Lear Corp (LEA) 2016 Q4 法說會逐字稿

Good morning. My name is Angel and I will be your conference operator today. At this time, I would like to welcome everyone to the fourth-quarter and full-year 2016 conference call.

(Operator Instructions)

Thank you. Joel Elsesser, Director of Investor Relations, you may begin your conference.

All right. Thanks, Angel. Good morning and thank you for joining us for our fourth-quarter 2016 earnings call. Our press release was filed this morning with the Securities and Exchange Commission and the presentation for our call is posted on our website, lear.com through the Investor Relations link. Today's presenters are Matt Simoncini, President and CEO; and Jeff Vanneste, Chief Financial Officer. Also participating on the call are several other members of Lear's leadership team.

Before we begin, I would 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 Relations, at the beginning of the investor information at the beginning of the presentation and also in our SEC filings.

We will also be referring to certain non-GAAP financial measures. Additional information regarding these measures can be found in the slides labeled non-GAAP financial information at the end of the presentation.

Slide 3 shows the agenda for today's review. Following the formal presentation, we will be pleased to take your questions.

Now, please turn to Slide 5 and I will turn it over to Jeff.

Thanks, Joel. Lear had another great quarter and year. As a result of our strong sales backlog and industry-leading cost structure, we achieved record full-year sales, core operating earnings, margins and free cash flow. During 2016, we continued to invest in our business by entering into a strategic partnership with Tempronics for seat heating and cooling and acquiring AccuMED, a specialty fabrics business.

Additionally, over the last five years, we have invested nearly $0.75 billion in our footprint, significantly expanding our component capabilities in low-cost countries. We also continue to provide superior value to our shareholders by delivering a free cash flow yield of 11%; achieving an investment-grade credit rating for Moody's; increasing our dividend by 20%; and repurchasing nearly 6 million shares, or 8% of our shares outstanding at the beginning of the year. Our total shareholder return was 250% over the last five years, which exceeded both the market and all of our peers.

Slide 6 shows vehicle production in our key markets for the fourth quarter and full-year 2016. In the quarter, 24.5 million vehicles were produced globally up 7% from 2015, with increased production in all major regions of the world, led by a 15% increase in China.

For the full year, global vehicle production was 91.2 million units, up 5% from 2015, with increases in all major regions, again, led by a 14% increase in China. In 2016, the US dollar strengthened against most other currencies and had overall, had the effect of reducing sales by approximately $330 million for the year.

Slide 7 shows a reported financial results for the fourth quarter and full-year 2016. Our fourth-quarter sales in 2016 were slightly lower than the prior year as a result of the impact of our fiscal reporting period which had three fewer working days in 2016 as compared to 2015.

For the quarter, pretax income before equity income, interest, and other expense, was $335 million, down $2 million from year ago. For the full year, pretax income before equity income, interest, and other expense was $1.4 billion, up $240 million from 2015. As a percent of sales, SG&A costs were 3.6% in the quarter and 3.4% for the full year, up from 3% and 3.2%, respectively in 2015.

The increase in the quarter is primarily driven by a one-time charge associated with the payout to certain terminated vested participants of our US defined benefit pension plans. For the year, the increase is related to increased program spending to support our record backlog. Equity income was $23 million in the fourth quarter and $72 million for the full year.

The increase primarily reflects increased sales and favorable operating performance in our joint ventures in China. Interest expense was $21 million in the fourth quarter, consistent with 2015. For the full year, interest expense was $83 million, down $4 million reflecting lower borrowing levels in 2016 compared to 2015.

Other expense was $7 million in the fourth quarter and $6 million for the full year. The full-year decrease is driven by lower foreign-exchange losses as well as the impact of one-time items in both 2015 and 2016. Net income attributable to Lear was $230 million in the fourth quarter and $975 million for the full year.

Slide 8 shows the impact of non-operating items on our fourth quarter. During the quarter, we incurred $13 million of restructuring costs related to census actions. Excluding the impact of non-operating items, we had core operating earnings of $386 million, an increase of $27 million from 2015. The earnings improvement reflects favorable operating performance in both segments.

Adjusted for restructuring and special items, net income attributable to Lear in the fourth quarter was $270 million and diluted earnings per share was $3.80, up 19% from 2015. The increase in earnings per share reflects our continued strong operating performance and the benefit of our share repurchase program.

Slide 9 shows our adjusted margins for the full year. Lear's adjusted margin was 8.3%, up 110 basis points from a year ago. In Seating, sales were $14.4 billion, up 5% from last year, excluding the impact of foreign exchange and commodity prices. The increase primarily reflects the addition of new business. Adjusted earnings were $1.175 billion, up $181 million.

Seating adjusted margins were 8.2%, up 110 basis points from a year ago. The increase in margin reflects higher sales and favorable operating performance. In E-Systems, sales were $4.2 billion, up 5% from last year excluding the impact of foreign exchange and commodity prices.

The increase primarily reflects the addition of new business and higher production volumes on Lear platforms. Adjusted earnings were $619 million, up $50 million. E-Systems' adjusted margins improved to 14.7%, up 90 basis points from a year ago, reflecting the increase in sales and favorable operating performance.

Slide 10 provides a summary of free cash flow, which was $297 million in the fourth quarter and a record $1.1 billion for the full year. The Company continues to generate strong free cash flow. For the full year, we have converted approximately 70% of our operating income to cash, reflecting the high quality of our earnings. In addition, our free cash flow yield of 11% is the best in our peer group at -- and within the top 10% of all companies in the S&P 500.

Slide 12 highlights the key assumptions in our 2017 outlook. Our guidance is based on an industry production assumption of 92.7 million units, an increase of 2% from 2016. This is consistent with the latest customer releases and IHS forecast. Our 2017 financial outlook is also based on the most recent exchange rates for all global currencies, which includes an average year assumption for the year of $1.05 per Euro.

Slide 13 shows our financial outlook for 2017, which is unchanged from the guidance we gave on January 10.

The chart on page 14 shows our revenue walk for 2017. At $1.3 billion, our backlog for 2017 is the largest annual backlog in our history and represents growth of 7% compared with 2016. Overall, our sales for 2017 are expected to be approximately $19.5 billion, including the impact of volume mix, net customer pricing and foreign exchange.

Slide 15 shows a summary of our 2017 to 2019 sales backlog. Our sales backlog only includes awarded programs, net of lost business and programs rolling off and excludes content growth. It provides a true proxy for top-line growth. The backlog is based on the most recent external production forecast and foreign-exchange assumptions by country.

Our sales backlog for 2017 to 2019 is a record $2.8 billion, which is 40% higher than last year's backlog. For years 2018 and 2019, there are still several programs that are up for bid so we expect a backlog in those years to continue to grow as those programs are awarded. In addition to our consolidated backlog, we have $800 million in backlog at our non-consolidated joint ventures. Including these new businesses -- new business awards, our total backlog is $3.6 billion.

Slide 16 provides a summary of the sales and earnings growth in our non-consolidated joint ventures. The vast majority of these JVs are located in China, with key customers as our partners. These relationships provide unique growth opportunities. In 2016, we had $2.4 billion in sales at our non-consolidated joint ventures, nearly double our sales in 2011.

Our equity earnings at these JVs have nearly tripled from $26 million in 2011 to $72 million last year. These earnings are not included in our core operating earnings but they are meaningful to our earnings per share. In 2016, the earnings from these joint ventures represented approximately $1 per share.

We expect these JVs to continue to grow faster than the market and exceed $3 billion in sales by 2019, based on our three-year non-consolidated backlog of $800 million.

Now I'll turn over to Matt for some summary comments.

Thanks, Jeff. Great job. We are extremely well-positioned to take advantage of major industry trends and deliver continued profitable growth in both our business segments. In Seating, Lear is the most profitable seating supplier with the most complete capabilities of any of our competitors.

In E-Systems, we are a leader in power and data management. We have strong capabilities in both hardware and software and we recently added a team of industry experts in cyber security. The acquisitions of Autonet and Arada provided us with the ability to move data from grid to vehicle and vehicle to vehicle, enhancing our existing capabilities, and allowing us to fully capitalize on the connectivity mega trend.

We are also well-positioned to take advantage of the increasing penetration of 48-volt architectures as well as hybrid electric vehicles. We have multiple programs of these technologies either in development or in production.

Slide 19 shows Lear's performance and our key financial metrics over the last five years. We have been growing our sales at a rate of 2 times industry production and our earnings have been growing even faster. Our growth rate of core operating earnings is approximately double the peer group.

We also have a long history of strong cash generation. Our cash flow yield is among the best in the S&P 500 and is the highest of our peer group. Our earnings per share is growing even faster than our core operating earnings, reflecting our efficient capital and tax structures as well our aggressive share repurchases. Despite this outstanding performance, we remain at a discount to the peer group.

In summary, we continued our positive momentum in 2016 with the best year in our history. The investments we have made in our business are paying off. With our record sales backlog and an industry-leading cost structure, we expect to continue the strong performance in 2017.

We have delivered superior shareholder returns, outperforming the peer group in the overall market. As I mentioned on the previous slide, I continue to believe that Lear's shares are undervalued.

We have the best team in the industry, a track record of outstanding execution, and the most complete component capabilities of all our segments. Consequently, I believe we are well-positioned to continue to deliver outstanding financial results and shareholder returns.

With that, I would be happy to take your questions.

(Operator Instructions)

Itay Michaeli, Citi.

Can you just help me start with going through some of the big margin drivers in 2017? I think the guidance for 2017 implies about 8.2%. Maybe if you could talk a little bit by segment as well, that would be helpful.

Well, we think we're at sustainable margins, Itay. We're -- we continue to grow the business profitably. Return well in excess of our cost to capital, continue to penetrate and provide earnings growth. For us, it's always a combination of giving cost solutions to our customers that allow them to be successful and their car lines to be successful, for us to be successful as a supplier and continue to grow earnings.

So I think the margins are sustainable. I think we can continue to grow at these rates and it's a combination of everything. It's our complete system design capabilities that allow us to find engineering solutions to help our customers bring their costs down and ultimately be successful. It's also running our plants more efficiently, managing a very complex supply chain in a very efficient manner, buying the mix always helps at a buy-and-kick in the car lines that we're on will provide some drive.

Now, the backlog as you know, comes in typically at about 10%. Incrementals, volume and mix will be pretty consistent with the margin profiles by region and car line. Pricing typically, Jeff, we're 1.5% thereabouts?

Yes, approximately. Net.

So those are major drivers year over year.

That's very helpful, Matt. And then just a second question on the backlog, is there anything on the cadence of when the backlog comes in that we should be aware of throughout 2017? Any particular quarter or when you have higher launch costs and things of that nature?

The launch costs have been pretty consistent. There's a little bit of a kick on the backlog. It was a little bit higher in Q4 of 2017 than any other quarter but it's fairly consistent first half to second half. It's going to average a couple hundred million through the first half and then slightly higher in the back half, but a couple hundred million a quarter so maybe slightly higher in the fourth quarter, Itay, but not noticeably. The launch cost should be fairly consistent.

Great, and if I could sneak one last one in. Just on the revenue walk, the volume mix of about $0.5 billion, just wondering what your assumptions are in terms of your Lear key platforms relative to the industry production assumption you have as well as just a mix component in there for your light trucks and content and trends things of that nature?

Well, I think with respect to North America K2XX, I think they are down 4% next year and similar to what we saw in the back half, or really the most part of 2016, the FordPass cars continue to be down. We've got strong backlog in North America for next year that somewhat offsets some of the volume mix but those are the main drivers.

Got it. That's very helpful. Thanks so much, everyone.

You're welcome.

Rod Lache, Deutsche Bank.

It's Rob on for Rod. Can you talk a little bit more about the AccuMED acquisition that you just completed in December?

Yes, it was a great acquisition. It adds to capabilities that we currently have in non-automotive fabric. The sales are little bit less than $100 million but what's exciting about the acquisition is that it brings additional technologies into our existing [vap] business with the acquisition that we made several years ago of Guilford. It also has a great manufacturing footprint with production capabilities in the Dominican Republic. So good Management Team, I think a platform for further growth both in automotive and non-automotive so it was nice acquisition for us.

And how should we think about the AccuMED margins?

They are consistent (multiple speakers). Yes, they are consistent with the seat margins overall. The multiple on that was slightly higher than Lear's multiple but I think with synergies and some growth opportunities, we will get it consistent with our multiple probably in 2018, if you will, so we need about year to get the growth synergies and the cost synergies together. But I think it is a really nice tuck-in acquisition.

That's helpful. And as we are looking out to next year, the question I have been -- you have breached a little bit earlier with regard to the mix of benefit; obviously, content per vehicle was a little bit of a headwind in the seating business in 2016. Should we think about that starting to shift to more of a tailwind as we look out to next year?

I think it will be consistent year over year, quite frankly. There's a lot of different inputs into that. I think the penetration of CUVs is definitely an opportunity. I think there's content growth as far as features on existing car lines offset by somewhat of the mix with the emerging markets typically being a little bit lower contented vehicle, but I think it will be -- it will look a little bit the same now. Ultimately, if we can get some, I think, demand growth in construction vehicles in the US, in North America, that can also be upside on the content since those vehicles are typically higher contented vehicles.

All right. That's really helpful.

Adam Jonas, Morgan Stanley.

Hey, Matt. Just one question on electric vehicles, this trends for your customers for electric vehicles. Just categorically, I know there's a lot of puts and takes but would an acceleration of the industry towards pure electric vehicles be positive, negative or neutral for your business?

We view it as a positive. You're typically twice the content on a traditional architecture system because a lot of times the way they are doing them now, Adam, is they are putting an overlay on a traditional architecture because they don't want to obsolete, if you will, the systems that work on things like connecting lights and some of the more basic electrical features in the vehicle.

But yes, it would be great and I think if it does penetrate faster, it could be a huge opportunity because if you take the Volt for instance, it's twice the content a normal mid-sized passenger car would be in electrical architecture. That could be upside, yes.

Okay. What about the same question for your customers? Would it be positive for them? And their margins?

That I can't speak to because I really don't know their margin profile on the vehicles. I imagine the more they sell, the better. I don't know what the margin profile is -- (multiple speakers).

Because I'm just trying to square because when the OEMs have been pretty outspoken that they need to move to electrification but they -- folks like Volkswagen are bit more outspoken about it, that it could be potentially -- (multiple speakers).

That might be because of their diesel engine issue. (laughter)

Okay. You mentioned the Volt, maybe a final one before I roll. You mentioned the Volt. Can you remind us what you do on the Volt?

On the Volt, we provide the electrical architecture system, the complete system so basically taking the power from the battery and distributing it everywhere else and that's a, like, for instance, I think we've said, it's about $2,000 contented vehicle for Lear.

That's the Bolt with the B, right?

That's the Volt with the V, which is --

Okay, what about the Bolt with the B?

We are not on that platform but I imagine that the architecture opportunity on a vehicle like that would be similar.

Okay. Thanks very much.

You're welcome.

Colin Langan, UBS.

Any color on the NAFTA risk, if there are tariffs imposed in Mexico, how would that impact your business? And how could you respond to a situation like that? Color there?

Yes, we're still trying to sort that out. There's a lot of different comments out in the marketplace right now, everything from a Paul Ryan's tax act to a full repeal of NAFTA to a modification of NAFTA so we are with you. We are trying to keep our head in the news, if you will, as well as working with industry groups whether it is OESA, the supplier organization or working with our customers to determine what the outcomes would be.

I would tell you this, Colin. We are in a net import position overall. The part of it is we're trying to understand what they determine to be an import, a net import, because a lot of times, these parts coming from the bus down to Mexico and back up. Sometimes they're coming from sub-tiers that are directed, if you will, so we're trying to sort through what it would mean.

We aren't in that position if they, for instance, implemented a tax act as Paul Ryan has proposed it, it would increase our tax rate something into the 30%s, if you will, from the effective tax rate of the high 20%s as it stands today. From a NAFTA standpoint, what seems to be happening now is there's a trend to modify NAFTA, not to necessarily throw it out so we are keeping close contact with that.

Now, our response would be this. The beauty of being a Company like Lear, we have the wherewithal, both financially and operationally, to make these components in pretty much every market we're in and that includes the US. In fact, in many cases, we make the components like [c] structures now.

We have experience making it right here in Detroit and so we could very quickly adjust and adapt. So it would mean in the near term, a modest probably step-up in capital as we would have to put some capital in place but I don't think it overall, it would change the financial DNA or investment thesis in a meaningful way.

And when you say that the tax rate would go up from a high 20%s to the low 30%s, that would be -- is that the combination of the tax rate coming down as proposed to -- from 35% to 20%? And then add it on the impact?

Yes, so it would be probably closer to mid-30%s but yes, it would be the combination as proposed right now. Now the President has come out and said, he doesn't buy into all aspects of the Paul Ryan tax act so we're still like everybody else in a wait and see. We continue to model -- work with our customers to deliver the parts in the most cost-efficient manner and taking into consideration indirect taxes and direct taxes. But yes, our estimates include the reduction in corporate tax as well as the increase or denying, if you will, of the deduction for net imports.

And just one clarification on it. So the -- you have the import, the mid-30%s would not be with adjusting your capacity to bring some back to the US eventually? That would be the immediate impact of it?

That is correct. That is correct.

And just lastly, any color on the NOLs? Your cash taxes still remain very low. How many more years do you think that those will continue to help drive down?

They go on for the foreseeable future. We've got, at the end of 2016, our US-based NOLs are roughly $250 million and our overall NOLs and other attributes are north of $700 million and they go on for the foreseeable future. So we anticipate a cash tax, or I think our cash tax rate for 2016 was roughly 16% and we anticipate for the near-term future to have a cash tax rate in the 20% range, high teens, 20%.

Now, I would like to add one thing, Colin, is we're all sitting here laser focused on our cost structure and what could possibly impact us as it relates to tax changes and direct taxes. But one area that we really have a hard time quantifying is we believe that the reduction in the overall tax structure, both individual and corporate and the reduction in regulation, which we also think is part of this tax act, will also spur demand, both in trucks, in construction and in personal ability to buy vehicles.

So that's the other piece of this thing that we haven't been able to quantify. So yes, we are laser focused on making sure that we have the right manufacturing footprint in light of potential changes in the tax environment and the tariff environment. The flip side of it is, we actually believe there is benefit overall to the industry with the reduced regulation and also the increase in personal income and discretionary spending abilities.

Okay. Thank you very much. That was very helpful.

David Leiker, Baird.

I got a numbers question here to start off on slide 8, you've got special items there of $36 million. Is -- I don't think I heard you with any color behind that at all?

Hang on. Just page 8. That is -- the bulk of that is the charge that we took associated with the lump sum offer we gave to the terminated vested US pension plan that we did in the fourth quarter of 2016. $34 million of that $36 million is related to that charge, non-cash charge.

Okay. Great. And then as we look at your restructuring activities across the world, are you at the point that these are incremental continuous improvement-type actions? Or are there structural things that you still need to do?

No, I think we are in the, let's say, the bottom of the eighth inning, David, as far structural things. We're looking for opportunities, obviously, to deliver the components in the most cost-efficient manner and there's always tweaking in the footprint that would happen that you can do, but I don't think there's any major, really, structural issues.

I mean, we've spent close to $1 billion over the last five or six years to make sure that our footprint is in the right spot and when I look like, at a logical division, one of the key drivers of moving those margins up to where they are at was the push to get our footprint in Northern Africa, Eastern Europe, in the right locations in the Philippines and what have you. So no, I don't think there's anything real structural that is still out there to do.

Okay. Great, and then one last one here. As we look at a world of shared mobility, driverless cars and things like that, and there's a lot of work and effort being done on that and I guess I'm trying to figure out how much of the work you're doing today is development work to determine what those vehicles look like from a seating perspective as opposed to the timeline where you're actually sitting down with customers in an RFQ process?

Well, I think we're doing a lot of development work on both sides of the house and there is a convergence between our E-Systems Division and Seating. The seats is going to have to provide a lot of information. We believe it is the first level of connectivity both in autonomous driving, semi-autonomous driving or just traditional driving.

The seats becoming very connected. We are in development talks there. I think we are working with the customers well on some architectures that allow the data to flow from the vehicle to their car, car-to-car which will be a key aspect of autonomous driving. None of those, though, are actually in, what I would say, development talks.

What is in development talks are things like the intelligent seat, and the gateways that allow over-year updates, so we are not quite in development in that future state, if you will. We are working with our customers to understand what type of requirements are going to be needed. We have some concepts on the interiors and what we think an interior on a seat would be in an autonomous vehicle.

We also have some ideas on how to manage the data and part of the investments we're making today with Autonet and Arada is for that future state as well as bringing a team of experts on cyber security. That's really -- benefits us down the road. So with Lear, we're trying to balance the investments for today as well as what we see in years, let's say, five or 10 that is out there. And I think we're in a really good spot to benefit.

Do you have any sense of when you might be sitting down in an RFQ process for natural production vehicle?

As it relates to an autonomous vehicle?

Yes, the driverless car.

I know (multiple speakers). Yes, the car companies believe we'll get to fully autonomous, what are calling it, Level 5 autonomous in the early 2020s. Usually, they will sit down with us sometime three years in advance of actually job one. I expect that timeline to be about the same, so maybe a couple years, we will start seeing it. Right now, everybody is still in the what-if stage. The reality for the seat, whether it faces forwards or backwards, you are strapped to it, first and foremost. It's a safety product, so a lot of the concepts that we're having still require the ability to withstand an impact because while the car may be autonomous unless every other car on the road is autonomous, it still has a crash risk.

Yes, great. Thank you very much.

You're welcome.

Stephen Hempel, Barclays.

Hi, it's actually Brian Johnson. Just want to talk a bit about the China margins and thanks for the additional detail on your joint ventures and the equity income. If I just double the equity income divide by revenue, I get like 6%, so a couple questions. Is that roughly the margin in the China JVs?

It's below your consolidated margins and is that an area where you are looking to boost margin performance, taking some of the operating skills you've demonstrated to the rest of world or is it really a market where the growth is there and you and your partners are prioritizing that over margins?

No, I don't think it's that. I mean, the -- we are slightly higher in consolidated and wholly owned because we have complete control. The issue with, in many cases, with non-consolidated joint ventures, you don't have complete control hence the reason why they are non-consolidated. So typically, I would say they run at a slightly lower margin. We want to bring, in many cases, our manufacturing capabilities and continuous improvement capabilities to these joint ventures.

But we don't always have full say in how they run. I don't think we're necessarily sacrificing margin for growth. I think it is just really comes down to our ability to fully get in there and leverage our capabilities and maybe take advantage of the cost in it. Now, that being said, I actually think the margin profile is consistent, albeit slightly lower.

Okay. And just one quick on margins on the consolidated non-Chinese rest of the world. They ticked up -- can -- is there anything you can comment on how much of that was that operating discipline you've been talking about versus more mix in your profitable components and other types of businesses?

Well, I think the mix always benefits us. I can't really quantify like how much is each line item, Brian, but I would tell you a strong mix benefits us because, when you have a CUV, which we were starting to see penetrating, even out of domestic brands, when you see crossover vehicles and SUV vehicles or platforms penetrate, that's an opportunity for content which ultimately converts at a higher-margin and we expect that trend to continue.

But we are also laser focused on these organizations on taking cost out and improving efficiencies and leveraging, I would say, best practices from other places in the globe. So probably half and half, if I had to factor a guess.

Brian, just to go back to your previous question. I think just a reminder that those equity earnings are net income which includes the impact.

Right, right, so the margin is actually much closer than to the consolidated.

Yes.

Chris McNally, Evercore ISI.

Congrats on a great 2016. Just had a follow-up on some of the earlier questions on mix and your comments around North America. If we looked at the last two quarters on an absolute basis, North America was down a little bit. You had the days issue in Q4. How do we think about the mix going forward?

Can we think about North America actually as up year over year in 2017? You mentioned the K2XX is down but you have a strong order backlog and I imagine some of sedan stuff that's at Ford, the headwind is going away. Can you just talk about some of those things because it looks like a potential area that you'll have strength in, in 2017.

Yes, and again, just to -- I think it needs to start with a review on some of the most recent quarters in 2016 where we saw that, in particular, the FordPass cars were down year over year. The backlog for 2016 in North America wasn't as big as what we're going to see in 2017. So if you roll the wheel forward to 2017, the backlog is very strong in North America and that's going to be somewhat offset by some of our top platforms being down year over year in terms of the production volumes like K2XX.

I think some of the BMW products are down year over year. Some of the Chrysler Pass cars are down and also some of the FordPass cars are down so we should see an overall increase in North American sales, I think primarily driven by the strong backlog.

Okay. And so ironically, we always talk about mix. We think about truck, more rows of seating. You'd actually have a slight benefit if we got a little bit of a rebound, specifically in something like Ford passenger cars versus the inventory reduction last year in terms of mix to Lear specifically in 2017?

Right, I mean, right now, we are sitting on a little bit of open capacity on FordPass cars, both the Fusion, the Focus and that has hurt us in both segments a little bit. Yes, so if we saw a rebound in those two platforms since they are high-contented Lear programs, that would benefit us.

Okay. Perfect. Thanks so much, guys.

You're welcome.

Joe Spak, RBC Capital Markets.

Just going back to the question on NAFTA and the ability to change capacity. Is that -- or shift capacity, is that also true for the wire harnesses given the high labor costs? Like, that's something you think you would be able to do in the US or that has to stay --?

No, I would tell you the harnesses themselves, probably not. I mean, we could make the adjustments. It's actually one of the easier products to move, quite frankly. That being said, I don't think because of labor intensity, Joe, that it would make sense. The other that probably doesn't make sense even with increased taxes would be the sewing of the seat covers, which is also very labor intensive. So that one would probably stay down there.

I think the electronic-to-boxes could be made here. In fact, we have made them in the past here and it would be fairly easy to ship that back up here. And I think the seat structures could move here, or portions of them could move here if it went through -- if the Paul Ryan tax act went through. In fact, in many cases, we're making structures here in Detroit now so I think we can move that as well. I think foam could be another product that could pull back to the US side of the border.

All right. That's helpful. On slide 14, so if I just look at that sales bridge, you put pricing and commodities a 2% headwind. I think you said general pricing is about 1.5%. I guess maybe I misunderstood how this works, but I thought copper given that it's pass-through would actually be a positive factor given the direction for sales this year. Is there an offset from a positive copper in that walk somewhere?

I think there's a bit of a trailing effect to copper so I think what we're going to see in the early part of the year is the lower prices that were in place in the latter part of 2016. As the year goes on, yes, we should see that turnaround assuming that copper prices remain where they are. I think also the hide markets are a big factor in that as well.

Okay. And then last one on M&A. I was just wondering. I thought I saw mentioned in the acquisition something about non-automotive materials. I was wondering if you can expand there -- or non-automotive business? And then just more broadly, given the commentary before about increasing electrification, how there's a content opportunity there. Should we begin to about tuck-ins more in E-Systems versus the fabric type tuck-ins that you have been doing recently?

Well, we'd like to do both. We're always looking for ways to improve our business through acquisitions and so we're laser focused on adding capabilities and increasing our business, both businesses. Getting back to the fabric piece of it, when we bought Guilford, Guilford was approximately $400 million in sales and of that $400 million, roughly $100 million of it was non-automotive.

And we retain that business, as it makes fabric for folks like Nike and Under Armour, and certain medical applications. With AccuMED, we'll basically double the size of that non-automotive business give us some mass. But also it has technologies that have many applications on the automotive side. So we think that was the perfect sweet spot for fabric in that. It not only improved on the non-automotive business but it also had a read-through and a carryover into the automotive and made that fabric business better.

Getting back to acquisitions, we are constantly looking at businesses that would either add to our component capabilities in either side of the house. We would love to grow our E-Systems Division. We are out there looking to find acquisitions that fit from a product and strategy standpoint that it would either diversify our customer mix, improve our component capabilities, our geographic footprint and do it, and this is the hard part, at a multiple that makes sense for our shareholders.

And that's taking into consideration the fact that we're so grossly undervalued. And also that we will get synergies from many of these acquisitions. We realize that multiple will be higher than Lear's discounted multiple, most of the things that we would buy but that in itself won't stop us if we can get ultimately the returns for our shareholders when you take into consideration sales, growth and synergies.

So we are out there looking. We're remaining disciplined. I think the beauty of our financial situation and liquidity profile is that we have ample opportunity to make the right investment if it became available not unlike Eagle Ottawa did for us.

Okay. Thanks a lot.

John Murphy, Bank of America Merrill Lynch.

Just another follow-up question on NAFTA. I hate to beat a dead horse here, but as we think about the delta between operating in Mexico and the US for you, it really centers around labor costs as far as I understand. And I would guess that right now, your labor costs are about 15% of your operating cost roughly on average and probably a third of that in Mexico.

So when push comes to shove, something that would be a 10% hit [key], whether it be border-tax adjustment, border tax or tariff, would give you potentially motivation to move products back to the US or something below that would give you motivation to find ways to offset it other ways. Is that a decent way to think about this?

Yes, more or less. I would also probably add in freight cost, certain things are more costly to move, if you will, and so it depends on the freight as well that's an impact. If you look at frames, for instance, seat structures, they don't typically ship as well as maybe seat covers and wire harnesses that stack up a little bit better over the road, Murph. But yes, you've got the basic equation correct.

Okay. And then just a couple of housekeeping because it's been a crazy morning here. The recent [update] is that you lost for sales, I mean, I would assume, Jeff, obviously that stacks up throughout the income statement and that just run through all your costs that we've matched those sales, it would have come otherwise in those three days. Is that a correct assumption?

Yes, and I think the impact, for example in the fourth quarter, if you exclude FX and commodities, our sales were up 1%. If you were to adjust for those three days, our sales in the fourth quarter would have been up around 5%. So it had a pretty significant impact on the quarter.

But the cost recognition matched those sales so that it's not like -- (multiple speakers).

Yes, it would flow right down. It would flow right through the income statement.

Okay. And just lastly on the backlog, it sounds like you were still bidding on a lot of stuff for 2018, 2019. We're looking at $1 billion, $1.25 billion, or $1.3 billion rolling on in 2017. As we look at 2018 and 2019, is there enough business that you are bidding where you could see 2018 and 2019 up eventually be in that same range as what's rolling on in 2017? Or is there just really -- has there just been a lot of opportunity in 2017 and you might not see a number quite that big in 2018 and 2019? I'm just trying to gauge the incremental upside in those numbers.

I think we could. I just want to point out that 2017 is a record backlog year in the history of Lear Corporation. We are bidding on a lot of programs but we are also maintaining our financial disciplines to make sure that whatever comes in, we can provide the proper returns on capital, if you will.

I think there's ample opportunity to move both those numbers up in a meaningful way. I would just cautioned a little bit that 2017 is a record backlog year for Lear Corporation. Could it happen? Absolutely. There's enough out there where we could get it there but I wouldn't necessarily model it, John.

Okay. All right. Thanks very much. I appreciate it.

Matthew Stover, SIG.

I wanted to just ask the question about the margin cycle. I think you guys have done a pretty amazing job with proving the margins in seating and getting the yield on the E-Systems this cycle. As we think about a maturing cycle, where we are right now, globally, and some of the changes that we're seeing, whether it be electrification or autonomy, I'm wondering how we should think about the contribution margins going forward?

And supposing we were to see electrification develop more quickly, would the initial investment expenses related to that result in a short-term burden to margin and you'd be able to realize the benefits? Or would you be able to manage through a change like that without a meaningful impact to the profitability of the business?

I don't think it would have a material impact. We would be able to manage through. I think we would sustain the margins with that evolution. Yes, you'd see higher development costs, but I also think you'll see some benefits on the contribution because of the content gains in that segment, which will probably wash itself out.

I think these margins are sustainable in both product segments. If you see a plateau in North America at these levels, that would be actually pretty good, if it would sustain it because it's sustaining itself at a high level and we're seeing growth in the markets, be it China or Europe. So the content gain, I think, would offset the incremental development cost.

You wouldn't have to see a big burden on incremental engineering beforehand, Matt, just programming expenses related to that sort of thing? I mean, typically, the big expansion of a new product profile like that, you do see front-end burden of engineering (multiple speakers) volume? You tend to --

We've been engineering these types of programs for awhile so we have a base capability so the -- it wouldn't so much as development as much as it would be application engineering? We could see, Matt, you could see a tenth here and there on margin, but I don't think it's meaningful. In any given quarter, you could see a modest erosion, but I wouldn't think that it would dramatically change the margin profile of that segment. Because we have core capabilities already in 48-volt hybrid and electric. So really, more it's about applications as opposed to pure development.

Okay. Thank you, guys. Appreciate it.

David Tamberrino, Goldman Sachs.

Couple questions from some of your comments earlier. Just on the backlog that you were just discussing 2018/2019, you said you're bidding on a lot of programs, but you want to maintain financial discipline. Curious what the read-through is as to what you're seeing in the marketplace from a pricing perspective with some of your competitors?

Well, I think the pricing environment is pretty consistent in E-Systems. I think it's a fairly disciplined approach where folks are more aligned to their cost of capital in relation to development cost and what the market to bear. Really, where we're seeing some chop in the pricing environment has been the seat side, largely driven by competitors trying to build up backlogs so they can sell the business. That's nothing new. That's -- we've seen irrational or unsustainable pricing in the past in that segment, be it, somebody trying to add business that's not Toyota or someone trying to penetrate North America.

Through all of this, we've maintained our pricing discipline and been able to grow the business at profitable margins. I'd expect that to continue. We will not subsidize customers or chase programs and grow for the sake of growing. What we will do is provide a value equation for our customers that recognizes our industry-leading footprint and capabilities in that business. And for that, we would expect a fair return and that's what been happening. We expect to continue to grow the business in both segments and maintain a margin profile.

That's helpful. Have you seen any change in the way that your customers are quoting some of that business, either any elongation of platforms, giving you more volume over multiple years or any additional upfront savings to get longer volume or award winning programs?

No, it's consistent. I mean, the upfront savings is a practice that's been going on for many years. We haven't seen a change in that, nor have we seen, really, a change in the lead times or it's fairly consistent. I do believe this though. When we're engaged early, on a total solution, we can provide the best solution for the customers at the lowest possible cost and certain customers are seeing that, and embrace it. I think in the end, they get the best product at the highest craftsmanship at the lowest possible cost. And so, that's what we're encouraging our customers to do.

Now, the flip side is, if they want to buy a direct to component or build a front seat, we can make a nice return doing that as well and provide world-class component at the lowest possible cost. However, we believe when we're engaged early with a total systems solution that's specifically in seating, that's the best way to go. Because you will get a high crafted seat when we balance in our capabilities on sewing fabric, leather, foam, and how it all attaches to a structure, and by the way, how it's assembled because that's part of the equation as well, So we encourage our customers to buy early and buy often. (laughter)

Understood, and just coming back in on if you were forced to re-footprint based on the new administration and different tax policies, what they could either in import tariff, either renegotiating NAFTA or the border adjustment coming through the House. How quickly and what type of costs could we be looking at from an investment in CapEx point of view, moving some of those different components where you -- north of the border from Mexico into the US?

Probably 12 months. We could move pretty quickly and pretty much every component. I would say, you're probably looking at about a 12 month, possibly 18 months for the [tougher] components. Capital that could probably increase by 10% to 7% in the near term capital spending. So nothing really too incredibly dramatic on the investment side.

Got it and then just last one for me. On the commodity price headwinds, I think when I'm breaking out the price versus commodity, it's maybe a couple of hundred million. Is there -- what's the pass-through mechanism there, and how much of a lag do we typically see?

It's different, a little different by commodity. I think with steel, a good portion of our buy there, 90% or so is either directed by the customers or provided to us in a fabricated form. On copper, it's a more near term index agreement where about 90% of our copper buy is indexed with the customer. And then on hides, it's more of a longer lead time index agreement, and I think about 60% of our hide market purchases are indexed and the other 40% is really handled through commercial discussions.

Understood. Thank you very much for the time.

Ryan Brinkman, JPMorgan.

This is [Sahmey] calling on behalf of Ryan Brinkman. I just wanted to start off the first question. I'm sorry to go back to the backlog and ask about -- what I'm trying to do is trying to get a sense of the margins that you'll be converting the backlog in 2017? Because when I look at full year, you are guiding for roughly $65 million of incremental CUI on $900 million of incremental revenues. I'm just trying to get a sense what are the nature of the magnitude of the launch costs that were incremental margins we should be assuming on the backlog?

Yes, the backlog typically comes in at 7% to 10% incrementals and what offsets it is the slight step-up in launch costs. Our launch costs will be slightly higher in 2017 as opposed to 2016, if you will, and the incrementals, it depends on the program, the location, the content. Each program has a slight -- its own financial DNA, if you will. But I would say if you model 7% to 10%, that's probably a right number.

Okay, got it. And secondly, I did want to ask on your E-Systems portfolio. I know you have V2X communications capabilities. With the proposal out there to mandate V2X communications on vehicles and I know there's (inaudible) comment right now, but are you seeing any change in auto makers coming to you for V2X communications to be put on the vehicles? Is there more attach rate than you're probably looking at?

Yes, it's a great question. I'm going to turn it over to my President of E-Systems, who's here in the room with us, Frank Orsini. Frank, can you give some guidance on this?

Yes, absolutely. So from a V2X standpoint and the proposed ruling that's out there with the government, we see it as a tremendous opportunity for Lear Corporation. Matt mentioned earlier we acquired Arada Systems in 2015. That acquisition brought 15 years of experience in V2X to Lear with 20 global deployments all over the world with V2X technology on the infrastructure side. It also brought about 50,000 of our units in production in various infrastructure deployments; again, that's all over the world.

So we're working and leveraging that unique position with our customers because Lear Corporation now brings both in-vehicle solutions as well as the infrastructure side of the business as part of that. So very excited about the opportunity. We are an industry leader on the infrastructure side. We have numerous programs in development where we're adapting and developing modules that will allow us to move power and signal related to V2X, in particular, autonomous data computation modules.

We're working on cyber security firewall modules right now, as Matt mentioned earlier. There's a lot going on. So for us, the whole concept of V2X becoming a reality plays right into our core strengths and we're very excited about it.

Got it. Got it. And just one last, if I may. And this is probably more for Matt. There were a lot of questions today and a lot of discussion about seating solutions for semi-autonomous and autonomous vehicles and how those will look and when you start working on those. So when I was listening to those, I started wondering, where you, in terms of your M&A concerns, doing more of interior solutions, like moving outside of seating into interiors, luxury interiors. I know you've sold your interior systems in the past, but now when you look at fully autonomous vehicle, is that a complete solution that would be something strategically interesting?

No. I don't think it interests us. You're right. We did sell our interiors business. For us, we think there's an ample opportunity to grow the business without extending into a third leg. We think the two product segments are converging, both our E-Systems with software and intelligent seating, and so I don't think an extension into the interior business is required in order to be a successful seat maker in an autonomous environment. So no, I don't anticipated that happening.

Got it. Got it. Very helpful. Thank you.

I think that may be it, Angel. Is that -- do we have other questions.

William Keller, Northcoast Research.

Earlier in the call, you mentioned the cyber security team of experts perhaps that you had brought on. I'm wondering if that's via one of the acquisitions you've mentioned or if that's a separate hiring effort? And if you could maybe elaborate a little bit on what exactly they are working on or if there's new products that might be coming on the market based on that expertise? Thank you.

That group reports to Frank Orsini, President of E-Systems. Frank?

So the two acquisitions that we made, both Autonet and Arada brought cyber stack capabilities for us and software. Both companies had very strong product offerings that were already in place. From the time of the acquisition, we have continued to elaborate on those solutions and continue to build and develop it. And what Matt was referring to earlier on the call is we've been bringing in a lot of talent to lead our cyber security activities.

We hired a gentleman by the name of Dr. Andre Weimerskirch, who is very well known in the industry. As a matter of fact, he's extremely well known in the auto industry and other industries for cyber security and capability and he's a tremendous leader. We are very excited to have him leading this activity for us. In terms of products and development in this area, the connected gateway modules that we are developing right now with some of our European customers have cyber security capabilities that we are building into those.

We've been awarded a firewall module in Europe as well that will have full-blown cyber security capabilities. So it is proliferating into our product offerings and these are business awards that we have on the firewall module already that we will be putting into production in the 2018/2019 timeframe and Andre is leading that activity for us. And we are building a team around Andre. We've had some great hires, so we are very excited about it because it is core to what we're trying to accomplish in connected car activity.

Excellent. Thanks again.

You're welcome. With that, I think it pretty much concludes the question side of the call and for those that are remaining, I think a large majority of you must be Lear employees and I want to take this opportunity, first and foremost, to thank the Finance organization for all the work in getting those closed and preparing all the analysis that makes a call like this so successful.

Two, to the broader team, these results just don't happen. We've realized that as a Leadership Team, these results are an outcome of teamwork, hard work, laser focus and dedication, and for that, you have the thanks of the Senior Leadership Team and my personal gratitude for all your hard work. We still have a lot of work to do but I know if we pull together, we will kick some serious [expletive] in 2017.

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