Lear Corp

NYSE:LEA

Earnings Call Transcript 2019-Q2

[Operator]

Welcome to Lear's Second Quarter 2019 Earnings Conference Call. I will now turn the call over to Alicia Davis, Vice President, Investor Relations. You may begin.

[Alicia Davis, VP, IR]

Thanks, Maria. Good morning, everyone, and thanks for joining us on Lear's Second Quarter 2019 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, including Tom DiDonato, Senior Vice President and Chief Administrative Officer; John Absmeier, Chief Operating Officer; and Jason Cardew, Vice President of Finance, also have joined us on the call.

Following prepared remarks, we will open the call for Q&A. You can find the presentation that accompanies these remarks at ir.lear.com. Before we begin, 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 highlights from the quarter and provide a business update. Jeff will then review our second quarter financial results and updated 2019 financial outlook. Finally, Ray will discuss our operational and organizational plan and then offer some concluding remarks. Following the formal presentation, we would be happy to take your questions.

Now I'd like to invite Ray to begin.

[Raymond Scott]

Thanks, Alicia, and thanks, everyone, for joining us today. Earlier this morning, we released our second quarter financial results, a summary of which appears on Slide 5. In the second quarter, we continued to face a challenging macroeconomic and industry environment. Despite significant industry headwinds, Seating continued to perform well. However, our performance in E-Systems fell short of our expectations. In a few minutes, Jeff will walk you through in detail the factors that contributed to the margin decline in E-Systems in the quarter. But before that, I would like to take a moment to share with you my perspective on the key drivers of the margin decline we have seen in E-Systems from the mid-14% range in 2017 to the mid-8% range reflected in our full year 2019 guidance.

The first driver accounting for roughly 70% of the overall change in margin since 2017 is lower production volumes and a change in the mix of business by region and customer. You may recall that we first highlighted the weakening volume environment in June of our last year's Investor Day. We're now seeing volumes on our existing programs decline by 15% over the past two years. The second key driver is what I would characterize as a rapidly changing industry and macro environment, which has impacted our cost structure and business model in the short term. These factors have had a disproportionate impact on our E-Systems business overall and on our wire harness business in China, in particular. Historically, our business in Asia had margins well above overall segment margins. However, over the past two years, we have seen our E-Systems margins in Asia decline by more than 50%. This alone has led to a 260 basis point reduction in our overall E-Systems margins.

Also, I want to take a moment to address the customer pricing environment. As we have previously indicated, the customer pricing environment was, is and will continue to be challenging, whereas on a total company basis, the level of price compression we expect for this year is in line with our historical run rate. E-Systems is currently experiencing a slightly elevated level of pricing pressure that is the upper hand of our historical range. And in the second quarter, I made this -- a strategic decision to settle commercial agreement with certain customers that included incremental price reductions for the opportunity for profitable growth. As I look forward, I'm extremely confident in E-Systems' competitive position and our plans to capitalize on the significant secular growth opportunities in electrification, connectivity and software.

Slide 6 provide some recent business highlights, and I would like to discuss a couple of them. On our first quarter earnings call, we said we expected to sign a new OEM customer for Xevo soon. Last month, FCA announced that it has partnered with Xevo for the launch of FCA's new Uconnect Market platform. Uconnect will be deployed in the second half of 2019 via an over-the-air software update impacting model year 2019 and '20 Chrysler, Dodge, Jeep and RAM-connected vehicles. This is a very important win for the Xevo team.

In April, we completed a financing that included Lear's first 30-year bond offering. This transaction serves as a testament to the financial strength of our company.

And with that, I'd like to turn the call over to Jeff to provide a review of our second quarter financial results and our revised 2019 outlook.

[Jeffrey Vanneste, SVP & CFO]

Thanks, Ray. Slide 8 shows vehicle production for the second quarter. In the quarter, global vehicle production was down 1.8 million units or 7.5% from 2018. Lear's top programs were down greater than the market in each of our major regions, with Europe down 15%, North America down 9% and China down over 20%. From a currency standpoint, all major currencies continued to weaken against the U.S. dollar.

Slide 9 highlights our financial results for the second quarter. For the quarter, sales were down $5 billion -- I'm sorry, sales were $5 billion, down $573 million or 10% from last year driven by production declines in all our major markets and the negative impact of foreign exchange partially offset by growth from the backlog. Excluding the impact of foreign exchange and the acquisition of Xevo, sales were down approximately 6.5%, reflecting 1% growth above market. Core operating earnings were $352 million, down $119 million, primarily due to the decrease in sales. Core operating margins were 7% in the quarter. Second quarter free cash flow was $268 million compared to $348 million in 2018. The reduction in free cash flow was primarily a result of lower earnings somewhat offset by lower capital expenditures.

Slide 10 explains the second quarter year-over-year variance in sales and adjusted operating margins in the Seating segment. Sales in the quarter were $3.8 billion, down 10% from the second quarter of 2018. Excluding the impact of foreign exchange, sales were down 6%. The decrease in sales was driven by lower production on Lear platforms in all our major markets, coupled with the impact of significant downtime and slower ramp-ups on some of our key platforms in connection with their transition to new models. These productions declines were somewhat offset by growth from the backlog.

Seating margins were 8.2%, down only 10 basis points from 2018 as the impact of the significant volume decline was almost entirely offset by strong operational performance in a margin-accretive backlog.

Slide 11 provides a second quarter year-over-year sales and adjusted operating margin walk for our E-Systems segment. Sales in the second quarter were $1.2 billion, down 11% from the second quarter of 2018. Excluding the impact of foreign exchange and the acquisition of Xevo, sales were down 7%. The decrease in sales was driven by significant volume declines on Lear platforms in all our major markets. These production declines were somewhat offset by growth in the backlog. E-Systems margins were 8% in the quarter. Consistent with the first quarter of 2019, margins were significantly impacted by lower volumes and unfavorable platform mix on key Lear programs. The Xevo acquisition had a 50 basis point dilutive impact on margins.

Net performance in the quarter was negatively impacted primarily by the settlement of certain commercial agreements, continued investments in launch and R&D cost to support our backlog, elevated labor costs and other economics.

Slide 12 shows full year IHS global vehicle production volumes and our currency assumptions. Industry production continued to decline throughout the first half of 2019. From a full year perspective, IHS is now forecasting 2019 global industry production to be down 4% year-over-year. This represents a reduction of approximately 2.6 million units or 3% as compared to their April forecast. We base our industry production outlook on several sources, including internal estimates, customer production schedules and IHS forecasts. At the midpoint of our guidance, our volume assumption for our top platforms in North America is down 6%; in Europe, down 8%; and in China, down more than 20%. Our volume assumptions for Lear programs primarily in Europe and China are lower than current IHS estimates.

Slide 13 provides our financial outlook for 2019. Our current 2019 outlook is consistent with the revised financial outlook we provided on July 16. At the midpoint of our 2019 outlook, sales are estimated to be $20.1 billion, down 5% from 2018. Excluding the impact of foreign exchange and the acquisition of Xevo, sales are expected to be down 2% year-over-year, reflecting lower production on Lear platforms partially offset by the addition of new business.

Core operating margins at the midpoint of our 2019 outlook are expected to be approximately 7% of sales compared to 8.3% of sales in 2018. The margin decline results primarily from the decrease in sales partially offset by net favorable operating performance.

In response to the lower industry production environment, we have revised our restructuring guidance to $200 million, an increase of $60 million over the guidance we provided in April. Our updated free cash flow guidance primarily reflects our outlook for lower earnings and higher restructuring costs, somewhat offset by lower capital expenditures.

Slide 14 summarizes the changes in sales and earnings from the full year outlook we provided in April to our current outlook. Since April, we have seen continued declines in global vehicle production coupled with slower production ramp-ups on certain new models. These factors, combined with the impact of weakening global currencies against the U.S. dollar, result in a sales decline versus our prior guidance of approximately 6%. The lower volume environment is the primary driver of a revised earnings and margin outlook. Favorable operating performance, primarily in our Seating segment, is expected to offset a portion of the volume-driven margin decline.

On a segment basis, we now forecast full year Seating margins of approximately 8%, down slightly from our prior outlook as favorable operating performance is expected to nearly offset the impact of lower volumes.

In E-Systems, we now forecast full year margins in the mid-8% range, including the impact of the Xevo acquisition. The decrease in E-Systems margins from our prior outlook is primarily driven by the impact of lower volumes and the settlement of certain commercial issues, somewhat offset by the favorable impact of lower amortization expense associated with the Xevo purchase accounting.

I now will turn it back over to Ray to discuss our operational and organizational plans.

[Raymond Scott]

Thanks, Jeff. Turning now to Slide 16. We continue to be proactively addressing the industry changes -- challenges. We already have taken significant actions and are currently developing a comprehensive operational and organizational plan designed to further reduce cost and improve profitability. This comprehensive effort is focused on efficiency and guiding our commitment to long-term shareholder value through sustainable, profitable growth, innovation and operational excellence.

As one element of this plan, we have formed a dedicated team led by our Chief Administrative Officer, Tom DiDonato, which is tasked with addressing administrative functions and processes. Their work will be supplemented by other teams focused on restructuring manufacturing plants and refining operating and business models.

Slide 17 provides the framework for our comprehensive plan to improve the performance of our E-Systems segment and position it for continued profitable growth. We are familiar with the challenges facing E-Systems. Our Seating segment faced very similar challenges in 2012 and '13. And our plan for E-Systems includes many of the same tools we used to improve the performance of our Seating business. First, it starts with having the best team. And to that end, we are close to naming the new President of E-Systems. The new President along with recent additions in key leadership roles will deepen the already strong management team we have in place.

Very similar to what I instituted in Seating, I have reorganized E-Systems to ensure greater visibility into profitability and financial returns by product segments, region, customer and program. We're undertaking a comprehensive assessment of our current product portfolio with a focus on product and customer diversification, increasing vertical integration on wire harness programs and secular growth opportunities in electrification, connectivity and software. We're also continuing to adapt to the current volume environment with a focus on reducing cost and improving our competitiveness. These challenges are not new to Lear. We have the best team in the industry with a history of operational excellence, and we're committed to making investments that drive profitable growth.

Turning to Slide 18. Restructuring is one element of our comprehensive operational and organizational plan. As Jeff mentioned earlier, we are increasing our 2019 restructuring program to $200 million. The additional $60 million in restructuring cost is intended to reduce our capacity, improve our overall efficiency and position our business for continued success. We anticipate approximately $75 million in annualized savings by 2021 related to this effort, with 80% of the savings in place by 2020.

Now turning to Slide 20. There's no question we are in a challenging environment. Though Seating performed well in the quarter, industry volume reductions continued to disproportionately impact these systems. We're not satisfied, and we're not standing still. We're undergoing top to bottom reviews of our organizational structure, cost competitiveness, product portfolio and all of our investments. We have a highly experienced and capable management team that has successfully navigated through challenging times, and we're making decisions that will benefit the company over the long term. That is who we are, and we are very confident in our future.

And now we'd be happy to take your questions.

[Operator]

[Operator Instructions]. Our first question comes from the line of David Tamberrino of Goldman Sachs.

[David Tamberrino, Goldman Sachs Group]

Great. Jeff and Ray, wondering if you can kind of talk us through how you see E-Systems' margins progressing over the longer term from here. I think the back half implied is somewhere in the 7% range. This was a segment that was earning 14% to 15% margins not too many years ago. So really trying to understand how much you think the implied degradation in the second half is transitory versus the structural change in the segment's profitability.

[Jeffrey Vanneste, SVP & CFO]

Yes. Dave, good question. I'm going to have Jason get into some of the details, and then I'll follow-up with my perspective and the path forward for E-Systems.

[Jason Cardew, VP, Finance]

So Dave, I think it'll be helpful to start by sort of reflecting on what's happened for the last two years and explain the overall reduction in E-Systems' margins from the mid-14% range to the mid-8% range. And building on what Ray talked about during the presentation, 70% of the volume decline was driven by volume and mix, which is really comprised of three distinct drivers. We've seen a 15% reduction in volumes in E-Systems. We've seen the volume reductions concentrated along mature, high-margin customers and programs. We talked about CAF and China, for example, Ford globally, JLR in Europe. The Ford C2 platform, for example, is down 45% in global volume over the past two years, and that's critical platform for E-Systems. Second driver within that volume and mix category was in China. We took control of the two joint ventures in China that sell to FAW and SAIC. We did this in an effort to improve our diversification in these systems, but the margin profile in that business is lower than the segment overall, and we've seen further pressure on the margins with those customers as we've faced the steep volume declines in China.

And while our backlog is growing on profitably and generating returns well in excess of our cost of capital, the margins have been dilutive to the 2017 E-Systems margins. The remaining 30% of the margin decline is a combination of the acquisition of Xevo, which is dilutive by 50 basis points, and what Ray referred to as the rapidly changing macro and industry environment, which accounts for the remaining 150 basis point decline. Ray mentioned pricing is one element of that, which was significant in the second quarter. But perhaps the bigger issue over the past two years has been our ability to offset the annual price reductions. We have a strong track record of not only offsetting annual price reductions through our cost reduction programs but also building margins through those efforts in both of our segments.

What's been different over the last two years in E-Systems is how so many of those factors have impacted our cost in a relatively short period of time. It's really three drivers of that. Starting with wage inflation. So typically our manufacturing efficiencies far exceed our annual wage inflation. Over the past two years, we've seen a significant step up. In Mexico, for example, we've seen an 8% increase in wages compared to the historical run rate of 5% to 6%. And in some of the Eastern European countries, we've seen double-digit wage increases. Our restructuring program is designed to address that.

The second issue, as we've mentioned previously, there's been shortages in certain electronic components that have led to price increases. Now over time, both of those cost changes will be passed through to customers either on existing programs or the changeover to new models will be reflected in the customer cost models.

The third issue, this one's at our discretion, that we incurred higher R&D and launch costs in the segment. Historically, R&D would have been an area where we would have cut as an offset to the lower-volume environment but we see great potential in electrification, connectivity and software businesses to not only drive future revenue growth but drive higher margins in the segment. We're already seeing progress in our backlog from these investments, and we see tremendous opportunity in the future for additional profitable growth in these areas.

I'll turn it back to Ray to talk about where we go.

[Raymond Scott]

Yes. Thanks, Jason. Good job. Dave, I'll probably give you a little bit more of an answer because I do kind of have to take a step back to give you my perspective as we move forward. Everything Jason just mentioned isn't new to the industry. The timing of it, obviously, has put some pressure on the margins at this particular time, but not new to us either. And I've personally experienced a number of different situations. I'll go back to 2006 and '07 when E-Systems was $1.8 billion and was losing money. And in the same time, volumes were going down, and we had to invest in different technologies. And using very similar tools that we're using today, we were able to turn that business around and even build it up to where it's at today.

And most recently, and why this is so familiar to me is, as Jason was with me back in Seating, in 2012 and '13, our margins dropped by 200 basis points. For a lot of the same and similar reasons, we're seeing some of the challenges in E-Systems. One, we're relying on 1 or 2 key customers and maybe even one platform. We're doing very similar things that we're doing in E-Systems that we're doing in Seating was diversifying our customer base, and we're growing the business and investing in the business. And so when I look at the E-Systems business right now, there is -- it's a very good business. We've kind of described it as the perfect storm with everything going on, we're diversifying our customer, we're hit with customer, volume reductions in particular, programs where we made good money, and we're investing, and we've had some of these other challenges with labor and economics. But nothing we haven't seen before is my point.

And it's very promising to say, if we could set a path forward, and this is what we're doing. We're relaying out the organization, just like we did in Seating and just like we did back in 2006 and '07 in E-Systems, focused on a structure that is driven by product customer region and program with return on invested capital as the priority. We're right now in the process of a portfolio assessment. And what's important about that is making sure we're focused on the core elements of growth, electrification and connectivity. At the same time, there's an important element here within our wire harness business is vertical integration. Our components -- and right now Ts and Cs that we manufacture represent about 10% of our wire harness business. We feel that, that's a great opportunity for us to accelerate the growth in Ts and Cs and drive margins forward. And we're in this process right now of electrification -- electronics with software embedded with some of the acquisitions we've had with Arada, Autonet.

So those things are in play right now. And then we have the steps that we're taking with restructuring and the operational changes we're making and the organization changes that I mentioned. And so I look at this business, I'm very, very confident with the growth. And I wouldn't have done some of the things that we just recently did with establishing contracts with our customers. I see the growth is being very positive and the backlog being very positive as far as profitable growth. And I don't see any reason why we can't achieve sustainable double-digit margins over time. It is going to take some time. But this business is good business. And I absolutely believe that we'll be back to double-digit margins over time. And the point right now, like you said, 7.5% in the second half is what we're guiding to, but we got everything moving to continue to drive those margins north.

[David Tamberrino, Goldman Sachs Group]

Okay. That's highly detailed and pretty helpful. I guess just following up on the commercial negotiation. Was that ongoing in the beginning of the year and then it just came to a conclusion sometime during the quarter? Or is it something that popped up during the quarter? And what was strained or what were the big differences for you versus your customer in order for you to strategically lower the price in order to maintain the customer relationship?

[Raymond Scott]

Yes. So I've been negotiating contracts for 31 years now. And I don't think there's anything significantly different in this year than we've seen historically except for Jason's comment of us being able to offset some of the labor economics through commercial efficiencies. And so I think we're aware of what the customers' requests were. We work with our customers. It's a lot of different things that go into a negotiation, Dave. And resolution to commercial issues, capacity issues, commodity costs and some of those take time for us to negotiate. But at this particular time, it was definitely in our best interest to get those deals behind us because the opportunities for growth were right in front of us. And so I made a decision to not wait and continue to negotiate open commercial issues we had to net it out. I thought it was without flushing the best decision for E-Systems because there's profitable growth on the horizon.

[David Tamberrino, Goldman Sachs Group]

Okay. But it wasn't tied to any new business bookings? It was ahead of some RFPs, is what it sounds?

[Raymond Scott]

Right. Yes. That's correct, Dave.

[Operator]

Our next question comes from the line of David Kelley of Jefferies.

[David Kelley, Jefferies]

Just a follow-up on the E-Systems margin pressure. I really appreciate all the detailed color. And it sounds like some of this was concentrated on wire harnesses. But we'd just love to hear if you're seeing any outsized pressure on the electronics side as well or any incremental change in that piece of the business.

[Raymond Scott]

Yes. Other than the component cost increases that I referenced, David, we're not seeing any unique issues within that space. It's -- that portion of the business is performing quite well. It's very profitable and continues to earn returns well in excess of our cost of capital.

[David Kelley, Jefferies]

Okay. Great. And then maybe switching gears just to the Xevo FCA announcement. I guess, how should we think about maybe the volume opportunity there? Is this a Xevo market product or Journeyware as well? And then are we now getting into -- you guys have been vocal about this recurring revenue stream. Is there any opportunity tied to this? Are we still early days and this is more about contenting vehicles? And we'll figure out the recurring revenue stream later?

[Jeffrey Vanneste, SVP & CFO]

Yes. So firstly, it is market. But as you know, we don't disclose the specifics regarding revenue or customer volume projections. As we discussed during the last earnings call in April, Xevo is in conversations with several OEMs regarding use of both market and Journeyware. And they continue to onboard more merchants to the platform. The FCA announced the market on June 24, and that partnership will begin to generate revenue this year in 2019. The revenue was anticipated and included in any estimates previously provided. Xevo shares a portion of that revenue with each OEM and thus it's offering a compelling value proposition to those customers. Well, we can't share the unit volume projections of our partners, the Uconnect platform is scheduled to deploy in the second half of 2019. And it's on 2019 and 2020 Chrysler, Dodge, Jeep and RAM-brand vehicles that have both connected services and next-generation touchscreens. It'll also continue to launch on new cars sold. The partnership is a good example really of how we're trying to expand our software and services business.

[Raymond Scott]

Primarily, it's software.

[Jeffrey Vanneste, SVP & CFO]

Yes, absolutely. Primarily, it's software at this point. But we are finding that the two are becoming more connected. There's no question about that there's definitely a linkage between the two.

[Operator]

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

[Colin Langan, UBS Investment Bank]

Maybe just firstly, I mean, to kind of help frame the margin assuming -- it looks like, in Seating, you're among the top of your sort of peers in that segment. I mean, how do you see yourself versus sort of the best-in-class in E-Systems to kind of see where the opportunities can be over time?

[Raymond Scott]

Was the question relative to comparing to E-Systems, Colin?

[Jeffrey Vanneste, SVP & CFO]

I think the competitors.

[Colin Langan, UBS Investment Bank]

Yes. Versus your peers just to kind of where you see the gap in terms of where the long-term potential is for that margin.

[Raymond Scott]

I think -- well, again, being in Seating and seeing some of the turnaround that we've driven. I mean roughly said, I think we've built a really sustainable business. I think in the face of the volume reductions we've seen, you can see that the business is put together nicely, and for a lot of different reasons. One, we've invested in the business over a long period of time. So we've put the right capital in the right locations. And we have a outstanding footprint. We've also, like I said, built the organization around a return on invested capital by product by segment. So each one of them have stand-alone on their own basis. And I think that's really helped us separate ourselves in respect to how we're performing today. And we have an outstanding team. I mean, we have incredible team that's doing an incredible job. And that takes a long time to have the type of maturity that we have in each one of the different functional areas from structures to trim to leather to just-in-time.

[Colin Langan, UBS Investment Bank]

And so when you mentioned, like, a double-digit margin over time, that would be among the top quartile of peers? Or any comments.

[Raymond Scott]

I think there's a balance between growth and profitability, and we've been able to really generate nice returns and still grow the business because I still think there's tremendous opportunities for growth in Seating. And that might be the landscape that we're playing in right now with the competitiveness in the competitive landscape that we're in. But I think there's a balance there, Colin. And I think we have to be mindful of that as we continue to grow the business.

[Colin Langan, UBS Investment Bank]

Got it. And on the commercial agreement, any color on -- I mean, is this one customer? And is there a risk now that you have this out there, all the customers come pushing for similar concession?

[Jeffrey Vanneste, SVP & CFO]

No. I think, again -- like I said, I've been doing this for a long time with these negotiations with our customers. As a matter of fact, I've negotiated probably the most complex deals that we've had within Lear. And I'm not seeing one. I know that there's a lot to talk about change within customers' expectations. I haven't seen a change. This was very selective and very specific. And it was with customers that we have working relations with -- relationships with that I thought it was without question in the best interest of the company long term to negotiate those deals and put them behind us. Now those types of negotiations cover a lot of different issues. And so they're very complex. I don't see other -- I know what the customers are looking for across every single customer across every single region. And they're very sophisticated and they're very good at what they do. And so, like I said, I haven't seen any major changes, and I don't expect any to hit us either.

[Colin Langan, UBS Investment Bank]

And just lastly. In the slides you mentioned getting out of the maybe low-return product. I mean any scale on how large these businesses might be that you may exit?

[Raymond Scott]

There's obviously some sensitivity around discussing what we might be considering. But like I said, every part of our business has to stand alone and it has to generate earnings above our cost of capital. And so if we don't see the trajectory in growth or the ability to get a fair return, then absolutely we'll consider exiting it. And we've done it previously in different regions with different products with different customers. And I even think back to when I was in E-Systems previously and we divested a tire pressure monitoring systems and switches. And so everything is under review, everything is on the table. We're looking at what makes sense and making sure that we continue to drive profitable business for our shareholders.

[Jeffrey Vanneste, SVP & CFO]

Yes. Just to add a little bit color on that, Colin, as we think about that right now, it's not going to be of a huge scale.

[Operator]

Our next question comes from the line of Brian Johnson of Barclays Capital.

[Brian Johnson, Barclays Bank]

Yes. Just you can imagine what business unit I'm going to ask about. So if I look at your margins and sort of just following up on the question earlier, Aptiv in its Signal & Power Solutions, which is kind of wiring harness with connectors and some other things, has been averaging around 14%. They don't -- they put corporate overhead in there so that would sort of be around 12% -- excuse me, that would kind taking your 14% being 12%, 13%. They've been very clear in public meetings that their margins in connectors are in the high teens, which would imply their wiring harnesses are high single digits. Your businesses always seem to us as tilted more towards wiring harnesses yet margins would be implied to be higher. They're recently over earning in wiring harnesses perhaps in China and now that's going to settle into more of a high single-digits business.

[Raymond Scott]

Yes. I think that's important too, though. Like I said, where I see this business going and the building blocks we've put in places, not that we're deemphasizing wire. I mean wiring has been an important partner of our business as we continue to grow. But we do see the vertical -- the need to vertically integrate. We do believe at Ts and Cs. And Ts and Cs do make a premium margin. And it's good business for us. And there's no reason why we're not vertically integrating more of our capabilities within the harness business overall. So what we're looking at is accelerating the Ts and Cs business to what is 10% -- between 10% and 20% is what we're looking at. We're also looking in -- if you look at the building blocks of what we're putting in places, wire would represent -- represents about 75% of our business today. We're looking at wiring representing 65% of our business. Still growing. Not deemphasizing it. But accelerating the growth in electronics and connectivity and our software. And so you can see how we're positioning ourselves. And that's why I'm very confident, when I talk about we can get this business back to double-digit margins over time, given the profile and the right to play that we have within the businesses we've put in place. And so -- and we're seeing their growth. And so it's important. Like I said, we're not deemphasizing wire. Wire is an important and good business for us. But they need to vertically integrate that business is important to us. And the need to accelerate our software capabilities that will be embedded in our hardware. That's where we believe we can continue to improve margins.

[Jeffrey Vanneste, SVP & CFO]

Yes. Just a thought on over earning intro. I would suggest that -- I would look at that a little bit differently. I would suggest that why are we historically achieving that level of marketing is because we think we have the best footprint in that business. We think we have a robust team that, that margin improves by engineering changes, by operational efficiencies, history of operational excellence. It's no -- it's not an accident that you earn a margin like that. You invest in it, you work in it and it -- only through those efforts do you get to that margin level. Not everybody can do that.

[Brian Johnson, Barclays Bank]

Okay. Fair. And just looking at the quarter, the 30% decrementals in E-Systems, that strokes -- usually I think of that as being in the sort of low-20s kind of business. Is that the kind of decrementals we should be thinking about? Or was there something in terms of just the pace to fall off of their performance in China that brought it up to the high end?

[Jeffrey Vanneste, SVP & CFO]

Yes. Brian, as we talked about on the first quarter earnings call, the variable margins in that segment generally growing 25% to 30%. So it depends on the underlying margin profiles of the programs that we're seeing the decline in. And so they have been concentrated around our more mature higher-margin programs.

[Brian Johnson, Barclays Bank]

Okay. And final question. I think and if you people talked about that, just want to clarify the answer. So customer agreement, I get it, a whole bunch -- it sounds like you're saying it's not just priced down, it's a whole bunch of probably commodity pass or a bunch of issues, all previous. So that was done in 2Q, then why is it the margins are where they are in the 7s for 3Q and 4Q? Is the actual impact of those agreements spread out somehow? Or is it just all the other factors hitting 3Q and 4Q?

[Jeffrey Vanneste, SVP & CFO]

Brian, it's really a combination of factors. So the pricing agreements, commercial settlements that were reached in the second quarter do also impact the third and fourth quarter margins in a similar fashion. In addition to that, the bigger driver from how we're exiting the second quarter and looking at the third and fourth quarter in E-Systems is the reduction in volumes. We have the normal seasonal reduction in the third quarter, which is driving margins down, and then a bit of a recovery in the fourth quarter as volumes come back up. That's the biggest factor impacting margins in the second half of the year relative to the second quarter results.

[Operator]

Our next question comes from the line of Dan Levy of Crédit Suisse.

[Dan Levy, Crédit Suisse]

And I will continue the trend of asking more questions on particular segments, and then I promise you I'll give you a question on Seating. If I look at your backlog today or at least the last backlog that you had updated us on in January, in the first quarter call, obviously electrification, connectivity is an increased part of this. And I assume that it's only going to grow. So why wouldn't we think as this continues to grow and as presumably there's going to be more expense associated with getting this growth ready to go to market? Why there wouldn't be further pressure on E-Systems margins at least over the next couple of years before you start to really get to a scalable state on some of these programs?

[Raymond Scott]

Well, a couple of things. That's exactly what we're going through now. So a lot of work -- it's interesting. A lot of the technologies that we're developing are, to a certain extent, almost at a level of production. When we go in with our technical quotes, technical presentations. So a lot of the advance work is somewhat accelerated. So I do see a balancing once we start being in the production of the investment that's required. And I think that's more front-end loaded. So I look at it more of the cost that we're incurring today is helping us with the backlog growth. But we should be able to scale that reasonably quickly over a period of time as we continue to win business. And so I don't see a major step up in investment. I think one of the jobs that we're doing right now, when I talk about we named Tom DiDonato as our head of looking at our overall administrative cost. I think there's opportunities for us to better balance our overall cost too and invest in the future in a more efficient manner. And so I think there's work we have to do internally to get at that to even offset if there are additional costs. But I don't see a significant cost increase due to the investment that we're putting in today for future growth.

[Dan Levy, Crédit Suisse]

So it's more along the lines of just keeping the costs steady rather than seeing it further ramp and just getting further growth on that cost, and that's sort of the opportunity?

[Jeffrey Vanneste, SVP & CFO]

So Dan, I would just add to Ray's comment. If we do make significant progress in the backlog and have a significant step of the new business wins, there may be a modest increase in the underlying engineering investment associated with that as we look out into next year. We think that our restructuring program and the comprehensive organizational and operational plan that Ray outlined will allow us to fund that all.

[Dan Levy, Crédit Suisse]

Great. And just to switch gears on to Seating. Any update you can provide us with. I know you generally -- you don't provide sort of midyear backlog updates. But has anything accelerated in terms of the -- further conquest wins related to some of the challenges that some of your competitors have gone through? And to what extent, in the middle of a program, would you actually see a program where it's dual- or tri-sourced where a customer could pivot more business to you mid program?

[Raymond Scott]

Well, I mean, that's a number of discussions with our customers today. And I think what's important -- and if that does happen, and nothing has changed significantly in respect to us gaining new business because of the competitive landscape, like, right now. And I do believe though, over time, that will play itself out. And we do have discussions with our customers that would lead us to believe that, that will happen. I think when you think about the landscape, and I'm glad you brought up Seating. I mean Seating is 75% of our business. It's amazing how well they're performing. And it's because of all the investment and the things that we put in place and we talk about the organization and the capital that we've invested over multiple years. We have to keep doing the things that we're doing. It's led to great growth. We've seen our market share go from 18%, 19% up to 23%, 24%. And I believe that trend is going to continue. And so there are opportunities that present themselves. But I think the best recipe for us to continue to be successful is do the things we're doing, deliver our customers while the expectation and in a cost-competitive way. Over time, that's going to continue to play out nicely for us.

[Operator]

Our next question comes from the line of Joseph Spak of RBC Capital Markets.

[Joseph Spak, RBC Capital Markets]

This is maybe a little bit of a housekeeping question. But Jeff, if we look at Slide 11, where you walk -- where you do the walk on E-Systems, is the way we should think about it that sort of normal course of business price downs are in that volume mix bucket? And then the additional commercial agreements are in that performance bucket?

[Jeffrey Vanneste, SVP & CFO]

Yes. Joe, the price reductions that Ray described earlier and the commercial negotiations that were described earlier are in that net performance bucket. They're not in the volume and mix bucket. They would only be reflected in that if that -- those deals have been reached in the prior year and were part of our starting point coming into the year.

[Joseph Spak, RBC Capital Markets]

Okay. I mean, can we get a -- and that's the not performance? And I'm assuming there was, I guess, a gross performance. Is there any way to sort of get a better quantification of the level of absolute sort of commercial agreements? How much they weighed in the quarter?

[Jeffrey Vanneste, SVP & CFO]

Yes. I can give you a general sense of that. Pricing historically has run for our business overall in the 1% to 2% range. And in the quarter, we did see that in the north of 3% range. And while that's within the historical range of the E-Systems segment, it is at the higher end. And so that was higher than we had anticipated. And that's about 1/3 of that 340 basis point bucket of net performance. The second 1/3 of that is really our lack of offset to our contractual price reductions, particularly in China, where we've had difficulty with SAIC and FAW joint venture. We've had the steep volume decline. We had contractual price reductions, and we haven't been able to offset that. And we're working with our partners to try and address that. That's about 1/3 of the 340 basis points. The remaining 1/3 is comprised of the 2 points that Jeff mentioned in the formal presentation. One, the elevated labor inflation that we're experiencing, particularly in Mexico and Eastern Europe. So the wage inflation was in excess of our manufacturing efficiencies. That, coupled with the price increases on the electronic components, is about 70 basis points. And then the last piece of that is our launch and engineering costs, which were higher than the prior year and that's about 40 basis points.

[Joseph Spak, RBC Capital Markets]

Okay. And then the second question is -- and maybe this is somewhat of an ignorant question. But -- sorry, I apologize. But can you just explain what you mean by more vertical integration in wiring? Like, what don't you do today that you want to do? How do you increase your vertical integration there?

[Raymond Scott]

Yes. Well, one, we have Ts and Cs capabilities. And so we currently do that, and it represents about 10% of our wire harness business today. We have a right to play. And we need to accelerate our vertical integration because the Ts and Cs business is, like I said, very good business. And there's some things that we can do with localizing it in respect to different components for Ts and Cs, and also just the components on the harness itself. There's other components that we can manufacture and, as opposed to outsource, manufacture ourselves that add tremendous amount of content and have good margin to them. And so it's an opportunity for us that I think we need to really study and accelerate.

[Joseph Spak, RBC Capital Markets]

And is that in something you plan to do organically or inorganically or a mix of the two?

[Raymond Scott]

Yes. Primarily, it's organic. Like I said, we have the right to play. We'd -- it's something that we can do, and we're going to take advantage of it.

[Operator]

Our next question comes from the line of Emmanuel Rosner of Deutsche Bank.

[Emmanuel Rosner, Deutsche Bank]

Just a couple more questions on the commercial agreement. So the magnitude of it seems to be pretty large if I look at your Slide 14, old versus new guidance, seems like it's probably on a full year basis north of $50 million, and that's really only applied starting in the second quarter. That would be by itself, sort of, like, an additional 1% price down to E-Systems on a full year basis. But it's really only over, sort of, like, three quarters. And it's not all of E-Systems that -- where you've been giving price reduction as far as I understand. So I guess my question is, in practice, how should we think about it? Is it sort of -- should we now think of E-Systems as having just steeper price downs? So essentially 3%, 3.5% or so, sort of, on an ongoing basis, the way it probably was in Q2? And it seems it could be in the second half? Is it more, sort of, like, a one-off? And then also at the same time, curious if it's strictly isolated to wiring or to specific geographies? Or is it, sort of, like, broader than that?

[Raymond Scott]

Yes. Starting, Emmanuel, with the overall level of price down in that segment. So historically, as we've talked about price reductions run between 1% and 2% for the company overall, and E-Systems has historically been between 2% and 3%. And so we did see a roughly 1% increase in that for this year. But the last time we ran at this rate, you have to go back to 2015 and '16, and I think it's important to point out, that coincided with record backlog as well. So a lot of the elevated pricing is tied to the cycle plan and sourcing plan of our customers and the conscious decision that we've made to try and participate in that growth, and we hope that's reflected in the backlog that we update in January. So it is elevated but it's within the historical range, albeit, at the higher. I wouldn't take that as a signal but that's going to continue into the future. I think we'll continue in that range of 2% to 3% depending on the year. In terms of the geographical location of that, it's not concentrated in any one market. It's more on prior than in other areas. But it's -- it affects the entire E-Systems business in a similar fashion.

[Emmanuel Rosner, Deutsche Bank]

Okay. That's helpful. But sort of just a clarification on this and then I have a second question. So not assuming that you will necessarily continue with the increase. But in the second half, you are assuming that extra 1% price down as it continues, is that right?

[Raymond Scott]

That's correct.

[Emmanuel Rosner, Deutsche Bank]

But your point is not necessarily in future years?

[Raymond Scott]

That's correct as well.

[Emmanuel Rosner, Deutsche Bank]

Okay. And then sort of -- I would like to ask you a maybe a higher-level question regarding E-Systems. And you've been really very generous and transparent with your thought. But as you know, we've been concerned with that business for a while. Trends have deteriorated considerably over the past year. I mean we've spoken a lot about margins on this call, but the backlog has been coming down quite a bit, the margins, obviously, cut in half, now you're, sort of, like, cutting prices. And yet all these things feel to us more like symptoms of something bigger. Is there a root cause that can sort of explain so many different negative developments in E-Systems? I was really surprised by some of your earlier comments that make you seem like it's relative to a lot of different headwinds but it's really mostly things that business as usual. Like I'm curious is there, like, one root cause. Is cable and wiring becoming commoditized? Is it just extremely competitive? Can you just help us explain the bigger picture and what implication that could have for what the strategy should be forward?

[Raymond Scott]

Yes. Jeff started talking in that and simplified. I mean it's kind of the perfect storm. I mean volumes came down on our most profitable platforms. At the same time, we are launching, which is what we need to do and diversify our customer base, new programs that were at a lower margin. I mean that was a big part of what we've talked about. I think I mentioned -- I said earlier, there is a 260 basis point hit alone just with what we saw in Asia, that reflect the new business that we're rolling out and consolidating with FAW and SAIC. At the same time, we had significant reductions on very profitable programs in China.

And so those two are working somewhat against each other at the same time. And then Jason mentioned the -- that did increase in some of the labor economics. That's the one I'm familiar with it, but it was coming at a very particular time that we're seeing volumes that were being reduced. And we weren't able to offset what we typically do through productivity and commercial settlements and net that out. And now I think that's more of a short-term effect of the business. But I'm not seeing any significant changes in the overall business. The business is very good. When I look at it by customer now and maybe it was unintentional, we're much better balanced across all of our different customers. We have a nice book of business regionally and by product and by customer. I think it just happened to be a perfect storm with a lot of different things going on that I just described. But I am absolutely confident in this business. Like I said before, Emmanuel, we've been through this -- I've been through it in E-Systems and when E-Systems was losing money. We're able to turn that around relatively quickly. And Seating, very similar situation of what was going on. There is a lot of things going on in Seating business. But we knew exactly what to do. I look at this one, the last two I just mentioned is probably the best positioned to get back to the double-digit margins. And so I'm very confident. It just -- a couple of big issues hit us at a particular time.

[Operator]

Our next question comes from the line of David Leiker of Baird.

[Erin Welcenbach, Robert W. Baird & Co.]

This is Erin Welcenbach, on for David. I have one follow-up question for you on E-Systems. You indicated that you're reevaluating the product portfolio on E-Systems. So does this suggest a lower new business activity there with the exception of connectivity and electrification business pursuits that's likely to moderate the backlog growth contribution going forward?

[Raymond Scott]

Sorry, what's the question? We lost the connection.

[Jeffrey Vanneste, SVP & CFO]

It's looking at your product portfolio potentially getting the growth in general in the backlog.

[Raymond Scott]

Yes, our comments around evaluating the portfolio really don't have anything to do necessarily with the current outlook for the business. If the backlog is strong, remains strong in E-Systems, then we'll be looking for our programs, customers or products where we don't see a long-term opportunity to earn -- continue earning returns in excess of our cost of capital. But to be clear, I mean, the core of that business is electrification and connectivity and what we've mentioned with the wire business and Ts and Cs. I mean those are at the core of our growth engines.

[Operator]

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

[Itay Michaeli, Citigroup]

I do apologize, if I may have missed this. But wanted to just dig it more into revenue. So it looks like you probably cut your second half revenue outlook of the company by about 10%. Maybe that's coming more on E-Systems. I was hoping if we could walk through the revenue walk at E-Systems a bit more. And how much of your key platform underperformance is just tied to lower production as opposed to potential decontenting? And whether you would know that split from where you stand? And how does that affect your -- or influence your prior view on the outgrowth of E-Systems? Per your Investor Day talk, it will go up 6 to 8 points over market to 2023 you conveyed last year. So maybe just more detail there will be helpful.

[Jason Cardew, VP, Finance]

Yes. Okay. Well, starting with the change in assumption on revenue. So we did lower our volume assumption by about 3%. So the volume on the platforms that we're on came down by just over 3% for the full year and then the balance is a reduction in our backlog relative to what we had previously expected. And if I look at the second half, in particular, IHS cut their production outlook by about 4% globally. And we're a bit less optimistic than IHS. We have our platforms in North America down about 7% in the second half of the year or 3% more than IHS. We have Europe down an incremental 3%. And then we have China down 12% more than what IHS's outlook reflects. So the key change in our sales guidance, particularly in the second half of the year, is a lower production outlook. In terms of the other things that we talked about in the first quarter earnings call, we still see a nice improvement in revenue first half, second half in Seating from the impact of changeovers of the GM full-sized trucks and the Ford Explorer and the roll on of our backlog. And that sort of offsets the lower production environment in Seating. In E-Systems, we have the same production reduction, but we don't have that tailwind from the changeovers that we have in Seating. We really don't see any impact from de-contenting, if that was the second part of your question, Itay, at all, and that's not reflected in our outlook.

[Itay Michaeli, Citigroup]

Okay. That's very helpful. I guess there -- sure.

[Raymond Scott]

Go ahead, Itay.

[Itay Michaeli, Citigroup]

Yes. So just a follow-up on that is -- so I guess would you still feel reasonably confident on the 6 to 8 points of outgrowth beyond the year given that you don't think you're seeing decontenting this year?

[Jason Cardew, VP, Finance]

Yes. I think what's weighing on revenue in E-Systems is the lower production volumes on our platforms. So we have a mix issue that this has been significant. We look at the future, and we look at our backlog and the win rates that we're seeing in connectivity and electrification, we're still confident that the long-term growth rate is in that 6 to 8 points above market. It's going to take some time to work our way through the lower production volumes on our existing business. But over time, that's still what we're targeting.

[Jeffrey Vanneste, SVP & CFO]

Yes. And I think on E-Systems, if you look at the, let's say, the second half sequentially, Q3 and Q4, everything that Jason is referring to kind of hits -- from a volume perspective, hits a low in the third quarter. Jason mentioned some of the reasons. In E-Systems, it's primarily normal seasonality and just overall volume lower in Q3 versus Q2. It doesn't have the tailwind that Seating does with respect to the changeovers and some of the ramp-ups coming back on board. So as a result, what we're seeing in E-Systems in the third quarter, from a margin perspective, it's going to be down versus what we saw in Q2, probably in the eight -- I'm sorry, in the 7% range or around 7% for the third quarter. And then as volume comes back a little bit in the fourth quarter, margins will improve in E-Systems.

[Operator]

Our next question comes from the line of John Murphy of Bank of America Merrill Lynch.

[John Murphy, Bank of America Merrill Lynch]

I just wanted to, obviously, stay on E-Systems here for a second. When you look at the competitive landscape outside of wiring harness and Ts and Cs, I'm just curious how you sort of scope that relative to what you're looking at in your Seating business? I mean because it just seems like the landscape -- the competitive landscape is much wider and deeper with many more competitors than you'd be looking at otherwise. And I'm just curious if that is a sort of a real reason that we might be seeing some pricing pressure developing here as competition is piling in more and more. And also, if we think about return on invested capital in that business, right outside of wiring and Ts and Cs, can you earn adequate returns at this mid-8% range? Or do you really need to get back to this low double-digit range to get adequate return on invested capital?

[Jeffrey Vanneste, SVP & CFO]

So John, at 8%, we're earnings returns in excess of our cost of capital in E-Systems, even contemplating the effects of the Xevo acquisition and prior to that in the mid-7% range we're earning the return well in excess for our cost of capital.

[Raymond Scott]

Yes. Just to kind of hit the point on the competitive landscape. It is different. Seating, obviously -- we're very, very strong player in Seating, I think the leader in Seating. And in E-Systems, we -- there's more competitors. There's no question about it. And I think the way we look at the business, well, we've done a really nice job with our customers. And in talking with the customers, we really design components that are very tailored and very customized to their needs. And a lot of those, I call it, the megatheres have off-the-shelf type designs that, obviously, they can scale but aren't customized to where our customers are heading. And so what we've been able to make really good inroads is our ability to be very flexible, customized and tailored to their needs. And so I think that's a very nice fit for us. It's worked extremely well for us. And I don't really see that changing because I do believe that the competitive landscape is changing. But I think the need for our customer to create value in that very selective area works for us well.

[John Murphy, Bank of America Merrill Lynch]

And Ray, I certainly don't doubt your ability to fight your way in and win. I'm just curious, when you're having these discussions and these commercial agreement discussions with the customers, are they reviewing sort of your margins or are they looking more at your returns? Because I think there is -- there may be something going on here in the customer base where they're saying, "Hey, listen, you're earning adequate returns. So for that reason, we're willing to put a little bit of pressure on you because you'll continue to invest if you're returning -- if you're getting adequate returns." And it seems like there's a little bit of a shift going on in sort of a thought process at the customer base that they may be more willing to put more pricing pressure on because it's not necessarily going to change the products that they're getting and the technology that they're getting from their suppliers.

[Raymond Scott]

It's a good question. And I look at this way, like I said, I'm very familiar. I've been negotiating with the customers for a long time, and they're very sophisticated. I say it this way, they're very sophisticated. They know and study all of us -- all the competitors. And again, I think it's how you operate. I think it's how you drive your business for design. I think it's how you -- where you put your footprint. It's the things that you can control that drive the margin. And like Jeff talked about with wire harnesses, we're very good at it. I mean we know exactly how to drive the most efficient system. And so there is a margin opportunity there that we get to essentially keep. And so I think as long as you're competitive and you're driving to a market price that margin that you drive below that through cost efficiency is what we keep. And I don't see that -- I haven't seen that change. I think that's a -- like I said, always been very sophisticated. They're very good at what they do. We have to be very good at what we do. And that's the bottom line. And I think we've done an incredible job of keeping that gap in margin through efficiencies and design customization and personal commitment to what we have to deliver. And that's where you have to work it. And that's where we do a really good job. I think you see it in Seating, very similar. And if you're seeing it in what we've been able to do in E-Systems.

[John Murphy, Bank of America Merrill Lynch]

And then maybe just lastly on the Seating side because I think I've gotten a lot of airtime. I mean are there any sort of competitive openings here as some of your large competitors are maybe backing away or retrenching a little bit? I mean are you seeing any sort of greater light of day on bids and higher wins?

[Raymond Scott]

Well, no significant changes. Like I said earlier, it's really -- we've done a nice job of really increasing our market share, and we'll continue to do the things that we're doing, which is drive and deliver the best quality, best parts at the best price. And I think that will continue to increase our market share over the long haul. But nothing significant. We have conversations with our customers every single day on opportunities. And I think if we continue to do what we're doing, we're going to put ourselves in a position to continue to gain market share.

[Operator]

And ladies and gentlemen, our final question comes from the line of Jeff Osborne of Cowen and Company.

[Jeffrey Osborne, Cowen and Company]

Real quick one on E-Systems as well and the vertical integration. Can you just discuss, Ray, the procurement process for Ts and Cs as well as wire? Are those typically in conjunction with each other? I just want to get a sense of perspective as we move to higher voltages, how you can increase the attach rate?

[Raymond Scott]

So what happens is there will be a specification or a requirement that's put out. And there's different levels of that. There's build-to-print models that are very specific and selective with the Ts and Cs and the type of design that supply components for, which, by the way, we can get a good nice return on. And then there's full -- fully designed architectures that we will design and with that will be specification requirements. And then we have the luxury of being able to select the particular Ts and Cs that meet those specifications. And sometimes those are limiting our ability to supply components. But other times, they're open. And so there's a range of different types of quotes that the customer will send out. And where I think our opportunity really is in the full-service design and designing in our Ts and Cs into their specifications. And so, like I said, there's different types of sourcing in their procurement process, but it doesn't limit us from being able to source our own components where we need the specifications.

[Operator]

And that was our final question.

[Raymond Scott]

Okay. Good. Thanks to everyone that's on the call. I really appreciate your time. And just kind of -- and -- just -- there's a lot going on, obviously, in the industry, in the macro climate around us. And just kind of want to remind everyone not only our employees but our investors, why it's important to think about Lear? One, we have an incredible talented leadership team and we have incredible talent throughout the company. And that's very critical as we continue to see industry headwinds, very important to continue to manage the business the way we've been managing it in the past.

We have two high-performing product segments with two powerful growth drivers. And I don't see that changing. I'm very, very optimistic about the growth of E-Systems. And we'll continue to do really good things in Seating. And I really think both groups are doing an incredible job. We have -- and we have to stay focused on this, an incredible track record of operational excellence. And the mix of everything going on, we have to stay focused and continue to deliver, like I said, what our quality expectations to our customers and continue to launch our successful programs for our customers.

We have an incredibly strong balance sheet and free cash flow generation, and we're well positioned for future growth. And we're going to stay steadfast at our capital allocation strategy, which is designed for maximum and long-term shareholder value.

And so with that, I just want to thank everyone that's on the phone. And I thank our employees, especially, for all your hard work and everything you've done to drive this great company.

[Operator]

Thank you. Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.