Lear Corporation (LEA) Q1 2011 Earnings Report, Transcript and Summary

Good morning. My name is Sara, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lear Corporation First Quarter 2011 Earnings Call. [Operator Instructions] I would now like to turn the call over to Mr. Ed Lowenfeld, Vice President of Investor Relations. Mr. Lowenfeld, you may begin.

Thank you, Sara. Good morning, and thank you for joining us for our first quarter 2011 earnings call. Review materials for our earnings call were filed this morning with the Securities and Exchange Commission, and they posted on our website, lear.com, through the Investor Relations link. Today's presenters are Bob Rossiter, CEO and President; and Matt Simoncini, Senior Vice President and 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 last slide of the presentation material and also in our SEC filings. In addition, we will be referring to certain non-GAAP financial measures. Additional information regarding these measures can be found in the slide labeled Non-GAAP Financial Information, also at the end of the presentation materials. Slide #2 shows the agenda for today's review. First, Bob Rossiter will review highlights from the first quarter. Next, Matt Simoncini will cover our first quarter financial results and our 2011 full-year financial outlook, then Bob Rossiter will have some wrap-up comments. Following the formal presentation, we will be happy to take your questions. Now please turn to Slide #3, and I'll hand it over to Bob.

Thank you, Ed, and good morning, everybody. And I'm thankful that so many us could break away from the royal wedding and attend the call this morning. It's all that's on TV and everybody's talking about, but I think we've got some good things to say. The year started off pretty good for Lear, and we've had an outstanding first quarter. Obviously, with the events in the Middle East and the tragic events in Japan, there's great concern. But let's focus on what we've accomplished. Earnings have improved. Operating performance has improved as well. We've got strong sales growth in both of our product segments. Seating has achieved target margins for the fourth consecutive quarter, and Electrical Power Management continues to improve its margins. We generated positive cash flow in the quarter, strengthened our credit metrics and we ended the quarter with $1.7 billion in cash. As you're aware, we initiated cash dividend in the first quarter, authorized $400 million in share repurchase and completed 2-for-1 stock split. We continue to win new business and our backlog is growing in the areas we targeted, and it's well balanced by our customers and by our products. If you move to Slide 4, we'll talk briefly about Japan. So far, Lear has experienced limited direct impact. We don't have any production currently in Japan, and our sales to Japan are about 1.6 of Lear's total -- 1.6%, that is. We didn't have any major damage to any of our facilities. They were all technical, but we did have -- we had no employees that were injured. We do expect some impacts in shortages resulting from the problems in Japan. It will probably happen in the second quarter, with the bulk that will happen in the second quarter. But IHS believes that it should end by mid third quarter, and we believe we can make it up by the end of the year. So overall, we feel pretty comfortable. If you move to Slide 5. You can see the balance in our products from 2005 to 2010 as we've moved into the emerging markets. Growth in Compact business, so now we have a better balance between Mid Size, SUV and Crossover and Compact. And we're still well-positioned in the other products. So I'd like to turn it over now to Matt.

Great. Thanks, Bob. Please turn to Slide #7. This slide provides financial highlights for the first quarter. Global industry production was up 5%, reflecting growth in most of the world's major markets, partially offset by a 32% decline in Japan where production was disrupted following the earthquake and tsunami. Lear sales were up 20% to $3.5 billion and core operating earnings were $205 million, up 48% from a year ago. This represents the seventh consecutive quarter of year-over-year earnings improvement. The increase in profitability from a year ago reflects improved industry production, new business and the benefit of cost saving, partially offset by customer pricing and higher costs for product development, launches and commodities. We generated $84 million of free cash flow during the first quarter. Our reported earnings per share was $1.44, up 136% from a year ago. The impact of the disaster in Japan on our financial results was modest in the first quarter. In the next few slides, I'll cover our first quarter results and our outlook in more detail. Slide #8 shows vehicle production in key automotive markets for the first quarter. Global vehicle production was 18.6 million units, up 5% from a year ago. Slide #9 provides our financial scorecard through the first quarter of 2011. As previously mentioned, sales were up 20% to $3.5 billion. Pretax income before interest and other was $199 million, up $79 million from a year ago. And net income was $156 million, up $90 million from the prior year. SG&A, as a percentage of sales, was 3.3% compared with 4.4% a year ago. The lower SG&A rate reflects the increase in sales and lower cost. Interest expense was $3 million, down $16 million, primarily reflecting a refund of interest related to a favorable court ruling of an indirect tax matter, as well as lower debt. Other income was $7 million compared with an expense of $21 million a year ago. In the first quarter last year, we wrote off $12 million in deferred financing fees resulting from the refinancing of our term debt. The year-over-year improvement was also driven by the positive impact of certain foreign exchange items and increased equity earnings in our nonconsolidated joint ventures. Depreciation and amortization was $62 million, an increase of $3 million from a year ago. Slide #10 shows the impact of nonoperating items on our first quarter results. Our reported pretax income before interest and other was $199 million. Excluding the impact of operational restructuring costs and special items related to the emergence equity grants, we have core operating earnings of $205 million, an increase of $67 million or 48% compared with a year ago. Other special items in the first quarter include $3.9 million in other income for an adjustment related to the acquisition of additional equity in an existing joint venture. Adjusted for restructuring and other special items, net income attributable to Lear in the first quarter was $158 million and adjusted earnings per share was $1.46. Please turn to Slide #11 for a summary of our results by business segment. In Seating, adjusted margins in the first quarter improved to 7.7%, up 90 basis points from a year ago. The margin improvement reflects higher global vehicle production, the addition of new business and the benefit of cost improvements, which more than offset price reductions, higher launch and development costs related to the backlog and higher commodity cost. Slide 12 summarizes the operating performance in our Electrical segment. Financial results in this segment continue to improve. Adjusted margins in the first quarter improved to 5.7%, up 70 basis points from a year ago. The margin improvement reflects higher global vehicle production and the benefit of cost reductions, which more than offset higher launch and development costs related to the backlog and higher commodity costs. We also continue to experience certain operating inefficiencies and other premium costs associated with the industry-wide shortage of microprocessors. Please turn to Slide #13. We generated $84 million of free cash flow in the first quarter, up from $4 million a year ago, reflecting primarily the increase in earnings. Capital expenditures of $71 million were $36 million higher than a year ago reflecting spending on new programs, as well as increased investments in component capabilities in the emerging markets. Slide #14 provides more detail regarding the shareholder actions that we announced during the first quarter. On February 17, we announced a $400 million share repurchase authorization. During the quarter, we spent $27 million repurchasing 529,000 shares of stock at an average price of $52 per share. Going forward, we plan to continue to buy back shares consistently, subject to the company's alternative uses of capital, prevailing financial and market conditions and other certain factors. On March 16, we paid a cash dividend of $0.25 per share on a pre-split basis or approximately $13 million. On March 17, we completed a 2-for-1 stock split. Total cash returned to shareholders during the first quarter was $40 million. Please turn to Slide #15 for an updated status of our share count. At the end of the first quarter, we had approximately 105 million shares of common stock outstanding. The number of shares outstanding reflects the completion of the stock split on March 17. Approximately 900,000 warrants remain outstanding, which are exercisable into 1.8 million shares of common stock. The warrants expire at November 9, 2014. Assuming exercise of all the warrants and the vesting of the management shares, Lear's total shares outstanding will be $109 million. Please turn to Slide 17 for a view of the major assumptions of our 2011 outlook. We continue to monitor and assess the impact on our business of the earthquake and tsunami in Japan. Last month's disaster has begun to impact our customer production schedules and has led to shortages of certain components. We assume that production loss outside of Japan as a result of the disaster will be recouped before year end and have elected to hold our production outlook flat in all markets other than Japan. Consequently, our present financial outlook is based on a forecast of global vehicle production of 73 million units, down 1% from our prior outlook, reflecting an 18% reduction in Japan. Our updated financial outlook is based on an assumption of a 2011 average euro of $1.40, which is up 5% from the prior outlook. The 2 commodities that influence our business the most are steel and copper. Steel costs have increased since our prior outlook, and we are now forecasting steel at about $0.50 per pound, up 25% from the prior outlook and from last year. As a reminder, most of our steel buy is through purchase components so the impact of raw material price increases is somewhat mitigated. Copper prices have remained volatile and our updated 2011 outlook assumes copper prices of $4.30 per pound, a 1% from our prior outlook and 25% from last year. Roughly 80% of the copper we purchased is used in our wire harnesses where we have index pricing agreements with our customers. Slide 18 details our present 2011 financial outlook. We expect that indirect impacts related to the disaster in Japan could be significant during the second quarter. However, we do not anticipate a significant impact for the full year. We expect that most loss production outside of Japan will be covered within the calendar year. In addition, there are certain cost inefficiencies related to short-term volatility and production schedules that could increase our cost in the near term. We expect 2011 sales in the range of $13 billion to $13.4 billion, up $400 million from our prior outlook reflecting primarily a change in the euro assumption. We are reaffirming our 2011 outlook for core operating earnings at $700 million to $740 million. We are increasing our 2011 outlook for capital expenditures to $300 million, up $50 million from our prior outlook primarily reflecting increased spending to expand our component capabilities in emerging markets. Depreciation and amortization is forecasted at $260 million, up $10 million from our prior outlook, reflecting the increase in capital expenditures. We are holding our free cash flow forecast of approximately $400 million. We have also reduced our interest expense by $10 million to $45 million, primarily reflecting the benefit of the interest refund in the first quarter that was discussed at an earlier slide. Net, other expense remained about breakeven. Adjusted tax expense is estimated to be approximately $125 million. Our cash taxes for 2011 should be approximately $90 million. Adjusted earnings per share is forecast at $4.70 to $5.05 per share. Now I'll turn it back to Bob for some closing comments.

Thank you, Matt. 2011 is off to a strong start and our financial performance is improving. First quarter sales were up 20% versus 2010. The margin improvement in both business segments were generating strong cash flow, finished the quarter with $1.7 billion in cash and our debt is just under $700 million. We commenced the program to return cash to our shareholders, spending $40 million on cash dividends and share repurchase. We completed 2-for-1 share stock split. We're maintaining our 2011 financial outlook, even in the face of the issues in Japan. We feel anything that's lost in the second quarter can be made up by year end. And we're continuing to win new business in the markets we want to and in the product areas that we feel most confident. With that, I'd like to open it up for questions.

[Operator Instructions] And your first question comes from the line of Rod Lache from Deutsche Bank.

A couple of things. First, would you mind providing us the impact in dollars from raw materials, what you saw in the quarter and what your new assumption is in terms of dollar impact for the year? And then also, what is the kind of magnitude of higher cost that you're kind of baking into your guidance related to this Japan's supplier disruptions?

Let me see if I can get you there, Rod. In the quarter, from the commodity impacts, the commodity that impacts us the most obviously were steel and copper. But there's also, on a smaller scale, impact on petroleum-based chemical that we use in our foam, as well as the hide market, which saw some increases. Overall, from a commodity standpoint in the quarter, we probably faced headwinds in the $15 million to $20 million range on a year-over-year basis, Rod. On the full year, we expect that to be about $50 million on a year-over-year basis, covering those 3 major commodities. Again, most of the exposure in steel is in purchase components, so we may also see some pressure on our key saves. As far as the inefficiencies, let's say, or additional cost associated with the choppiness that we expect in the production schedules both on the way down, but also on the overtime that may be required in order to recoup the production, that will impact our conversion rates. And what I mean by that is normally, we'll guide to incremental or short-term volume decreases in production in that 15% to 20% range. We could see those margins impacted on the way down, probably before seeing us towards the higher end of that conversion range. And then on the way back up, because of the use of overtime in order to make up production, we could see the margin being more towards the lower end of the conversion rates.

Okay. But these would presumably be temporary factors, I would think. Is there any way for us to kind of think about -- as we're thinking forward beyond this year, what is the impact that you're bearing this year that probably wouldn't recur because of these inefficiencies in overtime and that kind of stuff that you baked into your guidance?

It's really -- at this point, Rod, it's really hard to kind of put a bookend around it in that level of specificity. Because at this point, really, no one really knows and I don't think even the car manufacturers have fully flushed out their plans, which car lines are going to go down or which car lines are going to halt production for a period of time while they get caught up on their components. For us, each car line has its own kind of financial G&A and the margin is driven by, as much as anything, the content that the vehicle has and how much of the content we will provide. And the margin conversion is also going to be impacted on the manner in which they take a production down, the manner in which they put the production back in. If it's done with overtime, obviously, that's a premium cost. It's going to impact us. So I'd be very hesitant to give you a bookend on what the conversion is and more importantly, what it means into next year's number.

Okay. And just lastly, I noticed you're still using 12.5 million units production for North America, CSM is at 13.1 million. Is there any reason why you're there aside from just conservatism? And also just anything you can share on your mix expectations or assumptions that are built into your guidance for this year.

It just seems to us, in this period of uncertainty on what the component shortages are going to be, both direct and indirect, that it was a little bit -- we want to take a more cautious view than what CSM is using at a production and possibly stand back and hold our guidance firm. And we thought from a comparison standpoint that would be a little bit easier for people to analyze what we're projecting. From an mix standpoint, the mix is pretty consistent with what we said before, a little bit stronger in North America and in Europe but fairly consistent, Rod, with what we saw before and what we were guiding to before. So we're cautiously optimistic that the sales rates have held. And from that standpoint, we don't see that the Japan crisis is impacting longer-term demand for the products. And in time, as long as the demand is there, the car companies are doing an excellent job of figuring out solutions for the components that are tight, and they will figure out where to make the cars that they're selling.

Your next question comes from the line of Colin Langan from UBS.

You actually gave the percent, 1.6% of sales in Japan. I mean, how much globally is the Japanese automakers around the world of the indirect impact of that disruption?

I don't know, to be honest with you. From our standpoint, our sales directly into Japan are about $200 million. I don't know what their impact is. You mean, the Japanese industry or Lear's impact to the Japanese?

Like your Japanese automaker exposure around the world, like who apply to them in North America?

It's roughly 10% of what we do. We've got a good book of business with Nissan in North America and in Europe, in Toyota, with their joint venture in the Czech Republic. So it would be about 10% of our sales.

Okay. And then in terms of the microprocessor risk, I mean, where does that really lie? That's in your wire harnesses or is that in [indiscernible] electronics?

We have Ray Scott here. He's the President of our Electrical Power Management business, and he can answer that question. That's why we brought him today.

I'll answer that particular question. The microprocessor issue, obviously, has been an issue we've been dealing with, the industry has been dealing with, not just automotive. They've been outside of automotive for well over a year. Obviously it's being compounded with the Japanese crisis, and I will say this, our customers are doing a great job of communicating and working in an open forum for us to find solutions. From an allocation standpoint or replacement standpoint, even designing around situations. So we are working diligently around-the-clock. We have a crisis management team in place, and we'll continue to monitor and work closely with our customers.

The whole products, I understand, is wire harness or...

It's all electronics. The microprocessor basically is stored as a software and is the smarts of the electronic boxes.

Okay. And then in terms of -- I thought -- you've had several quarters now of over 7% of margins in Seating. But is it fair to assume that's in the range of something above 7% or is there reason going forward that that should [indiscernible] from them.

I think longer-term, we're in the 7.5% type range of the product. It will really ultimately depend on the mix of the business. And what I mean by that, the level of vertical integration, mechanisms and possibly foam. Really, from our standpoint, the greater the investment required for that vertical integration will drive the margin requirements a little bit higher so we could see it moving towards the 7.5% to 8% type range. But right now, with the mix of business that we have and the level of vertical integration, it's 7.5% about the run rate.

Your next question comes from the line of Peter Nesvold from Jefferies. H. Nesvold - Jefferies & Company, Inc.: Maybe as a brief follow up to Rod's question. You said that $50 million is the material tip that on a net basis is discounted into your current outlook. What was the net impact that was discounted into the outlook of when you originally provided guidance?

It was a little bit less than that because we're seeing pressure coming in. Copperheads remained volatile and fairly consistent at a higher range. But we are in the $35 million, $40 million range at the end of the first quarter or at the end of the year when we gave the guidance. H. Nesvold - Jefferies & Company, Inc.: SG&A as a percentage of sales down to 3.3% in the quarter, which is terrific. Is that -- are we nearing the point of which that starts to level off or do you see that continuing to improve as we progress through the year?

No, I think we are going to run it at 3.5% type range. As we continue to control our cost in the mature markets, we're also spending to develop the emerging market and the infrastructure in the emerging markets. We're continuing to make investments there, not only in capital but in our teams as we grow our capability there. We're also continuing to win new business and new business comes with a requirement to develop it. H. Nesvold - Jefferies & Company, Inc.: Okay. And very last one, I mean, you addressed this, I think to a larger degree. I just want to make sure I really flushed it out. When I look at the full year guidance, when they backed out, what you did in 1Q and then I compare that to where consensus is right now, you're guiding about 10% below where consensus is for the rest of the year. Any other color on that other than just conservatism out of the Japan situation?

Well, it really ties back out to the production assumptions and the uncertainty associated with the second quarter. From our standpoint, the businesses are performing well on a steady-state type production number as evidenced by the margins that both business segments posted. That being said, it really comes down to the overall production, the car lines that are produced, how the production is made. Is it made in a steady-state, in constant-type release situation or is it brought in and out on a short-term chop with overtime and on the way back. So really, from our standpoint, really, if you look at the consensus and the amount of production that's out there being used by others in the space, whether it's IHS or some of the other people that are really starting to be pretty consistently ahead of the production assumptions that we've used for the last 3 quarters.

Your next question comes from the line of John Murphy from the Bank of America Merrill Lynch.

I'm just wondering if you can expand a little bit more on the increase in CapEx, going from $250 million to $300 million is a reasonable step. And I'm just wondering is that have anything to do with the potential for an increase in quoting activity or new business running, coming online that you weren't expecting before? Just trying to get a better idea of what the increase is for.

Well, we've continued to win new business during the first quarter. Yearly though, the capital goes in place a little bit later than like when you win the business. So what I would tell you is really the capital increase is consistent with what we've been talking about on prior calls and consistent with the use of our financial power, so to speak, our liquidity and our cash position. While we're looking to continue to expand in the emerging markets, our component capabilities is an area where we're very, very focused. And the majority, if not the entire amount of the increase, really reflects the type of footprint expenditures that we're making in places like China, Northern Africa, Eastern Europe and South America and India.

And then a second question, you alluded to the potential in seeing of getting a little bit more vertically integrated and we've seen one of your big competitors make some acquisitions along that line. I was just wondering if there are any acquisitions that you could see out there to move forward on that vertical integration, on the Seating side?

I mean, we're continuing to look at certain niche acquisitions that would help us maybe expedite our vertical integration or diversity or even access to additional customers. So I need to know what would help us improve our footprint, help us expedite the diversification of our sales either by customer or regionally. Yes, we could. We don't think there's a major acquisition in the cards in order to do that but there could be some niche acquisitions on the horizon.

And then just lastly, we've seen from other suppliers that there's been some pressure from launches or the ramp up in launches in the industry on margins. And you guys really just aren't seeing that. All else equal, are you getting a little bit of pressure on margins from these launches? And is the base business just doing that much better than what it even appears based on the numbers that we're looking at?

That's a good question. Let me kind of explain it this way, John. We have part of the year-over-year impact at Lear Corporation. It was a step up of about $20 million to $25 million in launch cost off of our base last year of $60 million. We've also seen a step up in program development which goes hand-in-hand obviously with the launch cost at the facilities. But the backlog will come in and part of the conversion on the incremental revenues is the backlog, and backlog typically comes on at around 10%. So a little bit lower than a normal benefit you're going to see just from volume. One of the things that both divisions, Ray, Lou and their teams exceeding rush and distribution to is an excellent job of launching products. That being said, it is a risk and it's an additional inefficiency in the operations when we launch them. In the quarter, we probably have launch costs totaling about $25 million, and we would expect those costs to continue during the full year, maybe a little bit more front-end loaded. But all in all, a step up in those costs this year versus last.

And the next is just the last question, on Slide 5, Bob, you really did a good job of laying out the sort of the diversification of the model lines and segments that you guys have made. I was just wondering, as you look at this kind of a change in the potential changes going forward, maybe a smaller vehicle mix out there, I mean, how should we think about margins and returns on these smaller vehicles? I mean, obviously, there might be a little bit less content. I'd like to hear your thoughts on that. And what kind of impact could that have on margins and returns? Would they still be the same as what we see on the larger vehicles?

Well, they won't be the exact same because it's driven by content. One way we're trying to offset the lack of content on smaller vehicles is to have more vertical integration. And so we think overall, the margins. although will be slightly less than our traditional margins, but still very good margins for the business. So I don't see any real change as we expand in the emerging markets. And I do want to add -- just let me add something on the acquisitions so we make sure that we get this clear. We've looked at a number of acquisitions out there and walked away from a lot of them for a very simple reason. We want to put new assets in emerging markets and we want them efficient. We want new equipment, new systems, new processes and that's why we've elected to expand internally as opposed to going outside and acquiring companies. And where we see a specific niche that will help us advance our product offering and we'll look at it. We have several of those that we're working on right now. But overall, I'd rather put new efficient assets in rather than spend my money on restructuring.

Your next question comes from the line of Brian Johnson from Barclays Capital.

I want to drill down on simple aspects of the strong revenue growth for the quarter. So 3 sets of questions. One, kind of a housekeeping one, how much was currency? And second, kind of strategically, what's driving the organic growth here, to what extent is it backlogged, to what extent is it getting yourself in the phase of growth in some of the emerging markets and to what extent is it customer programs and established markets doing perhaps better than just your averages?

Actually, you just answered it.

Well, you can quantify it for us, maybe starting with currency.

Let me try to give you some color on the year-over-year revenue lock. Our currency number was relatively modest. It's a real run-up and the currency happened subsequent to the quarter end, fiscal quarter end. Now we're starting to see the euro very, very strong in the $1.45 to $1.50 range over the last several weeks. But the majority of the run-up happened after we closed the books on the quarter. The currency impact is only about $20 million to $25 million. Our backlog in the quarter was roughly $190 million and the vast majority of the rest of it, and there's really a lot of different inputs to what changes revenue other than just industry and backlog and currency. There's also adjustments on price-related to value, engineering and what have you. But that being said, the vast majority of the rest of it was the volume increases. From our standpoint, we saw North America production in the quarter at a little over 3.3 million units versus, I don't know, 2.9 million in the first quarter of 2010. And in Europe, we're estimating -- the way we manage Europe, we look at Europe at roughly 4.7 million units. And that was up a couple 100,000 units. So what I would tell you is you just kind of have to do the math based off of the production side that we showed you, Brian.

But it seems like if we do that, you're still pacing the production plus backlog increase or is it just the remaining backlog? How much was -- are you on platforms that you think are gaining market share?

Yes, we've got some pretty interesting index that's launched and come out and have done really well. And we're on some really key platforms. You've got a pretty good mix. I mean, some of the backlog -- we're launching the new Explorer and that seems to be a real winner. We're on a new Fiat 500 and that looks like it's going to have some success. And from our mix of product as well, we're on some very diverse group of products, which Bob mentioned on Slide 5. Everything from the Ford Focus, the Fiat Punto, the 3 series in Europe, the 900 in North America. So we're pretty balanced and I think what you're seeing is that in these results.

Right. Particularly if you look at Europe, you're up 21%. Current production was only up 4%. Unless all your $125 million backlog hits there and implies, you're on. And maybe it's the programs, you mentioned some attractive fast growth programs.

We've got a nice mix and a pretty balanced mix of products in Europe, across all vehicle platforms and well represented in the luxury segment, which has shown some very good strength. But we've also well represented in the entry-level vehicles A, B and C platforms.

Your next question comes from the line of Chris Ceraso from Crédit Suisse. Christopher Ceraso - Crédit Suisse AG: I just wanted to clarify a point from earlier in the call just to make sure that I've got this right. Your sales to Japanese customers, you said, it's about 1.6% in Japan, 10% overall. So that's something around 8.5% to Japanese vehicles that are produced outside of Japan. Do I have that right?

Yes, thereabouts, it's about right. Christopher Ceraso - Crédit Suisse AG: Okay. And then on a materials front, you mentioned it's $15 million to $20 million in the first quarter but only $50 million for the year. Is there a reason that it's more front loaded? Is it a function of the comparisons that are getting easier as the year goes on? Or why only $50 million relative to $15 million to $20 million in the first quarter?

Well, we had an inflationary period in 2010 on copper end and a little bit in steel as well. So the comps, part of this was baked in the first quarter. Copper costs last year were lower than when we finished the year. Christopher Ceraso - Crédit Suisse AG: And then you mentioned on the copper, you do have indexing on a lot of that. Is there any lag? Is that baked into the $50 million?

Yes, it's typically done on a quarter lag and it is baked in. It sometimes provide some chop in the quarter. So you finished the quarter and then you work through the price changes with your customer. Christopher Ceraso - Crédit Suisse AG: Okay. Last question, any update on your stake in IAC or your plans with regard to that stake?

Well, it's the same. It's not a core asset for us. We believe that the current ownership there and the management of that will be successful. And they're seeing improvements in their business as the industry continues to rebound. It's got a good book of products and we're confident in their success, but it's not a core asset for us. Christopher Ceraso - Crédit Suisse AG: Okay. So not a core asset, meaning if you found the right deal, you would sell it?

You got it.

Your next question comes from the line of Aditya Oberoi from Goldman Sachs.

Well I wanted to go back to the question on microprocessors and microcontrollers. What have you guys been hearing in terms of how much of the industry is ready to manage the shortfall from ultimate sourcing or overtime in the plants that are running?

I will turn that over to Ray Scott, our President of the Electrical Division.

Could you repeat the question again?

I'm just curious to know what you guys have been hearing in terms of where the industry stands from a rebound in supply either by overtime or via alternate sourcing?

Well, I mentioned earlier, obviously, the microprocessor situation, it was a serious situation prior to the Japan crisis. And what's happened since then is obviously our customers have been doing an outstanding job of redesigning alternative and/or replacement parts or alternative designs to design around particular components or reallocating particular parts and working in collaboration with our customers. We're obviously working around the clock to satisfy their production needs. In addition to that, we're working closely with our suppliers, obviously, as they're going through this very tough situation. In respect to overtime and the continuation of the situation, there's a lot of clarity that needs to be, that needs to take place with wafers and other components that are supplied to the microprocessors. So we're working through them. It's a tough situation but like I said earlier, our customers are doing a great job of being creative and flexible in communicating their needs. And I see this situation going on through June and prior to the rest of the year. And that's some of the experiences and issues that we're dealing with here as a company.

Great. My second question was on your increased investment and increased CapEx plan as you kind of plan for more vertical integration in the emerging markets. I'm just curious, is this something that will probably end this year or going forward as well, you will continue to focus more and more on vertical integration across geographies.

Let me answer this. Basically, we don't want to make every component 100%. But we do want to have the ability to make all components, which we do today. So we're looking at having enough balance between what we've purchased and what we manufacture so that we have flexibility in times when industry sales drop or when industry sales go up. So I guess just looking for that right balance and also looking for where we want to expand our component capability at. And obviously, the emerging markets, India, China and eastern countries of Europe are very attractive as is South America and Southern Mexico. So that's kind of the strategy overall.

So can you kind of quantify, like this is the level of work integration [Audio Gap] and in those regions right now and this is where you wanted to go?

Right. Let me frame it up from a financial perspective. Historically, we've run in the range of 1.5% to 2% of sales as capital expenditure, really driven by the cadence of the backlog on whether or not it would be at 1.5% versus 2% of the sales on a spend standpoint. To Bob's point, we are going to continue to look for opportunities to grow organically. We think that provides better returns and in many cases, the acquisitions that are out there and I think it's put a value for our customers and better value from our investors. From a return standpoint, we see over the next several years, using our financial wherewithal to invest in Lear organically and move that sales number or that investment number up about 2% to 2.5% range, as a percentage of sales over the next several years. And then going back to the more normalized percent to 1.5% to 2% range. But with vertical integration, I think it really comes down to the ability, not to provide value but not necessarily to make everything. Trim we have competitive advantage in our seat cover business and we're pretty well vertically integrated and in a low cost footprint everywhere in the world. Metals we still have capabilities there and the capability to continue to expand. We don't want to make everything, like Bob said. Our foam, in certain cases, makes total sense for us to make foam. We're a little bit more vertically integrated in North America than we are in Europe and Asia. That's a huge opportunity for us and we will continue to look to expand in there. But to Bob's point, we don't really plan on making everything, it doesn't make sense for us to do that. But the vertical integration returns has been very, very good. More importantly, it provides quality products to our customer and it's a way of us controlling our cost and controlling the quality to our end-customers.

Your next question comes from the line of Himanshu Patel from JPMorgan. Himanshu Patel - JP Morgan Chase & Co: Just a couple of questions. The $50 million commodity hit, obviously, that's a little bit higher than what you thought before but you're not changing your guidance. Can you just talk us through a little bit on the game plan on how to deal with the commodity inflation this year and next year? Are you generally thinking that this is going to be offset with internal cost savings? Or is there sort of an implicit expectation that you're going to be able to get a lot of this back from the OE?

There's been a lot of talk about this in the past and Bob addressed it on numerous calls where we're cooperative with our customer and our suppliers to address the higher costs if the entire supply chain basis when commodities increased, whether it's a customer or our suppliers, it's a higher cost where all of us observe. And what we try to do is look for consolidation opportunities to get cost out of the supply chain, to work with our customers, to address it through commercial negotiations as well, as they recognize that it's a higher cost in the cost model where we settle on pricing every year. The costs are higher this year, but there are literally thousands of different inputs that go into making a projection. [audio gap] Japan sales are down. Mix is a little bit stronger. Plant performance is a little bit better and you try to balance all of these different inputs, Himanshu, and come out and at this point, with the higher commodities, we're confident that we can cover them. I'm hesitant to say how the impact will be in 2012 at this point in time. Himanshu Patel - JP Morgan Chase & Co: I appreciate the guidance for this year. It may have had a lot of other moving parts outside of commodities. But I guess just conceptually, Matt, you've got one big competitor out there who's been pretty vocal in claiming that they've got pretty strong commodity protection language contractually written into their contracts. And I think you've always had to view that you don't necessarily have it, but you may not necessarily need it either because you can kind of get a lot of that done through your own negotiations. I'm just curious, is that kind of the view that you still have where at the end of the day, you don't really think one supplier is going to be treated dramatically differently on commodities versus another?

Well, I'm going to tell you, if they're getting paid for their commodities, they would be the only ones in the industry that are getting it. But if they are, I compliment them. But in our case, I also believe that our margins are better than most people in our business, which would suggest that we're doing pretty well somewhere. So we're doing well, productivity-wise, working well with our customers, giving back what they need and still protecting our margins. So overall, we'd like to get a recovery on steel, for instance. But that's not in the cards today. And wherever we've had any real wild swings, the customers have always worked with us to help us mitigate those wild swings. I guess that's the best way to answer it. Himanshu Patel - JP Morgan Chase & Co: And then 2 smaller questions...

That big competitor, were you talking about Magna? Himanshu Patel - JP Morgan Chase & Co: The 2 follow-up questions, CSM did a little bit of a haircut on Detroit 3 production in North America I think for Q2 as well, but it's a little bit inconsistent with anything we've heard publicly. How are you guys feeling on that? I mean, are you hearing anything that would make you think CSM would be right or perhaps too conservative on that?

Well, we're below were CSM is at pretty consistently, CSM did talk about a pullback overall in the industry in North America that would represent about a 10% pullback in the second quarter. Obviously from our guidance in the quarter, weathering that, how that breaks down by customer, I haven't seen a whole lot by car line, Himanshu, if anything. Right now, the releases don't reflect that. I think the car companies themselves are trying to sort through where the shortfalls are and they're going balance that with demand for the vehicles. Ray, do you have any -- you're in the discussions every day.

I don't have anything in particular to say.

All right. So it's really, Himanshu, I think, a wait-and-see game, whether or not ultimately, CSM will be accurate or not. We're taking somewhat of a cautious view until we see.

We like them to be.

We'd like them. Actually I think it would be great if they're right, and they have it historically it would mean fairly accurate. But again, it will come down to which car lines are impacted.

We spent a lot of time sitting here and trying to decide what numbers to use, and we're convinced that we've got the right number for the year under -- with the things that we have to face coming from Japan, we don't know what the impact is going to be in the second quarter. We believe it will be over some time in the early third quarter, but we can't be sure of that. So we think it's prudent to take this approach. Himanshu Patel - JP Morgan Chase & Co: Bob, maybe last one for you. You caught my attention when you mentioned that you've elected to expand internally more than doing M&A. I understand, I'm sure you guys are still actively looking at acquisitions, but was that comment meant to signal some kind of change versus what you guys were thinking in terms of the trade-off between internal versus M&A opportunities 6 months ago?

Absolutely not. It's the exact same strategy we've implemented since well before we went into chapter and since we've left, we feel that we made, not a number of errors. But we lowered the balance sheet with debt and we spent a lot of money on restructuring. We just don't want to go through that again. We'd rather put new efficient assets in the right place, and that's the direction that Lou and Ray are taking the business and I fully support it, as does Matt and the rest of the team and the Board. Are we looking at outside acquisitions? We look at all of them. We have a number that we're looking at that we believe will enhance our product offering. They're not major in the sense that they're transformational, but they will help us to sell our products better.

Your next question comes from the line of Brett Hoselton from KeyBanc.

Matt, with regards to your guidance, normally when you raise your sales guidance, I would have expected you to increase your core operating earnings guidance, but clearly you've got some offsets here. I was hoping you could just say, probably which one or 2 or 3 things would you say would be the primary reasons why you didn't raise your core operating earnings guidance along with your sales guidance?

First off, the vast majority of the sales increase, $300 million relates to the strengthening of the euro. That's not going to convert at your normal 15% kind of incremental conversion. It's going to convert more to 3% or 4% type range. So the vast majority of the sales growth really came from there. There is some mix and the mix in the Japan impact kind of washed one another, although with slightly different kind of financial G&A from a conversion standpoint. We are seeing a little bit step up in the commodity costs from the prior outlook. That's when we look at that, when we factor all those things in, along with what we believe now will be a continuation of certain costs and efficiencies and premium costs with the shortages on these boards, we thought would kind of mitigate during the year or pull back during the rest of the year. We're holding our earnings guidance the same. If we're able to perform better, it will be towards the higher end of the range. And if some of these problems persist or get a little worse, it will be towards the mid-point or the lower end of the range.

Longer-term margin targets. On the Seating side, I think what I'm hearing you say is that 7.5% is a good run rate, but it sounds like you're planning or continuing your plan of increasing your vertical integration. So 7.5% might be a good run rate but we shouldn't be surprised to see some upside to that 7.5% over the next year, 2 or 3 years.

That's a fair comment. It's really a function of investment and investment dollars and the amount of capital we spend in that segment. And as you see, we are stepping up our spending. So you would expect the margins to increase in order to get a return on an investment. I think it's a fair statement on what you mentioned.

As you think about the electronics side of the business, I know that in the past, you talked about the electronics potentially increasing margins to the point where you're on par with the Seating side. Your expectations today, do you still believe that you can get kind of into that maybe 7%, 7.5% range over the next 2 or 3 years?

Absolutely.

To round it out a little bit, the key, if you think back to what we said about the segments is if a segment that really needed a level of critical math [indiscernible] to development costs in the engineering expenses in order to be a global provider on both low power and high power systems, complete systems. We are now approaching between our backlog and industry recovery that kind of $4 billion plus revenue number over the next several years. That, coupled with the restructuring efforts that Ray and his team are facing there, we'll get that margin into the target range of 7% to 8%.

Do you want to add anything, Ray?

Absolutely. I think with the backlog that's coming online [indiscernible] position ourself with high power, launching of both has really driven a lot of opportunities for continuation of growth. And we will put ourselves in a great position from an engineering, restructured engineering and the footprint of our plants. We are in a good position going forward.

And your last question comes from the line of Itay Michaeli from Citi.

Slide 20 talks about continuing to win that new business. I was hoping you could elaborate on that a little further. Which segments are you seeing some strength at and perhaps regionally? And then when do you expect to update the next or announcement of backlog update?

Both segments are winning business and they're winning globally so it's been across the Board. We'll be winning in a study pace and we would expect that to continue. We historically had only provided an annual update on backlog at the end of the year. Last year, we gave a mid-year update. We probably anticipate, I'd say, in doing this again this year related to the second quarter earnings call.

And then on the full-year guidance, did you share what your assumptions now are for the T900 platform?

No, we didn't. It's about roughly 900,000 units.

Okay. So that went up a little bit? Is that right?

Yes.

And then lastly on the $400 million free cash flow guidance, you were able to maintain it despite the $50 million of higher CapEx. That's the function of conservatism early in the year or is there any change in terms of restructuring cash outlays or anything else in the wall?

I wouldn't say conservatism. I think the guidance overall is balanced. The restructuring actions are occurring a little bit later in the year for several reasons. We would expect the cash restructuring to be a little bit lower. We're not committing about $90 million to $100 million of cash used for restructuring. It's down slightly. But again, there's also a lot of other changes that are going through as far as working capital just as we get more clarity in the year. And performance, we've tightened it up. And we will hold the number of $400 million a year even with the higher capital spend.

Okay, great. Any change in terms of the 2012 cash restructuring price path?

We expect 2012 to go back out for more normalized levels. We talked about that and our business normalizes close to about $40 million on average, and we expect cash to be consistent with that.

Thank you, and thanks to everybody who joined the call today. The company is off to a pretty good start, there are some concerns about the second quarter. But the team is doing an outstanding job. I want to thank all of you and just say, let's get to work. Thank you very much.

And this concludes today's conference call. You may now disconnect.