Lear Corporation Q3 2007 Earnings Call Transcript

Nov. 7.07 | About: Lear Corporation (LEA)

Lear Corporation (NYSE:LEA)

Q3 2007 Earnings Call

November 6, 2007, 9:00 AM ET

Executives

Mel Stephens - VP of IR

Robert E. Rossiter - Chairman and CEO

James H. Vandenberghe - Vice Chairman and CFO

Matthew J. Simoncini - CFO

Analysts

Himanshu Patel - JP Morgan

Chris Ceraso - Credit Suisse

Brian Johnson - Lehman Brothers

Robert Hinchliffe - UBS (US)

Jonathan Steinmetz - Morgan Stanley

Brett Hoselton - KeyBanc Capital Markets

Rod Lache - Deutsche Bank - North America

David Lim - Wachovia Capital Markets

Robert Barry - Goldman Sachs

Operator

Good Morning. My name is Luann and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Lear Corporation's Third Quarter 2007 Earnings Conference Call. All lines have been placed on mute to prevent any background. After the speakers' remarks, there will be a question-and-answer period. [Operator Instructions]. Thank you.

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

Mel Stephens - Vice President of Investor Relations

Thank you, and good morning everybody, and thanks for joining us for our third quarter earnings call. By now, you should have received our press release and our financial review package. These materials have also been filed with the Securities and Exchange Commission and they have been posted on our website at lear.com under the Investor Relations link.

Today's presenters today are Bob Rossiter, Chairman, and CEO, and President, he is joining us from Asia; and here is Southfield, Jim Vandenberghe, our Vice Chairman; and Matt Simoncini, Chief Financial Officer are other presenters. Also participating here in Southfield in the call are Dan Ninivaggi, Executive Vice President; Ray Scott, Senior Vice President and President of our North American Seating Group; Shari Burgess, Treasurer; Jim Murawski, Controller; Bill McLaughlin, Vice President of Tax; and John Trifall [ph], our Vice President of Finance.

Before we begin, I would like to remind you that during the call we will be making forward-looking statements that are subject to certain risks and uncertainties. And some of the factors that could impact our future results are described in the last slide of this deck and also in our SEC filings.

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

If you turn to slide 2, here we outline the agenda for today's review. Mr. Rossiter will provide an overview of the company. Then Jim Vandenberghe will provide an update on business conditions and next Matt Simoncini will review our financial results and the outlook for our business. And following the formal presentation, we will all be happy to take your questions. Now if you will turn the slide number 4. I will turn it over to Bob Rossiter.

Robert E. Rossiter - Chairman and Chief Executive Officer

Well thank you very much Mel. I would like to start off by talking about the industry trends and our response to those trends. Since mid 2005, we have been restructuring our operations. We implemented a number of actions to increase shareholder value and improve our overall competitive position for now and the future. We still face many challenges, but we continue to improve our operating and financial results. Our Seating business is performing well globally. Our electronics and electrical business needs further improvement. The business is in transition as we relocate to lower cross countries, and the lower cost operating structure.

Today, there is a... the market itself is a fiercely competitive environment in this segment. And I will tell you right now it's extremely tough to play out there. We are undergoing consolidation and restructuring, and we know there is opportunity both organically in growth and through acquisition to strengthen these businesses.

In terms of diversification of our sales, Asia offers us the best opportunity. And the theme there is doing an outstanding job, and we had significant success in Asia in the first nine months and recently in this last quarter both in Asia and globally. We have made many changes in the company over the last year, but the one thing that remains the same is the force that drives the company and that's our customers. Quality, service, and our relationship are key to our growth.

If you turn now to slide 5. On slide 5, we have implemented a number of actions to improve shareholder value. Number 1, the implementation of our global restructuring initiative. That will improve our long-term competitive position. We have accelerated our global footprint actions and have reduced manpower to match and we've actually went deeper than that.

Number 2, we have refinanced our 2007 through 2009 debt maturities and divested our interiors business through IAC in Europe and in North America. And we renewed our focus on growth. This is a priority for me, it is for the entire company and I am personally committed to that. Collectively these actions have significantly improved our operating result at the same time making us more competitive.

If you move now to slide six. Slide six, we start through this strategic assessment of our businesses. Our seat systems, our business is still an excellent business. And it is globally. And it is core and central to the company overall. From a market environment standpoint, Lear has a very strong competitive position globally. We will maintain that and we are looking for ways to enhance it. And the business is overall performing well in every area of the world. Our core strategy to leverage our global leadership and systems integration achieved the lowest cost, global footprint, and I think we fast underway doing that. I think the actions that we have taken over the last 1.5 to 2 years have really put us out-front.

And we also want to expand our capabilities and our value added component. We want to enhance those through growth internally to developing new products and also through acquisitions. But more importantly moving those out of the high cost area. And we also further want to grow our sales and diversify. And we see Asia as the opportunity for us to grow with it [ph]. And I will tell you in all areas of our seat business, there is significant opportunity for the company to grow. And from a business outlook standpoint, our core strategies do support our leading competitive position globally in all our component and our growth opportunities as we go forward.

Now move to slide 7. We will talk about our electrical, electronic segment. As I mentioned, it's going through difficult times, but still very profitable. There is significant opportunity out there for us, but there fierce global competition that's depressing the margin. We think that a lot of the opportunities are coming up... are coming from consumer demand shifts with definitely more electrical content in vehicles such as safety related features, infotainment. And obviously our strong position in power equipment.

The core strategies obviously are to further develop our systems integration capability in that area. I think, we really do have a strong control over the interior electrical architecture in that product and I think that that's going to give us an advantage going forward. And also to achieve again the lowest cost global footprint. Today, we are under pressure. We still have a number of operations, but are in the process of being relocated. We capitalize on emerging technology in our power distribution systems and also value added electronics product. We look at the business outlook. There is significant margin pressure, obviously in the current near term because the industry and also the restructuring of consolidations taking place. And also significant new business coming online over the next few years, this got us at a pretty position, but again it's been very difficult, and it has a solid future, I think opportunity-wise strengthening our global position in the power distribution and growing our electronics business.

If you move now to slide 8. Talk about IAC. Since the joint venture has been formed IAC has provided opportunity for future success in our interiors business. We play today in both areas of the world where we think are significant. The industry consolidation restructuring and I think the business integration in this segment is on track and I think the IAC group is well ahead.

Lear is positioned to participate in improving business fundamental. IAC Europe is about a billion dollars in sales and we have a 34% minority interest in that business. In North America, about $3 trillion in sales. We just recently completed the acquisition of Collins & Aikman soft trim business where Lear contributed $32 million to that and along a 19% share in the business. But it is on track and moving forward.

In terms of the growth in Asia, we are talking about that specifically. We will update backlog of business in the first quarter next year. But overall for the year, we had over $530 million and new business added in the first nine months and just $245 million in the last quarter alone. I think more importantly, the number of your business and how broad-based the customers are, we are really selling to everybody out there in Asia. And that's one of the reasons why I spend a lot of time out here as well. But it's personally something that I think is significant growth potential for us. I think we have an absolutely outstanding team in place here today. They are doing a fantastic job and I see more and more success as we go forward.

If you look at slide 10, you see also a number of the major customer award. And that's been important to us awards in terms of quality, let's look at the different opportunities there with the customer base. The number of Asian producers, Toyota, Mazda, the number of European producers, Chinese producers. Better to measure of your performance, the measure of your relationship, and it always... also leads to growth.

Now I would like to turn it over to Jim Vandenberghe for our business conditions.

James H. Vandenberghe - Vice Chairman and Chief Financial Officer

Thanks Bob and good morning. We are going to start off moving to slide 12 and go over the present business conditions. Starting out with the macroeconomic factors of the US, the outlook is mixed. Positive factors include lower interest rates and moderating commodity prices. The risks include consumer credit, a weak housing market, and high oil prices. And capital markets remain volatile. Sorting through all the data, we still see fairly steady overall demand in the auto sector, and that is exactly what we have been experiencing this year. Certain important segments of the market, such as full-size pickups and large SUVs continue to be under pressure.

In Europe, overall demand is also relatively stable at a healthy level, and in Asia industry growth in major markets continues. As for specific industry developments, supplier consolidation and industry restructuring are continuing. Also importantly the UAW has reached a new pattern labor agreement with the domestic automakers. We will comment on these trends and developments over the next few slides.

Moving to slide 13. About two-thirds of Lear's revenue in North America comes from light trucks and this is concentrated among full-size pickups and full-size SUVs. These large utility vehicles steadily increased in popularity from 2000 until 2004. The growth in these vehicles was driven by moderate fuel prices and increased functionality. However, since early 2005, the North American vehicle market has become increasingly more challenging and higher fuel prices have led to a shift in consumer preference away from full-size pickups and SUVs. At the same time, there has been a rapid growth in cross-over vehicles that are more fuel efficient and offer similar attributes as their full-size counterparts.

As a result, North American production for high interior content full size pickups and SUVs has been on a slightly downward trend. While production for full-size pickups and SUVs is up slightly this year reflecting new pickup entries from GM and Toyota and increase in sound spending, projected production for 2008 is down above 9% according to the CSM production outlook basically since factored our outlook as well.

And moving to slide 14. Bob talked about to offset lower production and key truck platforms in North America. We are aggressively pursuing growth opportunities in Asia and with Asian automakers on a worldwide basis. For the last several years, we have enjoyed strong growth in total Asian sales.

Going forward, we see this growth moderating somewhat, but we are still targeting significant revenue growth. China continues to represent a major avenue of growth and the Chinese market will account for a significant portion for a projected total Asian sales in the past two years.

Turning to slide 15. I will give you an update on our restructuring. As Bob mentioned in response to challenging industry conditions and shifting market trends, significantly restructuring by our customers as well, we launched an initiative back in mid 2005 that affected our operations on a worldwide basis.

Our objectives were to eliminate excess capacity, respond to the structural changes within the industry and accelerate our move to low cost countries to improve our competitive footprint. We have been implementing a 3$00 million overall restructuring plan. This has provided funding for a substantial realignment of our global manufacturing footprint. We now expect to incur an additional 25 million this year, bringing the total restructuring program to about $325 million. The additional restructuring will allow us to take further advantage of low cost country opportunities and more fully respond to customer actions. We are on track to achieve annual savings of $125 million this year, and ongoing annual savings of $150 million.

Beyond 2007, we will continue to invest in restructuring actions that are required to respond to the structural changes and make economic sense for Lear. These investments could be significant.

Moving to slide 16. Obviously a very important recent development to the North American auto industry has been the successful negotiation of new labor contracts between the UAW and the domestic automakers. Importantly these agreements were reached without a significant production disruption. Nearly all the press reports and analyst opinions have indicated that these agreements will support improved competitiveness for the automakers and preserve union benefits. The implications for major tier 1 suppliers like Lear has been less clear. Some reports speculate that this contract will result in significant in-sourcing of business by the automakers and a loss of competitiveness for major suppliers.

We do not believe this is the case but we are still in the process of evaluating a major provisions of the contracts. Our initial reactions is that first we fully intend to maintain a competitive wage and benefit structure at all of our facilities as we negotiate new agreements. And second while automakers may bring some contract work and other non-core functions back in house, we do not see a fundamental change in overall sourcing patterns for our core products.

At this point, I would like to turn it over to Matt Simoncini, our Chief Financial Officer for Lear Corporation.

Matthew J. Simoncini - Chief Financial Officer

Thanks Jim and good morning. Please turn to slide 18. For a review of financial results and outlook, I would like to mention the major factors that are impacting our business.

In the third quarter special items included costs related to our restructuring initiative, the merger transaction, and the settlement of transaction related items for the divestiture of our interior business. Excluding these special items, core operating earnings came in at $170 million, an increase of $70 million from a year ago. Solid improvement reflected favorable cost performance and operating efficiencies, net savings from our restructuring initiative and the benefit of new business outside of North America. For the full year, we are increasing our outlook for core operating earnings to the range of $680 million. We are also increasing our free cash flow forecast to the $350 million range reflecting the higher earnings and lower capital spending. These are the highlights. Now let me review our results in more detail.

The industry environment, in the third quarter, was generally in line with our expectations. In North America industry production was $3.5 million units up 4% from a year ago. The Big Three were up 1%, and our top 15 platforms were down 1%.

In Europe, industry production was about 4.3 million units up 2% from a year ago. Production for our top 5 customers in Europe was also up 2%. Compared with the prior quarter heavy steel prices were down 6%, while copper prices were flat and crude oil prices were up 16%. Compared with a year ago, the steel price were down 15%, copper was down 1%, and crude oil was up 7%. Commodity cost changes did not have a meaningful impact on our result in the third quarter on a year-over-year basis.

Slide 20 provides our financial score card for the third quarter. Starting with the top line, we posted net sales of $3.6 billion down $495 million from last year. The decline reflects the divestiture of our interior business. Net sales on our core businesses were up $259 million from a year ago primarily reflecting the addition of new business outside of North America and favorable foreign exchange offset in part by a favorable platform mix in North America.

Operating results improved reflecting the divestiture of the interiors business, favorable cost performance and benefit of new business outside of North America offset in part by a favorable platform mix in North America. Our reported income before interest, other expense, and income taxes was $108 million to compare with $29 million a year ago. Our pre-tax income was $60 million a net income of $41 million or $0.52 per share also reflected solid improvement from losses a year ago.

On the next slide I will show these results excluding restructuring cost, and other special items to highlight our underlying operating performance. SG&A as a percentage of net sales was 4.5% compared with 3.9% a year ago. The increase in SG&A reflected cost related to the AREP merger proposal.

Excluding special items, SG&A was down from a year ago. Interest expense was about $48 million which is down 9% from last year primarily reflecting lower net debt balances. Depreciation and amortization was about $71 million, was down from a year ago as well reflecting the divestiture of the interiors business. Other expense was about $18 million compared with $9 million a year ago. The increase in other expense reflects an increase in minority interest expense resulting from improving performance in several Lear's joint ventures and favorable... unfavorable equity earnings in our non-consolidated JVs.

Slide 21 summarizes the impact of restructuring actions and other special items on our reported third quarter results. We recorded income before interest, other expense and income taxes for our Seating, Electrical and Electronics business, was $108 million. Excluding a restructuring cost and other special items, core operating earnings were $170 million compared with $100 million a year ago. The improvement in operating earnings primarily reflects favorable cost performance and the impact of new business outside of North America. To help verify how these special items impacts our financial statements, we have indicated the amount by income statement categories on the right hand side of the chart.

Turning to page 22. This slide summarizes the impact of major performance items on our third quarter sales and margin compared with a year ago. As you can see, the major cost factor for the change in sales was the divestiture of the interiors business. Partial offsets with new business outside of North America had a favorable impact of foreign exchange. The margin improvement was more that explained by favorable cost performance that benefited new business again in divestiture of interiors.

Slide 23 shows what is happening within our core product segments. Segment area shown are both in reported and on adjusted basis which excludes cost from restructuring as well as other special items. To help understand our underlying operating performance we have also provided adjusted margins. I should note, however, that our restructuring related initiatives which began in 2005 are expected to continue behind the current year. We believe they are key to maintaining our long-term competitiveness. On an adjusted basis, seating segment results continued to improve. Results of our Electrical and Electronic business, however, continued to be under pressure.

Headquarter costs were lower primarily reflecting the divestiture of our interiors business and other cost reduction actions. On a run rate basis we would expect quarterly headquarter cost to be in the range of $50 million to $55 million.

I'll review our results for each of the major business segments in detail on the next two slides. Our seating margins continued to show solid improvement with major regions up from the year ago. This reflects favorable cost performance from restructuring in ongoing efficiency actions. Margin improvement actions including the selective vertical had a benefit from new business outside North America. In our electrical electronics businesses, margins were lower. The decline reflected a very competitive net pricing environment and a roll-off to several key programs in North America. We have recently been awarded some new electrical electronics programs and these programs will begin coming online over the next couple of years. Net commodity costs were slightly positive reflecting a recovery of prior period copper cost increases.

Please turn to page 26. Free cash flow was positive $91 million in the quarter with ankle and restructuring investments being funded through operations. The positive cash flow during the third quarter reflects our solid earnings and favorable net working capital. We have generated approximately $500 million of free cash flow over the last four quarters.

Turning now to our key assumptions and this year's outlook. In North America we see industry production of about 15 million units which is down 2% from a year ago. Production for the Big Three is expected to be down about 6% with our top 15 platforms forecast to be down 8%. In Europe we see industry production of about 19.7 million units, up about 3% from a year ago. Production for our top five customers in Europe is expected to be up 3% as well. As for the euro we are forecasting a rate of $1.35 per euro for the year. This is about 8% stronger than last year.

Key commodities have not had a material impact on our '07 outlook. Steel prices have moderated while copper is up somewhat this year and their impact has been offset by prior period's recoveries.

Slide 28 summarizes our 2007 financial outlook for Lear's core businesses. The outlook shown here excludes Lear's interiors business for the full year. At this basis, we expect net sales for 2007 of approximately $50 million. This is unchanged from the prior outlook. Our core operating earnings or income before interest, other expense, income taxes and restructuring cost and other special items are now estimated to be in the range of $680 million. This is up from our prior outlook reflecting lower production risk and more favorable operating performance.

Interest expense is estimated to be approximately $200 million. Our forecast for pre-tax income adjusted to exclude restructuring costs and other special items is in the range of $430 million. Our estimate for tax expense is about $135 million subject to the actual mix of financial results by country. Restructuring cost are estimated to be about $125 million.

Capital spending is estimated to be approximately $200 million which is down $35 million from our prior forecast. Depreciation and amortization are estimated at above $300 million. Lastly, free cash flow is expected to increase to approximately $350 million. As we see core operating earnings for the fourth quarter down from a year ago, reflecting the roll-off to some major programs and lower production in our key platforms.

Q4 2006 was a relatively solid quarter for our core businesses as we saw operating margins return to more normal levels. This reflected a relatively stable production environment on our key platforms, lower launch cost and increased savings from restructuring. This year we are forecasting lower production on our key platforms driven by plant downtime by our customers with a risk for further cuts. Also our Q4 results this year include one-time costs associated with new business development and growth in our sales backlog.

In Electrical and Electronic business, we see Europe improving and normalized production, while North America and Asia are down reflecting the roll-off of North American programs as well as increased development costs.

Slide 29 shows a preliminary outlook for 2008. With respect to our core Seating, Electrical and Electronic businesses we estimate that we will add net new business of about $300 million next year. In addition, we see industry production in North America generally in line with our 2007 outlook in Europe up slightly from 2007. In North America we are forecasting moderately unfavorable platform mix reflecting lower production of high content, full-size pickup trucks and large SUVs. We are also assuming an exchange rate of $1.40 per euro.

Based on these assumptions we forecast net sales before operating earnings excluding a restructuring related cost to be roughly in line with our 2007 outlook. With respect to our three-year sales backlog covering the 2008 to 2010 period, our present status is about $600 million reflecting the addition of significant net new business since our last formal update in January.

We have also recently been awarded significant new business behind a backlog period in 2011 to 2012. We will update our three year sales backlog and provide more detail on 2008 outlook in January.

To summarize, Lear is financially sound and our financial results are on an improving trend. As Bob mentioned we are actively pursuing initiatives to strengthen our core businesses. Our recent financial performance has given us the flexibility to pursue strategic opportunities and at the same time preserve a strong balance sheet. We are also making solid progress on operating priorities including restructuring of our global operations and identifying further sales growth and diversification opportunities. And while the industry outlook remains challenging we are continuing to implement actions to strengthen our long-term competitiveness. As a result, our preliminary financial outlook for 2008 is in line with 2007 despite lower forecast production of full-size pickup trucks and large SUVs.

Now we will be happy to take your questions.

Question And Answer

Operator

[Operator Instructions]. Your first question comes from Himanshu Patel with JP Morgan.

Himanshu Patel - JP Morgan

Hey guys. Couple of questions. The production volume decline that you guys have assumed for the P900 platform for 2008, could we get that?

James H. Vandenberghe - Vice Chairman and Chief Financial Officer

Actually we are going along with the -- what CSM has and they are down about 10 to 11%, I believe.

Himanshu Patel - JP Morgan

Okay. And then the core operating profit guidance is flat year-over-year, what would be sort of the incremental restructuring savings that we should think about for 2008 versus '07, is it about 25 million or so?

James H. Vandenberghe - Vice Chairman and Chief Financial Officer

It's exactly right. The original guidance was about $125 million, which we said was on average to 2.5 year payback. We expanded it and pulled some -- pull ahead some of the restructuring cost and that's going to provide about $25 million of incremental savings on a year-over-year basis.

Himanshu Patel - JP Morgan

Okay and then we -- just conceptually the, I know you don't break it out this way, but the margins in the North American business versus European businesses, any directional comments you could give us on how that's been trending in the latest quarter?

James H. Vandenberghe - Vice Chairman and Chief Financial Officer

It's been pretty consistent with what we have seen so far in three quarters. Europe is a little bit ahead of schedule but all-in-all all regions are doing fairly well.

Himanshu Patel - JP Morgan

But fair to say, I mean is North America more profitable that Europe still.

James H. Vandenberghe - Vice Chairman and Chief Financial Officer

Yeah. North America is more profitable, part of it the level of vertical integration than we have mainly in our seat business and firstly the directed content that we have in Europe all historically Europe's margins have been fairly lower than North America and that continues but improving.

Himanshu Patel - JP Morgan

Okay. And then lastly what sort of negative contribution margin should we be thinking about for the business not necessarily for the next quarter but just longer term, now that you've done through most of the restructuring?

James H. Vandenberghe - Vice Chairman and Chief Financial Officer

Not sure I fully understand the question. We do see....

Himanshu Patel - JP Morgan

In the sense that you're expecting your revenues or your production volumes to come down if we were just trying to model the impact of that separately, what sort of negative contribution margin would we apply to that?

James H. Vandenberghe - Vice Chairman and Chief Financial Officer

I think it's roughly the same, I mean on a short term basis it's still kind of in that low 20% range. And it depends on if our customer takes capacity action that allow us to take down, we can mitigate that some what. As they take out to ship that helps us to take a facility out that helps us as well.

Himanshu Patel - JP Morgan

All right. One last if I could speak, I know CSM has got a pretty conservative P900 forecast for next year but have you gotten any indication from GM so far directionally about what they're thinking for 2008 volumes on that and is that consistent or inconsistent with what CSM is saying.

James H. Vandenberghe - Vice Chairman and Chief Financial Officer

I think what we have done is, obviously we have taken the neutral parties of perspectives and I think we will get a better view of what the customer's plans are really for all three of them probably in January.

Himanshu Patel - JP Morgan

Okay, great. Thank you.

Operator

Your next question comes from Chris Ceraso with Credit Suisse.

Chris Ceraso - Credit Suisse

Thanks, good morning.

Robert E. Rossiter - Chairman and Chief Executive Officer

Hi Chris.

Chris Ceraso - Credit Suisse

A couple of things. Can you comment maybe just directionally on the profitability of the new business in Asia relative to the full size truck business in North America, is it less profitable, more profitable, the same?

Matthew J. Simoncini - Chief Financial Officer

It's -- overall the businesses in Asia are performing fairly consistent with the segment earnings overall. It depends on really what platforms over there are growing. Where we have seen growth is on some of the regional car makers, Chris and obviously its going to be less content on an entry level vehicle than it is on a three-row large North American SUV.

Chris Ceraso - Credit Suisse

Okay. The three-year backlog, can you just give us a feel how that 600 million breaks down roughly '07 and... or rather '08, '09 and '10?

Matthew J. Simoncini - Chief Financial Officer

We will be given a complete update in January and the cadence on it, $300 million though, Chris, is in 2008 which is an increase of about $200 million from the last time we gave a formal update in January and the rest of it's spread over '09 and '10. Some of it is impacted by timing of how these programs will opt to as sometimes there are little bit grey, we're fairly comfortable with the '08 guidance now.

Chris Ceraso - Credit Suisse

I think on the last call you said that '09 was maybe about $75 million of new business, was that a net number and do you have a comparable update?

Matthew J. Simoncini - Chief Financial Officer

Right now in 2009 I think what were getting it on the call before and was directional there was a lot of confusion on it. It was probably talking more about business wins at that point and what have you really but rather wait until January to get the complete changes on how to stop this kind of rollout. But all in all at $600 million with $300 million coming in next year and the rest of it is spread over the next two years.

Chris Ceraso - Credit Suisse

Okay. And then lastly there's been clearly a significant lag up in crude prices in the last couple of months, have you factored in the potential for higher resin costs in your '08 outlook?

Matthew J. Simoncini - Chief Financial Officer

Now since we've had a divestiture of the interiors business, the impact on resin on our businesses really hasn't impacted us as dramatically as did when we actually had interiors which was a huge user of resin. Right now, we don't find raw resin in any real quantities whatsoever and it's really more of an impact on our supply base. We are keeping an eye on it and managing with them.

Chris Ceraso - Credit Suisse

What about as it relates to the chemicals and the foam for the seats?

Matthew J. Simoncini - Chief Financial Officer

We are working with our form providers to help offset the increase on it. We have factored some in it and started thinking for '08. We are also looking at engineering solutions to try to mitigate the impact but all in all we have factored a level of that in.

Chris Ceraso - Credit Suisse

Okay. Thank you very much.

Operator

Your next question comes from Brian Johnson with Lehman Brothers.

Brian Johnson - Lehman Brothers

Hi, have you adjusted your backlog, that $300 million you set down from $400 some million a few months ago, and if so what were the drivers of that?

Matthew J. Simoncini - Chief Financial Officer

No, I think there was -- again there was some confusion on what we were talking about last call. The number $450 million was really talking more about what we have seen its business wins and the cadence was a little bit off and that we have actually pulled a little bit into this year on the parallel program roll-offs. The reality is backlog has increased, not decreased. I just think that was a number that got away from us a little bit and hence the conversions. So on all it has not come down at all.

Brian Johnson - Lehman Brothers

Okay and second, if we were to think about a currency neutral CPB in Europe, can you give us some guidance in terms of how much your Seating in Europe is currency driven versus production driven versus content driven?

Matthew J. Simoncini - Chief Financial Officer

Well, this year we're seeing a currency impact in the quarter. If you take the quarter... let me put it this way. Our European sales for the year are above $7 million. So, if you run the math you take it and you extend it out, and that's probably three quarters if you want to see three quarters seating to two quarters or one quarter electrical and a rough breakdown. So if you run the math and the sensitivities on a year, you should get pretty close.

Brian Johnson - Lehman Brothers

Okay, thanks.

Operator

Your next question comes from Rob Hinchliffe with UBS.

Robert Hinchliffe - UBS (US)

Thanks, good morning.

Robert E. Rossiter - Chairman and Chief Executive Officer

Okay.

Robert Hinchliffe - UBS (US)

Thinking of the updated guidance for the year and how that... what that implies for the fourth quarter, looks like Q4 maybe down a little bit here, surprised to see that given just seasonality, any comments there?

Robert E. Rossiter - Chairman and Chief Executive Officer

Yes, it's coming in kind of how we discussed back in the second quarter where we saw the second half being much softer than last year where we actually saw stronger second half. Some of the key things that are driving it, is right now on our key platforms we see about 10%... in North America 10% reduction on the volumes with the customers scheduling some plant shutdowns. In addition we have a roll-off business in the electrical business segment as well as we are starting to ramp up the program expenditures, the new business backlog wins and we are investing in some infrastructure in Asia. That will supply the key drivers on the fourth quarter.

Robert Hinchliffe - UBS (US)

Okay.

Robert E. Rossiter - Chairman and Chief Executive Officer

Well, we are taking a conservative view on production in terms of we have baked in additional downtime that we don't know about, yes.

Robert Hinchliffe - UBS (US)

Okay. The $600 million backlog, I know you are going to wait till the first quarter for more detail but does that incorporate some of the changes that Chrysler that we are seeing... I know, you are talking about moving the Durango out of Delaware back to Michigan and just talk about Ford looking at their product portfolio as well.

Robert E. Rossiter - Chairman and Chief Executive Officer

It incorporates everything to date that's been publicly announced. There's a lot of speculation on their car lines but everything to date has been announced and we've incorporated it into them.

Robert Hinchliffe - UBS (US)

Okay. And then I guess a last one on the UAW contract. Given the two tier with the non-core wages at the big three now, just how you define a competitive wage for your own business change at all or is the current wage still competitive in light of what's going on here?

Matthew J. Simoncini - Chief Financial Officer

I mean I think in some case it is but clearly we have to look at what kind of contracts are being awarded to other seat makers, other competitors and then also what the impact is on this two-tier wage with not only the automakers but also a couple of significant tier one suppliers: Visteon and Delphi. So, I mean our view is that we have to maintain our competitiveness and UAW has always worked with us on that.

Robert Hinchliffe - UBS (US)

Okay, thanks a lot guys.

Operator

Your next question comes from Jonathan Steinmetz with Morgan Stanley.

Jonathan Steinmetz - Morgan Stanley

Thanks. Good morning everyone, can you here me?

Matthew J. Simoncini - Chief Financial Officer

Yes.

Robert E. Rossiter - Chairman and Chief Executive Officer

Yes.

Jonathan Steinmetz - Morgan Stanley

Okay. Really quickly on the guidance for next year, you are talking about flat I guess you are talking about $25 million of restructuring. And you talked about the impact of production cuts. Should we think about those largely offsetting each other or there are some other factors like new business wins or raw mats [ph] or FX that you could care to comment at least the direction we talk about?

Matthew J. Simoncini - Chief Financial Officer

There's a lot of factors that are going into it. Besides the restructuring savings year-over-year, we have other vertical integration benefit as we continue to look for opportunities to invest in our components, into right margin. So, overall cost reductions, FX is also helping us on a year-over-year basis although it doesn't convert to the same amount as downward production numbers.

Robert E. Rossiter - Chairman and Chief Executive Officer

I want to clarify one thing, though, you mentioned $25 million in restructuring, the $25 million restructuring that Mat math referred to was basically higher restructuring expense that we will take in 2007. We have not commented on 2008 but there will be restructuring in 2008 probably comparable to 2007.

Jonathan Steinmetz - Morgan Stanley

Okay. But the $25 million I was referring to was I think the benefit you were talking about from past restructurings rolling into 2008, is that a correct number or is it bigger than that?

Robert E. Rossiter - Chairman and Chief Executive Officer

That's correct.

Jonathan Steinmetz - Morgan Stanley

Okay, all right. Switching to the backlog, when you think out over time here can you have this growing Asian business roll on and keep your CapEx at a 200 million type level or do you need to grow the CapEx meaningfully to accommodate it or will we more see a sort of shift among regions?

Matthew J. Simoncini - Chief Financial Officer

No, I think overall, if you look at our historical capital spend rate, it always in that 1.6% to 1.8% ever since the UTA acquisitions what we brought on the electrical business and that's specifically just seating in electrical because the numbers were so much due by interiors which was a heavy user of capital. We are comfortable that we can maintain at 1.7% to 1.8% type range of capital spending and still do the type of things that we want to do.

Now, it's important to note that when we are investing in Asia, we seem to be able to do that a little bit less expensively than in the more material markets in Western Europe and North America. So, all in all we are comfortable that we can remain in the range of 1.8% of sales on a capital spending and still do the things that we have outlined in the plan.

Jonathan Steinmetz - Morgan Stanley

Okay. And last question related to the backlog. Someone also I think tried to get at this but if you think about it relative to the company wide margins should we think about it flowing in at a similar type of level or do you sort of have to win business by being reasonably aggressive on price and then get the benefits as you have sort of experienced it over a couple of lifecycles?

Robert E. Rossiter - Chairman and Chief Executive Officer

I think it would be comparable with our overall average margins that we have in our businesses. I mean obviously in electrical that would be probably a more normalized margin.

Jonathan Steinmetz - Morgan Stanley

Okay, alright. Thank you very much.

Operator

Your next question comes from Brett Hoselton with KeyBanc Capital Markets.

Brett Hoselton - KeyBanc Capital Markets

Good morning gentlemen and ladies.

Unidentified Company Representative

[Indiscernible].

Brett Hoselton - KeyBanc Capital Markets

I don't know who to say hi to there, you've got a whole army there. But anyway the corporate expense math in the fourth quarter, what are your thoughts?

Matthew J. Simoncini - Chief Financial Officer

Well I think it's a little bit lower in Q3 than a normalized run rate. We see that in the $50 million to $55 million range on quarterly. We should be smack dab right about the middle of that for Q4.

Brett Hoselton - KeyBanc Capital Markets

And then as you may move into the fourth quarter, your expectations for seating margins, are they going to deteriorate materially or is it primarily going to take place in the electrical systems business?

Robert E. Rossiter - Chairman and Chief Executive Officer

We actually see seating coming back, a point back a little bit perhaps based on in North American market and we see about 100 basis point improvement from Q3 in electrical business determined largely by the normalized production in Europe where the margins are little bit higher in the net segment.

Brett Hoselton - KeyBanc Capital Markets

Okay. And then with the backlog if I understood you correctly, the... you were talking about $600 million over the next three years on a consolidated basis.

Matthew J. Simoncini - Chief Financial Officer

Yes.

Brett Hoselton - KeyBanc Capital Markets

Now, does that include the 245 million of new business that you talked about here today?

Matthew J. Simoncini - Chief Financial Officer

Adding the $245 million that we talked about today Brett, includes both consolidated and non-consolidated. So, portion of that would have been included in and -- but it's important to know that on the backlog when we define it, we define it net of any businesses roll-offs for a three-year period only and it's just awarded business that's consolidated. So, when you look at it, I mean $245 million, that would include non-consolidated as well and it maybe outside of the... unfortunately it's going to be outside of the three-year window.

Robert E. Rossiter - Chairman and Chief Executive Officer

I think the point we are trying to stress on the backlog is that when we started the year, we had some business rolling off in this time frame and we actually had, our backlog was unfavorable by $300 million at the beginning of the year, and we basically have won $900 million dollars worth of business that we will have revenue on over the three-year period. So, it shows that we have been able to pull some business into this period, and we think we can still do more.

Brett Hoselton - KeyBanc Capital Markets

And I assume I have got a tax expert there in the room and so I am wondering the $135 million of taxes this year, if you look into '08 and '09 what are your thoughts in terms of your tax expense and then cash tax as we move through '08 and '09?

Robert E. Rossiter - Chairman and Chief Executive Officer

I think what we see on a preliminary basis for 2008 is we should be in the low 30% range on an effective tax rate basis and we probably will be in the $100 million to $120 million cash tax range next year.

Brett Hoselton - KeyBanc Capital Markets

Okay. And then finally as far as the IAC, can you talk a little bit about what are your expectations in terms of profitability of IAC in Europe, IAC in North America as you look at 2008 and 2009, is there an expectation for material improvement in profitability in those operations?

Robert E. Rossiter - Chairman and Chief Executive Officer

Well they still have a lot of consolidation in restructuring to go through 2008. They are on track but we wouldn't expect to see a meaningful improvement in profitability until beyond that... 2009 or beyond.

Brett Hoselton - KeyBanc Capital Markets

Okay, great. Thank you so much.

Robert E. Rossiter - Chairman and Chief Executive Officer

Welcome Brett.

Operator

Your next question comes from Rod Lache with Deutsche Bank.

Rod Lache - Deutsche Bank - North America

Good morning everyone.

Robert E. Rossiter - Chairman and Chief Executive Officer

Good morning.

Rod Lache - Deutsche Bank - North America

Your core earnings in the quarter up $70 million on this $259 million in sales. I'm just trying to get at the drivers of that 27% incremental margin. Did you give us what the raw material did overall in the quarter on year-year basis?

Robert E. Rossiter - Chairman and Chief Executive Officer

We did have some good luck... good news on the supplier-material cost Rod, we did not give that number specifically. We also saw a timing issue but timing difference on our engineering spending, where some of it is going to be pushed into Q4 and our headquarter's cost was a little bit lower than the normalized run rate. The other thing about the production, is the environment through Q3 was very stable, there was no shifts in... late minute ships in production other than the GM strike which actually in duration was a little bit shorter than we were anticipating. So all in all we had a pretty stable environment from a production standpoint not only in North America, we had a pretty good mix in Europe and in Asia. The last thing is we continue to see benefits from our pull ahead benefits on restructuring savings and our vertical integration strategy.

Rod Lache - Deutsche Bank - North America

Okay. If you... the chart that you'd given on the cost savings from the restructuring showed like $55 million incremental benefit for the year to reach a sort of level load that over the cost of the year or was that more back-half weighted?

Matthew J. Simoncini - Chief Financial Officer

No, it's coming to its conclusion. There's a slight benefit in Q4 but for the most parts it's level loaded, it's pretty close [ph].

Rod Lache - Deutsche Bank - North America

Okay. And I imagine that you were able to offset pricing. It looks like price deflation with VAV or other initiatives internally?

Matthew J. Simoncini - Chief Financial Officer

In Seating that would be true. Electrical we didn't quite cover the pricing environment.

Rod Lache - Deutsche Bank - North America

Okay. And the $15 billion sales guidance for the year, that excludes the interiors business?

Matthew J. Simoncini - Chief Financial Officer

Yes it does.

Rod Lache - Deutsche Bank - North America

Okay. So then you are implying $3.5 billion in sales roughly for the fourth quarter, kind of similar to the third quarter. I am just not understanding, I guess, the four year EBIT guidance of $680 million implies a pretty sharp drop-off, since you are close to $570 million through the nine months?

Matthew J. Simoncini - Chief Financial Officer

Again a lot of it, Rod, comes down to what we see in North America between the customer downside and the volumes on our key platforms along with the risk for further production cuts as why these guys are starting to align their production needs with their sales numbers. We've also had infrastructure improvements that we are making in Asia to support our growth there and also support our move to low cost structuring as well as program expenditures.

Rod Lache - Deutsche Bank - North America

So it seems like an unusually high cost quarter?

James H. Vandenberghe - Vice Chairman and Chief Financial Officer

No, I think, we have some one-timers in there related to new business development that Matt had mentioned in his earlier comments.

Rod Lache - Deutsche Bank - North America

Okay. And then just lastly can you just give us a little bit more color on the plan for turning around the electronics business?

James H. Vandenberghe - Vice Chairman and Chief Financial Officer

Yes, I think there's few things on this. One of the issues that we are facing this year, Rod, is that they have got kind of a trough in sales that they rolled off some significant North American programs and were chewing up the ramp-up starting in Q1 on the new business backlog.

In the meanwhile you have got somewhat inefficient operations in North America. In Europe what we see is of some of the programs that we restructured and moved into lower cost locations experienced volume reductions simultaneous with the move. And it's taken us a little bit time to work out the inefficiencies and realign our footprint in combination with some of our outside service providers there in our temporary cost structure.

Finally, we have established a center in China which allows to take advantage of some lower cost program expenses, and right now we are incurring a little level of redundancy in order to improve the footprint going forward.

For next year we see probably in the range of about 100 basis point improvement getting it closer to the '06 or in the range with the '06 margins in that segment.

Rod Lache - Deutsche Bank - North America

Great. Okay, thank you.

Operator

Your next question comes from Rich Kwas with Wachovia Capital Markets.

David Lim - Wachovia Capital Markets

Hi, this is David Lim for Rich. Most of my questions have been answered but I just wanted one clarification. On the prepared remarks you mentioned something about being awarded significant business in the 2011 to 2012 time period. If so, can you provide a little more color on that?

Matthew J. Simoncini - Chief Financial Officer

Yes. I really don't want to get into providing full detail on the backlog right now, but if we took it out through the 5-year period as we see it right now we would probably be in about $1 billion range for backlog.

David Lim - Wachovia Capital Markets

Got you. That's it. Thank you very much.

Operator

And your final question comes from Robert Barry with Goldman Sachs.

Robert Barry - Goldman Sachs

Hi guys, good morning.

Robert E. Rossiter - Chairman and Chief Executive Officer

Hi.

Robert Barry - Goldman Sachs

And just a couple of quick ones. You mentioned, of the $245 million of wins in Asia, how much of that was in the electronics businesses?

Matthew J. Simoncini - Chief Financial Officer

Overall for the year, if you look at the business that we mentioned in Asia and Asian-related awards, it would be slightly over $500 million. And of that is probably in the ballpark of two third seats of incurred Electrical.

Robert Barry - Goldman Sachs

Great. So that's $500 million of the $900 million you mentioned earlier has been electronics?

Matthew J. Simoncini - Chief Financial Officer

Look. I want to be really clear on this point. Every quarter we have been updating our Asian business awards and that includes consolidated and non-consolidated. And it's Asia related which could be production in Asia and Asian manufacturers in North America. And when you tally it all up it's about $500 million; if you tally the three-quarters... three-quarters... the first three quarters of this year. And of that amount about I would say two-thirds of it is Seating, and about a third of it is Electrical.

Robert Barry - Goldman Sachs

Okay. And then just a follow up on the question earlier about CapEx from the depreciation perspective. Clearly cash flow's getting a real boost here from this sub-one times ratio of CapEx to D&A. Just as we look out how long do you think that will continue?

Matthew J. Simoncini - Chief Financial Officer

Well, I think it will continue in a near term. I think the GAAP will become less. Part of the benefit of this year's capital spending is drifting and just reducing cost reduction. A part of it is timing of the capital recognition, some of that will push into next year. We are still comfortable of that ballpark, the 1.8% give or take a touch here and there. And so if you compare that to our run rate on depreciation and amortization of $300 million, you should get pretty close.

Robert Barry - Goldman Sachs

So as we look over say the next 3 to 5 years just we would see it... the ratio drip to CapEx to D&A back towards one and then maybe over one slightly given the growth?

Matthew J. Simoncini - Chief Financial Officer

No, it's hard to give guidance beyond a three-year window for that. But right now it's kind of hard to see going above 1%, that's for sure.

Robert Barry - Goldman Sachs

But directionally just getting back up towards 1%.

Matthew J. Simoncini - Chief Financial Officer

Right.

Robert Barry - Goldman Sachs

Okay, thanks a lot.

Robert E. Rossiter - Chairman and Chief Executive Officer

If that is the last question, so I just want to stop the... and finish here and thank the entire Lear team for the great quarter. Remember, we have got a year to finish out here. We have got restructuring to complete. We have got 2008 to look forward to. Things aren't going to get any easier, but I think really we are in the right direction. I am really pleased with Matt's performance on his first role as CFO of the company.

Matthew J. Simoncini - Chief Financial Officer

Thanks Bob.

Robert E. Rossiter - Chairman and Chief Executive Officer

And Jim this wasn't your last one. You will be having much more of it. A great job. I guess [indiscernible]. I want to thank everybody and around this company, everywhere you go things... really good are happening. In effect those we have is recently [indiscernible]. New businesses coming out of Asia, the team is out here; what's happening in South America, and good things are happening in Europe. I just want to thank everybody for a good job, and I want to thank everybody also for the attitude; the attitude is fantastic. Let's just keep it that way, and keep the company moving forward. Thank you all very much.

Operator

Thank you for participating in today's conference call. You may now disconnect.

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