Ed Lowenfeld - Matthew J. Simoncini - Chief Executive Officer, President and Director Jeffrey H. Vanneste - Chief Financial Officer and Senior Vice President.

John Murphy - BofA Merrill Lynch, Research Division Brett D.

Hoselton - KeyBanc Capital Markets Inc., Research Division Brian Arthur Johnson - Barclays Capital, Research Division Rod Lache - Deutsche Bank AG, Research Division Ravi Shanker - Morgan Stanley, Research Division Daniel Galves - Crédit Suisse AG, Research Division Colin Langan - UBS Investment Bank, Research Division Richard J.

Hilgert - Morningstar Inc., Research Division Joseph Spak - RBC Capital Markets, LLC, Research Division.

Good morning. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lear Corporation Third Quarter 2014 Earnings Conference Call. [Operator Instructions] Ed Lowenfeld, you may begin your conference..

Thank you, Stephanie. Good morning, everyone. Thank you for joining us for our third quarter 2014 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 at ir.lear.com.

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 slide 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, then Jeff Vanneste will cover our financial results and outlook, and Matt will return with some wrap-up comments. Following the formal presentation, we'll be pleased to take your questions. Please turn to Slide 4, and I'll hand it over to Matt..

Great. Thanks, Ed. We continued our positive momentum with record results in the third quarter. Sales increased 8% to $4.2 billion from a year ago, which is almost 3x the increase in global production. Core operating earnings were up 22% to $251 million, our ninth consecutive quarter of year-over-year earnings improvement.

Adjusted net income was up 32%, and earnings per share increased 33%. Both our business segments reported higher sales and margins. We also continue to return cash to shareholders. During the quarter, we returned $119 million to shareholders through share repurchases and dividends.

Based on our strong performance, we are increasing our 2014 outlook, which Jeff will discuss in more details a little later in the presentation. During the quarter, we also announced an agreement to acquire Eagle Ottawa, which I'll describe in more detail in the next slide. Slide 5 provides a profile of Eagle Ottawa.

Eagle Ottawa is the world's largest supplier of automotive leather, with a low-cost manufacturing footprint and annual revenues of approximately $1 billion. The company has an experienced management team, modern facilities, the latest technology and a reputation for superior quality, product innovation and craftsmanship.

The company has an industry-leading position in North America and Asia and is one of the top leather suppliers in Europe. Eagle Ottawa has a balanced customer mix, serving virtually every major automaker in the world. No single customer represents more than 20% of their sales, and no single vehicle platform accounts for more than 6% of sales.

Slide 6 summarizes the Eagle Ottawa transaction. The purchase price is $850 million, and we expect the transaction to close in the first quarter of 2015 following regulatory approvals. Excluding synergies, the valuation multiple is approximately 6x the 2015 EBITDA.

We expect the transaction to be accretive by approximately 5% to earnings per share, excluding synergies, in the first 12 months following the closing.

The 5% EPS accretion assumes Lear finances 100% of the purchase price and incremental depreciation and amortization of approximately $25 million to $30 million related to the purchase accounting adjustments. We have identified annual synergies of approximately $20 million, which we expect to achieve within 24 months of closing.

We also expect incremental sales growth as we combine the 2 businesses and build on both companies' strengths. The acquisition is consistent with our strategy of investing in our business and returning cash to shareholders. The Eagle Ottawa transaction will not impact our ongoing share repurchase program.

Slide 7 provides an update on our share repurchase program. During the third quarter, we repurchased slightly more than 1 million shares of stock for a total of $103 million. Since initiating the share repurchase program early 2011, we have repurchased 29.3 million shares for a total of $1.8 billion.

This represents a reduction of approximately 28% of our shares outstanding at the time we began the program. The average stock paid to repurchase shares over the life of the program is approximately $60 per share. At the end of the third quarter, we have a remaining share repurchase authorization of $491 million, which expires in April of 2016.

This represents approximately 7% of our current market capitalization. Now I'd like to turn it over to Jeff who'll take you through our financial results and outlook..

Thanks, Matt. Slide 9 shows vehicle production in our key markets for the third quarter. In the quarter, 20.4 million vehicles were produced globally, up 3% from 2013. Our major markets showed increases, led by China and North America, which were up 10% and 8%, respectively. Production in Europe was up 1%, and industry production in Brazil declined 17%.

Slide 10 shows our financial results for the third quarter. As Matt mentioned, our sales, which were up 8%, continue to grow faster than the overall market. The increase in sales in the quarter primarily reflects the addition of new business and increased production on key Lear platforms.

In the third quarter, pretax income before equity income, interest and other expense was $225 million, up $32 million from a year ago. Interest expense was $16 million in the third quarter, down $2 million, primarily reflecting interest savings related to the refinancing of our 2018 and 2020 notes.

Other expense was $11 million in the third quarter, down $6 million, primarily reflecting a gain of $5 million related to a transaction with an affiliate. Net income attributable to Lear was $140 million in the third quarter, up $27 million. Slide 11 shows the impact of nonoperating items on our third quarter results.

During the third quarter, we incurred $21 million of restructuring costs primarily related to capacity reductions in Europe and various census-related actions. Excluding the impact of restructuring costs and other special items, we had core operating earnings of $251 million, up $45 million from 2013.

This represents the ninth consecutive quarter of year-over-year earnings improvement. Adjusted for restructuring and other special items, net income attributable to Lear in the third quarter was $157 million, and diluted earnings per share was up 33% to $1.93 per share. Slide 12 shows our third quarter adjusted margins.

Total company adjusted margins were 5.9%, up 60 basis points from a year ago and a record for the third quarter. Sales and margins increased in both business segments. In Seating, sales of $3.2 billion were up 10% from last year, with adjusted earnings of $176 million, up $21 million or 14%.

The increase in sales was driven primarily by the addition of new business and improved production on key Lear platforms. Adjusted margins were 5.5%, up 10 basis points from a year ago. The increase in earnings from a year ago primarily reflects strong sales growth, favorable operating performance and the benefit of operational restructuring.

Our full year margin outlook for Seating remains in the 5.5% to 6% range. In Electrical, our positive momentum continued into the third quarter with record margins. Adjusted margins were 13.3%, up 240 basis points from a year ago, primarily reflecting favorable operating performance and the benefit of operational restructuring.

Given the strong year-to-date performance, we expect full year margins in our Electrical segment to be approximately 12.5%. Slide 13 provides a summary of free cash flow, which was $145 million in the third quarter.

Slide 14 highlights the key assumptions in our 2014 outlook, which reflects the latest production assumptions in each of our major markets. Global production of 85.5 million units is generally consistent with our prior guidance. Compared to 2013, vehicle production in China, North America and Europe is expected to be up 9%, 5% and 3%, respectively.

Our 2014 financial outlook is based on an average euro assumption of $1.33 per euro, down 3% from our prior outlook. This implies an average exchange rate of $1.26 per euro for the fourth quarter. Slide 15 summarizes our 2014 outlook. Based on our continued strong performance this year, we are increasing our full year guidance.

For 2014, Lear expects net sales of approximately $17.7 billion, consistent with our prior guidance despite a weaker euro assumption.

Core operating earnings are forecasted to be in the range of $1.01 billion to $1.04 billion with a $25 million increase in guidance, reflecting improved operating performance and increased margins in our Electrical business. Tax expense is estimated to be in the range of $270 million to $285 million.

Adjusted net income attributable to Lear is forecasted in the range of $640 million to $655 million. Pretax operational restructuring costs are expected to be approximately $100 million, up $10 million from our prior outlook, reflecting plant consolidations and other census-related actions.

Free cash flow for 2014 is forecasted to be approximately $450 million. Now I'll turn it back to Matt for some closing comments..

All right. Great job, Jeff. We had our best third quarter ever. We continue to set new sales and earnings records in both our business units, contributed with the improved results from a year ago. We're very excited about the Eagle Ottawa acquisition, and we expect it will further improve our Seating business.

It enhances our ability to serve our customers, will improve our design capabilities, enhance our craftsmanship and quality and ultimately allow us to provide a lower-cost, higher-quality product. We continue to invest in the business, and we continue to return cash to shareholders. With that, we would be pleased to take your questions..

[Operator Instructions] Our first question comes from the line of John Murphy with Bank of America..

Just a first question on Slide 6 on Eagle Ottawa, Matt. I mean, you mentioned that there'd be some stepped-up D&A for purchase price accounting of, I think, $25 million to $30 million.

Is that encompassed in your expectation for 5% accretion?.

Yes..

Okay.

And that's obviously pre-synergies?.

Correct..

Okay.

And as we think about Eagle Ottawa, what percent is coming through Lear right now? And what percent goes through your competition?.

Yes, the intercompany sales, Jeff, that we talked about, I want to say, was....

They're about $150 million of intercompany sales right now, of the billion-ish annual sales in total..

Okay.

So the majority is going through other seating suppliers at this point?.

Yes, yes..

Okay, that's helpful.

And then second on the EPMS margin increase, I mean, what are you seeing there? Is that something that's sort of a short-term benefit from mix? Are we looking at some real structural shifts here, which are going to allow you to earn these higher-margin structure looking forward?.

There was the benefit of a little bit of timing on a commercial resolution that was a pull ahead from the fourth quarter, John. Probably, I don't know, a couple bps, a couple of tenths, 20 basis points. The business is running in that high 12% to 13% range right now, so we think it's sustainable in that 12.5% to 13% margin rate..

Okay. And then just lastly, you guys are certainly not shy about buying back stock, so that's a good thing.

But given the recent pullback in the stock, do you see an opportunity to potentially get more aggressive and use the strength of your cash flow and balance sheet to buy back even more and maybe get a higher authorization on what you have outstanding right now?.

Well, we continue to believe the business is strong. We see the -- we haven't seen anything in the releases or the outlook that would tell us otherwise. Both business units are continuing to perform. We continue to believe our shares are undervalued, and the outlook for the business is good.

We said publicly that we want to base our share repurchase on the market conditions and be opportunistic, and I think those all imply for a pretty good pace of buyback..

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

On the Electrical side, can you talk a little bit about what your longer-term margin expectations are for that? Because that -- it sounded like, based on your comments to John, that it seems like you're thinking that they might be higher. I think in the past, you've kind of talked about them being kind of that 10.5% to 11% range.

You're maybe a little reluctant to go too high because you want to be able to have the opportunity to take on some 10% business because I think that's good return on invested capital business for you guys.

How are you thinking about your longer-term margins in the Electrical business at this point?.

I think you're right, Brett, as far as the market conditions on the product, it's good business for us when it starts in the high single digit margins. We have a nice gap to our cost of capital and returning in excess of our cost of capital. We think this business can run in about 12.5% and still kind of grow..

Okay. And is there anything in your backlog that disrupts that? It doesn't sound like you have anything at this point in time that really is going to weigh on that contribution margin that you've been seeing.

Is that a fair statement?.

That is a fair statement. I think the backlog would support kind of a run rate in that range..

Okay. And then Eagle Ottawa, you talked a little bit about some -- it sounded like some possible revenue synergies.

And I know that in talking with some clients, there's -- as we kind of think about the fact that a lot of that goes up through your competitors, they've been concerned that maybe some of your competitors might buy less from them or something along those lines for various competitive reasons or something.

But it sounds like you think there's an opportunity to actually sell more.

Can you kind of talk a little bit about that?.

Oh, I absolutely think there's an opportunity to sell more. Leather is directed by the car companies, much like fabric, and we have a real case experience with our acquisition of Guilford. So to me, it comes down to having the best product, the best quality, which Eagle Ottawa does, and so it's really a car company decision.

And in our industry, it's not uncommon to have buy-sell relationships with your competitors as car companies -- direct sourcing components.

So I think it's a very, very minor modest risk, and I think it's outweighed by the capabilities of combining world-class design capabilities in leather with world-class design capabilities in fabric and world-class design capabilities in seating and to come up with unique designs that can personalize vehicles and also take cost out.

So I think those will override any desire to de-source..

That makes perfect sense. And then finally, just very quickly, European production, you did not change your guidance, but there's a lot of concern on The Street that Western European production in particular is likely to see some headwinds, maybe be reduced. But it doesn't sound like, based on your guidance, you're seeing any changes there..

Yes, I think....

Yes, I'm going to throw you over to Jeff in a second. He'll give you the exact numbers that we're basing our guidance on from a production standpoint, Brett, but you are correct. I will tell you that we have not seen any meaningful reduction in releases with basically 7 more weeks of production scheduled before the holiday shutdown.

So from our standpoint, Europe has been pretty stable other than probably Russia, but the rest of the market looks stable..

Yes, I think I agree with that. Kind of -- we've not seen anything from the customers via the shorter-term releases to suggest that there's any headwinds there. Our assumptions with respect to our guidance are that on an annual basis, sales will -- production rather will be up by 3%.

If you look at the individual quarters, we were up about 1% in the third quarter, and we'll be flat on a year-over-year basis in the fourth quarter. But on a full year basis, up roughly 3%, and I think the projections over the next couple of years would be growth in that segment 2% to 3%..

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

I have a strategic question on Electrical, then just a housekeeping question.

When you're talking about 12.5%, 13% margins, would you describe it as a combination of things that you're doing? Are you getting to -- is it just throughput through your lower-cost capacity? Are you actually seeing better pricing out in the market? And is capacity overall for the wiring harness industry maybe a bit tighter than it was? And then what's just kind of value-added product in engineering and some of the end-of-the-wire things we have discussed on prior calls?.

Yes, it's a great question. Really, it's driven by 2 things, Brian. First and foremost, you have to have the design capabilities to be able to deliver the lowest-cost architecture of the vehicle.

And that really is driven by knowledge of the entire kind of circuit, meaning including junction boxes and the way to route signals in the most efficient manner, which allows you to reduce the per-circuit cost by reducing the circuits. We have some great technology connectors, which allow us to use thinner gauge wire.

And that, coupled with our historically industry-leading junction box capabilities, things like solid-state junction box, which reduces or eliminates fuses at a vehicle, really allows you to have a low-cost design. That's the starting point.

The other piece of this is definitely the manufacturing footprint, which we've invested upwards of $0.5 billion over the last 6, 7 years to get our footprint correct in that segment, and you're starting to see the dividends of that.

Now those 2 things, just coupled with our sales growth, is allowing us to run these component facilities at much more efficient levels as we put more product through it. So I think it's a combination of factors, starting with design, followed by footprint, and then volume always helps..

Okay.

And within that, does that imply that CapEx as a percent of sales ought to be coming down going forward in that segment?.

CapEx really is a function of backlog as much as anything. We have invested in the emerging market footprint. Right now, mid-2.5% is about right, and we'll take that all day long. It's because the type of returns we're getting for that investment has been outstanding..

Okay. And it sounds like on the revenue line, maybe we shouldn't get carried -- too much carried away with revenue growth there because some of the things you're doing for customers is making up, helping them reduce the miles of wires in a car and then making it up in the margin for your design expertise..

Yes. I don't think that's as much as a factor as just the amount of penetration that we've had and the cadence of sourcing. This segment has grown incredibly over the last 3 or 4 years. So to keep that pace is somewhat unrealistic, especially in light of the cadence of sourcing in the industry.

The other headwind is we have a big portion of this unit probably from a percentage standpoint is in Europe, and that's facing some headwinds with the euro exchange rate against the dollar. I don't think it's so much is the design efficiencies because cars -- it's being offset by cars are becoming more complicated and requiring more content.

So while you're designing efficiencies in the system, the cars are becoming much more connected, much more complicated, all of which requires more signals to be managed. And so we're seeing a growth rate in the components on about 5%, and that's kind of offsetting some of the efficiencies..

Great, which gets to the housekeeping question.

Between your 2 segments, can you kind of remind us of the revenue and directionally, the EBIT exposure to Europe so we have the right currency in mind as we think through the next year?.

The exposure that we have with the fluctuations in the euro specifically are for every penny change in the euro on an annual basis, it affects our sales by about $48 million to $50 million and then whatever the translation of the earnings are with those specific programs that are affected..

Okay.

And segment-wise, any difference?.

Not materially, no..

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

A couple of questions. I was hoping that you might be able to just give us some -- just some insight into the moving parts within Seating. Revenue was up almost $300 million. Earnings were up $21 million. I would imagine that South America was a headwind, that $800 million business structure is probably a tailwind.

What is happening within that? And just remind us of what's the bridge from this 5.5%, 6% margin level that you're at to the 7% target? What needs to happen to get to that level?.

Yes. You're right, Rod. There's a lot of moving parts. And while we made an improvement in South America, specifically in Brazil, it continues -- we continue to struggle now facing additional headwinds on volume. And I think you know our customers are struggling there as well.

So that's going to take more time to get it to return to profitability, and our guidance does not assume that happens this year.

We made a nice improvement in North America metals and would expect that to continue as we kind of burn through and digest the phenomenal growth that, that segment has had, and we expect that performance to continue into next year.

Going into next year, part of the road map into returning into target margins in this segment of 6.5% to 7%, we would need a few things. One, we need a solution to South America. That business doesn't need to necessarily go back to target margins themselves, but we need to return to profitability.

And that's going to take working with our customers, looking at the footprint, possibly even giving certain programs back that may make more sense for somebody else to do as they look to synergize reduced capacity.

We need Europe to continue to recover, and we need to work through the evolution of the portfolio, start implementing some value engineering changes. So we'd expect the trend of performance improvement to continue in Seating, make a nice step improvement in the fourth quarter and continue that into next year..

The time frame for getting to 6.5% to 7% is 2 years? Or what -- do you have a time frame in mind?.

I believe next year, we'll make a nice step into the low 6s, Rod, and then I think we'll continue in -- with that improvement into the following years..

Okay. And just you've given us a little bit -- little pieces of this. But in Electrical, kind of similar, you had a $26 million improvement in earnings, but in this case, it was on $18 million improvement in revenue.

So did you mention that there was a sort of a one-timer in there and that there were also some cost reductions that drove part of that?.

Yes. What I mentioned a little bit earlier in the call, Rod, was net, there's always a litany of different adjustments that go through. The quarter was relatively clean. There was some timing issue on commercial resolutions in the third quarter that we were expecting in the fourth quarter. That benefited the segment net by about 20 basis points.

If you subtract that, the rest of it's just performance, benefits of restructuring, the mix of the products we were selling..

What's the typical seasonality in that business just going forward? That -- it had been sort of on upward trajectory through last year, back half stronger than the first half..

On average, I would say both segments typically are similar. This quarter was a little bit different from a mix. Electrical has less exposure to Brazil, which was a falling market, and Russia, which was a falling market, India, which had some difficulties in the quarter. So this quarter was a little bit different than we normally see.

But on average, you're going to see the same type of seasonality between the 2 businesses. I don't think there's a whole lot different..

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

So your press release referenced market share gains.

Is that primarily in Seating versus Electrical? Was it both? And can you characterize the competitive environment in the Seating space right now?.

Yes, it was in both. We're continuing to win business in both segments and gain share. The competitive environment in Seating is difficult. It requires you to be the low-cost producer and have the right footprint and capabilities and components.

Our customers sell a price-sensitive product, and it requires suppliers to figure out ways to reduce their cost. And we've been able to do that through our footprint action and our capabilities and all the components that make up a seat, as well as our design capabilities. But it's a tough environment, but it really hasn't changed.

That's been pretty constant, Ravi..

Yes.

But on specifically the JCI, do you feel like they have decided what side of the fence they want to be on with Seating? And have you seen any pickup in share there?.

Well, not to speak specifically of Johnson's, you probably know more about what's going on there, quite frankly, than I do. But I will tell you this.

In our business, that takes 3 years prior to start-up production and then production runs for 5 to 7 years, so you're looking at anywhere from 8 to 10 years of -- from time of award that you're going to be producing a product, who is going to own your business and whether or not you're going to be able to continue to invest in the business is a big question that you need to answer when you're being sourced.

So if there is uncertainty in the ownership, I think that doesn't work for you..

Got it. And just switching to Europe, you guys have grown CPV in Europe by double digits for 4 quarters now and close to double digits for 3 more quarters before that.

Can you just give us more color on what's driving that and where that trend goes?.

Yes. The good news in Europe for us is that we're well represented by all the customers, and we're well represented by the various vehicle segments. So we serve fairly evenly both the entry-level vehicles and also the high-end vehicles.

On the high-end vehicles, what we're seeing is buoyancy in the export markets for certain autos that sell outside of Europe. For instance, 3 Series, Audi A4 and A6, the Jag Land Rover product. So we're on a fair bit of product to get exported. We are seeing the high end continue to increase content. We're seeing the low end continue to increase content.

Electrical products are benefiting from the additional complexity in features in those vehicles, and that's helped us as well. So it's just a general trend of increasing the complexity of the autos..

Got it. Just finally, your EPMS margins are now higher than some of your competitors that are much larger than you, which is most impressive. At the same time, the Electrical space remains fairly fragmented as well.

So is there room to further expand these EPMS margins if you guys kind of maybe consolidate some of the smaller players in the space?.

Sumitomo, Yazaki, Delphi and us. We are, however, less capital-intensive because we have a little bit higher proportion of wiring. So from our standpoint, we start returning in excess of our cost of capital at about 6%. So if we set the margin expectations too high, Ravi, I'm worried that we'll turn our back on profitable growth.

So for our standpoint, we think around 12.5%, we can continue to grow the business, make a nice return for our shareholders, penetrate the market, and that's good business. So I don't think you'll see a margin expansion beyond kind of that range in the long term..

Your next question comes from the line of Daniel Galves with Crédit Suisse..

So can you talk a little bit about how you're thinking about your leverage and your leverage targets pro forma to the Eagle Ottawa acquisition? And are you -- by saying 100% financing in the estimates, is that what you've decided on? Or is that just an assumption?.

That's -- we have not decided on it yet, but we've looked at the capital markets. They continue to be relatively attractive to us. Our leverage target is, on a gross level, about 1.5x. If we were to fully finance the Eagle deal, the resulting leverage would be about 1.2x. So it still would be fairly well under our target leverage of 1.5x..

Okay, great. Appreciate it. And then one other question on North America. Pretty strong production growth in the quarter, but Ford was down 7.5% year-on-year, and I know some of the key platforms for you guys were down quite a bit.

Did that impact you in the quarter? And maybe what were the offsets?.

Well, I think in the quarter, Ford in -- specifically, and I think as you look to the 2% growth in Electrical in the quarter versus the industry, Electrical specifically was more impacted by some of the Ford declines on the Focus, for example, in North America and Europe and some other vehicles in the Ford lineup.

The Seating business wasn't as affected. K2XX had a strong quarter year-over-year.

I think in the fourth quarter, as you look at the forecasts, some of the similar things are out there, and that Ford volumes looking -- look to be down in the fourth quarter year-over-year as well, which, again, I think affects us or would affect us more on the Electrical side than the Seating side..

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

Great. Any color on how much the euro actually impacted your guidance for this year? And also any color on the decrementals that we should expect because aren't your margins in Europe a bit lower? So it's actually a little bit smaller than your overall margin from the conversion factor.

Is that correct?.

I think on a full year basis, that the euro, because it was stronger earlier in the year, is not going to have a significant impact on the full year. It will have in the fourth quarter as our assumption in the fourth quarter is at $1.26 euro, and I think in the fourth quarter last year, it was $1.36.

So it is going to have some bearing in the fourth quarter. In terms of the impact on earnings, as you look at the profile of the business in each of the segments, the earnings are a little bit higher in Electrical.

So as you translate the impact of a devalued euro, it's going to have a greater impact on the Electrical margins in the quarter versus Seating, albeit our Electrical business is smaller than Seating in that segment -- in that region..

But when I'm thinking of Seating, I always thought you were more -- you were less vertically integrated in Europe. So your overall margin in Europe was a bit lower. Is that....

Yes, in Seating, it's a little bit lower, and Electrical's a little bit higher, Colin..

Okay. So when the -- the conversion impact is not as -- the impact is smaller than your overall gross margins. It's a little bit less of a headwind than on the sales side..

Yes..

Okay. And are there any synergies between the Electrical and Seating business? There's a lot of chatter about potentially splitting the 2.

Is that something you'd ever consider longer term?.

No, there's a lot of synergies between the 2 groups especially as the seat becomes much more intelligent and requires a lot more programming in it and electronics in it. So there's starting to be more and more product synergies between the 2.

And then from a management and infrastructure standpoint, there's a lot a flow of talent back and forth as you would expect.

Everything from administrative to even engineering, materials management, plan manager, a lot of the protocols and the disciplines are very, very similar between the 2 businesses because at the end of the day, what we're doing is moving a complex supply and component chain to low-cost assembly with precision quality, and those disciplines hold true in both segments.

We also share, in many cases, a regional infrastructure for sales and engineering-type offices. So there's no plan to split them. And if anything, I think the products are starting to merge in certain cases as the seat becomes much more intelligent, if you will..

Okay. And one last question. You mentioned earlier that you're seeing progress in the North American metals business.

How far are you along? Is that finally back to the normal margin? Or is there still more margin upside? I mean, so is that going to be a benefit into next year? Or is it kind of already been fixed at this point?.

Well, it's not at the -- it is solidly profitable, and it made a really nice improvement in the third quarter as they digest a lot of growth and start kind of relaying out their shop floors to be more efficient.

It's still not at the level of margin that we would expect for a business that's this capital-intensive, and we do expect the performance to improve heading into next year. So it is an opportunity to help us get to the target margins overall..

Your next question comes from the line of Richard Hilgert with Morningstar..

Most of my questions have already been asked. So the one that's still outstanding, just wanted to circle back to Eagle Ottawa. You mentioned in your comments about a $20 million cost savings from synergies with the company. And I'm curious to know, on the face it doesn't seem like that would be an economies-of-scale thing.

Is that more of a back-office thing? Or how was it that you would achieve some cost synergies with Eagle Ottawa?.

Well, we don't view Eagle Ottawa necessarily as a consolidation or your typical acquisition play as it relates to integrating into Lear because for us, the value of Eagle Ottawa is not only their book of business and their manufacturing capabilities, but it's also the senior leadership team and some very unique design capabilities.

Lear does have an existing leather business, although it's very small. It's about $100 million in annual revenue. So the base that we're looking to grab the synergies from is relatively small. So you're correct in that manner.

We look at the synergies coming from facility consolidation, from being able to buy leather hides better and back-office transaction processing and leveraging some of our indirect buy where if we make them part of a bigger reorganization. I think we can improve the cost structure from that regard..

Our final question comes from the line of Joe Spak with RBC Capital Markets..

Just one quick point of clarification on -- when you're talked about the revenue by region for Eagle Ottawa.

That's by where the vehicle is produced, not necessarily where the vehicle ends up?.

No, that's where we sell. That's our origin of sales..

Okay. So my guess is....

Which, by the way, is typically -- it's typically the market that the car is produced in, but that's where we -- that's where it's produced. Now where it gets -- where it may be a little bit different, North America is being produced in Mexico largely, and some of those cars are produced in the U.S..

Okay. You -- Matt, you talked a little bit about the Seating margins as we head into '15, and I think you said low 6s. Can you just clarify, is that inclusive of Eagle Ottawa? Or is that sort of the base Seating business? And then related to that, I mean, in the past, you've talked about over time long-term Seating margin in that 6% to 6.5% range.

I was wondering if you had any updated thoughts inclusive of Eagle Ottawa..

Right. No, it excludes -- that completely excludes Eagle Ottawa. What we anticipate is once we do close, we'll provide updated kind of range of earnings including Eagle Ottawa. Eagle Ottawa runs at a target margin or executes a margin that's slightly higher than the target for Lear.

We'd expect it to improve margins, if you do the math, by maybe 20 basis points thereabouts..

Okay, that's helpful. And then the last question, sorry, out of curiosity. There's a supplier yesterday who mentioned some negative mix impacts in China. It looks like at least your Asia sales were still up pretty nicely in the third quarter. I was wondering if you saw any impact in that market there..

No, no. It's been pretty -- actually, it's been pretty stable. No, we haven't seen that. With that, that concludes the call, and probably who remains on the call are the Lear employees. I want to personally thank all of you on behalf of the senior leadership team. It's not luck that generates these type of results.

It's hard work and dedication, and I want to thank you for both. Thank you very much..

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