Good day, ladies and gentlemen, and welcome to the Lear Corporation's Fourth Quarter and Full Year 2018 Earnings Call. Please welcome Alicia Davis, Vice President of Investor Relations. The floor is yours.
Thanks, Grace. Good morning, everyone, and thanks for joining us for Lear's Fourth Quarter and Full Year 2018 Earnings Call. Presenting today are Ray Scott, Lear's President and CEO, and Jeff Vanneste, Senior Vice President and CFO. Other members of Lear's senior management team have also joined us on the call. Following prepared remarks by Ray and Jeff, we will open the call for Q&A. Please note that you can find the presentation that accompanies these remarks at ir.lear.com. Before Ray begins, I'd like to take this opportunity to remind you that as we conduct this call, we will be making forward-looking statements to assist you in understanding Lear's expectations for the future. As detailed in our safe harbor statement on slide 2, our actual results could differ materially from these forward-looking statements due to many factors discussed in our latest 10-K and other periodic reports.
I also want to remind you that during today's presentation, we will refer to non-GAAP financial metrics. You are directed to the slides in the appendix of our presentation for the reconciliation of non-GAAP items to the most directly comparable GAAP measures. The agenda for today's call is on slide 3. First, Ray will review 2018 highlights. Jeff will then review our fourth quarter and full year 2018 financial results and 2019 financial outlook. Finally, Ray will provide a business update and offer some concluding remarks. Following the formal presentation, we will be happy to take your questions. With that, I'd like to invite Ray to begin.
Thanks, Alicia, and good morning, everyone. It's a pleasure to speak with you today. In 2018, we continued to deliver strong results in the face of significant macroeconomic headwinds. Despite substantial volume reductions in the second half of the year, we achieved record full-year sales and operating income in 2018. Our consolidated backlog of $3.4 billion represents the largest backlog in our history. In 2018, we increased our dividend by 40% and repurchased over $700 million in shares. Since 2011, we have repurchased over $4 billion in shares. Throughout the current market weakness, we have aggressively attacked cost. Our financial performance is a testament to Lear's strong execution capabilities and focus on process improvements. During the year, we hired John Absmeier, our first Chief Technology Officer, and accelerated our investments in innovation and technology because they are the key to the future growth of our company.
Later in the presentation, I'll say more about our focus on operational excellence and our innovation strategy. First, Jeff will discuss our 2018 financial results and review our 2019 guidance.
Thanks, Ray. Slide 7 highlights our financial results for both the fourth quarter and full year. For the quarter, sales were $4.9 billion, down $421 million or 8% from last year, as our strong backlog growth was offset by significant production declines on key Lear platforms and the negative impact of foreign exchange. Core operating earnings were down $52 million, primarily due to the decrease in sales, somewhat offset by strong operating performance. Core operating margin declined 30 basis points to 7.9%. For the full year, our sales grew 3% to $21.15 billion, driven by our strong backlog, favorable foreign exchange, sales resulting from gaining control affiliates, and the acquisition of Grupo Antolin's seating business, partially offset by the impact of lower production volumes on key platforms in our major markets.
Core operating earnings were up $30 million to $1.75 billion, with a margin of 8.3%, down slightly from last year. Full-year adjusted earnings per share were up 7% to $18.22 per share, reflecting the increase in operating earnings, a reduced share count, and a lower effective tax rate. Equity earnings were down year-over-year in the fourth quarter and full year, primarily due to weakened production environment in China and the consolidation of a couple of our Chinese wire harness joint ventures. Full-year free cash flow was approximately $1.1 billion, reflecting another year of strong cash generation. Free cash flow was approximately $100 million better than our October guidance, primarily driven by aggressive working capital management, particularly a heightened focus on reducing inventory levels. Slide 8 provides a fourth quarter year-over-year sales and adjusted operating margin walk for our E-Systems segment.
Fourth quarter revenue declined 4% as our strong backlog was offset by significant volume declines on key Lear platforms in all our major markets. E-Systems margin of 11.3% was down 300 basis points from 2017. The walk on the right side of the slide sets the margin in the fourth quarter of 2017 as the baseline. Indicates whether each variance item was accretive or dilutive to that baseline.
Approximately 9% of the year-over-year margin decline was related to lower production on key Lear platforms, particularly on higher margin platforms in China and Europe. The backlog came on strong at a 12% margin, but was slightly dilutive to the fourth quarter 2017 baseline. Our strong operating performance offset the impact of incremental investment to launch our backlog of business, as well as advanced engineering spending to support long-term growth. Slide 9 explains the fourth quarter year-over-year variance in sales and adjusted operating margin in the Seating segment. Sales in the fourth quarter were $3.7 billion, down 9% from the fourth quarter 2017. Reduction was driven by lower production on key Lear platforms in every major region, particularly Europe and China, and the negative impact of foreign exchange, somewhat offset by strong revenue growth from the backlog.
In a challenging industry environment, our seating margin was 8% in the quarter, 10 basis points lower than last year, as the margin impact of negative volume mix was nearly offset by strong operational performance and a margin accretive backlog. Slide 10 highlights our debt structure as of the end of 2018. Lear has an investment-grade credit rating and one of the strongest balance sheets in the industry. Our debt structure includes a combination of flexible term debt, a $1.75 billion undrawn revolver, and bonds with no maturities until 2024. We have a history of significant cash generation and converting a high percentage of our earnings to cash. Lear has never been in a better financial position or had more financial flexibility. Slide 11 provides our financial outlook for 2019, which is unchanged from the guidance we provided last week.
Our sales guidance of $20.9 billion-$21.7 billion represents a wider than normal range, reflecting the current uncertainties in both the operating and macroeconomic environments. We developed the high end of our sales guidance range using IHS estimates as a baseline, with modifications for information gained from customer releases and our internal assessments. Our outlook forecasts our top platforms in North America and Europe to be down approximately 5% and 1% respectively in 2019. In China, our forecast reflects volume on our top platforms to be down more than 10%. From a currency perspective, our guidance assumes an average euro exchange rate of $1.13 per euro and an average Chinese RMB exchange rate of RMB 6.95 to the USD. Given the launches on some of our key platforms, we expect to experience 13 weeks of downtime on those specific programs, primarily in the first half of the year.
As a result, the cadence of sales is forecasted to ramp up from the first half to the second half of the year. To put that in perspective, the high end of our sales guidance assume first half sales down more than 5% year-over-year, and second half sales up more than 10% year-over-year. Our core operating earnings are forecasted to be in the range of $1.6 billion-$1.7 billion. The high end of our guidance range reflects a full year seating margin of approximately 8% and a full year E-Systems margin of approximately 12%. We expect first half margins in both segments to be lower than full year margins, but improve throughout the year, with second half margins above full year margins. We are expecting another year of strong cash generation, with free cash flow forecasted to be in the range of $850 million-$950 million.
Restructuring costs are forecasted to be approximately $140 million, up $40 million from 2018, primarily reflecting footprint and census actions attributable to the current macroeconomic and industry environment, including the impact of recent customer announcements. Based on our projected mix of earnings by country, we expect our overall effective tax rate to be between 22%-23%. Given our tax attributes, we expect our cash tax rate to be around 20%. Slide 12 compares the high end of our 2019 free cash flow guidance to the 2018 actual free cash flow. At the high end of our guidance range, we forecast free cash flow of $950 million, a decrease of approximately $150 million from 2018.
The lower year-over-year free cash flow is primarily due to lower projected earnings, higher capital expenditures to support our record backlog, increased restructuring charges in response to the current industry environment, including the impact of recent customer announcements, and increased working capital requirements to support forecasted second half sales growth. Slide 13 shows our 2019 to 2021 backlog. It's important to note that our sales backlog includes only awarded programs, net of any lost business and programs rolling off, and excludes pursued business. Our updated backlog includes the negative impact of approximately $300 million of customer-announced program cancellations and a $100 million decline due to the impact of foreign exchange. Despite these negative impacts, our sales backlog for 2019 to 2021 of $3.4 billion represents the largest backlog in our history. The backlog is well-balanced by region and customer, driving continued diversification of our top line.
Of our overall consolidated and unconsolidated backlog of approximately $3.9 billion, $1.2 billion is in China, with approximately 45% of that in E-Systems. From a segment perspective, our backlog is split approximately 70/30 between Seating and E-Systems. Consistent with last year's backlog, approximately 90% of our Seating backlog is on CUV and SUV programs. With respect to our E-Systems segment, we continue to take share and win new business aligned with emerging industry trends, especially vehicle electrification and connectivity. Over 40% of our E-Systems backlog is in electrification and connectivity. There are still several programs that are up for bid, we expect, consistent with historical experience, the backlog in 2021 to continue to grow as those new programs are awarded. Now I'll turn it back to Ray for a business review and some closing thoughts.
Thanks, Jeff. Slide 15 highlights our continued focus on operational excellence. Over the last several years, we have consistently invested in subject matter experts to support our operational excellence, as well as in tools and training to make them successful. To date, we have dedicated and experienced teams deployed all over the world, analyzing efficiencies and implementing changes across our global portfolio, making operational excellence a competitive advantage for Lear Corporation. This is part of our DNA at Lear Corporation, and at the core of how we run our business every single day. We have the best-in-class capabilities in cost, technology, and optimization, a disciplined engineering change management process, and a world-class team with employees at every level of the organization who are dedicated to operational excellence.
From engineering and program management teams working with our plants well ahead of program launches, to Six Sigma and Lean projects throughout the life of the program. We are constantly looking for ways to improve efficiencies and take cost out of the system while maintaining a high level of quality for our customers. Although always a focus at Lear, these tools are even more important in this current environment. Turning to slide 16. We have a great team, tools, discipline to manage any challenging times, and the financial strength and long-term focus to maintain and accelerate investments in technology and innovation that will drive future profitable growth. This is a transformational time in the auto industry. The next 5- 10 years will bring new content opportunities from secular trends that will shape the future of the industry and accelerate our growth.
Lear has been developing industry-leading capabilities and technologies across all these megatrends. Here are a few examples of the recent Lear innovations. As you know, last year, Lear launched the industry's most sophisticated connected gateway with Audi, a first-to-market 4.5G system with over-the-air software and capabilities. This technology is now being deployed across more than 10 different nameplates with Volkswagen. We currently have in development a program for a 5G system with cellular V2X that is slated for China. Also, in the connectivity space, we have multiple V2X deployments in over 40 cities across 15 states and five countries. In the electrification space, we've developed some of the most sophisticated high-power terminals and connectors in the industry. We have a portfolio of onboard chargers ranging from 7 kilowatts- 22 kilowatts to speed up the charging cycle for electric vehicles.
Currently in production is the seven kilowatt onboard charger with Jag Land Rover I-PACE. In the next couple of years, we will be launching 11 kilowatt onboard chargers with Volvo and Jag Land Rover. In our Seating business, INTU seating continues to gain momentum, not only with development programs, but also with production contracts. We are excited about the powered version of ConfigurE+, which is launching in 2020. ConfigurE+ is an untethered rail system that allows seats to reconfigure and is so well positioned for the future of shared mobility. Our investments in innovation, both internally and externally, are critical to our future growth and aligned with these industry megatrends. Slide 17 highlights some of the steps we have taken to increase our focus on innovation. In 2018, we established internal product teams dedicated to electrification and connectivity, two key growth drivers for our company.
A few weeks ago, we announced the launch of Lear Innovation Ventures. Through LIV, Lear will invest in advanced development teams, partnerships, and early-stage technologies. We've also recently announced a partnership with Techstars Detroit, a venture fund and startup accelerator that will soon be co-located in our innovation center here in Detroit. In addition, we're excited to announce that we reached an agreement with Hyundai to be our first EXO Technology development partner. This partnership will allow Lear and Hyundai to enhance vehicle positioning systems currently on the road while developing advanced systems for fully autonomous driving. We also launched a joint development partnership with Gentherm to accelerate the future of in-vehicle microclimates. This creates a significant value proposition for our customers and puts Lear in a great position for future growth.
These are just a few examples of the things that we are doing to enhance our capabilities in the mobility space and accelerate the pace of innovation within our company. Now turning to slide 18. Though the industry is facing significant macro challenges, we built this company to thrive in this kind of environment and really separate ourselves from our competition. Our efforts are paying off. We have the strongest backlog in our history, the most talented team in the industry, and an incredible reputation for operational excellence. We are continuing to make smart investments in innovation and technology. We are well-positioned for growth while generating strong free cash flow and returns above our cost of capital. We have never been in a better competitive position or had more financial flexibility than we have today.
I'll tell you, I couldn't be more excited about the future of Lear Corporation. Now, Jeff and I would be happy to take your questions.
Thank you. As a reminder, to ask a question, please press star one on your telephone keypad. Our first question comes from the line of David Tamberrino from Goldman Sachs. Your line is now open.
Great. Good morning, gentlemen.
Hey, Dave.
Wanted to start kind of where you left off there, Ray. A lot of advanced development work, a lot of incremental spend for program launches this year on CapEx as well. First question is, when do you expect to see a return on that advanced development R&D expenditures that you're putting forth?
Well, Dave, I think a lot of the investments we're putting in place right now are anywhere from 2-3 years out in respect to the capital comments. A lot of the things that we're doing with John Absmeier and the investments are complementary to our growth strategy, so they will range within our backlog. We see that probably hitting in, like I said, 2-3 years.
Okay. On the CapEx side, I think last year you gave us a pretty good roadmap as to how many launches you had for 2018. I think it was like 145 in Seating and maybe 116 E-Systems. Is that growing year-over-year and helping drive that higher CapEx? As you think about going forward, will there be a little bit more capital efficiency, or is this a new reestablished higher level of CapEx, call it above 3% of sales?
I look at it this way. The elevated level we've had in 2018 and 2019, we made an investment in our structures and mechanisms business on a new technology. I think we got a little bit more to go in 2019. That will tail off. I think some of the investment that we made on the electrification and connectivity business is new. We had no embedded capital to utilize, so that's kind of new. I think over time, beyond 2019, we'll get back to that 3% or maybe even high 2% of sales range of CapEx.
Got it. Just last one from me. I think you've put out pretty conservative guidance with the range top of it being IHS, lower end being a little bit more conservative. Just curious what you're seeing from your customers across different regions, given there's been chop in production in almost every region. Are you starting to see the broadcasts from your customers smooth out, or are you still in an environment where day to day you still have some production changes and shifts that you have to deal with?
I think that IHS came out in January, it was a pretty significant move from what they said in December as it relates to 2019. I think they took 750,000 odd vehicles. The primary piece of that was in China and in Europe, the areas that we had seen at the end of last year to have some volume weakness. I think with respect to the Europe change, a lot of it was geared seemingly towards JLR and FCA, I think in China, the change got IHS closer to our assumption, I think we're still relatively conservative in China versus IHS. I think our guidance is prudent there with respect to our thoughts.
To your question, I think we do see pockets of weakness continuing as customer releases are taken down or taking down weeks. I know the OEMs in the U.K. have announced some down weeks surrounding the potential for a hard Brexit and uncertainty on parts there. We are maybe not to the depth and severity that we saw it at the end of last year, but there is still pockets of weakness. I wouldn't call it a slippery pig.
Got it. What you're saying is a little bit easier to manage your business day-to-day than it was, say, in the fourth quarter?
Yeah, no, I think you saw some of that in Q4 in E-Systems that notwithstanding the margin decline was pretty significant. 90% of it was really related to the impact of the volume decline on some of our key programs and more profitable programs. We had an ability to react better in Q4 in E-Systems than we had in Q3, given the severity and consistency that we saw then in Q3.
Understood. Appreciate the time, gentlemen. Thank you.
Thanks, Dave.
The next question comes from the line of Colin Langan from UBS. Your line is open.
Oh, great. Thanks for taking my question. Just going through the numbers, when I look at other EBIT or other corporate income, it seems abnormally low this quarter. Is there anything unusual going on there that helped out that other line item, other corporate?
I think there's a couple things going on there. One is we did react to the changing volume scenario globally, we took some costs out of the HQ spend, which is your normal corporate type costs. We had some census actions in the quarter, the lion's share of it, quite frankly, is related to compensation expense given the results for the year against our targets, if you will. A lot of it was really related to compensation expense.
Got it. When I look at this year, I think sales are up about 3%, I think if you adjust for FX and the JV that you consolidated, it's actually closer to flat to slightly down, which is sort of a deviation from the last at least five years where you were well above market growth. What was so unique this year? Is it really just mostly customer mix, are there other things that we should think about that was weaker than normal outperformance versus the market this year?
I think the main item is we had a very solid backlog. The impact of volume mix was very significant. I think collectively, volume and mix from a top-line perspective was north of $1.2 billion, I believe, in impact. It was very severe. It really was more significant in the second half of the year versus the first half of the year.
Got it. Just lastly, slide 8. When you look at the E-Systems walk, why is the margin on the backlog actually negative? Actually, the volume mix, which I thought would be the bigger issue because of some of the mix issues in the quarter, seems actually pretty normal on a decremental. The new backlog launching at a sort of negative margin headroom, I mean, why so low? Am I misinterpreting that?
No, I think we tried to put in the script because this was misinterpreted in the third quarter as well. What that chart represents is what is the margin impact of each of those variance items against the 14.3 baseline. The margin on the backlog was very profitable, it was north of 12%. As you compare that 12% to a 14.3 baseline, it was dilutive.
Got it.
It's a great backlog.
Got it. Okay.
Yeah, I think that's an important point.
Okay, thanks.
Yes, thanks.
The next question comes from the line of Brian Johnson from Barclays Capital. Your line is open.
Yes. Thank you. I want to kind of talk about E-Systems because I think some of the discussion over in the Detroit conferences was around, if you just kind of roll back two years, the step down from a 14%-ish business to a 12% margin business. I guess three questions. One, you have long-term targets from your Investor Day of 14%. Are you still on track for that? Kind of second, if so, can you quantify some of the investments you're making that flow through the income statement that gets you there? Kind of third, we'll see when the K comes out, the split on CapEx between Seating and E-Systems, but how are you kind of thinking about that business, not just in terms of op margins, but in terms of ROIC, given the CapEx going into it?
Yeah. First of all, when we look at our E-Systems business, obviously we're not satisfied, and we have some things that we're doing internally, but nothing fundamentally has really changed with the exception of what we've talked about. 90% of what we were hit with was volume mix, and a lot of that volume mix was on older programs that were more mature and were even accretive at more of a premium margin within our E-Systems business. Obviously that was a Something that we've been managing.
When we look at the margin within E-Systems, there's a lot of things that we're currently doing. One, obviously, we can moderate and negotiate some of our agreements with our customers through CTO and VA/VE, which we're currently actively doing. We have a number of activities that we can right size, consolidate, and make sure we're utilizing our capacity in the right way. Obviously, any discretionary spending. We have some work we're doing, and like we just mentioned on the last call, we're launching a lot of new business within E-Systems with different customers. We're diversifying our customer base. With these new customers, even though the margins are healthy, it's going to take some time to work those margins back up to what we've traditionally seen. It's not unlike anything we're unfamiliar with.
I think if you recall, even back in Seating, we were positioned with one or two key customers. We did a great job at diversifying our customer base. We did an outstanding job of working the margins up. You can see how that reflects in the current margins today because we're much more balanced. The impact is significant. I'm very confident in the business. With the increased awards we've got with electrification recently, those drive higher margin type business opportunities, I'm very confident we'll get back to what we've traditionally seen, it's going to take some time.
You want to get in?
Hey, Brian.
Okay, in terms of CapEx and ROIC?
Yeah. CapEx what was the last one?
ROIC.
Let me answer that question so you don't have to wait until the K comes out. It's generally speaking, the split is two-thirds, one-third seating to E-Systems. From an ROIC perspective, this goes back to our fundamental philosophy that our margin profile needs to make sure we have a return greater than our cost of capital. When we look at investing in any project, be it any sub-product or any segment, they have to stand on their own. When we look at investment thesis, we look at hard on the investment required, the return that's required to get a rate of return, and that's no different on any product that we ultimately want to take on.
Okay, thanks.
Our next question comes from the line of Rod Lache from Wolfe Research. Your line is open.
Hi, everybody. Can you hear me?
Yes.
I had a couple questions. First, is it correct that the decrementals on volume in E-Systems were 29%? If that's correct, how should we be thinking at this point about the incrementals if some of these key China platforms start to come back?
Well, I think they're kind of one and the same. That you're right, that the decremental margin in the quarter, and really I think it was similar in Q3 as well, that given the program that was affected, the customer that was affected, the product that was affected, it was one of our higher margin businesses, and as a result, there was a pretty significant downward conversion. To the extent that that volume comes back, we would anticipate that the comeback would be in that same ballpark range of margin accretiveness.
Okay, great. Thank you. I wanted to also just understand a few components of the 2018- 2019 bridge that you guided to an operating earnings decline of 100- 150. First, there's some confusion about what's embedded in the high end versus the low end of your guidance. I think that you've said that you adjusted IHS for both, and that you used -10%, -5%, and -1% for China, North America, and Europe for the high end. Is that correct? If it is, what would the low end be?
The high end would be, as I think you said, an assumption in North America that our top platforms are down 5%. IHS has that down, at least in their January estimate, 1%. In Europe, our top platforms are down 1%. In China, we've said that our top platforms are down more than 10%. That represents the guidance that we are guiding to with respect to the top end of the range. From there, I think it's kind of wherever volume falls in whatever region, that's why we gave it a very wide range, because history tells us, at least in the back half of the year, that volume, wherever it may be, can come quick and regardless of region.
I think our assumptions in China, as you relate to our largest customer, E-Systems there, are pretty conservative versus what IHS is saying, even after IHS made a pretty significant change in January. To the extent that maybe the volume drop within those products isn't as severe or isn't like what it was in the fourth quarter, there may be some upside.
Okay. The low end of your guidance would be worse than that -5%, -1%, and -10%, presumably.
Yeah. I'm sorry. Yes.
Yes. Okay. What are your expectations? Can you just clarify for us your expectations for 2019 year-over-year change in R&D, DNA, and that corporate number? Which has been pretty volatile, down to $46 million in the quarter. How should we be thinking about a run rate?
I think I don't know who mentioned it, I think it was Colin who mentioned, the biggest change in the quarter, and I think ultimately for the full year, was largely attributable to the HQ as it relates to compensation expense.
Right.
Going into next year, we hope the comp expense is much higher. I think we all hope that, because the numbers then, as a whole, are much better. I think on a run rate basis, I would expect to see a number that maybe is slightly below what we've historically run, but it's going to be higher than we were certainly in 2018. I think embedded into that number is going to be some incremental costs associated with our investment in innovation that John Absmeier is going to lead from a corporate perspective. There is some incremental amount of cost that's going to be in HQ as it relates to those activities.
Okay. R&D and commodities for next year?
R&D is going to be slightly up in E-Systems year-over-year. I'd label maybe 10 basis point of margin associated with that. What was the other one?
Commodities.
Commodities, I would say pretty flat with respect to E-Systems, I think given what we're seeing recently on the price of copper. On the Seating side, the whole steel scenario in conjunction with the tariffs will have about a 20 basis point decremental impact on Seating margins.
Okay, great. Thank you.
Thanks, Rod.
The next question comes from the line of Chris McNally from Evercore. Your line is open.
Hi, guys. Good morning.
Morning.
If we could just follow up on E-Systems to a couple of other questions to ask. I think it's clear that you guys have discussed that the volume decline on the key platforms in China and in Europe is the reason for, I think we just talked about it, the decrementals being roughly 30%. I think you've been quite clear on China, which those platforms are specifically for being down so much. Could we go a little bit into Europe, maybe without discussing who the OEMs are? Is there a type of vehicle? Is it sedan? Is there a diesel mix component? Just so we can get a sense for if those vehicles will recover, because obviously we're expecting Europe to be quite tough for most of the first half.
Yeah, I don't think there's any particular platform or vehicle style that we would point to. In Europe, we're much more vertically integrated with our terminals and connectors business. It's kind of across the board of components that we ship, and obviously terminals and connectors making a very good margin in respect to how we build those up into the harness itself. It's more the vertical integration aspect of it and not necessarily a particular platform or power line.
Okay, it's pretty broad-based. I guess the second part of that question is, obviously the decline in the second half of the year, particularly Q4, was quite sharp. Could you talk a little bit about maybe some of the absolute cost actions that you're taking part in either China or Europe in the first half? Whether we could start to see the decrementals in the first half of the year where volumes are still quite tough, maybe they could be a little bit better. Anything that you're doing on the cost basis in China and Europe in the first half. Thank you.
Yeah. Obviously, we pride ourselves, and I mentioned it with operational excellence on how we get at the cost side of the business. There isn't anything that isn't looked at or reviewed and executed right now. Obviously right-sizing our facilities, there's a number of different actions across all of our plants, all 257 plants relative to anything we're seeing as far as deterioration in volume. We have weekly reviews on what we're doing, right-sizing our plants, and how efficient we're running every single week and every single day we run those plants. At much broader, obviously, if there's restructuring actions, how we can consolidate plants, consolidate our overall business, our footprint, get better use out of our capital. All those are actions that we're taking in all the regions, not just specific to China or Europe.
Every single region we're looking at that and acting on those type of things that can drive efficiencies. There's actions we're taking with our customers, and we have great relationships with our customers. As we get into this type of environment, we work with our customers on what we call CTO, in cost technology optimization, where it's VA/VE and alternative specifications and designs that we've done a great job of getting those type of suggestions through, especially given some of the uncertainty that we're facing. We kind of take a proactive approach to not just ask for price increases, but work with them in a collaborative way to solve a problem, which is efficiency and cost. Any discretionary spend.
I've said this before, this is a very unique time in the auto industry, we're holding sacred our investment in innovation and technology. We feel that that is the growth driver, that is the differentiator, and we have the financial flexibility to do that. We'll get at what we can control. We will. We'll drive our cost out. We pride ourselves on that. That's what we're very good at. At the same time, understanding how important it is to invest in the future of this company and drive those growth drivers that will differentiate us longer term. We have a lot of different things that we're doing internally, but one thing we're very good at is getting at cost.
Understood. Much appreciated.
Our next question comes from the line of Itay Michaeli from Citi. Your line is open.
Great, thank you. Good morning, everybody.
Morning.
Just, morning , the first question, just want to go back to the margin cadence for the year, particularly in E-Systems. Hoping you can kind of talk about where you think you'll exit margins in 2019 and how sustainable would that exit margin rate be into 2020?
I think we said a couple of times last week and this week that from a bookend calendar year perspective, E-Systems margins are going to be approximately 12%. We ended 2018, obviously, where we were, but I think it's indicative of what the volume levels on some of our top platforms are at that time. Obviously, our assumption going into 2019 is that there's not going to be an immediate recovery of those vehicle volumes. Coupled with that, given the downtime with some of our customers, et cetera, that the first half sales are going to be lower, I think we said in total, not necessarily with respect to E-Systems, but in total, down more than 5% year-over-year. The back half, given the cadence of the backlog and other things, sales will rise.
I think what we'll see in the first half of the year is margins in E-Systems below that 12% calendar year threshold. On the back half of the year, the exit rate margins will be north of that 12% threshold. Now, they could vary 10- 20 basis points either way, but in a general way, that's the cadence of the way we see margins in E-Systems.
That's helpful. I want to go back to the key platforms in E-Systems in Europe. To the earlier question, you mentioned the decline was broad-based. Just want to clarify, are you seeing the declines in unit volume? Are you seeing any signs of declines in trim and option rates that might be affecting the content of connectors and just overall electrical systems in the vehicle?
I think on the latter, no. I think on the former, yes, specifically with respect to our larger customers there, they've had some volume weaknesses. The Focus program globally is down, but specifically in Europe, I think it's down 50% in the quarter, something like that. Some of our other major customers have been down in the quarter. The main factors, the main regions that have affected E-Systems in the quarter are primarily in Europe and in China. Now, North America, we knew this, the Focus built out in North America, that built out at the end of Q2, early Q3. It was primarily in the fourth quarter related to Europe with some of our larger customers, maybe JLR and Ford. Product-wise, terminals and connectors. Then in China, we discussed one of the major customers that had weaknesses there.
Great. Just lastly, if I could sneak it in on restructuring, you've clearly been stepping up the efforts. Jeff, do you have a cash restructuring number for 2019? Also kind of how you look at restructuring generally over the next few years off of the base you've guided for here in 2019.
I think from a cash restructuring standpoint, we would say that I think we had $100 million plus in restructuring in 2018. We've announced via our guidance $140 million for 2019. The cash restructuring cost in 2019 will be about $45 million more in 2019 than it was in 2018. The ongoing restructuring?
Yeah, go ahead. Yeah.
The restructuring actions in 2019 that are planned that comprise that $140 million really are related to some footprint actions that we're going to be making globally. Some actions that we're going to take as a result of some of the customer announcements that will affect some of our plans. I think beyond that, restructuring, as we see it today, should be going down pretty dramatically beyond 2019.
Great. That's very helpful. Thank you.
Yeah, thanks.
The next question comes from the line of John Murphy of Bank of America Merrill Lynch. Your line is open.
Good morning, guys.
John.
Just first question on some of the comments Ford has made recently, and I'm not sure this would impact you at all, but just wanted to get your perspective. Talking about increasing sourcing to local suppliers in China. I'm just curious if that would either benefit you in some of your JVs or maybe be detrimental to the backlog in the future, or is this something that's outside the purview of seating electronics as you see it in China?
Yeah. To kind of give you a little bit Of the success we've had even with domestics. We've done a great job of growing with the domestics in China, obviously we're competing against the local domestics today, so we continue to see success in our growth. I obviously heard the same comment. I don't know exactly what that means, but I do know that it doesn't, from my perspective, we have to compete every single day, and we've been competing against domestics for a long time. I think at the end of the day, our customers want the best quality, low-cost producer, and we absolutely are confident that we can deliver that. So I just see the same success going forward that we've had with the domestics on the ground and with the traditional OEs going forward.
Okay. That's helpful. A second question. There's some rumors floating around, and I don't think this is in your backlog, and it seems like it's a little bit far-fetched, that you may have won the F-150 contract away from Adient, and that's not really apparent in your backlog. I would imagine it would be a big bump. Can you kind of confirm or deny that in any way?
Yeah, I think I started that rumor.
There you go. That would be a big win for you, right? That would be a big win.
You're giving me news that I don't have. No, I can't. No, I don't agree with that.
You deny.
We deny. I like it, but we deny.
Yeah, that would be a big one for you. Then maybe just lastly, more practically as we look at slide 9 and we look at the improvement in net performance on seating of 60 basis points. That was pretty impressive in the face of everything that's going on right now. If we kind of fast-forward to next year, or this year I should say, and say, "Hey, listen, the volume and mix is flat," which may or may not be the case, we'll see. Would we actually see your seating margins flip up by 60 basis points and be more in the mid 8% range? That's assuming volume's flat. I know that's not what you're assuming, but would you be able to hold onto that net performance if things kind of just leveled out here?
Go ahead, Jeff.
Well, let's get to the cadence question on seating, and I think it will ultimately answer your question, John. That same thing. Book end for the year is going to be roughly 8%. We're going to struggle in the beginning given the cadence of sales, largely attributable to the amount of customer down weeks that have been announced. In the first half, we will be south of 8%, but as the backlog comes on and we get through those down weeks and sales increase pretty dramatically in the second half versus the first half, the margin profile of that business will improve and will be north of 8% as we exit 2019.
Yeah, I think-
Yep.
-to talk about seating. Seating is in an incredibly good position. We still have a lot more work to do, but the team has done an incredible job. We look at where we're at with these systems, and we talk about where Seating's at because we've been through this before. They've done an incredible job of building up a balanced portfolio of diversifying their customer base, and we held very sacred our disciplines to margin. So, it doesn't get as dramatically impacted if there's a shift by a particular platform or customer or region. So they've done a really nice job of protecting that business globally. I think we do have opportunities. I think we continue to work a number of different issues within our Seating business, but with the same respect, it's amazing the growth that we're seeing.
We kind of keep this balance between where our margins are at in respect to growth. You look at the Seating backlog, I think we're looking at conquest business of $1.1 billion. I think we've talked about business we've flat out turned down because we will not take it because it doesn't hit our margin thresholds. So, that's one heck of a number. So there is a balance between the margin and that growth rate that we're seeing, and we think the opportunities in front of us in seating are very bright. So there might be additional opportunities that present themselves, and we're going to have to be prepared for that. Frank and the team have done a great job. There's more opportunities, I think, on the margin side, but we're going to balance that with the incredible growth we've seen.
Maybe just one quick follow-up to that. It kind of seems like you're indicating mid-sevens for the first half, mid-eights for the second half on Seating margin, full year around 8%, give or take. Should we think about sort of that exit rate next year in the second half or 2019 this year, I apologize, as a more normal number than the 8%? Is there something really positive going on in the second half that's kind of pushing the numbers up or pushing the margin up?
From a total, John, from a total company perspective?
No, I am sorry, just for Seating alone specifically.
Yeah. We would anticipate end-of-year exit rate margins to be north of eight.
That's a more normal number than the full year of around eight.
Yeah.
Yes. I'm sorry.
Got it. Okay. Just thinking about out years. Okay. Thanks so much, guys.
Thank you. Our next question comes from the line of Joseph Spak from RBC Capital Markets. Your line is open.
Thanks. Good morning, everyone.
Good morning.
I think we went through this last quarter. You sort of alluded to this, and maybe we could take it offline exactly how you're calculating the profit walks as sort of an adjustment to the baseline. With your definition, I just want to understand. Because my recollection is that you've indicated that sort of backlog, when it launches, always comes on a little bit less profitable. So by the way you're reporting it, won't the backlog always have this sort of negative impact and E-Systems or do you actually expect it to be a positive contributor? Again, not in absolute terms, but the way you're sort of reporting it as adjusted to a baseline. I know that was a confusing question, but, hopefully you got it.
Well, let me try to piecemeal that. The chart is meant to describe an accretive or dilutive variance item compared to a baseline. In this case, the baseline is a 14.3% margin profile in the segment. The backlog doesn't always come on in a dilutive way. We saw that in Seating. The margin was accretive. Our backlog was accretive in, I think, both Q3 and Q4. The margin in E-Systems on the backlog was north of 12%. It's great business, and that business is going to continue to have margin accretion as we go forward. It's not an absolute that the collective businesses that make up the backlog in any given quarter, any given year, may be dilutive to the baseline margins in a segment. It just so happens in this case, it is. I think historically, that's probably the case, that margins come on lower.
You've got launch costs that are baked in there. You got a number of different things. As we work the program, we work the efficiencies, we work engineering changes, we work manning levels, that's when margin improves on those programs. To me, it's no different than what we've seen in the past. Those programs, as they get longer in life, will improve the margin profile.
As we think about 2019, and let's, I guess, stick with E-Systems. Again, relative to a baseline as we move through the year, the backlog will be accretive eventually, or?
Yes.
Okay. The second question, this is sort of really just an understanding. In your adjustments to adjusted operating income by segment, it looks like you're deducting out the favorable tax ruling from there, which I think is an EBIT measure. I'm just curious sort of why it's there and not sort of somewhere in the tax line.
Sorry, the tax ruling?
Yeah, it looked like you were deducting a favorable tax ruling to sort of adjust your segment EBIT.
Yeah. This gets complicated, but we had a favorable tax ruling in Brazil that was years, I mean, literally years in the making. I was in my 40s, I think, when this thing was started. It was a one-time item. It's not a run rate item for us going forward. As a result, we didn't want to indicate that it was a run rate item, and we treated it as an adjustment.
Right. I guess I'm just curious, why is it in an EBIT measure as opposed to sort of in the tax line? Not that it matters from an adjusted basis, I guess.
It affects things that we would put in EBIT.
Okay.
The type of taxes that it relates to that we would get a reduction on going forward would be within that geographic accounting line item.
Okay. Last one, just I guess, housekeeping, and we'll see this in the 10-K, but any update on the pension status?
The pension, the funded position of the pension at the end of the year decreased, I think it was like $20 million year-over-year. I may have that number slightly wrong, but it's in that ballpark. Given the interest rates, the rise in interest rates, that certainly is helped. The underfunded position definitely went down between 2017 and 2018.
Okay. Thanks, guys.
Thanks.
Our final question comes from the line of Emmanuel Rosner from Deutsche Bank. Your line is open.
Emmanuel.
Hi, good morning, everybody.
Morning.
Two follow-up questions on E-Systems, if I may. First of all, I think your comments at last week conference was around the idea that only half of the $1 billion in quoting opportunity that you had assumed for 2018 was actually attributed. I'm just curious, when I sort of look at 2019, does that mean that there's $1.5 billion or is it still $1 billion? I guess more fundamentally, what is it that's driving sort of this lower pace of attribution for E-Systems business in particular than you may have anticipated before?
Yeah, that's a good question. You're right, it was about 50% was actually awarded last year of the billion-dollar quoted business that we were pursuing. That business that was quoted and awarded, we won about between 25% and 30%. We're at the win rate of what we're projecting and what we're confident in winning. The rest of it was carried over into this year. What's interesting is we've talked about this every year. We try to give some consistent insight into what we're seeing, because in electrification and connectivity, we are seeing the rate of quoted activity from our customer increase significantly. I think at this time last year, we were around $600 million, $700 million, and now starting the year off right now we're at $1 billion.
We see that number increasing incrementally throughout the next several quarters. What's interesting about the awarded business from last year, 75% of it was in electronics. That's the higher margin business that we've been talking about. We did a really nice job of winning in those two really big mega trends for us, but specifically in electronics. The team did a great job. The reason why it's taking a little bit longer than what we would see in a traditional awarding process is our customers, in some respects, are redeploying and looking at how they can scale across multiple platforms. I think there's good reason for that. There's been legislative changes. They're looking at accelerating versus a 48-volt up to a PHEV to an EV. They're kind of thinking through some of their strategies internally, which I think is very positive.
We can go from a lower-end CPV type quoting activity to a higher end. That's been positive for us. I think the specifications and some of the requirements just takes longer. To be on a bidding process or be in the bidding process for the customer, you have to have an enormous amount of capabilities, and you have to have competencies in some respects that are brand new. What we've been able to do is build up those technical capabilities. As the customer's going through it just takes a little bit longer time in their own quoting process. Nothing alarming. I think it's all positive. I think the rate of how we're getting these quotes, how we're looking at these quotes, and how we've been winning them is all good news.
That's very helpful color . I guess secondly, still on E-Systems. One of the big headwinds obviously has been those very large volume declines in China at Ford. When you look ahead, Ford seems confident that they could sort of turn things around over the next couple of years, but a lot of it seems to rely on new product. I think they're talking about 10 new cars. Some of them I'm sure are just refreshes, probably some of them are introductions and redesign. Are you on these new models as well? Would you benefit from the upside if it came from different models than what has been under pressure?
Yeah. We're on some of them. We have a great relationship with Ford, and we absolutely love what they're doing as far as the strategy. What's great about it, let me give you an example that worked out perfect for us, and I think it's a tribute to the relationship that we have. Jeff mentioned the Focus was canceled, but we had that business here locally. We were able to work with Ford Motor Company, and we transitioned to the new Bronco Ranger. That was a great shift for us. We work with Ford. We understand what they're doing, and we obviously are very supportive. At the end of the day, we have to do what we've always done. We have to be competitive.
We have to deliver high-quality parts. We have to secure the launches we have for them, because we're going through a big launch with them right now with the Explorer. That's an exciting launch for us. We just keep our head down, keep doing what we've done, do a great job with launches, give them the best cost and quality. We're confident that we'll continue to build on that as far as new business.
Great. Thank you very much.
Okay, great. I think that's the last question. I think probably the only one really left on the phone is the Lear team. I just want to say thanks to the whole Lear team for a great 2018. There's a lot of headwinds, but I really appreciate what we all did as a team. Remember, and we say this over and over again, focus on what we can control. There's a lot of noise out there, but we're really good at what we do internally. Let's just remember to stay focused. We built this company for success during good times. We build it for uncertain times. This is when we're really going to separate ourselves, so let's just stay extremely focused.
We're in a great position. I absolutely have all the confidence in the world that we're going to continue our success. Thank you for a great 2018. I look forward to a great 2019.
Thank you, ladies and gentlemen, for joining us today. This concludes our conference. You may now disconnect. Have a great day.