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Lear Corp. (NYSE:LEA)

Q1 2008 Earnings Call

April 29, 2008; 9:00 am EDT

Executives

James Vandenberghe - Vice Chairman

Matt. Simoncini - Chief Financial Officer

Robert E. Rossiter - Chairman, Chief Executive Officer and President

Mel Stephens - Vice President, Investor Relations

Dan Ninivaggi - Executive Vice President

Terry Larkin - General Counsel

Shari Burgess - Treasurer

Wendy Foss - Controller

Bill McLaughlin - Tax

John Trifall - Vice President of Business Planning and Analysis

Analysts

John Murphy - Merrill Lynch

Brian Johnson - Lehman Brothers

Christopher Ceraso – Credit Suisse

Brett Hoselton - Keybanc Capital

Rich Kwas – Wachovia

Himanshu Patel – JP Morgan

Itay Michaeli –Citigroup

Rod Lache - Deutsche Bank

Jonathan Steinmetz – Morgan Stanley

Operator

Good morning. My name is Dennis and I will be your conference facilitator today. At this time, I would like to welcome everyone to Lear Corporation's first quarter 2008 earnings conference call. All lines have been placed on mute to prevent any background noise. 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, Investor Relations

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

Today our presenters are Bob Rossiter, Chairman, CEO and President; Jim Vandenberghe, Vice Chairman; and Matt Simoncini, Chief Financial Officer and also participating on the call are Dan Ninivaggi, Executive Vice President of Strategic and Corporate Planning; Terry Larkin, our General Counsel; Shari Burgess, Treasurer; Wendy Foss, Controller; Bill McLaughlin, Vice President of Tax; and John Trifall, Vice President of Business Planning and Analysis.

Before we begin, I would like to remind you that during the call, we will be making forward-looking statements that are subject to risks and uncertainties and some of the factors that could impact our future results are described in the last slide of our slide deck and also in our SEC filings. In addition we will be referring the certain non-GAAP financial measures. Additional information regarding these measures can be found on the slides, labeled "Non-GAAP Financial Information," and those are also located at the end of this presentation.

On slide two, we summarize the agenda for today’s review. Jim Vandenberghe will begin, providing the assessment of business conditions, next Matt Simoncini will cover our first quarter financial results and discuss the outlook for 2008 and then finally Bob Rossiter, will provide some closing comments.

Following the formal presentation, we will all be happy to take your questions, and so now, if you will turn to slide number four, I will turn it over to Jim Vandenberghe.

James Vandenberghe

Thanks Mel, and good morning. We start up by looking at the Global Automotive Industry environment. This year the Global industry production is forecasted to be up 3% from a year ago. The increase in production is driven by continued growth in emerging markets. In North America, business conditions remained challenging, and we are seeing lower production. 2008 is now projected at the lowest level since 1993. Additionally, shifts in consumer preferences have favored crossovers of passenger cars versus light trucks and SUV’s.

In the compound math, energy and commodity prices are increasing, there is a strike at a major supplier and the potential for increase the stress throughout our supply chain is increasing. In response, the industry is undergoing major restructuring particularly in North America, and there is more consolidation and increased globalization.

At Lear we are continuing to implement aggressive actions to improve our long-term competitiveness and recently, we have put in place a new global organization to ensure that we are best leveraging our worldwide resources in size. On the next few slides, I will talk about each of these factors in more detail.

Slide five, provides additional detail on the 2008 outlook for global automotive production. On the positive side overall industry projection is projected at $671 million units up 3% from year ago and the increase reflects continued strong growth in major emerging markets ranging from a 12% increase in Brazil to a 31% increase in India. The Europe production adjusted over 20 million units is equal to a year ago and North America industry projects - industry production is projected to be down 6% in 2008 to a level of 14.1 million vehicles.

Slide six shows impact that energy prices and concerns about the environment are having on consumer preferences moving away from larger light trucks and SUVs for its smaller fuel efficient vehicles. Just a few years ago full sized pick ups and large SUVs comprised 25% of the production in North America with in other 25% in minivans and other light trucks. In 2008, production of the larger trucks is forecast to a comp for 39% versus 50% of the mix back in 2004. Crossovers and passenger are picking up the slack.

But we are seeing restructuring initiatives by domestic three to bring overall capacity in North America more inline with the present compositional demand. As a result, major manufactures are operating more efficiently than a few years ago and through our own restructuring initiatives we are as well.

Slide seven looks at energy and commodity prices, which have been moving higher since 2004. Steel was Lear’s largest commodity exposure. Steel price content that Lear’s is directly responsible for, includes relatively small raw steel buy, and the steel included in fabricated components, which is considerably more than of raw buy.

So remainder of steel we utilize as directed by the customer. We are able to mitigate steel price increases somewhat in the fixed price contracts and other purchasing initiatives. Form related chemicals represent Lear's second largest exposurebut is far less than our steel exposure. These contracts are primarily priced at market. Direct price exposure in this area is minimized somewhat by vertical integration, purchasing initiatives, value engineering and other supply chain management efficiency actions.

Copper is not a major risk this year, approximately 75% of our copper use is past through to the customer. Of the remainder, primarily content in terminals connectors and another electronics about two-thirds is hedged through 2008.

Slide eight; we highlight our supply base initiatives. We continue to be proactive in monitoring our suppliers and identifying any signs of distress early on. This is allowed us to minimized cash outlays. Lear’s cash outlays to support distress suppliers peaked in 2005. Since then we have significantly decreased our exposure to resins and supplier issues with the divestiture of the interior business.

Other actions to reduce risk in the supply chain have included supplier consolidation, ongoing value engineering, selective in-sourcing and managing contractual terms. Additionally, start up activities substantial less – substantially less than it was in 2005 for Lear and our suppliers meaning as far launch risk. That said, North American supplier distress has increased due to credit market conditions, commodity cost and lower production. But based on current conditions we believe we can contain the cost within our full year outlook.

Moving to slide nine, in addition to our pro-active efforts with our suppliers and our continuing efforts to improve our cost structure, we recently implemented a new global operating structure for our two core products seeding and electrical electronics. We believ this organization better aligns Lear with the global strategies of our major customers. It allows us to take full advantage of our global scale leveraging our worldwide engineering and product development resources.

While we feel good about our progress to date in these areas, we believe that there is significant opportunity to improve our engineering resource and footprint. So to wrap up my comments, challenging business conditions in North America are driving the industry to restructure their operations and pursue global operating strategies. We’ve been aggressive in taking actions to reduce our cost structure and improve our long-term competitiveness.

The initiatives we have taken such as the divestiture of our interior business pursuing sales growth outside to North America and the ongoing evolution of our global footprint have allowed us to improve financial performance despite some difficult conditions in North America. Now I would like to turn over to Matt Simoncini for his financial review of the quarter.

Matthew Simoncini

Great. Thanks, Jim. We continued our positive operating momentum in the first quarter despite the many challenges in North America. Net sales in our core business were up 2% and core operating earnings were up 10%. These results were better than we had anticipated reflecting increased benefits from our restructuring and strong operating performance as well as the timing of favorable commercial settlements. These favorable factors allowed us overcome a lower production driven by the American Axle strike.

For the full year, our outlook for revenue is increased of $15 billion to $15.5 billion reflecting favorable foreign exchange primarily the Euro offsetting impart by lower projected industry production in North America. Our full year outlook for earnings however, remains unchanged from our prior guidance as favorable operating performance and foreign exchange offset by a lower estimate for the full year industry in North America and increasing commodity cost. On the next few slides, I will cover our first quarter results and our full year outlook in more detail.

Slide 12 of the presentation breaks down the industry environment in the first quarter. In North America, industry production was 3.5 million units, down 8% from year ago. The Domestic Three were down 13% and our top 15 platforms were down 16%. The lower production in North America includes the impact of the strike at American Axle. In Europe, industry production was 5.2 million units, flat with a year ago. Production for our top five customers in Europe was down 2%.

Prices for key commodities increased sharply during the first quarter. These increases do not had a significant impact on our first quarter financial results, because the contracts in place, price adjustment mechanisms and the timing of price adjustments. At present levels, however, commodity cost for the full-year represent an increase compared with the year ago. As Jim mentioned, we believe we can contain the risk within our earnings guidance.

Slide 13 provides a financial scorecard for the first quarter in more detail. Starting with the top line, we post net sales of $3.9 billion down $549 million from last year. The decline reflects the divestiture of the interior business, net sales in our core business were up 75 million from year ago reflecting favorable foreign exchange and the addition of new business outside of North America, offset in part by lower production in North America.

Our reported pre-tax income was a $110 million, and net income was $78 million or $ 1 per share. These levels represent solid improvement from reported results a year ago. On the next slide, I will show our results excluding restructuring cost and other special items to highlight our underlying operating performance. SG&A as a percentage of net sales was 3.5% compared with 2.9% a year ago. SG&A a year ago benefited from a onetime curtailment gain on ourU.S. pension plan.

Excluding this gain and other one-time factors, SG&A cost as a percentage of revenue was essentially flat with a year ago. Interest expense was $47 million down 4 million from last year primarily due to lower net debt balances, as well as lower borrowing costs.

Depreciation and amortization at 75 million was flat with a year ago. Other expense was 6 million compared with an expense of $25 million a year ago. Last year, other expense included a loss related to a joint venture transaction. This year other expense benefited from favorable impact hedges, improved performance in our non-consolidated joint ventures and lower factoring costs.

Slide 14 summarizes the impact of restructuring actions on a reported first quarter results. Reported income before interest other expense and income taxes was $162.9 million. Excluding restructuring cost, core operating earnings were $186.5 million compared with the $170 million a year ago.

The improvement in operating earnings primarily reflects favorable cost performance including increased savings from restructuring actions. As I mentioned earlier, our results in the first quarter were also favorably impacted by the timing of commercial settlements. The net impact to commercial settlements in our full year outlook is relatively neutral.

Slide 15, summarizes the impact of major performance items in our first quarter sales and margin compared with a year ago. As you can see, the major adverse factors for the change in sales were the divestiture of interiors business and lower industry production in North America including the adverse impact in American Axle strike, partial offsets with a favorable impact to foreign exchange and new business outside in North America. The margin improvement was a result of more favorable operating performances and the divestiture of the interiors business.

Turning to our performance by product line, our seeding business continue to perform well in the first quarter, excuse me, with a 6.5% adjusted margin compared with 6.4% a year ago. The improvement in our seeding margins reflects favorable cost performance, increased savings from restructuring in the timing of commercial settlements largely offset by lower industry production in North America including the adverse impact of the American Axle strike.

For the full year, we are forecasting our adjusted seeding margins will be better than 6% this reflects continued favorable cost amd operating performance and further benefits from restructuring actions offset by lower production in North America and the margin impact of foreign exchange.

In our electrical and electronic businesses, first quarter adjusted margins improved from 4.8% to 5.5%. This reflects favorable operating performance including benefits from restructuring and a net impact of legal and commercial claims offset in part by lower production in North America.

For the full year we expect our adjusted electrical and electronic margins to be in the mid 4% range. This will represent an improvement of about 100 basis points from 2007, and it’s consistent with our prior year guidance.

This reflects continued favorable cost performance, restructuring savings, and a benefit from new business offset impart by lower industry production in North America and further investment in growth initiatives.

Free cash flow was a negative $31 million in the quarter this reflects primarily higher working capital for the full year we are forecasting positive free cash flow of about $250 million.

Now turning to our key assumptions for this year’s outlook. In North America, we are forecasting industry production to decline to about 14.1 million units, which is down 6% from a year ago. Production for the Domestic Three is expected to be down about 10% with our top 15 platforms in North America forecast to be down about 16%.

In Europe, we see industry production of about 20.2 million units, which is roughly flat with a year ago. Production for our top five customers in Europe is expected to down 1%. As for the Euro, we are forecasting a rate of $1.52 per Euro for the year. This is a 1% stronger than last year. Commodity costs are up from a year ago, while there is a risk, at current levels we believe the exposures contained with in our full year guidance.

Slide 20 summarizes our 2008 financial outlook. We are forecasting net sales for 2008 of approximately $15.5 billion. This is up about 500 million from the prior outlook reflecting favorable foreign exchange.

Our core operating earnings are estimated to be in the range of $660 million to $700 million. This is unchanged from the prior forecast. Interest expense is estimated to be between $185 million and $195 million. Our forecast for pre-tax income adjusted to exclude restructuring all the special items is in a range of $430 million to $470 million.

Our estimate for tax expense is about a $135 million and it subject to the actual mix of financial results by country. Restructuring cost are – estimated to be about a $100 million. Capital spending is expected to be in a range of $255 to $275 million. Depreciation and amortization are estimated about $300 million. Lastly, free cash flow was expected to be about $250 million including about $150 million of cash restructuring cost. Now I will turn it over to Bob for some supporting comments.

Robert Rossiter

Thanks Matt. We now move on to slide 22 obviously we were pleased with the first quarter results as we maintain profit for the momentum in on operations. Despite get call the industry conditions and the suppliers strike has been mentioned.

Our results reflect the benefits of the – our aggressive restructuring actions and a lot of hard work of Lear team. Before we improved our comparativeness announce and implemented a new global structure, two strong global businesses Seeding and Electrical Electronics. We expect to realize significant efficiencies as we begin to operate as a truly global company.

I believe this new structure will benefit our growth initiative support our cost objectives could be the low cost producer and allow way to take full damage of our expanding global engineering capabilities in low-cost countries. We are also making significant commitment to growth in Asia as well by moving several keys executives to Shanghai China to develop our infrastructure and prepare for that growth. Last quarter we provided an overview of our Electrical and Electronics capabilities. We also outlined our plans for improving this business.

With completed our strategic review, we are now engaged in implementing our improvement plan. Lastly, we had net loss focus on our commitment to our customers to be the best in quality, service, and innovation.

Moving to slide 23, I believe the outlook for Electrical and Electronics business is very positive. Our distribution is a critical system in every vehicle and consumers are demanding increased electronic content.

To set the right course for this business we have now completed the strategic review, and we are beginning to implement in improvement plan and priorities for this business are to execute our restructuring plan, including further evolution of our global footprint to low-cost countries, development of the global centers with excellence and sales growth in our core electrical distribution and the radio electronic products. We are also encouraged by the opportunities in the area of high bill electrical systems and high voltage components.

Slide 24, please. We continually evolve our low-cost footprint. We opened a new seat foam plat and Wuhu, China and a new cut and seal operation in Hang Hai, Hai Phong harbor Vietnam. In addition, we continue to expand our electrical, electronics capabilities and our growing campus in Shanghai, China. Several other low cost facilities were under the way in Asia, Eastern Europe, Molako and Mexico.

Slide 25, please. We continue to focus on delivering a best possible quality service and innovation in the industry. Shown here are some of the major customers, awards - and the industry awards where you see surprise here. In addition to awards from the domestic three we’re also recognized by several European and Asian Automotives. In addition we’ve received some excellent recognition in the press and throughout the industry for our – and for innovative products.

To summarize on slide 26, we are continuing to mix our progress improving our long-term competitiveness of our business. Major actions include the restructuring of our global operations, continued sales diversification, further revolution of our low cost footprint and actions to strengthen all our Electrical and Electronic business. Despite challenging industry conditions particularly in North America we delivered a solid operating and financial result in the first quarter and a strong start to this year is allowing us to maintain our full year earnings outlook.

Especially despite lower forecast for industry production in North America and increasing commodity for us. Going forward we planned to continue to restructure our global operations, invest in our core businesses and further position the company for long term competitiveness. Before we take your questions, I again want to thank the team, the entire team for their efforts. We simply could not deliver the results we did without the dedication, hard work and focus of every our employee and now we will be happy to answer your questions.

Question and Answer Session

Operator

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

John Murphy - Merrill Lynch

Good morning guys. I Just—

Robert Rossiter

Good morning.

John Murphy - Merrill Lynch

First I just wanted to dig into what was going on at the Axle Strike here. I mean we lost 90,000 units of our — a bit impact in the quarter, you guys are just getting really good at this stuff because this is becoming a sort of the normal course of business in auto industry sort of these production shorts or whether you have a lot other offsets in the quarter that tend to make up for this?

Robert Rossiter

Well, to talk about the strike first and then the offsets. The strike impacted the industry John by 90,000 units to the best of our estimates on loss production based on the shutdowns. The impact of Lear in Q1 specific to those shutdowns was about 80,000 units since not all our up — not all the platforms affected will be the platforms.

However, due to — prior to the strike to the first half of the quarter we are actually running a little bit of ahead of our production expectations. Now if you look at it, from a revenue standpoint. The CPB on average for the units affected were in the $1,100 range, since the majority of them were full sized pick up and a typical downward conversion in a short-term production reduction for Lear on average is about 20%.

Some of the platforms are higher, some of the platforms are slightly lower, but on average that’s a number that we kind of usually see. In this particular the instance the downward conversion was higher due to the inefficiencies associated with the strike and the degree of vertical integration.

Now your question related to offsets and what have you, we did benefit in the quarter to achieve about $25 million to the timing of commercial settlements and vivo resolutions. Seeding benefited in the range of about 20 which was about five, but at the core of it we had underlying strength in our operations, we still were seeing increased benefits from restructuring year-over-year, good strong performance in the operations in the cost reductions, manufacturing efficiencies and strength in our international operations, so in a nut shell it’s kind of how we saw the quarter.

John Murphy - Merrill Lynch

Okay and secondly on the content preview goals we look SUV’s versus crossover utility vehicles as the market, just in that directions. I just wondered what you could talk about the general content potential on the CUVs versus the SUV’s that you have?

Robert Rossiter

It’s obviously depends on the type of crossover vehicle. On the larger V roll SUV’s I would say the content is pretty comparable and in some cases it might be even slightly higher. In the base level two roll crossover vehicles is priced more in line with a midsize sport utility, so it’s the full range. It really depends on the level of the crossover vehicle, base level (inaudible) it’s going to be probably closer higher than a car, but closer inline with a pickup truck and a large luxury crossover with three rows of seats, it’s going to be comparable to a full size SUV.

John Murphy - Merrill Lynch

Got it. Any update on the backlog?

Robert Rossiter

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

John Murphy - Merrill Lynch

Got it and then just lastly on electronics are there any transactions or small bonds that would be involved in the development or sort of the reorganization of that segment?

Robert Rossiter

Yeah. I mean we will look at those. There is nothing specific that we are ready to talk about today, but certainly looking for different ways to grow the business and, organically as well as through acquisitions.

John Murphy - Merrill Lynch

Great. Thank you very much.

Robert Rossiter

Thank you.

Operator

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

Brian Johnson - Lehman Brothers

Good morning.

Robert Rossiter

Thank you for your question. Brian Johnson

Brian Johnson - Lehman Brothers

Hi, Johnson.

Robert Rossiter

Hi, Brain.

Brian Johnson - Lehman Brothers

Hey, can you give us a sense of the electrical margin improvement, maybe breakout that prior referred settlement, what hit there and then where the margin reversion is there versus the 100 basis points you’ve talked about in the past liking to improve that business?

Robert Rossiter

In the quarter we benefited by about $5 million net on the commercial and legal settlements for that segment; $5 million to $6 million. If you screw that we’re from a margin standpoint pretty consistent year-over-year and on track, on track for a 100 basis point improvements and really where we are seeing performance is we are starting to get traction on our restructuring efforts both in North America and in Europe and that’s probably the biggest driver.

Brian Johnson - Lehman Brothers

And have you begun any other re-foot printing of the plant shift?

Robert Rossiter

Absolutely.

Brian Johnson - Lehman Brothers

Okay.

Robert Rossiter

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

Brian Johnson - Lehman Brothers

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

Robert Rossiter

We are hitting now, we are hitting now, but they are beyond going and expanding as we continue to take the tough actions that we need to do to fix our footprint. I think from the watchful distribution standpoint in North America, we have taken a lot of the actions, we still have some work to do on the electrical and electronics or electronics plants here in North America.

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

Brian Johnson - Lehman Brothers

Okay. And copper are you fully pass through on your commodity cost in this sector?

Robert Rossiter

No, on we are not. The copper situation is roughly 80% of our comp as our electrical distribution and its covered through pass through agreements with our customers typically on a one quarter lag and the remaining 20%, its our responsibility, but we’ve hedged roughly two thirds of it, so we have protection price wise, so the quarter really didn’t have a significant or meaningful impact on the results and just to put a frame or reference around it, we use around 110 million to 120 million pounds of copper a year on products.

Brian Johnson - Lehman Brothers

Okay, great that’s going to be my final question, but thanks for thinking about it.

Robert Rossiter

Thank you, Brian.

Operator

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

Christopher Ceraso – Credit Suisse

Thanks, good morning.

Robert Rossiter

Good morning, Chris.

Christopher Ceraso – Credit Suisse

A few items; first can you give us some idea about the nature and timing of your steel contracts. Are they annual? Are they big contracts fitted in role over at the end of ’08?

Robert Rossiter

Yeah, what we have from the steel standpoint is really a mix back. Our contracts cover a whole litany of different components, different suppliers, different contract arrangements from fixed contracts, collars, triggers, flow through adjustments and what have we now.

If you look at it, we use roughly 300 million pounds of raw steel of that we are directly responsible for. If you look at the portion of the steel that we used that we were responsible for and the components you are probably looking at a $750 million to $800 million buy and that excludes the components that are directed by our customers.

Christopher Ceraso – Credit Suisse

On the stock that you buy the 300 million pounds—

Robert Rossiter

That’s the raw and then — but it like Jim mentioned in his section, the exposure on our commodities is largely in the components.

Christopher Ceraso – Credit Suisse

So, that—

Robert Rossiter

The steel that’s using in the components and roughly half of that exposure is directed and the other half is sourced via various responsibility. Of the stuff hat we are responsible for and the metal of content that we are responsible for, Chris its roughly $750 million to $800 million of our buy annually.

Christopher Ceraso – Credit Suisse

Can you give us an idea, you have been talking about growth outside of the U.S., and I know you reported the revenues, but maybe you could give us an update or some directional feel as to how much of a profit improvement you are seeing from regions outside of North America and Europe?

Robert Rossiter

Well, what we are seeing Asia, our consolidated sales this year is going to be about $1.2 billion out of Asia and we are converting that on a most for our consistent with the seed margins overall and that would represent a 15% to 20% growth in year-over-year annual sales.

Christopher Ceraso – Credit Suisse

How was the profitability in Europe?

Robert Rossiter

Europe’s profitability is a little bit lower than the segment overall from the seed standpoint, just because of that our nature of the business less if any large SUVs and pickup trucks, in the level of vertical integrations, so it is a slightly different business model and so the margins have been less than in the U.S, but still on track.

Christopher Ceraso – Credit Suisse

Last question, can you aggregate even a rough number for how much your total restructuring related cost aids where or maybe what the trend should be going forward? Is it accelerating from here or is that first quarter run rate about what we will see for the rest of the year?

Robert Rossiter

Yeah. When we last spoke at year end we talked about a restructuring savings number for 2007 and the $140 million range and we guided to about 185. For the quarter, we run about $5 million were about harder than our initial estimates. We see the full year savings for ’08 in the $200 million range.

Christopher Ceraso – Credit Suisse

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

Robert Rossiter

Yes.

Christopher Ceraso – Credit Suisse

Okay. All right thank you very much.

Robert Rossiter

You are welcome.

Operator

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

Brett Hoselton - Keybanc Capital

Hi, good morning gentlemen.

Robert Rossiter

Good morning Brett.

Matthew Simoncini

Good morning Brett.

Brett Hoselton - Keybanc Capital

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

Mathew Simoncini

Okay. Starting with the totals steel buy in pounds is roughly GBP 3 billion. Roughly, a little less than half of that is directed by our customers and again the remainder 300 raw and the remainder of that is in the component’s that we source. There is no one particular solution to our price increase, it’s everything from negotiations, consolidation of the supply chain working with our customer full recoveries offsets to price closing targets what have you — value engineering, substitution of materials and just trying to be more efficient overall with the supply chain. So, it is not one particular mechanism that we use, it’s across the board throughout the supply chain starting with our customer and working out through the sub-tiers.

Brett Hoselton - Keybanc Capital

So, the $3 billion that includes the — does that includes a $750 million to $800 million?

Mathew Simoncini

It’s GBP 3 billion

Brett Hoselton - Keybanc Capital

GBP 3 billion. Does that includes $700 million to $800 million in that—.

Mathew Simoncini

That’s correct, it’s a subset.

Brett Hoselton - Keybanc Capital

Okay.

Mathew Simoncini

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

Brett Hoselton - Keybanc Capital

Okay, and then secondly as you think about the electrical margin is so forth expecting a 100 bps increase this year, as you kind of look out into the following years what are your expectations for margin improvement in the following years? And what are some of the key drivers there?

Mathew Simoncini

A couple of key drivers, I mean from a margin expectation standpoint we think over to next 36 months we can start getting them the approach the Lear overall margins in, for instance in seats, 6.5 this type of range. The key drivers is one Dan’s talked about in the past and we mentioned the lack in scale. A lot of the backlog that we announced at year-end roughly, I want to say two-thirds of it was in the segment which is starting to provide the math’s that we need. Secondly, those restructuring actions that we are taking — continue to take, should start — really starting to pay dividends and those are probably the two biggest drivers in the margin improvement, Brett.

Brett Hoselton - Keybanc Capital

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

Mathew Simoncini

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

Brett Hoselton - Keybanc Capital

Okay, thank you very much gentlemen.

Operator

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

Rich Kwas – Wachovia

Hi, good morning guys.

Robert Rossiter

Hi, Rich.

Rich Kwas – Wachovia

Matt on the commodity cost, I am sorry, I missed, if I missed this, did you quantify the impact for the year what you expected to be for the year?

Matthew Simoncini

No, we did not quantify other than to say that our exposure to the metals that we direct or we are responsible for, the total metal cost and our material buys in the range of $750 million to $800 million and we didn’t expect copper to have a meaningful impact on the results at this point. One way or the other larger due to the pass through agreements and the hedge contracts that we have in place where our assumption for the commodities and the guidance is basically the first quarter exit rate for steel.

Rich Kwas – Wachovia

Thanks and then I assume that the guidance also includes the latest news, from GM regarding the truck plans and the reduction in checks there later this year?

Robert Rossiter

Right. What GM actually announced Rich was a reduction in production capacity. They didn’t really spike out a production figure provides the absolute production number. Now what we have assumed in these platforms that are affected by the announcement was a 24% reduction on a year-over-year basis. Last year that platform did about a large trucks in SUV, it did about 1.5 million units actually slightly over 1.5 million units. This year we have a production on those platforms packed at $1 million to $150 million. So if it changes from that obviously that would have an impact on our assessment.

Rich Kwas – Wachovia

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

Robert Rossiter

Right, we had it at I think when we started the original assessment at about $1,300 million.

Rich Kwas – Wachovia

Okay. And then do you have — what’s your assumption for the supplier strike in that number. Is that’s—

Robert Rossiter

Well, right now if you just look at the supplier strike to the end of last week, the industry or the recent production announcements attributed to the strike, it was roughly 210,000 units. Our impact on the platforms that we’re on was slightly less and maybe in the 200 range. Again it’s hard to call the strike per se or production overall. Our production overall the 41 number, in this particular platforms, this is a platforms that had been affected by the strike at roughly 24% down.

Rich Kwas – Wachovia

But is it fair to say there is some risk that if the strike lingers that there would be some downside provisions to that.

Robert Rossiter

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

Rich Kwas – Wachovia

Okay. And then lastly bigger picture question on Europe; when you are bidding or programs are you seeing any change in the way the European OEMs are working with their suppliers in terms of pricings specifically?

Robert Rossiter

No, not any major changes. From time to time there is a — our paid customers went to difficult times and obviously their position changes in the way they source their business but overall I would say there is no real change.

Rich Kwas – Wachovia

Okay. Thanks so much.

Operator

Your next question will come from the line of Himanshu Patel with J.P. Morgan.

Himanshu Patel – J.P. Morgan

Hi, good morning guys.

Robert Rossiter

Hi.

Himanshu Patel – J.P. Morgan

The commercial settlement of $25 million in the quarter, I think that Matt had mention that the full year impact should be relatively neutral. Does that mean that that comes out in the second quarter or does that certain here later on the year?

Robert Rossiter

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

Himanshu Patel – J.P. Morgan

Okay. Second question; the — just to be clear the $1,100 content per vehicle on the T900 programs there was affected is that pretty much all the seeding division?

Robert Rossiter

Yeah pretty much

Himanshu Patel – J.P. Morgan

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

Robert Rossiter

No. Now we are growing in all of our markets so, that is not the case.

Himanshu Patel – J.P. Morgan

Thanks, great. Thank you Johnson.

Operator

Your next question will come from the line of Patrick Archambault with Goldman Sachs. Pat, you queue line is open. Patrick your line is open.

Robert Rossiter

Alright, that was our last question.

Operator

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

Itay Michaeli –Citigroup

Great. Good morning. Just on working capital looks like you may have had a bit of head win there in the quarter; anything unusual there Matt? Maybe a pension contribution or a strike impact there?

Matthew Simoncini

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

Itay Michaeli –Citigroup

Great, and just on the, I guess the 100 million or so security, is that securitization or factoring in the quarter?

Matthew Simoncini

That was factoring.

Itay Michaeli –Citigroup

A factoring, great and just finally can you just quantify what you’re baking in for the impact on tier II and tier III supplier distress? I believe maybe it was $50 million back in 2005. We’re looking for something similar or still it below that?

Robert Rossiter

No, I think you are right. In 2005, the number on cash cost associated combination of capital tooling and pricing was in the $50 million range, but the business has changed fairly significantly since that time and the prior the biggest changes is the divestiture of investitures which saw a disproportion amount of distress and exposure to resin. We think the amount will be higher than the last year when it was basically break-even, but not approaching at this point anyway near to 2005 level.

Itay Michaeli –Citigroup

Terrific. Thank you guys.

Robert Rossiter

Thank you.

Operator

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

Rod Lache - Deutsche Bank

Good morning. Most of my question has been answered I was just wondering; two things, did you — can you quantify the size of that pension curtailment gain in the quarter and was that in you quarter EBIT and also did you say that materials net-net were natural in this quarter?

Matthew Simoncini

Okay, the pension curtailment gain in Q1 of last year was $36 million, and it was excluded from our cooperating earnings last year.

Rod Lache - Deutsche Bank

Okay. And materials?

Matthew Simoncini

I am sorry, what was the question again—

Robert Rossiter

It was flat.

Rod Lache - Deutsche Bank

Raw materials were flat?

Matthew Simoncini

Right.

Rod Lache - Deutsche Bank

Great. Thank you.

Robert Rossiter

Thank you

Operator

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

Jonathan Steinmetz – Morgan Stanley

Hi, guys this Ravi in for Jon and can you here me?

Robert Rossiter

Yes, we can.

Jonathan Steinmetz – Morgan Stanley

Did you have any supplier business costs in this quarter?

Matthew Simoncini

No, it was insignificant.

Jonathan Steinmetz – Morgan Stanley

Okay. And also there has been some talk about steel companies levying surcharges on customers, if that does come through are you confident of being able to pass that through to your customers?

Matthew Simoncini

We would work with the customers and the suppliers to collectively find offsets. It depends on the size of the increase and the contract arrangements that we have both with our suppliers and with our customers on whether or not we’ll be able to pass those through.

Jonathan Steinmetz – Morgan Stanley

Got it and finally, there’s been some talk lately of customer — of OEM’s especially for in-sourcing some seeding engineering and I think Chryslers has tried to move some seeding business oversees. Are you seeing a fundamental change in the way OEM’s approach seeding?

Robert Rossiter

No absolutely not.

Jonathan Steinmetz – Morgan Stanley

Got it. Thanks very much.

Robert Rossiter

Yeah. Okay that was the last question. I just want to thank the Lear team for the job they did. Matt you did a great job today, very good. We have got two new business units in this Company and I like the way it’s been launched. So far it’s been smooth and everybody is doing an outstanding job. Let’s keep that attitude positive and let’s go grow this business. Thank you for today.

Operator

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

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