Lear Corp (LEA) 2017 Q4 法說會逐字稿

Good morning. My name is Dan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter and Full Year 2017 Earnings Call. (Operator Instructions)

I would now like to turn the call over to Joel Elsesser, Vice President, Investor Relations. Please go ahead.

Thanks, Dan. Good morning, and thank you for joining us for our Fourth Quarter and Full Year 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; Jeff Vanneste, Chief Financial Officer; and Ray Scott, President of our Seating Division. 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 the 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 4, and I'll turn it over to Matt.

Thanks, Joel, and good morning. 2017 marked our eighth consecutive year of improving financial performance. We achieved record fourth quarter and full year results in all key financial metrics.

Results like this just don't happen. They are the results of strong execution and the significant investments we've made in our business over the last decade. These investments have expanded our global product capabilities, provided an industry-leading cost structure and driven superior shareholder returns. In 2017, we delivered a total return to shareholders of 35%. Over the last 5 years, our total return was approximately 300%, and that's nearly 3x that of the S&P 500. Despite our record performance, our shares remain at a discount to the peer group.

Now I'd like to turn it over to Jeff to discuss the '17 results as well as review our 2018 guidance.

Thanks, Matt. Slide 6 shows the financial highlights for the fourth quarter. Our positive momentum continues with record sales, record core operating earnings and record adjusted earnings per share. Sales grew 16% in the quarter despite flat global industry production, driven by our record sales backlog, the acquisition of Grupo Antolin's seating business and favorable foreign exchange. Core operating earnings increased 14% to a record $441 million, primarily driven by the addition of new business and operating efficiencies.

Slide 7 shows the quarterly results for our 2 product segments. Both segments had double-digit sales growth as we continue to gain market share with 20% growth in our E-Systems segment. Both segments also had strong earnings growth in the quarter. In Seating, adjusted earnings grew by 13%. In E-Systems, adjusted earnings grew by 16%. Margins were down slightly from a year ago, reflecting higher development costs associated with the backlog, our growing business in China and investments in R&D to support our alternative energy vehicle and connectivity initiatives.

Slide 8 highlights our financial results for the full year, where we, again, achieved records in all key financial metrics. Full year sales, core operating earnings and adjusted earnings per share all experienced double-digit growth compared with 2016. Sales grew by nearly $2 billion or 10% to a record $20.5 billion, driven by our sales backlog and the acquisition of Grupo Antolin's seating business. We generated record free cash flow of $1.2 billion as we continued to convert a high percentage of our earnings to cash.

Slide 9 shows our segment results for the full year. Sales in both segments grew by approximately 10% year-over-year compared to 2% industry production growth, reflecting market share gains and continued content growth. Both segments delivered record earnings and generated returns well in excess of our cost of capital.

Slide 10 provides an update on our share repurchase and dividend programs. During the fourth quarter of 2017, we bought approximately 700,000 shares for $122 million, bringing our full year share repurchases to $454 million. As of the end of 2017, we have a remaining share repurchase authorization of $546 million, which expires in December of 2019, and a diluted outstanding share count of 68.1 million shares. Since initiating the share repurchase program in early 2011, we have repurchased 44 million shares of our common stock for a total of $3.5 billion at an average price of $79 per share. This represents a reduction of 42% of our outstanding shares at the time the program was initiated. We have also increased our dividends each year since 2011. In total, we have returned over $4 billion to shareholders through share repurchases and dividends.

Slide 12 shows the key assumptions behind our 2018 guidance. Our vehicle production outlook is based on the January 2018 IHS forecast.

Slide 13 provides a summary of our financial outlook, which is unchanged from the guidance we provided at the Deutsche Bank conference last week. Our 2018 outlook represents another year of record sales, earnings and cash generation.

Slide 14 shows our 2018 to 2020 backlog. Our consolidated sales backlog of $3.2 billion is the largest in our history. I would like to take a moment to remind you how we define backlog because it is different from all of our competitors. Our backlog reflects only awarded new business, net of any lost business. It does not include any pursued business, replacement business or content growth. It's not a wish list, and it's not based on estimated lifetime revenues or bookings. Because our backlog includes only awarded programs, we believe that it is a true proxy for future sales growth. For 2019 and 2020, there are still programs that are up for bid, so we fully expect the backlog in those years to grow as those new programs are awarded.

E-Systems accounts for 40% of the backlog as we continue to increase market share and win new business aligned with emerging industry trends, especially vehicle electrification and connectivity. Currently, new awards relating to these emerging trends represent approximately $400 million or 30% of our E-Systems backlog with quoting for new programs increasing rapidly. In addition to our consolidated backlog, we have $700 million in backlog at our nonconsolidated joint ventures. Including these new business awards, our total backlog is approximately $4 billion.

Now I'll turn it back to Matt, who'll review our performance over the last several years.

Great. Thanks, Jeff. Nice job. As I mentioned in my opening slide, we've been investing in our business for a long time now, and Slide 16 highlights the significant investments we have made. Since 2011, we've invested $5.5 billion in our business through capital expenditures, acquisitions, footprint actions. With these improvements, we've established an industry-leading product portfolio and low-cost footprint with complete design, engineering and manufacturing capabilities in every automotive producing region in the world. We believe our product capabilities and cost structure provide Lear with a significant and sustainable competitive advantage. This is how we've been able to increase our operating margins by more than 300 basis points since 2012.

Slide 17 summarizes the key acquisitions that we've made over the last 6 years to bolster our product capabilities, strengthen our competitiveness, drive sales growth and improve diversification. In Seating, the acquisitions of Guilford Mills and Eagle Ottawa, combined with our existing capabilities in cut and saw, foam and structures, enable us to offer unique seat designs to our customers with the highest level of craftsmanship. Grupo Antolin's seating business also strengthened our market share with key customers in Europe that helped bring additional innovative technologies to Lear. Our acquisitions in E-Systems have positioned Lear to capitalize on the significant growth opportunities in that segment. Autonet and Arada increased our wireless connectivity capabilities, and EXO Technologies provides us with industry-leading accuracy of vehicle positioning for the autonomous and connected vehicle applications.

Slide 18 shows the results of the investments we've made in our business over the last several years and our disciplined approach to financial returns. Over the last 5 years, our sales have grown 3x faster than the industry, and our operating earnings have increased at an even faster rate than our sales. Today, we're delivering margins in both of our product segments that generate returns that are well above our cost of capital and superior to any of our direct competitors in these segments. At this level of financial performance, our return on invested capital is amongst the highest of the automotive suppliers.

As Slide 19 shows, we continue to generate significant free cash flow. Since 2012, we have generated over $4 billion in cumulative free cash flow with a record $1.2 billion in 2017. Our 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. Based on our strong free cash flow, consistent earnings growth and history of returning cash to shareholders, we have consistently delivered shareholder returns well in excess of our peer group as well as the S&P 500.

As I've previously announced, I will be stepping down as President and CEO on February 28, and Ray Scott will be my successor. Ray has 30 years of experience with Lear, including several international assignments. He has led both product segments and, most recently, transformed our Seating business into the fastest growing and most profitable seat supplier in the industry. Previously, Ray was instrumental in establishing a turnaround strategy for E-Systems, putting that business on the path to the record performance it's achieving today and accelerating sales growth for the future. I can think of no one more qualified to lead Lear going forward. We also have the most experienced and talented senior leadership team in the industry to support Ray, and I am confident the best days lie in front of this company.

I'd like to turn it over to Ray for a few of his thoughts on our future.

Thanks, Matt, and you -- thank you. You truly have left this company in a place where our best days are ahead of us, and I appreciate your great leadership and what you've done for everyone here and for Lear.

And as I look to the future, I can tell you one thing. We're going to continue to stay focused. We have the best team in the industry. We'll continue to build on that great team. At the core of our business, the DNA of who we are, what has made this company great is our operational excellence. We're going to continue to focus on our operational excellence and continue to invest in building a value proposition for our customer and great efficiencies within our plants.

The products that we've set up with innovation technology in both business segments are perfectly aligned with what we see in future growth opportunities, and we will remain diligent and focused on the financial disciplines we put in place and profitable growth. And when we define profitable growth, we define it with returns in excess of cost to capital. We're going to make sure we're not chasing business just for the sake of growth, but making sure we're getting a fair return for our shareholders.

As we enter a time of unprecedented change and opportunity with the trends that we see in our industry, it truly is exciting with how we positioned ourselves in both business segments. The transition to high contented crossovers and SUV perfectly align with our Seating business, and the acceleration and penetration of the electrification and connectivity perfectly aligns with the product portfolio we've built in our E-Systems business. And the continued growth in the investment we've made in Asia and China is going to continue to see growth areas in both business segments.

With the team that we have built, the investments we have made in both 2 outstanding business segments, we are perfectly positioned for continued profitable growth. We have never been in a stronger competitive position, and I believe the future has never been brighter for Lear Corporation. I'm so excited to lead this great company.

And with that, we will take your questions.

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

First, Matt, just congratulations. We'll certainly miss you and look forward to staying in touch. So congrats on all that you've accomplished. Just 2 margin questions, if I may. The first on 2018. Given the product turnover this year and launches, any sense of how we should think about the cadence of margins in just the kind of overall business this year? And then secondly, on margin. Given the growth you have for CapEx in China in 2022, I want to understand how to think about the impact to Lear's long-term margins from that kind of change in regional mix.

Yes. What -- in respect to the first question, in the cadence, we are going through some launches, particularly here in North America with our JIT business. That's 30% or 40% we're seeing a turnover. But as far as the cadence of the margin, we're well positioned. We're much better diversified from the last time we're going through some significant launches, particularly with the large truck. So we're very well balanced. 60% of our total sales are outside North America and really well balanced with the profitability. So we're well within the target margins that we've given. And on the E-Systems side, we continue to see growth. And really, if there's any pressure on the E-Systems side, it is with the growth that we're seeing. It's to support the backlog that we've -- the tremendous backlog that we have in E-Systems. 40% of the record backlog is coming from E-Systems and the continued expansion within Asia. As far as Asia, I'm looking at the growth opportunities with electrification and connectivity. I think the transition and how we've set ourselves up with our manufacturing footprints, we're well established. We have one of the best cost basis out there. So I see a very similar margin cadence in Asia, too.

Itay, I guess just from a sequentially, our margin guidance on Seating is low- to mid-8s; margin guidance in E-Systems, low- to mid-14s. Other than the seasonality that typically hits us in Q3, I think we'll see the margin profile in both segments kind of generally along that full year guidance in each of the quarters. Not significant changes between one and another.

That's very helpful. And then just 2 last -- just quick housekeeping questions. First, do you have the organic revenue growth in the fourth quarter as well as just what the full year 2017 backlog contribution ended up as?

The backlog for 2017 came in at a little over $1.4 billion. And I think with respect to the organic growth, our growth over -- between '17 and '18 was -- I'm sorry, between '16 and '17 was a about $1.4 billion, and we probably had organic growth of probably $1.2 billion.

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

At the risk of being repetitive, Matt, we will very much miss you and look forward to catch up. Maybe we can grab a beer at Millers next time I'm in Detroit. That would be a lot of fun. Ray, thank you for...

Sounds great, Murphy. You've got to buy though because you got a low rating on Lear.

I know. There's 2 things that we disagree on, but the stock is one. So I look forward to catching up and staying in touch.

Thanks, Murphy. Thanks.

Maybe just, first, to kind of -- staying on sort of Itay's margin question. Jeff, you kind of mentioned, as you were going through -- I think it was Slide 9, that either there were sort of some higher development R&D and cost in China that weighed a little bit on margins in the quarter. Is that the kind of thing that you think is just kind of ongoing sort of necessary cost of driving the business going forward? And is there any way to sort of dimension what sounds like slight headwinds in the quarter on margins that you did a good job offsetting. But just curious what those -- sort of the magnitude of those were.

Yes. We talked about that a little bit, John, as you recall, in the Deutsche Bank as it relates to 2018 and the costs, specifically in E-Systems, to support the larger backlog. And then as a mix of that backlog, the electrification and connectivity programs. I think we'll see that for certainly 2018. And the impact on margins, I put in the 20 basis point ZIP Code, not significant. And I think we can still hold that 14% to 14.5% margin profile even despite those additional investment costs.

I mean -- and this is the kind of stuff that -- it's necessary to drive the business for R&D going forward. So it's not like it's going to all of sudden drop off, right? I mean, it's going to be constant investment in the business.

I think we'll get some leverage on that spend over time. Given -- yes.

Got it. And then a second question. I mean, structures and mechanisms seems to be a hot or not-so-hot topic at one of your big competitors. And just curious on your view of what's going on in the market, how you're sourcing and, in particular, sort of what you're seeing on the raw materials side in addition to steel, maybe on foam and resins.

Yes. The commodities side, we've got some headwinds. It's not significant. We -- on the structure side, specifically. We've talked about structures as -- is a capability that we haven't gone out and aggressively grown, but we've grown it with an attention to making sure it's profitable business and we can manage it. We believe that there's got to be -- and we have to add some capabilities, but a very manageable business. And our structures business is solidly profitable today. We have more work to do in regions to get it to -- from a return standpoint. But we're in a good position with structures. We have the capabilities and the competencies that we need to continue to grow the overall business, but we don't have any major issues in respect to what some of our competitors are dealing with.

Jeffey H. Vanneste I think John, we've said this before, just to maybe round out the steel question. About 90% of our steel requirement is either directed by the customer or bought by us in a fabricated form. So our exposure is really only relegated to that remaining 10%. That said, yes, we did see some steel pressures slightly in the quarter. And I think, overall, as you look at steel, it's probably more of a headwind in '18. But it's encapsulated in our guidance.

Okay. And then just lastly. I mean, Eagle Ottawa was something that looked like a good acquisition. It kind of shot the lights out. So it looks, in retrospect, to be -- have been a fantastic acquisition. You just -- the acquisitions of Arada and Autonet and a number of other smaller acquisitions. I mean, is there anything in that portfolio of acquisitions that you've executed on or that you see in the future that may really shoot the gap, kind of like Eagle Ottawas, and really surprise us 2 to 5 years out as something that was just really a spectacular acquisition that we just are missing right now.

Yes. We're constantly looking at different types of opportunities. Grupo Antolin was a great tuck-in for us from a customer diversification, gave us some great exotic materials and capabilities that we're able to enhance our ability to grow globally. In respect to Seating, we produce today 85 -- we're vertically integrated, the most vertically integrated company. We could produce up to 85% of our content. So if we were to look in Seating, there are opportunities, if there's a captive-type opportunity in seats that is with a particular OE might become available and might make sense for us or, regionally or geographically, how we can continue to accelerate our growth within a particular region, like Asia or China. E-Systems, the acquisitions we've had just continue to create value proposition for our customers with the most recent one with EXO. Our ability, from a GPS perspective, has continued to allow us to create connectivity modules that we're developing today for our customers, and we'll continue to look in that area. So on both sides, we have the financial flexibility. If an opportunity does come up, you're absolutely right. Eagle Ottawa was a great acquisition, and we're constantly looking at any type of opportunities that would continue to accelerate our growth.

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

So you mentioned the $400 million of E-Systems backlog in electrification and connectivity. Can you please quantify what is the average CPV on some of these program wins and how that compares with your typical E-Systems CPV?

Well, why don't I give it a shot. Frank Orsini is here, who runs E-Systems. He can kind of give a little bit more detail. But to break down the $400 million, there was about -- 2/3 of that was electrification, and so that's really been a growth engine for us and, particularly, breaking it down into China. And so we had a great backlog and new business wins in China. And obviously, they're one of the leaders when you talk about legislation and change for electrification. The remaining portion of that was connectivity. The CPV, I mean, we -- like I said, we have a product portfolio that ranges from Start-Stop all the way to a full EV capability with connectivity continuing to grow within some of the smart modules within the vehicle. And CPV, Frank, was -- mild hybrid is $300.

Yes. About $300 of incremental content for 48-volt applications. That scales all the way up to manual to about $2,000 worth of content on full EV. So like Ray said, the backlog is very strong in these areas. We've had a lot of success in all the regions with all of our product lines, too. We've managed to gain share and improve our backlog in power electronics, high power wire, high power terminals and connectors. All of our product lines are benefiting from this growth trend. So yes, we're really excited.

I think one point and the way we look at it too is, one, just the performance and the growth that we've had in our backlog. But the amount of quotes that we're getting in electrification and connectivity. We've seen it, and it's -- just a few years ago, which was a minimal amount of quotes. This year, we're looking at $500 million to $700 million of quotes in electrification, connectivity. In addition to that, we've had a number of key customers reach out to us and ask about specific partnerships and how we can really invest in innovation for their future application. And so that increase of awareness, well, activity from our customer is a really telling sign of what we're going to be able to deliver in the future.

Okay. That's very helpful. And then I guess when I look at your E-Systems margin for the quarter, some of the factors behind the sort of 50 bps of down year-over-year, seem to be a lot of the same factors that you're also mentioning for the outlook for 2018? So launch costs, commodities, investments into China. Is there a way for you to break it out for us? In terms of if you look at the margin progression in the fourth quarter, how much came from sort of each of these markets?

Yes. I think it's -- number one, it's important to note that E-Systems in the fourth quarter, year-over-year, their earnings were up 16% year-over-year, significant improvement in the earnings profile. Some of the factors that influence margin, we talked a little bit about the investment in R&D and in the backlog and, specifically, electrification and connectivity. We did have a little margin headwinds with respect to copper. Copper had spiked, and about 90% of our copper buy is covered. So it's relatively low in terms of the percentage of our buy that's at risk. But we did see a spike in the quarter, 10-ish basis points associated with that. And then you mentioned the China growth, which is a great business for us in China, margin profile, above 10%, a return well in excess of our cost of capital. But taking on that type of 10%-plus business as you look at that segment overall, that's in the 14.5% has a mathematical dilution to margins, albeit it's great business. So we were happy to have business in China that is north of 10% and improving.

And is that a fundamental function of the structure of the business in China that it is at these levels? Or is there room to bring that up to the segment average over time?

No. It's more of -- I mean, the mix. I mean, we've got a lot of different things going on. But the expectation is we're going to move that up and more aligned with what we see as far as our target margins.

But I think getting back to the return comment, which is that -- it's wire business that we're talking about in China. And wire, by the nature of it, is less capital intensive than some of the other businesses in the E-Systems portfolio. So anything north of 5% margin gets us a return well in excess of our cost of capital. So at 10.5%, we're well above that. So it's great business to have in a great region.

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

Just a couple of follow-ups from some threads earlier in the conversation. On EXO Technologies, I mean, this follows on the back of your V2X and over-the-air update capabilities that were acquired from Arada Systems and Autonet. Can you kind of help us understand what the strategic plan is with these assets and what incremental capabilities you might need to execute upon your vision?

So the EXO acquisition, we're really excited about it. You're completely in line with exactly what we were trying to accomplish with this. One of our goals has always been to enhance our software capabilities, especially in the area of connectivity, and EXO brought those exact capabilities to us. I'll just kind of touch on exactly what we picked up there. But the technology is about very accurate vehicle positioning. The technology is instant, it's accurate and it's everywhere. It's instant in the sense that the signaling comes into the vehicle much better than anything that's available on the market today. We're averaging about 1 to 2 seconds on signal communication versus about 30 seconds in the available technology that's on the market today. Accurate in that it's 10 centimeters of accuracy, where the current market technology is about 1 meter. That gives you not just road accuracy, but within lane accuracy, which is very unique and it's something our customers are looking for. And then it's everywhere in that it's satellite-based technology, which -- and it's compatible with everything. It's compatible with Europe, Asia and the North American systems. So the algorithms that EXO brings to the table really round out our connected car strategy, in particular, as you mentioned, with V2X. This puts us right in the sweet spot for enhancing our capabilities in those areas. And as I mentioned, software capabilities are something we are going to continue to take a look at. Vehicle positioning was one of the areas that we wanted to enhance our skills at. We're going to continue to look at wireless communication, signal data management, data prioritization, anything in those areas that will allow us to enhance our connected car strategy. As it relates to V2X, autonomy, any of those areas are technologies that we're actively pursuing right now in the market and looking at. But I'll tell you, EXO comes with an incredible leadership team as well. We're very fortunate to have picked this up. We're very excited about the technology. And as Ray mentioned, we're quoting on a ton of connectivity business this year, and we do believe this will help position us for future growth.

Yes. Can you -- and on the quotes, I think you said about $700 million earlier -- $500 million to $700 million. How much of that is really broken down between electrification versus the connectivity business that you're looking at? And what's the margin profile of that software business? I mean, how much more accretive could that be relative to the overall corporate margins and the E segment margins itself?

So the breakdown of the quoting activity that we have visibility over today is about $500 million of it is in electrification, about $200 million of it is in connectivity. As far as the margin profile, we believe it's acquisitions like this that will allow us to continue to maintain the margin profile that we're talking about while continuing to grow the business. So it's added capabilities that are going to give us opportunities to quote larger pools of business. And from a margin standpoint, we think it's going to keep us right in this margin segment range that we've been talking about.

Got it. And then one more, a different line of questioning from earlier, just on the electrification side of the business. Obviously, some launch cost, some R&D, you're winning business. What do you think the margin profile that electrification revenue is going to be when it begins? At what level do you have to grow it to, from a top line revenue perspective, for it to be above corporate average? And when do you see that kind of crossing that threshold? Is that beyond 2020?

Well, I'll tell you, the business we're winning right now is all profitable business. In many ways, it's in line with our current margins that we have today. We're very disciplined on the growth no matter what the trend is, whether it's connectivity or electrification. We're making sure that everything we bring in is returning well in excess of our cost of capital.

So we think that's important, Frank, is that the way -- and looking at the backlog, the discipline we talk about at how we look at business, we look at it with a return on invested capital by platform, by program. And so it has it to generate the returns as we're getting in the quote and as we're developing these programs. And so the enhancements we're making, the continued capabilities that we're bringing on will differentiate our products. But the expectation is we're still going to be able to deliver the returns on invested capital that we've set as far as targets. And one thing that's important here, and we talked about this before, is our engineering, our engineering capabilities. We engineer our own products, 70% of our wiring. We engineer all of our products. And so we have that unique capability to scale unique products for our customers and drive value for our customers. On electronics, it's -- we engineer -- with the software capabilities we have and the product engineers we have, nearly 100% of our products were engineered by Lear Corporation. So picking up those capabilities, the engineering capabilities, are crucial to continuing to grow our business.

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

I just want to follow up earlier on the structures and mechanisms question, because you indicated that you don't have major problems but there's actually some work needs to be done. I mean, is there a structural issue with metals and structures that you see that makes it much more challenging to get the return on invested capital? And is that part of the reason why you've actually seen it...

Okay. Let me -- I mean, yes, if you go out and buy business, it creates a problem in the marketplace. And we are not going to do that. So the business that we have is very focused and selective on how we can drive a value proposition for our customer. Structures is a very difficult, difficult business. It's a very capital-intensive business. And so when you overstretch yourself and you don't have the resources, you don't have the manufacturing capabilities, that's a problem that's going to exist for a long time. And so we want to make sure, and I've said this before, this is very strategic. We're very selective on the programs we're going to take with our customers, and it's manageable so that we can continue to grow profitably.

Okay. And any color on your NAFTA risk? I mean, any sort of framing of, if NAFTA were to break up, how that might impact your business?

Yes. We alluded to this, Colin, as you know, when we presented at the Deutsche Bank conference. As I said then, the expectations or the desires of the U.S. with respect to having either NAFTA content in NAFTA vehicles or domestic content in NAFTA vehicles would suggest that there's no vehicle on the road right now that could meet that level of content. That said, I think we're in a good position if NAFTA does -- if the U.S. does withdraw from NAFTA for a couple of different fronts. One, a lot of business that exist in Mexico today existed at -- a lifetime before it, in the U.S. So we have a footprint in the U.S. that could absorb business back, if it makes sense. And secondly, and probably more importantly, if the U.S. withdraws from NAFTA and we go back to the duty scheme that was in place at that time, seat and seat components carry a zero duty with it. With respect to our E-Systems business, wire harness does have a duty attached to it in the 0% to 5% range. So we have some exposure there. But given the amount of wire, that exposure is not that significant.

I always thought the 0 duty would be on the seating content, but...

No, the duty would be on the wire harness. On seat and seat components with -- outside of NAFTA, pre-NAFTA, the seat and seat components had no duty.

Okay. And just lastly, is there any change in the directed sourcing model in Seating? I know years ago, there was a lot of concern about OEMs doing more directing, and I've heard sort of chatter that maybe it's actually shifting back. But you're seeing suppliers...

Shifting back to more directed, shifting back where?

Shifting back to allowing you to do the entire seat and doing the subcomponents, and then the OEM is focused on direct but...

Yes, there's definitely change. And I think it's driven -- there's a lot going on in the auto space today with autonomous and electrification, and our customers have limited resources. And the investment that they're putting and the mega trends that I mentioned, they are rebalancing and relooking internally at where they need to really direct their engineering resources. And so there's several customers that we're working with that are looking at going back to a more of a full-service supplier. And I think there's the benefits, one, from a cost efficiency standpoint that our customers will see, but there's efficiencies that -- when we're as vertically integrated as we are and being the only seat supplier with both leather and textile to really establish a well-crafted seat that could help them with their brands, we're seeing them open up to ideas, where we come in to the studios and assist them with how they really want to project their seats from a brand and image standpoint. But more importantly, we create a heck of a value proposition for them when we can integrate all the components together, we can execute it at another level. So yes, they are looking at that.

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

Yes. And Matt, wish you well with your kind of well-earned break from the auto industry. I want to kind of talk about kind of your execution culture, but also kind of where you think you're strategically focused within that kind of range of structures and metals. Maybe a couple of things. One, what does the industry look like there? And are there good parts and bad parts? Two, given that, kind of how have you chosen where to compete in that? And three, if a competitor were to decide that there were parts of the structures business that could be more capably managed outside of their company. Would you be open to picking up some of those factories or businesses?

Yes. Let me start off with our strategy. Like I said, we haven't had a strategy to grow that business just for the sake of growing it. So we've been very focused on being very good at what we do supply. And what we do a great job at is rear seats and rear seat configurabilities. And the front seats, 80% of the customers have their own designs. And so we'll still supply components on a build-to-print basis if we get a fair return in excess of our cost of capital, but the mechanisms do offer some value. And there's some values where we've been able to integrate our components and help the customer outdrive cost and weight out but, at the same time, get a fair return for our products. So it starts, our strategy, a fair return for our components, be focused more on the mechanisms and the latch systems within the rear seats, which we have a leadership position. And no, we would not have any interest in helping out Adient as they start to sell off that business.

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

This is Joe Heidt on for Joe Spak. Just a quick question on top line guidance. You're saying about 5%. But when we're looking at it, we see backlog gives you about 6% growth, production's up 2%. And even if price offsets that, you get an extra 3% from FX. So that looks more like 8% or 9% growth. Can you kind of go through the offsets there?

Yes. There's a bunch of pieces, and I think you hit on a couple of them. One, the backlog, as you mentioned, is about $1.2 billion, of which 40%'s in E-Systems, 60% in Seating. FX provides an increase of about $400 million, largely associated with the euro assumption at $1.18. The Grupo acquisition that we had in Seating, if you look at it on a year-over-year basis, there's about $200 million more sales in '18 than there was in '17. We acquired that business in May of 2017. We talked about the China growth in E-Systems. That's roughly $200 million. The pricing environment, we've mentioned before pricing tends to be roughly in the 1.5% of sales range. And then kind of the missing ingredient is volume mix, in that, notwithstanding the fact that both in North America and in Europe, the industry production is forecasted to be up 2%. Some of our programs are -- some of our key programs are down year-over-year. We've talked about the K2XX, T1, that's down 10% year-over-year, and the focus builds out in North America in the second quarter. So the mix is a bit of a headwind for us in 2018, and that makes up the difference.

Okay, great. And then just one last question. It looks like you guys might be repatriating some cash after tax reform. Would you guys be keeping your same capital allocation policy? Or should we be thinking about it a little bit differently?

Yes. The -- we don't intend to change our capital allocation policy. I think first and foremost, invest in the business is not an entitlement, that you can generate $1.2 billion of cash. You have to continue to invest in it. Look for strategic acquisitions, either niche or otherwise, to develop capabilities, get regional diversification, customer diversification, product diversification. And then to the extent that there's cash left over, as we've demonstrated in the past, continue to return that back to shareholders. From a tax reform standpoint, it really doesn't change significantly our ability to move cash around. We've had, historically, efficient mechanisms to do that. So tax reform does not change that in any significant way.

Your next question comes from the line of Jeff Osborne with Cowen and Company.

I might have missed this. But can you give us a sense of the percentage of the E-Systems backlog that's from China?

In China, if you look at both on a consolidated and nonconsolidated perspective, we've got about $1.6 billion of that total in China, of which, Joel, how much is in E-Systems?

In E-Systems, it's a little--about 40%, 45%.

Of that total. So total consolidated and nonconsolidated, $1.6 billion for the company, of which 45%-ish is in E-Systems.

Got it. And then just on the quoting activity, maybe for Frank. But could give us a sense of -- is there any general mixes -- mix shifts, either that are notable from either DSRC or cellular interest as we think about V2X connectivity? I was just curious how you're positioned in both of those and if there's any bias towards one or the other.

We're equally excited about both opportunities, because we have capabilities in both areas, whether technology remains DSRC here in North America or both cellular or if cellular is favored out in Europe or even potentially Asia, we have capabilities to both. When we picked up Autonet and Arada a couple of years ago, we actually purchased wireless capabilities in both areas. And the V2X modules we're designing today are being designed so that we can utilize either technology. So right now, it's a bit of a mixed bag. We're seeing a lot of cellular. We've seen some interests in the DSRC work that we've done on predevelopments here in North America. But I just want to make sure you understand, Lear's capabilities in both areas are very strong and we're well positioned in either way. So whether this NHTSA proposed rulemaking goes through for DSRC here in the States, we know we're extremely well positioned there, even from an infrastructure standpoint as well. So excited about both opportunities for that matter. I think we're designing our products to be capable in both technologies.

And your final question will come from the line of Richard Hilgert from Morningstar.

On the backlog, I just wanted to talk a little bit about, directionally, how it progresses. In that outlying year, you're picking up programs that are at the longer end of the development time range, the longer time to develop a vehicle program. And moving in 2019, you're looking at programs that are 18 months. 2018 you're picking up programs that might be some -- a little bit last minute business here and there. But I'm wondering about, directionally, we go from $1.2 billion to $1.4 billion in 2019. So is there a little bit of color that you can add to that, that gives us that directional bump up from 2018 to 2019 instead of the progression where it would probably be more normally going down from year 1 to year 2 and then from year 2 to year 3 and then as we roll over in the next years, each one picks up a little bit more?

I guess there's a couple of themes there. One is with respect to 2019, I think it's really all dependent by the timing of various awards. But I think what you're seeing in '19 and the spike, let's say, versus '18 is the onset of these electrification and connectivity programs. We saw these on the horizon. Now they're more nearer term as they get actually implemented in vehicles, and you're starting to see that in the back of '18 and into '19. So that certainly accounts for part of the spike. But if you did the same -- if you asked the same question last year, which I think is your second question, when we put out our '17, '18 and '19 backlog, 2019 being the third year at that time, that backlog was $650 million. Now it's $1.4 billion. So part of your point is, given the timing of these things and the fact that some of these programs, when awarded today, don't come into production for 3 years, some of those programs are still not awarded. So that 3 -- that third year of our backlog, typically, based on the recent history, has come in at double, if not more, than the initial view we had when we entered that year into the backlog. So we fully anticipate that happening as '20 -- 2020 becomes the second and the first year of the backlog.

Right. Yes, that's what I was saying. The first year and the third year look correct, but directionally, the second year is that, that spike up. In between the 2 is what looked a little odd, and -- hey, all the more power to you. It looks great that you're picking up that additional business. I was just curious if there was a little bit more business that you were picking up in the shorter term that you hadn't picked up before that made the difference, and it sounds like you're talking about electrification. But you've got a nice bump up on both sides, E-Systems and Seating. So I'm curious if it was just additional penetration than what you've seen in prior years to cause that spike in 2019 versus the natural progression of higher first year, a little lower second year, lowest third year.

I think it's kind of all of those things. It's -- we're gaining market share, the advent of these emerging trends that are coming out in quotes and now becoming a reality in terms of going into production.

Well, since that's the last question, I think the only people that remain on the line are Lear employees, and I just want to take a minute to say thank you for all your hard work and dedication. It's been an honor and a pleasure to serve as your CEO these past 6 years. I'm leaving in peace because I know we have the right CEO in Ray Scott, the best management team in the business, an investment grade balance sheet and a product portfolio that's extremely well positioned to take advantage of the unprecedented change in these industry opportunities that are just amazing in front of us. In short, our best days are truly in front of us.

On behalf of my wife Mona, my daughter Sydney and I, I just want to say thank you, again, and God bless all of you, all the Lear families around the world. I'll be cheering you on from the sidelines, enjoying watching you continue to kick ass.

So thank you very much. Bye-bye.

Thank you to everyone for attending today. This will conclude today's call, and you may now disconnect.