Lear Corp (LEA) 2008 Q1 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 first quarter 2008 earnings conference call. (OPERATOR INSTRUCTIONS) After the speakers' remarks, there will be a question and answer period. (OPERATOR INSTRUCTIONS)

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

Thank you very much, and good morning, everyone. By now, you should have received our earnings release for the first quarter and also our financial review package. These materials have also been filed with the Securities and Exchange Commission and are also posted on our Web site, Lear.com, under the Investor Relations link.

Today, our presenters are Bob Rossiter, Chairman, CEO and President. Jim Vandenberghe, Vice Chairman, and Matt Simoncini, our Chief Financial Officer. Also participating on the call are Dan Ninivaggi, Executive Vice President of Strategic and Corporate Planning, Terry Larkin, our General Council, Shari Burgess, Treasurer, Wendy Foss, Controller, Bill McLaughlin, Vice President of Tax, and John Trythall, Vice President of Business Planning and Analysis. Before we begin today, I would like to remind you that during the call, we will be making forward-looking statements that are subject to risks and uncertainties. And, some of the factors that could impact our first half to results are described in the last slide of our slide deck and also in our SEC filings. In addition, we will be referring to certain non-GAAP financial measures. Additional information regarding these measures can be found on the slides labeled non-GAAP financial information, and those are also located at the end of this presentation. On slide two, we summarize the agenda for today's review.

Jim Vandenberghe will begin, provide an assessment of business conditions. Next, Matt Simoncini will cover our first quarter result and discuss the outlook for 2008, and, finally, Bob Rossiter will provide some closing comments. Following the formal presentation, we will all be happy to take your questions, and, so now, if you'll turn to slide number four, I'll turn it over to Jim Vandenberghe.

Thanks, Mel, and good morning. I'm going to start off by looking at the global automotive industry environment. This year global automotive -- the global industry production is forecasted to be up 3% from a year ago. The increase in production is driven by continued growth in emerging markets. In North America, business conditions remain challenging, and we are seeing lower production. 2008 is now projected that's lowest level since 1993. Additionally, shifts in consumer preferences have favored cross-overs of passenger cars versus light trucks and SUVs. In to compound that, energy and commodity prices are increase, there's a strike in a major supplier, and the potential for increased distress through without our play supply chain is increasing. In response, the industry is undergoing major restructuring, particularly in North America, and there's more consolidation and increased globalization. At Lear, we are continuing to implement aggressive actions to improve our long-term competitiveness. We have put in place a global organization to make sure that we are best leveraging our worldwide resources and size. The next few slides, I'll talk about each of those factors in more detail. Slide five provides additional detail on the 2008 outlook for global automotive production. On the positive side, overall industry projection is projected at 71 million units, up 3% from a year ago, and the increase reflects continued strong growth in major emerging markets, ranging from 12% increase in Brazil to a 31% increase in India. In Europe, production of just over 20 million units is equal to a year ago. And in North America, industry projection -- production is projected to be down 6% in 2008 to a level of 14.1 million vehicles.

Slide six shows the impact that energy prices and concerns about the environment are having on consumer preferences, moving away from larger light trucks and SUVs towards smaller fuel efficient vehicles. Just a few years ago, full-sized pickups and large SUVs comprised 25% of the production in North America with another 25% in minivans and other light trucks. In 2008, production of these larger trucks is forecast to account for 39% of the mix, versus 50% of the mix back in 2004. Cross-overs and passenger cars are picking up the slack. But, we are seeing restructuring initiatives by the Domestic Three to bring overall capacity in North America more in line with the present composition of demand. As a result, major manufacturers are operating more efficiently than a few years ago, and, through our own restructuring initiatives, we are, as well. Slide seven looks at energy and commodity prices which have been earning higher since 2004. Steel is Lear's largest commodity exposure. Steel price content that Lear is directly responsible for includes a relatively small raw steel buy and the steel included in fabricated component, which is considerably more that much our raw buy. The remainder of steel we utilize is direct by the customer. We're able to mitigate steel price increases somewhat with fixed price contracts and purchasing initiatives. Form-related chemicals a represent Lear's second largest exposure, but is far less than our steel exposure. These contracts are primarily priced at market. For direct price exposure in this area is minimized somewhat by purchasing initiatives, value engineering, and other supply chain management efficiency actions. Copper is not a major risk this year. Approximately 75% of our copper use is passed through the customer. Of the remainder, primarily content in terminals, connectors and other electronics, about two-thirds is hedged to 2008. Slide eight, we highlight our supply-base initiatives. We continue to be proactive in monitoring our suppliers and identifying any signs of distress early on. This has allowed us to minimize cash outlays. Lear's cash outlays to support distressed suppliers peaked in 2005. Since then, we have significantly decrease our exposure to resin and supplier issues with the divesture of the business.

Other actions to reduce risk in the supply chain have included supplier consolidation, ongoing value engineering, selective in-sourcing and managing contractual terms. Additionally, startup activities substantially less than it was in 2005 for Lear and our suppliers, meaning there's been far less launch risk. That said, North American supplier distress has increased due market conditions, commodity costs and lower production, but based on current we believe we can maintain our costs in the outlook. Moving to slide nine.

In addition to our proactive effort and continuing to improve our cost structure, we recently implemented a new new global operating structure for our two core products, Seating and Electrical and Electronics. We believes this better aligns Lear with the global strategies of our major customers, allows us to take full advantage of our global scale, leverage our worldwide engineering and product development resources, but we feel good about our progress to date in these areas. We believe that there's significant opportunity to improve our engineering and sourcing footprint.

So to wrap up my comments, challenging business conditions in North America are driving the industry to restructure their operations and pursue global operating strategies. We have been aggressive in taking actions to reduce our cost structure and improve our long-term competitiveness. The initiatives we have taken, such as the divestiture of our interior business, pursuing sales growth outside North America, and the ongoing evolutions over our global footprint, have allowed us to continue our financial performance despite in some tough conditions in North America. Now, I would like to turn it over to Matt Simoncini for his financial review of the quarter.

Great. Thanks, Jim. We continued our positive operating momentum in the first quarter despite the many challenges in North America. Net sales in our core business were up 2% and core operating earnings were up 10%. These results were better than we had anticipated, reflecting increased benefits from our restructuring and strong operating performance as well as the timing of favorable commercial settlements. These favorable factors allowed us to overcome the lower production delivered by the American Axle strike. For the full year, our outlook for revenues has increased from $15 billion to $15.5 billion, reflecting favorable foreign exchange, primarily the Euro, offset in part by lower projected industry production in North America. Our full year outlook for earnings, however, remains unchanged from our prior guidance as favorable operating performance and foreign exchange are offset by our lower assessment for the full year industry in North America and increasing commodity costs. In the next few slides, I'll cover our first quarter results and our full year outlook in more detail.

Slide 12 of the presentation breaks down the industry environment in the first quarter. In North America, industry production was 3.5 million units, down 8% from a year ago. The Domestic Three were down 13%, and our top 15 platforms were down 16%. The lower production in North America includes the impact of a strike at American Axle. In Europe, industry production was 5.2 million units, flat with a year ago. Production for our top five customers in Europe was down 2%. Prices for key commodities increased sharply during the first quarter. These increases did not have a significant impact on our first quarter financial results because of contracts in place, price adjustment mechanisms and the timing of price adjustments. At present levels, however, commodity costs for the full year represent an increase compared with a year ago. As Jim mentioned, we believe we can contain the risk within our earnings guidance. Slide 13 provides our financial score card for the first quarter in more detail. Starting with the top line, we posted net sales of $3.9 billion, down $549 million from last year. The decline reflects the divestiture of the interior business, net sales in our core business were up $75 million from a year ago, reflecting favorable foreign exchange and the addition of new business outside North America offset in part by lower production in North America. Our reported pretax income was $110 million, and net income was $78 million, or $1.00 per share. These levels represent solid improvement from reported results a year ago. On the next slides, I'll show our results excluding restructuring costs and other special items to highlight our underlying operating performance. SG&A as a percentage of net sales was 3.5%, compared with 2.9% a year ago. SG&A a year ago benefited from one-time curtailment gain on our U.S. pension plan. Excluding this gain and other one-time factors, SG&A cost as a percentage of revenue was essentially flat with a year ago. Interest experience was $47 million, down $4 million from last year, primarily due to lower net debt balances as well as lower borrowing costs. Depreciation and amortization of $75 million was flats with a year ago. Other expense was $6 million compared with an expense of $25 million a year ago. Last year, other expense included a loss related to a join venture transaction. This year other expense benefited from favorable impact to hedges, improved performance in our non-consolidated joint ventures and lower factoring in costs.

Slide 14 summarizes the impact of restructuring actions on our first quarter results. Reported income before interest, other expense and income tax was $162.9 million. Excluding restructuring costs, core operating earnings were $186.5 million, compared with $170 million a year ago. The improve in operating earnings primarily reflect favorable cost performance, including key savings from restructuring actions. As I mentioned earlier, our results in the first quarter were also favorably impacted by the time in commercial settlements. The impact our commercial settlements in our full year outlook is relatively neutral. Slide 15 summarizes the impact of major performance items in our first quarter sales and margin compared with year ago. As you can see, the major adverse factors for the change in sales were the divestiture of the interiors business and lower industry production in North America, including the adverse impact of the American Axle strike. Partial offsets were the favorable impact of foreign exchange, and new business outside North America. The margin improvement was a result of more favorable operating performance and the divestiture of the interior business.

Turning to our performance by product line, our Seating business continue to perform well in the first quarter with a 6.5% adjusted margin compared with 6.4% a year ago. The improvement in our Seating margin reflects favorable cost performance, increased savings from restructuring and the timing of a commercial settlement, largely offset by lower industry production in North America, including the adverse impact of the American Axle strike. For the full year, we are forecasting our adjusted Seating margins will be better than 6%. This reflects continued favorable costs in operating performance and further benefits from restructuring action offset by lower production in north America and the margin impact of foreign exchange. In our Electrical and Electronic business, first quarter adjusted margins improved from 4.8% to 5.5%. This reflects favorable operating performance, including benefits from restructuring and the net impact of legal and commercial claims, offset in part by lower production in North America. For the full year, we expect our adjusted Electrical and Electronic margins to be in the mid-4% range. This will represent an improvement of about 100 basis points from 2007 and is consistent with our prior guidance. This reflects continued favored cost performance, restructuring savings and the benefit from new business, offset in part by lower industry production in North America and further investment in growth initiatives.

Free cash flow was a negative $31 million in the quarter. This reflects primarily higher working capital for the full year we are forecasting positive free cash flow of about $250 million. Now, turning to our key assumptions for this year's outlook. In North America, we are forecasting industry production to decline to about 14.1 million units, which is down 6% from a year ago. Production for the Domestic Three is expected to be down about 10% with our top 15 platforms in North America forecast to be down about 16%. In Europe, we see industry production of about 20.2 million units, which is roughly flat with a year ago. Production for our top five customers in Europe is expected to be down 1%. As for the Euro, we are forecasting a rate of $1.52 per euro for the year. This is 11% stronger than last year. Commodity costs are up from a year ago. While there is a risk, at current levels, we believe the exposure is contained within our full year guidance.

Slide 20 summarizes our 2008 financial outlook. We are forecasting net sales for 2008 of approximately $15.5 billion. This is up about $500 million from the prior outlook, reflecting favorable foreign exchange. Our core operating earnings are estimated to be in the range of $660 million to $700 million. This is unchanged from the prior forecast. Interest expense is estimated to be between $185 million to $195 million. Our forecast for pretax income adjusted to exclude restructuring of these special items is in the range of $430 million to $470 million. Our estimate for tax expense is about $135 million and is subject to the actual mix of financial result by country. Restructuring costs are estimated to be about $100 million. Capital spending is expected to be in the range of $255 to $275 million. Depreciation and amortization are estimated about $300 million. Lastly, free cash flow is expected to be about $250 million, including about $150 million of cash restructuring costs. Now, I'll turn it over to Bob for some closing comment.

Thanks, Matt. If you move over to slide 22. Obviously we're pleased with our first quarter results as we've maintained positive momentum in our operations, despite difficult industry conditions and the suppliers strike that's been mentioned. Our results reflect the benefits of our aggressive restructuring actions and a lot of hard work by the Lear team. We further improved our competitiveness, announced and implemented a global structure, two strong global businesses, Seating and Electrical/Electronics. We expect to realize significant efficiencies as we continue to operate as a truly global company. We believe this new structure will benefit our growth initiatives, support our cost initiatives to be the low-cost producer and allow Lear to take full advantage of our expanding global engineering capabilities in low cost countries. We are also making significant commitment growth in Asia as well, by moving several key executives to Shanghai, China to develop our infrastructure and prepare for that growth. Last quarter, we provided an overview of our Electrical/Electronics capability. We also outlined our plans for improving this business. We have complete ours strategic review, and we are now engaged in implementing our improvement plan. Lastly, we have not lost focus on our customers to be the best in quality, service and innovation.

Move to slide 23. I believe the outlook for Electrical/Electronics business is very positive. Power distribution is a critical system in every vehicle, and consumers are demanding increased electronic content. To set the right course for this business, we have now completed a strategic review, and we are beginning to implement an improvement plan. Our priorities for this business are to execute our restructuring plan, including further evolution of our global footprint to low cost countries, development of global centers of excellence and sales growth in our core electrical distribution and related electronic products. We are also encouraged by the opportunities in the area of hybrid electrical systems and high voltage components. Slide 24, please. We continue to evolve our low cost footprint. We opened a new seat foam plant in Wuhu, China, and a new cut and stow operation in Hanoi Hai Phong Harbor in Vietnam. In addition, we continue to expand our electronics/electrical capabilities on our growing campus in Shanghai, China. Several other low cost facilities are underway in Asia, Eastern Europe, Morocco and Mexico. Slide 25, please. We continue to focus on delivering the best possible quality, service and innovation in the industry. Shown here are some of the major customer awards and industry awards we received so far this year. In addition to awards from the Domestic Three, we were also recognized by several European and Asian automakers. In addition, we receive merchandise is excellent recognition in the press throughout the industry for our innovative products.

To summarize, on slide 26, we are continuing to make solid progress in improving our long-term competitiveness of our business. Major actions included the restructuring of our global operations, continued sales diversification, further evolution of our low-cost footprint and actions to strengthen and grow our Electrical Electronics business. Despite challenging industry conditions, particularly in North America, we delivered solid operating and financial results in the first quarter. Our strong start to this year is allowing us to maintain our full-year earnings outlook. This is despite lower forecast for industry production in North America and increasing commodity costs. Going forward, we plan to continue to restructure our global operations, invest in our core businesses and further position the company for long-term competitiveness. Before we take your questions, I again want to thank the team, the entire team, for their efforts. We simply could not deliver the results we did without the dedication, hard work and focus of every Lear employee, and now we will be happy to answer your questions.

(OPERATOR INSTRUCTIONS) Your first question will come from the line of John Murphy with Merrill Lynch.

Good morning, guys.

Good morning.

First -- first, I just wanted to dig into what was going on at the Axle strike here. You lost 90,000 units although it doesn't seem like there was any big impact in the quarter. Are you guys just getting really good at this stuff? Because this is sort of becoming the normal course of business in the auto industry with these production shocks, or were there a lot of other things in the quarter to make up for this?

Well, to talk about the strike first, and then the offsets. The strike impacted this industry, John, by 90,000 units to the best of our estimates on lost production based on the shut downs. The impact on Lear in Q1 specific to those shut downs was about 80,000 units, since not all our -- not all the platforms affected were Lear platforms. However, prior to the strike, through the first half of the quarter, we were actually running a little bit ahead of our production expectation. Now, if you look at it from a revenue standpoint, the CPV on average for the units affected were in the $1,100 range since the majority of them were full-sized pickup. On a typical downward conversion in a short-term production for Lear on the average say is about 20%. And some of the platforms are higher, some are slightly lower, but on average, that's the number that was we kind of usually -- we usually see. In this particular instance, the downward conversion was higher due to the inefficiencies associated with the strike, and the degree of vertical integration. Now, your question related to offsets and what have you, we did benefit in the quarter to the tune of about $25 million to the timing of commercial settlements and legal resolutions. Seating benefited in a range of about $20, electrical was about $5. But at the core of it, we had underlying strength in our operations. We still we're seeing increased benefits from restructuring year-over-year, good strong performance in the operations and cost reductions, manufacturing efficiencies and strength in our international operations. So in a nut shell, that's kind of how we saw the quarter.

Okay. Particularly, then on the content of vehicles, we typically look at SUVs versus cross-over utilities as the market shifts in that direction. Just wonder if you could talk about the general content potential on the CV versus the SUV's you have.

It, obviously, depends on the type of crossover vehicle. On the larger, three-row SUVs, I would say the content is pretty comparable, and in some cases might be even slightly higher. On the base level two-row cross-over vehicle, it's probably more in line with a mid-size sport utility, so it's the full range. It really depends on the level of the cross-over vehicle, base level [cloth] two-row, going to be probably closer, higher than a car, but closer in line with a pickup truck. On a large, luxury cross-over with three rows of seats, it's going to be comparable to a full-size SUV.

Got it. Any update on the back log?

We're not going to update the backlog, per se. But if you remember last year when we talked about the backlog, John, we said in the last 12 months, or during '07, we booked roughly about $1.5 billion in sales, increased sales during 07, and for the first were you able we're kind of on that base. So, we're consistent with that pace through the first quarter.

And, lastly on Electronics, are there any transactions or small bolt ons that would be involve development or sort of reorganization of that segment?

Yes. We would look at those. There's nothing specific we're ready to talk about today, but, certainly, we're looking for different ways to grow the business, organically as well as through acquisition approximation.

Great. Thank you very much.

Thank you.

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

Good morning.

Thank you for your question.

Brian Johnson.

Hi, Brian.

Can you give us a sense of the electrical margin improvement, maybe break out that prior preferred settlement? What hit there? And, then, where the margin reversion is there versus the 100 basis points you've talked about in the past, liking to improve that business?

Okay. In the quarter, we benefited by about $5 million net on the commercial and legal settlement for that segment, $5 million to $6 million. If you exclude that, we're up -- from a margin standpoint, pretty consistent year-over-year and on track for 100 basis point improvements. And really where we're seeing performance is we're starting to get transaction on our restructuring efforts both in North America and in Europe, and that's possible the biggest driver.

And have you begun any of the re-footprinting of the plants yet?

Absolutely.

Okay

Absolutely. We have initiatives both in North America and also in Europe.

And are those just -- when do you expect the cost savings from re-footprinting to start hitting?

They're hitting now. They're hitting now, but they'll be ongoing and expanding as we continue to take the tough actions that we need to to fix our footprint. I I think from a Electrical distribution standpoint in North America, we've take an lot of the actions. We still have some work to do on the Electrical and Electronics plants here in North America.

In Europe, we're getting savings for our actions. We still have a few more locations we need to address or footprint issues we need to address. So, we are getting savings. We expect to them to increase during the year and into next year as well.

Okay. And copper, are you fully passed through on your commodity costs in this segment?

No. No, we're not. And the copper situation is roughly 80% of our copper is on Electrical distribution, and it's covered through pass through agreements with our customers, typically on a one quarter lag. On the remaining 20%, it's our responsibility, but we've hedged roughly two-thirds of it, so we have protection on price spikes. For the quarter, really didn't have a significant or meaningful impact on the results. And-- and just to put a frame of reference on it, we use 110 to 120 million pounds of copper a year in our products.

Okay, great That was going to be my final question, but thanks for thinking about it.

Thank you, Brian,

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

Thanks, good morning.

Good morning, Chris.

A few items. First, can you give us some idea about the nature and timing of your steel contracts? Are they annual? Are there big contracts that are going to roll over at the end of '08?

Yes. What we have from a steel standpoint is really a mixed bag. Our contracts cover a whole litany of different components, different suppliers, different contract arrangements from fixed contracts, collars, triggers, flow-through adjustments and what have you. Now, if you look at it, we use roughly 300 million pounds of raw steel that we are directly responsible for. If you look at the portion of the steel that we used that we're responsible for in the components, you're probably looking at a $750 million to $800 million buy. And that excludes the components that are directed by our customers.

From the stuff that you buy, the 300 million pounds --

That's the raw, but like Jim mentioned in his section, the exposure on our commodities is largely in the components.

So that's --

Steel that's used in the components, and roughly half of that exposure is directed, and the other half is sourced by Lear, or Lear's responsibility. Of the stuff that we're responsible for, the metal content that we're responsible for, Chris, it's $750 million to $800 million of our buy annually.

Can you give us an idea -- you've been talking about growth outside the U.S., and I know you report the revenues, pit maybe you could give us an update or and directional feel as to how much of a profit improvement you're seeing from regions outside of North America and Europe?

What we're seeing in Asia are consolidated sales. This year, it's going to be about $1.2 billion out of Asia. And, we're converting that, for the most, consistent with the Seat margins overall, and that it would represent a 15% to 20% growth in year-over-year on those sales.

How is the profitability in Europe?

Europe's profitability is a little bit lower than the segment overall from a Seat standpoint, just because of the nature of the business. Less, if any, large SUVs and pickup trucks in a level of vertical integration, so it's a slightly different business model. So those -- the margins have been less than in the U.S., but still on track.

Last question. Can you aggregate even a rough number for how much your total restructuring-related cost saves were, and maybe what the trend should be going forward? Is it accelerating for here, or is the first quarter run-rate about what we'll see for the rest of the year?

Yes, when we last spoke at year-end, we talked about a restructuring savings number for 2007 as the $140 million range, and we guided to about $185. Now, for the quarter, we ran about $5 million, thereabouts, hotter than our initial estimate. We see the full year savings for '08 in the $200 million range.

So you were $5 million ahead of pace in Q1 towards $200 million?

Yes.

Okay. All right. Thank you very much.

You're welcome.

Your next question will come from the line of Brett Hoselton with KeyBanc Capital.

Hi. Good morning, gentlemen.

Good morning, Brett.

Matt, I'm wondering if you can kind of talk a little bit more about the non-direct -- the steel buy that you purchase from your suppliers. Specifically, is there some way you could possibly quantify that, and, secondly, can you talk about your ability to mitigate price increases through supply chain and your ability to pass them along to your customers?

Okay. Starting with the total steel buy impounds -- it's roughly 3 billion pounds, roughly. A little less than half of that is directed by our customers, and, again, the remainder, 300 raw, and the remainder of that is in the components that we source. There is no one particular solution to a price increase. It's everything from negotiations, consolidation of supply chain, working with our customer for recoveries, offsets to price closing targets, what have you, value engineering, substitution of materials and just trying to be more efficient overall with the supply chain. So there's no one particular mechanism that we use to cross the boards throughout the supply chain, starting with our customer and working on through the sub-tiers.

So the $3 billion, that includes -- does that include the $750 million to $800 million?

3 billion pounds.

Or 3 billion pounds. Does that include the $700 to $800 million in --?

Correct, that's a subset.

Okay.

And that's again what we are directly responsible for sourcing.

Okay. And then, secondly, as you think about the Electrical margins and so forth, expecting 100 BIPS increase this year, as you look out to into the following years, what are your expectations for margin improvement in the following years, and what are some of the key driver there is?

A couple of key drivers. From a margin expectation standpoint, we think over the next 36 months, we can start getting them to approach the Lear overall margin in Seats. For instance, in 6.5-type range in my opinion key drivers is, one. Dan has talked about in the past, and we've mentioned the lack of sales.

A lot of the backlog that we announced at year ends, roughly, I want to say two-thirds of it was in this segment, which is starting to provide the math that we need. Secondly, the restructuring action that we're taking, continue to taking, should start paying dividends. And those are probably the two biggest drivers in the margin improvement, Brett.

Okay. And when you think about, back to the steel issue, what are your expectations in your current guidance, regarding your ability to absorb steel price increases versus your ability to pass them along to your customers?

Well, I think any solution that we have, at this point, what we're assuming is the exit points -- rates for Q1. Any significant spike to that would have to work with our customers and our suppliers to find offsets and solutions to them. Right now, we've gone through the level of increases, and our agreement, and, if you use the first quarter exit rates, we've contained it in our guidance. If it spikes from that, it would be a risk.

Okay. Thank you very much, gentlemen.

Thank you.

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

Hi. Good morning, guys.

Good morning, Rich.

Matt, on the commodity cost, I'm sorry -- I'm sorry if I missed it this, but did you quantify what you expect to it be for the year?

No, we did not quantify it other than to say that our exposure to the metals that we -- we direct or that we are responsible for, the total cost in our material buy is in the range $750 to $800 million. We didn't expect copper to have a meaningful impact on the results at this point, one way or the other, largely due to the past-due agreements and hedge contracts we have in place. Our assumption for the commodities in the guidance is, basically, the first quarter exit rate for steel.

Thanks. And, then I assume that the guidance also includes the latest news from GM, regarding the truck plants and the production in shifts there later this year?

Right. What GM actually announced, Rich, was a reduction in production capacity. They didn't really spike out a production figure or provide the absolute production number. Now, what we've assumed in these platforms that are affected by the announcement was a 24% reduction on a year-over-year basis. Last year, that platform did about our large trucks and SUVs, did about 1.5 million units, actually slightly over 1.5 million units. This year, we have production for those platforms pegged at 1.150 million. So, if it changes from that, that would obviously have an impact on our assessment.

And that's different. I think, I recall that at the beginning of the year, you had assumed a 10% decline, right?

Right. I think when we started the assessment we had it at about 1.300 million.

Okay. And do you have -- what is your assumption for the supplier strike in that number -- at --?

Right now, if you just look at the suppliers strike through the end of last week. The industry, or, at least the production announcements attributed to the strike, was roughly 210,000 units. Our impact on the platforms that we're on was slightly less than that, maybe in the 200 range. Again, it's hard to call the strike per se or production overall. Our production overall is the 14.1 number, and this particular platform is the platform -- the platform that has been affected by the strike at roughly 24% down.

But, is it fair to say there's some risk that if the strike lingers that there would be some downside revisions to that?

I think the strike provides volatility within the quarters. For the year, the real issue is are they going to make 14.1 million units in North America, and what platforms are they going to make within that mix?

Okay. And then lastly, bigger picture question on Europe. When you're bidding for programs, are you seeing any change in the way the European OEMs are working with their suppliers in terms of pricing specifically?

No, not any major changes. From time-to-time, there's customers going through difficult times, and, obviously, their position changes in the way they source their business. But overall, I would say there's no real change.

Okay. Thanks so much.

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

Hi. Good morning, guys.

Hi.

The commercial settlement of $25 million the quarter, I think, Matt, you had mentioned that it's the full year impact should be relatively neutral. Does that mean that that comes out in the second quarter, or does that sort of hit you later on in the year?

Comes out -- I mean, first off, it's important to note it wasn't one particular item, it was several items that make up that amount, and that's a net amount. At any given time, we're in negotiations effectively with almost all of our customers and suppliers, and it's very difficult to kind of bucket it in within a particular quarter. For the full year, we're pretty comfortable setting guidance, because usually the contracts are based on a calendar year performance. Now, particular in this situation, the net impact of roughly $25 million came at the expense of the succeeding three quarters probably on a fairly linear basis.

Okay. Second question, the -- just to be clear, the $1,100 content per vehicle on the T-900, is that pretty much all on the Seating division?

Yes, pretty much.

Okay. And, then lastly, Johnson, JCI has been talking about some fairly significant backlog growth in the European Seating business out in '09 and particularly in '10. I'm wondering if you could sort of comp out how that would act your business over there? Would you expect a deceleration in Europe out in those years?

No. We're growing in all of our markets so that's not the case.

Thanks. Great. Thank you, guys.

Your next question will come from Patrick Archambault with Goldman Sachs. Patrick, your line is open.

All right. That was our last question.

We'll move on to the next question. The next question is from the line of Itay Michaeli with Citi.

Hey. Good morning. Just on working capital, looks like you may have had a head wind there in the quarter. Anything unusual there, Matt, maybe a pension contribution or strike impact there?

No, I would say that inventory levels were a little bit higher than normal because of the strike, not significantly. You had some FX impact. Overall, the main thing working capital is the normal seasonality or cadence of sales in the preceding three months. The one unusual item is we actually, from a fiscal standpoint, we cut off the day a couple of days early, and that resulted in about $100 million of collections coming in a couple of days after the quarter end. But other than that, no significant change in terms, no significant contributions, nothing really material.

Great. And just on the -- I guess the $100 million or so of AR, security -- was that securitization or factoring in the quarter?

That was factoring.

Factoring. Great. And, just finally, could you just quantify what you're baking in for the impact on tier two and tier three supplier distress? I believe maybe it was $50 million back in 2005. Are we looking for something similar, or still a little bit below that?

No, I think, you're right, in 2005, the information on cash costs, a combination of cash tooling and pricing, was in the $50 million range. But the business has changed fairly significantly since that time, and, probably the biggest change, was the divestiture of interiors where we saw a disproportion at amount of distress and exposure to resin. We think the amount will be higher than last year when was to basically break even, but not approaching, at this point, anywhere near the 2005 level.

Terrific. Thank you, guys.

Thank you.

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

Good morning. Most of my questions have been answered. I was just wondering two things. Did you -- could you quantify the size of that pension curtailment gain in the quarter, and was that in your core EBIT, and also did you say that materials net-net were neutral in this quarter?

Okay. The pension curtailment gain in Q1 of last year was $36 million, and it was excluded from our core operating earnings last year. Okay. And materials? I'm sorry, what was the question again?

It was flat.

Raw materials were flat?

Right.

Great. Thank you.

Thank you.

And the final question will come from the line of Jonathan Steinmetz with Morgan Stanley.

Hi, guys. This is Robbie in for Jonathan. Can you hear me?

Yes, we can.

Do you have any supplier distress costs this quarter?

No, it was insignificant.

Okay. And, also, there's been some talk about steel companies leveeing surcharges on customers. If that does come through, are you afraid of being able to pass that through to your customers?

We would work with the customers and the suppliers to collectively find offsets. It depends on the size of the increase and the contract arrangements that we have both with our suppliers and with our customers on whether we would be able to pass those through.

Got it. And, finally, there's been some talk lately of customer -- of OEMs, especially Ford, in-sourcing some seating, engineering, and I think Chrysler is trying to move some seating business overseas. Are you seeing a a fundamental change in the way OEMs approach seating?

No, absolutely not.

Got it. Thanks very much.

Yes. Okay. That was the last question. I just want to thank the Lear team for the job they did. Matthew did a great job today. Very good. We've got two new business units in this company. I like the way it's been launched. So far, it's been smooth and, and everybody is doing an outstanding job. Let's keep that attitude positive, and let's go grow this business. Thank you are for today. Good job.

Ladies and gentlemen, this does conclude Lear Corporation's first quarter 2008 earnings conference call. You may now disconnect.