Lear Corp (LEA) 2011 Q4 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 fourth-quarter and full year 2011 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 Ed Lowenfeld, Vice President of Investor Relations. Mr. Lowenfeld, you may begin your conference.

Thank you, Sara, good morning, everyone, and thank you for joining us for our fourth-quarter and full year 2011 earnings call. Our earnings press release was filed this morning with the Securities and Exchange Commission and materials for our earnings call are 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'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 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 number 2 shows the agenda for today's review. First, Matt Simoncini will provide a Company overview. Next, Jason Cardew will review our fourth-quarter and full year financial results and full year 2012 outlook. Then Matt will take-- will have some wrap-up comments. Following the formal presentation, we will be happy to take your questions. Please turn to slide 3 and I'll hand it over to Matt.

Thanks, Ed, and good morning. We finished 2011 with another quarter of improved operating performance. Sales and earnings increased at a faster pace than industry production and we achieved our tenth consecutive quarter of year-over-year improvement in core operating earnings led by a growing Electrical business. We generated $461 million of free cash flow in 2011 and finished the year with cash of $1.8 billion. Our liquidity was further improved in June when we increased our revolving line of credit to $500 million. The major credit rating agencies acknowledged the improvement and our operating performance and balance sheet with rating upgrades during the year. In addition to investing in the business, we initiated a share repurchase and dividend program in 2011. During the year, we returned $330 million to our shareholders through these combined efforts.

Slide number 4 shows our 2011 consolidated sales by region and customer. In addition, we have $1.3 billion in sales at our core non-consolidated joint ventures which further diversifies our sales profile. We will provide further detail on the next few slides. As shown on slide number 5, our sales in China, Brazil, India and Russia have grown significantly over the past several years from $1 billion in 2007 to $2.4 billion in 2011. This represents an annual growth rate of 25% versus industry growth in these markets of 17%. Lear's total sales in China including non-consolidated sales of approximately $800 million are $2.1 billion. Since 2007, total sales in China including non-consolidated joint ventures have almost tripled.

Slide number 6 provides a summary of our 15 non-consolidated joint ventures. We have 13 core non-consolidated joint ventures, 10 of which are located in Asia. We consider our 23% stake in International Automotive Components, for IACs, to be non-core. We utilize joint ventures largely in emerging markets to gain access to non-traditional customers and to facilitate further diversification of our business. We also believe these joint ventures provide a platform for growth. Our joint ventures are profitable and we expect them to continue to grow.

Slide number 7 profiles our turnaround in Electrical Power Management segment. Several key drivers enabled this business to increase profitably by over $250 million since 2009. In 2009, the Electrical Power Management segment was unprofitable. Over the past several years, we have invested approximately $300 million to improve our footprint. We've also made incremental investments in high power technologies, rationalize certain non-core product lines and improved our overall competitiveness. As a result, our sales in this segment grew faster than the overall industry. We expect continued positive momentum as we launch $1.1 billion in new business through 2014.

Slide number 8 details our three-year backlog, which is unchanged from what we reported at the auto show last month. As a reminder, our backlog only includes new awarded programs over a three-year period net of lost programs or business that is rolling off. We do not include pursued or high confidence business or non-consolidated business. The three-year sales backlog covering the 2012 to 2014 period stands at $1.8 billion with approximately 60% in EPMS and 40% in Seating. We believe they are additional sourcing opportunities especially in 2014 which will provide further opportunity to increase our business and further diversify our sales.

Slide number 9 focuses on the key elements of our strategy. We believe we're well-positioned in both of our business segments and we have the product expertise, global reach and financial resources to grow our business. Our primary focus remains on serving our customers to ensure we remain the supplier of choice. We continue to invest in the emerging markets and expand our low-cost component capabilities to further improve value and quality for our customers. We are evaluating certain niche acquisitions that will compliment our present product offering, facilitate the diversification of our sales and possibly add scale in our Electrical segment with particular attention to components for both product segments. No transformational acquisitions are needed or planned.

In addition to investing in our core businesses, in 2011 we initiated a share repurchase and dividend program to return cash to our shareholders. Going forward, we plan to return cash to shareholders on a consistent basis while at the same time continue to invest in our core businesses. We plan to do this while maintaining a strong balance sheet with investment grade metrics. Now like to turn over to Jason who will take you through our financial results and our outlook.

Thanks, Matt. Slide number 11 provides financial highlights for the fourth quarter. Global vehicle production was up 1% reflecting double-digit increases in North America and Japan largely offset by production decreases in most other major automotive markets in the world. Lear sales were $3.5 billion, up 11% from year ago, reflecting primarily our strong sales backlog in increased production on Lear platforms. Core operating earnings were $176 million up 17% from a year ago. The increase in earnings reflect higher sales as well as operating performance improvements, partially offset by customer pricing and higher costs for product development and launches. We generated $192 million of free cash flow during the quarter and finished the quarter with cash of $1.8 billion. Our reported EPS was $1.03 per share. Reported earnings per share decreased from 2010 reflecting higher restructuring costs and other special items which offset the impact of improved core operating earnings in the lower tax expense. On the next few slides, I'll cover our fourth-quarter results in more detail.

Slide number 12 shows vehicle production in our key markets for the fourth quarter and for the full year. In the quarter, global vehicle production was 19.3 million units, up 1% from 2010. However, production was down in Europe as well as in our key emerging markets, China, Brazil and India. For the full year, global vehicle production was a record 74.8 million units, up 3% from 2010. Slide number 13 provides a more detailed summary of our financial results for the fourth quarter and full year of 2011. In the fourth quarter, pretax income before interest and other was $102 million, down $24 million from a year ago reflecting higher restructuring costs and other special items. I'll provide more detail on these charges on the next slide. For the full year, pretax income before interest and other was $680 million, up $141 million or 26%. During the quarter we recognized $47 million in one-time tax benefits related primarily to the release of valuation allowances in three European countries.

For the full year, taxes were $69 million for an effective rate of 11% which includes $70 million in one-time tax benefits. Net income was $107 million in the fourth quarter, down $11 million from a year ago. Weighted average diluted shares in the fourth quarter were 103.9 million, 4.5 million lower than 2010 primarily reflecting the impact of our share repurchase program. For the full year, net income was $541 million, up $102 million from a year ago, and diluted EPS was $5.08, an increase of 25%. SG&A as a percentage of sales of 3.8% in the fourth quarter compared with 3.2% a year ago. The higher SG&A primarily reflects higher engineering spending. Going forward, we expect SG&A as a percent of sales to run in the mid-3% range. For the full year, SG&A as a percentage of sales was 3.4% down from 2010. Interest expense was $15 million in the fourth quarter, up $4 million primarily reflecting expenses related to the settlement of an indirect tax [amendment].

Slide number 14 shows the impact of non-operating items on our fourth quarter results. Our reported pretax income before interest and other expense was $102 million. During the fourth quarter, we incurred $57 million of restructuring costs primarily reflecting a plant closure and headcount reductions in Europe as well as pension plan wind up costs at a previously closed facility. On the last day of the third quarter, we experienced a fire at one of our European component facilities. The facility was destroyed but thankfully no one was injured and our team did an outstanding job making sure our customers requirements were met. Included in special items is a charge of $10.6 million which reflects costs incurred net of insurance recovery received to date. We expect to incur additional costs related to this fire in 2012.

For working closely with our insurance partners and we expect to receive full recovery. Excluding the impact of operational restructuring costs and special items, we had core operating earnings of $176 million, an increase of $26 million or 17% compared with a year ago. Excluding the benefit from one-time tax items discussed earlier, adjusted tax expense was $26 million for an effective rate of about 16%. Adjusted for restructuring and other special items, net income attributable to Lear in the fourth quarter was $131 million and adjusted EPS was $1.26 up 6% from 2010.

Slide number 15 shows the trend of our core operating margins which improved for the second year in a row in 2011. The Company margins increased to 5% in the fourth quarter, up from 4.7% in 2010. For the full year, margins increased to 5.6% from 5.2%.

Slide number 16 provides additional detail on our fourth quarter and full year segment margin performance. In Seating, margins in the fourth quarter were 6.5%, down to 50 basis points from 2010 primarily reflecting higher product development and launch costs partially offset by improved operating performance net of selling price reductions. For the full year, Seating margins were 7.2%, down 30 basis points from 2010. Increased backlog and launch activity during 2011 drove year-over-year increases in product development and launch costs. Commodity cost inflation also impacted our results in 2011. These factors were partially offset by improved production on key platforms, new business and operating efficiencies net of selling price reductions. In Electrical, our margins increased compared to 2010 for both the fourth quarter and the full year.

Please turn to slide number 17. We generated $192 million of free cash flow in the fourth quarter and $461 million for the full year. Compared to our prior free cash flow guidance of $435 million, cash flow improved by about $25 million primarily reflecting the timing of cash payments related to restructuring actions. The cash payments related to these actions will be made in the first quarter of 2012.

Slide number 18 provides an update on our share repurchase program. During the fourth quarter we repurchased 2.1 million shares of stock at an average price of about $40 per share for a total of $85 million. During 2011, we repurchased $279 million of stock. Last month, we announced a $300 million increase to our share repurchase authorization. Taking into account this increase, we now have $421 million available under the repurchase authorization which expires in February 2014. Going forward, we plan to continue to buy back shares consistently subject to the Company's alternative uses of capital prevailing financial and market conditions and certain other factors. Total cash returned to shareholders through share repurchases and dividends during 2011 was $330 million.

Please turn to slide number 19 for an update on our global tax attributes, which we estimate to be in excess of $1.1 billion. Most of the tax attributes have not been recognized as an asset on our financial statements. The $1.1 billion of total tax attributes can be used to offset approximately $3.6 billion of future taxable income. The vast majority of our tax attributes either have no expiration date or a 20 year life providing the Company with ample opportunity to realize these benefits. We've been profitable in the United States for the past two years, and based on our current outlook expect to remain profitable in 2012. The reversal of the valuation allowance will increase deferred tax assets and reduce income tax expense by approximately $800 million. After the release of the US valuation allowance, our effective tax rate should normalize at around 30%. However, for the next several years, we expect our cash tax rate to remain in the 15% to 20% range reflecting the benefit of our global tax attributes.

Slide number 21 summarizes the major assumptions in our 2012 outlook. Our outlook is unchanged from what we announced at the Detroit Auto Show on January 11. Our 2012 outlook is based on global vehicle production at 79.3 million units, up 6% from 2011. Anticipated recovery at the Japanese OEMs will drive much of the production increase forecasted in North America. Our outlook is based on the assumption that production for the domestic three will decline by approximately 1% in 2012.

Slide number 22 summarizes our 2012 financial outlook. We're projecting sales of $13.85 billion to $14.35 billion in 2012. We expect sales to stay relatively flat year over year reflecting increases from our sales backlog offset by lower European production, the negative impact of foreign exchange, selling price reductions and platform mix. 2012 core operating earnings are projected in the range of $740 million to $790 million. I will highlight the key drivers impacting margins in our operating segments on the next slide. Tax expense is estimated to be $150 million to $170 million resulting in an effective tax rate of approximately 23%. The effective rate has increased from 2011 reflecting primarily the elimination of valuation allowances in certain European countries. Our cash taxes for 2012 should be approximately $125 million an increase of $45 million from 2011.

As we have indicated previously, we anticipate that operational restructuring costs will return to more normal levels. In 2012, we are forecasting restructuring expense of about $40 million, which is a decrease of approximately $30 million from 2011. The vast majority of the restructuring is behind us. However, cash restructuring will increase by approximately $10 million from last year reflecting the carry over from 2011 that I mentioned earlier. Capital expenditures are forecast to increase in 2012 to approximately $425 million. The increase reflects primarily investment and support of our strong sales backlog as well as additional investment in component capabilities in emerging markets. Free cash flow is projected at $275 million down from 2011 reflecting the higher capital spending, higher cash taxes and the cash impact of restructuring actions.

Slide number 23 provides additional detail on our segment margins. In Seating, we are projecting full year segment margins in the 6.5% to 7% range, down from 7.2% in 2011. In the first half of 2012, margins will be disproportionately impacted by elevated launch costs and manufacturing inefficiencies related to recently launched programs as well as the implementation of customer price reductions. We expect margins to increase throughout the year as performance improvements are implemented and other cost reduction actions are taken to offset customer price reductions. Key drivers of the year-over-year change in Seating margins include negative platform mix and higher commodity and product development cost. We expect this to be partially offset by new business, operating performance net of price reductions, lower launch costs and the positive impact of foreign exchange.

In Electrical we are projecting full year segment margins in the 6.5% to 7% range, up from 5.9% in 2011. We expect Electrical margins to start 2012 relatively flat for the fourth quarter and improve over the course of the year. Key drivers of the year-over-year improvement in Electrical margins include the benefit from new business and operating performance which we expect will more than offset selling price reductions. These positive factors are expected be partially offset by higher product development and launch costs as well as negative platform mix. Now I'll turn it over to Matt for some closing comments.

Thanks Jason, great job. As we begin 2012 there are some macro economic headwinds that we're facing particularly in Europe. Despite the near-term uncertainty, based on our present production assumptions, we remain comfortable with the guidance we announced last month at the Detroit Auto Show. Looking at our two operating segments, we expect our Electrical business will continue its trend of improving sales and margin. As Jason mentioned, we expect that our Seating margins will moderate in the first part of the year before improving in the second half of 2012. Our competitive market position as well as our balance sheet will provide further opportunities to drive growth and create value as we invest in our core businesses to increase profit and improve our competitive position.

In closing, I want to thank the Lear team for their continued hard work and dedication. 2012 will be another year of challenges and I am confident with your support that we will be continuing to be successful. With that, we will be happy to take your questions.

(Operator Instructions) Rod Lache from Deutsche Bank.

Had a couple things, first of all, maybe you could just touch on the-- your North American sales grew pretty strongly in the quarter which is I guess a bit surprising considering that in the quarter production, the strength in the North American production was disproportionately the Japanese and Chrysler. Was there anything unusual with respect to launch activity in the quarter in North America?

No, I don't think there was. We had a backlog that was coming on board. Again, we don't necessarily as you know Rod, sell to the industry overall, we sell to a particular mix. We see continued strength in some of our production numbers on the cards that we're on. Nissan for instance has been a nice book of business for us. (Inaudible) do you have any light on what driven that beyond the backlog?

It really was backlog story in North America, we had $159 million of backlog that rolled on in our Seating business in the fourth quarter. And about $15 million in Electrical as well, and Chrysler was a portion of that.

All right. And just two other things, one is noticed that you didn't change your European forecast. It's pretty much the same as what you had in four weeks ago in Detroit. IHS did lower their forecast for Europe, so is there anything that you're looking at that's maybe specific to your customer mix that's driving this? And then lastly, click a few of your Japanese competitors, the [Karetz] in Electrical have been kind of out in the headlines lately with some fines on these investigations and haven't seen Lear and any of those headlines. I'm wondering whether we should be able to interpret hat as a positive may be indirectly that you're not involved or maybe that-- and also wanted to know whether that's maybe opening your opportunity set with some of the Japanese customers?

Well let me take the lead on these questions and I'm going to go to the team for some additional data and support, Rod. Starting off on the European, we are aware that IHS has brought their production assumptions down for Europe in their January 15 release. We're still working through the details on that. From our standpoint, the market is really kind of tale of two cities with the premium brands and luxury brands and higher end market being-- have showing some sign of resiliency and in the A/B platforms showing some weakness. Our production assumptions however did assume on the platforms that we were on that there was some pull back. I mean Jason, if you'd break it down from a customer standpoint, what were some of the key assumptions that we had in our--

Yes, if you look at-- we have four down about 10% year over year --

I'm talking about Europe, Rod.

In Europe and Fiat down about 8%, Opal down 11%, so some of the customers were-- we have a little more vulnerability to the uncertainty in Europe, the BMC segments. We already had a pretty significant reduction in production volumes assumed in Europe in 2012. So we have the market down 800,000 units overall and we've got the luxury brands relatively flat, Audi, BMW and Daimler are relatively stable year over year. So we think we've captured a lot of that risk or uncertainty in the initial assumptions that we made.

And we're still monitoring it, keeping an eye on it, nothing at this point that we're seeing would tell us that our production assumptions at this point are incorrect in Europe, Rod.

On your second part of the question regarding the Yazaki and DENSO press release and Justice Department fines that were announced earlier this week. Before I get in to the specifics of the case, I'll ask Terry Larkin, our Head-- our General Counsel, to talk about the specifics. Our business in this segment is growing, and it's growing faster than the market overall and we are continuing to gain share and we're gaining share in a lot of different places from a lot of different competitors. It's hard to say whether the case has a lot to do with it, my instincts tell me no. I'd like to think that there will be a benefit to Lear Corporation as a result of the disclosure earlier this week, but at this point I just think we're winning it based on the merits of our competitiveness. As far as our involvement in the review of the anti-trust, Terry, do you have update you can provide Rod and the team?

Yes, the DOJ did announce these pleas in the Automotive Electrical Component Business this past week. These are we believe related to the ones that they announced last fall involving [Feracoa] and what we can tell you is that Lear has not been the subject of any DOJ proceeding in this matter. So we're not directly involved and we can't-- we don't know more about it because we're not involved than what we read in the criminal information in the press releases that the DOJ has issued on it. We note that there are an ever-increasing and a broader group of components being subjected to inquiry.

This criminal proceeding though is different than the civil anti-trust class actions involving price fixing that we've commented upon earlier, I just want to make sure we're all clear about that. The status on those is that Lear has had roughly 40 separate lawsuits filed against it. There was a hearing before the judicial panel on multi-district litigation just last week at which various of the plaintiffs have asked that the cases be consolidated into one case. We expect that's likely to occur, that court has -- the panel has it under advisement and we expect to hear in the next several weeks on that. As you know in the past we've said and we continue to maintain that we don't believe that we've violated any anti-trust laws in those proceedings either.

Thank you.

Peter Nesvold from Jefferies.

When I look at the Seating margin guidance for next year of 6.5% to 7%, yet taking into consideration that's a full year average, do I start at sort of the low end of that range and then work up to the high end of the range as the year progresses or do you think the variance is going to be wider than that over the course of the year?

I think Peter, I think the variance is going to be wider than that especially in the first half of the year where we'll start I think outside of the 6.5% range of the low side, probably in the low 6% ballpark, 6% to 6.5% something like that, and then towards the high end the range in the back half of the year for the average. I think some of the drivers that we're seeing coming out is again a very active launch calendar and some of the inefficiencies associated with that as well as the need to immediately fund your customer concession price cost downs in the beginning of the year as we work for offsets towards that. So it'll start off slow and then ramp up towards the target in the back half of the year.

Okay, and then the follow-up question, if I want to think through the margin sensitivity to further declines in volumes in Europe, is it fair to think about this conceptually this way that as industry volumes decline in Europe, you're losing volumes as fairly high incrementals because they are more mature platforms for you and you sort of backfilling that with the volumes out of the sales backlog that might initially be at lower incremental margins because of launch costs and other items? Is that a reasonable way conceptually to think about it?

Yes overall, I would say that is true, let me try to put some bookends around it though to help you a little bit more. The content per vehicle on average in Europe for Lear would be about 300 theoretical-- $300 per unit. Now again, it depends as much as anything on which platform goes down and how they take the volume out of the system and whether your able to adjust your cost structure accordingly. But if you use a content of about $300 I think that's about the average. The downward conversion in the short term will be roughly around 15%. Again, cautioning that it depends on the particular car line. From a backlog perspective, usually backlog comes on at a rate lower than that while you work it up through efficiencies and value engineering propositions, but incrementally, typically at about a 10% margin in the backlog.

Great, that's very helpful. Thank you.

You're welcome.

Chris Ceraso from Credit Suisse.

A couple of items, the fourth quarter margin in Seating I'm just trying to get a feel for what some of the other factors are. You highlighted roughly $10 million in a couple of different categories, but even after I back that stuff out, it still looks like the contribution was a little bit thin, is anything else weighing on the results there, is it mix, is it materials, is it all the launches that were going on?

Well it always is a product of what you're making in the quarter because each kind of platform has its own kind of financial DNA or financial template. So it depends as much as anything on the mix of the product. Jason, what are some of the other drivers in that segment besides-- that could help Chris get there?

It really was launch and development cost were the main headwind. Yes we were up about $200 million in sales and that all came through the backlog, so that converts at around 10% normally. And they've come in $1 million or $2 million below that, but that was offset by the higher launch and development costs. Everything else sort of nets out year over year, customer pricing was offset by our performance actions.

Okay. And then you touched on this little bit but maybe you can give us some more detail of the rough breakdown for you in Europe, how much of your business in Europe is BMW, how much is Fiat, et cetera?

I don't think we've gotten into that level of specificity on the breakdown. BMW is obviously pretty important. Well we have talked about the BMW overall (inaudible).

Yes, overall BMW is about 11%, 12% of our sales.

That's worldwide.

Globally, yes. In Europe it's a little bit higher percentage than that.

Yes, it's a percentage of sales, of European sales.

Okay, but you're not willing to give a more detailed breakdown?

I think what we try to avoid because a lot of this too is import business or export business out of Germany from our standpoint, so if we give you the production, it wouldn't necessarily tie to the sales.

Right, okay. And then just one housekeeping item, you mentioned the tax rate you're going to have to release that valuation allowance at some point in 2012, is that like a Q4 event or when should we start dialing in the 30% rate?

Tell you that the drivers on when we release it is the profitability of our US segment mainly. And from our standpoint, based on our guidance we'd expect this to be about the third year and Bill, doesn't it typically take about-- I'm looking at Bill Mclaughlin, our Head of Tax, take about three years in order to justify releasing it?

Yes, that's right, Matt.

And then to the rest of his question, what does that do to our effective rate?

Well we're thinking that it would-- valuation loss will probably come off at some point in the back half of the year, and then at that point our effective rate should normalize around 30%.

Okay, thank you.

Brian Johnson from Barclays Capital.

Just wanted to talk about the Seating business. Could you describe maybe sort of the next level down on the kind of pricing pressures you mentioned that will roll into first half, where they're coming from, is it a particular type of OEM or type of program? And then what are things you're working on in terms of pushing back and maybe helping them achieve their cost reduction goal without decontenting the vehicles or getting back to where some of the mass market makers were several-- a decade ago with poorly contented cars and squeezed suppliers?

Great, that's a good question. The-- normally on average our pricing in this business is going to net out on a price down level at around 2%, slightly higher in industry years where volume is up. That being said, each car line is a little bit different depending upon the amount of content that we control, where it is to market and where it is to return on investment. We look at a lot of ways on-- we constantly look at our business on a return on investment basis. Now, we sell to a customer that has a product that's a consumer product obviously that's very dependent on price.

They're looking for ways to take cost out of their product, and I think one of the benefits that Lear brings as a global supplier with the amount of depth that we have in vertical integration and our engineering capabilities, the way to find them solutions to take cost out of their product without impacting the quality and without impacting our margins. So some of the things that we're doing, we'll constantly benchmarking best in class, trying to develop alternative engineering designs that take cost out and looking at the value stream beyond the Tier 1s to try to find inefficiencies to help pass that along to their customers. And so we're able to provide in many cases savings well in excess of a 2% that you'll see topside from our revenues or from our P&L.

Some of the things that we'll do is streamlining the design using lighter weight materials, trying to get the same type of performance in a seat or a structure or electrical distribution system using less material, trying to identify potential inefficiencies in the sub tiers as it relates to logistics. Things of that nature, Brian, are what we attack so that at the end of the day the customer gets and consumer gets a seat that is best in class or electrical distribution system that performs additional electrical content with less cost.

And to you see (inaudible) having to put several hundred quality control black belts, particularly in the Europe to handle launch issues, is that something you're seeing in terms of step up in complexity or is that an issue unique to a competitor?

Well I think that every business uses some form of lean combined with black belts to take variation and efficiency gains out of their facilities and we're no different. Complexity in a launch is usually driven by the reach of it. One of the values I think Lear brings is our global footprint and as customers are going to these global launches, these launches are becoming very complex because you're managing in many cases multiple regions of the world in many cases emerging markets. That's what we do. I don't see a particular demand or need for a black belt per se although we do use black belt to try to eliminate the variation and improve our quality. But the business is challenging and you can see from the elevated launch costs that we've incurred in our Seating segment over the last several quarters.

Okay, thanks.

John Murphy from Bank of America Merrill Lynch.

I just had a question for Terry first just on these anti-trust inquiries and what you're facing. I just want to make sure this is clear at least for me, is the stuff that Yazaki and the other suppliers are facing are regulated driven inquiries and accusations and ultimately some fines here? But what you're facing is suits that are being brought by lawyers on behalf of consumers that they overpaid for their cars which are then looking back at Seats and your Electronic business is being overpriced to the auto makers. I'm just trying to make sure that we've got that straight, I mean these are consumer lawyer driven inquiries as opposed to regulator inquiries, is that correct?

That is correct. That's a very important distinction. What we're saying is that we have not been subjected to any criminal proceedings by the Department of Justice. We do have these civil complaints alleging that there has been price-fixing and therefore, excessive pricing on products that were sold to customers by us and then later those customers of ours sold to retail consumers. In those cases Lear is not alone being a defendant in those. They are virtually all the major electrical wire harness suppliers in the United States are parties to those suits as well.

And it's not an uncommon thing once you have these criminal complaints come down that civil complaints get filed. But they're two very distinct separate types of proceedings. And the civil cases, as I mentioned, while there are many a number will likely ultimately be consolidate into just one for at least the pre-trial proceedings. But you pick up on a very important point. There's a substantial difference between being party to the criminal proceedings and being party to civil cases.

Okay, that's great. Matt, second question, as we look at the distribution of cash to shareholders, it looks like it was about 72% of free cash flow in 2011. I know it's hard to commit to percentages directly of free cash flow being returned to shareholders, but it looks like you'd probably based on your share buyback and your dividend policy right now would potentially be returning more than all of your free cash flow that you're forecasting for 2012 to shareholders. Just curious, is that a correct interpretation and do you think you have some excess cash on the balance sheet in addition to the free cash flow you'll generate in 2012 that'll end up back with shareholders?

What I will say is that we have about two years left on our authorization if not two years exactly. And we have about $400 million of share buyback capabilities. What I would do, John, is just probably take the eight quarters remain and divided into the overall authorization for some planning purposes.

So 72% or 70% of free cash flow back to shareholders is a decent placeholder for us to use?

No, I wouldn't necessarily look at it that way. I would just say from probably the proper way to do it and what we've been seeing is we're going to return on a consistent basis depending upon other uses of the cash and market conditions and whatnot. What I would do for planning purposes is just take a quarterly run rate as opposed to percentage of the free cash flow.

Okay, that's helpful. And then just sort of a follow up on that and not to parse your words too much, but you said on acquisitions that a transformational acquisition would not -- is not needed or planned. But is it something that if it was-- if it came up you would consider if it was at a very attractive price?

Well absolutely. We would consider it if it came up, we don't see anything on the horizon that would work. To us, our philosophy is first and foremost, the kind of balanced growth risk and returns and make sure that we provide value to our shareholders taking that into consideration. We also look at the same time at what do we need to do to ensure that we maintain or improve our position in the marketplace with our customers. How do we remain and improve our competitiveness that provide value and improve quality, because ultimately that creates value for our shareholders. So I don't see it out there, John.

I would love to do one significant acquisition that fixes the business or improves our profile. I don't think it's out there. I don't think we need it, I think we can compete otherwise, but if there was something out there that would improve our position with our customers and improve our ability to give balanced returns to our shareholders, we would absolutely look at it.

Great. Thank you very much.

Aditya Oberoi from Goldman Sachs.

So I had a question on IAC. Last year there was some talks about potentially taking the Company public and then the markets turned in the wrong direction, is there any update on the-- that you guys have on that?

No, no real update. I think you read the tea leaves correctly on the kind of the thought process on the potential IPO. What I can tell you is that asset for us is not core, we own roughly 23% of the IAC venture, European and North American venture that's recently been [confined]. We will look to exit and monetize that investment. We believe that global [loss]and the ownership team a group of that business and the management team will be successful there. They have a track record of success and they will be successful here as well. But in the end, we'd like just to monetize our stake and move forward.

Great. And I had another follow up on T900. Obviously there's a distinct thought process going on between what GM is saying and some of the other suppliers are saying versus what IHS is forecasting. As you guys look at your schedule at least in the near term or where GM is hinting to where the production could go, what are your thoughts on that?

Jason?

Yes Aditya, we haven't-- we're looking at that. If you look at the announced down weeks that GM has talked about as they prepare for the changeover to the K2xx and you look at their production capacity in each facility, we think that they can very easily build between 950,000 and 1 million units in 2012. We've used 960,000 in our outlook, which is considerably higher than what IHS recently disclosed. We've been in discussions with IHS, we're trying to understand their thought process, but what we think they've done, they've really looked at the capacity that GM had last year over laid the down weeks and assumed that production would be down. And that's not what we're hearing from GM, that's not what we're seeing in releases. The sales have been very strong in the platform, inventory levels are relatively low and so we're pretty comfortable with the 950,000, 960,000 units.

Aditya, if they sell them, they'll build them.

Great. Thanks a lot, guys.

Himanshu Patel from JPMorgan.

Two follow-up questions. Just does the pressures in Europe right now, do you think they create any opportunities to do any additional restructuring?

Not really. I don't think they do-- our restructuring there is largely complete. There's always things you'd like to do and maybe we'll try to do, but it really comes back down to more just whether or not the financial justification makes sense and whether operationally you can execute them in a timeframe. There may be some modest things we can do, but I really, Himanshu, don't think the pullback will create additional restructuring opportunities.

Okay. And then just so we sort of understand the operating leverage on the T900, does that platform have a notably different level of vertical integration then sort of your average platform?

Yes on the 900 again, what kind of impacts the conversion rates on any vehicle is number one, the size of the vehicles. I mean three rows of seats is better than two seats or two rows. If it's a highly contented electrical content, electronic content, full power leather seats, that usually adds to the value of seats. And if we're making that content that usually impacts to conversion rate both up and down. Something like the 900, one, it's a high running program obviously with the amount of units that go through and also there's a fair bit of content, there's a fair bit of Lear content on it, so it would convert up and down at the higher end of our typical conversion rates.

Okay and then just going back to Chris's question on slide 4 where you give a very useful customer breakdown, can you just directionally tell us how much of the GM and Ford slivers are Europe related?

I really want to get out of geographic breakdowns by customer mix because of the way that they cross over the lines in imported transfers, and I don't want to get into another slice of the disclosure, Himanshu.

Okay, no worries. Thank you.

Joseph Spak from RBC Capital Markets.

I just had a couple of questions on EPMS actually if we could move the conversation there. It looks like the contribution margin this quarter were about 15% and maybe 20% if you sort of strip out the development cost. So I was wondering is that sort of about the right run rate going forward once you get that scale and volume or can the contribution margin go even higher in that segment?

I would tell you that overall while you'll see that type of conversion rate on a year over year or quarter, there is a natural baffle in the business on returns and this segment I think is really no different, between 7% and 8%. And it really comes down to two things, at that rate can we return on our investment both our engineering and our assets at a rate that exceeds our cost to capital, and we believe we can. And number two, it's still a competitive marketplace. And so there's a natural kind of market baffle when you get up into these type of margin and performance levels that I think the marketplace will bring you back down into that range.

So the first response is yes, it could happen. On the incremental sales obviously if you're doing more of a platform and you're on a platform that's running well and you have an efficient manufacturing process then yes, you can convert it there on a short term, but longer term it'll balance back out at the 7% or 8%.

Okay. And then finally, I know in your guidance page you point to copper lower but than I didn't see it listed as sort of a margin benefit in EPMS for next year. Can you just remind us how much copper you use and if there is a benefit that you've calculated for 2012?

Sure. We use about 125 million pounds of copper at this production rate, and about 20% of that is our exposure. The balance is on an index and agreement with our customers. And so we have factored in about a $0.50 reduction on that controllable by about $10 million, $11 million year over year. And that's been offset by some commodity pressures and other areas of the Electrical segment rather than-- and in some of the Components.

Okay, thanks a lot gentlemen.

Thank you.

Itay Michaeli from Citi.

Wanted to delve into the 2012 revenue outlook. You called out some mixed headwinds in North America. But I was hoping you can share what you're assuming for mix in the rest of the regions particularly Europe and perhaps the BRIC countries, excluding the backlogs. So just how you're looking at Lear's revenue in those regions relative to industry production?

Sure. In Europe, we see our revenue changing pretty consistently with the market overall. With the CMB segments down significantly, more than the 5% reduction overall, and then the luxury brands sort of compensating for that and bringing it back in line with that 5% industry change.

Now in South America, we're-- our change year over year is very similar to the market as well. We have a strong backlog that's rolling on in South America that's helping us in that region. And then Asia, our changes are very similar to the market overall, not a real big mix exposure in the other regions. The mix issue that we have is more centered around North America.

That's helpful. And then on slide 6 I appreciate the new disclosure on the JV income, are you collecting dividends from the Asian joint ventures and it looks like you're-- for 2012 you're remodeling about a neutral other expense, so what are some of the other offsets to that joint venture income coming in 2012 to get you to that neutral implied in your guidance?

We do enjoy dividends from our joint venture, each one is slightly different. We've been able to fund a lot of our growth in Asia through the dividends. We have a pretty efficient cash modeling and tax structure that allows us to use the cash earned and many of these joint ventures to expand the growth and apply in other -- to other kind of investment opportunities. The second part of the question was on the other?

Yes, it looks like your--

The other is just kind of getting a catch all, a lot of different things that go through there. Jason, how else can you help?

So we have equity earnings of about $25 million and that's offset by state and local taxes, FX and other miscellaneous expenses so we do have it at zero overall.

Great and a quick housekeeping, I noticed D&A in the quarter of $57 million, a little bit light, anything going on there or is that just kind of normal?

Yes it came down from the third quarter, the fourth quarter primarily because we had some assets in our terminals and connectors business that were fully depreciated at the end of the third quarter. And so we'll see that benefit continue into 2012, but then it's offset by the big step up we have in capital spending in that segment.

Great. Got it, thanks so much, guys.

You're welcome.

Matthew Stover from Guggenheim.

Thank you very much. Most of my questions have been asked, I do have some clarification though. The first question is on the pricing discussion, Matt. 2% sort of the normal number, the implicit guidance for 2012 is in line with that normal performance or is it worse?

It's in line, I mean it's a net 2% number. We're able to provide benefits in many cases closer to 5% with engineering changes and some other things that we can do to help our customers get the cost down in their product, but the net number is about 2% and our guidance is pretty consistent with that.

Good. The other question I guess is I'm little bit confused to the answer to the last question about mix. I guess arithmetically if European production is going to be down in A&B segment is going to be down much worse than the average, I would suppose then that your mix actually improves in Europe in 2012, would that be correct?

You're saying that since we're higher on the luxury brand vehicles as a percentage?

Yes, C Class plus you're going to be higher and their performance is going to be better than average.

Yes you can look at it that way because we are seeing some stability in the C, D, the Audi A6, the 3 Series BMWs and I think Jag is-- well Jag's pretty consistent and Land Rover. Yes you could say that. Yes you could say that. What we were trying to say and I think what Jason mentioned was our sales impact is pretty consistent with the overall assumptions for Europe because our business base, Matt, pretty much reflects the business base in Europe.

Okay. Well thank you very much, I appreciate it.

Ravi Shanker from Morgan Stanley.

Can you help me understand the launch costs a little bit better because I think your backlog is down for 2012 and overall from this point last year, so I know there's an FX component to that but should that not mean your launch costs should also be pretty much in line?

Yes normally it does, that's the biggest driver is backlog. But you could be launching a lot of replacement business as well. So it's not exactly that clean, Ravi, as far as just the number of backlog. In any given year, you're constantly doing mid-cycle enhancements which requires a new line layout or retraining of employees or expansion into other facilities for instance.

Got it. So what you're implying is that the mix of the new launch is a bit different or does that mean that if you're doing more complex launches that the margins are going to be a little different than what your typical backlog incrementals are as well?

They could be, yes, they absolutely could be.

Okay. And also on the cash flow, I think you did good job of walking between why the free cash flow declines in 2012 versus 2011, but when you look out to 2013 and beyond, I mean do you think you get back up to a $400 million level of cash or is the CapEx a little more sustainable and the cash taxes as well?

Right. I want to get away from a little bit from given projections in 2013. What I would tell you that from a CapEx standpoint, what we've been talking about is a little bit elevated CapEx as we take advantage of our balance sheet strength and the opportunity to kind of put some footprint into the emerging markets to facilitate our growth and kind of have an opportunity to provide value and get a nice return for that investment. Cash taxes I think are really a function of a one-year lag on your tax expense from a modeling perspective. And again, it all is driven by earnings and earnings are driven by production. So I would work it that way, but I'd like to stay away from giving a projection on '13 at this point.

Understood. Thank you.

Colin Langan from UBS.

Great, thanks for taking my question. Just a couple clarifications. In terms of the tax guidance, I mean is that reflecting the 30% rate in the second half or will that tax guidance change once --

I'm sorry, Colin, can you repeat the question? You broke up a little bit.

Yes, sure. I just-- clarification on the tax guidance, if the valuation allowance is reversed does the rate go up to 30% and that guidance changes or is that already reflecting the expectation that the valuation allowance will be reversed?

Colin, I'll start the answer and then I'll turn it over to Bill Mclaughlin. We have not assumed in our guidance the reversal of that valuation allowance and so the 23% effective rate that we're using in the guidance does not reflect that reversal. Bill anything--

Yes, that's right. The 30% that we talked about would start in 2013 and the 2012 guidance does reflect the fact that we did release several valuation allowances in Europe in 2011.

And just to clarify that again, if the valuation allowance is released in the second half, the rate won't go to 30% this year still, it'll be next year?

No, due to the way the accounting rules work, we would basically still be at the 23% that we're guiding to for 2012.

Okay. So using 23% is good for '12, probably goes up to something like 30% if it's reversed in the second half?

Yes.

Okay. And then just I want to understand the Seating margins, why they're weak in the first half of the year? I thought in the third quarter it sounded like it was related to challenges with launching products that were probably going to continue into the first half, but from slide 23 it looks like it is more of a mixed commodity issue, what really is the underlying margin issue for Seating?

It's really the launch and the product development and it's also driven by the fact that on Jan 1 there was a whole litany of customer pricing that takes place, Colin, that you then need to work to find offsets for (inaudible) supply base, your manufacturing facilities and your lean workshops and what have you and just working for solutions to offset the price [downs]. So those are probably the three biggest drivers.

Okay so the issues that we saw in the third quarter are kind of addressed already at this point?

No, I think in certain cases they're continuing. We're still not as crisp as we would like on the launches and maybe say the manufacturing efficiencies of recently launched products because at some point it's not a launch anymore. So we're still working through those issues to some extent.

Okay. And just one last one, the contributions are normally 15%, I mean when we look at Europe, is that the same or is that a higher or lower than the average for the Company?

I would say that Europe usually comes in at about 15% and that's a little bit lower than the impact on North America for several reasons. The biggest one being the level of vertical integration in Europe is typically a little bit less than you're going to see in North America. And so that usually drives a lower conversion rate up and down.

Okay. Okay, thank you very much.

Well thanks, Colin. That's the end of the questions, at this point I think it's mainly the Lear team that remains on the phone. I want to thank you for a very great job in 2011 and all the hard work and effort. We have some headwinds in front of us with uncertainty in Europe, but I know with dedication and working together, we will win together in 2012. So thank you very much.

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