Lear Corp (LEA) 2009 Q3 法說會逐字稿

Good afternoon. My name is Michael, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lear third-quarter 2009 earnings conference call. (Operator Instructions). I would now like to turn the conference over to Mr. Mel Stephens. Sir, you may begin your conference.

Okay, thank you, and thank you all very much for joining us for our call. The review materials for this earnings call have been posted on our website earlier today, and they will be filed with the Securities and Exchange Commission tomorrow. For today, our presenters are Bob Rossiter, our Chairman, CEO and President, and Matt Simoncini, our Chief Financial Officer. And also with us here today are Lou Salvatore, the President of our global seating business, and Ray Scott, the President of our global electrical distribution business. Terry Larkin, our General Counsel, is here; Shari Burgess, Treasurer; and John Trythall, Vice President of Business Planning and Analysis.

Before we begin, 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 future results are described in the last slide of our deck and they also will be included in our SEC filings.

In addition, we will be referring to certain non-GAAP financial measures. And additional information regarding these measures can be found in the slides labeled Non-GAAP Financial Information, also at the end of the slide presentation.

If you'll turn to slide 2, please, here we show the agenda for today's review. Bob will begin with a brief a few brief comments on our plan of reorganization. Next, Matt will cover our third-quarter and year-to-date 2009 financial results. He'll also comment on our full-year 2009 financial forecast. And he'll update -- provide an update to our consolidated sales backlog that covers the 2010 to 2012 period. Then Bob will provide some summary and outlook comments. And following the formal presentation, we will all be happy to take your questions.

So if you'll please now turn to slide number 3, I will hand it over to Bob Rossiter.

Thank you, Mel, and good afternoon, everybody. It's great to be back. And it feels really good to have you on the other side of the phone from us, and happy to be back with you.

As most of you know, we entered Chapter 11 voluntarily on July 7. While bankruptcy is never a first choice, we needed to reorganize with the minimum disruption, preserve maximum value and best position our Company for long-term success.

Operationally, we did not miss a beat in terms of serving our customers. Our quality metrics continue to improve. Our suppliers were paid in full, and we were able to preserve employee pay and benefits and leave pension obligations intact. In addition, we were able to continue to win new business in every region of the world, and we grew our three-year backlog sales significantly, to I think our highest level ever.

Financially, we were able also to reduce Lear's debt obligation by approximately $2.8 billion, and we have no significant near-term maturities. In addition, we have a cash balance of over $1 billion. So we have the financial resources to invest in new products and technologies, as well as grow in emerging markets.

New Lear common shares have been listed on the New York Stock Exchange under the historical symbol LEA. Matt will provide more details on our capital structure and our share count in a few minutes. Also importantly, this management team remains in place.

I would ask you to go to slide 4.

Before I turn it over to Matt, I would like to remind you of some important Lear strengths that have not changed. We continue to be a leading Tier 1 automotive supplier, with strong market position in two critical product lines, seating and electrical systems. We have a long history of leadership and quality, customer satisfaction and innovation that continues to represent the core of our value proposition going forward.

I also believe we have the best customer relationships in the industry, and that was very evident during this past year, as our backlog has continued to grow. We've made significant progress in restructuring our business over the past few years, including a significant expansion of our low-cost footprint. The result is lower structural costs and improved operating efficiencies. At the same time, we are continuing to diversify our sales in all regions and within our product lines. Lastly, I believe the strength and commitment of the Lear team is a clear competitive advantage for us.

So now, I would like to turn it over to Matt and give you a financial update, and I'll be back at the end.

Great. Thanks, Bob. Please turn to slide number 5. This slide provides a good perspective behind this year's industry environment and our financial results, broken down into three periods -- the first half, the third quarter and the outlook for the fourth quarter.

In the first half, industry production levels were severely depressed in our major markets. As a result, our net sales were down 43%. And despite significant cost reductions, our core operating earnings were down and our free cash flow was negative.

In the third quarter, industry production remained depressed in the mature markets, but improved relative to the first half. As a result, our net sales were $2.5 billion, down 19% from the same period a year ago. Our core operating earnings, however, were a positive $111 million, and our free cash flow was a positive $133 million. These solid results reflected the benefits from our operational restructuring initiative and other ongoing cost improvements.

For the fourth quarter, we expect next sales to be in line with the third quarter and core operating earnings to remain positive. We will provide more details on our full-year outlook a little later in the presentation. On the next few slides, I will cover our third-quarter and year-to-date results in more detail and provide an update to our sales backlog.

Slide number 6 shows the global industry production environment for the third quarter and year to date. For the third quarter, global industry production was down 6%, which was driven by lower production in Europe, down 8%, and lower production in North America, down 21%. In Asia, industry production was strong in major markets, with China up 66% and India up 18%. Through the first nine months of the year, global industry production was down 22%, led by a 42% decline in North America and 25% decline in Europe.

Slide number 7 provides our financials scorecard for the third-quarter and year-to-date periods. Starting with the top line, we posted net sales of $2.5 billion in the third quarter, with 45% of our sales coming from Europe, 32% in North America and 23% in the rest of the world. On a global basis, net sales was down 19% from last year. The decline reflects lower industry production in mature markets.

Our reported pretax profit was $49 million compared with a loss of $72 million a year earlier. Net income was $25 million or $0.32 per share compared with a net loss of $98 million or $1.27 per share in the year-earlier period.

On the next slide, I will show our results excluding restructuring and special items to highlight our underlying operating performance. SG&A as a percentage of net sales was 3.9% compared with 4.1% a year ago. The decline in SG&A reflects census reductions and cost improvement actions. On an absolute basis, SG&A expenses were down about $30 million or 23% compared with the same period a year ago.

Interest expense was about $22 million, down $47 million from last year. The lower interest expense reflected interest on Lear's debtor-in-possession financing compared with the debt obligations, total debt obligations, a year ago.

Depreciation and amortization was $65 million compared with $76 million a year ago. Lower depreciation expense reflects lower capital spending over the last several years. Other expense was $26 million in the third quarter of this year, the same level as a year ago. However, 2009 included charges related to transactions with certain joint ventures. 2008 was impacted by currency and foreign exchange items.

Going forward, we expect other expense to be approximately $10 million a quarter, excluding special items. Also during the third quarter, we recorded costs related to our capital restructuring of about $39 million. These costs included professional fees, as well as an incentive compensation program related to achieving certain bankruptcy-related milestones and operating performance targets.

Slide number 8 shows the impact of restructuring and special items on our reported third-quarter and year-to-date results. In the third quarter, our reported pretax income before interest, other expense and reorganization items was $135 million. Excluding operational restructuring costs and fees and expenses related to capital restructuring, our core operating earnings in the third quarter were $111 million compared with $46 million a year ago.

The credit for restructuring costs was driven by a change in our restructuring plan with respect to one action, which reflected negotiated changes in certain employee benefit plans. The improvement in core operating earnings reflects favorable cost performance, including increased savings from restructuring actions, offset in part by the lower industry production. The note at the bottom of the slide indicates the impact of restructuring and special items on SG&A.

Turning now to our performance by product line, starting on slide number 9, in the third quarter, the adjusted margins for our seating business improved from 3.1% a year ago to 7.2% this year. The improvement primarily reflects favorable cost performance and a cumulative benefit from restructuring actions, offset in part by lower industry production levels in our mature markets.

Third-quarter earnings also benefited by about 50 basis points from a favorable commercial item. Year to date, our adjusted seating margins declined from 5.1% to 3.4%. This reflects the sharply lower industry production environment we experienced in the first half of the year.

Slide number 10 shows adjusted margins for our electrical distribution business. In the third quarter, this business earned a small profit. While our margin remains below the year-ago period, our results did benefit from favorable operating performance and savings from our restructuring. These positive operating factors, however, were more than offset by the lower industry production in North America and Europe.

Longer term, we expect our electrical distribution business to continue to improve as we bring online our sales backlog, implement further cost reduction actions, including additional restructuring actions, and we continue to grow in emerging markets and benefit from the industry recovery in our mature markets.

Please turn now to slide number 11. Free cash flow was a positive $133 million in the third quarter, following a cash outflow of $300 million in the first half. The improvement in free cash flow primarily reflects the improvement in earnings, as well as the timing of certain payments. Compared with a year ago, free cash flow was favorable by about $150 million. This also reflects an improvement in earnings, period cutoff changes in relation to our fiscal calendar, as well as lower capital spending.

In the fourth quarter, we expect free cash flow to be negative in the range of about $100 million. This reflects the timing of payments for certain prepetition payables and cash costs for both our operational and capital restructuring. This is partially offset by continued positive operating earnings.

Despite the projected negative free cash flow in the fourth quarter, free cash flow for the second half of 2009 is forecasted to be slightly positive, including funding for operational restructuring of more than $100 million and fees and expenses totaling about $70 million related to our capital restructuring.

Next, I would like to provide some color on the status of the Company's balance sheet upon emergence from Chapter 11. Please turn to slide number 12. Our total debt obligations have been reduced by approximately $2.8 billion to $1 billion or less. We also have in excess of $1 billion in cash.

Our new capital structure provides adequate liquidity to support global operating needs and growth plans. In addition, we have no significant debt maturities before 2012, and our debt covenants provide sufficient flexibility to navigate the current environment and execute our operating plan.

Slide number 13 provides a snapshot of our capital structure upon emergence from bankruptcy. Along with our new capital structure, we have some new securities. This slide provides a summary of our common stock (technical difficulty), as well as the terms of our preferred stock and common stock warrants.

Lear had 34.1 million shares of common stock and 10.9 million shares of preferred stock at emergence, bringing total shares outstanding to 45 million shares. In addition, there are outstanding warrants exercisable into 8.2 million shares of common stock and 1.3 million of management-restricted stock units. On a fully diluted basis, we have 54.5 million shares, assuming full conversion of all warrants and the management RSUs, which vest over a three-year period.

The preferred stock has preferential rights over the common in liquidation. In addition, each share of preferred stock is convertible into one share of common stock. Each warrant is exercisable into one share of common stock on the business day immediately following a period of 30 consecutive days of trading with the closing price of the common stock equal to or greater than $39.63, or at least 20 of those days.

Lastly, before I summarize our full-year financial outlook for 2009, I would like to comment on our operational restructuring and cost improvement initiatives. We initiated a worldwide restructuring program in mid-2005, with a primary objective of responding to structural changes within the industry, maintaining and strengthening our long-term competitiveness. We have focused on repositioning our cost footprint globally by accelerating our move to low-cost countries, streamlining our infrastructure with that of our customers, and eliminating excess capacity.

Through 2008, we have invested $580 million in the restructuring program and we're forecasting another $180 million of investment this year. This will allow the Company to significantly improve our operating efficiency and lower our ongoing cost structure. Major restructuring actions have included the closure of 35 manufacturing facilities and 10 administrative locations, significant census reductions and a substantial realignment of our low-cost footprint.

Presently, we have more than half of our facilities and 75% of our worldwide employment located in low-cost countries. Our annual savings from restructuring actions totaled about $250 million through 2008, and our incremental savings this year are expected to be about $125 million.

Slide number 15 summarizes our full-year 2009 financial outlook. We're forecasting net sales for the year of approximately $9.5 billion. Our core operating earnings are estimated to be about $80 million. Interest expense is estimated to be about $165 million. On a pretax basis, our forecast, adjusted to exclude restructuring costs and other special items, is a loss of $140 million.

Our estimate for tax expense is about $70 million. Restructuring costs are estimated to be about $180 million this year. Capital spending is expected to be approximately $110 million, and depreciation and amortization is estimated at about $265 million.

Lastly, free cash flow is expected to be about a negative $275 million for the year. After positive negative free cash flow of about $300 million in the first half, we're forecasting positive free cash flow of about $25 million in the second half. Our full-year free cash flow forecast includes approximately $300 million of cash costs related to our operational capital restructuring.

Slide number 16 provides an update on our consolidated sales backlog. As a reminder, we define backlog as net new business awarded or new business that has been awarded, less programs rolling off and any lost business. We do not include pursued or high-confidence new business or nonconsolidated business.

Since our last formal update in January of 2009, we've been very successful in signing new business in every region of the world, despite lower industry volumes and program cancellations and deferrals by our customers. The present status of our three-year backlog covering 2010 through 2012 now stands at $1.4 billion. This new business continues to represent further diversification of our sales as 40% is in seating and 60% is in our growing electrical distribution business. Also, more than half of our backlog comes from outside of North America.

Now I would like to turn it back to Bob for some closing comments before we take your questions.

Thank you, Matt. You did a great job. To sum it up, where Lear is today, our Company continues to have a very strong customer focus, and our operating fundamentals have never been better. We completed the financial restructuring process in just four months and have emerged from Chapter 11 with a strong, flexible balance sheet, with over $1 billion in cash and less than $1 billion of debt and financial resources to invest in new products and technologies and further grow in emerging markets.

Earlier this week, new Lear shares began trading on the New York Stock Exchange. We are regaining our positive operating momentum, despite continued challenging industry conditions. In the third quarter, we posted positive operating earnings and positive free cash flow. And looking ahead, our sales backlog for 2010 to 2012 period represents continued sales growth and diversification.

To conclude, I would like to thank our employees for their dedication, hard work, as we move through this financial restructuring process. I'm very pleased that we were able to retain all of the positive factors that make Lear a global industrial leader -- our unrelenting focus on quality, our unwavering commitment to customer satisfaction and the most talented team in the entire business. When you add to that our strong balance sheet, competitive cost structure and focused growth strategy, we are ideally positioned to benefit from the industry recovery.

Now we would like to open it up for questions.

(Operator Instructions). John Murphy, Banc of America.

Congrats and welcome back. I have a number of questions here, so I will try to keep them as brief as I can.

First, when we look at the core operating income margin, it was about 4.4% in the quarter. Obviously, this was a better quarter than what we've seen in the first and second quarters of this year, but still not a fantastic quarter. But that was a pretty good performance in what is still a tough environment. Do you foresee, and at the higher end of the range of where you guys have performed in the past, do you foresee further expansion in that operating margin going forward as volumes recover and your restructuring kicks in? Could we see significant expansion there?

It depends as much as anything, John, on the industry and specific car lines within the industry that we sell to. What we've said in the past, and I still believe it to be true, which is we believe that seat margins can remain in the 6% to 7% range, and we think ultimately when the industry recovers and the backlog kicks in and the benefits of restructuring take hold on the electrical distribution business, that those margins could be comparable to the seats.

So we do think longer term, there's margin expansion opportunities. Our operating leadership under Ray and Lou have done a phenomenal job taking costs out. We think many of those cost reductions are sustainable, even with higher production volumes. So, yes, we think we can move the margins up longer term.

Okay. Then next, if you look at the EBITDA for the second half of this year, it looks like it's in a ballpark of about $330 million in the second half. That's in a production environment in North America of about 5 million, a reasonable production environment in Europe. Would it be safe to say in an environment where North American production was about 10 million units that you could annualize that to $660 million, as we see expansion in production, that it could go up from there?

I want to get away from providing guidance on the auto peer. There's a lot of public information out there, John, for 2011, 2011 and 2012 as part of the disclosure statement. What I'd like to say is we don't sell to the industry per se. We sell to the specific car lines within there. So it's as much as anything, part of it is the mix.

I do think the second half is a pretty good run rate, although, as always, business isn't linear. There's engineering expenses that need to drive the backlog and the development costs. So it's hard to make a run rate out of two quarters. I think what I would say about the [outlooking] period is it looks like we're starting to do some recovery in the production volumes. There's still a lot of uncertainty on the car lines within that production volume. We've got a lot of public information out there on '10, '11 and '12, and we're comfortable with the projections.

Okay. Next, just on the balance sheet, pension and OPEB liabilities, where do those stand now that you have worked through the process?

During all this, we've continued to fund our pension obligations. At the end of the year last year, John, we were at about $250 million underfunded position at 12/31/08 on our pensions, of which about $175 million of that was US and Canada. We received some recovery on the performance of the assets through the first half of the year. We would expect that to continue through the third quarter. Again, we've continued to make funding during this period, so we haven't shied away from that. So net-net, we think we're going to be in pretty good shape.

Lastly, Bob, just on sort of bigger picture and where the Company goes going forward, obviously there's growth in electronics in the backlog. But are there opportunities to make acquisitions that exist out there in companies that are distressed, to grow these businesses significantly larger? Or do you believe with the portfolio and the backlog that you see in front of you that this Company has got the economies of scale and can take over businesses as opposed to making acquisitions going forward? Is there acquired growth that comes in going forward?

Well, one, I think we're on a pretty good path now. And I think that during the Chapter 11 process, I think, and during the last year the things that we faced, one, the industry cutting back, and two, the fact that programs were delayed, even in that time we've secured the biggest backlog in our history.

I think the other thing that is telling in there is a high degree of it was in the electrical electronics area, and so the team that we've put in place under Ray Scott's leadership is doing the job.

I believe that this business is going to grow. We're looking for opportunities. I'll tell you, John, we're not going to get our Company in a leverage position like we did before. We think there's other ways to grow this business, one, organic growth -- which is actually my preference and always has been. I've never really been a big proponent of acquisitions. It is a quick and easy way to do things, but it's difficult.

I think the philosophy that we have here and the way we conduct and run our business and the team we have, I believe that we're going to, longer term, pick up significant shares. There is opportunity, on the other hand, I think, to find ways from a joint venture standpoint to help us grow.

And then the last piece that I think is probably more critical to our growth longer term is growth in Asia in these markets. And I think we're positioned pretty well there today. We've got a number of joint ventures there that we really are going to put more focus and emphasis on. I think longer term, our Company is fine, but we're always open to opportunities. And with equity and the right partners, I think we'd look at things, but I don't want to see the Company get into a highly leveraged position of the past.

Great. Thank you very much, guys.

Himanshu Patel, JPMorgan.

A couple questions. On the third-quarter results themselves, just at the core operating income level, it looks like roughly a 60% sequential contribution margin, Q2 to Q3. That seems pretty high by historic standards. I'm just wondering, what are your thoughts on that going forward? Should we view that as sustainable, or does it sort of fall back to the 20%, 25% range you guys have talked about before?

Well, we've taken a lot of costs out of the system, Himanshu, I think, starting with the restructuring actions that we talked about on an earlier slide of $125 million for the year. That is sustainable.

I think on an SG&A basis, much of what we've done in SG&A as a percentage of sales or actually on a law basis is sustainable, because it's census reductions. However, there is a piece of that that needs to flux as the backlog comes on, because it's related to program development costs.

We think we've made a good dent in our infrastructure costs. I'm happy with the way we've performed against the variable margins of 20% that we've talked about in the past. We still think that's a good rule of thumb. Like I said, we're not going to get too much into 2010 out there, because there's a ton of information and we're still doing our bottoms-up plan. But what I would say is, if we use the restructuring amounts and keep SG&A as a percentage of sales in that high 3% to 4% range, I think you'll be pretty close.

Okay. And then just what precisely changed from the Q1 to Q2 walk versus Q2 to Q3 walk? Because I understand the cost savings have been pretty strong, but I've got to imagine those were coming through even in the first part of the year. So was it just mix differences that really drove the higher contribution margin?

It's both. It's both. Cost savings are kind of like a snowball coming down a hill. Once it picks up momentum, they gain in size. So you have a bit of that. We've done some nice things commercially, both on helping out solutions with our customers and also working on supplier consolidation that has provided benefit through the years. The mix has improved first half to second half, at least first quarter to third quarter, that we benefited from that as well, global mix. We see strength in our operations.

So with a company this size, it's kind of hard to put your finger on one thing. I will tell you that if we had to bucket it, what I would say is that it is probably equally mix and cost reduction actions.

Okay. And then the backlog growth is pretty impressive. Can you help us just break that down? What was the last reported backlog number you guys gave, how does -- what was the breakdown between seating and electrical previously versus now?

The last backlog we did was back in January. At the time, we said, hey, our backlog is roughly $1.1 billion. And the way we broke it down at that time was roughly $600 million of it was in seating, and then the remainder was in electrical.

And the new backlog is -- I'm sorry, you gave the numbers earlier. I missed it. What's the new breakdown?

60% of the $1.4 billion is in electrical distribution, and 40% of it is in seating.

Okay. So fair to say that the seating backlog has sort of stayed flattish, and most of the growth in the backlog came from electrical.

Wait a minute. I wouldn't necessarily characterize it like that, Himanshu. I think it is still a pretty sizable amount in seating if you take the 40% on the $1.4 billion. The seat group, led by Lou Salvatore, has done a great job in growing that business in a time when there's been a lot of delays, delays in program launches and uncertainty, as well as certain rolloff programs.

I think the takeaway that we're trying to say in this is that, with the 60% of the backlog coming out of electrical, we're continuing to diversify. So it's not -- I don't think in any way that the seats are lagging their historical performance on business wins.

Yes, that's the point. It's actually better to the extent -- because a lot of other suppliers have actually talked about their backlog going down because of lower industry volumes. So I guess holding flat on an absolute basis for seating sort of implies that there's been net new wins there. Is that --

Yes, that is true. That is true.

Okay. And then last clarification, just a lot of stuff going on with commodity economics for other suppliers. Where are you guys now in terms of recovery mechanisms on your future contracts for commodity costs versus let's say where you were a year ago?

There's two major commodities that really have a direct impact on our operating results. The biggest one is steel. And we've seen a benefit in the third quarter because of the lower prices, metal prices. And that has benefited slightly in our seeing business. The vast majority of our exposure to steel is actually the purchase component. So from that standpoint, we did get a little bit of a tailwind. They are starting to trend up.

The other major commodity that we use is copper, most of which is covered through pass-through agreements with our customers. There is a small portion, roughly 20% of what we use, let's say in a 75 million pound buy, annual buy, about 20% of which is used in the components that are not covered through commercial pass-throughs. We do hedge about two-thirds of that. Those hedges unfortunately are a little bit under water. Net-net, we did get a bit of a tailwind in the third quarter because of the commodities, but not what I would consider to be significant.

Okay. Thank you very much.

Brian Johnson, Barclays Capital.

A few questions. Do you know the precise cash and debt at the time of emergence that we should use as our baseline?

No. I know we're getting a lot of questions on that because of the exit cash balance that we have. What I would say first and foremost is our best estimation of where the cash and debt balances are going to be is what we stated in our disclosure statement. And just to refresh everybody's memory, at that time, we said after the working capital adjustment -- and I'll talk about what that is in a minute -- after the working capital adjustment, we expect to pay down the preferred stock of approximately $50 million. And this is all contractual. $50 million of the second lien, and the remainder would go against the first lien. And we expect that to be roughly $100 million to $200 million.

From a working capital mechanism, we would expect through the calculation to return roughly $150 million to $200 million of cash to Lear, where that will remain with us. So if you did the walk from that standpoint, it would leave you with a cash balance of roughly $1.2 billion, $450 million of preferred, $550 million of second lien, and first-lien debt in the $300 million to $400 million range. That is kind of what we're looking at right now. We're still working through the mechanics with the working capital adjustment, but that's our best estimate.

Okay. And on backlog, 2011 looked strong and then 2012 is back down substantially. Is that something related to your bankruptcy? Are there things in the pipeline that might improve that, or do we just have a --

I think it has more to do with open sourcing in the outer periods, especially three years from now. So I think there's still a lot of opportunity to improve that number. In fact, I would expect that number to grow.

And the electrical mix, is any of the hybrid inverter/converter business showing up, moving that backlog towards electrical, or is this just core traditional electrical?

I've got Ray Scott, who is our President of our electrical distribution business, is here in the room with us, and he would be more than happy to answer that one.

Yes, absolutely. One of the significant wins that and one of the largest suppliers of the Volt, we've been able to take the competencies that we've built for the Volt with the bulkhead battery disconnect, the battery charger, the electrification of the distribution centers, and be able to apply that to Renault-Nissan, use that with BMW and other customers.

Okay. So that backlog is reflecting some of that hybrid growth initiative.

Yes, some of it. And we actually feel that's going to grow significantly.

And what is causing the backlog to tilt overall to North America? Most other suppliers we've seen have been European and Asian tilt.

Yes, it still is for us as well. It's not that North America is not an important market for us. We continue to win business in North America. There's just some rolloff programs that kind of disguise it a bit. But North America is important. We're winning business in all geographic regions.

Some of the business in North America is also from Asian/European producers.

Right. And I guess final question -- when do you expect the NYSE trading to begin?

Well, it's kind of traded on a when-issued basis right now. We would think by the end of this week or early next week that it will truly be listed under LEA as we try to get the shares into everybody's hands. The difficulties that we were having, Brian, was related to [the debt] traded right up to the minute of emergence. So trying to catch who actually and verify who actually gets the shares has been a bit of a challenge.

You can give them to me.

Okay, thanks.

Chris Ceraso, Credit Suisse.

As you look at the guidance for Q4, you're guiding to core operating earnings of around $90 million. Why is that lower than the Q3 number? You've got revenues that are kind of flat. Most forecasts call for production to be up sequentially. You mentioned maybe a $10 million commercial settlement to help you. Is there anything else that goes away such that your profits will go down from Q3 to Q4?

Yes, there's a few things that go in there. First and foremost, again, I don't know how else to stress this point. We don't necessarily sell to the industry specifically. We do see the industry projections on the volumes we're booking off. At this point in the year, we start working off the leases on our car lines and building it up from the bottoms up.

There was the one-time commercial settlement. The number you used is the right number, Chris. But there's also a need to start investing in backlog programs. As that backlog is coming online, getting ready for launch, they had to start developing, doing the development costs on there. So again, business isn't always linear in this case. So that is probably the biggest reason why you see a little disconnect between third and fourth quarter.

Okay. Were there any important changes to pricing or any contracts with your customers while you were in bankruptcy that we should know about?

Well, we didn't reject any contracts. We work with our customers in a cooperative manner to try to find solutions that works for them and works for us. We think we're the best at engineering changing and providing low-cost solutions.

The only other thing I would say is I think if you take a look at our overall Chapter 11 preparation, there was never an intent to hurt anybody. It was to sit down and try, as we always have, to try to find ways to work with everybody through each equitable settlement. I think we did that very well with the unions and with our customers, with our suppliers, with our bondholders and with our banks.

The unfortunate part of it is we lost a lot of shareholders. And we all are shareholders as well. So that hurt. But in truth, I think what was done beforehand by Matt Simoncini, the CFO, Terry Larkin with the legal group, the group from finance, and the two operating groups, I think it really showed how dynamic the Company truly is and the relationships it has with all constituents that we deal with.

So lastly, I'd like to thank our employees, who to my understanding never gave up on the Company, and just want you to know that even through that, we were able to keep everybody pretty well satisfied.

Matt, you mentioned the full-year '09 restructuring benefit of $125 million. Were you at that run rate by Q3, or is there more to pick up in Q4?

We're at that run rate pretty much in Q3. The issue is there's additional charges in the fourth quarter, but those savings won't show themselves until later periods.

And then just the last question about the backlog. As you've mentioned, a lot of it is in the electronics business. The margin on the backlog business, is it closer to your longer-term expectation, or is it going to run more like the 2% to 3% that you've been doing there?

It is consistent with where we expect segment margins to go overall. The key to returning to the sustainable margins that we've been guiding to in the 6% to 7% longer term really is about scale. This business has been hit a little bit disproportionately than the other segment because of the impact on mix. Their sales were down, are down about 40% on a year-over-year basis. We think once we get the backlog in the industry recovered, you will start seeing the margins improve closer to those longer-term run rates of 6% to 7%.

You know, just one more, if I can. The backlog number is so big in 2011; is there one or two or three big programs that we should look for to gauge how those are performing relative to your expectation for the backlog in '11?

No, it's not -- probably the biggest one in there is the -- I think you get the second half of the Chrysler 300 coming through. But it's not dominated by a major program, and it's not dominated by a particular region. It's pretty diversified.

Okay, thank you very much.

Itay Michaeli, Citigroup.

This is [Will Randolph] for Itay. Congratulations. I wanted to drill down on a couple of points that were touched on already. I guess first, backlog progress looks pretty solid. How was your quoting activity during the financial restructuring process? How is it today and particularly in your --

I'm going to turn it over to Lou Salvatore, who is the head of our seating group.

I believe Bob covered that a little bit. During Chapter 11, we continued to have positive relationships and quoted all over the world, including in Europe. I saw no difference in RFQ activity. As you can see, the awards continued to come in above historical levels. And I expect to continue to have our share of success on the business that were quoted during Chapter 11.

Did you see yourself losing any share? Because obviously some of your competitors were parading that sort of (multiple speakers).

I'd probably like to answer that. No, actually, we gained share in relation to several of our competitors. But that's not something that we sit around and do. We focus on what we do. I think this is a pretty solid team and it's proven itself over time that it has the ability to grow, because we have such wonderful relationships and because we are a competitive company. And that's not going to change. The facts are, with this financial restructuring and the footprint change that we've made to this business, we're more competitive now than we've ever been.

Definitely. And then on your financial projections, I believe you said you were comfortable with those projections, but you didn't want to go over them. I was hoping you could refresh us on what kind of restrictions you have in terms of capital investments, as well as acquisitions.

We've got -- we do have certain buckets related to capital spending. But there is sufficient cushion to what we have used in the long-range plan. And in the long-range plan for next year, for instance, we had capital spending of $175 million. And that is going up to $190 million and then to $235 million in the subsequent two years. We've got --

It's still right around 1.5%.

Yes. We've got more than enough availability in our covenants to cover that.

And on acquisitions as well?

Any really meaningful or significant acquisition would probably require some renegotiation of the debt, just from the standpoint of borrowing. But you heard Bob earlier; that is not on our radar screen. That's not in our plans. So we're not really that concerned about it.

Understood. And then just strategically, when you're looking at the electrical and electronics businesses, you have a lot of backlog growth there. How should we be thinking about that longer term in terms of your revenue projections from your court filings?

If you look at it and what is implied in the court filings, it's through industry recovery and backlog. Over the three-year period, you get a number that is probably in the mid-$3 billions of revenue.

Okay, thank you very much.

Rod Lache, Deutsche Bank.

A couple things left over. I would think that you still have a fair amount of underutilized capacity and was hoping you can maybe just elaborate a little bit on how you see the incremental margins in your two businesses initially and then kind of longer term. And then if I understand you correctly on the electrical business, basically the strategy for improving the profitability there is purely volume. Is there anything else that we should be anticipating there?

Let's break it down in two pieces here. Actually, there's probably three questions that were included in there. Starting with capacity, the capacity of the JIT plants, just-in-time seat plants, are pretty much tied to the customer production. Unless the customer takes plant out, then you are left with the volume that it's running at. And so you can do the math there on the various car lines versus what their peak is. And it's safe to say that the vast majority of those are not going to be running at capacity.

As far as the component plants, we do not adjust the footprint down to 8 million units because we don't think that's the right number on a go-forward basis. That's also allowed us to take advantage of restructuring to do things a little bit faster than we had anticipated doing it.

How that relates to the incremental margins on variable margins as sales come and go, safe rule of thumb is usually 15% to 20% on the improvement. There's a lot of factors that go into it, most importantly is which car lines and what is the profile of those car lines and how they come in and then what other expenses we have to have with development and backlog.

Your last piece, we've done the margins on electrical. It's not just volume; they've done a lot of work -- Ray and his team has done a lot of work restructuring that business and getting out of high-cost locations, moving the production to Northern Africa and Eastern Europe, electronics into Northern Mexico. So they're continuing to look for opportunities to improve the profitability that's not related just to volume.

Okay. And the 15% incremental margin, historically it was in the 15% range in seating and I think closer to 20% in the electrical. Is that still the case now, even though you're taking advantage of underutilized capacity in the electrical business?

Yes, still the case.

Okay. And then just lastly, can you maybe just elaborate on the build and FX assumptions that you've built into the backlog? You said that they had been recalibrated versus a year ago.

What we use is we use an FX -- the biggest impact on the backlog from a foreign exchange basis the euro, and we'd use the euro at $1.40. And then we use for our projection, always, we use DSM. And if you use DSM, you'll be very, very close to what we use. But again, we build it up typically by car line. But again, if you want to tie into our projections, always use DSM.

Okay, thanks.

Sarah Thompson, Barclays Capital.

I just wanted to get a clarification on a couple of things. On the cash balance, I realize there is a question about what it was on emergence on an adjusted basis. But if we just look at it for the end of 2009, because it will take the working capital confusion out of it, if I start with [a billion seven seven], I take off $100 million for your -- I think you said you're going to burn $100 million of cash flow -- $100 million for the preferred and second lien, pay down $500 million for the DIP payback, and then I borrow somewhere between $300 million and $400 million on the new facility, I should end up with cash of like $137 million to $147 million at year end. Is that correct?

Yes, again, I couldn't find the walk exactly, Sarah, but I think what we would be in the ballpark of $1.5 billion if we file the disclosure statement. We're still kind of comfortable with that. Again, we cut off the month on October 3, which happened to be right smack dab in the middle of receiving cash from our customers and not fully dispersing many of the centralized payments out of North America, which puts that number a little bit higher than it would be on a normalized basis. So I think your math is about right.

Okay. Yes, that's fine. I was just trying more to get to the year-end number.

And then second question, and I realize you don't want to give guidance, but I just want to make sure I'm understanding this, your planned projections were obviously quite a bit lower for 2009. And 2010, I think EBITDA or EBITDAR was like $440 million. But you've also given guidance you can't annualize this quarter or the second half, and you're comfortable with 2010. Should I take that to mean you're comfortable you're going to hit at least $440 million and you're not ready to give us an update? Or is there something (multiple speakers) in 2010 that would bring it back down like that?

We're comfortable with 2010. We're still going through our bottoms-up planning cycle. There's a lot of variables that go into building our projections, as you know, everything from the industry and specific car lines and commercial deals, commodities, FX, cost reduction, commercial pricing, whatnot. We're still going through a line-by-line, bottoms-up buildup of the number. And right now, based on everything that we see, we're comfortable with the number in 2010.

Okay, thank you.

Michael Rosenthal, QVT Financial.

Just wanted to confirm, you said that you expect that the stock would begin to trade regularly you thought at the end of the week or early next week? Is that right?

Yes.

Okay. And then in terms of your North American seating backlog, has anything changed in the last year in terms of the sort of expected profitability of the car segment as opposed to the truck?

No, it's about the same. The backlog is coming in. The margin expectations are consistent with the segment margins overall. And Lou, do you have anything you want to add, or --

Yes, just a couple things. We've had some very exciting wins in North America, particularly the Fiat 500 just came out in The Wall Street Journal, very exciting product. The Volkswagen Beetle. We've got the GM Regal in Canada. They put in the Mercedes coupe in Europe and the Nissan global A-platform. We're having a lot of success, and Matt is absolutely right. It will be certainly in line with previous operating income.

Is that to say that there's been improvement in profitability of the car segment in seating from a historical --

No, I mean, the mix between -- the way we look at the margins or what drives margins, level of vertical integration, the amount of content on a seat. Obviously three rows of heavy content in seats are typically that we make all the components, are -- typically have an ability to improve the margins. That being said, a high-end luxury vehicle has more opportunity to perform than an entry-level vehicle. And so when we talked about variable margins, we've tried to make a distinction between pass car and truck.

And we've got to try the break this myth that it's all in sport utilities. It's not there. It's pretty well balanced throughout. And in fact, one of the things that I think the team did extremely well on negotiating -- not negotiating, but getting the customers to work with them pre-Chapter 11 was to more balance evenly our margins on our other products. And that was probably the biggest thing. The overall number didn't shrink, but the way we spread it around is a little more balanced. So I think it's a little more realistic look at the way the business should be done longer term.

Just to add to that, it's not like the third quarter in any stretch of the imagination was a stellar quarter (multiple speakers) platforms.

That's a good question, good question, because we wanted that to get out. Thank you. (multiple speakers) beforehand and getting the (inaudible) from me.

You mentioned the vertical integration. I think in the last couple of years maybe you've moved a little bit away from vertical integration?

No, actually, we've moved more into it. We've done more vertical integration. In fact, we now today can make every component we have. We don't want to make every component. We do want to be in the right regions of the world to produce. And we want to have the capability to look at what is in the marketplace.

So the other thing is, we don't need to replace everybody in the planet's investment. I think we need to use it wisely, but we have to have the ability to manufacture those components so we can remain the most competitive supplier in the world. But we will be in every component.

In terms of frame components --

Absolutely, frame.

-- can you give an estimate of what percentage of your complete seat you're actually producing the frame as well?

We've got about -- I wouldn't call it frame; I would call it all metals -- we're about 30%. We make about 30% of the metals that go into our (technical difficulty) seats. Metal [is the] mechanism.

Since that was last question, I just usually wrap it up with a few comments. One, this team didn't have any experience in Chapter 11. But the preplanning and the work that went into it, you did a great job. I'm happy it's over with, but I can't thank, as I said, Nat, Terry, finance and the operations of the Company for the job you did. I appreciate the people, the understanding you took going in it, because I know it was disappointing. But the attitude you carried to work every day, the efforts you had and the fact that you're all team players really helped to get this thing through, and continuing to believe in this great Company.

Lastly, I would like to thank the former Board, some of which I'm sure are on the call today. Thank you for the great service you gave to the Company, provided guidance, tough questions and independence that you showed for the shareholders. And I want to welcome the new Board, and look forward to a long working career with you. And hopefully, we'll see this Company go to new, successful levels.

So thank you all for the time, and thanks, everybody, for their questions on the call.

Ladies and gentlemen, this will conclude today's conference call. You may now disconnect.