Mel Stephens - Vice President, IR Matt Simoncini - President and CEO Jeff Vanneste - CFO Ray Scott - President, Seating Division Frank Orsini - President, Electrical Business Phil McLaughlin - Head of Global Tax.

Itay Michaeli - Citigroup John Murphy - BofA Merrill Lynch Joseph Spak - RBC Capital Markets Rod Lache - Deutsche Bank Brian Johnson - Barclays Capital Brett Hoselton - KeyBanc Capital Markets Matt Stover - SIG Colin Langan - UBS Patrick Archambault - Goldman Sachs Adam Jonas - Morgan Stanley Chris McNally - Evercore ISI Richard Hilgert – Morningstar.

Good morning. This is Steve and I will be your conference operator today. At this time, I would like to welcome everyone to the Lear Corporation First Quarter 2016 Earnings Conference Call. [Operator Instructions] Thank you. I will now turn the conference over to Mel Stephens, Vice President of Investor Relations. Please go ahead..

Good morning everyone and thank you for joining us for our first quarter 2016 earnings call. Our press release was filed earlier this morning with the Securities and Exchange Commission and the presentation for our call is now posted on our website, lear.com at the Investor Relations link.

Today's presenters are Matt Simoncini, our President and CEO; and Jeff Vanneste, Chief Financial Officer. Also participating on the call today are several other Lear's Executives including Ray Scott, he is the President of our Seating Division and Frank Orsini the President of our Electrical Business.

Before we begin, I would like to remind you all that during the call we will be making forward-looking statements that are subject to risks and uncertainties. Some of the factors that could impact our future results are described in the slide Investor Information, found at the beginning of the presentation, they are also included in our SEC filing.

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 which can be found at the end of the presentation. Slide 3 shows the agenda for today's review. And following the formal presentation, we will be taking your questions.

Now, please join me and turn to Slide 5 and I will turn the program over to Jeff Vanneste..

Thanks, Mel. Lear is off to a great start in 2016 with strong sales growth and record core operating earnings. These operating results are the outcome of the investments we have made over the last several years, as well as our industry leading cost structure.

We have expanded our product capabilities in seating with the acquisitions of Guilford Fabric and Eagle Ottawa Leather. And in electrical we have expanded our industry leading capabilities with the recent acquisitions of Autonet Mobile and Arada Systems to enhance our ability to move data and signals to, from, and within the vehicle.

Since 2010 we have added 29 new component operations in low cost countries and now have over 80% of our component manufacturing capacity in low cost countries. This provides us with the lowest cost structure in both of our business segments.

We have long history of strong free cash flow generation which has allowed us to continue to invest in our business and return cash to shareholders, while maintaining a strong and flexible capital structure.

In line of our first quarter performance and confidence in the outlook for our business, we are increasing our earnings and free cash flow outlook for 2016. Slide 6 shows vehicle production in our key markets for the first quarter. In the quarter, 22.5 million vehicles were produced globally up 1% from 2015 and in line with our expectations.

Production increased in all of our major markets. Slide 7 shows our reported financial results for the first quarter of 2016. Our reported sales in the quarter increased by 3% from a year ago to $4.7 billion. Excluding the impact of foreign exchange and commodity prices, sales increased by 8%.

Pretax income before equity income, interest and other expense was $374 million up $113 million from a year ago. Equity income increased by $4 million reflecting strong performance in our non-consolidated joint ventures in China. Other expense was $9 million in the first quarter down $22 million.

The first quarter 2015 was impacted by cost associated with our debt refinancing and higher foreign exchange impacts. Interest expense was $21 million, down $3 million reflecting lower average debt in the first quarter of 2016 versus the first quarter of 2015. Net income attributable to Lear was $248 million, up $101 million.

Slide 8 shows the impact of non-operating items on our first quarter results. During the first quarter we incurred $12 million of restructuring costs primarily related to salary expenses actions. Excluding the impact of non-operating items, we had core operating earnings of $387 million up $93 million from 2015.

The increase in earnings reflects increased production on key platforms, the benefit of new business and a favorable operating performance. Adjusted for restructuring and special items, net income attributable to Lear in the first quarter was $256 million and diluted earnings per share was $3.40 up 49% from 2015.

Slide 9 shows our adjusted margins in the first quarter. Lear's adjusted margin was 8.3%, up 180 basis points from a year ago. In Seating, sales of $3.6 billion increased 3% from last year with adjusted earnings of $299 million, up $80 million or 36%.

Excluding the impact of foreign exchange and commodity prices, sales increased by 8% reflecting higher production on key platforms and the addition of new business. Adjusted Seating margins were 8.3%, up 200 basis points from a year ago.

The increase in margin reflects strong operating performance, sales growth, and a timing of price adjustments related to commodities. In electrical, sales of $1.1 billion were up 2% from last year with adjusted earnings of $154 million, up $16 million or 12%.

Excluding the impact of foreign exchange and commodity prices, sales were up 8%, primarily reflecting addition of new business and higher production on key platforms. Adjusted electrical margins improved to 14.5%, up 120 basis points from a year ago, reflecting the increase in sales and favorable operating performance.

As we've discussed many times in the past, the required margin profile in each business reflects the level of investments and the need to have recurrence in excess of our cost of capital. Return on invested capital is one of our key financial measures and drives most if not all of our investment decision.

At present margins, Lear's ROIC is averaging in the mid teens with both business segments achieving returns well above our cost of capital. Slide 10 provides a summary of free cash flow, which was $201 million in the first quarter of 2016.

Compared with a year ago, free cash flow was up $321 million reflecting higher earnings in additional cash received this year due to the timing of our fiscal quarter end. Slide 11 provides an update on our share repurchase program. In February, Lear's Board of Directors increased our share repurchased authorization to 1 billion through December 2017.

In the first quarter of 2016, we repurchased 1.4 million shares for a total of $155 million. Since initiating the share repurchase program in 2011, we have repurchased 36.7 million shares for a total of $2.6 billion. Including dividends, total cash return to shareholders over the same period is $2.9 billion.

Our share repurchases represent a reduction of approximately 35% of our shares outstanding at the time we began the program. The average price paid repurchase shares over the life of the program is about $70 per share.

At the end of the first quarter, we had 74.2 million diluted shares outstanding and remaining share repurchase authorization of $845 million. Slide 13 highlights the key assumption in our 2016 outlook. Global industry production is forecasted to grow by 3% to 89.7 million units consistent with our prior outlook.

Our 2016 financial outlook is based on an average euro assumption of $1.10 per euro, which is unchanged from our prior outlook. Slide 14 shows our financial outlook for 2016, which as I mentioned earlier reflects an increase in earnings and free cash flow from our prior outlook.

Our sales are projected to be in the range of $18.5 billion to $19 billion consistent with our prior outlook. Core operating earnings are projected to be in the range of $1.4 billion to $1.45 billion, up $50 million from our prior outlook.

Interest expense is projected to be approximately $85 million, a decrease of $5 million from our prior outlook reflecting our increased free cash flow. Net income is expected to be $900 million to $940 million up from a prior outlook of $855 million to $895 million.

Free cash flow is expected to be approximately $850 million up $50 million from our prior outlook. This reflects the free cash flow yield of approximately 10% among the highest in the automotive sector and the highest among our direct competitors. Now I'll turn it over to Matt for some final comments..

Thanks Jeff, great job. Slide 16 shows our revenue growth for the full year based on the midpoint of our outlook compared to 2015. Excluding the impact of foreign exchange and commodity prices, our sales are expected to increase by approximately 6% to both Seating and Electrical which is well in excess of 2% production growth over the industry.

Lear continues to focus on profitable sales growth and return on invested capital. At the same time, we continue to gain market share both business segments reflecting our industry leading cost structure and product capability.

In summary, we had another great quarter with above industry sales growth, record earnings and margins and strong performances in both business segments. Our unique component capability for Seating allow us to differentiate our seats with unique design and the highest quality of quality and craftsmanship with the lowest possible cost.

In electrical, we’re well positioned to capitalize on trends to increase content, alternate energy vehicles, and connectivity. Our recent acquisitions of Autonet and Arada have increased our capabilities to manage data and signals both within and outside the vehicle.

Given our unique product capability, leading cost structure and experience management group, I'm extremely confident that our business will continue to perform well. In short we are in the best competitive position in our history. Now we'd happy to take the questions..

[Operator Instructions] And your first question comes from the line of Itay Michaeli from Citi. Your line is open..

Great, thanks. Good morning, and congrats everyone. So just a question I think just on the guidance, given the strong Q1 EBIT. I think historically the first quarter EBIT contribution typically is actually under 25% for the full year, which could actually make your full-year guidance now look a bit conservative.

Was there any kind of one-time or nonrecurring benefits in the first quarter or do you think there is even potential upside now to your new 2016 outlook?.

Little bit of both Itay. It's unusual for us to increase guidance four months into the year. Normally we wait for the midyear point to kind of reassess where we are at initially but the performance was very strong in both segments.

Seating benefitted about, I would say 30 basis points for the timing of commodity adjustments but the business is already running in a high 7% to low 8% margins. We'd expect that kind of margin performance to continue and probably the high 7s if you will. Electrical we’re pretty confident that we can maintain at 14.5 percentage range.

That being said, it’s still you know four months into the year. So there may be some conservatism built in. Quite frankly if the production assumptions fold and the currency stay relatively consistent where we have them, as well as the commodity environment we would expect to post numbers in the high end range..

That's very helpful. And if I could follow up with two quick ones. Matt, love to get a sense of what the booking environment has looked like year-to-date.

And then maybe for Jeff, how much of the $800 million backlog this year, roughly how much did you launch or accrue in the first quarter?.

I will start off before I hand it over to Jeff. The booking environment has been great. We are gaining fair in both product segments. We are in some very interesting preproduction development that we hope will eventually turn into production contracts.

For us it's not building a backlog for the sake ability a backlog, its building a profitable backlog and we’re able to penetrate the market while we are going to business profitably and when I think you can take confidence based on our history that when we have a backlog number, that business is going to come out profitably.

So from our standpoint we’re gaining share in both segments as evidenced by I think our unique capabilities in both product segments. We're focused on profitable growth and return on investment..

And the backlog starts – with the cadence of backlog is relatively consistent by quarter, I would say that the first quarter was slightly lighter than what we will see in the forth coming quarters, but not materially so, it's pretty ratable throughout the year..

That's very helpful. Thanks so much guys.

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

Good morning guys. Just the first question, if we look at the growth above market in the first quarter, it was 7%. You're talking about 3% for the full year ex-currency. And you've been kind of running in that range for a number of years right now.

When do you think you might change the narrative on the top-line growth to 5% above market? And is that something that you think could be sustainable given what you are seeing in your backlog? Because I think backlog is helpful, but the simple explanation of what you think your growth could be above market might be helpful.

Yes, it's probably a better way of saying it. I think we are saying that. We have been growing 5% above the market if you will and as we penetrate and gain share in both segments and also taking into consideration, growth in electrical. So from our standpoint maybe we need to do better job of articulating but I think that's exactly what we're seeing..

Okay. That's helpful. And then Jeff, to parse some of your words, I mean I think when you were talking about seating, you said, and I think it might have been electronics as well, that as new business was rolling on, it was helping margins.

I'm just curious if the new business that you guys are writing and bringing on is coming on at higher margins than corporate average and that's a big part the upside in margins here?.

I think they are coming on at margins that certainly were better than years ago when the old business rolled up. I think they're pretty consistent with what seems in terms of the results that we’re posting. So it's top new business coming on..

Okay.

And then just lastly, as we look at where the stock is right now and what you guys are doing as far as buybacks, is there anything you would think to do to maybe get even more aggressive on recapitalizing the business? I mean obviously an LBO might be a bit stretchy at this point given the math and what is going on in the capital markets reserve and the credit markets.

But is there anything that you guys have considered as far as getting even more aggressive on recapping the business that could set you up to return even more value to shareholders? Because with the current leverage, you're relatively low..

First and foremost our focuses and on our balance strategy of investing in the business and returning access liquidity to the shareholders and I think this Board has a history and a track record on being aggressive and returns to shareholders if you will.

We are looking first and foremost to invest in the business organically or through acquisitions that would complement our growth and our products offerings and provide value down the road.

I think if we finished the year and now put the resources to work if we will through acquisitions then you probably will see a more aggressive stance on share repurchase. As far as recapping the business to do that, I don’t think that I'll likely outcome, I’m not going to roll it out but I don’t think is a likely outcomes in remainder of the year..

I'm sorry, and maybe just a follow-up to that and this is the last question, is on the acquisition front. Obviously, you've had some great success on a number of acquisitions. Is there anything of size that you're looking out there or that you think could come your way to help grow the business? Maybe even --.

Nothing that would significantly change the profile of the business. We are looking at things in between the Guilford and Eagle Ottawa type range. Just there is passionate 250 to 770 an acquisition for us. It could be something in that range John, but I don’t think it's - sweetly changes the profile of our business.

I don’t see a major acquisition out there. I see nice little tuck-ins that would complement our existing business and increase our product capabilities..

Great, thanks. Great, quarter guys..

Your next question comes from the line of Joseph Spak from RBC Capital Markets. Your line is now open. .

Hi, good morning everyone. Congrats on the quarter. First question's for Jeff, just housekeeping. Was there something unusual with the free cash flow timing? It was a big source. It looks like over the past couple of years, if anything, it was a little bit of a use.

And if so, what quarter do you expect that reversal?.

Historically we operate on a fiscal calendar which has a way of changing at the quarter end. For example, last year the fiscal quarter ended on March 28. In this year, the fiscal quarter ended on April 2. And as a result of that, you get a couple extra days. In those days that we're added this year happen to be day where we got customer payment.

So there was some cash received that we had received in that timeframe that was different than last year. So that was a big portion coupled with the earnings growth that we saw in the first quarter leading to the $320 odd million year-over-year variance.

I think what we'll see this year versus may be previous year is more of a leveling effect on free cash flow through the quarter because the cadence of the fiscal quarter will continue to be kind of overlapping the calendar quarter end. But we should see a more even cadence of free cash flow this year by quarter than we've seen maybe historically..

Okay, that's helpful. And then can you just, with Adient coming to market, I guess, here later on in the year and the filing today, can you just remind us, Matt, of your competitive positioning in some of the different sub segments? I think they are bigger in frames and mechanisms.

You're obviously stronger in leather, but what about cut-and-sew and some of the other stuff? As well as you've been starting to mention more and more intelligent seats and I'd be curious to see how you think you stack up there versus the competition..

Well, I think overall we are at a number two position on global seating pretty much in every market. As far as components they're little bit better on range in mechanism as far as size. They are little bit bigger with their acquisition of Hammersein and Kypa a few years ago. We are more focused on surface materials, craftsmanship.

And it's not just the leather, it's the fabric. It's the leather and it's combining it with our sewing operations, which we've been the industry leader out for many, many years. And when you put it together with our knowledge of how a seat comes together with foam, that's where I think we're truly unique in our capabilities and craftsmanship.

I think we're number one in that ability to provide that.

I also think we're number one in intelligence seating and our knowledge in electrical and software, thousand software engineers that we have around in world that help us right allowing us to develop some very unique capabilities in seating and what we're calling into seating, intelligence seating, and I don't think anybody else in the industry has the capabilities we have there.

By that we are headed shoulders above anybody including Adient..

And just to follow up on the intelligent seating, is that something that's beginning to creep into the backlog in the outer years or is it still sort of you showing your capabilities to the different auto makers?.

I have raised all our seating, but it's not in the backlog for stay and Ray can more more color on it but we are in reproduction development with numerous cars..

Yes, right now we're - there is at least three customers we have development programs with. And so this is more of a development program that we see coming at us pretty quickly. And the different features that we're going to offer our customers are really - allow them to differentiate their products in the marketplace.

So we're really excited about what's happening. And like Matt said with the convergence, electrical and seating, the two fit perfectly together and what we're giving our customers..

Great. Thanks a lot guys..

Your next question comes from the line of Rod Lache from Deutsche Bank. Your line is now open..

Good morning everybody. I was hoping just to get a little bit more color on the year-over-year earnings bridges. So if I look at seating and I take away the 5% impact from FX, your top-line grew by maybe $290 million and your EBIT ex this benefit from raw materials and FX probably grew by the mid-70s.

That looks like a 25% incremental margin, which is a bit better than what you have suggested in the past, even excluding this benefit from raws. And electrical looks like it's even better than that. It looks like, ex-FX, maybe $25 billion on the top-line and $17 million or so on the EBIT. Just a huge conversion.

Is there something else unusual in that bridge that we should be aware of next..

Not really, Rod. The performance of the business has been very good in both segments in the day-to-day, just operational excellence, if you will, continue improvement in restructuring savings. We're continuing to get leaner and build our administrative and our manufacturing groups. It's just sure out execution on seating.

I think there maybe quarters when we post numbers that are in the low 8s, but on average the run rate on that business is in the high 7s. We're pretty confident they will..

And was there anything in the electrical business in terms of R&D spending this quarter or pricing that was, or commodity timing that was unusual?.

No. It's pretty clean quarter. I do think that as we continue to penetrate into market, we'll see a step up in development spending. Engineering spending to support the backlog gains that we're seeing. And so that could in a quarter maybe impact but that business should run above 14.5% pretty clean..

Okay, and then lastly, your commentary is placing a lot of emphasis on returns, which is terrific. And obviously, at the same time, the street is hearing from Adient that they've got a big win rate so far this year.

How should we interpret that vis-a-vis Lear? Are you basically suggesting that you might sacrifice some growth to sustain margins and returns in the future?.

We're not taking sales from Lear's, I'm not sure where they're getting it up from. We are not here to build a backlog so we can sell our business. We're here to build a backlog to have profitable growth. There is a certain cost structure that allows you to do that and product capabilities and we're focused on.

So I'm not really sure where they're getting sales from, because they're not getting them from us..

But the message is you are prioritizing the returns on the business and the margins as opposed to..

I think we're balancing. I don't know prioritizing, because that kind of signals the fact that we're going to substitute sales growth. The Adient are doing both. We're getting the returns and we're growing the business and we are penetrating a marketing and gaining share. So I saw the comments. To me it's kind of support selling a business..

Okay. Great, thank you..

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

Good morning, Matt and team. So far - on a couple of prior questions where you talked about the different parts of seating and their relative positions.

Can you give us a sense of the, just very roughly, the revenue mix between just-in-time seats, surfaces, and then other components that could help us better understand kind of, since we can assume different margins on each, the sustainability of these margins and how that can -.

We will - I'll turn over Jeff in a second. Reality is a lot of our components while at times directed to other customers really go through here and for the time - business. But that means that Jeff can give you some color on it..

So if you look at it from portal standpoint. In other words disregarding the inter-company nature, JIT business is about two thirds of the seating mix, trim including the impact of the eagle out of a deal is about 20% of the overall mix, and metals is about 10% with the remaining portion being the foam business..

Okay.

And when you look at the margin expansion, is it coming more from the mix amongst those or is it coming from margin expansion, for example, in JIT?.

I think it's collectively within all those product segments. The margin expansion is growing..

Okay..

We benefited from the mix, the just in time facilities are going quite well. We're sorting our issues in North America structures that we talked about in the past. Surface materials, which is a combination of fabric, leather and sewing I think is stepping up. It's across the board, Brian..

Okay.

And then are you seeing in terms of the production requests coming from your customers, a tilt towards higher-end option mixes that take more upscale fabrics, upscale motors, upscale structures, and is that helping the margin?.

I think what we're seeing a trend toward BUDs in China and in North America. Europe mixed pretty consistent. In North America, we're seeing a rotation towards more CUVs and that typically comes at a higher content. For one reason alone it typically have more seats than the past car. And that is helping us somewhat..

Okay. Thanks..

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

Good morning everybody. I was hoping you could maybe expand on your comments regarding the competitive landscape. Obviously, some of your major competitors are going through some significant changes here.

I'm wondering, it doesn't sound as though you're seeing any significant changes in your win rates or pricing or anything along those lines at this point in time.

I'm wondering, is my understanding correct? And then secondly, do you see anything on the horizon that might cause some changes there? And I'm of course referring to the seating business specifically..

Not really, I mean rational pricing or a competitor has rational pricing in his segment is nothing new. We’ve seen that in the past.

You know for us, we need to stay focused on winning profitable business, working on our footprint of product capabilities and quality standards because in the end it’s ultimately what wins the market place on a sustainable basis. Really don’t anticipate any changes.

I mean it’s been absolute lows over the years with different competitors kind of trying to penetrate and what have you- but I really don’t – I think we need to stay focused on what we offer, which again is we need product, outstanding partnership and quality at very low cost footprint. So for us, no. I don’t really see a change in the dynamic at all. .

And then can you speak to your margins? You set forth some mid-term margin targets, in the seating and electrical business and you are obviously exiting those. Your contribution margins are driving the margins for each of those segments higher. So things are performing very, very well.

And I'm kind of wondering what are you thinking in terms of you're mid-term margin targets at this point in time? And what, if they are still in the same range that they've been in for the past year or so, what drives your margins back down to those levels?.

One would be engineering costs associated with the backlog gains that we are seeing and anticipating. It could be mixed as well. We talk little bit about positive mix on CUVs if that changed. But right now, we are comfortable with seating in that mid-7 to 8 range.

Let’s just pick any number in the middle and say 7-7%.Inelectrical 14.5%.I think the business overall will run. We are increasing our infrastructure in some of the emerging markets, specifically China and Asia which will drive a little bit more administrative expense. But all in all, we are pretty comfortable on it. .

Thank you very much man. Great quarter..

Your next question comes from the line of Matt Stover from SIG. Your line is now open..

Thank you very much. I have two questions.

Number one was on the RD&E this year versus last, how would that compare?.

I think as you look at it, the R&D in the first quarter was pretty consistent on a year over year basis. I think as Matt eluded to with respect to some new program that are coming onboard, the engineering great bay elevate slightly in the back half as the backlog starts to come on board and start engineering.

But in the first quarter it’s relatively flat. .

So if we look at those do you comparison renewal, no recoveries in there?.

Well there’s always recoveries but nothing significantly different..

I don’t really see a significant change in the run rate. It could be half a point here and there but it’s pretty consistent. It’s really driven Matt more than anything. We try to recover pretty consistent but I would tell you that it’s driven by kind of the cadence to the backlog.

But I don’t see a material change if you move it a 10-20 basis point in a particular quarter, but I don’t really see a whole scale change on it. .

This is the other question was on the CPV there. There might be something that's impacting this comp, but given the mix of production in North America, I was a bit surprised to see your calculated CPV go down 8% from 459 to 422.

Is there something sort of odd happening in the quarter there in North America that distorts that?.

Well, again, it was the mix. We don’t sell necessarily to the industry. We sell just specifically car lines in the industry. North America was up by 5%. Some of the program that are larger program weren’t up that much for in some case were down like the Focus, the Mustang, the Spinata programs were down year over year. So it affected us in North America.

.

So but if you were to look in region, in North America, as an example and you looked at the key platforms, you generally had higher content on those things, and therefore, that was one of the favorable contributors to improve profitability in that region..

What we disclosing though is a theoretical mix. So from our standpoint, what we saw in the program we are on versus where we thought would be. Our products are running well. There are obviously certain things are up and other things are down. And Jeff mentioned a couple of our car lines that are down. But overall I thought the mix actually benefitted us.

.

Okay. Thanks very much guys. Great quarter..

Your next questions comes from the line of Ryan Brinkman from JPMorgan, your line is now open..

Good morning. This is [Samick] [ph] on behalf of Ryan. Just firstly wanted to get your views on China. I know you have a big presence there through your consolidated operations and also through your joint ventures.

Maybe you can share your thoughts about what are you seeing there in terms of industries and speed of advertisement demand but what drives your confidence in that plus six plus end number in terms of growth that you're using for the year and what are you seeing there in that market?.

We’re seeing growth pretty consistent with our assumptions. There is a rotation there. You see more CUVs, Cross Over Vehicles ,penetrate there. I think the domestic brands are growing faster than the partners or the foreign partner brands if you will. There is obviously a push for alternative energy vehicles. All these trends benefit Lear.

We have great relationships both with the foreign partners as well as the domestic automakers, and we have great capabilities as well in alternate energy vehicles. So from that standpoint, I think it sets up pretty well.

We’re seeing growth both in our consolidated business which is over 2.1 billion and our non-consolidated business which is growing as well, which is about 2 billion.

So overall I think we’re positioned well and we’re seeing growth pretty consistent with what our expectations are and I think we’re setup very well for continued penetration in that market. .

All right. And just a follow-up there. You said domestic auto makers are doing better than before in CUVs. Is there a difference in your content per vehicle on those sort of two segments and maybe just remind me what your relative exposure to each of those look like in China..

Yeah. Right now the domestic partnerships or the foreign partnership are still more significant as far as sales in the marketplace. Although these comments I made, signals that we are seeing a growth in the domestic brand share.

Typically the domestic brands are little bit lower in content typically than the foreign partner brands that come at a higher content through Lear. Obviously, this is roughly 65%, 35%. With the 65% being with the foreign partner brands, and about 35% being with domestic brands. But as the domestic brands gain we would expect to gain share as well. .

Got it. And just more on the housekeeping side.

Are you seeing any OEMs pull back on production schedules in 2Q here because of the impact from the earthquake in Japan?.

It hasn’t hit us in a meaningful way. There is some adjustment because of some commodity tightening coming out of imports. It hasn’t yet impacted Lear in a meaningful way and if it did, it would be a short term because if they are selling those vehicles ,that would make the production off on the back half of the year.

So I don’t anticipate a meaningful impact for Lear Corporation at all. .

Good, great. Thank you. Thanks for taking my questions..

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

Great, thanks for taking my questions.

Can you just remind me, I don't know if I missed it, the impact of the commodity help sustaining margins in the quarter? Is there a dollar number there or a percent?.

Yeah. We said about 30 basis points in seating. 30 – 40 basis points, Colin..

Okay. Got it. And any color, just a couple maintenance questions. Most of mine have been answered at this point. Any color on NOLs? I think there's about $900 million left.

How many year of a tax benefit does that give you? And what is the tax? Is it like a 10% tax savings versus your cap rate?.

Well, I’ve got tax experts sitting here at the table. Phil McLaughlin, our Head of Global Tax can take you through where we’re at.

Phil?.

Yes, we have about 900 million worth of tax affected attributes globally. About two-thirds of those are in the U.S. and because they all are around the world, they will last for different periods of time.

But I think it’s safe to say that we will still have attributes in the next five years in our long range planning period and we continue to see to a cash tax rate below 20%..

Got it. Very helpful. And just last question, I think last time I was out at your R&D center, you highlighted some of the technology you are adding around connectivity.

Is there any movement there? Any opportunities that have opened up since that space is becoming more and more important? Any large ones there or anything notable?.

There is huge opportunities in that space. What we are focusing on, our gateway is one product that allows us to participate in that segment. Frank Orsini, our President of our Electrical Division that heads up our connectivity efforts.

Frank, can you give him some color on what we are doing there?.

Yes, absolutely. As Matt mentioned, we do have a lot of activity in the area of connectivity. It’s a really hot trend right now.

And we are actively pursuing this with all of our customers on a global basis but to get specific, there is a development program that we are working on right now which essentially will be a connected gateway system, that provide 4G-LTE over the air software upgradable models for a premium OEM company in Europe.

So it’s a development award that we are working on right now. The production, according to followers, we go through the process. But Lear was single sourced that development from all of our competition in the industry.

So we are really happy how the software acquisitions that we've made have really augmented the gateway business - that we have as Matt mentioned earlier. So a lot of traction in this areas, it’s a very hot topic for us..

Yes. Sounds very interesting. Congrats on a good quarter. Thanks for taking my questions..

Your next question comes from the line of Patrick Archambault from Goldman Sachs. Your line is now open..

All right. Thank you. Most of my questions have been answered, but one technology one as well. Can you remind us, 48-volt, how relevant is that for your portfolio? How big of an opportunity is it? And to the extent you have any color on the ability of it to maybe even display some EV penetration? Would be curious for your thoughts there too as well..

That’s a great question. Once again, I'm going to go to our President of our Electrical Division, Frank Orsini..

48 volt is another real hot topic for us in the industry right now. It’s really all about adding power to the electrical architecture so our customers can add content for their consumers. And ultimately even add vehicle efficiency systems such as start/stop as you reference to hybrid models and ultimately give lower cost solutions for electrification.

For Lear, it’s right now real house of all of our product lines. Our wire business, our terminals connectors business, and our electronics business will all benefit from this trend. We've scalable technology from 12 volt to 48, all the way on upwards to 400 volts in all these areas. So for us it is very exciting.

We see it as a major trend and we are very excited to be a part of it. We have three production intent awards that we are working on right now with three different customers. Two in Europe, one is Asia that are slated for production in late 18 and mid-19. These are actual development products that have been slated for production.

So we are excited about that. We have many other active projects on 48 volt with other customers around the world. So for us, it is a real trend and we are obviously deeply involved with it and excited about it..

That's great color. Just one other one is some people have suggested that the efficiency that you get is so good that it could actually maybe even push back some EV penetration.

Is that - just your views on that, if this is something that - if you would agree with that characteristic of its capability?.

It could. I don't think it will because EV is driven by a lot of different things, everything from fuel economy and efficiencies due to CO2 emissions and what have you. But it is also the cost of the system, the relative cost of the system. And you have to balance it out. I don’t think it will really change the dynamic of alternative energy vehicle.

I think it will be more of the content that is going into traditional systems..

Got it. All right. Thanks, guys and congrats on the quarter..

Your next question comes from the line of Adam Jonas with Morgan Stanley. Your line is now open..

Hi Matt and Jeff. There's just one question. Hello. Just one quick one.

There's been a lot of talk recently of these new types of nontraditional companies looking at manufacturing cars and consumer electronics firms and tech firms that might view the car as basically an iPhone on wheels which, of course, would need seats and an electric component, thankfully.

But I'm just curious, even at a preliminary level from your perspective, and not mentioning any names, of course, is Lear beginning to engage with such nontraditional players on maybe early design and engineering efforts at any level at all or is it still just smoke, but no fire yet?.

No, I think we are in conversation with pretty much all the players that you’d expect us to be that have interest in developing autonomous vehicles or enter into space. I think what’s great about where we are at is that we can help them execute the plan in an efficient manner.

So we are out there and we don’t publicize it a whole lot but we’ve got a presence last and we have conversations on a regular basis and we are ready to step in.

I personally think, and probably said it before, Adam it’s the most exciting time ever to be in the auto industry because of the convergence of these type of companies in our space which create all kind of opportunities. Whether you believe in a full rolling smart device on wheels to some level of adapt to safety.

It is a great time to be there, and I think we are well positioned to take advantage of that trend..

Great. Thanks a lot..

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

Thanks, guys. Just one more seating margin question, if you don't mind. I want to come at it from a regional contribution basis. Just curious if Europe, you raised the outlook. I know you've taken a lot of costs out of the regional over the last couple of years.

Could you just discussed, has that been a big benefit to margins? Just looking at the margin expansion, we're all trying to figure out what's the largest contributor and Europe has been on my radar screen for a while. Just curious how European margins come into the mix..

Well, we improved both in North America and Europe. Asia stayed pretty consistent but consistent at a high clip. Europe has contributed as we expected it would. We’ve seen a recovery in that marketplace but more importantly our efficiencies are improving and the restructuring actions that we have taken has started to pay dividends.

But we pretty much improved in every major segment, say for South America where we are just kind of continuing to whole serve, we are losing money there and we don’t anticipate that to turn around in a near term but we are trying to holding the losses if you will.

But I have to say that we have pretty improved in every market including North America, but Europe was a big contributor. Europe historically has been slightly below target margins for that segment but they are fast closing the gap if you will..

That's great. And just a follow-on for European mix. You discussed some of the larger platforms like the Focus and Mustang in North America. Maybe a slightly drag on the revenue mix, but made up by the fact that maybe some trucks have a larger EBIT mix.

Could you maybe discuss that dynamic in Europe?.

Yes. In Europe, our business is great in that. It is very well balanced by automaker but also by type of vehicle and platform. We have a nice blend of A, B, C platforms. We also have a nice blend of luxury cars that are available for export like the Mercedes C-class, the 3 series BMW, Jag Land Rover, as well as Fiat and Peugeot and Citroen.

I mean, from our standpoint, we are pretty reflective of the market overall. The Audis are actually doing well. Volkswagen maybe not so much but overall our business is pretty balanced. And as the segment grows, we will grow equal to the gains that we are seeing overall in that region..

Okay. Great color, guys. Thanks..

Your next question comes from the line of Richard Hilgert from Morningstar. Your line is now open..

Thanks for taking my questions this morning, guys, and congrats on the quarter. Yes. Great margin expansion. Historically, going back years, the first quarter has always been the quarter where the price-downs hit, and the consolidated COGS is always higher, relative to the rest of the year.

I know you commented during the call here about the margin, but when I am looking back over time, that spread can be anywhere between 0.5 to 1.5 percentage points for the first quarter being higher cost of sales than the average the rest of the year. And again, the primary reasoning in the past has always been price-downs.

Can you comment a little bit why that's not going to be the kind of relationship versus the rest of the year this time around?.

You're right. The first quarter is typically a weak quarter compared to quarters two and quarters four historically because of the reason that you mentioned.

I would say Richard what's a little bit different about this year besides the commodity impact of 30 or 40 basis point that we talked about earlier on the call, is the mix to strong in the quarter.

And we expect it not to be as strong in the back half of the year, as well the fact that we anticipate higher R&D spending to support the backlog growth that we’re seeing. If the production assumption hold, we would expect this business to post towards the higher end of the guidance range, however..

Okay, great. The other question was, you had the slide in the deck that showed the growth rates being roughly 6% for both seating and electrical full-year revenue.

As we progress over the next five years, with all of the electronic stuff coming out from the auto makers, the way that we should think about the growth rates, long-term growth rates, for these two different segments - luxury vehicles where you tend to do better than your competitors has grown at a faster pace than the overall mass market on a global basis.

So thinking in terms of the differences between these two, are we going to see these kinds of growth rates being the same for both sectors over the long run? Or does electrical kind of overtake seating and the sitting growth rate kind of stays the same? What is your thinking longer-term there on these growth rates for the two sectors?.

I think that both will stay about the same as where they're at right now. I think we continue to win business and penetrate. The reason why is yes you are correct that electrical content is going to grow with the complexity of the vehicles and the trend – the penetration of alternative energy vehicle.

But the seat is also becoming much more complex and I think the offers that we’re providing through intelligence seating in some of the craftsmanship initiative, as well as the feature growth as seats become more power and safer will provide ample content growth in that segment as well, plus the fact that we are consolidating business in that segment.

So I think the growth rates will be consistent with what we’ve seen and I think it will be consistent between the two segments for that reason..

Okay, great. Thanks again guys..

And this concludes the Q&A portion of the call. I will turn the back to the company..

Great, thank you. By this time, probably the folks remaining on the call are the Lear employees and I have a message for you. First off, thank you because these results just don't happen, it happens through hard work and dedication. I want to thank all of you for the work that you performed to help us to achieve these results.

I also want to remind everybody that we need to continue to reach for greatness and perform and drive these results. So, thank you for all your hard work for the past. And thank you for the hard work in the future. Have a good day. Bye, bye..

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