Lear Corp (LEA) 2010 Q3 法說會逐字稿

Good morning. My name is Simon, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lear Corporation Third Quarter 2010 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. (Operator Instructions).

Mr. Lowenfeld, you may begin your conference.

Thank you, Simon.

Good morning and thank you for joining us for our third 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 web site, lear.com, through the investor relations link. Today's presenters are Bob Rossiter, CEO and President, and Matt Simoncini, 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'd lake to remind that you 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 shows the agenda for today's review. First, Bob Rossiter will review highlights from our third quarter. Next, Matt Simoncini will review our third quarter financial results and update our full-year financial outlook. Then, Bob Rossiter will have wrap-up comments. Following the formal presentation, we will be happy to take your questions.

Now please turn to slide number three and I'll hand it over to Bob.

Thank you, Ed. Good morning, everybody.

Well, the positive momentum has continued in the third quarter; the Company had its fifth consecutive quarter of improvement in core operating earnings. We continue to win new business globally in both our key products, and we continue to report positive cash flow. For the third quarter, we generated $79 million of cash. The balance sheet is strong, and Standard and Poor's and Moodey's recently upgraded our credit rating. Because of our improved operating performance and industry outlook, we are increasing our full-year guidance. Matt will share that with you, later.

Please turn now to slide four. This slide provides an update on our geographic mix of sales. We are well-diversified with 66% of our sales outside of North America. The Asia Pacific region, our major area of focus and effort, is growing and accounts for 15% of our sales globally. On the right side, you can see Brazil, Russia, India, and China have grown significantly in the past five years from $600 million in 2005 to $1.9 billion this year. Our new business is growing at a faster rate in these countries than our traditional market. Does that make you happy, Mel?

Yes.

We've been growing in these markets since 2005 at a compounded annual rate of 28% versus the industry growth of 18%. In addition, our sales at our non-consolidated joint ventures in the BRIC markets are also growing faster than the industry. We now have $650 million annually in joint ventures.

Please turn to slide five. This slide provides an update on our balance sheet at quarter end. We have one of the industry's strongest balance sheets. We finished the quarter with $1.5 billion in cash and debt under $700 million with no significant debt maturities until 2018. Our credit metrics continue to improve and the rating agencies recently upgraded our credit rating. Also, we have a modest pension liability; substantially all of our US plants are either frozen or have no future benefit accruals. Our capital structure provides us with significant financial strength and flexibility and gives Lear a competitive advantage.

Now I'd lake to turn it over to Matt.

Thanks, Bob.

Please turn to slide number seven. This slide provides financial highlights for the third quarter. Global vehicle production improved 13% in the quarter, reflecting industry recovery in North America and continued growth in the emerging markets. Lear sales were up 11% to $2.8 billion and core operating earnings were $150 million, up 35% from a year ago. The increase in profitability from a year ago reflects the improved production environment, the addition of new business, favorable cost performance, and the benefit of operational restructuring actions. Adjusted earnings per share was $2.28 in the third quarter and $6.44 year-to-date. Free cash flow was $79 million, continuing our trend of positive free cash flow generation since mid-2009. We finished the quarter with $1.5 billion in cash and total debt of $699 million. As Bob mentioned during the quarter, both S & P and Moodey's upgraded our credit ratings in recognition of our improving credit ratings and outlook.

On the next few slides, I'll cover third quarter results in more detail and provide a revised financial outlook for 2010. Slide number eight shows vehicle production in our key markets for the third quarter. Overall, global vehicle production was 16.9 million units, up 13% from last year. With the exception of Europe, industry production was up in all our major markets. Slide number nine provides our financial scorecard for the third quarter. As previously mentioned, sales were up 11% to $2.8 billion. Pretax income before interest, other expense and reorganization items was $119 million, down $17 million from the prior year. In 2009, this line item benefited from the reversal of a previously recorded restructuring charge of $64 million. Excluding last year's reversal of the restructuring charge, 2010 results improved by $47 million.

Net income was $95 million, an improvement of $71 million from last year, largely reflecting higher earnings from operations in the absence of reorganization expenses incurred in 2009. Interest expense was $12 million, down $10 million, primarily reflecting lower interest rates. Other expense was $3 million, an improvement of $23 million from a year ago. Last year, we incurred $25 million in one-time charges related to an impairment and a loss on a sale of an equity interest in a non-core joint venture. The improvement in other income from a year ago reflects primarily the absence of these charges and increased equity earnings in our non-consolidated joint ventures this year, partially offset by the impact of foreign exchange.

Slide ten shows the impact of our non-operating items on our third quarter results. Our reported pretax income before interest and other was $119 million. Excluding the impact of operational restructuring costs and special items, we had core operating earnings of $150 million, an increase of $39 million or 35% from a year ago. To help clarify how the special items impacted our financial statements, we've indicated the amount by income statement category on the right-hand side of the chart.

Please turn to slide 11 for a summary of our results by business segment. Margins in both of our operating segments improved compared to last year. In Seating, adjusted margins in the third quarter improved to 7.5%. In Electrical Power Management Systems, adjusted margins improved to 4.2%. The margin improvement in both segments reflects higher global vehicle production and the addition of new business and the benefit of cost reductions. Year-to-date, adjusted margins were 7.7% in Seating and 4.8% in Electrical Power Management Systems.

Please now turn to slide number 12. We generated $79 million of free cash flow in the third quarter. Year-to-date, we've generated $269 million in free cash flow.

Slide number 13 provides an update status of our share count. At the end of the third quarter, about 85% of the preferred shares and warrants issued under our plan of reorganizations have been converted in common shares resulting in 50.5 million shares of common stock outstanding as of October 2. In accordance with the terms of the preferred stock, effective November 10, all remaining shares of preferred stock will be converted to common. We've begun the process to ensure this conversion is completed as soon as possible. Common stock outstanding will increase by 1.8 million shares once the preferred stock is converted. The 1 million remaining warrants continue to be exercisable through November 9, 2014. Assuming conversion of the preferred stock, exercise of the warrants, investing of management restricted stock units, Lear's total shares outstanding would be 54.6 million.

Now, turning to slide 14 for our revised outlook. Our full-year forecast for global vehicle production now stands at 69.6 million units, up 4% from our prior guidance. We increased our production forecast by about 800,000 units in both of our major mature markets. In Europe, we increased our production forecast to 16.8 million units. That's up 5% from our prior forecast. In North America, we raised our production forecast to 11.8 million, and that's up 7% from the prior forecast. Our latest financial outlook is based on a 2010 average year Euro assumption of $1.33 per Euro. The full-year Euro assumption is up 2% from $1.30 using our prior outlook.

Please turn to slide 15, which summarizes our full-year outlook, a revised outlook. We're increasing our same-sales guidance by $700 million to $11.7 billion, reflecting the higher global production and the favorable impact of foreign exchange. We are increasing our forecast for core operating earnings by $100 million to $550 million to $600 million, reflecting the increase in sales and improved operating performance. We are also increasing our forecast for pretax income before restructuring costs and other special items by $100 million to $480 million to $530 million. We are increasing free cash flow guidance by $100 million to about $350 million as a result of the higher earnings. We narrowed the range of our forecasted tax expense, excluding restructuring costs and other special items to $80 million to $90 million. Our forecast for interest expense, depreciation and amortization, operation and restructuring costs and capital spending remain unchanged.

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

Thank you, Matt. Great job, by the way.

On slide 17, it gives you a little summary. We continue to benefit from our restructuring actions and the industry recovery. The third quarter sales are up 11%. Operating income up 35%, and it's the fifth straight quarter of earnings improvement. A balance sheet is a competitive advantage and among the absolute best in the industry. We continue to generate strong free cash flow and at quarter end, have a cash balance of $1.5 billion. As a result of improved industry outlook, continuous excellent operating performance, we've increased our 2010 financial outlook to sales up to $11.7 billion, earnings up $100 million, and free cash flow up $100 million to $350 million. The improving industry outlook, outstanding balance sheet, excellent operating performance, growing significantly in both products in region, coupled with the best team of people, and I believe the absolute best management team in the business, provide Lear with what I believe is a great future.

Now, I'd like to open it up for questions.

(Operator Instructions)

We'll pause for just a moment to compile the Q&A roster. And, your first question comes from the line of Himanshu Patel with JPMorgan. Your line is open.

Hi, this is [Vivek Aalok] for Himanshu Patel this morning.

Good morning.

Good morning. Yes, so your 2010 revenue guidance was, I think, increased to $11.7 billion.

Correct.

Whenever I look at the midpoint of [fuel] guidance then that suggests nearly 3% operating margin in fourth quarter; [was the] type of margin that you posted in third quarter. Would you please comment on what would bring the margins down in fourth quarter?

Yes. The margins come down a little bit in the fourth quarter really as a result of the launch costs that we're incurring in the fourth quarter; start launching a backlog that begins -- the sales start really in the first half of 2011. That coupled with program development costs to help engineer the increased backlog that we announced in a prior earnings call, as well as there's a slight step-up in the headquarters spending. The run-rate is down slightly. Some of these expenses are not linear; it's a time when they get recognized. Overall, we expect the HQ costs for the full year to be in at that [$190 million]-type range, so those are the key drivers on the margin step-down in the fourth quarter.

And could you please comment on Lear's platform mix outlook in 2011, in both North America as well as Europe?

Well, it's a little bit early to start talking about '11; probably the best place to look for that is going to be -- is CSM, as they look into the outer period. Right now, I would tell you this; our platforms ran very well this year from both Europe and in North America, but I'd like to stay away a little bit from '11. It's kind-of premature at this point to get into that mix conversation.

Okay, and then lastly, could you please comment on Lear's exposure, or Lear's growing exposure, to German luxury?

To German luxury?

Yes, German luxury.

Well, we've got a pretty good --

(Inaudible - multiple speakers) German luxury production has been freezing because of some higher exposure to China?

Yes, you know, it's -- there are a lot of drivers to it. One, we have a good book of premium brands and premium car lines in Europe, like the 3 Series; We have a portion of the C-Class Mercedes seats. We do the Audi A6, so we've got a really nice book of high-end vehicles. The sales have been strong in that segment relative to the rest of Europe for a lot of reasons. One, is the demand in the region as well as the export, not only to Asia but also to North America, so we've had good success on those high-end platforms, and we'd expect that to continue.

Okay, that is helpful. Thanks a lot.

You're welcome.

Your next question comes from the line of Ravi Shankar with Morgan Stanley. Your line is open.

Thank you. Could you give us a little more detail on the timing of the launch costs and the engineering costs here? Because I think you'd said that the second half would be much higher than the first half, and, obviously, we do not see that in this quarter's performance, so is there a timing issue there, or is this just you guys being more efficient than you thought?

No, I think that it's still consistent with what we said; I believe the fourth quarter for both launch and step-up will be higher than the third quarter. Launch activity actually steps-up in the fourth quarter. The second half, though, is significantly higher than the first half. The first half on launch costs, for instance, and we guided to about $50 million to $60 million spend. The first half was probably about 25% of that and -- on launch, and so the vast majority of that's going to come in in the second half, and we're probably going to double-up -- double-up in the fourth quarter what we saw in the third quarter right now on launch.

As far as engineering, we would expect a pretty meaningful step-up in engineering as well in the fourth quarter as compared to what we saw for the third. A lot of it's seasonality; for instance, in Europe, a lot of times car companies take time-off, we will also sunset some of our costs. So, it's pretty consistent with what we've been seeing and what we've been talking about.

Got it, and any change to your longer-term margin outlook for each segment? I think you're talking about 7% to 7.5% range for both segments. Do you still stick with that, or do you think you can go a little higher?

No, I think in Seating we'll stay between a 7% to 8% range, longer-term; I think that's pretty much the market rate on that, and I think from a logical longer-term, we'll see them as well in that range.

Okay, and finally, what levels of utilization, approximately, are you running at about now? Just trying to get a sense of what available margins you guys can do in the next couple of quarters?

It's kind-of hard to give an overall-type number. What I will tell you is that our adjusted time facilities are tied to the car lines that they serve. The vast majority of those car lines are not at the rate of capacity just because the sales demands, even though relatively good compared to last year, are still below historical demand level, so I would tell you on those facilities that we're running a good portion below our capacity. To pick a number, probably anywhere from 25% to 30%.

On the components, we're starting now to see the capacity utilization increase higher than that because we've taken so much production out. The key is to have the production in the right regions. I would tell you that in the emerging markets, we're probably very close to capacity in our component facilities, and in the mature markets, we still probably have some wiggle-room to increase production without adding capacity.

Great, thanks. Great quarter, guys.

Thank you.

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

Hello, thanks. Good morning.

Hello, Chris.

Chris Ceraso?

Yes. So, Bob, you sound a little tired. Have you been out marketing winning new business, and if so, do you have an update on your three-year backlog?

No, actually I've got a cold, so I apologize.

But what about the new business?

What about it? It's great --

Do you have any --

Well, I'm going to tell you something, they've got my lawyer sitting right on my left; he says, "You're not allowed to tell them that." But, the backlog is growing very nicely.

Okay. Now, the -- I know you mentioned that there are some costs that are going to pick-up in Q4 relative to Q3, but the guidance still looks pretty conservative. You've got a track record here of putting-up numbers that are considerably better. Is that it; is it still just conservatism? Is there any element here of the GM truck build, which may decline in Q4 relative to Q3? It does look like they overbuilt those trucks.

Yes, we pretty much are consistent with CSM's expectation for production and what we've used in the guidance, Chris. To us, from an expense standpoint, we put a range around the outcome because there's literally thousands of inputs that go into these forecasts, and from our standpoint, we're measuring them, and we're just trying to stay focused one quarter at a time. Right now, I believe that we will have a step-up in launch costs, and we will have a step-up in program development costs as we try to get ready for this backlog coming online, as Bob mentioned. We are continuing to win new business. We'll give a full update on our backlog in January, which is the normal custom, but, I think it's a balanced guidance.

Okay, and then last question. You've talked in the past about thinking about your options on the excess cash balance. Can you comment on what your views are today; in particular, how you're feeling about maybe a share are repurchase, and what you'd want to see in terms of the economic environment and vehicle demand to give you comfort to go forward and do something like that?

Well, from our standpoint, it's pretty consistent with what we've been saying; we'd lake to maintain liquidity of about $1 billion for a lot of reasons. From our standpoint, we're well beyond that. Our focus, near-term, is to first-and-foremost continue to generate free cash flow, because we believe that's the key to creating shareholder value. We'd also look to utilize some of that excess cash, organically, and what we mean by that is investing in capacity -- component capacity or manufacturing and emerging markets. We think that's key to maintaining our cost advantage in the industry.

We'd also look to possibly do some strategic JVs with -- in the emerging markets to help us diversify our sales. We'd look to expand maybe some key technologies; specifically, in Power Management Systems, and ultimately, we'd look to maybe for some niche acquisitions that could accelerate our diversification of sales.

Having said all that, what we'd like to see is the performance for the remainder of the year; get a good handle on how next year looks. We would not rule-out returning a portion of the cash to the shareholders in an efficient manner, and we'll probably start having that discussion the early part of next year with our Board.

Okay. So, this is not something that you've brought to the Board yet on how you plan to return cash to shareholders?

It's always a discussion with the Board. You have it every quarter, and we're aware of it, and we're very focused on creating shareholder value.

Okay, thanks, guys.

Thank you.

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

Hello, everybody.

Rod, do I sound tired to you?

Not more tired than me. Can you -- just a couple clarification points. The $350 million of free cash flow is after what level of restructuring spending?

Rod, right now, the free cash flow -- the use of cash for restructuring, excluding CapEx, is going to be about $125 million this year.

All right, so it's --

And, it's a little bit -- and that's a tough number to call exactly, because it's tied into the ability to execute and customer demands and what have you, but right now, that's what it's based on, about $125 million, use of cash, excluding the capital.

Okay. So, I'm just wondering -- you know, you're doing over $400 million, almost $500 million of free cash flow here at still recessionary levels of production in Europe and North America. It seems like, just given what your capital spending metrics are, that that's going to continue. It's not like the CapEx is going to double unless I'm interpreting this wrong, and even if it did, it seems like you'd still be able to generate free cash. I'm just wondering, what is the rationale here for keeping even $1 billion of additional liquidity? Is it conceivable in any scenario that you would be burning cash at this point, given where your cost structure is?

I would tell you, Rod, first off, on the $1 billion liquidity targets, that's not what is needed to run the business, but we like to have excess cash as a demonstration of strength when we talk to customers, and to give them comfort that three years out or four years out that we will have the financial wherewithal, under any circumstances, to launch their program and maintain the type of capital and cost structure we need to be competitive; that's why we like it. Now, the real need is significantly less than that.

And, the second part of your question was, is it conceivable? The only thing I could point to is what happened in the beginning part of '09 when we went dark? Last year, we did 8.5 million units in total, but the first half was on a run-rate that was significantly less than that, and we had a modest cash burn. So, never say never; I mean, it's not inconceivable that we could have a quarter where we would go negative in cash if there was a market dislocation, a significant market dislocation. All in all, though, I see things pretty consistently with you.

Okay. Can you clarify for us what the FX impact was on your revenue and EBIT in the quarter, and then, lastly, can you just give us a little bit more help on this walk for the fourth quarter; what are you seeing? You didn't want to comment on platform mix for next year, but can you tell us what you see in terms of platform mix looking into the fourth quarter, and maybe the T900 production?

Yes. FX -- first off, the easier part of the question is FX caused about an $80 million negative impact on revenue, and that was largely driven by the change in the Euro. As far as -- you're right, I don't want to get a whole lot into '11. I will tell you that CSM has the 900 down year-over-year from this year; it's been a pretty strong build on a 900. Right now, I don't know, CSM is calling in at roughly, excuse me, 950, and next year, they've got that platform coming down about 100,000 units thereabouts (inaudible).

Okay, so you're anticipating some negative platform mix in the fourth quarter on a year-over-year basis?

Yes, slightly, but not incredibly. But, last fourth quarter was a very strong -- 2009 fourth quarter was a very strong build for us, with our platforms.

Thank you.

You're welcome.

Your next question comes from the line of John Murphy with Bank of America Merrill Lynch. Your line is open.

Good morning, guys.

Murph, how are you doing?

Good, how are you? I was just wondering if you could comment a little bit on quoting activity. There was sort-of a logjam in the last two years where some automakers were a little bit frozen. I was just wondering if you're seeing that picking-up in general, and also how this relationship is developing. I mean, has anything changed in pricing as you're quoting on new business, or is it similar as the way it's been historically? Has anything changed there where they're a little bit more accommodating on any pricing actions?

I don't want to surprise with you my answer, but the customers are being really flexible now; they're always asking for higher prices. Just kidding around, but no -- the quoting activity has picked-up; there are new programs, a lot of new programs; there's a lot of activity globally. Lear is participating in every market in the world. Actually, we've got a lot of opportunity in Asia where we're focusing our efforts. But, no, the customers haven't changed their pricing philosophy; they're always looking for ways to get the costs out of things; that's normal business practice. I think we know how to operate in this market, and we'll be successful, and I think we'll win the lion's share of what's out there, so I feel really good about the future. I don't feel real good about my future, but I feel good about that future.

I think it's looking pretty good. Just looking at the schedules you're seeing in the near-term, versus some of the estimates that are out there for the fourth quarter. It sounds like things might still be running a little bit better than expectations in the near-term. We've seen this happen for the last couple of quarters where the actual production numbers for the industry have been higher than expectations at the beginning of the quarter. Is there anything you're seeing in your near-term order rates from your customers that would indicate that the production in the fourth quarter might be better or worse than what's generally expected right now?

The releases are strong right now, Murph, but they're holding pretty consistent with how we're guiding, right now. Could they step-up? Yes; I think a lot is going to depend on what we see in the SAR over the next October/November, but then they could step-it-up, then, heading into next year. So, from our standpoint, we're fairly consistent; the releases are strong, and we'll just keep an eye on it.

Great. Thank you very much, guys.

You're welcome.

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

Yes, if you could maybe talk about some of the competitive dynamics, especially between North America, Europe, and China in the Seating business; what that means for sequential profit margins going forward. Is the European business, in particular, developing better margins, or still a bit of a detraction from the US business?

Yes. I think from our standpoint, what we talked about in the past, really, the margins are driven more than anything by the level of content on a vehicle and our level of vertical integration, which we have a higher percentage of both in North America, both in the content and vertical integration, so that always kind-of supports a slightly higher margin rate.

We've talked about Asia being consistent with our overall margin rate and target for the business segment, and Europe because of the lower content on average and less vertical integration, more directed, being a little bit lower. We are seeing European margins improve and step-up from the low levels of around 3% to 4%, and they're stepping-up higher, and we expect them to continue to improve.

But, the reason is because [they've] got more vertical integration.

Right. Absolutely.

The more you vertically integrate, the higher your margins are.

We've had a lot of investment, Brian, fixing our footprint. Also, expanding our capacity and components, whether it's seat trim, seat covers in northern Africa or Eastern Europe; to our mechanisms facilities that we've opened along Eastern Europe, and that's providing dividends for us.

So, as we think about sequential margins in Seating, on a year-over-year basis on a positive, it was 10% plus, which is a bit lower than you've talked about. Quarter over quarter where, of course, you had seasonality -- it was down 22%. What kind-of range should we be thinking about, and how does the sequential or year-over-year changes in the various regions affect that sequential margin?

Well there's literally, thousands of inputs into the margins, and there's -- we focus a lot on the industry dynamics, but the reality is, we sell to specific car lines in the industry; each has its own financial DNA, which I'm sure we all understand. From our standpoint, we're pretty comfortable being in the range of 7% to 8% on the Seating margins; we'll be solidly in the 7% -- expect to be solidly in the 7% margin heading into next year.

Okay, thanks.

You're welcome.

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

Great, thanks. Good morning.

Good morning, Itay.

Maybe as somewhat of a follow-up to that question, for the 2010 guidance, the revenue is up $700 million; EBIT up $100 million; it's about 14%, which is at the low-end of your historical experience. Is that some of that mix playing-in, or are there incremental launch costs and other headwinds implied there as well?

Yes, it is the mix; it's not all real high margin business. There's also FX that factors into that number, but there's also been a significant increase in our sales backlog, which drives development costs, launch costs, and what have you. So, from our standpoint, again, there's literally thousands of different inputs that come in here. We don't sell to the industry; we sell to specific car lines. Each car line has its own financial DNA and stuff like that, so all-in-all, we're pretty comfortable with the performance of the business. It's running very well, and I believe we're converting at a nice clip on our incremental revenues.

That's helpful. And then, Matt, can you maybe update us on how you're thinking about restructuring in the next couple of years? You typically gave us a bit of a scale there for '11 and '12 for cash restructuring. And, also, what the magnitude of annual restructuring savings might look like.

Right. I would tell that what we've guided to is roughly $110 million this year and $110 million next year. Some of the cash actions, because they're becoming back-loaded -- the actions becoming back-loaded this year, will trip into next year. We started the year talking about a cash impact of roughly $150 million for 2010; that's down a little bit.

Now, that cash is going to slide into next year, so from our standpoint, what I'm seeing for the next two years is an average of about $110 million for this year, next year. Again, some of those actions may slip into next year, so you've got to kind-of look at it in a 24-month bundle. Cash for that standpoint will be probably balanced at about $125 million or $135 million for each of the two years, okay? Then we'll see them go down to what we call normalized, so we're still on a somewhat accelerated pace over the next 18 months. Then, we'll bring it back down to a normalized-type $40 million-type range, which is what we believe is normalized for this business and for this Company in 2012.

That's helpful. And lastly, can you maybe update us on the profitability of the unconsolidated joint ventures, particularly IAC and some of your other ventures.

Yes. We have roughly 16 unconsolidated joint ventures; roughly nine of them are in Asia, and we also have them in North America and in Europe, the biggest of which is IAC. We're pretty much profitable in all our joint ventures in Asia -- Asia, our non-consolidated joint ventures in Asia.

From our standpoint, IAC is profitable; they return to profitability both as a combination of the industry recovery and a lot of the restructuring actions that we have. Now, we have a 30% interest in the European joint venture, and then 19% interest in North America. We're very happy that they've returned to profitability. We believe that the results can improve further as they continue to implement their strategic business plan, and you see an industry production in those two mature markets return to more historical levels.

That's great, thank you.

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

Thank you. Can I ask a quick follow-up on the restructuring? What was the difference between the $110 million per year and the $120 million to $135 million costs? Is $110 million the savings?

No, what it is -- and I didn't talk about the savings; I will in a minute. The difference is the expense, Colin, versus the cash. Many times, we'll recognize the expense in advance of the cash, and the cash is kind-of a follow-up wave, a little bit, so a lot of times, there's a disconnect between the expense and the cash. It's just the timing of recognition versus when the actual cash outflow goes.

From a savings standpoint, we've talked about savings in a 2.5-year type pay back. We've run a little bit better than that, historically, but we believe as we get into some of the longer and tougher to implement actions, that it'll approach more of a 2.5-year payback. I'd model anywhere from $75 million to $100 million of savings on an annualized basis for this year and next.

Okay, that's very helpful. Can you also comment on commodity costs? Were they a headwind in this quarter, and are they going to be a headwind going forward? Also, could you just update us on whether you're getting more protection in your contracts for commodities, or if that's possible?

Okay. Yes, they're starting to be a headwind, mainly in copper at this point. Now, just to kind-of refresh where we're at on commodities, we did incur additional costs in the quarter, and we expect a little bit more in the fourth quarter. The two major commodities that we use in our products are steel and copper. In steel, we have roughly 2.8 billion pounds of steel in our seats. Roughly 250 million pounds, though, are the raw steel that we convert into components. The rest of it is really through purchased components, of which about 1.4 billion pounds are used in components that we buy. The rest are directed by our customers mainly in Europe. Now, [then] directed by the customer, we believe there's a level of price indexing and protection just because that's a negotiation between the customer and the supplier.

On the components that we buy, we have certain types of agreements, anything from price indexing to fixed annual requirement contracts and what have you, and it provides a bit of a buffer on the pass-through. And, every year, we renegotiate, and we look for ways to overcome any price increases that our suppliers are incurring, or cost increases that they are incurring on the raw stock. We do that through consolidation of buying other metrics and value engineering that are able to help us offset that impact.

Now, steel is running at about $0.38 a pound. It's pretty close to the recent historical history, if you take away the spike to $0.60 a couple years ago.

Copper at this level of production will use anywhere from 90 million to 100 million pounds of copper a year. We use it in our wire harnesses, in our junction boxes and components; connectors. On the harnesses, themselves, we use -- about 80% of the copper we buy is used on the harnesses, and those have historical price indexing arrangements with our customer. We have seen a spike in copper recently; it's been -- in the quarter, it was around $3.50, up about $1 year-over-year, and we're seeing it now spike at times up to about $3.80.

That's where we're incurring the majority of our commodity costs right now. We believe it's manageable, and we will continue to work to find offsets for it, but that's probably the biggest driver right now on the commodity headwind.

And also, leather has gone up.

Right, Bob mentioned we're one of the biggest hide buyers in the world, and we're up about $0.40 on hides.

So, you guys get back to eating chicken.

So, for the copper side, 80% is price index, so only 20% of that 90 to 100 million pounds a year that is -- is that actual exposure?

Correct.

Okay, and just one last question. On the tax rate -- I mean, currently paying cash taxes, any time in the foreseeable future where you'd have to start accruing taxes at a normal rate, since you've had some consistent profits?

Well, I have the -- one of the smartest tax guys in the industry here.

Don't say that; somebody is going to try to hire me.

Bill, good answer to that.

Our Vice President of Tax, here, Bill McLaughlin.

Yes, really we would probably get back to a normalized tax rate once the valuation allowance in the US is eliminated, and right now, we see that probably in the latter part of 2012, so then 2013 would be the first year where we would be back to a normalized tax rate.

Okay, great. Thank you very much.

Your final question comes from the line of Brett Hoselton with KeyBanc. Your line is open.

Brett, before you talk, I misspoke myself; don't eat chicken, eat more beef. If you eat more beef, we get more hides.

Correct.

More hides, lower price.

Right.

Go ahead, Brett

Thank you, gentlemen. Good morning.

Morning.

Morning.

Seating margins; you seem fairly comfortable you're going to be in that 7% to 8% range over the longer-term; you're already there. That sounds somewhat reasonable here. On the Electronics side, I think you said that you think you can get up into that comparable margin range, into that 7% to 8% level. I think I understand some of the underlying reasons for that. What I'm wondering is, can you give us the sense of what your expectations are for the progression of that improvement? Is that a six-month timeframe, one-year timeframe, two-year timeframe before you push-off into that level?

Yes, good question, Bret. From our standpoint, really the key to the Electrical business returning to more historical margin levels of 7% to 8% is really getting the scale back into that business, because it has a fairly high level of fixed costs for the level of sales that it has. Last year at $2 billion in revenue, we had fixed costs of roughly 25% in that business, and that's part of the cost of being in every continent in the world, and also having the capabilities both high-powered and low-powered, which has driven our infrastructure cost up. That, however, has also provided opportunity to grow our sales.

The backlog that we announced last quarter had a significant portion, roughly $900 million of it, being in Electrical Power Management. We believe that the sales in this segment need to get to about $4 billion before we'll start seeing the margins in the target range. That being said, through industry recovery, the backlog continuing to penetrate and win new business in that segment, that we can get there in the three-year timeframe. In the near-term, we will see continued improvements in the margin in this segment. I don't see any reason why next year, for instance, we couldn't perform at a rate consistent with what we saw in the first half of this year where margins were 5%.

And then, longer-term, as you think out beyond that two-, three-year timeframe, given the high fixed cost structure and (inaudible - technical difficulty) given the potential for leverage here and so-forth, is it possible that the Electrical margins could actually exceed those of the Seating margins in your opinion, or do you think just comparable margins is kind-of the longer-term norm for both the Seating and the Electrical?

I think it could stay at 7%, 8%. Could it be higher? Possibly. It depends on the mix of the business. Harnesses have -- [wire] harnesses have the same capital intensity that a seat does in the same kind-of engineering up-front expenditures as seats do, and to get the right return on invested capital, you don't need to post margins in excess of 7%. The Electronics portion of that business is consistent with the mechanisms that we invest in; a lot of up-front engineering and some capital, and it requires a slightly higher return, so it'll depend largely, Brett, on the mix of the product within the segment. All in all, we're pretty comfortable that the margins will remain in that 7% to 8% range, and at that rate, we'll return a nice -- we will have a nice return on investment for our shareholders.

Very good. Thank you very much, Matt. Thank you, gentlemen.

Thanks.

Thanks, Brett. Anyways, I think -- I'd like to thank everybody for being on the call. I want to thank you, Matt, that was very well done, and the whole finance team [that's here] did an excellent job. I also want to thank every single employee in the Company for the great job that you do. This is absolutely a great company, and we have a great team of people all throughout the Company, so I want to thank you all for what you've done and what you're going to do. Thank you very much.

Ladies and gentlemen this concludes today's conference call. You may now disconnect.