Lear Corporation (LEA) Q3 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 Third Quarter Earnings Call. [Operator Instructions] I would now like to turn the call over to Mr. Ed Lowenfeld, Vice President of Investor Relations. Mr. Ed Lowenfeld, you may begin.

Thank you, Sara. Good morning, and thank you for joining us for our Third Quarter 2011 Earnings Call. The materials for our earnings call were filed this morning with the Securities and Exchange Commission and posted on our website, lear.com, through the Investor Relations link. Today's presenters are, Matt Simoncini, President and CEO; and Jason Cardew, Interim 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 materials and also in our SEC filings. In addition, we will be referring to certain non-GAAP financial measures. Additional information regarding these measures can be found in the slide labeled Non-GAAP Financial Information, also at the end of the presentation materials. Slide #2 shows the agenda for today's review. First, Matt will review highlights from the third quarter. Next, Jason will review our third quarter financial results and our full year 2011 outlook, and then Matt 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 Matt.

Thanks, Ed, and good morning. Our trend of positive momentum continued in the third quarter. Sales and earnings increased at a faster pace than the industry production, and we achieved our ninth consecutive quarter of year-over-year improvement in core operating earnings. We generated $64 million of free cash flow in the third quarter. In addition to reinvesting in the business, we also have been returning cash to shareholders through a combination of share repurchases and dividends. During the quarter, share repurchases and dividends totaled $107 million. In August, J.D. Power released its annual Seat Quality Study, and Lear was recognized as the highest quality major seat manufacture for the 10th time in 11 years. We are increasing our full year guidance, and Jason will provide details a little bit later in the presentation. Please turn to Slide #4. There's no change in the strategic direction of our company from what we've been talking about for the last several years. We believe we are well positioned in both our business segments with global product capability and financial flexibility to grow and further diversify our business. Our primary focus remains on serving our customers to ensure we are a supplier of choice. We plan to continue to expand our component capabilities in emerging markets to further improve as well as create long-term shareholder value. We continue to evaluate niche acquisitions that will expand our capabilities in the emerging markets, increase our sales and add scale to our Electrical segment. No major acquisitions are needed or planned. We are committed to maintaining a strong balance sheet with investment-grade metrics. Finally, I would like to discuss some recent management changes. Lear has a very deep bench with outstanding management talent. At the end of September, Lou Salvatore, who ran our seating business left the company. This week, I asked Ray Scott, our most experienced operating executive, to return to seating to lead that team. Most recently, Ray has done a great job leading the turnaround of our EPMS business. We have also announced that Frank Orsini, who worked closely with Ray in running our EPMS business, to go back to running EPMS as the Interim President. I am confident that both of these leaders will do an outstanding job in their new roles. Slide #5 highlights our geographic sales diversification of recent growth in emerging markets. We continue to diversify our sales with almost 2/3 of total sales outside of North America. The Asia Pacific region continues to grow and is expected to account for approximately 16% of our consolidated worldwide sales in 2011. Furthermore, our sales in the BRIC markets have grown significantly in the past 5 years from about $800 million in 2006 to approximately $2.4 billion this year. This represents an annual growth rate of 24% versus industry growth of 17%. Over half of our BRIC sales or approximately $1.3 billion are in China. This does not include, however, our sales at our unconsolidated joint ventures in China, which total approximately $700 million. Slide #6 shows our recent and planned investment in low-cost component capacity. For the period 2010 through 2012, we anticipate spending approximately $300 million on new component capacity in low cost regions. In seating, we are adding capacity in seat trim, structures, metals and mechanisms and seat foam. In electrical, we're adding wire harness capacity as well as capacities in connectors and electronics. Please turn to Page 7. As I mentioned earlier, we have been successful in growing our electrical business over the last several years. In 2011, we expect over $3 billion in EPMS sales. Going forward, we expect this sale to grow -- this segment to grow at a rate faster than the overall industry. Factors that support our growth plans include an increase in electrical content in vehicles, further industry recovery, a strong sales backlog and content growth in traditional and high-powered systems. Based on our expected sales growth, we expect that we can increase scale sufficiently to allow us to achieve our target margins. Turning to our seating business. Slide #8 provides more detail on the 2011 J.D. Power & Associates seat quality satisfaction study that I mentioned earlier. The left side of the page shows the trend of Lear seat quality as measured by the number of problems over 100 vehicles. Our 2011 performance, which was our best ever, improved by 13% compared to a year ago. The right side of the page highlights our ranking among all seat manufacturers. Now I'll turn it over to Jason for a review of our financial results and the outlook for the remainder of the year.

Thanks, Matt. Please turn to Slide #10. This slide provides financial highlights for the third quarter. Lear sales were $3.5 billion, up 23% from a year ago, reflecting our strong sales backlog, increased production on Lear platforms and the positive impact of foreign exchange. Core operating earnings were $178 million, up 19% from a year ago. The increase in earnings reflects higher sales as well as operating performance improvements, partially offset by customer pricing and higher cost for product launches, engineering and commodities. We generated $64 million of free cash flow during the quarter, and finished the quarter with a cash balance of $1.7 billion. Our reported EPS is $0.95 per share. On the next few slides, I'll cover our third quarter results in more detail and update our full year outlook. Slide #11 shows vehicle production in key automotive markets for the third quarter. Global vehicle production was 18.4 million units, up 6% from a year ago, reflecting increases in all major markets except for Japan, which is still recovering from the earthquake and tsunami that occurred earlier this year. Slide #12 provides more detailed summary of our financial results for the third quarter of 2011. As previously mentioned, sales were up 23% to $3.5 billion. Pretax income before interest and other was $159 million, up $40 million from a year ago. Tax expense increased by $26 million from last year, reflecting higher earnings and the mix of earnings by country as well as a low effective tax rate in the third quarter of 2010. Net income was $101 million, up $5 million from a year ago. SG&A, as a percentage of sales, was 3.3% compared with 3.9% a year ago, reflecting the increase in sales. Other expense was $9 million, up $6 million, primarily reflecting losses at our IAC joint venture and the impact of foreign exchange. Our nonconsolidated joint ventures in Asia remain profitable. Depreciation and amortization was $64 million, up $5 million from a year ago, reflecting higher capital spending over the last 4 quarters. Slide #13 shows the impact of nonoperating items on our third quarter results. Our reported pretax income before interest and other expense was $159 million. Excluding the impact of operational restructuring cost and special items primarily related to the emergence equity grant, we had core operating earnings of $178 million, an increase of $28 million or 19% compared with a year ago. Other special items in the third quarter include $2.8 million in income, primarily reflecting the gain related to an affiliate transaction and $3 million in tax benefits, primarily resulting from the release of a valuation allowance in a foreign subsidiary. Adjusted for restructuring and other special items, net income attributable to Lear in the third quarter was $114 million, and adjusted EPS was $1.08. Please turn to Slide #14 for a summary of our results by business segment. In seating, core operating earnings increased by $17 million to $181 million. Adjusted margins in the third quarter were 6.7%, down from a year ago. Year-over-year margins were negatively impacted by customer pricing as well as higher launch, development and commodity cost. Year-to-date, adjusted margins in seating are 7.5%. Slide #15 summarizes performance in our EPMS segment. Financial results in this segment continue to show year-over-year improvement. Adjusted margins in the third quarter improved to 5.4%, up 120 basis points from a year ago. The margin improvement reflects favorable operating performance and the benefit of increased production on Lear platforms, which more than offset customer price reductions and higher launch and commodity cost. Year-to-date, adjusted margins in EPMS are 5.7%. Please turn to Slide #16. We generated $64 million of free cash flow in the third quarter and $269 million through the first 9 months of 2011. Year-to-date, free cash flow is flat compared to last year as the increase in earnings was offset by higher capital expenditures. As Matt mentioned earlier, higher capital spending in 2011 reflects primarily increased investment in component capacity in low-cost countries. Slide #17 provides an update on our share repurchase program, which was announced in February. During the third quarter, we purchased 2.1 million shares of stock at an average price of about $45 per share for a total of $94 million. Year-to-date, we have purchased $194 million of stock. As of the end of the third quarter, $206 million remained under the share repurchase authorization. Going forward, we plan to continue to buy back shares consistently, subject to the company's other alternative uses of capital, prevailing financial and market conditions and certain other factors. On September 21, we paid a cash dividend of $0.125 per share or approximately $13 million. Total cash returned to shareholders during the third quarter was $107 million. Please turn to Slide #19 for the major assumptions underlying our 2011 full year financial outlook. Our outlook assumes North American production of 12.9 million units and European production of 18.1 million units, an increase from our prior outlook of 2% and 1%, respectively. In key emerging markets, our outlook assumes China production of 16 million units, up 2% from our prior outlook. Production in Brazil and India are forecasted to be down from our prior outlook by 2% and 9%, respectively. Our forecast for global vehicle production is up 1% from our prior outlook to 75.2 million units. Our 2011 outlook is based on an assumption of an average euro of $1.40, which is unchanged. Copper cost has trended down since the beginning of September, but remained high relative to historical levels. Taken into account the recent pullback, our outlook assumes copper at a full year 2011 average cost of $4.25 per pound, down $0.15 or 3% from our prior outlook. Steel costs are flat with our prior guidance, however, both copper and steel are up almost 25% from last year. We continue to see additional pressure on other commodities that impact our business such as petroleum-based chemicals. Slide #20 summarizes our updated 2011 financial outlook. We expect 2011 sales in the range of $13.8 billion to $14.1 billion, up from our prior outlook, reflecting higher industry production. We are increasing our 2011 outlook for core operating earnings to $760 million to $790 million. Interest expense is expected to be approximately $40 million, down $5 million from our prior outlook, reflecting primarily higher interest income. Other expense, which includes equity earnings at our nonconsolidated joint ventures, foreign exchange, state and local taxes and other miscellaneous items, is forecast at about $10 million. This is up $10 million from our prior forecast, reflecting lower equity earnings at our IAC joint venture and the impact of foreign exchange. Tax expense, excluding restructuring costs and other special items, is expected to be approximately $140 million, $5 million higher than our prior outlook, reflecting the increase in pretax income and the mix of earnings by country. Free cash flow for 2011 is expected to be approximately $435 million, up $10 million from our prior outlook, reflecting the increase in earnings. The remainder of our 2011 outlook is unchanged. Taking into account the changes noted above and pure outstanding shares as of the end of the third quarter, our adjusted EPS forecast has increased to a range of $5.05 to $5.35. Now I will turn it over to Matt for a brief summary.

Thanks, Jason, great job. We had another strong quarter of performance. Our competitive market position as well as our balance sheet will drive further growth and value creation. In closing, I want to thank the Lear team for their continued hard work and dedication. I'm very proud to lead what I believe is the best team in the industry. Thank you for your interest in Lear, and we'd be happy to take your questions.

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

Okay. I had a couple questions. First, I was hoping you can drill down a little bit for us on the incremental margin bridge. You had $640 million of revenue growth on a year-over-year basis and maybe first of all, how much of that was FX of the $640 million?

The $153 million of that was FX, Rod.

So you had basically $487 million or so of revenue growth organically and about $30 million of EBIT growth, which looks a little light relative to history. Maybe just -- can you drill down on that for us?

Right. Well, first of all, let me just break down the remainder of the sales change. We had a very strong backlog quarter with $280 million of backlog. So there's about $170 million for volume. If you think about our normal conversion on the backlog, we like to look for about 10% on that. It's not going to convert at the same level as volume. And on the volume change, we'd expect that to convert at about 15% to 20%, which it did in the quarter. So really what's offsetting the benefit of volume and backlog in the quarter is higher commodity costs of $15 million in the quarter and higher launch and development cost of about $18 million in the quarter.

Yes, I think you're raising a good point, Rod. We weren't as crisp as we would like or as efficient as we would like in some of our launches. In North America, we were launching a lot of product this quarter, and we just didn't come out as crisp as we would have wanted. That impacted the conversion.

Did the launch cost diminish a bit, going forward, on a year-over-year basis?

It's a little bit richer in the back half of the year versus the first half. All in all, I would say, you probably look at the fourth quarter, it's fairly consistent with what we saw in the third.

How about next year versus this year? It looks like revenue -- this is the big year for revenue growth on a year-over-year basis, is it more comparable in 2012?

Yes, the backlog next year is actually pretty comparable. I don't want to really get into a whole lot of sitting numbers for next year. The guidance next year, the backlog for next year is pretty consistent year-over-year. Again, the top number is consistent, but it really comes down to the number of launches and the time line on those launches. It's probably one of the most uncertain things in the industry is your launch performance of that and possibly moving production from one facility to the next, which is actually pretty simple similar to a launch. There's probably not a whole lot we could say at this point, any further on '12 though, Rod.

And maybe drilling down into the divisions, the seating business had been running 7% to 8% margins, had a fixed [ph] handle this quarter, should we be reading -- you did mention pricing and raws there. Is there anything for us to read into that, just kind of prospectively about the margins there or do you think that, that kind of comes back?

No, you've heard me say many times that I think that business operates on a longer-term basis between 7% to 8%. In any given quarter or short-term period, it could be above or below that range. I wouldn't read anything into it longer term.

Okay, just -- and lastly, you do have some disclosures about, I think, 5 facilities in Thailand, just if you have any update on what you're seeing just regionally and, in particular, with those disruptions up there? Is that something that's material?

We do have 5 facilities in Thailand, 4 manufacturing facilities and a commercial headquarters. And we have had no damage to any of the facilities as a result of the flood, and -- but we have seen our customers take some downtime. Ford and Nissan are our largest customers there, and both have been down for several weeks. We expect that to continue for another few weeks. What's more difficult to predict is perhaps the impact on components that come out of Thailand. So far, there's been no direct impact on components that we buy from Thailand, but that could change.

What percentage of your revenue would Thailand represent?

It's about 1.5%. Pretty small.

Your next question comes from the line of Chris Ceraso from Crédit Suisse. Christopher J. Ceraso - Crédit Suisse AG, Research Division: So the -- it looks like you're paying out just about all the cash you're going to generate this year. You mentioned no acquisitions needed or planned. You do still have a fair amount of excess cash on the balance sheet. Any plans to do anything with that, or you're holding it just because the market is still uncertain?

No, it's not necessarily that. I mean, we like to maintain a level of about $1 billion liquidity, combination of cash and revolver. Really, I mean, our first priority is always to invest in the business for long-term value creation, and that comes by being the low-cost producer, high-quality producer and being in the regions of the world where the growth is coming and that, obviously, requires capital investment. We also are looking for potential niche acquisitions that could either facilitate our growth and diversification or add that component capacity in emerging markets or possibly add some capabilities in things like connector systems and what have you. We're not really just holding it for the sake of holding it. I think we've made a nice step in returning cash to shareholders, approximately $200 million through the first half of the year, and will continue to probably do that in a very systemic and consistent manner, and that's it. As far as acquisitions, we don't really think we need a major acquisition. We're not looking at it. And from our standpoint, while there are -- there is some uncertainty on a go-forward basis with production -- I know IHS is calling for a little bit of flat number next year in Europe. We still think that this is a growth industry, and that we're going to see a recovery, albeit, maybe a little bit more gradual than we originally anticipated. Christopher J. Ceraso - Crédit Suisse AG, Research Division: Okay. Can you give us any detail on what's going with IAC? It seems like that was a pretty big hit to your P&L below the operating line. Every supplier that we cover is reporting better results versus a year ago. What's happening with IAC?

Well, we don't have an active role in the management of that organization. We do know that Wilbur Ross has been successful in all the investments that he's done, and we would expect this to be no different. We do have -- we have approximately a 22% equity stake in that business, and it's not core to us. And at some point, we'd be looking to monetize it and invest in something that is core. On that, we really can't say they are, as much as anybody else, exposed to certain petroleum-based chemicals like resins and what have you. But other than that, I really can't shed a whole lot more light on it. Christopher J. Ceraso - Crédit Suisse AG, Research Division: About how much of that $11 million was related to IAC? And how much was FX related?

Well, that line has a lot going through it, and Jason can give you a breakdown. But it's not quite that clean, Chris. There's a lot of things that go through that line.

Yes, equity earnings, overall, were down about $7 million from last year and FX was up by about $3 million. Christopher J. Ceraso - Crédit Suisse AG, Research Division: Did you get any help from the real or did that seem to have benefited some other folks?

I'm not seeing a whole heck of a lot there. There is a small change. Let me see here, maybe $10 million in revenue in the quarter for FX.

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

First question is on acquisitions. You alluded to doing maybe some small acquisitions on the EPMS side. Just curious if you think you need to do that or you can grow through organic investment there and be real competitive. But also, in addition, on the seating side, one of your big competitors has made some acquisitions on metals with frames and tracks. Just curious if you think you might need to do something on that side and where you are sort of in that vertical integration with the seat tracks and frames.

Well, let me break it down step-by-step, Murph. Starting on electrical side, do we think we need to? No, we don't. We think we can get there organically. However, through an acquisition, it may facilitate or expedite the growth because it comes in typically with an existing management team, existing production capacity and customer purchase orders. So if we could do something that made sense, we would look to do that within reason, valuation, and -- but we're looking and everybody's kind of looking for the same thing. On the seat side, the acquisitions of the mechanism provider, Keiper and Hammerstein, by one of our competitors is an interesting move. From our standpoint, we didn't think we needed to do that. We've got the technology and from -- we're very focused on having the right footprint. And we like where we're at from a footprint perspective in Europe. If we could get the right footprint and make an acquisition and add capacity in an emerging market that can also serve as a low-cost source for those mechanisms, we would do that. But we don't feel that we need to respond to that action in any way. And we've got a nice book of business with mechanisms and track, and it's actually our heritage is -- comes from the seat structures, and we're pretty happy with where we're at right now.

Okay. Then just a second question on the schedules that you saw in the third quarter and what you might be seeing in the fourth quarter, you sort of alluded to being maybe not as crisp as you would've liked in the quarter on execution in North America. I'm just curious if you were maybe caught off guard a little bit with vinyls being stronger than you expected and really what you're seeing going into the fourth quarter, if you're seeing schedules maybe even a little bit stronger than you would have thought before and maybe even stronger than relative to what IHS is putting out right now.

No, we weren't really caught off guard by the schedules. We're always a little bit cautious about the schedules because the schedules typically are set and the releases are set, John, to protect production for the customers. And we've learned through history that they can pull back on a relatively short-term notice. So we keep our eye on inventories. The problem with that is it's kind of hard to see the inventory levels in markets outside of America. For the fourth quarter, Jason, what are you seeing?

We're seeing a small increase in North America and a bigger step-up in Europe sequentially from the third quarter.

Yes, from our standpoint, there's nothing remarkable. In the releases, John, at this point, we've just got to be a little bit cautious because they do have a tendency to change on short notice.

Okay. And then just lastly, Matt, as you go through the next, I don't know, 50 days and do strategic review, which I'm sure you're constantly doing, is there any point in time when you think you have -- you might change strategy a little bit? I mean, I know you've alluded to this being seamless. I certainly would agree from that. From an operating standpoint, I'm just curious if there's any point in time where you think, as we roll into 2012, that you might change your mind or make any revisions.

John, I learned in my life never to say never. But I'd really be surprised if there was a change in direction since the strategy was really developed by guys that are still here and myself included. So I buy into the strategy and had a big hand in developing it, so I'd be surprised. Now business is dynamic. The beauty is that we have the ability and the flexibility to maybe modify the strategy, but I'd be very, very surprised if there was a change in direction. I'm comfortable where we're at. I'm comfortable with both business segments. I'm very excited about the EPMS segment and the improvements that were made there underway and what Frank's going to do as the leader of that segment. So Murph, I'd be very, very surprised if there was a change in direction.

Your next question comes from the line of Himanshu Patel from JPMorgan. Amy L. Carroll - JP Morgan Chase & Co, Research Division: This is Amy Carroll, in for Himanshu. I just had a quick question. Can you give us an update on the antitrust case? We're seeing some headlines about opening of civil suits and so forth

I'd like to turn that question over to Terry Larkin who's at the table right now, who's our General Counsel. So Terry?

Yes. As we've disclosed publicly, we were once sued in a civil antitrust class action lawsuit. I guess it was on October 5 when the first one was filed. Since then, there have been 12 others that are very similar in nature. And I think what is important to understand about these lawsuits is first, that they are civil lawsuits. These are not criminal proceedings brought by the U.S. Department of Justice. And secondly, these are 40 class actions filed by indirect purchasers, and what that means is that these are individuals who bought new or used vehicles, who claimed that price fixing caused the price of their vehicle to be higher because the cost of wire harnesses was higher. These are not lawsuits brought by our customers who make those allegations. Ultimately, we expect all these cases, and there may be more filed, yet that's not uncommon in these kinds of matters. But we also expect they all will be consolidated for, at least, trial proceedings into one case. And as we've said publicly before, we do not believe that Lear engaged in any anticompetitive behavior in violation of the U.S. antitrust laws, and we intend to vigorously defend ourselves against these claims. Amy L. Carroll - JP Morgan Chase & Co, Research Division: And do you have a sense of the magnitude of how much they're claiming or, at least, the time frame of the suits? Is it like back in 2000 to 2005 or something like that?

The time frame for the purported class period is roughly 2000 through 2010. We don't have any estimate of what their damage claims might be. They are not required to articulate those. Amy L. Carroll - JP Morgan Chase & Co, Research Division: Okay. And then the second question I had is I think a lot of dealers and as well as OEMs are saying that the -- their truck mix have improved. What are your thoughts on GMT900 production heading into 2012?

It's a little bit early to call the 2012 number. We have raised our GMT900 production assumption for this year. We're assuming just under 1 million units for 2011. I think if you look at what IHS is projecting for next year, they have that number coming down a little bit from 1 million to, well, I'll say, 975,000, somewhere in that range.

Your next question comes from the line of Itay Michaeli from Citi.

Just want to go back to other expense. It looks like from your full year guidance, you're probably modeling about flattish other expense in the fourth quarter. So are you seeing anything better in the fourth quarter versus the third quarter, or is that more of just a place holder for now?

Yes, we are modeling it to be flat in the fourth quarter or maybe even slightly positive. We don't anticipate that FX will be the same headwind that it was in the third quarter, and we do see an improvement in equity earnings from the third to the fourth.

Okay, great. And then just also in the fourth quarter, can you maybe share directionally what you're looking for in terms of the seating and electrical margin within the guidance?

Yes, and if you just look at what we're guiding to in the fourth quarter, it would be roughly flat to up slightly from the third in seating and up in electrical. We're going to benefit a little bit in the fourth quarter from lower capital pricing in electrical. That will help us.

Is there any impact at all for Thailand or a contingency in the guidance in the fourth quarter? Are you pretty set on what the outlook there is for you guys?

We've included what we know at this point, and so we lost about 2.5 weeks of production in October. We're expecting to lose the first week of production in November, and that's what we've assumed.

Great. Can you quantify how much that's worth on the EBIT line?

It's an insignificant amount.

Okay. And lastly, Matt, can you maybe just talk about how your recent conversations with customers have gone? And also, maybe comment on the booking activity in general this year?

The conversations with the customers have been good. Lear has been well-regarded. I've spent the vast majority of my time as CEO going back to September 1, traveling around the world and meeting with our customers. And for the most part, they're extremely happy with Lear. They appreciate our global footprint. They're happy with the way that the succession plan was run, and that Lear's culture will continue. And it's been relatively seamless for them. So from that standpoint, it's been good. As far as the bookings, we're continuing to win business. It's really more driven by the cadence of the program awards, but we're in there, and we're winning more than our share in all segments. So it's been a nice kind of continuation. And the transition from Bob to me has been seamless in the eyes of the customers.

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

Just want to get a sense from you, and I know that I asked the question last quarter about the -- how we ought to think about mid-term seating margins. About the balance between the pricing and commodity pressures and the launch costs in terms of the margin performance there and if there's any different tenor given the volatilities and the commodities given the OEMs, looking maybe not as much growth and perhaps coming after the suppliers again, has there been any change in tenor in the discussions you've had with the OEMs? And is there anything different in the kind of pricing commodity discussions one way or another around seating?

No. It's pretty consistent. Obviously, our customers sell a consumer product, and it's a consumer product that really is price sensitive in many ways. So they're constantly looking to reduce cost and improve their pricing. And from that standpoint, the biggest, obviously, component of their cost is the materials that they buy. From our standpoint, the pricing pressures are intense. That's what this industry is. It actually plays in many ways into our strength because we have the ability to not only make the components and all the components, but actually engineer the design of the major products we're in, seating, electrical distribution. And so we look to try to get the cost out, and it actually plays in our benefit. Commodities have been sustained in many ways at a relatively high level, even though we've seen a recent pullback. They do enter the productivity discussion because most of the productivity or pricing discussions focus on a cost model and trying to get to that optimum cost. Obviously, you're expected to be the most efficient producer. In the same token, they understand the raw material cost. So I think it's a burden for the entire supply chain and including the customers, it does enter into the discussion. No, it has not, in any way, soften the pressure, so to speak. I think it is part of the dialogue. As far as launch costs, launch costs are our responsibility. That's the cost of doing business, and it's an area where, historically, Lear's been very, very good at. And we need to just get back to being good at it. Jason, I don't know if you can add some color on the breakdown of how it kind of -- what our assumptions are with the remainder of the guidance.

All right. Well, pricing, we still got at about 2% is what we've seen historically. We haven't really seen a change in that from the prior guidance to where we're at today. Launch cost, we have increased by about $20 million. We originally expected $90 million in launch cost this year. We're now at about $110 million, so we're up about $10 million in the third quarter, and we see that same $10 million again in the fourth quarter. Commodity cost, we're seeing it's a headwind of about $60 million for the year. We hadn't provided any guidance in the second quarter call on that. But that's roughly in line with the second quarter, although, it's pulled back a little bit and capital [ph] sits a couple million on that.

Okay. And the vertical integration, I guess, someone touched on it earlier, but could you maybe describe where you think you are in vertical integration versus your major competitor after they digest the acquisition that they've made in Europe?

I don't really know where we're at versus them, but I'll tell you where we're looking to invest, Brian. I haven't really studied Johnson Controls to tell you exactly where they're at. I'd like to not compare it. But I will tell you what we're looking to do. From our standpoint, I think the emerging markets has the ability to provide the opportunity to invest and get the right returns and better quality in things like mechanisms, foam and possibly, even fabric. We're pretty mature in our vertical integration in North America, and I like where we're at in Europe, although, I think there might be some modest opportunities to improve on the mechanisms. We're very vertically integrated on the cut-and-sew in both of those major markets. We have a great connectors business in Europe. I'd like to see that expanded into Asia. And I think that's an opportunity for vertical integration as well. So from our standpoint, it's really more about the emerging markets and vertical integration in the emerging markets. South America as well, we've made a push there on mechanisms as well as electrical distribution, and I'd expect that to continue.

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

Well, I have one housekeeping first. The EPS guidance that you guys have provided, that does not assume any more buybacks. Is that correct?

That's correct.

Okay, great. And the more longer-term question I have is, Matt, can you comment a little bit about the backlog? Do you see any risk for your next years' backlog number, given that Europe is kind of slowing down now, and the expectations for Europe would have changed versus the time that you gave that backlog earlier this year?

Yes, not a material risk at all. I mean, obviously, it comes down to volume and what they produce and, as always, business is dynamic. Sometimes, programs are extended or programs are pulled ahead or delayed, but I don't really see a material risk to the backlog number.

So in a way, does that mean that you are not seeing any kind of program or launch delays at the OEMs as of now?

No, not as of now. But typically, what will happen is if they do delay a launch, we'll extend the model that precedes it. So usually, if there is a change, either up or down, it's pretty modest.

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

You commented briefly on the civil investigation. Is there any update on the criminal investigation? Have you been contacted by the Department of Justice? I think, further, I think you mentioned that it was in February of 2010 that they reached out for information.

Let's be clear about that. We have not been contacted by the U.S. Department of Justice or the FBI here. What you're referring to about the February 2010 investigation is the European Commission Investigation that we've talked about previously. And there, we were asked for information by the European antitrust authorities. We've cooperated fully, but we've not heard more from them on that. And as far as now, they have not made any further public statements about where they stand in the process. It's not possible for us to determine or find out from the European authorities where they are in the process and whether they were asking Lear for information simply as a source of information or someone they're investigating. But the new cases that were referenced earlier, the civil lawsuits are lawsuits here in the U.S.

Okay. So I mean, from the criminal type, there has been really no new update over the last quarter?

I'm sorry, you broke up a little bit. Can you repeat your question, Colin?

For the criminal type of investigation that there is -- there hasn't been any change since the last quarter?

That's correct.

That's right.

Okay. And for the commodity outlook, it's -- I think that you said it was $15 million in this quarter. Is it about the same next quarter? I think that's about $60 million for the full year. And when -- given the quantities have come down a bit, I mean, will that be more of a 2012 benefit if they stay at these levels?

Well, in the case of copper, we are going to see a benefit from the third to the fourth quarter. It's $2 million to $3 million is what we would expect. If copper remains lower, then we would expect to see a further tailwind into 2012.

It seems on the commodities as a whole, it seems to ebb and flow with the general consensus of the health of the economy. So if we start producing, you'll probably see commodities run up. But other than that, we probably don't want to say a whole lot about '12, Colin.

Okay. But I mean, sequentially, commodities would be a slight -- if they stay at these levels, a slight benefit, but not material...

Yes, it's a slight benefit, but part of it too, as we started seeing a run-up in the fourth quarter of last year. So on a year-over-year basis, it's probably down slightly, but it's not -- I wouldn't expect a big tailwind.

And how about the cadence of launches, how do they compare to -- from Q3 to Q4? Are they about the same or does that start to get a little bit better into Q4?

It's pretty flat from the third to the fourth quarter.

Okay. And I guess just one last one. I mean with the UAW contract being ratified, it sounds like they're pushing for more jobs. Do you see any change in the view of in-sourcing of the automakers, or do you still think -- do you see any risks there at all or...

No, not really. From our standpoint, making each seat or wire harness from that standpoint is a skill that requires not only the ability to design it, but also to coordinate the -- all the components being delivered to your facility on time. And then with an hour or 2 window, assembled into a seat and delivered on time. So it's that skill set. Plus, it's just the reality of the floor space. A lot of these facilities do not have the floor space to do it. So I don't think it's a major push. But one thing I'll remind everybody on the call is with Lear, we've had a long and great relationship with the UAW. We don't have a blanket agreement. Each facility has its own agreement, and we work with them to find opportunities to remain competitive. So from our standpoint, really, there's no change at all.

And your last question comes from the line of Peter Nesvold from Jefferies. H. Peter Nesvold - Jefferies & Company, Inc., Research Division: I guess I'm going to break an unwritten rule and be the third or fourth guy to ask on a similar question rather than taking it off-line. But the reason I ask, I mean, with stock down almost 10% here intraday. The seating margins, so the second quarter of year-over-year margin compression and the items you tick through, product launches, I mean, product launches are sort of cost of success. Materials always seem to be an industry pressure point, and price reductions never seem to go away. So are there specific actions that you can take internally to sort of control your own destiny to get back to that targeted 7% to 8% type margin level within a quarter or 2? Or are the levels that we're at right now sort of the new normal, if we want to call it that, until volumes start to really improve?

No, I think you're right. I don't think we were as crisp as we would like on the launch cost. And I think from our standpoint, we're looking at trying to put processes in place on the front-end to ensure that we're cleaner in the future. Longer term, we still believe that the margin in this business is between 7% and 8%, and I think we'll finish this year. Year-to-date, we're already at 7.5%. We think that's the longer-term rate. Now, we need to always look to do things better, and that includes the efficiencies of our launches, the efficiencies of our operations, including our administrative processes. So no, it's not the new normal. It's not the new normal. We need to just get better at launching. Well, if that's the last question, first off, I'd like to compliment Jason on an outstanding job and all the hard work with him and the finance team. You seem to be much better than the previous CFO. Congratulations. And I want to thank all of the folks from Lear and the hard working team from Lear for having another outstanding quarter. Thank you for your efforts. And with that, I'll see you later. Bye-bye.

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