Lear Corp (LEA) 2015 Q3 法說會逐字稿

Good morning. My name is Angel and I'll be your conference operator today. At this time I would like to welcome everyone to the third-quarter 2015 earnings conference call. (Operator Instructions)

Thank you. John Trythall, Vice President, Financial Planning and Analysis, you may begin your conference.

Thanks, Angel. Good morning and thank you for joining us for our third-quarter 2015 earnings call. Our press release was filed this morning with the Securities and Exchange Commission, and the presentation for our call is posted on our website, Lear.com, through the Investor Relations link.

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

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

We will also 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.

Slide 3 shows the agenda for today's review. Following the formal presentation, we will be pleased to take your questions. Now please turn to slide 5, and I'll turn it over to Jeff.

Thanks, John. Lear continued its positive momentum in the third quarter, with sales growing faster than the industry and record core operating earnings. Sales in the third quarter were $4.3 billion, up 2% from a year ago. Excluding the impact of foreign exchange, sales grew by 11%, including organic growth of 6%.

Core operating earnings increased 27% to $320 million, and margins were higher in both our business segments. Adjusted earnings per share increased by 33% to $2.56 per share.

During the quarter, we acquired intellectual property and technology from Autonet Mobile, a leading developer of communication software and devices for automotive applications. This acquired technology directly connects onboard vehicle systems with cloud-based applications via cellular networks.

We also continued to return cash to shareholders. I'll provide more detail on that later in the presentation.

In light of our year-to-date performance, we are increasing our 2015 earnings and free cash flow outlook.

Slide 6 shows third-quarter vehicle production in our key markets. In the quarter, 20.3 million vehicles were produced globally, consistent with a year ago. Brazil was up -- I'm sorry, production was up in North America and Europe, but down in China and Brazil; and the euro averaged $1.11 in the quarter.

Slide 7 shows our reported financial results for the third quarter. Reported sales in the quarter increased by 2% from a year ago to $4.3 billion. Sales were negatively impacted by $374 million in foreign exchange, primarily related to a weaker euro and Brazilian real. Excluding the impact of foreign exchange, sales were up 11%.

Pretax income before equity income, interest, and other expense was $303 million, up $78 million from a year ago. Interest expense was $21 million, up $6 million, reflecting debt incurred to finance the acquisition of Eagle Ottawa.

Other expense was $22 million, up $11 million, reflecting the impact of foreign currency transactions. 2014 also benefited by a $5 million gain related to a transaction with an affiliate.

Depreciation and amortization increased by $8 million, primarily reflecting the acquisition of Eagle Ottawa. Net income attributable to Lear was $181 million, up $41 million.

Slide 8 shows the impact of nonoperating items on our third quarter. During the quarter, we incurred $17 million of restructuring costs related to various census actions.

Excluding the impact of these items, we had core operating earnings of $320 million, up $69 million from 2014. The increase in earnings primarily reflects favorable operating performance, the Eagle Ottawa acquisition, and the benefit of new business, partially offset by the unfavorable impact of foreign exchange. Adjusted for restructuring and special items, net income attributable to Lear was $198 million, and diluted earnings per share were $2.56, up 33% from 2014.

Slide 9 shows our adjusted margins in the third quarter. Total Company adjusted margin was 7.4%, up 150 basis points from a year ago and a record for the third quarter.

In Seating, sales of $3.4 billion increase 5% from last year, with adjusted earnings of $243 million, $67 million or 38%. Excluding the impact of foreign exchange, sales increased by 14%, reflecting the acquisition of Eagle Ottawa and the addition of new business.

Adjusted Seating margins were 7.2%, up 170 basis points from a year ago. The increase in margins primarily reflects the strong sales growth, including the impact of the Eagle Ottawa acquisition, and favorable operating performance.

In Electrical, sales of $973 million were down 7% from last year. Excluding the impact of foreign exchange, sales were up 4%, primarily reflecting the addition of new business. Adjusted Electrical margins improved to 14%, up 70 basis points from a year ago, reflecting strong operating performance and a benefit of new business.

Slide 10 provides a summary of free cash flow, which was $163 million in the third quarter, bringing our year-to-date free cash flow to $404 million.

Slide 11 provides an update on our share repurchase program. During the third quarter we repurchased 1.4 million shares for a total of $148 million. Year-to-date we have repurchased 3.5 million shares for a total of $383 million.

Since initiating the share repurchase program in 2011, we have repurchased 34.4 million shares for a total of $2.3 billion. Including dividends, total cash returned to shareholders over the same period is $2.6 billion.

Our share repurchases represent a reduction of approximately 33% of our shares outstanding at the time we began the program. The average price paid to repurchase shares over the life of program is about $67 per share.

At the end of the third quarter, we have a remaining share repurchase authorization of $617 million, which expires on December 31 of 2017. This represents approximately 7% of our current market capitalization.

Slide 13 highlights the key assumptions in our 2015 outlook, which is based on the latest IHS production forecast and communications from our customers related to our specific platforms. Global production is now forecasted at approximately 86.1 million units, down 1.1 million units from the prior forecast, but up 1% from a year ago with growth forecasted in all of Lear's major markets. Our 2015 financial outlook is based on an average euro assumption of $1.11 per euro.

Slide 14 highlights our 2015 financial outlook. Based on our strong performance in the first nine months of the year, we are increasing our full-year earnings and free cash flow guidance.

Sales are expected to be approximately $18.2 billion, consistent with the midpoint of our prior guidance. Core operating earnings are now expected to be in the range of $1.27 billion to $1.3 billion, with the midpoint up $35 million from our prior outlook.

The effective tax rate is projected to be approximately 28%, down from our previous guidance of approximately 30%. Free cash flow for 2015 is forecasted to be $650 million, an increase of $25 million from the prior outlook, and capital expenditures are expected to remain at approximately $500 million for the year.

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

Great. Thanks, Jeff. Good morning. Slide 16 highlights the major trends that will continue to impact the auto industry. Global platforms and direct component sourcing from the OEMs continue to increase. We're well positioned to benefit from this, with our low-cost global footprint and full component capabilities in both product segments.

Seating is an active part of the vehicle safety systems. Lear has been an industry leader in developing safety features, with innovations such as the active head restraint and seat structures that withstand collision impact well in excess of what is demanded by regulatory agencies.

Consumers are demanding more features, driving increased complexity and greater content for electrical distribution and signal management systems. Stricter fuel economy and lower emission requirements are also driving electrical content growth. Traditional powertrains are requiring more signal management to achieve better fuel economy, and we expect higher contented alternative energy vehicles to continue to penetrate the market.

China has become and we expect it to remain the world's largest automotive market. Lear has a major presence in China with complete engineering capabilities in 44 manufacturing facilities. We have joint ventures with all the leading Chinese automakers to support continued growth with both domestic and foreign brands.

Vehicle connectivity is an emerging megatrend. Autonomous driving, adaptive safety, over-the-air software updates, and the management of data are in the early stages of development and have the potential to be the most significant advancement and growth opportunity in recent automotive history. We are well positioned to capitalize on this opportunity with our ability to distribute power and manage signal utilizing our wireless technology and our leading position in Smart junction boxes and gateway modules.

As shown on slide 17, we believe that Lear is well positioned for profitable growth in both business segments. In Seating and Electrical, sales are growing faster than the industry. We are the low-cost producer, and we have complete component capabilities in all major regions of the world.

In Seating, we're the world leader in luxury and performance seating, and we are extremely well positioned to differentiate our seats with unique designs and the highest level of craftsmanship at the lowest possible cost. In Electrical, we have introduced 15 first-to-market innovations over the past 36 months and, as I mentioned in the previous slide, we are extremely well positioned to capitalize on the megatrend of vehicle connectivity.

Slide 18 shows that both our business segments are outpacing the industry growth. Our market share gains reflects the investments we've made to improve our cost structure and to strengthen our product capabilities. Since 2010, Lear's sales have grown at a compounded annual rate of 9%, which is more than double the industry production growth rate.

As the chart on slide 19 shows, our investments have positioned Lear to capitalize on industry trends and deliver improving financial performance. Since 2010 we have doubled our core operating earnings and increased our margins from 5.2% to 7.1%. We will continue to provide our customers with the best cost, quality, and innovation; and we expect a further increase our market share and continue to provide superior shareholder returns.

In summary, we continued our positive momentum in the third quarter, achieving sales growth, record earnings, and margin improvement in both segments. Our industry-leading component capabilities in Seating allow us to differentiate our seats with unique designs and the highest level of quality and craftsmanship at the lowest possible cost.

In Electrical, we are well positioned to capitalize on the trends for increased content and connectivity. Our recent acquisition of the technology from Autonet Mobile complements our existing capability to distribute power and manage signals utilizing wireless and cellular networks.

Given our strong competitive position and unique capabilities in both our product segments, we are confident our business will continue to perform well. Based on our strong year-to-date performance, we are increasing our full-year outlook. And with that, we'd be happy to take your questions.

(Operator Instructions) Itay Michaeli, Citi.

Great, thanks; good morning, everyone, and congrats. I thought we'd maybe start with the seat margin in the quarter. We usually don't see expansion from Q2 to Q3 and, of course, you delivered that in the quarter.

Can you maybe talk a little bit about the sequential drivers in the seat margin this quarter? And maybe talk to the sustainability of this over the next few quarters.

Well, it was a good quarter. I think that we're taking care of our issues and operating issues. We're still having some headwinds in South America, but we're able to overcome it.

Eagle Ottawa is performing well. That's turning out to be an outstanding acquisition for us.

Operationally, we're improving in some of the hot spots like North American structures business. But overall, just a good, clean, hard-working quarter and I think the margins are sustainable.

Sustainable, great. Then maybe just another area of strength in the quarter, organic top-line growth in a tougher macro. Can you maybe talk about the drivers there?

How much of it is coming from your backlog or segment mix, content mix? And is there any region that might be contributing more than another, or is it pretty broad-based?

It's pretty broad-based. I mean the beauty of the way our business has become diversified, both from a geography basis but also from the type of car lines that we're on, we're pretty well diversed. So while a certain market may slow or have problems, be it Russia or South America, other markets then perform.

For that -- I think is what you are seeing. The backlog was strong. It was a good quarter for backlog. We had about $200 million in backlog between the two business segments. So I just think it's all indicative of diversity of the business and also our market share gains, Itay.

Great. Maybe just on that point lastly, just to go back to slide 17, and you mentioned the backlog, how is booking activity in the last several months, given the acceleration in the connectivity megatrend, some of your intellectual property, recent deals, and just the overall environment?

I think that trend is upside in the future. Our backlog bookings have been very good. We'd expect to continue to penetrate the market. When we announce the backlog in January, I think you'll see that, the evidence of that.

But as far as the megatrend, that's more down the road as car companies are working through how they want to attack. It's important that you have the capabilities to not only do the traditional electrical architecture but also be able to manage data, as it's becoming as much as anything now moving data as much as moving electrical power to the vehicle. I think you'll see that more in the future than right now.

Terrific. Thanks so much and congrats again.

John Murphy.

Good morning, guys. Just a first question on China, because it seems like you operated very well around what was a tough market, down 6% there. Just curious if you can give us some idea of your business mix over there, maybe by Tier 2-plus cities versus Tier 1 cities, domestic versus international customers, and then maybe some segmentation. Because obviously crossovers and SUVs are pretty strong there and sedans are fairly weak. If you could maybe give us some broad strokes on those mixes.

Yes, we really don't break it down by city, broad city, or not, John, so that would be a new cut for us. But what I can tell you is our business there is very diversified in that it reflects the market overall.

Right now when we look at it, it's roughly, I would say 70/30 domestic brand versus partner brands or JV brands -- actually 70% being the foreign automakers joint venture brands, 30% being the domestic automakers, which is pretty consistent with the market overall.

Our balance of business there is actually also very consistent from entry-level A/B platforms, C platforms, crossover vehicles. So the mix is pretty good.

Now, growth is slowing in that market, but you're putting it on a pretty big base. I think IHS is calling, Jeff, for what? About 1 million units of volume a year over the next five years going into China alone.

Yes.

So while it slowed up in the quarter we were able to withstand it and with our diversification overall. As far as our segment, our sales there are roughly $3.7 billion, when you include consolidated and nonconsolidated. It's about $2.1 billion consolidated; the rest is nonconsolidated.

We're bigger in Seating. It's about $1.5 billion of consolidated sales in Seating. In Electrical, it's just under $600 million, and both business segments are doing well.

I think that market's incredibly important. I think the initial indication is that the stimulations with the adjustment on the taxes on the entry-level vehicles is working.

So we'll see, but in the meanwhile even if the growth slows to a couple percentage points, it's still on a pretty big base. We'd take that type of growth rate in any market.

Matt, directionally the Seating content on crossover and SUV over there versus sedan, is that similar to what we would see in the US or the rest of the world? Or is (multiple speakers) should be a big content differential, I would imagine.

Yes, there is, John. I would say on the foreign brands it's exactly the same. When you have the -- whether it's the BMWs or the Audis or the Volkswagens, you'll see very similar to Europe if not identical.

On the domestic brands, there's really not a whole lot of differentiation between sedan and crossover. They are typically slightly lower contented than their foreign competitors, if you will; but we are seeing a trend where more and more features are being added to the domestic brands as they try to compete with the joint venture brands and consumers are demanding more content.

So the content growth in those products are increasing. But not a whole lot of difference, quite frankly.

Okay. Then second question. The messaging that we're getting from automakers is that the raw material exposure is moving a little bit away from them and a little bit more towards the suppliers. That's generally the messaging, and it just sounds like it might be on the margins.

But just curious what you're seeing there and also how much benefit you're getting from what's been a pretty big decline in copper in the Electrical division.

Before I turn it over to Jeff for the actual heavy lifting on that question, I don't really see a change, John, in the way that the car companies are handling commodity cost adjustments up or down. It factors into your annual negotiations and productivity and pricing, whether the commodity moves up or it moves down as we've seen in the last year and a half.

In certain cases there are formal indexing agreements, like we have on the copper that are part of our harnesses. In other cases it's just an annual negotiation.

Jeff, regarding the copper, can you take John through the exposure?

Yes, I think with respect to the agreement on copper specifically, about 85% of our copper buy is covered by some type of recovery agreement with the customer. Then with respect to the overall commodities, I think they've been consistent over the last several quarters in a positive way, in that the commodity prices have been generally down year-over-year.

So we've gotten a tailwind on almost every one of our major commodities across the board over the last several quarters.

Okay. Then just lastly, given that there's -- I mean the world is not falling apart, but there are certainly some people that think it might. If we think about the minimum liquidity that you think you need to keep on the balance sheet as far as cash and available borrowings, what is that number, if you could remind us of that? And has anything changed in your view that would make you more or less confident in how much of a buffer you need to keep?

Let me start with the latter part before I turn it over to Jeff on how we're managing our capital structure. No. The answer is no. There is nothing that we see that would change our view on what we need.

We don't see any real storm clouds on the horizon. I think we are well positioned with our balance sheet strength to take advantage of any market opportunity and also be able to well withstand any short-term market disruptions.

So we really don't see any changes in the need to change our capital structure. Jeff?

Yes, we've defined numerically -- it's not exact -- but we'd like to have approximately $1.5 billion of liquidity. Part of that's associated with the working capital peaks and troughs, the cash that might be in joint ventures that's not available for daily use or in countries that can't easily access; and then a buffer to take advantage of market opportunity.

So all-in that's roughly $1.5 billion in cash. We also want to make sure that we maintain investment-grade credit metrics, which for us means gross leverage at 1.5 times. Given where we're at with current gross leverage, we think we have about $500 million to $600 million of additional debt capacity to take and still fall within that 1.5 times gross leverage.

That's incredibly helpful. Thanks a lot, guys; and great quarter.

Ryan Brinkman.

Hey, thanks for taking my question. I thought to maybe ask on Autonet Mobile, trying to understand the implications, if any, of the fact that whereas your Electrical business has historically been focused on wires and wired connections, now you're expanding into wireless capabilities. So maybe just two things.

First, I think there's always going to be a need, obviously, to distribute power within a car by wires. But presumably some of the signal distribution could also be done wirelessly, maybe to save weight.

Is there any thinking in buying Autonet that this helps to look to the future and prevent potential disintermediation of wired signal distribution within the car? I don't think so, because Autonet seems to be focused on communicating between the car and outside networks, not within the car; but I just thought to ask in case you want to weigh in.

Then secondly, maybe more interestingly, does the expansion into a new area within Electrical mean that you could expand into other new areas maybe relative to, I don't know, safety electronics, vehicle-to-vehicle communications, or anything along those lines.

Yes, let me take part of that answer and then I'm turning over to Frank Orsini, who's in the room with us today. He's the President of the Electrical division.

I would tell you one thing, Ryan, we have been in wireless. We have been a leader in wireless.

And for us it's really not so much expanding our product line offering as to utilize the product line that we have to take advantage of the trend. The gateways, which we're one of the leaders in the industry, is the main hub, if you will, that translates all the data to the different domains.

Frank, regarding Ryan's question regarding the use of wireless and how it all ties together and whether or not you'll see the wireless transmission of signals, what's your thoughts?

Yes, Ryan, I think it's a great question. What we anticipate happening in the future is you're always going to be connected through power and signal on the car. The electrical distribution business that we have will continue to go forward very strong.

On the wireless side itself, as Matt mentioned, we have industry-leading capabilities in wireless in production today. So if you take our hardware capabilities and gateway technology that was referenced earlier on the call, and you couple that with enhanced software capabilities that we're bringing onboard with Autonet, we believe it really gives us a strong platform for connectivity.

The Autonet acquisition brought cellular communication connectivity, WiFi, GPS positioning, so it really sets us up with this great platform of hardware and software for the future. But wire will continue to be in the vehicle; we see that as a strong segment going forward. And the Autonet acquisition really enhances our existing capabilities in wireless and electronics, and we're very optimistic about what that looks like in the future.

Okay. Sounds like an interesting area. Thanks a lot.

Chris McNally.

Thank you. My question really goes back to Seating and really a higher-level question with regards to margins. So you've gained about 150 basis points since 2013; it's been extremely impressive.

My question really is: how far can we push the margins with the outlook in Europe, US, and China looking out for 2016? Can we still see incremental margins in the midteens going forward if volume and share gains continue? Thanks.

Well, our view on it, Chris, is that really we look at our margins as an outcome or function of the investment, and everything we do is a return on investment. In Seating we start returning in excess of our cost of capital in the current configuration when we cross over that 5% operating margin line, if you will, based on the current capital intensity. That would change if, obviously, the business changed; if it's build to print it's lower, certain components are higher, if you will.

We have our President of Seating here who fights this battle every single day in the marketplace, Ray Scott. Ray, what are your thoughts on Chris's question regarding margins?

Well, let me answer it this way. One, I don't think we've ever been in a better position than where we're at today. We've really done a great job of differentiating ourselves from our competitors.

If you look at what we've built when our experienced and our knowledge now with the acquisition of Eagle Ottawa, Guilford with textile, and our number-one position with cut and sew, we stand alone. So where we're at is being able to differentiate ourselves to our customer, allowing them to really expand the envelope of design where they can differentiate their products, and we can drive value not only to Lear but to our customers -- but also, and I think just as importantly, to our shareholders.

So we're in a great position. We continue to stay focused on it. We're continuing to focus on the margin.

But I think just as importantly, really put ourselves in a position where we're different from any one of our competitors out there, which will help our customers and help our shareholders.

That's great. But I guess just to confirm, as volumes increase it's not like we have to add incremental capacity; and so the business should continue to operate as-is going forward with -- if volumes remain strong. Meaning -- you talked about being in a good position. There's not much that would change if we continue to see strong volumes.

No.

No, it's -- we've been adding capacity as we've been growing the sales there, Chris, so our capital spending profile and utilization would be consistent. I don't really see -- Ray, do you see anything changing?

No, I don't see anything changing.

Did that answer your question, Chris?

Yes. Great results, guys. Thanks so much.

Dan Galves.

Hey, good morning, guys. Great job in the quarter. Can you remind us of your content opportunities if plug-in hybrid or full-e, the adoption rates or production increases in the future, can you talk about what the typical electrical content is in a vehicle like that versus a traditional vehicle? And are you seeing any uptick in the bidding activity over the last year or two?

Yes, I think this is another great question for Frank Orsini, our President of our Electrical division.

Yes. I would tell you that if you want to think of it in terms of a traditional architecture versus a hybrid or a high-power architecture, there are two incremental steps. To go to a hybrid system, you definitely see an uptick in terms of sales and content per vehicle. But the real content is driven by a fully electric vehicle, where you could actually see the architecture doubling in terms of size.

So it varies by the car and it varies by the particular application. Because hybrid you can get there with certain technologies, but if you go full electric with battery charging and cord sets and things of that nature you could be looking at doubling a standard cost of architecture.

Okay, got it. The bidding activity, are you seeing any change over the last year or so in terms of automakers getting more serious about full electrics?

It's consistent. We're working with all the automakers all over the world. There isn't a car company that we don't have an active project with. So everyone's still considering it as a potential market in the future and something we're still actively involved with.

Okay, got it. Then on the cash employment, just summarizing your comments, like you're $500 million to $600 million below your leverage target; and it looks like you're maybe $600 million, $700 million above your liquidity requirement. When do you expect to start deploying some of that excess capital above and beyond free cash flow, which is what you've been returning recently?

Well, we've been returning it and we will continue to return it. For us, first and foremost, we look to invest in the business. At any given time we have anywhere from 10 to 15 projects that we're looking at, or potential acquisition targets that we're discussing investments in.

Ultimately we would like to invest in the business because we believe that's the best return. On the same token, year-to-date I think we've returned a significant portion of our free cash flow to the shareholders through a combination of share repurchase and dividend, and I would expect that to continue.

So for us it's having that balanced strategy of having a strong balance sheet and investment-grade credit metrics; looking for investments like Eagle Ottawa, which really differentiates us, or Autonet; and then ultimately also balancing that with shareholder returns. That combination has created, I think, a really nice balance and also driven the stock price well.

Okay. Thanks a lot, guys. Appreciate it.

Rod Lache.

Good morning, everybody. A couple data points would be helpful just to understand some of the components of the earnings bridge. Can you actually confirm the magnitude of the raw material tailwind and also the effect of FX on EBIT in the segments?

On the revenue side I'm assuming that FX is like a $270 million-ish negative on Seating and maybe $100 million on Electrical. But maybe you can just talk a bit on the EBIT effect of that.

Yes, I think you're pretty close on the sales dollar impact of foreign exchange. On the margin profile in Seating, given the fact that the main currency impact is euro-based and the margin profile of our European business is generally lower than the margin profile of the Seating business as a whole, the impact of that is going to be a bit of a tailwind on the overall Seating margin as a result of that. Probably 20 basis points or so associated with the Seating margin improvement would be due to just the impact of that.

Okay.

Both segments, Rod, are very profitable in Europe. I think that differentiates Lear in many cases from other suppliers. The profile of Electrical is actually more profitable and our European segment overall is more profitable than Lear Corporation's total operating margin.

So it's a little bit different profile between Seating and Electrical, but overall it obviously has a negative impact on OI.

And what was the raw material benefit?

Probably pretty equal to 10, 20 basis points on raw material in the quarter on a year-over-year basis.

Mostly in the Seating business since there's (multiple speakers)

Yes, that's what I'm referring to, yes.

Okay, okay. Any color on how the acquisition of Eagle affected EBIT in the quarter?

It was consistent with what we said. They're running a little bit hotter on integration savings. It's been a great acquisition, and they've added a couple tenths to the bottom line or to the margin profile.

Okay.

It's been a great acquisition, Rod.

Then just higher level, just your performance and commentary is making people feel pretty optimistic about the upside to margins versus historical expectations of maybe 7%-ish in Seating and mid 13%s in Electrical, just given that you have operating leverage and presumably some opportunity for South America to improve and Canada restructuring and some other things.

Is that what you want people to leave with, coming out of this call? And any color, lastly, on the acquisition pipeline?

Yes, we're comfortable with the margin profile of the business as it stands today, Rod. In any given quarter there's thousands and thousands of input that can have an impact on a 10th this way, a 10th that way, and at any given time things are moving up and down.

But overall, the business is performing -- Lear Corporation -- as we would expect. Both business segments are pretty much where we would expect them to perform. Longer term there could be some -- a bip here and a bop there, but overall, they're where they need to be.

As far as the acquisition targets, we're looking really -- the acquisition focus has changed somewhat. We think Seating is pretty well set as far as its component capabilities. It's very uniquely positioned with leather, fabric, coupled with our sewing capabilities and the foam and structures I think puts us in a really nice position to compete there.

On Electrical, we're continuing to look for intellectual property, so maybe things that don't necessarily come in with a lot of business, but things that could really help us as we look to penetrate and leverage our existing capabilities. So that's where the primary focus of it has been.

Great, thank you.

Colin Langan.

Oh, great; thanks for taking my questions and congrats on a good quarter.

Can you -- to follow up on the commodity question, outside of copper what is the hedging that you have or the pass-through protection that you have on other commodities?

I think two main ones. One would be on the steel side. Not necessarily a pass-through, but of all the steel that we buy, about 50% of that buy is directed by our suppliers. About 35% of the overall steel buy is purchased in some type of fabricated component from a supply base. And then the remaining 15% is a direct coiled steel buy by us, and that would be the part that would be subject to fluctuations in pricing.

Then the other one would be on the leather buy with respect to -- we bought Eagle Ottawa, which significantly increased that leather buy. About 50% of that buy is subject to some indexing agreement with the customer; and about half of that is subject to commercial discussions coincident with discussions on productivity, etc.

Okay, got it; all right. Cash flow has been extremely good. Any color on what your cash tax rate is today and given your NOLs how long you could still benefit from low-cash tax (technical difficulty) how sustainable that is?

Our cash tax rate is approximately 20%. I think given our NOLs and the lifespan of that NOLs I would not anticipate a major change in that in the near future.

Okay, great. Then just one last question. Any color on the split in assembly and components in the Seating business? I mean just any color there. I understand assembly is a lot lower margin; components is quite a bit higher. Where do you stand today in (technical difficulty) in the mix?

Well again, we do everything based on a return on investment. For us, the just-in-time business is great business, even if it's just build-to-print, because the capital utilization is lower. For us, a just-in-time business on the assembly side is really good business when it's in lows -- let's say mid-single-digit type margin profile.

The flipside is on certain components we need to be in the high single digits like foam and structures. Now, all the components are providing returns in excess of their cost of capital, perhaps other than maybe North American structure business which has been challenged with some pricing and restructuring that we need to get done.

As far as the split, Jeff, do you have the split? Have we disclosed that?

Yes. Of the -- on the Seat side, if you looked at it in the context of gross sales or total sales because a lot of the sales in there --

Intercompany.

Intercompany. But if you look at it in the context of a gross basis, the JIT business is about two-thirds of the business; metals about 10%; trim, given the acquisition of Eagle Ottawa, is about 20%. Then the remainder would be on the foam side.

Okay. All right; thank you very much.

Brian Johnson.

Yes, good morning. I've got two questions. First, you've been talking a lot about the growth opportunities in Electrical. But if we actually look at the quarter, Seating outpaced Electrical in terms of revenue growth.

Is that just temporary or acquisition related? Or are there just program things? Or you continuing to evolve your focus towards higher-margin business that actually might mean slower revenue growth?

Yes.

So how should we then think about, as we go into next year, the growth in the Electrical versus the margin trade off?

Also a bit early to talk about next year, Brian.

Okay. In terms of margins, given what you said on incremental margins, is there any -- where do you see an upper bound to margins, if any?

We're pretty happy with the margin profile of the business currently.

Okay. You've talked in the past about you're happy with some Seating or Electrical business as long as it's higher than your cost of capital for that segment, which seemed to imply a limit on margins or that you might be growing revenue, good ROIC but lower margin. We didn't see any of that this quarter. Is that something you've moved away from?

No, we're consistent with our approach to the market.

Okay, thanks.

Joe Spak.

Thanks, guys; congrats on the quarter. Just one big-picture one and then maybe one housekeeping.

Just in light of some of the stuff coming out of Volkswagen and them asking for some supplier savings, have any of those conversations taking place thus far? If so, what's the tone of those conversations?

No, they really haven't. We're not involved in any way with the direct impact on those components. We're not -- I don't think we have a whole lot of any exposure to the diesels, especially in North America.

We have not had any, let's say, conversations that are not normal course as far as productivity. We're always in discussion with our customers on ways that we can help them reach their targets from a cost standpoint, but there's been nothing specifically from Volkswagen related to their current issues with the diesel.

Okay, good. Then just again housekeeping. On the guidance, depreciation and amortization, looks like you're saying $365 million for the year; but I think you've only done, if my math's right $257 million year-to-date. So that's a pretty big step up in the fourth quarter. Is there something going on there or is (multiple speakers)?

Maybe a bit of conservatism. We do have a step up in capital spending in the fourth quarter, but it's probably a tad conservative.

Okay, thanks a lot, guys. Congrats.

David Tamberrino, Goldman.

Yes, hey, thanks. Maybe just one real quick on pricing in China. There's been some top-line headwinds for the OEMs there. Have you seen any of that pressure really flowing through to you within your negotiations there?

Not anything that's not normal course; it's all been the same. I mean, our responsibility as a Tier 1 with like full integration capabilities is to give solutions to our customers. Now we're always in discussions on how we can take cost out, improve efficiencies in the supply chain -- and in the designs for that matter.

But I don't see anything that -- nothing has come that's unusual as related to the volume changes.

All right; thank you. That's it from us.

Paresh Jain.

Morning, everyone. Just wanted to follow up quickly on the discussion on EVs and hybrids, a couple of questions here. First, what is management's view on long-term EV penetration, assuming that comes up a lot in management Board meetings?

Then second, the Autonet acquisition, is there any reason to think that tech is even more important in an EV car than an internal combustion or a hybrid car? Thanks.

Well, I know we're assuming a growth rate of around 3% to 5%, which is I think consistent or maybe a tad lower than what you'll hear from a lot of the firms that forecast. We're seeing probably more opportunity for these vehicles coming out of China; but all car companies are working on active programs and are pushing this technology as a way to meet their regulatory requirements on CAFE and CO2 emissions.

As far as the complexity of a vehicle, I think traditional powertrain vehicles are becoming incredibly complex as they're looking for more signal management to help improve their performance as it relates to CO2 emissions. And all of them are looking for ways to update their operating systems over the air. So I really think they are both incredibly complicated.

Got it. Thank you.

You're welcome. Well, with that, that wraps up the Q&A portion of the call, and I think who remains are largely our workforce. I want to thank all of you at Lear Corporation for your extreme hard work and dedication. Results like this do not happen without hard work and teamwork, and I want to thank all of you for another excellent quarter. Thank you very much.

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