Lear Corp (LEA) 2013 Q3 法說會逐字稿

Good morning. My name is Michelle and I will be your conference operator today. At this time, I would like to welcome everyone to the third-quarter 2013 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 Mr. Ed Lowenfeld. Please go ahead, sir.

Thank you, Michelle. Good morning, everyone. Thank you for joining us for our third-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, Lear.com, through the Investor Relations link. Today's presenters are Matt Simoncini, President and CEO; and Jeff Vanneste, Chief Financial Officer. Also participating on the call are several other members of Lear's leadership team.

Before we begin, I'd like to remind you that during the call, we will be making forward-looking statements that are subject to risks and uncertainties. Some of the factors that could impact our future results are described in the slide titled Investor Information at the beginning of the presentation materials, and also in our SEC filings. In addition, we will be referring to certain non-GAAP financial measures. Additional information regarding these measures can be found in the slides titled 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 third-quarter financial results and 2013 outlook, and Matt will return with some wrap-up comments. Following the formal presentation, we would be pleased to take your questions.

Now please turn to slide 4, I'll hand it over to Matt.

Great. Thanks, Ed, and good morning. Lear had a strong third quarter, with sales and earnings growing faster than the industry production. Sales in the quarter were $3.9 billion, up 11% from a year ago, and our core operating earnings increased 15% to $207 million. Our EPMS segment achieved record quarterly earnings and a 16th consecutive quarter of year-over-year margin improvement, as the business continues to benefit from market share gains and an improved cost structure. As a result of our strong performance year-to-date, we are increasing our full-year guidance. And Jeff will provide the details a little later in the presentation.

Slide number 5 provides our margin outlook for Seating. When we established 2013 guidance in January, we indicated that our Seating margins for the year would be in the mid-5% range. As we look ahead to 2014, we expect meaningful improvement in our Seating business, with margins for the full year of approximately 6%. Our full-year Seating margins are projected to improve; the early part of the year will be negatively impacted by the continuation of major program changeovers, as well as annual pricedowns, which generally are effective at the beginning of the year.

Performance in Seating should improve steadily throughout the year, as we continue to digest major program changeovers and implement manufacturing efficiencies, BABE cost reductions, and certain commercial resolutions. We also expect to benefit from modest volume improvements in Europe, improvements in South America, and increased earnings from investments we've made in expansion of our component capabilities. We plan to provide a full 2014 guidance in January.

Slide 6 shows progress we made at our strategy of selected vertical integration and expansion of our component capabilities in emerging markets and low-cost countries. We believe this strategy will improve our competitiveness, better support our customers, and enhance our quality and provide an avenue for future growth. We also believe these actions are aligned with increasing customer trends towards global platforms, localized content, and increased direct-to-component sourcing.

From 2011 to 2013, we have invested approximately $350 million to open new component facilities. As a reference, we define components as parts that are not required to be assembled and delivered in a just-in-time manner. Our sales in the new plants are forecasted to be over $1 billion this year, and we believe they will be a future driver of sales and earnings growth.

Slide 7 provides an update on last year's acquisition of Guilford Performance Textiles, a leading global provider of fabric for seats, headliners, and other interior applications. We have focused our M&A strategy on acquisitions that can grow, strengthen, and further diversify our business. We purchased Guilford for approximately $250 million, and this acquisition added sales of about $400 million at margins that are consistent with longer-term target Seating margins.

Since the acquisition, we have been benefited from administrative and operating synergies, and Guilford's performance has exceeded our expectations. In addition, Guilford has strengthened our existing industry-leading seat cover business by providing increased design, technical, and manufacturing expertise. With Guilford, we have been able to offer our customers unique fabric designs as well as custom seat covers, which gets us involved earlier in the design process and provides lower-cost seat cover solutions for our customers.

The Guilford acquisition also has facilitated certain manufacturing efficiencies in our industry-leading cut-and-sew operations, and in general, provides greater growth opportunities for our Seating business. Since acquiring Guilford, we have developed a number of new fabric options, including providing cost savings through strategic-wear placement, durable fabrics for excessive wear applications, secondary embellishment technologies, and fabric performance finishes to preserve and protect the seat surface. We continue to invest in complementary technologies, such as laser etching and polymer printing, to allow distinctive expression in upscale appearances with reduced time-to-market.

Slide number 8 provides a summary of the cash we've returned to shareholders since early 2011 through our share repurchase and dividend programs. In 2013, we repurchased $1 billion of stock, including a $200 million open market purchases in the first quarter, and $800 million in an accelerated share repurchase program initiated in April. Under the ASR, we retired 11.9 million shares of stock in the second quarter, which represented 80% of the ASR's transaction value at a price of $53.95 per share.

The ultimate number of shares to be repurchased and the final price paid per share will be based on the 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 common stock, which represents a reduction of approximately 25% of our shares outstanding at the time the repurchase programs were initiated. At the time of the ASR, our Board of Directors also authorized an incremental $750 million share repurchase program. Shares repurchased under this authorization are expected to be made over a two-year period immediately following the conclusion of the ASR.

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

Thanks, Matt. Slide 10 shows global vehicle production for the third quarter. In the third quarter, global vehicle production was 19.6 million units, up 4% from 2012. Vehicle production increased in all of our major markets, led by an 8% increase in China and a 6% increase in North America. Europe production was up 2% compared to a year ago, the second consecutive quarter with year-over-year increases.

Slide 11 shows our financial results for the third quarter of 2013. As previously mentioned, sales were up 11% to $3.9 billion, with all regions showing year-over-year increases. Pretax income before equity income, interest, and other expense, was $193 million, up $23 million from a year ago. Equity income was $9 million, up $6 million from a year ago, primarily reflecting the divestiture of our IAC joint venture and improved performance of our equity affiliates in China.

Interest expense was $18 million, up $4 million, primarily reflecting the impact of the $500 million bond issued in January. Other expense was $17 million, up $15 million from a year ago, primarily reflecting losses associated with foreign currency fluctuations. In addition, in the third quarter of 2012, we recognized one-time net gains of approximately $3 million, that included insurance recoveries, partially offset by bond redemption costs.

Slide 12 shows the impact of nonoperating items on our third-quarter results. During the third quarter, we incurred $13 million of restructuring costs, primarily related to various actions in Europe. Excluding the impact of these items, we had core operating earnings of $207 million, up $27 million from 2012. The increase in earnings reflects the benefit of new business and increased production on key platforms, partially offset by the impact of the changeover in key programs. Adjusted for restructuring and other special items, net income attributable to Lear in the third quarter was $119 million, and diluted earnings per share was $1.45.

Slide 13 shows our third-quarter adjusted margins for both segments as well as for the total Company. In Seating, adjusted margins were 5.4%, down 70 basis points from a year ago. The year-over-year margin reduction was driven primarily by the impact of program changeovers, partially offset by improved production on key platforms and the benefit of new business. Our full-year margin outlook for Seating remains in the mid-5% range.

In Electrical, our positive momentum continued into the third quarter. Sales were over $1 billion for the third consecutive quarter, and adjusted margins were 10.9%, up 340 basis points from a year ago, reflecting operating efficiencies and strong sales growth. Performance in the quarter benefited by the timing of commercial settlements. We now expect full-year margins in our Electrical segment to be in the high-9% range. Total Company adjusted margins were 5.3% in the third quarter, up 20 basis points from a year ago.

Slide 14 summarizes our free cash flow, which was $61 million in the third quarter.

Slide 16 highlights the key assumptions in our 2013 outlook, which reflects the latest production assumptions in our major markets. Global production of 81.6 million units is relatively unchanged from our prior guidance. Our 2013 financial outlook is based on an average euro assumption of $1.32 per euro, which is up 1% from our prior outlook.

Slide 17 summarizes our 2013 financial outlook. Based on our strong performance year-to-date, we are increasing full-year guidance. For 2013, Lear expects net sales of approximately $16 billion, up from our prior guidance, reflecting higher production on our key platforms. Core operating earnings are forecasted to be approximately $835 million, up from the prior outlook of $750 million to $800 million.

Tax expense is estimated to be approximately $230 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 approximately $505 million. Free cash flow for 2013 is forecasted at $325 million, up $25 million from our prior outlook.

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

Thanks, Jeff. Lear had another strong quarter, with sales and earnings growing faster than the industry. And our EPMS business continues to benefit from market share gains and improved operating performance. As a result of our year-to-date financial performance, we have increased our full-year guidance. Our results reflect record earnings in EPMS, benefits from the investments we've made to increase component capabilities in low-cost countries and emerging markets, and our acquisition of Guilford.

We plan to continue to identify additional investment opportunities to further grow our business and improve our competitive position. We will continue to return cash to shareholders through our existing share repurchase and dividend programs.

And with that, we'd be pleased to take your questions.

(Operator Instructions). Itay Michaeli, Citi.

Good morning and congrats, everyone. So maybe we'll start on the EPMS side, a thick margin in the quarter. I'm wondering could you quantify the commercial settlement you left, for instance? And then, two, even with that, it looks like your Q4 margin probably will run at or above 10%. Maybe, Matt, if you can update us on just your long-term thinking on that segment, relative to your prior thinking.

Yes, I think -- let me start with the last part of that question and work back towards the original question, Itay. I think longer-term in this segment, we're comfortable at about 9.5% to 10%, based on our mix of business, capital intensity, and engineering intensity, and also recognizing kind of the competitive landscape, if you will. At that rate, we make a significant return on our investment.

I think operating margins, once we start breaking through the high-5's/low-6's, we start making a real nice return on our invested capital. This business is still, I think, about two-thirds wire as opposed to connectors in Electronics, which require higher engineering and capital intensity. So, we get a nice return in that regard. I think, in any given quarter or subsegment of the year, we could go through the high end of that. But I think longer-term planning perspective, I believe we have the ability to gain share, continue to gain share, and profitably grow this business at a margin rate that's between 9.5 and 10.

For the quarter, Jeff, commercial resolutions?

It accounted for approximately 50 basis points of improvement in the quarter.

The quarter also benefited, Itay, though. We had a nice strong mix of business. The platforms that we were on did well in the marketplace in this segment.

Absolutely. And then just maybe just on a Seat margin outlook for 2014. One, can you maybe talk a little bit about the cadence? I assume maybe you'll be off to a slower start because of the changeover in North America with the GM trucks. How should we think about that kind of roughly in and around 2014?

I think what we'll see is that it will start off a little bit lower than our exit rate for 2013 ramping up through the year. I think key drivers on this is, besides the changeover, continued changeover of the portfolio, led by the remaining GM large truck platforms, is on January 1, we took -- we have a fairly big slug of commercial pricing commitments to our customer, as we continue to work with them to reduce their material costs and improve their competitiveness. A lot of that hits on January 1 or is effective January 1. And I think that's a key driver. And as we work through the year and are able to execute some value engineering, get some of the launch costs behind us and improve our operations, we typically increase margins.

Terrific, guys. Thanks so much and congrats.

Thank you.

Rod Lache, Deutsche Bank.

Yes, thanks for that clarification. Just first of all, in prior years, I think that you typically -- not every year, but typically did have better margins in the fourth quarter than the third quarter, with, I think, that commercial settlements very often happen in the fourth quarter. Are you thinking that the seasonality of that changed? And would that be -- or would that be the same still in the Seating business?

No, you're right. Typically, that is how it shakes out, Rod. I think from our standpoint, on certain key platforms, the volumes on them are a little bit actually lighter in the fourth quarter. We had a strong third quarter in certain key platforms, and we're seeing a little bit of a pullback on that. So it's really about the mix.

And from commercial resolutions, speaking of Electrical, for instance, we pulled into the third quarter resolution that we're expecting in the fourth quarter. But right now, based on what we're seeing in the marketplaces is some chop in the emerging markets, we think it will be a relatively flat quarter.

Okay. And how should we be thinking about the incremental margins in the Electrical division going forward?

I think longer-term, 9.5 to 10 is about the right rate, based on the capital intensity and engineering intensity on our portfolio as it sits today, because it is two-thirds wire, Ron. I think at this rate and at these margins, we can continue to gain share and grow the business profitable. But with the competitive landscape, I think that's the right margin, at this point, to plan for.

You're saying that that's the right assumption for incremental margin as well as --?

No. Incremental -- I mean, it depends. On new just volume, on volume recovery, typically, it's in the 10% to 15% range. New programs usually right around 10% in the backlog, but there is a baffle and there is the obligation to continue to return productivity to your customers. And I think, with the competitive landscape in there, I think it kind of balances out at that rate longer-term. I don't think they grow into perpetuity, if you will -- the margins.

Okay, and just last question. Can you just give us some color on working capital trends? There's a fair amount of capital that was consumed there over the nine months. And how should we be thinking about, just for a dollar of revenue growth going forward, what's the working capital commitment that you'd need to provide?

Well, I think as we look at the sales trend going forward, and increasing sales, certainly, what's going to accompany that is likely to be some level of increase in working capital requirements. Certainly part of what we're focused on right now is the inventory, given the launches, given some of the inefficiencies that we've mentioned in areas like South America, part of the goal there is to take a slug out of working capital, given the inventory required for those launches.

I think going forward, I think you'll see a similar cadence, maybe less increase in working capital, given some of the initiatives we have. But you'll see some level of continued working capital increases going forward.

What's evolved in the business, Rod, as you know, the complete kit model, which did not require us to maintain a lot of inventory, to a more global model with a level of direct components, which extends to supply base, we're working with the supply base and working with our customers to try to balance that a little bit more. I think the rate of consumption of working capital to dollar of sales growth is going to decrease, but working capital needs are going to -- like Jeff said, continue to increase.

Can you share a rule of thumb maybe for us? For $1.00 of revenue growth, what is a reasonable assumption for working capital consumption?

I really can't, because it depends on where that dollar growth comes from. If it comes from certain emerging markets, which has an extended global platform supply base, if you will, many times you're going to be sending components from Europe in to places like India or Brazil, and that extends the working capital. So I'd be a little bit hesitant to simplify it at that rate.

And I think, Rod, just one other comment, which is, certainly, working capital in particular can be sensitive to the fiscal quarter-end. And a couple of days here or there could make a pretty significant difference on receipts and disbursements. So I think Q3 was particularly affected by that.

Yes, when did we cut off Q3 exactly, Jeff?

28th of September. And that one day versus last year, for example ,which I think Rod is referencing, can have an impact, and did have an impact.

All right, thank you.

You're welcome.

John Murphy, Bank of America Merrill Lynch.

Just a first question, Matt. You had mentioned that you were making a lot of market share gains in the EPMS business. And I'm just curious, if the growth that we're seeing or the outperformance that we're seeing really is from you gaining market share? Or is there also a lot of it is coming from just actual dollar content growth as the automakers focus on more electronic content?

Well, it's both. I mean, we're seeing an average content growth of around 3% in this segment, as they add additional features and use more signals in the vehicle, John. But we're also penetrating share. I mean, this business the last several years is doubled. And so we're penetrating and we're gaining share, and we're in every region in the world. So it's a combination of both.

Is that share gain coming from smaller fragmented suppliers? Or do you think you're actually going up against some of the big guys and winning takeover business there?

We're winning takeover business from the big guys.

Got you. And that's helpful. And then on the launches and the changeovers, is there anything unique that's going on there, other than sort of the GM truck launch or any other large launches? Are there any other delays or problems with the launches that are creating some sort of near-term heartburn? Or is it just regular course, just a lot of launches?

It's a lot of launches, and it's the portion of the portfolio that's changing over, the combination of it. So, we are in the final third, if you will -- or I hate to use a baseball term coming from Detroit these days (laughter) (multiple speakers) --

Tough right now.

-- but we're in the bottom of the seventh, and -- of the launches and the changeovers. And there's two dynamics there. One, there's the additional launch costs and inefficiencies associated with launching product. But it's also such a significant amount of the changeover in the portfolio, when new programs roll on, they typically roll on at a lower margin than the business that they're replacing, because we haven't had years of cost reduction and value engineering ideas going through the customers. And the plants just haven't been, in many cases, laid out in the most efficient manner with the new business coming on.

So I think both dynamics are impacting us, and launch costs will correct themselves relatively quickly. Program profitability usually takes a little bit more time to execute and improve.

Then just lastly on Europe, I mean, you're outperforming a lot of regions, but the outperformance in Europe segment is pretty impressive. Is that a combination of Seating and Electronics? And what is really driving that? Because it is -- it's a weak market, but you seem to be doing very well. I'm trying to understand what the outperformance is being driven by.

Well, both segments have improved their performance in Europe. In Electrical, that segment is mature and has a fair bit of vertical integration. And we've spent a significant amount of restructuring several years ago to get our footprint in the low-cost regions, and expanded our footprint in Eastern Europe and Northern Africa. And as a result, it's performing at target margins.

Europe, while not at target margins, is profitable in a meaningful way, and has improved the margins. And again, we've done a lot of restructuring, a lot of move of the product to Eastern Europe and Northern Africa for them as well. And I just think it's been a solid management of that segment.

The good news about Europe for us is we're pretty well-represented with the AB platforms all the way up to the luxury brands. And many of the luxury brands have some level of resilience, both in Europe but also as export products to other markets.

Okay, and one last question. I apologize. The long-term targets for Seating are what? And do you think you could reach your long-term targets at an exit rate for 2014, given sort of your expectation of margin improvement there?

Yes, I think with the current mix of business, including just-in-time assembly, foam structures and seat covers, as well as the amount of system responsibility versus build to print, right now we really longer-term margins for this segment could be right around 7%. I don't believe we'll get there on the exit rate in 2014, John.

Okay, great. Thank you very much.

You're welcome.

Ryan Brinkman, JPMorgan.

Congrats on the quarter and thanks for taking my question. (multiple speakers) I know you report your profits by business segment, and only revenue by geography, but I'm curious, because you do get 38% of your revenue from Europe. If there's anything you can say about the overall profitability of your operations there? I'm trying to gauge just how much margin opportunity there could be? How much profit opportunity there could be, I guess, if both the European market normalizes and then your own margins normalize in Europe?

Well, you're right. We are solidly profitable. On the profitability in Europe, I think at one time, we said it had reached proceeding around 4%, pulled back to around 2%, 2.5% during the pullback. We're significantly higher than the 2.5%, approaching kind of the 3.5%, 4% range in Seating.

And what drives those margins a little bit lower, besides the significant reduction in volumes, is the reduced vertical integration on the components in Europe, which is a little bit higher, if you will, in North America. So the margin opportunities and the capital intensity in North America is a little bit higher than it is in Europe. And for that, we command a higher margin.

In Electrical distribution, which is a very mature business for us, we've worked really hard in the footprint, as I mentioned earlier, and has a fair bit of vertical integration on connectors and boxes. We're able to achieve the kind of target margins for the segment overall, and it's running consistent with it.

As far as opportunities, I still think Europe is going to be a longer-term recovery. I do believe we're at the bottom. I do think margins will remain a little bit lower than target margins overall for Seating. I think we'll maintain the margins that we have in Electrical. Some volume would help us, and we think it's going to come back, but we think it's going to be a very slow and choppy recovery.

That's great color. Thanks. Maybe just a quick question on Seating. Using the preliminary Seating margin guidance that you provided today for 2014, if we sort of -- that's a margin number -- if we just sort of simplistically assume that your revenue grows roughly in line with global light vehicle production growth of, I think, 4% by IHS, our quick math seems to suggest that that's about a 17% incremental margin.

I was curious if that seems right to you? Or maybe if you can't comment on that, perhaps you can just share what you view as normalized contribution margins for the Seating business, and then what some of the puts or takes might be in 2014 that could make Seating contribution margins differ from a normalized amount. Thanks.

Yes, there is about 1000 inputs that go into making a projection, and it really comes down to which car line moves up in the mix, Brian. Because each car line kind of has its own financial DNA, if you will. Some of the variances, besides running the amount of manufacturing locations that we do efficiently, and assuming there's no disruption in any way, is the mix; but on top of that, another variable would be pricing.

Typically, we give about 2% of pricing a year net to our customers as we help them try to achieve their cost targets and their cost models. I think that's actually one of the things that Lear does extremely well, is help our customers reduce cost. And so, while the incremental volume typically comes in at 10% to 15%, depending upon what region and car line it comes in, there's other offsetting type variants, if you will.

Okay, thanks. And then just last question, if I may. You already mentioned that we've reached the bottom in Europe in your view. We heard from AutoLeap yesterday that mix was improving there; luxury was doing better. Maybe excess inventories were starting to come in line. I'm just curious what maybe the latest is that you're seeing on the ground? Any anecdotal evidence you're seeing that us, as analysts on the outside, aren't able to see?

See steady, it's -- Ryan, it's been pretty steady. There hasn't been the shutdowns and extended shutdowns, if you will, that you would typically see when there's excess capacity in Europe. So, to us, I would probably agree with what AutoLeap said. I think there's some strength in the luxury brands that also lend themselves to export. And I think I've seen a little bit of chop in the AD platforms. I think certain carmakers are doing a little bit better than others. The Germans seem to be doing a little bit better than some of the other ones. But all in all, we're confident that we're at the bottom and we're seeing -- we're starting to see the recovery sprout, if you will.

Okay, thanks. Great job.

Thank you.

Joseph Spak, RBC Capital Markets.

Just continuing on the Seating conversation, and you talk a little bit about further improvement beyond 2014, is that mainly volume-driven at this point? Or are there additional cost actions or inefficiencies that give way beyond 2014? I guess just how should we bucket, in terms of order of magnitude, the drivers that take us from, call it, a 6% level back to 7%?

It's not just volume alone, although volume would help us. Because one of the drivers that hurt the margins was the significant pullback in Europe, where we receive roughly 40% of our revenue in this segment from. So, a volume recovery there would be part of the solution. But, as well, it's also additional value engineering and commercial resolutions on some of these programs that are launching, as well as the efficiencies associated with that program launch. I would say each is about one-third responsible.

And there's just the ongoing existing operational efficiencies that we drive through every year. So, I would say it's pretty well-balanced. It's not all volume.

Okay. And then so, I know one of the drivers you've talked about in the past is South America. And I think you expected to maybe turn profitable in the back half. Did that occur during the quarter or --?

During the third quarter? No. I think we had indicated that by the end of the year, we had hoped to get to roughly breakeven margins. And I think the current assumptions right now would be we'd be in and around that area at the end of this year, and ultimately, getting into next year.

And that's specifically proceeding in the Electrical business, which has a footprint in South America as well. They've been able to get to slightly profitable in the third quarter.

Okay, great. And then on EPMS, good to hear you sort of take up the longer-term margin target a little bit. How are you on capacity -- you know, you talk about gaining share. I mean, are you going to need to build that out a little bit over time?

Yes, I think, as we win new programs, one of the reasons capital has been elevated is because of our significant backlog over this last several years. We do have some level of excess capacity in Northern Africa and in China to support future growth, but at some levels we keep winning business at this rate, then we would have to maintain what has been a slightly elevated capital spend. But I don't think it will be incredibly meaningful.

Okay. And one last quick one from me. When you talk about taking share on the EPMS business, is that more on the wire harnessing side or on the connector side? Because I thought, historically, the connector type business is a little bit stickier. So I'm just wondering if something changed there or if you're winning business in that segment, sort of what's the go-to-market strategy that's causing you to win?

What's causing us to win in that segment -- and you're right; it is a smaller segment for us, and we don't have the full catalog of connectors, standard connectors. What we specialize in is specialty and high-powered connector systems, which is the higher value-added. And why we're winning business in that segment -- and we are winning business in all three major component groups -- wire, connectors, and our junction box business.

What's driving the wins there, and the market share gains in the connectors business, is really the footprint, the product is evolving to more nonstandardized solutions because of high-powered and some other applications, and the penetration of content. We've invested heavy in this segment. We -- about six months ago, I think we opened our first connectors facility in China, and that's doing really well to support growth in that region.

So, we are winning in all segments. It's being driven by our capabilities and the evolution of the components to more nonstandardized solutions.

Thanks, great. Thanks for the color and congrats on the quarter again.

Thank you.

Colin Langan, UBS.

Any color -- at the beginning of the year, you gave guidance after the trade show that EPMS would be -- sort of the outlook was around 8%, and now you're guiding 9.5% to 10%. What changed through the year? What has gotten a lot better that sort of makes you more bullish on the long-term outlook of that segment?

I think our execution on transferring the product to lower-cost regions, and some of the performance that we're seeing not only in North America and Europe, but in the emerging markets, has been very successful. I think we've worked very hard to design some cost out of the product and share the benefit of that with our customers. So we're little bit ahead of schedule on the product moves and the growth. Volumes helped us in certain key car lines as well.

And I mean, this always comes up periodically, but any thoughts on -- it doesn't seem like there's a lot of synergies between Seating and EPMS. I mean, would you ever consider divesting the business? And what factors would you consider as you think of that long-term?

I wouldn't -- there's actually a lot of synergies between the two segments. Not the type of direct synergies that you would think of, but besides the fact that Seating uses a harness in your seats, there's a lot of synergies from a commercial approach, from a sharing of talent back and forth, whether it's manufacturing talent or administrative talent, commercial talent, sharing admin centers in sales and technical centers all around the world. Logistics, if you will, have synergies on sharing truck lines and truck routes. So there's a lot of hidden type of benefit. We also believe there's a benefit in diversifying our portfolio, and we have no intention of ever divesting EPMS.

Okay. Very clear. And just lastly, any update on where you view your share in China in both Seating and EPMS at this point?

Yes. In EPMS, we're number four but gaining quickly, if you will, behind Sumitomo, Yazaki and Delphi. And in Seating, we're number two behind Johnson Controls.

Any sense of the percent of the market in Seating you have or --?

It's a hard market to call. We estimate it at about low 20s. I'm looking at my artificial intelligence -- low 20s. But it's a hard market to call because of the joint ventures.

Okay. All right. Thank you very much.

You're welcome.

Brett Hoselton, KeyBanc.

Let's see. Three different questions. First, Seating margins -- and I don't mean to nitpick you here, Matt, but in the past, you've talked about Seating margins maybe longer-term getting up into that 7% to 8% range. Today, you're kind of talking a little bit about 7% range. I guess I'm wondering, has something changed in your view? Or is it just 7% -- 7% to 8% is kind of the rough expectation?

You know, we are seeing a gradual kind of evolution of the business to more direct component sourcing, which is nothing new. It's just a continued trend. We're also seeing a trend to sometimes build to print designs as they go to a more common platforms and architectures -- all of which requires less capital intensity and less engineering intensity upfront, which then results in, I think, commercial requirements to make less margins, if you will, and still have a significant return on investment.

So really, it really depends on the mix of the business, the amount of components, the capital intensity. For us, in the current configuration of the business, when we're above mid-5's, if you will, we're making a nice return on investment, and have a gap to our cost of capital. So, between market pressures, mix of the business, we think longer-term margins will balance out at 7%. But I don't really see it a whole lot different than 7%, 7.5%. But about 7% right now.

And then with the Electronics margins, I mean your incremental margins over the past eight quarters have been 22%. So, very, very good incremental margins. And you're pretty close to that longer-term margin target of 9.5% to 10% today. And I guess what I'm wondering, can you talk about some of the headwinds that you anticipate might kind of mute that incremental margin as you go forward?

Yes, I mean, first and foremost, we're in a pretty competitive segment. A lot of competitors out there and a lot of aggressive price targets from our customers who are looking always to reduce their costs. That'd probably be the biggest reasons why margins wouldn't grow, let's say, into perpetuity or expand beyond -- well beyond, let's say, a 10% type number.

Our business too is a little bit different than some of our competitors. We're a little bit heavier in the wire harness as opposed to the electronics and terminals connectors, which require a lower margin to have the type of returns that access our cost of capital. So, I would say that's probably the main driver.

And then, as I think about your capital, you're kind of essentially net debt cash-neutral at this point in time. You had a little bit of excess debt. Your $750 million share repurchase kind of beyond March of 2014 seems to basically spend your free cash flow over that period of time. That's obviously my guess, but that seems like a reasonable approximation. So that kind of leaves you net debt cash-neutral. And you've got a business generating $1.1 billion, $1.2 billion in EBITDA. A one-times net leverage ratio suggests that you've got maybe another $1 billion or so that you could do something with. And I guess my question is, what do you think you might do with that?

Well, I think having financial flexibility to invest in the business and future competitiveness and potential consolidation in the space is a good thing to have. It's still a relatively volatile industry -- uncertain industry, and I think those with investment-grade metrics and financial flexibility will be the winner. And with the global platforms and expansion around the globe, I think the firms that will win in the long run are those that have the capability to invest in that type of expansion.

So, first and foremost, we always look to invest in our business. We've had nice returns not only in our organic investment, as you can see with the market share gains and the margin improvement that we've had in Electrical, but also, with the Guilford acquisition, which is performing extremely well. We would look to continue to do investments of that type, Brett, first and foremost. And I think the Board has also demonstrated that excess cash will return to the shareholders.

Thank you very much, gentlemen.

You're welcome, Brett.

Ravi Shanker, Morgan Stanley.

Another question on the EPMS share gains that you said you plan to get. Have you seen any movement at all with the market share of the Japanese players there, post their being found guilty in some of these antitrust investigations? (laughter) I'll just be straight up.

No. We have not seen that change the competitive landscape with the fact that they've had to plead guilty to price-fixing.

Got it. That's fair. A couple of housekeeping items. Your corporate expenses as a percentage of revenue spiked a little bit this quarter to 1.6%. Anything unusual going on there? And what do we assume as a normalized run rate?

Yes. No, there's not anything unusual there. What's happening is, when we expand our global capabilities and add structure in places like Brazil, Russia, ASEAN, China, regions of the world, when those facilities are shared or support both business segments, we capture it in the corporate HQ strip, if you will. So, nothing unusual. There's also some compensation costs associated that are buried in that number.

But I think on a go forward basis, Jeff, the run rate would be -- how would you characterize it?

I think in the near-term, we're probably looking at $55 million to $60 million on a quarterly basis.

Okay, that's fair. Also your interest expense guidance seems to imply a pretty big bump in the fourth quarter. Anything to explain that?

Well, I think what we've tried to do in the organization, and I think successfully so, is this -- the amount of money that we have that isn't efficient for daily use, we've been putting a heavy focus on that. And these are in areas in -- primarily in Asia, that are in countries that are difficult to pool cash, or in some of our joint ventures, where we've tried to pull money out of those joint ventures and bring it back to the US. And ultimately, as a result of bringing the cash back, we've been able to improve our overall net interest expense situation, which is kind of the reason why we improved the guidance in that area.

Okay. And just finally, on the ASR, your stock price right now is significantly above the price at which the ASR was struck. Can you remind us again how that works at the end of the process? Do you have to hand shares back to the executor?

Yes, there's a settlement at the end of the ASR which could settle as late as March of next year. And if the settlement price is ultimately above a certain breakeven point, we'll either put back -- if the settlement price is above that breakeven point, we'll have to either put back shares or cash to the bank. And conversely, if the settlement price is under that breakeven point, we'll retire more shares as part of that settlement.

Got it. So I believe the settlement price is $66 million, $67 million. So, do you expect to do that by cash or equity at this point --?

I think where we're probably at right now is that there is likely to be a settlement whereby we'd have to put back cash, which we -- I think would be our preferred choice, back to the bank in settlement.

It's a good problem to have.

Understood. Makes sense. Thank you very much.

And your final question comes from Matt Stover from Guggenheim. Your line is open.

Hello, Matt?

Hey, Matt. I understand the difference in margin between the EU and North America, relative to the degree of vertical integration into markets. Is there anything that would stop you from changing your vertical integration strategy in Europe? And if you could update us on how the margins look in the North American structures business, relative to the average?

Yes. I would tell you that we would want to go faster with vertical integration. It's been a great investment for us in Europe. We have some footprint issues that we needed to address, and we have. And it's been a great investment. If anything, I'd tell you that, from our standpoint, we have an industry-leading seat cover business there. We'd be looking to bolster it with additional fabric and leather capabilities in Europe; that's been a great investment for us in North America and in Asia.

From a structure standpoint, foam -- we're making nice returns. In North America, I still think we have some footprint issues we need to address. It's lagging slightly, but I think it's doing well. And I think it's a core competency, if you're going to be in the business, as the business evolves to common platforms, common architecture, higher requirements for safety, I think you have to be in a structure business, just like I think you need to be in the foam business to protect your quality, and also to ensure that you're capturing the margins that's related to their product. So, they've been good investments. We'd be looking to do more.

Okay. And a second question is on the M&A front. You identified that opportunistic M&A could be a use of capital. I sensed in the market that there is a concern that you folks might go out and do something a little bit bigger than bolting on within your existing business. And I was wondering if you could kind of characterize how you guys think about the M&A strategy. Is it sort of more bolt-on and consolidation? Or are you looking at things that are a bit more transformational?

I mean, first and foremost, Matt, we'd look at strategic fit as opposed to opportunistic. And many of the things that we think would be a strategic fit aren't actually for sale. So it takes a longer time to start the dialogue with the ownership groups on our interest and their desire possibly to sell. From then, we go into valuation, and we look at buying at the right price. And we've been very disciplined in our approach to market, both strategically and on valuation, as evidenced by what we've been able to achieve with Guilford.

From our standpoint, we don't -- we talk about niche acquisitions or bolt-ons. We don't think there's anything transformational out there nor do we think we need anything transformational. We look for opportunities to strengthen our two core businesses, to diversify and to add some technical capabilities. I think you'll see acquisitions in the range of what we did with Guilford. I don't see a significant one out there and I don't think we need one.

Terrific. Thanks. That makes a lot of sense. Appreciate it.

Thanks. I think that's it, isn't it?

I have no further questions in queue.

Thank you. For those of you that are still on the call, our employees at Lear Corporation, I want to thank you for all the hard work and effort, and tell you to keep pushing. Let's finish the year strong. Thank you very much.

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