Lear Corporation (LEA) Q2 2016 Earnings Report, Transcript and Summary

Good morning. My name is Angel and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions] Thank you. John Trythall, Vice President of Investor Relations, you may begin your conference.

Thanks, Angel. Good morning. Thank you for joining us for our second quarter 2016 earnings call. Ours press release was filed this morning with the Securities and Exchange Commission and the presentation for our call is now 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 including Ray Scott, President of our Seating Division; and Frank Orsini, President of our Electrical Division. Before we begin, I would like to remind you that during the call we will be making forward-looking statements that are subject to risk and uncertainties. Some of the factors that could impact our future results are described in the slide titled Investor Information at the beginning of the presentation, and also in our SEC filing. We will also be referring to certain non-GAAP financial measures. Additional information regarding these measures can be found in the slides labeled Non-GAAP Financial Information at the end of the presentation. Slide 3 shows the agenda for today’s review. Following the formal presentation we will be pleased to take your questions. Now please turn to slide 5 and I will turn it over to Jeff.

Thanks, John. Lear continues to grow in both segments with record core operating earnings and margins. These operating results are the outcome of the investments we have made over the last several years, as well as our industry leading cost structure. We have expanded our product capabilities in seating with the acquisitions of Guilford Fabric and Eagle Ottawa Leather. And in Electrical, we have expanded our industry leading capabilities with the recent acquisitions of Autonet Mobile and Arada Systems to enhance our ability to move data and signals to, from, and within the vehicle. Since 2010 we have added 30 new component operations in low-cost countries and now have over 80% of our component manufacturing capacity in low-cost countries. This, coupled with our investment of over $1 billion in operational restructuring, provides us with the lowest cost structure in both of our business segments. We have long history of strong free cash flow generation which has allowed us to continue to invest in our business and return cash to shareholders, while maintaining a strong and flexible capital structure. In line of our first quarter performance and confidence in the outlook for our business, we are again increasing our earnings and free cash flow outlook for 2016. Slide 6 shows vehicle production in our key markets for the second quarter. In the quarter, 22.5 million vehicles were produced globally, up 3% from 2015 and generally in line with our expectations. Production increased in all of our major markets except Brazil. While the euro was up 2% versus the U.S. dollar, this was more than offset by the strengthening of the dollar in currency in other key markets, including China, which had a net impact of reducing sales during the quarter. Slide 7 shows our reported financial results for the second quarter. Our reported sales increased by 3% from a year ago to $4.7 billion. Excluding the impact of foreign exchange and commodity prices, sales increased by 4% reflecting our continued strong backlog. Pre-tax income before equity income, interest and other expense was $373 million, up $87 million from a year ago. Equity income increased by $11 million, reflecting strong performance in our non-consolidated joint ventures in China. Other income included a one-time gain related to the consolidation of a joint venture. Excluding this gain, other was in line with a year ago. Interest expense was $20 million, also in line with a year ago. Net income attributable to Lear was $282 million, up $101 million from the prior year, primarily reflecting strong operating performance and lower restructuring costs. Slide 8 shows the impact of non-operating items on our second quarter. During the quarter we incurred $28 million of restructuring costs primarily related to hourly and salary census actions. Excluding the impact of non-operating items, we had core operating earnings of $399 million, an increase of $61 million from 2015. The earnings improvement reflects the benefit of new business, increased production on key platforms, and favorable operating performance. Adjusted for restructuring and special items, net income attributable to Lear in the second quarter was $270 million; and diluted earnings per share was $3.66, up 30% from 2015. The increase in earnings per share reflects our strong operational performance and our share repurchases. Slide 9 shows our adjusted margins in the second quarter. Lear’s adjusted margin was a record 8.4%, up 110 basis points from a year ago. In Seating, sales of $3.6 billion increased 2% from last year with adjusted earnings of $302 million, up $49 million or 19%. Excluding the impact of foreign exchange and commodity prices, sales increased by 4% reflecting the addition of new business and improved production volumes on key platforms. Adjusted Seating margins were 8.3%, up 120 basis points from a year ago. The increase in margin reflects the increase in sales, and strong operating performance. In Electrical, sales of $1.1 billion were up 3% from last year with adjusted earnings of $161 million, up $14 million or 10%. Excluding the impact of foreign exchange and commodity prices, sales were up 5%, primarily reflecting the addition of new business. Adjusted Electrical margins improved to 14.8%, up 90 basis points from a year ago, reflecting the increase in sales and favorable operating performance. Slide 10 provides a summary of free cash flow, which was $435 million in the second quarter, and $636 million through the first half of 2016. The Company continues to generate strong cash flow with a free cash flow yield of approximately 11%. Slide 11 provides an update on our share repurchase program. As we mentioned in the past, our philosophy and historical practice have been to employ a balanced approach of investing in the business and consistently returning cash to our shareholders. The strength of our balance sheet allows us the flexibility to take advantage of market opportunities, both with potential acquisitions as well as the repurchase of our own shares. In February, Lear’s Board of Directors increased our share repurchased authorization to $1 billion through December of 2017. In the second quarter of 2016, we repurchased 1.3 million shares for a total of $250 million, bringing the year-to-date total to 3.7 million shares or 5% of our shares outstanding at the beginning of the year. Since initiating the share repurchase program in 2011, total cash return to shareholders is $3.2 billion including dividends. Our share repurchases represent a reduction of approximately 37% of our shares outstanding at the time we began the program. The average price paid to repurchase shares over the life of the program is about $72 a share. At the end of the second quarter, we had 72.3 million diluted shares outstanding and a remaining share repurchase authorization of $595 million. Slide 13 highlights the key assumption in our 2016 outlook. Our current global industry production forecast is 89.5 million units, an increase of 3% from 2015. This is consistent with the latest customer releases, as well as the latest IHS forecast. Our 2016 financial outlook is based on the most recent exchange rates for all global currencies, which includes an average euro assumption of $1.10 per euro and a Chinese RMB of 6.6 per dollar. Slide 14 shows our financial outlook for 2016, which as I mentioned earlier reflects an increase in earnings and free cash flow from our prior outlook. Our sales are projected to be in the range of $18.5 billion to $18.8 billion. Core operating earnings are projected to be in the range of $1.45 billion to $1.5 billion, an increase of $50 million from our prior outlook. Interest expense is projected to be approximately $85 million. Adjusted net income is expected to be $935 million to $975 million, up from our prior outlook of $900 million to $945 million. Free cash flow is expected to be approximately $900 million, an increase of $50 million from our prior outlook. Our assumptions for restructuring, capital spending, and depreciation and amortization are all unchanged from our prior outlook. This guidance reflects another year of continued sales growth, double-digit earnings growth, and record free cash flow. Now I will turn it over to Matt for some final comments.

Great. Nice job, Jeff. Thank you. Our record results are the outcome of the investments we have made over the last several years in our product capabilities and our cost structure. Our complete component capabilities in Seating allow us to differentiate our seats with unique designs and the highest level of quality and craftsmanship at the lowest possible cost. In Electrical, we are well positioned to capitalize on the transfer increase content, alternative energy vehicles, and connectivity. Our recent acquisitions of Autonet and Arada have enhanced our capabilities to manage data and signals both within and outside the vehicle. Our capabilities in electronics and software are allowing us to develop more intelligent and advanced Seating systems, which we call into Seating. This product has been well-received by our customers and highlights one of Lear’s unique capabilities. In summary, we had another outstanding quarter with continued sales growth, record earnings, improved margins, and strong performance in both business segments. We continue to outperform our peer group in free cash flow yield and earnings growth and return on invested capital. Given our unique product capabilities, industry-leading cost structure, and experienced management team, we are well positioned to take advantage of major industry trends. In short, we are in the best competitive position in our history. Now we would be happy to take your questions.

[Operator Instructions] Your first question comes from the line of John Murphy with Bank of America Merrill Lynch. Your line is open.

Good morning, guys. And congrats on a very solid operating quarter here.

Thanks, John.

If you could just talk about the margins in both Seating and Electrical, these are sort of at the higher end of the range or even above the range of what you have been talking about as what we should be thinking about for long-term margins. And I appreciate sales are up a little bit. But they are only up a little bit. It sounds like it is a lot of operating performance and execution here that is driving the margins. Just curious if there is anything that is just one-time in the quarter, that is not repeatable; or what you are really doing to push these margins to all-time highs.

It was a clean quarter, John. There’s really no one-timers. It was a very clean run-rate, if you will, in both product segments. We are executing. I think the investments we have made in our footprint help us in restructuring costs, moving some of the product to lower-cost regions help. The main thing is we are just running clean. We are running hard. We are attacking costs at every level. We continue to take cost out and attack census and footprint. The sales were up modestly. If you take into consideration the FX and commodity adjustments that rolled through the top line, I think our sales, Jeff, were up about 4% or 5% for the quarter so we still, I think, performed fairly well. We are caught up a little bit on the mix of the pass cars being down, both in North America and in Asia, and that rotation to, you know, CUVs, if you will. But it is a pretty clean quarter. Now, as it goes forward as far as margins in both segments, we think that in quarters we can continue this type of performance, John, in shorts periods of time. Seating averages out around high-7%s, low-8%s, depending upon the mix of components and product. Electrical, you know, high-14%s to 15%s type margins; depending upon, again, the mix of the product and the regions where it is produced. So it was a really clean quarter. The team is doing an outstanding job attacking efficiencies and costs at every level.

Matt, do you think those numbers are hardcore product ceilings on where you can go. Because we are seeing the margins kind of inch up or are they really what you see on the horizon right now? I am just trying to understand how –

Not necessarily, John. We always talk – I know you know this – about return on investment because really that is the key driver in this business, is making sure that we are investing in efficient use of our capital and investing in a way that provides returns in excess of our cost of capital. And we believe both business segments are performing well above that threshold right now. I do not think it is the cap. Longer term, I think, in the marketplace, we will see them settle down in the high-7s%, low-8%s for Seating depending upon the mix of components. What I mean by that, I mean the mix of surface materials versus structures versus the assembly business. And the same thing with Electrical. Electrical could touch low-15%s, high-14%s. It is in that range. So no, I do not think this is the peak. I think it could go higher still. But I think long-term it kind of settlers in that range.

And then a second question as we think about long-term and think about the revenue line, when you think about Seating and Electrical, what do you think growth above market numbers or rates are for each of those segments, if you think about it that way?

About 5% above market longer term. And that is really being driven by our product capabilities, our positioning globally, our footprint; some of the major trends that play very, very well for us, like global platforms, direct to component sourcing, the drive for fuel efficiencies and reduced CO2 emissions. So we are winning business and I think that trend will continue and I am comfortable with that type of rate of growth.

Okay. And then just lastly, you are running a not-so-slow motion buyout here. If the market conditions were ever right on your stock price and availability in the capital markets on the credit side, would you ever consider an LBO?

Boy, I have learned never to say never, right? I do not think it is cards in the near term, quite frankly. Lear is, in our opinion, one of the best investments in any market right now. And I think when you see opportunities like we saw this quarter, we will be aggressive like we were this past quarter; driven by our view of our business, our view of our valuation relative to others in the space, and our ability to generate cash. And so from that standpoint we will be aggressive like we were.

Great. Thank you very much. Keep it up.

Thanks, John.

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

Great, thank you. Good morning everyone.

Good morning

With the margin progress that you have had and the execution, I am just curious as you look out in the next few years, how should we think about restructuring opportunities? I think you are doing about $70 million this year. Are you seeing a lot more of these opportunities going forward that could drive margin expansion? Or is some of the restructuring you are doing kind of required just to maintain margins?

I think there is some opportunities, mainly in the Structures business. There may be some things to do there. We could possibly move that business up. I still think it is not performing at optimal margins, specifically in North America, so you may see some additional activities there that could possibly drive margins, Itay. But I would definitely say we are in the late innings of doing this, because we have been doing it for a while. So some of the restructuring we do truly is just kind of maintenance. But then we also have, I think, game-changers like we saw with the recent action that we did in Canada. We moved that production to a state-of-the-art structure facility in Mexico and that is been a benefit and you are seeing it in the results.

Great. That is helpful. And just a quick one, kind of housekeeping on the guidance. I think the full-year global production outlook that you have is mostly unchanged. I think you took down the top end of the revenue a little bit. Is that mostly what you were referring to before with the passenger car and customer schedules or is there a little bit of FX in there as well?

It is all of it. We adjusted to the latest thinking of IHS, which, I think John Trythall, is about 15, 20 days old now?

Yes, July.

July. So the most recent IHS. But we also bounced that up, Itay, against customer releases, what we know – what the customer has communicated. We also adjusted our FX assumptions and all our currency matches around the world to the latest exchange rates. So it is a little bit of everything. The biggest kind of adjustment, quite frankly, has really been the rotation away from pass cars. And I think it is no secret on the pass cars with Ford and Chrysler, with their plans are greatly reduced year-over-year and that is impacting us a little bit on the top line.

Great. That is helpful. Just lastly, Matt, on the booking environment, how have things gone the last few months, you know; both on the activity win rates and the overall environments. Just an update on that?

Great. We are continuing to gain share in both product segments. The booking environment is very good. I think from a pricing standpoint, we have been very disciplined in our approach to the marketplace, and I am excited about our backlog.

Terrific. That is very helpful. Thanks so much, guys.

Your next question comes from the line of Chris McNally with Evercore. Your line is open.

Hi, guys. Thanks so much. So I think we have asked about peak margins for a couple of quarters, and you guys have just continued to impress and beat most of our expectations. I want to sort of take it a different route. In a lot of the supplier calls over the last two quarters, companies have been calling out increased R&D as a percentage of sales to support higher order intake for new products, and this has been a drag on margins. Clearly you have a similar situation, that order intake is quite good from your outlook. Is this something we have to think about going forward, that you have to have an increased spend to support future growth, which is a good problem to have, but, you know, something that we should think about for margins over the next year or so?

Yes, it is a great question, Chris. We are seeing a little bit of that in the back half of the year as our backlog continues to grow and we gain share. We have to obviously invest in engineering in those programs to make sure that we launch properly and develop them properly. So, yes, it could have a little bit of a headwind against your margins but I do not think it is meaningful. Our backlog has been averaging about $1 billion a year in the preceding – in the immediately preceding 12 months, right. So I think it is largely in the run-rate already. There may be a modest step up in engineering spending in the back half of the year through – to actually get ready to launch the backlog. But I do not see it being meaningful because of the fact that, you know, our backlog has been meaningful for the last several years. So it is largely in the run-rate.

Okay. So if we were to sort of guess at a magnitude, it is not something – you know, we are talking tens of basis points; nothing that is really significant? Because the order rate has already been good for the last two years?

Right. You’re absolutely right.

Okay. Thanks so much.

You’re welcome.

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

Great. Thanks for taking my questions. First, can you just clarify? You said you expect to grow 5% above market. Is that for the whole business or is that for Electrical? I was not sure if I got that in the right context.

For the whole business.

I think in the past you said twice production. So now that is more bullish than what you said in recent history?

Yes, we’ve been pretty consistent. We said about 5 basis points above market. I think we have been pretty consistent with that, Colin. Sorry for any confusion on that point. And it has been our history, actually, the way that we have been booking business, our backlog for the last several years has been about $1 billion a year as we enter into the next 12 months, and that remains true. So it has been pretty consistent, actually.

In the press release you mention 48-volt content. Can you just remind us what are the key products and opportunities that you see on that, and if that is showing a lot more potential lately?

Yes, I will. I have Frank Orsini, our President of our Electrical Division here with us, and he will take you through that content.

Yes. So Colin, 48 volts for us is a very big opportunity because it does impact all three of our major product lines; wire, terminals, and connectors and electronics will all see growth opportunities from this trend. From our standpoint it is a very positive thing for Lear. Right now we have three platforms we are developing right now. Two of them are in Europe. One of them is in Asia. And those three platforms themselves will generate Lear content on approximately 11 vehicle name plates in the industry over the next three years. These programs we are working on are slated to launch are in the 2018 and 2019 timeframe. So, yes, it is a very important opportunity for our Company, very important trend in the industry right now and I think we are extremely well-positioned to capitalize on it.

Any color on how much additional dollar content you get in one of these numbers?

Yes, for us it is – you know, the overall vehicle itself will see at least 30% of content growth on a 48-volt system. For Lear, this is exactly one of the key drivers that continues to push these mid- to high-single digit growth levels we have been looking at on our business segment. We see each one of our product lines growing because of this 48-volt technology. Like I said, we have great capabilities on all fronts in this area, so we are really optimistic about what it will do for us.

Okay. Thank you very much for take our questions and congrats on a great quarter.

Thanks, Colin.

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

Good morning, gentlemen.

Good morning, Brett.

How are you guys doing?

Great.

Let us see, a couple of different thoughts here. I think that you had a couple of JCI-type questions but I want to make sure I am understanding this correctly. It sounds like from your perspective – and correct me if I am wrong here, Matt – that you are not seeing a material change in the competitive landscape as far as you are concerned. In other words, market share, pricing, that sort of thing.

You mean like irrational, unsustainable price quotes coming out of Johnsons as they try to sell their business? It is not impacting us, no.

That is exactly what I am asking, Matt. Perfect. Okay.

At the end of the day, in all seriousness; irrational or unsustainable or price quotes that people try to drive their top line is nothing new. There always seems to be some competitor that is trying to achieve sales growth for the sake of sales growth. You know, at the end we maintain our commercial disciplines and our value equation, whether it is craftsmanship or footprint or component capability stands on its own, and we have maintained that discipline and you have seen our sales backlog come up profitably. Nothing has changed with our approach to the marketplace.

We have not spent a lot of time talking about the Electronics side of the business. But you made a nice move to low-cost countries, made you more competitive, and so on and so forth and you are seeing the benefit of that over the long-term. Where are you at today in terms of that competitive landscape? Is that potentially going to change? Is the likes of, well anyway, the other – are the other electronic competitors making any material changes which could result in some headwinds to your margins?

No, I don’t think at all. I mean, it is a business that we have refocused and invested in, both in a footprint and in product capabilities. I think we are just scratching the surface of what that segment could be, both in size and in capabilities, and I think the opportunity is great. And no, we are not seeing a real change in the competitive landscape and in that segment. We are winning business at a great rate, and we are winning it from everybody.

And then finally; M&A, where would you look to do M&A, and I presume it is for the most part bolt-on acquisitions?

Yes. I don’t see anything major out there. I wish there was one that could – like, one acquisition that could really set us apart. I think more and more you are going to see things not unlike Eagle Ottawa, which was a great acquisition, and really helped us differentiate our product at a fair value. In Seating, you know, we are in active dialog with several organizations that would help us from a product standpoint, from a diversification standpoint as it relates to customer mix and geography. We are looking to get better in moving data around the vehicle. So I do not see anything out there that is the size of Eagle Ottawa, but I do see several things out there that could add up to the size of Eagle Ottawa. Now, that being said, things change as well. We at one point did not think that Eagle Ottawa would be available and then it became available. The benefit of having a balance sheet like Lear’s allows us to take advantage of market opportunities when and if they come. And so we are ready to move quickly if that happens. In the meanwhile we are staying focused on increasing our product capabilities in Seating, our geographic region diversification in both business segments, and also improving our abilities to move data in a secure manner around the vehicle in Electrical.

Thank you very much, gentlemen. Appreciate your time.

Thanks, Brett.

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

Good morning, Matt and team.

Hi, Brian.

In both segments, you have talked about the operating cost reductions really driving what is an impressive margin improvement. You talked about some of the sources of that. But when you sit down with your customers and certainly in light of – there is an OEM just released with less than stellar results, your strong margin performance certainly stands out. A couple of questions. One, as you drive these operational improvements. How much of it do you share with the customers? And is it win-win? And then second, kind of when do you start down and start talking about pricing and price-downs going into the next year and the programs going forward?

Well, never really ends. We understand that our customers are in a very price-sensitive industry, and the value in many ways that Lear brings to the table is our expertise in the whole value chain of our products and our ability to engineer costs down to help them meet their goals. Pricing in many ways are achieved through engineering changes and the ability to take cost out of the product and share that with our customer so that they are successful. That is our role in tier 1, to help manage that supply change. So the discussions never really end. I mean, off the top we are probably averaging 1.5%, sometimes 2%. That has been consistent from the get-go. I do not really see that environment changing. I think Lear has a great ability – I think industry-leading ability – to take costs out of the product and share those with the customers. And so when you can do that, the customers want you to be successful from a profitability standpoint.

So is there any sort of almost idea-sharing, value-sharing above and beyond the pre-negotiated pricedowns that come down, and do you sort of set bogeys? Is it a joint effort with the customers sometimes, in terms of logistics and supply chain, to get there?

Yes, each customer is slightly different in their approach to achieving cost reductions as it relates to materials, Brian. We are in an active dialog. We bring ideas to them. We look for solutions that can help. I think that is one of the benefits you receive when you source Lear, is our broad understanding of the industry and the products that you do. It could be anything from redesigning. It could be ways of taking costs out of the logistic routes, helping with some of the sub-tiers, even some of the direct suppliers and improving their efficiencies and design. It could be pretty much anything. We are constantly attacking cost and helping the customer achieve their goals. So it is not uncommon to be able to provide cost reductions to a customer, you know, in the range of 5% a year on their material. As they are increasing content, you are offsetting in certain cases the increased cost to the end consumer.

And that’s above and beyond the savings they would get from a contractual pricedown? It’s going to join value engineering, it sounds like? Okay, thanks guys.

You’re welcome.

Your final question comes from the line of Joe Spak with RBC Capital Markets. Your line is open.

Good morning, everyone. Congrats on the quarter.

Hi, Joe. Thank you.

I guess just to follow up on first Brett’s question around M&A, is it all talk – I mean, your answer in terms of something larger seems to have been more in light of the existing business line. Would you ever look at taking on a new business line?

No, not really. We think there is a lot of opportunity to expand in the two product lines that we are in, with both Seating – I think there is capabilities and Electrical, there is capabilities to kind of expand. It is some of the things we are not doing that would benefit a customer; whether it is lumbar, Seating and cooling, or Electrical, cyber and some data movement and even expanding our connector capabilities in Electrical. I think there is ample growth opportunities in both segments that don’t necessarily require adding a third leg of the stool, if you will.

Okay. And then just on – I sort of did not really hear anything on your guys’ internal take on Brexit and what that could mean for you guys or for the broader industry in terms of both your exposure, I guess, from a currency perspective but also what you think is going to happen to demand.

Well, let me handle the kind of the broader expectations on demand, and Jeff will take you through the metrics. From a demand standpoint, we have not seen anything that would impact it. I personally do not think it is going to impact the demand cycle just because I think it is in the best interests of the UK and the European Union to work together to ensure that jobs and demand are not destroyed because of this split, if you will. The industry is linked, whether the cars are produced in the UK or sold in the UK, components come from Europe and vice versa. So I think it is in everybody’s best interests to work together to make sure that we do not get into a cycle that would hurt demand. In our business right now, our UK business that is produced in the UK is for the Nissan QASHQAI and the Jag Land Rover business. And what we have seen is no weakening in demand. In certain cases we have actually seen an increase in releases in those two products. So it really has not impacted us and I personally do not think it will impact us longer term. Jeff from the size –

Yes, so Joe, from the amount of business we have in the UK is roughly $1.5 billion, but I think the important thing to know is of that $1.5 billion, about 70% of that business is denominated in euro. So with respect to the recent devaluation of the pound, we have not been significantly affected by that.

Okay, great. And just one housekeeping; I guess for both segments, but specifically in Electrical, sales were up 3%. FX and commodity up 5%. Is there split you could give us between foreign exchange and commodity impact?

It is probably, in terms of the impact on sales in the quarter, about 1% each.

Okay. Thanks a lot.

Thanks, Joe.

Your last question comes from the line of Emmanuel Rosner with CLSA. Your line is open.

Hi. Good morning, everybody.

Good morning.

First, a question on China. I think you continued to perform very well there. I was curious to get a little bit of color on how some of the makeshift is happening there is impacting you, either positive or not. It seems like a lot of the growth is coming somewhat from the lower-tiered cities, lower-end vehicles, maybe somewhat less content. So is that something that you see happening in terms of, say, creative equipment from global automakers? And then can you maybe also remind us what your position is with the local automakers and how much of an opportunity that is?

Well, we have got a great position with the local automakers. I think of the top automakers in China. We sell content to the local brands directly with all of them at some level. Our relationships are very, very strong. We obviously also have a relationship with a partner, joint venture vehicles that come from Europe and North America. So I think we are well-positioned for the trend. Now, as far as the trend, what we are seeing is a rotation, an increase in penetration from the local automakers and I think we will participate in that nicely. We are also seeing a trend towards CUVs. And CUVs in certain cases actually provide a content opportunity just by the nature of the amount of seats and Electrical circuits that they have, which is typically higher than pass cars. So overall, I think the trends there are positive for Lear. We see some slowing in certain past, Western pass cars, if you will, as you see that trend. Emerging market vehicles typically do come in a little bit lower content. But then they end up moving up in content as they become more mature. But I think overall the market opportunity in China is outstanding. Jeff, can you provide any more color on that?

I agree, in terms of our sales, our sales were up, I think, excluding FX, 6% in the quarter. So we had another strong, solid quarter, growth in excess of industry production in that region. So we continue to grow on both sides; both on the consolidated side and on the non-consolidated side. And I think in the earnings presentation, you can see the growth that we saw in our equity earnings primarily associated with the growth, the profitable growth that we have seen in the non-consolidated JVs in China.

Great. That is great comment. One just final one for me, on the – I guess segment mix in the U.S., I think in your earlier comments you were sort of talking about maybe the biggest adjustment to full-year revenue guidance. It is sort of this rotation away from passenger cars. Can you maybe just remind me what is sort of – is your exposure in the U.S. reflected by segments and how to think about some of the shifts that are happening now, and the impact on your business?

Yes, it is kind of a hard question to answer, quite frankly. We are well-represented in all the product segments in the U.S. It really comes down to the mix of the vehicles. For instance, I think we have the right penetration in heavy truck with the large GM platform. We are great with crossovers, whether it is the BMW segments or Hyundai; and then the Explorer, if you will, and then we are big in pass cars. In this particular case, what is hurting us in North America is the Ford pass cars are down and we have a lot of content on the Ford’s Fusion, and Taurus as well as the small pass cars in Chrysler. That’s what’s been the drag in kind of the sales mix. That carries over to some extent in Europe and in China, specifically with the focus and the Ford pass cars.

Perfect. Thank you very much.

You’re welcome. Since that is our last question, I think the folks that remain on the call are largely the Lear team. I want to thank the finance organization once again for an outstanding job in getting us ready for the call and closing the books this quarter in a timely and a complete manner. More importantly I want to thank the Lear team, because results like this just do not happen. They happen through hard work, dedication and team work. Keep up the outstanding job, and I want to personally thank all of you for your dedication to Lear Corporation. Thank you.

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