Lear Corporation (LEA) Q4 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Lear Q4 and Full Year 2019 Earnings Conference Call. At this time, all participants’ lines are in a listen-only mode. During this presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Alicia Davis, Senior Vice President of Corporate Development and Investor Relations.

Thanks, Carmen. Good morning, everyone, and thanks for joining us for Lear's fourth quarter and full year 2019 earnings call. Presenting today are Ray Scott, Lear's President and CEO; and Jason Cardew, 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&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. 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.

Thanks, Alicia, and good morning, everyone. It's a pleasure to speak with you today. But earlier this morning, we released our fourth quarter and full year financial results. A summary of the full year results appears on Slide 5. Sales in 2019 were $19.8 billion, adjusted operating margin was 6.6% and EPS was $13.99. Adjusted operating margin in Seating was 7.5%, and in the 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 in 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 second half of 2019, General Motors experienced a labor strike that had a significant effect on the entire North American auto supply chain, including Lear. And despite these very challenging environment, we delivered a 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 6 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 these 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, noncore 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 million of electrification and connectivity business, representing a win rate of almost 40% of the more than $1.2 billion 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 Honda and increased their vehicle penetration by almost 50% to 37 million 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 30-year bond offering. Finally, we continued 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 million to our shareholders through share repurchases and dividends. Turning to Slide 7. We are optimistic about the year ahead of us. And given our financial strength, we're 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 8. Over the past year, I 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 30 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 to our margins from price concessions. In addition to being able to find internal efficiencies, we have tools that are at our 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 for benchmarking, identifying cost gaps and product realignment, value chain analysis and footprint optimization and sharing best practices across multiple platforms, all 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 out of the system while maintaining a high level of quality for our customers. Slides 9 and 10 highlight a few of our key; program changeovers as well as the new program launches in the – 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 E-Systems. Of particular note in Seating, in the second quarter, launch of General Motors, the TB SUV program, which includes the GMC Yukon, Chevrolet Tahoe and Suburban and the Cadillac Escalade. In E-Systems, we anticipate key electrification launches this year, including the Volvo Polestar 2 and the Jaguar I-PACE, which will have Lear onboard charger content. And now I'd like to take – turn the call over to Jason for a financial review.

Thanks, Ray. Slide 12 shows IHS vehicle production volumes and key exchange rates for the full year 2019. Global vehicle production declined approximately 5.4 million units or 6% compared to 2018. Lear 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 continue 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 $4.8 billion, down $124 million or 3% from last year as we faced production declines on Lear platforms and the negative impact of foreign exchange, partially offset by growth in the backlog. Excluding the impact of foreign exchange and acquisitions, sales were down 1%, reflecting growth over market of 5%. Core operating earnings were $241 million, down $148 million 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, sales decreased 6% to $19.8 billion. This decline was driven by lower production volumes in each of our major markets as well as foreign currency exchange, partially offset by growth from the backlog. Excluding the impact of foreign exchange and acquisitions, sales were down 3%. Core operating earnings were $1.3 billion 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 the decrease in operating earnings, slightly offset by a lower share count. Full year free cash flow was $680 million, 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 $3.6 billion, down 3% from the fourth quarter of 2018. Excluding the impact of foreign exchange, sales decreased 1%. The decrease in sales was driven by a lower production on our platforms, partially offset by strong growth in the backlog. Seating margins were 5.9%, down 210 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 $15.1 billion, down 6%. Excluding the impact of foreign exchange, sales decreased 3% reflecting 3% growth over market. In 2019, Seating margins were 7.5%. But without the GM strike, Seating margins would have been an estimated 8%. E-Systems sales in the quarter were $1.2 billion, down 2% from the fourth quarter of 2018. Decrease in sales was driven by a 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 360 basis points from last year, primarily due to the impact of lower volumes, negative net performance and the Xevo acquisition. For the full year, E-Systems sales were $4.7 billion, 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 million in restructuring costs. These restructuring actions are intended to reduce our capacity, improve our overall efficiency and position our business for a continued success. We anticipate approximately $75 million in annualized savings by 2021, with 80% of the savings, or $60 million 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 RMB 7 to the dollar. Slide 17 provides our financial outlook for 2020. Our sales guidance of $19.4 billion to $20.2 billion represents a wide range, reflecting current uncertainties in the macroeconomic environment. Core operating earnings are forecasted to be in the range of $1.21 billion to $1.34 billion. 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 2020 to 2022 backlog of $2.7 billion. 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 $1.4 billion. We now estimate 2020 backlog of $825 million, reflecting significant declines in both segments. The biggest single driver of the decline is a program delay that results in more than $200 million of revenue shifting out to 2021. Additional drivers include generally lower industry volume assumption 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 $1.2 billion, more than twice the $525 million backlog estimate we provided for 2021 in last January, an increase resulting from both new business wins and the timing of launches. From a segment perspective, our backlog is split two thirds, one thirds 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 two thirds 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 we'll 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. I'll turn it back to Ray for some closing thoughts.

Thanks, Jason. Nice job. 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.

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

Hi, Dan. You there, Dan?

Dan, your line is open. If you have your line muted on your hand, please unmute your line. There is no response from that line. Your next question will be Itay Michaeli with Citi.

Great. Thanks, everyone. Good morning.

Good morning.

Good morning.

Just a first question on Slide 16. It looks like the China Lear platform assumption, 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?

Yes, Itay, the biggest factor driving that disproportionate decline in volumes for us as we look out to 2020 is on our GM business there. I think GM's talked about some of the risk 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 had some business with Changan 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 3 automakers in China is a factor that's impacting our performance there 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.

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 clear launches or other factors to think about for the model?

Yes. So I think holding this coronavirus aside and what impact that may have on the first quarter. As we looked out at our plan for this, 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 the – 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.

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

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

Great. That’s – it’s all very helpful. Thanks so much for the detail.

Yes. No problem.

Thanks.

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

Good morning, guys. I just had a – and I apologize, I got on, sort of, halfway through the call. But I mean just on the backlog chart here on 18, I'm just curious, why you think the $3.4 billion you had last year dropped $2.7 billion. 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?

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 volumes. So volumes have come down in the current year in 2019. They are 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, there 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 platform, 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 2022 and 2023 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. So that's impacting both Seating and E-Systems. We have some exposure on the Seating side to EV as well.

Okay. That makes sense. And then on 2022, I mean, if you looked at the out-year last year being 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?

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 in 2020. One program by itself is $200 million, and there were other programs as well. There's about $300 million in total that shifted from 2020 into 2021. So I wouldn't anticipate that repeating itself. But there are still plenty of opportunities to win new business that will launch at least in the second half of 2022.

Yes. I think one thing that's probably been more obvious to us is some of this Conquest Business in 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 an increased request from our customers in respect to current business programs. And so that would definitely impact that model year.

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, sort of 2020 or that sort of what you think are, sort of, sustain margins for the foreseeable future in each segment?

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 to 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 to mid 8s. And I think at the beginning of that time period, we were in a really robust iron environment, gold production was growing. The tail end of that time period, we saw, obviously, volume challenges globally, particularly last year and a little less so in 2018. And we still continue to run that business in the 7.5%, 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 the 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-teen 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. I don't know, Ray, if you want to add on.

Yes, I just to add – just to give a little bit more insight. We're very confident in our Seating business. We've built a nice moat or this competitive advantage in Seating. And I'll tell you, we have incredibly strong relationships, but 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 I think in addition to that, what's great about this time is the – in all the cycle is there is 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 Convergence plus. It's something that was a collaboration effort between E-Systems and Seating. And it's the first powered rail system with a really flexible cassette that goes in the vehicle that was sold at one platform with one customer and now is on – we've been awarded a second program to that. And I think there's going to 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 structures, primarily in Europe, our portfolio management. Now 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, if you look how quickly we stabilized that business. And you think 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've talked about exiting margin-dilutive programs. And we're continuing to work on that and continuing to improve our overall margins. So that turnaround and how we stabilized, that happen really quickly. And we're done with the short term. We're under the midterm type things the midterm type things we talked about, with continuing with electrification and connectivity, higher-margin type businesses. And we're doing very well in the growth there. Mike Balsei 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 E-Systems. And like I said, we stabilized that quickly. And now I'm very optimistic about the future of E-Systems. And we're going to roll that out in a lot more detail about our vision with E-Systems in our Investor Day in June. So more to come.

One last question if I could sneak it in. I 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? I 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 or electronics side to do something like that? Or could you say, hey, listen, our stock is widely undervalued, and we want to do an ASR and get something done quickly. I mean how are you thinking about cap allocation right now? And has anything changed?

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, in 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.

Yes. I'd just 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 two really good businesses. There's some smart tuck-in opportunities that would be nice. I think I've mentioned Ts and Cs is something that we're really focused on. I think that's a nice play for us. You think about wiring, a whole wire harness-type program, 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.

Great, thanks very much guys.

[Operator Instructions] Your next question comes from the line of Emmanuel Rosner with Deutsche Bank.

Good morning everybody.

Good morning.

Good morning.

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

Do you want me to read it off again? We can go through that again.

Transcript by e-mail will be perfect. Thank you. Now I'll make it quick, though. So the – it looks like compared to your remarks in – back in December, the – you were expecting the Lear platforms to be down quite a bit more in China and Europe, in particular, I think you were looking at down 5%, it'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?

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 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 in December, I 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.

Okay, thanks. And then similar apologies, 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.

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 whole segments in the high sevens. And so in Seating, we would be up about 30 basis points at the midpoint year-over-year. Despite the benefit of the nonrecurrence of the 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 lower 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 million 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 million 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 then sort of on the positive side, we do see restructuring savings and outperformance 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's 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 cost out there. And in general, those – the margins on those programs are still pretty strong, but a little bit lower than some of the electronics programs that are pulling 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.

Yes, definitely. And then just verifying one on the E-Systems backlog. I think some of the message over the past 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 large new business in sort of like in the out years. Is that now reflected in that three-year backlog? Or is it that some of these reasons was that's really passed beyond 2022?

I would say it's more so out past 2022, but 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.

Okay, thank you very much.

You are welcome.

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

Hi, Dan.

Hi, good morning. Hi, good morning. Thank you for taking the question.

Good morning.

Good morning.

Yes. First, I wanted to ask on E-Systems. I know that one of the issues which drove the margin compression from 14% down to 7% was really the negative mix shift, and 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?

Yes. I would say that the last significant sort of roll on and 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. And so there isn't anything – if I look out to 2021 and 2022, the vast majority of that portfolio that had above-market margins, it will largely have – already have 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 12 months, I think, we’re more likely to be talking about a backlog and 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 is 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, and we've talked about it before, and we're in a much better position in respect now I don't think there's 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 how – what a great job they've done in 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.

Great. Great. And then, I guess, in a related fashion – sort of as a follow-on, if you could just remind us of where your T and C mix was to end 2019, 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, 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?

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 15% and 20%, generally; and E-Systems, between 20% and 25%. 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.

And in respect to the Ts and Cs question, I think, 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 harnessed 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 this – when we talk about this right to win, we absolutely have the right to win. And what's changed from the past is our customers are now in 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 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. And it just goes to show the confidence we have by winning this – these type of business that we're on track to continue to improve our Ts and Cs overall portfolio.

Great. Thank you very much.

And your next question comes from Shreyas Patel.

Hey, This is Shreyas on for Rod. I just had a couple of questions. I 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. I just wanted to get 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?

Yes starting with, I guess, Europe overall, I think, IHS has the market down 1% for 2020. And we just felt given the regulatory risks associated with CO2 emissions and this 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 as those are sort of nearing the end of their normal life. Nissan Qashqai, that program is important to us. Big platform, particularly on Seating side and that's in the last year of its life from the volumes were down pretty significantly there. On the electric vehicle side, I think that, when we set our backlog assumptions back in December of 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. And so I don't think that I can point to any one customer issue or one particular common thread that cuts across all 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. I think maybe part of that could be initial demand, particularly in the U.S. being lower than anticipated.

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?

In terms of just the pure volume impacts, yes, I think, that's the right way to think about it 15% to 20% variable margins in Seating and 20% to 25% in E-Systems. In terms of what's impacting the margins in those segments in 2020 relative to 2019 there's some subtleties that may be 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'd mentioned in Europe and then also in China. And that's converting sort of at that 15% to 20% range. And it's 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 a 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.

Okay. And that's going to be offset by better performance?

Yes. And that's an – exactly, that's going to offset by an improvement in net performance and restructuring savings.

Okay, understood. Thanks a lot.

Yes, you’re welcome.

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

Hey, good morning guys. Thanks for taking my question. 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?

Yes, 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 a $100 million. 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. And 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, and Toyota being the largest. And now we have two more customers. And I think in a short period of time here we will 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 3 million vehicles. And so we look at the penetration rate And we've doubled almost a 50% we’re on 37 million 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 working on is how we integrate the software into our gateway systems and our TCUs. And so everything, if I was to rate the success of the Xevo and the Xevo plan is right on track in how we monetize, commercialize that. We're doing a nice job of really 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, 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. I appreciate the color. And then just 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 Xevo has contented on today?

It’s 37 million.

Yes, that is the number I referenced.

Yes, in terms of the composition of the $600 million of backlog in electrification and connectivity is more heavily weighted to power electronics. I 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 on an electric vehicle, that's a global electric vehicle. So that's a portion of that $600 million backlog tied to those two growth areas.

Great, perfect. Thank you.

Thanks.

You're welcome.

Thank you. And your final question will come from the line of Joseph Spak with RBC Capital Markets. Please go ahead.

Thanks. Good morning. Thanks for squeezing me in here. Just on E-Systems margin profile over time. I just want to – I know you quote stuff or you bid on business based on a 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?

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 CTO, as Ray described in the prepared remarks that 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've launched previously. In the business we're quoting and 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.

Okay. Thank you. 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 an ADAS. Maybe I'm mistaken, but is that something you could disclose today, how that's trending?

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

Okay. And then just, I guess, while we're here unlike 2021 and 2022, is it a roughly sort of flat global industry you're assuming embedded in there?

Yes, we generally rely more on IHS for 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 assumptions 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 in it. The market is pretty stable now for the next couple of years. In fact, there's not much growth in industry volume.

Great, thank you very much.

Yes, thanks. I think that is it.

Yes.

Okay. That's it for questions. I think the only people probably left on the call at this time is the Lear team. I just want to 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 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 to 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, continuing on our success.

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