Lear Corp (LEA) 2010 Q4 法說會逐字稿

Good morning, I will be your conference operator today. I would like to welcome everyone to the Lear Corporation, Fourth Quarter and Full Year 2010 earning call. 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.

Thank you, Sarah. Good morning, everyone, and thank you for joining us for our Fourth Quarter and Full Year 2010 Earnings Call. Review materials for our earning 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, our Chief Financial Officer. Also participating on the call are other members of Lear's leadership team.

Before we begin, I'd 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 result are described in the last slide of the deck and also in our SEC filings. In addition, we will be referring to certain non-GAAP financial measure. Additional information regarding these measures can be found in the slides labeled non-GAAP financial information, also at the end of this presentation.

Slide 2 shows the agenda for today's review. First, Bob Rossiter will review highlights from our fourth quarter. Then, Matt Simoncini will cover our fourth quarter and full year 2010 financial results and our 2011 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 number 3, and I'll hand it over to Bob.

Thank you, Ed. Obviously, 2010 was a recovery year for the industry and the Lear Corporation, as our positive momentum continued through the fourth quarter. We achieved our six consecutive quarters of year-over-year improvement in earnings in both of our segments; achieving target margins, and the electrical business, returning to profitability, and it looks good for the future. The company continues to generate significant free cash flow. And in 2010, we refinanced our capital structure. Our balance sheet and liquidity position are in the best shape since I've been in the company, 40 years.

In addition to the growth, we have significant year of new business wins with our backlog growing to $2.2 billion, up $800 million from a year ago. And we continue to receive the industry and customer recognition. We have three finalists in the PACE Award.

Turn to slide 4. You can see as sales by today 66% of our business is outside of North America. With 16% coming from Asia, which is our fastest growing market. And, that's up since 2005 from 5%.

Turn to slide 5, it summarizes our new business backlog, $2.2 billion. Well balanced between seating and electrical, well balanced in each of the regions of the world. And as I said, our Asia-Pacific regions is growing fast, and all the positive signs are there for it.

Move to slide 6. The electrical business, several key drivers enabled us to see profitability by almost $200 million in 2009. The EPMS business segment was negatively impacted because it was under scale relative to the fixed cost structure. And in 2010, sales segment grew faster than the overall industry. Sales increases which reflect the industry recovery, in addition to new business, and growth in the emerging markets are one of the major reasons for returning to profitability. This segment also benefited from restructuring efforts. In the past five years, we've closed 14 plants. Now, 27 of our 33 total plants are in low-cost countries, over 90% of our headcount is there, as well. We expect this to continue, the positive momentum, as we launch $1 billion in new business over the next few years. Now I'd like to turn it over to Matt.

Thanks, Bob. Please turn to slide number 8, please. This slide provides financial highlights for the fourth quarter and full year 2010.

For the fourth quarter, Lear sales were up 15% to $3.2 billion, and core operating earnings were $150 million, up 30% from a year ago. This represents the sixth consecutive quarter of year-over-year earnings improvement. The increase in profitability from a year ago reflects improved industry production, new business, and the benefit of cost reductions and restructuring actions. Our adjusted EPS was $2.38 in the fourth quarter, and free cash flow was $160 million.

For the full year 2010, net sales were up 23% to $12 billion and core operating earnings increased over $500 million to $627 million. Reflecting the increased vehicle production, new business, and the benefit of cost savings and restructuring actions. Our adjusted EPS was $8.83 in 2010, and we generated $429 million in free cash flow. We finished the year with cash balances of approximately $1.7 billion after paying down about $275 million of debt.

On the next two slides, I'll cover these results in more detail. Slide number 9 shows vehicle production in our key markets for the fourth quarter and the full year. In the quarter, global vehicle production was $18.6 million units, up 9% from 2009. For the full year, global vehicle production was a record 71.5 million units, up 25% from 2009. It is important to note that in the mature markets while vehicle production has increased, it remains significantly below historical levels.

Slides number 10 provides our financial scorecard for the fourth quarter and full year. As previously mentioned, sales were up 15% to $3.2 billion in the fourth quarter. In the fourth quarter, pre-tax income before interest and other was $126 million, and net income was $117 million. The 2009 numbers are not comparable as a result of certain special items related to our financial restructuring. Fourth quarter, SG&A as a percentage of sales was 3.2%, compared with 4.3% a year ago. The lower SG&A in the quarter reflects primarily the increase in sales. Interest expense was down $11 million, primarily reflecting the refinancing earlier this year.

Other income was $5 million, an improvement of $25 million from a year ago. The improvement from a year ago reflects the positive impact of foreign exchange, increased equity earnings in our consolidated joint ventures. Depreciation and amortization was $62 million, down slightly from a year ago. And for the full year, net income was $438 million.

Slide number 11 shows the impact of non-operating items on our fourth quarter and full year results. For the fourth quarter, our report of pre-taxable interest and other was $126 million. Excluding the impact of operational restructuring costs and special items, we had core operating earnings of $150 million. An increase of $34 million or 30% compared to a year ago. For the full year, our core operating earnings were $627 million, up $521 million from 2009. To help clarify how these special items impacted our financial statements for the full year, we've indicated the amounts by income statement category on the right-hand side of the chart.

Please turn to page 12 for a summary of our results by business segment. In seating, adjusted margins in the fourth quarter improved to 7%, up 90 basis points from 2009. The margin improvement reflects higher global vehicle production, the addition of new business, and the benefit of cost reductions which more than offset higher lost costs related to the backlog. For the full year, adjusted margins and seating achieved target levels at 7.5% compared to 4.1% in 2009.

Slide number 13 summarizes our performance in electric power management. In the fourth quarter, adjusted EPMS margins improved to 4.3%, up 180 basis points from 2009. The margin improvement reflects higher global vehicle production, the addition of new business, and the benefit of cost reductions which more than offset higher commodity costs and launch. As Bob described earlier, this segment returned to profitability in 2010 with adjusted margins of 4.7%. A significant improvement in one year. Going forward, we expect further margin improvement as we continue to gain scale in the segment. We believe we will need to increase revenues and EPMS segment to approximately $4 billion in order to reach our target margins of between 7% and 8%.

Please turn to slide number 14. We generated $160 million of free cash flow in the fourth quarter of 2010. For the full year, we generated $429 million of free cash flow leaving us with year end cash balances of $1.7 billion, well in excess of our debt. As a reminder during 2010, we used a portion of our cash balance to reduce debt by $275 million.

Slide number 15 provides an update of our share count. Approximately one-third of the Management RSUs granted upon emergence from bankruptcy vested on November 9, 2010. On November 10, all remaining shares of the Preferred Stock were converted into newly issued shares of Common Stock. As of December 31, 2010, there were 52.6 million shares of Lear Common Stock outstanding. In addition, one million Warrants remain which are exercisable through November 9 th, 2014. Assuming exercise of the Warrants and vesting in a Management Restrictive Stock Units, Lear's total shares outstanding would be 54.5 million shares.

Please turn to slide number 17 for review of major assumptions of our 2011 outlook which was announced at the Detroit Auto Show last month. Our financial outlook is based on a forecast of global vehicle production of 74.0 million units, up 3% from 2010. In the mature markets, production growth is driven by North America, where we expect vehicle production to increase by about 600,000 units or 5% to 12.5 million unit. Europe is forecasted to be flat at 17.4 million units. Growth in emerging markets expected to continue at a healthy pace, though at lower rates than in 2010.

Our 2011 financial outlook is based on an average Euro assumption of $1.33, which is flat with 2010. The two major commodities that influence our business are steel and copper. We are forecasting steel cost to be about flat with 2010 at about $0.40 a pound. Copper prices increased significantly in the second half of last year. Our outlook for 2011 assumes copper prices at about $4.25 per pound, up 24% from 2010 averages.

Slide number 18 shows a four year trend of our sales and core operating earnings. For 2011, we are projecting sales of $12.6 billion to $13 billion. The increase in sales reflects the impact of net new business and higher projected industry volumes partially offset by net selling price reductions in the mix of sales by platform. We are projected core operating earnings of $700 million to $740 million. Margins in our seating segment are expected to be the mid 7% range. And electric power management, we expect continuing improvement from 2010 with margins increasing to 5% to 5.5%. The improvement in margins reflects significant structural cost reductions, the benefit of operational restructuring, as well as efficiency gains throughout our operations. We expect to maintain our competitive cost structure and higher revenue which will result in another meaningful increase in earnings in 2011. Going forward, we continue to focus on aggressively managing our cost and running our business efficiently.

Slide number 19 provides additional detail on our 2011 financial outlook. I'd like to highlight a few items, in addition, to the sales and core operating earnings that were described on the prior slide. Capital expenditures are projected to increase to $250 million, driven by our backlog; as well as selective investments in component manufacturing capacity in emerging markets. We are continuing to evaluate incremental investment opportunities to expand our component capability in the emerging markets.

We are forecasting 2011 restructuring expense at about $125 million, up from 2010. Reflecting a delay in the timing of certain actions previously anticipated to have occurred in 2010. Cash outlays for restructuring expect to be consistent with the expense at about $125 million. We anticipate that 2011 will be the last year of accelerated restructuring spending. Despite the higher capital spending and cash restructuring, we are forecasting positive free cash flow of approximately $400 million. We expect net other expense to be about break even, which includes earning from non consolidated joint ventures, offset by the impact of certain foreign exchange items, state and local taxes, and other miscellaneous items.

Adjusted tax expense is estimated to be about $120 million to $125 million, resulting in an effective tax rate of approximately 18%. The increase in taxes from 2010 reflects increased earning of foreign subsidiaries. Our cash taxes for 2011 should be approximately $90 million.

Turning now to page 20 for a summary. Lear's performance in 2010 continued to benefit from industry recovery and cost reductions. Our sales were up 23% versus 2009, and margins improved in both business segments. We generated strong free cash flow and finished the year with $1.7 billion of cash. Alternatives for deploying our excess cash balances include increased capital spending with a focus on component capacity in emerging markets, niche acquisitions that can further diversify our sales, providing scale and electric power management or provide additional component capabilities. Returning excess cash to shareholders.

We expect to further improve our financial performance in 2011 with sales of $12.6 billion to $13 billion, core operating earnings of $700 million to $740 million, and free cash flow of approximately $400 million. This will result in adjusted EPS of $9.20 to $9.85 per share. We continue to win new business in both segments and enter 2011 with a three year backlog of $2.2 billion. Now we'd be happy to take your questions.

(Operator Instructions)And your first question comes from the line of Rod Lache from Deutsche Bank. Your line is open.

Good morning, everyone.

Hey, Rod.

Could you, first of all, on your Q4, could you tell us how significant the launch costs were and raw materials on a year-over-year basis, and to what extent is that affecting gross profit growth? What should we be thinking about that going forward?

Yes. We did have a significant quarter for launch costs, Rod, as a lot of the expenses that we incurred this quarter is in support of the $900 billion of new business that's coming on in 2011. On a year-over-year basis, launch costs were between $25 million and $30 million on a year-over-year basis. We did also see some headwinds on commodities, mainly in Electrical Power Management, between $5 million to $6 million, on higher copper costs on the components that we're responsible for, as well as the timing and the adjustment of the timing of recovery that usually has a one-month lag or one-quarter lag. We also saw some impact from the mix in the quarter as some of our key car lines were down slightly from the third quarter sequentially.

Okay. And do those, you'd mentioned previously that you expected about $10 million of raw material costs inflation, I'm wondering, just given that pace of $5 million to $6 million in one quarter, is that likely to be higher now in 2011? And how should we be thinking for the full year 2011 versus 2010 about those launch costs?

Yes. On the launch cost, probably the big changes year-over-year is you're going to have launch and development costs on the backlog, are probably going to increase in the ballpark of $25 million each. So about a $50 million headwind between those two line items as we continue to try to get ready and prepare to launch the $900 million in new business this year and next. From a commodity standpoint, the main headwind that we're seeing, Rod, is on copper. And it's been pretty volatile, up and down.

But significantly higher at an average year-over-year. Just to refresh everybody's memory, we use about 100 million pounds of copper, 80% of which, however, is managed through price -- historical price indexing with our customer. And that's the wire that we use, the copper that we use in our wire harnesses. On the components, the connectors in the box, that's our responsibility, that's roughly 20% or 20 million pounds, that's our responsibility. And that's where we're seeing the headwinds. Right now our guidance is based on roughly a $4.25-per-pound type commodity numbers. We are seeing some pressure to that number, but we're comfortable with our guidance at this point.

Okay. And this steel was flat because of contracts that you have or pass-throughs?

It's actually slightly up from the average. But consistent with the $0.40 a pound. On the steel, we use about 2.8 billion pounds of steel at this level of production. The vast majority of it's through purchase components, only about 200 million to 250 million pounds of that 2.8 billion is through raw steel buy. So components, roughly 60% we direct, 40% is directed by the customer.

So on the directed portion from the customer, we have some certain built-in commercial protections. On the other purchased components, we typically have fixed price contracts. That being said, when steel does move up, it does provide additional cost to the supply chain from the customers to us to our sub-peers that need to be addressed through value engineering and maybe a reduction in purchasing savings. It's an area that we're comfortable with right now, we're keeping an eye on. But we're comfortable with where our steel is.

One last thing if you have it. Any update on how material the Tunisia situation is to the Electrical Power division, if it is at all.

Yes. You know, we did incur in the fourth quarter in the early part of this year some additional costs for the disruptions that the -- the political disruptions in Tunisia. We do have an Electrical Power Management plant there, a wire facility that supports our business in continental Europe. We did incur some premiums, but at this point not material to the guidance.

Great. Okay, thank you.

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

Hi, good morning, guys.

Good morning, Himanshu.

Two questions. I know you don't disclose regional profits by quarter, but can you just comment directionally on how margins look or compare between the Seating business in North America versus Europe?

Yes. It's typically high. We are profitable in both segments in Europe. The profit in the US is typically higher than Europe in the Seating segment for a lot of reasons. But the main one being the level of vertical integration and the amount of Lear content on our platforms. We typically have higher level of directed content in Europe, so in the US, we're able to benefit from our ability to make seat covers and metals and mechanisms and place them on our products.

We have a higher level of Lear content on the seat and that provides the ability to reduce costs to our customer but also to improve our margins. And in Europe, there's still a higher portion of customer directed which in times depress margin. The other issue is Europe typically has lower contented-type vehicles because you don't see the level of three rows of large SUVs fully powered. That's a very unusual vehicle for European markets.

Okay. And then, Matt, just two more questions. Just going back to the fourth quarter, I know there's seasonality. But if we just look at the business sequentially, it looks like there was about $300 million odd of revenue growth and pretty much flat core operating income. I'm just wondering was there anything non-recurring during the quarter that sort of prevented any operating leverage on a sequential basis or -- it does seem like the top line was stronger than what you guys were thinking about maybe at the start of the quarter?

Yes, it was slightly stronger. There's always -- there's always one-timers in the numbers, or what we call one-timers or what have you, adjustments, whether they're positive, negative, Himanshu. But the real driver for us was the mix was slightly weaker on a sequential basis. We did have a step-up in development and launch costs. So from our standpoint, it really wasn't too unanticipated. We actually outperformed the guidance that we gave as little as -- on the third-quarter earnings call by a fair amount reflecting the kind of stronger revenues that came in.

So from that standpoint, it wasn't unanticipated. Overall, the seats are performing very well, right in the sweet spot of the target margin range. If it was a material one-timer we would be disclosing it. So from our standpoint, it was a fairly clean quarter. But there's always pluses and minuses.

Okay. Then just this ramp up that you saw in development and launch costs in the fourth quarter, could you speak to the cadence of that just over the course of the four quarters of 2011? Should we think about that going back down in Q1, or does it stay at this elevated level?

It stays at this elevated level just because of the cadence of how the backlogs would come in. We think -- to put a frame of reference on it, our [loss] costs in 2010 were roughly $40 million higher than they were in 2009. We expect this year to be about $25 million higher still. So we went from a number of roughly $20 million to $60 million, $65 million type in launch costs in 2010. We'd expect that to grow by another $20 million to $25 million in 2011. We think from a cadence standpoint, it would be pretty equal first half, second half, from a launch perspective. And fairly consistent with what we're seeing in the fourth quarter.

Thank you.

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

Yes, I have a sort of housekeeping question, then a broader strategic question. Two housekeeping questions. Can you maybe elucidate a bit on that other income, how it swings from positive $5 million to neutral for the year? And in particular how we should think IAC or any equity income as part of that?

Yes. If swings really -- it's a pretty choppy line. And right now it's based on mainly the changes in the FX assumptions for the remainder of the year, this line captures a lot of the FX impact on some of the inter-Company loans. Also it has state and local taxes. It's kind of a catch-all, unfortunately. From an equity earnings standpoint, we'd expect equity earnings to remain relatively consistent year-over-year on a non-consolidated (inaudible.)

Now that line item's a little bit hard to gauge because the visibility isn't as great as a wholly owned Lear controlled entity in many cases. IAC is profitable. It returned to profit in 2010 on an operating basis, and we took our share of it. From our standpoint, they have completed a consolidation of Europe and North America with their Asian operations. Our combined share of that business is roughly 23%. That's probably about all I can say about IAC right now. From our standpoint, the earnings in non-consolidated [subs] should be between $35 million and $40 million and that includes IAC at this point.

Okay. Then again, as we think about the strategic, maybe some of the strategic implications behind the relatively flat sequential quarter, you mentioned loss costs. Was there anything around the year-end negotiations truing up pricing with the OEMs one way or another that either gives you more confidence going into next year, makes you think that the OEMs are perhaps more willing than in the past to absorb some of the commodity cost increase, passing on launch costs and so forth? Or is it pretty much what it has been for awhile and no real change in that [tenor] account?

There's really -- we get this question a fair bit. There's really no change. Our obligation as a Tier One is to provide cost reductions. Our customers are in a very consumer and price-driven business. And our obligation as a major Tier One is to find a way to get costs out of our product.

Now from a planning perspective, we run at about a net 2% price-down, but we're able to provide cost savings far in excess of that amount through our ability to control vertical integration and design. Through value engineering and being able to manage a lot of the components, we're able to take far greater cost out of the system and provide that to our customer to make them more successful in their price point externally. There's really been no change. The customer's not responsible for launch costs.

That's our responsibility as a supplier. And from a commodity standpoint, while there's not a direct pass-through on commodities, other than the historic pricing indexing on copper, we do work with the customer to try to attack costs throughout the system, and we work with our supply chain. And it does impact negotiations from that standpoint as we go in there and try to work through the cost models.

The short answer, though, to your question, Brian, is there really hasn't been a change. I think that one of the benefits of Lear Corporation and being able to control the level of vertical integration that we do and having the global footprint that we do have, and the engineering capabilities, is as customers are looking for these price downs it plays very strongly into our strengths of being able to engineer cost out and provide component savings.

So the guidance you gave was obviously in line with what the pricing negotiations that ended up with the OEMs?

Right.

So --

It was completely in that, and the price environment is tough. But that's nothing new.

So there's no end of the year true-up that would have caused profits to either be better or worse than we would have thought?

No.

Okay, thanks.

Your next question comes from the line of John Murphy from the Bank of America. Your line open.

Good morning, guys, and thanks for all the additional detail today. Appreciate it on your outlook.

You're welcome, [Murph.]

Page 13, when you were going through the Electrical business, Matt, you mentioned something about not being able to get to your target margins until that revenue line got to about $4 billion, and this is going to be somewhat intertwined with my second question. I mean, is that the thing that you guys can do in the next two or three years with some small niche acquisitions and investment in emerging markets? Or is that the kind of thing where you need to do a bigger deal to bring that level of revenue on?

And second question, which is intertwined with that, is as you outlined your priorities for your excess cash which is pretty significant at this point, you mention increased CapEx, niche acquisitions and then return of excess value to shareholders. I mean, you'd have to do some pretty big ramps in your CapEx and pretty big niche acquisitions not to start returning cash to shareholders soon. First, on the Electrical business and what you might do there. And second, that is intertwined with this redeployment of capital and what you'll do there?

Right. Let's start with the Electrical business. On the Electrical business, if you look at where we finished this year, [Murph], the $2.6 billion, with the backlog that we had, and we still expect the backlog to grow, especially in 2013 when there's still open sourcing, you've got $1 billion of incremental revenue. That puts you in that $3.5-billion-type range with upside for sourcing, and that's not taking into consideration what we believe will be continued market recovery in the mature markets. So I think we can get there organically in the relative near term, three years, let's say.

Okay.

That being said, if we had the opportunity to invest in a niche acquisition that would facilitate the growth or facilitate diversity or give us some additional capabilities in emerging markets, we would absolutely consider it. So from our standpoint, we don't have to do it to get to scale, but we would consider it and we are evaluating different opportunities to make those type of niche acquisitions. From use of the cash, you're right, I don't think that these potential actions are mutually exclusive. From our standpoint, just to kind of refresh it, we like to maintain a minimum liquidity of $1 billion, combination of cash and revolver, although we need a fair bit less than that on a real basis to run our business, which results in a fair bit of excess liquidity.

We do believe that position A is to look at opportunities to invest organically followed by niche acquisitions. We're constantly keeping our ear to the ground on looking at things that could provide value in the relative near term. Thirdly, we are very conscious of shareholder value and creating shareholder value as is our Board, and we're looking for ways to do that. Part of that may be returning a modest amount of the cash in an efficient manner to the shareholders. But having financial wherewithal and a strong balance sheet is not necessarily a bad thing in this market. And in this industry.

Okay. And then maybe just lastly on your regional margins, you used to give us awhile back North America, Europe margins. Now the rest of the world is becoming pretty material. Is there anything you can give us on levels of relative profitability or maybe even absolute profitability in North America/Europe/rest of world?

Yes, I can. Margins are continuing to improve in Europe. We are profitable in Europe. Historically, we talked about a 3% type of margin range net-in on a consolidated basis, we're actually running a little better than that. North America is a little bit higher than the target margins of the segments, specifically in Seating, because of the level of vertical integration. And in the emerging markets, we typically run at about target margins overall for both segments. So if I were to kind of give you directional type numbers, I would say in Seating, North America runs a little bit stronger in the segment margins overall just because of the level of vertical integration. The flip side is in Electrical Power Management, Europe runs a little bit better because they have a little bit stronger vertical integration to their connector capabilities in Europe. In the emerging markets, they both kind of average at, right around targets.

Great. Then on the tax code, is there anything that you guys see that's coming as far as legislative changes or anything that would make any -- make you scratch your head or think about changing your tax guidance? I mean, obviously, there's a lot of moving parts right now. But is there anything that you foresee that would change that right now or no?

Well, Murph, I've got one of the best tax guys around here, (inaudible) Bill McLaughlin, our VP of Tax, (inaudible).

I guess, really, the big talk right now in Washington is lowering the corporate tax rate.

Yes.

To something in the mid-to high 20s with a corresponding base broadening. Currently with our valuation allowance position, that really won't affect our tax expense or our cash taxes for that matter in the short term. Longer term, when we come out of the valuation allowance, it could change our tax profile.

And the length of the non-cash tax paying -- how many years you got left there?

We really haven't given you that, Murph, but have to give you the profitability in the US, which we haven't historically --

I'll take both.

I don't expect to be a taxpayer this year domestically.

Great. Thanks a lot, guys.

You're welcome, Murph.

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

Thank you. Good morning. I joined a little bit late, so I apologize if you've already spoken to this. But I noticed that margins in the Seating business were down a little bit sequentially from Q3 to Q4, even though revenues were up pretty nicely. Is this a function of mix? For example, fewer T900 trucks, or is it higher cost or higher spending? What was the reason for that?

Really couple-fold. There was a mix issue where, we don't sell to the industry, we sell to a specific mix of platforms, each with their only financial DNA based on the level of content and vertical integration. So the mix worked against us a little bit in the quarter, not unanticipated. We also had a step-up in our development and launch costs quarter-over-quarter as we get ready to launch that $900 million or thereabouts of additional backlog. So we saw those pressures mainly in the quarter.

And, Matt, how do you see that as we roll into Q1? Similar level of cost and similar mix, or does it bounce back?

For the quarter from our standpoint, I think that the -- there will be a similar level of cost. The mix should improve slightly from Q1. So I would anticipate a slightly higher margin in the first quarter than what we saw in the fourth quarter in the Seating segment.

And then the trajectory on margin in electronics that's been improving as revenues have gone up, does anything throw that one way or the other, launch preparation or anything like that?

No. I mean, the team, our electrical distribution team, our Electrical Power Management team is doing a great job, launching a lot of product, winning new business at a profit, and coping with some pretty serious headwinds on commodity costs and, as well as some costs associated with certain shortages on circuit boards. That being said, we still expect the margin expansion to continue going into next year as you're able to gain scale with their backlog and continue with their savings from restructuring. We're pretty comfortable with the projections of 5% to 5.5% for this business overall for next year.

Okay, thanks, Matt.

Your next question comes from the line of [Adia Aborle] from Goldman Sachs. Your line is open.

Hi, guys.

Good morning.

A quick question. I wanted to know your thoughts on the competitive landscape in the Seating segment given your competition, your competitors have been doing some acquisitions of late. Can you comment a little about that?

Yes, I can. What you're seeing, I think, mainly with Johnson Controls is execution of the strategy that we've been talking about for a long time, which is the need to have vertical integration in order to improve your quality and control your cost and because of the margin opportunities. We were aware of those potential targets and acquisitions. We felt we were in pretty good position competitively, mainly in Europe, in both seat covers and our footprint for mechanisms and we chose not to pursue that level of that -- those investments.

That being said, we do believe that investment in components and specifically components in emerging markets, mechanisms, recliners, tracks, seat covers, is -- and cut-and-sew in fabric is the way to go.

Do you think this kind of vertical integration put some pressure on the pricing environment given that everybody would benefit from a margin standpoint going through this vertical integration process?

Not necessarily. I think it's a way to improve quality and definitely drive waste out of the -- out of the components and sub-tiers as you can control more of the design capabilities. And that would benefit everybody from the customer to the suppliers, as you continue to figure out ways and work the ways to bring your cost point down. But each product has its own financial DNA, and really what you need to be looking at is the return on investment. And so from our standpoint whether the margins go up or down depends on the amount of up-front investment required. We believe that the target margins in Seating between 7% and 8% that captures the additional vertical integration investments that we're contemplating and still provides a return in excess of our cost to capital.

Great. Thank a lot, guys.

You're welcome.

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

Good morning, Matt.

Good morning, Brett.

A few questions here. First of all, launch costs, you've talked about 2011, your expectations are going to be higher. But as you look out to 2012, do you think you see launch costs starting to tail off or do you think you see another step up in 2012? And I know that's a ways off, but your expectations there?

You're right. It is a ways off and a little bit early to be taking about 2012. But just directionally I would expect it to be relatively consistent because of the launch, and we have $900 million, almost $1 billion of backlog in that year. So I would tell you I expect it to be consistent with 2011, just directionally at this point.

And then as far as distribution of cash to shareholders, is there an internal kind of timeframe or expectation that you have? I mean, is this something that you think you're going to come to a conclusion on in 2011, or is it kind of -- well, is there a timeframe?

There's not a hard timeframe. What we've talked about on the distribution of cash or the consideration of distribution of cash to the shareholders was the need to get through 2010, the year after emergence. We've done that. Demonstrate our ability to generate cash and grow our cash balances and take care of our capital structure, we've done that. Provide guidance and see the shape of the recovery. We're pretty confident that we see it. Now we're out there giving guidance. I think it's a dialogue that will -- that has taken place and will continue to take place with our Board. And I would expect at some time in the not-too-distant future that we'll have a definitive statement on what we plan to do.

And then I -- I think you may have answered this earlier, but I kind of got distracted here. Pricing pressure from the automakers, your margins, particularly in your Seating segment, are doing quite nicely here. There has been some concern with regards to increased -- or the potential for increased pricing pressure from the automakers? As you compare it to three years ago or something along those lines, would you consider pricing pressure to be just kind of on par with where it was three years ago, or you do you think it's increasing, decreasing?

It's about the same, Brett. The only time it really kind of lightened a little bit was during 2009, but that was really driven by the lower production volumes where you were unable to get cost savings out because the industry was in many cases dark or many car companies were actually dark. So you didn't have the ability to take the cost out of production because, quite frankly, there was no production. The historic kind of 2% net is pretty consistent.

Obviously, our customers are in a very competitive and consumer price-driven type product. Our obligation as a Tier One is to find them solutions through managing our cost structure in finding ways to get the inefficiencies out of the supply chain and helping them meet their overall market price. So from our standpoint, it's been a difficult environment. It will remain a difficult environment. But in many ways that plays to Lear's strength with our level of vertical integration, our design capabilities and our kind of global footprint. I think we'll probably be in the best position to help the customer ultimately meet their goal of getting cost out.

Okay, thank you very much, Matt.

You're welcome.

Your next question comes from line of Ravi Shanker from Morgan Stanley. Your line is open.

Good morning, guys. I think I heard you say that mix could be a headwind in 2011, as well. Can you just touch on that a little bit more? Is there any particular platforms that you think are going to be weaker next year?

Yes, there's a couple of our key platforms that we think year-over-year may be down slightly, probably for slightly different reasons. In Europe, for instance, we've got the 3 Series down, one 3 Series down because it's going through a refresh. As they're going through their multiple different platforms, they're starting to relaunch the next generation. We would expect that production in that platform to be down slightly. And that would drive the mix since that's a very important and highly contented Lear platform. In the US, the large full-size GM SUVs and pickups we expect to be slightly weaker year-over-year. They had a great year in 2010.

And we think that we would see a little bit of a softening, are planning for a little bit of a softening on that platform, as well. The other thing that's important to note from a mix standpoint is that while the industry is growing and we expect North America to grow, in our backlog are certain programs like the Fiat 500, for instance, that is an incremental production number for the North American production, but it's actually in our backlog since we're going to be doing that. So that's one of the reasons why you don't necessarily see that conversion on the industry.

Got it. A couple of quick housekeeping questions. Your guidance for next year points to your core operating income being about $100 million to $140 million higher, but your cash flow is pretty flat. And your CapEx only up $15 million. Can you just help me understand what's going on there?

Yes. I can. Part of the cash this year and the outperforming of the cash -- if you remember we were guiding to about $350 million as little as a month ago -- benefited from kind of some certain actions this year that in 2010 that didn't happen. For instance, our restructuring cash expenditures were down about $20 million, $30 million, from what we were anticipating because certain action items slipped into 2011.

So between the improved earnings and the delay in restructuring cash, that benefited the 2010 timeframe. That will have a rebound effect or a negative impact on our cash in 2011. Now when you put the two years side-by-side, though, you have over $800 million of cash generation between 2010 and 2011. You really have to broaden the period of the cash. You're right, capital expenditures are up, and we also expect cash from restructuring to be roughly $125 million. So that's a higher use of cash, as well. Those are probably the items that are impacting cash more than anything. But we're really happy with our ability to generate cash and we're very happy with the fact that we think over 2010 and 2011 we'll generate over $800 million of free cash flow.

Got it. And finally, your SG&A has been a very narrow band, around $100 million the last three quarters, even with your [top line] being in a wider range. Is that $100 million level like a new threshold for you, or is it going to be more sensitive to the top line?

It's almost like a stair-step process. It's not variable per se, but at the same token it's not a fixed line item. As business activities increase, and as we expand in emerging markets that's going to create some additional requirement for program management and support costs to help us grow the business. That being said, we would expect in any given quarter SG&A to be in the 3.5% to high 3% as a percentage of sales. So it's going to bop around probably in that, I would say, high 3% of percentage of sales through 2011.

Understood. Thank you.

And your final question comes from the line of Itay Michaeli from Citi. Your line is open.

Thanks, good morning.

Good morning, Itay.

Just to follow up on the cash flow question, Matt, when I look at the guidance on EBITDA and then run through CapEx, interest, restructuring and taxes, I still come up with something, maybe $50 million, $60 million higher than $400 million. Is there anything going on in working capital or accrued that is also in that walk?

Working capital will be a use. As you would expect, as sales ramp up and continue to grow, exiting the year I would expect to see a use of working capital to support the higher sales. So that's probably about it. I mean, if you walk the number down, I would assume a negative working capital because of the sales growth.

Other than that, there's nothing really unremarkable or anything that we haven't disclosed whether it's the cash from restructuring or the roughly $125 million to the interest expense, the cash taxes we provided. So from that standpoint, I would just do the math that way, and I think you'll get pretty close.

Okay, that's helpful. And then can you also update us on the pension and the OPEB situation at year end?

Yes. During 2010, we continue to fund the pensions. Our philosophy is to fund at a minimum the service costs and interest cost on the obligation. We would, however, expect a modest growth in OPEB in pension. Right now, slightly above $300 million at $316 million, combination of OPEB and pension on funding, which is still, for a Company our size, extremely modest. And really that was driven more than anything from the change in the discount rate. And the discount rate is tied in many ways to long-term bond rates which decrease, which have the impact of decreasing the obligation. But I still believe that it's very, very modest, and probably the lowest of any company in the space our size.

Right. That's helpful. And maybe lastly, could you just maybe refresh us on your -- the content per vehicle on the T900 platform, both the SUVs and pickup trucks? And how should we think about the incremental margin there versus sort of the corporate average?

Yes. Really what drives the incremental margins on any product is the amount of content and then the amount of Lear content. So a high-powered seat typically has more content and more Lear content than that. And the 900 is a really unique platform in that it has a combination of the basic full-size pickup truck with a very basic type seat, bench seat, to a full three-row SUV with leather and full electric power.

So on a pickup truck, you could see anything from $1,000 to $1,400 in content depending upon whether it's a base pickup or a crew cab to an SUV, which on average is going to be around $1,800 to $2,000 or slightly higher level of content.

From an incremental margin stand, again, we use the rule of thumb of between 15% to 20% incrementally on pure volume as it comes in. But it really depends on how the volume comes in, what type of platform, what level of content is on it, whether it's a pickup truck or a full-size SUV.

Terrific. Thank you, Matt.

You're welcome. Okay, I think that handles all the questions. On behalf of the Lear Corporation, I'd like to thank you all for your support. To our employees around the world, thank you for another great quarter. And for shaping up to have 2011 be a fantastic year. So I appreciate all the hard work. Thank you very much.

And this concludes today's conference call. You may now disconnect.