185 million and $195 million. Our forecast for pre-tax income adjusted to exclude restructuring costs and other special items is in the range of 430 to $470 million. Our estimate for tax expense is about $135 million, and restructuring costs are estimated to be about $100 million. Capital spending expected to be in the range of 255 million to $275 million, depreciation and amortization are estimated at about 300 million. Lastly, free cash flow is expected to be in excess of $250 million. This is down from 2007 reflecting the lower earnings, higher capital spending, and timing of cash used for restructuring actions.

My final slide is a recap of the sales backlog information we provided earlier this month. I have included in here for reference as we refer to some of the data contained here later in today's presentation. I would like to make one final point. While business conditions in North America remain challenging, we still see a solid financial outlook for the year. Presently we have board authorization to repurchase up to 1.5 million shares or about 2% of our share that is are outstanding. Our share purchases so far have been very modest, about 10% of our existing authorization. Going forward, we will consider further repurchases.

As always, we intend to continuously evaluate how we should invest our cash to achieve the best returns for our shareholders and to maintain financial flexibility given the uncertain environment we're operating in. I will now turn it over to Daniel Ninivaggi.

Thanks, Matt. It is great to be on the call to discuss our strategic plan. Turning to slide 16, on the next several slides I will cover our strategic objectives for each of our product segments and review our Electrical and Electronics business in more detail. In seating we have a very strong competitive position globally, and our business is performing well. Our vision for the seating business is to strengthen our leadership position globally and achieve a well diversified sales mix. We're also seeking to selectively increase our vertical integration, and we intend to remain a leader in technology and innovation in all key areas of seat development and manufacturing. In Electrical distribution our objective is to achieve critical global scale and rank among the top tier wire harness suppliers worldwide. We also plan to further diversify our customer mix and achieve the lowest cost footprint available.

Finally, we'll take advantage of our system integrations expertise to provide complete electrical architectures that offer improved functionality at the lowest cost. Lastly, in our Electronics business, we will seek to leverage our industry-leading technology and key components such as smart junction boxes and wireless products to substantially increase our global share. A little history on our Electrical and Electronics business, slide 17. We acquired the business in 1999 from United technologies. Presently net sales total about 3.1 billion annually, but about 70% of sales in Electrical distribution and 30 years in Electronics. We have a significant market position in Electrical distribution ranking number three in North America, number four in Europe with a growing presence in China. In Electronics we're a leader in junction box technology which is highly complementary to our wire harness business. Through our smart junction box technology we're able to reduce switches, circuits and fuses and design complete Electrical distribution systems at lower cost and weight. In addition, smart junction boxes allow to us integrate other Electronic components.

Turning to slide 18, the market environment for Electrical distribution is undoubtedly highly competitive, and it is undergoing significant restructuring and consolidation. Global scale is increasingly important, and accordingly the top three wire harness suppliers have aggressively sought to increase and defend their share in recent years. In addition, we only recently acquired Valeo's Wire Harness business strengthening their number five position. We're currently ranked number 4 globally. While we've been able to maintain our market share, our margins have been declining. Given the competitive nature of the Electrical distribution segment we're focused on increasing our global scale, achieving a more diversified customer mix and further improving our cost structure.

Moving to slide 19. Despite near-term challenges we're optimistic about the outlook for our Electrical and Electronics business based on the increased demand for automotive electronics, as well as opportunities in power distribution driven by alternative powertrain technologies. Electric distribution is a critical system in every vehicle. We see significant opportunities for growth in the segment and also have a number of competitive advantages to leverage. Our strong customer focus, low cost footprint, systems integration capabilities, and our technical expertise in key electronic components allow us to design and engineer a vehicle's electrical requirements at the lowest total system cost. In addition, our capabilities in electronics allow us to offer customers select electronic components in areas where consumer demand increasing such as wireless products. Another potential area of opportunity lies with the merging powertrain technologies. High voltage systems will drive increased content and additional opportunities to add value. Lear is well positioned to do take advantage of this growth with a portfolio of hybrid electric components, established technology partners and several development programs in place. Given the positive outlook for growth in this segment, we see an excellent opportunity to increase shareholder value as we grow our sales and improve our margins.

Turning to slide 20. We're in the process of implementing a comprehensive improvement plan for the Electrical and Electronics business. The major elements are shown on this slide. First we have significant new business coming online over the next few years as Matt discussed, and we have aggressive plans for further growth. We plan to focus on and leverage our confidence in key products such as smart junction boxes to increase our scale globally. In addition, we plan to expand our wireless products to Europe and Asia, grow our terminals and connectors business and participate in the rapid growth of hybrid electric systems. We also see significant opportunity for continued growth in Asia, and we're evaluating consolidation opportunities. In terms of cost structure improvements, we will benefit from increasing restructuring savings as well as the ongoing transition of our global low cost footprint. We have three new low cost facilities coming online this year, and we're targeting to have the majority of our Electronic components originate in low cost locations by 2010.

Slide 21 provides an assessment of how the Electrical and Electronic business is performing in each major region and a summary of our improvement plans by region. Presently the business is under performing in North America. This reflects the loss of several major programs, the adverse impact of lower production, as well as the difficult pricing environment. We expect to return this region to positive results with significant new business coming online over the next few years, opportunities to grow our Electronics business, increased savings from restructuring actions, and additional cost improvements as we complete our transition of Electronic components to low cost locations.

In Europe margins have declined somewhat reflecting highly competitive pricing and a cost structure in transition. We see opportunity to improve our results as we bring new business online, pursue additional growth opportunities, realize increasing savings from restructuring, and further improve our overall cost structure. In Asia we're doing well. We expect to continue to profitably grow our Electrical and Electronic business particularly in China. We also plan to further leverage our low cost footprint in Asia throughout the region and globally.

Finally, turning to slide 22, while margins will be under pressure as this segment transitions, longer-term we believe this business represented a great opportunity. Our focus for this business is to aggressively pursue the growth opportunities I outlined before and complete our shift to low cost locations. We also are targeting to further diversify our sales mix by customer and major region. As we increase our scale in Electrical distribution, focus our efforts in Electronics, where we have a competitive advantage, and further improve our global footprint and cost structure, we expect to see our margins improve over the next few years. Longer term we see the segment as a strong overall contributor and a complimentary business to our seating business. We're focused on executing our improvement plan and optimistic about the long-term potential for this business. Now I will turn it over to Jim.

Thanks, Dan, and good morning. I would like it start out by putting our recent results into perspective and really give you are our thoughts on the outlook for Lear. Since mid-2005 we have been restructuring our operations and implementing a number of actions to increase shareholder value and improve our long-term competitiveness. We are getting the desired results as we've now improved our operating and financial results for the second consecutive year. We are diversifying our sales as we continue to make steady progress in growing our business in Asia and increasing our total sales with Asian manufacturers globally. For 2007, 55% of our revenue was generated outside of North America. Importantly, with all the changes we have made, and are continuing to make, one thing has remained constant and that is our focus on delivering the best possible quality and Customer Service. Within our segments our seating business is performing well, and as Dan just outlined, we have an improvement plan in place for the Electrical and Electronic business.

Moving to slide number 25, as I mentioned earlier despite challenging conditions in North America, we improved the operating performance of our core business substantially the last two years. The major factors that drove the improved performance include global restructuring and other productivity initiatives, selective vertical integration, and the benefit of new business primarily outside of North America.

Going to slide 26 our recent financial results and strong cash flow have led to significant improvements in our liquidity position and strengthened our balance sheet. As you can see from this slide our cash balances are up, and our net debt balances are down. In addition, we have no significant debt maturities until our revolving line of credit comes due in 2010. We talked about sales diversification and slide 27 highlights our progress over the past year.

As I mentioned earlier, in 2007, 55% of our sales were outside of North America compared to 45% in 2006, and you can see that we continue to diversify our customer mix with increasing sales coming from European and Asian manufacturers. So to wrap up 2007, Lear delivered solid operating and financial results last year representing the second consecutive year of significant improvement. Our financial performance has given us the flexibility to pursue strategic opportunities and at the same time preserve a strong balance sheet. We are making solid progress on improving the basic structure and longer-term competitiveness of the business which included the divesture of our interior business, restructuring of our global operations, and continued sales growth and diversification while we actively worked to strengthen and grow our Electrical and Electronic business.

While the industry outlook in North America is going to be challenging this year, we will continue to improve our cost structure and strengthen our international operations. We believe our financial outlook for 2008 is solid, and we're well position to do capitalize when industry conditions turn more positive and when market sediment improves. On behalf of Bob Rossiter and the rest of the management team I want tho thank all Lear's employees for their hard work this past year and most importantly for your solid performance. We would now be happy to take any questions that you have.

(OPERATOR INSTRUCTIONS) Your first question will come from the line of Rod Lache with Deutsche Bank.

Can you hear me?

Yes. Hi, Rod.

A couple things. First on the production for Q1. You said that the top 15 platforms in Q4 were about a million units in North America and next year or '08 you're looking for 3.6 million. How does Q1 or the first half look?

If we look at the cadence starting with the first half right now, in North America the overall industry pullback, Rod, is about 650,000 units. We see about 70% or so coming out of the first half and from how that breaks down is in our key platforms is a pretty consistent with that. Now, for the first quarter we see production on our key platforms down slightly above 10%. We think from our standpoint that we'll be able to contain it within the 10% variance year-over-year on the mid-point guidance.

Okay. And just switching gears to the Electronics business, can you talk a little bit about what the margin potential is there by 2010? How much do you think you'll achieve by shifting more to low cost countries, and just generally can you talk about whether you feel you need to take any kind of strategic action there? You members of the members of the mentioned number three or number four position in electrical distribution. Is that something that you think is sort of a defense I defensible position and where you can achieve your margin objectives longer term?

We've talked in the past about longer-term margin target of 6.5 to 7%. We think that's very achievable. The scale is important. Right now we're about 9% of the global wire harness business. In light of the competitive landscape we think we probably need to be in the 15% range at least. We think they can do that internally. In some of the components like junction boxes and wireless, it is really just scaling the businesses and the competencies we already have. For example, the wireless products we have are almost entirely in North America, so we think there is real solid opportunity to expand that to Europe and Asia. Junction boxes are disproportionately in Europe. We think we have opportunity to penetrate new customers and expand our market there? North America. Those are higher margin products. We think we can get there on our own. We have an internal plan to get there. Whether consolidation opportunities arise that could accelerate that is sort of outside of our control, but we clearly would look at anything that came along.

What's the breakdown of that business regionally?

Of the overall business.

The Electrical and Electronics segments?

Right now it is Europe is about probably I want to say 60% of it.

Europe is 1.7, roughly 1.7 billion of the 3.1. North America is about a 1 billion in 2007. That shifts a little bit going forward.

Okay. My last one is you mentioned the hybrid opportunity. Do you have a content per vehicle on hybrid vehical for Electrical distribution versus what it typically is these days.

It is a little tough to quantify, and I don't want to mislead anybody. The hybrid components can be quite expensive. For example, inverters or converters could be $500 to $1,000 of content. We're not going to be doing all of those components, though, and we'll be relying to some extent on partnerships for that. The overall content is significantly higher on hybrid systems than low voltage systems.

The key, Rod, on that is it is a redundant system. You don't do away with a low voltage just sits on top of it more or less so the basic architecture of the vehicle stays the same. From a hybrid standpoint the high voltage systems and the converters are completely incremental.

Thank you.

Your next question will come from the line of Rich Kwas from Wachovia.

Good morning. Just wanted to follow up on the Electrical question for margins. At least for 2008, Matt, what's the key swing factor that would prevent you from getting back to the mid-4% range?

Volume's obviously our key factor, and volumes on your key car lines would impact it. Right now we think we've taken a balanced and a little conservative approach to our outlook on volumes. That would be one. Two would be the ability to get or achieve the run rate savings on restructuring actions that we already implemented or initiated. Those are probably the two biggest factors.

And then on Asian margins, I think in the past you talked about Asian margins being above the corporate average but there is potential for that to come down over the next few years. What do you see in Asia right now and where do you see margins going directionally?

They were slightly running hotter than the overall business overall. We think longer term that they'll pretty much fit the profile of the product line, so right now we see them settling in the 6.5 to 7% range there, and as the market evolves to more localized type vehicles for that continent.

Okay. In terms of restructuring, as you look beyond 2010, what's the cadence restructuring cost? You're going to do 100 million in restructuring charges this year. How does that fall out in '09 and '10 and beyond '10 does that drop down significantly?

We believe it pulls back. We talked a couple weeks ago in Detroit at the auto show that we see '09 pulling back from the $100 million '10 becoming more normalized at the $50 million range give or take a small amount, and the outer periods we see the same. The impact of what could impact that is if the OEs decide to take capacity out specifically in North America to reflect losing share, that actually benefits us longer term, but we would adjust. For the most mart we think the normalized run rate restructuring is around 50 million, and we get to that probably in the '09, '10 timeframe.

Thank you.

Your next question will come from the line of John Murphy with Merrill Lynch.

Good morning, guys.

Good morning.

If we look at the wiring harness business, I am just following up on an earlier question and look at Yazaki, Delphi, Sumitomo those are really the 900-pound gorilla in that space and then after you follow up. You said you had 9% in Electronics business. Is that similar in wiring harnesses and what did you have to do a transaction there? Looks like Leoni is a potential partner.

The 9% is the Electrical distribution side.

So that would be the wiring?

That's the wire harness business, right.

So you think with the size they have you can be competitive because they're much larger?

Yes. We think we can be competitive. Obviously the Asian measures are extremely challenging with Yazaki and Sumitomo . We think we have an opportunity to penetrate our existing further and bring in new customers in western Europe and North America in

I think from a competitive standpoint, too, John, we have a pretty good foot printed in North America, competitive footprint and low cost access to manufacturing and that's the key in that segment.

And also if you look at Sumitomo over the last few years they've grown significantly, penetrating Europe and North America, largely internally with some acquisitions, and they've improved their position considerably, so we think we can do the same thing.

Okay. And if we just think simply about the GMT 900 and the pressure it is facing in 2008 and potentially beyond that, are there any big launches or new vehicles that might help offset that negative mix shift we're seeing in the short-term and long-term.

For us, what's in our backlog, I think one of the exciting programs that are out there, I don't know how much it carries the water for the 900, but got the new cross over for the BMW, the X-6, it is an exciting product that could help carry it, but I think as well as some Hydau business on the Santa Fe and the new Lincoln MKS cross over, so we've got this product, but it depends again what happens with the 900 and how much it comes down. We think we've taken a balanced approach to the production numbers that platform. We're fairly consistent with (inaudible - background noise) looks at it.

And lastly, if we just think about your production forecast of 14.4, at least in our opinion that's pretty conservative. I know there is a lot of people in line with that. If we saw improvement in production in the second half of the year and going into 2009, and given your current restructuring actions would seem to be going pretty well. Do you think we'll see fairly good operating leverage and being able to take advantage of that upside potential upside in production?

We do believe that. As always, John, it depends on which platforms are up. Hopefully they're the one that is we're on we have a lot of content. As always it just depends on what platted form. If we had an uptick in sales, we're pretty confident we could convert it at a pretty good clip.

One last point on the share repo. What was the current authorization?

It was a 1.5 million shares.

A 1.5 million shares. Do you think if you look at your RP basket, looks like you have a lot more room to return value to shareholders, and that's growing over time. Could you get a higher organization there?

The authorization we got was actually something we pulled together relatively quickly kind of late in the fourth quarter, so we didn't have a chance to use it all. It is something we look at, and again we just have to balance it against other ways to improve shareholder value, but clearly we think the stock is massively under valued right now.

Okay. Thank you very much.

Your next question will come from the line of Patrick Archambault from Goldman Sachs.

Good morning.

Good morning.

Can you just help us dimension a little bit like on slide 8 how this might look for your '08 guidance? How much do you have factored in from restructuring? I know you're going to do 100 million in spend, but what are you going to get incrementally in benefits year-on-year? What kind of margin might we be using on the 330 new business backlog and just kind of help us pencil to the platform mix industry production piece.

Yes. I think if we go back to what we talked about at the North American analyst meeting in Detroit back a couple weeks ago, we think that the restructuring actions are a year-over-year basis would provide about a little over $40 million a year incrementally versus 2007, and typically on backlog at the $300 million in backlog, if you use a high single-digit margin to low double-digit margin, you're probably in the right range depending upon how efficient we are getting these things up and running and how the cadence of how the customers pull the product, so if you use that 10% type number, you won't be too far off.

Okay. So in the end, then, I guess the decline, it looks like the other piece would probably have to be in the neighborhood of sort of 160 head wind, the math I am doing, 150 160 headwind if the math I am doing is right.

The downward conversion on volume and mix?

Correct.

Yes, that's about right. Not too far off.

One last question on other income. Obviously that was pretty strong for you this quarter. You guys mentioned, I think, the Wilbur Ross JV as being part of the driver there. How should we think about modeling that going forward? Is that a kind of performance that we should expect to continue to improve into '08 or was that sort of unusual?

It was a little bit unusual. The way I would think first off, there is a lot of things that go through that line besides earnings and not consolidated [Saab] results, and also royalties and FX impact and state and local taxes, so it is a pretty choppy line. How we're modeling it implies a range of 35 to 45 million for the full year, about an expense on average of about $10 million a quarter. For IAC specifically in our projections for 2008, we held it neutral because of the uncertainty in the production environment and also as they're continuing to consolidate business it is a little difficult to see what that business will do for 2007 the IAC venture our portion of the earnings was positive in the range of about $15 million between North America and Europe.

Okay. So you would have 15 million positive I guess somewhere in the neighborhood of 55 million in negative cost off sets?

For 2007 that's correct.

And in Europe with IAC in Europe we should see incremental improvement year-over-year. As I think I mentioned on the last call, in North America 2008 really is a year of restructuring and rebuilding the backlog, so it goes slightly the other way.

Got it.

Again, I think if you use that rule of thumb of 10 million a quarter, a lot of volatility in that line, line, I think you'll be pretty close, though.

Okay. Thanks a lot.

Your next question will come from the line of Itay Michaeli of Citi.

Matt, on the cash balance how much of the cash is domestic and what do you guys think your minimum cash requirements are going into '08?

Well, we think -- let me start in reverse. We think we're going to be cash positive obviously. There may be a little bit of a cadence issue or slow start in the first quarter because of the earnings pull back and also this fiscal close of the quarter would make us a little negative in the quarter. From a cash balance standpoint a portion of it obviously is restricted or trapped, I think would be a better term. As far as how much of it is domestic, I am looking at our treasure Shari Burgess.

About 140 of it is in either joint ventures or Asian countries in which it is more difficult to get a hold of it, and then in Europe we have about 150, but we have mechanisms in place to utilize that should we choose it.

And, Matt, back at the auto show you spoke about a few hundred million I believe it was in new backlog opportunities. Any update there? I know it has only been a couple of weeks about when you may see some of that if at all over the course of the year?

Yes. No, I don't have an update. What I can say about our backlog is we don't include any high probability backlog. It is only just booked. The way that we do it is if we know a program is going to roll off and haven't received a replacement business, we exclude it from our backlog. For a frame of reference, if you look at what we were able to book in the near-term last year, we picked up $200 million incremental for '08 during '07. There is always a level of business being pursued longer-term and near-term. Some of it is just on the existing programs that our on you get content increase programs don't end exactly when they say they're going to end so there is always a lot of puts and takes. There is no formal update. The number we have is still our best look based on that, but we do think there is opportunity to improve the backlog number and even in the near-term.

Great. Thank you.

Your next question will come from the line of Himanshu Patel from JPMorgan.

Good morning.

Good morning. For your backlog for '08 through '10 with '10 can you tell us off the Electronic and Electrical backlog how much is Electronic and how much is Electrical?

Well, I don't have that exact figure broken down, but it would be a little bit higher in the actually a fair bit higher in Electrical Distribution which includes junction boxes. We don't typically -- I don't have the breakdown as far as Electronics, but just based on the base business, I would say a good rule of thumb is probably two-thirds to three quarters would be in Electrical Distribution.

Okay. The Electrical business in order to achieve scale I think you mentioned you wanted to be about 15% of the global market to get the margins that you're looking for. So would that mean that you need to maybe buy another asset or something or do you think internal growth is sufficient for you to get there?

Clearly if we're able to buy something would accelerate that. We would look at what's available. There have been some assets on the market over the past year or so, but we have to assume that we get there internally, so were are focused on the internal plan, if acquisition opportunities present themselves, we clearly look at it.

How core is the Electronics portion of your business there, the 900 million business?

Particularly the portion of the Electronics business that integrates or potentially integrates into junction box sincerely pretty core. That really is our competitive advantage that we can integrate the Electronic, like body Electronics, wireless, into junction boxes or even in a more distributed architecture into different boxes in the vehicle, and that allows us to optimized the overall Electrical distribution system. We think capabilities and technical competency in those Electronics products are -- it is important. Obviously some of the Electronics products are more important than others. There might be some rationalizing the product offering as we go along as well.

And could you sort of help me to dimension that the junction box, the core part, how much of that is a percentage of your total Electronics business?

It is about 450 million.

About half. Okay. That's helpful.

I am sorry, of our total EST business, about 450 million in sales.

Okay. If I could shift gears a bit, with all the stresses in production happening, to some extent in the fourth quarter but more in the first half of '08, how would you describe your relations with tier 2 suppliers like do you see any issues coming up either on the P&L or even through cash flow such as maybe giving them better terms or something like that? Do you foresee any of that happening?

We're constantly working with our suppliers both in North America and in Europe to kind of monitor it and keep it close contact with them as far as their financial needs and financial health. We went through a pretty heavy time of restructuring and distress in the '05 and '06 timeframe, '07 we saw a very much more stable kind of environment with our suppliers. Right now we don't see anything material on the horizon, but it is something that we're constantly looking at.

Okay. Lastly, your CapEx increase, could you remind us what that's been driven by?

A couple things. If you start for a minute, back when we gave original guidance for 2007, capital spending in the beginning of the year it was $250 million. Some of the reduction was just good old-fashioned thrifting, and some of it was a carry over into this year. Some of the activities that we have coming up, one, we've booked a $1 billion of new programs over the last twelve months, and a lot of the capital is associated with that and the penetration in Asia along with programs to move our metals businesses into lower cost locations. We have some new business coming on with BMW and Nissan, and those are the key drivers. If you look at our average spend as a percentage of sales over the last two years, we're still slightly below what I believe our run rate is in that 1/6 to 1.8% of sales. It averages at the last two years at 1.5%. A little lower in '06, a little higher in '08, but those are the key drivers.

Thank you.

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

Good morning. If we walk the margins in seat wring where they were last year to the goal of the mid-600s, how far can you get in restructuring? What would be the contribution of scale when and if it emerges and finally what's the chunk you're thinking of in terms of moving into higher value-added product?

Okay. The way I would look at it to walk the numbers, one of the biggest drivers in the margins year-over-year is the pullback in the North American markets, significant pullback in the North American market and the fact that we have large pickup trucks and full-sized SUVs pulling back over 10% on a year-over-year basis. Typically what we see on volume and mix when it comes out of North America is about a 20% downward conversion, and if our content per vehicle overall in North America is about $500 a unit, but if you look at it on the Big Three and the large SUVs and pickups, it is considerably higher than that.

Right.

From a restructuring standpoint, we have been ahead of the schedule, roughly half of the incremental improvement year-over-year we think will come out of the seating segment as an improvement. We think, however, we can continue to get cost efficiencies and working with material improvements through value engineering and working with our supply base to get costs out of materials. We think that could also help us mitigate some of the downward pressure.

So was this really the wider guidance was the North American pressures coming through seating?

It is proportional to the revenues, and from that standpoint would be more in seats.

In Electronics to get a couple hundred 300 basis point improvement in Electronics, how does that divide between restructuring, scale, and strategic moves?

I think first off works we talk about scale, really our plan and what we talked about is taking the business to the comparable margins that we've seen in seating based on the new business we've won and the restructuring plan we have in place, so as Dan mentioned, scale would help us accelerate that, but our game plan is really to get there based on the business we have and the business we've already won and the restructuring plans we have in place. In that it is probably 50/50 between the benefit from the volume coupled with the restructuring.

And how much do copper prices help contribute to that 100 basis points year-over-year expected margin expansion?

It doesn't. We're assuming that it is flat for 2008.

And just what's the nonmaterials cost base addressable cost-cutting cost base in Electrical, labor, over head, et cetera?

I don't really break it down that specifically. We believe we have the opportunity to take costs out of both our structure costs, our labor costs and our material costs through value engineering as a product that's allows for a lot of design change that helps us move the margins, so I think it is all available for potential improvement.

And is it the same management team that's been in there and is just corporate moving around focusing on the turn around here or is it new management as well?

It is the same management team.

Okay. And the share repurchase, any timeframe the Board gave on you that or open ended?

It is open ended.

Thanks.

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

Thanks. Good morning.

Good morning, Chris.

A couple of items. First, what is the expectation for taxes in 2008 on a book basis? I know you gave cash tax expectations, but what -- I know it gets tricky based on the valuation allowance, but you seem to be more steadily profitable. Are you releasing that allowance or how should we think about taxes a book basis for '08?

On an adjusted basis we're guiding to approximately 135 million which would put us right around a 30% effective tax rate for 2008.

That's higher than what it was in '07, right, but your income is lower? What explains that?

Well, in 2007 there was a number of one-time items in our numbers that were favorable. We had a couple of valuation allowance releases in certain countries.

The big picture, if you stand back for a minute, it is really the mix of where earnings come in. We see a pullback in the North American operations but a bit of a step-up in the global earnings, so it really comes down to the mix of earnings. Obviously with the loss carry forwards we have, the majority if not all of our earnings in the U.S. will be sheltered, or we won't be paying taxes them, and then we will be taking taxes in most of our international operations, so that drives as much as anything.

Are you now profitable in the U.S.?

We were profitable in the U.S. in 2007. It is important to note, too, that the majority if not all of our interest expense is U.S. dominated.

Okay. Another one kind of a detailed question on the numbers. It looks like you hit the full year guidance in terms of core operating earnings of 750 million. The fourth quarter that would have been implied by the first three quarters, you had earned 580 roughly through the first three quarters. That would have suggested you would have to print about 170 million in Q4 to get to the 750. You ended up printing close to 180 in Q4 and still did 750. Did you have to revise downward anything from the first three quarters?

No. Really I think what drove it from a production standpoint and our top platforms in North America, it was probably one of the weaker production quarters. It was the weakest production quarter in the year as they were burning off some of the excess inventories that they carried into the fourth quarter, so I think that more than anything. Now, what did happen was we had built in at the end of the third quarter we had built in contingency because we actually thought the shutdowns would be greater than what they actually ended up being.

Then why didn't the 750 end up higher? You know what I mean? If you did 580 for the first three quarters, to get to 750 you would have only had to do 170, you did closer 180. Why wasn't the full year 760? What am I missing?

I don't know.

I think we did 570 through the first three quarters.

Right. I got a little lost in your math.

Interiors in the first quarter.

And depending on how he is looking at that.

The interiors, right. That's the difference. There was 13 million of (inaudible) in the fourth quarter based on a basically the purchase accounting that IAC did. That's where you're getting the 10 million.

That squares it. Last one. Maybe I am trying to understand what is different about your business in 2008 than let's say 2005 where you had a pretty sharp downturn in some of your key programs and you saw much deeper fall off in margin. Here you're looking for a steep 12% decline in the top 15 platforms but only are expecting a modest decline in margin. Is it the fact that you're no longer in the interior trim business or what is different about your business?

There is several factors that are different. First and foremost, we divested the interiors business which was a fairly significant drag on earnings in that timeframe. Two, we've completed a lot of restructuring actions and made a huge investment in restructuring, and we've improved our footprint which is lowered our infrastructure cost. Three, we've seen growth and improvement in our international operations, and finally we were still struggling with the impact of absorbing a lot of the commodity cost increases and why they're still pretty high we've been able to work with our customers and find design solutions to kind of help mitigate the impact of those increased commodity costs.

The other thing about 2005 is we were looking at a record backlog of new business and basically all of our platforms, about 8% of our platforms were changing over. We obviously had a lot more involved in launch costs, a lot more in support for our business, and that's not the case now.

Okay. Fair enough. Thank you very much.

Your next question is a follow-up question from Rich Kwas from Wachovia.

Hi, Matt, just a quick follow-up on SG&A here. Looks like the SG&A sales ratio increased pretty materially on a sequential basis. Usually you get a decline from Q3 to Q4. What was the big driver there on the SG&A?

A couple things. One is first and foremost it is the book of business that we've booked the $ 1 billion in new business coming on line, the investment that we made in infrastructure in Asia and foreign exchange impact of the Euro denominated centers. From a run rate basis, Rich, I would say that you should probably look in the mid-3s to high 3s as a percentage basis on an ongoing basis, so that's kind much how I would look at that line.

Helpful. Thank you.

One more question.

This morning's final question will come from the line of Jonathan Steinmetz with Morgan Stanley.

Thanks. Good morning, everyone.

Good morning.

Can you hear me?

Yes. Good morning, Jonathan.

Just a couple of questions here. I think in the past you talked about on a restructuring basis about 90% of the booked restructuring expense being cash. Is that still the way we should think about things going forward over '08 to '10?

I would look at it slightly different differently because of the incremental charges we took in the fourth quarter that came in late in the quarter. This year I think we're going to have incremental cash use as we start catching up. The cash use for restructuring in 2007 was about $100 million. You will start seeing the catchup over the next two years.

There is some timing differences, but overall we're still comfortable it is 90% cash, but there are obviously some things that are carrying over into '08.

Do you have an amount on what you didn't put out in terms of cash use in the fourth quarter that would be carry over and paid in cash in the first half of this year?

It is a tough number to peg based on a timing of some of the payments, but right now if you used any ballpark around 50 million incremental year-over-year, you would be fairly close.

Okay. Just follow-up on some of the questions about the cost structure on the Electrical and Electronic side. Can you break out on a rough basis what the fix versus variable nature here, and I am just trying to understand, I didn't intuitively think of this as a majorly scale driven business in terms of from a manufacturing perspective. Where does scale enter into it in terms of really getting the operating leverage? Maybe you can give us some insight what your utilization is, that kind of thing, and what it could go to.

Yes, I guess I would break out the Electronics from the Electrical Distribution, and Electronics, there is an investment in technology there, and there may be further investment in technology, so scale is important. For example, our junction box technology we think is world class. We could scale that technology, it is obviously the contributions are significant, same with RF. Terminals and connectors which has been a focus largely in Europe, and in wire harness it is really having the low-cost footprint, and so we've had over capacity. That's largely a revenue play. We need to build more scale to basically use the capacity we have and absorb some of the basically the corporate and engineering infrastructure.

So basically our wire harnesses get to a lower cost location and add business at the same time.

Correct.

Okay. Thank you.

At this time there are no further further questions.

Okay. Just want to thank everybody and once again thank all the employees for your contributions this past year and looking forward to your contributions going forward. Thanks, everybody.

Ladies and gentlemen, this does conclude Lear Corporation's fourth quarter 2007 earnings conference call. You may now disconnect.