Let's get going. We're very excited to have Lear at our Industrial Conference for the first time in quite a while this year. We're joined by John Absmeier, Chief Technology Officer, and Jason Cardew, VP of Finance for Seating. For those of you who don't know, Lear is one of the largest global suppliers of automotive seating and is also a growing player in vehicle electrical architecture through its E-Systems segment. One of the largest suppliers in our coverage by revenue, $21 billion, as well as with an attractive secular growth. You issued 2019 guidance, which combined a conservative end market outlook with very strong underlying growth over market. With that, we'll turn it over for a five-minute intro, just because Lear is new to this conference, then I'm going to talk to Jason and John about some of the trends.
All right. Thanks, Brian. It's an honor to be here today. I want to start by sharing our safe harbor statement. Before we get started with the fireside chat, I wanted to provide a brief overview of Lear Corporation. We're a large global automotive technology supplier of two critical automotive systems, seating and electrical and electronic systems. We have complete design, engineering, and manufacturing capability in all key auto markets globally with 169,000 employees operating out of 39 countries. We have very low leverage and a proven ability to generate significant free cash flow. Our strong financial performance, coupled with our share repurchase program, has allowed us to deliver superior shareholder returns. In fact, over the last five years, our total shareholder return has significantly outpaced both the S&P 500 and our automotive supplier peer group.
While the industry is clearly facing a challenging macro backdrop, we've built this company to thrive in this environment and really separate ourselves from the competition. Our efforts are paying off. We have the largest consolidated sales backlog in our history, the most talented team in the industry, and an incredible reputation for operational excellence. While the industry is going through a transformational change, we've been investing in technologies and capabilities that will allow us to continue growing across all of the industry megatrends. John Absmeier, our CTO, will share some details around that in just a moment. Before that, I'm going to show a brief video.
Today, the gap between concept and reality is razor-thin. Expectations are higher. Results come faster. Lear is a global automotive technology company with a passion for turning concepts into realities that improve the human experience. We leverage our comprehensive advanced technology portfolio and advanced manufacturing processes to create answers now for future questions. Our intelligent seating capabilities enhance the experience and proactively adapt features and functions for personalized comfort, wellness, and safety. Our industry-leading innovations allow flexibility and adaptability to tailor the vehicle experience to individual lifestyles, creating many opportunities for integration in shared mobility. We support cleaner and more efficient mobility with electrification technology. Our advanced connectivity and positioning between vehicles, infrastructure, and pedestrians help make cities smarter. With autonomous driving on the horizon, our high-accuracy GPS enables precise positioning.
At Lear, we're reshaping the way people think about transportation, applying a new frame of reference and pushing the boundaries for what's possible. It's our passion, a passion that drives possibilities, the possibilities are endless.
Great.
We have just one more slide for you, Brian.
Okay, good.
Before we jump into the Q&A, I just wanted to share briefly a little bit about how Lear is positioned, which will be a good setup for the Q&A. If you look across the autonomous, connected, electric, and shared landscape, these trends are affecting our industry greatly right now, and Lear is very well-positioned. With everything from localization services and products that help autonomous and ADAS systems and vehicles figure out where the vehicle is, to connectivity with gateway modules, which are the central data hub in the vehicle for all information, and connectivity modules, as well as V2X with safety applications, V2X connectivity using both DSRC and cellular, into electrification where we work on power electronics, so inverters, converters, battery chargers, as well as battery management systems. Then across all of those with our electrical architecture in wiring and connection systems.
Finally with the shared mega trend, we're addressing that with configurability and personalization and bringing in health and wellness and lifestyle technologies into our products. Really across the board, we're addressing each of these mega trends, and we have all of the ingredients to invest, innovate, differentiate, grow, and create value. With that, a couple of examples of where we are participating with production programs. Oh, I lost the clicker here. We have basically a slide with four product launches that we've done or are coming in the near term.
On the top left is a very important one for Lear. This is the Jaguar I-PACE, which is the newest, most advanced electric vehicle on the market, competing with some of the early entrants with new, fresh technology from Jaguar. It has, as you can see on the left-hand side of that quadrant, a lot of content from Lear. Onboard charger, connectivity, gateways, audio systems
Even a full seat package. On the bottom left is our ConnexUs system, which is the most advanced connectivity module in the market today, a 4.5G LTE connectivity module providing telematics as well as consumer content delivery, over-the-air updates, and so on for the Audi vehicles, as well as 10 other platforms across the Volkswagen Group. The gateway module, which is again that network hub in the car. These two left quadrants are in production today. On the right-hand side, the top right is our CONFIGUR+ technology, which is an untethered seat. In other words, you can configure and move the seat around the cabin, which is important for shared mobility as well as new configurations that are being required with new business models at the OEMs and other service businesses.
Finally, bottom right, we announced in January our first partner on our localization platform, and that's Hyundai. That localization platform is an automotive-grade, low-cost hardware that sits in the car with a service using data that's publicly available, like weather and atmospheric information, to bring localization or vehicle positioning down to sub-10 centimeter accuracy, which will be required across all the ADAS and autonomous driving landscapes. I think in the Q&A, we'll get into details of all of these, but just for the setup. With that, I'll hand it back.
Okay, good. For the setup, can we pull up ARS question number 1? "Do you currently own this stock?" 21. That's about what the conference has been running. Number 2. General bias. We remember we had 21% owning. Positive, neutral, many neutral, more positive than owners. It'd be interesting if he can make some sales. Why don't we go in, Jason, let's talk about the current production environment. Your guidance assumes, was frankly one of the most conservative of the auto parts suppliers. You assume top platforms in North America down 5%, China down 10%, EU down 1%, and particularly for North America, which could be more platform related, more conservative than other companies, but particularly for China. Maybe start with the hot topic first, which is China.
Okay.
Down 10%. What are you seeing now? What did you factor into your guidance?
As you mentioned, we did have China factored in with a 10% reduction for the year on our key platforms. The year started out slow. It's in line with what we expected. We've seen continued weakness in China. If you look at the January sales are down high teens in January, we think our guidance was appropriate at a 10% reduction on our top platforms. Maybe take this opportunity to sort of round out what we're seeing for the first quarter overall too. We haven't seen or heard anything that will really impact our full-year guidance, the first quarter's going to start off weak. We talked about on our earnings call that the first half sales would be down a little more than 5% and the second half would be up more than 10%.
If you break that down further in the first quarter, we see the first quarter sales down high single digits for this weaker production environment that you referenced in China, but also some weakness in Europe as well. We have some company specific weakness with our backlog. Our backlog is weighted more to the second half of the year with the Chevrolet Blazer, the Ford Ranger, and Mercedes-Benz GLE and GLS ramping up to full volume throughout the year. You're going to see only about 10% of our backlog hit in the first quarter. Foreign exchange, the first quarter is the toughest comp with the euro and the RMB both about 8% weaker in the first quarter. We have the changeovers of some key platforms that led to some downtime in the first quarter.
All those factors taken together, we see Q1 revenue down high single digits and Q2 down less than that.
In terms of China, given IHS is still out there with a 1%-2% decline, what led you to want to be more conservative in China?
I think just having experienced what we went through in the third quarter, fourth quarter of last year, I think IHS has sort of been chasing a number and they've been bringing their number down consistently. We've seen it come closer to our assumptions. I think just the general weakness in demand that we saw throughout the second half of the year and into the first quarter. We heard our customers talk about working off some excess inventory in the first quarter. They've spoken publicly about that. All those things taken together, we thought that was the prudent assumption for our guidance.
In terms of second half, do you see any potential for the retail sales rate to stabilize and then the comp becomes much easier?
Yeah, I think the comp is definitely easier and then we see the full benefit of our backlog since a lot of it's back end loaded as those programs ramp up. We definitely see an improvement in our performance and our outlook in the second half of the year.
You mentioned softness in Europe in the quarter. Can you elaborate?
Well, January sales, I think for the industry in Europe, were down roughly 5%. We are seeing pockets of weakness in the production outlooks. The good news is what we're seeing is our customers are starting to kind of rerate their lines or take shifts out, so there's more predictability on what the production will be, and we can start to restructure our business and align to that new volume run rate as opposed to down weeks or down days, which are very disruptive to the business and harder to respond to. I think that's something that will help a little bit in Europe specifically.
Better decrementals. One of the risks people are discussing at the conference is around potential tariffs on EU autos coming into the U.S. You have a very strong position, good news in German luxury. Bad news is, have you quantified your potential exposure to platforms that part of the volume is coming into the U.S.?
Yeah. We have very little imported material from Europe into the U.S. It's in the neighborhood of $40 or $50 million, and most of that is directed by the OEM. Generally speaking, where we're sourcing the material, we're sourcing it locally for the U.S. market. We see almost no direct impact from Section 232 tariffs on EU auto parts. If there's a tariff on vehicles, obviously that will impact the competitiveness of some of the products produced in Europe that are shipped into the U.S. I think roughly 10% of U.S. sales are imported vehicles from Europe. Certainly that portion of our business will be impacted somewhat.
Okay. Well, let's move over. Why don't I pause there and see if there's questions from the audience around kind of the macro and the high-level guidance before drilling down into the technologies? Okay. My first question for John is, you came from Aptiv, and this role of Chief Technology Officer is new to Lear. At least I believe. It's been longstanding between Glen De Vos and Jeff Owens at Aptiv.
Yeah.
Can you give a sense of what led Lear to create the position and kind of your discussions with Ray in terms of where he wants to take the company?
Yeah. I think it exhibits Ray's commitment to holding innovation and technology sacred. Really, as part of my lead-in, I talked about the autonomous, connected, electric, and shared trends that are happening. I think everybody talks about those, but they're now in our face in terms of those types of business opportunities are on the table. It's important, I think, now more than ever, especially if we head into a cycle, that we hold that sacred. We're very well-positioned to do that. Obviously both financially and operationally, as well as from our capabilities and the investments that we've made in technology over the past several years. This is really an opportunity to really systematically put a process in place or put a systematic process in place around innovation.
That's what I'm doing right now and setting up an organization that does both internal invention and innovation, working with partners and collaborations with startup and tech companies, making early-stage investments in startups as well as in venture capital funds, and of course, M&A. Those are kind of the four levers and the four areas that we're looking across. We announced in January our initiative called Lear Innovation Ventures or LIV Possibilities. That's really encompassing all of those four levers that we can pull to move the needle for the future. A lot of the focus in the past has been on the core technologies and businesses that Lear is a leader in, of course, in seating, but also in E-Systems.
Now what we're looking at is new business opportunities that are high growth, high margin, and low capital intensity, things like software and services and data, things with recurring revenue streams that aren't necessarily tied to the SAR or tied to vehicle volumes. These are areas that are complementary to current Lear capabilities and product offerings, but that extend our business opportunities.
When you got here, what did you find about the state of Lear on the E-Systems side in terms of its positioning vis-à-vis vehicle electrification and then sort of vehicle connectivity and big data and SAR?
Yeah. Spectacular. Actually, first of all, the team is outstanding, and I've said it before, but I'll reiterate, the team at Lear is top-notch. That was one of the first things I recognized. Secondly, I recognized that Lear has a lot of the foundational work done, especially in connectivity and electrification, that positions us very well to take advantage of some of these software and data opportunities. If I just dive into connectivity briefly, because you talked about data and software and our position there.
With connectivity modules being the central point of contact between off-board or between the cloud and the car, with gateway modules taking all the data from new sensors and new systems in the vehicle and really being the single hub or the network switch in the car, if you will, to do that, we feel like we have a great opportunity to add value for the OEMs. With creating differentiating technology and adding value for the OEMs, it gives us a business opportunity that we can also take advantage of. We can do things like pre-processing of the data in the gateway modules. We can look at monetization paths for the data. We can do over-the-air programming and cybersecurity through those connectivity and gateway modules. It's really about expanding and extending the capabilities of our existing offerings into these new areas.
What did you find that Lear needs to build more of or build deeper skills in and/or acquire?
Well, in our business in the past, it's been more focused on, I won't say black box, but the traditional Tier 1 model for electronics has been the software and the hardware packaged together as a product and sold as a one-time sale to the OEM. Now that the architectures of the cars are evolving and changing, we're seeing this centralization of functionality happen where you're getting bigger computers that are mostly defined by software. There's up integration of various controllers in the car into one domain module that has software-defined features and functions, and that basically is now an opportunity for us. Where in the past, we couldn't separate hardware and software in terms of the value provided to the OEM, now the OEMs have to separate the hardware and the software sourcing.
They become business opportunities for software that are a different business model than our traditional one-time sale hardware. That's the area that we're growing into is now how do we disaggregate hardware and software? I think we're very well positioned, but that's definitely a focus for us going forward.
Is part of your backlog software only, or that's something to work on?
It's not in the backlog, but we are entertaining RFQs today. I think it's sort of in the next cycle, the next business cycle. Those opportunities are coming significantly as the OEMs are re-architecting the next generation of vehicles.
Would that be a content per vehicle story? Would it be an annual license fee? I mean,
Both
a sense of how meaningful this could be.
Yeah, it's both. You can look at different types of software enterprise licenses or per-vehicle licenses. You can also look at recurring streams when you have to do updates or maintenance on vehicles. Also, analytics and service. Looking at what the car is doing and how you could improve the experience of the user because, at the end of the day, this change in model for the OEMs is about creating a better user experience for the consumer so that they can differentiate brand and they can retain customers. GM made a public statement that 1% customer retention means $700 million in revenue for them. It's a significant value just for that piece of doing analytics and sort of service and maintenance. That's not to mention if you look at e-commerce and other ways to monetize data for consumption of information in the car.
In terms of the data, what role do you see Lear there in the kind of mass flood of data coming out of cars?
Yeah, great question. We don't think that we're going to be a data aggregator or a data owner per se. We're going to enable our products and our service offerings to help the OEMs to create new revenue streams with that. We're looking to facilitate monetization of data, but also to bring in software content that we can have a recurring revenue stream from.
In your video, you had a clip of autonomous driving. I mean, what is Lear's current and planned future role in that trend?
Yeah. I've personally led two significant autonomous driving development efforts, and I can tell you this is a problem that's going to cost tens of billions of dollars to actually deploy in the market. There's very few companies in the world that have that on their balance sheet to be able to fund that over the next decade. I think it's going to take a village. It's going to take a lot of companies. Lear is not focused on this sort of full stack development. We're more focused on certain high-value, high-margin areas that are coming with autonomous driving that are underserved today. Localization is a perfect example. Today in autonomous cars, without exception, they're using a $60,000-$100,000 system for localization or for positioning that has a military-grade IMU or inertial measurement unit.
It has a real-time correction service that requires infrastructure so that you can do triangulation. These systems are highly expensive, and the monthly subscription for these correction services are very high. We're looking at a solution that is automotive-grade, off-the-shelf hardware for GPS or GNSS that's low cost. The embedded system is already automotive-ready and low cost. Then the service that we provide is more of a software and an algorithm that uses data like atmospheric information and weather conditions and general location information to the normal GPS accuracy of three meters, which is 10 feet, and brings it down to 10 centimeters or four inches. Lane-level accuracy, meaning you can keep the vehicle in the lane with this solution. These are the types of technologies that we're working on. Another one is V2X.
Obviously, there's a lot of activity there, we have made an acquisition of a company called Arada several years ago, or a few years ago, that brings full V2X capability with both DSRC or dedicated short-range communications as well as cellular because the differences are across OEMs and in different regions for the two types of protocols, as well as the safety applications that take in sensor information, fuse that together, and can deliver a more safe experience driving the car.
Let's go to some of the M&A. Obviously, the ARS questions, one of which will drive M&A. Number 3, get the audience's opinion after hearing your job for through-cycle EPS growth and appears being the Tier 1 automotive suppliers. It's interesting. Still half the audience who aren't sort of in line with peers. The other peers are benefiting from content growth trends. Maybe Jason, could you talk just very briefly about the growth in seat?
I think our backlog is probably the best evidence of our ability to continue growing the seat business. We have 23% of the market globally right now, and we're continuing to gain share. Backlog comes in 2 forms. It's either OEMs introducing a new vehicle, or you're taking business from a competitor. If you look at our seating backlog right now, $2.4 billion, $2.2 billion of that is in just-in-time seating, and half of that, or $1.1 billion, is conquest business we've taken from competitors. We have significant quote activity in the pipeline that would suggest that we should continue around that same pace of growth over the next several years. We believe we can grow the seating business 4 to 5 points above the market.
It's going to be driven by the content expansion within seating and taking market share primarily, but also some of the underlying trends in shifting away from passenger car to SUV is certainly supportive to our growth as well.
The very public troubles of one of your largest competitor, is that neutral, positive, negative, certainly now have a Lear alum running it?
Yeah, I think that on balance, that's a near-term positive for us. I don't think there's a glaring example where we're going to go and take a big program away from them necessarily. It's more around how you're competing for new business that the OEMs are offering. I think that our current reputation for launch execution and the strong financial performance of the company gives customers a higher degree of comfort that we can execute a program and support them. Certainly that should be an advantage for us in the near term.
Number 4. What should you do with excess cash? Share repurchases, which, of course, have been a Lear trademark since your emergence from restructuring several years ago, debt paydown. Interesting, bolt-on M&A and larger M&A. John, now that there is support for that, what do you have in mind, if anything?
Well, what do we have in mind? Obviously, we're not going to make an announcement or anything, obviously, we're looking at opportunities on a daily basis for M&A, as well as investments. It's high on the radar, and it's something that we're constantly looking for things to strengthen and grow the business. From a capital allocation perspective, I'll hand it to Jason.
Yeah, certainly our priorities remain the same. We're going to invest in our core business first through capital expenditures and then through bolt-on acquisitions as well. If we see an opportunity to round out our capabilities in a region that we don't have today or give us access to a customer and prove the diversification of the customer portfolio, those are particularly appealing to us. That's what you've seen us do over the last several years, and that's worked out quite well for us. Certainly with our recent announcement of increasing our share repurchase authorization back to $1.5 billion over the next three years, we're going to return excess cash to shareholders. Between our share repurchase program and dividends, I think we've returned $5 billion since we initiated the program in 2011 and 2012.
Okay, ARS number 5. Multiple of earnings trade at? 10x-12x. Okay, number 6. Most significant investment issue? Core growth margin. Number 2, I did want to drill down a bit on. E-Systems has been soft in terms of good margins, but not sort of what we're used to for the last couple of quarters. It looks like the head of E-Systems has left, and Ray's stepping in temporarily to right it. What is going on in E-Systems? Good news is lots of growth. A lot of it's going to be in that E-Systems area that you're working on, John. Bad news is short-term margins took a turn for the worse.
Yeah, I think the E-Systems business is still extremely strong. We have a deep team. We have deep experience in operations and engineering, program management, and we're still performing quite well. I think as we talked about on our fourth quarter earnings call, the biggest driver of the margin decline year-over-year was volume and mix. We had some mature high-margin programs, particularly in China and also in Europe, that saw significant volume declines, and that drove 90% of our margin compression. If you look at our 2019 outlook of roughly 12%, sort of more of the same. That's the biggest driver of the margin decline year-over-year is volume and mix, and everything else is kind of a wash.
We have a little bit of a headwind on tariffs and commodities, five basis points, a little bit on R&D as we continue investing in the business, particularly with electrification and connectivity and this backlog of $400 million that we're launching over the next three years. On balance, we see this year around 12%, and we see opportunities to work that number back up in the coming years.