Lear Corp (LEA) 2013 Q4 法說會逐字稿

Good morning. My name is Lisa and I will be your conference operator today. At this time I would like to welcome everyone to the fourth-quarter and full-year 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. Ed Lowenfeld, you may begin your conference.

Thank you, Lisa. Good morning everyone and thank you for joining us for our fourth-quarter and full-year 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 would like to remind you that will 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 Invest Information at the beginning of the presentation materials and also in our SEC filings. In addition, we will be referring to certain non-GAAP financial measures. Additional information regarding these measures can be found in the slide labeled Non-GAAP Financial Information at the end of the presentation materials.

Slide 3 shows the agenda for today's review. First Matt Simoncini will provide a Company update, then Jeff Vanneste will cover our financial results and 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'll hand it over to Matt.

Great, thanks Ed and good morning. Lear finished the year strong. Sales in the fourth quarter were $4.3 billion, up 14% from year-ago, and core operating earnings increased 9% to $208 million.

For the full year, sales of $16.2 billion and core operating earnings of $839 million were up 11% and 10%, respectively, both more than double the global industry production increase of 4%.

2013 represented our fourth consecutive year of higher sales and adjusted earnings per share.

Our Electrical segment achieved record sales and earnings both in the fourth quarter and for the full year. Finally, 2013 marked the third consecutive year we returned significant cash to our shareholders.

As outlined on slide 5, our fourth-quarter results overall were in line with previous guidance with our seating margins coming in lower than expected, while our electrical margins were higher than expected. Our seating margin in the fourth quarter was 5%. This was below our expectations, reflecting slower than anticipated improvement in South America, and manufacturing and launching efficiencies in our North American Structures business. The remainder of our seating business is performing well and in line with our expectations.

In South America, we continue to experience inefficiencies related to the rapid growth of our sales in that region. We're also facing a challenging economic environment with currency devaluation and wage inflation. We are collaborating with our customers to identify solutions to address these challenges, and while we are making progress, it's taking longer than we previously expected.

Over the last several years, we've also rapidly expanded our North American Structures business as we launch a new family of lighter-weight seat tracks and recliners. As we ramp up production, we are experiencing efficiencies associated with the new manufacturing processes and materials. We are improving our manufacturing processes and footprint to more effectively manage this growth.

Our electrical business continues to perform extremely well, benefiting from our industry-leading cost structure, marketshare gains and constant growth in these products. We expect another year of record sales and earnings in 2014. The Company overall is performing well, as reflected in our results and our outlook. And for 2014 we expect to increase core operating earnings by approximately $100 million and post our fifth consecutive year of higher sales and earnings per share.

Slide 6 shows our trends of improving sales and earnings per share. Since 2010, our sales have grown at an annual rate of 11%, which is more than double the industry. Over the same timeframe, our earnings per share have grown at annual rate of 10%.

Slide 7 helps put our sales growth into perspective. Both of our business segments are outpacing the industry growth rates and reflecting Lear's highly competitive cost structure as well as industry trends towards global vehicle platforms, increasing direct to component sourcing, and added feature content.

Our electrical business is also benefiting from macro industry trends that are driving increased electrical content, such as stricter fuel economy and emissions standards, increased consumer demand for safety and connectivity, and additional comfort and convenience features.

Slide 8 shows the profile of our sales worldwide by vehicle segment and by customer. We supply every major automotive manufacturer. In Seating, while we remain the world leader in luxury and performance seats, we're also well-diversified across all vehicle segments.

We're also very proud to provide seats to General Motors for their Corvette Stingray and Chevy Silverado, this year's winners of the car and truck of the year at the North American International Auto Show.

We've also made steady progress diversifying our sales by geographic region. In 2013, 62% of our sales were outside of North America.

Slide 9 highlights our rapid growth in key emerging markets. Our sales in the BRIC countries continue to grow faster than the overall industry. In 2013, consolidated sales were $3.2 billion in these markets. That's up $1.2 billion or 61% since 2010.

Including non consolidated sales in the BRIC countries, our sales in 2013 were $4.7 billion. This represents an annual growth rate of 20% versus industry growth rates in these countries of 8% over the same period.

The Asia-Pacific region continues to grow rapidly and now represents 18% of our consolidated sales. In addition, we have $2 billion in sales at our nonconsolidated joint ventures, primarily reflecting joint ventures in Asia, which further diversifies our sales profiles.

While we serve all major markets in Asia, our largest market in the region is China. Since 2010, our total sales in China have almost doubled.

Slide 10 provides a summary of our nonconsolidated joint ventures. We presently have 17 nonconsolidated joint ventures, 10 of which are located in Asia and three of which support Asian customers in North America. In 2013, we had $2 billion of revenue in our nonconsolidated joint ventures, which is up $1.2 billion since 2010.

Our equity earnings at these JVs have also increased from $24 million in 2010 to $38 million last year. We expect this profitable growth trend to continue. Now I'd like to turn it over to Jeff, who will take you through our financial results and outlook.

Thanks, Matt. Slide 12 shows vehicle production in our key markets for the fourth quarter and the full year. In the quarter, 21.3 million vehicles were produced globally, up 6% from 2012. Our major markets showed increases with China, North America and Europe up 20%, 5% and 4%, respectively.

For the full year global vehicle production was a record 82.6 million units, up 4% from 2012. Vehicle production in China increased to 19.3 million units, up 14% from 2012, and vehicle production in North America increased 5% to 16.2 million units.

In Europe, vehicle production stabilized in 2013 with a modest increase of 1%. Vehicle production of 19.7 million units in 2013 remained below historical levels.

Slide 13 shows our financial results for the fourth quarter and full year of 2013. In the fourth quarter, pretax income before equity income, interest, and other expense was $168 million, up $9 million from a year ago. For the full year, pretax income before equity income, interest and other expense was $737 million, up $31 million from 2012.

Equity income was $11 million in the fourth quarter. Excluding one-time items in 2012 related to our previously owned IAC joint venture, equity income increased by $2 million as compared to a year ago. For the full year, equity income was $38 million. And excluding one-time items in 2012, equity income increased $13 million in 2013, primarily reflecting higher profitability at our joint ventures in China.

Interest expense was $17 million in the fourth quarter, up $7 million, and $68 million for the full year, up $19 million, primarily reflecting the impact of the $500 million bond issued in January 2013.

Other expense was $20 million in the fourth quarter and $58 million for the full year. Excluding the impact of one-time items, other expense was up $12 million and $25 million, respectively, for the fourth quarter and full year, primarily reflecting losses associated with foreign currency fluctuations.

Net income attributable to Lear was $73 million in the fourth quarter and $431 million for the full year. The fourth quarter of 2012 was impacted by a $767 million in one-time tax benefits related primarily to the release of our valuation allowance in the US.

Slide 14 shows the impact of nonoperating items on our fourth-quarter results. During the fourth quarter, we incurred $37 million of restructuring costs primarily related to plant closures in Europe and various census-related actions. Excluding the impact of these items, we had core operating earnings of $208 million, up $17 million from 2012.

The increase in earnings primarily reflects the benefit of new business, increased production on key platforms and operating efficiencies, 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 fourth quarter was $129 million and diluted earnings per share was $1.55.

Slide 15 provides a summary of our free cash flow. We generated $259 million of free cash flow in the fourth quarter and $367 million for the full year.

Slide 16 provides a snapshot of our cash, debt, and pension and OPEB obligations. At the end of 2013, we had cash and debt of approximately $1 billion each. We do not have any outstanding debt maturities until 2018.

Our unfunded pension and OPEB liabilities are $260 million as of the end of 2013, which is down substantially from a year ago, reflecting strong asset returns and a higher discount rate. Substantially all the US plans are frozen or at closed locations with no future benefit accruals.

We plan to maintain a strong and flexible balance sheet with investment grade credit metrics. This strong capital structure provides Lear with significant financial resources and flexibility which will allow us to invest in our business and drive profitable growth.

Slide 18 shows our industry production assumptions by major market for 2014. Global industry production is forecasted to grow from 82.6 million units in 2013 to 85.1 million units in 2014, an increase of 3%. Production in Europe is forecast increase by 2% to 20.1 million units and production in North America is forecast increase by 4% to 16.8 million units. Rapid growth in key emerging markets continue, with China and India leading the way with increases of 8% and 7%, respectively.

Our 2014 financial outlook is based on an average euro assumption of $1.35 per euro, which is up 2% from our 2013 outlook.

Slide 19 shows a five-year trend of our sales and core operating earnings. At the midpoint of our 2014 guidance, sales are projected to increase 6% to $17.2 billion and core operating earnings are projected to increase by 11% to $935 million. Looking at the growth trend since 2010, this would imply annual growth of 9% in sales and 11% in core operating earnings through 2014, which is well in excess of the 4% global industry growth over the same timeframe.

Slide 20 shows our 2014 outlook for adjusted margins for Lear as well as for both of our business segments. We expect total Company margins to increase to approximately 5.5% in 2014, up from 5.2% in 2013.

In seating, we expect first-quarter 2014 margins to be slightly better than the fourth quarter of 2013, and for the full year we expect margins in seating to improve to a range of 5.5% to 6%. We expect full-year 2014 electrical margins to be in the range of 10.5% to 11%. Both of our business segments continue to generate strong cash flow, in that our present mix of business provides returns in excess of our cost of capital.

Slide 21 outlines our detailed financial outlook, which is unchanged from what we announced earlier this month. Lear expects net sales to increase to $16.9 billion to $17.4 billion, primarily reflecting the impact of our sales backlog. Core operating earnings are forecasted in the range of $910 million to $960 million, up almost $100 million from 2013 at the midpoint of our guidance range, reflecting primarily higher sales and improving margins.

Our effective tax rate in 2014 is expected to be approximately 30%. However, given the benefit of our tax attributes, we expect the cash tax rate to be approximately 20%. We expect the cash tax rate to remain below the effective rate for the next several years.

Restructuring costs are expected to be approximately $65 million, reflecting footprint actions as well as various census and other cost reduction actions. And free cash flow for 2014 is forecasted in the range of $350 million to $400 million.

Slide 22 provides a summary of our sales backlog for 2014 to 2016, which stands at $1.9 billion. Approximately 70% of our backlog is in seating and 30% is in electrical. We continue to diversify our sales and we are adding new business in all regions of the world. We expect strong growth in 2014 and 2015, with $950 million and $750 million respectively of new business coming online.

For 2016, there's still open sourcing, so we would expect that number to increase as new programs are awarded.

Now I'll turn it back to Matt for a brief summary.

Great, thanks Jeff. 2013 was our fourth consecutive year of higher sales, earnings per share and significant cash generation. We expect continued sales and earnings growth in 2014 as well as another year of strong cash generation. We continue to follow a balanced strategy of making investments to profitably grow our business and to improve our competitive position while maintaining a strong and flexible balance sheet and returning cash to our shareholders. And it's working.

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

(Operator Instructions) Itay Michaeli, Citi.

Great, thanks, good morning. So, want to start off with a two-part question on seat margins, one near-term and one long-term. On the near term, Jeff, you mentioned it looks like Q1 is going to be a bit below the full-year range. Maybe walk us to the levers for improvement throughout 2014 and perhaps where you think you'll exit.

And then the bigger question, a bigger picture question on seats is maybe if you can quantify or talk about what's sort of the remaining self-help or other factors within your control beyond 2014 that you can sort of get to improve your seat margins on, without the help of global volume. Maybe just talk about what the remaining initiatives are and what they're worth in terms of what you can do.

With respect to Q4 to Q1, as I said we expect the margins in seating to improve slightly in Q1, really driven by the backlog coming on board in that quarter. With respect to some of the items in the fourth quarter, specifically the North American metals and South America, we expect some slight improvement in those areas, but not meaningful in the first quarter.

As you go through the cadence of the remainder of 2014, we would see steady improvement in the North American metals business, and ultimately at the end of the year, be solidly profitable in that business going through the remainder of 2014.

In South America, I think the cadence there will be a little bit slower. I think we'll be at the end of the year in a profitable position, but it's going to take a little longer in that segment to improve the earnings profile.

In the first quarter of next year as well, given the launch cadence, the launch costs are going to be slightly higher than it was in the first quarter. We're also going to get the benefit in the quarter of some of the restructuring actions that we've taken throughout 2013, especially the ones that we initiated at the tail end of 2013. So we'd have the exit rate on those going into 2014.

That's very helpful. And then just secondly, on the 2014 revenue guidance, you ended 2013 on a very strong note. It looks like if I just sort of take your global production and your backlog, it kind of gets to the high-end of the full-year revenue range. Any other factors to think about here, or is your bias now perhaps towards the higher end given the strong exit in 2013?

Well, if the production levels stay consistent with what we're seeing in our platforms, you'd probably shade the higher end of the revenue guidance, quite frankly. Some of the factors we have to keep in mind, obviously the productivity reductions that we provide to our customers that typically run around 2% off the top. There's also FX that factors into some regard into those numbers.

If we see the production on our platforms, consistent with what was released by IHS, I think a week ago, we probably push more towards the higher end of the range than the midpoint.

That's great. That's very helpful, thanks very much guys.

Rod Lache, Deutsche Bank.

Can you, first of all, just elaborate a little bit more on the fourth-quarter bridge in seating? You had a 14% increase in sales and the EBIT declined from [163 to 156]. You said it was structures and launches and South America. Any more color on magnitudes of some of those headwinds in the quarter?

I think the -- with respect to the fourth quarter, our sales came in a bit higher than we had anticipated, a couple hundred million we were able to get some benefit there in. But some of the items in South America and in metals, we had inefficiencies and all the things that Matt talked about that drove additional costs in the quarter. That was really worth about 40 basis points in the quarter.

And as I said, going into the first quarter of 2014 we would expect some slight improvement in those areas, but not necessarily meaningful until you get beyond the first quarter.

Okay, and what was the loss in South America for the full year? You said you're going to exit at breakeven this year.

In the fourth quarter our loss down there was, I believe, $8 million to $9 million.

So, for the year (multiple speakers)

That's just in seating.

Right. So, for the year 2013, the losses were roughly what for South America?

Roughly $20 million.

All right. And in the structures business, can you just elaborate a little bit more on what actually needs to happen there? Obviously, it's a challenging business. But it's kind of a little bit of a mystery on what exactly are some of the challenges that are being incurred in that business. Is it just pricing or is there some kind of manufacturing or commodity issue there?

Yes, it's probably several issues. One is, you know, that business going through a changeover much like the just-in-time businesses, because the designs are interrelated in many cases. A lot of what we're doing with the lighter weight designs require lighter weight materials and different manufacturing processes such as laser welding.

And so, as we're growing in and maturing those processes, Rod, we are not as efficient as we would like there. So I think what needs to be done there, in certain cases there are pricing issues where we need to go back and get recovery.

The commodity market has stayed relatively stable, so I don't think that's necessarily a driving factor in that particular segment. I just think we need to burn in and get more efficient on our manufacturing process, reduce the launch-related inefficiencies and get better capabilities on some of the -- like laser welding and new assembly process required by the lighter weight designs.

And just lastly, any thoughts on what we should be thinking vis-a-vis corporate expense for 2014? It was up a bit in the fourth quarter. And on that authorization, I think you still have $750 million authorized for two years that kicks in after the ASR. But that doesn't really result in any material increase in the leverage given your free cash flow.

How should we be thinking about that? Is there something that would serve as a catalyst for you to kind of reassess leverage?

Yes, two separate questions. Let me start with the HQ. HQ is up in the fourth quarter, driven by two factors. One is the expansion into some of the emerging markets; Asia, South America, if you will. And that's driving costs as we kind of re-shift our structure from mature to emerging markets.

Secondly, some of the benefit plans are a tad back loaded. We would expect on a go forward basis that that number would come down by probably around $10 million on the average for next year, but as we get some cost out of some of the more mature locations.

Heading into next year as far as your question on leverage, we believe we could go up as high as a turn and a half of EBITDA on the leverage and still maintain investment grade metrics. What would be required to do that is basically a need for the proceeds, either through investment opportunities organically or more likely niche acquisitions that would help facilitate our component expansion, our emerging market footprint or further diversification of our sales or even growth in electrical. So if we were able to execute a transaction like that, we would be comfortable increasing our leverage.

All right, thank you.

John Murphy, Bank of America Merrill Lynch.

Just first question on slide 21. The free cash flow number that you're talking about on a year-over-year basis is roughly flat, yet you're saying core operating earnings are up around $100 million. D&A has actually increased, which is a good guide for free cash flow. CapEx is flat.

Just trying to understand what's going on. Is there sort of a vicious working capital swing of negative $100 million that you're expecting in 2014? It just seems like there is $100 million missing in that free cash flow number.

Yes, just setting the parameters our 2013 free cash flow was $367 million. At the midpoint of our 2014 guidance we're at $375 million -- $8 million to $10 million or so. Earnings is up $100 million on a year-over-year basis.

You're right, John, that the primary issue is working capital and there is certain lumpiness in that working capital rationale. One of them is the timing of customer payments. We had anticipated getting paid by a couple of customers. In 2014 they accelerated some of those payments into 2013. That created a good guy, if you will, for 2013 and a corresponding bad guy in 2014 which was part of the reason.

Additionally we've got some working capital buildup associated with the growth of the business in 2014. Restructuring cash will be slightly higher, roughly $10 million higher in 2014. And then there's some other compensation type payments that will be funded in 2014 that is a little bit greater than the expense that we're incurring through the course of 2014. So there is an imbalance there between the expense that's in the OI number and the cash payout related to the 2013 performance.

Okay, that's incredibly helpful. And then just a second question as we look at the potential for consolidation in the seating business, particularly North America as maybe one of your large competitor's exits, you probably wouldn't be the buyer of that big a deal on the seating side because you run into antitrust issues.

But could you be a buyer of seating assets in North America if they weren't that big bang JCI deal, if somebody else was forced to divest assets? Is that something you have thought about as being part of the industry consolidation, but obviously not the big consolidator?

Absolutely, we would. It's not our primary focus, though, John. We're very strong in North America both in the just-in-time assembly in our mix of business and our components.

We would more be interested in a market that maybe we're less represented such as Asia, or in components that we could possibly get stronger in such as leather. If a niche acquisition, if you will, brought us further customer diversification in North America, we would strongly consider it, quite frankly. But for the most part were pretty happy with what we have here in this market.

Got you. And then just lastly, Matt, there's quite a bit of noise about capacity adds here in North America, although they seem like they're very much focused on sort of hiring more labor at the automaker level. Is there anything that you are seeing in your quoting activity, or what you're hearing from your customers, that would be sort of alarming that we are going to rebuild some of the excess capacity that's been taken off-line and create some imbalances between supply and demand?

Or are you just seeing sort of slow capacity adds on the labor front? I'm just trying to understand your perspective on what's going on in the industry as far as capacity sort of (multiple speakers).

It's a lot different than it was probably pre-2008, John, in that before I think collectively in North America we were sitting on a lot of excess capacity, both with the OE's and with the supply base, the supply community. And it resulted in some lack of discipline on production where you would have running high inventories and then all of a sudden a massive correction. That's not what we've seen. I don't really have the concern here.

I do think in Europe there is excess capacity. And I think the OE's are all struggling with how to adjust their capacity to demand, if you will. And the good news is we are starting to see that market show signs of recovery. But in North America, no, I don't have that concern at all actually.

Okay great, thank you very much.

Matt Stover, Guggenheim.

Hey, I wanted to follow on to the question from Rod. So, South America is a piece and seating is a piece. And you described that as 40 bps. And I still think that sort of comes up short on the year-to-year incremental. And I am wondering how much the impact of the changeover affected the seating margins?

Well, on a year-over-year basis, that's the biggest driver right now where we are looking -- there's a lot of positives that have gone on in that business. But the headwind is we are looking at about 80 bps associated year over year in the fourth quarter with the program changeover, associating with launching a very significant portion of the platform portfolio. That's about 80 basis points.

And I'm wondering if you could kind of give us a sense on the structures business. It's a higher CapEx business, and I recognize your struggling with some operating issues. But I'm kind of curious and interested in how you view the solution of that problem and the timeframe over which you think improvement to something more along the lines of your target is achievable, Matt.

Because I would assume -- you're losing money in that business, but that's a business, because of the capital you put in, should have a better margin then your ambient margin in the seating.

Right, you're absolutely right on that, but overall, we are not actually losing money on that business. We lost money in North America in the quarter, but that's the first quarter that we've lost money in North America.

The business was profitable in 2012 and was profitable through the first half. We just had a fairly significant growth cadence and launch of new product in the fourth quarter. Europe was profitable and Asia is profitable and performing at target.

The metals business is more capital intensive than the JIT business and would need to kind of perform -- need to perform in the high single digits as far as margin, return in excess of its cost of capital. As far as the go forward plan, I think it's a critical capability in order to be a world-class seat manufacturer, designer and manufacturer to have the capabilities to do lightweight recliners and track mechanisms. So it's a core competency.

We need to work through the manufacturing efficiencies associated with all this new product that we are launching. In our new family of structures and designs, which includes frames, tracks, recliner mechanisms both power and manual, are world-class. And I think we just need to digest these new designs from the manufacturing standpoint. And I do believe we'll exit the year at a profit in that segment North America.

Do you think that's getting more to target as a 2016 kind of thing or --?

No, I don't. I think this year we'll exit North America not necessarily at target but at a profit. I think heading into 2015, we'll exit 2015 at the target margins overall for that segment. But like I said, we've had a lot of success in that structures business in other markets and we've had success in this market as well. It's just over the last quarter, quarter and a half we are struggling with launching this product.

I do believe there some restructuring that still needs to be done in that segment North America and we are in the process of looking at the footprint as well to make sure that we have it in the lowest possible footprint.

Okay, thanks very much, guys. Appreciate it.

Patrick Archambault, Goldman Sachs.

Yes, for me, just one clarification, and I should probably know this. But the F series, can you just give us a snapshot of what you have currently within your complete portfolio of products, and how that is set to change with the changeover of the new product at the end of the year?

Well, I would tell you they do not have the leader in luxury and performance seating on that vehicle proceeding. But we do have some limited electrical components, I think a few of their family of harnesses we are on. But we don't really have a whole lot of content on that vehicle. I think that seat is provided by Johnson Controls.

And the amount of content that you have doesn't sound like it's going to change much with the new program.

No, no; I don't believe it will change at all actually.

Okay. And then the -- my follow-up is on Latin America. Can you give us a bit of a sense about what it is that's really kind of drawing out this turnaround? Is the recovery volume-dependent, in which case it's obviously harder to predict? Is it a matter of getting more local sourcing bringing the cost down? If we could just get a little bit of the commentary on the pieces that need to fall into place there.

Well, there are several pieces. First off, the environment there is very challenging in the fact that you've got the currency devaluation. In many cases our contracts are in the local currency, but the supply agreements are not because they are direct to components from outside of that region. So we need to work on a solution of what localization or some sort of currency balancing, working at a collaborative way with our customers. And that always takes time because we don't fully control the equation.

The other piece of it is rightsizing your facilities as you gain manufacturing efficiencies. Brazil, if you will, is a very difficult market to reduce labor costs because it's a negotiation, a much tougher negotiation than other markets to reduce labor. In certain cases the product needs to be just repriced. In the event that I think it's been engineering changes that have worked through the programs that haven't necessarily been recovered yet.

The volume -- it's not volume-dependent per se, but what we would like to see is a more stable production release schedule. When there is near-term changes in the production schedule, that drives a lot of premium cost, not only in manufacturing inefficiencies and overtime, but in premium cost to bring the components into the manufacturing facility. So, while it's not necessarily volume-related, what would like to see is a little bit more stable production release schedule.

Okay that makes sense. And one final one, I know this was asked at the Detroit Auto Show, but with the benefit of a few more weeks, obviously you had your major competitor significantly pare back its growth expectations in the seating segment. Is that something that has potentially brought more opportunities or changed the quoting dynamics as you're looking forward over the next couple of years?

Well, I think when anybody kind of makes public statements that it's not going to be as important or a focus or will not -- they will challenge the investment or the commitment to it, the customers have concerns. And whenever the customer has concerns, that creates an opportunity for the others in the space. I think in this particular case it's no different.

In our business, it's very important for the customers to know that in three years from now you're still committed to doing the products that you're quoting today. So, as others deemphasize the products we are in, that's always a good thing for Lear.

Okay, terrific, thanks a lot guys.

Emmanuel Rosner, CLSA.

I wanted to ask you about your Asian joint ventures. You gave us a lot of great detail in the [early years], and I was obviously very impressed with the pace of growth over there. At the same time you're also commenting that the average operating margin there is about 7%. And I was curious if you could comment on how that profitability has been trending over time.

Has it been fairly stable? Is it benefiting from the volume growth? Or has it been under pressure from competition?

No, it's been actually fairly stable. For us, many of the joint ventures are partnerships with the supply divisions of the customers and it's a slightly different process than you'll see typically in Europe or North America. So there is little bit more stability in pricing and in margins. And I would say for the most part it's pretty stable at those rates.

And so the fact that it's around 7%, is that really -- mostly a reflection that it's mostly in the seating business? Or is that just -- and in fewer electrical partnerships there, or is it -- is that really the case?

Yes, it's about 70% seating. It almost reflects the business overall. So, yes, it's about 70% seating, so that's why you'll see an average margin at 7% as opposed to something slightly higher that you would expect at an electronics facility.

Understood. And then one more -- one follow-up on the electrical margin bridge going into the first quarter. I understand that some of the drag that you saw in the fourth quarter will modestly improve into Q1. I wanted to ask specifically about the changeover cost going into the quarter, obviously maybe launching the full-size SUVs, which have some nice expensive seats at GM.

And I was curious. Will those launch costs and changeover costs be roughly stable quarter over quarter or can they actually increase in the first quarter?

Slightly two different things. I think starting with electrical, electrical is not going to be as impacted by launch and product changeover in Q1. And we would expect their margin momentum on a year-over-year basis to continue, and that kind of drives in many cases the guidance of 10.5% to 11%, which is a little bit higher than what we've been talking about for that business over the past year, as they continue their profitable growth and getting the benefit of a lot of the restructuring actions that we've taken.

On the seat side, still think that through the first half of 2014, we'll be seeing headwinds on the product changeover as well as the launch costs, which are in many cases two separate things. Product changeover will be defined as just the kind of profit profile of the business that's coming online versus the profile that it replaces.

Launch costs are really inefficiencies associated with ramping up the plants and training the workforce on new product. The launch costs would be heavier in seating to the first half and then diminish as the year goes on. And that's one of the drivers on what we expect that segment, with a steady improvement in margins, as we start off the year a little bit lower than we expect to finish the year.

Is that an increased drag on a sequential basis as well Q1 versus Q4? Or is it that roughly comparable because you were launching those other products in Q4 as well?

I think Q1 will be a little bit better than Q4 for both for seating and for the Company overall.

Okay, I appreciate that (multiple speakers)

On a year-over-year basis -- pardon me?

Yes, sorry, one final one on the acquisition. There was some language in your press release. You were saying, consistent with your previous language, you are looking obviously for acquisitions as a matter of priority.

Has there been any change in the landscape? Are you trying to signal that you're getting closer to this? Or is this just reiteration of your ongoing strategy of looking for acquisitions?

No, it's our ongoing strategy of looking for acquisitions. In any given time we're talking to numerous firms that fit what we are looking for strategically, whether it's component capabilities, diversification of sales, gaining size in electrical and leveraging our world-leading footprint and engineering capabilities in that segment.

So I don't think it's a change in stance or change in status. We are in ongoing dialogues with multiple firms that could possibly fit and help us.

Great, thank you very much.

Colin Langan, UBS.

Great, thanks for taking my questions. Just first question is more of a modeling question. The other expenses of $20 million in the quarter, you highlighted that was mostly FX related. Any color should how we should model that line item going forward? Because that was up quite a bit year-over-year.

I think the outlook for 2014 would be a decrease in that area. I think the guidance would be in the mid-30 range.

Okay, and then the FX was more balance sheet items being re-measured or it's not related to (multiple speakers)

Exactly. It's the revaluation of the balance sheet and the fluctuations in currencies that are driving those losses.

Okay. And then looking at Europe, it continues to be a pretty massive outperformance relative to the market again in Q4. Any color on how we should think about that outperformance looks like? The market was up [1%] and you were about [13%].

Is that mostly backlog of business or did you have favorable customer mix? Is that a risk next year if some of that mix is not as strong or goes the other way?

No, I don't think it's a risk. The good news about our business in Europe is we have a pretty wide bandwidth of both customer and platform mix. So if the market does recover, we're usually a benefit on one car line or the other.

And a good section of our car lines also have an export leg, whether it's the 3 series BMW or the Jag Land Rovers or the Audis 4 and 6, C-class Mercedes. Many of the products have production or sales, if you will, outside of the home market. So we're pretty well-balanced there from both luxury and high-end vehicles all the way down to entry-level A/B platform. So I don't view it as a risk that would be any different than just the overall production.

We continue to perform there. We put a lot of effort into restructuring our business there over the last several years. Seating has remained more than solidly profitable and our electrical division is performing consistent with target margins in that space. So overall, we're happy with the business segment there.

And in terms of electrical, you obviously have grown quite significantly this year. How are your competitors responding? Are you seeing a more difficult pricing environment as you gain quite a bit of share?

Well, it's a difficult pricing environment. But one of the things that we are able to do, by controlling both the junction boxes and the design, is a way to design cost out and meet many of their pricing challenges or cost reduction targets through design. And that helps us.

It is an aggressive space, and quite frankly I think one that we can play extremely well in.

And any color on where or what markets you are growing the most in that segment this year geographically?

It was really across the board. We've seen solid growth in Europe, where we had a very mature business segment going back to the days of UT automotive, as well as in North America where we have an outstanding footprint in electronics in Mexico as well as electrical distribution in Mexico and Honduras.

Asia is winning their share of business in this segment, although I believe there's a whole lot more that we can do in that region. Asian has been a great story for us with footprint we put down in Thailand. So it's been pretty steady by region. It's nice to see that business has growth both in revenue but also in the margin expansion.

Okay, fair enough. Thank you for taking my questions.

Brian Johnson, Barclays.

Just want to press further; I'm surprised that until the last caller there hadn't been many questions about the electrical segment. Could you maybe comment on what's driving this margin uptake? I guess my hypothesis would be connected car. How sustainable do you see the growth in margin progress through mid-decade on that?

Well, what's driving the margin expansion for Lear has been pretty much the effort we put into our cost structure; mainly the footprint. Over the years, Brian, we've spent $300 million to $400 million restructuring that footprint and making sure that we have capabilities in places like Morocco and Tunisia and Romania, and in Asian and in Brazil. And that is driving profitable growth and allowed us to basically produce and be the low-cost producer in that segment. So that drives growth and it also drives margin expansion.

As I know you've heard me talk about in many cases, the margins are really just now come of the investment that's required. We're comfortable with the margin outlook in this business at 10.5%, 11% based on our capital intensity and engineering intensity, and our balance of business between harnesses which are really low capital intensity versus junction box and connectors, which require a higher margin to get the type of returns that are in excess of your cost of capital. So we believe the 10.5% to 11% is sustainable and we believe at that rate we can continue to profitably grow our business.

Okay, I think your prior guide, was that 9.5% to 10% midterms? Or is this a higher guide than you'd been looking for?

It is, it is. And it's being driven by the fact that we can leverage the sales that we do have now and spread some of the fixed engineering that's required in this segment, whether it's software development or some of the work that we're doing on battery charging and alternate energy vehicles is now spread over a larger base. And that's driving it as well. So, yes, the guidance is higher in this segment and where we were a year ago.

Okay. And I noticed an activist -- or a firm noted for its activism took a relatively significant position. Is the dialogue with just that community in general, does it continue to be around cash in the balance sheet? Or are there also questions about how you kind of further realize the value of that fast-growing, higher-margin electrical segment?

No, it's been, we talk about first and foremost the business, how we compete, what's the business prospects, and all the dialogue there I think they have been very complementary of the Company and how it is run, and its profit profile and projections. Really the majority of the conversation is usually about capital structure.

Okay thanks.

Ravi Shanker, Morgan Stanley.

I just have one question to add to what has already been discussed. Does the seating segment -- the seating business doesn't strike me as being particularly fragmented. Just given the nature of the importance of the jet business to the OEMs and even the structures business, do you need any kind of OEM approval for further consolidation in the industry? And do you know what their views on consolidation in the industry are?

Yes, I would think that you would. Formally they would probably have to change and assign their purchase orders to a new buyer, so that gives them the right, if you will, to maybe not give you the thumbs up. So while technically you have the right to buy whatever you want as long as it passes antitrust, the reality is with the companies formally they have to approve the PO changeovers to the buyer.

Informally they have the sourcing ability to de-source a consolidation that maybe they weren't supportive of. I do believe that in certain cases they would support consolidation, because ultimately it reduces overall administrative costs and possibly adds synergies that they could share in. But I would think that any real significant consolidation you would absolutely want to have the approval of your customers.

Great, thank you.

Brett Hoselton, KeyBanc.

Since you are in discussions, and back to the prior question about capital deployment, earlier in the call you kind of talked about the idea of feeling comfortable about going up to 1.5 times net leverage for -- it sounds like a transaction, an acquisition or an opportunistic acquisition of some kind.

What are your thoughts on the capital deployment side? You've got the $750 million authorization that's potentially going to kick in after March 2014 here. That seems to expend, over a two-year period of time, your free cash flow.

You've got net debt cash neutral, $1.2 billion in EBITDA. It kind of seems like you've got $1 billion, $1.25 billion, almost $1.5 billion to do something with. What are your thoughts there?

Our comments have been along the line that we're comfortable with a turn and a half of gross leverage as opposed to net leverage. From our standpoint we do have wherewithal to take advantage of any potential opportunities, whether it's organic with the business growth or expansion of the footprint, which has been very good for us. And you've seen the results of it in electrical.

Two, we would look to participate in any significant consolidation in the space, so particularly in electrical and also in the components in seating. So I think from our standpoint, having financial wherewithal is great.

As far as the share repurchase, I'm proud of the fact that this board was one of the leaders in the segment to return cash to the shareholders early on. I mean we started back in 2010 which was a year out of the recovery period, if you will, so we were an earlier adopter of returning cash to shareholders through share repurchase and dividends.

So I think the board has demonstrated that they have a multi-prong approach of investing in the business, doing acquisitions when they make sense strategically and from a valuation standpoint, and ultimately returning meaningful cash to the shareholders. I don't expect that to not continue (multiple speakers). And you're right, we do have ample financial wherewithal to do all three.

From an acquisition standpoint, a lot of what you've done up to this point has been bolt-on acquisitions. Is there the potential for some more significant acquisition? I mean if it -- with let's say $1 billion, plus $1.5 billion in capital, that's quite a significant acquisition or war chest so to speak. Are you thinking that that's a possibility?

I don't see anything out there that would fit strategically at a valuation that would make sense to our shareholders. If it was out there, we do have obviously the financial flexibility to execute something like that. I don't see it out there. I don't see something that fit strategically at that size, at a valuation that makes sense to our investors, our shareholders.

So I don't think it's likely. But yes, if it was out there and it fit and it was the right valuation, and we could execute and get the synergies that would justify the investment, we would do it. But I don't think it's probable, Brett.

I think what's more probable is more along the lines of what was you saw us do with Guilford, which is been an excellent acquisition for us. It's increased our capabilities and is providing nice financial returns. I think what you'll see is more along the lines of Guilford.

Matt, thank you very much.

You're welcome, Brett, thank you. And with that, I think that concludes the Q&A. No, there's more? I thought they said that was the last one.

Did the others drop off, Lisa, or do we have any left?

We still have two questions in queue.

Oh, I'm sorry. My apologies.

Ryan Brinkman, JPMorgan.

So it seems like you're incrementally tweaking the tone today on 2014 seating and electrical margin relative to just a few weeks in Detroit, really extending on the trend you had communicated then of in-line margins overall for the total Company, but a little bit softer at seating and a little bit stronger in electrical.

I'm just curious what's driving that latest tweak. And could some of it relate to seating kind of on-boarding lower margin, but good return business that JCI is exiting? Or wouldn't you expect to see that the results soon as 2014?

I would say that we're -- overall your assessment is probably right. We're a little bit cautiously optimistic on the seat business. We had nice returns in electrical. We expect that to continue.

Overall we are very consistent with what we talked about a few weeks ago at the auto show, with a meaningful improvement in Company margins overall, a nice step up in the operating margins for Lear Corporation in 2014. And we are very confident we'll be able to deliver those numbers.

We haven't seen the necessary benefit of Johnson's walking away, if you will, from any business. I don't think that's really what's happening. We have gained share from pretty much everybody in that segment, as evidenced by the fact that we've grown faster than the industry overall.

And our backlog remains very strong and we have gained share against Johnson Controls and others, for that matter. I would just tell you that from our standpoint, what we want to do is guide at a number that we are extremely confident we can deliver on at these levels. We're very confident we can deliver these guidance numbers.

Great, I'll just leave it at that and let that final caller squeeze in.

Joseph Spak, RBC Capital Markets.

Just to follow on some of that last commentary and the commentary you said in Detroit about how there could be a longer-term opportunity from Johnson maybe walking away from some of that business. I know you like that chit business, it's good returns. But it is lower margin. I just was curious if that shift in business is factored in at all to your longer-term expectations within the seating business.

It's a great question. And Joe, I would tell you what is factored in is if the business became more -- a higher content of just-in-time business as opposed to component business or metals business if you will, a lower margin would still provide a great return versus your cost of capital, because it's not as capital-intensive to do just-in-time assembly. And so, from that standpoint, the margin could be lower and still have a nice return for our shareholders if that was the case.

It hasn't factored in because, quite frankly, I don't see a change overall in the balance of the business between just-in-time, metals and mechanisms, and surface materials and cut and sew, if you will. Right now in the current composition of the business on average in the low 5% we're returning in excess of our cost of capital, and that's kind of how we run the business.

So if it was to come and if just-in-time business was to come at a significant way and change that ratio, if you will, then yes, the margin profile would be a little bit lower.

Okay, thanks a lot for the color, Matt.

You're welcome. With that now I can say we're done. So, for those of you that remain on the line, Lear employees I want to thank you for all your hard work and outstanding effort and for a great 2013. That year is now behind us. It's time for us to stay focused on driving the performance forward in 2014. Thank you very much.

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