L e a r ( L E A ) Q 1 2 0 1 7 R e s u l t s E a r n i n ... · Apr. 26, 2017 2:27 PM ET by: SA Transcripts Q1: 042317 Earnings Summary EPS of $4.27 beats by $0.34 | Revenue of $5B

5/2/2017 Lear (LEA) Q1 2017 Results Earnings Call Transcript | Seeking Alpha

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Lear (LEA) Q1 2017 Results Earnings Call Transcript

Apr. 26, 2017 2:27 PM ETby: SA Transcripts

Q1: 042317 Earnings Summary

EPS of $4.27 beats by $0.34 | Revenue of $5B (+ 7.3% Y/Y) beats by $70M

Lear Corp. (NYSE:LEA)

Q1 2017 Earnings Call

April 26, 2017 9:00 am ET

Executives

Joel Elsesser Lear Corp.

Jeffrey H. Vanneste Lear Corp.

Matthew J. Simoncini Lear Corp.

Frank C. Orsini Lear Corp.

Ray Scott Lear Corp.

Analysts

Brett D. Hoselton KeyBanc Capital Markets, Inc.

Ryan Brinkman JPMorgan Securities LLC

Colin Michael Langan UBS Securities LLC

David Tamberrino Goldman Sachs & Co.

Chris McNally Evercore ISI

Joe D. Vruwink Robert W. Baird & Co., Inc. (Broker)

Dan M. Levy Barclays Capital, Inc.

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Adam Michael Jonas Morgan Stanley & Co. LLC

John Murphy Bank of America Merrill Lynch

Rod Lache Deutsche Bank Securities, Inc.

Matthew Stover Susquehanna Financial Group LLLP

Operator

Good morning. My name is Angel, and I'll be your conference operator today. At this time,I would like to welcome everyone to the First Quarter 2017 Earnings Conference Call. Alllines have been placed on mute to prevent any background noise. After the speakers'remarks, there will be a questionandanswer session.

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

Joel Elsesser Lear Corp.

All right. Thanks, Angel. Good morning and thank you for joining us for our first quarter2017 earnings call. Our press release was filed this morning with the Securities andExchange Commission, and the presentation for our call is posted on our website,lear.com, through the Investor Relations link. Today's presenters are Matt Simoncini,President and CEO; and Jeff Vanneste, Chief Financial Officer. Also participating on thecall 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 forwardlooking statements that are subject to risks and uncertainties. Some of the factors thatcould impact our future results are described in the slide titled, Investor Information at thebeginning of the presentation and also in our SEC filings.

We will also be referring to certain nonGAAP financial measures. Additional informationregarding these measures can be found in the slides labeled NonGAAP FinancialInformation at the end of the presentation.

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

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


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Thanks, Joel. We are off to a great start to the year. Both of our product segments areperforming well, we're the most profitable seat maker, and both product segments areachieving returns well in excess of our cost of capital.

We expect to close on the acquisition of Grupo Antolin's seating business in the next fewdays, funded by our existing cash balance and we are constantly improving our alreadybestinclass footprint. The recent meaningful increase in our quarterly cash dividend andthe increase in our share repurchase authorization reflect the confidence we have in ourability to continue to generate positive cash flow. Since 2011 we have increased ourdividend every year and we have repurchased nearly 40% of Lear shares outstanding.

Slide 6 shows vehicle production for the first quarter with increases in all major autoproducing markets. In the quarter, 23.9 million vehicles were produced globally, which wasgenerally in line with the guidance we provided in January. The dollar strengthenedagainst both the euro and the Chinese RMB compared to 2016, and overall, foreignexchange had the effect of reducing our sales by approximately $60 million during thequarter.

Slide 7 shows our reported financial results for the first quarter 2017. Reported sales inthe quarter increased by 7% from a year ago to $5 billion. Excluding the impact of foreignexchange, our sales increased by 9%, reflecting our strong sales backlog and increasedproduction. Pretax income before equity income, interest and other expense was $417million, up $43 million from a year ago. Other expense was $4 million in the first quarter,down $5 million from last year, with the decrease driven primarily by lower foreignexchange losses. Net income attributable to Lear was $306 million, up $57 million, drivenby the increase in sales and our strong operating performance.

Slide 8 shows the impact of nonoperating items on our first quarter. During the quarter weincurred $9 million of restructuring costs primarily related to census actions. Other specialitems include a tax benefit of $16 million related to a change in the accounting for sharebased compensation. We have excluded this benefit to keep adjusted tax expenseconsistent with prior years and more reflective of our operational run rate. Excluding theimpact of nonoperating items, we had core operating earnings of $432 million, anincrease of $45 million from 2016. The earnings improvement reflects the increase insales and favorable operating performance in both segments.

Adjusted for restructuring and special items, net income attributable to Lear in the firstquarter was $300 million and diluted earnings per share was $4.27, up 26% from 2016.The increase in earnings per share reflects improved operating earnings, the benefit of our



share repurchase program and the lower effective tax rate.

Slide 9 shows our adjusted margins for the first quarter. Lear's adjusted margin was 8.6%,up 30 basis points from a year ago, reflecting the addition of new business, higherproduction on Lear platforms and operating improvements in both segments. Theinvestments that we have made over the last several years to improve our cost structureand expand our product capabilities are reflected in the market share gains and marginexpansion in both of our segments.

Slide 10 provides a summary of free cash flow, which was $158 million in the first quarter.The company continues to generate strong free cash flow. Our free cash flow yield is thebest amongst the peer group and within the top 10% of all companies in the S&P 500.

Slide 12 shows the key assumptions in our 2017 outlook. Our financial outlook is based onan industry production assumption of 93.2 million units, an increase of 2% from 2016 andconsistent with the guidance we provided in January. This is in line with the most recentIHS forecast and customer releases. Our estimates for global currencies remainunchanged from our prior outlook and include an average euro value of $1.05 per euro forthe year.

Slide 13 provides our financial outlook for 2017, which is unchanged from the guidance weinitially gave on January 10. This guidance excludes Grupo Antolin. We plan to update ourfullyear guidance during our second quarter earnings call to reflect our results through thefirst half, as well as the addition of Grupo Antolin.

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


Great. Thanks, Jeff. Slide 15 shows our performance for several key financial metrics aswell as our most recently announced three year sales backlog. I believe that thisoutstanding performance is the result of our balanced strategy of investing in thebusiness, maintaining a strong and flexible balance sheet and returning cash toshareholders, all executed by the most experienced and stable management team of anyauto supplier.

I also believe that we're well positioned to take advantage of major industry trends such assafety, efficiency, connectivity and globalization. However, even with this profile, we tradeat a discount to the peer group. I believe our track record of performance, our position totake advantage of these major trends, and our growth profile justifies a valuation well inexcess of the average.



In closing, we had our best quarter ever with record results of sales and earnings. Theinvestments we've made in our cost structure and our product capabilities will driveanother year of outstanding financial results. This year, as we celebrate our 100thanniversary, the company has never been in a stronger competitive position and I havenever been more optimistic about our future.

Now we'll be happy to take your questions.

QuestionandAnswer Session

Operator

Your first question comes from the line of Brett Hoselton with KeyBanc. Your line is open.


Good morning.


Good morning, Brett.


I was hoping to ask you a little bit about contribution margins. Seating, I calculated about11%, that's over the 8.5% you reported this quarter. And then Electrical continues to reallyoutperform, up 20% yearoveryear, versus 14.9% quarter (13:22). My question is, is thereany reason to believe that those contribution margins will change materially over the nextfew years, whether it be maybe some lower margin new business in your backlog orpossibly some structural cost changes?


No, on average I think it'll be consistent. We benefited I think, from a pretty good mix. Butyou got to understand something, Brett, Lear Corporation believes in selling the product ata fair cost, and a fair price, I should say, that we expect a return on our backlog. We don'tsell just for the sake of selling. Our management team is not incentivized just on salesgrowth. We're incentivized on earnings growth and return on investment. So we look ateverything on a return on investment. So longer term it kind of depends on the productmix. Certain products don't require a higher margin to get the return on invested capital



that we require. So you could see possibly some changes there. And other componentsquite frankly demand a higher margin to get the return in excess of our cost of capital butin general I think this is a pretty clean quarter.


Okay. And then just secondly, as you think about your Seating business and the ESystems business, is there any logical incremental steps, maybe some boltonacquisitions or some larger acquisitions – not suggesting you add another leg to the stoolor anything along those lines. But is there potential to make, let's say a larger acquisitionto extend the capabilities of maybe the ESystems business?


The pickings are becoming very slim and very pricing – very pricey I should say. We areconstantly looking at opportunities to extend ESystems, and also to support theconvergence of Seating and ESystems. Seating, in many cases, are becoming softwaredriven. And we're seeing a convergence with our capabilities in software and electronics inmany ways supporting our intelligent seating capabilities. And so we'd look for somethingthat could possibly benefit both product segments. I don't see anything in the neartermhorizon of size. But in the same token, we never expected to be able to pull off EagleOttawa until shortly before it became available. So the industry is fluid, the opportunitiesare fluid, and yes, we are looking for investments that would extend both those productsegments and support the convergence of Seating and ESystems.


Thank you very much, Matt.


You're welcome.

Operator

Your next question comes from the line of Ryan Brinkman with JPMorgan. Your line isopen.




Great. Thanks for taking my question. Congrats on the quarter. Could you talk a little bitabout the strategic benefit of the Grupo Antolin acquisition such as if it strengthens yourposition in certain desirable customers or geographies? And then is there anything youcan say broadly at this point about the economics of the transaction, like the valuationlooks to be something like one times sales versus Lear is maybe more like 0.5 times? Andthen, what type of margin do they have? And where could you take that, what kind ofsynergies? How you think – how should investors think about this?


Well, Scott, (sic) [Ryan], it's a perfect tuckin acquisition for our seat business in that itcomes in with sales that would help diversify our sales in Europe. Daimler; grows ourbusiness with Daimler and with PSA just to name a couple of them. It also has greatcapabilities in components and a pretty good footprint with manufacturing in EasternEurope – I'm sorry in Eastern Europe and Northern Africa, to name two locations. So fromthat standpoint, I think it adds diversification, some nice product component capabilities aswell as some nice manufacturing capabilities.

I think from an economic standpoint, it's roughly on an annualized basis about $300 millionin annual revenues and the margins are fairly consistent with our seat business as theystand today. We're still working through some of the purchase accounting issues and theoverlays that may adjust that slightly. But on average, that's kind of how we're looking.

From a multiple standpoint, the reality is, unfortunately, everything in this space is going tobe slightly more – a higher multiple than Lear Corporation. Which speaks a little bit to thecomments I was making at the end of the call, which there is no reason for Lear to betrading at a discount but if we use that as a guide, then I don't think we'd be buyinganybody unfortunately. So overall, we think it was a great buy. We think there's a lot ofopportunities with that segment, it comes with a really good management team and somegreat capabilities.


Okay. That's very helpful for us. Just last question is on ESystems, organic revenuegrowth in the quarter, pretty strong, up, I think, what, 8%orso, at least the top line. Canyou just kind of help us understand the driver of that? So as I think about kind of theproduct areas, you sort of got the wire harnesses, then you've got sort of like the terminalsand connectors, you've got some of the electronics, including some higher value add stuff.Is there anything in particular that's driving this from a product perspective?




Well, I have Frank Orsini, our President of that segment here on the call today. Frank, whydon't you explain how you're driving growth there?


It's very evenly spread out amongst all the product lines. We're seeing growth on all threeareas, so electrical distribution, wire harnesses, we're seeing growth on the terminals andconnectors side and we're seeing growth on the electronics side and that's coming in allthe regions as well. It's pretty well balanced. You take a look at North America, we've wonsome business there and that's impacting our backlog and the results in Q1, but we'vealso seen growth in Europe and we're seeing growth in Asia as well. So it's really a verynice balance amongst all the product lines and the regions.


Okay. Thanks for all the color.


You're welcome.

Operator

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


Great. Thanks for taking my questions and congrats on a good quarter.


Thank you.


First question is one of your competitors is talking about entering airline seating or otheradjacent markets. I mean, have you looked at sort of these adjacent markets? And what isyour thought on potentially entering those kind of segments...?




Sometimes it's really great to go in adjacent markets when you can't make money inseating, in the automotive seating. I think, in many cases, that our capabilities play intononautomotive with fabric and leather and sewing and precision assembly and weactually do have a growing nonautomotive fabric business that's been very profitable forus and we're looking for opportunities to use some of what we do in nonautomotivewhether it's airline seats, good luck with that.


Okay. So you're not actively pursuing anything outside of auto at this point?


I think there are certain capabilities at Lear Corporation that lends itself to nonautomotiveapplications. The AccuMED acquisition, for instance, really extended what we're doing innonautomotive into certain applications in medical. I think that would be one example ofwhat we're doing there, extending kind of our product capabilities into other outlets forsales.

I'm not so sure aviation seating is the way to go, in fact, we're not pursuing it. We don'tthink it's the right thing for Lear Corporation, the product liability and the limited amount ofseats that are available in that market really doesn't make financial sense.


Got it. And any color, why, given the strong start to Q1, why didn't you change guidance?Are there hiccups or mix issues as we go through the rest of the year that we should bethinking about or just the uncertainty? Any thoughts on the...?


It's still early. It's still early in the year. It's four months in. We've had a great start. If themacros hold the way we think and that we project, we'd expect to do significantly betterthan the $1.6 billion in NOI which has been our history. But a bit little early in the year, let'ssee how it plays out. And then with Grupo Antolin, what I wanted to do is get through theacquisition, close it, be able to dig through their numbers and then give a comprehensiveupdate on guidance and we'll do that a little bit later in the year.


Great. All right, thank you very much.



Operator

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


Thank you. Good morning, gentlemen, congrats on the quarter. I want to followup kind ofon a couple of the threads that we've been talking about so far, Grupo Antolin, not raisingthe guidance right now. If we think about where we are, at least in North America and inChina at the end of March from an inventory perspective, it seems like we're a little bitmisaligned with where sales have been. Is there anything that you're seeing in the nearterm expectations for production schedules in those regions from your customers thatwould point to any bit of softness?

And then on the back of that, so think about the 2H 2017 for you at least in North America,GM is one of your larger customers. How much of that 10 weeks of shutdown that they'veannounced is fully baked into your current guidance right now and possibly helping keepthat flat at least in the nearterm?


Starting with the back half. Yeah, the GM announced shutdowns and changeovers on theK2XX as they start the running change of that platform is all factored into our guidance.We're seeing some chop in Asia and some rotations in product and mix. Specifically we'reseeing a little bit of weakness I think in the Ford brand. Specifically, I think, the Kuga carline is one that we've seeing some recent pullback in production schedules. But allinall,the year has shaken out pretty much as we expected when we gave guidance back inJanuary.


Okay. That's helpful and then just from a competitive environment standpoint, I know we'rea little bit longer in the tooth here, at least in North America and OEMs have to continue tolayer on incremental incentives to really hold this 17 million pace. Have you seen anyadditional pressure, any quick savings if you will, in order to win RFPs for the longertermfrom the nearterm?

And then on that, one of your competitors again, still out there looking to build a backlog ofbusiness, you've said in the past you've seen a little bit more pricing actions from them,just wondering if that competitive environment has increased or maintained or decreased?




No. It's about the same. I mean, part of the benefit of being Lear Corporation is with ourvertical integration and product capabilities and footprint, we don't have to compete on inmany cases on just giving the product away in order to penetrate sales. So theenvironment really hasn't changed and the fact that there's irrational pricing in a space attimes is nothing new.

We've seen it in the past, whether it was Boshoku or Faurecia when they're trying topenetrate or diversify their sales in North America. So it's not a new game. It's not asustainable game. It's not one that you can continue for more than a couple years withoutgreatly damaging the profitability of a business or hurting a customer by coming in andraising pricing later.

So it's not something that we do. We've been able to grow our sales all through this,again, driven by our unique product capabilities and I think our industryleading footprint.So the environment is tough, it always is. We choose to compete on capabilities and ourcost structure as opposed to subsidizing customer programs.


Understood. Thank you.

Operator

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


Thanks so much, guys and congrats again on a great quarter. Just two quick questions,just a followon to the mix question that was previously asked. Last year, I think you calledout Ford sedans as being one of the only areas of mix weakness. Can you just go into alittle bit more detail about where we could – what's on your radar screen for platforms orareas of the market that you would be concerned about this year?


I just think there's a rotation away from pass cars in general. For us, we are on Ford passcars, so we see it probably heavier with Ford pass cars because we have a big book ofbusiness in those vehicles, but I think general, North America, what we're seeing is a



rotation to CUVs and SUVs, which in the long run I think, would benefit Lear Corporationbecause there's typically more content, more seat content in a CUV than there is in a passcar on average. So we're seeing that general trend.

And then in Asia, what we're seeing is continued penetration of the domestic vehicles asmore and more, the domestics are grabbing market share away from partner vehicles.And again, I think, in the long run that will benefit Lear Corporation since we have greatrelationships with pretty much every domestic automaker. Those are probably the twomajor trends out there. I mean, the sales rates are the sales rates. We're seeing itconsistent with how IHS is and that's why we're using them to help guide on salesguidance.


Okay. That's perfect. And Matt, because essentially the same thing happened last yearand even though there was some negative mix on the sedans, we didn't see it affect themargins. How should we think about seasonality, maybe a little bit this year, given that mixfor trucks was actually strong? Or from a production standpoint in the first half and it'sfactored into guidance, should we expect less of the profit seasonality to occur in Q3 andQ4 because of the K2XX shutdown?


Yes. It's a – we're going to be – this year's go to be a little unique from a cadence orseasonality to pass. Normally, we would see a slightly higher second half even with thesummer shutdowns, if you will. This year, we're going to see it slightly the other way,where the first half will be a little bit stronger than the second half, driven by kind of thechangeover and the production cadence and the changeover of the large GM SUVs. Froma margin standpoint, fairly consistent, it's very consistent first half, second half, maybeslightly weaker just because of the summer shutdown in the mix. But it will be slightlystronger through the first half, slightly weaker in the second half because of thatchangeover.


Perfect. Thanks so much, guys.

Operator

Your next question comes from the line of David Leiker with Baird. Your line is open.




Hey, guys. This is Joe Vruwink for David.


Hi, Joe.


I want to ask a slightly different question on business wins because I don't think seats isbinary, where if Adiap (28:48) wins, it means well, Lear must be losing. It does seem likethe bigger suppliers, so those with scale, Lear absolutely, but also Magna, Faurecia, etcetera, you're all growing faster than the market, so can you maybe speak to whatautomakers are ultimately demanding and why that favors a company like Lear?


Well, first and foremost, it demands the capabilities to design a complete system and allthe components in it. Secondly, they demand that you have a global footprint to executeglobal programs. So I think both those trends speak to the larger suppliers. Then you takeit a step further. I think it comes down to the ability to assemble a highly crafted seat at thehighest possible quality with the lowest possible cost.

You start looking then into things like the quality of your footprint and the quality of yourcapabilities and your ability to execute programs, taking one step further then ultimately, inmany cases, you have to be the leader in each of the components that you provide, be itleather fabric, sewing the covers, the foam, the structures, the track technologies, I thinkthese things drive sales, if not just in the total seat system then subcomponents that inmany cases are sold directly. And I think that's why you're starting to see really aseparation of the larger, more capable seat providers.


And so just on that thought, are you going to be able to dramatically upscale Antolin'sbook of business? Or is there a customer relationship, I know you brought up Daimler andPSA. Has Lear lacked that relationship, but now you bring that relationship to your globalfootprint and it's just a much higher structural rate of growth for that business?




More the latter. We've always had a great relationship with Daimler. In fact, Daimler's beenin our top five as far as the sales, but I think by bringing Grupo in that house, we'll alwayshad a long and a very strong relationship with PSA on both sides of the house, bothElectrical and Seating. So it's more just extending the relationship, adding differentcapability, additional capabilities and being able to leverage kind of the cost structurebetween the two companies. And so it's more just building on what is already a strongcustomer base.


And then quick one. Any changes in your win rate when you looked at what was booked inthe quarter relative to the recent trends?


No. We're continuing to gain share in both product segments, not inconsistent with whatwe've done over the last several years.


Very good. Thank you.


Welcome.

Operator

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


Hi, this is Dan Levy on for Brian. Thanks for taking the question. I wanted to ask aboutcommodities. We've seen a number of the key commodities that you're exposed to upquite significantly in the first quarter, and while I know that you're mostly indexed on thosecosts, I think there is an optical effect that in times where commodity prices are down, thatleads to higher margins on the flipside. So I think that you probably benefit from that. Sojust wondering what the impact of commodities was to margins in the first quarter? I knowthere's a lag effect, if you could just remind us on the timing and how that would lead tochanges in margins?




Well, we had cited in our guidance that we initially provided in January that on a yearoveryear basis, I think pretty much across the board the commodity environment wasgoing to be a little bit more challenging than it was last year.

On the indexing side, on the steel, about 10% of the steel purchases we're exposed to,about 90% is either covered through an agreement with the customerdirected sourcesuppliers or about 40% comes in a fabricated way. So we've got about 10% exposurethere. On copper, about 90% of our copper buy is covered through an indexing agreementwith the customer and then on the leather side, about 60% is covered and the other 40%generally is covered through commercial discussion, which includes productivity.

What we've seen since the first quarter is nothing significantly different. The commodityenvironment really hasn't moved dramatically since the first quarter, and we'veincorporated that same level of assumptions with respect to commodities in our guidance.


Okay. And just – if we're just thinking over a longer time period, commodities obviouslyhave been some positive on the margins. Could you just quantify or give us a roughballpark sense of how much they've contributed to margins in recent years from lowercommodity prices?


Well, I guess I'll look at the first quarter and the impact on a yearoveryear basis. I thinkwe probably had an effect on margins in the quarter anywhere between 10 and 20 basispoints on a yearoveryear basis because of the higher commodity.


Okay. And over a longer time period, any ballparks on that?


I wouldn't say in the long term, Dan. Commodities provide chop more in the short term,meaning, 12, 18 months, maybe even 24. But if you're talking longer term, they usually getfactored in either positively or negatively into the pricing discussions with the customers aswe try to balance our annual productivity negotiations with them. And so I would say, theyhave a tendency to kind of work their way through the system, if you will, in an 18 to 24



month type timeframe. In the nearterm, we've had some benefits. Now we're facing a littlebit of headwinds, we've been able to I think offset them with other cost reductions throughthe quarter and we'd expect to do the same thing for the year.


Understood. Thank you.


You're welcome.

Operator

Your next question comes from the line of Adam Jonas with Morgan Stanley. Your line isopen.


Hey, guys. So yesterday during Conti's Powertrain Capital Markets Day, they mentionedthat consumer electronic companies are targeting more auto business and that OEMs areincreasingly insourcing some key components, including some electronic components. Iwas wondering if you agree or whether you're seeing any of this.


Well I think a lot of what the car companies and the industry needs from a next round ofdevelopment, quite frankly, is already existing in many consumer electronics type firmsand hightech startups. So I think as the industry moves forward, you're going to see moreand more collaboration with those type of firms.

That being said, the auto industry is very specific with its needs for the threeyear proveout if it's a safety device, in many cases a safety product. And so going through that typeof validation, through the front end of preproduction takes I think, automotive industryexpertise. So what we're not seeing is a wholesale outsourcing of boxes and electronicmodules and things of that nature to the consumer product or electronics or nonautomotive players because I think the barriers to entry in the segment are one of thebenefits of being in this segment. So we haven't seen it, but what we have seen and whatwe've participated in as well, is collaborating with nontraditional automotive suppliers, andI think that trend will continue. And I think ultimately, it's a positive trend for the industryand it's a very positive trend for Lear Corporation.




Okay. Well just to followup on that point you make. And I hear that what you say from alot of your peers is that the auto – making something for an iPhone is one thing, you canjust reboot the iPhone, no one dies. But in a car, the safety considerations are on a totallydifferent level but haven't we seen this? I mean, the Chevrolet Bolt, with a B, not the Volt, Ibelieve, LG Corp., as you're aware, it does over 50% of the purchase bill of materials onthat car, the charger, the inverter, electric motor, electric architecture, wiring, clusters, theybasically make half that car. So why would GM – what's GM thinking? And could that be atrend?


Well, I think right now we're looking for the low cost producer. LG has been in the spacefor a long time in the automotive space for a long time, and they're very proven not just inautomotive but in other industry. So it's not like they're a new entry into the space. Frank,from your standpoint, where you've done the architecture for things like the Volt and someother battery chargers for other customers, what are you seeing in that marketplace?


Yes. I think it's exactly what you're saying, Matt. Where you see the consumer typeinvolvement with some of the automotive space, it's where they're trying to gaincapabilities where maybe it's more tied to consumerrelated activities. And what we seeright now is, especially in our area of expertise, where it's data and signal management,making sure that we're giving the customer electronics and the vehicle to allow them toprocess information in the vehicle. We haven't seen any of that impacted. LG has beenaround for years. They've done OnStar with GM for years, they've had a long partnershipwith GM. And I know they have a successful partnership with them but across the globeand with all of the customers, you see pockets of it where there is active engagement butfor the most part in our particular product segments, we see traditional competitors on ourquotes and business.


The other piece of this thing which is the ability for instance, to update software over theair, and I know there's been a lot of communications of that recently in this space, isnothing new. I mean, we've been updating software on your PC and your phones foryears, right.




Yeah.


Even annoyingly so for an Apple phone. That being said, to update the software in an autothe technology is there but we need to make sure that we can do it in a cyberly secure –cyberly, did I just make up a new word...?


I like it.


Put it in the dictionary (39:29).


Cyber secured way...


Yeah.


So not only are we innovating as far as product, we're also innovating as it relates to theEnglish language...


All right. Thank you. Keep innovating.


Thank you.


Innovate, elevate.

Operator

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




Good morning, guys.


Hey, Murph.


Hey, just a first question on Grupo Antolin, and to beat a dead horse there but I mean itlooks like you guys paid almost 10 times EBITDA on that just based on what you talked onabout in the press release and the fact that you just kind of talked about EBITDA marginsare margins be similar to what you got right now. Is that about correct, sort of 9 to 10 timesEBITDA and is there something you're seeing there that is (40:24)?


No. It's significantly less than that. It's higher than Lear, but significantly less than 10times. So split the difference and you'd be closer to it, Murph.


Okay.


On an EBITDA multiple.


Okay so the margins are higher that a 10.5


EBITDA, talking EBITDA, not necessarily EBIT.


Got it. Okay. Then just a second question. As you think about mix, I mean, obviouslythere's the shift from cars to crossovers which seems like it's pretty structural but withinmodel lines are you seeing real significant upward shift to higher trim levels that you thinkis sustainable or is there some risk there on the mix side.




That's got – specifically I mean, we are absolutely seeing that in electrical because of thecontent gains in the higher features for – need for power, more circuits, so we've talkedabout that at length. As far as the Seating, I've got Ray Scott, the President of Seatinghere is on the front line of the market...


Yeah. Just I mean the same thing in seating I mean, you talk about the content adds aregoing into rear seats with recliner mechanisms, adjuster mechanisms, the customerpreferences, customer features, both comfort and adjusting features as just continue toincrease.


So the consumer tends to love that stuff once they get it and don't want to give it up. Andsometimes will trade from sort of a midsized crossover to a small crossover might be thetrade that happens as opposed to going back to cars. If the cycle turns and things gettougher. I mean, if you went from like an Edge to a to an Escape or something like that,would there be a big content differential on the seating side or I trying to just kind of usingthose sort of you know gross examples for a midsize crossover to small crossover, wouldthere be a big negative mix shift for you that in content?


No. There wouldn't be a major shift.


I think where you see the major shifts quite frankly, Murph, would be if you went to a fullsize or large size premium SUV to pass car, that's where the real gap is. Obviously threerows of fully powered leather seats have more content than a two row passenger vehicle.


But it sounds like the mix for you, the mix benefit is a lot stickier than it has beenhistorically is what it sounds like.


Is a lot what, Murph?




A lot stickier than it has been in the past because the shift to crossovers has not changed?


No, I think I think we're well represented on all type of product segments. We have a goodrepresentation of the industry overall both in premium and also in type of vehicles andcustomer mix. I'd expect to benefit from it. Obviously you want the cars you're on to sellmore than the market. But I don't really see it as a major headwind just like evolution ofthe product if that's what you're asking.


Yeah. No, that's great. And then just lastly, I mean, the margins are very impressive. Imean, are you getting any inbound calls from the automakers or seeing anything in thebidding process where they are pushing back a little bit on price because they see thefantastic margins you guys are putting up because they're – they seem to be spreadingout and putting pressure on the dealers right now because they can more quickly and theyare looking at other parts of the value chain apparently to try to gain some of the marginsback that are being earned.


That's nothing new. Really what you do though is we work through what we can provide itat the capabilities that we can provide at, the footprint that we can provide the componentsthat. The fact that the car companies are in a very price sensitive product and arecompeting very heavily with one another in a weird way supports Lear Corporation in thatwe have the ability through our design capabilities and our component footprint and in thevariable – I'm sorry, the vertical integration to help them be successful in their product.Because what we want is the car companies to be able to sell their products more thanother car lines that we're not on because that ultimately benefits us. And when they dothat we're able to share some of the cost benefit that we get from higher volume. So thefact that it's a demanding price environment is nothing new, that's an old story that's beengoing out for many years here.


Great. That's very helpful. Thank you.

Operator



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


Good morning, guys.


Hey, Rod.


How are you doing? Two questions. One is just a housekeeping item. You had very strongorganic growth in both segments, and I was wondering if you happen to have offhand howmuch of that $1.25 billion of consolidated backlog you realized in the quarter? And is theESystems backlog tracking better than the $225 million that you were expecting for theyear?


Well in the quarter, we had about, rough speak about $250 million of backlog, pretty muchalong the lines of the overall spread between Seating and Electrical in terms of, I think, it's– according to the overall bookofbusiness that we have or mix of the bookofbusinesscurrently between Seating and Electrical.

I think your other question is, are we – is the current backlog a little bit greater than whatwe originally foresaw on Electrical, which was roughly $207 million? I think it's runningmaybe a little bit higher than that but pretty consistent with that, Rod.


Okay. And Matt, in North America now, we're obviously seeing some big picture macrotrends with tradein values moderating maybe around 7% which is maybe $1,300, $1,400lower yearoveryear on the average tradein. We're seeing some tightening of creditterms, particularly in leasing, not a lot, but some signs of that. I guess the big question iswhether that's going to affect mix. And it doesn't sound like you're seeing anythingnoteworthy in terms of the build forecast. But I was curious if you can share yourperspective on how you think over the next two or three years, how do consumers andOEMs react to that? And if content is going up in areas like electronics and a few otherareas, where is the content coming out in order to kind of keep affordability within areasonable range?




Actually, I'm very optimistic on the industry overall. We may see some tightening andsome changes in rotation, but I actually think the macros in North America are very strongwhen you look at employment rates and credit availability, even with the kind of tighteningon the leasing terms and the tradein values.

I think overall, it would sustain a 17 million unit year in North America for the near future,which will be pretty good for us. I mean, I think it would be outstanding. And then if youlook at what's happening on a global basis, I still think we're going to see expansions inthe 2% to 3% range globally which is now on a very meaningful base. I mean, we're fastapproaching 100 million units a year in the near term. So from that standpoint I'm positive.

As far as the content, there's constantly ways to take cost out of a vehicle, anywhere fromthe metals and using alternate metals to feature content to consolidating feature content.From our standpoint, I believe that we have the ability to continue to take cost out of ourproduct through design changing. I think by consolidating some of the components thatthey're sourcing separately, right now would be a huge opportunity to provide a betterproduct at a lower overall cost to our customers. And that's part of the discussions thatwe're having right now is how we can do that, so provide basically more content at a lowercost at a margin consistent to what we are enjoying. So Rod, you know the game and howit's played, and that's how we do it.


Great. Thank you.


You're welcome.

Operator

Your final question comes from the line of Matt Stover with SIG. Your line is open.


Thanks very much. A lot of the questions have been addressed, but I did have two. Iguess the first one is, electrification in all its forms is increasing in outlook and there's awhole wide range of forecasts. And it looks like we're seeing a lot more higher penetrationamong (49:43) hybrid, hybrid and EV. And I guess my point is – or question is, are youbeginning to see a meaningful change in bid activity? If not, when do you expect to see a



meaningful change in bid activity? And then the third piece of that would be, would thatimply the need to ramp your R&D as a percent of sales, which is – it's been kind ofrunning in the high 2%s for a little while here, to a higher level?


Let me start with the last part of that and turn it over to Frank Orsini, the President of ESystems. In general, no. I think the financial template that we have both in capital andR&D is consistent with supporting that type of growth. Because we've been doing this for awhile, everything from full electric to hybrid to higher voltage vehicles which we haveprograms in production in all sub segments. Frank, from a quoting standpoint, what areyou seeing in the marketplace?


It's very active right now. Whether – if you just take highpower architectures, which coverseverything from hybrid to full EV capabilities, all of our customers globally have a lot ofactive quotes going on. There's definitely a lot of interest in this area. And we're seeing alot of success with our products, whether it be our onboard charging systems, ourelectrification of just the wire, the actual electrical distribution products as well. And 48volthas been big for us in all three of our product categories, so, a lot of quoting activity goingon. It's in every region of the world, it's with every customer, it's a very big opportunity forus and it's something that we're seeing very active right now.


The last question is sort of structurally on the valuation. Matt, you've addressed that inyour opening comments, and I understand historically the argument and logic behind notsplitting the company up, because of the symbiotic nature of the balance sheet. But Iwonder if you have any thoughts about why you think Lear isn't getting the value that itdeserves in the marketplace right now? And then I guess, two, is that causing you oranyone within the board or company to rethink the structure of the company?


I think there may be confusion over what the Company is and how we compete. I thinkthere's a lot of misinformation in the marketplace about seating being a commodityproduct when in reality it's a key driver of connectivity since you're strapped to it. It'ssafety, because you're strapped to it. And also it's becoming a key driver, if it isn't already,



in the consumer's purchase decision of a vehicle. Besides the exterior skin the first thingyou look at typically is the seat and how the seat looks and how does it play and how doesit feel, in your decision to buy a vehicle.

So I think there's a misconception of the seat business. I think there is certain competitorsthat are misrepresenting kind of the marketplace for seating and the fact there's aprofitably kind of template that's happening in seating. And I think people are confusingthat misinformation with Lear Corporation's position there.

I think they're confused a little bit about our Electrical business, what it is, what it can do,the sustainability of it. So from that standpoint, I think more and more, it's about continuingto perform and continuing to explain the proper way of how this business runs. I believethat there's a convergence in these two products and I believe in many cases, ourcapabilities in ESystems and the 600 software engineers we have around the world willultimately help us separate even further on the seat as we get into intelligent seat systemsbecause we're very unique in that capability, so we see a convergence.

And for us, as far as separating the business, it's not like we're in two different industrieswhere, in many cases, you want to unlock that value. We have two product lines that areconverging in the same industry. And I think every major auto supplier has at least twokind of product lines and we're no different in that regard, because I think ultimately itallows you to share costs, share structure and benefit both product organizations and thesame time balancing kind of risk.

So as far as the board, the board has studied this at length. They're constantly looking atways to increase value for the shareholders, that's their role. We study it. And ultimately,we come back to the same conclusion time and time again, that Lear Corporation is betterthe way it's structured today than it would be by separating it. We think longterm that's thebest thing for our shareholders. And quite frankly, it's proven to be true. So that's kind ofour thoughts on it right now.


Appreciate it.


You're welcome.




So at this point, I think the only folks probably left on the call are Lear employees and Iwant to start by thanking the finance organization for all the work they do in preparation ofthis call. I want to thank the entire organization because results like this just don't happen.They come through hard work and teamwork.

And I want to remind everybody that's on the call that we need to continue to focus on thefundamentals of teamwork. One Lear, the leadership model, working together as a team,communicating fully and transparently, and ultimately working hard at taking great effort tomaintain our momentum and take care of the families that count on this corporation andtake care of our shareholders. So thank you for all your hard work. Let's continue to kickass and I'll see you at the second quarter. Bye.

Operator

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

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L e a r ( L E A ) Q 1 2 0 1 7 R e s u l t s E a r n i n ... · Apr. 26, 2017 2:27 PM ET by: SA Transcripts Q1: 042317 Earnings Summary EPS of $4.27 beats by $0.34 | Revenue of $5B