Lear Corp (LEA) 2018 Q1 法說會逐字稿

Good morning. My name is Dianna and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter 2018 earnings call. (Operator Instructions) Thank you. I would now like to turn the conference over to Mr. Joel Elsesser, Vice President, Investor Relations. You may begin, sir.

Thanks, Dianna. Good morning, and thank you for joining us for our first quarter 2018 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 Ray Scott, 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 safe harbor statement 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 presentations, we will be pleased to take your questions.

Now please to turn to Slide 5, and I'll turn it over to Ray.

Thanks, Joel. We're off to a great start this year. We again, delivered record quarterly results for sales and earnings, and we are increasing our full year guidance. We increased our share repurchase authorization and cash dividend demonstrating our confidence in Lear's long-term outlook and our ability to profitably grow our sales and continue to generate strong free cash flow. Jeff will cover our first quarter results and our revised full year outlook in a few minutes, but first I'd like to comment on our unique product capabilities and our accelerating sales growth.

Both our product segments are well aligned for current industry and market trends allowing us to grow faster than industry production. We are experiencing a significant increase in quoting activity on E-Systems product in electrification and connectivity. We continue to invest in future growth, and our guidance includes increased investments to support that growth and ensure the successful execution of the significant launches that we have in both product segments over the next few years. This year, we will be launching the industry's most sophisticated connected gateway module. In 2020, we will launch the industry's first reconfigurable electrified seat tracks that leverage our combined Seating and E-Systems capabilities.

Slide 6 shows our record sales backlog for the 3-year period from 2018 to 2020. This backlog will continue to drive sales growth above market for our Seating business and represents an acceleration in the rate of growth for our E-Systems business. In Seating, 90% of our backlog is on higher content crossover and [yet] SUVs. In E-Systems, our backlog includes $400 million of new business in electrification and connectivity. Our backlog in China is approximately $1.6 billion, including nonconsolidated sales, and approximately 40% of the China backlog is with the domestic OEMs.

Slide 7 highlights the acceleration of our growth opportunities related to the trends of electrification and connectivity. Last year, we had $200 million in revenue related to these trends consisting mostly of high-powered components for electric vehicles. Over the next 3 years, that number is expected to triple as we launch the backlog. Opportunities for future growth will follow the increased penetration rates for both technologies. By the year 2027, we estimate that 70% of vehicles produced globally will be connected. By that same time, nearly half of all vehicles produced globally are expected to have some type of electrified powertrain. These trends are translating into significant new quoting opportunities for Lear's E-Systems business. In January, we reported that we were quoting $700 million in annual new business related to electrification and connectivity. That number is now up to $1 billion and growing. With our strong capabilities in electrical architectures, gateway modules and software, we're well positioned to take advantage of these growth opportunities.

Slide 8 shows some of our key launches for 2018. This year, we are launching $1.2 billion in backlog, while managing the changeover of a significant number of key programs in both Seating and E-Systems. In Seating, we have 145 launches with many programs launching at multiple component plants. These launches are concentrated on the higher content crossover and SUV and pickup markets. In E-Systems, we have 160 launches, including the industry's most sophisticated connected gateway module with Audi as well as new 48-volt and high-power content with FCA and Jaguar. We continue to make the investments to ensure that we are successful with these launches.

Slide 9 highlights how Lear is participating in the vehicle connectivity trend. Lear has a long history and leadership position in gateway modules, and has strategically added advanced connectivity capabilities over the past several years through acquisitions and organic investments. The gateway module, which manages signal and data on board a vehicle is the perfect platform to combine the wireless connectivity to extend signal and data management outside the vehicle. We are beginning to launch new connected focused architectures with advanced central gateway modules that now include significant increases in capabilities such as cybersecurity, over-the-air software updates and centralized application processing. Lear's E-Systems product strategy is aligned with industry trends in electrification and connectivity and will support the significant growth opportunities.

Okay, now turning to Slide 10. This year, we are launching the industry's first connected gateway and communication modules for Audi. Our products are delivering industry-leading connectivity functionality, including 4.5G cellular connectivity, over-the-air software updates, eCall Internet capabilities. These products utilize our modular software architecture to enable efficient product development. As I said earlier, this will be the most sophisticated connected gateway and communication module in the market.

Slide 11 shows another example of Lear's product innovation. Our Drop & Go adaptive seating is a unique seat track and rail system that provides significant flexibility within the vehicles' interiors. Its ability to easily enable numerous seating configurations makes an ideal solution for advanced mobility applications. We recently launched the Gen II product on the Peugeot Traveller, which is shown on this slide. The next-generation system is a perfect example of product convergence between Seating and E-Systems.

Leveraging our capabilities in E-Systems, our engineering teams developed an untethered solution to provide power to the rail system, enabling features like seat heating and power recliners. Our first production award for this third generation power-enabled adaptive seating system will launch in 2020 with a major European customer. We are currently in discussions with several other global OEMs on future applications for vans, Crossovers, SUVs and autonomous vehicles.

Slide 12 summarizes the tremendous opportunities we see for sales growth in both our business segments. All of the above opportunities will enable us to continue to deliver sales growth above-industry production for both business segments. In seating, we expect growth in the mid-single digit range above market. In E-Systems, we are seeing growth accelerate to the high single digit range above market. In addition to the technologies discussed in the previous slides, China will continue to be a significant growth opportunity for both business segments. In 2018, our China sales are expected to increase by 10% year-over-year to approximately $4.6 billion. Going forward, growth in China will come from continued market share gains led by opportunities with local OEMs, increased demand for higher content seats and a leadership position in the drive for electrified powertrains. We see sales in China growing to $7.5 billion by 2022.

Now I'll turn it over to Jeff to cover our financial results and outlook.

Thanks, Ray. Slide 14 shows the financial highlights for the first quarter. We had a great quarter with record sales, core operating earnings and adjusted earnings per share.

Sales grew 15% in the quarter driven by our strong sales backlog, the benefit of foreign exchange and the acquisition of Grupo Antolin's seating business, partially offset by lower production volumes on key Lear platforms. Core operating earnings increased 14% to a record $491 million, primarily driven by the increased in sales. Adjusted earnings per share was up 19%, driven by the record earnings, a lower tax rate and a reduced share count.

Slide 15 shows the first quarter results for our 2 product segments. Both our E-Systems and Seating segments delivered double-digit sales growth with E-Systems sales growing 24%. Excluding the impact of foreign exchange, Seating sales grew 6%, and E-Systems sales grew 15%, both well in excess of global industry production, which was down 1%. Both segments also had strong earnings growth in the quarter with earnings up 9% in Seating and 17% in E-Systems.

As we indicated in January, margins were down slightly in both Seating and E-Systems compared to last year. The decline in both segments is consistent with our guidance and driven by the significant program changeovers, increased investments to support our backlog, accelerated new business quoting activity and higher commodity costs, primarily related to steel and copper. Despite lower margins in both segments, our total company margin was flat compared to last year, driven primarily by the accelerated growth in our higher-margin E-Systems segment and leverage of our corporate overhead costs.

Slide 16 shows the key assumptions behind our 2018 guidance. Our vehicle production outlook is based on the April 2018 IHS forecast. Since our prior outlook, most foreign currencies have strengthened against the U.S. dollar led by the euro and the Chinese RMB.

Slide 17 provides a summary of our revised financial outlook. As a result of our strong first quarter performance and outlook for the remainder of the year, we are increasing our full year 2018 financial outlook for sales and earnings. We now expect sales to be in the range of $21.8 billion to $22 billion, an increase of $400 million from our prior outlook. The increase is driven primarily by the benefit of foreign exchange as well as higher production forecasted on key Lear platforms, including the GM large trucks and SUVs. Core operating earnings are expected to be in a range of $1.79 billion to $1.81 billion, up approximately $40 million from our prior outlook. We have increased our capital spending guidance by $30 million to $660 million to reflect additional sales growth, to support significant launch activity, and to reflect the impact of foreign exchange. Free cash flow is still forecasted at more than $1.2 billion for the year.

Now I'll turn it back over to Ray for some final comments.

Thanks, Jeff. In summary, Lear had another great quarter again, reporting record financial results. We continue to experience significant sales growth in both segments driven by a record backlog, including awards with innovation and innovative products like our adaptive seating system and aligned with the trends of connectivity and electrification. With the amount of quoting activity related to these trends accelerating quickly, we are extremely confident that this growth will continue.

Importantly, our focus is, and will remain, on profitable sales growth. With our industry-leading product capabilities, our cost structure, consistent focus on operational excellence and our financial discipline, we are committed to driving continued strong earnings and also superior shareholder returns.

Now, we will be happy to take your questions.

(Operator Instructions) Your first question comes from the line of David Leiker of Baird.

Ray, we have a lot of people in the industry are talking about multi-domain controllers and connected gateway. Can you help a little bit in understanding exactly what it is Lear is doing relative to other people, and what your competitive position is within that product category versus others?

Yes, sure. Actually, Jeneanne Hanley is here who is running our E-Systems business. I may have her elaborate a little bit more on where we're at with respect our competitive position and what we're doing differently.

Yes, I'd love and what we tried to show and maybe I'll take a second here to elaborate is, we're in a very strong position. So in today's connected architecture or architecture, right now, we're #2 in gateway modules. So this is a product we have a lot of experience with, we're #2 in the marketplace today, 18 years of experience, a broad range of customers. So when you take that foundation and then you look at the acquisitions that we've been made over the last several years to improve connectivity, so the Arada, Autonet, EXO that we -- I know that you're aware of as well as our organic investments in cyber security, that's where we're perfectly positioned to take advantage of that trend. So today, we highlighted just one of the products. You can see how advanced it is. So instead of just doing a moderate amount of over-the-air updates, we're now able to facilitate our customers updating all of these used on their vehicle. You can see how there are short-term needs for that today, and then long-term, it ultimately will enable the autonomous world of tomorrow.

So with what you're doing at Audi, this would sit on the zFAS controller? Is that the way we should think about it, or is that separate from that?

So we do have a long-standing partnership with Audi, and so what we have is a connected gateway module so it's an enhanced capability of what we already do. But there's also a secondary communication module that goes with it.

And then just the last one, of your E-Systems, how much of it is in the connected architecture business space today?

So Joel...

It's pretty small. So combined between electrification and connectivity, we're around $200 million today.

About $200 million.

Your next question comes from the line of Itay Michaeli of Citi.

Just to start off with maybe 2 financial questions. First, Jeff, do you have just the organic growth for the company in Q1, and then what the latest thinking for 2018 is? And then just how to think about margins, the rest of the year. I imagine with the FX move that might be having a bit of a dilutive margin on the business. Just wanted to get your updated thoughts on that?

So if you exclude FX, I think we said it in the presentation, the growth in Seating was 6% year-over-year, and in E-Systems, it was 15%. So total company was up 8% year-over-year, excluding the impact of FX with an industry that was down 1%. With respect to, I think your second question was on full year margins, Itay?

Yes, and the cadence as well throughout the year.

I think the cadence is going to be pretty consistent. Obviously, we'll see in the third quarter as we typically do some cyclicality given the downtime that the OEMs typically experience during that time frame. But I think overall, you'll see a pretty even cadence throughout the year of margins in both of our segments. As you look at overall, what we highlighted in January when we gave the initial guidance and I think not a lot has changed as a result -- as it relates to what we see margins for the full year, we highlighted a couple things. One, in E-Systems, we said that there was going to be investment in growth associated with the significant backlog. That would incorporate some margin impact related to the launch costs and the R&D type investment to support the electrification and connectivity. Secondly, we mentioned that we had a couple of previously nonconsolidated joint ventures in China that we took control over and, albeit, it's great business, it's wire business, it's north of 10% business and as a result, it has a return well in excess of our cost of capital. It has a dilutive effect on the overall E-Systems margins that in total are low 14%. And then we highlighted some copper headwinds in E-Systems as well. So all in all, we had suggested and would continue to suggest that we'll see margins full year for E-Systems in the low 14s. And in Seating, again, back in January, we suggested that we had a heavy launch curve, we had about 1/3 of our North American and European JIT business that was going to changeover and we had some headwinds associated with that, coupled with some headwinds that were associated with commodities, primarily steel and as result, we would see margins in -- rather Seating of low 8s. I think it's important to note that, notwithstanding the margins going down year-over-year, for the reasons I explained, the pure increase in earnings is pretty significant, both in Seating in the quarter, that was up 9%, and in E-Systems, our earnings were up -- I'm sorry, 17%. And as you look at the overall margins in the quarter, our overall margins as a company were flat year-over-year, which is -- we're getting the benefit of the outgrowth in E-Systems versus Seating at a higher-margin profile and leverage in our HQ cost that were flat in the quarter. We wouldn't necessarily see those flat for a full year. But the costs would definitely not -- in HQ, would not outpace the growth in our overall top line. So we should see, from a full year perspective, some benefit from the overall company margins associated with those 2 facts.

That's very helpful. And a quick follow up perhaps to Ray on Slide 7 with the increase in quoting activity. How much do you think that increase is just secular growth as opposed to your perhaps indication that Lear might be gaining market share, just given that typically not every supplier is invited for the quoting. So what do you think the split between those 2 might be?

Between the secular and the market share gain, yes, I don't really know, Itay. I'd just tell you that this is an unprecedented amount of quotes that we've seen in the time frame that we've been seeing it. I mean, just thinking back to January when we were talking $700 million in respect to where we're at today, and we have talked before, to get on the bid list is significant. You mean you have to have incredible capabilities in respect to just getting on the bid list and they audit your plants, they audit your processes, they do technical presentations. This process, in some respects, can take anywhere from 3 to 6 months as we go through a quoting process. But I think the key here to is just the unprecedented amount of quoting activity we're seeing in connectivity and electrification.

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

Ray, just a follow-on question on E-Systems and the quoting, maybe a little bit on the end markets that we're seeing. You had a success around 48-volt. Could you talk a little bit about maybe the breakdown of sort of 48-volt versus maybe higher forms of electrification driving the quoting activity?

Yes, it's kind of a shifted. We're seeing more of a 50-50 split now between electrification and connectivity. I think when we were talking earlier it was more of a 2/3, 1/3 electrification connectivity, and we're definitely seeing the pick up in the connectivity side of the quoting activity. As far as the breakdown, Jeneanne, do you have any numbers with respect to...

Yes, I mean, just looking out a little bit further in the future and then we'll pull it back in. When you think of 10 years out and the entire marketplace having an opportunity of $44 billion, we believe that $9 billion of that will be in mild. So even though the CPV is on the lower end of the range that we've provided, when you think that will be where predominantly even in Asia and in Europe, a bigger portion of their electrification strategy up to 30%, we're definitely seeing a lot of activity in that. But also, in the fold, there's a full range of vehicles. The customers are really spreading their options out and I would say, it's the full range of electrification at this point.

That's great, and I know you've given these numbers before but could you just remind us the historical rough range of conversion factors from quoting to backlog. I think people just are trying to get the sense -- obviously electrical demand is going up, but if we were to see, I don't know, a couple of years of $1 billion each of quoting, what would that typically convert to in terms of a backlog on...

What our win rate is in respect to this (inaudible)

Yes, exactly.

So historically, it's been between 20% and 25%.

Okay, perfect. And that would be essentially the 20%, 25% is an add-on to your sort of the longer-range backlog, right, this is sort of a top up?

Yes, I think what you've seen historically in the third year, there's still quotes that we're going through. Usually in a lot of cases we've doubled that third year, so we have had quotes that we're working on today that will be reflected in our third year backlog.

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

Last night, Ford announced that they're getting rid of some of their cars. Can you remind us what exposure you have and if that's reflected in your backlog right now?

Yes. There were some -- obviously, there's some discussions with Ford. There's one program in the passenger side that would be reflected in our backlog. However, what kind of the way we look at it, we have a really good relationship with Ford Motor Company. If they're going to transition any type of product, our relationship with them if it's in Hermosillo, the infrastructure we put in place, we work closely with them on the transition to any type of vehicle they're talking about and make sure that we're the most cost competitive, the best quality and deliver the best product to win and secure any business that might be replacement for that plant. So it's minimal. It's the Fusion in Hermosillo.

Got it. And can you remind us your deal -- I mean, you said it was a headwind, any quantification of how large it is? And what, are you 2/3 hedged on the deal?

Yes, with respect to steel, we buy about 3 billion pounds of steel a year and of that buy, we're exposed at roughly 10% at that buy. The other 90% is either we participate in a steel buy program with the OEMs, which they handle the risk where the steel comes in a fabricated way. So we've highlighted some exposure in our '18 guidance, 10 to 20 basis points on steel. We have bought ahead for our entire steel buy for 2018. So any changes in the current steel prices with respect to the impact on '18 will be fairly negligible.

Got it. And can you just remind us -- I'm not sure if I missed this earlier, but I think you said there was $600 million of electrified and connected business between the backlog on what you have today. What is the split of that number of EVs, 48-volts and connected?

Yes, it's a 2/3, 1/3. Right now, it's electrification in the 2/3.

2/3, electrification. And is that 48-volt for EV, like -- and you're talking about inverter type business wins?

It's a combination, but primarily 48-volt.

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

So one follow-up question on this large backlog in electrification and connectivity. What kind of margin does it sort of come into your revenue? Is there some initial below average because of the investments, or sort of like the lack of initial scale? Or is it very profitable, pretty quickly?

I'll put it this way, we have our financial disciplines. And when you go after business and we win business, it hits the metrics that we have internally financially. So we don't take business that is below the threshold that we have set up as far as acceptable. So it's good business, it's profitable business. I mean, you've seen where our margins are at in E-Systems and its in line with that.

Understood. Okay. And then, I guess, sort of just switching gears to the Seating side. So your main competitor there has been having troubles on the structures and mechanisms business. Can you just...

Thank you for bringing that up.

Can you please remind us from your point of view, I guess how important is this of a capability to have as a Seating supplier? What is the sort of revenue you derive from these? And is it a structurally challenging business, or are there any specific issues here?

Yes, thanks for that question. One, we've always focus on structures, and we do believe you need some capability. We don't think you need to have an enormous amount of capability with structures. It does give you some advantages in certain circumstances but we can still do extremely well, as you can see from our results, without having a big chunk of our business in structures. And our businesses is profitable. And we still have more work to do but nonetheless, it's profitable. So we don't have a desire to go out and grow that business just for the sake of growing it. In respect to your second question, how difficult it is, that is a very, very difficult business. And it starts with the right people in respect to their experience, and we're talking about tools and dies and PFMEA and DFMEA and control plans, et cetera that you have to invest in this business 3, 4, 5 years prior to any type of particular launch. And so, I say, these guys hear me say it all the time, in trim or JIT or wiring, we can put people in place to fix a particular issue. In structures, you can't. You have to, in some cases, start from the ground up, revalidating new tools and dies, capital equipment Pokey Oaks, fail safes, everything. And so it is a very challenging business and when you do have issues, it is very difficult to get out of. And then I'll answer any questions in respect to if we're going to take any of that business on if -- it hasn't been asked, but we're not going to take any of that business on.

Okay, that's super helpful. And then just a very quick clarification, you were talking about some of the E-Systems' margin dynamics and one of them was consolidation of some of the JVs in China. The -- sort of below average margins there, is that a function of the geography or is it just the type of -- the mix of products that you manufacture there that are lower margin?

Well, I think, a, it's wire and as a result, there's the lower investment cost associated with wire. So typically, we would gain a return on our investment at a margin profile north of 6. But I think the bigger issue here with this JVs is that we've take an over operational control of these JVs and as a result, we'd be able to apply the Lear operational disciplines that we have not been able to do prior. So I think given the fact that we can get in there and do what we need to do, we should anticipate seeing the margin profile get back up to where the other type of wire business, both in that region and in other regions would be.

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

This is Dan Levy on for Brian. I just wanted to ask about the E-Systems growth. Certainly, this organic growth is really robust, but I guess just more of a historical question. When I compare this to what you were putting up in the segment several years ago, which had organic growth of sort of low to mid-single digits, which is certainly fine, but it's below what your comps are. I guess, I'm wondering, what is really inflecting today that wasn't occurring several years ago because one would argue that a lot of the trends that are in place that are benefiting E-Systems today, those are things that should have occurred great several years ago. So is there catch up of some sort? Is there any one particular product? Is there any one particular customer? Why is it so much better today than it was several years ago when some of your competitors were getting that growth several years ago?

Well, I think, this has taken some time too. If you go back, I remember when I first was in E-Systems and it was $1.6 billion in lost money and there was talk of what we should do with that business for a completely different reason. But what we did was we invested in our people and we brought in some of the best, most talented people and that did take some time. But putting that talent in place, building those capabilities, not just from a people standpoint but from an infrastructure standpoint, we invested in the business with the right capital allocation, how we looked at our plants, how we set up the inorganic investment that we made and organic investment we brought in. So we built one heck of a division that now is -- you're seeing the results. I mean, we are in a great position to grow and return great returns to our shareholders. So I think on top of it, not just what was more traditional, this secular growth story. I mean, this is really compelling. It's unprecedented and like I said, with what we're seeing with these trends with connectivity and electrification. The investment, that we made, is playing out perfectly with these trends that are moving the industry forward.

Okay. And just one more follow up on the segment. The other thing that you could compare and contrast today versus several years ago was that you had much more significant margin expansion, albeit coming off of low comps, your margins are fraying a little bit here but some of that is investment, I get that. But what's the ROIC that you're seeing on the business that you're winning today versus what you were bidding on several years ago? Is it comparable, because I believe for a while, you said it was sort of abnormally high and that it could come down. There was still room to be profitable, but maybe you could take more growth but at slightly lower margins. So how is that dynamic today versus what it was several years ago?

I think overall, the dynamics are that we are -- the ROIC that we're getting on the business is higher than what we've seen in recent years. But I think it's important to understand that given the current configuration of the products that we have in the E-Systems, 2/3 of it if being wiring, which is relatively low investment, we get a return on our cost of capital in that segment with a margin profile at around 6. So the fact that the margin profile is in the 14s suggests that we're getting a significant return on that. So there's a natural baffle associated with what the OEMs are going to allow you to make. But I think in general, if you look at the ROIC returns that we've had over the last several years, they continue to grow.

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

I wanted to ask you, could you elaborate a little bit on your willingness to increase your metals segment? I think there's an announcement earlier in the quarter that you were increasing some capacity in one of your European facilities and again, it's one of our -- the conversation alluded to earlier, one of your competitors having a bit of challenges there. I was just wondering how much Lear would be willing to pick up some of that slack if they were asked to by their OEM partners?

Yes, to answer the first question, we did make an announcement that was more specific to a customer increased volume request. And so that was very specific and, obviously, we were extended some fair returns in respect to our investment. The second question, to be very clear, we have a lot of great things going on right now. We have our own launches. You can see we're launching and some of the most exciting products are going to be launched this year and next year and the following year. So we're focused on what we needed to deliver to our customers in order to deliver us growth for the future. We have zero interest in picking up any structures business that is in a situation of crisis. That can become a distraction and it can become a serious problem. We have way too many opportunities that are a lot brighter in our future than picking up a structures business from a competitor that's having problems.

Okay. Understood.

The only thing I'll add there is that in the event, I've said this, if a customer does come to us and they want us to pick up the business, if they're willing to give us their JIT plant with it, maybe we'll talk about it.

Understood, and that's fair from an overall corporate return and what your ROIC is relative to your cost of capital for those businesses. Maybe shifting gears. One of the underlying, I think, trends that you're pointing and kind of continuing to harp on is just the shift from passenger car to light truck and where you're seeing a significant amount of that new business is coming on. Can you just refresh us on what the profitability difference is for Lear moving from a passenger car to a light truck platform?

Well, I think it's really a function of the content difference. And, for example, in a SUV, you typically have 3 rows. They tend to be more outfitted with leather and other type of content features. I think what we generally see in terms of those type of vehicles, it could be gross margins or contribution margins in the 15% to 15-ish percent. And when you get into the passenger cars with 2 rows, which may be doesn't have as much content in it, they could be 12-ish -- 10% to 12%.

Okay. And just lastly I know we talked about it a little bit earlier today, on the E-Systems quoting, a lot of business out there. Who are you seeing as your main competitors? Is it the traditional, let's call it, E-Systems suppliers that we would think of from a Tier 1 automotive perspective? Are you seeing anyone else, any Tier 2s or technology companies trying to come in and take those businesses.

Yes, for the most part, it is the traditionals but there are new entrants, there are new players. I mean, there are some other, as you are aware of, technology companies that are looking to get into the space. But for the most part, it's the traditionals that we compete against and have competed against for years.

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

I just -- if we look at, and I notice a big CPV increase in Europe, is that primarily driven by some of the higher E-Systems as some of the more content gets on? And then, I guess, related to some of the E-Systems commentary and disclosure you put in earlier on the bidding, how does that break down geographically, especially compared to the existing E-Systems geographic breakdown?

I'll take -- Joe, I'll take the first one with respect to the CPV in Europe. We did see a pretty significant increase in the CPV in the first quarter. There's really 3 main elements to that, the biggest of which is FX, the euro appreciated significantly between first quarter last year and this year. We did have a significant backlog in that region as well. And we had an acquisition that we -- the Grupo Antolin acquisition came on in, I believe in May last year. So year-over-year, the Antolin sales would be completely incremental year-over-year. So those were the 3 main factors that drove CPV in Europe.

Okay, I didn't realize you -- I thought CPV were constant currency. And then just on the E-Systems sort of bidding opportunity versus sort of the current mix business geographically.

So right now, we're seeing -- I think it's a bit comparable, may be more heavily weighted to North America and Europe but we have obviously, or have been in close contact with the customers. And we believe that there are more firm opportunities to come specifically in Asia. I think that something -- it's going to be a little bit dynamic. But right now, the bigger -- it is somewhat correlated to the current business that we have today.

So about 1/3, 1/3, 1/3.

Okay. And then just getting back to the structures business. So I mean, if a competitor does sort of tow a harder line with their customers on the pricing required for that, wouldn't -- am I not thinking about it correctly that, that would be positive for you as well.

Yes, that would be positive. All the relationships of all the components that ship through us are directed components. So that's something that they would have to work out with our customer directly, and unfortunately I kind of know a little bit about that, and that doesn't go well. When you go and ask for price increases or want changes or you want to relieve yourself of your contractual obligations, that either puts you on immediate new business hold, it locks out any growth opportunities and the next step is they start to remove -- to desource you on programs that you -- are usually your most profitable.

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

This is Aileen Smith on for John. Can you talk about the realization of the backlog in the quarter relative to your initial estimates, especially with production schedules that moderated through the quarter in some of the major regions?

I think they came in right where we thought they would be. I think we had a pretty good balance and if you look at the backlog for the full year, it's going to be a fairly ratable cadence of the backlog in each quarter.

Okay, great. That's very helpful. And to ask a related question to Joe's on the pricing dynamics as result of some of the pressures one of your competitors is facing, some of your other peers are forecasting some pretty substantial growth in their respective seating business over the next few years. With these dynamics and again, in a more muted volume growth environment, would you think that pricing competition among the major players for quoting new business would increase or change in any material way?

No, I don't think anything is going to change. I don't think it has changed. We hear that -- there's always been a irrational players in our space. And one thing I'll add to that, our customers are very sophisticated too. They know when you're taking it below just to try to win business and those programs haven't worked out well for the customer or the supplier. In some cases, we've even have had to go in and build seats for some of our competitors, like last year, we built seats for one of our competitors because a lot of different reasons. But I think it -- my opinion was it was because it was below market and they didn't put the right capital investment in place. So it hasn't changed. We haven't seen it change, and I don't see a significant change moving forward either.

Great, understood. And one final question for Jeff. If I'm looking at your full year outlook for operating earnings versus what you reported in Q1, it implies what could be some seasonally lighter earnings in the back half of the year. Is this more a function of conservatism on production schedules? Or from where you sit now, is there anything notable on product launches or roll offs that might be hitting a bit harder in the back half of the year?

No, it's pretty much what we thought. Quarter in, I think the industry volume environment has been a little bit better than what we had anticipated. The FX environment has helped us out as well. But other than that, I think it's exactly what we thought it would be. And I think that if the industry conditions hold with respect to commodities, volume, mix, those type of things, I think we would post at the high end of our guidance.

Your next question comes from the line of Armintas of Morgan Stanley.

When we think about the opportunity at the vehicle, I think Aptiv talks about 40 terabytes an hour of raw data that is generated by an autonomous vehicle. Given the investments you're making in connectivity, can you talk about the data opportunity you roll in that developing ecosystem? And then just curious about your capabilities, how much of it is a mix of software versus hardware, if you can talk about that, that'd be great.

Yes, I'll take that, I mean, maybe I'll start with the back one. Obviously, we've said before, well over 3,000 engineers and growing, both on the hardware and software side, so we're fully staffed internally. So we do that in-house. You talked about the quantity of data that's being transferred and the speed. And again, we highlighted one key product, and that's why the 4.5G capability, and we all know in later years, the 5G capability is going to be critical to enabling that. So one of the things that we do that's maybe a little bit different than our competition is we're partners with our customers, we don't compete with them. So we're going to help them manage that data, bring that data in with more accuracy, quickly, lower latency. It isn't in our plan right now to try to own that data or monetize that data but we do have full capability in delivering it with speed and with accuracy.

Okay. And the gateway product, just trying to understand sort of the very basics, so pardon my sort of ignorance here. But is that transferring data to the vehicle, from the vehicle, within the vehicle? How do I think about just the very basics of what your gateway product does?

Yes, starting at the foundation, it was just what you would think it would be, it was more internal to the vehicle, but a central hub. So it still required a high amount of processing ability to consolidate the communication. Kind of the first level of connectivity became some of the infotainment updates or some of the connectivity module updates that you would traditionally find with your cellular or Bluetooth service et cetera in the car. Again, what we're able to do now, so it's a super or connected, enhanced gateway, in addition to the communication module is your over-the-air updates now can address all of the ECUs in the vehicle. So now, the think about the ability to update quickly for warranty or software bugs, et cetera, it really takes on a much expansive role in the vehicle.

Okay. And if you're not trying to own or monetize the data, just trying to think of the revenue scheme for your end, is it just effectively a one-time payment for a vehicle? Or is there any sort of recurring revenue model that you're working through?

That's -- let's talk through this -- our value proposition for our customer is right in line with what we're doing with connectivity at the gateway module. As far as getting in -- and I know there's some mega tiers getting into that space and in some respects, competing directly with our OEM customers. That's not something we're interested in. We have a really good value proposition, delivering the gateway and the seat boxes in the space that the customers really sees us as delivering value in. But as far as getting into those adjacencies, that's not something we're interested in. I think that gets in complete conflict with our customers and like I said, the opportunities in front of us are enormous, and we just have to make sure we capitalize on them.

Your next question comes from the line of Anthony Deem of Longbow Research.

So I have a few questions here. First, can you give us any early indications of Seating quoting activity year-to-date or awarded business? Do you see last year's momentum continuing into 2018, or potentially are competitors getting better?

No, I think we're still, from a success -- let's just say, from a win rate, we're still at the same level. There is more of a secular nature of the seat business as we're going through quotes because we are going through the heavy quotes right now as far as our launches. But where we see opportunities in seating is in China. I look at China and right now what we're spending a lot of our time and effort on is we have one of our competitors has 50% of the market share. We believe that's their Achilles heel. We think the domestics -- and we've had numerous meetings with the domestics now, they're taking a much more traditional look at their business. And they want a more balanced share of wallet, meaning they want multiple seat suppliers in their portfolio. They don't want exclusively one partner because they want technology. They want the efficiencies, they want the cost advantages, and they want the quality. So what we're seeing is where the growth is going to come in Seating is with the domestics in China, and we think that's a big opportunity for our growth.

Very helpful. In your quoting activity of $1 billion in the emerging categories, just 2 questions. Is the split between the consolidated and unconsolidated even with your existing backlog, call it maybe 75-25? And then secondly, you mentioned connectivity used to be 1/3, now it's half. So obviously that trend has really taken off. Is that primarily in OTA, V2X or security, or maybe an even blend of all these categories?

To answer the first question, we're actually growing at an accelerated rate to what we have today. So have about a 70-30 position with the domestics and the foreign OEs and I think you saw with our growth rate, it was 40% with domestics. So we're actually increasing our domestic content in China. In respect to the second question... Jeneanne.

Yes, just on the connectivity, it is dynamic. I expect when the time is right or there's another update with the backlog maybe next year we'll continue to communicate with you but we have to be prepared for it to be dynamic. Connectivity, in particular, we're seeing the full range from just the baselevel embedded communication, the high end, which we talked about today, which was more the over-the-air but there is activity in the V2X area. Obviously, these are different horizons but we are seeing activity with the V2X as well.

And then just a last question, given the Ford North America announcement and the larger trend really this consumer preferences towards larger vehicles. In your estimation, when do you expect the industry sales mix benefit and the shift out of the passenger cars to really plateau? Do you see that as an early next decade issue? And does your backlog or conversations with customers give you any indication?

Wow, that's a heck of a question there. Yes, I think, I mean, we have seen a significant shift, there's no question about it. And where it ends up, I really don't know. The programs that we're working on, fortunately for us, are a lot of the popular brands that we're seeing that are going to launch over the next several years. But as far as giving you a final percentage, I don't have that number.

Fair enough.

Yes, thanks,.

Your final question comes from the line of Jeff Osborne of Cowen & Company.

One quick one, I might have missed this. But is there a differential in margins in E-Systems as you -- as the mix of quoting 3 years out moves more to connectivity versus legacy wiring and other electrical aspects? I'm just trying to get a sense of 2020 and beyond, should we still be thinking in the 14s or as there's more cybersecurity and hardware software platforms with compute...

I think the way we look at it is everything's got to earn a rate of return on the investment. And when you look at connectivity type programs, it's a higher-level investment type business. So as a result, it should theoretically have a return or a margin profile that's slightly higher. But it's not going to significantly change kind of where we think in the near term E-Systems is going to be. I think we still see given that we're going to be in that low to mid-14% range.

Got it and then maybe just one quick follow up. You mentioned the win rate of 20% to 25%, is that pretty consistent within electrification and connectivity or are you higher or lower or one or the other?

It's actually a little bit higher than I think what we've seen traditionally than where we're at today. So yes, it's a little bit higher.

Okay, I think that's it, I think no one probably left on the call is the Lear team. I just want to say a couple of things. One, we do have the best team in the industry, there's no question about it. And it's part of the results that we keep continue to produce quarter-after-quarter, and I just want to thank you for your outstanding work. It really pays off with everything we're doing. We have a really tough year this year with our launches but I know we're up for it and then like I said, thank you for everything that you're doing.

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