Lear Corp (LEA) 2010 Q2 法說會逐字稿

Good morning. My name is Christopher, and I will be your conference Operator today. At this time, I would like to welcome everyone to the Lear Corporation's second quarter 2010 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 session.

(Operator Instructions)

I would now like to turn the call over to Mr. Ed Lowenfeld, Vice President of Investor Relations. You may begin your conference.

Thanks, Christopher.

Good morning, everyone, and thank you for joining us for our second quarter 2010 earnings call. Review materials for our earnings call will be filed with the Securities and Exchange Commission and they were posted today on our website, Lear.com, through the Investor Relations link. Today's presenters are Bob Rossiter, Chairman and CEO, and Matt Simoncini, our Chief Financial Officer. Also participating on the call are Terry Larkin, Senior Vice President and General Counsel, and Mel Stephens, Senior Vice President of Human Resources and Communications, as well as others on the Lear finance leadership team.

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 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 at the end of this presentation.

Slide two outlines the agenda for today's review. First, Bob Rossiter will review highlights from our second quarter and provide a sales backlog update. Next, Matt Simoncini will review our second quarter financial results and our full year financial outlook. Then Bob Rossiter will have some wrap-up comments. Following the formal presentation, we will be happy to take your questions. Now, please turn to slide three, and I'll hand it over to Bob.

Okay. Thank you, Ed.

Before I start, I would just like to announce that Ed Lowenfeld has just been promoted to Vice President of the Corporation, well deserved, and an exceptionally fine young man that's going to do a great job for us. Congratulations, Ed.

Thank you.

Lear's strong operating momentum continued in the second quarter, with our fifth consecutive quarter of improved core earnings. Production levels improved in all our key markets, and importantly, margins improved in both seating and electrical power management systems. In addition, we generated substantial cash in the quarter. As a result of our improved operating performance, we are increasing our full year 2010 core operating earnings and free cash flow outlook. Matt will provide details later in the presentation. Lastly, we're increasing our sales backlog to $1.9 billion for the three-year period ending 2013. This reflects an increase of $500 million from our prior reported backlog, as we continue to win new business in both business segments.

Please turn to slide four. This provides more detail on our consolidated sales backlog. As a reminder, we define our backlog as new awarded programs over a three-year period net of lost business and programs rolling off. We do not include pursued or high-confidence new business, or non-consolidated business. Since our last formal update in November 2009, we have been very successful in signing new business in every region of the world across both product lines. The present status of our three-year sales backlog covering from 2011 to 2013 period now stands at $1.9 billion. This new business continues to represent further diversification of our sales, as 55% is seating; 45% is in our growing electrical power management systems business. Also, more than half of our backlog comes from outside of North America.

Now I would like to turn it over to Matt for a review of our second quarter financial results.

Thanks, Bob. Please turn to slide number six. This slide provides financial highlights for the second quarter. Global vehicle production improved 29% in the second quarter, with mature markets moving higher from distressed levels and growth in emerging markets continuing. Net sales were up 33% to $3 billion. Core operating earnings were $190 million, compared to a loss of $53 million a year ago. This represents the fourth consecutive quarter of year-over-year improvement.

The increase in profitability from a year ago reflects an improved production environment, the addition of new business, favorable cost performance, and the benefit of operational restructuring actions. Free cash flow was $186 million, versus a use of $81 million a year ago. The improvement was driven primarily by the increased earnings. We finished the quarter with $1.4 billion of cash, and total debt of $721 million. On the next few slides, I will cover second quarter results in more detail, and provide a revised financial outlook for 2010.

Slide number seven shows vehicle production in our key markets for the second quarter. Industry production was up in all our major markets. Overall, global vehicle production was 17.7 million units. That's up 29% from last year.

Slide number eight provides our financial scorecard for the second quarter of 2010. Starting with the top line, net sales were up 33% to $3 billion, driven primarily by increased production in all major markets and the addition of new business. In the second quarter, about two-thirds of our sales were generated outside of North America. Net income was $160 million, and that's an improvement of $333 million from last year's net loss of $173 million, due primarily to increased core operating earnings and lower interest expense. Interest expense was $13 million, down significantly from $62 million last year, reflecting the lower debt levels. Depreciation and amortization was $57 million, compared with $69 million a year ago. The lower expense reflects lower capital spending over the last few years, as well as extended asset lives as part of the fresh start account.

Other income was $23 million, compared with an expense of $6 million a year ago. Last year, we incurred an impairment charge of $27 million in our IAC Europe joint venture. The improvement in other income from a year ago reflects the absence of the impairment charge, along with increased equity earnings at our non-consolidated joint ventures in the second quarter, partially offset by the impact of foreign exchange.

Slide nine shows the impact of non-operating items in our second quarter results. Our reported pretax income before interest and other income was $173 million. Excluding the impact of operational restructuring costs and other special items, we had core operating earnings of $190 million, compared with a loss of $53 million a year ago. I'll clarify how these special items impacted our financial statements. We've indicated the amount by income statement and category on the right-hand side of the chart.

Please turn to slide number ten. Margin in both of our operating segments improved in the second quarter. In seating, adjusted margins improved to 8.7%; and in electrical power management systems, adjusted margins improved to 5.2%. The margin improvement in both segments reflects higher global vehicle production, favorable platform mix, and cost performance, including savings from our operational restructuring. We believe absolute margins for the balance of the year will decrease somewhat, with the expectation of lower second half production, as well as increased new business development expense associated with our growing sales backlog and second half launch costs.

Please turn to slide number 11. Free cash flow was a positive $186 million in the second quarter, as compared to a use of $81 million last year. The improvement in free cash flow primarily reflects the improved earnings. Cash flow during the quarter was also favorably impacted by the timing of certain commercial items.

Slide number 12 provides a snapshot of our share count. At the end of the second quarter, almost three quarters of the preferred shares and warrants issued under the plan of reorganization had been converted into common shares, resulting in 48.1 million shares of common stock outstanding as of July 3, 2010. The remaining 5.2 million preferred shares and warrants outstanding can be converted to common stock at any time. Assuming full conversion, exercise investing [in] remaining preferred stock warrants and management restricted stock units, total shares are 54.6 million.

Please turn to slide 13. If the industry recovers and our financial results improve, I wanted to bring to your attention the amount of global tax attributes that are available to the Company. At year end 2009, we disclosed that our tax attributes were $937 million. We now estimate that our global tax attributes have increased to over $1 billion. These tax attributes can broadly be categorized into two types. The first is the tax loss carry-forwards, which are used to offset future taxable income; and the second is tax credit carry-forwards, which offset future tax expense on a dollar for dollar basis. Based on the current tax rates, we estimate that the amount of tax benefit related to our tax loss carry-forwards is approximately $800 million, about half of which is related to the US. In addition, we have $220 million of tax credit carry-forwards, about 90% of which is related to the US. Both of the tax attributes have not been recognized as an asset on our financial statements.

The $1.0 billion of total tax attributes can be used to offset approximately $3.3 billion of future taxable income. The vast majority of our tax attributes either have no expiration date or a 20-year life, providing the Company with ample opportunity to realize these benefits. We estimate that our US tax attributes were able to offset up to $200 million of US taxable income per year, providing us with a potential cash tax savings of $70 million per year at the current corporate tax rate of 35%.

Now turning to slide 14, for our revised outlook of the remainder of the year, our full year 2010 forecast for global vehicle production now stands at 67.1 million units. In total, the global production forecast is up 3% from our prior guidance, while our major markets are relatively flat. Our guidance is based on a 2010 average year Euro assumption of $1.30 per Euro. This is down from $1.35 in our prior outlook.

Please turn to slide 15. Turning to our full year financial outlook for 2010, we are holding our net sales flat at approximately $11 billion, as we expect the negative impact of foreign exchange to be offset by favorable global mix. We are increasing our forecast for core operating earnings by $75 million to a range of $450 million to $500 million, reflecting higher production on Lear platforms and improved operating performance. We are also increasing free cash flow guidance by $75 million to a range of $225 million to $275 million, largely related to the increased earnings expectations.

2010 capital spending is expected to be approximately $195 million, up $20 million from the prior forecast, to support the higher sales backlog. Increased interest expense -- I'm sorry, interest expense is estimated to be $60 million. That's actually down from our prior guidance, reflecting the lower debt levels and higher cash balances. Our forecast for tax expense, operational restructuring costs, and average diluted shares outstanding remain unchanged from the prior guidance.

I'll turn it back to Bob for some closing comments before we take your questions.

Thank you, Matt.

Slide 17, please. Lear continues to benefit from the industry recovery. Our second quarter sales up 33%; core operating earnings improved for the fifth consecutive quarter. Our balance sheet is competitive -- is a competitive advantage, and among the best in the industry. At the end of the second quarter, we had a cash balance of $1.4 billion, which gives us the financial resources to continue to invest in new business and technologies, and to further grow in our global business.

In light of improved operating performance, we've increased our 2010 financial outlook as follows. Core operating earnings in the range of $450 million to $500 million, and free cash flow in the range of $225 million to $275 million. We continue to win new business in both product segments, and our three-year sales backlog stands at $1.9 billion.

Now I would like to turn over it over to the floor for any questions you may have. Thank you.

(Operator Instructions)

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

Good morning, gentlemen.

Good morning, Brian.

Want to drill down on the seating business, with a couple of related questions. First, you achieved 55% incremental margin. How did you do that? Was that timing of some contracts which shouldn't necessarily roll forward, or -- sequential margin, or was it just a change in how you run their businesses that we can look forward to going forward?

Right. In the seating business, they obviously had a very strong quarter, and that was benefited by global mix. We've had strong performance in some of our key platforms in Europe, as well as North America. We continue to see strength in China on key platforms that we're on.

Secondly, they have done a very good job managing their cost structure, their restructuring actions, their manufacturing performance, controlling their SG&A costs. And then third, we did see a small benefit from certain commercial recoveries that were anticipated a little bit later in the year, but probably in the ball park of about $10 million.

And -- but weren't a lot of those cost structures already in place in 1Q?

They were in place, but they pick up steam as the year goes on, Brian. You're constantly improving your performance and you're getting the benefit of -- for the full quarter, for instance, for a cost reduction action that you may have put in place midway through the quarter.

So it's not so much the new business on a sequential basis as a 55% incremental margin, it's that the new business came in at the regular margin, plus cost actions hit bottom line again, that were in full force in 2Q?

That's correct. The other thing I would like to point out is that in the back half of the year, besides the production cadence or the sales cadence, we're going to see some additional pressure on earnings because of the need to increase our development costs to support the backlog, as well as the launch costs that typically come in in the second half.

Which gets to my second question on seating. You've talked about this being a 7%-ish margin business in the past, maybe 8%. Now we see 8.7%. Does that mean we should be thinking about more of an 8% to 9% range for this business, or is it -- this is a good cost-cutting quarter, no real investments at this point in new programs, so this is kind of a spiky peak and it will settle back down?

When we gave you margin guidance, we're still comfortable with that 7% to 7.5% range of guidance, it's usually given over a longer-term cycle as opposed to a particular quarter. In particular quarters, there may be a commercial item or a performance spike or a platform that runs higher than another one. Longer term, we're comfortable with the 7% to 7.5% margins we've given on this business. We think that's what's sustainable.

Okay, and so -- but when you say full cycle, do you mean that in a few good years it could sustainably run higher, or when you just mean average, you mean average in a --?

I mean average, Brian. It's hard to give guidance on a quarterly basis with the amount of [chop] that typically happens in the industry. There's literally thousands of different inputs that can go through, from timing of commercial resolutions to a particular hot program, or even just a timing of expenditures or accounting treatment.

So when we talk about a cycle, we like to look at cycles in four-quarter increments. So from our standpoint, we still believe, you know, that this business will run in the 7% to 7.5% operating margin.

Okay, thanks.

Your next question comes from the line of Patrick Nolan from Deutsche Bank. Your line is now open.

Good morning, everyone.

Hello, Patrick.

I wanted to ask you a couple questions. First, on the electronics business, so you've basically maintained a 5% margin in both the first and second quarter now. Could you just comment on how you see the trajectory of the margin recovery in that business, and should we be thinking about the level, this 5% margin level, as kind of what you can do next year once launch costs diminish?

Yes, I think, standing back at 10,000 feet first on the electric power management system segment, we believe that this business is a 7% to 7.5% business as well that's been suffering a little bit from lack of critical mass to cover the fixed costs associated with having to be, you know, basically in every continent of the world and (inaudible) components. So there's a level of base engineering that needs to be absorbed, as well as infrastructure costs that need to be absorbed. From our standpoint, the second half will be under pressure, because of the need to step up both the launch costs, and this segment has disproportionate amount of backlog to seating this year.

We also need to step up our program development costs as we have growth in the backlog in second half of the year. Normalized, it's a little bit early to start giving guidance on margins for 2011, Patrick, but I don't see any reason why this business can't sustain at that type of level.

And can you comment on the SG&A level? When you adjust for the restructuring and the one-time items, it looks like it took almost a $20 million dip down sequentially quarter-over-quarter. Could you maybe discuss what's the normalized level there?

Yes, normalized, at this level of sales, at $11 billion approximate level of sales, we should be seeing SG&A rates in the low 4%, 4.2%, 4.1%, 4.3%, in that range. In a particular quarter, sometimes it's a little bit choppy based on the commercial recoveries or timing of expenditures associated with a program development, but we think that we should be running in the low 4% based on $11 billion of [revenue].

Got it. And just one last one on the cash balance, are there any significant uses of cash that you're targeting right now, and when can we expect some type of communication of what you're ultimately going to do with the pretty substantial cash balance you have here?

Regarding cash, we like to maintain a minimum liquidity of cash and revolver of about $1 billion, for a lot of reasons. Peak to trough use, some of the cash that's inefficient to use for daily, and also just to show financial strength to our customers. With the excess cash, first and foremost, we think there's opportunities to invest in the business organically through a step-up of capital expenditures, and you've seen the first step of that in the earnings guidance. We're looking to components in emerging markets. We also evaluate certain niche or smaller acquisitions that could provide us either access to the Asian markets or Asian auto makers, anything that could provide some additional component capabilities on electrical distribution or add to our customer diversification or mass in that segment. So those would be options A and B.

Longer term, we would expect to see some level of industry recovery, sustainable industry recovery, the shape of the recovery curve, so to speak. Our ability to continue to generate cash, we would at that point consider down the road possibly returning to the shareholders a modest recurring dividend, or provide it to them in an efficient manner through share repurchase if there was a market dislocation and evaluation.

So to me, it's still premature to talk about those items. We would need to see cash generation for the remainder of the year, get a pretty good handle on what 2011 looked like, and take it from there. So I think, Patrick, it's a bit premature. We're looking internally first, and we think there's opportunities to do some things that can solidify our two business segments.

I'll get back in the queue. Thanks very much.

Your next question comes from the line of John Murphy from Banc of America. Your line is now open.

Good morning, guys.

Hey, Murph.

Just looking at the guidance for core operating earnings of $450 million to $500 million, you've done about $328 million of that year-to-date, and would imply a range of about $122 million to $172 million in the second half of the year. So it seems like you're looking for a pretty big deceleration, and running at a rate that's actually lower than what you even did in the second quarter, and you've alluded to a number of factors; I was just wondering if you could sort of rank order them? Sort of give us a laundry list of what you think explicitly is going to decelerate in the second half of the year, other than top line?

First and foremost, it is the top line, Murph. (inaudible). If we assume, for instance, that North America production -- North American production of 11 million units. We would expect then some level of deceleration, roughly $1 billion of revenue for the Company on a consolidated basis. First and foremost, it is the top line. That's followed by -- there is a step-up in launch costs. When we talked at the end of the first quarter, we were in the range of $50 million to $60 million of launch costs, which are disproportionately second half, as you would expect with the July shutdown and relaunch of products. We also have a step-up in program development costs in the back half of the year. Those are probably the three biggest items. But by far, it's the top line change.

That's very helpful.

You assume $11 billion of revenue.

And then thinking about -- sort of stepping forward the next three years, as the backlog rolls on and you work through these launches, is there any reason to believe that the backlog margins, once you get through the choppiness of a launch, should not be equal to or greater than existing core operating margins?

I would say consistent with the segment -- consistent with the segment overall. When backlog comes on, it typically comes on a little bit lower than -- even discounting the launch costs, it usually comes on a little bit lower than existing programs, just because a new program is not as efficient as a program that you've been running for several years. But as it gets up and as the efficiency gains, let's say 12 to 18 months into a program, we expect the backlog to come on consistent with the business overall; and help and support us, for instance, in getting to our longer-term margin targets of 7% to 7.5% in electrical and seating.

Lastly, on your Tier 2 suppliers, we heard some stuff where there were some -- we had problems with getting some electronic components from a number of suppliers. I'm just wondering if you're seeing anything like that, or if you're pretty comfortable with the relative health, if you will, even of the Tier 2 supply base at this point in the cycle?

Yes, almost -- it's almost two different questions. What you're hearing about is, there is a shortage, a global shortage of boards, semiconductor boards, driven mainly by the demand for consumer products as opposed to automotive. So it is a rationing type situation that is not -- it's happened in the past. So we're working through it with our customers, with our suppliers, and -- so far have been successful, but it is a tight global supply on the boards, so to speak.

As far as distress in the supply chain, there has been distress, as you would expect, in the sub-tiers. We've been able to manage through. It's nowhere near from the levels that it had been in the past, and we're comfortable that we've got enough wherewithal in our guidance to manage what we're seeing. So it is there; it's probably consistent with what we saw last year at this point, but we're comfortable that we've got the issue surrounded as far as our guidance is.

Great. Thank you very much.

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

Hi, good morning, guys.

Hi, Himanshu.

The 2012 backlog increase from $100 million to $700 million, could you give us just some color on that; which competitors would you have taken that from, which regions did that come in, and which segments was that in?

Yes, starting with the first and foremost, that number grew because the further out you go into backlog, the more open sourcing there is. For instance, right now we're announcing a $200 million 2013 backlog number, but there's still a lot of open sourcing. There's still a lot of innings to be played in 2013. There's actually a few innings to be played as well in 2012. We're not going to single out an individual competitor. We're winning business across the board from, you know -- in both seating and electrical distribution. The way we look at it, from our standpoint, we're one of only four global players in electrical distribution that can do both high-powered and low-powered solutions on every continent in the world, and that puts us in a pretty good and competitive position, even though we're a little bit under scale.

In seating, we're truly only one of two global seat providers that can do complete seat design and all the components on every continent in the world. So from that standpoint, that puts us in a unique position as well competitively. So we're winning business across the board pretty much from everybody.

Now, this business is -- you know, there's an ebb and flow to it, but from our standpoint, I like our competitive position. We're winning business in all regions of the world, and I think that's a testament to our footprint. We have a very competitive footprint. We've invested, you know, $750 million over the last three to four years to improve our component capabilities and reduce our costs. That's what you're seeing. That's why we're winning business.

Okay. Are you hearing anything, Matt, from your customers on non-North American dealer inventory levels, you know, in Europe? Is there still generally low inventories, and is that why production keeps creeping up, and we're also obviously hearing some excess inventory issues in China? I'm just wondering what kind of feedback you're getting from your customers?

We're not getting that type of feedback. The releases are strong in North America through the third quarter. But what we do is probably the same information that you use, [Wards] or CSM. There has been a creep in North American inventory. It's up to about -- last reported number in June was 2.1 million units of domestic inventory, and production has slightly outpaced the sales rates. There's -- there's not the same type of detailed information on inventory levels in either China or Europe, so it's a harder market to call because of how segmented it is. So all I can tell you is that releases seem to be holding strong through the third quarter.

Okay, and then I noticed your NAFTA production estimate is unchanged at 11 million, and CSM is at 11.6 million. I mean, are you trying to, you know, just take your best stab at that, or are you just trying to leave some cushion here for guidance to maybe potentially come up even lighter?

Really, when we [set] the production number, Himanshu, we look at the SAR and the inventory levels. Right now the SAR through the first half I think in North America has averaged around 11.2 million. We'd need to see it run at about a rate of 11.8 million to kind of move that number forward. So we think the production estimate is balanced, probably favoring a little bit on the side of conservatism or cautiousness.

But at the end of the day, it's important to note, we don't sell to the industry; we sell to specific car lines. So we need our car lines to run; so far through the first half, they have been doing well in the marketplace, and that's benefited us both in Europe and in North America. Whether the production ends up being 11.2 million or 11.5 million or 11 million units, you know, it depends on the car lines you are on, and obviously higher production for us is better. And if it comes in 11.5 million, that would be great for us.

And just lastly, you know, on the seating business, if I take out the $10 million you mentioned earlier, it's still I think about a 43% sequential contribution margin. And I know that moves around, and you've got some costs coming in the back half, but where should we think about kind of normalized contribution margins for that business going forward?

Really don't look at it in that manner. So it's kind of hard to talk to it, that's not how we look at the business. I think if you look at incremental sales or short-term changes in the top line in the range of 15% to 20%, depending upon which car line, how much content, you know, that's the way to look at it and that's how we analyze it.

Great, thank you.

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

Thanks. Good morning.

Good morning, Chris.

Maybe just one follow-up on that, Matt, as it relates to the sequential incremental margin. If I remember, in Q1, is there anything that weighed on the results in that quarter, whether it was any kind of customer accommodation or any kind of excess price giveback in Q1 that would have made the sequential profit walk seem better?

No. No, it was a pretty clean quarter. If there was anything like that, we would probably have to call it out in our documents or in our public statements. No, it was a pretty clean quarter. It's just first quarter typically takes some time to ramp up and offset the new pricing that usually or sometimes kicks in on January 1. Savings, as the year goes on, a lot of times, are stronger in sequential quarters. We talk about the -- you know, some of the commercial recoveries that came in this quarter that benefited the business overall. But it was pretty clean, it was pretty clean in both quarters.

Okay. Can you tell us how much new business came on in the second quarter, and maybe some rough breakdown of regional new business for the quarter?

Yes, just a minute. You're sending us -- going through our notes. Our Head of Financial Planning, Vice President of Financial Planning, Jason [Pardue], is handing me the notes as we speak. Our backlog was about $100 million in the second quarter, and it was really contained in electrical distribution, where seating did have some business wins, but we also had some roll off business that we've previously discussed, like the Volvo business.

And was that pretty evenly split by region or was it mostly Europe?

It's split by region, North America and Europe. A smaller portion in Asia.

Okay. And then another one on the quarter, were there cash restructuring charges in the quarter? And what do you expect in that regard for the full year?

Yes, there was cash restructuring charges for the quarter, it was roughly $17 million. We think for the first half, cash restructuring was about $63 million, because we had a big hangover from the fourth quarter announced action, where the cash actually went out in Q1. For the full year, we still think that cash restructuring including our guidance is going to be about $150 million, and that's consistent with the prior guidance.

What do you think that is, Matt, on a normal basis, say 2011, 2012, 2013?

We are trying to stay away from giving that amount of future-looking guidance, but what we've talked about in the past, Chris, is next year from an expense standpoint, will look pretty similar to this year at $110 million. Cash restructuring usually runs about 90% of expense. Again, that's consistent with prior direction. We believe that beyond 2011, that restructuring will become more normalized as opposed to accelerated. By normalized, we believe that the $40 million range, that in any given year you're going to have some level of restructuring actions, whether it's, you know, improving your cost footprint or just the ebb and flow of business as facilities close or customers take actions.

Okay. Thanks, Matt.

You're welcome.

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

Great, thanks, good morning.

Good morning.

Matt, I wanted to go back to the seating margin. I think you mentioned that 7% to 7.5% was a long-term objective, but would there be anything preventing you from getting there as early as next year? I mean, with the backlog looking pretty [big] for next year and some modest global production, doesn't seem like you would need much more than maybe a 10%, 15% incremental to get there. Just want a little more color on that?

Yes, we're trying to stay away from giving guidance for 2011, but seating is obviously further along in their margins, their target margins. I don't see anything -- any real roadblock in their way for sustaining a 7% number.

Okay, great. And then on the equity income, if I look at the full year guidance, it doesn't seem like you're expecting much income there in the second half of the year. Why wouldn't we see a continued tailwind from equity income, which was pretty strong in Q2?

Yes, the problem with that line item, Itay, is there's a lot of things that go through, including FX, which is very difficult to call the impact of foreign exchange, for instance on inter-company Euro-denominated notes. There's also state and local taxes that go through that line item, so we would expect earnings to continue from the JVs, but as always, it's dictated by the production environment in North America and Europe, and to a lesser extent Asia. So the good news is that our JVs were all profitable in all regions of the world in Q2. We would expect that to continue, albeit flex somewhat with the production volumes.

Great. Just lastly, I did notice the CapEx guidance for the year went up a bit, still within your 1.5% to 2% of sales range; as the backlog has improved, do you think you can still maintain CapEx within that range over the next couple of years, or do we potentially see that creep up?

I think we would favor the higher end of the range, because of the backlog. CapEx is driven as much as anything by the future business, so it's really the cadence of future sales and backlog. We would also look for an opportunity to invest in component capabilities in emerging markets, expand our capability in certain regions and new products. So from that standpoint, I would probably favor the higher end of the range, but right now we're comfortable with that range, maybe favoring closer to 2% than 1.5%.

That's helpful. Thank you.

You're welcome.

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

Good morning.

Good morning.

You actually were just talking about equity income or other income, and you said that all joint ventures are profitable. I assume that includes your joint ventures with IAC. Is that the first profitable quarter? How long has it been since that's been profitable, and is there any --?

It's not the first profitable quarter, but it's probably the first one when both of them have been profitable in recent history, I believe. But they are both profitable. That business is actually very volume-sensitive, because of the fixed cost nature. So they've done a lot of good things to fix their footprint, done a lot of consolidation efforts, restructuring efforts, and I think now that you're starting to see a decent production environment or better production environment, they were able to turn a profit.

Okay. And then you talked about other income year-over-year, but actually it was significantly improved quarter-over-quarter. So what were the big swings sequentially?

Again, it's a wild card, because of the nature of what goes through that line. It's not -- it's not exactly clean with the FX, but the improvement quarter-over-quarter first and foremost was driven by the improved earnings in the JVs, and then also you have the FX swing quarter-over-quarter.

Okay. And you highlighted the NOLs. At what point would you stop recording cash taxes? Would you need several years of positive earnings or would that be something --?

You mean stop recording cash taxes?

Where you start using a normalized tax rate?

Well, I've got my head of (technical difficulty).

Don't say that. We don't want to lose him.

Bill McLaughlin, our VP of Taxes is on the line. Bill, why don't you explain how you see the taxes?

Yes, as you know, we have a valuation allowance against our US NOLs, and usually a rule of thumb would be that we have to have cumulative pretax income for three years before we would release that valuation allowance, so for us that would put us somewhere in 2012 for the US.

Okay. That's very helpful. One last question is, any color on commodity costs in the second half, is that going to be a headwind or -- because you didn't actually mention it.

I do believe it's going to be a little bit of a headwind. We've seen some trending up on steel. The two major commodities that we use in our product, first and foremost is steel, the vast majority of which is through purchased components, and about half of which are directed by our customers, although it will put some pressure on the second half. The other commodity we use is copper. We've seen a trend up in copper costs as well. Gold commodities have been a bit choppy. The copper is a little bit different situation, where 80% of the copper we use is through index agreements or -- we enjoy index agreements with our customer. And then 20% or roughly 15 million to 18 million pounds is on [Lear's] side. We believe at this point, we're comfortable with our guidance, and that we've created enough cushion, so to speak, to cover what we're seeing in the marketplace.

Okay. All right. Thank you very much.

Your next question comes from the line of Brett Hoselton from KeyBanc. Your line is now open.

Good morning, gentlemen.

Good morning, Brett.

Matt, just want to make sure, as I look to the back half of the year, what I hear you saying is the two primary drivers of lower income, lower margins are one, your lower revenue expectations, and two, higher launch costs. Are those the two primary drivers?

Absolutely.

Have you quantified the launch costs at all, maybe in terms of dollar amount or basis points?

Yes, we have. We said that we believe that launch costs this year will be in the $50 million to $60 million range, with about three quarters of it coming in the second half.

Okay. And then obviously as some of the guys alluded to already, your expectations for revenue seem to be a little bit light production and so forth, expectations seemed to be a little bit lighter than the Street. As we go from the first half to the second half of the year, if we were to believe that production was going to be higher than your expectations, is there any reason to believe, whether it be mix or otherwise, that your revenues wouldn't follow the higher production?

Yes, again, I would just like to caution, we don't sell to the industry overall, but if our car lines were higher or running higher than we guided to, obviously that would benefit us. I think in general, if you used a content per vehicle in North America of about, a theoretical content per vehicle of roughly $300 per, you can do the extension, and we should convert that anywhere from 15% to 20%, depending on which car line moves up. Obviously higher production, if you believe the production's going to be higher, then, yes, that would benefit us obviously.

As we look at your backlog and we think about 2013, obviously there's still, as you said, a lot of open sourcing. Is there any reason to believe, let's say, the amount of open sourcing for 2013, or the number of contracts, is materially different than it was in 2012, or for that matter 2011, or is it pretty much steady?

It's fairly steady. There's always a little bit of ebb and flow. But right now it's steady.

Okay.

The product launches. There's always business that's out there. I believe we have a really good opportunity to improve that number in 2013 because of the amount of open sourcing, and because I like our competitive position.

Very good. Very helpful. Thank you, Matt.

And there are no further questions at this time.

Okay. I'll just wrap it up here.

Thanks, everybody, for being on the call. Matt, great call. The team that supports Matt, excellent job. I want to thank the people in the factories, the people that actually make the profit for this business. You guys all do a great job. And thanks both to the seating and electrical, electronics group. You're doing an absolutely great job. Keep up the good work.

Momentum is building, and let's go win together. Thank you all very much.

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