Lear Corp (LEA) 2014 Q4 法說會逐字稿

Good morning. My name is Keith and I will be your conference operator today. At this time, I would like to welcome everyone to the fourth-quarter and full-year 2014 earnings conference call.

(Operator Instructions)

Ed Lowenfeld, Vice President Investor Relations, you may begin your conference.

Thanks, Keith. Good morning, everyone, and thank you for joining us for our fourth-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 www.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, Jeff Vanneste will discuss our 2014 financial results and 2015 outlook. Then, Matt Simoncini will provide some closing comments. Following the formal presentation, we will be pleased to take your questions.

Now, please turn to slide 5, and I'll hand it over to Jeff.

Thanks, Eddie.

Lear finished 2014 strong with another quarter of higher sales, core operating earnings, and free cash flow. Sales in the fourth quarter were $4.5 billion, up 7% from a year ago, and core operating earnings increased 35% to $280 million. Margins were higher in both of our business segments.

In November, Lear took advantage of favorable conditions in the debt markets to increase liquidity and reduce our borrowing costs. We increased and extended the maturity of our revolving line of credit and issued debt to pre-fund the Eagle Ottawa acquisition and the anticipated March 2015 redemption of our remaining 8.125% senior notes due in 2020.

For the full-year sales of $17.7 billion and core operating earnings of $1.05 billion were up 9% and 25%, respectively, both significantly in excess of the increase in global industry production of 3%. The significant increase in earnings per share reflects our strong operating performance. 2014 marked the fourth consecutive year of strong cash flow generation and significant return to shareholders.

Slide 6 shows vehicle production in our key markets for the fourth quarter and for the full year. In the quarter, 21.8 million vehicles were produced globally, up 1% from 2013. Production increases in China and North America were offset by lower production in Japan, Brazil, and Russia. For the full year, global vehicle production was a record 85.6 million units, up 3% from 2013. Our major markets showed increases with China, North America, and Europe up 9%, 5%, and 3%, respectively.

Slide 7 shows our reported financial results for the fourth quarter and full year of 2014. In the fourth quarter, pretax income before equity income, interest, and other expense was $257 million, up $88 million from a year ago. For the full year, pretax income before equity income, interest, and other expense, was $929 million, up $193 million from 2013.

Equity income was $7 million in the fourth quarter. Excluding a nonrecurring item at one of our joint ventures in 2014, equity income increased by $1 million as compared to a year ago. For the full year, equity income was $36 million. Excluding the nonrecurring item, equity income increased $3 million in 2014, primarily reflecting higher profitability at our joint ventures in China.

Interest expense was $20 million in the fourth quarter, up $4 million, primarily reflecting the impact of the $650 million bond issued in November of 2014. Interest expense was $68 million for the full year, down $1 million from 2013. Other expense was $17 million in the fourth quarter and $74 million for the full year.

Net income attributable to Lear was $262 million in the fourth quarter and $672 million for the full year. The fourth-quarter and full-year of 2014 were impacted by tax benefits primarily related to the release of valuation allowances in several foreign subsidiaries.

Slide 8 shows the impact of nonoperating items on our fourth-quarter results. During the fourth quarter, we incurred $24 million of restructuring costs, primarily related to plant closures in Europe and census-related actions. Excluding the impact of these items, we had core operating earnings of $280 million, up $72 million from 2013.

The increase in earnings primarily reflects favorable operating performance, increased production on key platforms, and the benefit of new business. Adjusted for restructuring and special items, net income attributable to Lear in the fourth quarter was $183 million, and diluted earnings per share was $2.27, up 46% from 2013.

Slide 9 provides a summary of free cash flow. We generated $372 million of free cash flow in the fourth quarter and $503 million for the full year.

Slide 10 provides a snapshot of our cash, debt, and pension and OPEB obligations. We have a very cost-effective capital structure with minimal debt maturities for the next five years and relatively low borrowing costs. At the end of 2014, we had cash of approximately $1.1 billion and debt of approximately $1.7 billion. In addition to the cash shown on the balance sheet, we also had $600 million in restricted cash included in other assets, which was used to fund the Eagle Ottawa acquisition that closed on January 5 and will be used for the anticipated redemption in March, 2015 of our 2020 notes.

Our unfunded pension and OPEB liabilities are $407 million as of the end of December, which is up from a year ago, reflecting a lower discount rate in 2014, partially offset by strong asset returns. Substantially all of the US plans are frozen or at closed locations with no future benefit accruals.

We are committed to maintaining a strong and flexible balance sheet with sufficient liquidity and investment-grade credit metrics. This strong capital structure provides Lear with significant financial resources and flexibility which will allow us to invest in our business and drive profitable growth.

Slide 12 shows our industry production assumptions by major market for 2015. Global industry production is forecasted to grow by 2% from 85.6 million units in 2014 to 87.6 million units in 2015. Production in China remains strong with production expected to increase by 8%. In Europe and Africa, production is expected to be flat with 2014, and our production forecast in this region is down slightly from initial guidance primarily reflecting lower production in Russia. Production in North America is forecast to increase by 3%.

Since we provided our initial 2015 financial outlook on January 13, the euro has weakened further, and as a result, we are updating our guidance assumption to reflect an average euro of $1.15. Despite the change in the euro assumption and some changes in production forecasts in certain markets, we are still comfortable with our overall financial outlook in 2015.

Slide 13 shows our 2015 outlook for adjusted margins for Lear, as well as for both of our business segments. We expect total Company margins to increase to approximately 6.4% in 2015, up from 5.9% in 2014. In seating, we expect meaningful margin improvement to the 6% to 6.5% range, including the favorable impact of approximately 20 basis points from the Eagle Ottawa acquisition.

Our electrical business is expected to continue its trend of strong operating performance. We expect 2015 electrical margins to be in the range of 12.5% to 13%. Both our business segments continue to generate strong cash flow and at our present mix of business provides returns in excess of our cost to capital.

Slide 14 outlines are detailed financial outlook, which is unchanged from what we announced earlier this month. Lear expects net sales to increase to $18.5 billion to $19 billion primarily reflecting the impact of our sales backlog and the Eagle Ottawa acquisition partially offset by the negative impact of foreign exchange. Core operating earnings are forecasted in the range of $1.175 billion to $1.225 billion, up from 2014, reflecting primarily higher sales and improving margins.

Interest expense will increase in 2015 reflecting the new debt incurred to finance the Eagle Ottawa acquisition. The increase in depreciation and amortization is also primarily related to Eagle Ottawa and includes the estimated impact of purchase accounting.

Our effective tax rate in 2015 is expected to be approximately 30%. However, given the benefits of our tax attributes, we expect the cash tax rate to be approximately 20%. We expect the cash tax rate to remain below the effective rate for the next several years. Restructuring costs are expected to be approximately $80 million, reflecting footprint actions, as well as census-related and other cost reduction actions. Free cash flow for 2015 is forecasted to be approximately $575 million, which represents a free cash flow yield of more than 7%.

Slide 15 provides a summary of our sales backlog for 2015 to 2017, which stands at $2 billion, with approximately 75% in seating and 25% in electrical. We expect strong growth in 2015 and 2016 with $700 million and $850 million respectively of new business coming online.

For 2017, there are still programs we are actively quoting on, so we would expect that number to increase from $450 million as those new programs are awarded. In addition to the backlog shown on the slide, we have $725 million in backlog in our non-consolidated joint ventures. Including these new business awards, our total backlog would be over $2.7 billion.

Now, I'll turn it over to Matt for some closing comments.

Great. Nice job, Jeff. Thank you.

As you can tell from our recent financial performance, our balanced strategy is working. 2014 was our fifth consecutive year of higher sales and earnings, and we're projecting our sixth year of improvement in 2015.

We also continue to generate strong free cash flow. Over the last five years, we've generated over $2 billion in free cash flow. In seating, our sales and margins are growing. Eagle Ottawa provides customer and geographic diversity, improved profitability, and a platform for additional sales growth. It will also enhance our ability to differentiate our seats by strengthening our industry-leading seat design capabilities while improving overall comfort and craftmanship of the seat.

In electrical, we are uniquely positioned to take advantage of the transformation in this segment of the industry as increasing demand for features, fuel efficiencies, and connectivity is driving more electrical content than ever before. The investments we made in this segment over the last several years have resulted in market share gains and improved profitability.

Slide 18 puts our sales growth into perspective. Since 2010, Lear sales have grown at an annual rate of 10% per year, which is more than twice as fast as the global industry production. Both of our business segments are in pacing with the industry growth rates reflecting the investments we made in the business and key industry trends.

Slide 19 highlights some of the major trends that are impacting the auto industry. OEMs increasingly are utilizing global platforms and direct-component sourcing. Lear is well-positioned to benefit from these trends with our low-cost global footprint and full component capabilities in both product segments.

In addition, vehicles are becoming more complex with added features as consumers are demanding additional content and connectivity. Furthermore, vehicles are safer than they've ever been, and advanced driver assistance systems are becoming more prevalent. Self-driving cars will require even more sophisticated electrical architectures and distribution systems.

A seat is also an active part of the vehicle safety system. Lear has been an industry leader in developing safety features in seating with innovations such as the active head restraint and seat structures that withstand collision impact well in excess of what is demanded by regulatory agencies.

Stricter fuel economy and lower emission requirements continue to drive electrical content growth. We believe that these trends will continue, given the strict CAFE requirements and environmental concerns. Traditional power trains are requiring more signal management to achieve better fuel economy.

We also expect alternative energy vehicles to continue to penetrate the market, and these vehicles will have higher electrical content. China has become, and we expect it to remain, the world's largest automotive market. Lear has a major presence in China with 75 facilities and more than 20,000 employees and full engineering and testing capabilities. We have joint ventures with all the leading automakers, and we can take advantage of the strong relationships to support continued growth.

As I mentioned on a previous slide, our electrical business is benefiting from transformation in the industry as consumers demand more features and connectivity. Slide 20 shows some of the drivers of this increasing content.

Electrical content growth is increasing the complexity of every aspect of the electric architecture as more and more signals need to be managed. As more circuits are required to support the added content, it becomes more important to reduce weight by working with new materials and developing more efficient architectures.

Connectivity requirements are growing as vehicles increase communication with cellular networks, satellites, with other vehicles. In the grid, vehicles are effectively becoming a smart device on wheels. Software capabilities are becoming increasingly more important to manage the increased complexity and highly sophisticated architectures.

All these trends play to our strengths. We're an industry-leading, electrical distribution product portfolio with significant experience in designing and manufacturing complex electrical architectures, software expertise and a leading position in junction boxes, battery chargers, alternative energy technology. We're well positioned to take advantage of an expected 5% content growth in this segment for the foreseeable future.

Slide 21 shows Lear's total shareholders' returns as compared to our peers and the S&P 500. The strategy we have been following has improved our product capabilities, our competitiveness, and created value for our customers, and our shareholders. Lear's total shareholders' returns in 2014 and for the last five years exceeded those of the peer group, as well as the broader market.

I continue to believe this is a great time to invest in Lear. We have the best team in the industry, a focused strategy that is delivering results, strong market positions in both product segments, a footprint that is second to none, a well established and growing position in China, and strong financial position with a sales backlog of $2 billion. Our 2015 outlook reflects continued sales and earnings growth in excess of the industry production with strong cash generation. This will allow us to continue to invest in the business and return cash to the shareholders.

Now, we'd be happy to take your questions.

Itay Michaeli, Citi.

Congratulations. Matt, maybe I will just start off where you just ended up. It seems like revenue outperformance has become something of a norm with Lear both in electrical and in seats. If I do my math correctly, I think even on your 2015 revenue guidance, excluding the backlog, you are looking to outperform global production. As you look at the business, three to five years out, how do you look at the sustainable revenue growth of the entire Company -- either in absolute terms or relative to the industry?

I think we can continue to outpace the industry production in both product segments, Itay, because of the trends that we talked about. Global platforms, direct component sourcing, the content growth in the electrical side. Our footprint allows us to participate in this and take shares. As car companies are looking to have standardized suppliers on their global platforms, it's important that you can do the product the same way in every automotive-producing region in the world.

If you look at Lear in seating, we are one of two independent seat providers that can do that with all the components. In electrical, we are one of four. So, I think it plays into our strength.

I think that car companies want to know that a company is committed to being in the business when they're sourcing program that might be three to five to eight years from the time of award, and I think that plays to Lear's strength as well. I think this trend continues for the foreseeable future.

Great. And then, just on electrical margins, now two consecutive quarters north of 13%. Maybe just an update on the moving pieces into 2015? What could cause you to be at the 12.5% area versus the 13% in your range? Or, maybe potentially even higher?

Probably the biggest thing, Itay, is always the mix of the products that you're on. Each one has its own financial footprint. It's important to note in this business segment when we perform in excess of 6.5% to 7% OI, we're having returns well in excess of our cost of capital. So, the business continues to perform well.

If we get the right mix and are able to get the efficiencies that we're driving for in our facilities we could see the higher end of the earnings margin range, if the mix holds. If we get a little bit weaker in some of our key platforms then you see a little bit south of the margin range.

But overall, we're very happy with the progress that the team is making in that segment. We'd expect the performance to continue, and we think at that 12.5% to 13% range, we can continue to penetrate and gain some pretty good business.

Great. And then, just lastly -- quickly, any updated thoughts on commodity costs and how that might be impacting you in 2015? Are you seeing any tailwinds there? Maybe just remind us of what the pass-throughs and lags might be? And, that's all I had.

Yes. Commodities right now are providing somewhat of an offset to what we're seeing in the euro. And, if they remain at this level, both copper, steel, and petroleum and petroleum-based chemicals, I think that would provide a little bit of a tailwind and a benefit. Jeff, can you take them through the actual indices?

Yes. Just to reiterate -- on copper, we buy about 150 million, 160 million pounds of copper a year of which commercial agreements cover about 85% of that buy. So, our risk there is about 20 million to 25 million pounds, and we typically buy forward on that risk, and we're bought forward probably just slightly into the second quarter. So, to your point, we would anticipate seeing on a year-over-year basis some tailwind with respect to where they see those prices now.

Steel is a bigger buy for us, but our risk there is slightly lower in terms of pure dollars. Again, steel, maybe not so much as copper, is down, but we should see a tailwind as it relates to what steel is forecasted to be right now. But, not as significant maybe as the copper.

That's very helpful. Thanks so much guys.

John Murphy, Bank of America Merrill Lynch.

Just maybe a quick follow-up there. Your guidance didn't change much, yet you changed your assumption on the euro exchange rate from $1.20 to $1.15. Is that really just a function of raws being an offset? Or, is there something else that you're able to offset that headwind with?

It was raw, John. It was also some modest changes in the production on certain key car lines. As IHS updated their January numbers, we looked at the releases and the inventory levels, so there was a few other things. It was the performance in the first quarter in certain cases we think is very sustainable heading into the year. So, we took it all into consideration, and we're very comfortable with guidance.

And then, Jeff, you guys have been very proactive, and this is Matt, as well, on the capital markets activities in front of transactions and maturities that would be advantageous to take out. I'm just curious if there's anything else you see on the horizon in the near term or the long term that are going on in the capital markets which might provide opportunity to really set up for the long term?

Well, I think with respect to what we've done -- let's say in the past couple years in terms of enhancing liquidity, we're at a point right now where I think we're comfortable with our current liquidity. We upped the revolver a couple of months ago. We pre-funded Eagle.

We had secured some financing to take out some bonds that from a financing perspective made a lot of sense. There's no bonds in our current future that at least make sense to take out given the length of time between then and now, because of the rate structure on those current bonds. So, I think we're pretty well set. Absent some acquisitions, and we'd have to take a look at those individually. But, I think from a financing perspective, we're pretty set for a while.

And then, if we think about more recently you have been executing incredibly well across the business, created some great upside surprises. And, a lot of that is micro, it's not just a function of volumes. Is there anything in -- I'm thinking way down the line here. Is there anything that you're doing in your operations that will help you when we eventually see a downturn?

And, I'm not trying to portend this happening in the next year or two. It's way down the line, but just trying to understand about your flexibility if volumes start turning in the other direction, particularly in North America. Because that's a big concern we hear from investors.

First and foremost, John, it starts with the footprint and making sure that your component capacity is in low-cost and lower cost regions in components, and that you're making sure you're not adding excess capacity. If there is a pullback, we will take advantage of consolidating into the lowest-cost facility. So, first and foremost, it's always that.

Secondly, it's to have a plan, a contingency plan, and we always have that, and we're always looking at our cost structure -- both our fixed cost structure, our variable cost structure to look for opportunities where in the event there was a pullback that we could move very quickly. And, I would tell you that it has been a hallmark and a staple of Lear to perform extremely well in tough times, and I would expect that to continue in the event we did see a market correction.

I also think with our balance sheet and the flexibility that we have with the work that the team has done to increase our flexibility and our liquidity, we could take advantage of a downturn to maybe consolidate some very good assets at a reasonable price.

Sounds like great stuff. Then just lastly, as you push more into electronics, I'm just curious about the asset intensity there. And, as you get bigger and gain even more scale over time, will the asset intensity decline and will returns increase to levels that might be higher than what you're at right now or have been historically?

I think, obviously, higher intensity -- asset-intensity businesses are upfront and investment businesses demand higher returns. With our business, we have a nice balance right now between electrical distribution, which is a lower asset intensity than maybe boxes or terminals connectors. So, I think we're really happy with the margin profile. If we had -- if we expanded to something that's more capital-intensive or engineering-intensive, we'd expect to get the increase in returns.

Right now, we really don't see anything at this point that's on that horizon. We think the mix will continue. We're very comfortable playing in the electrical distribution and signal managing space. I think our software capabilities on the junction box plays extremely well to managing the signals.

So, I don't really see a dramatic change in the asset intensity, John. But, if it became more intense, then we'd probably have to revise our margin profile higher.

Okay, great. Thank you very much.

Patrick Archambault, Goldman Sachs.

Really just two on seating. First is, I know this has been asked before, but with your other major global competitor still seeing a fairly cautious amount of content growth, i.e., lack of content growth as they're paring back the contracts they're going after. How much is this an opportunity for you? And, is it something that you're seeing in your backlog as a tailwind both in terms of content and profitability?

And then, I guess I'll just as the second question. Is just on how you see the landscape for seating between JIT and assembly business versus vertically integrated? How is the industry moving? And, what are the profit implications for you guys of that?

Starting with the competitive landscape with the uncertainty of the players in the space, if you will. It's provides an opportunity. It's hard to quantify what it is. There's still other firms out there that are able to take on some of the programs. So, it's a very competitive space, as you would expect.

But, when there is uncertainty as far as ownership and who is going to have a company and the financial viability on programs that are sourced three years before start of production and then run typically five to seven years after that. It is a concern with automakers to know who is going to be owning a company that's ultimately going to be doing the production. And, if all things are equal, then that's obviously a deciding factor.

As far as the breakdown between -- and the evolution of the seating business. I would tell you that they're looking more and more at the business from a breakdown of assembly separately from the component sourcing -- the direct-component sourcing. And, what it means is you really need to be the leader in each of the key components. You need to have core competency in all the components because that ultimately helps you to design the best seats in the world, and it also allows you to provide a certain level of comfort and craftsmanship that the customers expect.

The seat business on just-in-time assembly itself is actually pretty asset-light, and the margin profile is a little bit lower because of that. And, it is still a very good business even when it's in the low- to mid-single-digit margins because of the returns that typically come through on a program.

When you're cutting and sewing a seat cover, it's fairly similar. Asset intensity, it's just-in-time assembly, and that would require a lower margin. The flip side is the foam and the structures business and the recliners and the tracks that they need. They demand a higher margin. For us, we take that all into consideration when we're quoting.

We think the seat business is an outstanding business. It's continuing to grow. Seats are getting more and more content. They're becoming smart, if you will.

People touch, feel the seat when they come in. It's a key decision-maker or assists in the decision-making to buy a car. And then, in the end, it's also a safety product because you're strapped to it.

So, we like the segment. We like the seating. We like the components. We're going to continue to invest in it, and I think we're going to continue to post really nice returns for our shareholders.

Okay, thanks Matt. Appreciate the color.

Joe Spak, RBC Capital Markets.

Jeff, maybe just on FX, is there or would there be any transactional impact? I guess I'm specifically thinking in the electronics business maybe where some of that stuff is shipped a little bit more.

We operate in a number of different currency pairs between the euro and others, and we have hedges in place that reflect the mitigation of a good portion of that risk, but there is always some transactional exposure that you will have. We do a pretty good job, I think, of trying to mitigate that through the various hedges we have.

Matt, I guess I'm just wondering if you could update us on some of the progress in South America where I think you showed some progress through the year. I want to get update there, especially considering the environment down there.

It's a tough environment, that's for sure. We've seen production decreases in the Brazilian market, in the South American market overall. So, with the currency devaluation, wage inflation, and production increases, it's a really tough environment not just for us but for our customers. Which ultimately makes some of the commercial remedies that we need harder and harder to get.

We expect 2015 to continue to lose money in South America, and that has been taken into consideration in our guidance, although we expect the losses to narrow. The good news for 2014 is while we continued to lose money in the fourth quarter, we were able to hold the losses constant even with a significantly lower sales base. So, we're taking the appropriate actions to restructure our footprint.

In the meanwhile, some of our product and program portfolio is changing over, and we think that will help with the profitability improvement there, but we don't expect it to be profitable in 2015 in our guidance. But, we are making progress in what is a very, very challenging market.

Okay, great. Thanks for the color.

Dan Galves, Credit Suisse.

On the cash return side, Q4 cash returns annualized at higher than the free cash flow guidance for 2015, and it looks like you still have some excess liquidity above your targets. Is there -- do you have any update on how that cash return should trend in 2015 relative to free cash flow?

And then, are there any other opportunities maybe in the seating business? Whether regionally or component-wise for inorganic growth?

Let me work in reverse. We're pretty happy with the component capabilities that we have in seating. I don't really see anything out there that's all that compelling or that is needed in any way. Of course, we're always looking for chances to invest in the business or opportunities to invest in the business, but we're pretty happy with our capabilities in seating both from a component standpoint and a geographic footprint.

On the electrical side, I think there's some things we can do. We're actively out there looking for the right strategic fit than can enhance our ability to move signals around the vehicle and maybe improve our ability to write software and help manage the crush of data that's going through the vehicle. Our priority is always to invest in the business first and take advantage of the market opportunities.

From cash return to shareholders, I think we have the flexibility to do both. Right now, for modeling purposes, I'd probably model a consistent type cash return. I know that the Board is constantly at every meeting discussing the pace of the buyback. I think we've been an industry leader in returning cash to shareholders and balancing our capital structure.

I don't think anybody -- we were early and big in our return of cash to shareholders especially when you take into consideration the dividend. I'd expect it to be a topic at the upcoming Board meeting, and I expect the pace to be meaningful.

Thanks. That's helpful. And then, on the product side. Appreciate the highlighting of the trends in electrical. Are you seeing this type of growth in forward-quoting activity? I think you mentioned a 5% content growth number.

How should we think about that? Is that what a new product has versus the product it's replacing? Or, is that an annual growth in the overall electrical content globally?

Kind of both. It's always easier to do it with a new product design, Dan, as a launch. Typically a new design or a refresh will have additional content which will drive it, but even in vehicles that are in the midst of a production run -- they will typically favor higher-contented vehicles in order to keep up in the competitive landscape with their competitors' product. So, you see a content growth in that segment in both new products and in existing product that's on the road, and we'd expect that trend to continue.

Are there any good examples of a particular product -- you don't have to name it. But, what type of electrical content growth it has when it does refresh?

I'll tell you what. I'd like to answer it this way, if you will. If you can, think back to the Ford Focus when it originally started hitting the marketplace and the type of features and power features that it had. If you look at the modern-day Focus between the connectivity, the driver interfaces on the infotainment system to the full-power windows, seats -- it's just an incredible amount of content growth.

And, we're seeing that level of content growth in pretty much all the platforms. An entry level A and B platform in emerging markets will eventually evolve into the type of content that consumers are demanding in their cars, and we'd expect that to continue.

Okay thanks. Appreciate it.

Colin Langan, UBS.

Great. Thanks for taking my questions. You gave the backlog number. It's 75% seating so a bit more balanced than it had been historically. Any color on how much is assembly-type business versus component business? Because I believe some of your competitors are talking about shifting away from assembly? And, does that mean some of that may roll on at a longer term -- a lower margin going forward if it's more assembly-focused?

We expect the backlog, Colin, to come in at around 10% incremental. That's about the average on new business. 10% incremental margins from a variable standpoint, that has been the history of it. The business is largely still, I would say, two-thirds assembly for us.

We think the margin profile -- I think the backlog will help us meet our margin profile for the business segment overall as we move into the mid-6% type range of OI. So, I don't really see it changing our targets in that segment at all.

And so, you said two-thirds, is that consistent --.

Roughly two-thirds.

Is that consistent with your current -- so, today though your current business --. (multiple speaker)

Yes, it's consistent. It's consistent with what we have now. I don't see a real change at all in the makeup of the business from assembly to component due to backlog, period.

Okay. You highlight directed sourcing as an opportunity, but is your share in components the same as your share of assembly? Because I would have thought that actually could be a risk if you're not as strong on the component side?

No. I think it's about the same at this point, but I think the investments that we've made in the seat cover business, specifically with Eagle Ottawa and Guilford and some of the footprint we've put down in Northern Africa and Eastern Europe and Asia on the sewing of the covers gives us a competitive advantage, and we'll continue to leverage that.

That's probably the prime component example that I have where I think we can continue to penetrate. I think our structures business is outstanding -- tracks and recliners and seat frames, and we've got a really nice footprint in Asia as well as Eastern Europe to do that business. And, we've made massive investments in Mexico. So, I think we're in pretty good shape with our component business, and I think it's a huge opportunity.

Just one last question. Can you give any color on the benefit if we see a shift towards trucks given the lower gas prices? Obviously, I imagine on the seating side that that could be a pretty large opportunity.

Well, we like large vehicles, and we like large vehicles that have three rows of seats and three rows of Lear seats. From our standpoint, we think it's an opportunity. We believe those vehicles support a lifestyle that other vehicles can't, quite frankly.

And, typically, if you look at a three-row, fully contented SUV, you're in a range of content that could approach on a seat alone about $2,000 worth of content. And, when it's Lear content, that converts at a nice clip that would be probably higher than the 10%, probably closer to 15%. So, that could be a real opportunity for us.

And, that $2,000, that would compare to what on like a compact car? Just so I get a range?

I'd think a better comp might be a pickup truck. A pickup truck is anywhere around $1,000 to $1,200-type average seating, depending on if it's a crew cab or just a regular, one-row seat. On a compact, I don't know. Maybe $500 on average, AB platform, something like that.

Okay. Alright, thank you very much.

Ryan Brinkman, JPMorgan.

This is [Salman Kir] on behalf of Ryan. Thanks for taking our question.

Just firstly wanted to touch on seating. The year-on-year contribution margin when we look at this quarter was roughly 15% higher than what we've seen in for a few quarters now. So, anything to give us a sense of what has changed there this quarter? And, is this a more typical execution that we should expect in the coming quarters?

We continue to drive efficiencies in our plants, digest some of the product portfolio changes that we've incurred over the last 18 months. We are seeing improvements in our business in Europe. We continue to restructure our business. We continue to work with our customers on certain commercial remedies on some of the programs that may not make sense for Lear to do. I think you take it all into consideration, and we've made a nice improvement in that segment. And, we'd expect that improvement to continue into 2015.

And, when you talk about the improvement going into 2015, as well. Are there -- can you give us more details on which particular regions will be driving that in 2015?

North America and Europe, mainly. Asia has performed well, and we expect it to continue to perform well. We'll make improvements in South America but will remain unprofitable in 2015, but we will get better as the year goes on and we see some product portfolio changeover.

There's literally thousands of inputs into that business segment as you would expect for a business of that size and global reach. We have more initiatives on efficiencies, and continuous improvement than you can count. I think just overall the business continues to run very well under what is an outstanding leadership team.

Great. And, just on the free cash flow for the full year. It came in quite a bit better than what you were guiding to back at the North American auto show. Like roughly $503 million, I believe, versus the $450 million, what you were guiding to.

Were those driven by one-off factors that will not repeat? Or, is it fair to assume there is some upward pressure on your 2015 free cash flow guidance?

No. I think that generally there's two main items that allow for it to come in higher. It is the timing of CapEx, which our guidance on CapEx was $450 million. We came in at $425 million, so there was a timing mechanism of that, and also the improved earnings of the Company. We came in a little bit higher than the midpoint of the guidance, and the combination of those two is really what led to the cash flow being roughly $50 million higher.

Okay, that makes sense. And, just lastly, touching on the backlog which you disclosed at the North American auto show, as well. Now, curious what the electrical mix there that seemed to come in a bit on the lower side than what most people would have expected. Just wondering if that's more of a capital allocation strategy? Or, it's available capacity for the next few years at your facilities? Or, is this -- and is there potential for that mix in electrical backlog to go up in -- probably in the next few years?

Yes, there is potential for it to go up. It's not a capital allocation strategy. It's a business that we're very high on and have been high on, and we think has huge opportunities. It's more just a function of timing of business sourcing, if you will.

If you look at what we've been able to do over the last four years, we had a compounded annual growth rate of 15%, so really it's more just timing of program awards as opposed to capital allocation. We'd expect through the upcoming year to see that number continue to increase.

Great, great. Thanks for taking my question.

Brian Johnson, Barclays.

I guess two questions. What changed on the operating side since you gave the guidance? And then, second, I want to talk strategically about the balance between JIT and components in the backlog and how Eagle Ottawa contributed to maybe more components?

Really nothing has changed in the operations. We had a strong quarter of digesting the growth that we had in seating and launching the products clean, so I can't point to one thing, Brian. It's just overall the business is running well.

We got strong results in Europe, as well as Asia. The North American team did a nice job. I think we made some nice improvements in the structures business in North America, so it's just a clean and strong fourth quarter and we'd expect that to continue.

As far as the backlog, Eagle added about $100 million to the backlog over the three-year period. The split, as I mentioned on an earlier question, is about two-thirds assembly, one-third component business, which is fairly consistent with the business overall, and we'd expect that to continue. I do think though that having the Eagle Ottawa, the premiere automotive leather manufacturer in the world as part of the Lear family will go a long way to increase the platform for additional growth. So, I'd expect that business segment to grow quickly.

And, there is a pretty big step-up from 2015 to 2016 in the seating line. What's broadly driving that? Second, is there going to be CapEx or expenses we need to think about to launch that higher volume of business?

It's really just timing of the business awards. We've had a nice run of business wins. We are continuing to penetrate the market. We've had a nice book of business with Audi. We've taken on the Renegade in Asia. We've got a seating program out of Jeep in North America, and these are business takeaways for us.

As far as the CapEx, we're pretty comfortable with the CapEx run rate as a percentage of sales. I don't see a dramatic change at all in any way on the amount of CapEx required to sustain this backlog. Jeff, we've been running at 2.5% --.

I think we came in in 2014 -- obviously, what we talked about on the timing of the CapEx, about 2.4%. I think our guidance next year is about 2.7% driven largely by the incorporation of Eagle which has a little bit of a higher percentage of CapEx to sales. We'll be in the 2.5% range in general.

Just final strategic question on seating. You talk a lot about a major competitors and the business wins you appear to be taking from them. Toyota Boshoku recently reorganized. Not clear if they are more aggressively going beyond their core customer. Are you seeing them vying for any of the seating business in the market that perhaps the other player is passing on or less aggressive on?

Yes. They are in the marketplace. Obviously, their strategy is to expand their sales beyond Toyota, and car companies have to come to grips on whether or not they want to source this competitor or not.

Okay great.

Rod Lache, Deutsche Bank.

A couple, just housekeeping things. First of all, I was hoping you could just confirm the effect of currency on the electrical division year-over-year at the $1.15 euro. Could it be something like $275 million, something like that? Just on the top line?

What we've said, Rod, in general for every $0.01 change in the euro, it has from an overall Company perspective about $50 million in impact to sales.

But, just trying to fine-tune the allocation of that between the two divisions?

We've got about half of our sales in that segment are in Europe, roughly half.

In electrical -- our electrical sales are in Europe, Rod. The number as a percentage or as a ratio is more meaningful for electrical.

Yes, okay. And then, also wanted just to confirm the effect of copper on the margins? For the pass-through, if we're doing the number right, it would reduce your revenue by maybe $85 million to $90 million but no impact on EBIT? So, that would be 20 basis points accretive to margin? Does that sound right to you?

I think, in general, you're right in terms of the sales line. There is some delayed impact to that, but the sales will go down to the extent that -- the selling price will go down because the cost is going down. So, sales will go down.

There will be some benefit on copper that's not related to the customer agreements for the piece that -- let's say, technically we're at risk for that has a lower cost base. There should be some combination of sales down overall cost down that provides some margin improvement.

I guess what I'm asking is just using your exposures, the 150 million to 160 million pounds and your direct exposure of 20 million to 25 million pounds, it looks like the pass-through mechanism just mathematically adds maybe 20 basis points and then the direct exposure might add 40 basis points to your electrical margins.

It seems like it's pretty accretive just mathematically, but you guys are guiding to flat margins. Maybe just what I might be missing from that, kind of high level?

It is accretive. You're a little bit heavy on the accretion side of it. But, it does benefit us. If it holds, we would expect it to continue to benefit us, Rod, through the year.

There's other things that go into it. Obviously, it's not just copper. It's the mix of the programs that you're on, the mix of wiring versus electronics in [Ps and Cs], the amount of upfront engineering you need to do on the programs that you are winning, pricing environments with the customer, efficiencies at the plants. Things like that.

We're comfortable at 12.5% to 13% margins. If we continue to perform, we will be at the higher end of the range, and if we get some headwinds, we will be more towards the middle or lower end.

Just switching gears. On the seating business, can you quantify what the rough tailwind would be from commodities on the year-over-year basis? When you look at steel and resin and things, just is there some high-level thoughts on that?

Steel -- it's a little bit harder in seating just because of the indirect nature of the component costs in steel since the vast majority of our steel exposure is through purchase components, Rod. But, we're probably looking at 10 basis points on commodities when you take that and petroleum products and transportation costs into consideration, it is probably about a 0.10.

Does that affect your productivity number that you have to provide back to the OEMs? Obviously, it's a pretty direct mechanism in any other division. But, how does that affect that?

They want the commodities and my firstborn. (laughter)

Not necessarily in that order. (laughter)

It comes into play. Obviously, if your costs are going down on commodities, they want to share in that benefit. Just like when the commodity costs go up, we ask them to share in those costs, so it's part of the overall pricing discussion, Rod.

My last one is just how should we be thinking about the restructuring that you took in seating and electrical in 2014? It was $92 million of restructuring and seating and $10 million in electrical, and then you guys guided to restructuring for this year. So, is that something that we should be thinking about in terms of mitigating price deflation? Or, is that something that also we should be thinking is -- contributes some lift to margins in 2015?

It obviously provides a benefit. What we've been seeing is in the early days when we started restructuring, we would get a payback typically of 2.5 years-type payback. A lot of that low-hanging fruit has been trimmed, if you will, Rod. It is going to provide a benefit. We need to continue to restructure the business.

And, as far as the terms of restructuring, we're maybe in the bottom of the eighth or top of the ninth as far as footprint actions. There is a couple thorny ones that we need to take care of, and I do think where you're seeing it is in the growth rates that we've enjoyed in both businesses. But, yes, it obviously provides a benefit when we do it. We would expect another 24 months, if you will, of accelerated restructuring, especially in light of some of the things we need to do to consolidate Eagle and a couple of the facilities in Europe and North America. And then, we'd get back to more normalized-type $40 million, $50 million range.

Okay, thank you.

Matt Stover, SIG.

Good quarter. Two questions. The first one is on seating. The outlook for a 50-basis increase in your guidance. If I'm penciling my numbers right, for Eagle Ottawa, you'd accomplish most of that with the inclusion of Eagle Ottawa. So, I guess -- am I overestimating that impact? Because I assume we should also envision margin improvement on the base business?

I think Eagle Ottawa should add about 0.20 -- 20 basis points to the margin profile, Matt. And, I think the base business is improving as well, so we expect to be solidly in the 6% margin profile this year.

And then, on the electrical side, that business has been stronger. As you guys identified, you've had strong top line growth, really nice margin reflecting that growth and the leveraging of your restructuring.

If I look at the backlog and I think about the secular trends, implying what 5% content growth. And, if I look at just doing the dopey math on the backlog, it implies 2.5%, 3% per annum of growth for the business, excluding industry volume, excluding pricing. So, how should we interpret what seems to be a slowing revenue growth, and what for the first quarter -- and as long as I can remember, you saw negative year-over-year comp in that business.

Probably the biggest problem -- or, headwind that we're facing in that segment is the exposure to the euro with roughly 50% of their business in Europe, and I think without that, you would see sales growth. I also think it's a cadence issue with the digesting a huge amount of growth that we've had over the last four years on an annual growth rate of 15%. This business as little as 2010 was barely $2 billion so we've more than doubled it in a four-year period.

I think it's really a cadence of program of awards. I do expect it to get back into a more normalized growth rate that will exceed the market production growth overall. So, to me, we are happy where we are at. I think the euro is disguising some of the growth that is happening in that segment, both from a content and program penetration.

Just to follow on to that, if we're bidding right now in the balance of this year, my guess is you probably can't add the 2017 -- the additions would be the 2018 and beyond?

Yes. There might be a small amount in 2017. It's mainly going to benefit 2018 and beyond. What we will see probably in the 2017 timeframe is some added content growth on existing platforms.

Okay. Thanks guys.

Richard Hilgert, Morningstar.

The prior question about revenue. It feeds into my question, and I think that this might help explain the revenue growth issue a little bit better. When you look at the $17.7 billion that you did in revenue this year, $700 million in net new business backlog, $1 billion in revenue from Eagle Ottawa, you should be coming out at roughly $19.4 billion in annual revenue, which would be quite a percentage bump up from last year. But, the guidance is $18.5 billion to $19 billion. So, I'm assuming that with the $0.01 change in the exchange rate to $50 million in revenue, that's what's bringing up the difference there? Is that correct?

That's a big part of it. Roughly $1 billion of it, and there's also in this business about 2% -- 1.5% to 2% in pricing that we work through every year with our customers. I think those are the two drivers. There's obviously mix issues as well that come in here. Hopefully, we don't sell to the industry as much as to specific car lines. But, the big -- you hit the biggest driver. It's the FX issue that's disguising the growth, if you will.

And then, question on the electrical margin. 12.8% this year. We saw quarterly run rate hitting over 13% in the last couple of quarters. Since you put the guidance at the 12.5% to 13% range, kind of splitting the difference as to where we're at for the full-year 2014.

Was the reason for going slightly below on the guidance to 2014 comparison also a currency issue? Or, have you just peaked out on what electrical margin can do?

No, it's not really a currency issue in that the currency is going to convert at the average price. There may be some modest, modest impact just because of the mix on Europe where we performed fairly well. All in all, it is the mix of the programs within it, in the portfolio.

I also think if things stabilize and we're able to achieve some the efficiency gains and monetize some of the commodity prices, we'll be in the higher end of the range. But, all in all, this is great business at 12.5% to 13%. And, we think at that rate we can continue to penetrate the industry, support our customers' cost initiatives, and grow the business. We're comfortable at this rate at this point.

Okay great. Thanks again.

Ravi Shanker, Morgan Stanley.

Just a couple of follow-ups. Another way of looking at the EPMS business would be, you guys have always been pretty focused on ROIC, maybe even over margins. And, just given the strength of margins in EPMS and what the top line has done in the last couple of quarters -- the slowdown to the one to minus one range. Is it time to maybe give up some of that margin and try and go after volume growth again? Or how are you guys thinking about that?

It's a good question. I don't think it's limiting our growth, our demand for acceptable returns and returns in excess of our cost of capital. I don't think that's necessarily the baffle on the growth rates, Ravi, at this point.

I think we're aggressive but disciplined in our approach to the market. I'm comfortable that the backlog when we do win a new businesses is going to provide the type of returns that our shareholders would expect us to provide. At this point, it has not been a reason why we have not won a program.

But, is that something you chose to do? It's something you can do, right?

No, I think one of the focuses of the organization overall is to make disciplined investment decisions, whether it's restructuring capital, acquisitions, or even new programs. And, we do keep an eye on return on investments.

That being said, I don't think that's the reason why growth is impacted because we demanded a fair return on our product investment. I don't think that's limiting it at this point. We are aggressive in the marketplace, but very disciplined in our demand for acceptable returns.

Understood. And just one follow-up. I apologize if I missed this earlier. Can you talk about the trajectory of seating margins through the year? This year, you started in mid-5%. Then you said you end up close to 6%, and that's exactly what you did. How do we think about next year?

I think that it will improve steadily through the year. There is seasonality. First quarter and third quarter are always usually pretty tough quarters. First quarter because there's usually a lag before the OEs really ramp up their production and also starts a new year of price-downs with your customers before you have a chance necessarily to get the efficiency gains and the supply chain reductions. So, first quarter usually starts off a little bit tough.

Second quarter is usually a pretty good quarter based on production. Third quarter has the summer shutdown season, especially in Europe, so that's always a difficult quarter. Then, we usually finish strong. From our standpoint, overall, we expect to make improvements in the first half and then continue those improvements in the second half. So, steady progress. Not a whole lot different than how we handled 2014.

Very good. Thank you.

There are no questions at this time. I'll turn the call back over to our presenters.

Great. Thank you. At this point, it's probably the Lear team. I want to start by welcoming the Eagle Ottawa leadership team and the employees there to the Lear family and tell you all how very, very excited we are to have you as part of our family, the Lear family.

And, for the Lear employees that are on the phone, thank you very much for your hard work and dedication. As I said in my e-mail earlier today, these results just don't happen. They happen when we're focused, and we make sound business decisions, and we work very, very hard work. So, on behalf of your senior leadership team, I want to thank each and every one of you. And, I want to give a special thanks to the finance organization for their work in preparation of year-end and this call. Thank you all. Now, let's get back to work. (laughter)

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