Lear Corp (LEA) 2012 Q4 法說會逐字稿

Good morning, ladies and gentlemen. My name is Martina, 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 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, Investor Relations. Please go ahead, Mr. Lowenfeld.

Thank you, Martina. Good morning, everyone, and thank you for joining us for our fourth-quarter and full-year 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 slides labeled non-GAAP financial information at the end of the presentation materials.

Slide 3 shows the agenda for today's review first. First, Matt Simoncini will provide a Company overview. Next, Jeff Vanneste will cover our fourth-quarter and full-year financial results for 2012 and outlook for 2013. Then Matt will come back with 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.

Thanks, Ed, and good morning. Despite a challenging industry environment in Europe, Lear posted strong financial results in the fourth quarter with improvements in sales, earnings and free cash flow.

Sales in the fourth quarter were $3.7 billion, up 6% from a year ago, reflecting the benefit of new business and the Guilford acquisition, partially offset by adverse impact of foreign exchange. Lower production in Europe was largely offset by increased productions in other regions of the world.

Adjusted earnings per share was $1.48 per share, up 17% from a year ago, and free cash flow was $219 million.

Our electrical business continues its rapid growth and achieved a quarterly sales record of $959 million in the fourth quarter. Adjusted margins improved to 8.4% from 6.3% last year as the business continues to benefit from sales growth, market share gains and cost benefits from our improved footprint.

We continue to return cash to shareholders. In the fourth quarter, we returned $64 million to shareholders through a combination of share repurchases and dividends. Since the inception of these programs in the first quarter of 2011, we have returned $608 million to our shareholders.

Moving to the full year, 2012 marked our third consecutive year of higher revenue and earnings per share were revenues of $14.6 billion and earnings per share of $5.49 per share.

As outlined on slide 5, our sales are well-balanced by region and by customer. We have made steady progress diversifying our sales over the last several years with over 60% of our total sales in 2012 coming from outside of North America. The Asia-Pacific region continues to grow, representing 17% of our consolidated worldwide sales.

In addition, we have $1.7 billion in sales at our core non-consolidated joint venture, further diversifying our sales profile.

Slide 6 shows our growth in key emerging markets. Our consolidated sales in China, Brazil, India and Russia have more than doubled over the past several years, from $1.2 billion in 2008 to $2.7 billion in 2012. This represents an annual growth rate of 23% versus the industry growth in these markets of 17%.

Lear's total sales in China, including non-consolidated sales of approximately $950 million, are $2.4 billion. Since 2008, total sales in China have tripled.

Slide 7 shows our three-year sales backlog, which is unchanged from what we reported at the Detroit Auto Show last month.

As a reminder, our backlog only includes awarded programs net of lost business and programs rolling off. We do not include pursued or high-confidence new business or non-consolidated sales. The backlog is based on specific car line volumes and foreign exchange assumptions by country.

Our backlog for the 2013 through 2015 period stands at $1.8 billion. The backlog continues to represent further diversification of our sales as 55% is in our Seating business and 45% is in EPMS. We are growing our sales in all regions of the world.

For 2015, there is still open sourcing, so we would expect that number to increase as new programs are awarded over the next several months.

Slide 8 provides an update on our share repurchase program. During the fourth quarter, we purchased 1.2 million shares of stock for a total of $50 million. We have been repurchasing shares since early 2011. Through the end of 2012, we have invested approximately $500 million to repurchase 11.5 million shares, or about 11% of our shares since the program began.

Following the $800 million increase in our share repurchase authorization in January, we have a remaining authorization of $1 billion over the next three years. The available repurchase authorization reflects approximately 20% of our market cap at current prices.

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

Slide 9 highlights the key elements of our strategy. We have the product expertise, global reach, competitive footprint and financial flexibility to profitably grow our business. We plan to continue to invest in the emerging market and expand our low-cost component capabilities to further improve our competitiveness and to support future profitable sales growth.

We are well positioned for the industry trends towards global platforms in increasing electrical content as well as direct-to-component sourcing.

We are evaluating certain niche acquisitions that will complement our present product offering, facilitate the diversification of our sales and further increase our component capabilities in emerging markets. No transformational acquisitions are needed or planned.

Going forward, we plan to continue to invest in our core businesses while maintaining a strong and flexible balance sheet. At the same time, we plan to continue to return cash to shareholders on a consistent basis.

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

Thanks, Matt. Slide 11 shows vehicle production in our key markets for the fourth quarter and for the full year.

In the quarter, 20 million vehicles were produced globally, up 2% from 2011. As Matt mentioned, business conditions in Europe remained challenging in the fourth quarter as industry production decreased by 8%. In North America, the recovery continued with industry production up 10%. China's production increased 4% versus last year.

For the full year, global vehicle production was a record 79.7 million units, up 7% from 2011, reflecting increases in all major markets, except Europe.

Slide 12 shows our financial results for the fourth quarter and full year of 2012.

As previously mentioned, fourth-quarter sales were up 6% to $3.7 billion. Excluding the impact of foreign exchange, Lear's sales in the quarter were up 8%. For the full year, sales were $14.6 billion, up 3%. Excluding the impact of foreign exchange, Lear's sales in 2012 were up 7%.

In the fourth quarter, pre-tax income before equity loss, interest and other income was $159 million, up $57 million from a year ago. For the full year, pre-tax income before equity income, interest and other expense was $705 million, up $26 million from 2011.

Interest expense was $10 million in the fourth quarter, down $5 million, primarily reflecting the favorable settlement of tax matters in foreign jurisdictions.

For the full year, interest expense was $50 million, up $10 million, primarily reflecting the favorable settlement of a tax matter in 2011.

During the quarter, net income was impacted by $767 million in one-time tax benefits related primarily to the release of our valuation allowance in the US. In addition, equity and net income loss from affiliates as well as other income and expense were also impacted by one-time items during the fourth quarter.

I will provide more details on those items on the next slide.

Slide 13 shows the impact of non-operating items on our fourth-quarter results. During the fourth quarter, we incurred $45 million of restructuring costs primarily related to the planned closure of our Genk, Belgium facility, as well as various census-related actions. Other special items include $13 million of income, primarily reflecting insurance settlements.

Excluding the impact of these items, we had core operating earnings of $191 million, up $15 million from 2011. The increase in earnings reflects new business and operating 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 loss in the fourth quarter includes special items of $11.8 million related primarily to impairment and restructuring charges at one of our non-core joint ventures.

Other income in the fourth quarter includes special items of $14.2 million, reflecting insurance settlements.

Net income in the fourth quarter includes tax benefits of $767 million primarily related to the value -- to the reversal of a valuation allowance on our deferred tax assets in the US. Adjusted for restructuring and other special items, net income attributable to Lear in the fourth quarter was $145 million and diluted earnings per share was $1.48.

Slide 14 provides a summary of free cash flow. We generated $219 million of free cash flow in the fourth quarter and $291 million for the full year. We finished the year with cash of $1.4 billion. Capital expenditures were $439 million in 2012, up $113 million from 2011, reflecting increased investment in component capabilities and the emerging markets.

Slide 15 provides a tax update. As mentioned previously, in the fourth quarter based on our profitability in the US over the past three years and our outlook for continued profitability, we released a significant portion of our valuation allowance related to our deferred taxes in the US. This resulted in a one-time tax benefit of $739 million. And in 2013, we expect a more normalized effective tax rate of approximately 30%.

We continue to have global tax attributes in excess of $1.1 billion, which will reduce our cash taxes for the next several years. Approximately 45% of the tax attributes relate to the US, with the remainder in foreign countries. These 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.

Lear's cash tax rate is expected to be approximately 20% for the next several years, reflecting the benefit of our global tax attributes.

Slide 17 summarizes industry production assumptions for 2013. Global industry production is forecasted to grow from 79.7 million units in 2012 to 80.7 million units in 2013, an increase of 1%. Production in North America is forecasted to increase by 1% to 15.6 million units and production in Europe is forecasted to decline by approximately 4% to 16.2 million units. Growth in the emerging markets is expected to continue with production in both China and India forecasted to grow by 9% in 2013.

Our 2013 financial outlook is based on an average euro assumption of $1.28 per euro.

Slide 18 summarizes our financial outlook for 2013, which is unchanged from what we announced at the Detroit Auto Show. For 2013, Lear expects net sales to increase to $15 billion to $15.5 billion, primarily reflecting the impact of our sales backlog.

Core operating earnings are forecasted in the range of $725 million to $775 million, relatively flat with 2012, reflecting higher sales offset by lower production in Europe and key program changeovers.

Interest expense in 2013 is expected to increase to about $80 million, up from 2012, reflecting primarily the impact of the new $500 million bond. Tax expense is estimated to be $195 million to $210 million, reflecting the increase in our effective tax rate to approximately 30%. As mentioned previously, given our tax attributes, we expect the cash tax rate to be approximately 20% for the next several years.

Capital expenditures are expected to remain elevated in 2013 at approximately $450 million, reflecting our strong sales backlog as well as additional investment in component capabilities and the emerging markets. Free cash flow for 2013 is forecasted at $275 million.

Now I will turn it back over to Matt for some closing comments.

Great. Thanks, Jeff.

Lear continues to deliver solid financial results, and 2012 was our third consecutive year of higher sales and earnings per share. We also continue to make progress on achieving our strategic objectives. We believe that the investments we have been making in components and emerging markets will provide benefits and lead to improved results going forward. Our strong and flexible balance sheet will allow us to continue to profitably grow our business and create value for our shareholders.

In closing, I want to thank the Lear team for their hard work and dedication. I'm confident with your support that Lear will continue to be successful.

With that, we would be pleased to take your questions.

(Operator instructions) Itay Michaeli, Citigroup.

I was hoping you can just help us in terms of thinking about the cadence of earnings and margins throughout the year. Just how should we prepare for the first couple of quarters, at least, given the volatility in some of the production schedules there?

I think what we're seeing from our side is a pretty normal, I would say, seasonality, if there is such a thing, a little bit stronger in the first half, a little bit weaker in the second half, driven by the third quarter shutdown more than anything. The margins should be pretty consistent around that overall 5% number first half to second half.

So it's a year without a meaningful spike or hockey stick or, in that regard, a pullback. We just think it's going to be a fairly steady year, and based on a production cadence that we see at this point.

That's helpful. And then on the pace of buybacks and cash deployment, can you help us a little bit more in terms of how we should think about it? You did issue some debt, which would be a bit dilutive, given the increase in interest expense.

So, should we think about the deployment to be a bit more front-end loaded in the next three years as opposed to how it has proceeded in the past two years?

Well, I think the increase of the authorization of $800 million is a fairly significant step up, obviously, in the pace that we had been buying at over the first two years. The open $1 billion authorization over three years would imply a rate of slightly over $80 million a quarter.

From our standpoint, I think what you should assume is that we buy at a pace that's consistent throughout the period, contingent upon prevailing market conditions. So I would not expect it to be different at this point.

That's helpful. And then just lastly, quick housekeeping, can you share what you have assumed for 2013 production for the GMT900/K2XX platform?

We have assumed production volumes that are relatively flat year-over-year with 2012, I think, at 1,040,000 vehicles.

That's great, thanks so much, guys.

Rod Lache, Deutsche Bank.

Good morning, everybody. I guess, first, two questions on the Seating margins. In Detroit, you went through a bit of guidance suggesting that Seating margins go down about 100 basis points in 2013.

Can you just give us a little bit more on what exactly is driving that? I think -- you mentioned launches, but should we be thinking something like 20% of your business goes down 500 basis points? Is that what you are referring to on the launches? And, is there any improvement expected in Latin America?

And then, to follow up on that, how should we be thinking about a reasonable magnitude of improvement as you go out to 2014 once you have cleared through some of these big launches?

The key drivers in this business are probably the three major drivers as far as the margin erosion, Rod, is, first off, the programs that are changing over are relatively significant this year as far as just a sheer revenue standpoint. And that is probably about -- in itself, maybe 100 basis points just because of new programs coming in at lower margins as we become more efficient in both our design and manufacturing process.

European decrease in volumes and mix is also impacting that, probably about half of that.

And the other piece of it -- while we expect South America to return to profitability, it's still significantly below the run rate of the segment overall. We would expect these trends to continue throughout the year, and then start improving heading into 2014.

So does the 100 basis points that you experienced from these launches -- does that fully recover in the second year? Or, is there some kind of a normal trajectory that you can give us some feel for?

Not completely, Rod, because the program portfolio changeover continues into next year as well. We would expect to see some improvement heading into next year, but I wouldn't expect it to be a snap back.

So you wouldn't necessarily get back to the 2012 margins in Seating, is basically what you are saying?

Not necessarily.

Okay, and then secondly, when you gave the guidance, I think you were assuming a weaker euro. Was it $1.28? It's now at $1.36. If we wanted to adjust for that, would we apply the corporate average margin, or are European margins somewhat below that now?

I think, as we have said on calls before, the margin as it relates to ups and downs on FX are normally around the 3% to 4% range.

Okay, and then lastly --.

I was just going to say, Rod, on the conversion of that, from a revenue standpoint, each $0.01 change in the euro to the US dollar is worth about $40 million annually, if you were trying to do the math.

Yes, and just one last housekeeping thing. I think when you made the acquisition, you suggested that it was at the corporate average margins. Was that actually the case over the course of 2012?

You are referring to the Guilford Mills acquisition; and yes, that is the case. It probably came in at target margins for the segment overall, Rod. So it's pretty consistent with the segment and in line with our expectations.

Okay, thank you.

John Murphy, Bank of America Merrill Lynch.

First question, on electrical, you continue to beat our expectations and, I think, are performing relatively well, relative to your expectations as well, on the sales line there.

I'm just curious what is really driving that upside specifically there. Is that just volume? Is it mix? Is there backlog rolling on faster? I'm just trying to understand really what the outperformance is being driven by there.

Well, this is a segment where the content per vehicle is actually increasing. So we do benefit probably disproportionately in this product group than just sheer volume, John.

The real benefit, however, is coming from the backlog. This segment has grown faster on a percentage basis than Seating as we continue to gain share. And I think that is really a function of the investments that we have made restructuring and in our footprint and in our product portfolio, whether it's the solid-state junction box and some of the innovations we have had there to some of the innovations we have had in our connector systems or ultimately high powered.

So I think it's a combination of factors, but probably the biggest one is we are penetrating and we are gaining share in this space.

So there is nothing in the quarter that was really -- had to do with mix or any program really ramping up; this is more sustainable than just really something that happened in the quarter?

We believe the performance is sustainable from the quarter.

Okay, second question just on quoting that might roll into the backlog, any rough figures on what you are quoting on right now in addition to the $1.8 billion that you have already booked?

Yes. If you look at how we improved 2014 from a year ago, I think that number is up a couple hundred million dollars from when we announced the backlog back last January. I would expect that same type of net new business coming in at least on the outer year on the 15 year as there is still open sourcing in that segment, in that time frame.

That's incredibly helpful. And then just if we think about the GM truck launch -- obviously, that's a big one for you. Is that still in the ballpark of 10% of your sales? Is it that important to the business?

It's about that size. It's about that size.

So when you are talking about these changeovers, obviously, we have the pickups this year and the SUVs at the beginning of next year. That's a pretty big deal for the Company. And once you get through that, that should be something that helps normalize margins, once you get through that mid 2014?

That's a big driver on the program portfolio. And as we launch new programs, which is typical in this space, they typically come on at a lower margin than the business that they are replacing, as you work through your engineering changes and your cost reductions and your efficiencies at the plant.

So, yes, we would expect that, as we digest that launch with 1 million units spread out over a couple years, that we would see some improvements in the segment.

And then just lastly, just a simple question on working capital, Jeff. As you are looking at your free cash flow forecasts, are you looking for working capital, a small working capital use similar in 2013 to what you did in 2012? Is that a fair assumption, roughly?

Yes, yes. I think working capital for the full year 2013 is going to be a use of cash.

Okay, great, thank you very much.

Ravi Shanker, Morgan Stanley.

A couple of questions -- Matt, we have seen some other suppliers take costs actions or restructuring actions in Europe, given the structural issues with that market. I think, given that that is a bit of a drag on your margins as well, is that something that you guys are looking at?

Well, you are always looking at your infrastructure costs, especially in light of what we believe is going to be a little bit of a sustained pullback. The one thing I would like to note is that we started our restructuring program several years back, and we are approaching $1 billion of investment, and a good portion of that has been in Europe. And we remain, even in the downturn, solidly profitable in both segments in that region of the world.

We are looking for opportunities to restructure there or do some additional restructuring, but we have been doing it all along. And I would say that's really probably not a whole lot different than what we do in any other region of the world. Even in ones that are growing, you are constantly challenging your footprint.

Obviously, the pullback in Europe from what was a high of 20 million units, which is now around 15 million, provides some opportunity to make those type of investments, and we are looking to do that. But I can't see it being -- at this point, being hugely significant.

And any larger actions needed there around some of the OEM plant closures that have been announced?

Well, I would expect that there will be more coming just because of the excess capacity that's in the segment. So I would expect -- I think all the OEMs are looking at a way to balance their production capacity to what they believe is the sustainable production estimates that are looking out over the next several years. So I would expect some more OEM actions, quite frankly.

Got it. And finally a big picture question, now that you and the other Seating suppliers have made a bunch of component acquisitions over the last several years, do you see any change in the way the OEMs are changing the way they source components? Are they more comfortable giving you guys full Seat contracts now that you have a much better vertical integration capabilities?

No, I don't think that has really changed. I think it has been fairly consistent sourcing. There may be some nuances to it that are different.

I just think that in order to be a tier 1 seat provider, you have to have full design capabilities, first and foremost; the ability to assemble in a just-in-time nature. You have to have global reach because there's a rotation to global programs. And you have to be able to design and assemble the major subcomponents of the seat because it's a key driver on cost and quality.

And I think what you are seeing as some of the others in the space are trying to get that vertical integration is a recognition of the drivers in quality and cost. For us, it has been a good investment and we have made nice returns in those sub segments.

Great, thanks very much.

Brian Johnson, Barclays.

I know you don't talk, or you don't put on the slide the kind of order and the pipeline pre-backlog activity, but just a kind of couple questions around that.

First, are there differently times on Seating versus electrical? I tried to discern a pattern in the growth of the 2013 and 2014 pattern but didn't see one.

And then the second question is, given these high margins in electrical, as others have noted, and the lower-than-typical margins in Seating, how does the ROIC look between those two divisions? And then how does it affect the kind of business you go out and quote for and where you put the additional $50 million of CapEx as you think about going after business?

I would start with your first question, which is the lead time. And I would tell you that, if you have full design responsibilities, the lead times are pretty consistent between the two products, Seating and electrical distribution, to about 3 years, 2.5 to 3 years. The OEs are working hard to shorten that, and we are seeing some shortening of award to start of production. But I would say between 2.5 and 3 years is probably the norm at this point.

If it is build-to-print or a running change, as they say in the industry, then it can be much shorter. But the vast majority of what we do is in the 2.5 to 3-year because we do have full design capabilities in most cases.

As far as margins in electrical and return on investment, the return on investment in both segments are fairly consistent and both are performing slightly above our cost of capital right now.

From an investment standpoint, we believe that the investment in electrical space with its current mass and market position has great returns. But we also believe the same for Seating, where we have a solid number two position and I think we can leverage that position to take advantage of some of these global platforms, whether it's connectors in China or seat cover business in South America. We are making a nice return on both those investments.

And so I would tell you, on the incremental capital, we don't necessarily steer to electrical or to Seating. We have opportunities in both.

And in terms of the quoting activity, as we think about where 2014 and 2015 backlog may go, any difference in the mix between 55/45 the backlog currently is? Because it looks like it's 50/50 in the out year (multiple speakers) --.

Yes, I would tell you that -- I would tell you, Brian, that I would expect it to get back to more normalized. While we are penetrating a little bit faster in electrical, I would not expect a 50/50 split to continue. I would expect it to, again, kind of tilt a little bit more towards Seating just because of the sheer size of that segment in relation to the $4 billion that we have in electrical.

The cadence of sourcing is -- it's a pretty normal year coming up. I don't see it accelerating; in the same token, I don't see it slowing. And I think it's just a pretty normal year coming forward.

Okay, thank you very much.

Chris Ceraso, Credit Suisse.

I wanted to come back to a couple of things. You mentioned that you thought this would look like a relatively normal year in terms of the distribution of earnings first half versus second half. I was hoping you could revisit that a little bit, because it looks like most third-party estimates for the build rate, certainly in Europe, is much more back-half weighted than front-half weighted. So why is it that your earnings would not be somewhat tilted that way as well?

What I said was that I thought the sales were going to be a little bit more front-half loaded just because of the shutdown that you typically see in the third quarter for both product changeovers and European vacations, Chris. I thought the margin distribution would be relatively consistent first half to second half at right around 5% on average, first half to second half.

That's driven by a lot of different things. One is the step up in program changeovers in the back half of the year versus the front half offset by the production cadence.

So there is literally thousands of inputs that go into projecting a company of this size, global reach and size and complexity. From our standpoint, we don't see a major spike in the margins or a decrease in the margins. It's a pretty normal seasonal year with the third quarter from a revenue standpoint being down, which is more normal. So the sales will be a little bit front half-loaded to the first half, our first half over the second half, and I think the margins stay right around that 5% range.

Okay. So if I can paraphrase, maybe, yes, there are double-digit production declines in Q1 in Europe, but you also have a heavier concentration of changeovers in the back half, and those two things kind of balance out?

That would be a good way of putting it, yes.

Okay. Second question -- I don't think I'm making this up, but I thought when we were in Detroit and you were making your presentation, you had mentioned that you thought longer-term you could get Seating margins to something in the 5.5%, 6%, maybe 6.5% range, which sounded like a departure from your previously held long-term guidance, which was for Seating margins to be in the 7% to 8% range.

Is that right? Are you backing away from that 7% to 8%? And if so, why is that? Did you think that maybe you were over-earning when you were doing 7% or 8% because of strong build rates on certain programs? Can you explain?

No, there's really no change. It's just a function of timing and maybe the product changeover. The European production volume is obviously a lot weaker than what we thought, and the recovery is going to be a lot slower than we initially thought, based on what IHS is seeing and what we are seeing as well.

I do believe we can see it climb back in the relatively near term into the 6% range, and I think longer-term, 7% -- over 7% makes sense for a lot of reasons, one of which is really, to me, margins are more a function of investment and the investment required. So as we go into our vertical integration strategy and component strategy and expand our capabilities there, I believe that the returns will follow.

And to us, margins are just an outcome of investment and getting the return on investment that you need.

So, to me, we don't believe longer-term that 7% is out. There has really been no change in that.

Okay, so it's just a function of over the next year or two or so, it may be stuck in the 6% range; but longer-term, you still think you can get there?

Yes.

Okay, and then last question is about the backlog, the $850 million. I'm hoping you can maybe identify a few of the major programs that contribute to that. Including on the GM trucks, do you have increased content versus the current program, decreased or about the same?

I will tell you, on the GM trucks, it's not really net in the backlog because it's a replacement program. And the way we define backlog is net new business. So from that standpoint, I would tell you that it's not really a meaningful change at all.

Jeff, why don't you take him through some of the programs that we are rolling up this year.

Yes, just some of the larger programs, in terms of marquee size, is the Ford Focus program, which is Conquest business for us -- that's probably the largest single item. We have got some European business across the board, probably the biggest of which is the seat assembly on the Maserati Quattroporte. There is literally hundreds of these things, but probably the biggest of which are those two coupled with, also in Europe on the EPMS side, the Land Rover Range Rover business is very significant for us in total, and certainly for that segment.

Okay, that's helpful, thanks a lot.

Aditya Oberoi, Goldman Sachs.

Great, thanks a lot. A question on the margins in the EPMS segment, if you annualize the run rate of revenue that you guys did in the fourth quarter, that kind of implies almost a $4 billion in revenue. And the margins, at least in the fourth quarter, were close to 8.5%. As we go forward and revenue continues to grow in that segment, can you just talk about the puts and takes that would impact margins from the 8.4% levels?

Yes. I think that -- we believe we can continue to grow that segment profitably, and we believe that we can do about 8% this year in that segment.

The key drivers on margin, again, is it depends on the type of business that we win and the capital requirements associated with it. For instance, wire harnesses -- the portion of wire harnesses in electrical distribution systems are really not that capital intensive. It's very much like a just-in-time assembly plant.

On the other hand, the electronic boxes and connectors are more capital intensive and require a little bit higher electrical engineering content as well, and they would support having a higher margin.

Right now, what I would say, Adi, is that just assume that we can maintain the kind of run rate margins that we enjoyed in the fourth quarter as we continue to grow that business profitably.

That's helpful, guys. And the second question is on the capital deployment. With the debt deal that you recently did, I think your net cash position probably would stand close to $1.9 billion. And the run rate of cash towards buyback that you are implying means a $320 million, $330 million buyback annually, which is more or less the normalized cash flow that you would generate in a normal year. Right?

So can you talk about where do you plan to utilize this $1.9 billion of cash in the near term?

Right. We have been pretty consistent with how we talk about cash and capital structure allocation, and it is really not a whole lot different. What we want to do is continue to look for opportunities to make niche acquisitions which will, not unlike Guilford and the size of Guilford Mills, which will diversify our sales, provide another platform for profitable growth and also provide component capabilities, ideally in low-cost regions of the world. We also believe there's opportunity through organic investment to step up our capital expenditures and provide, again, another vehicle for profitable growth and investment.

Thirdly, we have $1 billion of authorization available for share repurchase based on prevailing market conditions and financial positioning and valuations. And we'd look to do that. And then, we also return cash through dividends.

So, we're happy with the amount of leverage right now. I think we took advantage of a nice credit market environment to lower our long-term borrowing costs and provide flexibility to create value in a lot of different ways.

Got it. And finally, one housekeeping question, on the backlog, you said that there is some upside risk to the 2015 number because there is still some open sourcing. Is it primarily the EPMS segment, or is it both Seating and EPMS?

I would expect both segments to grow in that period.

Got it. Thanks a lot, guys.

Emmanuel Rosner, CLSA.

Firstly, one more question on, I guess, the production cadence starting this year. Can you please tell us what you are seeing currently in Europe, I guess so far in the first quarter and then for the next few weeks? I think a lot of estimates are looking for double-digit declines, as was pointed out before.

But Johnson Controls, for example, was guiding to down 14% in Western Europe. Is that the sort of magnitude you guys are seeing? And also, how is the mix playing out over there at the beginning of the year for you?

I think, relative to the volume itself, we generally utilize IHS volumes in planning, and IHS, as several of you have alluded to, is down in the first quarter. As it relates to mix, what we are seeing there is that our general mix of vehicles is likely to be down greater than the overall industry average, at least in the first quarter and potentially extending beyond the first quarter.

I'm sorry -- and that is a function of what?

Well, it's the key car lines we're on. Right now, the good news about Europe for Lear Corporation is that we are well represented in all the segments. We have a good portfolio of business that reflects both customer and platform diversity in this segment. What it does mean from a mix standpoint is -- we don't sell to the industry. We sell to certain car lines, and those car lines would be impacted by the decrease in volumes.

Understood. And then, I guess, turning to your efforts to grow your components capability, the acquisitions that you are looking at, can you maybe characterize the environment for those acquisitions? Obviously, a lot of suppliers have been consolidating and growing more vertically.

So are there still lots of assets available? Are the valuations generally reasonable? Can you talk a little bit about the sort of environment you are encountering there?

Well, it's a difficult environment because everybody is looking for the same thing. I don't believe there is a silver bullet out there, but I do believe there is nice niche acquisitions that can be executed at a fair value where the value is greater than the sum of the parts. I still think they are out there. We have had a very active process over the last several years. I think the key is to find the right one at the right value that can help the business strategically, but also create shareholder value for our investors.

They are out there. You've got to work really hard to find them and to cultivate them, because in many cases, the best strategic fits are not necessarily assets that are for sale. And so you need to start to dialogue with the ownership groups.

Their valuations a little bit lower in Europe, a little bit higher in Asia, would probably be how I would characterize it.

That's very helpful. And just one housekeeping to finish, on the restructuring costs you are getting for $50 million for 2013, is that a similar amount on the cash basis? And then, more specifically, obviously, you incurred almost $45 million or $50 million this quarter related to the Genk facility. But my understanding is obviously that Ford will continue to produce there for a little bit more time. So when would you expect that cash to come out?

I think, generally speaking, for 2013, the expense will generally mirror the cash, with the largest portion of that being, as you mentioned, related to the Genk closure.

So you'd expect the cash for Genk to actually go out this year?

Some of it, some of it.

Understood, thank you very much.

Colin Langan, UBS.

Looking at the EPMS segment, you are at about a mid-8% now, and your target is 8% for 2013. Is it just a factor of the weaker sales, or are there other factors that make it slightly lower going through the rest of next year with kind of driving the sequential decline?

Well, there's literally thousands of inputs that go in there. But overall, what I would say is that it's really just a function of the mix of the products that you are on. This segment has a significant portion of their revenues in Europe as well, so they are impacted by the downturn there, which hits them a little bit disproportionately over Seating from a percentage standpoint.

But, all in all, we think it's going to be good business in the 8% range.

Okay, and any color on the pricing environment in Europe and in China? I know, obviously, with the volumes coming down, are you getting a lot more pricing pressure from the OEMs? And I know in China as well, it seems like pricing is an issue for the OEMs. Are they putting pressure on you there?

Yes. It has been -- it's a tough pricing environment. We typically run at about 2% net give-backs. The cost reductions we are able to provide to our customers, however, are significantly higher than that because through our ability to control the value stream, so to speak, and the vertical integration in our design capabilities, we have the opportunity to provide, I think, greater savings than many through value engineering.

So the pressures are huge, as you would expect, because of the downturn and because of the consumer nature of purchasing of vehicles, price-sensitive. We, however, I believe are in better shape than many to provide cost reductions to our customers in these components because of our global reach and our vertical integration.

So long answer, short question -- it's a tough environment, but it's not a whole lot different than what it has been.

And one last one, in terms of your $1.4 billion in cash, any update on how much of that is in the US? Is there any risk that you may need to repatriate some of that?

Let's turn you over to Shari Burgess, our Treasurer.

(Inaudible - microphone inaccessible) in the US.

What was that? Sorry?

Approximately a third of it is in the US.

I think we have got a pretty efficient cash structure which allows the vast majority of our cash to be used for daily needs. There's probably only about, I want to say 200, Shari, that would be a little bit inefficient to come back for daily purposes?

Yes, there's a couple hundred that it would take more than a day or two to get back because you need some government approvals. But we have a very extensive network of intercompany loans that allows us to bring back the cash as needed to the US.

Without incurring repatriation tax?

Limited additional income taxes, there might be some withholding taxes here or there, but it's pretty minor.

Okay, very helpful, thank you very much.

Joe Spak, RBC Capital Markets.

Just a quick question on the CapEx -- 2013 is another elevated year. I think the midpoint is about 3% of sales, and that's two years in a row now. If you look at, the backlog the past couple of years have been higher EPMS sales, and then it looks like it shifts a little bit back more towards Seating in the outer years. So should we expect that the CapEx rate comes back down to that about 2% of sales that you think is more normal -- after 2013?

Yes, I would think -- I mean, we have made some really nice investments over the last several years. I think the number is about $300 million on the component capabilities in the emerging markets, things like connectors plants in China and electrical distribution plants in South America, Brazil and Northern Africa.

Those have provided not only access to low-cost components, but it is also facilitating the growth, in many cases, because we're able to leverage those facilities to grow the top line.

I quite frankly would like capital to increase because I think that would provide opportunities to increase returns and further grow our sales.

From a planning perspective, though, I would probably assume 2% to 2.5% in the outer periods at this time, Joe. If we had the opportunity to invest, we would step it up because we are making nice returns and they are paying dividends through the sales growth. Key driver, obviously, to any capital is production numbers and backlog.

So right now, as the backlog stands, we would see a decrease in 2014, and that should also drive the capital down. So again, I would probably just use 2% to 2.5%.

All right, thanks, that's helpful. And then just back on the cash, I was just wondering -- you've clearly made some progress on the share repurchases. Has there been any additional thought given to the dividend maybe getting the yield more in line with an S&P 500 average?

Yes. If you look back, two years ago we initiated the dividend, and then last year in February we increased it. I think you need to look at the two actions combined. While many have a yield higher than us, not many have both a dividend and a significant share repurchase like Lear does.

I know the dividend, the size of the dividend and the potential increase will be considered by the Board here shortly.

Okay, great. And then maybe one housekeeping for Jeff, if you could give us, if you have it ready, an update on the pension, the funded status, how that closed at the end of the year?

The funded status of the pension plan increased slightly on a year-over-year basis, largely attributable to the acquisition of Guilford. So that the lines -- [essentially] all the increase is going to be attributable to acquisition of Guilford and the unfunded pension that came from that acquisition.

Right now, we would expect that to be -- for a company our size, even with Guilford, between the OPEB and the pension, the legacy liability, so to speak, are very, very modest. We have closed most -- the vast majority of our plants, so really we are at kind of ebb and flow with the discount rates. Right now, the unfunded status is slightly above $500 million. It's not that meaningful for a company our size.

That's combined with the OPEB?

Yes, that's combined with OPEB. I think the split on that is roughly $175 million OPEB and $350 million, $360 million on pension.

Okay, thanks a lot, guys.

Peter Nesvold, Jefferies & Co.

My questions on the quarter really have been answered. I'm sure you get the question a lot about the difference in the margins between you and some of your competitors.

But can you just walk me through briefly? How have you really been able to sustain the margin advantage relative to others, particularly in Seating, and particularly in Europe, number one? And then, number two, how do you sustain that going forward? How do you not get dragged down to the level where others are at?

Well, I think it's really -- it's actually pretty independent. I can't really speak to our competitors. What I can tell you is we have invested in restructuring. The vast majority of that was in Europe as well as other places. To turn the clock back, since we started this journey we've spent about $1 billion on restructuring our footprint, so a lot of the actions that we had to take we have taken. And we benefited from that and you can see it in the margins.

So from our standpoint, I think each one is independent. At the end of the day, we need to make right decisions for Lear Corporation. We believe we can compete and we believe we can grow the top line profitably based on our capabilities.

At this point, I think roughly 90% of our component facilities are in low-cost markets, or at least 90% of the employment. 80% of the components are in low-cost regions of the world or emerging markets. I think we're seeing the benefit of that as the car companies are -- the major Western companies are going to global platform.

So, we are confident that we can continue to grow margins.

Okay, all right, thanks, guys.

Brett Hoselton, KeyBanc.

I wanted to go back first to Rod's margins question. With regards to the 100-basis point margin impact due to the program changes, it sounds like you are going to get the bulk of it back as you move into 2014. But my question is, when do you possibly see getting that full 100 basis points back? Is it out into 2015, or is it by the time you get to mid-2014, when you have worked your way through these major changeovers?

The model -- the program portfolio, vast majority of our program portfolio in Seating changes over the next -- this year and next. I think that needs to settle down before we get the full benefit of those basis point improvements.

The thing to note, though, Brett, is that there are many inputs to margins, whether it's European volume and mix or North American sales, hopefully in car lines that you provide the seats, to the actual operations of the facilities.

So it's a lot of issues driving margins. The one particular as related to program portfolio changeovers -- we would expect that to get better once we get it behind us, and we expect to get it behind us in 2014.

By the end of 2014, or is that the idea? Is that why I'm hearing?

Yes, that is the idea.

And then South America -- I think during the Auto Show, you had talked about that being roughly a 100-basis-point headwind. I could be incorrect there, so if I am, please feel free to correct me. But how do we think about the progression of margins there?

Well, we became unprofitable in the second half of the year, and the 100 basis points that you are mentioning relates to the year-over-year performance erosion or the impact on Seating on South America alone. So in the back half of the year, that was worth about 100 basis points because that region was underperforming and actually went to unprofitable results.

We expect this year to return to modest profitability but significantly below the margins for the group overall. We'd expect that trend to continue to improve as we go through the year.

And then switching to the backlog, if I were to dial the clock back a couple of years and look at your 2013 backlog, your 2013 backlog was $400 million and now it's $850 million, so a $450 million increase, almost a doubling -- very significant increase. And you can see a similar progression on the 2014 backlog.

My question is, as you look at your 2015 backlog of $300 million, and you think about the Seating, you think about the electrical business, is it unrealistic to think that, as this occurred in the past, that you could see almost double that in terms of the backlog by the time we get to 2015? Currently at $300 million, could it be as high as $600 million?

That's not unreasonable to assume that.

Okay, great. Thank you very much.

Ryan Brinkman, JPMorgan.

Obviously, the margins in the electrical business are doing very well and a significant part of the story. One of the reasons that has been given for the improvement is the increasing scale. And I know you guide to 8% roughly, over the near and medium term. But in thinking about the long-term margin potential for this division, which did track above 8% in 4Q, have you done any benchmarking work to estimate what the margins of competitors with even greater scale are in the subset of electrical power management that you participate in?

If so, would that seem to suggest even more margin expansion potential here?

I think probably the best comp might be Delphi, and I think Delphi's margins are above 10%. But their business model is a little bit different than Lear Corporation in that they do have a greater size, which allows them to absorb some of the infrastructure costs a little bit better than Lear can. They also have a business that is a little bit higher -- or significantly higher in connectors and electronics, which would require them to make a higher margin in order to get the type of return on investment they need to justify the investment.

So from our standpoint, could it go higher? It could. Right now, we are comfortable guiding to that, to the range that we gave you.

Okay, thanks. I know you have been doing a lot on the cost side. And it looks like your operating expenses declined in 2012, both in dollar terms and as a percentage of sales with the largest decline being in the fourth quarter. Can you maybe talk about some of the drivers there and also to the sustainability?

I think our cost structure is sustainable. We are actually looking for opportunities to bring it down further. A lot of that is just the timing of the engineering spend in relation to the backlog and where you are in the life cycle.

But we are diligent on cost. We are focused on continuous improvement. We are attacking every line item of our spending everywhere in the world, plant by plant. So it's a constant battle and it's a constant focus of the management team and I think we are really good at it.

Okay, well, great. Thanks for the color.

Brendan Mason, Guggenheim Securities.

We are okay, thank you.

Adam Brooks, Sidoti & Co., LLC.

Just two quick questions here, one, can you give us a sense by segment of the cadence of the backlog throughout 2013?

I think, generally speaking, in EPMS the backlog should come in at 2013 more back-end loaded than front-end loaded, but not significantly so. And I think if you look at the Seating side, it's -- I think early on in the first quarter, you will see a bigger chunk. But again, that is not terribly skewed in first half versus back half; it's pretty ratable throughout the year.

I would tell you, Adam, it's pretty consistent overall. I don't really -- I don't know, Jeff, it's pretty flat. We are talking nuances.

Yes, we are not talking big swings.

Okay, and then just one other quick question, on the China business, can you give us expectations for your performance versus the market? It seems like it has narrowed a bit over the past year, so maybe what you think you can do going forward?

I think we can continue to penetrate there. We have got great relationships with DFM, BAIC, SCIC, FAW, and we also have, obviously, the extensions of the foreign automakers going in there.

And I think, as they continue to look on global platforms, Western-style type quality and whatnot, that it's a real opportunity for Lear. And we would expect to grow in that region faster than the market.

Thank you.

That's the last of the questions. For the Lear team that's still on the phone, I want to thank all of you for your hard work and dedication. The results, I think, are a testament to what you have achieved this year and we look forward to a great 2013. Thank you very much.

This concludes today's conference call. Ladies and gentlemen, thank you for your participation. You may now disconnect.