Lear Corp (LEA) 2017 Q2 法說會逐字稿

Good morning. My name is Kim, and I'll be our conference operator today. At this time, I would like to welcome everyone to the second quarter 2017 earnings conference call. (Operator Instructions)

Joel Elsesser, Vice President, Investor Relations, you may begin your conference, sir.

Thanks, Kim. Good morning, and thank you for joining us for our second quarter 2017 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'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 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'll turn it over to Jeff.

Thanks, Joel. We continued our positive momentum in the second quarter despite a more challenging macro environment. We achieved record results across a number of financial metrics, and both of our product segments are performing well, with increasing margins and returns well in excess of our cost of capital. In light of our first half performance, the addition of Grupo Antolin's seating business and our confidence in the outlook for our business, we are increasing our financial outlook for 2017 sales, earnings and free cash flow.

Slide 6 shows vehicle production for the second quarter. In the quarter, 22.6 million vehicles were produced globally, flat as compared to 2016. Both the euro and Chinese RMB weakened compared to 2016, and overall, foreign exchange had the effect of reducing our sales by approximately $68 million during the quarter.

Slide 7 shows our reported financial results for the second quarter of 2017. Sales increased by 8% from a year ago to $5.1 billion. Excluding the impact of foreign exchange, sales increased by 10%, reflecting our strong sales backlog and the acquisition of Grupo Antolin's seating business. Pretax income before equity income, interest and other expense was $409 million, up $36 million from a year ago.

Other expense was $6 million in the quarter, up $29 million from last year. In the second quarter of 2016, we recognized a gain of $30 million related to the consolidation of an affiliate. Net income attributable to Lear was $312 million, up $30 million, driven by the increase in sales and our strong operating performance.

Slide 8 shows the impact of nonoperating items on our second quarter results. During the quarter, we incurred $24 million of restructuring costs primarily related to census actions. Other special items included a tax benefit of $29 million related to the release of a valuation allowance in certain foreign subsidiaries. Excluding the impact of nonoperating items, we had core operating earnings of $439 million, an increase of $40 million from 2016.

The earnings improvement reflects the increase in sales and favorable operating performance in both segments. Adjusted for restructuring and special items, net income attributable to Lear in the second quarter was $305 million, and diluted earnings per share was $4.39, up 20% from 2016. The increase in earnings per share reflects improved operating earnings, the benefit of our share repurchase program and a lower effective tax rate.

Slide 9 shows our adjusted margins for the second quarter. Lear's adjusted margin was 8.6%, up 20 basis points from a year ago, reflecting the addition of new business and operating improvements in both segments.

Slide 10 provides a summary of free cash flow, which was $413 million in the second quarter and $571 million for the first half of 2017. The company continues to generate strong free cash flow. Our free cash flow yield of 11% is among the best in our peer group and within the top 10% of all companies in the S&P 500.

Slide 12 shows the key assumptions in our 2017 outlook. Our financial outlook is based on a global industry production assumption of 93.1 million units, an increase of 2% from 2016 and down slightly from the guidance we provided in April. This is in line with the most recent IHS forecast and customer releases. Our 2017 financial outlook is based on a euro assumption of $1.12 per euro for the second half of the year.

Slide 13 provides our updated financial outlook for 2017. We are increasing our revenue guidance by $500 million, reflecting the acquisition of Grupo Antolin's seating business as well as the strengthening of most major currencies compared to the U.S. dollar. We are increasing our core operating earnings by $50 million, reflecting the increase in sales and continued strong operating performance. Capital expenditures is now expected to be $560 million, reflecting the addition of Grupo Antolin's seating business. And finally, we are increasing free cash flow guidance by $100 million to approximately $1.1 billion.

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

Thanks, Jeff. Great job.

Please turn to Slide 15. Lear has unique product capabilities in both of our business segments. In Seating, no other seat manufacturer can match our component capabilities and level of craftsmanship. In E-Systems, we have expertise in complete electrical architectures for both traditional and high-powered applications as well as capabilities in a broad range of wireless and electronic components. This allows us to participate fully in the emerging trends of connectivity and alternate energy powertrains while continuing to grow our core electrical distribution business, which is a key contributor to margins and free cash flow. We believe that our expertise in electronics, software and cybersecurity provides additional differentiation as automotive seating systems become more intelligent and connected.

Slide 16 shows how our 2 business segments capitalize on emerging industry trends. Our unique software and electronic capabilities enable the seat to transfer information to and from the occupant for a more enjoyable, safer and healthier driving experience. Our E-Systems division also assists in the development of software for wellness modules and audio expertise for personal sound zones in our seats. No other seat manufacturer has these internal capabilities.

Turning to Slide 17. Lear's unique product capabilities, industry-leading cost structure, global customer reach and financial strength have driven a strong track record of outperforming the peer group on key financial measures. As a result of our strong market position and record backlog, we're well positioned to continue to outperform the peer group.

Turning to Slide 18. Despite Lear's consistent outperformance of the automotive peer group and positive outlook for growth, our shares continue to trade at a discount. Senior management and the board consistently review actions to increase shareholder value. This process includes evaluating organic investments, acquisition, the pace of share repurchase and the size of the dividend as well as the strategic review of our product portfolio.

At this time, we believe that Lear's current product portfolio provides the best opportunity for profitable growth in both product segments as well as sustain value creation due to product convergence, shared infrastructure, customer sourcing preference and capital availability. Any change to our product portfolio would require a significant premium to current trading multiples to more than compensate for the costs associated with the shared infrastructure and significant negative tax consequences. We will continue to evaluate all options to eliminate this unreasonable discount.

In summary, we had another great quarter, again reporting record financial results. The investments that we've made in this business have positioned Lear to continue to build on this success. We have increased our full year outlook for 2017 and expect our profitable growth to continue due to our unique product capabilities and record backlog. We have the best team in the industry. We also have a track record of performance and a balanced strategy of capital allocation that are delivering superior returns to shareholders. With our strong free cash flow and financial flexibility, we will be able to continue to invest in the business while consistently returning cash to shareholders.

Now we'd be happy to take your questions.

(Operator Instructions) And your first question comes from the line of Itay Michaeli with Citi.

Just first question, I apologize if I missed this, but could you share the contribution from M&A on Q2 revenue as well as the 2017 revenue and operating income guidance?

There were 2 acquisitions that we made that affected the year-over-year comparison: one, Grupo; and one, AccuMED. Collectively, it added about $110-ish million to the top line in the quarter.

$110 million, great. And just do you have this kind of contribution -- the impact on the updated 2017 guidance as well?

For a full year, collectively, Grupo and AccuMED are going to add roughly $330 million in sales to the year-over-year sales comp. Contribution margins, roughly in line with seating margins.

Great. That's helpful. And just secondly, just given the disparity we're seeing in the market between passenger car demand in the U.S. and light truck, can you just kind of remind us of your North America revenue in total, your exposure to light trucks and maybe even pickup trucks within that relative to the passenger car segment?

Yes. Revenue in North American market is roughly 35% to 40% depending upon the mix and what's happening. From a pass car, I don't think we've ever really broken it out. We can get that to you, Itay. But the reality is we've seen a rotation and have been seeing a rotation on the pass cars. The move to actually CUVs will be positive for Lear because most CUVs have higher content than a typically pass car, especially if there's 3 rows of seats in these CUVs, like you see in the Explorer, if you will. It also provides additional content for electrical distribution because, typically, they are larger vehicles and with more functionality than a base pass car. So we believe we're well represented in that segment and that, that rotation in the long term will provide huge benefits to Lear. In the short term, it's providing some chop, and we're seeing it mainly right now in electrical as they're struggling with their portfolio of pass cars that -- for Ford Motor Company.

That's very helpful. And just lastly for me, the E-Systems margins continues to grow. Any update on how we think about that both for the rest of the year as well as kind of over the next few years?

I think at the level that they're at right now, they're providing a return well in excess of their cost of capital. I think we can maintain these margins and still be competitive and win new business and penetrate and grow share. So we're happy where they're at, and we think that's a good balance of growth and competitiveness as well as an outstanding return in relation to our cost of capital. So we think they'll be pretty consistent right around that high 14's, possibly 15% level.

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

Maybe just a first question as we look at, I mean, the revenue in the quarter. I mean, you did pretty well relative to the market and had some pretty good outgrowth. I'm just curious how consistent you think you can consistently outperform the market as we go forward, because, I mean, at some point, you reach some sort of asymptotic limit about content growth. But you're not hitting that yet, and you're doing a great job of outperforming the market consistently. So just curious what your expectation is on sort of duration. And is this something you could do in perpetuity? Or is it something you think is a result of mix? Just trying to understand that number.

Well, it really wasn't the mix, John. It was, as much as anything, the backlog. This year's backlog is over $1.3 billion for 2017. We're approaching $1 billion backlog going into '18. We'd expect the backlog number to continue to kind of grow. It's really driven by market penetration more than the mix right now. While we've had some benefit in the mix, we've also had the pass car rotation out of electricals. So I think with our product portfolio, our footprint, our competitiveness, our expertise, our customer reach, I wouldn't expect our growth to slow down.

Okay. Second question, I mean, as we look at the schedules as we went through the quarter, obviously, North America started -- or the expectations for North America were a little bit stronger and they weakened through the quarter. Same thing happened in China. So I mean, it looks like, on a global basis, you lost almost 1 million units relative to the build schedules at the beginning of the quarter. I'm just curious, I mean, obviously, you guys performed well, but how disruptive are changes like that? If we see a market that continues to fade in North America and we'll see what happens in China, how do you manage around sort of that volatility in build schedules if that happens going forward?

Right. I would tell you, John, first and foremost, as you mentioned, it is a global market, and the global industry is actually fairly strong. And North America, while a little bit choppy, it's one of the better years that we've seen even if there is a correction, a modest correction. For us, it's really about knowing in advance when there's going to be a production change so we can manage our components and our supply base accordingly. A little bit easier to do on electrical, a little bit harder to do in seating programs just because we have dedicated just-in-time seats. So we can adjust if we have enough advance notice. We work with the customer directly. We maintain -- we evaluate inventory on hand and sales rates to try to figure and work through where we think the production will ultimately be. But overall, the production environment is pretty good. The macros are pretty good, even in North America when you look at employment levels, borrowing, oil and gas cost, housing. We look at it and say, not bad, not a bad environment at all. Europe's doing quite well. And while China growth has slowed, it slowed from a pretty very big base. So overall, we're happy with the production environment.

And maybe just to put a finer point on it, I mean, there was a deterioration in the build schedules through the quarter, and obviously, that's not your -- I mean, that's what the automakers are doing. But when you get these releases, I mean, is 30 days out enough time for you to react to work relatively smoothly through your inventory and production process?

Yes, it absolutely is. If we can get 30 days advance notice, then we can adjust ordering of raw material and components, John, and we can adjust our component facilities. Now our component facilities are fairly flexible as far as what products they make. They're not typically dedicated to one product or one customer, so we can always kind of adjust our manufacturing capabilities. It gets a little bit harder on the seat side because of the dedicated nature of the just-in-time seat assembler. But overall, if we have 30 days' notice, we can mitigate the downturn.

Okay. And then just lastly, I mean, I appreciate your frustration with the stock. I mean, obviously, there's some other peers out there that have run sort of breakup strategies to unlock value, maybe either through multiples or making the assets more attractive to potential suitors. I'm just curious, as you're looking at the 2 segments as they stand right now, I agree with you generally, just on the -- somewhat of the synergies there, but there could be some unlocking of value. Would you consider doing that? And really, you keep kind of highlighting this negative tax implication. Just wondering if you could put some details around that so we can understand that better as well.

Sure. Look, we're well aware, as the board is, on what's happening in the space. I think the circumstances are largely different. If you take Johnson Controls, they wanted out of the automotive business and they jettisoned their seat business. They were a multi-industry conglomerate. With Delphi, they had a segment that's high capital intensity and no growth. So obviously, they wanted to jettison their powertrain business and put it in the marketplace in a relatively efficient manner, I guess. For us, that's not our problem. What we have are 2 high-growth, high-performing businesses with product overlap and synergies and cost synergies between the 2 of them. We're just stuck with an unreasonable valuation. So we understand our fiduciary responsibilities to shareholders to look to maximize shareholder value. We want to do it in a way that's sustainable and just doesn't provide a short-term pop in the stock, if you will, but something that would be sustainable. We do need to compensate -- any premium that we have has to be sufficient enough to create value after compensating for the shared infrastructure costs, which I think we've talked about in the past of being a few hundred million dollars to put one of these businesses on a stand-alone basis or to separate them. And then there's a lot of misinformation on what is a tax-free spin. The tax-free spinoffs are typically just in the U.S. only. The vast majority of our electrical business, quite frankly, is outside of the United States. And so that would be a taxable event. In the past, we've talked about a number approaching $0.5 billion of tax consequence, negative tax consequences. So these are things that we take into consideration. Ultimately, though, John, we believe that with the product convergence, our customer reach in seating, the shared infrastructure and the ability to grow these businesses would be better if they're together. And that's true with electrical, but it's also true with seating. So I think for -- it would take a very healthy market premium to make sense for our shareholders to do that.

Maybe just one last follow-up on that. I mean, would you consider selling the whole company if some white knight kind of landed in like we've seen in other situations?

Well, yes, it's for sale. It's publicly traded, it's for sale every day. So that's a board decision. I think the board's well aware of their fiduciary responsibility to create value for the shareholders. But -- so let's just leave it at that.

Your next question comes from the line of Joseph Spak with RBC.

I guess I just wanted to talk a little bit about your opportunity in China. It actually -- despite a challenging market, it looks like Asia Pac actually accelerated this quarter. So maybe you could just talk a little bit of what's going on there and then what you expect to happen in China in the back half. And then beyond 2017, how big is your incremental content opportunity there as you have the domestic automakers look to put better seats in and maybe even an opportunity for you to gain some share with those automakers?

Great. Great question. Let me just start framing up China for some on the call that may not be aware. We've actually got a great footprint in China. Both businesses are fairly well positioned there. When you take in consideration our consolidated business of roughly $2.5 billion and add to it and our nonconsolidated business of $1.6 billion, $1.7 billion, we're well in excess of $4 billion of revenues that we control in that marketplace. The margins on that business are usually pretty good, slightly higher than the averages in seating, slightly lower in electrical, but on average, higher than the segment overall. The opportunity there is huge because I believe as China matures as a marketplace and the domestic vehicles penetrate, that they'll be looking to upgrade their supply chain for the domestic vehicles, and that's a huge opportunity for us as we pivot from partner brands to domestic vehicles. Their base vehicles are becoming much more contented, again another opportunity. And the last thing is on electrical. As electrical vehicles penetrate there, that's, again, a huge opportunity for our E-Systems, with their knowledge in high-powered vehicles and battery charging and connected systems. But I think the opportunity there is quite good. This is a managed economy in many ways, and the main priority of the government there is to manage economy to create jobs. This industry creates a lot of jobs, so they're going to do everything in their influence to make sure that there's an orderly growth in the production area. And that, again, provides an opportunity for us. So I think the contribution margins are very good. I think the opportunity is outstanding. We spent a lot of years building our capabilities there. We can do basically every component there, whether it's seating or electrical. We have state-of-the-art facilities scattered throughout the country. So yes, I think we're -- and we've got great relationships with the customers, both the domestics and the joint venture brands. So I think we have a huge opportunity there.

Do you have an estimate of the content differential between an average seat you supply to a JV versus a domestic OEM?

Just in generality, a base-level vehicle coming out of passenger car are typically, for seating, I want to say $700-ish, thereabouts; and I think on electrical, probably a little bit less than that, electrical distribution. As these cars evolve into, let's say, a BMW or Mercedes C-Class, you're starting to see seatings cross over to that $1,000 a seat, depending upon leather and the type of electronics that are in them. And also, you see the same type of progression on electrical distribution as they go from domestic pass cars to partner luxury brands. Many of the things that we're seeing, quite frankly, is they're starting to really increase the content on seating and electrical for these cars because they're trying to attract the executive group, if you will. So you're having rear seats that, in many cases, actually lay down and recline. Some of the most advanced seats in the industry are coming or will be positioned for China. So we think that's a content opportunity for Lear. The last thing is they, too, are seeing an evolution from pass cars to CUVs, which, again, is another opportunity. So I wouldn't be surprised to see content growth in excess of 5% per unit there for the sustainable future.

Your next question comes from the line of Emmanuel Rosner with Guggenheim.

Just wanted -- first, a quick housekeeping question on the mechanics behind the new guidance. So revenue was increased, core operating income was increased, free cash flow. Is -- was net income left unchanged?

Yes. There was -- we rounded the net income in our April guidance to, I believe, it was $1.1 billion. If you looked at the specifics of that, it was probably, at that time, below $1.1 billion, rounding up to $1.1 billion. So this kind of trues it up to the real math, more exacting numbers.

Okay. But there's no below-the-line item that's sort of like...

No, no, no. There's nothing below the line that has negatively impacted the net income guidance. It's really when we did the guidance in April, we rounded up to $1.1 billion.

Okay. And then, I guess, just wanted to come back once again on the -- I guess, the topic of sort of keeping the 2 businesses together. And I want to approach it from a different way, away from the financial engineering. Just curious about whether E-Systems would do even better as part of a bigger group. How important is scale in the electrical distribution business? And also, I sort of like -- the whole business seems to be moving a little bit away in the future towards -- away from wiring and sort of like less material content and more towards like centralized boxes with a lot of software that smartly distribute power. How well positioned are you to benefit from this trend?

Well, let me start with the last piece first. I think we're in excellent shape. That trend is nothing new. Lear has always been a leader in intelligent smart junction boxes, which is the computer mind that allows for that type of distribution. And that's one of the kind of things that we do extremely well that allows us to penetrate the market in that we can design the most efficient architectures for these electrical distribution systems because of our capabilities in these centralized, smart, intelligent junction boxes. So that evolution really is nothing new, and I think it plays in the strength of Lear. Your question on scale, I think, is a good one, but I believe that we've accomplished scale. As we approach $5 billion in revenue, we have adequate scale and footprint and capabilities that will allow this business to continue to grow, thrive and penetrate. So I don't think it needs to be part of a larger electrical distribution business to be successful. We're quite successful. In fact, I believe, we're the highest-margin business -- higher-margin supplier in this business, quite frankly. So I don't really believe it needs to be with a bigger like electrical player, if you will. We are a very big organization at this point at $20 billion of revenue, and we have the capital structure that can fund growth. The exciting part of it is there is an overlap in the product between seating and electrical that provides other avenues for growth. So I would tell you I don't think it needs that, Emmanuel. I think we're well positioned, and I think the results speak to that.

All right. That's great color. And just a quick follow-up on your -- the first part of your answer, sort of like the evolution of electrical distribution. How should we think about the impact on content per vehicle and profitability over time as sort of like the business model moves a little bit away from how many kilometers of cable go into a car and more towards sort of like some of these centralized boxes?

I've got the expert here that deals with this every day. Frank Orsini is our President of E-Systems. He's in the room with us. He's probably better served to answer this question.

Yes. Thanks, Matt. So Emmanuel, from our perspective and everything we're seeing in the industry right now, and we're working on vehicle architectures that are out in the 2020, 2021 range, there is nothing but growth in content coming into the vehicle. And that's coming through feature content. It's coming through opportunities where various types of electrical architectures are being developed to accommodate more efficient architectures, more content on the 12-volt architecture. So flexible circuits and different types of technologies that can reduce the amount of wire that's being used also come at a higher cost. So for us, we're seeing growth in wire. We're seeing growth in boxes. And even where you see centralized gateways or centralized modules being utilized, essentially that's to allow more efficient architectures to add content to a 12-volt system. Or if you're on a 48-volt system or higher levels, you're also trading space in the architecture by consolidating modules to free up room for other modules to come in to allow for more content. So from our perspective, it's a positive story. We see growth in all areas, growth in all product segments. And even where you see some consolidation, it's typically to allow for more features to be added, which drives more content as well.

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

So my question is another follow-on regarding the assets and IP within electrical. The investment community sort of struggles to understand, I think, the long-term future of harnesses specifically. I'm sort of certain that some analysts in the queue will ask about Tesla's future use of flex circuits to significantly reduce the amount of cabling, for example, and whether this is an existential risk to your electrical business. I mean, again, put simply, Matt, the question is, is there a value to adding assets within connectors or other areas of power electronics, maybe not for scale, as you just answered, but just because they have strong EV futures?

Right. I think the question, Chris, is which ones. We would like to increase our capabilities in connectors, and we continue to look for the right asset at a price that makes sense to the shareholders. So we continue to evaluate that. And so it depends on the exact component that you're talking about. Regarding some of the other developments, at one point, it was optic cables and flat, flexible cables, so these fiber optics and things of that nature. Trying to find a more efficient way to take wire out of a vehicle is nothing new. We've kind of come up with some interesting technologies like using alternate materials as opposed to copper to bring the weight and the cost down. Frank, do you want to talk to this a little bit?

Yes, sure. So the concept, as Matt said, the flex circuits and different types of applications in the vehicles, is nothing new to Lear even. We've actually used flex circuits in the past. We have the technology in our product portfolio. It is more expensive technology than traditional applications of wire. So as Matt mentioned, what we do well in the industry is we optimize the architecture, and that can come through various different methods. You can optimize the wire itself through alternate materials, copper clad, steel, things of that nature, or you can do it through electronics. And the beauty of Lear's product portfolio is we have it all. We have electronics, we have wire, we have terminals and connectors. And it really does come together as a system, and we provide the best solution for our customers on a specific architecture or car line that works best for them. So we don't see the usage of wire shrinking. Wire is a very secure way of connecting the signaling and data communication in the vehicle. So right now, the trends are added circuit content and added module content, and in many ways, we're optimizing those architectures, as Matt mentioned, through alternate materials and things of that nature. But this is where -- we see growth opportunities and margin opportunities in both of those areas.

That's great. And just a quick follow-up. Could you just remind us the content per vehicle that you have sort of as you see it right now on a full EV versus traditional IC and also your potential to either take share or just keep share in future EV architectures?

Yes. So just in terms of general content -- and again, this is kind of general because every vehicle's a little bit different, every architecture is a little bit different, and content on vehicles can vary. But a typical 12-volt system, as Matt mentioned earlier, can range $500 to $700 for content. If you start getting into 48-volt or hybrid-type applications, you see that rise up to the $750 to $850 range. And then EV is almost a doubling of that, so you're in the $1,500 to $2,000 range in terms of content overall.

Your next question comes from the line of David Tamberrino with Goldman Sachs.

First one, just from a margin standpoint, looking at the guidance and thinking about heading from the first half to the second half. I think we've seen some continued deceleration, at least in margin expansion year-over-year, and I think we're looking at maybe flat margins overall for the company in 2H implied by the guidance. Can you walk us through some of the puts and takes that you're seeing, either from the raw materials headwinds or potential incremental pricing pressure from the OEMs?

Well, pricing pressure is not incremental, David. It's consistent, and I think that's actually one of the values that Lear brings to the table. With our design and component capabilities, we're able to find solutions, as we should, for our customers because, obviously, they're in a price-competitive product. If the macro environment stays consistent, I would expect to outperform. And by that, I mean both FX and commodities. There is a trending upwards in the commodity market that we've taken into consideration. If we can hold it consistent with what we see at the end of the second quarter, I'd expect to outperform these numbers, quite frankly. That being said, I really don't see anything -- any major headwinds on the quarter. Regarding long-term margins, it's important to note that we are performing at both product segments well in excess of our cost of capital. Our return on investment is one of the highest in the supplier industry. So I think at these margin rates that we can continue to grow the business, in many cases, under unreasonable competitive threats. So overall, we're pretty happy with the margins, and we think it's the right balance between profitability and return on investment while allowing us to continue to gain share. So I'd expect the margin to stay fairly consistent.

Okay, that's helpful, Matt. And from a commodity exposure standpoint, can you just remind us how much of your COGS on an annual basis is a steel buy? And how much of that really is in the U.S. and potentially imported into the U.S., if there is any?

We buy on an annual basis about $3 billion of steel -- 3 billion pounds, I'm sorry, of steel per year. About 90% of that steel exposure is covered via the material being directed by the customer or coming into Lear as a fabricated component. So about 10% of that 3-billion-pound buy is truly at risk for Lear. We've seen the price of steel moderate somewhat recently, but it's still higher on a year-over-year basis. I don't know that we've disclosed historically what our North American buy on steel. I think that would be probably greater than what we have, for example, in Europe because I think we have more structures, component capability in North America than we do, I think, in Europe.

Okay, understood. And If I can take the strategic line of questioning and thought process in a different direction. What I've been hearing from you guys consistently is seating plus E-Systems, future mobility, autonomous vehicles, we should be able to help create the cockpit of the future. Would you go further down that line of thinking and get more into the integrated cockpits, the displays, the infotainment systems and truly be able to have the fully connected customer infotainment system with a swivel chair and the side armrest that comes up with a screen so I can look at it in the middle of the vehicle? Is that something you could see doing down the road? Or is that a little too far (inaudible)?

Well, it's 2 or 3 different questions in there. I would say we believe there's huge opportunities to continue to grow in the 2 main products that we're in. While we do have an audio group, we're really not in infotainment, which I think will be dominated, in many cases, by consumer electronics companies. I do believe there's huge opportunities to increase the content in a seat, including possibly, like you mentioned, video screens that come up through it. Now we don't need to make the video screens. We need to integrate the video screens. I think collaboration will be key to these developments. We do believe that we're well positioned to take advantage of the trend of autonomous. It's important to note that the seat, however, is a safety product. So as much as I'd like to lay flat in a Barcalounger while being massaged, probably not going happen in our lifetime. But there's ample opportunity to help assist in the design of the cockpit of the future. More importantly, there's great opportunity to integrate and make these features work through our knowledge of software, cybersecurity, connectivity and the seat. So I think we're in an excellent position to leverage these trends.

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

Couple remaining questions. First, just on the 48-volt. Maybe Frank could just give us some sense of the size of the opportunities that you're seeing, the number of platforms or the number of vehicles that you see currently that are out on RFP or that the automakers are talking about. Any color on the bookings that you've got in that business?

Yes. So Rod, it's a real big opportunity for Lear Corporation in terms of our product offering because all 3 of our areas, the wiring side, the terminals and connectors and the electronics, all benefit from this trend. So I believe the last time we were on the call, we talked about Lear's content being with 4 customers on 13 nameplates. Awarded business, we're now at 6 customers and 27 nameplates. And that's in various -- varying, sorry, different levels of content, but we have tremendous activity going on with 48-volt in general. I'm seeing it with all the customers, and that's what we've been awarded. You can imagine we're quoting a lot behind the scenes as well right now, and it's just a very positive trend. And I believe we've got a great product offering in this area, and our customers are recognizing that through the awards that we're getting.

Okay, great. And then back on the topic of E-Systems and separation, Matt. A couple of years ago, you'd mentioned something like a $400 million number on the tax leakage, and I thought that there were ways to mitigate that over time, redomiciling some of the IP that was in China or Germany. Do you have an updated number for what that would be? And what is actually the multiple that you'd need to see for that business as a separate company to make that an interesting value-creating opportunity for you?

Yes. Before I throw it over to my tax expert, hopefully you can hear him, I will start with the multiple. We need a market multiple, and there's a lot of benchmarks out there on companies that are out there, Rod. So you can kind of figure out what that means. But we would need a market multiple and a significant premium over what we're traded at today to even make this thing come close to make sense. As far as the tax leakage, there are ways to mitigate it. That being said, that number is fairly consistent because of the foreign subs. I've actually got my expert here, Bill McLaughlin, the best tax guy in the business, at the table. Bill, why don't you give a little bit more color to Rod on this?

Yes. I mean the tax number that Matt gave is still in the ballpark that we ran a few years ago, and it's primarily for tax leakage in the foreign countries. So there's just certain foreign countries where you can't do a tax-free spinoff. And obviously, the value of the business in those countries would drive the tax leakage. As far as moving IP offshore or something, the best tax strategy for Lear as a company right now with the 2 segments is to keep that IP in the U.S. Because of our tax attributes, that drives our cash tax rate to a very low number. So it's much better for the company to keep that IP in the U.S.

So the tax leakage number has not been mitigated in any material way in the past 2, 2.5 years, I guess, is what you're saying.

Well, no, because while there are strategies to mitigate it, it would damage Lear overall. But the other thing is the business has become more valuable, which makes the gap between the basis and the fair market value higher, which increases the tax liability. So it's pretty fluid, but in those 2 years since we've talked last on this specific topic, Rod, the business has become more valuable.

Right. But it's embedded inside of another business that may also be more valuable. But obviously, there's different investors that are interested in expressing a view on electrification and some of those things than the cash flow generation that you see in the seating. I guess -- so just to put a finer number on this, so a market -- when you say a market multiple, are you saying an automotive market multiple? Are we talking about 7x, 7.5x EBITDA? Are you talking about a broader universe of companies when you're suggesting that you need a market multiple for that business?

There's examples in automotive of very similar companies that are well in excess of 7 multiples, Rod.

Okay, yes. So that's basically what you're -- you need to see or have conviction in is what you're saying.

Yes.

Okay. And just last question. How much did commodities impact the revenue and the EBIT line? I know that there's some pass-through, obviously, on the copper and so forth, but can you just clarify that one for us?

Revenue was extremely small from a margin standpoint. On a year-over-year basis, roughly 20 basis points, commodity prices being higher in the second quarter of '17 versus what they were in '16.

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

A couple of questions, keeping on the strategic theme. First, can you give us some example of some design wins that are -- where you have both the E-Systems and the seating, with some of the advanced, connected, massaging, electronically controlled features, et cetera, you've been talking about?

Yes. We're in development on both sides of the pond with multiple carmakers. That's about all I want to say. We're in preproduction development with several luxury automakers on both sides of the pond. So that's about all I want to say about it at this point.

Okay. And secondly, as you think about fitting into the broader world of automotive supply, is there strategic value you could see a more diversified parts company getting from Lear that would complement other product sets, whether it was something like infotainment mentioned earlier; interiors, which historically had been not attractive but seems to be improving; or just kind of a general move to outsourcing more modules of the car?

No, I think there's ample opportunity to grow the business faster than the market overall. With the 2 products we're in, both of them have kind of extensions that could make sense, getting better in connectors, some other components that would go in the seats. I don't really see adding a third leg or an over -- unifying leg, if you will, between the 2 of them like infotainment, if you will. I don't think we need to do that. I think there's folks that are well entrenched there already that do a great job, and I just don't see the returns for our shareholders by doing that. So we're pretty happy with the product the way it is -- the product lines the way it is right now.

And your next question comes from the line of David Leiker with Baird.

I wanted to follow up -- go back to, I think, it was first question, Grupo Antolin. The $330 million number, Jeff, was that a full year number? Or is that a 2017 contribution number?

That's a 2017. So just the math is we acquired Grupo at either the tail end of April or beginning of May, so it's 8 months' worth of Grupo and a full year worth of AccuMED. We acquired AccuMED late in 2016.

Okay. And then can you give some characterization of what the growth of the business and what the backlog looks like for it?

Yes. When we last announced our backlog, we had a backlog going into '18 of $900 million and '19 is $650 million. Now '19 still had a lot of open sourcing. We'd expect that number to increase. But we've been averaging the first year of the backlog right around $1 billion on average, and we'd expect that to be true and hold true based on what we're seeing in the marketplace.

Yes. And then what about the backlog at Grupo Antolin?

Grupo, we'd expect it to grow at a market rate, I don't know, 2%, 3%, thereabouts. We're still digging through, in many cases, their bookings. It's a good business, came in with some great kind of technology and structures that we think we can leverage. It's a well-run segment of their business -- or was a well-run segment of their business and expands our customer reach into some of the premium European automakers. So we think, with that, we can accelerate growth. We can accelerate growth.

Okay, great. And then, just one other item here. As you look at the restructuring actions, the charges that you flowed through your P&L, where do you stand on those in terms of whether they're structural or they're more tactical related or headcount related? How do you characterize that?

I think the vast majority of what we do in restructuring is kind of, I would say -- how do you split tactical from strategic? It's lowering the infrastructure cost, David, from a facility standpoint. So it's getting better in structures, if you will, and kind of getting our components [blueprint] where it needs to be. So if that -- I think that's kind of strategic. There is always a portion that's census related. You can't avoid it. So -- but I would say, on average, it's probably 75% to 80% strategic, if you will, putting the plants where they need to be and overall reducing your cost structure.

And our final question comes from the line of Irina Hodakovsky with KeyBanc.

This is Irina on for Brett Hoselton. You guys discussed this in detail earlier on in the call, but just to sum it up, production outlook for IHS is at 17.4 million. Some of the other automotive suppliers in the space expressed that their internal schedules that they have from their clients are a little bit below that and expressed some concerns that there's downside potential to that revised outlook. You also mentioned that you have sufficient visibility. How do you feel within your schedules relative to IHS? Do you feel there's concerns for the downside?

No, I don't actually. We've got our releases. We have the same releases that the other suppliers have. We keep an eye on the macro environment as far as inventory levels and sales rates. We've taken into consideration IHS. Our guidance is based on it. However, we adjust it for specific car lines and the information and the planning documents that we have from the customers, and we all share those documents equally on the supply base. So we're comfortable with our sales projection based on what we're seeing in the marketplace in North America. The other thing that's important to know, Irina, is that, obviously, the majority of our business is outside of the North American market, so it's pretty balanced from a geographic standpoint. So we're very comfortable with the sales guidance.

Okay. That probably leaves the folks that are on the call just being the Lear team. I want to start off by thanking the finance organization for their work preparing us for this call and for the communications. I want to thank the entire team for the outstanding work that you're doing, the effort, the hard work, the teamwork that drives these type of performances, this type of performance. So thank you very much.

We're not done yet. Complacency is the enemy. Let's continue to kick a**. Thank you.

Ladies and gentlemen, this concludes today's conference call, and you may now disconnect.