Lear Corp (LEA) 2009 Q4 法說會逐字稿

Good morning. My name is Mason. And I will be your conference operator today. At this time, I would like to welcome everyone to the Lear Corporation fourth quarter and full-year 2009 earnings call. (Operator Instructions). Thank you.

Mr. Mel Stephens, you may now begin.

Okay. Thank you very much. And thank you everyone for joining us for our call this morning. The review materials for our call were filed with the Securities and Exchange Commission, and they have also been posted on our website, Lear.com underneath the Investor relations link. Today our presenters are Bob Rossiter, Chairman, CEO, and President, and Matt Simoncini, Chief Financial Officer. And also participating on the call, are our two division presidents, Lou Salvatore, President of Global Seating, and Ray Scott, President of Global Electrical Power Management. Terry Larkin is with us, our General Counsel, Wendy Foss, our Controller, Shari Burgess, our Treasurer, and John Trythall, Vice President, Business Planning and Analysis, and there's a number of other folks from our finance staff that will help us with questions. Before we begin, I remind you that during this call, we will be making forward-looking statements that are subject to certain risks and uncertainties. Some of the factors that could impact our future results are described in the last slide of the slide deck, and they're 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 entitled non-GAAP financial information. They're also at the end of the deck. If you will now turn to the next page, we -- on slide 2 outline our agenda for the review today. Bob Rossiter will open with an overview of 2009. Then Matt Simoncini will review our fourth quarter and full-year 2009 results, and also provide our financial outlook for 2010. Bob Rossiter will come back with some wrap-up comments. And then following the formal presentation, we'll be happy to take your questions. So now if you will turn to slide 3, I will hand the presentation over to Mr. Rossiter.

Thanks, Mel. Good morning, everybody. Obviously, things were pretty tough in 2009. But in the environment, we reduced our structural costs, realigned our global production footprint, and completed a major financial restructuring. We needed to do to it to restore the Company to financial health and position our business for long-term success. We made progress on our strategic priorities, which include diversification of our sales globally, continued business development in the emerging markets. For 2009, approximately 70% of Lear's net sales came from outside of North America. Our goal -- global seating business continues to perform very well.

In the second half of 2009, we operated the business close to our long-term target margin, despite industry production levels that were depressed. We continue to see significant growth opportunities in Asia and other emerging markets. In Electrical Power and Management business, we put in place a comprehensive sales growth and margin improvement plan set by Ray and his team. Our sales backlog includes about $800 million in new electrical business, and we see a significant opportunity for future growth in emerging high power and hybrid electrical vehicles. This segment was profitable in the second half of 2009, and we expect to make steady progress toward our margin targets over the next few years.

If would you please go to slide 4. Slide 4 summarizes our major restructuring initiatives. Since mid 2005, we've invested $740 million in operational restructuring actions, resulting in significant reduction in structural costs, and major repositioning of our production footprint. During that time, we closed 35 manufacturing facilities, and 10 administrative offices, had a reduction in headcount of 35,000 employees. And today, 50% of our total facilities and 75% of our employment is in 21 low-cost countries. In 2009, we completed a comprehensive evaluation of our strategic and financial options, and concluded that filing for Chapter 11 was necessary in order to realign our capital structure, and position Lear for long-term success. On July 7, 2009, the company filed Chapter 11, and just four months later we emerged with substantially lower total debt, and improved credit profile. Following the problems of 2009, the Company returned to profitability in the third quarter. We achieved positive free cash flow on the second half, and we ended 2009 with a cash balance of $1.6 billion, and less than $1 billion in debt.

If you go to slide 5. In addition to restructuring our business for the future, we also continue to make progress further diversifying our sales mix. Last year, 70% of our sales, as I mentioned, were outside North America. In addition, we continue to diversify our customer mix, with increasing sales coming from Europe and our Asian manufacturers. Please go to slide 6. We continue to grow in Asia. The Asia Pacific region now accounts for $1.3 billion, or 13% of our consolidated worldwide sales. Including non consolidated sales, our total revenue in Asia is about $1.9 billion. Within Asia, China is our largest and fastest growing market. Last year, we had consolidated sales of $900 million in China, and total sales including our joint ventures of $1.3 billion.

Slide 7. On this slide we're highlighting the sales growth and margin opportunity we have in the Electrical Power Management business. We have global capability to supply both traditional, electrical distribution and power management systems, as well as emerging high power and hybrid electrical component systems. We also have a strong sales backlog of $800 million, and have restructured this business to reduce our costs and to improve our low-cost footprint. We're optimistic about the future for this business. In fact, I'm more optimistic than everybody else. We're making solid progress in restoring the margins in this segment, as evidenced by our fourth quarter results.

The sales backlog, combined with industry recovery over the next three years should improve our sales to $3.5 billion. Longer term, we're targeting revenue of $4 billion to $5 billion, and our margin target is 6.5% to 7.5%, which is consistent with our long-term target for our seating business. While overall electrical content of vehicles is continuing to grow, we are excited about the opportunity that is emerging in high power and hybrid applications. Essentially, these new electrical systems include high power wiring, connectors, and other components, in addition to traditional wiring and power management systems. We have one significant new business on a wide range of electrical and hybrid electrical vehicles, including the new Chevy Volt which launches later this year. I'd like to turn it over to Matt for review of financial results and outlook, and I'll come back at the end.

Great, thanks, Bob. Please turn to slide number 9. This slide provides financial highlights for the fourth quarter and for the full-year of 2009. As you know, we returned to profitability in the third quarter, following losses in the first half of the year. In the fourth quarter, industry production levels in mature markets improved year-over-year, and strong growth continued in Asia. Net sales in the fourth quarter were up 5% to $2.7 billion. Core operating earnings were positive $116 million, reflecting significant cost reductions, and our free cash flow was positive $11 million. For the full-year, net sales were down 28% to $9.7 billion reflecting sharply lower production volumes. Core operating earnings for the year were $107 million, reflecting an improvement in the second half results, as the production environment improved and cost reduction actions continued.

Free cash flow for the year was a negative $156 million, reflecting losses in the first half and cash investments and restructuring initiatives, both capital and operational. On the next few slides, I will cover our fourth quarter and full-year results in more detail, and provide an updated financial outlook for 2010. Slide number 10 shows the global industry production environment for the fourth quarter and the full-year. In the fourth quarter, global industry production was up 20%. This was driven primarily by the higher production in Europe, up 20%, and accelerating growth in the emerging markets. Production in North America was up modestly. For the full-year, global industry production was down 13%, reflecting significant declines in the mature markets, offset in part by continued growth in the emerging markets.

Slide number 11 summarizes the status of fresh start accounting. Basically, fresh start accounting results in a new basis for our assets and liabilities, and establishes a new financial reporting entity following our emergence from Chapter 11. For 2009, our financials have been segregated and reported as predecessor for pre-emergent results and successor for post-emergence results. Fourth quarter and full-year 2009 financial results reflect combined predecessor and successor results. Results of operations of the predecessor and successor, however, are not comparable, due to various adjustments in connection with the fresh start accounting. Under fresh start accounting the Company's consolidated assets and liabilities are recorded at fair value as of November 9th, the date that we emerged from Chapter 11, in a manner that's similar to purchase accounting.

On the emergence date, the consensus distributable value for Lear was about $3.1 billion, including $2.1 billion of equity and about $1 billion in debt. This is the amount that was included in the Company's plan of reorganization that was approved by the US Bankruptcy Court. Slide 12 shows the specific fair value adjustments we have made to the various balance sheets. Goodwill decreased by $900 million based on the overall distributable value, as well as an allocation to customer and technology intangibles. Customer and technology intangibles increased $162 million -- these assets have an average life of seven years. The ongoing increase in amortization costs for this asset will be about $22 million a year. Intangible assets in total are now about $800 million, and they include $621 million of goodwill and $187 million of customer and technology intangible assets.

The overall fair value of our fixed assets decreased by $5 million. The lives of certain asset categories were extended, and as a result, annual depreciation expense will actually decrease by about $10 million a year. Finished goods inventory increased by $9 million, which impacted reported cost of sales in the fourth quarter by the same amount. The value of our equity investments in non-consolidated joint ventures increased by $9 million. The non-controlling interest in our consolidated joint ventures increased by $55 million. Slide number 13 provides our financial scorecard for the fourth quarter and full-year 2009, including the impact of fresh start accounting. Starting with the top line, net sales were up 5% to $2.7 billion in the fourth quarter, with 44% of our sales coming from Europe, 32% in North America, and 24% in the rest of the world. For the full-year, net sales were down 28% from last year. The decline reflects lower industry production in mature markets.

Our reported fourth quarter pretax income was $1.2 billion, compared with a loss of $683 million a year earlier. Income in 2009 was primarily driven by a gain related to our capital reorganization. On the next slide, I will show our results excluding our restructuring and other special items, to highlight our underlying operating performance. SG&A in the fourth quarter as a percentage of net sales was 4.3%, compared with 3.7% a year ago. The increase in reported SG&A reflects an increase in new program development costs. Interest expense was about $22 million, down from $51 million from last year. The lower interest expense reflects primarily lower total debt obligations compared with a year ago.

Depreciation and amortization was $64 million, compared with $72 million a year ago. The lower depreciation and amortization expense reflects lower capital spending over the last several years. Other expense was $21 million in the fourth quarter of this year, compared with $64 million a year ago. The improvement reflected a nonrecurrence of an impairment charge related to our divested interiors business last year. Slide number 14 shows the impact of several non-operating items on our reported fourth quarter full-year results. In the fourth quarter, our reported pretax income before interest and other expense was about $1.2 billion. Excluding the impact of reorganization items and fresh start accounting, restructuring costs, goodwill and special items, our core operating earnings in the fourth quarter were $116 million compared with $22 million a year ago. The improvement in the core operating earnings reflects primarily favorable cost performance and increased savings from our restructuring actions.

Turning now to our performance by product line, and starting with slide 15, in the fourth quarter, the adjusted margins for our seating business adjusted to exclude restructuring and special items, improved from 3.6% a year ago to 6.1% this year. The improvement primarily reflects favorable cost performance and a cumulative benefit from restructuring actions. For the full-year, our adjusted seating margins declined from 4.8% to 4.1%. This reflects primarily the sharply lower industry production environment we experienced last year, offset in part by favorable cost performance and a cumulative benefit from restructuring actions. Slide number 16 shows adjusted margins for Electrical Power Management business. In the fourth quarter margins improved to 2.5%. The improvement from a loss ago -- a year ago, reflects favorable operating performance, savings from restructuring and improved industry production.

For the full-year, our margin was a negative 3.7% reflecting sharply lower industry production in the first half and selling price reductions, offset in part by favorable operating performance and restructuring savings. Longer term, we expect our electrical business to continue to improve as we bring online our sales backlog, implement further cost and improvement actions, including additional restructuring actions, continue to grow in emerging markets, and benefit from the industry recovery. Please now turn to slide 17. Free cash flow was a positive $11 million in the fourth quarter, despite significant cash investments in both operational and capital restructuring initiatives that totaled approximately $85 million in the quarter. Free cash flow in the quarter compared with our prior outlook benefited by about $100 million, from the timing of certain customer payments and cash outlays for operational restructuring. For the full-year, free cash flow was a negative $155 million, including cash, investments, and operating restructurings, and cash utilized in our capital restructuring.

Next I would like to provide some additional information on the status of the Company's balance sheet at year-end 2009. Please turn to slide 18. Most importantly our total debt obligations have been reduced by approximately $2.7 billion to less than $1 billion at year-end. We also ended the year with a cash balance of $1.6 billion. 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 plans.

Please turn to slide 19. This slide summarizes our full-year financial outlook for 2010. The status is based on industry production of 10.5 million units in North America, 15.4 million vehicles in Europe, and a value for the Euro of about $1.40. Based on these assumptions, we are forecasting net sales for the year of between $10.2 billion to $10.7 billion. Our core operating earnings are estimated to be in the range of $250 million to $350 million. Depreciation is forecasted to be about $240 million, and amortization is forecasted at about $25 million. Interest expense is estimated to be about $85 million. Our estimate for tax expense is in the range of $70 million to $90 million.

Operating and restructuring costs are estimated to be about $110 million for 2010. Capital spending is expected to be about $170 million. Free cash flow is expected to be in the range of $50 million to $100 million for the year. In the first quarter of 2010 however, free cash flow is expected to be negative, reflecting a normal capital -- working capital increases, the timing of certain payments that benefited the fourth quarter as well. Lastly, our 2010 forecast for average diluted shares outstanding is about 54 million shares. The share count includes the common shares, preferred shares, and warrants, and a portion of the management shares that was granted at the time of emergence. Now I would like to turn it back to Bob for some closing comments.

Thank you. Okay, to sum it up today, the Company continues our very strong customer focus, and our operating fundamentals have never been better. We completed the financial restructuring in just four months, with a strong and flexible balance sheet, and we ended the year with $1.6 billion in cash and $1 billion in debt. That gives us the financial resources to further improve our capital structure, invest in new products, and grow in emerging markets. Despite the continued challenges that are taking place in the industry, our restructuring and cost reduction initiatives have allowed us to regain our positive operating momentum. Our financial outlook for 2010 reflects the continued momentum; core operating earnings at $250 million to $350 million, and free cash flow in the range of $50 million to $100 million.

In looking ahead, the sales backlog of $1.4 billion for the 2010 to 2012 period represents continued sales growth and diversity. To conclude, I would like to thank our employees for their dedication and hard work, as we restructure our Company for future success, and also their understanding. I'm very pleased that we are able to retain the positive factors that make Lear a global industry leader, unrelenting focus on quality, commitment to customer satisfaction, and the most talented team in this business. When you add to that our strong balance sheet, competitive cost structure, focused growth strategy, we're ideally positioned to benefit from industry recovery. Now we'll be happy to take your questions.

(Operator Instructions).

Your first question comes from the line of Colin Langan from UBS. Your line is now open.

Good morning.

Hey, Colin.

Actually, my first question, on slide number 6, you disclose the sales in China. Could you just give any color on which segments those are in, and if that includes things that are exported out of China?

I'm sorry, you broke up a little bit.

The segments.

It's in both segments. We have a little bit stronger book of business on seating side, than we do on the electrical side, so the percentage basis would be slightly higher than -- to seating, than it is overall for Lear corporation in Asia. And it does not include a large amount of export, if any.

And then --

However, one point I would like to clarify, Colin, we do export components from Asia to the North American market and to European markets for some of the components that we manufacture. But it's not captured in the top line.

Okay. And then in terms of the different segments, which -- are you expecting -- where are you expecting the biggest improvement next year? Is that really going to be the electrical business, or are you expecting -- I mean, seating seems to be pretty close to your long-term target.

I would say that it's fairly even. From a percentage standpoint, electrical, definitely electrical; from a raw dollar standpoint, it's fairly -- fairly even percentage improvement, dollar improvement.

Okay. And then one last one. It looks like in the quarter that the corporate overhead expense seems to have improved, at least sequentially to around $30 million. Is that a sustainable level? I mean is there a reason those corporate expenses --

No, no there's a lot of clean-that up went through the accounts through the -- in the fourth quarter on the operating basis. It's not sustainable. I would think of that number on a quarterly basis, closer probably to 45ish, on an ongoing basis. And we talked before in the third quarter call, about certain factors that were not linear in the results; for instance, compensation programs that in the past had been called out as a special item or a reorganization item. Those, for instance would go through that line item, as well as certain other programs that just weren't sustainable. So the $31 million is not the run rate.

Okay. But 45 would actually means -- it is actually going to be even up year-over-year?

It will be up year-over-year.

Okay. Thank you very much.

You're welcome.

As a reminder, please dial one to ask a question. Your next question comes from the line of John Murphy from Bank of America. Your line is now open.

Good morning, guys.

Hey, Murph.

I think you probably were just getting into some of the details of the question I was about to ask, but I'll ask it anyway. Looking at the operating margin you did for the third and fourth quarter, you were well north of 4%, closer to 4.3%, yet the outlook that you're talking about for 2010 would imply Op margins of 2.5% to 3.3%. Is that -- you're still -- I think you're probably using some pretty conservative production numbers going forward, but is it these non repeatable benefits that we saw in the third and fourth quarter that are just going to keep this margin down? I mean, it just seems very conservative.

Well, what we talked about in the third quarter call, which is still true is that the second half run rate is not sustainable, because we enjoyed the benefit of a couple of things, Murph. One, we talked about the compensation programs that have been called out largely as special items. We also talked about the fact that the backlog now has grown, the car manufacturers have gotten back into launching the normal cadence of production. We have backlog coming on that's rather significant, starting in this year. So we have a litany of program development costs that we're starting to see ramp up in the fourth quarter, but hit in earnest in 2010. We also now are launching a backlog, so our launch costs that have been significantly below average through 2009, are now coming up slightly above that curve. So the business isn't linear. The second half run rate is not indicative of what we see going into 2010.

And if we -- Matt, if we should think about incremental margins what do we think they should be, 15%, 20% as sales rise, is that a reasonable -- ex these one-time reversals?

Yes, I think that's a good way of looking at it. It depends, as much as anything what drives the increase in sales, where it's coming from what car lines it's on and what have you, what regions of the world. That's a pretty good rule of thumb, Murph.

When we look at the electronics business, obviously there has been some wild things have been going on in the press with some electronic -- or I should say mechanical parts that are moving to more electronic base. Is there an opportunity in steering or braking or anything like that as we move to more electric systems there, maybe that play a role there, or do you sort of add on to your existing business? I mean are you seeing opportunities open up?

Let me knock it over to our President of our Global Electric business, Ray Scott, is on the call, Murph.

I think the example you used in safety, I think that's not really our area of focus. We see a tremendous amount of opportunity right in front of us within the PHEV, the EVs, the hybrid, and then the consolidation and the growth within components themselves and options. So we're looking at being very selective moving forward. We have a tremendous amount of backlog right now. It's about executing and delivering of flawless launches of what we have. Looking forward we see tremendous up side with the consolidation and the growth within electrical and electronics.

Okay. And lastly, just on mix, how was it in the quarter, and how do you expect it to trend forward in 2010, both in North America and Europe?

Yes, I think the mix in North America was what we expect to see for the most part going through 2010. In Europe we saw -- we were hurt a little bit in the mix, because it benefited the small car, a little bit disproportionately to the larger brands, and we expect that to continue as well through 2010.

Great, thank you.

You're welcome, Murph.

Your next question comes from the line of Rod Lache from Deutsche Bank. Your line is now open.

Hey, everybody.

Hey, Rod.

On your last call you gave a backlog breakdown for 2010, 2011, and 2012. It was $300 million, $1 billion, and $100 million. I was wondering whether that's changed at all since then. That $800 million that you've got in the electrical and electronics business, can you give us a sense of how that breaks down over next couple years?

Yes, couple things. We update -- we try not to update the backlog every call. Obvious there's ebbs and flows in business, and we're continuing to be in the marketplace and win our fair share, but we're not formally updating backlog from what we provided, Rod, in the call last. The breakdown on the electrical business is roughly $270 million in 2010, about $300 million, slightly above $300 million in 2011 and a little over $200 million in 2012. And that's how we got to the $800 million.

Okay, thanks. And just back to a prior question, if you annualized the EBITDA that you did in the quarter, you get to $720 million. That's on $10.9 billion of annualized revenue, and you did mention that launch costs are going up for some comp issues there, but you also have about $120 million of prospective cost savings. I guess what I'm asking is, is there any reason to believe that the EBITDA would not -- would not be able to achieve at least that annualized run rate, that 720, if you were to get to that $10.9 billion of revenue that you're annualizing in the fourth quarter?

The way I would -- I would caution on doing that type of math a little bit, Rod, again, to talk about program development costs. There's a lot of moving parts in the business, everything from commodities, to commercial agreements with our customers, to suppliers, and just overall development costs, launch costs, compensation programs, and whatnot. So it's kind of hard to do that math. The way I would probably come at is it slightly differently. I would say that assuming that we're in the midpoint of the guidance, with a 10.5 for instance, unit build, I would almost do the extension slightly different. I would take our average content per vehicle, and then extend it out with a conversion between 15% to 20% and kind of do it that way, and see what the math comes in at. But I'd to have caution again that we don't sell to the industry, for instance, we sell to specific car lines. So as much as anything, it depends what they build. Each car line has a slightly different kind of financial DNA, and how it impacts us depending on how much vertical integration we have on it and whatnot. So I would come at it slightly differently.

On the electrical and electronics, the 6.5% to 7% margin is a couple years away, but you're at 2.5% in the quarter. Can you give us a sense of how we should anticipate the trajectory from here into 2010?

Yes, what I would tell you is -- probably the best -- the way I would look at electrical on a go forward basis is, we talked about in 2009 levels, that they had roughly 25% fixed cost structure, or $500 million on a $2 billion revenue base, right? So from our standpoint, it really is very, very sensitive to the top line. Now, if you look at the top line in 2008, I think we had a revenue number of $2.8 billion, and we were posting a margin at that time in the mid to high 2%, 2.5% to 2.8%. This year in 2010, we won't see revenue quite get to those levels, even with the industry recovery in the backlog.

So I would expect those margins to be slightly lower. Or you can take the fourth quarter run rate, and say off of that we have to do some incremental development costs, since a disproportionate amount of backlog is in this segment. And so on a trajectory basis, I would say probably 2010 will be slightly lower than the fourth quarter run rate is probably the best way. Then on a go forward basis, I would think that as we get to our $3.5 billion type near term industry recovery and backlog revenue number in 2012, I would expect those margins to about double.

Great. And then just lastly, do you happen to have the pension funded status at the end of the year, and what the FX impact was on the quarter?

Yes, let me start with the easier of the two questions, Rod. On the pension funding status, at the end of 2008, you will remember that we had an unfunded pension obligation of $255 million. Our current estimate is that that would be decreased 130, and that's a decrease because of both funding and asset performance. We continue to fund our pensions all through our Chapter 11 process. On the OPEB, OPEB is down slightly, not as meaningful, but from 172 to 157. So in total, between pension and OPEB, we actually had a decrease of about $150 million. The FX impact in the quarter was roughly $170 million on the top line.

Great, thank you.

You're welcome.

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

Hey, Matt, can you help us just quantify how big of a benefit you think the improvement in mix in Europe could be for you guys in 2010? I think you guys are talking about industry production being down about 2%. If you sort of just controlled for currency, and assume no new backlog, would it be fair to say that your European revenues would be up in 2010?

No, I don't see that happening, actually. I see them being relatively flat on a year-over-year basis, based on what we've guided to right now.

On this issue of one-time items, I think on the last call you guys helped us a little directionally, in terms of just drilling down into the specifics on what the impact was from some of these items. Can you help us with that for the fourth quarter?

Yes, in the third quarter we had the benefit in the seat group that we called out on the commercial recovery of roughly $10 million. Now what I would tell you, Himanshu, every quarter has nits and nats in it that reflect an out-of-period adjustment, whether it's a distressed supplier cost or a commercial recovery, or net-net. I will tell you that the fourth quarter was relatively clean. There was not a significant one-time event that we haven't called out as a special item or restructuring. So we didn't have that big item. I would say that, net-net, it's actually a pretty clean quarter from a run rate perspective.

So no major commercial settlements. And then the issue with incentive comp accruals, has that been normalized in Q4?

No, it will start Jan 1.

And then the third bucket, I think you talked about, engineering/launch/development costs, can you help us bracket how much of an increase we could think about there, relative to the fourth quarter run rate?

Let me see how I can get you there. It will be a step up from the fourth quarter run rate. I would think that probably one of the ways to look at it is, if you took the second half run rate, and extrapolated on it, the production volumes would be consistent for 2010. The decrease from the earnings is probably split evenly, between the comp programs and the program development costs. And then a small portion of it, it goes into launch related.

So if I had to bucket it, I would say probably 75% of the run rate detriment from the second half, is a combination of comp and program development costs. And then the remaining 25% is related to actually plant inefficiencies associated with the launch, with program launches, if I was going to use broad buckets. Now, there's a million moving parts on an $11 billion corporation, with manufacturing facilities all around the world, and the number of programs that we have. So when we're giving these type of guidance, there's one thing I need to caution everybody on, there is a ton of variables that go into giving a projection that is this detailed. So -- but in broad senses, that's how I would get there.

Two last questions. On the China business, we've heard from a lot of suppliers that that's typically a higher margin region. Is that kind of fair to say for you guys as well?

We think longer term the margins in China and Asia will support the overall targets for the two segments that we've laid out. Recently it has run a little bit hotter. But we were projecting it to come more in line with the targets of the segments overall.

Okay. Lastly, just on the capital structure, once you kind of get a revolver in place, and doing other things on the capital structure you're envisioning over the next year, what's kind of the optimal level of cash you think the Company needs to hold?

We've talked about the need for minimum liquidity of $1 billion dollars to run our business. We've had peak to trough use, and we also have cash. It's inefficient to get our hands on that in some of our foreign jurisdictions that would take a period of time to get back. So it's not available for day to day funding from a debt standpoint. We think again $1 billion is probably the minimum liquidity. We like having a little bit more than that obviously. So from our standpoint, it really comes down to how do we see the opportunities in front of us for growth. We think there's a lot of opportunity organically to grow this business still, in electrical distribution, but also in seats as well. So from our standpoint, we could envision a possible debt paydown when we come out and refinance the debt here, hopefully fairly quickly. And I couldn't see -- I wouldn't think of our debt, our cash levels going below that $1 billion to $1.1 billion. When we talk about cash, we talk about liquidity. So it's cash and revolver.

Okay, great, thank you, guys.

Your next question comes from the line of Itay Michaeli from Citi. Your line is now open.

Good morning. Matt, going back to the capital structure question, can you maybe share what the size of the revolver you may be looking to place roughly?

Well, it really depends on what they're going to charge me for a revolver. Banks typically don't like to give them. And so in the past we had a $1 billion revolver, up to $1.3 billion. I think those days are long gone, as well as the tightening of the overall credit markets. I can see a revolver anywhere from 10% to 15% of those levels. But again, it comes down to whether -- what the banks are going to charge, and whether or not it makes sound financial sense for us. Now what we are seeing is an opening in the bond markets, which all of you probably see as well, with the comps and what some of our competitors are doing out there. And we think that we can fairly quickly take a second lien out, and improve the economics and the flexibility as well. And we're looking at the overall capital structure. We obviously have more cash than we need at this point to run the business on a day-to-day basis. We probably would use some of that to bring it down. Whether or not we get a revolver still remains to be seen.

Right. And then on the 2010 guidance, can you maybe share what you've embedded for pension expense as well as contributions?

Yes, we typically expect pension expense to be consistent with this year, which is in that $35 million, $40 million range. We usually contribute consistent with that amount -- with the expense amount.

That's helpful. And then lastly, maybe can you give us an update on the NOLs? And specifically how we should be thinking about cash taxes over the next few years?

One of the experts I have on the call today is, Bill McLaughlin, our VP of tax who will be more than happy to take you through that detail.

Yes, we ended up at the end of 2009 with approximately $750 million of tax loss carry forwards in the US. We lost about $200 million in 2009 because of the bankruptcy emergence, and the cancellation of debt income. In addition, to the tax loss carry forwards, we also have about $175 million of tax credit carry forwards that are still available. And that is in addition to all of our foreign losses that continue to be available.

That's helpful. Thank you.

Your next question comes from the line of Brian Johnson from Barclays Capital. Your line is now open.

Yes, just want to go into some of your puts and takes around the rather wide core operating earnings range. Can you give us a sense of where the North American year production, is that anchored in the midpoint of the range. And if so, then what are the puts and takes between 250, 350? How much are macro related, how much might be customer and mix related, how much are internal and expense related?

First, the easier part of the question, Brian. Our guidance roll up at 10.5 million units in North America, and the production guidance that we've given in Europe, as well at 15.4 it would roll us up right in the middle of the range. And the reason there's such a broad range on revenues is, we're still on a relatively uncertain production environment. Sales rates, for instance, in North America have not reached the levels that would support a 10.5 unit build yet, although there's optimism, obviously, that we can get there. So first and foremost, it's not only what the industry does in all regions of the world. It's also what car lines within the industry get built, because we don't sell to every car line in the industry. So we've put broad range of sales in there that reflect the uncertainty.

We're rolling up clearly -- at 10.5, we would be in the middle of that revenue range. Now, very simply, the reason that we've got a $100 million earnings range wrapped around that, first and foremost is, it's 20% conversion on that revenue number. That's also supposed to reflect not only the production uncertainty that we have, and the revenue uncertainty that we have. But again, there is literally thousands of inputs that go into providing a projection of this nature for a Company this large, this complicated, in this many regions of the world with this many different car lines. So it's meant to reflect not only the production uncertainty, but also the difficulty in calling everything from commercial deals to the benefit and timing of restructuring actions and what have you.

Okay. So we can think, though, the midpoint of the guidance corresponding to the midpoint of sales, which corresponds to the midpoint, to the production estimate down below. Second question, when you kind of go through all the fresh value accounting, is the net put and take around depreciation and amortization -- actually it looks like it's amazingly flat year-over-year given that. And within each of the segments, is there any difference in the depreciation load each of the segments bears?

Yes, I think from our standpoint, depreciation is down slightly on a year-over-year basis, and it's driven by the overall trend that we had in capital spending over the same period. So as our capital spending has continued to decrease, as you would expect, depreciation decreased as well, again, impacted by the $22 million step-up on the amortization. So the guidance that we've given has this $22 million step up in depreciation and then the depreciation reduction that we called out on it. From a depreciation standpoint between the two business segments, I would tell that you, one, amortization of the intangibles disproportionately pushed seating. There is a difference in the loads, probably a third goes to electrical distribution, and two-thirds goes to seating on the depreciation standpoint.

Okay. And just final question. You talked about the kind of margin targets midterm around electrical. Where are you on seating midterm margin targets?

We would see a step-up, definitely a step up from 2009 overall, but not at the fourth quarter run rate. I think you would see a step down from the fourth quarter run rate. We don't think that's a sustainable margin through 2010. We think that we get back towards that 7% kind of performance range, closer to the exit rate or midpoint rate of 2012. And I think we take a step each year towards that.

Okay, thanks.

Your next question comes from the line of Chris Ceraso from Credit Suisse. Your line is now open.

Thanks, good morning.

Hey, Chris.

So can you quantify roughly what the size of the launch cost you expect to see in 2010?

Yes, we can. In 2009, we had a relatively modest launch year as far as number of launches. Now in this business, any given year you're launching multiple, multiple programs, even when we have negative backlogs. But this year was on basis -- 2009 was a low backlog year, or launch year. So we saw launch costs below the average of about $25 million versus our normal run rate of $40 million to $50 million. We think that 2010 is a much more normalized launch year, and we see launch costs basically doubling, or getting back to that $50 million range from the $25 that we incurred in 2009.

And then similarly, the step up in the comp accrual? I'm sorry if you gave that already.

Yes, we didn't talk specifically about it, but it would be more meaningful than the launch cost increase.

Okay. The guidance for tax, if I look at what you're expecting on tax, I think it's on a cash basis, but if I compare that to your pretax income, it looks like you're paying a pretty high rate, then just before you talked about all the NOLs you've got and the credits. How do you reconcile that? Why does the tax rate look to be so high?

As you know, we pay tax in various countries where we earn our pretax income. So we have a large amount of pretax income in Asia, specifically China, South America, and various countries where we do not have the tax loss carry forwards. As pretax income grows globally, you'll see a disproportionate decrease in our effective rate as that happens. But as it stands right now, we're looking at about $70 million to $90 million tax expense for 2010, and the cash taxes should be approximately $10 million below that range.

Okay. You gave a good rundown in the deck about all of the restructuring actions that have been taken to date, but you're still spending at a pretty high rate. Can you give us a feel for 2010 and beyond, what is left to do, what are you still spending all this money on in terms of restructuring?

One, we talk about accelerated restructuring, or restructuring the terms of accelerate. And we think it's going to remain accelerated through 2010 and 2011, then getting back to more normalized. For our business, we think more normalized is in that $40 million range. And so we believe we're in the 8th inning of the restructuring game. We still have work to do on our seat component plants that we can move to a more efficient footprint, both in Europe and North America.

We think for the most part we're where we need to be in electrical, but there's still some components that need to move into Eastern Europe. And as always, there's customer actions that dictate that we have to incur costs. For instance, the recently announced action in Sicily by Fiat will result in us having to also close our facility that supports us. We'll get the benefit from that action however, because we will produce the same amount of vehicles, over less manufacturing facilities which ultimately will allow us to save on one plant overhead type costs. So still some work to do in the components and moving it, but we would probably call it in the 7th or 8th inning.

Okay. Last one, Matt, you mentioned the margin in the Asia business is rung a bit hotter than the 6% to 7% guidance range longer term. Can you just give us a ballpark of where North America and Europe are running?

Yes, what we talk about in Europe is that overall, longer term Europe is -- had been running in the 2% to 3% range, at these levels of volumes. We're still kind of consistent with that, and if you -- you did the math at home that would mean that North America was probably in that 4 to 5 range.

Okay, thanks, that's helpful.

Your final question comes from the line of Derrick Wenger from Jefferies & Co. Your line is now open.

Thank you. Of the restructuring charges that you listed in the fourth quarter, how much of the $59.3 million was COGS versus SG&A, and similarly also for the $15.1 million of other that you broke out? Secondly, is there an interest rate assigned to any of the other long-term obligations of $563.6 million on the balance sheet?

Okay, let's break it down step by step. On the restructuring of the $59 million, that's the capital restructuring charges. Let me take that back. On the -- you're talking about the operational restructuring of $59 million that we had?

Yes, then the $15.1 million of other.

The vast majority of it, like roughly $54 million of it went to cost of sales.

Okay. What about the $15.1 million of other?

$15.1 million of other was related to -- I'm drawing a blank right now. 50/50. My resident expert, John Trythall, the head of Financial Planning is telling me half and half.

Okay, and then how about any interest rate on the other long-term obligations of $563.6 million? What does that consist of?

The other -- you're catching me flat-footed, I'm sorry.

On the balance sheet, right below, in the long-term.

It's a bunch of miscellaneous that goes in there. There is some modest interest rates on about $40 million of it, but it would be consistent with our debt profile overall, I would tell you probably a little bit lower actually, since some of this is kind of government provided financing of some expansion plans in Europe. So it's not really interest bearing for the most part.

And what constitutes the other 520?

It's a whole litany of other longer term liabilities that come into the business. I mean, pensions, OPEB, Workers' Comp, just the normal stuff that is not payable within the next 12 months.

Okay. Thank you.

Okay. I want to thank all for the questions, and being on the call today. I also want to thank the Lear employees again, for the great service last year. But last year is over. I also want to thank you for your hard work, your understanding, and the sacrifices that you all made. Sorry we had to do it. 2010, we're all hopeful. Unfortunately we don't know really what's going to happen in the marketplace out there. There is some optimism, but not enough to make you feel like it's going to back to business as usual. So keep our focus, do the things that we do the best, and everything will work out. Thank you all.

This concludes today's conference call. You may now disconnect.