Lear Corp (LEA) 2011 Q3 法說會逐字稿

Good morning. My name is Sara, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lear Corporation third-quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions).

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

Thank you, Sara. Good morning, thank you for joining us for our third-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 Matt Simoncini, President and CEO, and Jason Cardew, interim 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 the slides labeled non-GAAP financial information, also at the end of the presentation materials.

Slide 2 shows the agenda for today's review. First, Matt will review highlights from the third quarter. Next, Jason will review our third-quarter financial results and our full-year 2011 outlook, and then Matt will have some wrapup comments. Following the presentation, we will be happy to take your questions.

Now please turn to slide number 3, and I will hand it over to Matt.

Thanks, Ed, and good morning. Our trend of positive momentum continued in the third quarter. Sales and earnings increased at a faster pace than the industry production, and we achieved our ninth consecutive quarter of year-over-year improvement in [cooperating] earnings.

We generated $64 million of free cash flow in the third quarter. In addition to reinvesting in the business, we also have been returning cash to shareholders through a combination of share repurchases and dividends. During the quarter, share repurchases and dividends totaled $107 million.

In August, J.D. Power released its annual seat quality study, and Lear was recognized as the highest quality major seat manufacturer for the 10th time in 11 years.

We are increasing our full year guidance, and Jason will provide details a little bit later in the presentation. Please turn to slide number 4.

There is no change in the strategic direction of our Company from what we've been talking about for the last several years. We believe we are well-positioned in both our business segments, with global product capability and financial flexibility to grow and further diversify our business.

Our primary focus remains on serving our customers to ensure we are the supplier of choice. We plan to continue to expand our component capabilities in emerging markets, to further improve, as well as create long-term shareholder value. We continue to evaluate niche acquisitions that will expand our capabilities in the emerging markets, increase our sales and add scale to our Electrical segment. No major acquisitions are needed or planned.

We are committed to maintaining a strong balance sheet with investment-grade metrics.

Finally, I would like to discuss some recent management changes. Lear has a very deep bench, with outstanding management talent. At the end of September, Lou Salvatore, who ran our Seating business, left the Company. This week, I asked Ray Scott, our most experienced operating executive, to return to Seating to lead that team.

Most recently, Ray has done a great job leading the turnaround of our EPMS business.

We have also announced that Frank Orsini, who worked closely with Ray in running our EPMS business, to go back to running EPMS as the interim President. I am confident that both of these leaders will do an outstanding job in their new roles.

Slide number 5 highlights our geographic sales diversification and recent growth in emerging markets. We continue to diversify our sales, with almost two thirds of total sales outside of North America. The Asia-Pacific region continues to grow and is expected to account for approximately 16% of our consolidated worldwide sales in 2011. Furthermore, our sales in the BRIC markets have grown significantly in the past five years, from about $800 million in 2006 to approximately $2.4 billion this year. This represents an annual growth rate of 24% versus industry growth of 17%.

Over half of our BRIC sales, or approximately $1.3 billion, are in China. This does not include, however, our sales at our unconsolidated joint ventures in China, which total approximately $700 million.

Slide number 6 shows our recent and planned investment in low-cost component capacity. For the period 2010 through 2012, we anticipate spending approximately $300 million on new component capacity in low-cost regions. In Seating, we are adding capacity in seat trim, structures, metals and mechanisms and seat foam. In Electrical, we are adding wire harness capacity, as well as capacities in connectors and electronics.

Please turn to page 7. As I mentioned earlier, we have been successful in growing our Electrical business over the last several years. In 2011, we expect over $3 billion in EPMS sales. Going forward, we expect this segment to grow at a rate faster than the overall industry.

Factors that support our growth plans include an increase in electrical content in vehicles, further industry recovery, a strong sales backlog and content growth in traditional and high-powered systems. Based on our expected sales growth, we expect that we can increase scale sufficiently to allow us to achieve our target margins.

Turning to our Seating business, slide number 8 provides more detail on the 2011 J.D. Power & Associates seat quality and satisfaction study that I mentioned earlier. The left side of the page shows the trend of Lear's seat quality as measured by the number of problems over 100 vehicles. Our 2011 performance, which was our best ever, improved by 13% compared to a year ago.

The right side of the page highlights our ranking among all seat manufacturers.

Now I'll turn it over to Jason for a review of our financial results and the outlook for the remainder of the year.

Thanks, Matt. Please turn to slide number 10. This slide provides financial highlights for the third quarter. Lear's sales were $3.5 billion, up 23% from a year ago, reflecting our strong sales backlog, increased production on Lear platforms and the positive impact of foreign exchange. Core operating earnings were $178 million, up 19% from a year ago.

The increase in earnings reflects higher sales, as well as operating performance improvements, partially offset by customer pricing and higher costs for product launches, engineering and commodities.

We generated $64 million of free cash flow during the quarter and finished the quarter with a cash balance of $1.7 billion. Our reported EPS is $0.95 per share.

On the next few slides, I will cover our third-quarter results in more detail and update our full-year outlook.

Slide number 11 shows vehicle production in key automotive markets for the third quarter. Global vehicle production was 18.4 million units, up 6% from a year ago, reflecting increases in all major markets except for Japan, which is still recovering from the earthquake and tsunami that occurred earlier this year.

Slide number 12 provides a more detailed summary of our financial results for the third quarter of 2011. As previously mentioned, sales were up 23% to $3.5 billion. Pretax income, before interest and other, was $159 million, up $40 million from a year ago. Tax expense increased by $26 million from last year, reflecting higher earnings and the mix of earnings by country, as well as a low effective tax rate in the third quarter of 2010.

Net income was $101 million, up $5 million from a year ago. SG&A as a percentage of sales was 3.3% compared with 3.9% a year ago, reflecting the increase in sales. Other expense was $9 million, up $6 million, primarily reflecting losses at our IAC joint venture and the impact of foreign exchange. Our nonconsolidated joint ventures in Asia remain profitable.

Depreciation and amortization was $64 million, up $5 million from a year ago, reflecting higher capital spending over the last four quarters.

Slide number 13 shows the impact of nonoperating items on our third-quarter results. Our reported pretax income before interest and other expense was $159 million. Excluding the impact of operational restructuring costs and special items primarily related to the emergence equity grant, we had core operating earnings of $178 million, an increase of $28 million or 19% compared with a year ago.

Other special items in the third quarter include $2.8 million in income, primarily reflecting a gain related to an affiliate transaction, and $3 million in tax benefits, primarily resulting from the release of a valuation allowance in a foreign subsidiary. Adjusted for restructuring and other special items, net income attributable to Lear in the third quarter was $114 million and adjusted EPS was $1.08.

Please turn to slide number 14 for a summary of our results by business segment. In Seating, core operating earnings increased by $17 million to $181 million. Adjusted margins in the third quarter were 6.7%, down from a year ago. Year-over-year margins were negatively impacted by customer pricing, as well as higher launch, development and commodity costs. Year to date, adjusted margins in Seating are 7.5%.

Slide number 15 summarizes performance in our EPMS segment. Financial results in this segment continue to show year-over-year improvement. Adjusted margins in the third quarter improved to 5.4%, up 120 basis points from a year ago. The margin improvement reflects favorable operating performance and the benefit of increased production on Lear platforms, which more than offset customer price reductions and higher launch and commodity costs. Year to date, adjusted margins in EPMS are 5.7%.

Please turn to slide number 16. We generated $64 million of free cash flow in the third quarter and $269 million through the first nine months of 2011. Year-to-date free cash flow is flat compared to last year, as the increase in earnings was offset by higher capital expenditures. As Matt mentioned earlier, higher capital spending in 2011 reflects primarily increased investment in component capacity in low-cost countries.

Slide number 17 provides an update on our share repurchase program, which was announced in February. During the third quarter, we purchased 2.1 million shares of stock at an average price of about $45 per share, for a total of $94 million. Year to date, we have purchased $194 million of stock. As of the end of the third quarter, $206 million remained under the share repurchase authorization.

Going forward, we plan to continue to buy back shares consistently, subject to the Company's other alternative uses of capital, prevailing financial and market conditions and certain other factors.

On September 21 we paid a cash dividend of $0.125 per share, or approximately $13 million. Total cash returned to shareholders during the third quarter was $107 million.

Please turn to slide number 19 for the major assumptions underlying our 2011 full-year financial outlook. Our outlook assumes North American production of 12.9 million units and European production of 18.1 million units, an increase from our prior outlook of 2% and 1%, respectively.

In key emerging markets, our outlook assumes China production of 16 million units, up 2% from our prior outlook. Production in Brazil and India are forecasted to be down from our prior outlook by 2% and 9%, respectively.

Our forecast for global vehicle production is up 1% from our prior outlook to 75.2 million units. Our 2011 outlook is based on an assumption of an average euro of $1.40, which is unchanged.

Copper costs have trended down since the beginning of September, but remained high relative to historical levels. Taking into account the recent pullback, our outlook assumes copper at a full-year 2011 average cost of $4.25 per pound, down $0.15 or 3% from our prior outlook.

Steel costs are flat with our prior guidance; however, both copper and steel are up almost 25% from last year. We continue to see additional pressure on other commodities that impact our business, such as petroleum-based chemicals.

Slide number 20 summarizes our updated 2011 financial outlook. We expect 2011 sales in the range of $13.8 billion to $14.1 billion, up from our prior outlook, reflecting higher industry production. We are increasing our 2011 outlook for core operating earnings to $760 million to $790 million.

Interest expense is expected to be approximately $40 million, down $5 million from our prior outlook, reflecting primarily higher interest income. Other expense, which includes equity earnings at our nonconsolidated joint ventures, foreign exchange, state and local taxes and other miscellaneous items, we forecast at about $10 million. This is up $10 million from our prior forecast, reflecting lower equity earnings at our IAC joint venture and the impact of foreign exchange.

Tax expense, excluding restructuring costs and other special items, is expected to be approximately $140 million, $5 million higher than our prior outlook, reflecting the increase in pretax income and the mix of earnings by country.

Free cash flow for 2011 is expected to be approximately $435 million, up $10 million from our prior outlook, reflecting the increase in earnings.

The remainder of our 2011 outlook is unchanged. Taking into account the changes noted above and fewer outstanding shares as of the end of the third quarter, our adjusted EPS forecast has increased to a range of $5.05 to $5.35.

Now I will turn it over to Matt for a brief summary.

Thanks, Jason. Great job. We had another strong quarter of performance. Our competitive market position as well as our balance sheet will drive further growth and value creation.

In closing, I want to thank the Lear team for their continued hard work and dedication. I am very proud to lead what I believe is the best team in the industry.

Thank you for your interest in Lear, and we would be happy to take your questions.

(Operator Instructions) Rod Lache, Deutsche Bank.

Hi, everybody. Can you hear me?

Yes, Rob, we can hear you.

Okay. I had a couple questions. First, I was hoping you can drill down a little bit for us on the incremental margin bridge. You had $640 million of revenue growth on a year-over-year basis. And maybe, first of all, how much of that was FX, of the $640 million?

$153 million of that was FX, Rod.

So you had basically $487 million or so of revenue growth organically and about $30 million of EBIT growth, which looks a little light relative to history. Maybe just can you drill down on that for us?

Right. First of all, let me just break down the remainder of the sales change. We had a very strong backlog quarter, with about $280 million of backlog. So there's about $170 million for volume. So if you think about our normal conversion on the backlog, we like to look for about 10% on that; that is not going to convert at the same level as volume.

And on the volume change, we would expect that to convert at about 15% to 20%, which it did in the quarter. So really what is offsetting the benefit of volume and backlog in the quarter is higher commodity costs was about $15 million in the quarter, and higher launch and development costs of about $18 million in the quarter.

I think you are raising a good point, Rod. We weren't as crisp as we would like or as efficient as we would like on some of our launches in North America. We were launching a lot of product this quarter, and we just didn't come out as crisp as we would have wanted. That impacted the conversion.

Did the launch costs diminish a bit going forward on a year-over-year basis?

It is a little bit richer in the back half of the year versus the first half. All in all, I would say you are probably looking at fourth quarter, it is fairly consistent with what we saw in the third.

Right. How about next year versus this year? It looks like revenue -- this was the big year for revenue growth on the year-over-year basis. Is it more comparable in 2012?

The backlog next year is actually pretty comparable. I don't want to really get into a whole lot of setting numbers for next year. The guidance next year -- the backlog for next year is pretty consistent year-over-year.

Again, the top number is consistent, but it really comes down to the number of launches and the timeline on those launches. It is probably one of the most uncertain things in the industry, is your launch performance, other than possibly moving production from one facility to the next, which is actually pretty similar to a launch. There is probably not a whole lot we can say at this point any further on '12, though, Rod.

Maybe drilling down into the divisions, the Seating business had been running 7% to 8% margins, had a 6 handle this quarter. Should we be reading -- you did mention pricing and raws there. Is there anything for us to read into that just kind of prospectively about the margins there, or do you think that kind of comes back?

No, you've heard me say many times that I think that business operates on a longer-term basis between 7% to 8%. In any given quarter or short-term period, it could be above or below that range. I wouldn't read anything into it longer-term.

Okay, just -- and lastly, you do have some disclosures about, I think, five facilities in Thailand. Just if you have any update on what you are seeing just regionally and in particular with those disruptions up there -- is that something that is material?

We do have five facilities in Thailand; four are manufacturing facilities and a commercial headquarters. And we have had no damage to any of the facilities as a result of the flood, but we have seen our customers take some downtime. Ford and Nissan are our largest customers there and both of them down for several weeks. We expect that to continue for another few weeks.

What is more difficult to predict is perhaps the impact on components that come out of Thailand. So far, there has been no direct impact on components that we buy from Thailand, but that could change.

What percentage of your revenue would Thailand represent?

It is about 1.5%.

Oh, it's pretty small. Okay, thank you.

Chris Ceraso, Credit Suisse.

Thanks. Good morning. It looks like you are paying out just about all the cash you are going to generate this year. You mentioned no acquisitions needed or planned. You do still have a fair amount of excess cash on the balance sheet. Any plans to do anything with that or are you holding it just because the market is still uncertain?

No, it is not necessarily that. I mean, we like to maintain a level of about $1 billion liquidity, combination of cash and revolver.

Really, our first priority is always to invest in the business for long-term value creation, and that comes by being the low cost producer or high-quality producer and being in the regions of the world where the growth is coming. And that obviously requires capital investment.

We also are looking for potential niche acquisitions that could either facilitate our growth and diversification or add that component capacity in the emerging markets or possibly add some capabilities in things like connector systems and what have you.

We are not really just holding it for the sake of holding it. I think we've made a nice step in returning cash to shareholders, approximately $200 million through the first half of the year. And we will continue to probably do that in a very systemic and consistent manner. And that's it.

As far as acquisitions, we don't really think we need a major acquisition. We are not looking at it. And from our standpoint, while there is some uncertainty on a go-forward basis with production -- I know IHS is calling for a little bit of flat number next year in Europe -- we still think that this is a growth industry and that we are going to see a recovery, albeit maybe a little bit more gradual than we originally anticipated.

Okay. Can you give us any detail on what's going on with IAC? It seems like that was a pretty big hit to your P&L below the operating line. Every supplier that we cover is reporting better results versus a year ago. What is happening with IAC?

Well, we don't really have an active role in the management of that organization. We do know that Wilbur Ross has been successful in all the investments that he's done, and we would expect this to be no different.

We do have approximately a 22% equity stake in that business, and it is not core to us, and at some point we would be looking to monetize it and invest in something that is core. Other than that, we really can't say.

They are, as much as anybody else, exposed to certain petroleum-based chemicals, like resins and what have you. But other than that, I really can't shed a whole lot more light on it.

How much of that $11 million was related to IAC, and how much was FX-related?

Well, that line has a lot going through it, and Jason can give you a breakdown, But it is not quite that clean, Chris. There is a lot of things that go through that line.

Equity earnings overall were down about $7 million from last year, and FX was off by about $3 million.

Did you get any help from the real, or -- that seemed to have benefited some other folks.

Not seeing a whole heck of a lot there. It is a -- small change. Maybe $10 million in revenue in the quarter for FX.

Okay. Thank you.

John Murphy, Bank of America.

Good morning, guys. And Matt, congratulations on officially taking the reins.

First question is on acquisitions. You alluded to doing maybe some small acquisitions on the EPMS side. Just curious if you think you need to do that or you can grow through organic investment there and be real competitive.

But also, in addition, on the Seating side, one of your big competitors has made some acquisitions on metals, frames and tracks. I'm just curious if you think you might need to do something on that side, and where you are sort of in that vertical integration with the seat tracks and frames.

Let me break it down step-by-step, Murph. Starting on the Electrical side, do we think we need to? No, we don't. We think we can get there organically.

However, through an acquisition, it may facilitate or expedite the growth, because it comes in typically with an existing management team, existing production capacity and customer purchase orders. So if we could do something that made sense, we would look to do that, within reason -- valuation and --. But we are looking and everybody is kind of looking for the same thing.

On the seat side, you know, the acquisitions of the mechanism provider, Keiper and Hammerstein, one of our competitors, is an interesting move. From our standpoint, we didn't think we needed to do that. We've got the technology, and we are very focused on having the right footprint. And we like where we are at from a footprint perspective in Europe.

If we could get the right footprint and make an acquisition and add capacity in an emerging market that can also serve as a low-cost source for those mechanisms, we would do that. But we don't feel that we need to respond to that action in any way.

We've got a nice book of business with mechanisms and tracks, and it's actually -- our heritage comes from the seat structure. So we're pretty happy with where we are at right now.

Then just a second question on the schedules that you saw in the third quarter and what you might be seeing in the fourth quarter. You sort of alluded to being maybe not as crisp as you would have liked in the quarter on execution in North America.

I'm just curious if you were maybe caught off guard a little bit with volumes being stronger than you expected, and really what you are seeing going into the fourth quarter, if you are seeing schedules maybe even a little bit stronger than you would have thought before, and maybe even stronger relative to what IHS is putting out right now.

No, we weren't really caught off guard by the schedules. We are always a little bit cautious about the schedules, because the schedules typically are set and the releases are set, John, to protect production for the customers. And we've learned through history that they can pull back on relatively short-term notice. So we keep our eye on inventories. The problem with that is it is kind of hard to see the inventory levels in markets outside of North America.

For the fourth quarter, Jason, what are you seeing?

We are seeing a small increase in North America and a bigger step-up in Europe sequentially from the third quarter.

So from our standpoint, there is nothing remarkable in the releases, John, at this point. But we've just got to be a little bit cautious, because they do have a tendency to change on short notice.

Okay. And then just lastly, Matt, as you go through the next, I don't know, 50 days, and do a strategic review, which I'm sure you are constantly doing, is there any point in time where you think you might change strategy a little bit?

I know you've alluded to this being seamless. I certainly would agree from an operating standpoint. I'm just curious if there is any point in time where you think as we roll into 2012 that you might change your mind or make any revisions.

You know, John, I've learned in my life never to say never. But I would really be surprised if there was a change in direction, since the strategy was really developed by guys that are still here and myself included. So I buy into the strategy, and had a big hand in developing. So I would be surprised.

Now, business is dynamic. The beauty is that we have the ability and the flexibility to maybe modify the strategy. But I would be very, very surprised if there was a change in direction. I'm comfortable where we are at. I'm comfortable with both business segments. I am very excited about the EPMS segment and the improvements were made there under Ray, and what Frank is going to do as the leader of that segment. So I would be very, very surprised if there was a change in direction.

Great. Thank you very much, guys.

Himanshu Patel, JPMorgan.

This is Amy Carroll in for Himanshu. I just had a quick question. Can you give us an update on the antitrust case? We're seeing some headlines about opening of civil suits and so forth.

I'd like to turn that question over to Terry Larkin, who is at the table right now, who is our general counsel. So, Terry.

Yes. As we've disclosed publicly, Lear was sued in a civil antitrust class action lawsuit. I guess it was on October 5 when the first one was filed.

Since then, there have been 12 others that are very similar in nature. And I think what is important to understand about these lawsuits is, first, that they are civil lawsuits. These are not criminal proceedings brought by the US Department of Justice.

And secondly, these are [purported] class actions filed by indirect purchasers. And what that means is that these are individuals who bought new or used vehicles who claim that price-fixing caused the price of their vehicle to be higher because the cost of wire harnesses was higher.

These are not lawsuits brought by our customers who make those allegations.

Ultimately, we expect all these cases -- and there may be more filed yet; that's not uncommon in these kinds of matters -- but we ultimately expect they all will be consolidated for at least pretrial proceedings into one case. And as we've said publicly before, we do not believe that Lear engaged in any anti-competitive behavior in violation of the US antitrust laws, and we intend to vigorously defend ourselves against these claims.

And do you have a sense of the magnitude of how much they are claiming, or at least the timeframe of the suits? Is it, I think, 2000 to 2005 or something like that?

The timeframe for the purported class period is roughly 2000 through 2010. We don't have any estimate of what their damage claims might be. They are not required to articulate those.

Okay. And then the second question I had is I think a lot of dealers, as well as OEMs, are saying that their truck [mix there] have improved. What are your thoughts on GMT900 production heading into 2012?

It's a little bit early to call the 2012 number. We have raised our GMT900 production assumption for this year. We're assuming just under 1 million units for 2011. I think if you look at what IHS is projecting for next year, they have that number coming down a little bit -- from 1 million to -- I want to say 975,000, somewhere in that range.

Great. Thank you.

Itay Michaeli, Citi.

Great, thank you. Good morning. Just want to go back to other expense. It looks like from your full-year guidance, you are probably modeling about flattish other expense in the fourth quarter. So are you seeing anything better in the fourth quarter versus the third quarter, or is that more of just a placeholder for now?

We are modeling it to be flat in the fourth quarter, or maybe even slightly positive. We don't anticipate that FX will be the same headwind that it was in the third quarter, and we do see an improvement in equity earnings from the third to the fourth.

Okay, great. Also on the fourth quarter, can you maybe share directionally what you are looking for in terms of the Seating and Electrical margin within the guidance?

If you just look at what we are guiding to in the fourth quarter, it would be roughly flat to up slightly from the third in Seating, and up in Electrical. We are going to benefit a little bit in the fourth quarter from lower capital pricing in Electrical. That will help us.

Is there any impact at all for Thailand, or contingency in the guidance in the fourth quarter? Or are you pretty set on what the outlook there is for you guys?

We've included what we know at this point. And so we lost about 2.5 weeks of production in October. We're expecting to lose the first week of production in November. And that is what we've assumed.

Great. Can you quantify how much that is worth on the EBIT line?

It is an insignificant amount.

Okay. And lastly, Matt, could you maybe just a talk about how your recent conversations with customers have gone, and also maybe comment on the booking activity in general this year?

The conversations with the customers have been good. Lear has been well-regarded. I've spent the vast majority of my time as CEO, going back to September 1, traveling around the world and meeting with our customers. And for the most part, they are extremely happy with Lear. They appreciate our global footprint. They are happy with the way the succession plan was run and that Lear's culture will continue. And it has been relatively seamless for them. So from that standpoint, it has been good.

As far as the bookings, we are continuing to win business. It is really more driven by the cadence of the program awards, but we are in there and we are winning more than our share in both segments. So it has been a nice kind of continuation. And the transition from Bob to me has been seamless in the eyes of the customers.

Terrific. Thanks so much, guys.

Brian Johnson, Barclays Capital.

Good morning, Matt. I just want to get a sense from you -- I know I asked the question last quarter about how we ought to think about mid-term Seating margins -- about the balance between the pricing and commodity pressures and the launch costs in terms of the margin performance there. And if there is any different tenor, given the volatilities in the commodities, given the OEMs looking maybe not as much growth and perhaps coming after the suppliers again. Has there been any change in tenor in the discussions you've had with the OEMs, and is there anything different in the kind of pricing commodity discussions one way or another around Seating?

No, it's pretty consistent. Obviously, our customers sell a consumer product, and it is a consumer product that really is price-sensitive in many ways. So they are constantly looking to reduce costs and improve their pricing. And from that standpoint, the biggest, obviously, component of their cost is the materials that they buy.

From our standpoint, the pricing pressures are intense. That is what this industry is. It actually plays in many ways into our strength, because we have the ability to not only make the components and all the components, but actually engineer the design of the major products. We're in Seating and Electrical Distribution, and so we look to try to get the cost out, and it actually plays in our benefit.

Commodities have been sustained in many ways at a relatively high level, even though we've seen a recent pullback. They do enter the productivity discussion, because most of the productivity or pricing discussions focus on a cost model and trying to get to that optimum cost. Obviously, you are expected to be the most efficient producer; at the same token, they understand the raw material costs.

So I think it is a burden for the entire supply chain, and including the customers. It does enter into the discussion. No, it has not in any way softened the pressure, so to speak. I think it is part of the dialogue.

As far as launch costs, launch costs are our responsibility; that is cost of doing business. And it is an area where historically Lear has been very, very good at, and we need to just get back to being good at it.

Jason, I don't know if you can add some color on the breakdown of how it kind of -- what our assumptions are in the remainder of the guidance.

Right. Well, pricing, we've still got about 2%, is what we've seen historically. We haven't really seen a change in that from the prior guidance to where we are at today.

Launch costs, we have increased by about $20 million. We originally expected $90 million in launch costs this year; we're now at about $110 million. So we are up about $10 million in the third quarter, and we see that same kind of again in the fourth quarter.

Commodity costs, we're seeing as a headwind of about $60 million for the year. We hadn't provided any guidance in the second quarter call on that, but that's roughly in line with the second quarter, although it's pulled back a little bit in copper and we've saved a couple million on that.

Okay. And the vertical integration, I guess someone touched on it earlier. But could you maybe (inaudible) describe where you think you are in vertical integration versus your major competitor, after they digest the acquisitions they made in Europe?

I don't really know where we are at versus them, but I will tell you where we are looking to invest, Brian. I haven't really studied Johnson Controls to tell you exactly where they are at, so I would like to not compare it.

But I will tell you what we are looking to do. From our standpoint, I think the emerging markets has the ability to provide the opportunity to invest and get the right returns and better quality in things like mechanisms, foam and possibly even fabric. We are pretty mature in our vertical integration in North America, and I like where we are at in Europe, although I think there might be some modest opportunities to improve on the mechanisms. We are very vertically integrated on the cut-and-sew in both of those major markets.

We have a great connectors business in Europe. I would like to see that expanded into Asia, and I think that is an opportunity for vertical integration as well.

So from our standpoint, it is really more about the emerging markets and vertical integration in the emerging markets. South America, as well, we've made a push there on mechanisms as well as electrical distribution, and I expect that to continue.

Okay. Thanks.

Adi Oberoi, Goldman Sachs.

Great. Thanks a lot. I have one housekeeping first. The EPS guidance that you guys have provided, that does not assume any more buybacks. Is that correct?

That's correct.

Okay, great. And the more longer-term question I have is, Matt, can you comment a little bit about the backlog? Do you see any risk for your next year's backlog number, given that Europe is kind of slowing down now and the expectations for Europe would have changed versus the time when you gave that backlog earlier this year?

Not a material risk at all. Obviously, it comes down to volume and what they produce, and there is always -- business is dynamic. Sometimes programs are extended or programs are pulled ahead or delayed, but I don't really see a material risk to the backlog number.

So in a way, does that mean that you are not seeing any kind of program or launch delays at the OEMs as of now?

No, not as of now. Typically, what will happen is if they do delay a launch they will extend the model that precedes it. So usually, if there is a change either up or down, it is pretty modest.

Great. Thanks a lot, guys.

Colin Langan, UBS.

Could you -- you commented briefly on the civil investigation. Is there any update on the criminal investigation? Have you been contacted by the Department of Justice any further? I think you mentioned that was in February of 2010 that they reached out for information.

Let us be clear about that. We have not been contacted by the US Department of Justice or the FBI here. What you are referring to about the February 2010 investigation is the European Commission investigation that we've talked about previously. And there, we were asked for information by the European antitrust authorities. We've cooperated fully, but we've not heard more from them on that, and as far as I know, they have not made any further public statements about where they stand in the process.

It is not possible for us to determine or find out from the European authorities where they are in the process and whether they were asking Lear for information simply as a source of information or as someone they are investigating. But the new cases that were referenced earlier, the civil lawsuits, are lawsuits here in the US.

Okay. So I mean from the criminal type, there has been really no new update over the last quarter?

I'm sorry, you broke up a little bit. Can you repeat your question, Colin?

For the criminal type of investigation, there hasn't been any change in the last quarter?

That's correct.

And for the commodity outlook, I think you said it was $15 million in the quarter. Is it about the same next quarter? It gets to about $60 million for the full year? And when, given the commodities have come down a bit, will that be more of a 2012 benefit if they stay at these levels?

In the case of copper, we are going to see a benefit from the third to the fourth quarter; $2 million to $3 million is what we would expect. If copper remains lower, then we would expect to see a further tailwind into 2012.

It seems -- on the commodities as a whole, it seems to ebb and flow with the general consensus of the health of the economy. So if we start producing, you will probably see commodities run up. But other than that, we probably don't want to say a whole lot more about '12, Colin.

Okay. But sequentially, commodities would be a slight -- if they stay at these levels -- a slight benefit, but not material (multiple speakers).

Yes, it is a slight benefit, but part of it too is you started seeing a run-up in the fourth quarter of last year. So on a year-over-year basis, it is probably down slightly. But it is not -- I wouldn't expect a big tailwind.

How about the cadence of launches? How do they compare from Q3 to Q4? Are they about the same or does that start to get a little bit better into Q4?

It is pretty flat from the third to the fourth quarter.

Okay. And I guess just one last one. With the UAW contracts being ratified, it sounds like they are pushing for more jobs. Do you see any change in the view of insourcing at the automakers or do you still think -- do you see any risk there at all?

No, not really. You know, from our standpoint, making a seat or a wire harness from that standpoint is a skill that requires not only the ability to design it, but also to coordinate all the components being delivered to your facility on time, and then with an hour or two window, assembled into a seat and delivered on time. So that skill set, plus it is just the reality of the floor space. A lot of these facilities do not have the floor space to do it.

So I don't think it is a major push. The one thing I will remind everybody on the call is, with Lear, we've had a long and great relationship with the UAW. We don't have a blanket agreement. Each facility has its own agreement. And we work with them to find opportunities to remain competitive. So from our standpoint, really, there is no change at all.

Okay. All right. Thank you very much.

Peter Nesvold, Jefferies.

Good morning and thanks for squeezing the question in. I guess I'm going to break an unwritten rule and be the third or fourth guy to ask on a similar question rather than taking it off-line.

But the reason I ask, with the stock down almost 10% here intraday. The Seating margins. So this is the second quarter of year-over-year margin compression. And the items you ticked through -- product launches -- I mean, product launches are sort of cost of success. Materials always seem to be an industry pressure point and price reductions never seem to go away.

So are there specific actions that you can take internally to sort of control your own destiny, to get back to that targeted 7% to 8% type margin level within a quarter or two? Or are the levels at where they are right now sort of the new normal, if we want to call it that, until volumes start to really improve?

No, I think you are right. I don't think we were as crisp as we would like on the launch costs. And I think from our standpoint, we are looking at trying to put processes in place on the front end to ensure that we are cleaner in the future.

Longer term, we still believe that the margin in this business is between 7% and 8%, and I think we will finish this year -- year to date, we are already at 7.5%, and we think that's the longer-term rate.

Now, we need to always look to do things better. And that includes the efficiencies of our launches, the efficiencies of our operations, including our administrative processes. So it's not the new normal. It's not the new normal. We need to just get better at launching.

Okay, great. Thanks for the time.

You're welcome, Peter. Well, if that's the last question, first off, I would like to compliment Jason on an outstanding job and all the hard work from him and the finance team. You seem to be much better than the previous CFO. Congratulations.

And I want to thank all of the folks from Lear and the hard-working team from Lear for having another outstanding quarter. Thank you for your efforts. And with that, I will see you later. Bye-bye.

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