Lear Corp (LEA) 2015 Q1 法說會逐字稿

Good morning, my name is Sean. I'll be your conference operator today. At this time I would like to welcome everyone to Lear Corporation's first-quarter 2015 earnings conference call. (Operator Instructions)

Vice President of Investor Relations, Mr. Ed Lowenfeld, you may begin your conference.

Thank you, Sean. Good morning and thank you for joining us for our first-quarter 2015 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 beginning of the presentation materials and also in our SEC filings.

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

Slide 3 shows the agenda for today's review. Following the formal presentation, we'll be pleased to take your questions.

Now please turn to slide 5 and I'll hand it over to Jeff.

Thanks, Eddie. Lear is off to a strong start in 2015 with higher sales and record core operating earnings.

Sales in the first quarter were $4.5 billion, up 4% from a year ago. Excluding the impact of foreign exchange, sales grew by 12%. Core operating earnings increased 21% to $294 million, the highest quarterly earnings in our history, and margins were higher in both business segments.

Excluding restructuring and special items, earnings per share increased by 24% to $2.28 per share. Eagle Ottawa will further strengthen our industry-leading sewing and fabric capabilities and enhance our ability to differentiate our seats with unique designs at a higher level of craftsmanship. At the same time Eagle Ottawa will provide another platform for sales growth and product diversification.

We continue to return cash to shareholders and in the first quarter we announced increases in our existing share repurchase and dividend programs. In recognition of the performance improvements we have made in the business, S&P increased our credit rating outlook to positive during the quarter.

Slide 6 shows vehicle production in our key markets for the first quarter. In the quarter, 22.1 million vehicles were produced globally, up 2% from 2014. Our major markets all showed increases with China, Europe, and North America up 8%, 3%, and 2%, respectively. Production was mixed in other key emerging markets with India up 6% and Brazil down 15%.

Slide 7 shows our reported results for the first quarter of 2015. Our reported sales in the quarter increased by 4% from a year ago to $4.5 billion. This includes the $369 million unfavorable impact of foreign exchange related primarily to a weaker euro and Brazilian real. Pretax income before equity income, interest and other expense was $261 million, up $45 million from a year ago. Interest expense was $24 million, up $8 million, primarily reflecting debt incurred to finance the acquisition of Eagle Ottawa.

Depreciation and amortization increased by $10 million, primarily reflecting the acquisition of Eagle Ottawa. Net income attributable to Lear was $147 million, up $25 million.

Slide 8 shows the impact of nonoperating items on our first-quarter results. During the quarter we incurred $8 million of restructuring costs, primarily related to a plant closure in Europe and census-related actions. Other special items of $25 million primarily reflect one-time costs related to the Eagle Ottawa acquisition. Excluding the impact of these items, we had core operating earnings of $294 million, up $50 million from 2014. The increase in earnings primarily reflects favorable operating performance, the benefit of new business, increased production on key platforms and the Eagle Ottawa acquisition, partially offset by the unfavorable impact of foreign exchange.

Other expense in the quarter included $14 million in costs, related to the early redemption of our 2020 bonds.

Excluding the impact of one-time items, other expense was up $4 million, primarily reflecting losses associated with foreign currency fluctuations. Adjusted for restructuring and special items, net income attributable to Lear was $181 million and diluted earnings per share was $2.28, up 24% from 2014.

Slide 9 shows our first-quarter adjusted margins for the total Company as well as for both business segments. Total Company-adjusted margins were 6.5%, up 90 basis points from a year ago and a record for the first quarter. Margins increased in both business segments.

In seating, sales of $3.5 billion were up 8% from last year with adjusted earnings of $219 million, up $43 million or 24%. Excluding the impact of foreign exchange, sales increased by 16%, reflecting higher production on key platforms, the acquisition of Eagle Ottawa, and the addition of new business.

Adjusted margins were 6.3%, up 80 basis points from a year ago. The increase in margins from a year ago primarily reflects strong sales growth and favorable operating performance. Eagle Ottawa did not impact seating margins in the first quarter but it is expected to benefit full-year margins by 20 to 30 basis points.

Our full-year margin outlook for seating remains in the 6% to 6.5% range.

In electrical, sales of $1 billion were down 9% from last year. Excluding the impact of foreign exchange, sales were up 2%, primarily reflecting the addition of new business. Adjusted margins improved to 13.3%, up 100 basis points from a year ago, reflecting strong operating performance and the benefit of new business. Our full-year margin outlook for electrical remains in the 12.5% to 13% range.

Slide 10 provides a summary of free cash flow. Free cash flow was a use of $121 million in the first quarter, primarily reflecting the timing of our March 28 fiscal quarter end, as well as increased working capital to support our sales growth. The early fiscal quarter end negatively impacted free cash flow as there were significant customer payments received just after quarter end.

Slide 11 provides a snapshot of our capital structure and liquidity. At the end of the first quarter we had $748 million of cash and, including our unused $1.25 billion revolver, we had approximately $2 billion in liquidity. As shown on the right side of the chart, we have minimal debt maturities for the next five years and a very efficient capital structure with low borrowing costs.

We are committed to maintaining a strong and flexible balance sheet with sufficient liquidity and investment-grade credit metrics.

Slide 12 provides an update on our share repurchase program. In February, Lear's Board of Directors increased our share repurchase authorization to $1 billion. During the first quarter, we repurchased slightly more than 1 million shares for a total of $112 million. Since initiating the share repurchase program in early 2011 we have repurchased 31.9 million shares for a total of $2 billion. This represents a reduction of approximately 30% of our shares outstanding at the time we began the program. The average price paid to repurchase shares over the life of the program is approximately $63.50.

At the end of the first quarter, we have remaining share repurchase authorization of $888 million which expires in December of 2017. This represents approximately 10% of our current market capitalization.

Slide 14 highlights the key assumptions in our 2015 outlook, which reflects the latest production assumptions in our major markets. Global production of 87.3 million units is generally consistent with our prior guidance. Our 2015 financial outlook is based on an average euro assumption of $1.10 per euro, which is down 17% from 2014. This implies an average exchange rate of $1.09 per euro for the remainder of the year.

Slide 15 outlines our detailed financial outlook was is unchanged from what we announced earlier this month. Lear expects net sales in the range of $18 billion to $18.5 billion and core operating earnings in the range of $1.175 billion to $1.225 billion. Free cash flow for 2015 is forecasted to be approximately $575 million.

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

Great job, Jeff. Thank you.

As shown on slide 17, our balance strategy of investing in our business, maintaining a strong financial position, and returning cash to our shareholders is delivering superior value to both our customers and our shareholders. Lear's share price has steadily improved over the past several years, reflecting the Company's strong sales and earnings growth. Our total shareholder return for the past three years is 180% which is significantly higher than the automotive peer group, as well as the broader market.

Slide 18 highlights Lear's valuation multiple. While our recent performance has been strong and our valuation has improved, Lear remains undervalued relative to the peer group.

In summary, we continued our positive momentum in the first quarter with record quarterly earnings and we are on track to deliver our sixth consecutive year of higher sales and earnings per share. As Jeff mentioned, the acquisition of Eagle Ottawa will provide a platform for improved craftsmanship and additional sales growth. Combining Eagle Ottawa's leather expertise with Lear's world-class fabric and sewing capabilities will allow us to provide highly differentiated designs for our customer, while improving quality and lowering cost. We'll also provide additional sales growth as other content continues to increase and we leverage our existing customer relationships to gain market share.

Lear is also well-positioned to take advantage of major industries' trends, such as global platforms, increasing electrical content, improve fuel efficiencies and growing consumer demands for comfort convenience and safety features.

Lear is in the strongest competitive position in our history. We have a focused strategy of delivering results, strong market positions in both business segments, a footprint that is second to none, a well-established and growing business in China, a strong financial position, and we have the best team in the industry.

And with that, now I'd be happy to take your questions.

(Operator Instructions) John Murphy, BofA Merrill Lynch.

Just a first question, Matt. We just got back from Shanghai. I know Eagle Ottawa did great business but I was a bit surprised there were some luxury vehicles that were launching over there where Eagle Ottawa is cited as a sort of differentiating part of the vehicle, with the leather from Eagle Ottawa. I'm just curious, what kind of position Eagle Ottawa has in China specifically? And is that opening more doors for share growth in China for you?

We have a great position. If we are not number one we are close to number two in leather. It's kind of hard to measure sometimes. The information there is not as clean as it is in North America, Murph. For us, what's happening there besides the Western automakers' business growth what we are seeing is the domestic automakers trying to penetrate with their own products, and in order to do that they are going to need to be able to provide craftsmanship at a level comparable with Western automakers, and that's providing a great opportunity for Eagle Ottawa and for Western suppliers likelier that can deliver that type of quality.

So I think it can be a differentiator for growth and I think there's a lot of upside in that market for Eagle Ottawa.

Okay. And then a second question -- I hate to call you guys out on this but your margins in the quarter for seating were sort of at the high end of what you're talking about for the full year and, then, your margins for electrical were actually [well behind] what you were talking about for the full year.

Is there something that you are expecting to sort of fade through the course of the year or was there some unusual strength in the first quarter that really supported the [great numbers] in the quarter?

Overall, we had a nice mix of seating, a little softness in certain areas around the globe like South America but, overall, it was a clean quarter, John. I would expect the performance to continue -- you know that the second quarter is usually our strongest quarter or one of our strongest quarters from a normal seasonality in cadence.

So I would tell you that we would expect the performance to improve. It's still relatively early in the year which is as we just closed the first quarter and only in April, if our assumptions on production and currency remain stable, I would expect to post numbers at the high end of the range.

Okay. And then just lastly, obviously, we agree with you at current levels we would be buyers of the stock and it sounds like you are being pretty aggressive in the market which is great, but, Matt, there have certainly been some rumors of M&A in the seating market. Just trying to understand where at some point what levels would you become a seller? Obviously you are a buyer right now -- but just trying to understand if there was a big consolidator that came in, sort of what levels would you consider potentially selling the business at?

As a publicly traded company, arguably we are for sale every day, John, and the shareholders would make a decision if there was an offer that was compelling. I don't really see that right now. For us, we are more focused on investing in the business. From an acquisition standpoint, we are very focused on electrical and trying to improve our capabilities in software there to take advantage of what is becoming an incredibly exciting time in that segment -- its content is exploding.

In the seating, we are pretty happy with our product capabilities. I can't really see us making a meaningful acquisition in that space or be part of the consolidation effort, John. So in some ways it's a tough question to answer but I really don't see us participating at this point.

Okay. Thank you very much. Great quarter, guys.

Itay Michaeli, Citi.

Thanks. Good morning, everyone, and congrats. Just a question on seat revenue growth. Another quarter where organically, ex Eagle Ottawa, you are outgrowing the market really well. I think, Matt, you mentioned some of the platform mix. Can you maybe draw down a little bit more -- is it just that the platforms you are on are -- happen to be stronger? Or are you actually seeing better content and take rates are pushing up your revenue growth relative to the market? It's been a pretty consistent and impressive trend here.

Well, it's pretty much all of it, including the volume and mix, the business win on the backlog, and content growth. When we speak about content growth -- and many times we focus on electrical, because it's been so high and so fast -- but the reality is even seats are becoming contented as people ask for more features and leather continues to penetrate and power continues to penetrate. We look for entry-level vehicles to expand their comfort and convenience features, so we are benefiting from all of it, including our footprint in China which is allowing us to participate in that business and gain share, and we consistently gain share in that space. And I would expect that to continue.

So it's not one factor, it's several. The business is performing well. We are digesting what has been a historic kind of changeover of the portfolio, where two-thirds of the portfolio has changed over the last several years. Now we are starting to digest that -- digest some of the growth that we had in North America [constructured] business so it is making the steps at improving as we expected and we would expect that's improvement to continue both on a topline and a bottomline.

So that's great to hear. Is there any way -- I know it's never an easy question but when we think about post-Eagle Ottawa and some of the mix factors that are playing favorably for you, roughly how you think -- how we should think about the next couple of years for seating revenue relative to industry production? Do you think you grow industry plus a few points in line? Any kind of latest thoughts there?

Well, we are continuing to win business in both segments but in seating as well -- the backlog would tell you alone that that's net new business and the backlog will tell you that we would gain share at a rate consistent with what we've done over the last year and the last 24 months. I would expect that to continue and we're continuing to win business. I don't see any real changes.

Again in our backlog as opposed to how others may measure it, our backlog is net new business. So we've already factored in any rolloffs or if business gets lost, and it only includes business that's booked.

So I think it's a fairly conservative estimate of where we are going to be. That would tell you that we are going to continue to gain share and add growth a few points over the industry.

Great. And then just one quick housekeeping. It looks like your D&A and CapEx both ran a bit below in the quarter of what's implied for the full year guidance. Is there anything happening there as Eagle Ottawa ramps up that would cause those to be higher the next couple of quarters? Or just any color there would be helpful.

I think it was more than anything else timing, a little bit lower but I think it's going to pick up a little bit as we go through the rest of the year, not necessarily tied to anything with Eagle Ottawa. It's just really a matter of timing -- both on the capital side and on the D&A side, which will follow.

Great. And then just lastly -- and we ask this occasionally, on restructuring how much is left beyond 2015 prospectively, both on an expense level and maybe even on a cash level now that you are kind of integrating Eagle Ottawa and kind of moving on here?

I think -- I use the baseball analogy always. I think we are in the eighth inning. The vast majority of the component work that needs to be moved into lower-cost regions and some of the thrifting of adjusted time facilities -- most of it has been done. I would expect it to get back to more normalized type of restructuring over the next couple of years down to something in the $50 million a year range.

Right now, though, the investments that we are making in restructuring are paying dividends, both in annual performance but also in the ability to win new business which requires us to have the best footprint. So there's a couple locations that still need to be moved, if you will. But, overall, I think you'll see us start drifting down to more normalized restructuring levels.

Terrific. Thanks so much for the color. Thanks, guys.

Dan Galves, Credit Suisse.

Good morning. You talked a little bit about the future opportunity from the local Chinese brands but right now those brands appear to be outperforming the foreign JVs. Can you give us a sense of your exposure to each today and how does it impact your business if those local brands continue to outperform?

I think it would be great if they continue to perform -- our focus really in Asia for the most part is with the domestic automakers that have foreign partners that we serve both sides of the house, if you will -- both the foreign brands but also the domestic brands. I think we're one of the biggest domestic brands quite frankly in seating and catching up very quickly in electrical with our relationships with FAW and BAIC and Dongfang and SAIC.

So we've got great relationships with all the major domestic automakers. Our business is I would probably say about 60/40 in seating and a little bit less than that in electrical. But we have great relationships and they are looking for suppliers likelier to help them develop their domestic brands.

Whenever I'm over there and meeting for the automakers that's the topic of conversation even if it's [Chaoyang] or Dongfang or SAIC even. So I would expect that trend to benefit Lear quite a bit.

Okay. Thanks. And second question is, just you know you've still got quite a bit of room to your liquidity and debt targets -- even today, which seems like kind of the seasonal low point in cash. Can you address thoughts on where liquidity and debt will go over the next few quarters?

I think that you are right. We did reach a low in the first quarter which is kind of normal, and part of that is due to the timing of our fiscal quarter end. I think if you look at that on a trailing 12-month basis which we put in the package, we are about 1.4% gross leverage. I think over time that will probably migrate down to about a 1.2 times gross leverage which would give us about $400 million of additional flexibility to take on additional debt for opportunities to further invest in the business.

Assuming those possibilities are out there we would potentially utilize that debt liquidity to further invest in the business. But we have no plans as of right now to do so.

Got it. And then just, you know, is there any commentary on discussions with Mark Otto Capital after you received the letter on February 3?

We've had real positive conversations. I haven't spoken to Mick recently but subject to the letter, the conversations were positive. In certain cases we agree and in other cases we disagree but overall the one thing we do agree is that Lear is undervalued and that it's a great investment. On that, we agree with them. We also agree with them that it's a well-run company.

We agree, too. Thanks a lot.

Emmanuel Rosner, CLSA.

I wanted to ask you first another question about China. Can you just tell us what your performance was, I guess, in terms of revenue growth in the quarter -- what was consolidated and not? We've seen some pretty strong performance for a lot of the Western suppliers. What was yours?

Well, we've grown faster in the industry. We don't report China out specifically as a segment. I would tell you that Asia, overall, has outgrown the industry and we've outgrown China from a growth rate standpoint, especially in seating but also in electrical and that's true for both our consolidated joint ventures and our non-consolidated joint ventures.

At Lear I think it's important to note that we don't include earnings from our non-consolidated joint ventures in our operating earnings. We don't think that's proper, so we exclude it. So it's not part of the earnings growth that we're reporting when we talk about seating margins. It's not included in there, but both our non-consolidated joint ventures and our consolidated joint ventures grew faster than the market.

Okay. That's helpful. And then, just in responding to your previous question about your China exposure you were saying Lear is less than 60/40 in seating. Was that seating versus electrical or was that --?

No. What I was talking about is right now our opportunities -- we grew originally with the Western automakers and their products that are over there. But those relationships that were established with the foreign joint venture partners allowed us to penetrate on the domestic vehicles and what I was talking about is the relationship between domestic automakers and foreign automakers over there being 60/40. 60/40 being foreign partners.

Okay. And then one last one on the acquisition strategy. So you were saying you were focused on the electrical business, in particular in the building position and software. At the same time, it feels like the wiring business is still something that's quite fragmented on a global basis.

Would you also be interested in -- do you see the potential for consolidation in the industry? But also would you be interested in participating or forcing that?

Absolutely. It is somewhat fragmented -- there's the Big Four. Obviously Delphi, [Yazaki], Sumitomo, and us and then there's strong regional players and then some really niche players.

We would. Again, everything is under the backdrop of doing it for the right valuation. We have to make sure that it makes sense for our shareholders and we have to make sure that it makes sense for our customers but yes, we would be interested in that.

Okay. Great. Thank you.

Colin Langan, UBS.

Great. Thanks for taking my question. Do you have any update on -- in the past, you mentioned South America had been a drag in the metals business in North America. Where are you in sort of the process in getting those back? Their overall margins.

South America on lower sales, the loss was relatively flat in seating and the operations improved to break even in electrical. I think the beauty of Lear is that we are so geographically diversified that we can absorb a region when it stumbles like this and possibly Russia and still post the type of numbers that we did. It's a longer term play both in customer support but also in the ability to fix the restructuring and maybe working through certain commercial deals to get that business back on its feet.

So the loss was flat, Colin, with the fourth quarter in seating and a little bit better in electrical. On the North American structures business, that business is improving. It did improve year over year and it did improve from the fourth quarter as well. So we're making nice strides.

And I would tell you that we are making nice strides in South America even though it's -- the environment is becoming very challenging -- more challenging, if that's possible.

Should we think of -- as they continue to improve those should be (technical difficulty) (inaudible) margin for the rest of the year?

I think that's part of the reason why we would expect the margins in seating to return more to target margins longer term of around 7%. Those would be two areas we would expect to improve to get us there.

And you've said in prior presentations that you are against splitting the seating and electrical business, but do you think the Company is trading at a discount. What do you think you could do to actually address the evaluation valuation discount? Do you think maybe being more aggressive with share buybacks? Any thoughts there on how you (technical difficulty) to improve that?

First and foremost, I think the performance of the Company worldwide, the valuation -- specifically I think the valuation will be benefited by the type of performance we are seeing in seating and the margin expansion in seating. I think electrical people are starting to recognize the value of that business and I think you are seeing a margin expansion -- the margin expansion there will drive further multiple expansion.

We've been very aggressive with the share repurchase, but at the end of the day I don't think a share repurchase program in itself will drive a valuation improvement. I think it's really all about performance and communication and we are doing that.

Okay. All right. Thank you very much.

Brian Johnson, Barclays.

Good morning. Dan Levy on for Brian. Thanks for taking the question. Could you provide us with some context on the disparity of organic topline growth between electrical and seating? I understand that seating has benefited from launch activity on a number of platforms but it just seems that even increased electrical architecture content and vehicles, that the growth profile for electrical would be much closer to what you've seen in seating. Is it just a function of underperformance for electrical on specific platforms?

It's driven, probably more than anything, by the euro. This business has a little bit bigger in Europe as a percentage than seating and the euro impact of this and I think if you took exchange out of it, you would see a growth rate that doubled the industry and would be consistent with the content growth and a business that's gaining share. There was some mix shift headwinds in the quarter on some certain car lines that they have high content on, but it's important to look at that segment, I believe, over the last several years the growth rates that it's had from a compounded standpoint [as been] in certain years almost tripled the industry growth.

So it's just an odd cadence right now. That business is continuing to win new programs and gain share and I expect it to continue to grow, and it has been growing on an exchange consistent basis, if you will.

You said organic growth for the segments was 2%, is that correct?

The industry growth was 2% and that content growth in the segment is between 4% to 5%.

And do you have a specific target for outperformance over the industry?

I think we can continue to outpace the industry by at least a couple of points in this segment.

Okay. And just one more follow-on, should we think -- is there any lumpiness in the backlog or customer mix programs, changeovers for electrical? How should we think about the cadence of growth for the remainder of 2015?

It's really consistent, it's not really lumpy. It's fairly consistent. The profile is consistent with the first quarter. So, it's actually pretty steady -- steady [backliner]. There might be 2s or 3s type lumpiness but really nothing that big as far as revenue.

Okay. Thank you very much.

Patrick Archambault, Goldman Sachs.

Thanks. Good morning. A bunch of mine have been answered but just wanted to focus a little bit on the trajectory margins beyond 2015. How do we think about what the main levers there? So far, based on the discussion we've had today it seems like Eagle Ottawa accretion is kind of mostly this year. You are kind of nearing the end of the restructuring of the components' footprints. So can be go through the key margin levers that are left for beyond 2015? I think Latin America was discussed as one of them but there may be other things, I'm sure.

I think production numbers in Europe while up are still below their historic numbers. I think getting that segment or that geographic region to start performing closer towards its historic run rate will benefit us with our business segment there, including getting Russia to stabilize. Same thing with South America. North American metals is making -- construction businesses making nice strides. I think the opportunities are just beginning with Eagle Ottawa. I think we'll see some improvement with that in the back half of the year and it's again on a two-thirds changeover business segment. It's running that business more efficiently and putting in some of the engineering changes that we can help with our customers to drive lower costs and in the end better performance for Lear.

So we're making nice strides and I think we'll continue to work on those items. It's important to note in seating that, with our current cost of capital, that we start returning in excess of our cost to capital when this segment posts margin numbers above 5%, so it's all really good business for us at this point.

In electrical, we believe that business can run at about 13% which is where it's out now and continue to gain share. That business segment with its current mix of business starts returning in excess of cost of capital at 6.5%, 7% maybe? So again, we've got a nice opportunity to create value for our shareholders by continuing to grow both business segments.

That's helpful. Just one maybe clarification on Europe, I think to your point, a lot of suppliers are viewing this as probably the biggest incremental growth opportunity over the next year or two and the hope there is that the incremental margins on the first 15% of that business will be relatively high since it's underutilized.

Is that the right way to think about it? Or are there other complications of maybe some initial pricing pressure and some things like that that make it less rosy?

There's always pricing pressure in our business because our customers are under it. And that's just a given. And I think that controlling the amount of the vertical supply chain that we do and having the full kind of engineering capabilities allows us to provide solutions for our customers. That being, I think -- I don't really see anything that would impact the incremental conversion. Every car line kind of has its own financial DNA.

On average in Europe, we are about I would say 10% to 15% on the incremental conversion of the additional volume. While component facilities are starting to reach some level of high-capacity utilization, our just-in-time assembly plants that are usually dedicated to a specific car line still has a lot of room to improve and I think that would provide a conversion that would be in the mid-teens. So I think there's upside. I think that market is finally starting to deliver on the promise that we were hoping for over the last several years.

Great. And one last one to clarify, so you said Eagle Ottawa, you said, I think, accretive 20 basis points this year to margins. But it sounds like that's really only a start. It kind of spills into next year -- some of that is calendarization and some of that is synergies, I guess?

Yes. It's synergies, it's calendarization, it's the ability to utilize their design capabilities combined with our sewing capabilities to really provide lower-cost solutions to our customers, which I think the incremental volumes that that will drive will allow us to convert nicely on the margin and still provide a great solution to our customer. So, I do think we are just at the beginning of the value for that to acquisition.

Okay. Great. Thanks for all the color.

Rod Lache, Deutsche Bank.

First question, just in terms of seasonality of earnings -- I looked back over the past couple of years for electrical and I can't see a single instance since 2011 where Q1 was the peak margin. Typically it's been improving sequentially each quarter.

What is different about this year that would give it a different cadence?

Not a whole lot. Timing of commercial resolutions in a broad bucket, Ron, and settlements with customers and suppliers. Overall, like I said, if the industry volumes and currency stays the same and the mix stays the same, we would expect the segment to post towards the high end of the range.

Okay. Normally the settlements are like later in the year and that's positive in the beginning of the year. You're dealing with the price down for the new year. That's consistent this year?

Fairly consistent. There's literally thousands of inputs and that's one of them, but it's fairly consistent. It was a good quarter, clean quarter. There's still some commercial resolutions that need to take place in that segment that can move the margins slightly lower it on the range that we gave at 13%. Right now we're kind of comfortable at this range -- this is the range that it will perform acts if the assumptions hold.

Okay. And on seating, could you just clarify what your answer was on the South American margins? Or South American earnings? Are you saying that is flat year over year or were you saying that it's breakeven? And where is North American structures now in terms of profitability?

Year over year, first quarter/first quarter South America was better, Rod. From a run rate standpoint coming off the fourth quarter it was flat but it was flat on lower sales as we continue to restructure that business, and in certain cases kind of trade-off programs -- and it may make sense for others to do. So the business is, I think, performing better even though the losses are flat. It's just because it's on a meaningful reduction in revenue, if you will.

The structures business is still below where we expected to be long term. It is profitable but not yet returning its cost of capital. We still think there's upside there. That business, I believe it went through an unprecedented level of growth. We are digesting it, we're doing some things with the footprint and plant layouts and in certain cases we are working through engineering changes with our customers to try to get the product cost in line with where they needed to be. So I still think both have upside.

Okay. And lastly, this year your CapEx is in the 2.7%, 2.8% of sales range. Excluding FX and acquisitions, you are suggesting like 4.5% to 7% organic growth. Could you give us maybe a little bit of a rule of thumb on CapEx with the new business configuration? If a normal year down the road was more like 2% or 3% what would your CapEx be as a percentage of sales?

I think this year the guidance on CapEx obviously includes Eagle Ottawa. Eagle Ottawa runs a little bit higher as a percent of sales -- they are in the mid 4% range which ultimately, when combined with Lear ,has taken our overall CapEx as a percent of sales from the 2.5% range to 2.7%.

I think as you look at what's coming on board down the road I think we'll level off on CapEx in the mid-2% of sales range, longer term.

Is that maintenance CapEx or does that include growth CapEx?

That includes the CapEx to support the backlog so it does include growth CapEx.

All right. I guess what I'm trying to get out maybe more specifically is, is there a way to think about that in terms of maintenance versus growth CapEx?

At any given time, you are going to have some maintenance. It might be 10%, 15% of the overall CapEx bill. It might just be to maintain the franchise, if you will.

Okay. But if the growth were to slow -- some companies (multiple speakers)

If growth would slow capital would come down obviously because the vast majority of our capital is to support growth. That being said there's always some level of capital on footprints and maintaining and in certain cases moving production, Rod. So you'd see it trim up to maybe something slightly below. If there was no growth you would see it slightly below 2%. If there is growth you would see it at 2.5%.

It's not a real big movement, quite frankly. If you look at the history, probably the best way to guide it, would be to look at 2008 and 2009 and 2010 when capital was way low you didn't have any growth. To me that would keep the maintenance capital -- the bottom.

But there were also program cancellations at that point of time. Every year you are presumably spending capital on new programs that are launching.

2010 was probably-- 2010 would be a good year to look at from a profile standpoint as a percentage of sales. I think that year, if I remember right, Rod, it's about 1.5%, 1.75%'s -- something like that.

Great. Okay, thank you.

Ravi Shanker, Morgan Stanley.

Thanks. Good morning, everyone. If I could just ask the strategic question a different way. I'd say in the last year, you've seen a fair bit of consolidation and change in the interior space with some of the smaller players actually getting bigger.

I'm wondering if there is still any connection between interiors and seating, and if the interiors business which has been a pretty hard business over the last decade gets to be a better margin, better return business, if there's any implication at all for the seating business?

No. There is no connection, thank God. No, I really don't see that happening, Ravi. You're right, it is a -- in many cases -- a highly engineered commodity price product and we exited that segment as part of our portfolio management because we didn't think it made a whole lot of sense for us. And I don't envision those businesses combining or extending or overlapping in any way.

We have absolutely no involvement in any interiors business at this point. I don't anticipate getting involved in an interiors business anytime soon or at all, actually.

Understood. Just a couple of housekeeping. On Eagle Ottawa, I apologize if I missed this, but what was the revenue and EBIT contribution in the quarter?

I think the sales were just slightly under $200 million, and the margin contribution was just slightly ahead of the overall seat margins for the quarter. So, it didn't really move the needle on the overall seat margins.

Okay. In terms of growth is that also going to be consistent with your overall seating business?

In terms of --

The Eagle Ottawa portion, does that grow in line with the overall seating business?

No, it grows at a higher -- there's more content growth that we foresee in that segment certainly, given everything Matt talked about on comfort craftsmanship where the vehicles go on in terms of increased leather participation. We see that debt market or that business growing maybe faster than the overall seat business.

Great. Thank you.

Ryan Brinkman, JPMorgan.

Thanks for taking my call. Can you update on the raw material tailwind at least in part I think allowing you to offset the currency headwinds. So which raws are pass-through and are they necessarily 100% pass-through? How should we think about raw material savings being split just sort of generally between automakers and suppliers?

You've got to take it individually. I think as a broad brush what we are seeing on commodities is that on a year-over-year basis. commodity prices are generally lower than what they were in 2014 and continue to seemingly go down. Maybe other than copper, that recently spiked back up a bit.

In terms of customer recoveries, with copper we buy about 150 million pounds of copper on an annual basis and about 85% of that buy is covered by some type of customer recovery agreement. So that 15% is our exposure, and what we are seeing given that exposure is with the lower year-over-year copper cost we've seen some tailwind on that.

The other large one for us is as a result of Eagle Ottawa -- obviously the hide markets. The hide markets have softened somewhat recently. Now a lion's share of that hide market buy is covered via customer agreement, so our exposure on the hide markets is relatively small.

On steel, obviously that's a big buy. I think our buy in that area is about 3.5 billion pounds of steel annually. About half of that buy is directed by the customer, so our exposure to that is nothing with respect to 50% of it. There's about 35% of that steel buy that comes in in a fabricated form from our supply base and about 15% that is a direct buy of coiled steel. And generally speaking, we do not have customer agreements that cover us for that roughly 15% steel buy risk.

That's very helpful. And then, just a final follow-up on sort of unrelated note -- what impact do you see the lower fuel prices having on your business? Do you think it's a tailwind relative to your exposure to large SUVs that naturally have more seats? But, wanted to get your thoughts there. Then, also in terms of your own logistics cost, what impact could fuel prices have on freight in, freight out, transportation between your factories, etc.? Is that something we should be thinking about?

I think, you know, low fuel prices obviously benefit the larger vehicles and the trucks. If you look at the historic trends and the correlation, and I think we are starting to see that as well in the production mix and the sales rates and the expectations of sales rates in the large product segments -- SUVs, pickups and large domestic vehicles. So we are getting a tailwind there. Jeff, can you take them through what we are seeing on freight logistics savings?

I think you are exactly right in phrasing the question that we have seen both from a logistics cost and the fuel cost -- I say fuel costs but chemical costs as it relates to some of our foam buy --that the cost structure both logistically and foamwise has been down. It's been a tailwind for us to kind of offset some of the downside that we've seen on the currency devaluation.

So it's provided a tailwind generally across the board in each of the commodities.

Okay. Great. Thanks a lot.

Brett Hoselton, KeyBanc.

M&A -- I was hoping, Matt, you might be able to provide us with a little more detail on what you might be seeking in the area of the electronics or electrical business? What types of acquisitions might you be looking for targeting?

Really, software houses that can help us expand our industry-leading gateway modules that help us move signals within the vehicle but also bring signals in from outside. Software capabilities, connectors would be great for us as we connect devices.

What we are not looking for is to be a main participant in active safety or self driving vehicles. We are focused more on the moving of the signals and connecting the devices. The right electrical distribution provider -- i.e., wiring, if it provided a diversification of customer mix or geographic diversity would be interesting for us.

But again, Brett, everything has to be at the right valuation to make sense. We're winning business without it, and we continue to have industry-leading smart junction box technology and gateway. But this would facilitate growth. So if we found the right firm we would absolutely make the investment.

And in terms of say, size, of the company or something along those lines how would you kind of characterize it? Should we expect these to be largely bolt-on acquisitions or is it possible that you could make quite a meaningful acquisition with [possibly] one of your major competitors?

I don't see the major competitors for a few reasons. I don't think it makes sense. They are typically strong where we are. In many cases, not available or they are available at a multiple that doesn't make a whole lot of sense for Lear and it doesn't make a whole lot of sense for our customers ultimately who will actually impact the decision-making process.

So I would tell you that I don't foresee that -- I don't think that's going to happen. I do think it will be more in the bolt-on range, really about adding capabilities from a technical standpoint and then leveraging that technical capability against our customer relationships and footprint and being able to expand it that way. I think that's the better investment options for our shareholders and the better solution for our customers.

And I know this may go contrary to some of the investors that you've been speaking with here, but is there any consideration of adding a third leg to the organization? Or is the focus going to be primarily on growing seating organically and then growing the electric organically with some possible bolt-on acquisition?

More of the latter. I really don't see a third leg for us -- I don't think it makes sense. I'm really happy with the product portfolio as it stands right now between the two business segments. I think both have growth opportunities. I think the content explosion in electrical is great. I think cash generation and seating is outstanding so I'm happy with the product portfolio and I do not see a third leg at this point.

Excellent. Thank you very much, Matt.

Richard Hilgert, Morningstar.

Thanks. Good morning, everyone. On the European revenues, down 3.2% for the quarter. We've got the euro down about 18% versus the first quarter last year.

Is there something in there that -- your production was higher? Eastern Europe was higher. What was it that offset --? Maybe you have an organic Europe revenue percentage change number you can give us?

I think, generally speaking, we had backlog in the quarter specific to that region to kind of offset some of the impact of the devaluing series of currencies there. We also had, in some cases, a positive mix on our specific programs -- we don't sell to the overall market, we sell to specific car lines. So we did get a mixed tailwind, I think more predominantly in the seating side of the business than on the electrical side.

Some of our key programs in electrical -- Focus, for example, was down year over year. But generally speaking it was the backlog became on in the quarter, and on an overall basis some of our key programs were higher on a year-over-year basis to offset some of the impact of currency.

Okay. And then, on the margins, was there any impact from the currency there that helped the margin to be more favorable, where you've got some US dollar revenue but some costs in euros or something?

That's more on the transactional side, when you get paid in one currency and have to pay others. I think, as a general rule, there's a number of different currency pairs that we deal with there but on the transactional side, generally, we'll get paid in euros and have to pay labor and overhead in some of the Eastern European countries in the local currencies.

And generally speaking from a transactional perspective, it was a negative in the quarter.

Okay. So, you've gotten a positive margin expansion even though currency was a headwind towards the margins in the quarter. Is that fair to say?

No. I think from a margin perspective -- for example, electrical. Electrical is a higher margin business in Europe than our seating business, for example. So as you translate the income statement back into US dollars at a devaluing currency it's going to have an impact and it had a greater impact in the quarter on our electrical business, given the higher margin profiles that that business has in Europe in the seating business.

Overall I think the question is did it have -- it was more of a negative effect than a positive effect to the business. If it sorts itself out, it could be a tailwind.

Okay. And just wanted to get a little bit more insight into South America. You know, the run rate was declines of the high teens up until this quarter. Did you have specific customer shutdowns or something going on down there that made the drop so much larger in the first quarter?

We did have certain shutdowns, lower productions and missed shifts, if you will, and it's fairly pervasive across the board as far as delays because I think everybody is experiencing that problem. But we also had certain programs that didn't make sense for Lear to do that we gave back so we had a negative backlog, if you will.

So it was a combination of factors. I think everybody is kind of struggling with that segment. I think everybody sees the long-term value of being there but it's going to go through some pain in the near term before I think it gets back to a profitable region, if you will.

Okay. Great. Thanks, guys. I appreciate it.

You're welcome, Richard.

I think that does it for the Q&A and probably all that remain on the call now is the Lear team and I want to personally thank all of you for your hard work and dedication and attention to detail because these results just don't happen by luck or happenstance, it happens through hard work. I want to urge all of you to remain focused on attacking waste at all levels and inefficiencies at all levels and I know if we do that -- we are the best team in the industry. We will remain successful, so thank you.

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