Lear Corp (LEA) 2014 Q2 法說會逐字稿

Good morning, ladies and gentlemen, my name is Ryan and I will be your conference operator today. At this time I would like to welcome everyone to the second-quarter 2014 earnings conference call. (Operator Instructions).

I would now like to turn our call over to Vice President-Investor Relations, Ed Lowenfeld. Please go ahead, Sir.

Thank you, Ryan. Good morning, everyone. Thank you for joining us for our second-quarter 2014 earnings call. Our earnings press release was filed this morning with the Securities and Exchange Commission and materials for our earnings call are posted on our website, lear.com, through the Investor Relations link.

Today's presenters are Matt Simoncini, President and CEO, and Jeff Vanneste, Chief Financial Officer. Also participating on the call are several other members of Lear's leadership team.

Before we begin, I would like to remind you that during the call we will be making forward-looking statements that are subject to risks and uncertainties. Some of the factors that could impact our future results are described in the slide titled Investor Information at the beginning of the presentation materials and also in our SEC filings.

In addition, we will be referring to certain non-GAAP financial measures. Additional information regarding these measures can be found in the slides labeled Non-GAAP Financial Information at the end of the presentation materials.

Slide three shows the agenda for today's review. First, Matt will provide a Company update, then Jeff will cover our financial results and outlook, and Matt will return with some wrap-up comments. Following the formal presentation, we will be pleased to take your questions.

Now please turn to slide 4 and I will hand it over to Matt.

Great. Thanks, Ed. In the second quarter we continued our positive momentum with very strong operating results. Sales in the second quarter were $4.6 billion, up 11% from a year ago and more than triple the global production increase of 3%. Core operating earnings were up 23% to a record $275 million and earnings per share increased 31%, also a new record. Both of our business segments reported record sales and grew significantly faster than the industry in the second quarter.

In seating, operating earnings increased from a year ago. In our logical business, we again achieved record sales and earnings. We also continue to return cash to shareholders. During the quarter, we returned $172 million to shareholders through share repurchases and dividends. Based on our strong performance, we are increasing our 2014 outlook which Jeff will discuss in more detail a little later in the presentation.

Slide 5 lists several key elements of our strategy. We are following a balanced approach of investing in the business, maintaining a strong and flexible balance sheet, and returning cash to shareholders. We have the product expertise, global reach, competitive footprint and financial flexibility to profitably grow our business. We are also well-positioned for significant industry trends towards mobile platforms, direct component sourcing, and increased electrical content. We plan to continue to invest in emerging markets and increase our component capabilities in both business segments to improve our market position and returns.

We also continue to pursue acquisitions that will complement our present product offering, facilitate further diversification of our sales and increase our component capabilities. We are focused on following this strategy and believe doing so will continue to drive value for our shareholders.

On the next few slides I will provide some perspective on performance on several of these key elements over the past few years.

Slide 6 highlights our financial performance since 2010. Our sales and adjusted EPS have increased for four consecutive years, and we are on track for a fifth consecutive year of higher sales and earnings per share in 2014. Our sales have grown at an average rate of 11% per year since 2010 which is more than double the rate of the global industry. Both our business segments are up, outpacing industry growth rates and gaining market share, reflecting Lear's product capability, global reach and cost structure. And we continue to win new business and further diversify our sales.

From 2010 through 2013, we generated almost $1.6 billion in a cumulative free cash flow and since we began our share repurchase and dividend programs in 2011, we have returned $1.9 billion to our shareholders.

Slide 7 highlights the expansion of our component capabilities in emerging markets in low-cost countries. We believe this strategy has improved our competitiveness, enabled us to better support our customers and provide the platform for future growth. We also believe these actions are in line with increasing customer trends towards global platforms, localized content, and increased direct to component sourcing.

Since 2010 we have invested approximately $450 million to open 24 new component facilities in low-cost countries. More than 80% of our component facilities and more than 90% of the related workforce are now located in low-cost countries. Our sales and new component plants are forecast to be over $1.5 billion this year and we believe they will be future drivers of sales and earnings growth.

Slide 8 highlights our acquisition strategy. We are focusing our efforts on craftsmanship and innovation to differentiate Lear in the marketplace, improve our quality and continue to provide value to our customers and our shareholders. We followed a disciplined approach acquisition taking into account the strategic fit and valuation. We are pursuing acquisitions that will accelerate growth and improve returns. We are targeting acquisitions that will enhance our present product offerings, facilitate further diversification of our customer mix, increase our component capabilities, and increase our exposure with customers in emerging markets.

The Guilford acquisition is a great example of the type of acquisition we are pursuing. Guilford strengthens our industry-leading cut and sew operations, provides access to new customers and add design as well as manufacturing efficiencies that otherwise would not have been available. This acquisition has provided incremental growth opportunities and it enhanced the margin profile in seating.

Slide 9 highlights improvements we made to our capital structure while, at the same time, returning significant cash to shareholders. Over the past few years we have accessed the capital market several times to reduce our borrowing costs, extend our debt maturities, and improve our liquidity profile. During this time, the rating agencies have recognized our efforts with rating upgrades. Our strong capital structure provides Lear with significant financial resources and flexibility, which allows us to invest in our business and drive profitable growth.

In 2011, we were one of the first automotive suppliers following the industry downturn to initiate a share repurchase program. Since the beginning of 2011, we have repurchased 28.2 million shares or approximately 25% of our outstanding shares. We have also increased our dividend for each of the last three years.

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

Thanks, Matt. Slide 11 shows vehicle production in our key markets for the second quarter. In the quarter, 21.4 million vehicles were produced globally, up 3% from 2013. Our major markets showed increases with China, North America, and Europe up 12%, 4%, and 2%, respectively. Industry production in Brazil declined 23%.

Slide 12 shows our financial results for the second quarter of 2014. As Matt mentioned, our sales, which were up 11%, continue to grow faster than the overall market. The increase in sales in the quarter primarily reflects the addition of new business and increased production on key Lear platforms.

In the second quarter, pretax income before equity income, interest, and other expense was $233 million, up $32 million from a year ago. Interest expense was $15 million in the second quarter, down $3 million, primarily reflecting interest savings related to the refinancing of our 2018 and 2020 notes.

Other expense was $17 million in the second quarter, up $7 million, primarily reflecting losses associated with foreign currency fluctuations. And net income attributable to Lear was $149 million in the quarter, up $11 million.

Slide 13 shows the impact of non-operating items on our second-quarter results. During the second quarter, we incurred $43 million of restructuring costs primarily related to capacity reductions in Europe and various census-related actions. Excluding the impact of restructuring costs and other special items, we had record core operating earnings of $275 million, up $51 million from 2013. Adjusted for restructuring and other special items, net income attributable to Lear in the second quarter was $174 million and diluted earnings per share was up 31% to $2.12 per share.

Slide 14 shows our second-quarter adjusted margin for the total Company as well as for both business segments. Total Company-adjusted margins were 6% in the quarter, up 60 basis points from a year ago reflecting improved performance in our electrical business. In seating, sales of $3.4 billion were up 12% from last year with adjusted earnings up $19 million or 10%. Adjusted margins were 5.7%, down slightly from a year ago, but up from the 5.5% margin in the first quarter of 2014. The increase in earnings from a year ago primarily reflects strong sales growth, favorable operating performance and the benefit of operational restructuring, partially offset by the impact of key program changeovers. Our full-year margin outlook for seating remains in the 5.5% to 6% range.

In electrical, our positive momentum continued into the second quarter with record sales and earnings. Adjusted margins were 12.5%, up 280 basis points from a year ago, reflecting favorable operating performance and strong sales growth. Given the strong performance in the first half of 2014, we expect full-year margins in our electrical segment to be approximately 11.5% to 12%.

Slide 15 provides a summary of free cash flow which was $137 million in the second quarter. Slide 16 highlights the key assumptions in our 2014 outlook, which reflects the latest production assumptions in our major markets. Global production of 85.7 million units is up 1% from our prior guidance with Europe up 2% and North America up 1%. Our 2014 financial outlook is based on an average euro assumption of $1.37 per euro which is down 1% from our prior outlook.

Slide 17 summarizes our 2014 outlook. Based on our strong performance in the first half of the year, we are increasing full-year guidance. For 2014, Lear expects net sales in the range of $17.6 billion to $17.9 billion, up from the prior guidance of $17.2 billion to $17.7 billion, reflecting higher production on our key platforms.

Core operating earnings are forecasted to be in the range of $975 million to $1.25 billion, up $40 million from the prior outlook, reflecting the increase in sales in first-half performance. Tax expense is estimated to be in the range of $270 million to $285 million. Adjusted net income attributable to Lear is forecast in the range of $610 million to $645 million. Pretax operational restructuring costs are expected to be approximately $90 million, up $25 million from the prior outlook, reflecting plant consolidations in Europe and other census-related actions.

Free cash flow for 2014 is forecasted in the range of $400 million to $450 million, which is up $25 million from our prior outlook.

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

Great. Thanks, Jeff.

I thought we had a great quarter. I thought the Lear team did an outstanding job. We remain focused on driving continued improvement in the business, improve quality and cost for our customers and returns for our shareholders. We continue to invest in the business and return cash to shareholders while improving our competitiveness.

And with that, I would like to open it up for questions, Ed.

(Operator Instructions). Rod Lache, Deutsche Bank.

Good morning, everybody. Couple of things. First on the electrical business in 2012 and in 2013, your margins were actually higher in the back half than they were in the first half. It was, I guess, a pretty steep trajectory over that timeframe. Was wondering whether you see something specific in the second half of this year that would cause the electrical margins to moderate meaningfully from what you were seeing in the first half or is there some conservatism that's plotted in there?

No. It is a pretty clean first half, Rod. The business obviously is performing quite well. I think it is benefiting from a lot of the restructuring efforts that we've made there. It also benefited through the first half of a pretty strong mix on volume. We see sales decreasing slightly in this segment in the second half versus the first half of the year. And so, really That's more it than anything.

Just, seasonality of the sales level in some --

Right, I mean, this business has a big exposure to Europe or a bigger percentage of exposure to Europe than seating. And with the third quarter being down for the normal season -- shutdown season in Europe which extends a little bit longer than it does in North America, it impacts it a little bit disproportionately. It also benefited through the first half of a pretty strong mix on a product that we have high content on.

Okay. And secondly, can you give us a little bit more color on what you are seeing in terms of the drivers of the seating business? You said obviously you are very focused on the turnaround in South America. Is that business still lossmaking? Do you still think you can get to breakeven there? Even with the headwinds in terms of production at the end of this year? And what do you think the exit rate could be maybe on the North American structures business?

Let me start it in reverse. The North American structure business had a very strong quarter. It is still not where it needs to be, but it returned to profitability. We are still working through some structural issues as well as some commercial issues with our customers in a collaborative way. So made a nice stop. The team did a really nice job in that segment.

South America is a little bit more of a challenge because you are trying to make corrections in a very dynamic environment which includes inflation as well as volume cuts, specifically in Brazil. So we did make improvements sequentially from the first quarter. It is still not profitable in the seat side, but we would expect that to continue through the end of the year. We expect to get closer to break even by the time we exit. Our guidance is based on improving through the second half of the year in that segment.

You think you can get close to breakeven by year-end there even with the weak --?

I do. We are working with our customers. It is going to take some help from our customers to help us work through some commercial issues and consolidation that needs to get done there to address some of the overcapacity and volume shortfalls. But, yes, I think we can improve. (multiple speakers) breakeven.

On the structures business, is there some kind of targeted exit rate that you might be able to share with us on what kind of margin range do you think that business can get to?

No. We made a nice improvement. It is not at the target rate that we needed that to justify the investment yet. The segment overall, though, meaning the structures business when you take into consideration Europe and Asia is doing quite well and it is approaching the margins we needed to be at to justify the investment which we think is in the approximately 10%.

Electrical will be -- I'm sorry, the North American structure business isn't there yet, Rod, nor will we expect it to exit there. But we will make -- we will continue to make sequential improvements every quarter in that segment.

Okay, thank you.

John Murphy, Bank of America Merrill Lynch.

Good morning. A first question on slide 7. You are talking about more components and modules in emerging markets and I am curious because we think about the receptivity of your customers to larger parts of the car, more modules that you would provide. Is there the potential for some real margin expansion as you are providing a larger chunk of the car in the seating and electrical components? And then also as we look at this, you -- on the last bullet -- talked about reaching full capacity sometime in the future, meaning you are not at full capacity right now. So it seems like there could be some more margin potential as you fill up that capacity.

Just curious where you are in that capacity utilization as well.

Well, it really depends on the component, the market, and the program. I think a lot of our facilities in Europe, if you will, still have open capacity. Especially the [just in time] facilities. Because they have not reached the level of volume that was planned. While they have made a nice recovery, they are still significantly below peak volumes. I think that is an opportunity.

Our component facilities in the low cost in Europe are getting fairly full. The same thing in North America. I do think we have opportunities in certain facilities in Asia to increase capacity as well.

As far as the margin expansion with acquisitions, John, it really comes down to what the component is and what the return on investment is required to justify the investment. I do think overall, however, that acquisitions provide the ones we are looking at, [the] valuations we are looking at would provide an opportunity to not only expand sales and improve quality, but also expand margins.

Okay. And just a follow-up. As you are seeing some of this capacity fill up, do you envision maybe in a year or two an accelerated level of investment spend that might depress your margins? Or do you think that given your current base of business that as you invest for growth maybe in that next year or two above and beyond what you are doing right now, that you wouldn't see that kind of compression or leveling out in margins?

I really -- John, I don't see a real need to step up capital expenditures from the rate that we have been doing over the last couple of years. It would be great if we could because I think that provides a nice return on the organic investment piece of this thing, and we have been able to have nice returns on the capital investments that we have made. I think the rate that we are at currently is pretty good and should allow us to support the backlog that we have in the new business that we are winning. I don't really see a negative headwind in that area. Jeff?

I would agree. There's some structuring that still needs to take place in some instances which may require some capital, but other than that, just on the book of business, no.

Okay. Then if we think about that in the context of the capital allocation, obviously you guys are being pretty acquisitive on your own stock and with it up 50% in the last year and three times in the last two years, obviously it has gotten a little bit more expensive but still looks like a good deal. Meaning, as you look at that versus what the stock has done and sort of the acquisition environment that is out there, how are you -- you are looking at capital allocation because you do have a high-class problem of generating a tremendous amount of free cash flow and not being levered at this point. And it seems like you have been aggressive, but you might need to get more aggressive in allocating capital and generating adequate returns on that incremental capital. How are you assessing the stock versus acquisitions right now and could you get more aggressive on either side?

Well, I think we are still a discount to the space. I think the beauty of our balance sheet and the cash generation that we expect to see here doesn't make one or the other exclusive. I think we can do both. I like the pace that we are on from share repurchase. And the same token, I believe if we could buy an asset that would either provide benefit to the craftsmanship in seating or provide innovation and some help in electrical to expand that business a little bit faster, we would do it. But it has to do the right strategic fit and it has to be at the right valuation.

But, I don't think they are either/or questions, John. I think they are both.

Okay, great. Thank you very much.

Ryan Brinkman, JPMorgan.

Good morning. Congrats on the quarter.

Thank you.

So it looks like you are raising most or all of the guidance items for the full year in excess of the [beat lows] to The Street in 2Q. I'm curious is that an indication that your outlook for the back half of the year is now stronger than before or can't I really say that because I don't know exactly what you're assuming for, for 2Q.

If it is -- if you are ticking up the back half what would you say are the biggest changes to your forecast in terms of geographies or customers, et cetera?

What Jeff said on the call and what we said a little bit earlier is we had a nice first half. We had a strong mix. The fundamentals in the industry from the SARS to the European recoveries to the rate of growth in Asia are all fairly strong. The one blemish would be South American production environment and exchange environment.

Internally, I like where we are at. I like the performance of the groups. We are six months in and we are a little bit ahead of pace and that is why we decided from what we see to increase guidance.

So overall, it is a lot of different factors that go into building the projections. But those will probably be the main drivers, Ryan.

(technical difficulty) with this talk of [that effort] at TRW which I think took a lot of people by surprise, but has been confirmed by those companies, there has been some increased speculation that there could be other large industrial combinations in auto parts of the sort that we haven't seen since the downturn. So I am curious where you think the seating subsector fits into this if this is some sort of emerging trend?

Well, I really don't know. I know we are not in talks with anybody and I would be a little bit hesitant to speculate if somebody else is. It is really probably a better question for somebody in the investment banking side than for us. We are happy with where we are at in seating and we are in no talks with anybody.

Got it, great, thanks. Last question, you have given some electrical margin guidance for the full year. Obviously superstrong margin results this quarter. I know the last quarter was strong too and there was talk on the call then that it had benefited from some of the lumpiness of commercial settlements. Does that continue into Q2 or -- ?

No. We were -- it was a pretty clean quarter. The team did an outstanding job performing and executing. And we benefited from a nice volume on our key platforms and we expect it to be a little bit weaker in the back half, but overall the team is doing an outstanding job.

Okay, congrats on that. Thanks for all of the color.

Thank you.

Itay Michaeli, Citigroup.

Good morning and congrats.

Thanks, Itay.

Wanted to gauge, get your latest thoughts on the midterm outlook for electrical. Both, of course, margins. And then also where you think revenue growth can get to. It seems with the mix in the first half growth might be running a little bit ahead of expectations. And how you are balancing booking activity, I presume there's a lot of opportunity out there for you to grow with the margin objective in mind.

Right. I think, first and foremost, on electrical, besides looking at Lear, before we look at Lear specifically, that segment is benefiting from a real shift with content growth. Even the traditional architectures, internal combustion architectures has seen a content growth that is in excess of 3% a year just on the base business. More and more content in electrical distribution requirements are going into these vehicles as they become more complicated, and have more features, and use more computer management to extend mileage, if you will.

If you couple that with the penetration of alternate energy vehicles, I think there is a huge opportunity to increase content.

When you look at Lear specifically, I think the restructuring efforts and the product capabilities that we have invested in prior years is really starting to pay dividends now with the win a business. Things like connectors facilities in China and electronic facilities in northern Africa are now starting to facilitate growth and we would expect that trend to continue.

From backlog standpoint I think there's -- when you look at our backlog in this segment, I think it could easily be an additional $1 billion in the next four to five years.

That is very helpful in detail. Then with the maybe increased discussion today on M&A, Matt, hopefully you can review for us your latest thoughts on leverage target, maybe gross and net and then also liquidity requirements. Given that you are growing revenue, I am wondering if any of those have changed at all.

No, I think as we said in the past our leverage target on a gross basis is 1.5 times or less. We feel that is important to maintain investment-grade credit metrics. Now that gives us some room, obviously, from where we are at to get to that. Probably $800 million or so of debt could be added and still stay within that range. And then we would like to maintain minimum liquidity of roughly $1.5 billion. That takes into account the peaks and trough of working capital in the business, cash that is not necessarily available for daily use.

And then, an amount related to set aside for taking advantage of opportunities that may be out there and short-term market disruptions, et cetera. So that is how we view what we need from the leverage and from a liquidity standpoint.

Very helpful. Then, a quick last housekeeping. It looked like other expense you mentioned some of the impacts there was above the equity income and it looks like for the guidance for the full year those two might still be assumed at zero. Is the thought that other expense trails off in the second half or that other income -- equity income rises or maybe a combination of the two, maybe just help us out there a little bit.

Well, I think the equity side was probably -- the issue with the equity side if there is an issue in the quarter was there were some launch costs incurred in some of the Chinese non-consolidated joint ventures that are supporting new business growth going forward. So we would see that improving as we go down the line. And the other expense is really related to the FX volatility that is out there and the revaluation of the balance sheets that is associated with that. And some of the currencies have been, seemingly over the last several quarters, working against us. So we would say that, hopefully, over time balancing out and hopefully at some point benefiting us.

Right. That is very helpful. Thanks so much and congrats again.

Thanks.

Pat Archambault, Goldman Sachs.

Good morning. A couple of follow-ups based on the discussion so far. As you think about the margins on the electrical side, obviously, if you keep on hitting new peaks here.

Can you give us a little bit of perspective as to how close we are to what you assume to be the sustainable margin? And also, maybe layering on what the potential to change that is, if you shift the mix of business over to connectors. What kind of opportunity there is to bring the margin up, relative to the current run rate?

Well, everything in the margin is really more of an outcome on the upfront investment whether it is engineering or capital. With us, right now, we are probably a little bit heavier in wire harnesses than we are in electronics and connectors compared to our major competitors in this segment. With a current capital configuration, upfront capital investment, capital intensity, we start returning nicely in excess of our cost of capital in the low 6%.

I think the margin profile that Jeff talked about in this business is sustainable and would allow us to continue to penetrate and gain share. If we went into more capital-intensive electronics in a greater way or a heavier percentage, whether it is the junction boxes or the connectors, then that would be a reason why we could expand margins.

Right now, steady state, we don't see a major shift in those products as a ratio to wire harnesses. So we believe that we can grow the business at the margin that it is currently at. And maintain that 11.5% to 12% type margin profile.

Okay, yes, that's helpful. And on the other business segment, since it was the end of last year, a major competitor of yours highlighted that its own seating growth would be relatively stable, flat because it was pruning its portfolio. Just wanted to see has that had any kind of impact on your quoting activity in terms of the margin opportunity? Are things -- is there any evidence that as far as the new backlog is concerned things are getting a little bit more disciplined?

I think what is important to customers when you are quoting is knowing who is going to do the business three to five years out. With us there's no question of where we are going to be and what we are going to be doing three to five years from now. We are going to be making the best seats in the world.

And I think that is important to our customers and that provides an opportunity to stability of the ownership, the stability of the organization is incredibly important as you would expect to our customers that are going to be producing global platforms all around the world.

From a margin standpoint, again, margins are -- reflects -- a reflection more of the upfront investment. Everything we do whether it is capital, acquisitions, restructuring, we look at as a return on investment and quoting is no different than that. And the seating segment as current capital intensity we are returning in excess of our cost of capital once we break through the 5% margin. We expect those margins where they are at right now to continue to improve, but there is a limitation on how far you can push them just because of the -- even with potential consolidation there's still competition in this space.

But overall from an opportunity standpoint, we are one of two that can do a global platform in all the related components in every automotive producing region in the world and if there is uncertainty on one of those suppliers on where they are going to be in three to five years, then obviously that is the opportunity for the other one.

Got it. And tying everything together just on the seating side, it sounds like just make sure -- just to make sure I have this correctly, some of the drivers aside from the one we just talked about are -- the breakeven in Latin America and as well as increased sequential improvements in the components, is that sort of the -- as you get to your margin target for this year are those the key levers?

Those are two key levers. I think there are other ones as well, the digestion of growth that we are seeing on some of the new platforms and making sure that we run them efficiently. It is also seeing continued recovery in Europe. We made a very nice step in Europe this quarter, digesting the growth that we have had there, but also taking advantage of some of the volume upticks on our key platforms. We need to see that trend continue. And I think those are probably major drivers.

All right, terrific. Thanks a lot.

Brett Hoselton, KeyBanc.

Good morning. First, electrical margins. I think the last update, you were thinking your longer term target rate was going to be 10.5% to 11%. I am wondering what you are thinking now. You are running at 12%. The last eight quarters your contribution margins have been around 29%, based on my calculations.

I don't sense that there is going to be any dramatic change in your capital expenditures and/or maybe your backlog coming online that might drive those margins down. So it all kind of suggests or seems to indicate or point to the idea that your margins in that business likely will continue to go up.

And I know you don't want to hamstring yourself because you have got the cost of capital is in the mid-6% range. And so you might take some 10% business, which would pressure your margins, but I don't see you doing that at this point in time.

So how do we think about your longer term margin expectations for that business? Or maybe even just the next year or two?

I think, Brett, you've hit a really good point which is, in certain cases, a 10% margin business would be great business for us just because of our -- it depends on the capital intensity and, quite frankly, on harnesses I think you start returning in excess of your cost of capital when you breakthrough the high 5% because it is not that capital intensive.

So I don't want to hamstring the business, but I think on average we can maintain, continue to grow the business and be in the 11% to 12% margin range. Certain quarters will be above that, like this one, and other quarters might be slightly below it. But on average, that is the range that I think we can manage this business at.

And, but -- I guess what I am not necessarily hearing is any particular disruption over the next year or two, step function change and expense spending, R&D spending, capital intensity -- I don't hear any of that. I just -- (multiple speakers) business is (multiple speakers)

I don't see anything, Brett, right now that would disrupt it. I mean, there's nothing on our horizon. Business is dynamic, things change. It is hard to say where you are going to be 24 months from now more than a narrow range of between 11% to 12% margins on this business.

But there's really -- I really don't see anything out there if the backlog and production stays and the volume assumption stay consistent with where we are at right now.

Switching gears here, on an M&A front, it sounds like you would like to expand your expertise in your current portfolio businesses. Can you maybe provide a little bit more, some specific examples of maybe the types of products that you might be looking for? I assume connectors might be an example, but can you talk through maybe the two or three or four things that are on the top of your wish list?

Yes. Connectors would be, obviously, one. I think in the past we talked about leather, that would be another one because it ties into both innovation and craftsmanship. Possibly heating and cooling and lumbar mechanisms on seating. I think anything that would help our ability to write software and code and logic could also help. But, really just focusing broadly on craftsmanship and seating and more innovation and electrical.

On the capital deployment front, I think, Jeff, if I understood you correctly earlier you talked about -- we seem to have about $800 million of capital available. We would like to keep some dry powder for M&A and that sort of thing.

So I guess my question is your current pace of share repurchase, plus your dividend burns your free cash flow. A year from now, two years from now do you think that $800 million in your balance sheet is where you want to be? Or do you look at that and go, you know what, we probably need half of that?

Well, a lot depends on where the business is, obviously, in a couple of years. Our backlog is going to be greater. Our sales are likely to be greater given the backlog. So it is hard to go that far out and pinpoint what we need, but I don't know that the direction itself will be much different. Maybe the dollar amount may be different.

Okay. Thank you very much.

Joe Spak, RBC Capital Markets.

Good morning, everyone. Maybe building off that M&A tick list that you just mentioned. You have clearly mentioned connectors before.

I am curious would you -- does it need to be --? Do you need to add something that you already at least have some position in or would you even consider something like sensors, which some other connectors players do as well that is maybe a little bit ancillary to the actual business?

Well, we would consider it. It really depends on the technology. The technology and the capabilities and manufacturing and tooling specific with that. So, we won't rule it out. We think there is a convergence of sensors to connectors and a lot of players that are in there are in both product lines. We wouldn't rule it out, but it would have to be compelling with the capabilities on the connector side.

Okay. And bigger picture on electrical, I know also you -- I believe that's almost exclusively if not -- or at least the vast majority is all automotive. I was wondering, is there any opportunity to take your core competency into other end markets?

Oh, absolutely. I think there's -- there is capabilities both in connectors to extend beyond automotive. It is very much the same technology and I think a lot of our battery-charging technology and intellectual properties have applications outside of automotive, and I think the electrical distribution also -- whether it is heavy truck or white goods, what have you -- have applications.

It could be non-automotive and I think that is not just true for electrical, I think that is true for seating with some of the precision assembly, our fabric, and cut and sew capabilities. In fact, Guilford came in with a nice but small book of non-automotive business and I think that is a great way to spread your technology and leverage your investment and derisk the company. So, yes, I think there's applications there.

But, will there -- correct me if I am wrong, but right now on stuff like electrical distribution it is all light vehicle for now.

It is all light vehicle for now.

Okay. And are there discussions with some of those other players? Like in the backlog, or -- ?

I don't want to discuss specific acquisition targets. We would be open, however, to if the company had both automotive and non-automotive, we would be open to discuss it.

Well, I guess I meant organically are you having those discussions with some of the other end markets?

Always.

Okay. Then, one quick housekeeping. What was launch cost in seating, was that on a year-over-year basis pretty neutral in the year or good guy or bad guy?

It was improved on a year-over-year basis.

Okay. Thanks a lot.

Ravi Shanker, Morgan Stanley.

Good morning, everyone. There was an earlier question on [JCI] and seating and the flow through the year, but in [EPMS] as well your press release mentioned share gains of potential tailwind this quarter. Can you flesh out a little bit more? Are you seeing any shifts in market share as a result of maybe the fallout of the antitrust investigations or something else out there?

Well, I don't want to speculate on why we are gaining share and whether or not it has something to do with the antitrust problems that are in certain competitors.

We are gaining share. I like to think it is because of our products and our footprint and the investments that we have made in our capabilities. Because at the end of the day, I really think that is what drives sustained growth and I believe our footprint is second to none in this space. I think we have got outstanding products and I believe that is probably what is driving the growth.

Great. And that is a good segue to my next question which is, if you look at the about 500 basis point margin improvement you had in EPMS since 2012, just very roughly how much of that do you think maybe a result of your cost and footprint actions versus growing content in the car versus mix up between wiring harnesses and connectors?

Well, that is a tough question. We don't really quite look at that, but if I had to factor, I guess, I would probably say half and half.

Half and half, okay, got it. Finally, it was good to see your corporate costs come back closer to a normalized level of 1.3%, 1.4% versus 1.6%, 1.7% for the last three quarters. Is that now a sustainable run rate, do you think?

Yes, I think so. I think going forward you'll see something very similar to that for the remainder of the year.

Great. Thank you.

Colin Langan, UBS.

Earlier this week, GM announced some recalls with seating issues. Could you clarify whether you were on any of those platforms and if that is a risk going forward?

It's our history with our customers is that we participate in helping them solve any warranty issues and one of the things that you get from Lear as a supplier is the ability to stand behind our products.

We don't want to specify specific programs, but when you sell as many seats as we do to every customer in the world, there is going to be no doubt a time when we have a recall with it. We just think it is a normalized risk at this point. No different than what it has been in the past.

Okay. Then could you clarify if there's any -- I mean, if there was a substantial recall cost coming, you would have accrued it for these results?

That is correct.

Okay. Any color -- you look at seating you substantially outperformed in both North America, Europe, I would assume pickups had something to do with the North America performance. Any color on Europe, why the 12% gain well above market? What were the key drivers of that positive mix?

Well, Europe is benefiting from a volume recovery albeit still below historical peaks. We are seeing a nice recovery there and I think our business there is strong in that it is a nice ratio of luxury and high-end vehicles as well as AMB entry-level vehicles. So, I think we are very well diversified there. I also think a key driver to the margin recovery is all the efforts we put into restructure that business over the last several years and try to adjust our passing and improve our cost structure.

So the team in Europe has done a really nice job. We still have some work to do there. But all in all I think it is a combination of both.

I guess what I was getting at is that Europe I think was up just (technical difficulty) sales were up 12, so what were the key sort of major platforms that help drive that huge outperformance or is it all just new business?

It's backlog and FX, foreign exchange and backlog. The euro is strong, stronger on a year-over-year basis. We had a nice backlog there, and I think from a platform standpoint we are on some of the best platforms that are selling over there whether it is the 3 series, C class, the Audis, Jag Land Rover off a small base, but they are doing outstanding in the marketplace and we are their basic exclusive seat provider.

Okay. And when we look at the seating margins they were down slightly despite that very large sales gain. Can you remind us of the big factors? Is this really South America? It wasn't really an issue this time last year and the components in North America were not issues? Is that the reason why we didn't see them? (multiple speakers)

There's literally thousands of puts and takes, but probably if I put it down to just one major factor, I would tell you it is to change over the portfolio. We are going through over the last I want to say year and a half, probably a changeover that impacts 40%, 50% of our portfolio in seating.

And when you change over, it is not just the launch costs. It is also new programs typically come on lower -- at a lower margin than the programs they replaced for several reasons.

One, you don't have years of experience and the efficiencies and the design improvements that you need to get it at its lowest possible cost. The second side of it is a lot of these programs went through a competitive bid process which puts pressure on the margins as well. So that is probably one of the key drivers on the margins.

Okay. And one last question. I noticed when you raised your guidance, restructuring was also raised. So what are the big restructuring actions going on? I mean, is that all focused in South America and the North America components?

No. It is those two, but it's as much as anything Europe as we continue to look for ways to improve our cost structure in Europe. So Europe drives it as well.

Okay. All right, thank you very much.

Brian Johnson, Barclays.

Good morning. You know -- want to, as usual for me, talk about the electoral business. A few more strategic questions. In 2010 electrical was 15% of your core operating earnings. This quarter it was 42%.

Has there been an evolution similarly in the way you spend time on it at the corporate level, where it is in terms of allocating R&D capital, expenditure budget, acquisition targets? So you have really a two pillar business as opposed to your seating with an electrical side. How has that evolved?

Well, even when it was smaller several years ago, I think we spent quite frankly as much time on that business and maybe even a little bit more on it to try to get it to this level. Look at all investments, whether it is seating and electrical on the same type of gating which is again as a return on investment. Even when we were struggling in this business back in 2008, 2009, we continued to invest in product development and a lot of those products today are paying dividends whether it is connectors or junction boxes or the high power.

So I would tell you that we don't necessarily spend our time based on revenue; in certain cases smaller revenue and smaller profit require more intensity. As far as capital investment, we will invest where we get the greatest returns and where we think we can provide the most value for our shareholders as opposed to percentage of revenue.

Okay. If you think about some of those investments and then a couple of questions very roughly what your split of business is between those categories of harnesses, connectors, and then high power inverters, converters? Secondly how do you see that evolving over a five-year period especially as OEMs begin especially in Europe to add 48 volt systems, plug-in hybrids, advance start stops? Do you think that will change? And three, back to the M&A question, are there tuck-ins that would be helpful to get you to that kind of end of decade where there is greater electrification of powertrains?

Well, that is a big question. (multiple speakers) let me break it down a little bit. I need some help here, guys are flashing me.

On the breakdown it is roughly 60% wire harnesses. The rest is split fairly evenly between boxes and Ts and Cs. In many cases Ts and Cs and boxes are converging in that some could argue that a box is nothing more than an educated connector, but that is converging there.

The car is becoming a rolling platform. There is no doubt -- or smart device or rolling smart device and it also is using a lot of the features that you mentioned like start/stop to improve the fuel economy and Cap A standards. And from that standpoint that is improving the signals. That is what is driving I think the overall content increase of 3% plus because it is being balanced also with that the growth in the industry is coming many times from A and B platforms that don't have really high electrical content. So when you balance it all off we are really comfortable at this point with a type of 3% content growth per year on the overall industry.

In certain segments, that content growth is much higher in much more mature platforms or sophisticated vehicles or luxury segments. You are going to see a content growth that is even higher than that.

As far as hybrid and alternative energy vehicles, there's some estimates that put that penetration as high as 10%. We are not planning on that. We think it will be much lower than that. However, it is still a bit of a wild card when you look at the Asian markets and specifically China on whether or not they demand some level of alternative energy vehicles. We are working with some of our Chinese customers to get positioned in that market. In the event that that does happen (technical difficulty) up being higher than what we are planning.

Okay and is there any sort of where you are on the 48 volt issue? Would that be -- some of the European suppliers we are talking to and OEMs see a future for that mid decade, later in the decade for Europe.

It is a possibility and we have capabilities there. We actually think that that won't be as great a penetration as others. We think that the basic architecture over the next five years will stay relatively the same. I think the real gains will be coming into wire gauge and the type of material the wire is made out of. Whether it is aluminum clad or what have you. So we don't really see a major change in the architecture, quite frankly.

Okay, thanks.

We have no further questions on the line. I would now like to turn our call back over to the presenters.

Great. I guess the only people left on the line, Ed, are the Lear employees. And I want to sincerely thank them for all the hard work because results like this just don't happen by luck. They come from very hard work and teamwork. We still have a lot of work to do. It was a great quarter but we have to continue to get better.

So from the senior leadership team, I want to thank all of you and tell you enjoy the rest of the afternoon, but let's get busy. Thank you.

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