Q4 2019 Earnings Call
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[laughter] presentation, there will be a question and answer session.
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I'd now like to hand, the conference over to unleash a Davis senior Vice President 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, we're as president and CEO and Jason Harbes Senior Vice President and CFO .
Members of the your senior management team have also joined US on the call. Following prepared remarks, we will open the call for acuity you can find the presentation that accompanies these remarks at IR Dot Lear dotcom.
Oh really begins I'd like to take this opportunity to remind you that as we conducted called we will be making forward looking statements to assist you in understanding what your 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 Kincaid and other periodic reports I also want to remind you that during today's presentation. We will refer to non-GAAP financial metrics you were directed to the flies in the appendix of our present.
Function 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 are 2020, outlooks and 2023 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 race to begin actually show 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 result.
Summary, the full year results appears on slide five.
Sales in 2019 were $19.8 billion adjusted operating margin was 6.6% and he P.S. was $13 a 99 cents.
Adjusted operating margin and shooting was 7.5% and a knee system was 8.7%.
In 2019, we faced significant macroeconomic headwinds, including the continued weakening of foreign currency against the U.S. dollar.
And then industry a marked by a 6% decline in global vehicle production.
The first half of the year, our results were impacted by significant downtime associated with some of our key changeover programs and heavy launch accepted.
The second half the 2019 general Motors experienced a labor strike that had a significant effect on the entire north American auto supply chain, including litter.
Despite these very challenging environment, we delivered a solid financial results for the year I'm proud of what the team accomplished and pursuing growth aggressively managing costs and positioning the business for long term success.
Slide six provide some 2019 business highlights.
Our seating segment delivered strong results and continue to demonstrate its position as an industry leader.
Receiving external recognition for quality operational excellence and innovation.
Last fall Karl Esposito, a seasoned executive with expertise in electronics software development and calculated the joint there's a new president of East systems, Carl's arrival and other key senior hires in 2019 has given us the strongest E systems leadership team in our history.
In addition to building a team we reorganized these systems to ensure a greater visibility into profitability in financial returns by product segment region customer and program.
We're also embarked on a strategic portfolio review that will lead to expansion in high growth and profit areas and that's it from low return noncore product lines.
2019, we saw a significant increase in quoting activity in the high growth areas of electrification conductivity.
And during the year over year awarded approximately $450 million electrification and connectivity business.
Representing a win rate of almost 40% of the more than 1.2 billion and business we pursued.
Last April we acquired medieval.
And automotive software supplier that connects consumers would their favorite retail brands directly from their vehicles.
Acquisition as evil has enhanced our capabilities and software services and data analytics as well as our market position in connectivity.
Legal team has brought tremendous talent and expertise to Lear organization.
And since the acquisition the team has added new OEM partners, including XT, eight and Honda and increase their vehicle penetration by almost 50% to 37 million vehicles.
Last year as a testament to our financial strength Moodys upgraded lear's credit rating and we completed a financing that included Lear's first 30 year bond offerings.
Finally, we continue to show our commitment to returning excess cash to our shareholders. In 2019, we increased the quarterly dividend to 75 cents per share and returned over $550 million to our shareholders through share repurchases and dividends.
Turning to slide seven.
We are optimistic about the here.
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 are 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 nine numbers of Lear 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're doing to refine our business in our product strategies and I look forward to sharing our vision for the future of ceding a new 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 negotiate 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 extra ordinary 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 seats yield to offer alternative past to cost savings as opposed to pro.
Nice reductions and provide value to our customers CTL 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 a 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 an tools and training to make them successful.
This is part of our DNA, therefore operation and at the core of how we run our business every single day.
And CTL, we focus on using technology and innovation for benchmarking identifying cost yet and product realignment.
Value chain analysis and footprint optimization in sharing best practices across multiple platforms, all while ensuring we meet or exceed customer requirements.
CTO as a continuous process at leer with over 200 customer workshops held each year across the globe. Each event generates on average 100 cost savings ideas.
We're constantly looking for ways to improve efficiencies and take cost out of the system, while maintaining a high level quality for our customers.
Slide nine and 10 highlight a few of our key purpose changeovers as well as a new program launches and that are part of our 2020 backlog. This year, we will launch several high content products in seating.
And programs involving complex electrification conductivity technologies in these systems.
Particular note in seating and second quarter launch of General Motors.
The TV SVB program, which includes the GMC Yukon Chevrolet top hole in suburban and the Catholic escalate.
And these systems, we anticipate key electrification launches this year, including the mobile pollstar too and the Jaguar eyepiece, which will help their onboard charger content.
I'd now like to take.
On the call over to Jason for a financial review.
Right.
Slide 12 shows I just vehicle production volumes you exchange rate for the full year 2019.
Global vehicle production declined approximately 5.4 million units or 6% compared to 2018.
Livers clap platforms were down greater than the market in each of our major regions with Europe down, 8% and both North America and trying to 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 fourth quarter and full year 2019, our financial results were significantly impacted by an extended labor strike a general motors our largest customer.
Quarter sales were $4.8 billion down 124 million or 3% from last year as we faced production declines on their 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 over market of 5%.
Core operating earnings for $241 million down 148 million year over year, primarily due to lower volume.
Adjusted operating margins were 5% for the quarter and what have been an estimate at 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%.
For operating earnings were $1.3 billion on an 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 million down year over year, due primarily to lower earnings.
Slide 14 provides our segment financial results for both fourth quarter and full year 2019.
You mean sales in the quarter were $3.6 billion down 3% from the fourth quarter 2018.
Including 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 from the backlog.
See 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 season sales were $15.1 billion down 6%.
Including the impact of foreign exchange sales decreased 3%, reflecting 3% growth over market.
In 2019, CD margins were 7.5% without the GM strike seating margins would've been an estimated 8%.
These system sales in the quarter $1.2 billion down 2% from the fourth quarter 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 zero.
These systems margins were 7.7% down 360 basis points from last year, primarily due to the impact of lower volumes negative net performance and zibo acquisition.
For the full year, you system sales were $4.7 billion down 8%.
Excluding the impact of foreign exchange in the Zibo acquisitions sales decreased approximately 6% or in line with overall industry production.
In 2019 any 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 for continued success.
We anticipate approximately $75 million, an 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.
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.
Well I chose this forecast in 2020 global industry production to be down approximately a half a percent 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 platform.
In North America is up 4%, Europe down, 7% and China down, 12%, we base our production outlook on several sources, including internal estimates customer production schedules NHS 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 seven RMB 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 season in these 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 a $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 pursued 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 that decline as a program delay that results in more than 200 million 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 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 last January and increase resulting from both new business wins and the timing of launches.
From a segment perspective, our backlog is split two thirds, one third between seasonality systems, respectively, and our E systems segment, we continue to win new business aligned with emerging emerging industry trends and specialty vehicle electrification any kind of activity approximately two thirds of our E systems backlog is in these high growth.
Both areas.
System 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 or backlog is lower than last year. It is in line with our historical average backlog despite declining industry volumes.
This reflects a secular growth potential of our electrification and connectivity portfolios as well as our continued conquest business wins in seating, we're optimistic about our future growth potential in both segments now I'll turn it back to rate for some closing thoughts. Thanks.
Thanks.
Now turning to slide 20.
In summary, we delivered solid financial results in 2019, and despite the challenging macro environment, we're very optimistic about the path forward in 2020.
Built this company to thrive in the current environment and separate ourselves from our competition. We have the most talented team in the industry in a culture centered on innovation and operational excellence.
We are 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.
Look forward to sharing more of our vision for the future with you at our Investor day now we'd be happy to take your questions.
At this time I would like to remind everyone. If you do you have a question. Please press star one on your telephone again that star one.
Your first question is from the line of Dan TV with Credit Suisse. Please go ahead.
And then.
Is there Dan.
Dan Your line is open if you have your line muted on your end. Please unmute your line.
Okay.
Hey, there is no response from that line.
Your next question.
Your next question will be a time mccolley with CP.
Great. Thanks, everyone. Good morning.
Good morning Martin.
Just first question on slide 16.
Looks like the China Lear platforms assumption down about 12% just we talk about what's happening there specifically as far as you can in terms of just the you the lear platforms relative to the overall market outlook.
Yes.
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 John talked about.
The recent challenges they've had in that market and so we do see.
A significant decline in a couple of GM platforms that were on in China that are impacting us. In addition to that we have some business with Chang on that's a that's quite a bit lower.
Those are sort of the outliers that are driving us down more than the market overall I'd say just generally.
Our exposure to the Detroit three 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.
15% of our new business backlog is what the Chinese domestic so we do see a lot of interest and growth potential with those customers and that that should improve the profile of our business in China longer term.
That's helpful. And then maybe just a second question is hoping you could give us a bit of a sense on on the cadence of earnings and margins throughout the year.
Any color you launches or the other factors to think about for for the model.
Yes, so I think.
Holding the this corona viruses side and what impact that may have on on the first quarter.
As we looked out at our our plan for this year, we expect earnings and and revenue to be fairly stable throughout the or the one exception is going to be in the second quarter as GM changes over the to the T. One full size to be in.
In Arlington Theres 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 and so that will have a meaningful impact both on revenue and margins in the second quarter outside of that we expect the margin profiles the relative.
Stable throughout the year.
Great. That's that's helpful. Much left just a quick housekeeping on on the 2020 revenue guidance could help us just just parse out the organic growth component of that just the impact on FX that you're modeling.
But anything else within that.
Sure. Yes. So if you look at our revenue overall, there's about a $525 million production and sales at our mid point year over year for for volume about 2.7% our backlog growth rolls out at 825 million.
And then we have about 150 million.
For foreign exchange and 150 million headwind for for pricing assumed.
In the outlook.
Great. That's that's all very helpful. Thanks, so much of that detail.
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.
Hey, Hey, I apologize I got on the halfway through the call, but I mean, just on the backlog chart here on 18 I'm just curious.
Why do you think 3.4 billion that you had last year dropped to 2.7, I know you kind of explain sort of the push and pull between 20 and 2021, but is this just primarily the assumption of lower global volumes that really what's what's going on here.
Yes, if you look at the backlog overall I would say that's the most important factor in and you know if you look at what's happened in some of the bigger markets that were in our backlog Europe in China, there was meaningful pullback in volume so volumes that's come down in the current year in 2019 that are expected to be lower.
Got it 20 and 21.
We had anticipated growth in those markets. If you look at what I just 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 electric vehicle platform, specifically, we're seeing on ramp up a little bit slower and so that is pushing some of the revenue growth.
Out into sort of 22, and 23 time period and out of 2020 and 2021.
As those those customers ramp the production up a little bit more slowly on the new ERP platforms and Thats impacting bull full season. These systems, we have some exposure on seeding side to TV as well, Okay. 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 theres 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 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 got pushed out to 2021 program by itself is 200 million and there were other programs as well there's about 300 million in total that shifted from 20% 20, once I wouldn't anticipate that repeating itself.
But there are still plenty of opportunities to to win new business that will launch in the second half of 22, Yes, I think one thing that's probably.
Good morning.
Obvious.
Some of this conquest business and seeding, we're getting a lot more requests on mid cycle type requests quotes that would impact that model year.
So we are seeing more that again, what we said is we're going to be very mindful of investment in investment dollars and returns and those type of things, but we are seeing an incredibly 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 are running through that I think I heard you said something about sustained margin of 8% in both segments did I hear that correctly or is that just a question of semantics and what you're looking forward for 2020 or is that sort of what you think is sort of sustained margins for the foreseeable future in each segment.
Yes, the cat the guidance assumption for 2020 at the midpoint and what we said was that high sevens in both segments and in seeding new systems at the high end of the range at roughly 8%.
And.
And so in terms of how we see those businesses longer term I think the answer that question is very different in terms of seeding I think it would be helpful. If you sort of look at the last five years and on average Weve run that business that just under 8%, 7.9% and it's running in a range of low sevens to mid eights.
And I think.
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 but volume challenges globally, particularly last year and a little less so in 18, and we still continue to run that business in the second half a percent 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 in the range and low under the range no. We stopped parks that business that we think we can improve.
We do have exposure to structures that businesses modestly profitable globally, but it's an area that we think we can do better end and we're working hard to improve the margin profile that business.
South America has historically underperformed and we see some improvements in the factored that in to our outlook. This year. So those are factors that could drive that margin profile in setting up a little bit.
In terms of what could dilute the margin you win more business on the just in time seeding side, it's less capital intensive that 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 ROI C 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 just to add just to give a little bit more insight.
We're very confident in our seed business, we've built a nice mode. This competitive advantage in seating and I'll tell you. The we've had incredibly strong relationships and more importantly, we've invested in that business over a long period of time and capital and people that is not easily replicated and I think it's being recognized when I mentioned earlier that we're seeing enough.
Ticking conquest opportunities, that's a significant change for us and we usually quote programs that are new programs. The new launches, but now we're seeing requests that are somewhat exclusive just alere and I think thats 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 what's great. About this time is the in the auto cycle is there's a lot of.
Introduction in innovation and technology, and we're really focused on it. So in addition to delivering great performances in the operations. We're focused on this innovation and technology and its taken a great example is this convergence plus it's something that was a collaboration effort between east systems and seeding and it's a first powered rail.
System within.
Really flexible because set that goes in the vehicle that was sold on one platform with one customer and now is on it we've been awarded the second program to that and I think theres going be more to come I think it's just an example of not just focusing on the operational excellence, but this innovation technology that will continue to help us improve our margins I think to Jason's point that we have a lot more work.
Due to what's great about this team in this company is that we're never done I mean, Jason mentioned a couple of them. We've got great Plains in South America, our structures, primarily in Europe , our portfolio management that we just exhausting ourselves and continue to drive the business and so there's a range there, but I think we've done a great job of really separate.
Getting ourselves and I think any systems you look how quickly we stabilize 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 in 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 in the partners that we have in China by hiring some great people, they're building some great relationships and really change in those profiles and we've talked about exiting margin dilutive.
Programs, we're continuing to work on that and continue to improve our overall margin so that turnaround and how we stabilize that happened really quickly and we've we're done with the short term were onto the mid term type things, we talked about with continuing with electrification cat activity higher margin type businesses, we're doing very well and the growth.
There.
Mike ball seeing a team with continue to vertically integrate with wiring and T's and C's, 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 won the business. We put in place in seating is very well position and I love, what I'm seeing a knee systems and like I said, we stabilize that quickly and now.
I'm very optimistic about the future of these systems I'm going to roll that out in a lot more detail about our vision with these 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 mark comes down 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 Borgwarner are there opportunities for you either on the seeding electronic side did you something like that or could you say, hey, listen our stock is widely undervalued, we want to do NSR and get something done quicker.
I mean, how you're 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 there may be modest tuck in acquisitions round out capabilities in both segments, but nothing transformational and we're going to continue returning excess cash to shareholders I mean I think.
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 is going forward, yes, I'd just add I mean, what's nice is there.
The flexibility, we have and will be opportunistic, but like Jason mentioned nothing transformational on the horizon. We have a two really good businesses. There's some smaller 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 thats a nice play for US you think about wiring.
The whole wire harness.
Type program will lead 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 and margin obviously, we'll consider that.
Great. Thank you very much guys.
Again, if you do have a question Chris Star one on your telephone Keypad. Your next question comes from the line of Emmanuel Rosner with Deutsche Bank.
Good morning, everybody.
Good morning.
I apologize I really joined the call late so I missed your prepared remarks.
So let me to read it up again.
Let me go through that again.
Transcript by email will be perfect. Thank you [laughter].
Now I'll make it a quick though.
So the.
Looks like compare to your remarks in the back in December the.
You're expecting to your platforms to be down quite a bit more and China Europe , particularly you really came down five guys like down 12 don't seven can you maybe just comment is it sort of back the markets are being worse or this specific launch platforms that we should be say chemo.
Yes, I think overall our outlook for for next year on volumes is very similar to what I have talked about.
In December I was speaking really more about the underlying industry.
Volumes in those regions and and obviously, we don't sell.
Every.
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 were sort of in line, we see the market down 7% that is a little bit worse, then I think I talked about it in December inside of do more like 5%.
And I think if you look at the macroeconomic environment. All the uncertainty there are we thought it was prudent to have a little wider range at this stage in the European a bit more cautious and whether it's two regulations or just general economic weakness in Europe , I think there's enough uncertainty that at Warner.
To 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's margin outlook is it still inline with what you said in December and then any color on the the size of the corporate line.
Yes, so in terms of the the segment margin.
Outlooks for similar what I talked about in December so at the midpoint of our guidance range, we have both coal segments in the high seven cents so in seating.
Would be up about 30 basis points at the midpoint.
Year over year.
Despite the benefit as the Nonrecurrence with GM strike volume is a headwind for us and it's about 30 basis points dilutive and thats related due to the lower volumes in Europe , and China incentive comp is 15 basis point headwind.
In seating and then both of those are more than offset by restructuring savings and net performance.
Net performance is partially the result of lower lower launch costs, but we see about 70 basis points of tailwind between restructuring savings and that performance that sort of the walk there and at the high end of the range in seating, we see that business at 8% any systems.
So little bit better than what I described I think in December .
Midpoint were spread about 7.7%, so down 100 basis points from from this year and really the biggest factor driving that it's a higher engineering and development cost Thats about an 85 basis point headwind. So we have a 450 million of new business awards, and electrification 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 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 that growth and then theres about a 15 basis point headwind on incentive compensation.
So thats the 100 basis point had when we see any systems and then.
Sort of on the positive side, we do see restructuring savings and outperformance.
Setting margins and in 2020, and but we do see some dilution due to volume and backlog.
Volume side, we have some.
Wire programs that are changing over very high margin programs. The replacement business solid double digit margin business for us, albeit at a little bit lower margin profile that in the business that it replaces we think overtime similar to what we've done with those same programs with those same customers, we will work that margin up.
Overtime and then the other factor impacting the backlog and volume dilution margins. In these systems is some of our power electronics business in particular, a couple of the onboard charger programs I think that.
Needless products were a bit over engineered it's nascent technology, we're still trying to figure it out as everyone. So margins are coming in a little bit lower the volumes a little bit lower at launch than previously anticipated, but I think overtime as volumes ramp up and we have a chance to declare our cost reduction programs will be able to.
Take some cost 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 pulling off that had at 20% plus operating margin. So that's sort of them the margin story and that at the high end.
Emmanuel we do see systems at about 8%, so that's a little bit better and we talked about in December .
Oh, Yes, definitely and then just for final on the.
These systems backlog, so I think some of the message for the past years, so was that.
Making progress on sort of like winning new future business electrification, you just quantify that as well I think some of the commercial negotiation between 90 anywhere.
The result was to sort of win some largely business in sort of back in the out years is that not reflected in that.
Three year backlog or was it.
So some of these reasons was is that is really past beyond 2022.
I'd say, it's more so out past 2022, but we'll see the benefit of that in some of those those quotes are still in process and could 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 we continued.
With those programs in the next generation, that's part of the equation as well annual.
Okay. Thank you very much.
Thank you welcome.
Your next question is from the line of Dan Levy with Credit Suisse. Please go ahead.
Hey, Dan Hi, Hi, Good morning, Hi, Good morning, Thanks for taking my question yes.
First wanted to ask on on E systems, I know I wanted the issues, which drove the margin compression from 14 down to seven was really the negative mix shift and Thats 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.
At much higher profitability product do you have left in it you 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.
Yeah, I would say that the last significant sort of roll on roll off for major program change over the that's happening is is underway right now and it started in the fourth quarter and continues into the first quarter.
And so there isn't anything I look out to 2021 and 22, the vast majority of the that portfolio that had above March market margins.
This is largely have already changed over so there is some dilution than in 2020 that I just.
Mentioned it in a manuals question there.
So I think thats 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 that's not dilutive, it's not necessarily accretive but more in line with where the segments at right now.
If I could just add to that Dan just again I think we kind of categorize is 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.
Well.
Platforms, but what we're doing that we've done a nice job diversifying our customer base and when we talk about putting this team in place and our focus is on return on invested capital capital is just that we want to minimize the risk have a much better.
Balanced between our customers and our products.
Globally, and that's exactly what we're doing I think weve minimized the risk Weve talked about it before and we're in a much better position in respect now because anything significantly out there that would impact like we saw before any systems I think important I mentioned it earlier is how quickly that team and now what a great job they've done a stabilizing that business.
Mystic 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 or investing in.
In a smart way to make sure we're driving that growth and so those two different things going on the business today, but just want to add depth.
Great great. Thank you.
And then I guess in interrelated fashion, Oh started as a follow on if you could just remind us of where your PNC mix was to end 2019, where do you think that can go but might 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 the comment on where you think the industry, maybe 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, how youre your guidance two different to 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, both business segments with seeding between 15, and 20% generally and any systems between 20, and 25% and I think if you're looking at China specifically.
It's it's very much in line with that now in both segments, maybe a little bit higher in seating than the global average.
Systems, it's pretty close now.
And then in respect to that the T's and C's 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 harness itself the wiring cost or price within that represents 40% to 50%. So theres a tremendous amount of opportunity for us to vertically integrate and this will we talk about this.
Its 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 I respect opening up their catalogs, because they're looking at different opportunities and with the new platforms are coming out specifically with electrification those are brand new type terminals in so we have the right to design the right to win in were actually winning business and where we.
It's going to 10% of our total wiring business is t's and C's what our targeted 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. When these type of T's and C's you ended across multiple platforms. It just goes to show the car.
Confidence we have by winning this this these type of business that we're on track to continue to improve our t's and C's overall portfolio.
Great. Thank you very much.
Okay.
And your next question comes from Sharif the tail.
Hey, this is transformed from 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.
I think when it went right just 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 what's the challenges you're hearing from Oems that are launching new EPA in that market.
Yes, starting with the I guess Europe overall, I think I adjust as the market down 1%.
For 2020, and we just felt given the regulatory risks associated with Seo to 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 that our weakest in 2020, if you look at our download business. If you look at Hs forecasts for the GLC in the C class that is down as those are sort of nearing the end of their normal life Nissan Qashqai.
Program, it's important to us.
Big platform, particularly on seeding side and Thats in the last year, if its life in the volumes down pretty significantly there.
Electric vehicle side, I think that when we set our backlog assumptions back in December 2018, Yes. There was just a very different view on how volumes would ramp up on these programs and that they would be more similar to what you see with a traditional ice vehicle ran.
Wrapping up and so I don't think that I can point to any one.
Customer issue, a one particular common thread the cuts across all the 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 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 I just quickly on the.
On the guidance.
How do we think about the kind of incremental or decremental margin.
Being kind of assume here I think in the past.
And what we've seen.
E systems, it's been closer to 30%.
I think maybe into 2025% zone for us for seeding is that kind of how you're thinking about it for 2020.
In terms of just the pure volume impacts the I think thats the right way to think about a 15% to 20% variable margins in seating in 20% to 25% in these systems.
In terms of what's impacting the margins in those segments in 2020 relative to 2019, if 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'd.
I mentioned in Europe , and then also in China, and so and that's converting sort of at that 15% to 20% range and his 30 basis points dilutive to margins year over year.
In these systems revenue due to volume is roughly flat backlogs, 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 water programs that are in the high teens.
Twentys changing over to low teens to just low double digit margins. So good margin business, but lower than the businesses, 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 any systems.
Okay, and that's going to be offset by.
By better and that happen.
Exactly that's been offset by an improvement in net performance and restructuring savings.
Okay understood. Thanks, a lot.
You're welcome.
Your next question is from online David Kelley with Jefferies.
Hey, good morning, guys. Thanks for taking my questions. A quick question on the electrification and connectivity backlog I guess is I'm, assuming cboes included in that and if so anyway, you could contextualize could that impact of zibo.
Yeah, it's actually not included.
And that backlog number David.
Yes, it and we Havent talked a lot about zibo since the initial announcement of the acquisition. We did talk about last year, we had anticipated revenue of around 100 million became 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 Zeeble, obviously, it's been a great Act.
Okay.
Acquisition.
But the team has been incredible and whats important is that when we first acquired Ziegel they had to.
Main customers it was Toyota in general Motors and try to being the largest and now we have two more customers and I think in a short period of time here, we'll have to more and just as importantly, we think about it in respect to being on platforms and we've doubled the almost a 50, 50% run 37 million vehicles and so.
We look at the penetration rate of how many vehicles were on his so they've done a great job in the continuation of Zibo, one thing that were.
We're working out and is how we integrate the software into our gateway systems and RTC use and so everything if I was to rate the success of the zibo in the Zibo plan is right on track in how we monetize commercialize that we're doing a nice job. So we're looking at the different ways, we can do that.
I would like Jason said and I think at the low and we will at the Investor Day, we'll have more details around the specifics of zibo, what we're doing on us in respect to the platform, but so far it's been one heck of it.
Up partnership with us in vivo and our customers.
Okay, Great I appreciate the color did the couple of quick follow ups. What 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 you systems penetration into hybrids and electric vehicles and.
Then quickly as a follow up.
Did you guys disclose where we are up from it penetration standpoint number of vehicles.
Those content on today.
It's $37 million, yes that is the number I referenced.
Yes.
Yeah in terms of the composition of the 600 million of backlog in electrification connectivity is more heavily weighted to power electronics.
I want 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 where we've had success we're not really in burgers, we have a very small business there.
That's not an area of emphasis is more around charging systems, and then high voltage wire in connection systems as Ray mentioned.
We had a big connectors Award connection Systems Award the ended the year. That's on an electric vehicle. That's a global electric vehicle. So that's that's a portion of that 600 million backlog tied to those those two growth areas.
Alright, perfect. Thank you.
Thanks, you're welcome.
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 overtime, I just want to.
I know you quote stuff or are you bid on on business based on return on invested capital metric, but.
Does 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 or there was like the three factors, we should think about.
Yeah, I think that's 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 doesnt seem to have changed at all particularly as I think we're a little bit further along this year with CTO as Brady described in the prepared.
Third remarks.
We have a great pipeline of cost reduction ideas that will really help that that piece of the business in 2020, but you're you're.
Components of the lot longer term margin profile are right on and I think the scaling up of engineering, we'll take a little bit of time, but will 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 were quoted in the backlog in general is accretive to the operating margin in the segment are in line with the operating margin in the second we're not seeing a lot of pressure.
Terms of margins at award for New business, we're going after right now.
Okay. Thank you and then just maybe one quick housekeeping, but.
I believe in the past you also used to talk about.
Consolidated backlog, which I think primarily was in Asia.
Maybe I missed a mistaken but.
Is that something you could disclosed today, how that how that's trending.
Yeah, our NAFTA validated backlog is about 200 million.
In the coming three years that is.
Quite a bit lower than last years, I think it was 500 million roughly and the biggest component of the 500 million in the last three or 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 not consolidated backlog a bit.
Okay, and then just I guess.
While we are on like 21, and 22 is it roughly sort of flat global industry, you're assuming embedded in there.
Yes, we generally relied more on I just for the for the out years, but where we have.
Deviated from that particularly on Sundays electric vehicle platforms, we've taken a more cautious volume assumptions on perhaps what.
Others are projecting HSV, one example that.
You can use that as a reasonable frame of reference in the market is pretty stable for the next couple of years back there's not much growth in industry volume.
Okay. Thank you very much.
Thanks.
Okay.
Okay.
Is it for questions.
I think the only people probably left on the call at this time as 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'm I couldn't be more optimistic about our future 2020 is going to be a really good year for earlier 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 continue on our success.
Thank you. Thank you again for joining today's webcast you may now disconnect.
HM.
Yes.
Okay.