Lear Corp (LEA) 2012 Q3 法說會逐字稿

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

And I will now introduce and turn the call over to Mr. Ed Lowenfeld, Vice President, Investor Relations. You may begin your conference, sir.

Thank you, Tracy. Good morning, everyone, and thank you for joining us for our third-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'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 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 on 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 will provide a Company overview, then Jeff will cover our third-quarter financial results and 2012 outlook. Then Matt will have some wrap-up comments. Following the formal presentation, we'll be happy to take your questions.

Please turn to slide number 4, and I'll hand it over to Matt.

Thanks, Ed, and good morning. Despite a challenging industry environment in Europe, Lear had another solid quarter of operating performance, with year-over-year improvements in sales, earnings, and free cash flow. Sales in the third quarter were $3.5 billion, up 2% from a year ago, reflecting the benefit of new business, the Guilford acquisition, and higher production in North America and China, partially offset by the adverse impact of foreign exchange and lower production in Europe.

Adjusted earnings per share was $1.29 per share, up 19% from a year ago, and free cash flow was $88 million, up 37%. In addition to improved financial results, our earnings per share also benefited from our share repurchase program. Over the last 12 months, we reduced our shares outstanding by 6.9 million shares or approximately 7% of the total shares outstanding.

Our electrical business continues its rapid growth and achieved a quarterly record with sales of $877 million in the third quarter. Adjusted margins improved to 7.5% from 5.4% last year, as the business continues to benefit from greater scale and previous restructuring actions.

We continue to return cash to shareholders through dividends and share repurchases. This year, we will return $214 million to shareholders, bringing the total to $544 million since these programs were initiated in the first quarter of 2011.

We are increasing our 2012 guidance for net income by $15 million. Jeff will review the outlook in more detail a little later in the presentation. Also, during the quarter, we were recognized again by JD Powers and Associates as the Highest Quality Major Independent Seat Manufacturer for the 11th time in 12 years in their annual studies.

Slide number 5 provides a regional overview of Lear's business results in the third quarter. In North America and Asia, our business continues to perform well. Within Europe, both product groups are profitable despite lower auto production in the region. South America was slightly unprofitable in the third quarter, reflecting higher facility and product launch costs, as well as increased infrastructure spending to support new business growth.

On a consistent foreign exchange basis, our sales in South America are expected to increase by about 15% in 2012. Over the next 18 to 24 months, we expect sales to increase by an additional 40%. We are also expanding component capabilities in seat structures, covers and foams, as well as wire harnesses.

We are confident that the investments we are making today in this emerging market will provide sales and earning growth opportunities going forward. However, we expect that margins in the region will remain under pressure into next year during this ramp-up phase.

At present, margins both seating and EPMS businesses are generating returns on invested capital in excess of Lear's cost of capital.

Now I'll turn it over to Jeff, who will take you through our financial results and outlook.

Thanks, Matt. Slide 7 shows vehicle production in our key markets for the third quarter. In the quarter, global vehicle production was 18.7 million units, up 2% from 2011.

As Matt mentioned, business conditions in Europe remain challenging in the third quarter, as industry production was down 7% and the euro weakened by 12%. In North America, the industry recovery continued, with industry production up 14%. And in China, industry production remains strong, up 7% versus last year.

Slide 8 shows our financial results for the third quarter of 2012. As previously mentioned, sales were up 2% at $3.5 billion. Excluding the impact of foreign exchange, Lear's sales in the quarter were up 9%. Our sales in Europe decreased 10%. However, adjusting for foreign exchange, European sales were up 1% compared to a decline of 7% in industry production.

Pre-tax income before equity income, interest and other expense was $170 million, up $11 million from a year ago. Interest expense was $14 million, up $3 million, primarily reflecting interest expense related to an indirect tax matter. Other expense was $2 million, down $9 million, primarily reflecting lower foreign exchange losses.

Reported earnings per share were $1.23, up 29%. The increase in earnings per share reflects the improvement in pre-tax income, fewer shares outstanding, and a lower tax rate.

Slide 9 shows the impact of nonoperating items on our third-quarter results. As I just mentioned, our reported pre-tax income before equity income, interest and other expense was $170 million. Excluding the impact of operational restructuring costs and other special items, we had core operating earnings of $179 million, up 1% from 2011.

The increase in earnings reflects new business and operating performance improvements, partially offset by increased product and facility launch costs, primarily in South America, and higher program development costs associated with the sales backlog.

Equity income in the third quarter includes income from special items of $2.2 million related to a reversal of a valuation allowance at one of our non-core joint ventures.

Other expense in the third quarter includes income from special items of $7.2 million, reflecting insurance recovery of items expensed in a prior period, and a loss of $3.7 million related to the costs associated with the redemption of 10% of our outstanding bonds.

Adjusted for restructuring and other special items, net income attributable to Lear in the third quarter was $127 million, and EPS was $1.29.

Please turn to slide 10 for a summary of our results for the seating segment. In seating, adjusted margins in the third quarter were 6.1%, down 60 basis points from the third quarter of 2011. The decrease in margin compared with the year-ago reflects primarily increased product and facility launch costs, as well as program development costs to support our growth in South America.

We expect that these launch-related costs in the seating segment will remain elevated in the near-term to support the new facilities and programs in the region. Year-to-date adjusted margins in seating are 6.5%.

Slide 11 summarizes the operating performance in our electrical segment. Financial results in this segment improved both sequentially, as margins were up 70 basis points from the second quarter of 2012 and year-over-year with margins up 210 basis points.

The year-over-year margin improvement reflects the impact of new business, higher production on key platforms and productivity improvements, partially offset by higher product and facility launch costs, and program development costs. Year-to-date, adjusted margins in EPMS are 6.9%, up 120 basis points from 2011.

Slide 12 provides additional detail on some of the key drivers impacting our performance in each of our business segments. In seating, margins continued to be impacted by higher costs related to the launch of new program and facilities, increasing infrastructure and program development to support new business, particularly in emerging markets such as South America. Seating margins have also been negatively impacted by the weak production environment in Europe.

We expect these factors to continue to impact us in the fourth quarter, and we are projecting 2012 full-year seating margins to be in the mid-6% range.

EPMS is benefiting from increasing scale and a highly competitive footprint following restructuring of the business. This segment continues to grow faster than the overall industry. For EPMS, we expect full-year margins to be in the low 7% range, representing a third consecutive year of improvement.

Please turn to slide 13. We generated $88 million of free cash flow in the third quarter and ended the quarter with cash of $1.3 billion. Capital expenditures were $113 million in the third quarter, as we continued to expand our footprint in emerging markets, invest in new programs, and increase spending to improve our competitiveness.

Slide 14 provides our quarterly update on our share repurchase program. During the third quarter, we repurchased 1.3 million shares of stock for a total of $50 million. Year-to-date, we have repurchased 4.2 million shares for $173 million. And since initiating the share repurchase program last year, we have repurchased 10.4 million shares, or approximately 10% of our outstanding shares, for a total of $452 million.

As of the end of the third quarter, $248 million remained available under the share 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 15 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 79 million units. Our outlook is based on an average full-year exchange rate of $1.28 to the euro, which is up 2% from our prior outlook, and reflects an average of $1.28 to the euro in the fourth quarter of 2012.

Slide 16 summarizes our 2012 financial outlook. Our outlook for sales, core operating earnings, capital expenditures, and free cash flow remains in line with the prior guidance. We are projecting sales of approximately $14.3 billion in 2012, and core operating earnings in the range of $745 million to $785 million. The 2012 outlook for free cash flow is approximately $275 million.

Tax expense is estimated to be approximately $130 million, at the low end of the range from our prior outlook. The decrease in tax expense reflects the change in the mix of earnings by country.

Net income is expected to be in the range of $520 million to $560 million, up from the prior guidance, primarily reflecting lower interest expense. Depreciation and amortization is forecasted to be approximately $250 million, down $5 million from the prior guidance.

Now I'll turn it over to Matt for some closing comments.

Great. Thanks, Jeff. Lear continues to deliver solid financial results as sales, earnings, and free cash flow all increase in the third quarter.

At a regional basis, our core businesses are doing well in North America and Asia, and remain profitable in Europe despite lower production in that region. At present margins, both businesses are generating returns in excess of our cost of capital.

We continue to invest in emerging markets to expand our capabilities and support growth, and the benefits of the Guilford acquisition are being achieved. We continue to win new business at a pace consistent with prior years, and expect to provide an update on our backlog at the Detroit Auto Show in January.

Our balance sheet and strong operating performance is allowing us to continue to invest in the business, take advantage of future market opportunities, and return cash to shareholders.

In summary, we are delivering solid operating performance in a challenging environment. I 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 business globally. Thank you for your efforts.

With that, we'd be happy to take your questions.

(Operator Instructions) John Murphy, Bank of America Merrill Lynch.

First question, just as we look at the electronics business, I mean, it's about 50% higher on revenue than it was about two years ago. Your profits are actually double. A lot of conjecture there that you might make an acquisition on the electronics business, but it seems like you're growing pretty rapidly. I mean, is this the kind of business where you think you might be able to generate some real chunky organic growth, and might not need to go out and make an acquisition?

Well, we don't think we need to make an acquisition. We would consider one that would help us add some scale, because I think this business, historically, John, has suffered a little bit from a lack upscale and the absorption of the fixed costs.

That being said, we have a healthy backlog in the segment. I mean, the backlog in this business is pretty sizable and higher as a percentage basis than seating. If there was an opportunity, we'd consider it, but we believe that we're penetrating the market, we're gaining scale, and we're increasing margins and returns while we're doing it.

So, we don't necessarily need to do it, but it's one that we would consider if the right opportunity presented itself.

Okay. Second question. It sounds like Europe is pretty profitable for you, probably not that far off the profitability of North America. A little bit shocking, given the market conditions over there and what's going on with automakers, and the massive losses that are being printed.

Do you foresee any incremental pricing pressure or givebacks from your customers in Europe? Are you seeing that in the near-term? Or would -- you would expect that if we saw further deterioration in Europe?

Well, profit runs about half the target margins overall from -- that we've established for the two individual segments. So it is down from North America, but it is solidly profitable in the, let's say, 3.5 range overall.

Yes, I think whenever there's difficulties in the market from excess capacity, you're going to see pressures to take cost out of your product. Our customers are in a price-sensitive business for their products with a lot of excess capacity. I think from our standpoint, pricing really will be dependent on the ability to get cost out. In many cases, we're in the best position to do that, between our full engineering and vertical integration, John. That allows us to do it.

But in the end, pricing will be dependent upon whether or not it's sustainable, and whether or not the program meets the returns that it needs to. It's kind of hard to give pricing in a down production environment, though, quite frankly.

Okay. And then just lastly, have you seen any choppiness in any key large programs in North America from your major customers? Just curious if you've seen any sort of disruption in schedules or anything that was unexpected, maybe particularly in the GMT900 K2xx change-over or anything else like that?

No. I think that's been pretty smooth. And GM's been -- the production overall of a lot of our customers have been pretty stable in North America. There hasn't been the near-term chop that we might have seen in other times.

North America has made a nice step in production volumes. More importantly, while they're down from the peaks that we saw three, four, five years ago, John, it's been steady. And that's as important as anything.

It's not just the production, but it's how the production is achieved. In the best case scenarios, it's when a plant runs on a steady schedule, and we've seen that in North America.

That's encouraging. Keep it up, guys. Thanks a lot.

Thanks, John.

Rod Lache, Deutsche Bank.

It's actually Pat Nolan on for Rod.

Hey, Matt, can you talk a little bit about what do you think the mid-term outlook is for the seating margin -- the seating business margin? It looks like it's probably going to be sub-6.5% in Q4. Historically, it's been a 7% margin-plus business.

Well, of recent history, it's been 7%-plus margins and we think the target longer-term for this business is in the 7% range. I think we're going to see some pressure that continues from the launch cost and performance in South America to continue into next year. But there's a lot of factors that go into it. But I think the margins really going to be pressured heading into next year in this segment, Pat.

That's actually helpful. Can you also talk about your outlook for European production? There seems to be a disparity among some suppliers, particularly versus where the IHS forecast is for Q4.

Well, our forecast right now for Europe is [16.6%]. I think the IHS is a little bit different than that but it's really rounding. Our number is within I think 30,000 units from the IHS forecast, so they're pretty much one and the same.

How's the overall visibility then tracking for Q4? Have you seen schedules continuing to move around a lot the past couple of weeks?

Yes, they continue -- unlike what Matt had alluded to in North America where the schedules had been fairly stable, we've seen, in many cases, quite the opposite in Europe, where we get announced down-weeks pretty randomly. So we've seen a continued chop in that region.

And Matt, lastly, can you just talk about what are the factors that would lead you to either accelerate or decelerate your buyback pace?

Well, you know, the pace of the buyback is really a Board decision and it gets discussed every quarterly Board meeting that we have. The Board, as you know, made the initial authorization and then increased it to 700 million, I believe, earlier this year. It's usually dependent upon alternate uses for investment, but also the intrinsic value of the enterprise as it relates to the rest of the space.

But it's an area where the Board reviews it at every meeting, pretty much, Pat.

Okay. I'll get back in the queue. Thank you.

Itay Michaeli, Citigroup.

Good morning, guys, and congrats. Just want to follow-up on the capital structure question. I was hoping we could maybe talk about where you see your ideal leverage maybe from a debt to EBITDA perspective? You know, are you happy with your revolver capacity at the moment? And just if you could talk about the general M&A climate out there right now.

We think that it's extremely important from a competitive standpoint to maintain investment-grade metrics. And from our standpoint, that's any EBITDA, gross EBITDA to debt ratio of 1.5 or below, and we can still maintain that type of investment-grade profile. Obviously, right now, we're significantly below that. And while there's not a need for proceeds at the moment, it's something that we keep an eye on as far as rates and availability.

From a revolver standpoint, it's undersized for a company this size, and we'd be looking to probably increase it to provide additional flexibility in the use of the cash. So we would see something, I think, closer to $750 million to $1 billion being a more normal revolver for a company of our size.

Great. And how about the M&A climate in general, in terms of what you'd be looking for? And I apologize -- I may have missed it earlier. I logged in late to the call, so I apologize if I missed it.

No, you didn't miss it. You didn't miss it. The environment for M&A is actually getting a little bit better in that I think the expectations for multiples have -- should get more reasonable in light of the more difficult production environments, particularly in Europe. But we're also seeing maybe a little bit of a cooling of the multiples in Asia.

What we look for -- and we don't believe that there's a major acquisition needed, or will be made; but from a niche standpoint, there may be an opportunity to gain scale in electrical, gain component capabilities in emerging markets. From a component standpoint, we would possibly look at improving our, I believe, industry-leading surface material business and seat cover business, as well as possibly extending our capabilities in connectors. So those are the things we look at, but it comes down to valuation -- strategic fit and valuation.

Great. And then just lastly, you're one of the few companies to reiterate guidance for 2012, so that's great. But the range is still pretty wide. So I was hoping you could maybe share what would cause you to be at the lower end versus the higher end, and maybe if there's a bias at the moment to where you think you might come in.

Yes, you know, there's not a bias. It is a pretty wide range for this late in the year, but I think it reflects the uncertainty in the production environment, namely in Europe. So, really where we come in on that range will really be dictated on not just the overall production but the production on our platforms.

Jeff mentioned that we're not getting a lot of advance notice when they're pulling schedules back, so we're being a little bit cautious at this point. But overall, the guidance is balanced.

Absolutely. That makes sense. Thanks so much, guys.

You're welcome.

Joseph Spak, RBC Capital Markets.

Thanks for taking my question. Just getting back -- I don't want to harp on this too much, but getting back to the long-term seating margin target, I'm just trying to understand, how much of achieving that target is dependent on volume? And I guess the question is, if we really are entering this period of no to low growth in Europe for a period of four or five years, can we still get back to that 7%-plus target?

Yes, I think we can, Joe. I think part of it is obviously volume. And it's volume on the platforms that you're on. And each platform has a slightly different financial footprint, so to speak, that's really more dependent upon the capital intensity of the program and the amount of upfront engineering that's required.

I think that we can get back to 7% even with a slow growth environment in Europe, but we need the growth or the stability on the platforms that we're on.

Now the important thing to note is that at the current performance and capital intensity of the business and level of vertical integration, we are returning in excess of our cost of capital. So from that standpoint, I think that's a positive that we don't necessarily need to get to 7% to do that.

Okay, great. And then I realize it may be a little bit early to ask this question, but it does -- if I recall correctly, I think you were the seating supplier to the Genk plant that Ford just closed on the Mondeo. Do you have any commentary there as to whether you can keep that business as they move that -- as they ship that production?

Yes -- yes, you are correct. We are the seat supplier and we have a facility in Genk. If Ford follows through with the plan, that would obviously impact that production facility.

Typically, just-in-time facilities are dedicated to a customer location, and in this particular case, that's also true. So, at this point, we're still working through what that means for that location. But you are correct, that we do have that dedicated facility.

Okay, and then just one quick one, if I could, on the cash flow. It looks like the guidance implies a pretty strong fourth quarter. Is there anything unusual there? Or is that just normal working capital seasonality?

Well, a big part of it is, though, exactly that, working capital seasonality. I think we've got roughly $200 million of free cash flow forecasted in Q4, and the working capital component of that is pretty consistent with what we've seen in the fourth quarter last year.

Okay, thanks a lot. Very helpful.

Peter Nesvold, Jefferies.

I think most of my major questions have been asked. I guess maybe just in a clarification. So I think it was 6.1% seating margins in the quarter. You know, previously, the guide was that margins should be flat versus first half, which was about 6.7%. You mentioned launch costs, but I'm sure you knew those 90 days ago. So, I mean, is the variance entirely explained by the choppiness in European production schedules? Or is there anything else in that that I'm missing?

No. I think launch was a little bit higher than we anticipated, as the regulatory environment in South America created some disruption in production both for our customers that impacted us and our premiums down there. So, the launch costs and the performance in South America was a little bit worse than we anticipated when we gave guidance. And I think the European production environment was a little bit more choppy.

And I think those were the two main contributors to the performance. But overall, the performance of the business came in pretty much as expected for the third quarter.

Okay. And so Europe is obviously something that no one knows until we know.

South America, I mean, what's your experience been? And when you go through periods of elevated launch costs, how long does it typically take you to bring those back down in line?

Usually about six months, but it's important to note that that region will continue to launch product. And we mentioned a number of roughly 40% sales growth over an 18 to 24 months' period.

So what we're seeing is a rapid expansion in Brazil specifically, but also, to a lesser extent, in Argentina. And we are also expanding our capabilities down there to provide components for those finished assemblies.

So, from that standpoint, it's a period of massive growth. And we'd expect elevated launch to continue into next year in that region, although we do expect the performance to improve -- but to be below target margins for each of the two product segments.

Okay. All right, terrific. Thank you.

Colin Langan, UBS.

Okay. Thanks for taking my question. I think you mentioned earlier that you outperformed in Europe. Any color on the mix impact going forward? I mean, do you think you'll continue to be able to outperform in that region?

But I wouldn't say outperform. I mean, our margins in that region are roughly half of what the target margins are for each of the two businesses. That being said, I think it was solid performance and it's solidly profitable. The mix impacts it. And if they don't make the product you're on, obviously, that's a problem.

Right now the good news for us, when we look at our European business, is it's pretty diversified, both between seating and electrical as well as customer and platform mix. We're on both the high-end luxury vehicles that are performing fairly well, but also the entry-level vehicles B&C platforms, as well as the customer mix. So, we're pretty diversified, but we need our platforms to sell in the marketplace.

From a downward conversion standpoint on a variable basis, we typically talk in Europe in the 15% to 20% downward conversion if there's a near-term pullback in sales.

So you would say that your customer mix -- you're actually fairly in line with the market from the customer exposure you have in Europe?

Overall, I would say that that's true. Overall, I would say that that's a true comment, yes.

And your -- I mean, before Europe deteriorated, I mean I was under the impression that Europe was actually a lower margin than North America, because it may be a little less vertically integrated.

Is that the case or --? I mean, so is this -- does that make it easier to manage the downturn?

Colin, that's absolutely the case in seating. In electrical, we're pretty consistent between the two regions. But in seating, that is the case and it is driven by probably a lack of vertical integration.

I would tell you, no, it doesn't make it a whole lot easier, because in many cases, the just-in-time facilities are in locations that make it hard to flex your cost structure and your labor to meet a short-term downturn.

Okay. And then just one last one. Have you -- can you have any color on when your tax -- when you reverse the valuation allowance and you kind of go back to a normalized tax rate? Have you given any guidance on that?

Yes, let me turn it over to my Head of Tax, Bill McLaughlin.

Yes, it's likely that our US valuation allowance will be reversed in the fourth quarter. And then we would return to a more normalized tax rate in 2013 of something in the 30% range.

Okay, fair.

Brian Johnson, Barclays.

Good morning, Matt and team. Yes, just want to follow-up on the last question, and talk a bit more strategically about how you think about your European cost base, especially given where you are in the margins, which actually sort of good news in there, it implies North America actually has some pretty good margins. But you've addressed this in the past.

You've moved a lot of your electrical out of Western Europe. But do you have any go-forward opportunities to recognize in just-in-time nature of seating to shift resources within those plants out of the high-cost, fixed-cost locations?

Are there other ways that you could actually reduce that European cost footprint, and especially in light of the -- what you mentioned earlier, the price down requests and cost-savings requests from your clients?

Right. I think in the near-term, there's not a whole lot to do because the vast majority of our component facilities, if not all of them effectively, are in low-cost manufacturing locations.

And I think, for the most part, they're operating at a fairly high level of capacity, because we've taken so many actions over the last several years, Brian.

From a just-in-time standpoint is where we have the majority of our excess capacity, and that's really dependent upon the actions that the customers are going to take.

If they shrink their footprint and it's a plant that we're dedicated as the just-in-time provider, then that gives us an opportunity to maybe shrink our footprint with them, after an initial, obviously, cost of shrinking.

So, from our standpoint, in the near-term, there's probably not a whole lot we can do. I'm pretty happy with our component footprint. I think we've made a massive effort in investment to move the components into Eastern Europe, as well as northern Africa, and that's doing really well for us. In the end, with the just-in-time locations, it's really dependent upon the customer actions.

And in terms of just the short to mid-term contract workers, any other leverage you could do with -- to pull the deal with the kind of continued choppiness and uncertainty around European plant-by-plant schedules?

There's always things you can do. There's always things you can do, and we do have some level of temporary workforce that we can flex a little bit, but that's taken into consideration with the holding the line on a 15% to 20% downward conversion if there's further pullback in Europe.

The big driver of costs in many cases, however, is the launch cadence of product. And what we're seeing from a customer is really not a delay in any way of launching new product. So that's a little bit different than what we've seen in prior downturns.

The customers are all continuing to have the normal launch cadence, in product development cadence, which then requires us to invest in the upfront engineering.

Okay, thanks a lot.

You're welcome, Brian.

Aditya Oberoi, Goldman Sachs.

Congrats on a good quarter. I actually wanted to follow-up on the (inaudible) and on the situation in Europe here. I understand that the volume schedules that you're getting are pretty volatile. So is it fair to say that, given that you are getting less time to flex your operations, the detrimental margins would be towards the high end of the 15% to 20% that you're talking about?

It really depends on the program. But yes, the less advanced notice we have, the higher the conversion would be. But again, it depends on the program and the level of vertical integration that we have on it, Aditya.

Got it, that's helpful. And can you remind me of the profitability profile of Guilford Mills? Is it in line with your corporate average? Or do you guys have some bandwidth to improve the margins over there?

I think it's, all in all, in line with the seat margins overall. There is some opportunities to improve both the sales growth and the cost structure, as we look to synergize certain savings, whether they're purchasing or outside service fees and things of that nature.

I've got it, great. Thanks a lot, guys.

Chris Ceraso, Credit Suisse.

So I wanted to come back to the discussion you were having about the capital structure. That's a pretty big number. You mentioned up to 1.5 times to stay within the bounds of investment-grade, and you mentioned that you're not anywhere near that.

The authorization is starting to run low. You're down into the 200 million range. You're going to generate almost that much cash flow in Q4 alone, you said. So are you suggesting that you may reaccelerate the pace of buybacks and maybe use the balance sheet a little more to get there?

No, what I'm saying is, we have the capability and, obviously, ample capacity to increase investing in a way that creates value for our shareholders, whether that's, first and foremost, investing in the business organically; looking for niche acquisitions that would facilitate the achievement of some of our key strategies to grow the business and the earnings product profile; and finally, to buy back shares or return cash to our shareholders.

The pace of the buyback and the dividend is a Board decision, and it's a decision or an evaluation that they make pretty much at every meeting.

Okay. And then on the seating margins, they've been declining on a year-over-year basis for some time now. I think this is the sixth quarter in a row. You're suggesting that the launch costs and other upfront development costs are going to continue into 2013. And then if I think about some other big changeovers, the full-size SUVs at GM turnover in 2014, and that's a big content program for you, is there a risk that you're going to be stuck in the 6's here for the next two years?

There's a lot of drivers that go into the margin profile when you have a business that's over $10 billion and hundred of locations around the world. I think whatever new program comes on -- and it starts coming on next year, actually; it's an 18 to 24-month kind of a changeover on the next generation 900, Chris.

New programs typically do come on at a lower margin profile than the business it replaces, because of the efficiencies both in manufacturing and in design that you gain over a life of a program. And this one would be no different.

But there's other opportunities as well, whether it's a pullback in commodity costs, efficiency gains, or just managing through some improvements in launch performance. So, it's a lot of different things that go in it, but in a vacuum, if you'd looked at that changeover, that would be probably a push lower on margins.

Okay, all right. Thanks, Matt.

You're welcome, Chris.

Adam Brooks, Sidoti & Company.

A few quick questions here. Can you give us a sense of profitability in Asia now and maybe what your thoughts are three to five years out?

Well, profitability is a little bit higher than target margins overall. We'd expect that to balance out more to the market or target margins for each of the segments, as we can continue to grow and market pressures come into that segment.

Okay. And then maybe an update on IAC and your thoughts on monetizing that stake?

Well, we -- I think, as most people know, we own 23% of that what we can consider a non-core joint venture for us. Our desire is to exit that joint venture. We continue to feel that way.

And with respect to the results there, I think they've seen some positive things going on in North America and some chop in Europe, as all of us have seen that chop. But our desire is still to exit that joint venture and monetize it as soon as we see possible.

All right, thank you. And one last question. Just can you give us a sense of what South America is running at year-to-date as far as revenue?

Revenue number, Jeff, on --?

Well, on a full-year basis, there will be about $800 million in that range. So my estimate would be roughly $600 million to $700 million through the third quarter.

All right, thank you.

Your last question comes from the line of Emmanuel Rosner with CLSA. Your line is open.

I have a question regarding your initiative to try and achieve vertical integration in the seating business and then grow your component capability.

Can you comment on where regionally you feel that you're already in a good shape from this point of view? And where you're saying that you need to achieve further integration in order to keep improving returns?

Well, I think we're in really good shape in North America in all our major components, including our seat cover business, which I think is industry-leading, as well as our seat structure business and our foam capabilities, where we made significant investments over the last five or six years.

In Europe, I think we're where we need to be as far as the seat cover business. I think again, it's segment-leading with the investments that we've made into Northern Africa and Eastern Europe. We have a pretty good footprint in structures. I think, though, we could probably expand it a little bit. And in foam, I think there's some investment opportunities to invest in foam.

In Asia, I think we could probably get better in all three segments, although we have capabilities in all, in pretty much every region in Asia, whether it's China, India, or ASEAN, I think we were capable of doing all our major components in that region. I just think there's an opportunity to put greater capacity and capabilities in.

In South America, we've made a significant investment in all those components, including wire harnesses. In South America, I think we're in pretty good shape, but as the business grows, we'd want to do more of our own components there.

And in terms of, I guess, how future investment splits between doing that organically versus through acquisitions -- I mean, I know a big part of your increased CapEx has to do with growing in components. In the places where you're trying to grow, are you -- is that going to be mostly organically or through acquisitions or balance?

I anticipate that it will be mostly organically through capital expenditures. If we were able to identify a niche acquisition that would expedite or facilitate and come with a book of business, those expansion plans we would absolutely look at it, but only if it was at the right valuation.

And so we've got our feelers out, but the reality is, in many cases, the best returns are our own organic investment. And that's the path that we're taking right now.

Okay, and then just finally on this topic, can you disclose at all what rough percentage of your seating revenues currently are from component sales versus just complete seats? And maybe what your goal is, if you have one, in the mid-term?

It's very -- I don't have a goal. I think as we get more vertically integrated and there's more directed sourcing from our car companies, you're going to see more of it sold outside. But most of the components that we make right now are used on our seats and that will probably continue to be the trend.

The one exception to that rule is Guilford. Guilford is roughly $400 million in sales, and the vast majority of that are external to Lear, although there is a small portion, maybe 10% or so, that is sold internally to Lear.

Okay, thank you very much.

You're welcome. With that, that's the last question.

Probably who remains on the call is the Lear employees. I want to thank all of you for your long hours and hard work and efforts. You're the reason why we're successful, and I want to thank you for all your efforts. So, thank you very much.

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