Lear Corp (LEA) 2011 Q2 法說會逐字稿

Good morning. My name is Steve and I will be your conference operator today. At this time, I would like to welcome everyone to the Lear Corporation Second Quarter 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 will now turn the call over to Ed Lowenfeld, Vice President of Investor Relations. Please go ahead.

Thank you Steve. Good morning and thank you for joining us for our Second Quarter 2011 Earnings Call. Materials for our earnings call were filed this morning with the Securities and Exchange Commission and posted on our website, Lear.com, through the Investor Relations link. Today's presenters are Bob Rossiter, CEO and President, and Matt Simoncini, Senior Vice President and Chief Financial Officer. Also participating on the call are several other members of Lear's 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 the presentation materials 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 slide labeled non-GAAP Financial Information, also at the end of the presentation materials.

Slide number two shows the agenda for today's review. First, Bob Rossiter will review highlights from the second quarter. Next, Matt Simoncini will review our second-quarter financial results and provide an update of our 2011 outlook and sales backlog. 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 three and I will hand it over to Bob.

Thanks Ed and good morning everybody. Lear's positive momentum continued in the second quarter. Sales and core operating earnings were both up about 20%.

We achieved our eighth consecutive quarter of year-over-year improvement in core operating earnings. Our Electrical business continues to benefit from increasing scale and our margins improved significantly. We continue to report positive free cash flow, with $121 million in the second quarter and over $200 million in the first half of 2011. And we're winning new business globally in both of our business segments.

The balance sheet continues to remain strong as we increased our revolving credit facility to $500 million in June. We also continue to return cash to our shareholders through share repurchase and dividends. As a result of our improved operating performance and industry outlook, we are increasing our full-year guidance and Matt will provide details later.

Now go to slide four. This slide shows vehicle production in key automotive markets for the second quarter. Global vehicle production was 17.9 million units, down 1% from a year ago, reflecting a significant reduction in Japan due to the earthquake and tsunami, offset in part by growth in the emerging markets.

Now I would like to turn it over to Matt for the second-quarter financial results.

Thanks, Bob. Please turn to slide number six.

This slide provides financial highlights for the second quarter. Lear's sales were $3.7 billion, up 21% from a year ago reflecting the strong sales backlog, the positive impact of foreign exchange and increased production on Lear's platforms.

Core operating earnings were $228 million, up 20% from a year ago. The increase in earnings reflects the increase in sales and operating performance improvements, partially offset by customer pricing and higher costs for product development, launches and commodities. This represents our eighth consecutive quarter of year-over-year earnings improvement.

We generated $121 million of free cash flow during the quarter and finished the quarter with $1.8 billion of cash. Our reported earnings per share was $1.65. On the next few slides, I will cover our second-quarter results in more detail and update our full-year outlook.

Slide seven provides a summary of our financial results for the second quarter of 2011. As previously mentioned, sales were up 21% to $3.7 billion. Pretax income before interest and other was $220 million, up $47 million from a year ago. And net income was $178 million, up $18 million.

SG&A as a percentage of sales was 3.2% compared with 3.7% a year ago. The lower SG&A rate reflects the increase in sales. Interest expense was $11 million, down $3 million, primarily reflecting higher interest income.

Other expense was $4 million compared with an income of $23 million a year ago, primarily reflecting a year-over-year reduction of profitability of our International Automotive Components joint venture and unfavorable foreign exchange. Our nonconsolidated joint venture in Asia remained profitable, however.

Depreciation and amortization was $64 million, up $7 million from a year ago, reflecting higher capital spending over the last several quarters.

Slide number eight shows the impact of nonoperating items on our second-quarter results. As I mentioned on a previous slide, our reported pretax income before interest and other was $220 million. Excluding the impact of operational restructuring costs and special items, we had core operating earnings of $228 million, an increase of $38 million or 20% from a year ago.

Other special items in the second quarter include $19.7 million in tax benefits primarily reflecting a reversal of a valuation allowance at a foreign subsidiary. Adjusted for restructuring and other special items, net income attributable to Lear in the second quarter was $165 million and adjusted EPS was $1.54.

Please turn to slide number nine for a summary of our results by business segment.

In Seating, core operating earnings increased to $226 million, up from $209 million a year ago. The improved earnings resulted from higher production, backlog and cost reductions which were partially offset by customer price reductions and higher product development, launch and commodity costs. Adjusted margins in the second quarter were 7.9%, down from a year ago. Year-over-year margins were negatively impacted by customer pricing as well as higher launch, development and commodity costs.

Slide number 10 summarizes the operating performance in our Electrical segment. Financial results in this segment continue to improve. Adjusted margins in the second quarter improved to 6.1%, up 90 basis points from a year ago.

The margin improvement reflects the benefit of increased sales from higher production on Lear platforms, sales backlog as well as the benefit of cost reductions which more than offset higher launch, development and commodity cost and the negative impact of Japanese production disruptions.

Please turn to slide number 11. We generated $121 million of free cash flow in the second quarter and $205 million in the first half of 2011. Free cash flow in the first half increased as compared to a year ago, despite higher capital expenditures and working capital. The higher spending in 2011 reflects increased investment in new backlog programs and component capabilities in emerging markets.

Slide number 12 provides an update regarding the share repurchase program that was announced in February. During the second quarter we purchased 1.5 million shares of stock at an average price of $50 per share for a total of $73 million. Year to date we have purchased $100 million of stock.

As of the end of the second quarter, $300 million remained under the share repurchase authorization. Going forward we plan to continue buy back shares consistently, subject to the Company's alternative uses of capital, prevailing financial and market condition and other factors.

On June 22 we paid a cash dividend of $0.125 per share or approximately $13 million. Total cash returned to the shareholders during the second quarter was $86 million.

Please turn to slide 13 for an updated status of our share count. At the end of the second quarter we had approximately 104 million shares of common stock outstanding.

Approximately 660,000 warrants remain outstanding which are exercisable into 1.3 million shares of common stock. The warrants expire on November 9, 2014. Assuming exercise of all the warrants investing of the management shares, Lear's total shares outstanding would be 107.6 million shares.

Please turn to slide 15 for a review of our major assumptions for our 2011 outlook.

Our financial outlook assumes North American production of 12.7 million units and European production of 18 million units, an increase from our prior guidance of 2% and 3% respectively. Production assumptions are also up modestly in our key emerging markets. Global vehicle production is forecasted to be up 2% from the prior outlook to 74.5 million units.

Our full-year financial outlook is based on the assumption of a 2011 [average Euro] of $1.40, unchanged from the prior outlook.

Commodity costs for steel and copper, the two commodities that influence our business the most, are relatively flat with prior guidance but still up meaningfully from last year. We're also seeing additional pressure on other commodities that impact our business, such as petroleum-based chemicals. Additional challenges include continued shortage for certain components used in electrical business.

Slide number 16 details our updated 2011 financial outlook. We expect 2011 sales in a range of $13.4 billion to $13.8 billion, up $400 million from our prior outlook, reflecting primarily higher industry production. We are increasing our 2011 outlook for core operating earnings by $40 million, to $740 million to $780 million.

Tax expense excluding of restructuring cost and other special items is expected to be approximately $135 million, up $10 million from our prior outlook, reflecting the increase in earnings. Our outlook for cash taxes is unchanged at approximately $90 million. Pretax operational restructuring costs in 2011 are estimated to be about $100 million, down $25 million from our prior outlook.

Capital spending in 2011 is estimated to be down -- to be, I'm sorry, approximately $325 million. This is an increase of $25 million from our prior outlook. And it reflects increased investment in component capabilities in the emerging markets.

Free cash flow for 2011 is expected to be approximately $425 million, up $25 million from our prior outlook. The 2011 outlook for interest expense and depreciation and amortization remained unchanged from our prior outlook. Adjusted earnings per share is forecasted at $4.95 to $5.30 per share.

Slide 17 provides an update of our 2011 to 2013 three-year backlog. As a reminder, we define backlog as new awarded programs over a three-year period, net of lost business and programs that roll off. We do not include pursuit or high confidence business or nonconsolidated programs.

Since the beginning of the year, our sales backlog has increased by about $200 million. The majority of the increase reflects new programs in Asia and Europe, with most of the new business in Seating. The present status of our three-year backlog covering the 2011 to 2013 period now stands at $2.4 billion.

Now I would like to turn it back to Bob for some closing comments.

Okay. On slide 19 -- thank you, Matt. In the second quarter we sustained our positive momentum. Sales and earnings grew faster than industry production.

We achieved strong financial results in both business segments, and we put in place a new credit agreement that provides additional liquidity and financial flexibility. And, we've continued to win new business and increase our sales backlog.

Based on our strong results in the quarter and an improving production environment, we are increasing our 2011 full-year outlook for sales, earnings and free cash flow. I'm extremely proud of the performance of the Lear team and I'm proud to be a part of this team. Their hard work and dedication to serving our customers has enabled us to continue to report improving results and grow our business.

Now, I will be happy to open it up for questions.

(Operator Instructions) Rod Lache, Deutsche Bank.

Can you pass along the impact of FX, raw materials and launch costs year-over-year in the quarter and what your expectations are now for the full-year?

Yes. Launch cost and ER&D together -- combined, Rob, were close to $70 million. From a foreign exchange impact we did pick up some revenues on foreign exchange, mainly the euro; was roughly $200 million in revenue. And that converts at the average kind of operating earnings in Europe of around 4% or 5%.

And is that -- do you happen to have a launch cost estimate increase for the full year? And is that something that comes down next year?

It's a little bit early to talk about next year at this point, Rob. But I would tell you that year-over-year, launches are about $30 million higher than last year. Now, last year was about $60 million, so our launch costs, it would peg our launch costs around $90 million for the year.

The cadence of the launches are slightly front half-loaded, Engineering. For the full-year, increase is about $50 million. And again, that would put that number at about $200 million in total.

And that is a little bit different. That is a little bit more back half loaded. So net/net between the two of them, we're a little bit heavier the back half of big year as we launch the backlog.

Now from a backlog cadence standpoint, I would expect that there would not be a significant change next year in launch cost. But still, it's a little bit premature to get into the detail for 2012.

Okay. And do you happen to have the D&A forecast for the year broken down between the Seating business and Electronics?

And then lastly, just a question on cash. You continue to generate cash faster than you are deploying it. Even if you were to kind of run at the current rate of repurchases, it doesn't really look like it would dent your overall cash position all that materially.

Do you have any kind of updated thoughts on what your plans are for deploying that cash and getting a little more efficient capital structure?

Let me work backwards on that question starting with the cash deployment. One of the hallmarks of Lear is the ability to generate free cash flow and this year is no different.

From a deployment of cash standpoint, Rod, our first focus is always to make sure that we invest in the business in a manner that'll allow us to serve our customers and still be the supplier of choice in both segments. And we're doing that. That is going to require mainly organic investment in some of the emerging markets as we expand our footprint there and our capabilities there and lower our cost on components.

Two, we're going to look to do niche acquisitions to round out the product offering, to facilitate the diversity in sales, and also to add scale in electrical distribution. As we mentioned before, we are evaluating opportunities to do that.

Finally, we've announced, as you know, the share repurchase. And I think we had a nice pace this quarter on the share buyback. And we would do that because we are very cognizant of our relative valuation to others in the space, and we think that is the right thing to do with the cash.

From a capital structure standpoint, we made a nice step this quarter with the amended revolver where we upsized to $500 million. I think that gives us a lot of flexibility, not only to run our business on a day-to-day basis, but also to continue to invest in the business.

From a depreciation and amortization standpoint by segment, it is roughly -- the breakdown is typically about two-thirds Seating, one-third Electrical.

Okay, thank you.

John Murphy, BofA Merrill Lynch.

Just curious, recently you have been beating expectations and running ahead of what your guidance has been for the past few quarters. As we look at that, is the bulk of that, in your mind, driven by higher volumes? Or is there better execution going on internally than you'd been expecting, so even if volumes don't continue to recover you can still keep posting good numbers? Just trying to understand the volume versus the internal execution [side of the beat].

John there is literally thousands of inputs that go into making a projection. First and foremost is the volume, and the volume on the car lines that you are on. Each car line has its own financial DNA, so to speak, depending upon how much product we have on it and how much of the product that we make, where it's made, and what not.

So I would tell you that we did get a nice mix of product. When we were setting guidance earlier this year, we were at 12.5 million units in North America and 17.4 million units in Europe. And the mix has benefited us in the second quarter. So it always starts on selling your product.

Both businesses are performing well. Electrical made a really nice step in their margins even with the headwinds on some of the component shortfalls that drove some premium cost. Seating continues to perform well within their target margins on the higher sales. So, I would tell you that it starts with sales. But both businesses are performing very well.

Okay. And then just a second question; if we look at the key programs that you highlighted in the second quarter, and even in the first quarter, could you just remind us if there were any programs that are really big standouts as a positive in that mix that you just kind of talked about? And how should we think about those key programs in the second half or how you are thinking about them?

Well, I think the premier German manufacturers had a really nice quarter. I think the domestic automakers, GM, Ford, both did extremely well. We've got a lot of content on [the] 3 series and that still does strong in the marketplace to our expectations, as does the large trucks and SUVs from GM. The Explorer had a nice start and that is a good platform for us as well. So, those would probably be key drivers.

Okay. And then just lastly on the capital allocation and what you're doing to return value to shareholders, just to kind of follow-up on that. Now with the new amended revolver in place, your cash balance, your forecasted free cash flow, it looks like you are in a good spot.

What would it take to get you to release more value to shareholders through share buybacks? The stock is below where it was the entire first quarter, so I would imagine you might want to get more aggressive on the share buybacks. I'm just trying to really understand if there is something that you need on a macro basis that would be a trigger. Or is there just this massive macro uncertainty that is keeping you from potentially getting more aggressive?

No, I wouldn't say there is a macro uncertainty. I think if you look at our priorities from an investment standpoint, we believe we're still a growth Company and the growth industry. And our focus first and foremost is to continue to invest in the business in a manner that will allow us to serve our customers, continue to grow profitably and provide the type of returns to our shareholders that they expect.

So, our first priority is always to continue to invest in the business and we're doing that and we will continue to do that. I don't believe it is mutually exclusive. I think we can continue to provide cash back to our shareholders especially when we're trading at the levels we are trading.

Matt, you have net cash of $1.1 billion. It's almost 4 times your annual CapEx. Does that mean that there is a large acquisition on the horizon that you're looking at, or any other big strategic actions?

No, there's not. We don't believe we need a large acquisition. We think both businesses are well placed.

We would look to do something that would provide either access to customer diversification, access to geographic diversification to facilitate our growth in the emerging markets, or something that would add some scale to Electrical Power Management Systems, or some component capabilities. But all in all I don't see a major acquisition in our future.

I will tell you this; that from our standpoint we continue -- to run the business, we need to continue to invest in ourselves. It's a growth industry. We see a nice glide path on the industry recoveries globally over the next several years, and we're going to participate in it.

Great, thank you very much.

Itay Michaeli, Citigroup.

Matt, I think you've raised CapEx guidance for the year twice now. How should we think about that going forward into next year? And how does that impact the long-term margin target for both Seating and Electrical?

I would say that if you use -- just from an outlook standpoint directionally, if you use a rule of thumb of about 2.5% of sales from a capital investment standpoint, you won't be that far off. As we continue to invest in the business we -- obviously that creates a higher capital intensity.

We think that we capture that in our target margins of 7.5% to 8.5% in Electrical Distribution, and Seating and the 7.5% range. And I think at those levels we can provide a nice return on that investment.

Great. And then can you just remind us what the GMT900 production assumption now is in your new guidance?

Yes, we've got it at [930].

930, okay. And then just lastly with cash restructuring, where restructuring is coming down this year, any change you are thinking around 2012 and beyond?

No, at this point I would say no. These things are somewhat fluid because we're not in complete control of when we're able to take certain key actions. It comes with negotiations with our customers, production plans, discussions with our unions and labor unions and whatnot.

So we're not always completely in control over the timing of it. But at this point I would tell you that it doesn't change our thinking on 2012.

Okay, great. Thanks so much.

Peter Nesvold, Jefferies.

Question on the guidance; so if I take the full-year guidance and I strip out Q1 and Q2 actual results, the implied second half guide at the EPS line is about 30% below the first half. Now, undoubtedly, you guys are always putting up much bigger numbers relative to your guidance. We think of it as being conservative, which seems appropriate.

We've seen a number of other auto companies talk about second half being lower than first half; Ford and GM come to mind. But is there anything that might be kind of outsized in how you are looking at the world for the second half versus first half? I'm just trying to frame, frankly, how conservative is the second half guide versus what we're seeing at other companies?

Well, we think it is balanced. It starts with the production cadence and the production cadence on key car lines. Right now we think we're going to see a more typical automotive year as far as the cadence of production and sales, which normally first half to second half is something in the 52%, thereabouts, in the first half versus the second half. So, it starts with that.

Now, from a business standpoint, we talked about a step up in Engineering and some support costs in the back half of the year as we continue to grow our business and continue to increase to the backlog. And that is going to require some additional investments in Engineering and in some of the emerging markets, which will also be a headwind.

We are seeing some headwinds as well on commodities. We mentioned the petroleum-based chemicals largely used in our foam fuel surcharges and whatnot, with the crude oil being in the $90s. So from that standpoint there are some headwinds. But, again, we expect both businesses to perform well within their target margins for the full-year. Again, continued improvements in Electrical Distribution year-over-year and Seating continues to perform well.

Okay, and if I can ask a quick follow-up. As we hear more about technologies like electrical power steering and vehicle stop-start, how does that impact your Electrical Power Management Systems business going forward?

It creates more opportunity.

Yes, I mean any content per vehicle that [take that] option package, or anything else you can help me frame the size of the opportunity?

What I would tell you is this; and let me see if I can get you there. We're not going to frame the exact content per vehicle on a power steering unit or something like that. But what I will to you is the opportunity on a content per vehicle in that business is driven by many things.

Even on traditional powertrains, you are seeing more and more features, and more and more computer management of internal combustion engines to improve efficiencies. That is going to require more signals. That is going to require more circuits. That's going to require more content on electrical distribution systems.

On a hybrid or full electric, the electrical content could be as much as double what you would see on a full-sized, full-power luxury vehicle -- anything from $1000 to $2000 of content on the vehicle. What I would tell you is, you will see something in the content ranging from anywhere from 10% to 100%. I know that is a big range, but it really depends on the architecture.

Thank you.

Himanshu Patel, JPMorgan.

Good morning guys. My question was really about controllable costs. I know you don't want to give an outlook explicitly for 2012. But when you look at your backlog, you have some pretty hefty years ongoing right now, but 2013 seems to step down.

When does that start benefiting you guys in terms of moderation on things like engineering costs? Does that start showing up early 2012 or more towards the end of 2012?

If that backlog number remained the same, which we don't expect it to, I think what we're seeing is really the cadence of the sourcing. There was a backlog of the backlog. There was a backlog [of] sourcing cadence due largely to the disruption that we saw a year ago in the industry, or little over a year ago. And I think there was a flurry of sourcing activity and you're seeing it in kind of a launch.

Going back to 2009, many of the programs were delayed. And what that did was push the backlog into '10, '11 and '12. I still think there is opportunity to increase that number, a significant opportunity to increase that number in 2013, and I would expect that number to grow.

Now, if it stayed static, yes, you would start seeing some benefit as we are able to sunset some of the Engineering costs by new programs in 2012. But we don't expect that number to stay at that size.

Okay. So there is still scope to upgrade 2013 basically on the backlog?

Absolutely.

Okay. And then is there any update you can give us on the antitrust situation? I mean you guys put out your comments I think in February of 2010 and it has been a year and a half now. Has there been any movement on that that you can shed some color on?

This is Terry Larkin, the General Counsel at Lear. You are correct, just for the benefit of everybody listening in on the call. Our Paris offices were visited by the European Commission and the French authorities in February of 2010 as part of an investigation into the anticompetitive practices allegedly occurring among automotive electrical, electronic component suppliers. We are cooperating fully with the authorities in that investigation.

We have recently received a supplemental request for information. We understand that that request is not unusual, and so our cooperation with the authorities continues. To our knowledge we are not involved in any of the antitrust investigations that were going on in Japan or here in the United States.

Okay. So I guess two questions, my understanding is the agencies -- they talk to each other a lot. But despite that, you still think the investigations in Japan are not related at all to the European investigation?

We really are not in a position to speculate as to whether they are related or not. I think your premise that they talk with each other is correct, though.

Okay. And I guess just a clarification, are you under investigation in Europe or is it an inquiry in Europe?

The term used by the European Commission is an investigation. That covers the broad range of all sorts of inquiries. So, there is no particular significance attached to the word investigation by the Commission.

Okay, great. And Matt, just maybe a final question; we talked a little bit about this before. But we're just seeing a flurry of upward revisions on CapEx across the space. I know you guys mentioned some of it for you is related to, I think, investment on emerging market component capability.

But I guess just broadly, are you seeing something on the acceleration of product development schedules from OEMs or -- that's sort of triggering this? Is there any sort of common theme you are picking up on? Or do you view this as pretty kind of one-off for Lear?

It is really -- I think it is driven more than anything by the growth in the emerging markets and the need to have some selective vertical integration as an opportunity to control your quality, serve your customers and improve your cost (inaudible) (technical difficulty)

In our case, we balance the ability to do that organically versus niche acquisitions and the value that it can create to our investors, our shareholders. But I can't speak to others. I know from our standpoint really what drives it is we think there is real opportunity to provide value to our customers and our shareholders by making this investment. Returns are good, and I think more importantly, it kind of helps us improve our quality and cost footprint for our customers.

And when you talk about -- you have discussed better vertical integration on the Electrical business before. Is that -- just help us understand the commercial benefits of that. Does that help you win additional business? Or is it more just kind of a margin play?

It's both. I think that whenever you can control quality and reduce your cost, it makes you more competitive and gives you advantages when you're winning new business. From our standpoint I think we are uniquely positioned in the market place because of our ability to do complete electrical distribution, design and manufacture of all the components on every continent in the world, high-powered and low-powered.

So, from that standpoint, if we could expand our capabilities in things like connector systems, and expand our European business into other regions, that would be very, very good for us.

Great, thank you.

Aditya Oberoi, Goldman Sachs.

So I just wanted to follow-up on the question about CapEx. Is it -- [this is -- the] increased guidance, is it more investment that you guys are doing? Or are you just pulling forward some of the investments you planned for the next few years?

It's more investment. I mean, from our standpoint we're pretty excited about some of the investments we've made.

We have expanded our capabilities in Brazil in both our mechanisms facility and -- new facility in mechanisms in Brazil as well as new electrical distribution facility in Brazil and in Thailand. We're expanding our mechanisms capabilities in Asia, both in China and India. We're looking to do the same with connector systems, so it is really an increased investment.

Okay, great. The other question I had was on pricing. You guys mentioned selling price reductions as one of the [parameters] that weighed on margins in both the segments. Is it the standard 1% to 2% price reduction that is what we're talking about? Or is -- was there anything over and beyond that you saw this quarter?

We usually see a net price reduction of about 2%. We're able to provide much more value to our customers, though, through value engineering and being able to take costs out of the product form in a collaborative manner. But, net, it runs about 2% plus or minus.

Brian Johnson, Barclays Capital.

I would like to talk maybe a bit more strategically about the margin development and kind of where you are in your strategies both in Seating and Electrical. Maybe start with Seating, because clearly you are still running above the 7.5% (inaudible) to 8% margin.

Is the kind of 7.9% we're seeing about where it is going to go? And is there sort of an equilibrium at work there, where you can get backlog rolling in, but pressure on commodity and price [down to] coming to kind of keep it in that range?

Conversely, are you seeing maybe better margin enhancement as you vertically integrate in some of the content increases in Electrical? And what does that imply about either the 7.5% to 8% target or the pace of you getting there?

[That's a lot of] questions.

Yes, let's break it down. Let's work in reverse. Electrical distribution, one of the drags on that business recently have been the fact that it was under scaled in the amount of investment that we needed to make in infrastructure cost, we needed to maintain in order to be able to provide both high-powered/low-power solutions on every continent in the world fully integrated.

A couple of years ago our fixed costs were running at about 25% of sales when the business was at $2 billion. We need to scale that business up. And we need to get in the $4 billion-plus range to get it into their target margin of 7.5% to 8.5%.

Now again, there is no magic to that number. What makes that number work for us is, at that rate, we can return in excess of our cost of capital on the asset intensity of that business. We believe that through backlog and the industry recovery that we can achieve those type of sales and margin expectations over the next several years.

We're well on our path. The business has made a nice step this year and we should expect that business to run in the 5.5% to 6% range for the remainder of the year.

On Seating, we believe in a 7.5% to 8% range is kind of where it's that. In any given quarter we could break through the upper end or the lower end, but we will average out at that rate.

Sometimes it is hard to call a margin number specific in a quarter because of the mix in product, and expenses are not always linear, nor are commercial remedies or commercial solutions. So, sometimes you will have some chop in the quarter that will put you above or below. But on average we're comfortable with that range.

That range is important as well because with the capital intensity in Seating, that again allows us to return on our investment in excess of our cost of capital. So I think Seating is pretty much running at the rate.

And there is a natural commercial [baffle] in this business where I think it always comes back to the type of return on investment. And as long as we can return in excess of our cost of capital that we can continue to serve our customer in a cost-efficient manner, continue to grow and still provide returns to our shareholders.

I think the answer was as long as the question.

(laughter) I know.

So, really, it is Electrical where you really ought to be looking for incremental profitability lifting the margins up. In Seating, it's kind of running at roughly its average margin rate, and so it's not something where (multiple speakers) volume will drop to the line, in line with the average margin.

Let me try to answer in a Bob Rossiter manner. Seating is at target and Electrical will continue to improve.

Okay, and the pace of Electrical isn't it any faster or slower than you had anticipated earlier?

It is pretty much as we expected. They had a nice quarter though. It was a very nice performance from that segment. Ray Scott and his team did an outstanding job.

Chris Ceraso, Credit Suisse.

Just a couple of items here, can you give us the FX contribution to revenue by segment?

We don't have that by segment per se. Why don't I hand it over to Jason Cardew, our Vice President of Planning? You have that handy, Jason?

Foreign exchange in the quarter?

Yes.

By segment, it was about $170 million in Seating and $60 million in Electrical.

Any difference in the contribution on that? You said before, Matt, that it was about the corporate average around 4% or 5%, something like that?

Yes, and slightly -- I would say probably slightly higher in Seating but pretty consistent between the two of them.

Okay. Were there any costs in the quarter associated with supply chain disruptions, workarounds, premium freight? Can you give us a ballpark number for Q2 and if you expect that to diminish completely in Q3 and beyond?

There were costs associated with supply chain disruption. And where we're seeing it is mainly in the Electrical Distribution business, although Seating did get impacted by it in a modest way. The costs in the quarter were roughly $6 million. We would expect some level of that to continue through the remainder of the year.

Really? Continue through the rest of the year at a lower pace than that?

Slightly lower.

Okay, thank you.

Ravi Shanker, Morgan Stanley.

On the backlog, it looked like there was a bit of a shift towards the Seating business. And if I'm doing my math right, it looks like almost all if not more of the incremental backlog came in Seating. Can you just explain what is going on there?

Yes, I think both businesses continued to win new programs. From a backlog standpoint, if you look at it overall, we are still somewhat disproportionately Electrical as they penetrate the market. The net wins, the way the math worked in this update of the $200 million, the net wins were Seating. But both businesses are winning new programs.

But there has been no change in how and where you are quoting business and for which segments?

No, not at all.

Got it. And can you just broadly comment on the macro environment? There's been a lot of talk of potentially going into a double dip recession. How do you think the supply base is equipped to do something [like that], and specifically, how are you guys thinking of that as well?

Well, one, I can't speak to the supply base overall. I can speak to Lear Corporation and our suppliers.

From our standpoint I think one of the benefits of Lear is obviously the strength of our balance sheet and our ability to take advantage of opportunities, both to consolidate and invest in the business. This is still a global growth industry.

Whether it is a near-term blip or pullback, we're still running significantly below sustainable demand or long-term demand levels in North America. I think that provides an opportunity. It has in Europe in the mature markets.

From an emerging market standpoint I still think there is huge upside and continued growth over the foreseeable future. So, while there may be a pullback -- or if there was a pullback in our mature markets, I think Lear is in a great position to take advantage of a market correction like that and an ability maybe to consolidate.

We don't personally see it. The releases are strong, the product is great, we're in a great shape and we're pretty bullish on the future.

Got it. And finally, can I just quantify the impact of Japan disruptions in the quarter? And also you spoke about some premium costs on the electrical side, if you can give us some more color there?

Sure. The impact in Japan on our direct sales into Japan really impacted Electrical Distribution mainly, and it was about $65 million in revenue and about $20 million in earnings. From that standpoint, the premium cost that we incurred -- there were shortages. And the one that everybody pretty much incurred across the board in the industry was on the circuit boards. And there was a shortage on the system the majority of the world's boards come out of Japan and those facilities were off-line.

What that resulted in was premium freight and inefficient operations, and some bloated inventory on other components as we managed a rationed supply of the boards. It also saw an increase in some of the other electrical components like fuses and relays. From a premium standpoint, we talked about a number of $6 million and that is really what drove it.

Thank you.

Brett Hoselton, KeyBanc.

Matt, on the Electrical margin side, can you talk about the differences in your view of contribution margins on production or changes in production versus your backlog?

Well, backlog will typically come out a little bit lower than changes on production. Again, we're just making broad general statements as a rule of thumb. Typically if you do just get incremental volume and you're able to run them through your facility, you obviously get certain efficiencies and your fixed cost structures -- or your fixed cost structure. And you will convert between 15% and 20% on average. And again, this is just a very broad rule of thumb.

Backlog, on the other hand, is going to come in a little bit lower as you improve your efficiencies and designs to run at a little bit better in time, so you will see something around 10%.

And then can you quantify for me? I think you might have done this for Rob and I just missed it, but could you quantify the difference in your ER&D spending second half versus first half?

Yes, there's going to be a step up in the ER&D spending. For the full-year we expect that number to be around $200 million and we would expect, I don't know, the second half to be roughly 55% of that number.

And then your European production forecast is somewhat below what the industry is looking for. I believe part of that is because you exclude maybe Russia or something along those lines. But even on a percentage change basis, it is a little bit more conservative.

I'm wondering is that merely just conservatism on your part, or is there something you're seeing in the releases or something else along those lines or commentary from your customers that is kind of leading you towards a little bit more conservative bent.

Well, we moved the number up from $17.4 million from our previous guidance to $18 million. It does exclude Russia. And right now we're not hearing anything one way or the other from our customers.

The releases are continuing to hold firm. We just believe that this is a balanced production number to use for the sake of setting guidance at this point.

Fair enough. Thank you very much, gentlemen.

Thank you. Thank you very much everybody for being on the call.

Matt, as usual, you did an absolutely outstanding job. Finance team, couldn't do it without you. Corporation, the headquarters, everybody is doing an outstanding job.

Ray Scott, you and your team are doing an outstanding job. And Lou Salvatore and your team are again continuing to be very special. You are a great team of people.

We have to get out there. Let's keep this thing going. We're moving in the right direction and I'm proud of you. Thank you.

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