Lear Corporation (LEA) Q1 2013 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. My name is Martina, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Lear Corporation First Quarter 2013 Earnings Call. [Operator Instructions] I would now like to turn the call over to Ed Lowenfeld, Vice President, Investor Relations. Please go ahead, Mr. Lowenfeld.

Thank you, Martina. Good morning, and thank you for joining us for our first quarter 2013 earnings call. Our earnings press release was filed this morning with the Securities and Exchange Commission, and materials for our earnings call are posted on our website, lear.com, through the Investor Relations link. Today's presenters are Matt Simoncini, President and CEO; and Jeff Vanneste, Chief Financial Officer. Also participating on the call are several other members of Lear's leadership team. Before we begin, I'd like to remind you that during the call, we will be making forward-looking statements that are subject to risks and uncertainties. Some of the factors that could impact our future results are described in the slide titled Investor Information at the beginning of the presentation materials and also in our SEC filings. In addition, we will be referring to certain non-GAAP financial measures. Additional information regarding these measures can be found in the slides labeled Non-GAAP Financial Information at the end of the presentation materials. Slide 3 shows the agenda for today's review. First, Matt Simoncini will provide a company update. Next, Jeff Vanneste will cover our first quarter financial results and 2013 outlook. Then Matt will return with some wrap-up comments. Following the formal presentation, we will be pleased to take your questions. Now please turn to Slide 4 and I'll hand it over to Matt.

Great. Thanks, Ed. We're off to a good start in 2013 with improved operating performance despite lower global industry production. Sales in the first quarter were $3.9 billion, up 8% from 1 year ago, reflecting, primarily the benefit of new business in the Guilford acquisition. Core operating earnings increased from 1 year ago to $201 million, reflecting strong performance in our electrical business. In the first quarter, our Electrical segment achieved record quarterly sales and earnings as the business continues to benefit from market share gains and cost benefits from our improved footprint. During the quarter, we took steps to improve our financial flexibility. We also announced significant increases to our share repurchase and dividend programs. In total, we returned $216 million to our shareholders in the first quarter. Today, we entered into an agreement to repurchase $800 million of our stock under an accelerated share repurchase program. This transaction will be funded with available cash, and we will retire approximately 12 million shares within the next week. The transaction is expected to be completed within 11 months. During the quarter, we also completed the divestiture of our equity interest in the interior provider, International Automotive Components, for approximately $50 million. We had no active role in the management of this entity and we considered it noncore. Slide 5 highlights the key elements of our strategy. We are following a balanced approach of investing in our business, maintaining a strong and flexible balance sheet and returning excess cash to our shareholders. We have the product expertise, global reach, competitive footprint and financial flexibility to profitably grow our business. We're also well positioned for significant industry trends towards global platforms, increased electrical content and direct component sourcing. We plan to continue to invest in our business to improve our market position and returns. Our disciplined approach to capital investment is based on ROIC. We continue to pursue acquisitions that will complement our present product offerings, facilitate further diversification of our sales and increase our component capabilities. We plan to maintain a strong and flexible balance sheet, while at the same time, continuing to return excess cash to shareholders on a consistent basis. Slide 6 highlights some of our recent accomplishments. We have increased sales and earnings per share for each of the last 3 years. Sales growth over the last 3 years has outpaced the industry, and we expect this trend to continue given our strong sales backlog. We continue to invest to grow and improve the competitiveness of our core businesses both organically and with acquisitions. The Guilford acquisition has been successfully integrated into Lear and we're experiencing growth opportunities and cost synergies. The margin in this business is tracking higher than our overall seat margins. As I mentioned earlier, performance in electrical business continues to improve and we expect this positive momentum to continue to drive increased sales and profitability. Slide 7 highlights improvements we have made to our capital structure, as well as initiatives to return cash to shareholders. At the end of the first quarter, we had $1.6 billion of cash and no significant debt maturities until 2018. We were able to improve our financial flexibility during the quarter by increasing our revolving credit line to $1 billion. This line was unused at the end of the quarter and doesn't mature until 2018. We are committed to maintaining investment-grade credit metrics. Our customers consider financial strength in addition to quality, competitive cost structure and customer service as criteria for program sourcing. We believe the key contributor to our sales growth in recent years has been our strong financial position. In early 2011, we initiated a share repurchase and dividend program to consistently return cash to shareholders. On Slide 8, I'll provide an update on how we think about liquidity, which we define as a combination of cash and available borrowing capacity on our revolving line of credit. We prefer to maintain approximately $1.5 billion in liquidity. This level of liquidity provides us with cash to manage inter-quarter peaks and troughs, as well as compensate for cash that's not readily accessible for daily use. This also provides us with ample cash to react quickly to potential opportunities to strengthen and grow our core businesses. Finally, this level of liquidity provides a cushion for industry risks, which we believe is prudent given the historical volatility in the automotive industry. Slide 9 provides a summary of cash repatriation actions. Since initiating our dividend in the first quarter of 2011, we've made double-digit increases in each of the last 2 years. We believe the consistent return of excess cash to shareholders through a quarterly dividend is a key element of delivering shareholder value. Our share repurchase program gives us the ability to return excess cash to shareholders as well. Since our initial $400 million 3-year program was announced in 2011, we increased the size and reduced the time frame in which we will repurchase shares several times. Our total share repurchase authorization, including purchases to date, is $2.25 billion. Slide 10 provides more detail on our share repurchase program. During the first quarter, we purchased 3.7 million shares of stock for a total of $200 million. Since we began to repurchase stock in early 2011, we have repurchased 15.2 million shares of stock for a total of $702 million. This represents approximately 14% of the shares outstanding when the program began. As of the end of the first quarter, over $1.4 billion remains under the share repurchase authorization. This reflects approximately 1/3 of our market capitalization to present prices. Under the accelerated share repurchase program announced today, we expect to purchase $800 million of stock within 11 months. Following the conclusion of the ASR program, Lear will begin to repurchase shares under the remaining $750 million authorization, potentially utilizing a variety of methods, including open-market purchases, accelerated share repurchase programs and structure repurchase transactions. As always, share repurchases are subject to prevailing financial market and industry condition. I'll turn over to Jeff, who will take you through our first quarter financial results in more detail and provide full year outlook.

Thanks, Matt. Slide 12 shows global vehicle production for the first quarter. In the first quarter, global vehicle production was 20.4 million units, down 1% from 2012. In Europe, business conditions remain weak and industry production was down 8% in the quarter. Production in North America was up 1%. Market conditions were strong in emerging markets with industry production up 12% in China and 11% in Brazil. Slide 13 shows our financial results for the first quarter of 2013. As previously mentioned, sales were up 8% to $3.9 billion, with all regions showing year-over-year increases. Excluding the impact of foreign exchange, Lear's sales in the quarter were up 9%. Pretax income before equity income, interest and other expense was $174 million, down the $13 million from 1 year ago, primarily reflecting higher restructuring costs and special items. Interest expense was $17 million, up $4 million, primarily reflecting the new $500 million bond issued in January. Other expense was $11 million, up $10 million, primarily reflecting a loss of $4 million related to the redemption of 10% of our 2018 and 2020 bonds and unfavorable foreign exchange movements. In the first quarter of 2012, we also recognized the gain of $2 million related to insurance recovery. Slide 14 shows the impact of non-operating items on our first quarter results. During the first quarter, we incurred $18 million of restructuring costs, primarily related to various actions in Europe. Other special items of $8 million reflect losses and incremental costs related to the previously reported fire at one of our European facilities, as well as cost related to the proxy contest. Excluding the impact of these items, we had core operating earnings of $201 million, up $6 million from 2012. The increase in earnings reflects the benefit of new business and the Guilford acquisition, partially offset by lower production in Europe. Other expense in the first quarter includes special items of $3.6 million, reflecting the cost associated with the redemption of 10% of both our 2018 and 2020 bonds. Adjusted for restructuring and other special items, net income attributable to Lear in the first quarter was $124 million and diluted earnings per share was $1.30. Excluding the impact of our higher tax rate, diluted earnings per share would have been up 4%. Slide 15 shows our first quarter adjusted margins for both segments, as well as for the total company. In Seating, adjusted margins were 5.6%, down 110 basis points from 1 year ago but consistent with our full year guidance. The year-over-year margin reduction was driven by several factors. While we remain solidly profitable in Europe, we experienced volume reductions on many of our key platforms. Downward conversion on the sales decrease in Europe approached 20% due to the difficulty of reducing labor and structural costs in the short term. South America remained unprofitable in the quarter, primarily reflecting higher costs associated with new facilities and program launches. A third factor impacting Seating margins is the turnover of a significant portion of our programs, which typically launch with a lower margin profile. Each of these factors was responsible for roughly 1/3 of the decrease in the margins in the quarter. Our margin outlook for Seating this year remains in the mid-5% range, and we expect Seating margins will improve as we enter 2014. In Electrical, we reported record sales and earnings in the first quarter. Adjusted margins of 8.7% were up 220 basis points from 1 year ago. Our Electrical segment benefited from strong sales growth and operating efficiencies. Our Electrical segment results were slightly better-than-expected in the quarter, and we forecast full year segment margins to be in the mid-8% range. Slide 16 provides a summary of free cash flow. Free cash flow was the use of $28 million in the quarter, primarily reflecting increased working capital related to normal seasonality. Capital expenditures were $92 million in the quarter. Slide 18 highlights the key assumptions in our 2013 outlook. Our outlook reflects updated production assumptions in our major markets. Compared to our prior outlook, global production is up 1% at 81.5 million units, and our financial outlook is based on an average euro assumption of $1.30 per euro. Slide 19 summarizes our 2013 financial outlook, which is unchanged from our prior guidance. For 2013, Lear expects net sales of $15 billion to $15.5 billion. Core operating earnings are forecasted in the range of $725 million to $775 million. Interest expense in 2013 is expected to be about $80 million, up from last year, reflecting primarily the impact of the new $500 million bond. Tax expense is estimated to be $195 million to $210 million, resulting in an effective tax rate of approximately 30%. Given our tax attributes, we expect the cash tax rate to be approximately 20% for the next several years. Adjusted net income attributable to Lear is forecasted at $420 million to $455 million. Capital expenditures are forecasted at approximately $450 million, and free cash flow for 2013 is forecasted at $275 million. Now I'll turn it back to Matt for some closing comments.

Great job. Thanks, Jeff. 2013 started strongly with increased sales and core operating earnings. Despite challenging industry conditions in Europe, we remain solidly profitable in that region. We continue to follow a balanced strategy of investing in our business, maintaining a strong and flexible financial position, and returning excess cash to our shareholders. We are allocating more capital for return to shareholders and other automotive suppliers. In addition, our total return to shareholders since our financial restructurings better than the supplier peer average and more than double the S&P 500. With that, we'd be pleased to take your questions.

[Operator Instructions] Your first question comes from the line of Itay Michaeli from Citigroup.

First question on revenue, up 8%, very strong relative to global production. I was hoping you could give us a little bit more detail about what's driving, and this has become a pattern now, continued revenue outperformance at Lear, was it the greater proportion of backlog launches or mix, give us a little bit more detail there.

It was driven mainly by backlog. We've also had strong performance in some of our key platforms in North America, specifically in the electrical business, Itay.

So product mix, okay. And then on the full year outlook, you had a very strong quarter here. It looks like the EPMS margins are running above your initial plan for the year. I mean, how are you feeling in terms of the range of Lear revenue and earnings for the year? Are you feeling a little bit better about the higher end or are you kind of still taking that wide range for the full year?

No, I think if the production numbers hold as we outlined in the earnings decks, we'll be pressing the higher end of the range.

Okay, that's great. And just quickly, lastly, JCI mentioned that they had a supplier -- a distressed supplier issue in their quarter. Are you guys seeing any pressure in your supply chain, perhaps in Europe or even North America?

Well, there's always pressure in the supply chain. I don't see it any higher or lower than it's been in the last couple of years, but that's just the -- these days, seem to be a normal course of doing business, normal cost of doing business in the auto supply.

So nothing new? Okay.

Nothing new. It's pretty consistent. It's been pretty consistent the last several years.

Your next question comes from the line of Rod Lache from Deutsche Bank.

A couple of things. First, could you just elaborate on this repurchase plan? You're committing to buying the stock, I presume you're using derivatives somehow here to basically retire the shares even before you're actually acquiring them?

No, the way it will work is effectively next week, we'll fund $800 million with the impact from a shares perspective that we would retire, at the same time next week, 80% of the shares at a strike price at the closing that occurred yesterday at $53.95. So what that means is next week, we'll retire roughly 12 million shares or about 12% of the outstanding share count.

Okay. So the share count will decline next quarter, even prior to the actual shares being bought in the open market?

Right. And the program -- Rod, the program will take about -- will be completed within 11 months. And the 12 million shares represents roughly about 80% of the implied value at the strike price yesterday. So if you run the table through the 11 months at the true-up point assuming the share price remains constant, we would ultimately retire approximately 16% of the shares as a result of the ASR. Key point is that the stock price remains the same.

Okay. And then your first quarter segment EBIT obviously was up and probably the most difficult production comparison quarter of the year, at least in Europe, that's currently I think most people's expectations. Your guidance implies that second quarter to the fourth quarter segment EBIT declines, if we use the range that you gave us. Are there a few events that we should be taking into account that would lead the comparisons to be a little bit more challenging over the next few quarters?

No, I think it's mainly it's still pretty early in the year, Rod. And there's still a lot of uncertainty in the production environment and mix of platforms that will be produced mainly in Europe, where it's difficult to take cost out for a short-term downturn. But overall, there's nothing really unusual in the cadence or the seasonality of the business. We expect it to be pretty constant. Electrical in the 8.5% range, Seating in the 5.5% range.

Okay. And do you happen to have the backlog contribution to Seating and Electronics this quarter?

Yes, they usually -- backlog usually runs at around 10% of the sales on an incremental basis: true backlog, net backlog. The backlog in Seating was relatively flat this quarter, meaning it's very modest. Electrical was about 130-ish for Q1. Seating's backlog will pick up in the back half of the year and Electrical would be fairly constant through the year.

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

Just a -- first question on sort of this accelerated return of capital to shareholders, Matt. I mean, obviously, you're not one to just cave to outside pressure. So I'm assuming it's a lot more than just outside pressure that's driving you to do this. I'm just curious what's changing in your thinking about the company and the cash flow and maybe the acquisition environment out there? Or is it just Vanneste is a much more aggressive CFO than you used to be? I'm just trying to understand really what's changing in the thought process here?

He is definitely a better CFO than I was -- but I think it's a multitude of things, John. One is we started working on our capital structure at the end of last year and we were able to increase our line of credit -- revolving line of credit, which gave us some additional flexibility -- financial flexibility. We executed a very successful bond offering. We did make acquisitions and we pursued acquisitions but we -- we don't see anything major on the horizon that would be an alternative use of our capital structure at this point. And we completed, last year, fairly successfully as far as free cash flow generation. And looking into this year, we're still confident that even with a challenge in Europe that we're still pretty confident in our cash flow generation for 2013. You take all these factors into consideration, as well as input from all our shareholders, and we thought this was the way to create -- the best way to create value. So I just think it's a situation where we kind of balanced all the different inputs and felt this was the best approach. And we still believe we have the financial flexibility to continue to invest in this business and do the type of acquisitions we need to do to solidify our base.

That's incredibly helpful. And just a second question, raw mats have been coming down last year and they seem to be fading pretty hard consistently through the year-to-date period. Just curious when you might see any benefit from that, if you're still passing through the swings to the automakers, just trying to understand if you're ever going to see any big benefit from that?

From what, John? I missed the beginning part of your question.

From raw material. I mean, the deflation of raw material cost.

I see. They're actually fairly constantly with what we averaged last year. We have seen a little bit of benefit in copper that's included in here but it's been very, very modest at this point. I think, just like in times of inflation, in times of deflation of raw material costs, it enters into the kind of annual price discussions with the customers, maybe not as a direct offset but as part of your annual productivity negotiations. So I really don't see it as providing, at this point, a major tailwind. Just like when they had some inflation in prior years we didn't see it as a major headwind.

So most of that upside and downside, you think, is still being passed on to the automakers?

Yes, in the case of copper, it gets passed on in a direct indexing agreement with a quarter lag. As it relates to steel, John, it kind of gets entered into the annual productivity discussions with the customers.

Okay. And then just lastly, the K2XX -- or the GMT900 to that K2XX program is reasonably meaningful for you guys here in North America, particularly on Seating and Electronics, I would assume. What are you seeing on that launch? And could we see a big pickup in margins in the second half of this year and maybe into early '14 as that product -- program really ramps up?

More production is better than less. That is a key program because of the amount of content and just the sheer volume of units that they produce. When a new program rolls on, it usually comes out a little bit lower margin just because of the -- just the efficiencies that you gain over doing it in years and the engineering changes that come through with it. Right now, I don't see a major change happening. If there was a change as far as unit volumes on either those platforms, that would be helpful. But right now, I think it's pretty steady state through the year, John.

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

I had a question on the Seating margins. Jeff, you mentioned 3 factors. One is decrementals in Europe, one is the launch cost in U.S. and then some issues in South America. Now I understand that the launch cost in North America would continue for a while. But can you talk about a little bit about when you see Europe decrementals to start fading a little bit? And when can we move past South American issues?

Well, I think with respect to South America first, we did, in Seating, specifically, although launch costs in total were relatively flat, we did have higher launch costs in the quarter in South America. What we see in South America in Seating for the rest of the year is that those launch costs would subside and a return to some level of profitability between now and the end of the year. I think with Europe, I think as you look at the forecast -- production forecast for Europe for the quarter and then the remainder of the year, it's still choppy. For the full year, they're still anticipating that production will be down 3%. Our top platforms, our mix there is at least forecasted now to be slightly worse than that. So I think there's still some choppiness in Europe, albeit from a full year standpoint and for the first quarter, we still remain solidly profitable in Europe.

Got it. That's very helpful. The other question I had was on the Guilford Mills acquisition, you guys mentioned that it's running at above-average Seating margins. Are you guys satisfied at where those levels are or you think there's further scope of improvement in the margins in that business?

I'm happy with the margins in that business. I think the improvement that we could make is further sales synergy by using their design capabilities to help us with our industry-leading cut and sew capabilities in our footprint. I think the real synergies will be sales synergies as opposed to margin expansion. We're happy with the performance of that segment overall. It's been a great acquisition.

Your next question comes from the line of Ravi Shanker from Morgan Stanley.

Matt, your first quarter result was pretty strong compared to our expectation, at least, but you held guidance and change. Is that you being conservative at the back half of the year? Or do you think there are certain things to keep an eye on that might be volatile in the second half of the year?

I think the main thing we have to keep an eye on is the production environment, Ravi, specifically in Europe, while there's still a level of uncertainty on the key car lines and what the customer plans are. And it's a little bit harder segment to keep an eye on the leading indicators for production inventory and production levels by car line and sales rates by car line. So from our standpoint, if production holds the way that we outlined in the deck, then we would probably be towards the higher end of the earning guidance range that we gave this morning.

Understood. And the follow-up on the K2XX question. We're reading some media reports that say that the SUV part of the program may be delayed to 2014. Are you seeing anything similar as well?

Yes, I think -- I don't know if it's delayed as much as that's been the normal expectation that, that part of the K2XX would be a '14 launch, the Pickup starting earlier, but -- yes, that's consistent with what we hear.

No SUV launch this year at all?

They may be doing a product line fill towards the fourth quarter, Ravi, but it's relatively modest. The main thing is to get the Pickups out and get those running.

Got it. And just finally, you have some fairly sizable Japanese competitors. With the depreciation of the yen, are you already seeing or do you expect to see any pressure on pricing in the Electrical segment?

No, not really. Because I don't think any of them really produce in Japan. I don't really think that the pressure is going to be driven by the currency changes. I think more than anything, it's going to be by your cost competitiveness overall, which is typically driven in that segment by your footprint. We think we have one of the best, if not the best, footprint in that segment, and I think that's been a key contributor to the fast pace that we've grown that business and the size of our sales backlog. So I really don't see that as a major concern.

Your next question comes from the line of Ryan Brinkman from JPMorgan. Amy L. Carroll - JP Morgan Chase & Co, Research Division: This is Amy Carroll on for Ryan Brinkman. I just had a quick question since a lot of mine have been answered. Given the speed and the amount that you're doing your buybacks, are you guys concerned about like your credit ratings, is that even a consideration? And then secondly, could you just remind us what synergies you have between the 2 businesses? And does it help now that you're Electrical business is a little bit bigger going to bids with -- for Seating?

Yes, 2 very good questions. We're very -- we have great relations with the credit agencies and we're in constant communication with them. We don't believe this action, in any way, would damage our standing with our ratings and it's our goal to maintain investment-grade metrics, if you will. And I think even with this action, we're still well within those boundaries that have been established for the segment. So I really don't see it as a major, major issue. And before we did anything like this, we were in communication with them to make sure they understood the rationale and were comfortable with that. The synergies between the 2 businesses besides management flexibility and, I would say, regional administration, commercial relationships, in many cases, Electrical will lead the sales of Seating because of the interest in the high-powered segment and some of the unique technologies that we have in that segment. That helps us on the Seating side and vice versa. In many cases, we have relationships with customers on the seat side, which help us sell electrical. So from our standpoint, the businesses are somewhat related even though the product lines are very distinct. And there are synergies that are shared both administratively, commercially and in regional management teams.

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

I just want a clarification. I'm not sure if I just misunderstood this earlier. So with the -- this new accelerated share repurchase program, does that mean you're locked in over the next year to do repurchases? I mean, or is there some sort of price mechanism that if it hits a certain price you have the ability to kind of pull some of that cash back?

No, we are -- the way this particular ASR program was structured, we are locked in at $800 million. The eventual number of shares that we eventually buyback or retire will be based on what's called the volume weighted average price over the course of that time frame. But we are locked in at that $800 million regardless of where the price of the stock goes.

Okay. And I just want to clarify, the EPMS margins, did the guidance move up from I thought it used to be around 8%, to now mid-8%, so it's a bit higher or is that a...

Yes, we said 8% to 8.5%. Right now, we're about -- we're comfortable with the mid-8% range.

And any reason why the no shift in the full guidance because of that?

No, I think it's early in the year, Colin, and there's still some production uncertainties. We're comfortable with the performance of both businesses, both businesses are doing well operationally. But right now, I would tell you that we're just -- we want, we believe it's a little bit early and there's still a lot of production uncertainties, especially in Europe.

Okay. And then on the -- the backlog for the full year for EPMS is $450 million, but your sales were up $200 million in a pretty tough environment. Is that -- do you think that backlog is coming in stronger in terms of sales than you had expected? Or you also mentioned key platforms or is that...

Yes, I mean, right now, we see the backlog around $900 million and Electrical is about a little bit under 5, just under $500 million of it, so it's coming in a little bit stronger, we have the good fortune of being on a couple good running programs in that segment. So we think backlog is maybe a little bit hotter than we originally anticipated.

Okay. But a lot of that Q1 is actually just favorable product mix?

Yes.

And just lastly, any color on the size of the launch costs and how they should move through the year? Obviously, the K2XX is a big factor. Did that hit you at all this quarter and -- or is it more of a Q2 issue?

Well, I think with respect to the launch cost, if you look the full year launch cost, are anticipated to be significantly down year-over-year, especially in South America. In terms of the cadence of launch cost, I think they'll be pretty ratable throughout the year but I think they'll ramp-up to some extent based on the launch of programs like the K2XX.

Ramp-up through the year?

Yes. But still be well below last year.

Your next question comes from the line of Joe Spak from RBC Capital Markets.

Just quickly going back to the EPMS, I think on that long-term margin target, you historically said you need about $4 billion in sales to sort of get that scale and get it to that 8% -- call it, 8% to 8.5% range. Given that your -- if you annualize the first quarter and you hit that number, it doesn't seem like scale is really the issue. Is it investment for future growth that's really going to hold the margins back there?

No, I think, from our standpoint, we historically had spoken about scale, needing to get into that $3.5 billion and $4 billion, which we've now achieved. And we still have a fairly healthy backlog in that segment, so we think the growth and the market penetration will continue, as well as the content add in these products as more and more electrical features are added to the vehicle. To us, margins are more a function of the investment required to get those sales. And from this standpoint, at these margin rates, we believe we can return in excess of our cost of capital in a meaningful way and create value to that regard. So when we look at margins, it's more as an indicator of the investment required. Wire harnesses are typically lower investment than electrical components and so, when you balance the 2 out, the mix of the sales, we believe this is a fair margin.

Okay. But is it fair to say more the growth is in the electoral component side? So there might could be a little bit of a mix benefit in the future as well?

No, I wouldn't say that. I'd say it's been pretty consistent in both wiring and electrical components.

Okay. And then one more on the K2XX launch. I'm actually curious if you guys are seeing any inefficiencies on the existing GMT900 business given that you sort of have to support both lines for a little bit here?

Maybe a little bit -- maybe a little bit, not a whole lot. Whenever you're launching a new product in a facility that's continuing to produce the predecessor, there's always some doubling up of cost and a little bit of inefficiency on the shop floor. But overall, it's not, I would think, incredibly meaningful.

Okay. And then just one last quick one on the South America, what -- is that a little bit behind schedule that --being that it was still unprofitable in this quarter or was it always sort of a back half of the year where you expect greater -- to be able to be profitable in that region?

It's, I would tell you it's slightly disappointing. We wanted to be a little bit further along than where we are, but we always anticipated that it would be a -- it would take to the back half of the year to show profitability in that segment and we're kind of there. But as always, nothing seems to happen as fast as you would like.

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

Last quarter, we talked a bit about one of the drivers in Electrical being going to the core, which I interpret as distribution systems, terminals and connectors, maybe junction boxes. A, did that continue? And b, are there potentially some non-core products, take body electronics, lighting or audio, that you are either, a, deemphasizing or b, could consider perhaps divesting to refocus on the kind of core products?

No, I really don't think there's anything in that segment that's noncore, Brian. We really have worked extremely hard over the last several years to divest some of the noncore product lines that we had, whether it was our HomeLink system, our TPMS, our switches, any products like that, that were not really core to Electrical Distribution. What remains has synergies with moving signals through a vehicle whether it's our remote keyless entry, which moves the signal with a key fob and has a receiver that's consistent with the junction box. Even our audio business that we do have has many synergies both from a manufacturing, and a design, and a component standpoint, with the junction boxes, the amplifier business. So what I would tell you is that we're winning business in all of those subsegments, it’s all core, and there's a natural kind of design software and manufacturing synergies. So, no, it's all pretty core at this point.

And kind of back to the earlier question. I think one question I'm hearing from some of the kind of investor types is, do these 3 businesses -- really seem to have very different characteristics now? Seating is a business where there's a lot of operational pressures, which you're managing. Whereas Electrical just seems to be great growth, great margin. Is that something, when you kind of think about your valuation, are there ways of maybe getting better credit for that Electrical growth than having it tied to a large Seating business?

Both products actually have a lot of synergies and similarities. It just happens that what is dissimilar at this point was -- is that margins are expanding Electrical and we've had a period of decreasing margins in Seating, which we expect to get back on track with the -- back to more historical-type margins here shortly. But from a consistency standpoint, both, obviously, are automotive, both are core, both share certain regional teams. And in many cases, the processes are fairly similar, whether it's the assembly of a seat or assembly of a wire harness. And so from our standpoint, we think the 2 strengthen one another, whether it's customer relationships or the ability to share resources in regions or equality or some of the administrative functions. So from our standpoint, we think they're both strategic, they both help one another and they're both core.

Your next question comes from the line of Joseph Amaturo from Buckingham Research.

A couple of questions. I think there's still a bit of confusion about this AR -- ASR program. Jeff, how is this going to get reflected on the balance sheet? Meaning, are you going to reflect the $800 million reduction to cash by the end of the second quarter? And then if you could just review whether or not the share count will actually get reduced by the 12 million shares by the end of the second quarter or some pro rata portion given that it's May -- April?

Yes, the accounting entry that we'll make when we fund next week will be credit cash, $800 million, debit common stock for the retirement of 80%, so that'd be $640 million. And the remaining $160 million will be in additional paid-in capital. So we will effectively retire 12 million shares at that point inside the second quarter. And then throughout the life of the ASR agreement, once we get to a final settlement at the end of 11 months approximately, to the extent that we bought more or less shares than was called out, there'd be a further adjustment of allocated capital further reducing the share count. So it will be based ultimately on the average weighted cost of the share price over the period of time that will finally determine what the share count decrease will be, and we would estimate right now that to be 15% to 16% at the end of it, of which 12% reduction in shares or 12 million shares would be reduced in the second quarter.

Okay, that makes sense. The second, I guess, another question is, I mean, how should we think about the repurchase activity? Should we assume it to be fairly systematic over the next 11 months? I'm mean, the actual purchasing of the stock?

Well, it's kind of out of our hands of that point. It's in -- it rests in the hands of Citibank, which is the bank that we engaged to do this. And they have their own formula that is largely going to be based on the volatility of the stock at any given day. But it's completely out of our hands and in their hands in terms of when and how much they buy on a daily basis.

So they have total discretion?

Yes.

Yes.

Your next question comes from the line of Matt Stover from Guggenheim.

Most of the questions have been answered. You have $700 million in the outstanding buyback after this accelerated program is done, I guess we should assume that this would be done outside the 11-month period?

Correct. It's $750 million, Matt, and it will be done over the 2 years subsequent to the completion of the ASR, which we believe will be done within 11 months.

Your next question comes from the line of Anthony Deem from Key.

Anthony in for Brett Hoselton today. So you've highlighted European uncertainty as the primary reason for not increasing your guidance. Can you elaborate on that uncertainty, for one, what are you currently seeing in customer production schedules over there? It seems like several suppliers have noted stability within the region, at least sequentially first quarter to second quarter. So -- and as it relates to Lear's customer mix, do you agree that the production environment is stable, for one? And then second, if you do believe that, what sort of risk factors are you contemplating in the back half for Europe? Do you think inventory might be an issue or do you see further downside risk to registrations? Any insight there will be helpful.

Well, there's, literally, when you're doing a projection of this magnitude for a company of our size, there's thousands of inputs that come in. Probably the biggest one, obviously, is production -- in production, on the platforms that you have content on. In Europe, while the production has been somewhat stable, I wouldn't call it stable, somewhat stable, there's still a level of uncertainty with the macro environment that's in Europe, regarding austerity programs and cutbacks, just uncertainty on sales. And the other issue in Europe is it's very hard to see leading macro indicators on what production levels will be compared to what we see in North America, which has sales and inventory of our car lines. It's not as easy to see those leading indicators in Europe. So from our standpoint, if the production holds in Europe, we'd see ourselves at the higher end of the range. And right now, we're just one quarter in, and we're taking a wait and see look at it.

Your final question comes from the line of Adam Brooks from Sidoti & Company. Adam Brooks - Sidoti & Company, LLC: Just a quick question. If we look right now at ease of profitability, can you talk about it compared to North America and Europe? And if we look out 3 to 5 years outside of North America, can you rank how profitable South America, Asia and Europe are?

I would tell you that Asia profitability is consistent with the target margins for both segments and we've been able to grow our business there rapidly and profitably and consistent with the margins overall. We would expect at some point that South America, which has historically run at target margins until the last -- I would say, last 12 to 18 months, would be the same on a longer-term outlook. Europe historically in a stable environment, ran a little bit below target margins in Seating. I think we ran around 4% is what we talked about in the past. In Electrical, we've actually run at the target margins due to the level of vertical integration in that segment and footprint. So that's how we would look at it longer-term. Adam Brooks - Sidoti & Company, LLC: All right. And then one quick one, do you have an updated target leverage ratio at this point?

It's pretty consistent with what we said in the past. I mean, we'd like to run at 1 to 1.5. I mean if the right acquisition or investment opportunity came available, we would consider going higher than that. But we've historically said that we'd like to maintain investment-grade credit metrics. And from our standpoint, that's a gross leverage of about 1.5. With that, that kind of ends the questions for the call and the folks that remain are probably Lear employees. I want to take this opportunity to, first and foremost, thank Jeff and the finance team for their excellent job in preparing for this call. And I want to thank all of you for your hard work and dedication, which drove these numbers this quarter. So thank you very much.

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