Q4 2020 Lear Corp Earnings Call
Good morning, and welcome to Lear Corporation fourth quarter and.
And full year 'twenty 'twenty earnings conference call.
Participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions. Please note. This event is being recorded I would now like to turn the conference over to Alicia Davis Senior Vice President corporate development and Investor Relations. Please go ahead.
Thanks Kate.
Morning, everyone and thanks for joining us from Lear's fourth quarter and full year 2020 earnings call presenting today are Ray Scott Mair, President and CEO and Jason <unk> Senior Vice President and CFO, you can find a copy of the presentation that accompany their remarks and IR docs.
<unk> Dot com following prepared remarks, we will open the call for Q&A.
Before he begins 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 and understanding lear's expectations for the future as detailed in our safe Harbor statement on slide two our actual results could differ materially from these forward looking statements due to many factors discuss.
And 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 three.
First Ray will review highlights from the quarter and full year and provide a business update Jason will then review our fourth quarter financial results 2021 outlook and 2021 through 2023 backlog and finally ray will offer.
For some concluding remarks.
Moving 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.
Now if you could please turn to slide five.
Provide a brief overview of our fourth quarter and full year financial results and we finished the year strong with sales of $5 2 billion.
And core operating earnings of $330 million and the fourth quarter adjusted operating margin was six 3% and EPS was $3.66.
For the full year sales were $17 billion and core operating earnings were $614 million.
I'm very proud of everything the team accomplished during a very challenging year. We delivered delivered solid operating performance won significant new business and both business segments.
And continued to execute on our key strategic growth objectives, which will position the company for long term success.
Yeah.
Slide six provides from 2020 business highlights their sales grew faster than industry production by six percentage points, reflecting above market growth and both of our business segments.
Are your systems business, which grew 10 percentage points faster than the market and 2020 is benefiting from the shift to electric vehicles a.
The trend that we expect will support significant above market growth for the next 10 years and be on.
Despite a slowdown and the overall quoting activity in 2020 related to the pandemic today, we are announcing $2 $8 billion of backlog, which reflects conquest wins and seating and significant new awards and electrification.
Jason will discuss the backlog and more detail later in the presentation.
Last year, we won business on significant electrification platforms, including the highly complex battery disconnect units with general Motors for the GMC Hummer EV.
And it plugs board connector for Volkswagen modular electric vehicle platform that connects the battery to several high voltage wire harnesses.
The engineering work, we are doing on these programs for GM and Volkswagen is expected to create opportunities to win additional business and its derivatives are added to these new EV platforms.
We also won business with a customer who requested not to be named to provide high voltage and low voltage wiring harnesses for a new electric vehicle launching this year.
Finally, we received over 60 awards and 2020, including the J D power quality awards and seating and the pace Award and the systems that we noted earlier and this year.
Recognizing layers.
And highs and Lear for our ESG efforts operational excellence innovation quality and safety.
Slide seven highlights a few of our key program changeover changeovers and seating as well as new program launches that are part of our 2021 backlog.
Over the last 10 years, we have made targeted investments to increase our vertical integration capabilities.
As a result, we had the most complete capabilities of any seat supplier, which is apparent in the diversity of our products. We are launching in 2021.
In addition to our traditional gip business, we make components, such as leather fabric volume and structures, both for internal use and for sale to our seating competitors.
These component capabilities combined with our into suite of technology products allow us to partner with our customers early in the vehicle design and development process provides.
Providing us with a distinct competitive advantage as we bid on new business.
Also of note. This year is the launch of our first configure plus product for the new Volkswagen commercial band in Europe.
We have another configure plus program launching with a north American OEM and 2023 and many other Oems have expressed interest and this technology.
We also are exploring additional applications for our configure plus technology beyond the traditional automotive.
Such as for the last mile delivery service providers logistic providers and autonomous vehicles.
Slide eight highlights key upcoming E Systems' launches, which and in addition to our traditional product lines includes new electrification and connectivity business.
Our electrification launches include nine separate programs across Europe, Asia, and North America.
And we'll talk more about our product focus areas and electrification on the next few slides.
Slide nine highlights Lear, electrical electrification product portfolio and shows how this business has developed since we were one of the industry's first suppliers of high voltage wiring and charging systems for over 10 years. So we're over 10 years now.
And 2008, GM chose Lear to supply and electrical distribution system for the Chevy volt.
We developed the first mass market onboard charger and supplies high voltage wiring and connectors.
By 2010, we are supplying five customers with electrification content.
Over the past few years, we conducted an extensive study of the market concentrating on growth prospects and competitive dynamics.
Through these efforts we've identified the product segments, where we can leverage our core capabilities and generate attractive financial returns on a sustained basis.
And this exercise culminated and Lear, choosing three product families on which to focus.
Power Electronics battery management systems, and high voltage wiring and connection systems.
Today Lear is the only tier one supplier with a full range of capabilities and expertise to be a full architecture solutions provider for both electrical distribution systems and power electronics.
Using our vast experience, we can integrate different functions and.
And different pieces of the electronics in the vehicle, reducing weight and increasing efficiency.
Which translates into longer EV ranges and faster charging.
And the trend towards highly integrated power electronic solutions plays well to our strengths and we can offer different pieces of that portfolio and unique ways to solve customer needs.
Most high voltage connectors are being customized for applications to support unique designs at each OEM.
And these connectors require greater complexity and leverage and Leverages our position as the provider of the highest power density solution and the industry.
As the industry transitions to electric vehicles, where and a strong competitive position and <unk>.
Stand to benefit as high power connector Kellogg's develop over time.
Battery management systems and are increasingly critical components for electrical vehicles and ensure that the battery is operating as efficiently as possible.
Which maximize driving range. These highly software intensive products have millions of lines of code and are experiencing here combined with our domain knowledge will be invaluable as software continues to replace hardware in the electrical architecture.
And 2021.
We will be providing electrification content to 17 different customers on over 90 vehicle models, reflecting significant expansion and diversification of our customer base.
Based on business, we have already been awarded we will have a very active launch schedule for the foreseeable future.
I'm really excited about the opportunities. This provides for our E systems business.
Okay Slide 10 depicts the key components required for high voltage electrical architecture.
Which we reviewed in detail on our third quarter earnings call. We are showing the slide again today to reinforce how we have narrowed our focus on the areas, where we can best leverage our core competencies.
As shown earlier and the presentation, we have upcoming launches and all of these product areas.
And.
On slide 11.
We highlight the growth potential and electrification and.
In 2020 electrification sales totaled $270 million. This year, we expect this business to grow to almost $400 million and within three years, we expect the business to grow to $700 million on.
All of this business has already been awarded.
Looking out a little further we are targeting one $4 billion of business by 2026.
Which would represent a 32% compounded annual growth rate and electrification from 2020 and will contribute three percentage points of growth over market free systems overall.
This growth reflects both traditional customers, who are investing and this new electric vehicle offerings as well as companies new to the industry as shown here annual quoting activities for electric vehicles continues to accelerate.
We expect quoting activity and 2020 will increase throughout the year and as we pursue additional opportunities with existing new customers win rates and pursued business are targeted in the 25% debt 30 35 per cent range.
Consistent with our historical levels, which will result, and a continued growth over market for our E systems business and for Lear overall.
And as Oems increasingly increasingly communize their new vehicle architectures, we find those awards to be particularly valuable we are engineering and manufacturing components such as the main battery connectors and the battery disconnect units that are being designed into customers basic battery packs.
Engineering unique designs executing for our customers and providing differentiated technology is expected to support future growth and as these core elements are re used for different vehicles on common architectures.
We are working with many potential customers, including new electric vehicle companies and technology enablers, such as battery makers to show you show them the value of our technology offerings.
Our many years of experience on electrification and the family of products. We have developed provides a platform for growth with companies entering the vehicle electrification market.
Recently, we secured a new electric vehicle customer, who valued our experience capabilities and the ability to ramp production quickly integrating both wiring and connection systems and building on our global footprint, while this and EV manufacturers asked us to keep this program confidential and we expect similar opportunities present themselves.
Going forward and startups and established Oems prioritized industry expertise engineering capabilities and speed to market now.
Now I'd like to turn the call over to Jason for a financial review.
Slide 13 shows vehicle production and key exchange rates from the fourth quarter during the fourth quarter Global vehicle production was up approximately 2% compared to 2019 on Alere sales weighted basis global production declined by 2% the reduction of 2% reflects both where regional mix of debt.
And <unk> fourth quarter fiscal calendar, which had three fewer days in 2020 compared to 2019.
And North America production was relatively flat compared to a year ago production on our top platforms was up 5% as the prior year period was negatively impacted by the GM strike and.
And Europe industry production was up 1% and and China production increased 5% from.
From a currency standpoint, and the U S dollar weakened against our major currencies.
Slide 14 highlights lear's growth over market and the fourth quarter and full year 2020.
And the fourth quarter sales grew above market and both seating and E systems as well as and each of our major markets total company growth over market was eight percentage points driven primarily by the impact of new business from both segments.
And with growth over market was 11 percentage points and the quarter and seating and outgrowth was seven percentage points.
On a regional basis, North America growth over market benefited from the non re occurring from the GM strike in 2019.
And new business Awards.
And the rest of the World New business awards from the primary driver of growth over market.
For the full year growth over market was six percentage points, reflecting 10 percentage points and these systems and four percentage points and seating.
Slide 15 highlights our financial results for the fourth quarter.
Our sales increased 9% to $5 2 billion, excluding the impact of foreign exchange and acquisitions sales increased by 6%, primarily reflecting the addition of new business and both business segments.
Core operating earnings were $330 million up 89 million.
The increase in earnings reflects a margin accretive backlog and positive operating performance and both business segments, partially offset by net COVID-19 related costs and.
And 2019 fourth quarter operating earnings were negatively impacted by lower volume associated with the GM strike.
Adjusted operating margins were six 3% and the fourth quarter compared to 5% a year ago.
Adjusted earnings per share were $3 60 to expense up 39% from a year ago, primarily reflecting higher earnings.
Fourth quarter free cash flow was $234 million compared to $291 million and 2019.
The decrease and free cash flow, primarily reflects the reversal of COVID-19, austerity measures, which were implemented earlier in the year to conserve cash.
Slide 16 highlights our financial results for the full year sales earnings and free cash flow decreased significantly from a year ago, primarily reflecting significant volume reductions related to COVID-19 vaccine.
Despite a reduction and core operating earnings of almost $700 million and the actions. We took to preserve cash allowed us to generate free cash flow of over $200 million and 2020.
Slide 17 explains the fourth quarter year over year variance and sales and adjusted operating margins and the seating segment.
Sales and the quarter were $3 9 billion up seven 5% from the fourth quarter of 2019 and.
Excluding the impact of foreign exchange sales were up five 5%, reflecting the benefit of new business.
He didn't margins for seven 6% compared to five 9% last year, reflecting positive operating performance benefits from the non recurrence of the GM strike in 2019, and the margin accretive backlog, partially offset by net COVID-19 related costs.
Despite the challenges of operating and the COVID-19 pandemic, our seating business continues to post strong financial results.
Over the past decade, our seating business has consistently delivered returns and access of our cost of capital and generated strong free cash flow.
Allowing us to continue investing and this business to further strengthen our industry leading position.
Slide 18 explains the fourth quarter year over year variance and sales and adjusted operating margins and our E systems segment.
Sales and the fourth quarter were $1 $3 billion up 13% from the fourth quarter of 2019.
Excluding the impact of foreign exchange sales were up 9% driven primarily by the impact of new business and a growing electrification business.
Core operating earnings increased from $92 million or seven 7% of sales in the fourth quarter of 2000 $19 million to $103 million or seven six percentage of sales in 2020.
The increase in earnings resulted primarily from improved net operating performance, including restructuring savings and the benefit of new business.
We continue to make progress on our overall E systems margin improvement plan.
Despite the challenging operating environment and result in Permian and costs, we were able to deliver margins largely in line with the fourth quarter of 2019, while funding additional engineering investments to support our fast growing backlog, especially in electrification.
Slide 19 shows the assumptions for global vehicle production volumes and currencies that formed the basis of our 2021 full year outlook.
Based on our production outlook on several sources, including internal estimates customer production schedules and IHS forecasts.
At the midpoint of our guidance range, we estimate a 9% increase and global production or approximately 13% on alere sales weighted basis.
By region, we expect production and increased 20% and North America, 10%, and Europe, and 3% and China.
At the high end of our range, we are forecasting global production to increase by 12% and two percentage points lower than IHS since January forecast.
Our vehicle production outlook reflects some anticipated disruptions to near term production, resulting from shortages of certain electronic components as well as other risks posed by the ongoing COVID-19 pandemic.
From a currency perspective, our 2021 outlook assumes an average euro exchange rate of $1 18 per euro and an average Chinese RMB exchange rate of 665 RMB to the dollar both up about 4% from 2020.
Slide 20 provides our financial outlook for 2021.
Our sales guidance is $19 $8 billion to $20 8 billion and increase of 19% at the midpoint compared to 2020.
Excluding the favorable impact of foreign exchange sales are expected to be up 17% at the midpoint of our guidance, reflecting primarily higher production volumes and the benefit of our $1 billion backlog and 2021.
We expect sales to grow faster than the market again in 2021 with total company outgrowth of approximately 4% to five percentage points and E systems outgrowth of approximately 10 percentage points.
Core operating earnings are forecasted to be and the range of 1.13 billion to $1 $3 billion.
The midpoint of our guidance range reflects full year seating and E systems, adjusted operating margins and the low to mid 7% range.
Net operating margins and the first quarter are likely to be lower than our full year outlook, primarily reflecting premium cost and production disruptions associated with the industry wide semiconductor shortage.
At this point and we expect the disruptions on a relative basis to have a more significant impact on E systems and seating.
Restructuring costs are expected to be approximately $100 million and 2020 capital spending and is forecast at $600 million or about 3% of sales free cash flow is forecasted to be and the range of $550 million to $709.
One final item I wanted to highlight that we expect our headquarter spending to increase to approximately $70 million per quarter, and 2021, reflecting the unwinding of austerity measures increased investments and I T and higher compensation expense.
Slide 21 shows our 2021 to 2023 backlog of $2 $8 billion <unk>.
Important to note that our sales backlog includes only awarded programs net of any loss business and programs rolling off and excludes pursued business and net new business and our non consolidated joint ventures.
Backlog increased by more than $100 million compared to last year, Despite pandemic shutdowns impact and quoting activity last spring and lower industry volume assumptions from.
From a segment perspective, our backlog is split roughly two thirds, one third between seating and E systems, respectively.
The seating backlog includes a portion of the conquest awards, we announced last year as well as our first configure plus product launch for a VW from commercial van which starts production later this year and Europe.
And our E systems segment, we continue to win new business aligned with emerging industry trends, especially vehicle electrification, which represents approximately 50% of the backlog and that segment.
Consistent with historical experience, we expect the third year of our backlog to continue to grow and as there are still several programs that we are pursuing that will launch in 2023.
And I'll turn it back to Ray for some closing thoughts thanks, Jason.
Turning now to slide 23, it is and a very exciting time and the auto industry as global production volumes are growing.
And the transition to electric vehicles is accelerating Lear is well positioned to benefit from both of these trends and I am very optimistic about the year ahead.
We have strong momentum and both our business segments and.
We plan to continue to invest and our core businesses areas of focus include strengthening our vertical integration capabilities and seating to deepen and widen the moat around the business to protect our competitive advantage.
Our wiring business and connection systems business and continuing to accelerate our position on electrification and across both businesses investing in our operations to remain the leader and operational excellence.
And as part of the strategy strategy, we're going to concentrate on the types of investments that have workforce and the past.
We are planning on holding an investor day, and the fourth quarter net which point members of the 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, and I Hope we can do this and person.
And that we'd be happy to take your questions. Thank you.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
Youre using a speakerphone please pick up your handset before pressing the key to withdraw your question Press Star then two.
At this time, we will pause momentarily to assemble our roster.
Yeah.
Our first question is from Rod Lache from Wolfe Research go ahead.
Good morning, everybody.
A couple of questions on EV.
Just first of all look at externally.
Externally it looks like the landscape of potential customers for you is is expanding almost every day, there's another company and it's going public and.
We've estimated that they've raised something like $40 billion, new entrants over the past year or so so just hoping you might be.
And you're able to characterize what the process is for you.
And as you're looking at at this it's expanded.
Universe.
Do you have to expand your application engineering team.
To support a lot more platforms, what's the.
What do you pick and choose how do you guys have approached us.
Well yeah. It's that's a good question and we have spent a significant amount of time, given the complexity and the number of.
New entrants in electrification and and I think first of all Rod when you think back it wasn't that long ago, we were talking about quoting $300 million of business and and we talked about being very selective and in growing and expanding our customer base and I think we've done a remarkable job I think back to when we were on five different.
Customers and now expanded that to 17, and we were selective through that process and I'm really focused.
<unk> on different components that we felt we could scale and it is.
As derivatives, where being introduced we could you know given that we meet all the criteria from the customer expand that product line across multiple platforms as new entrants are coming and we do study and do a lot of work around the long term viability.
The strategic nature of the new entrant entrance into the market and where we think there'll be position long term and and we do take that into consideration when we look at risk and rewards on where we're going to put our capital and so that is a part of the equation net.
And something that we do consider and and I think we've been very successful. If you look at the expansion of customers we've been very selective.
We have invested.
We think we can win and.
And put ourselves in a position and like I said Rod what's interesting is this.
Battery disconnect units it used to be originally the bulkhead disconnect and we designed for the original bolt moving and this business for well over 13 years. So we have a tremendous amount of experience from the technology and innovation within the electrification area, where we focus our products and now it's the battery disconnect.
And what we're hopeful on the hummer.
Is that platform.
It accelerates across different vehicle lines that we've put ourselves in the best position to win those derivatives and that that's how we look at it right and then as new customers come in and a very similar approach how can we best position, our products, where we create value and create longer term.
Scale within that within that vehicle line.
Great. Thank you and just to.
To follow up on that.
And you've mentioned before that the addressable content for you on an EPS over $2000 can you just maybe characterize what your average content might be where the number of vehicles you might be on when you get to if you hit that $1 4 billion revenue and I and I was wondering if Jason might be able to just give us a quick word on a day.
Semiconductor shortage.
<unk> from obviously production volatility are there other things that are affecting you like premium freight or other things that might we might consider to be temporary.
Yeah, maybe I'll start with the last question first there.
Yes. So we we are incurring some modest premium cost that is not the the significant issue for us today and if you look at our two business segments and seating the impact of the semiconductor disruption is really driven by the loss last time on the system side.
We have that plus we do buy those parts and use them directly and and components that we sell to customers and so.
There's a $24 seven effort led by Carl Esposito on there and the.
E systems team to secure parts to protect customer production. So there is an extraordinary effort on.
Under way and there are some premium costs that hasnt been.
Overly meaningful the bigger impact has certainly been just the variable margin associated with the lost production.
That's not to say that there isn't a better risk associated with that there hasnt been a big impact.
And regards to the average content and it really just it depends on.
On the program and the customer.
But typically we're not being awarded.
And the complete complement of <unk>.
Power electronics wire and connection systems on an individual program, so although the content opportunity as $2000 or more on each vehicle.
The average content is going to be half that and in most cases and in some cases, where we're just providing connector systems. You know it may be 100 to $200. So there's a fairly wide range when it comes to electrification.
Brad and and just to add to that right I think what's important and when we talk about we're one on one.
With having power electronics power distribution and connector systems, and we're not naive to think that a customer is going to.
Source because of risks and other factors share wallet those type of things the complete architecture.
We do believe by having that domain knowledge and the expertise with software.
And the ability to drive efficiency and cost gives us an advantage.
On the individual components and how they quote and so.
No.
Yeah. We're after the whole architecture, we want to win at all I mean, I think that'd be great. That's how we can position ourselves. However, we do put ourselves in a position where we can design the most optimal components understanding.
On the power distribution across those components and so what we do when we quote we do have the ability to understand.
The values that are that reflect the component that we're quoting like a like a battery charging system or a battery disconnect system or.
Our battery management system, I mean that expertise coupled with what we have with wiring and connectors gives us a distinct advantage and.
I think through with the Volkswagen Award and whats.
Beautiful about this this electrification is that it's kind of a.
Clean sheet, there isn't a catalog that exist and so.
No.
And why the significance and so important to us on winning debt that connector business with Volkswagen is because we believe theres a legacy there that we believe that connector system will be used for years and go across multiple platforms successfully and so having that early adopter knowledge. When we were working on this 13.
Years ago, and being able to continue to gain experience I think back when we are just working on a three kilowatt.
Charger and now were in development and on a 22 kilowatt and it's across every one of our different product lines that where we are in the next generation of technology and innovation and I believe this trains moving and if you're not on it you're not going to get back on it because it's happening so quick and so the investment we've talked about and.
Two pressuring the short term margin, we're not going to take business that doesn't meet our targeted returns or exceeds them and so what I'm excited about is that I get to see the programs that we're launching I get to review the financials and my commitment to the to the the company into.
And investors is that we're going to be smart about where we invest we want we want to make a fair return.
But we also have to focus on delivering these things and.
And executing them to deserve the right to participate in the next generation of products and that's been our focus and I'll tell you that the quoting activity.
We discuss daily is accelerating at such a pace and we talked about the business we won.
And just just a month ago was a new EV, that's gonna be launching this year. They were thoroughly impressed with our capabilities and that was something that we targeted the team did a remarkable job of gaining that business and a short period of time.
Great. Thank you.
Okay.
Our next question is from Joseph Spak.
On RBC capital markets.
And I had.
And good morning, Thanks, Ray and Jason for all the day the details.
I guess, just maybe a first question to start with.
And the backlog, which I know is.
Up versus sort of what you reported last year, even though industry production.
It was lower.
It does seem like maybe some of the backlog specifically and seating shifted from.
'twenty one into 'twenty two so I was wondering if you could talk a little bit about what's what's going on there and then the electrification on sorry, the E systems backlog is.
It's pretty flat and again I know the production is lower but you just sort of talked about all this quoting and win activity. So is that is that.
Where it's really can impact that 23 open year and beyond and we should see an acceleration there as you continue to report the backlog and future years.
Yes, let me, let me start with that one Jason and then you can kind of.
Talking about the seating and the system, but yeah I think the pandemic did impact the quoting activity. There was a period of time that debt, particularly on the electrification things were.
Slowed down and I'm, not going to say impacted significantly, but it did impact the timing of awards and obviously when we're announcing backlog there's a significant amount of business that we're in process right now of.
Quoting that were I'll say somewhat carried over from last year, and it's a significant number and so.
When we are looking at our quoting pipeline, we have done a nice job like I said of it and we use our historical numbers and the 25% to 35% range of successful wins, we want to win at all if it's financially.
Is it financially makes sense, but.
Some of that was just due to the delay and the carryover, but I don't know again, what we're seeing is an acceleration and were really building up resources around whatnot would not only were seeing today, but what we believe we're going to see in this next couple of years.
And in terms of the numbers and starting with seating and 'twenty 'twenty, one and I think we were estimating and 825.
And in 2021 and $5 50, now that's primarily the timing of launches.
So a number of programs at the onset of Covid, there were a number of announcements where customers delayed the launch dates and so things that were scheduled to ramp up and the fourth quarter of last year and the beginning of 'twenty, one got pushed into the middle of 'twenty, one and a number of programs and so you see it's kind.
The corresponding benefit from that and 2022.
And so that's that's the main factor going on there.
In terms of E systems, I think we're at the cusp of.
And opportunity to increase the backlog and and you see the relative light too.
<unk> 2021, Theres still a lot that were 2023 I should say, there's still a lot of programs that we're quoting and we were awarded a program.
In December of last.
Last year that is launching this year I think there could be more opportunities like that.
And that we see in 'twenty, two and and.
And 23 drive and the backlog up further and and certainly just this overall explosion and an opportunity on the quote pipeline and in electrification and that's going to drive.
On the backlog up and any systems, I think and as Ray said, there was a slow period of the first half of 'twenty and 'twenty.
Where there wasn't as much business awarded and that that's weighed on the the amount of a source last year, but there's a lot going on now and there is ample opportunity to continue driving and the backlog out.
And it does seem like the design cycle for electric programs is faster.
Second question is.
And a.
And sort of investment support and electrification and initiative I think even said there was a little bit of a headwind and the fourth quarter and maybe you could quantify that but I guess more importantly, how do you view that and.
And in 'twenty one.
And going forward to support and all their efforts and then maybe just also while we're on 'twenty, one and E systems margins.
Is there a.
And on a dollar impact, but is there a margin impact from copper, that's sort of and embedded in the guidance.
Yeah. So in terms of the engineering investment and and I'd really put kind of engineering and launch together and we've got 45, and 50 basis points of incremental costs and these systems and in 'twenty, one as a result of that.
On the commodity side.
It's about a 20 basis point impact.
For the recent increase in copper and.
And that's mostly a transitory, they're 90% of our copper exposures and as pass through to our customers, there's a quarter lag and so there's a modest impact from that and then the balance of the impact is from the 10 per cent that we control.
And so that's the impact from factored in Joe into into our outlook a free systems.
Thank you very much.
Our next question is from James pick up were yellow from Keybanc go ahead.
Hey, good morning, guys.
And as previously.
Previously you separated out the E&C portion of the systems backlog can you provide that breakout within a $900 million and I believe last year.
And C accounted for about two thirds with electrification sitting at 400 million. So any color there would be helpful.
Yeah, and electrification, it's about $450 million about 50% of the $900 million and then we have just under $100 million of connectivity. So about $540 million I think is the number between the two.
And and the 900 million backlog.
Got it Okay, and then if I look at slide 10.
About.
<unk> capital allocation capacity the bolt on M&A strategy component within that are there any product verticals within that bottom portion outside of lear's current portfolio that could make sense, you're bringing in house one day.
No I think that we've consciously made the decision to.
Either deemphasize or not participate and certain product categories as.
As we said in the prepared remarks, we've spent the last two years really studying this market and what we're looking for as you know and alignment of our core capabilities with where the customer needs needs us and and so the areas that we're investing in and provide that.
And that value proposition for us and and I think that's what gives us confidence and both the margin profile of that business longer term.
And our ability to generate returns on a sustained basis so components.
More closely tied to.
On the battery.
And and Burgers, we don't think we can be competitive and that we're not going to we're.
We're not going to make investments, where we think there's ample opportunities on the top part of that chart.
Understood. Thanks.
Yep. Thanks.
Our next question is from David Kelley from Jefferies Go ahead.
Hey, good morning came and and thanks for taking my questions.
Good morning.
And just looking at the operating earnings guide.
<unk>.
Lower margin relative to the second half run rates.
Reference premium freight cost, but there are a number of moving parts here on the COVID-19 costs, continuing but also austerity on wine and then of course ramping sales.
Just wondering if you could provide a bit more color on from the puts and takes and maybe how youre thinking about cadence and some of these supply chain costs, hopefully normalize and the second half of the year.
David Your question about the company overall.
Yes, Thanks, Jason Yeah, Yeah.
So if you look at the second half of 'twenty and 'twenty, we ran at about six 5% and total company.
The biggest headwind comparing that to what we see for 2021 is really volume so even though.
Volumes are up year over year compared to the second half of last year, they're actually down about 5% and so while revenues are increasing and that's really driven by the backlog backlog rolling on and segment margins, but you have this lower volume rolling off at and.
And variable margins again relative to the second half.
Of last year run rate.
<unk> and and other premium costs related to the semiconductor issue.
We have embedded in both segments guidance, we have about a 40 basis point headwind any systems, and 25 basis points and seating, but relative to the second half of last year, there, they're actually both a bit favorable and the company is about 15 basis points favorable from the second half run rate because of.
The non recurrence of the high levels of Covid premium and costs, we incurred last year and commodities.
Or about a 25 basis point headwind for us relative to the second half of last year more on seating than any systems because of steel engineering is about a 20 basis point.
<unk> really driven primarily by E systems, and then offsetting some of that is restructuring and the net performance and the business, we have $55 million of incremental restructuring savings factored into our outlook and you do the math on that Dave and Youre down about 50 basis points at the midpoint of our guidance range rare.
And the second half run rate.
Okay perfect. That's super helpful. Thank you and then.
Not surprisingly I also have and EV question. So as we reach some EV revenue scale, let's say two 1 billion based on your 2025 target.
Hey, it's higher content per vehicle B I would assume product mix underlying is also favorable I was curious how are you thinking about the margin opportunity.
And for high voltage electrification here relative to your core E systems portfolio.
And overall, it's better and and part of our goal and improving the systems margin profile over the coming years is shifting that mix from 75% wire and connection systems and <unk> 25 per cent of electronics to 65 35 that happens gradually if you look out to 2002.
Five and I think we're we're approaching that debt targets allocation and and that's a key fab.
<unk> factored that will underpin our ability to get back to 10% and beyond and we do see a higher margin profile and.
And the EV business and in General and then.
And we do and the segment overall about 60% of our electrification business today is electronics 40, percents wire and connection systems, and we see that sort of continuing into the future and thats. The main factor driving the the split on the business shifting more to electronics and a little bit less on on.
Wider overall and I think just to add the weighted.
And why we're so confident in that business and.
It really is to the point, Jason mentioned, we strategically looked at that business and said it was primarily wearing and we had some expertise and electronics, but it was a small portion of that business. So we relied heavily on the wiring and.
And what we did was you said lift from a good transition to like Jason said 75, or 80% of our business is wearing 265% still growing the legacy business and we're still confident we're going to grow that business, but accelerating the electronics business, where there's a larger profile and margin expansion opportunity and well.
And what's happening is we're getting at that if you look at the timeline and our internal numbers quicker than we anticipated and and I think on the wiring side, we've talked about this the importance of the connectors and the engineered components and we're also accelerating debt part of our business and so we still have a lot of work to do.
But everything that we've put in place strategically too.
And look at our business and a 65 35 percentage of business between electronics and wiring is working and so this acceleration of electrification is only helping that and so we do believe that that will come on and it is coming on at higher margins and the acceleration of vertical integration and wiring is also.
And celebrating so that's why when we were very confident in and what we're doing and and I think so far the team has done and done an excellent job of executing to the plan, but like I said, we've got more work to do.
Alright, great. Thanks for the color.
Yep. Thanks on.
Next question is from Bank Levy from Credit Suisse go ahead.
Hey.
Good morning.
Thank you and good morning and question.
Hum and wanted to start with.
Seating, which.
People seem to forget is the vast majority of your business.
Hi.
And so far no questions on seating here.
You talked a lot about conquest business and the past year and I and I know you have I think the 27 or 28% share target and maybe you could just give us a mark to market on where you stand on share.
Share gains and in seating how much and this is reflected in and the backlog what's the opportunity for further share gains and as we think of that backlog coming on and I assume that's going to be hitting at and margin comparable to what you have today.
Yeah. So in terms of our market share. We ended 2020 at 23%. So we're still at the same rate. We were previously, but we did grow share when you look at Europe, and North America combined.
We grew share there really it's a matter of kind of the mix of business, we have and seating.
Relative to.
The global mix, and China held up better than North America, and Europe and that weighed on on the market share a bit.
We have a 28% target we are very confident and that the conquest wins last year and what's in the backlog this year will contribute to market share growth and and and the backlog is rolling on.
Last year and this year at the segment segment margins and some cases slightly better than that.
The main factor of course that will determined that it was primarily the mix of vertical integration versus jet. So jet program may roll on.
You know closer to the lower end of our seven five to eight 5% operating margin target range, and and seating and a more vertically integrated programs gotta roll on at the higher end of that or maybe even a little bit beyond that.
And I think and going forward I mean, we were last.
And last year was a good year, Frank and the team did a great job of conquest wins net wins.
In respect to conquest and I think the <unk>.
Year prior to that we won around $300 million and and I think as we look into this year theres opportunities for us and and I think it would be on the lower range of even if we're looking between 700 and $300 million somewhere between that number of what we consider to be a.
Possibilities this year.
Great and it sounds like most of the okta as opportunities are based on vertical integration and that's sort of the play on picking up more share here and.
I think it goes a little bit more than that and debt, we talk about the vertical integration and the ability to get in and work early with the customer on design and <unk>.
<unk> Sul force solutions and or problems and.
We have good insight into where we think we have those opportunities and then when I talk about those numbers. Those are line of sight targets that we're working with our customer on that they've given us some indication that we have to be obviously, you need all their criterias of competitiveness, but theyre, giving us insight into where they think we should be positioned.
<unk> based on their share of wallet and other factors and so we do have a high confidence, but again, we got to do our job and we got to work it and make sure that we're executing and it does play into other things that you're mentioning with having those.
And ability to have that vertical integration does give us a competitive advantage.
Great and then just.
Second question and in parallel to electrification, we've obviously seen and number of automakers talk about overhauled electrical architectures could you just maybe discuss what this means for you on on net content and as we're talking about the arbitration and content opportunity and maybe give us a sense and how much that incremental content factory game.
Content reduction on wire and Capri, and those architectures overhauled and then what you've seen from automakers and they want to bring some of the electrical architecture content and household control more of the value add.
Yes.
Well I'd say just generally speaking.
And we're seeing.
Stable electrical content.
And our and our core business, there may be a slight reduction and low voltage wire and over the over the next five years more fundamental changes to that space I would likely happen further out.
What we've modeled is perhaps a 10% reduction over the next five to 10 years and low voltage content, which is more than offset by the high voltage opportunities that we have we don't see.
Any risk of in sourcing and if I if I understood. The last part of your question right on on that portion of the business and on the power electronics side, we focused on things that we think the customers want to buy from the outside and partner with suppliers on yeah, and align with our capabilities. So we see a very low risk.
Of enforcement of those components and I think when we talked earlier about how we.
Strategically select and look at customers, it's important to point out that every customer has a different strategy.
And this is in a universal way of holiday or.
Going after electrification and so we spend a fair amount of time, where we can look at engineered components by Lear, and even though listened and we do value add and assembly or are we do build to print we will look at those and quoted and if it makes sense financially than we're willing to.
To take them, but.
We are much more focused on and.
Aligning ourselves with customers and their overall architecture and so all of them are different they're all completely different [laughter].
There is no universal way of how Theyre looking at it and they're all looking at it differently longer term and so we spend a fair amount of time looking at where we can design and engineer components that fit the architecture.
Over a longer period of time.
Great. Thank you.
Yep. Thank you.
Next question is from Ryan Brinkman from JP Morgan.
Hi.
Thanks for taking my question.
Maybe just starting with your one outlook being based on 9% global industry growth versus IHS expectation for I think 14% how much of that difference is a result of your specific geographic or customer weightings versus more conservative underlying industry assumptions, perhaps stemming from the semiconductor.
A shortage or other macro factors.
Yeah, its a 100% the latter there so it's.
So we have essentially a 5%.
Cushion between IHS projection for the global market and and what we've used to underpin our our guidance and it's a combination of three things one the near term issues with.
The semiconductor shortage and we have seen reductions and the first quarter releases and and outlooks from our customers. If you look at IHS as an example, I think the recent estimate was.
3% to 4% impact on the first quarter production.
We're seeing more announcements.
And that so I would say, it's likely going to exceed that.
So that's one factor the second factor is just the ongoing risk of the pandemic itself, we saw some modest disruption and production in China and the first part of the year.
And they went into a shutdown and certain regions and that impacted supply and.
And then the third factor is just demand and how how things hold up overall, we've been a bit cautious given this uncertain period, we've just gone through over the last two.
12 months, we thought that was the prudent thing to do at this stage and the year.
Very helpful. Thank you and then just and thinking about your high voltage portfolio as outlined on slide 10, do you have today, all the pieces that you desire or which represent a go to market synergies with the rest of your electrification portfolio or are there other aspects of high voltage electrical.
Architecture, you may wish to expand into and if so what would be the best way to do that do you think organically or inorganically.
Well, we have all the capabilities and what's highlighted here in lear's portfolio and we're obviously.
We have developed and have been and develop and understand the previous generation, but future generations and development contracts with customers today, and launching and and when these things.
To answer your question and obviously software is an important ingredient and we continued to build our capabilities and competencies around the software within those areas. That's an area of continued interest force. So we've organically done it but if there is an opportunity inorganically to accelerate debt that'd be one opportunity.
I think within connectors connectors are very important we have incredible capabilities within our company, we purchased with growth and heartland with our grounding capabilities and with our power to scale capabilities and we think that's a continued area of focus.
I think within the areas that we're looking at here with power distribution battery disconnect battery management system, we're very well equipped.
And to continue to be successful and those areas but.
And I look at the like I said software and an important area and the connectors and even though we have a leading position with the capabilities I mentioned, we'd love to see that that part of the.
Portfolio accelerate.
Great. Thank you.
Oh, okay.
Okay.
Our next question is from Evan Silverberg from Morgan Stanley Go ahead.
Hey, guys. Good morning, and good morning, I don't rest of day.
Quick question for you.
Wondering what leaders capability and flexible printed circuit Board zone, and when do you see such technology entering production. Thanks.
Yeah, that's a good question and and.
And we have experienced we actually we've we've had a couple of development programs. So with some Oems that we're working with on.
Uh huh.
The technology and we also have up and up.
Partnership with a company that actually is in production and so from a couple of different areas, where we're working on the capabilities and we're actually going into production and a limited a limited way this year and so.
And I look at it as well.
There's a lot of different solutions flat wire is one solution and I think it works nicely and certain applications, obviously, the traditional wiring copper clad Ethernet, there's all kinds of different.
Opportunities too and the one thing we're seeing is increased demand for <unk>.
Function and features and power solutions and so I think it's something that makes sense.
We're not seeing a significant pull.
From our customers there are certain applications.
And the headliner engine components door panels, those type of things, where we're working on different.
<unk> designs.
And then there's obviously.
Another new entrant that is really working on it but I do see that it makes sense and certain applications, but I also think.
Some of the redundancy and safety mechanisms and features within the vehicle are still going to require some of the traditional wire, albeit probably more limited.
And then other solutions like I mentioned, so we're working across a vast variety of different technologies and innovation and I think at the end of the day to answer your question, it's going to be a combination.
Okay, great. Thank you very much.
Thanks.
Yes.
Okay.
Okay.
And if I could real quick just a closing comment.
We have one more.
Hey, just real quick I want to thank everyone for participating today I. Appreciate your time, obviously, a very exciting time in our industry and I will.
Say to the team that's on the phone.
I'm very optimistic we positioned ourselves to be and a great position and we have a lot of work to do.
But we just have to execute so I want to thank everyone for participating the call and look forward to 2021.
The conference has now concluded thank you for today and then two.
Todays presentation you may now.