Lear Corp (LEA) 2013 Q2 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 the Lear Corporation second-quarter 2013 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. Mr. Ed Lowenfeld, Vice President Investor Relations, you may begin your conference.

Thank you, Tracy. Good morning, and thanks, everyone, for joining us for our second-quarter 2013 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 at 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, Matt Simoncini will provide a Company update. Next, Jeff Vanneste will cover our second-quarter financial results and 2013 outlook. Then Matt will return with some wrap-up comments. Following the formal presentation we will be pleased to take your questions. Now please turn to slide 4 and I will hand it over to Matt.

Great. Thanks, Ed. Lear had a strong second quarter with our sales and earnings growing faster than industry production. Sales in the second quarter were $4.1 billion, up 12% from a year ago, and core operating earnings increased 13% to $224 million.

In the second quarter our Electrical segment achieved record quarterly sales and earnings as businesses continue to benefit from the market share gains and improved infrastructure. We also entered into an $800 million agreement to repurchase stock under an Accelerated Share Repurchase program bringing our year-to-date repurchases to $1 billion.

As a result of our strong first half performance we are increasing our full-year guidance. Jeff will provide the details a little later in the presentation.

Slide 5 provides a regional overview of our financial results in the second quarter. Lear reported strong sales increases in every major region of the world. We've made significant investments in the emerging markets and we are well positioned for continued growth. We remain solidly profitable in Europe despite industry production running significantly below installed capacity.

In South America our financial results have been negatively impacted by inefficiencies and higher costs associated with significant expansion of our business in that region. We have historically been profitable in South America in both segments and expect our results to improve as we head into next year.

Slide six highlights the key elements of our strategy which remain unchanged. We are following a balanced approach of investing in our business, maintaining a strong and flexible balance sheet and returning excess cash to shareholders. We have the product expertise, global reach, competitive footprint and financial flexibility to profitably grow our business. We are well positioned to take advantage of industry trends towards global platforms, increased electrical content and direct component sourcing.

We plan to continue to invest in the business to improve our market position in returns. We continue to pursue acquisitions that will complement our present product offering, facilitate further diversification of our sales and increase our component capabilities. We plan on maintaining a strong and flexible balance sheet while at the same time continuing to return excess cash to shareholders on a consistent basis. Now I'd like to turn it over to Jeff who will take you through our financial results and outlook for the remainder of the year.

Thanks, Matt. Slide 8 shows global vehicle production for the second quarter. In the second quarter global vehicle production was 20.8 million units, up 3% from 2012. Europe production was up 2% compared to a year ago. While European production continues to be below trend, this was the first quarter without a year-over-year decline since the fourth quarter of 2011. Production in North America was up 6% reflecting improving economic conditions in the region. Market conditions were strong in key emerging markets with industry production up 11% in China and 23% in Brazil.

Slide 9 shows our financial results for the second quarter of 2013. As previously mentioned, sales were up 12% to $4.1 billion with all regions showing year-over-year increases. Pretax income before equity income, interest and other expense was $201 million, up $11 million from a year ago. Interest expense was $17 million, up $3 million, primarily reflecting the impact of the $500 million bond which was issued in January.

Equity income was $10 million, down $11 million from a year ago. In the second quarter of 2012 we recognized a gain of $15 million related to the reversal of a valuation allowance at our recently divested IAC joint venture. Excluding this one-time item equity income was up $4 million from a year ago.

Slide 10 shows the impact of non-operating items on our second-quarter results. During the second quarter we incurred $16 million of restructuring costs primarily related to various actions in Europe. Other special items of $7 million primarily reflect labor-related litigation claims and incremental costs related to the previously reported fire at one of our European facilities. Excluding the impact of these items we had core operating earnings of $224 million, up $27 million from 2012.

The increase in earnings reflects the increase in sales and improved operating performance, partially offset by the impact of the changeover on key programs. Adjusted for restructuring and other special items, net income attributable to Lear in the second quarter was $138 million and diluted earnings per share was $1.62.

Slide 11 shows our second-quarter adjusted margins for both segments as well as for the total Company. In Seating adjusted margins were 5.8%, down 80 basis points from a year ago. The year-over-year margin reduction was driven primarily by the impact of program changeovers and inefficiencies and higher costs in South America partially offset by improved production on key platforms. Our full-year margin outlook for Seating remains in the mid-5% range.

In electrical we reported record sales and earnings in the second quarter. Sales were over $1 billion for the second quarter in a row and adjusted margins were 9.7%, up 290 basis points from a year ago, reflecting strong sales growth and operating efficiencies. Performance in the quarter benefited by approximately 30 basis points reflecting the timing of commercial settlements. We expect full-year margins in our electrical segment to be in the high 8% range.

Slide 12 provides a summary of free cash flow, which was $74 million in the second quarter.

Slide 13 provides an update on our share repurchase program. During the second quarter we retired 11.9 million shares of stock through the initial delivery of shares under the $800 million Accelerated Share Repurchase program. This represented 80% of the ASR's transaction value at the then current price of $53.95 per share.

The ultimate number of shares to be repurchased and the final price paid per share under the ASR transaction will be based on the daily volume weighted average price of the Company's common stock during the term of the ASR agreement. The ASR transaction is expected to be completed no later than March of 2014.

Since initiating the share repurchase program in early 2011 we have repurchased 27.1 million shares of our common stock which represents a reduction of approximately 25% of our shares. After the completion of the ASR program Lear will have $750 million remaining in the existing share repurchase authorization which will expire two years after the completion of the ASR program. This reflects approximately 15% of our current market capitalization.

Slide 15 highlights the key assumptions in our 2013 Outlook, which reflects the latest production assumptions in our major markets. Global production of 81.3 million units is relatively unchanged from our prior guidance. Our 2013 financial outlook is based on an average euro assumption of $1.31 per euro, which is up 1% from our prior outlook.

Slide 16 summarizes our 2013 financial outlook. Based on our first-half performance we are increasing full-year guidance. For 2013 Lear expects net sales of approximately $15.8 billion, up from our prior guidance reflecting higher production on key platforms and the increase in the euro. Core operating earnings are forecasted in the range of $750 million to $800 million, up $25 million from our prior guidance.

Tax expense is estimated to be $200 million to $215 million, higher than our prior guidance reflecting the higher earnings. Our effective tax rate in 2013 is expected to be approximately 30%. However, given our tax attributes, we expect the cash tax rate to be approximately 20%.

Adjusted net income attributable to Lear is forecasted at $440 million to $475 million. Free cash flow for 2013 is forecasted at $300 million, up $25 million from our prior outlook reflecting the increase in earnings. Now I will turn it back to Matt for some closing comments.

Great, nice job, Jeff. Thank you. Lear performed well in the second quarter with sales and earnings growing faster than the global industry production. As a result of our strong first-half financial performance and our industry Outlook we are increasing our full-year guidance. Assuming industry production remains stable at present forecasted levels we would expect our guidance for core operating earnings to be in the high end of the $750 million to $800 million range.

We continue to follow a balanced strategy of investing in our business, maintaining a strong and flexible financial position and returning excess cash to our shareholders. With that we would be pleased to take your questions.

(Operator Instructions). Rod Lache, Deutsche Bank.

Good morning, everybody, congratulations.

Great, thanks, Rod.

Can you talk a little bit just first of all on Seating? The South America business I think you've said before is around a $700 million business and it's not profitable now. Is there a plan to get that to 5% or so margins? And if so, what would the timeframe be?

Yes, it is actually a little bit higher than that. We would expect them to come in probably closer to $800 million this year under Seating alone, Rod. There absolutely is a plan in this business, it's a combination of, first and foremost, getting this expansion and these growing pains under our belts with improved efficiencies at the new facilities and on a new programs, getting more localized content to reduce some of the freight costs and inefficiencies associated with bringing product in and components in from outside of the region.

It is also working with our customers to get a fair and balanced pricing, if you will, either a combination of price adjustments or value engineering. So it is a litany of different things. We believe that we will return to more of a breakeven type level as we exit the year and head into profitability going into 2014 with this segment. Historically we ran this segment at target margins in both -- or this region, in both product segments at target margins.

What would the timeframe be for getting it to maybe a -- the kind of margins you are doing elsewhere in Seating? Would that be like a 2015?

Probably 24 months I would guess, Rod.

Okay. And in Europe you have mentioned before that has been a 100 basis point drag on margins as that has declined. Can you recover that 100 basis points through restructuring or do you need that business to come back?

You know, volume would always help and volume on our key car lines would be great. And the good news is we have a pretty balanced portfolio by customer and product segment. I do think there is some level of restructuring, we have made it a focus through the first half of the year in looking for additional ways to take capacity out, specifically in the just-in-time facilities, which are significantly underutilized, if you will. But we've also looked at census actions pretty much everywhere.

So we have done a lot, I still think there are some things we could do in that region. So a combination of probably a little bit of both, I would probably split it right down the uprights. We don't anticipate a significant volume increase from the levels that we've seen through the first half.

We do expect normal seasonality in the third quarter as Europe typically goes on a shut down in July/August timeframe. I don't think this year is a whole lot different. And we're not counting on a huge tailwind in volume, Rod, but it would help. In the meanwhile we are looking to get capacity out of these facilities and census reductions in place.

So similar to South America would there be a path to getting that margin up -- back up to your target in a 24-month timeframe?

Yes, I would think, one, Europe is always going to run a little bit lower than the target margin in Seating to the target margins for that segment at 7%. And historically it has always been a little bit lower because the business kind of D&As a little bit different mainly because the lack of vertical integration there where it is more common to be the JIT assembler and we have a disproportionate amount of just-in-time assembly versus components. So typically we have always been a little bit lower margin there.

I think the timeframe I am getting is shortfall of from when -- our historical run rate is nearer term though. I do believe that we will start -- we made a nice stride in the second quarter and I think we'll continue to see improvements exiting the year. So I think in Europe it's a little bit nearer timeframe to close the gap on what our historical performance has been. On electrical distribution in Europe we are -- we remain at target margins for the segment largely.

And just last one really quick, it's an unusual year for launches. You said that you are redoing something like two-thirds of your platforms. Is the pressure from launches -- did it reach its maximum in the first half or is it more -- is it greater in the back half of this year?

It is actually -- it continues through the second half, maybe even slightly higher as far as model changeover just because of some of the delays in some the program launches, Rod. I would expect that pressure to continue into the first half of next year actually. Second half of the year is going to be a pretty heavy model changeover year -- or model changeover.

All right, thank you.

Itay Michaeli, Citigroup.

Good morning, guys, and congratulations.

Thanks, Itay.

First question just on the guidance, it does seem that if we just want an implied incremental in terms of the EBIT raise versus the revenue raise, it comes out somewhere below 10%. Can you just talk a little bit about the different drivers within that? Maybe perhaps it ties back into some of the launch costs you are seeing in the second half of the year.

Sales in the second half of the year pulled back versus the first half. That is driven largely to the summer shutdowns, if you will, and that is disproportionately in Europe. So we will be sitting on even more excess capacity in some of our key just-in-time plants. We've got a step up in the program changeovers, if you will, and then we had engineering for the backlog that continues to come through. So I think if the volume productions hold the way we see them right now, Itay, we could probably -- we will probably post a number close to the high end of the range.

Perfect, that is helpful. And then on CapEx, I know a while back you talked about eventually returning to your historical CapEx to sales ratio. Can you maybe update as on your thinking there perhaps as we start to think about 2014 a little bit more?

Yes, right now we're been running about 50 bps, Jeff, higher than historical average. Personally I can see it drifting back down to the normal 2, 2.5 type range heading into 2014-2015. The good news is we've got a lot of backlog and I do think there are some opportunities and we have been getting nice returns on organic investment, if you will. And we're finding in many cases that those investments that we've made in our footprint are helping us penetrate the market specifically in electrical distribution.

So I would like to see it at 3% of sales because it has been a pretty good return. But I can see as we are exiting 2014 right now with the backlog the way it stands that we would start drifting down to more normalized capital expenditures, if you will.

Great. And then just lastly on the pension, I know not a big deal for Lear, but you did pick up some liability, I believe, with the Guilford acquisition. Discount rates are moving in your favor. Do you have any numbers, any kind of sensitivities to share in terms of how much of a benefit or tailwind that has been for you year to date?

Well, I think what we have seen is the appreciation and the value of the pension assets has kind of outweighed the impact of the discount rates. And you are right, the year over year between 2011 and 2012, the increase in the underfunded position was entirely the impact of the Guilford acquisition. But we've seen some positive things in the past couple months and there is potentially some -- if it still carries forward, some positive effect as we go into the year end.

Perfect. Thanks so much, guys.

John Murphy, Bank of America-Merrill Lynch.

First question on the guidance. As we look at just the core operating earnings in the second half of the year that would be implied by the high end of your guidance range, it would mean that the earnings would be flat pretty much on a year-over-year basis, but it looks like the sales will be up 6%.

And I know there are some more launches, particularly the K2XX and others that might hamper you a little bit in the second half of the year, but it seems pretty conservative. Is there anything other than launches that would really tamp down the core operating earnings in the second half of the year? Because it just seems like a pretty conservative outlook.

There are literally thousands of inputs that go in, Murph, into creating the guidance. But the main one is probably the program changeovers. As I think Rod mentioned earlier in the call, there are a significant amount of programs that are changing over this year and it's a little bit different than launch costs, if you will. With the changeover of a program it is not unusual to see a pullback in the margins because of the efficiencies of a mature program versus a program that's in its infancy.

Plus in many cases the margins pull back just because of the competitive pricing situation that we are in where we typically have to price lower than the exiting program and then work the pricing back up, or at least the margins back up, through value engineering and working with our customers. So I think probably the program changeovers might be worth 50 to 60 bps mainly in Seating and that is probably what you are seeing and the year over year in the second half.

Okay, that's helpful. Then just a second question on what is going on in the electronics business; it is performing incredibly well. Just curious, are you seeing any pricing pressure coming in from automakers because you are making so much money there? And then sort of secondarily, there are some sales and acquisitions and M&A that is going on there that might be of interest to you particularly on the [JTI] side and [JenTech] seems to be moving. Is there anything that you are looking at as far as deals on the electronic side that might be attractive to you right now?

Yes, let me break it down, actually I think there are three questions there. Price pressures are always there regardless of whether you make money or not. And this year is no different because our customers are in a consumer product that is a very price sensitive. I think one of our strengths is with our global reach and our vertical reach, if you will, for the different components, that gives us a very good stage to take cost out of the product.

But, yes, the price pressures continue and I think in a strange way that actually plays to Lear's strength. I don't necessarily believe that it is tied to the performance in the segment, if you will, because there is -- really what we look at is performance versus our cost of capital. And in this particular business I think we have a nice gap to our cost of capital, but I don't necessarily think it's out of market, if you will.

As far as acquisitions, we are looking at many, many, many things in both segments. In particular in Electrical you've heard me talk about before how we would like to get better in connectors or some scale in Asia with electrical and we've got a lot of businesses that we have reached out to. We have absolutely no interest in Johnson Controls' electronics business; it doesn't fit our portfolio in any way. And I guess that's it.

Okay, and then just lastly on raw material cost, is a lot of that still being passed through through escalators and indexing to the automakers? Or are you guys getting any real benefit from the pull back in raws?

Yes, with primarily with respect to copper, copper prices are down year over year now. Our exposure to copper or benefit to copper is somewhat limited; about 15% to 20% of our overall buy is exposed. And we have benefited somewhat by the reduction in costs year over year. We've got hedge positions in place really between now and the end of the year on most of that exposure. But we are seeing a slightly positive year-over-year impact primarily on copper.

Any guess sort of on the bump that you saw in the EPMS margin and -- would it come off of that?

Net-net, because there's some other competing commodities that are going counter to that like resin. So it is relatively small in EPMS, it is not a big driver.

Okay, great. Thank you very much.

Bret Hoselton, KeyBanc.

Good morning, gentlemen. Nice quarter.

Thank you.

First, just by way of clarification on the Seating margins, and this is just basically trying to clarify some of the things that Rod was asking about. If I understand it correctly, South America -- it sounds like that is a drag on Seating margins to the tune of maybe 100 basis points. You expect some improvement over the next couple of years.

The launch is maybe another 150 or 100 basis points. You expect some improvement into the back half of 2014. And then Europe, you kind of expect some steady improvement there. And I thought I heard that characterized as 100 basis points. Is my understanding correct or would you make some adjustments to that?

Yes -- no, it is mostly correct. I would characterize -- instead of want I would characterize it as program changeovers. Launch to us, Brett, is a six week period wrapped around the start of production and represents the inefficiencies associated with ramping up.

What we're talking about is a little bit different, which is it is a changeover of the portfolio and as new business comes on it typically comes on as slightly lower margin than the business it replaces. And then as you work through value engineering and efficiencies throughout the supply chain we're able to work those margins back up. Jeff, but from the rest of it though I think he was fairly accurate?

Yes, I think he is there. I mean looking at South America, if you just look at it in the quarter on a year-over-year basis, it's about 20 basis points in the quarter on South America. And then I think everything else that you mentioned and Matt responded to is pretty much on mark.

So how do we think about the mid-term margin target for this segment? If we are tracking kind of mid 5's now, it looks like we have got kind of 200 maybe plus basis points of potential margin opportunity here which would kind of put you into the mid-7% range. Are we still kind of thinking 7% to 8% is maybe kind of one, two year time horizon target?

Yes, I probably would characterize it this way -- we are going to make steady progress to the target margin of 7%, Brett. The way I see the immediate term is that with the summer shutdown in the July period, and the third quarter is typically our weakest quarter, we will see some pull back from what we posted in the second quarter, which is a fairly strong quarter for us historically. Then we will see the fourth quarter again kind of improve probably not a whole lot different than the second quarter as far as the margin profile. So something along that range.

And then as we enter into next year there is another wave of program changeovers that come into play along with the typical seasonality of the first quarter. When the whole new level of productivity comes in contractual productivity comes in and pricing comes in for our customers. So I would expect to see some level of a pull back and then a steady march through the remainder of the year for progress towards the 6 and then 6.5 and then down the road 7. I think it will be a steady climb towards target margins over the next 24 months.

And then Electrical, it just seems to keep going up. I mean 9.7% this quarter, very, very good numbers. I mean high 8% range seems fairly conservative for this year unless you are expecting something to happen in the back half of the year. And it seems like that what's driven in is that operating leverage on your fixed cost base. And with revenue growth looking like it's going to continue to some extent, what kind of a mid-term target are you thinking with the electrical business? Because it looks like it can track right up into the double-digit range.

Yes, our business is a combination of harnesses, junction boxes and connectors under this umbrella of Electrical Distribution. And from our standpoint we started posting in excess of our cost to capital when we get in the mid to high 6's, if you will. And so, we kind of manage our business along those lines. We expect to continue to win business in the segment at healthy margins.

We are leveraging our fixed infrastructure with a level of sales that we currently have. And we are also getting the benefit of a lot of the restructuring and footprint actions we have taken over the last several years. I think from our standpoint we are monitoring the launches, monitoring the product changeovers, the business continues to grow. And we're keeping an eye on it and I think the margin profile in this business will remain fairly healthy and right now we believe it is prudent to kind of call it at the high 8's, if you will.

Thank you very much, gentlemen.

Ravi Shanker, Morgan Stanley.

I'm sorry, I may have missed this in your comments, but what did you say was the amount of the customer settlement that aided the EPMS margin this quarter? Can you give us a little more color there as to whether it was, A, a catch up to previous settlements or if it was pull forward from future quarters?

With respect to that, Ravi, in terms of basis point I think you can do the math. We indicated in the discussion it's worth about 30 basis points in the quarter. And it was really timing related. We had anticipated getting that commercial issue or those series of commercial issues completed later in the year. And as such we got it done earlier than we had previously thought. But it is worth about 30 bps.

Got it. So still very strong margins even if you adjust for that. And also just drilling back to something you said earlier in the Q&A. I think you had implied that even once the launch costs kind of wind down you expect the initial new programs to be slightly dilutive to margins. What about the content per vehicle? Is that going to see a significant step up once you have all of these new launches come in?

I'm sorry, what was your question on content per vehicle? You broke up a little bit, Ravi.

Oh, sorry. My question was what happens to the content per vehicle once all the new launches ramp up? Does that see a significant step up?

Yes, it continues to grow. We have done a really nice job with penetrating the market with our components, both structures, tracks and recliners as well as I think our leading -- industry-leading seat cover business, we call it cut and sew and trim. The content is continuing to grow; I think the benefit of Guilford is starting to come through as well and we are making nice gains in some of the foam business.

So we would expect the content to vehicle on the seat side to continue to grow. And then on the electrical side as the cars are adding more and more content on average, we believe it should be about 3% a year on content growth there. We're not only gaining share, but you are seeing overall the structure of the vehicles have more electrical content in there. Alternate energy vehicles as they penetrate the market, also provide an opportunity for significant content growth. So we are seeing content growth in all segments.

And just finally we saw the EU move to render some verdicts in the antitrust case in the wiring and harness last month. Do you consider yourselves as having got the green light there and is this over or do you think there could still be some actions?

Yes, as we said many times, we never believed we were the target of the investigation. We cooperated with the authorities fully and we ran our own internal investigation and we didn't find any evidence. We plan on continuing to defend ourselves vigorously in some of the civil matters. On July 10 when the European Commission issued their press release they imposed certain fines against our competitors, but no fines or penalties or liabilities were imposed on Lear.

And we believe that is an indication that the European side of this investigation is done and is consistent with our own internal findings. We are still subject to civil some civil class action suits in the US, but again we believe they are frivolous at least as far as including Lear in it and the fact that the European Commission did not fine us have very much strengthens our hands in our defense of those lawsuits and we plan on vigorously defending ourselves in these matters.

Very good. Thank you.

Joe Spak, RBC Capital Markets.

Actually just following up on the content per vehicle commentary. And I know it is not a perfect measure, but you guys have, as you report anyway, shown some good increases in Europe while North America flat. Is that because you are further ahead on the EPMS penetration in Europe? And if so, is that still an opportunity on some of the North America production?

Yes, I think so. I mean, we look at content per vehicle in two different ways. I guess the formal way is to take the total industry and kind of divide our sales and come up with a content per vehicle which is I think very theoretical. Joe, we don't sell to the industry, right, we sell to specific car lines.

And the car lines we are on we're constantly measuring our content growth. And we believe that between the penetration of electrical content as well as the investments that we've made in the component business, we are seeing gains in both our two product segments and we would expect that to be an opportunity in North America, specifically in electrical.

Okay, great. And then just thinking about the backlog, it looks like -- and you indicated this prior -- that Seating may ramp up a little bit more in the back half of the year; I just want to I guess confirm that.

And then, I know you are not going to update the three year figure today. But if we start thinking about it going out a little bit versus when you initially gave that sort of color, I think the industry as a whole is -- there's still uncertainty, but I think people are feeling better about it. So is there some potential upside to maybe some of the volume assumptions you initially gave with that three-year outlook?

I think what is out there right now, Joe, is a three-year backlog number of $1.8 billion, which included $850 million in 2013. And as we look at the numbers for all the reasons you just suggested for 2013, I think we are trending higher than that, maybe just right around the $900 million mark. And as you look at the cadence of that backlog when it is coming on board, we see the EPMS cadence more ratable throughout the year whereas the cadence of Seating is more back end loaded.

That's for 2013, right?

For 2013. All of that is for 2013.

Okay. Thank you.

We have had a good year winning business as well, Joe. We would expect -- we are penetrating in both segments and taking share in both segments in all regions. We've had a good booking year and would expect that trend to continue.

Thanks a lot for the color.

Brian Johnson, Barclays.

Good morning. Why don't we look at the backlog -- in light of some of the trends of year to date I get a sense, is there going to be upside to the backlog apart from new signings but just for some of the content growth you are talking about?

And in particular on the Electrical side are we just seeing more infotainment, more active safety, just greater take rate within the platforms of some of the higher end packages and does that drive content?

And parallel in Seating, we keep hearing from Ford how -- and GM, how their customers are airing -- or opting for the upper end of the trend packages. And so, are you seeing upside from that? And if so does it affect the backlog?

Yes, we are. We don't make theoretical adjustments to content in our backlog. In our backlog we pretty much just take the base scenario as the customer tells us net new business, so we have to have an award over a three-year period. So we have pretty narrowly defined backlog. We do expect though and we are seeing content growth.

What is typical, Brian, and you know this, is that cars are getting more electrical feature which requires more circuits to run signals through the vehicle, which plays to a strength that Lear has. We have been seeing an average of around 3% a year, that is continuing. But we did put a theoretical amount in the backlog but we would expect it to impact the backlog in a positive way.

On Seating, seats evolve and entry-level vehicles or B-Platforms, C-Platforms begin having more content. Whether it is power content or upgrading to a leather feature from a cloth feature that would at content as well. We are seeing that in the marketplace and that is a trend that we think would benefit Lear.

Okay. And then secondly on the cash side -- the ASR, obviously your partners are going out and covering that. But would you have any flexibility to enter the market opportunistically in addition to that? Or do you just need to wait for that to get cleaned up? And then secondly, can you maybe remind us of your leverage targets and what that implies for cash return beyond this current program?

I think with respect to your first question, we are not necessarily precluded from entering in the market ourselves and buying back shares coincident with the ASR program. With respect to the future beyond the ASR, the ASR will be completed no later than March of 2014. We have an existing authorization that extends beyond that point in time with of $750 million over a two-year period. So the thought would be that when we complete the current ASR we would roll right into that authorization.

Okay. And in terms of a leverage target, have you articulated one?

Yes, we have talked a little bit of -- you have heard us say a lot of times, Brian, about our desire to maintain investment-grade credit metrics. We believe a gross turn, 1.5 gross EBITDA leverage ratio is probably the range that would work longer-term. If we saw the right investment we wouldn't have a problem moving up to that level.

Okay, thanks.

Colin Langan, UBS.

Any color -- I mean you had very strong sales outperformance with global sales up just 3% and [Europe] 12%. I mean, was there any positive customer mix that was helping you out particularly in this quarter or is that all just really backlog driven?

Well, I mean we had a nice mix of platforms specifically in Europe. In Europe what we are seeing is we've got a pretty diverse customer mix and platform mix, everything from the high-end premium brands with the German OEs, as well as the more AB or lower end vehicles.

We are seeing strength in a lot of the luxury brands and premium brands in German OEs specifically as well with the car lines that get exported and that has benefited us. We also had a strong backlog quarter, so we were able -- we're continuing to penetrate the market in both segments and that is what you are seeing.

Okay. And then any concerns around rising warranty risk or any litigation risk? I think one of your competitors mentioned something about more exposure to some of the litigation after the Detroit bankruptcies sort of left more risk onto the suppliers. Is that a risk for you in the future?

It's a risk. It's nothing new though, it has been going on, it has been out there for a while. I mean we take great pride in standing behind our products and making sure that our customer gets our component first and foremost at spec, but, more importantly, in accordance with all the safety standards that you would expect. That is what you get when you buy components from Lear Corporation. So it is a risk but it is not unmanageable, it is not anything new by any stretch of the imagination.

So there is no increased pressure to take on more of the warranty exposure?

No, I think it is not increased, I think it is consistent. It's consistent. It may be increased from five, seven years, but it is not increased from last year.

Okay. And then just lastly, I mean you took up your guidance outlook for Europe. What gives you confidence that things are getting a little bit better there? Are you seeing some good signs from your customer base?

Well, it's stable. It's stable at what we think is a relatively low end. We are not counting on a snap back, it would be great if it did but we are not counting on it. We have been able to get some cost out of our facilities in looking at opportunities to do some more and our leadership team in Europe has done I think a very good job in managing and in a still somewhat challenging environment.

Okay, all right, thank you very much.

Aditya Oberoi, Goldman Sachs.

Congrats, guys, on a good quarter.

Thank you.

I just wanted to understand the opportunity in new businesses a little bit better. Would you characterize the opportunity more coming from current OEMs where you are bidding on global platforms rather than individual regions or is it an opportunity coming from new OEMs in emerging markets?

It is both. It is really both. I would say that the global platforms provide a unique opportunity for Lear because we are one of the few suppliers in both our spaces that can do a global platform in all of the components in every automotive producing region in the world. And I think that is going to play to our strength and that is a major significant trend in the industry.

We are also, however, winning business with some of the emerging market OEs, if you will. But really I think that is a longer-term play and a longer-term opportunity to see significant growth with them. We have business with all the major emerging market players that have more partners in China. With significant business with Mahindra & Mahindra. And we also have business with the some of the niche smaller domestic OEs in China as well.

So we have been able to penetrate pretty much everywhere, Adit, but I think the main opportunity for us is going to be the penetration of global platforms as all the automakers now are trying to launch consistency all around the world and I think that will play to our strength.

Got it, that is very helpful. And I wanted to circle back on the question of leverage here. It seems that we are heading into an environment where rates are going to rise. Any plans to kind of take up leverage a little bit before we get into a more costlier debt environment?

I think we are always looking at the markets to see where rates are going. We are not planning on doing anything in the near-term, but we do have a bond that we have the opportunity to redeem 100% of it in the latter part of the first quarter of 2014. So there may be a preemptive move to give us the ability to do that, whereby restructuring our maturity profile as well as reducing our overall cost of debt.

Got it. Thanks a lot, guys.

Adam Brooks, Sidoti & Company.

Good morning, guys, just two quick questions here. Can you talk a little bit about how the China business has been trending in recent months and maybe where you stand from a capacity standpoint?

Yes, it is continuing to grow, but growth is somewhat slowing at the moment. We put a lot of capacity in and I think we are seeing nice growth. I think from a Seat standpoint we are probably closer to our full utilization in our Electrical. In Electrical we've made nice investments specifically in connectors, and we think we still have some upside there as well as some electronics capabilities.

So all in all, while we continue to grow it is slowing a little bit, but still outpacing I think the more mature markets. So we are in pretty good shape. If we see a major step up in our backlog we would have to continue to invest in the business. Now for 2013 we are still calling the number at what, Jeff, 15%?

Yes, about 15% growth specifically in China.

And maybe now that you've had Guilford for a year now, can you kind of give us an update on kind of your thoughts and the strategy there? And I know maybe it has helped expose you more to some customers where you were underexposed before, so maybe just an update on your thoughts with the strategy going forward.

We are very happy with the investment that we made in Guilford. It is performing slightly better than we anticipated from a cost and margin standpoint. It is allowing us to get into the design studios earlier and as well come up with some pretty innovative solutions on the seat covers as well as take the cost out of the product, come up with unique designs. So I would tell you that that has been a very, very good acquisition for us and we are very happy with it.

All right, thank you.

Okay, with that, I think that concludes the question-and-answer part of the call. For the Lear team that is on the call, I want to thank all of you for your hard work and your teamwork. Without your hard efforts we wouldn't be able to post these types of results. So keep up the great job and I deeply appreciate it. And to Jeff and the entire finance team, great job getting ready for the call. Thank you. Bye-bye.

Thank you for joining, ladies and gentlemen. This concludes today's conference call. You may now disconnect.