May 14, 2009
Executives
Robert Rossiter – President & CEO Matthew Simoncini – CFO Mel Stephens – VP IR
Analysts
Himanshu Patel - JPMorgan Patrick Archambault - Goldman Sachs Brian Johnson - Barclays Capital Rod Lache - Deutsche Bank Chris Ceraso - Credit Suisse John Murphy - Banc of America/Merrill Lynch Brett Hoselton – KeyBanc
Operator
I would like to welcome everyone to Lear Corporation’s first quarter 2009 earnings conference call. (Operator instructions) I would now like to turn the call over to Mel Stephens, Vice President of Investor Relations.
Mel Stephens
Good morning everyone. Thanks for joining us for our earnings conference call today.
By now you should have received our press release and our financial review slide package. These materials have been filed with the Securities and Exchange Commission and they are also posted on our website www.lear.com under the Investor Relations link.
Today our presenters are Robert Rossiter, Chairman, CEO and President, and Matthew Simoncini, our Chief Financial Officer. Also participating on the call today are Daniel Ninivaggi, Executive Vice President; Louis Salvatore, President of our Global Seating business; Ray Scott, President Global Electrical and Electronics; Terry Larkin, General Counsel; Shari Burgess, Treasurer; and John Trithal, Vice President Business Planning and Analysis.
There is also a couple of other Lear executives to help with questions. 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.
Some of the factors that could impact our future results are described in the last slide in the slide deck and also included in our SEC filings. In addition, we will be referring to certain non-GAAP financial measures.
Additional information regarding these measures can be found in the slides at the end of the deck labeled non-GAAP financial information. If you’ll turn to slide number two, here we lay out our agenda for today’s review.
Matthew will cover our first quarter financial results and then Robert Rossiter will provide some summary and outlook comments. And following the formal remarks we will be happy to take your questions.
So now if you’ll please turn to slide number four, I’ll turn it over to Matthew Simoncini.
Matthew Simoncini
Thanks Mel, I’ll start with a brief overview of our first quarter. Business conditions and global automotive production levels remained severely depressed in the first quarter.
In this difficult environment our net sales were down 44% to $2.2 billion and our core operating earnings were negative $67 million. Industry production was down in all our major markets and in response to lower production we accelerated our global restructuring and cost reduction efforts.
Given the lower production in North America and our continued efforts to expand our business in Asia, 68% of our revenue in the first quarter was generated outside of North America. We ended the quarter with cash and cash equivalents of $1.2 billion as compared to approximately $1.6 billion at the end of last year.
The decline reflects negative free cash flow in the quarter and the termination of our accounts receivable factoring facility in Europe. Later in the presentation I will provide an update on where we stand in terms of our overall capital restructuring.
Slide five provides a little more detail on the present business environment. Amid very challenging conditions globally the auto industry is struggling to overcome a sales and production environment that is below replacement levels and not at a sustainable rate.
Automotive industry sales remained the most depressed in the United States with present sales running at an annual rate of 9.5 million units. As a result there was significant production downtimes during the first quarter and further plant downtime has been scheduled for the second quarter.
For the second half of the year however, industry forecast calls for sales and production to improve. For the full year CSM’s current industry production outlook is about eight million units in North America, and 15 million units in Europe.
In this depressed environment major automakers have announced further restructuring actions including the elimination of brands, vehicle program delays, and cancellations, reductions in dealers and further capacity actions. This restructuring and consolidation has created a very challenging environment in the near-term which should result in more stable and sustainable business conditions for the industry over the longer-term.
During the quarter Chrysler voluntarily filed for Chapter 11 as part of a US government supported plan of reorganization. General Motors is presently pursuing a revised restructuring plan to secure further financial support from the government.
Slide six provides detail of the first quarter industry production by major markets. Global industry production was down 36% in the first quarter as every major market experienced a decline.
In North America industry production was down 51% with the domestic three down 55%. In Europe industry production was down 40% and in South America industry production declined 18%.
In Asia industry production was down 29% however Lear’s major market in the region, China, was only off 2%. Please turn to page seven, with the sharply lower industry production our financial results were adversely impacted despite our aggressive restructuring and cost reduction efforts.
In the first quarter our net sales of $2.2 billion and our core operating earnings were a negative $67 million. We continued to achieve increased benefits from our restructuring initiative as well as other ongoing cost reductions however, these favorable factors were not enough to offset the steep declines we experienced in production.
Free cash flow in the quarter was a negative $219 million. As I mentioned earlier industry forecasting services that we follow are calling for an improvement in the second half industry production globally.
While we are not providing full year financial guidance at this time, we expect restructuring costs for the year to be in the range of $175 million and free cash flow to improve sequentially. Slide number eight provides our financial scorecard for the first quarter.
Starting with the top line, we posted net sales of $2.2 billion, down $1.7 billion or 44% from last year. The decline reflects sharply lower production globally.
Our reported pre-tax loss was $257 million. Our net loss after taxes was $265 million or $3.42 per share.
These reported results include restructuring costs and other special items. On the next slide I’ll show our results excluding restructuring and special items, to highlight our underlying operating performance.
Reported SG&A costs were down about $21 million or 16% reflecting census reductions and other cost improvement actions. SG&A cost adjusted to exclude special items were down about $32 million or 24%.
Interest expense was $56 million, up $9 million from last year primarily due to higher borrowing levels. Depreciation and amortization at about $66 million was down $9 million from a year ago reflecting a lower trend of capital expenditures.
Other expense was about $13 million compared with $2 million a year ago. The increase reflects primarily increased losses at our IAC joint ventures, offset in part by favorable foreign exchange.
Slide number nine shows the impact of restructuring and special items on our reported first quarter results. Our reported loss before interest, other expense, and income taxes was $188 million.
Excluding restructuring costs of $115 million and other special items of $6 million, our core operating earnings were negative $66.7 million, compared with positive earnings of $186.5 million a year ago. The decline in core operating earnings reflects the lower industry production globally offset in part by favorable cost performance including increased savings from restructuring actions.
Slide 10 summarizes the impact of major items on our first quarter sales and margin compared with a year ago. Again the major adverse factor resulting in lower net sales was lower industry production in North America, Europe, and [inaudible] major markets.
Foreign currency translation also had a negative impact on sales. Margins were adversely impacted by the lower industry production globally.
Favorable operating performance including restructuring saving was a partial offset. Let me comment briefly on what has been happening with our new business.
In January the status of our three-year backlog was $1.1 billion with zero net new business this year reflecting new business wins outside of North America being offset by lost programs in North America. While our overall three-year backlog remains in the $1 billion range, net new business for this year is likely to be negative by about $150 million reflecting program delays and deferrals as well as lower industry production.
Slide 11 shows what is happening within our product segments. The segment earnings shown are on both a reported and an adjusted basis which excludes costs for restructuring as well as other special items.
To help understand our underlying operating performance, we have also provided adjusted margins. In our seating business sales were down 42% and adjusted margins declined from 6.5% to 1.4% compared with a year ago, reflecting primarily lower industry production levels globally.
A partial offset was the benefit of restructuring as well as ongoing cost improvement actions. Longer-term we expect our seating margins to improve as the industry recovers and we realize benefits from our cost improvement growth in the markets.
In our electrical and electronics business sales were down 49% and adjusted margins declined from 5.5% to negative 12.6%. This reflects the impact of lower industry production.
As you know last year we initiated a strategic improvement plan for this business. While we made progress improving the cost structure of this business, the steep downturn in production volume has made increased scale a strategic priority.
Accordingly this business is in transition from a subscale sales level to critical mass as we implement our global sales growth plan and we see the benefit of hybrid technology penetration. In time we see our electrical and electronics margins improving as industry production improves, we [bring online] a significant backlog and new business and further improve our cost structure.
Please turn to page 12, free cash flow was a negative $219 million in the first quarter compared with a year ago, free cash flow was adversely impacted by extended holiday shutdowns, lower industry production levels, and lower earnings. We expect free cash flow to improve sequentially this year with the second quarter being less negative then the first quarter, and the second half being considerably less adverse then the first half.
Our liquidity position at the end of the quarter remained strong with cash and cash equivalents of approximately $1.2 billion. Again this compares with approximately $1.6 billion at the end of last year.
The decline in our cash balance reflects the negative cash flow during the quarter and the termination of our accounts receivable factoring facility in Europe. Let me turn now to our capital structure, yesterday we announced an extension of the waiver of covenant defaults through June 30.
We recognize that we have to address our debt structure although our liquidity remains strong. We continue to explore alternatives with our lenders and others to restructure our debt outside of bankruptcy.
This is our strong preference. Now I’ll turn it over to Robert for some summary comments and then we’ll be happy to take your questions.
Robert Rossiter
Thanks Matthew, to summarize obviously the global business conditions continue to be very challenging with sharply lower sales and production in all our major markets. In response, we are following a lean operating structure and a targeted investment strategy.
We also are accelerating and expanding our cost improvement and global restructuring actions and we have eliminated significant cost. Its been painful, but unfortunately necessary.
At the same time we are maintaining our focus on key operating priorities including continued diversification of our sales, further evolution of our low cost footprint, investment in new technologies, selective vertical integrations in seating, and actions to strengthen and grow our electrical and electronics businesses. And this entire company is focused on cash and minimizing cash burn during these difficult times and we have had exceptional success.
Discussions with our lenders and others regarding our restructuring of our capital structure is continuing. As Matthew mentioned it is our strong preference to accomplish this out of court.
Before we take your questions, I would like to sincerely thank the entire Lear team for their dedication, hard work, and perseverance in the face of unprecedented challenges. We have endured many sacrifices in meeting these difficult business conditions before us.
And I truly appreciate the extraordinary effort being put forth. I am confident we will withstand the downturn and be positioned to take advantage of the recovery in the industry in sales and production.
Now we’ll be happy to turn it over to you for questions.
Operator
(Operator Instructions) Your first question comes from the line of Himanshu Patel - JPMorgan
Himanshu Patel - JPMorgan
The $1.2 billion in cash, how much of that was held at the hold co versus overseas.
Matthew Simoncini
We’re not going to get into that level of specifics, but we have enough cash and its in the locations to fund our international operations. We have pooling that’s international like most corporations and we’ve got it in locations where we need to fund our operations.
Himanshu Patel - JPMorgan
Can you just talk us through how you’re thinking about working capital swings by quarter for the rest of the year, obviously we’ve got some productions shutdowns here, but when production resumes in the third quarter would that be the quarter when we should think about a big outflow.
Matthew Simoncini
Not necessarily, it’s as much as the cadence of the sales within a quarter. Right now we actually see from our standpoint, we see that production overall is kicking up and that will generate cash in the back half of the year.
Working capital is also tied to little bit of the cutoff on the month end, for instance, we’re on an [accounting close]. This quarter for instance was impacted by two things.
First and foremost the cadence of sales within the quarter since most of the shutdowns that we experienced in December extended well into the year, those sales were largely in receivables at quarter end. The other thing that happened was our calendar cutoff for the quarter was April 4 and that’s why the balance sheet is dated in that, in the press release.
That picked up an additional payment run, so to speak, mainly out of Europe. All in all, we don’t see right now a significant cash outflow for working capital in Q3.
Himanshu Patel - JPMorgan
On the restructuring spend, I think at the start of the call you said the total cost would be $175 for the full year, was that the cash cost you’re referring to.
Matthew Simoncini
No, cash costs will be a little bit less then that. A good chunk of our charges in this quarter was a noncash charge related to certain pension obligations with various facilities.
Himanshu Patel - JPMorgan
So how much was the cash restructuring spend in this quarter.
Matthew Simoncini
About $50 million.
Himanshu Patel - JPMorgan
And for the full year you’d say maybe like $150 or so.
Matthew Simoncini
Yes, that’s a good ballpark.
Himanshu Patel - JPMorgan
Last question, from your perspective, CapEx is obviously pretty low right now, what is sort of minimum maintenance CapEx in your view for the business.
Matthew Simoncini
Well we’re doing more then minimum maintenance CapEx. What’s driving the CapEx more then anything is the backlog and the program delays.
Obviously we’re also very cash focused and conscious during this time but the reduction in production has also freed up some component manufacturing capacity which has allowed us to reduce our capital expenditures. Historically we talked about CapEx in the range of 1.7% of revenues, last year we were able to bring that number down.
I would still look at the lower end of the range that we’ve given in the past of 1.5% of revenues and we’re pretty comfortable doing that even in the depressed revenue numbers that we expect to see this year.
Himanshu Patel - JPMorgan
I don’t know if you could even talk around this, but on the debt restructuring I understand you’re in a situation now where you can’t talk too much about it, but does a potential bankruptcy of General Motors influence your decision on whether or not you would like to try to do this out of court or in court or is that sort of an independent issue in your eyes.
Matthew Simoncini
Its an independent issue in our eyes.
Operator
Your next question comes from the line of Patrick Archambault - Goldman Sachs
Patrick Archambault - Goldman Sachs
Two questions, first can you just provide a little bit of an overview, obviously you had some pretty significant restructuring benefits accruing year on year in first quarter, can you give us a little color on sort of how those were split US versus Europe and how we can think about those benefits going forward. So far a lot of companies have reported really good progress in North America but have been struggling somewhat in Europe just as the restructuring actions there take more time and wanted to just get your take on that.
Matthew Simoncini
Starting with the restructuring program overall through last year we had spent about $580 million or invested about $580 million in restructuring actions and in the past we said you need to think about the savings in about a two and a half year payback. We actually cumulative were a little bit better then that.
We had cumulative savings last year of about $250. Now that was split relatively 50/50 between seating and electrical as we moved a lot of our high cost locations into more cost competitive regions of the world.
This year of that 175 its probably split two thirds to a third Europe. From a savings standpoint we expect the savings to come in this year about $30 million a quarter on average and a lot of those savings are actually benefiting from actions that we took in previous years.
So again the savings will probably skew in the same overall split of about two thirds to a third Europe, two-thirds North America, a third Europe.
Patrick Archambault - Goldman Sachs
And 30 is more or less the number just in terms of the incremental structural cost tailwind year over year.
Matthew Simoncini
Right, year over year, we’d expect that to be fairly consistent through the back half of the year. Now the action, the reason the first quarter is so high, we assumed in our plan certain plant closures that were pulled ahead as a result of a customer and now its pulled ahead of a plant closure.
Patrick Archambault - Goldman Sachs
One follow-up is with, with the significant downtime at Chrysler and at GM, there is concern about a working capital crunch out in sort of late August and maybe September, just given the general difference between payables and receivables and wanted to see if that’s something you anticipated and generally how we should model that from a working capital perspective.
Matthew Simoncini
We have anticipated it. We run the models.
The first thing, a couple of backdrops I’d like to provide though. We have $1.2 billion of cash and cash equivalents.
We expect a cash burn in light of even the production cuts that have been announced to improve each quarter sequentially taking into consideration even the timing of the production cuts. The other thing that’s important to note is from a percentage standpoint and a raw dollar standpoint we don’t have a whole lot of business with Chrysler any more.
From a percentage standpoint its pretty low. GM we do obviously have a lot of business with GM.
We’ve factored in the shutdowns. We do think there’ll be a slight use of working capital in the third quarter but again, we expect overall cash flow to improve each quarter.
Patrick Archambault - Goldman Sachs
And on that actually, can you give us any chance you can give us the receivables that you have out to GM an Chrysler and then if you can remind us if you participated in the Treasury’s receivable insurance program.
Matthew Simoncini
Yes, we have participated in both the GM and Chrysler receivable programs. From a receivables standpoint its really hard to give you an exact number because it depends on production levels and the timing of the month in relation to when you get the payments.
GM currently pays once a month on average and so if you did the math based on our sales volumes, global GM volumes are around 20% of Lear’s total sales. If you did the math you’d get back into a number of anywhere between $75 to $150 million at any given time globally with General Motors.
Obviously if its right after the payment that amount would be significantly lower and if its right before the payment, that amount would be higher. We believe we don’t have our exposure both with Chrysler and GM is very manageable.
Operator
Your next question comes from the line of Brian Johnson - Barclays Capital
Brian Johnson - Barclays Capital
A few questions, first why is the quarter closing on April 4, a Saturday this quarter.
Matthew Simoncini
We close every quarter during the year on the interim basis on what they call an accounting close which is with a [four, four, five], its pretty common. Its pretty common in the industry.
Its actually pretty common outside the industry for most publically traded company because it allows you to manage your workflow accordingly. We cut off every quarter on a Sunday or Saturday, I should say Saturday at midnight, that’s been consistent for many, many years.
At year-end however we keep it open to the exact date at 12/31. This is a very acceptable accounting treatment that many, many public companies do and its acceptable to the SEC.
Brian Johnson - Barclays Capital
Okay and in your release, can you tell us anything about the alternatives for Cap structure and when you say, you’re talking with lenders and others, is others just mean bankers and lawyers or would others include potential new sources of finance.
Matthew Simoncini
Well we’ve talked to a lot of bankers and lawyers these days, but what we mean by others certain potential and strategic and financial partners. All alternatives means quite frankly all alternatives.
We’re looking at everything and I don’t want to talk about the specifics of those alternatives.
Brian Johnson - Barclays Capital
Have you been approached or are you approaching someone who might be willing to put new money into the company.
Matthew Simoncini
We’ve been approached.
Operator
Your next question comes from the line of Rod Lache - Deutsche Bank
Rod Lache - Deutsche Bank
Can you repeat that number you gave earlier on your receivable exposure to GM North America, I think you mentioned it earlier but I missed it.
Matthew Simoncini
Yes, it really depends on production levels and timing in relation to the payment. Our global sales to GM which used to be in the 24%, 25% range, with the recent production cuts and what have you, its probably closer globally to about 20%.
If you do the math depending upon where we are and what they’re producing in the quarter, it can be anywhere from let’s say $75 to $150 million at these current production levels, depending upon where you are in relation to that payment.
Rod Lache - Deutsche Bank
That’s just the North American receivables, right, not the global.
Matthew Simoncini
That is the international receivables, its global.
Rod Lache - Deutsche Bank
Okay, and you said you’re participating in the program, the receivable guarantee program, are you also participating in that factoring program and how are you accounting for that.
Matthew Simoncini
We’re doing the guarantee program.
Rod Lache - Deutsche Bank
So did you charge, you charge yourself basically another 2% on—
Matthew Simoncini
Right, but we haven’t added, yes, per invoice, but we haven’t really, its just taking, I’m looking at Shari, its just been, our Treasurer Shari Burgess, its only really paid on a partial invoicing from Chrysler. The GM thing is not obviously up and running yet.
Shari Burgess
Yes, the program wasn’t up and running even for Chrysler till late in April. So all of the participation will show up in the second quarter.
Rod Lache - Deutsche Bank
Okay, and there was a report yesterday I think it was on Debt Wire, saying that the waiver precludes you from paying a coupon on the bonds, can you just talk about whether that’s correct and does that mean that basically you’d have to restructure your debt inside of a 30 day grace period. How does this sort of play out from here.
Matthew Simoncini
Your understanding is correct, we haven’t made a decision on bond payments. We’re continuing to evaluate all alternatives to the capital structure, taking into consideration market and industry conditions.
Now those conditions are starting to show some signs of stabilization and improvement. Our plan and the timing of it will largely depend on how the dynamics play out.
Rod Lache - Deutsche Bank
But it could extend beyond the 30 day grace period or is that basically—
Matthew Simoncini
It could.
Rod Lache - Deutsche Bank
Just lastly on the content per vehicle decline, can you just speak generally just given the situation that the company faces, is that effecting your backlog in any way, obviously there’s not a lot of new business being awarded to anybody nowadays, but just generally how do you see the company’s positioning relative to winning new business and retaining existing business.
Matthew Simoncini
There hasn’t been a whole lot of sourcing awards going on in the industry overall. The cadence of production awards have slowed.
We did continue to win business in the quarter but there was not a whole lot being sourced. Our ability to win new business I think is extremely strong just because of our global footprint and the products we offer and position that we’re in.
On electrical and electronics, we’ve got a great product offering and a very good footprint and global reach. On seating we’re one of the two true global providers with a great component capabilities and low cost footprint.
So, [inaudible] a point we really, we think we’re in really good shape. From the decline in the content per vehicle, its really just a mathematical decline.
And what I mean by that is we obviously don’t sell to the industry, we sell to specific car lines and the content will flow with the mix of the products that you’re on and in the rotation away from large or luxury vehicles in Europe probably hurt that content per vehicle a little bit in this quarter. But longer-term the reality is, the content in these products whether they’re electrical distribution is increasing dramatically and the content on our seats are increasing dramatically as people put higher end seats in the entry level vehicles and we put more of our components on those.
Rod Lache - Deutsche Bank
Have you been able to triangulate this 29% decline in GM models that they’ve been talking about, how are some of these rationalizations going to effect you.
Matthew Simoncini
Its still kind of early to tell. We’ve been obviously closely monitoring it.
We don’t have a whole lot with Pontiac and Hummer for that regard. But we’re keeping an eye on it and at this point its still too early to tell.
Now what’s been announced to date has not had a meaningful impact on us.
Operator
Your next question comes from the line of Chris Ceraso - Credit Suisse
Chris Ceraso - Credit Suisse
Is it conceivable that your operating profitability core operating profitability gets worse from Q1 to Q2 because of the concentration of downtime at GM is on the big trucks.
Matthew Simoncini
Yes, it could. What we’re seeing right now for the second quarter is somewhat consistent with Q1 but its important to understand, and this is extremely fluid environment.
It seems to change by the day, what they produce, how they produce it, these things all impact us. And plus its not just General Motors, we have a global business with more then half of it is outside the US.
Now we’re starting to see signs of recovery in Asia and that should help specifically in China. But Europe is still tenuous and even though the numbers are starting to stabilize a little bit, the mix of what they make and how they take the product out will impact us.
So right now it could get worse in the second quarter but we’re seeing a fairly consistent quarter in Q2 right now based on what we know today.
Chris Ceraso - Credit Suisse
You mentioned that GM globally was about 20% of your sales, how much of that is North America and how much is Europe.
Matthew Simoncini
Europe is probably about 5% of that.
Chris Ceraso - Credit Suisse
As I guess, there haven’t been a lot of awards lately but over the last year maybe, what’s your success rate been in getting contracts with commodity protection.
Matthew Simoncini
We’re not going to get into that level of specificity but we have won, we do protect ourselves in many cases on the commodities increases, in fact, on the wire we’re typically have a built in hedge. We work with our customers on commodity exposures when we have them.
We did not bear the full brunt obviously of the spike that we saw last year in metals because of our ability to work with the customers and find fair solutions. In the last two years we’ve been averaging business wins of about a billion dollars a year, so we’ve been very successful with continued penetration in the market and like I said our commodity impact last year was extremely light in comparison to the significant increase we saw in the metal market.
Chris Ceraso - Credit Suisse
Last question you mentioned in the outset that you’re trying to dial up your restructuring efforts, are you constrained in any way by your cash position. I know restructuring has been a big cash outflow for you, is there more that you’d like to do but you can’t because you don’t have the cash.
Matthew Simoncini
No.
Operator
Your next question comes from the line of John Murphy - Banc of America/Merrill Lynch
John Murphy - Banc of America/Merrill Lynch
Question on the AR here in Europe, I think if we look at the notes versus what you’ve got on this slide here, there’s $138.5 million that you had to pay back on that receivables facility and you haven’t included that in your free cash flow number. What was the age of those receivables, is that really old, is that why you’re pulling it out from the quarter because it seems like receivables in a facility like that would probably be intra quarter anyway.
Matthew Simoncini
No, I think, let me get the math correct and then I’ll kick it over to Shari. I believe the loss on the factoring program was $144 specifically in the quarter.
Those receivables weren’t old, what it was was a factoring program for certain of our European customer receivables. Now the European receivables are usually longer then the US just by normal business operations and we adjust our payment to the suppliers the same way.
So the business conditions in Europe typically a receivable is 60 days but its not uncommon to have them as long as 90 days. These were not, these were normal course receivables.
Shari Burgess
Yes, it was a typical financing arrangement, a factoring arrangement in Europe and they were ongoing current receivables that have been factored and the program was discontinued this quarter with the distress in the industry, that’s all.
Matthew Simoncini
We don’t have a past due issue in our receivables in any way.
John Murphy - Banc of America/Merrill Lynch
Okay so you’re not, so these were receivables that were originating in the quarter, put in the facility and then the facility was terminated so you’re backing that out of the working capital for the quarter. It seems like it should be included in the working capital change in the quarter.
Matthew Simoncini
It was receivables at year-end of roughly $144 million, that’s how the math would work.
John Murphy - Banc of America/Merrill Lynch
Then if we look at the waivers that you’ve gotten from the banks here, I know you can’t talk about it too much, but should we assume that the maturities that you got scheduled out last year in July, its still 468 on March 23, 2010 and 8/22, Jan. 31, 2012, is that sort of the same set of assumptions and its just a waiver to June 30.
Matthew Simoncini
Yes.
John Murphy - Banc of America/Merrill Lynch
Okay, and then if we look at the mix, I know this has come up before, GM was produced 192,000 GM 900’s in the first quarter which is an 800,000 a year run rate, that’s an incredibly rich mix in the quarter. Where do you see that going in the second quarter and then in the third quarter, as they’re really pulling back.
Matthew Simoncini
We’ll I’ll tell you where CSM sees it going. CSM has that production and with the announced shutdown of GM’s facilities many of which are 900 facilities, they see the production in Q2 at roughly 100,000 units and then moving up to about 150 in quarters three and four which would put a total year number for that platform at around 600.
John Murphy - Banc of America/Merrill Lynch
And then lastly when we look at the electronics business, you alluded to the fact that you needed to gain some scale there, is that scale 2x, 3x, or is it 50% larger, what is sort of the magnitude of the scale that you think you need to pull together there to make that business really, really hum, and if you can’t do that internally, might this be a set of assets that would be up for sale to raise capital here.
Matthew Simoncini
The way we look at it, our backlog, our January backlog for that segment is roughly $0.50 billion. That would be a nice, nice step as we bring it in.
We also think there’s a lot of opportunity to increase content per vehicle driven by a couple of factors. The vehicles are getting more electronics and each electronic needs a circuit to connect to, an electrical distribution to connect to and then put more content into the vehicle.
We think that’s a growth opportunity. The penetration of hybrids is the wildcard right now but the way it typically works in the designs that we’re seeing and we’ve got some pretty fascinating stuff going on with the Volt and the Fisker, is its electrical system is redundant.
It’s a duplicate, electrical system that sits on top of the low voltage system. Now as far as the scale, double would be great and we think its achievable.
Robert Rossiter
Triple would be better.
John Murphy - Banc of America/Merrill Lynch
And is that something that you would consider selling potentially and then just getting back to core seats or is that something that’s wound up with seats.
Robert Rossiter
No we think its core and we’re going to grow the business.
Operator
Your final question comes from the line of Brett Hoselton – KeyBanc
Brett Hoselton – KeyBanc
Just so I’m clear on this, it sounds like there’s no question in your mind that you’re going to see an improvement in your cash burn rate quarterly as you move forward sequentially, is that a correct understanding.
Matthew Simoncini
That is a correct understanding.
Brett Hoselton – KeyBanc
Can you characterize the order of magnitude versus where you were in the first quarter.
Matthew Simoncini
Yes its kind of hard, I’m trying to stay away from pinpoint guidance, obviously there’s a lot of fluidity in the production numbers which drive the cash flow right now. But right now I would expect a 20% improvement in the second quarter number, what we see today from the first quarter or another order of magnitude the, you could use the range of 35% to 45% of the cash burn that we expect for the year to be in the first quarter.
Brett Hoselton – KeyBanc
And then as far as your supply base is concerned, you obviously, you typically have a dollar amount that you spend on your distress supplier for your distress supplier costs, do you, can you provide us with an idea of where you are at in the first quarter and where is that relative to where you’ve been previously, whether it be last quarter or last year.
Matthew Simoncini
Yes, I can’t. Just to put a frame of reference on it and it tie backs on the statements that we’ve made in the past, in the fourth quarter last year we talked about a spike up in some of the distressed cost.
In 2005 was the worst year of distressed costs for Lear Corporation in recent history when we had interiors, the interiors business, and a disproportionate amount of the distress came from our supply base in interiors. At that time the distress combination of operating earning [subsidies] as well as cash flow to support businesses that were in trouble was about $50 million.
In 2006 we saw those costs come down in half. In 2007 we actually were nil and then last year in the fourth quarter we saw a step up.
And that step up I think at the time was less then $10 million and we said we could anticipate at year-end 2009 becoming more like in the range of $40 to $50 million. Our quarter costs this year, first quarter costs this year were less then $10, probably in the range of $5.
There is an obvious increase in that activity. But the one thing that’s important to note is we’ve gone through some difficult actions combined with the divestiture of ISD, we’ve consolidated our supply base fairly significantly.
There has been in the prior years obviously a rash of unhealthy suppliers that have ceased to exist or have been managed out of our supply base. So to make a long story short, we see it possibly, our thinking is that it could be possibly as high as the 2005 timeframe and that’s kind of what we’re seeing.
We did not get hit significantly in this quarter however.
Robert Rossiter
Okay I’ll just wrap it up. First off Matthew, you did a great job, really good, finance team, thank you for the job you’re doing.
Operating guys you’re doing a special job minimizing the cash burn for the whole company has been exceptionally good. I mention only that since that there’s hardly anybody left on the call probably, but the liquidity position of this company is very strong, in North America, Europe, and in every market we operate in the world.
So there should be no concern about Lear’s ability to pay. Secondly, there’s opportunity out there for us.
I really and truly believe that things are going to start stabilizing soon and we’re going to take advantage of that. So just keep focused, do what we have to do, stay positive, and its not over.