All right. Good afternoon, everybody. We're going to continue this program this afternoon here at the Deutsche Bank Global Autos Conference with Lear team. Very pleased to have you here. As you all know, Lear is the world's second largest global supplier of automotive seating, with leading market share in most regions. It's also a strong and growing player in electrical architecture with its E-Systems segment. This segment, we think, is positioned for strong growth going forward as a result of increasing vehicle electronics and electrification. Representing Lear today, we have Ray Scott, the CEO. He's been CEO since March of 2018. Previously was Executive Vice President and the President of the Seating Business, before that, he was actually president of the electrical business, knows the company quite well.
Yeah.
We have Jeff Vanneste, who's CFO of Lear since 2012. Prior to joining Lear, Jeff was Executive Vice President and CFO of IAC, which is International Automotive Components. We also have Alicia Davis, we have Joel Elsesser from Investor Relations, and we have the CTO of the company, John Absmeier, sitting here in the audience. Thanks again for joining us and over to you.
Great. Thanks. Thanks, Emmanuel, thanks for having us. It's an honor to be here, thanks everyone for attending. Today I'm giving you an update on everything that's going on within Lear Corporation. Okay. Before I begin, I'd like to direct your attention to our safe harbor statement, as we will be making forward-looking statements and referring to non-GAAP financial metrics. More information regarding these items is available at the end of the presentation. I'd like to begin the presentation with some background on Lear Corporation. We are a large global automotive technology supplier of two critical automotive systems, seating and electrical electronics systems. Both our seating and E-Systems segments are industry leaders. We have a very low leverage, the ability to generate significant free cash flow. Given our financial performance and track record of returning cash to shareholders, we have delivered superior shareholder returns.
Over the last five years, our total shareholder returns has outpaced that of the S&P 500, dwarfs that of our automotive supplier peer group. Lear has a very resilient business model, industry-leading operational expertise, a strong financial performance, a strong balance sheet, a robust backlog, the ability to generate significant free cash flow. We are in an exciting position to take advantage of any market opportunities that may present themselves in the current environment. As a matter of fact, we have never been in a better financial position or had more financial flexibility than we have today. Our commitment to maintaining a strong financial discipline ensures that any business we take on will offer fair returns for our shareholders. Lear has all the ingredients to invest, innovate, differentiate, grow, and create value.
We're committed to holding our investments in innovation and technology sacred, working towards expanding our top and bottom line with our products, our processes, and our business model advancements. Lear has tremendous capabilities in innovation and technology in two business segments that are perfectly aligned with the industry megatrends. We have consistently outperformed our peer group across every major financial metric. This level of performance is a result of having the best team in the industry, investing in the business over the long haul, and continuing to focus on our customers' operational excellence in achieving profitable growth. This slide highlights our global business segmentation by region and customer. As you can see, our business portfolio is well-diversed. We're not dependent on any one customer or region to deliver sustainable results.
Recent volume reductions in the current macro environment, though not something we seek, of course, have increased our customer diversification. For example, Ford represented over 20% of our sales in China in 2017. We estimate that number to be around 10% in 2018 and are forecasting Ford China sales to represent approximately 5% of our business in China in both segments in 2019. We are launching a significant number of new programs this year. Slide seven highlights some of our key launches in seating. We are very excited about several major new programs in key vehicle segments. Many of our most important programs are transitioning to new models, including GM's full-size pickup trucks in North America. As we discussed on our third quarter earnings call, we will experience downtime in advance of the start of production as OEMs reconfigure their assembly plans in preparation for new vehicles.
On a couple of these large North America seating programs, we expect 13 weeks of downtime through the first three quarters of this year, with eight of those weeks occurring in the first quarter. We couldn't be more excited about the business because this is some of the most coveted platforms in the industry. We're also launching significant backlog in E-Systems with premium vehicles such as Land Rover Defender and several different BMW models. We are excited about these product launches because they contain some of the most complex technologies we have ever produced, including the 11 kilowatt onboard charger on the Volvo Polestar 2, and Jaguar Land Rover I-PACE and the I-TYPE. As you can see on this slide, we have consistently outperformed our peer group across every major financial metric, especially those metrics related to earnings growth and converting those earnings to cash.
We are experiencing a transformational time in the automotive industry. The next five to 10 years will bring robust content opportunities from the auto tech secular trends that will shape the future of the industry and accelerate growth. Lear has been developing industry-leading capabilities and technology across all these mega trends. We have a strong leadership position in seating technology, which includes our INTU seating. We have industry-leading expertise in high power electronics, cellular Wi-Fi connectivity, and dedicated short-range communications based on V2X connectivity and safety applications. In cybersecurity, we have a dedicated product security team based in Ann Arbor, Michigan, which is led by the recognized industry expert, Dr. André Weimerskirch. Our recent acquisition of Xevo Technology brought us expertise in vehicle positioning and advanced sensor fusion software capabilities. Across all these trends, we are pursuing significant opportunities in software, services, and data.
Lear is very well positioned for growth in all these areas. Our investments in innovation, both internally and externally, are the key to our future growth in alignment within these industry mega trends. Key to successful innovation is forming collaborative partnerships with all these players in the ecosystem. I'd like to highlight some of the few initiatives. Last week, we announced the launch of Lear Innovation Ventures, led by our CTO, John Absmeier. LIV will enhance our focus on product, process, and business model innovation. Through LIV, Lear will invest in advanced development teams, partnerships, and early-stage technologies. We recently announced that we are a corporate partner with Techstars Detroit, a venture fund and mentorship driven accelerator and startups. We also reached an agreement with Hyundai to be our first Xevo 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. In addition, we launched a joint development partnership with Gentherm to accelerate the future of in-vehicle microclimate. Okay, this last one, I just want to go off script a little bit. I've talked quite a bit about innovation and technology. We've always been a great company with operational excellence. It's important as you see the transition that we're discovering and being awarded by our customers ways to commercialize our innovation technology. The upper left corner is the award of the 7 kilowatt onboard charger with Jag I-PACE, along with a number of key technology and innovations from our customer. The bottom left is, and we've talked about this, the most sophisticated communication box and connected gateway.
You can see the different programs that we've been able to reach across multiple platforms with Volkswagen. It's been one platform that's gone across multiple platforms with Volkswagen, and that is the most sophisticated C-box and connected gateway. In the right upper box, we've talked about this in the past, our ConfigurE+, which is a design. You talk about mobility and reconfigurability. We're going to launch in 2020 with a German OEM, a first electric slide rails. I know some of our competitors talk, and you see videos about what's out there, but we're delivering this innovation in technology in products for our customers. It's not just talk. You can see the transition from what is a great company operationally to really the focus on technology and innovation and delivering it for our customers for the future.
The last one, John was at CES last week, and with our partnership with Rinspeed, we continue to talk about intuitive seating. We were able to show some of the capabilities with Rinspeed, also we talked about the development programs we've won with our customers. It's not just talking about intuitive seating, we're actually delivering with development programs across the board. I think establishing the new relationship with Gentherm is only going to help us accelerate the microclimate type applications that we've been talking about. With that, I'm going to go ahead and introduce Jeff Vanneste, our CFO, to give you an update on our guidance.
Thanks, Ray. This slide shows our updated three-year backlog. I think it's important to note that our sales backlog includes only awarded programs, net of programs rolling off and net of lost business, and does not include any pursued business or content growth. Our updated backlog includes the negative impact of approximately $300 million of customer-announced cancellations and approximately $100 million decline due to the change in currencies versus last year's backlog. Despite these negative impacts, our sales backlog for 2019 to 2021 of $3.35 billion represents the largest backlog in Lear's history. The backlog is well-balanced by region and by customer, driving continued diversification of our top line. Of our overall consolidated and unconsolidated backlog of $3.9 billion, $1.2 billion is in China, with approximately 45% of that in our E-Systems business.
From a segment perspective, our backlog is split approximately 70/30, Seating versus E-Systems, and consistent with last year's backlog, approximately 90% of our Seating backlog is on SUV and CUV programs. With respect to our E-Systems segment, we continue to take share and win new business aligned with the emerging industry trends of electrification and connectivity. Over 40% of our E-Systems backlog is on vehicles regarding electrification and connectivity. For 2020 and 2021, there are still several programs that are up for bid. We expect the backlog in those years to continue to grow as those new programs are awarded. Here's our financial outlook for 2019. 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 December IHS estimates as a baseline, with modifications gained from customer releases and our own internal assessment. Our outlook forecasts our top platforms in North America and Europe to be down approximately 5% and 1% respectively, which is generally consistent with IHS's December forecast. In China, our forecast reflects volumes on our top platforms to be down more than 10%. From a currency perspective, our guidance assumes an average EUR of $1.13 per EUR and an average RMB of RMB 6.95 to the dollar. As Ray previously highlighted, given the launches on some of our key platforms, we will experience 13 weeks of downtime on those specific programs, primarily in the first half of the year. As a result, the cadence of sales will 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 assumes first half sales to be down more than 5% year-over-year, but second half sales to be up more than 10% year-over-year. Core operating earnings are forecasted to be in the range of $1.6 billion-$1.7 billion, with the high end of our range reflects full-year Seating margins of approximately 8% and full-year margins in our E-Systems segment to be approximately 12%. We're expecting another year of strong cash flow generation with free cash flow forecasted in the range of $850 million-$950 million. Restructuring costs are forecasted to be approximately $140 million, up $40 million from our 2018 outlook, primarily reflecting footprint and census actions attributable to the current macroeconomic and industry environment, including the impact of some of the most recent customer announcements.
Based on our projected mix of earnings by country, we expect our overall effective tax rate to be between 22% and 23%, and given our tax attributes, we expect our cash tax rate to be approximately 20%. Lear has one of the strongest balance sheets in the industry. Our debt structure includes a combination of flexible term debt, a $1.7 billion undrawn revolver, and fixed debt with no bond maturities until 2024. As Ray said before, we have never been in a better financial position or had more financial flexibility. Lear has a long history of converting earnings to cash and a disciplined approach to capital allocation. Our strong cash generation allows us to not only invest in the business, but return excess cash to our shareholders.
Our first priority is always to invest in the business, supporting our customers, expanding our product and process capabilities, and improving our cost competitiveness while making strategic acquisitions that add product capabilities and top-line diversification. We are committed to maintain investment-grade credit metrics and returning excess cash to shareholders on a consistent basis. Since 2011, we have returned nearly $5 billion to shareholders through a combination of our share repurchase and dividend programs. I'll turn it back to Ray for some closing thoughts.
Thanks, Jeff. Great job. I'd like to sum it up real quick. I can't tell you how excited I am about the future of Lear Corporation. Think about Lear, and we have an incredible management team, an incredible team around the world with a tremendous amount of experience. We have an incredible resilient business model, and we know exactly what to do given some of even the uncertainties that we've seen because of the experience we have. We're focused on operational excellence. We pride ourselves, it's at the core of our company, is our operational excellence and the things that we can do despite anything that's going on in the market, in the environment around us. We've never been in a better financial position today to take a look at any opportunities that might present themselves in the future.
I'll tell you, the drive for innovation and technology, and you've seen it through some of the awards, is continuing to take traction. We're being able to come, monetize that with new awards and be recognized by our customer. We are in a great position, given everything that is facing us in the future. I think our future is going to be extremely bright. For that, we'd like to go ahead and take some of your questions.
Thank you so much for the presentation. I'll kick it off, since you generously left us more than 20 minutes for Q&A, I'll ask maybe three. First of all, on 2019, Jeff, you were saying that the high end of your revenue expectation corresponds roughly to IHS in terms of production assumptions. What does the midpoint of the low end look like in terms of the main region production year-over-year?
I think let me just broadly characterize our volume assumptions. You mentioned it, that our assumptions with respect to North America down 5% and Europe down 1% is generally consistent with what IHS is saying for next year. With respect to China, that's kind of where we depart a little bit from IHS. IHS generally is not as reliable in China. Even beyond that, what we're assuming in China for next year is generally a continuation of what we saw at the tail end of last year, when we spoke about some of our key customers there and key programs there being significantly down, really starting from the middle of the year to the end of the year. As we look at the customer releases on those programs with that customer, we see at least for the first three months, kind of more of the same.
Our assumption therein that is driving the overall top platforms in China being down over 10%, is that with respect to those key customers, the level of run rate that we are seeing in the first quarter will extend all the way through the end of the year. Those set of assumptions and currency and other assumptions that we've made represent the top line. Now, we've given a wider range than what we've seen historically from us, primarily because what we've seen in the last six months is a level of uncertainty in terms of volumes and whatnot that we thought drove the need to have a wider range. The top line really flex those assumptions. Any deviations from those assumptions is where you come down from the top end of the guidance.
Understood. A second question on the backlogs, obviously, extremely strong despite seeing some cancellation and some FX impact. One area that I was curious about is on E-Systems, it's about 30% of your three-year backlog versus maybe 40% last year, the three-year backlog. Specifically for the 2019 contribution, it seems like you're going to launch about $400 million of E-Systems business this year versus $550 million expected in the previous backlog. Can you maybe speak a little bit about what's going on within E-Systems and to what extent is actually strong share gains in seating that are sort of squeezing the E-Systems contribution?
I think what you see for the most part between the departure specific to the 2019 year and then specific to the old backlog versus a new backlog with respect to E-Systems are a couple themes there. One is we saw in 2018 a pull ahead of some of the backlog that we had factored into 2019 come into 2018. It's still there, it's just moved ahead in terms of that. With respect to our volume assumptions on some of those backlog programs, the volume assumption is lower than it was before, that's part of it. The third one is, you mentioned it, there's a couple of program cancellations that are factored into that.
As you look at the full three-year backlog, old versus new, and Ray may touch on this later, is the pace by which some of the electrification and connectivity programs were being awarded. We had anticipated $1 billion of awards in those programs in 2018 that would have affected the backlog. That rate was a little over $500 million. It's pushed back somewhat the timing of the award of those programs, which is I think another reason why with respect to E-Systems, the overall comparative backlog is slightly lower.
Why don't I just give an update on that because I think everyone's heard. I've talked about the amount of quoting activity we have in these mega trend or these secular growth stories that we've talked about with electrification and connectivity. This time last year, we were talking about $700 million, obviously grew to $1 billion over the course of a year of business we are quoting in electrification and connectivity. One thing we're recognizing for a number of reasons, one, specification, the technical competencies and capabilities, legislative changes in respect to electrification and customers looking at taking these type of technologies and extrapolating those over multiple platforms has slowed down the rate of what we would consider to be a traditional sourcing model in that time frame. Like Jeff alluded to, only $500 million of the $1 billion we are quoting was awarded last year.
There's a positive in that we've talked about an award win rate of about 25%-30%, that's exactly what we won. $500 million of that has been carried over into 2019, we're already sitting on about $1 billion of business for quoting. We expect that to grow very similar to what we've seen historically. I think just two years ago, we were talking about $400 million of quoted business, that pace is increasing. There is a longer time horizon because of the factors that I mentioned, but our confidence in winning that 25%-30% is still there.
That's extremely helpful. Very finally, I'll turn it over for additional questions from the audience. If we look at some of your framework for margins through 2023, which was given at the June Investor Day, I think the idea was your seating margins would stay around sort of 8% through the planning assumption. Your E-Systems margin would stay around the 14%, and then the mix of more E-Systems sort of like benefits your overall margin. When I look at what we're going through in 2018 and then your 2019 outlook, looks like seating is indeed around 8%. E-Systems' quite a bit far from the 14%. What has essentially happened that you didn't foresee in June? What does that mean in terms of potential implications for the five-year outlook? Thank you.
Yeah. A couple things. One, I think it shows the resilience of what's going on in seating. The way we've described seating is, given the production environment and what we're seeing today on an annual rate, we're looking at seating at 8%. Quarter by quarter, obviously, that can change. We've talked about the launches that we're gonna have at the beginning part of this year. In E-Systems, there's a number of different factors that are going on. We've talked about the reduction in some of our key platforms and key customers. I think we mentioned with CAF in China, that was something that obviously happened extremely quick. What represented about 20% of our overall market in China went to around 10%, and now we have a run rate of around 5% of our sales, which we had a good share of electro and electronics with that customer.
That obviously hit us. We had the WLTP issue that went on in Europe. Even though that was short-lived, I think you look back now and you see that the volume that went down in Europe, only 50% of it was really contained within WLTP. The rest of it was just the production environment that we were supplying parts in. Those products were more vertically integrated, so we supply a lot more terminals and connectors, which impacts the margin. The third one, it's a good story, is that we're really growing E-Systems with a diverse customer base. As we increase our share with Geely, Volvo, Mercedes and Volkswagen, that business is coming on, albeit profitable, not at the margins as we've traditionally seen. We believe, we're not walking away from what has been a traditional margin within E-Systems.
We actually think it's a positive story as we increase our electronics content. To kind of give you some numbers of the $400 million that was awarded in electrification and connectivity, 75% of that was electronic components. Those are at a higher margin. We're starting to see the transition to electronic components that deserve a higher margin profile. As we mature the customers that I talked about, the customer base, I believe, I have a lot of confidence that those customers will mature and so will the margins as we get efficiencies out, work on design alternatives, work with our customer long term on opportunities that we can really create value on both sides through cost efficiencies.
There's a couple parts here, but we've said right now, given the production environment that we're in and some of the macro conditions we're facing, that that range is 12%-13%, and we're not walking away from that on an annual basis. I want to make sure I say that because Alicia will say you missed in an annual basis. Yeah.
We've had some major OEMs announce big restructuring plans recently. Just curious your view on how those could potentially impact Lear either in the short term or long term.
Well, good question. In our 2019 guidance, we've taken the information that we know, and that's built into our 2019 guidance. We worked extremely closely with our customers, and I'll give you an example. As customers have transitioned from a particular product line, we've been able to benefit the focus, for example, with Ford Motor Company. We were awarded the Bronco Ranger, and even on the Bronco, we are awarded full sourcing control. The model itself actually changed. We benefited, and I think working with all of our customers as they continue to do the right things for their business, we continue to work with them closely to continue to develop opportunities for ourselves. I think we keep that type of collaborative environment, and it's worked extremely well for us in the past.
Can I just take you up on what you said about WLTP being short-lived? Do you basically see it now as over?
As what?
Is it over for?
I don't think it's.
WLTP?
I wouldn't say. Here's the way I see it, is it's created a great opportunity for Lear Corporation because when I talk about some of these delays in some of these programs, our customers are now looking at how they can accelerate, in some cases, from 48-volt up to a PHEV or even a full electric. I still think there's discussions around platform scalability, technology. Even though I think the production, the significant production reductions could be behind us, it's opened up a lot of different discussions and opportunities for us as we move forward, and I think along with legislative changes that we're seeing. It's accelerated our opportunities from a CPB standpoint. Anybody got a joke?
Can you talk a bit about the environment in the seating industry, if there's been any opportunities to gain share as some of your competitors have struggled? Thank you.
Yeah. Thanks for that question. I'll say this. Of our backlog, $1.1 billion in seating comes from conquested business. Despite the environment we're in today, given some of our competitors' position, we've done a great job of taking business. I think that's represented in the backlog that you see today. If there's any more challenges with our competitors, I just think it's an opportunity for us, we're going to continue to do the job that we've been doing and deliver great products to our customer. If they want to reward us, I think that's a great opportunity for us. Nothing major, no major changes.
Can you just clarify your guidance for E-Systems margins? I thought you said in the presentation that the high end was 12%, but then I think you just said it was 12%-13%. Is it 12%-13%? Is that how we should think about them for the year?
Yeah. In the guidance, we have 12%. I'm saying we're not walking away from what we said on an annual basis of 12%-13%.
I think the distinction there is, I think Emmanuel's question was related to what we said at Investor Day. I think, I'm not trying to correct Ray's response, but I think just to clarify, we're not giving up on 12% margin. That's kind of what it is today. Our ability to grow those margins between 12 and 13 is absolutely there. With respect to the bookends of 2019, we see margins at around 12% on a full year basis.
Any color on the low end? You said China down 10 is sort of based on your customers and what you're seeing. What are the low ends I'm planning for China? Color there?
Well, there's not much left in China with respect to some of our key customers, given our guidance. I would say that with respect to specifically China on E-Systems, that there's probably, from a top-line perspective, more opportunity given, I think, the relatively conservative approach we've taken towards that specific customer and their run rate.
Thanks.
Thank you. When you hear your main customers talking about reducing complexity in a really meaningful way in the coming years, when you hear today Ford and Volkswagen announcing large platform cooperation also driving standardization, less complexity, how does that affect your profitability over time?
We pride ourselves, in a lot of cases, we even bring ideas forward to our customer. I think that's right in our wheelhouse. Because as our customers reduce their product, they standardize their components, we can become much more efficient. We have examples where we've designed components with our customers that have given us the ability to scale properly. I see that as something that's positive, I think it's something we pride ourselves on. We continue to bring opportunities forward to our customer where we can help them with proliferation or ability to scale or create value for not just our customers, but for Lear Corporation. I see that as very positive.
Would it be fair to say that you might give away some of your margin, your return on capital employed would be more driven by a higher capital turnover? Your cash flow might be really great still, you might have to give away some of your return on sale.
I think we've done a great job of growing the business and growing it profitably. I don't know. We've talked quite a bit about not taking business at a particular financial threshold, for good reason. You've seen some of our competitors take it on, they've been hurt by it. I think there's a balance there, I don't see any major changes in our strategy. Danny, right there.
Just a refresher on your capital allocation strategy. I know you spoke about it, Lear's always been adored for being a great cash story. As you embark on maybe a more challenging environment in 2019, any changes in terms of how you're thinking about the balance sheet and preserving capital or reallocating to shareholders, et cetera?
No, I think we obviously feel comfortable in the company's ability to generate significant amounts of cash. I think we've shown, with respect to the company and the board and the leadership on making sure that to the extent that there's excess cash available in the company after we've invested in the business and done whatever M&A we thought was necessary in the business, that we were good stewards and pushed back capital to the shareholders through the dividend and share repurchase program. I don't see a major change with certainly those set of priorities.