Lear - Earnings Call - Q4 2019

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by, and welcome to the Valere Q4 and Full Year twenty nineteen Earnings Conference Call. This time, all participants' lines are in a listen only mode. After the presentation, there will be a question and answer session. I would now like to hand the conference over to Alicia Davis, Senior Vice President of Corporate Development and Investor Relations.

Speaker 1

Thanks, Carmen. Good morning, everyone, and thanks for joining us for Lear's fourth quarter and full year twenty nineteen earnings call. Presenting today are Ray Scott, Lear's President and CEO and Jason Cardi, Senior Vice President and CFO. Other members of Lear's senior management team have also joined us on the call. Following prepared remarks, we will open the call for Q and 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 two, our actual results could differ materially from these forward looking statements due to many factors discussed in our latest 10 ks 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 three. First, Ray will review highlights from the quarter and provide a business update. Then Jason will review our fourth quarter and full year financial results, our 2020 outlook and 2022 backlog. Finally, Ray will 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.

Speaker 2

Thanks, Alicia, and good morning, everyone. It's a pleasure to speak with you today. Earlier this morning, we released our fourth quarter and full year financial results. A summary of the full year results appears on Slide five. Sales in 2019 were $19,800,000,000 adjusted operating margin was 6.6%, and EPS was $13.99 Adjusted operating margin in Seating was 7.5 and in E Systems was 8.7%.

In 2019, we faced significant macroeconomic headwinds, including the continued weakening of foreign currency against the U. S. Dollar and an industry marked by a 6% decline in global vehicle production. In the first half of the year, our results were impacted by significant downtime associated with some of our key changeover programs and heavy launch activity. In the 2019, General Motors experienced a labor strike that had a significant effect on the entire North American auto supply chain, including Lidar.

And despite these very challenging environments, we delivered solid financial results for the year. I am proud of what the team accomplished in pursuing growth, aggressively managing costs and positioning the business for long term success. Slide six provides some 2019 business highlights. Our Seating segment delivered strong results and continued to demonstrate its position as an industry leader, receiving external recognition for quality, operational excellence and innovation. Last fall, Carl Esposito, a seasoned executive with expertise in electronics, software development and connectivity, joined Lear as the new President of E Systems.

Carl's arrival and other key senior hires in 2019 have given us the strongest E Systems leadership team in our history. In addition to building the team, we reorganized E Systems to ensure greater visibility in the profitability and financial returns by product segment, region, customer and program. We also embarked on a strategic portfolio review that will lead to expansion in high growth and profit areas and exit from low return non core product lines. In 2019, we saw a significant increase in quoting activity in the high growth areas of electrification and connectivity. And during the year, we were awarded approximately $450,000,000 of electrification and connectivity business, representing a win rate of almost 40% of the more than $1,200,000,000 in business we pursued.

Last April, we acquired Xevo, an automotive software supplier that connects consumers with their favorite retail brands directly from their vehicles. The acquisition of Xevo has enhanced our capabilities in software, services and data analytics as well as our market position in connectivity. The Xevo team has brought tremendous talent and expertise to the Lear organization. And since the acquisition, the team has added new OEM partners, including FCA and Hyundai, and increased their vehicle penetration by almost 50% to 37,000,000 vehicles. Last year, as a testament to our financial strength, Moody's upgraded Lear's credit rating, and we completed a financing that included Lear's first thirty year bond offering.

Finally, we continue to show our commitment to returning excess cash to our shareholders. In 2019, we increased the quarterly dividend to $0.75 per share and returned over $550,000,000 to our shareholders through share repurchases and dividends. Turning to Slide seven. We are optimistic about the year ahead of us. And given our financial strength, we are well positioned to withstand continued industry headwinds.

We are poised for growth while generating strong free cash flow, and we're continuing to make smart investments in innovation and technology. We're pursuing a long term strategy that allows us to continue to build on our competitive advantages in markets where we have the right to win and maximize risk adjusted financial returns. At our Investor Day on June 9, members of Lear's senior management team will provide an in-depth review of the company's long term vision and growth strategy, product segments and financial objectives. I'm very excited about the work that we are doing to refine our business and our product strategies, and I look forward to sharing our vision for the future of Seating and E Systems with all of you in June. Now turning to Slide eight.

Over the past year, I have received a number of questions about whether there has been a significant shift in customer pricing behavior. And I've negotiated deals with customers for over thirty years. And heading into 2020, I'm not seeing any meaningful changes in price reduction requests. At this time, we don't anticipate any extraordinary negative impacts for our margins from price concessions. In addition to being able to find internal efficiencies, we have tools at disposal, including our cost technology optimization, or CTO, to offer alternative paths to cost savings as opposed to price reductions and provide value to our customers.

CTO is a unique global process used by Lear to generate, develop and implement product cost saving ideas. It is a sophisticated process that is not easily replicated and is the key differentiator for Lear. Over the last years over the last several years, Lear has consistently invested in subject matter experts to support our operational excellence as well as in tools and training to make them successful. This is part of our DNA at Lear Corporation and at the core of how we run our business every single day. In CTO, we focus on using technology and innovation benchmarking, identifying cost gaps and product realignment, value chain analysis and footprint optimization and sharing best practices across multiple platforms, all the while ensuring we meet or exceed customer requirements.

CTO is a continuous process at Lear with over 200 customer workshops held each year across the globe. Each event generates on average 100 cost savings ideas. We are constantly looking for ways to improve efficiencies and take cost system while maintaining a high level of quality for our customers. Slides nine and ten highlight a few of our key program changeovers as well as the new program launches in that are part of our 2020 backlog. This year, we will launch several high content products in Seating and programs involving complex electrification and connectivity technologies in these systems.

Of particular note in Seating, in the second quarter launch of General Motors, the TV SUV program, which includes the GMC Yukon, Chevrolet Tahoe and Suburban and the Cadillac Escalade. In these systems, we anticipate key electrification launches this year, including the Volvo Polestar II and the Jaguar I PACE, which will have Lear onboard charger content. Now I'd like to turn the call over to Jason for a financial review. Slide 12 shows IHS vehicle production volumes and key exchange rates for the full year 2019. Global vehicle production declined approximately 5,400,000 units or 6% compared to 2018.

Rivers platforms were down greater than the market in each of our major regions with Europe down 8% and both North America and China down 10%. With respect to foreign exchange, our major currencies continued to weaken against the U. S. Dollar. Slide 13 highlights total company financial results for both the fourth quarter and full year 2019.

Our financial results were significantly impacted by an extended labor strike at General Motors, our largest customer. For the quarter, sales were $4,800,000,000 down $124,000,000 or 3% from last year as we faced production declines on Lear platforms and the net negative impact of foreign exchange, partially offset by growth from the backlog. Excluding the impact of foreign exchange and acquisitions, sales were down 1%, reflecting growth of a market of 5%. Core operating earnings were $241,000,000 down $148,000,000 year over year, primarily due to lower volume. Adjusted operating margins were 5% for the quarter and would have been an estimated 6.6% excluding the impact of the strike.

For the full year, decreased 6% to $19,800,000,000 This decline was driven by lower production volumes in each of our major markets as well as foreign currency exchange, partially offset by growth in the backlog. Excluding the impact of foreign exchange and acquisitions, sales were down 3%. Core operating earnings were $1,300,000,000 and adjusted operating margins were 6.6% for the year. Full year adjusted earnings per share were down 23% to $13.99 per share, reflecting a decrease in operating earnings, slightly offset by a lower share count. Full year free cash flow was $680,000,000 down year over year due primarily to lower earnings.

Slide 14 provides our segment financial results for both the fourth quarter and full year 2019. Seating sales in the quarter were $3,600,000,000 down 3% from the 2018. Excluding the impact of foreign exchange, sales decreased 1%. The decrease in sales was driven by lower production on our platforms, partially offset by strong growth in the backlog. Seating margins were 5.9%, down two ten basis points from last year due primarily to the impact of lower volumes and higher launch costs, offset in part by a margin accretive backlog.

Without the GM strike, Seating margins would have been an estimated 7.7% in the quarter. For the full year, Seating sales were $15,100,000,000 down 6%. Excluding the impact of foreign exchange, sales decreased 3%, reflecting 3% growth over market. In 2019, Seating margins were 7.5%. Without the GM strike, Seating margins would have been an estimated 8%.

Seating systems sales in the quarter were $1,200,000,000 down 2% from the 2018. The decrease in sales was driven by lower production on our platforms and currency headwinds, partially offset by growth from the backlog and sales from Xevo. E Systems margins were 7.7%, down three sixty basis points from last year, primarily due to the impact of lower volumes, negative net performance and the acquisition. For the full year, E Systems sales were $4,700,000,000 down 8%. Excluding the impact of foreign exchange and the Xevo acquisitions, sales decreased approximately 6% or in line with overall industry production.

In 2019, E Systems margins were 8.7. Turning now to Slide 15. In 2019, we incurred $190,000,000 in restructuring costs. These restructuring actions are intended to reduce our capacity, improve our overall efficiency and position our business for continued success. We anticipate approximately $75,000,000 in annualized savings by 2021, with 80% of the savings or $60,000,000 being realized this year.

Our 2019 restructuring was only one element of the comprehensive operational and organizational plan we discussed on our second quarter earnings call. Other elements include reorganizing our manufacturing and logistics teams to improve synergies between segments and acceleration of the centralization of certain administrative functions that will lower costs and improve efficiency throughout the company. Our 2020 outlook reflects approximately 10 basis points of margin improvement from these additional initiatives, and we anticipate more than 20 basis points of margin improvement cumulatively by 2021. Slide 16 shows the assumptions for global vehicle production volumes and key currencies that form the basis of our 2020 outlook. While IHS is forecasting 2020 global industry production to be down approximately 0.5% year over year, we estimate a 2% to 3% decline in overall global production, with North America flat, China down 2% and Europe down 7%.

At the midpoint of our 2020 outlook, our volume assumption for our platforms in North America is up 4%, Europe down 7% and China down 12%. We based our production outlook on several sources, including internal estimates, customer production schedules and IHS forecasts. From a currency perspective, our 2020 outlook assumes an average euro exchange rate of $1.11 per euro and an average Chinese RMB exchange rate of RMB7 to the dollar. Slide 17 provides our financial outlook for 2020. Our sales guidance of $19,400,000,000 to $20,200,000,000 represents a wide range, reflecting current uncertainties in the macroeconomic environment.

Core operating earnings are forecasted to be in the range of $1,210,000,000 to $1,340,000,000 The midpoint of our guidance range reflects full year Seating and E Systems adjusted operating margins in the high 7% range. The high end of our guidance range assumes full year adjusted operating margins of approximately 8% in both segments. Slide 18 shows our twenty twenty to twenty twenty two backlog of $2,700,000,000 It's important to note that our sales backlog includes only awarded programs net of any lost business and programs rolling off and excludes Pursuit business. When we issued our backlog last January, we estimated 2020 backlog of approximately $1,400,000,000 We now estimate 2020 backlog of $825,000,000 reflecting significant declines in both segments. The biggest single driver of the decline is a program delay that results in more than $200,000,000 of revenue shifting out to 2021.

Additional drivers include generally lower industry volume assumptions for this year's backlog, with 2020 vehicle production expected to be down approximately 12% in Europe and 17% in China versus what we had initially assumed. In addition, volumes are expected to be lower on new electric vehicle platforms as OEMs ramp up production. Our 2021 backlog estimate is currently $1,200,000,000 more than twice the $525,000,000 backlog estimate we provided for 2021 last January, an increase resulting from both new business wins and the timing of launches. From a segment perspective, our backlog is split twothree, onethree between Seating and E Systems, respectively. In our E Systems segment, we continue to win new business aligned with emerging industry trends, especially vehicle electrification and connectivity.

Approximately twothree of our E Systems backlog is in these high growth areas. Consistent with historical experience, we expect the third year of our backlog to continue to grow as there are still several programs that we are pursuing that will launch in 2022. Finally, while our three year backlog is lower than last year, it is in line with our historical average backlog despite declining industry volumes. This reflects the secular growth potential of our electrification and connectivity portfolios as well as our continued conquest business wins in Seating. We are optimistic about our future growth potential in both segments.

Now I'll turn it back to Ray for some closing thoughts. Thanks, Jason. Now turning to Slide 20. In summary, we delivered solid financial results in 2019. And despite the challenging macro environment, we are very optimistic about the path forward in 2020.

We built this company to thrive in the current environment and separate ourselves from our competition. We have the most talented team in the industry and a culture centered on innovation and operational excellence. We're undergoing a top to bottom review of our organizational structure, cost competitiveness, product portfolio and our investments, and we are making decisions that will benefit the company over the long term. We look forward to sharing more of our vision for the future with you at our Investor Day. And now we'd be happy to take your questions.

Speaker 0

Your first question is from the line of Dan Levy with Credit Suisse. Please go ahead.

Speaker 2

Hi, Dan. Is there Dan?

Speaker 0

Dan, your line is open. If you have your line muted on your end, please unmute your line. There is no response from that line. Next will be Atai Macaulay with Citi.

Speaker 3

Great. Thanks, everyone. Good morning.

Speaker 4

Good morning. Good morning.

Speaker 3

Just a first question on Slide 16. It looks like the China Lear platform assumption is down about 12%. Just maybe talk about what's happening there specifically as far as you can in terms of just the Lear platforms relative to the overall market outlook?

Speaker 2

Itay, the biggest factor driving that disproportionate decline in volumes for us as we look out to 2020 is on our GM business there. And I think GM has talked about some of the recent challenges they've had in that market. And so we do see a significant decline on a couple of GM platforms that we're on in China that are impacting us. In addition to that, we have some business with Chang'an that's quite a bit lower. Those are sort of the outliers that are driving us down more than the market overall.

And I'd say just generally, our exposure to the Detroit free automakers in China is a factor that's impacting our performance relative to the market overall and the relative underrepresentation we have with the Chinese domestic OEMs. I will point out, though, that about 15% of our new business backlog is with the Chinese domestic, so we do see a lot of interest and growth potential with those customers, and that should improve the profile of our business in China longer term.

Speaker 3

That's helpful. And then maybe just a second question. I was hoping you could give us a bit of a sense on the cadence of earnings and margins throughout the year, Any pre launches or other factors to think about for the model?

Speaker 2

Yes. So I think holding this coronavirus aside and what impact that may have on the first quarter, as we look out at our plan for this year, we expect earnings and revenue to be fairly stable throughout the year. The one exception is going to be in the second quarter as GM changes over to the T1 full size SUV in Arlington, there's going to be about three down weeks in front of that and then a ramp up that happens there. And that's one of our largest platforms, as everyone knows. And so that will have a meaningful impact both on revenue and margins in the second quarter.

Outside of that, we expect the margin profile to be relatively stable throughout the year.

Speaker 3

Great. That's helpful. Just lastly, just a quick housekeeping on the 2020 revenue guidance. Could you help us just parcel out the organic growth component of that, just the impact on FX that you're modeling and anything else within that?

Speaker 2

Sure. Yes. So if you look at our revenue overall, there's about a $525,000,000 reduction in sales at our mid point year over year for volume, about 2.7%. Our backlog rolls out at $825,000,000 And then we have about $150,000,000 for foreign exchange and $150,000,000 headwind for pricing assumed in the outlook.

Speaker 0

Your Your next question comes from the line of John Murphy with Bank of America. John, please go ahead.

Speaker 3

Morning, guys. Just had a and I apologize, I got on the it's kind of halfway through the call. But I mean, just on the backlog chart here on 2018, I'm just curious why you think the $3,400,000,000 you had last year dropped to 2,700,000,000.0 I know you kind of explained sort of the push and pull between 2020 and 2021. But is this just primarily the assumption of lower global volumes? Is that really what's going on here?

Speaker 2

Yes. If you look at the backlog overall, I would say that's the most important factor. And if you look at what's happened in some of the bigger markets that were in our backlog, Europe and China, there was meaningful pullback in volume. So volumes have come down in the current year in 2019. They're expected to be lower again in 2020 and 2021.

We had anticipated growth in those markets. If you look at what IHS was forecasting, at that point in time, was some modest growth in Europe and in China. And so I think that's the biggest single driver. And then maybe just a little more granular there on the electric vehicle platforms specifically, we're seeing them ramp up a little bit slower. And so that is pushing some of the revenue growth, out into sort of the 'twenty two and 'twenty three time period and out of 2020 and 2021, as those customers ramp the production up a little bit more slowly on the new EV platforms.

And that's impacting both Seating and Need systems. We have some exposure on Seating side to EV as well.

Speaker 5

Okay. That makes sense.

Speaker 3

And then on 2022, I mean, if you looked at the out year last year, I mean, 2021, you said it more than doubled. Is there a lot of bidding that's still going on for 2022 programs where you think that you can potentially I don't know if you can commit to doubling that again by next year. But I mean, is there real there's a lot of activity going on for 2022 still for you as far as bidding?

Speaker 2

Yes, there's a lot of activity going on, but I wouldn't anticipate that same effect that we saw this year with 2021 more than doubling. That was partially because of things that got pushed out of 2020. One program by itself is $200,000,000 and there were other programs as well. There's about $300,000,000 in total that shifted from 'twenty into 'twenty one. So I wouldn't anticipate that repeating itself.

But there are still plenty of opportunities to win new business that we'll launch at least in the '2. Yeah. I think one thing that's probably been more obvious to us is some of this conquest business and seating. We're getting a lot more requests on mid cycle type request quotes that would impact that model year. So we are seeing more of that.

Again, what we said is we're going to be very mindful of investment and investment dollars and returns and those type of things. But we are seeing increased requests from our customers in respect to current business programs. And so that would definitely impact that model year.

Speaker 3

Okay. And then also just on the outlook on Slide 17. I think as you were running through that, I think I heard you said something about sustained margins of 8% in both segments. Did I hear that correctly? Or is that just a question of semantics and what you're looking for is for 2020?

Or is that sort of what you think is sort of sustained margins for the foreseeable future in each segment?

Speaker 2

So the guidance assumption for 2020 at the midpoint, what we said was the high 7s in both segments, and in Seating and E Systems, at the high end of the range, at roughly 8%. And so in terms of how we see those businesses longer term, I think the answer to that question is very different. In terms of Seating, I think it would be helpful if we sort of look at the last five years. And on average, we've run that business at just under 8%, 7.9%, and it's running a range of low-7s mid-8s. And I think, at the beginning of that time period, we were in a really robust volume environment.

Gold production was growing. The tail end of that time period, we saw obvious volume challenges globally, particularly last year and a little less so in 'eighteen. And we still continue to run that business in the 7.5% to 8% range. And so we feel very, very comfortable that we can continue to operate the Seating business in that range. And in terms of things that could maybe drive that to the high end of the range or low end of the range, we still have parts of that business that we think we can improve.

We do have exposure to structures. That business is modestly profitable globally, but it's an area that we think we can do better in, and we're working hard to improve the margin profile of that business. South America has historically underperformed, and we see some improvements and have factored that in to our outlook this year. So those are factors that could drive that margin profile in Seating up a little bit. In terms of what could dilute the margin, if you win more business on the just in time Seating side, it's less capital intensive than our component business, we would be happy to take that business in the 6%, 7% range, and generate returns that are in the mid double digit mid teens, in terms of ROIC.

And so that could be dilutive to margin. So it really depends on the mix of business that we have coming on stream longer term. Rick, you Just to add to to that, just to give a little bit more insight, we're very confident in our seat business. We've built a nice moat, worthless competitive advantage in seating. And I'll tell you, we've had incredibly strong relationships.

And more importantly, we've invested in that business over a long period of time in capital and people that is not easily replicated. And I think it's being recognized. When I mentioned earlier that we're seeing an uptick in conquest opportunities, that's a significant change for us. And we usually quote programs that are new programs and new launches, but now we're seeing requests that are somewhat exclusive just to Lear. And I think that's because of the reputation, our operational excellence, the things that we put in place that have built this business up over a long period of time.

And think in addition to that, what's great about this time in the auto cycle is there's a lot of introduction in innovation and technology, and we're really focused on that. So in addition to delivering great performance in the operations, we're focused on this innovation and technology. And I think a great example is this Convergent Plus. It's something that was a collaboration effort between E Systems and Seating. It's the first powered rail system with a really flexible cassette that goes in the vehicle that was sold on one platform with one customer and now is on that we've been awarded a second program to that.

And I think there's going be more to come. I think it's just an example of not just focusing on the operational excellence, but this innovation and technology that will continue to help us improve our margins. And I think to Jason's point that we have a lot more work to do, too. What's great about this team and this company is that we're never done. I mean, Jason mentioned a couple of them.

We've got great plans in South America. Our structure is primarily in Europe, our portfolio management that we're just exhausting ourselves and continuing to drive the business. And so there's a range there, but I think we've done a great job of really separating ourselves. And I think in E Systems, you look at how quickly we stabilize that business. And the big short term, we talked about driving that business, putting a leadership team in place.

We're done with that. That's behind us. We have an incredible team in place. The organizational changes that we've made that are driving down to the and getting visibility in return on invested capital by platform, by customer, by region are in place now. We've made great improvements with our China operations and the partners that we have in China by hiring some great people that are building some great relationships and really changing those profiles.

And we talked about exiting margin dilutive programs, and we'll continue to work on that and continue to improve our overall margins. So that turnaround and how we stabilize that happened really quickly, and we're done with the short term. We're under the midterm type things we talked about with continuing with electrification and connectivity, higher margin type businesses. We're doing very well in the growth there. Mike Balci and the team would continue to vertically integrate with wiring and Ts and Cs.

We're making some really good progress there. So we're continuing on our path, and I couldn't be more excited about both businesses. One, the business we put in place in Seating is very well positioned, and I love what I'm seeing in these systems. And like I said, we stabilized that quickly, and now I'm very optimistic about the future of E Systems. And we're roll that out in a lot more detail about our vision with E Systems in our Investor Day in June.

So more to come.

Speaker 4

One last question, if I

Speaker 3

could sneak it in. Mean, you guys have the high class issue of having a very strong balance sheet and a lot of cash flow, even as the market comes under a little bit of pressure. I mean, what are your sort of plans for cap allocation? Mean, should we think about I mean, we're hearing the news this morning of Delphi and BorgWarner. Are there opportunities for you, either on the seating, electronics side, to do something like that?

Or could you say, Hey, listen, our stock is widely undervalued. We want do an ASR and get something done quickly? I mean, how are you thinking about cap allocation right now? And has anything changed?

Speaker 2

Yes. I'd say generally, nothing has changed. Our priorities are the same. We're going to continue, first, investing in the business through CapEx. There may be modest tuck in acquisitions to round out capabilities in both segments, but nothing transformational.

And we're going to continue returning excess cash to shareholders. I mean, I think we returned more than 80% of our free cash flow in the form of dividends and share repurchases in 2019. And we'll be talking about that with our board again this year, and I would anticipate a similar approach and discipline around that going forward. Yeah. Just to add, I mean, what's nice is our the flexibility we have.

And we'll be opportunistic, but like Jason mentioned, nothing transformational on the horizon. We have a two really good businesses. There's some smart tuck in opportunities that would be nice. I think I've mentioned t's and c's is something that we're really focused on. I think that's a a nice play for us.

You think about wiring, you know, the whole wire harness type program. Only the wires represent about 40 to 45% of that business, and there's a ton of opportunities for us to vertically integrate just like we did in seating and continue to drive margin up. So there's areas, but for the most part, we have the right to win in both segments. We can do it with our own organic infrastructure. But if we can accelerate growth in margin, obviously, we'll consider that.

Speaker 3

Great. Thanks very much, guys.

Speaker 0

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

Speaker 6

Good morning, everybody.

Speaker 4

Good morning.

Speaker 6

I apologize. I really joined the call late, so I missed your prepared remarks. You

Speaker 3

want me

Speaker 2

to read it off again? I just want to go through that again.

Speaker 6

Transcript by email would be perfect. Thank you. No. I'll I'll make it quick though. So the it looks like compared to your remarks in back in December, the you're expecting the Lear platforms to be down quite a bit more, China and Europe in particular.

I think you were looking at down 5%, that's like down 12%, down 7%. Can you maybe just comment, is it sort of like the markets are being worse or are there specific large platforms that we should be thinking about?

Speaker 2

Yes. I think overall, our outlook for next year on volumes is very similar to what I had talked about in December. I was speaking really more about the underlying industry volumes in those regions. And obviously, we don't sell to every platform in every region. And so we do see our platforms down more than the market in China specifically.

The flip side of that, we see North America, up, on our platforms despite a flat overall market there. And And in Europe, we're sort of in line. We see the market down 7%. That is a little bit worse than I think I talked about it in December. Thought it would be more like 5%.

And I think if you look at the macroeconomic environment, all the uncertainty there, we thought it was prudent to have a little wider range at this stage in the year, be a bit more cautious. And whether it's CO2 regulations or just general economic weakness in Europe, I think there's enough uncertainty that it warranted a little bit more cautious assumption on volumes, and that's reflected in the outlook.

Speaker 6

Okay. Then similar, I apologize, but on the segment margin outlook, is it still in line with what you said in December? And then any color on the size of the corporate line?

Speaker 2

Yes. So in terms of the segment margin outlook, it's very similar to what I talked about in December. So at the midpoint of our guidance range, we have both core segments in the high 7s. And so in Seating, we would be up about 30 basis points at the midpoint year over year. Despite the benefit of the nonrecurrence with GM strike, volume is a headwind for us, and it's about 30 basis points dilutive.

And that's really due to the lower volumes in Europe and China. Incentive comp is a 15 basis point headwind in Seating. And then both of those are more than offset by restructuring savings and net performance. The net performance is partially a result of launch costs, but we see about 70 basis points of tailwind between restructuring savings and net performance. That's sort of the walk there.

And at the high end of the range in Seating, we see that business at 8%. In E Systems, it's a little bit better than what I described, I think, in December. At the midpoint, we're at about 7.7, so down 100 basis points from this year. And really, the biggest factor driving that is the higher engineering and development costs. That's about an 85 basis point headwind.

So we have $450,000,000 of new business awards in electrification and connectivity. That business is growing rapidly. It doubled in size from 2018 to 2019. It's increased again. In 2020, we see that business at about $350,000,000 in sales this year.

And as we're ramping that business up, we're scaling up the engineering organization to support that growth. And then there's about a 15 basis point headwind on incentive compensation. So that's the 100 basis point headwind we see in E Systems. And sort of on the positive side, we do see restructuring savings and net performance benefiting margins in 2020, but we do see some dilution due to volume and backlog. On the volume side, we have some wire programs that are changing over, very high margin programs.

The replacement business is solid, double digit margin business for us, albeit at a little bit lower margin profile than the business that it replaces. We think over time, similar to what we've done with those same programs, with those same customers, we will work the margin up over time. And then the other factor impacting the backlog and volume dilution margins in E Systems is some of our power electronics business, in particular, a couple of the onboard charger programs. I think that many of those products were a bit overengineered. It's nascent technology.

We're still trying to figure it out, as is everyone. So those margins are coming in a little bit lower. The volume is a little bit lower at launch than previously anticipated. But I think over time, as volumes ramp up and we have a chance to deploy our cost reduction programs, we'll be able to take some costs out there. And in general, the margins on those programs are still pretty strong, but a little bit lower than some of the electronics programs that are going off that had 20% -plus operating margin.

So that's sort of the margin story. And at the high end, Emmanuel, we do see E Systems at about 8%. So it's a little bit better than we talked about in December.

Speaker 6

Oh, yeah. No, definitely. And then just very final one on the E Systems backlog. So I think some of the message over the year or so was that making a lot of progress on sort of like winning new future business electrification. You just quantified that as well.

I think some of the commercial negotiation in 2019 where the result was to sort of win some larger business in sort of like in the out years. Is that now reflected in that three year backlog? Or was it some of these recent wins that's really passed beyond 2022?

Speaker 2

I'd say it's more so out past 2022, that we'll see the benefit of that. And some of those quotes are still in process and we could pick up some business that impacts the tail end of that three year backlog. And part of that was really intended to protect some of our existing business and ensure that we continued with those programs in the next generation. That's part of the equation as well, Emmanuel.

Speaker 6

Okay. Thank you very much.

Speaker 4

You're welcome.

Speaker 0

Your next question is from the line of Dan Levy with Credit Suisse. Please go ahead.

Speaker 4

Hi, Hi. Good morning. Hi, good morning. Thank Good you for taking questions. First, I wanted to ask on E Systems.

I know that one of the issues which drove the margin compression from 14 down to seven was really the negative mix shift, that's because you had some very high margin business in China around wiring harnesses rolling off. So could you just help us contextualize how much, I guess, disproportionately profitable or much higher profitability product do you have left in E Systems that's printing at, call it, 15% or 20% plus margin today versus where it was, call it, a year ago? And what's the, I guess, roll off of that type of business?

Speaker 2

Yes. I would say that the last significant sort of roll on, roll off or major program changeover that's happening is underway right now, and it started in the fourth quarter and continues into the first quarter. So there isn't anything if I look out to 2021 and 'twenty two, the vast majority of that portfolio that had above market margins will largely have already changed over. So there is some dilution, Dan, in 2020 that I just mentioned in Emmanuel's question there. And so I think that's sort of the last year.

And if we can fast forward twelve months, I think we're more likely to be talking about a backlog in volume and mix scenario that's not dilutive, it's not necessarily accretive, but more in line with where the segment's at right now. If I could just add to that, Dan, just again, I think we kind of categorized it as almost as the perfect storm. We were in the process of diversifying our customer base. And obviously, that was an issue relative to what was accretive in our current platforms. But what we're doing is we've done a nice job of diversifying our customer base.

And when we talk about putting this team in place and our focus is on return on invested capital, it's just that. We want to minimize the risk, have a much better balance between our customers and our products globally, and that's exactly what we're doing. I think we've minimized the risk. We've talked about it before, and we're in a much better position and respect now because of anything significantly out there that would impact, like we saw before, in E Systems. And I think important, I mentioned it earlier, is how quickly that team and what a great job they've done stabilizing that business, and we're very optimistic about the path forward.

And we're still very disciplined to this return on invested capital or even the new business we're bringing on in our backlog. And so there's certain targets and thresholds as far as returns that we expect. At the same time, we're investing in a smart way to make sure we're driving that growth. And so there's two different things going on in the business today, but just want to add that.

Speaker 4

Great, great. And then I guess in a related

Speaker 2

fashion, sort

Speaker 4

of as a follow on, if you could just remind us of where your TNC mix was to end twenty nineteen, where you think that could go. But I guess my follow on is this, when we look at your end market assumptions, I realize this is platform specific and this is less a comment on where you think the industry may be. But I think we all recognize that there is volatility and uncertainty in China. It's down 12%, but a lot of the sort of end market forecasts out there are for something that's maybe a little more stable in 2020 post 2019. I guess the question is, if there is upside to those volume numbers, what that could do to your margin expectations?

How we should basically think about sensitizing your guidance to different moves in the end markets?

Speaker 2

Yes. I think, Dan, you can rely on what we've talked about in the past in terms of variable margin profile of both business segments with seating between 1520% generally and E Systems between 2025%. And I think if you're looking at China specifically, it's very much in line with that now in both segments. Maybe a little bit higher in Seating than the global average. But E Systems, it's pretty close now.

Speaker 4

And then

Speaker 2

in respect to the the Ts and Cs question, I I think, you know, we've mentioned this before. We've done a nice job of growing our wiring business, and obviously, a nice job of, the margins on the wiring business. But the wiring harness itself, the wiring cost or price within that represents 40% to 50%. So there's a tremendous amount of opportunity for us to vertically integrate. And we talk about this right to win.

We absolutely have the right to win. What's changed, from the past is our customers are now, a lot of respects, opening up their catalogs because they're looking at different opportunities. And with the new platforms that are coming out, specifically with electrification, those are brand new type terminals. And so we have the right to design, the right to win, and we're actually winning business. And where we see ourselves going, 10% of our total wiring business is Ts and Cs.

What our target is is to gain access to 20% of our total business. And we just were awarded a great program with a major customer across multiple platforms. And when you win these type of Ts and Cs, you win it across multiple platforms. It just goes to show the confidence we have by winning these type of business that we're on track to continue to improve our Ts and Cs overall portfolio.

Speaker 4

Great. Thank you very much.

Speaker 0

And your next question comes from Charisse Patel.

Speaker 7

Hey, this is Charisse on for Rod. I just had a couple of questions. I actually just wanted to start with your Europe volume assumption. You have it down 7%. Obviously, that's a lot lower than I think where IHS is now.

Speaker 2

I just want to get

Speaker 7

a sense of how you guys are thinking about that number. And then also, you mentioned some push out of electric vehicle programs. Is there any more color you can provide on that in terms of what's the challenges you're hearing from OEMs that are launching new EVs in that market?

Speaker 2

Yes. Starting with, I guess, Europe overall, I think IHS has the market down 1% for 2020. And we just felt, given the regulatory risk associated with CO2 emissions, and just the general economic weakness and sort of how we saw that business running in the tail end of 2019, that it was more likely to be down more significantly than that. And also, as we look at the releases and planning volumes from our customers, it would suggest a bigger decline in volumes. In terms of what's impacting us, specifically, in Europe, the platforms that are weakest in 2020, if you look at our Daimler business, if you look at IHS forecast for the GLC and the C Class, that is down, and so those are sort of nearing the end of their normal life.

Nissan Qashqai, another program that's important to us, big platform, particularly on the seating side. And that's in the last year of its life, and the volumes are down pretty significantly there. On the electric vehicle side, I think that when we set our backlog assumptions back in December 2018, there was just a very different view on how volumes would ramp up on these programs and that they'd be more similar to what you see with a traditional ICE vehicle ramping up. So I don't think that I can point to any one customer issue or one particular common thread that cuts across all of the electric vehicle platforms. But it just seems that, in general, the volumes are ramping up slower.

It could be capacity constraints on certain components at the OEM level. I'm not certain of that, but we are seeing their planning volumes lower than what we had initially anticipated. And I think maybe part of that could be initial demand, particularly in The U. S, being lower than anticipated.

Speaker 7

Okay. All right. Understood. And then just quickly on the guidance, how do we think about the kind of incremental or decremental margin that's being kind of assumed here? I think in the past, from what we've seen in E Systems, it's been closer to 30%.

And I think maybe in the 20%, 25% zone for Seating. Is that kind of how you're thinking about it for 2020?

Speaker 2

In terms of just the pure volume impact, yes, I think that's the right way to think about it, 15% to 20% variable margins in Seating and 20 to 25% in Need Systems. In terms of what's impacting the margins in those segments in 2020 relative to 2019, there's some subtleties that maybe are important to point out. In Seating, we are seeing a fairly significant reduction in sales due to volume in 2020, particularly because of the reductions I've mentioned in Europe and then also in China. And so and that's converting sort of at that 15% to 20% range and is 30 basis points dilutive to margins year over year. In E Systems, the revenue due to volume is roughly flat.

Backlog is obviously positive, but the margin dilution overall for those two things taken together is about 100 basis points, and that's really driven by the changeover of some of the higher margin wire programs that are in the high teens, low 20s, changing over to low teens to just low double digit margins. So good margin business but lower than the business it's replacing. And then the backlog programs coming on at a margin a little bit lower than some of the mature electronics programs that are rolling off that were north of 20%. And those two things taken together are causing the margin dilution due to volume mix and backlog in E Systems.

Speaker 7

Okay. And that's going to

Speaker 6

be offset

Speaker 7

by better performance

Speaker 2

And that's been exactly, that's been offset by an improvement in net performance and restructuring savings.

Speaker 7

Your

Speaker 0

next question is from the line of David Kelley with Jefferies.

Speaker 2

Hey, good morning, guys. Thanks for taking my questions. A quick question on the Electrification and Connectivity backlog. I guess it is I'm assuming Xevo is included in that. And if so, any way you could contextualize kind of the impact of Xevo in it?

Yeah. It's actually not included in that backlog number, David. And we haven't talked a lot about Xevo since the initial announcement of the acquisition. We did talk about last year, we had anticipated revenue of around $100,000,000 We came in a little bit lower than that in 2019. We still anticipate significant growth in 2020, sort of north of 20%.

We're still trying to sort out exactly how we want to factor that into the backlog going forward. It is not part of it today, though. I think what's important, though, with Xevo, obviously, it's been a great acquisition. But the team has been incredible. And what's important is that when we first acquired Xevo, they had two main customers.

It was Toyota and General Motors, Toyota being the largest. And now we have two more customers, and I think in a short period of time here, we'll have two more. And just as importantly, we think about it in respect to being on platforms. And we've doubled almost 50%. We're on 37,000,000 vehicles.

And so we look at the penetration rate of how many vehicles we're on. And so they've done a great job in the continuation of Xevo. One thing that we're really working on is how we integrate the software into our gateway systems and our TCUs. And so everything I was to rate the success of the Xevo and the Xevo plan is right on track. And how we monetize, commercialize that, we're doing a nice job of we're looking at the different ways we can do that.

And like Jason said, and I think at the well, and we will at the Investor Day, we'll have more details around the specifics of Xevo and what we're doing in respect to the platform. But so far, it's been one heck of a partnership with us and Xevo and our customers. Okay, great. Appreciate the color. Just a couple of quick follow ups, one housekeeping.

So then is it fair to assume, again, back to the core electrification and connectivity backlog, is that skewed more towards, I'm assuming, electrification then? So we're talking E Systems penetration into hybrids and electric vehicles. And then quickly, as a follow-up, did you guys disclose kind of where we are from a penetration standpoint, number of vehicles Zboe's contented on today? It's $37,000,000 Yes. That is the number I referenced, 37,000,000.

Speaker 6

Okay, perfect. Yes.

Speaker 2

Yes. In terms of the composition of the $600,000,000 of backlog in electrification and connectivity, is more heavily weighted to power electronics. Want to say two thirds, one third, two thirds of power electronics. And then within that, the biggest component of that backlog is onboard chargers, battery disconnect units. Those are the areas where we've had success.

We're not really in inverters. We have a very small business there, and that's not an area of emphasis. It's more around charging systems and then high voltage wire and connection systems. As Ray mentioned, we had a big Connectors award Connection Systems award at the end of the year. That's not an electric vehicle.

It's a global electric vehicle. So that's a portion of that $600,000,000 backlog tied to those two growth areas. And

Speaker 0

your final question will come from the line of Joseph Spak with RBC Capital Markets. Just

Speaker 5

on E Systems margin profile over time, I just want to I know you quote stuff or you bid on business based on return on invested capital metric. But does that mean that as those products mature, they should still reach back to that low double digit margin range? And then the overall segment margins will then be impacted by continuing to ramp new business and further investment? Are those like the three factors we should think about?

Speaker 2

Yes. I think that's fair, Joe. Just in general, we're seeing the margins a little bit lower at launch, but we are seeing improvements in the margin profile over the life of the programs. That doesn't seem to have changed at all, particularly as I think we're a little bit further along this year with CPO, as Brady described in the prepared remarks. We have a great pipeline of cost reduction ideas that will really help that piece of the business in 2020.

But your components of the longer term margin profile are right on. And I think the scaling up of engineering will take a little bit of time, but it will plateau over the next couple of years, and then you'll see the benefit of growing margins on business that we launched previously. And the business we're quoting in the backlog, in general, is accretive to the operating margin in the segment or in line with the operating margin in the segment. We're not seeing a lot of pressure in terms of margins at award for new business we're going after right now.

Speaker 5

Okay. And then just maybe one quick housekeeping. I believe in the past, you also used to talk about an unconsolidated backlog, which I think primarily was in Asia. Maybe I'm mistaken, but is that something you could disclose today, how that's trending?

Speaker 2

Yes. Our nonconsolidated backlog is about $200,000,000 in the coming three years. That is quite a bit lower than last year's. I think it was $500,000,000 roughly. And the biggest component of the $500,000,000 in the last three year backlog was in 2019.

So I think some of the issues impacting our business in China, most notably lower production volumes just in general, are also weighing on that nonconsolidated backlog a bit.

Speaker 5

Okay. And then just, I guess, while we're here, on like 'twenty one and 'twenty two, is it a roughly sort of flat global industry you're assuming embedded in there?

Speaker 2

Yes. We generally rely more on IHS the out years. But where we have deviated from that, particularly on some of these electric vehicle platforms, we've taken a more cautious volume assumption than perhaps what others are projecting, and IHS would be one example of that. But you can use that as a reasonable frame of reference. And the market is pretty stable now for the next couple of years.

In fact, there's not much growth in industry volume. That's it for questions. I think the only people probably left on the call at this time is the Lear team. I just, wanna take this moment to, one, thank the Lear team. It was a very challenging year for us last year, but I couldn't be more proud of all the hard work and the commitment and dedication to the company.

We made a lot of tough decisions. We're in a tough business, but we know what we need to do. I appreciate everything you've done. I know that we've put ourselves in a great position going forward. We focus on the things that we can control, and we're going to continue to do that.

I couldn't be more optimistic about our future. 2020 is going be a really good year for Lear, and I believe that because of all the tough decisions we made last year. So we put ourselves in a really good position. And thank you for everything you guys have done, and I look forward to 2020 and continue on our success.

Speaker 0

Thank you. Thank you again for joining today's webcast. You may now disconnect.