Lear Corp (LEA) 2012 Q2 法說會逐字稿

Good morning everyone. My name is Sara and I will be the conference operator today. At this time I would like to welcome you all to the Lear Corporation second quarter earnings conference call. All lines have been placed on mute to prevent any background noise.

(Operator Instructions). Thank you. I would now like to turn the call over to our host, Ed Lowenfeld, Vice President of Investor Relations. You may begin your conference.

Thank you, Sara. Good morning everyone, and thank you for joining us for our second quarter 2012 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 Jeff Vanneste, 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 slide titled Investor Information at the beginning 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 slide labeled Non-GAAP Financial Information, also at the end of the presentation materials.

Slide number 3 shows the agenda for today's review. First, Matt Simoncini will provide a Company overview. Next, Jeff Vanneste will cover our second-quarter financial results and 2012 outlook, then Matt Simoncini will have some wrap-up comments. Following the formal presentation, we will be happy to take your questions. Now please turn to slide number 4 and I will hand it over to Matt.

Great, thanks, Ed. Great job with the forward-looking statements.

Lear had a solid quarter of operating performance despite challenging industry conditions in Europe. Sales in the second quarter were $3.7 billion, unchanged from a year ago, reflecting lower production in Europe and a weaker euro, offset by higher production in other major markets. Excluding impact of foreign exchange, sales would've increased by 5%.

Core operating earnings were $197 million, down from a year ago reflecting higher costs associated with the backlog and infrastructure costs in emerging markets. While business conditions in Europe are challenging, our European operations remain solidly profitable in the second quarter.

Our Electrical business continues its rapid growth and achieved record quarterly sales of $872 million in the second quarter. Adjusted margins improved to 6.8% as the business continues to benefit from greater scale and previous restructuring actions.

We continued to return cash to shareholders through dividends and share repurchases. Since the beginning of last year, we've returned almost $500 million dollars to shareholders through these programs. At the same time, we continue to invest in strengthening our core businesses by expanding component capabilities in emerging markets.

Since the beginning of 2010, we have added new component capacity in 11 low-cost countries or emerging markets. We estimate that we will invest approximately $300 million in these activities through the end of 2012.

On May 31 we completed the acquisition of Guilford Mills. Guilford adds global fabric design and development resources as well as technical expertise to our existing seat fabric and cover capabilities. We believe this will not only strengthen our current seating business, but will provide additional growth opportunities.

Slide number 5 shows a continuing trend of sales growth and performance improvements in our EPMS segment. Several key drivers have enabled this business to increase sales, profits and margins since 2009. In 2009 the EPMS segment was unprofitable.

Over the past several years, we've invested over $430 million in restructuring actions and capital expenditures to improve our manufacturing footprint in this segment. We've also made incremental investments in high-powered technologies, rationalized certain non-core product lines and improved our overall competitiveness. As a result, our sales in this segment have been growing faster than the overall industry.

The increased scale of business provides operating leverage which, coupled with lower structural costs and improved footprint, have improved our margins. We're on track for record sales in 2012 and expect margins to increase to 6.5% to 7% compared with 5.9% last year.

The positive momentum in this segment is expected to continue. And based on our existing backlog, we expect sales to grow to $4 billion to $5 billion over the next several years. Please turn to slide number 6, where I will review our approach to capital allocation.

Our primary focus is to provide our customers with outstanding customer service, quality and value so we can continue to deliver solid operating results and generate cash. As I mentioned earlier, we are making significant investments in expanding our component capabilities and manufacturing footprint in the emerging markets. We believe this strategy will improve the cost and quality of the products we provide to our customers, facilitate sales growth and deliver long-term value to our shareholders.

In addition to growing organically, we continue to evaluate acquisitions that will strengthen our core businesses, such as Guilford. Our acquisition strategy remains focused on companies that will further enhance our component capabilities, our competitiveness, help us grow in the emerging markets and add scale in our Electrical segment.

While we're investing in the business and returning cash to shareholders, we're committed to maintaining a strong balance sheet with adequate liquidity and investment-grade metrics and financial flexibilities. Now I will turn it over to Jeff, who will take you through our financial results and outlook.

Thanks, Matt. Slide 8 provides the financial highlights for the second quarter.

Business conditions in Europe were challenging in the second quarter. European industry production was down 9% and the euro weakened by 11%. In North America and Japan, production was up 27% and 68% respectively, largely reflecting volume recovery by the Japanese manufacturers following last year's supply-chain disruptions. On a global basis, industry production was up 11%, including a 16% increase in China.

Lear sales were $3.7 billion, flat with a year ago. Excluding the impact of foreign exchange, Lear sales in the quarter were up 5%. Core operating earnings were $197 million, down 13% from a year ago. The decrease in earnings primarily reflects increased product and facility launch costs, higher program development costs associated with the backlog, and selling price reductions -- partially offset by new business and operating performance improvements.

Free cash flow was $49 million in the quarter. We ended the quarter with cash of $1.3 billion, reflecting the purchase of Guilford, which was funded with cash. Our reported EPS was $1.45 per share. On the next few slides, I will cover our second-quarter results in more detail.

Slide 9 shows vehicle production in our key markets for the second quarter. In the quarter global vehicle production was 19.9 million units, up 11% from 2011. As mentioned previously, the year-over-year production increase was largely driven by increases in Japan, North America and China which were partially offset by production decreases in Europe.

Slide 10 shows our financial results for the second quarter of 2012. As previously mentioned, sales were flat at $3.7 billion. In Europe, adjusting for foreign exchange, our sales were down 7% compared with a decline of 9% in industry production.

Pretax income before equity income, interest and other was $190 million, down $30 million from a year ago.

Interest expense was $14 million, up $3 million, primarily reflecting interest expense related to indirect tax matters.

Weighted average diluted shares in the second quarter were 100.6 million, 6.8 million lower than 2011 as a result of our share repurchase program.

Slide 11 shows the impact of nonoperating items on our second-quarter results. As I just mentioned, our reported pretax income before equity income, interest and other expense was $190 million. Excluding the impact of operational restructuring costs and special items, we had core operating earnings of $197 million.

Equity income in the second quarter includes income from special items of $14.7 million related to a reversal of a valuation allowance at one of our non-core joint ventures. Excluding this one-time item, equity income from our nonconsolidated joint ventures was $6 million, an improvement of $2 million from a year ago.

Other expense in the second quarter includes income from special items of $3.5 million, reflecting insurance recovery of items expensed in a prior period.

Adjusted for restructuring and other special items, net income attributable to Lear in the second quarter was $135 million and adjusted EPS was $1.35.

Slide 12 summarizes the operating performance in our Electrical segment. Financial results in this segment improved both sequentially, as margins are up 30 basis points from the first quarter of 2012, and year-over-year with margins up 70 basis points.

The year-over-year margin improvement reflects the impact of new business and productivity improvements, partially offset by higher product and facility launch costs and program development costs. As mentioned previously, we continue to forecast full-year margins in this segment at 6.5% to 7%, representing a third consecutive year of improvement.

Please turn to slide 13 for a summary of our results for the Seating segment. In Seating, adjusted margins in the second quarter were 6.6%, down 130 basis points from the second quarter of 2011. The decrease in margin compared with a year ago reflects increased product and facility launch costs primarily related to the expansion of our component capabilities and backlog, higher program development costs to support our new business and lower production on key platforms.

Slide 14 provides additional detail on some of the key drivers impacting our Seating business. Seating margins in the first half of 2012 were 6.7%. Recent margin performance has been impacted by a number of factors, including increasing facility and launch costs globally, higher program development costs to support new business, investment in infrastructure in emerging markets and a weak production environment in Europe.

We are taking numerous actions to improve efficiencies and manufacturing performance. In addition, Guilford will strengthen our cut and sew business, provide efficiencies in fabric design and further leverage our global component capabilities.

Our 2012 outlook for margins in Seating remains at 6.5% to 7%. At our current margins and level of capital intensity, we are generating returns in excess of our cost of capital.

Please turn to slide 15.

We generated $49 million of free cash flow in the second quarter. Capital expenditures were $107 million in the second quarter as we continued to expand our footprint in emerging markets, invest in new programs and increase spending to improve our overall competitiveness.

Slide 16 provides our quarterly update on our share repurchase program. During the second quarter we repurchased 1.8 million shares of stock for a total of $70 million. Since our share repurchase program was initiated last year, we have repurchased $402 million of stock, or approximately 8.5% of our outstanding shares, leaving $298 million available under the repurchase authorization which expires in February of 2014. Going forward, we plan to continue to buy back shares consistently, subject to the Company's alternative uses of capital and prevailing financial and market conditions.

Slide 17 highlights the key assumptions in our 2012 outlook. Our outlook reflects updated production assumptions in our major markets. Compared to our prior outlook, global production is about flat at 78.7 million units.

Our production assumptions are consistent with the latest IHS forecast. Our outlook is based on an average full-year exchange rate of $1.26 to the euro, which is down 3% from our prior outlook, and reflects an average of $1.23 to the euro in the second half of 2012.

Slide 18 summarizes our 2012 financial outlook which includes the impact of the Guilford acquisition. We are projecting sales of $13.9 billion to $14.4 billion in 2012, unchanged from our prior outlook. The addition of approximately $200 million in Guilford sales is offset by the impact of foreign exchange.

Global automotive production is relatively flat with our previous outlook. Core operating earnings are projected in the range of $740 million to $790 million, unchanged from their prior outlook. This outlook reflects the addition of Guilford's earnings at margins which are consistent with our existing Seating business, offset by the impact of foreign exchange.

Interest expense is estimated to be approximately $52 million, down $3 million from our prior outlook, primarily reflecting the impact of the redemption of 10% of our outstanding bonds.

Tax expense is estimated to be $130 million to $150 million, a decrease of $20 million from our prior outlook reflecting the mix of earnings by country.

Capital expenditures are forecasted to be approximately $435 million, up $10 million from our prior outlook, reflecting the Guilford acquisition. Our outlook for free cash flow is expected to be approximately $275 million, unchanged from our prior outlook. Now, I will turn it over to Matt for some closing comments.

Thanks, Jeff. Great job. We continue to deliver solid financial results despite challenging market conditions in Europe. Looking at our two business segments, we continued to forecast margins in the 6.5% to 7% range.

Our Electrical business will continue its trend of improving year-over-year sales and margins. In Seating, we expect margins in the second half of 2012 to be consistent with the first half, and we continue to win business in both segments.

The expansion of our component capabilities will strengthen our core businesses and position Lear for profitable growth. The Guilford acquisition will complement these activities in Seating by strengthening our world-class seat cover business and providing additional capabilities in fabric design and manufacturing.

Our strong balance sheet and solid operating performance provides us the ability to continue to invest in the business, return cash to shareholders and take advantage of any market opportunity.

In closing, I want to welcome the Guilford employees to Lear. You're joining a great team and we're happy to welcome you to our family. I also want to thank all our employees for their hard work and dedication. I recognize the personal demands of providing world-class product and outstanding customer service while continuing to grow and expand our businesses. Keep up the good work.

With that, I would be happy to take your questions.

(Operator Instructions) Rod Lache, Deutsche Bank.

Just had, first, a couple of housekeeping things. Just to confirm, is the updated FX guidance now $700 million headwind, up from $500 million? And can you give us a feel for what commodities and product development and launch headwinds were this quarter, what your update is for the full year?

The FX, based on the revised guidance, provides a headwind on FX on a full-year basis of about $650 million.

From the commodity standpoint, Jeff, do you have the exact headwinds?

The headwinds on commodity on the copper side -- copper has been lower on a year-over-year basis, and as such, our earnings reflect roughly $2 million to $3 million of benefit on the copper side. On the Seating side of the business, both steel and resin costs were higher in the quarter on a year-over-year basis. Cumulatively, those two were about $6 million to $7 million.

And what is your expectation for the year?

For the year on copper, we continue to see some improvement on a year-over-year basis. And on the steel and resin side, we continue to forecast some year-over-year decline in performance based on those prices.

And you made some comments in your prepared remarks about Seating returning its cost of capital at the 6.5% to 7% margin. I was just hoping you can talk a little bit about what your longer-term expectations are beyond this year for that business.

I think historically you had a target of getting north of 7%. Is that something you would anticipate happening anytime soon? Or is that something with the launch activity you've got next year and the pricing environment would be a little bit more challenging?

Rod, I don't want to get into giving margins out for next year, really because of the uncertainty in the production environment. That being said, what we would expect this business to do is provide returns in excess of its cost of capital. That is going to be dependent upon the type of business we're winning, the type of business that is launching and obviously the production on our platforms -- the level of Lear content and the investment to provide those programs.

Just to run it out a little bit more, if it's a build-to-print, a program, that typically takes less upfront engineering and therefore probably demands or commands a lower margin in the marketplace. On the other hand, structures business, mechanisms business, little bit more capital-intensive and usually requires more engineering and that would require a higher margin in order to return. So really, it comes down to the programs you're on, the level of vertical integration and whether those are build-to-print or whether Lear is designed responsible.

Okay, thank you.

John Murphy, BofA Merrill Lynch.

Question on the European business. I'm hearing a lot of other companies really ring the alarm bell on a potential risk in Europe. And I know you guys are highlighting the potential for volume risk there, but it seems like your business is performing well. You mentioned it is solidly profitable.

I'm just curious how you are able to sort of sidestep some of the other risks we're hearing from other companies, or the pressures we're hearing from other companies. And when you talk about Europe being profitable, is it in the same ballpark as North America?

Well, it really depends. I will start with the ending question, Murph. It really depends on the two segments.

In Seating, we have historically performed a little bit less than the target margins and a little bit lower than North America really as more of a function of the vertical, the level of vertical integration, which is higher in North America. In Electrical we perform at or above target margins. And really, again, it is a more mature business in Electrical than -- in Europe than in North America, and it has a higher level of vertical integration. So that drives the margins.

Overall, Europe for us has been in the 4% to 5% operating margin range. And that is actually slightly down from last year but still solidly profitable.

I can't really speak to others and why they are not profitable. Our business there is, I think, positioned well. We've invested quite a bit in improving the footprint and getting our components into lower-cost manufacturing locations.

That is very helpful. Second question. You've been highlighting launch costs as a pressure for a while. I'm just curious; as we look forward, there is a lot more product activity coming over the next few years.

Are we going to continue to hear about launch costs being a headwind? Or at some point, do we just get up to this steady state of a high level of launches and on a year-over-year basis it'll normalize? I'm just trying to understand if that will ever happen.

You know, theoretically, if the backlog decreases, launch costs and launch activity would decrease as well, obviously. For now, the cadence of our backlog is pretty consistent over the next several years, so I would expect the launch activity to continue.

To us the other driver of this is, as we expand our capabilities in emerging markets, there is infrastructure costs as you establish facilities that may not be completely utilized, management teams in those regions to support the sales growth. I think those factors, coupled with program development costs, are what you are seeing in the business.

Now, year-over-year, do we expect it to be incremental? I would say no, Murph. But you would still expect the level to be fairly consistent over the next several years.

Okay, that is helpful. And then on the Guilford acquisition, at this point are you guys doing all of your own seat covers? And how much is Guilford doing of your current seat covers? And can you just really shut down all external sourcing now that you have got Guilford?

No, not quite. I would like to do all of our seat covers. I think we have a best in class cut and sew operations in the lowest possible footprint. I think it's a competitive advantage that we have.

Adding fabric I think enhances some of the front end design that we can do to create value and improve the quality of the seat covers. That component, however, is directed, both the fabric and the seat cover, in many cases independent of the seat award from our customers.

Right now I would say roughly, I don't know, 10% of Guilford sales are to Lear. We would like to penetrate it more, and I think the way to do that is going to be a little bit longer-term. But it's going to require us winning the business independent.

Okay. And then lastly, you guys are performing fairly well in a tough environment here on an operating basis. You're generating cash. You are buying back shares, you're paying a dividend. You are making what appear to be some pretty good smaller bolt-on acquisitions that aren't too disruptive.

What else do you think you can do sort of operationally or executionally to get more people interested in the investment in the Company or potentially to move the Company forward, because it seems like you are almost firing on all cylinders right now.

Well, I appreciate the compliment, thanks, Murph. You know, we've had a pretty active dialogue with the investment community trying to articulate our strategy and explain our value equation.

In the end, all we can do is keep our heads down, work very, very hard at the fundamentals of the business, look for investment opportunities, which we are doing, try to create value by returning cash to shareholders because we believe in the long-term value of this Corporation. And hopefully we get recognized for that, and the valuation takes care of itself.

Great, thank you very much. Keep it up guys.

Itay Michaeli, Citigroup.

I was hoping you could comment on just the overall booking activity, if you are seeing any deferrals in the pipeline. And also, are you still launching the same amount of backlog that you last disclosed when you updated it? Or has that moved around at all just given the macro environment?

No, it really hasn't. It's very unlike the last downturn in '09 when you had a lot of programs that were delayed. And if anything, the launch cadence in the programs are shortening and launching faster.

There has been really no delay or program delays that I'm aware of. Everything is launching on schedule. The volumes may be a little bit lower, particularly in Europe. But, no, there has not been any program delays and no change in the launch cadence.

And how about just the overall booking and quoting activity?

It's been great. Quoting activity has been very, very active and our business wins have been consistent, if not a little bit higher than our recent pace.

That's great. And then just on the full year guidance, the EBIT range is still about $50 million wide. You guys have had very stable results in the first half of the year. Can you share what would put you at the high-end versus low end? Is there maybe a little bit of cushion at the low end for production, just any thoughts on that?

Really it comes down to the -- one, there is literally thousands of inputs that go into setting guidance. But the biggest one is the volume on the car lines that we are on. With the uncertainty in the market, mainly in Europe right now, that is why we thought it would be prudent to keep a relatively wide range even though we are six months into the year.

Great, terrific. Lastly, on Guilford you mentioned some of the integration as a potential margin improvement initiative. Can you maybe quantify that a little bit? How much can that contribute to the seat margin? And is that more of a second half of 2012, or a 2013 tailwind for you guys?

I really don't see it driving, just because of the sheer size of it, driving a margin expansion in Seating. I think it contributes to Seating at the seat margins right now 6.5% to 7%. There's always opportunities to create value with an acquisition.

Our focus on Guilford really was more to drive growth and use it as a platform for growth and add -- get in design stages of the seat covers and drive that type of performance. So it's really been more on a growth perspective than a cost reduction.

Great. That is helpful, thanks guys.

Ryan Brinkman, JPMorgan.

Hi, thanks for taking my question.

You're welcome and congratulations on the recent appointment, Ryan.

I appreciate that; thanks so much. The sequential decremental margins that you had in the second quarter in Seating, I think I quickly calculated that at about 19%, not adjusting for FX. Is that pretty much what we should model going forward if Europe tracks worse than expected? Or do you think there are things you can do to keep decrementals smaller than that?

No, I think in the short term you're going to look at, depending on the platform and the region, anywhere between let's say 15% to 20% on a short-term volume reduction. We're always looking for ways to offset it. But we have to balance that with the long-term profitability and making sure that our program development targets are met and our milestones are met, and that the plants are ready to launch.

The vast majority of our component facilities are running still towards the upper end of capacity and are in low-cost countries. However, the just-in-time seat assembly business is typically located right next to a customer's manufacturing facility. It's a little bit harder there to reduce cost.

Our engineering -- I think we're pretty lean on our program development costs. There's not a whole lot of opportunity to improve that number in the short term. Longer term if this looks like a sustained downturn, and by that let's say over several years, then we would take actions to restructure the business.

Great, that is really helpful. And then I would just ask, too, I'm curious how you think about the potential for your business as GM rolls out its new full-size pickups next year, i.e. [just] automotive is looking for just a very small 3% increase in the combined GMT 900 and K2XX, maybe up 1% in 2014.

Do you think that there is actually more opportunity for you there for volumes as it relates to your Seating business, given your history of involvement with this program and your understanding of the competitiveness of the upcoming product?

Well, if history is any indicator, normally when a new program is launched and refreshed and redesigned, it usually gets a bounce in the marketplace as it's new product. And we have seen that with the new Ford large truck platform, and I expect to see the same thing for the replacement large truck program at General Motors. It's a great-looking vehicle, a great design and I think it has the best seats in the world.

I'm sure it does. Thanks. Very last question, on the backlog; you have got so much backlog coming on, on Electrical. How should we think about the cadence of that in 3Q and 4Q just to sort of continue to ramp quarter after quarter, or how should we think about that?

It actually steps up in quarters 3 and 4 from the activity that we have. So it almost doubles in the back half of the year from what we saw in the first half in Electrical.

Thanks so much for all the great color.

You're welcome.

Joseph Spak, RBC Capital Markets.

Thanks for taking my question. Just wanted to focus on the cash flow a little. You maintained the free cash flow guidance. It implies a much bigger step-up in the second half. Is that mostly working capital release or can you give some additional color there?

I think that's a big part of it, in that working capital is estimated to be a source of cash in the second half of the year versus the first half of the year. There is obviously a bunch of components that go into it, and part of it is Guilford and both on the cash flow standpoint and CapEx standpoint. But generally speaking, I think one of the big drivers is working capital.

And was there an impact on the working capital in the quarter from the acquisition?

It's relatively minor.

Okay. And just following up on the backlog, appreciate the color on EPMS. Is Seating still fairly evenly split? Or should it decelerate a little bit from what you guys saw in the first half?

It steps down a little bit in third quarter, but first half to second half is pretty even.

Okay. And then last one, is there any update on the tax valuation reversal? Should we still expect that to occur in 2013?

I have here our expert in tax, Mr. Bill McLaughlin, our VP (technical difficulty) Taxes.

Yes, we still expect the valuation allowance to be reversed this year in the second half.

In the second half, and then you would just start accruing closer to the 30% rate?

Yes, 2013 we would see approximately 30%.

Okay, thanks a lot guys.

Chris Ceraso, Credit Suisse.

So, you said that you expect Seating margins in the back half to be pretty comparable to the first half. Are there some headwinds that go away? Because I would think that seasonally Q3 would be a bit weaker. And then Q4 I think GM is taking a fair amount of downtime on the full-size SUVs, which I know are important for you. So help me bridge that. How do we get second-half margins that are comparable to the first?

Well, really it's the mix of the product. I think the seasonality plays into it, but also fourth-quarter is normally a fairly strong quarter for us as we get a full-year cost reductions in and offsets from some of the commercial activities that -- and assistance that we have given our customers. So if you look at the normal seasonality in that segment, you usually see a pretty strong fourth quarter.

Okay. And then you mentioned in your comments, Matt, that there were other opportunities for growth from Guilford. Can you expand on that? What were you talking about there?

Well, I really think if we can get in on the front end of the design of the covers and it always starts -- seat covers always starts with the design of the fabric. And as we're in the design studios with the fabric, I think that is a natural progression into the cutting and sewing of the seat covers. So I think what it could do is provide additional opportunities on that segment.

We have a well-established business with a great footprint on the cutting and sewing of the seat covers. Getting in on the front end of this, especially in Europe, I think would provide opportunities to grow that subsegment.

So if you're involved at the front-end with the fabric, you suspect you will be awarded more cut and sew business. Is that what you're saying?

Absolutely. Because I also think besides the design side of it, we can actually improve the quality and the cost of the fabric by milling bolt sizes to the most efficient manner of cutting. And so I think the combination really could provide a lot of value to our customers.

Okay, thanks. That is interesting.

Aditya Oberoi, Goldman Sachs.

Great, thanks a lot. Good morning guys. So I have one housekeeping question on your CapEx. You guys increased the guidance by $10 million. Is it a pull forward of some of the CapEx or is it like new opportunities that you have explored during the quarter?

No. It is really quite simple. It is the addition of the Guilford acquisition.

Okay, great. And secondly, I know, Jeff, you mentioned some price reductions that weighed on Seating margins in the quarter. Was there something abnormal? Or is it just the standard 1% to 2% price reductions that you give to your customers?

No, there was nothing abnormal that went on in the quarter, I think pretty standard to what we have seen historically.

Great. And on your backlog, typically you guys update your three-year backlog during midyear earnings. Any specific reason why that slide was missing this time around?

No, not really. We have done it -- we did it last year, but normally we only update it once a year, and that is usually in the January Auto Show in Detroit. There's really -- I don't think a whole lot of thought that went into it, other than the fact we are continuing to win business in both segments. It's on a pace that actually is slightly ahead of what we have done the last several years, but I wouldn't read too much into it.

Okay, that is helpful. And finally on your M&A, does the strategy still remain focused on the $300 million to $500 million range in terms of acquisition size, or you guys are looking at bigger deals as well?

Well, we always have our ears to the ground on all sizes of deals. We don't think there is a major one out there that really would provide value to Lear Corporation. Most of the potential or the vast majority of the potential combinations that are out there, acquisitions that are out there are more in the niche category. And quite frankly, I don't think we need a significant acquisition. I think the business is well-placed, both segments are well-placed.

Great, thanks a lot and congrats on a great quarter.

Thank you.

Emmanuel Rosner, CLSA.

Hi, good morning everybody. I have a follow-up question to your backlog -- your comments on backlog. During the last quarter conference call, I think during the Q&A you had implied that the 2012 backlog for Electrical was now just the $425 million. And that would've been down from, I think about $600 million that you had indicated back at the Detroit Auto Show. Is there any update on this? Did I understand that well?

You're a little bit off on the math. We see it more around $450 million. And the decrease at the time is really -- was driven mainly by the change in the FX assumption as we've seen the euro pull back.

Okay. So the way it stands right now is still around $450 million?

That's correct.

Okay, and then regarding the large reversal of valuation allowance in the equity income line, you mentioned that it has to do with a large noncore JV. So is that your IAC interiors joint venture? And if so, what does the reversal mean for the profitability there, if anything?

Well, I think it is IAC. And intuitively, that tells me that it is the US side of the equation that took the valuation allowance adjustment. And that tells me that there are some improvements in earnings, not only this year but historically as you measure that, as you measure the ability to take the valuation allowance down. So there is some improvement in US, seemingly, in that joint venture.

That is good news. My understanding is that there is also some element of a forward-looking assumption in general for that move. Is that right? Like, do you basically expect (multiple speakers) [possibilities] to continue?

Yes, that is part of the rationale that needs to go into the decision to reverse the valuation allowance.

Okay, well, thank you very much.

Colin Langan, UBS.

Great, thank you for taking my question. I apologize if I missed this. Any color on the Guilford, what it's adding to your guidance for the full year in terms of sales and core operating earnings?

Yes, roughly $200 million in sales at margins consistent with the seat margins of 6.5% to 7%.

Okay. And you just recently did a debt repurchase. What was the logic of that versus doing a share repurchase given where your stock is? Why taking out the debt since you're net cash anyway?

Well, there's a lot of different alternatives for utilizing our cash. In the case of the bond repurchase, the return on investment is certain and will save about $5 million annually in interest expense. We don't think that action stops us from doing other actions that also create value.

Okay. That's fair. And just another question. On the other expense line item, I know it is a little bit small, but a little bit higher this quarter. I guess it was around $14 million. What was driving that high, and is that an abnormally high run rate? Or should we be modeling in something similar going forward?

It is really attributable primarily to the FX changes, and it really relates to the various loans that are intercompany to Lear and the impact of that that's on those loans.

Okay. So this will be a one-time revaluation, so it wouldn't be ongoing?

Based on the current FX rate, yes.

Brian Johnson, Barclays Capital.

I want to talk a bit more strategically about the drivers of revenue and margin improvement in the EPMS. If you kind of think about the business in three rough buckets, and if you have better buckets that you think of, let me know you and feel free to recast the answer. Kind of core wiring harness, then connectors and other sort of more electrical inverters, converters, under the box product line, just a couple of questions.

How much of the backlog would be in each of those three categories? And is the margin improvement coming from more business at the end of the wire? Or is it coming from more scale and profitability in the core wiring harness component of it? And roughly kind of, because it's probably a bit of both, what would be the impact of each of those?

Right. We really don't look at the business in those subcomponents, although obviously they are different and have different assemblies. The reality is, for us, when we look at that segment, Brian, we've drifted it down and rationalized the product line to be electrical distribution, power and signal management.

When we look at the returns and how the returns are being driven, it is really scale in all three of the subcomponents of electrical distribution. We're winning business in all three, although from just a pure size standpoint, we're probably smallest in the connectors business.

Each has its own kind of financial DNA. Wire harnesses are less capital-intensive, but in order to design a neural network of a vehicle, you need to have a lot of upfront investment.

So, really the improvement came from having a more competitive footprint, not only in wire harnesses but also in a lot of the junction box and electronic modules that we do, which we now manufacture in Mexico and Northern Africa. Our wiring business has probably one of the best footprints in the industry, and that is a result of all of the restructuring that we have done.

That, coupled with the business being under scaled in 2009 when we had revenues of $2 billion we had roughly 20% fixed cost, that came because of our continued investment in the footprint as well as our continued investment in high power. Now that we are finally starting to get our critical mass up to $3.5 billion closer to $4 billion, you are seeing the returns that the business should have and that 7% plus margin.

So, in short, we really don't look at it by subcategory. We look at it as a complete kind of component, electrical distribution, because that is how we designed the products.

And [you seem to] a competitor recently bought a private equity owned connector business. Is that -- you had bought one I think several years ago.

Right.

Is that a business you're looking to get more scale in, or are you more focusing on the power management and other -- and wiring harness?

No, we looked hard at FCI and we had made it an acquisition back in, I think, 2004 -- the old Groton Hartman business in Europe which provided specialty connector systems on high-end electrical distribution with premium customers. It has been very successful for us and gave us a nice kick in that segment.

For us in the end, the value equation didn't make sense on that acquisition. It is a product that I think has value. But from our standpoint, we think a better solution for us is organic investment. And we're actively, actively expanding our capabilities in connectors from a manufacturing and design standpoint, mainly in Asia at this point.

Ravi Shanker, Morgan Stanley.

Matt, you said earlier that your Seating margins going forward will depend on how much the business is full sourced from you guys versus how much is designed by the OEM and just contracted out to you guys. Do you see a huge shift in that mix going forward? Do you think it remains pretty stable?

It's pretty stable. First off, it's a combination of whether or not your design responsibility -- responsible. But it is also the level of vertical integration that you have. So if you are making the structures, the foam, the seat covers, obviously there is additional capital that is required. That factors in as well on the margins of a program.

Customer-directed sourcing of components is nothing new. It has been going on for a long time. It is more prevalent in Europe than it is in North America and in Asia.

I think that the customer designing various aspects or having a company-wide solution or taking responsibility for the design is also not new. That has been probably in the industry for a while. And to us, when we look at a business and at margins and whether or not a program makes sense for us, we really look at it on a return on investment basis as opposed to the margins.

Great. And a follow-up question on M&A in the connectors business, do you see any potential targets out there that would be attractive fit with you guys? Or are you still, like you said, focused on just growing the business organically?

There are smaller connector businesses that are out there, none of which are formally for sale at this point. But we keep an active evaluation and dialogue with some of those companies. In the end, it really comes down to whether they have the technology in the catalog, and two, whether the valuation makes sense from an invested perspective, or if we are better off just in many cases expanding our organic capabilities. So there are ones that are out there; none the size of FCI, however.

Okay, and finally, can you just update us with what your assumption for the GMT 900 production is for the year?

Roughly a million units on a full-year basis.

Thank you.

You're welcome.

Adam Brooks, Sidoti and Company.

Just a few quick questions here. If we look at the CapEx run rate over the next few years, is it fair to assume this is the new normal, around 3% of sales? And I guess at what point would we get back to 2%, 2.5%, or is that part of the past?

No, I think it is elevated and it is part of the use of the liquidity and strong capital structure that we have. In many cases the organic investment is the best solution for providing returns. We stepped up our capital program to expand our footprint in emerging markets, and that, coupled with the strong backlog, is what has elevated the CapEx spending to a higher percentage of sales. We think that will stay true for the next year or so and then move down to more normalized, which is 2% to 2.5% of sales.

Okay. And then if we look at the pricing environment, maybe a little bit about Electrical over in Europe.

Well, the pricing environment is tough because the car companies are obviously having price pressures on the end product as they look to gain share and scale. Part of what we're able to do, by being a full-service electrical distribution provider with full engineering, is to design a lot of the cost savings they need out of the product.

The pricing environment is tough, but that is nothing new in this space and I think it plays to Lear's strength. On average we're going to run at about 2%. And I don't really see Europe Electrical being different than the overall business, quite frankly.

All right, thank you.

Brett Hoselton, KeyBanc Capital Markets.

Just to follow-up on that last question, how would you characterize pricing pressure versus six to 12 months ago? It sounds like it really hasn't changed that much. Is that indicative (multiple speakers)

No, it really hasn't. Obviously everybody is looking to help their customers get cost out of the product so they can deliver the most value to the consumer and facilitate sales. From our standpoint, we try to do it in a collaborative effort with our customers on the design side. We also give on average about 2%.

The pressures have been tough. It is very competitive. But I think in many ways it plays to our strength because of our full design and component capability.

And then on the Electrical business, the backlog implies growth of kind of double digits this year, dropping down to the high single digits next year, and then 2014 you're kind of down in the mid-single digits. How should we think about revenue growth kind of in that 2014, 2015, 2016 timeframe? Is it going to start to drift down into that kind of mid-single digit range and remain in that range? Or do you think it actually can see some improvement in that out year?

There is still a lot of open sourcing in '14 and '15 that is out there, Brett, but it's kind of hard to maintain double-digit growth which far exceeds the industry. So, it is kind of hard to commit to that level of growth because it has been so great in that segment for Lear Corporation.

Some of the other key drivers, however, are -- is the continued penetration and content gains as cars become more complex and there is more electronics being driven, whether it's engine management, powertrain management, or it is the infotainment type features that are in the vehicles. They all seem to be moving up and there's more circuits and more demands for electrical content. That also drives sales growth in this segment.

And then the 7% to 8% Electrical targets, is that achievable in the 2013 timeframe or is that more out in that 2014 timeframe?

I really want to get away from giving margin targets for '13, really as a result more than anything of the production uncertainty. But I believe if we can get our revenues in that $4 billion to $5 billion range, that is when you will see that segment achieve their margin targets.

Okay. And then finally, in the past, as you kind of transitioned from the GMT 800 to the 900, we saw some pretty significant margin pressure as the launch kind of went down and then back up again here. You've got the K2XX next year. What are your thoughts about margin pressure in that business next year as you go through the K2 program? Is that -- do you think that's going to -- you're going to see the same kind of margin pressure you have historically? Or do you think there is some reason to believe that it is not going to be as impactful this time around?

No, I think history is a good benchmark. Whenever you launch a major replacement program or a new program, margins typically get pressure as you work through engineering solution and cost reductions in your manufacturing facilities, learn how to make a very new product with a complete redesign. So I would expect next year to be not a whole lot different as it relates to that platform.

Thank you very much, Matt. I appreciate it.

You're welcome, Brett.

Matt Stover, Guggenheim.

Many of the questions have been addressed. But I was wondering, Matt, if you can provide some more color as we're thinking out to the second half with regards to the Seating business. The production schedules in Europe first half to second half are going to get worse, and I imagine you have some internal controllables that are probably getting better and North America is okay. But I wonder if you can kind of give a little more detail on some of the pluses and minuses as we really think through the second half. Thanks.

Well, I think you always get better with your value engineering cost solutions as you look for ways to offset some of the pricing. That typically picks up in the second half of the year as you get a full-year run rate of those savings that you've implemented in quarters one and quarters two. I think we will see the cadence of launch improve as well in the second half. But I think just overall, the facilities run better as they get a full year of efficiency actions under their belt.

Historically the fourth quarter's always been a pretty good quarter for us because we've had the benefit of those type of actions. The other side of it is, it really comes down to the mix. We talk a lot about overall volumes, and that is important. But as important, more important, is the platforms that you are on. And each one has its own kind of financial DNA.

There are no further questions at this time. I turn the call back over to presenters for closing remarks.

Well, thank you very much. I would like to thank the finance organization at Lear. Jeff and his team did an outstanding job once again. And to all of the hard working people at Lear Corporation, thank you so much for a great quarter. I appreciate all the hard work. Thank you.

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