Lear Corp (LEA) 2008 Q3 法說會逐字稿

Good morning. My name is Jessica and I'll be the conference facilitator today. At this time I would like to welcome everyone to the Lear Corporation third quarter 2008 Earnings Conference Call. ( OPERATOR INSTRUCTIONS) Thank you.

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

Thank you. Good morning, everyone. And thank you for joining us for our third quarter earnings call. By now, you should have received our Press Release and Financial review package. These materials have also been filed with the Securities & Exchange and are posted on the Website Lear.com, under the Investor Relations link. Today our presenters are Bob Rossiter, Chairman, CEO, and President. Matt Simoncini, Chief Financial Officer, and, also, with us, here in Southfield, Daniel Ninivaggi, Executive Vice President. We also have the Presidents of our two operating units. Lou Salvatore, President of Global Seating and Ray Scott, President of Global Electrical Electronics and their is a number of other Lear Financial Executives here as well to help with the Q&A.

Before we begin, I would like to remind you all, during the call, we'll make forward- looking statements, that are subject to risks and uncertainties. Some of the factors that could impact the future results are described in the last slide of the deck and there are also included in our SEC filings. In addition, we will be referring to certain non- GAAP financial measures, additional information regarding these measures can be found in the slides labeled non- GAAP financial information. Also, at the end of the presentation.

If you will turn now to Slide two. Here we provide agenda for today's review. Mr. Rossiter will review the business environment and discuss the Company's operating priorities and he'll turn it over to Matt Simoncini who review our third quarter financial results and outlook and other financial matters and Bob will come back with wrap- up comments. Following the formal presentation we'll be happy to take your questions. Now, if you'll please turn to Slide number four, I'll hand it over to Mr. Rossiter.

Thanks, Mel. As you know, we're experiencing an unfavorable economic environment and declining automotive production in our mature markets. In this environment, we're taking necessary actions to with stand the current industry downturn. At the same time, we're maintaining focus on strategic priorities. Despite the sharply-lower production in the second half of this year, we expect to generate positive free cash flow in the fourth quarter, and for the full year. We've initiated an operating improvement plan to strengthen our financial results and financial flexibility over the next 12 months. Matt will provide more details on this plan in a few minutes. We have faced many challenges before, and each time we've emerged an even stronger company and I expect that to happen here, too.

If you turn to Slide Five. Our near- term operating priorities are fairly straight forward. Our top priority is to execute the operating improvement plan I just mentioned, and to achieve $150 million in savings as soon as possible. This plan consists of incremental actions globally, ranging from more significant near- term cost reduction actions as well as temporary measures and selected deferrals of spending. In addition, we are re-timing certain restructuring actions and focusing our spending on the initiatives which achieved the greater near-term economic benefit, while, also, maintaining financial flexibility. Our plans are careful targeted to adapt to the present business conditions, and lower production levels we are facing. This year, our outlook for the industry is 12.9 million units in North America and 19.7 million units in Europe. Obviously, next year, we expect production levels in both markets to decline further. We'll do this while we continue to deliver superior quality, service, and - - sorry, customer service, regardless of the external environment.

Please move to Slide six. I would like to comment on the longer- term outlook. We see continued long- term growth in the automotive industry and further consolidation of the supply base. Critical success factors for our Tier 1 supplier are global capabilities, low- cost footprint and superior quality and customer service. In addition, technology, and innovation are key differentiating factors. Given this outlook, we're very well- positioned to succeed in the years ahead. In our Seating Business global capability and a leading market position in a segment where there are limited number of truly global competitors with significant scale. In addition, we have a low- cost footprint and a balanced approach to vertical integration. We, also, are recognized leader in quality, customer service, and innovation. In our Electrical and Electronics Business we see significant opportunity for growth. At the same time, we are continuing to evolve at a low- cost footprint and we're investing in key technologies such as high-powered electrical systems and components and other core products such as junction boxes and wireless products.

Please move to Slide seven. Let me comment, briefly, on the progress we are making in our Electrical and Electronics Business. Earlier this year, we established a stand alone global organization for our two product lines. This is improved the strategic focus, provided a greater accountability, allows us to leverage our global resources, and has increased our awareness of our global capabilities. With respect Electrical and Electronics Business, we've established the following operating priorities, delivered profitable sales growth and diversification, achieved world class cost competitiveness, focused our product portfolio around key technologies and put in place a strong global organization.

Please move to Slide eight. We've made solid progress on each of our priorities. I'll provide an update on the progress in growing and further diversifying our sales on the next slide. With respect to improving our cost competitiveness we've consolidated the global workforce and achieved significant restructuring of North America and European operations, further optimized low-cost footprint and expanding our low-cost engineering centers. In terms of our Product portfolio we've sharpened our focus, we plan to globally scale our core products such as wire harnesses, smart junction boxes, terminals and connectors and wireless products. In addition, we are investing in emerging technologies and high-powered electrical systems and components. With respect to the organization, we've recently made key appointments and have a very strong team in place, globally.

Please move to Slide 9. Lastly, I would like to comment on the outlook for sales growth of our Electrical and Electronics Business. Our present annual sales about $3 billion and a target of $5 billion by 2012 and we'll do better than that. Since January, we've been awarded net new business of about $400 million. The new sales we are adding are further diversifying our sales by customer, region, and segment. And as we have said before, we believe there will be further consolidation on the segment, and we stand to benefit from, and participate in that. Now, I'll turn it over to Matt Simoncini for review of the Financials and, then, I'll provide some summary comments at the end.

Great. Thanks, Bob. Please turn to Slide 11. The business environment in the third quarter was extremely challenging, with sharply lowered production in both North America and Europe. On sales $3.1 billion we delivered core operating earnings of $46 million. Free cash flow was negative $17 million. We continued to achieve increased benefits from our restructuring initiative as well as other ongoing cost efficiencies; however, these favorable factors are not enough to offset the sharply-lower industry production and adverse platform mix in our mature markets. For the full year, our outlook is based on industry production of 12.9 million units in North America and 19.7 million units in Europe. At this production environment, we're forecasting net sales at about $14 billion, and core operating earnings, are estimated to be in the range of $440 to $480 million dollars. The next few slides I'll cover the third quarter results and full- year outlook in more detail.

Slide 12 of the presentation breaks down the industry environment in the third quarter in more detail. In North America, industry production was 12.9 million units, down 17% from year ago. The domestic three were down 23%, and our top 15 platforms were down 33%. In Europe, industry production was 4.3 million units, down 3% from year ago. Production for the top five customers in Europe was down 8%. Prices for key commodities were generally higher than a year ago and started to trend lower during the third quarter. The impact of net commodities during the quarter was negative, which is steel representing the majority of impact..

Slide 13 provides our financial scorecard for the third quarter. Starting with the top line, we posted net sales of $3.1 billion, down $441 million from last year. The decline reflects sharply-lower production in North America and Europe, offset partially by favorable foreign exchange. Our reported loss is $77 million pretax; and $98 million after taxes; or $1.27 per share.

On the next Slide, I'll show the results, excluding restructuring costs to highlight the underlying operating performance. SG&A as a percentage of net sales was 4.1% compared to 4.5% a year ago. SG&A expenses are down from year ago, reflecting the nonrecurrance of cost related to the [Arab] merger proposal last year and lower- compensation related expenses this year. Interest expense was about $46 million, which is down $1 million from last year. Primarily due to lower borrowing costs. Depreciation and amortization at about $76 million was relatively flat with a year ago. Other expense was $32 million compared to $18 million a year ago. The increase reflects primarily foreign exchange and hedging losses as well as unfavorable results for unconsolidated joint ventures and the loss on the sale of our switch business and call premium to repay our bonds. We expect other expenses of about $25 million for the fourth quarter.

Slide 14 summarized the impact of restructuring actions on reported third quarter results. Reported income before interest, other expense income taxes was $900,000. Excluding restructuring cost of $45 million, core operating earnings was $46 million compared to $170 million a year ago. The decline of core operating earnings primarily reflects lower production in our mature market. Offset in part by favorable cost performance including increased savings from restructuring actions. Restructuring costs were higher than initially planned during the quarter reflecting pull ahead by GM of the announced closure of its Jamesville Truck plant as well as certain Lear [sense] actions. To help clarify how this special items impacted our financial statements we have indicated the amount by income statement category on the right hand side of the chart.

Slide 15 summarizes impact the major performance items on our third quarter sales and margins compared to year ago. The major adverse factor for the change in sales was lower production in North America and Europe and partial offsets favorable impact of foreign exchange and new business globally. Margins adversely impacted by lower volumes and mature markets. Favorable operating performance, including restructuring saving was a partial offset.

Turning to the performance by product line. Sales and margins for our seating business declined in the third quarter reflecting primarily sharply lower production in the mature markets. The full year, we're forecasting our seating margin will be in the 5% range. This is below our target range reflecting the sharply lower industry production and adverse platform mix in North America and Europe. Net sales price reductions as well as higher commodity costs. Longer- term, we expect our seating margins to return to the 6% range. The road map of returning our seating margins to the target range involves realigning capacity to match demand and taking a balance approach to customer pricing, ongoing cost improvement actions, including further restructuring actions, benefit from selected vertical integration, continued growth in emerging markets and recovery in the North America market.

In our Electrical and Electronics Business, third quarter adjusted margins were down slightly. This reflects the impact of lower production offset in part by favorable operating performance. For the full year, we expect our adjusted electrical electronics margins to be in the 4% range, despite the lower production. To represent an improvement from 2007, reflecting continued favorable cost performance, restructuring savings and benefit from new business, offset in part by low lower production in mature markets.

Please turn to Page 18. Free cash flow negative $17 million in the quarter. Compared to year ago, free cash flow adversely impacted by lower earnings. For the full year, we're forecasting positive free cash flow about $75 million after funding, approximately, $175 million in cash required to implement planned restructuring actions.

Turning to the key assumptions for this year outlook. In North America, we're forecasting industry production to decline to about 12.9 million units, which is down 14% from a year ago. Production for the domestic three is expected to be down about 19%. Our top 15 platforms forecasted to be down 26%.

In Europe, we see industry production of about 19.7 million units, which is down 2% from year ago. Production for top 5 customers in Europe is expected to be down 4%. For the fourth quarter, our present production assumption are roughly in line with the third quarter, with double-digit declines expected in the mature markets. As for the Euro, we're forecasting a rate of $1.30 per Euro for the fourth quarter, which is 10% weaker than last year.

Slide 20 summarizes the 2008 financial outlook. Given the production environment I just reviewed, we are forecasting net sales for 2008 of, approximately, $14 billion. Our core operating earnings are estimated to be in the range of 440 to $480 million . Interest expense is estimated to be between 190 and $200 million. Our forecast for pretax until, adjusted to exclude restructuring costs and other special items, is in the range 180 to $220 million. Estimate for tax expense is about $110 million. Restructuring costs are estimated to increase to about $150 million, reflecting further capacity actions and CENSUS reductions. Capital spending expected to be in the range of 180 to $200 million. Depreciation and amortization is estimated at about $300 million. Lastly, free cash flow expected to be $75 million. Again, including about $175 million of cash restructuring costs.

Turning to Page 21. Lear has a strong liquidity position. The Company's primarily liquidity sources are cash and cash equivalent at quarter end of $523 million and our revolve credit facility $1.3 billion. At the end of the third quarter, the Company had no borrowings under the revolving credit facility. On October 15, we're elected to borrow $400 million under revolving credit facility to protect against possible short-term disruptions in the credit market. This borrowing combined with normal cash on hand is more than sufficient to meet the Company's expected liquidity needs.

Turn to Slide 2 2. In addition to the strong liquidity position, we recently announced a $150 million operating improvement plan to improve operating results and maintain financial flexibility over the next 12 months. The plan consists of actions to be implemented quickly and do not require significant restructuring investment. We're targeting five broad areas for improvement. Ranging from commercial items to material costs, manufacturing costs, overhead, and restructuring actions. While a number of the actions have been implemented already, we expect to realize the bulk of the favorable impact in the first half of next year.

Slide 23 provides some example of the incremental operating improvement actions we are taking. As you know, we have been aggressively reducing our costs in response to the deteriorating business conditions and lower production volumes. This new plan represent as continuation of our previous efforts but includes deeper near-term cost reductions, temporary actions, the deferral of certain discretionary costs and investment as well as reprioritize of our restructuring initiative. We expect that the majority of incremental savings will come from targeted actions to improve near-term financial results and further reduce our ongoing cost structure. The re-timing of restructuring action should contribute about a third of the plan near-term operating improvements. Specific actions include further CENSUS reductions globally, reduction in salary pension benefit, eliminate incentive compensation, reduced salary fringe benefit, temporary salary layoffs and salary compensation concessions. Within our operations, we're reducing nonprogram related spending. Slowing up certain expenditures in new markets. Balancing customer pricing and lower customer environment and implementing a number of actions to further reduce our plant administrative costs including extended holiday shutdowns, additional consolidations, reduction in overhead costs and reduction of plant capacity expansions in the emerging markets.

Before I turn it over to Bob for closing remarks, I'd like to take a moment to comment on the coveted compliance. Our major credit facility covenant are leveraged in interest coverage ratios, determined by trailing 12 month operating income including restructuring cost. Historically we have targeted a 30% or more coveted cushion. Although we have a strong liquidity position our operating results declined as production volumes have declined. At the same time, our near- term requirements for additional restructuring actions have increased, as our major customers have initiated additional capacity actions. As a result, our projected covenant cushion has been reduced. In response, we've initiated an operating improvement plan designed to improve our near- term profitability and increase our financial flexibility. While we do not believe covenant complies is a near- term concern we'd like the flexible to more aggressively pursue restructuring actions with favorable payback action particularly given the steep decline of production.

At the same time, we also appreciation the risk of further production cuts. While we do not see the need to enter the market now for covenant relief, we will closely monitor industry and market conditions and respond pro- actively. I'll turn it back to Bob for some

Thank you, Matt. Outstanding job. Summarize the global business conditions, we become - - have become very challenging. In response, we will improve the near-term operating results by $150 million. This is incremental to the ongoing cost improvement and global restructuring actions. They are making solid progress on improving longer- term competitiveness of our business. Despite the challenging industry conditions we expect to generate positive free cash flow this year. Going forward, we intend to remain pro-active and managing the cost structure, liquidity position, and lastly, we believe that the longer-term outlook for our business is positive. Now I'll open it up for questions.

(OPERATOR INSTRUCTIONS) . Your first question from the line of Brian Johnson. Barclays's Capital. Your line

Good morning. I want to go into a little bit more depth on the restructuring. Three questions. One, what do you think the restructuring costs are going to be for '09? And, then, give me a - - if you could give sense of the cash cadence within that?

Okay. Starting with restructuring '09, Brian, what we said previously we would expect restructuring in '09 to be favorable con sis 10 year- over- year - - consistent year- over- year. Based on new improvement plan to maintain the financial flexibility we see that coming down by about a third at this point. Obviously, with the industry conditions, based on affordability and pullback we'd like to do more if we can. It's been a positive investment to date. Where we've been making returns and paybacks in the two to two- and- a- half year area. We believe that that's been very good for us. From a cash cadence standpoint, this year, expect the cash use to be about $175 million. Expect that to come down slightly next year, with the reduction. And the restructuring expense. Typically, on average, the restructuring is about 90% cash- related and tend to be noncash charges, typically, on average.

Okay. What are you seeing in terms of decremental margins both in 4thQ and you think about them going into '09?

It is a little bit early to talk about margins in '09. The think the production environment in Q4 as we see it right now, obviously, a lot of uncertainty surrounding it, but, we see it to be fairly consistent in North America, with the third quarter. Europe, it is getting a little bit softer and seeing slow up in the growth and pulled back a little bit in Asia. European and Asian markets don't contribute on a downside as richly as North America does, because of the type and the level of vertical contribution. So, the way to look at it, probably, is to say that the production environment about the same in North America and we have instituted the improvement plan and kind of given the guidance for the full year based on that production. You can kind of get to the margins from that standpoint, working backwards from a full-year guidance. Some the improvement plan actions that we've implemented are near- term and considered into the guidance that we gave on the lower production.

Okay. And, , finally, on the backlog, any update on that? In January said $600 million. Given the lower environment - - outlook in '09, where can we expect that

You're right. We give updates in January on a backlog. The way we define backlog, Brian, net new committed business, net of low loss. A lot of things go into it. Everything from FX to platform volumes to, obviously, the production plans of our customers are changing from time to time in light of the industry conditions. Year- to- date, we won about $700 million in net new business. When we gave the backlog date in January, it was 600 million but 600 million for the three- year period, '08, '09, 2010. When we give the update in January, this year, able to cycle through all of the new production plans and the volume assumption, we would layer on 700 million, now the 700 million, though, is over a five- year period, typically programs run five years. Based on the previous backlog and the new business win, we would expect to have a backlog now in the $1 billion range. Again, a lot of puts and takes. Things change rapidly as you know in today's environment. But that's about where we would be.

So, about 1 billion when you add all of that together?

Right. That's the three year, that would be the three- year period.

Three years.

'09, '10 and '11.

Thanks.

Your next question from the line of Chris Ceraso, with Credit Suisse. Your line is open.

Thanks. Good morning.

Good morning.

It looks like the weak ne in the quarter was below the operating line. Can you talk about the performance in some of the nonconsolidated subs?

Right. Probably the biggest issue at nonconsolidated subs was with our investment in the Insurer IEC, which is hitting headwinds mainly in North America on production volumes and the rotation out of the large SUVs and pickups, impacts them, as well as headwinds on the resident commodity products. So, that's probably the biggest driver on the JVs, that roll up into that line.

Okay. Probably, continues into Q4. Any thoughts about changing the relationship there? Or getting reducing your stake?

Well, in all likelihood will have to raise additional capital. We would not participate in that and may suffer some dilution.

Okay. Sounds like you're okay with that?

Yes.

Okay. The - - it looks like your expecting - - you're expecting the fourth quarter in Europe for your top five customers to be better in Q4 than Q3? Are there big launches coming up? Because your comments and everybody else's comments seem to point to fourth quarter getting worse than third quarter in Europe?

It is - - the one thing to remember about Europe, is the third quarter has a pretty healthy summer shutdown. More so than we do in North America. So from a linear standpoint it improves from a year- over- year, gets worse.

I think in your slide you showed that in the Q3 your top five programs in Europe down 8% and your outlook, showed the full year down four. What's the Q4 specifically?

As far as what? Top platforms? Industry overall?

Top flat forms in Europe, on a year- over- year for Q4.

We don't really talk about top platforms but customers.

Right.

A segmented standpoint. Fourth quarter talking about it being down near year-over-year 16%. On a linear basis, it is actually up slightly from the third quarter.

Just to be clear shall the top five customers, which would were down 8% in Q3 year-over-year you're saying down 16% year-over-year Q4?

Year-over-year, correct.

Okay. That makes more sense. The - - just lastly, on commodities, can you talk about the lag effect for you? Will you feel any of the change in spot prices in Q4? Not until '09?

Well, the majority of exposure to commodities through the purchase components and we talked about that in the past. The direct steel buy is only about 300 million pounds. There is a lag, typically, about a month lag from the time of raw steel prices until we see it actually get converted into product. We don't expect to have a benefit, in fact, I think we're still forecasting a bit of an impact negative impact in Q4 and incurred into Q3 through purchased components. It is important to note that on a year-over-year basis, even though we seen a pullback, it hasn't been back to '07 exit rates. What it will do is, I think, eliminate pressure on the supply chain nets, incurring a loft the burden of the higher commodity costs. So, while they have pulled back, they're still higher than what we exited last year at. We believe it will help eliminate the risk and reduce the pressure on the components. Commodity cost impact comes in from a couple of different ways. One, the direct cost on the steel that you buy. Two, there is the indexing agreement on certain component purchases. So, it is a cost. I think it eliminate a risk or reduces the risk in '09. But we don't expect a tail wind.

One more, if I could. You layered in a number of restructuring actions over the past couple of years and made changes recently. Can you just boil it down to what you're expected cost savings you think you'll achieve in Q4? And then net basis in 2009?

Right. The way to look at restructuring, averaging 2 to 2.5 years on pay back and running hotter. Senses actions, typically return quicker for obvious reasons. Plant consolidations are a little bit longer on pay back. Right now, anticipate, I think the last call, talking about year-over-year improvement in this year versus 2007 of about $100 million Actually running a little bit better than that. While we've expected that same type of improvement going into next year, again, it depends largely on, - - depends largely on the cadence of how we do restructuring, financial flexibility plan. Have the ability to do more financially, we'd like to do more. We believe in face of the production environment, that that's been a good investment for us. We've talked about, in the Press Release, around $250 million of savings to the program today, that's off the low or over half million dollars in expansions. So, all in all, pretty good for us. We'd expect to have that same level of savings going into '09.

Thanks, Matt.

Your next question from the line of Rod Lache, Deutsche. Your line is open.

Good morning, everybody.

Hi.

First of all, did you say what the chop hilt was in the quarter? - - commodity hit was in the quarter? Dollar impact?

No, I didn't, Rod. Seating segment roughly 20 million on direct basis. Real impact was probably higher than that. With the stress in the supply chain, it hinders our ability to get purchasing savings and work with the suppliers. They're incurring a lot of costs directly. So the real impact is, probably, higher on year- over- year basis. But the direct cost was about 20.

All right. There's been a lot of talk about that, that the tier two level and dependence on asset-backed borrowing. Any color on what this status is there? Is there the potential you guys may need to step into some of those situations?

The activity, obviously, picked up with the distressed both in the industry as well as the tightness of the credit market 'soap, so it has impacted. To put a frame of reference on it, I think going back to 2005, we had about 50 million of distressed costs, when we had interiors and disproportionately related to interiors components and cut in half '06 and basically nil last year. This year uptick in distress and we have a group dedicated to it and working with the suppliers and trying to be pro-active and identifying when the suppliers are having the difficulties. Certain early warning systems. We have incurred additional costs, but it has not been material yet. It is probably for the full year I would expect to approach closer to '06 levels, then anywhere near '05.

Okay. And, obviously, there's a lot of focus on this 3.25 leverage covenant? Could you give us color on the collateral underlying the revolver in the term loan? What kind of valuation is on that? Are there assets that you have that could be pledged in exchange for relief on those covenants?

Rod, I got the expert on collateral sitting at the table with us, Shari Burgess, our Treasure.

Hi, Shari.

Hi. On the collateral behind that is a combination of hard assets in the US, and the pledge of the majority of our subsidiary stack. We do not disclose the valuation of the various stock pledges but they do have, when we negotiated the agreement, they had, , well over one- time coverage. So, pretty

Okay. And what is unencumbered at this point? What additional collateral, if it would to come down to that, would be available to you, at your disposal?

Well, we'd have to-- it is dependent on what the debentures allow. Right now, allowed, up to 10% of our US assets. So, depends on the value of the US assets.

So there are additional US assets that you can pledge? Or no?

Right now, they have 10% of our consolidated sets. So, right now, under the debenture, that's all they can have.

Okay.

There is a bond reinstruction that limits our collateral to 10% of total consolidated assets. So that is the limiting factor on collateral. That excludes the stock (inaudible).

Okay. There is a limitation on liens and the bonds?

Yes.

Yes.

Bob, you mentioned something about participating in consolidation of electronics. Were you talking about that from the perspective of being a buyer? A seller? Elaborate on that comment?

Buyer.

Okay.

All the elaboration I'll do.

Thanks.

We're actively looking for opportunity to strengthen that business. And, strengthen the seat business as well. And we'll have to, obviously, have partners to help us do some things that we want to do on a go- forward base us. There's opportunities out there. And we're pursuing them.

Okay. Thank you.

We're strong business , Rod, don't worry

Thanks a lot.

Thank you.

Your next question comes from the line of Himanshu Patel, JPMorgan. Your line is open.

The question earlier on decremental margins, can we just go back and talk a little bit about how decrementals would be different between Europe and North America? Labor costs are, obviously, stickier there. On the other hand, you make less money there and you, I don't think, as vertically integrated.

Right.

Are decrementals roughly comparable or big difference there?

No. There is he a difference there, typically. If you look at what drives the margins typically, it is the size of the vehicle, how many seats or the complexity of the electrical distribution systems. Usually, more overall content on larger vehicles. There's nothing in a European class that really competes with large SUVs with three rows of seats that are highly-contented or electrical distribution systems that go into the type of vehicles. So the drivers on the margins, Himanshu, is both the content, how much of it is our content, and typically more control of the content in the North America market, North America customers, than we do in Europe, which has a higher degree of directed. How much do we make of it, we have more vertical integration typically in North America. So, if we use the 20% rule overall, which is how we've been talking about sales conversion downsize sales conversion. In many instances in North America higher than that and in Europe slightly lower on average.

Understand. Then, , Matt, what percentage of your European workforce

I don't know. I wouldn't factor a guess on that. I'd have to look that up.

Okay. Can we go back to Rod's question on could - - covenant? What '09 would get you concerned on breaching the covenant?

Right now, CSM is at 11- 8. Pretty consistent with what we've seen in the second half. I don't really want to walk through or break-even scenario, something like that. The reality is we don't sell to the industry but to specific car lines. As much important as what they make, also the cadence in which they make it on a quarterly standpoint. So, I don't want to talk no general amounts. We have a trailing 12 months or 12 quarters- type calculation. So, obviously, our focus and our priorities right now is managing through a very uncertain production environment. We're trying internally to develop and implement an aggressive improvement plan, well on the way. We've taken a nice first step on. So in the event that there is uncertainties, we're focused on managing our operating plan and being pro-active with maintaining as much flexibility as possible.

We're absolutely confident we're going to make it through this period.

Can I - - I'm sorry, I missed the first part of the call. The improvement plan, you're referring to, you had, also, made a comment, I think, earlier, Matt, that the restructuring expense in '09 would be cut by a third. Potentially to keep you away from breaching the covenant. What's the difference? (inaudible)

Well, improvement plan is off the second half run rate. When we announced, said, look, second half run rate. Production environment is going to be fairly consistent next year with what we've seen in the second half. And it is important that we maintain our financial flexibility with both the uncertainty that's in the credit markets and also the industry uncertainty out in front of us. If we look at the improvement off reported operating, includes, obviously, restructuring, we have to look at areas we can implement quickly improvements. That's a combination of both temporary actions and suspending and deferring certain actions that may be very good for the business, but a longer- term pay back on the horizon. For instance, expanding certain actions and emerging marketings obviously we have excess capacity and mature market, though a good pay back, we'd slow the growth down. Other actions are pure structural cost reductions. Painful actions that we have taken on the senses action globally. For us. Would be something that would provide an ongoing cost benefit. The third is reprioritizing our restructuring. (inaudible) A lot of investments are good for us, on average, pay back a little over two years, which is can extremely good. And it has been beneficial for us. We'd reprioritize them to try to maintain the level of financial flexibility and what is a very uncertainly industry environment.

Okay. I see, so, sounds like you're - - you would pull back on, sort of, actions that sort of require severance payments and, instead, sort of save cash? Or improve earnings through CapEx, benefit reductions?

It is important to know we have a strong liquidity position and a strong covenant cushion exiting the third quarter and expect to have a strong position exiting the fourth as well. I'd like to do - - we'd like to do more restructuring. But, again, we're maintaining the key focus for the management is implementing, maintaining flexibility, and balancing the different things to do to maintain our flexibility in a down market.

Okay. And, then, if Shari is there? Just - - I don't know, if you could even comment on this, but if there was a breach in the covenant - -

There won't be a breach in the covenant.

Let's say there was.

Let's say there wasn't.

What's a midrange outcome without numbers? You go back to the banks - -

Really, we're not going to talk about breaching covenant because we won't and I'm not trying to be rude to you. Because we're not going to answer the question, okay?

Your next question.

All right?

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

Hi, good morning. Matt, could you, I guess on restructuring activity, what's the split between Europe and North America?

I'm sorry, your breaking up. I think the question was, the split of restructuring activities between North America and Europe?

That's right. That's right.

It's been about, to date, about two- third, one- third North America to date. But, we're looking globally at areas to improve or footprint and better compete. Taking tough actions in Europe. And we've done the same thing in North America. That's about the break down.

So, if Europe is going to come down, say 12 or 14% in production next year, Western Europe does, does that split increase for your restructuring initiatives?

Not necessarily. Not necessarily. Because really the - - it is more to do with the components because with JIT contracts it really depends on the seat contracts, even though the volume is down, if we maintain the contract with the customer we need to stay in net just in that facility. Doesn't work that easy. Level of vertical integration is greater in North America than Europe. More of a driver-- more on the component side.

Okay. So, there wouldn't be much of a difference there?

I wouldn't expect it at this point.

Okay. Then, in terms of '09 for CapEx, your guiding 180 to 200 this year, how much can that come down for next year?

Well, there's a couple of drivers on CapEx. One is, obviously, backlog. As the backlog decreases, obviously, less capital to put in. Also, the restructuring actions dive drive a level of capital spending as does the expansion into emerging marketings. The last two years, we've averaged about $200 million in capital in the core businesses. Little bit early to be talking about '09 right now. But I can't see it being materially different.

Okay. So - -

At this point.

- - wouldn't expect a material decline? Necessarily?

I wouldn't expect a material decline or increase.

Okay. All right. Thanks.

Thank you.

Your next question comes from the line of John Murphy, Merrill Lynch. Your line is open.

Good morning, guys.

Hey.

Look at the current market cap, 190 million, roughly equates your annual CapEx number, have you thought about taking the Company private now the stock is so slack here?

Thanks for pointing that out, John.

I'm not sure - - I mean, a real question. I mean, I mean, is there anything preventing you from doing that? I mean, something you thought about?

In this market, obviously, a lot of things on the table. The priorities right now are maintaining our liquidity and financial flexibility.

Okay. And you haven't had discussions with any of the - - the, , the cast of people looking at this in the last two years? Looking for, offering $36 or better that may come to the table? Again? And buy at much

We wouldn't - - we wouldn't comment on that in any event.

Not interested in any help, either. We're okay.

Okay? Then, if we think about electronics and talked about on Slide 9, looks like a CAGR from 2008 to 2012 in sales, better than 13.5%. I would imagine that includes a big acquisition. Is there any way to gauge what is organic and what kind of acquisition might be coming there?

Yes. Just to kind of give clarity, this is Ray Scott. Obviously, Bob mentioned that we took the organizations in two specific directions. And our focus, our line and streamlining organization and going global has produced great results. And we believe, just internally, organically, we have the opportunity to grow the business. Now, our track record over the last three quarters would suggest that. So, we believe internally we could get there. While that's based on 2012, and going after very specific products.

It is important to note, too, John, that this is a segment where the content per vehicle is growing both just in base electronics, but also the penetration of hybrid. Two, by 2012, hopefully, we have a recovery of the industry. So there should be a pickup back to more normalized production in North America, which would give us a tail wind. We don't think we need major acquisitions if there's something out there, niche, tuck- in, stronger, expand, diversify we look at it.

Okay.

I'll add to it, Ray is focused on making sure the business rows organically and it is my job to make sure we look at any opportunities out there that could help enhance the business. So, the plan that we have in place, that he has 5 billion by 2012, going to exceed that. And the opportunities we're looking for, we believe, could significantly exceed that. So. I guess that's the best answer for you.

Okay. You guys are pretty battle-hardened and through tough times out there in Detroit and - -

Battle axes!

I mean, clearly tough and probably tougher. There's some big questions around two of your large customers, GM and Chrysler. And it is tough to call exactly how the situation will play out, together or apart. But it is pretty clear there's probably going to be some pretty big, potential cuts further in product lines and capacity, which ever way this shake out. In your war rooms out there, are you guys - - I mean, are sort of hot and heavy on this stuff and even if we saw a big cut at both GM and Chrysler, however it shakes out, do you feel like you're well- equipped to take a big hit, potentially, on GM and Chrysler volumes coming down on a structural basis much more than so far?

I think the plans in place and the way we're forecasting for 2009, obviously, we can't share everything with you. But, in terms of what happens there, both outstanding customers. We work extremely well with them. I think we've got good products and good future products coming' with both of them. Regardless of how that shakes out, I think we understand where we're at. We react to whatever the issue is. If there's something that comes up, we - - doesn't take long to jump into things. We're not going to predict the outcome of it. We respect both of them. And I think we can adapt to whatever situation they send to us.

Okay.

I'm confident that this is a - - that this team, that we have here today, is the best team we've ever had. And I think we can react faster than anybody in the industry. I'm convinced of it.

Great, thank you very much.

Thank you.

Your next question comes from the line of Brett Hoselton with KeyBanc Capital. Your line is open.

Good morning.

Good morning.

Let's see. Start off with commodities. Commodities, Matt, ramped up materially to the back half of the year?

It has ramped up. We did see a modest, very modest impact in the first half. It has, we talked about a number 20 in the seat segment in Q3 roughly double what we saw in the first half. It has ramped up. But it is important to note, too, Brett, we saw a steel, hot and cold steel hit about, I think, the mid $0.60 with processes costs. Doesn't equate to a ton. We saw the stuff up. Yes, we did see it pick up.

And, in the electrical electronics area, obviously benefiting from the Cooper side, can you give us a sense of what the impact might have been over the electronic side?

Modest on it. With Cooper, the way it works, just to refresh everybody, is there's typically a month lack from the time that you'll see a price quoted on exchanges for Cooper and until it actually gets into the raw material that we buy and then it takes time for it to actually go throughout processing in our plants to wire harnesses, 80% of what we buy is passed through agreements and we've been successful in tightening them up as far as the time lag from when we see it to the time of recovery on it on the bases for the customer. As from the 80%, we really don't see a whole lot of impact. On the remaining 20% of our exposure, we've hedged about, I want to say two-thirds of it, roughly, this year, at a price that's been favorable to the average this year to date. Net- net, has not been material for us. We don't expect it be material into the fourth quarter at this point.

And, you talked about the restructuring savings in 2009, possibly, roughly, equivalent to the - - let's see $100 million in 2008?

Right.

As we think about the, , let's - - the operating performance improvement, number of 150 million, is that incremental to that restructuring savings that you're

It is incremental. What it does include, though, reduction in restructuring costs.

Spent.

Spent, so what we talked about, initially, anticipating restructuring spending consistent this year, 140 to 150 range. Roughly a third 150 improvement plan is a reduction in net investment. Those costs. So, roughly 50 million of 150 will come from that area.

And then, finally, as we think about the tax expense, and - - maybe you can't forecast it into 2009, would it be roughly equivalent to 20 if in your opinion? Is it believe to change it will change? We got the expert on taxes, Bill McLaughlin, have, Vice President of Tax and he will take that.

Obviously, depends on pretax next year. Which we're not commenting on. But stayed similar to this year, would expect it also to be in the 110 to 120 million range.

Very good. Thank you very much.

Thank you.

All right. We'll take one final question and then we're going to have wrap- up comments. Or maybe that was the final question?

Your last question comes from the line of Itay Michaeli with Citi. Your line is open.

Touch off Matt on the status of the pension, if you could refresh us on where the US pension plans stand today? And I think you contributing or plan to contribute about, maybe, 40 million in 2008? We expect that to increase significantly potentially in 2009?

Well, I'll turn it over to Shari in a minute. Obviously, the disruption in the equity markets would probably impact our status. From the last time we looked at it, measurement date at the end of third quarter of '07, we were pretty good shape from funding standpoint. We were bumping minimums. Made extra contributions and also important to note that a couple years ago, we froze a number of our salary plans. So it is reduced exposure. At the last measurement date, we were about 82% funded, which would have been the third quarter '07 through the process for this year finalize what the impact is. Obviously, the disruption in the equity markets are more of an issue for '09. With that, I'll turn it over to Shari, who works on this pretty much daily.

We don't have a particular funding level just now because we don't measure the PDO level. But at year- end. However, obviously, with the impact of the credit markets, it will have impacted the market value of our assets and we expect we'd have to contribute move next year but we worked with the actuary based on the losses thus far this year. We think it is manageable amount. And we'll, also, have some benefit of the discounts rates up this year with the increase in interest rates.

Right. And just finally, on the backlog, I believe the '09 portion last quarter was about 120 million. Has that changed at all with the new business and of course a lot of volume declines we've seen?

It has changed. It would, at this point, looks like lower because of program cancellations and pushouts. But, again, we're going through the process of the bottom up. I expect the number to change once again, before we give the announcement in January.

Okay. Great. That's all I had, thank you.

Thank you all for your questions on the call. And I didn't mean to be rude to Himanshu Patel. Just know we're not going to comment on those issues. I want to thank the Finance Team. You guys did a great job, Wendy, Shari, thank you Mel, outstanding John, John Trithol and Bill. Thank you. Did a great job we appreciate. I know times are tough out there, we had to take actions that are difficult. All of which, everything did affects the people and the Company. For that, I'm truly sorry. Believe me I care about the team and the people and assure you that what we've done is in the best interest of the Company to protect it longer-term. So, just understand this, we're okay. We're going to do well. We have an excellent plan and great team of people to implement it. I'm confident in the Company and the future. Let's go out there and give it our best, thank you all.

This concludes today's Conference Call. You may now disconnect.