Canada Markets closed

Edited Transcript of LEA earnings conference call or presentation 26-Apr-19 12:30pm GMT

Q1 2019 Lear Corp Earnings Call

SOUTHFIELD May 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Lear Corp earnings conference call or presentation Friday, April 26, 2019 at 12:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Alicia Davis

Lear Corporation - VP of IR

* Jason M. Cardew

Lear Corporation - VP of Finance - Seating

* Jeffrey H. Vanneste

Lear Corporation - Senior VP & CFO

* John P. Absmeier

Lear Corporation - CTO

* Raymond E. Scott

Lear Corporation - President, CEO, Director & Interim President of E-Systems

================================================================================

Conference Call Participants

================================================================================

* Armintas Sinkevicius

Morgan Stanley, Research Division - Associate

* Brian Arthur Johnson

Barclays Bank PLC, Research Division - MD & Senior Equity Analyst

* David J. Tamberrino

Goldman Sachs Group Inc., Research Division - Equity Analyst

* David Lee Kelley

Jefferies LLC, Research Division - Equity Analyst

* Itay Michaeli

Citigroup Inc, Research Division - Director and VP

* James Albert Picariello

KeyBanc Capital Markets Inc., Research Division - Analyst

* John Joseph Murphy

BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst

* Joseph D. Vruwink

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Associate

* Joseph Robert Spak

RBC Capital Markets, LLC, Research Division - Analyst

* Rod Avraham Lache

Wolfe Research, LLC - MD & Senior Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, and welcome to the Lear Corporation First Quarter 2019 Earnings Call. My name is Kyle, and I will be facilitating the audio portion of today's interactive broadcast. (Operator Instructions)

At this time, I would like to turn this over to Alicia Davis, Vice President, Investor Relations. You may begin your conference.

--------------------------------------------------------------------------------

Alicia Davis, Lear Corporation - VP of IR [2]

--------------------------------------------------------------------------------

Thanks, Kyle. Good morning, everyone, and thanks for joining us for Lear's First Quarter 2019 Earnings Call. Presenting today are Ray Scott, CEO; John Absmeier, CTO; and Jeff Vanneste, CFO.

Other members of the Lear senior management team, including Frank Orsini, President of the Seating Division; and Jason Cardew, Vice President of Finance, who oversees the finance function at both Seating and E-Systems, have also joined us on the call.

Following prepared remarks, we will open the call for Q&A. You can find the presentation that accompanies these remarks at ir.lear.com.

But before we begin, I'd like to take this opportunity to remind you that, as we conduct this call, we will be making forward-looking statements to assist you in understanding Lear's expectations for the future. As detailed in our safe harbor statement on Slide 2, our actual results could differ materially from these forward-looking statements due to many factors discussed in our latest 10-K and other periodic reports.

I also want to remind you that, during today's presentation, we will refer to non-GAAP financial metrics. You are directed to the slides in the appendix of our presentation for the reconciliation of non-GAAP items to the most directly comparable GAAP measures.

The agenda for today's call is on Slide 3. First, Ray is going to share some first quarter highlights and give a business update. John will then discuss our recently completed acquisition of Xevo. Next, Jeff will review our first quarter 2019 financial results and 2019 financial outlook. Finally, Ray will provide some concluding remarks.

Following the formal presentation, we would be happy to take your questions. With that, I'd like to invite Ray to begin.

--------------------------------------------------------------------------------

Raymond E. Scott, Lear Corporation - President, CEO, Director & Interim President of E-Systems [3]

--------------------------------------------------------------------------------

Thanks, Alicia, and good morning, everyone. I'm excited to be here today and give you an update on Lear Corporation.

Slide 5 contains a few highlights I want to share with you. Our business performed well in the first quarter despite a tough macroeconomic backdrop, significant downtime in some of our key changeover programs and heavy launch activity.

Because of Lear's strong execution capability, industry-leading cost structure and a relentless focus on operational excellence, we were able to deliver strong results in a very challenging environment. I also want to discuss a moment -- as I will discuss in a moment, we have seen significant increase in our backlog, reporting activity in electrification and connectivity, 2 key growth drivers for our company.

We also have continued to show our commitment to returning excess cash to shareholders by replenishing our share repurchase authorization to $1.5 billion and increasing the quarterly dividend to $0.75 per share. Last month, as a testament of our financial strength, Moody's upgraded Lear's credit rating.

And earlier this month, Lear was recognized by Automotive News with a PACE Award for ConfigurE+, our powered adaptable seat rail system. This technology, which was jointly developed by engineers in Lear Seating and E-Systems divisions, allows the seat to be easily reconfigured within the vehicle and customized for many different uses, making it well-suited for a future of shared mobility. This is another example of how we continue to differentiate our Seating portfolio by leveraging our E-Systems capabilities in electronics. I'm extremely proud of this prestigious award, which is viewed around the world as an industry benchmark for innovation.

Finally, last week, we completed the acquisition of Xevo, an automotive software supplier that connects consumers with their favorite retail brands directly from their vehicles. Xevo will enhance our capabilities in software, services and data analytics as well as our market position in connectivity. And the Xevo team will bring tremendous talent and expertise to further strengthen Lear. John will say more about Xevo in a few minutes.

Slide 6 shows our first quarter 2019 financials. As anticipated, we face a tough macroeconomic backdrop and additional headwinds related to customer downtime. Throughout the current market weakness, we have continued to aggressively manage costs, and our solid financial performance is a testament to Lear's strong execution capabilities and focus on process improvement.

Slide 7 highlights a few of our key program changeovers as well as new program launches that are part of our record $1.4 billion backlog for 2019. For the second consecutive year, we have significant launch activity, including launches for several high-content products in Seating and programs involving some of the most complex technologies we have ever produced in E-Systems.

As we have stated previously, we have been and will continue to be impacted by planned customer downtime in some of our key programs, which will negatively impact first half revenue, however, with the ramp-up of these programs coupled with our heavily weighted second half backlog, we expect sequential sales improvements as the year progresses.

Slide 8 provides details of our quoting activity in electrification and connectivity. The pace of growth in these 2 areas continue to accelerate as penetration rates for electrified and connected vehicles increase. OEMs are accelerating quickly towards electric and hybrid vehicles, and by 2025, IHS estimates that over 40% of the global vehicle production will be hybrid or electric. Today, 85% of all new vehicles sold in the U.S., Europe and China are classified as connected, and by 2025, almost 450 million connected vehicles will be on the road in these regions.

These trends are translating into meaningful growth opportunities for Lear's E-Systems business. We are very selective about the quoting opportunities we pursue and what we report as quoting activity. There are a number of factors we consider before deciding to quote a program, but ultimately, it comes down to whether the program will allow for profitable growth and generate returns in excess of our cost of capital.

In January, we reported that the level of quoting activity in electrification and connectivity was approximately $1 billion. That amount now has -- is approximately $1.2 billion and is expected to continue to grow throughout the year. Our historical win rate on these programs is approximately 25% to 30%, and I expect that win rate to continue.

As you may recall, in the $3.4 billion backlog we announced in January, there was about $400 million of electrification and connectivity business. Over the last 3 months alone, we have been awarded an incremental $150 million of annual revenue on electrification and connectivity programs alone. We expect revenue related to these new technologies to increase by more than $0.5 billion by 2021, driven primarily by growth in electronics.

Now I'm going to turn it over to John to discuss the Xevo acquisition.

--------------------------------------------------------------------------------

John P. Absmeier, Lear Corporation - CTO [4]

--------------------------------------------------------------------------------

Thanks, Ray. Turning to Slide 10. As Ray mentioned, last week we completed the acquisition of Xevo. Xevo is an automotive technology company and a leading developer of software that unifies the connected car user experience.

The company generates 2 distinct recurring revenue streams. The first is from its Journeyware suite of products. Journeyware is an in-vehicle infotainment software solution that connects drivers and their vehicles to mobile applications, content and services. The software allows auto manufacturers to deliver infotainment that is customized with insights captured through artificial intelligence. Xevo software is agnostic to operating system or infotainment platform and can run on Android Auto, Apple CarPlay, QNX or Linux.

Through Journeyware, the company generates recurring revenue by licensing the software. Toyota is Xevo's largest Journeyware customer. Its 12-year history with Toyota has given Xevo the experience and knowhow required to deliver automotive-quality software, something most start-ups cannot do. Journeyware is deployed on most Toyota vehicles in the U.S. and is the delivery platform for the Toyota Entune system.

The company's second revenue stream is from Xevo Market. Xevo Market is an automotive commerce platform that connects consumers with popular food, fuel, parking, hotel and retail brands through in-vehicle touchscreens, voice assistants and OEM-branded mobile applications.

Xevo offers a white-label option that allows the OEM to own the consumer interface and maintain its brand identity. Xevo Market's key differentiator is its ability to use AI and data analytics to produce tailored, highly contextual recommendations based on consumer's predictable behavior patterns. Xevo currently has no direct competitors for its market platform and has a significant first-mover advantage.

Through Xevo Market, the company receives recurring revenue from retail merchants. This revenue takes many forms, including per-transaction fees as well as loyalty bounties and payments for preferred placement. Xevo shares a portion of this revenue with the OEMs, thus offering a compelling value proposition to automakers.

General Motors is the first automaker to deploy Xevo Market technology for its GM marketplace platform. Xevo Market is on almost all GM-connected vehicles that are model year 2017 and newer. Xevo currency is in negotiations with several other OEMs regarding use of the Xevo Market product, and we plan to announce new OEM relationships soon.

Acquiring Xevo is the next step in Lear's evolution as a global player in the high-growth area of in-vehicle data and connectivity. The acquisition of Xevo broadens Lear's connectivity portfolio as it brings together Xevo's leading infotainment and e-commerce platforms with Lear's expertise in electronics.

To position Lear for profitable growth within the connectivity megatrend, we have followed a technology road map from hardware to software to Software-as-a-Service to data. We set out to build on our leadership position in connectivity and gateway modules, so over the last few years, we have enhanced our software capabilities by acquiring Autonet, Arada and EXO Technologies. The recent addition of Xevo brings new functionality and business models to our connectivity product and service portfolio while also offering synergy opportunities with our existing business. There are tremendous synergies with EXO's high accuracy vehicle positioning technology, which can facilitate contextual recommendations and transactions.

In addition, as gateway and connectivity modules become in-vehicle Edge computing domain controllers, Lear can leverage Xevo's AI and data analytics capabilities to increase the functionality of these modules. This will allow us to deliver a better value proposition to our customers.

Another example is related to our Seating business. The seat is becoming a smart device, so there are natural synergies between Xevo's data utilization capabilities and our Intu seating occupant-sensing technologies.

Today, Xevo software is deployed on approximately 25 million vehicles, primarily in the U.S. Using Lear's reach and automotive industry knowledge, we can scale Xevo's innovative technology and business model globally, and we have a particular focus on expansion in Europe and China.

The Xevo management team includes Veteran Technology executives with decades of experience. The company has over 300 employees, the majority of whom are software engineers that bring unique capabilities in software, data and artificial intelligence. Xevo's high-tech talent and innovation are terrific additions to Lear. We view this acquisition as a major win for Lear, for Xevo and for our customers.

Now I'll turn things over to Jeff, who will discuss our first quarter 2019 results and review our 2019 financial outlook.

--------------------------------------------------------------------------------

Jeffrey H. Vanneste, Lear Corporation - Senior VP & CFO [5]

--------------------------------------------------------------------------------

Thanks, Jeff. Slide 12 shows vehicle production for the first quarter. In the quarter, global vehicle production was down 1.6 million units or 7% from 2018. Vehicle production was down in all our major markets with China down 14%, Europe down 5% and North America down 2%. From a currency perspective, all major currencies weakened compared to the first quarter of 2018.

Slide 13 highlights our financial results for the first quarter. For the quarter, sales were $5.2 billion, down $574 million or 10% from last year, driven by production declines in all our major markets and the negative impact to foreign exchange, partially offset by growth from our backlog. Excluding the impact of foreign exchange, sales were down 5%, which reflects 2% growth above market.

Core operating earnings were $378 million, down $113 million primarily due to the decrease in sales somewhat offset by strong overall operating performance. Core operating margins were 7.3% in the quarter.

Free cash flow for the first quarter was negative $71 million compared to positive $74 million in 2018. The reduction in free cash flow was primarily the result of lower earnings and the timing of working capital, including tooling and engineering, somewhat offset by lower capital expenditures.

Slide 14 explains the first quarter year-over-year variance in sales and adjusted operating margins in the Seating segment. Sales in the quarter were $3.9 billion, down 10% from the first quarter of 2018. Excluding the impact of foreign exchange, sales were down 5%. The decrease in sales was driven by lower production on key Lear platforms in our major markets.

In North America, revenue on Lear platforms declined 7%, reflecting in part the impact of significant downtime on some of our key platforms in connection with the transition to new models. Revenue on Lear platforms was down 8% in Europe and 15% in China. These production declines were somewhat offset by growth from the backlog.

Seating margins were 7.6%. The margins were primarily impacted by lower volumes and unfavorable platform mix, somewhat offset by strong operational performance and a margin-accretive backlog.

Slide 15 provides the first quarter year-over-year sales and adjusted operating margin walk for our E-Systems segment. Sales in the first quarter were $1.25 billion, down 11% from the first quarter of 2018. Excluding the impact of foreign exchange, sales were down 6%.

The decrease in sales was driven by significant volume declines on key Lear platforms in all our major markets with revenue declines of 15% in North America, 3% in Europe and 27% in China. These production declines were somewhat offset by growth from the backlog.

E-Systems margins were 11.3%. Consistent with the second half of 2018, the margins were primarily impacted by lower volumes and unfavorable platform mix. Approximately 75% of the year-over-year margin decline was due to these factors. Net performance in the quarter was negatively impacted by the settlement of certain customer and supplier negotiations and cost to support the launch of new business.

Slide 16 shows full year IHS global vehicle production volumes and our currency assumptions. Since we provided our initial 2019 guidance in January, the forecast for production volumes in all major regions has declined significantly. IHS is now forecasting 2019 global industry production to be down 1% year-over-year. This represents a reduction of approximately 1.9 million units or 2% as compared to their January forecast.

Slide 17 provides our financial outlook for 2019. Our current 2019 outlook includes the estimated impact of Xevo and, despite the forecast for lower production volumes, is unchanged from our January guidance, other than with respect to an increase in interest expense associated with the financing of the Xevo acquisition.

Due primarily to the weaker production environment, we now see estimate -- excuse me, we now estimate 2019 sales will be at the midpoint of the guidance range. Core operating earnings, including the impact of the Xevo acquisition, which we estimate will have a dilutive impact of approximately 15 basis points on overall company margins, will now be between the low end and midpoint of our guidance range.

From a segment margin perspective, excluding the impact of the Xevo acquisition, we see margins in both Seating and E-Systems up sequentially from the first half to the second half of the year, driven primarily by increased volume on key platforms, the ramp-up of program changeovers and the benefit of a second half weighted backlog.

For the second quarter, excluding the impact of the Xevo acquisition, we estimate that overall company sales and adjusted margins will be slightly down compared to the first quarter. We estimate that second quarter seating margins will be higher and second quarter E-Systems margins will be lower, sequentially, from the first quarter.

Prior to the impact of adjustments for purchase accounting, Xevo's operating earnings are expected to be breakeven for 2019. We expect purchase accounting adjustments to reduce E-Systems' margins by 90 basis points per quarter.

Slide 18 highlights our consistent disciplined approach to capital allocation. Our first priority is always to invest in the business, supporting our customers, expanding our product and process capabilities and improving our cost competitiveness. Second, similar to our recent acquisition of Xevo, we focus on targeted, bolt-on, strategic acquisitions that add product capabilities and sales diversification.

We're committed to maintaining investment-grade credit metrics. Moody's recent upgrade of our senior unsecured debt rating, despite the current volatility in the macroeconomic environment, is the result of our strong financial performance, operational flexibility and strong free cash flow generation.

In the quarter, we increased our dividend for the eighth consecutive year and replenished our share repurchase authorization to $1.5 billion over 3 years. Since 2011, we have returned $5.1 billion to shareholders through our share repurchase and dividend programs.

Now I'll turn it back to Ray for some closing thoughts.

--------------------------------------------------------------------------------

Raymond E. Scott, Lear Corporation - President, CEO, Director & Interim President of E-Systems [6]

--------------------------------------------------------------------------------

Thanks, Jeff. I'm very optimistic about Lear's future, and Slide 20 gives you a sense for why. We have never been in a better competitive position or had more financial flexibility. We have the most talented team in the industry and a long history of operational excellence. We also continue to make smart investments in innovation and technology, such as our most recent acquisition of Xevo.

In Seating, we are a leader in a large growing market and enjoy a strong competitive position and solid returns. We continue to develop new product and process capabilities and deliver first-to-market technologies, such as the PACE Award-winning ConfigurE+.

In E-Systems, we continue to invest in innovation that will create long-term value. We are an industry leader, well positioned in the fastest-growing auto tech markets and well aligned with industry megatrends. We continue to pursue software, services and data opportunities across these trends and, with Xevo, generate high-value, recurring revenue streams.

I'd like to welcome Dan Gittleman, the CEO of Xevo, and the rest of the Xevo team to the Lear family. We look forward to continue to build on the great business you have put in place.

In closing, I'm very proud of what the Lear team has accomplished, and I look forward to our future. And now we'd be happy to take your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question comes from the line of Brian Johnson from Barclays.

--------------------------------------------------------------------------------

Brian Arthur Johnson, Barclays Bank PLC, Research Division - MD & Senior Equity Analyst [2]

--------------------------------------------------------------------------------

Ray, just be -- we'd be very interested in a more detailed discussion of the margins in E-Systems, both this quarter, next quarter. And just maybe even stepping back for something that used to be running I think about a couple of 100 basis points higher in margin. The question is kind of what's driving this? Is it low-margin business coming on? Is it operational issues? Is it business that is low margin but good ROIC, or business -- perhaps you -- since there has been a change of management and a new leader, namely you, maybe was quoted too low.

--------------------------------------------------------------------------------

Raymond E. Scott, Lear Corporation - President, CEO, Director & Interim President of E-Systems [3]

--------------------------------------------------------------------------------

Yes, good question. I've had some time and I've spent some time, obviously, in E-Systems, and I just want to be very clear. There's no operational issues. I mean the good news is we have an incredible team over there. I mean I've surrounded myself with a team and got a good insight to what's really driving the business today. But you look at the talent we have in the business, and it's exceptional. And in addition to that, now with Xevo coming on board and Dan and his team, and we've spent some time with Dan, within the ranks within Xevo, they have incredible talent. So we're excited about the opportunity to continue to strengthen the team. What's really going on in E-Systems is this balancing or the deep reduction in volume on some of our higher-margin programs. And in addition to that, what we're doing is we're diversifying our customer base, and those customers that are coming onboard, albeit are coming in at less margin to what was traditionally the margins within that segment, it's still really good business. It's still -- it's generating great returns well in excess of our cost of capital, but nonetheless, it's not accretive. And so when I look at that business right now, we are diversifying our customer portfolio. We were too reliant on maybe 1 our 2 key customers. Now we're introducing Audi and Geely and Volvo and a number of other key customers, and with that, there's a -- I'd like to think of it, there's a maturity that we're going through and investing with those customers. There's launching within those particular programs with those customers. But we're not going to lose sight of the long-term value proposition not just for Lear but our customers and our investors. But creating a longer-term play as we continue to diversify that business. So no major issues. Just our issue right now is really balancing some of these customer launchers and driving that margin up with those customers. I don't know, Jason, if you want to elaborate a little bit more by the sequential order of the...

--------------------------------------------------------------------------------

Jason M. Cardew, Lear Corporation - VP of Finance - Seating [4]

--------------------------------------------------------------------------------

Yes, in terms of what we expect to see happen throughout the year, Brian, as we -- as Jeff alluded to, we do expect margins in the second quarter to decline. That's really driven by 3 factors. We have lower volumes expected in that business in the second quarter. We have a changeover, the Ford Escape in North America, and also some lower volumes with JLR in Europe, where we have significant content both in wire and in electronics. In addition to that, our engineering costs will be a bit higher in the second quarter, which really supports the strong growth we're seeing in electrification and connectivity. And then the third driver is a slightly higher launch cost in the second quarter. As you look out to the second half of the year, we see margins rebounding driven by some of the reversal in some of the same factors. So volumes would be higher in the second half of the year. We see launch costs moderating in the second half of the year. And then we also see the benefit of our normal cost-reduction activities on purchase parts and in our manufacturing facilities, which will then more fully offset the impact of customer contractual price reductions that were granted early in the year.

--------------------------------------------------------------------------------

Brian Arthur Johnson, Barclays Bank PLC, Research Division - MD & Senior Equity Analyst [5]

--------------------------------------------------------------------------------

So just a follow-up. As I look at the contribution in backlog, which you helpfully, on Slide 15, defined as 12%, which is below the prior segment all-in margin, that compares to the 14% roll-on of backlog in Seating, which is above segment margins. And historically, we thought about Seating as coming in at lower margin and then value engineering and change ordering margin up. How should we think about that 12% margin on the backlog coming in? Is it low margin now because of the ramp? Or are you bringing in programs that are just not going to be 14% contributors over their lifetime?

--------------------------------------------------------------------------------

Jeffrey H. Vanneste, Lear Corporation - Senior VP & CFO [6]

--------------------------------------------------------------------------------

No, typically -- and we've said this in the past that typically when a program comes onboard, it comes on at a level that's lower than the overall segment average at that time. And then over time, as you're able to get efficiencies and program engineering changes into that product, that's when margin tends to expand. So a 12% margin business in the E-Systems backlog, that's fantastic business, and that will grow in margin as the launch gets behind us and we continue to take out costs with respect to those programs. The difference between E-Systems at roughly 12% and Seating that came in at 14%, I think with Seating, again, and it's a testament of the type of business we're winning. But specifically within Seating, you may recall that we talked last year that we did not pursue a piece of BMW business. We let our customer have that because we weren't going to chase a low-margin program. So that program that rolled off for us was low-margin program -- was a low-margin program. So backlog is a combination of the rolloff and roll-on, and we rolled off a very low-margin program in Seating.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

Your next question comes from the line of James Picariello from KeyBanc Capital Markets.

--------------------------------------------------------------------------------

James Albert Picariello, KeyBanc Capital Markets Inc., Research Division - Analyst [8]

--------------------------------------------------------------------------------

Can we just -- wanted to make sure that I fully understand the impact of Xevo on E-Systems margins. I think it was mentioned that, when you include PPA, is it a 90 basis point headwind per quarter? Did I hear that right?

--------------------------------------------------------------------------------

Jeffrey H. Vanneste, Lear Corporation - Senior VP & CFO [9]

--------------------------------------------------------------------------------

Yes. So here is the tale of the tape on Xevo. 18 sales were, I think we had in the presentation, $75 million. We closed on that acquisition in mid-April. We would estimate that 2019 sales would be in and around $100 million. The business that is in place today in Xevo is from an OI and really from an EBITDA perspective breakeven business. But when you acquire something like that, the accounting requires that you capitalize certain intangible assets and ultimately have to depreciate those assets over time. Now we've not completed our assessment of purchase accounting, but the early estimates would suggest that, given the amortization that we're going to have to have on those capitalized intangible assets, will lead to Xevo having the impact on full year overall company margins of roughly 15 basis points, full year E-Systems margins dilutive by roughly 70 basis points and quarterly E-Systems margins dilutive to margins by roughly 90 basis points.

--------------------------------------------------------------------------------

James Albert Picariello, KeyBanc Capital Markets Inc., Research Division - Analyst [10]

--------------------------------------------------------------------------------

Got it. So if we kind of revisit -- okay, do you have anything?

--------------------------------------------------------------------------------

Jeffrey H. Vanneste, Lear Corporation - Senior VP & CFO [11]

--------------------------------------------------------------------------------

No, I just wanted to say that it's important to note that, again, that amortization is noncash-based, so it doesn't affect the EBITDA, but it does affect the OI.

--------------------------------------------------------------------------------

James Albert Picariello, KeyBanc Capital Markets Inc., Research Division - Analyst [12]

--------------------------------------------------------------------------------

Understood. So if I just think about the margin framework by segment, it sounds like -- it seems like Seating, that 8% target for the full year, is still well in hand. I know for the full year, you're pointing the margin guide at the midpoint to the lower end. So just curious, what does -- including all the factors for E-Systems, what is the -- kind of the new updated margin target for the full year for E-Systems?

--------------------------------------------------------------------------------

Jeffrey H. Vanneste, Lear Corporation - Senior VP & CFO [13]

--------------------------------------------------------------------------------

So I think -- let me give you a little broader explanation as to our overall guidance now versus what we anticipated in when we initially gave guidance in January. And I think that the main headline is, it's effectively a volume story coupled with the fact that we don't sell to the industry. We sell to specific car lines. So what's happened, obviously, with IHS volumes, as I said in the presentation, was that their April estimate is now roughly 1.9 million units lower than what their estimate was in January, and effectively what that says is they're now forecasting full year volumes globally to be down 1%. Specific to Lear platforms, the impact on Lear platforms versus what we saw in January is that, in each of our major regions, volumes are down more now than what we had anticipated in January. As an example, North America, we now anticipate our key platforms will be down 6% versus 5% in January, and China is now estimated, on our platforms, to be down more than 15% versus more than 10% in January. So coupled with that, there has been several of our new programs or changeover programs that are forecasted to have more down weeks now than what -- and delayed launches now than what we had anticipated in January. So that's the primary driver of the top line, which obviously slows down to the [OI] line. And sequentially, I think we've mentioned earlier that we expect that sales will go up pretty significantly between the first half of the year and second half of the year due to the volume scenario out there and the fact that we have a second half weighted backlog versus the first half. So getting to the margin profile, given the backdrop of lower volumes, what we see now in seating is really a great story that despite the fact that volume -- the volume environment is lower. We now see full year seating margins to be in the low 8% range, where before, we thought it would be roughly 8%. And that's really due to the strong operational performance that we've seen in that business. And similar to what we said in January, sequentially, the margins in the first half of the year will be lower than that full year average in margins, and the second half of the year will be higher than that full year average. In E-Systems, which -- I'm finally getting to your question, is the volume scenario and ultimately the mix scenario has been more severe in E-Systems than what we've seen in Seating, and the decremental margin impact in E-Systems is greater than in Seating. So what we're anticipating now, in terms of full year E-Systems margins is that the full year margins would now be in the low 11% range versus what we said in January to be roughly 12%. And similar to seating, we see first half margins to be below full year margins and second half margins to be greater than the full year margins.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

Your next question come from the line of David Tamberrino from Goldman Sachs.

--------------------------------------------------------------------------------

David J. Tamberrino, Goldman Sachs Group Inc., Research Division - Equity Analyst [15]

--------------------------------------------------------------------------------

So I'll turn to John. A lot of acquisitions -- we asked about it at the Investor Day last year. I don't think it was really fit to be discussed just yet because you just joined. But where do you see all this going? Where is it really headed? Do you want to become a much larger player in the interior software space of the vehicle? And what's the time line to really see that be creative to the company as opposed to talking about E-Systems margins being a little bit worse now?

--------------------------------------------------------------------------------

John P. Absmeier, Lear Corporation - CTO [16]

--------------------------------------------------------------------------------

Yes, so David, thanks. It's a good question. I think, as you know, the architecture of the car is evolving. And as that architecture changes, it's changing the landscape of the electronic control units in the car. So to some extent, we need to be prepared for that change and start to look at how our electronics capabilities in body computers and connectivity evolve into different domains in the vehicle. And so to your question about sensing in the cockpit, yes, definitely. I mean even in Seating, as more sensors are going in the seat, it's about the occupant sensing and about the (inaudible) as part of our Seating offering as well as how E-Systems content changes as a result of that. So with respect to when it's accretive or how it changes, I'm going to turn to Jeff for that question.

--------------------------------------------------------------------------------

Jeffrey H. Vanneste, Lear Corporation - Senior VP & CFO [17]

--------------------------------------------------------------------------------

Yes. Again, I think it's important to note the distinction here between operating income and EBITDA. EBITDA is effectively flat today and unaffected by the amortization of the intangible. But assuming that -- assuming a certain estimate on the amortization of that intangible asset, we would see that, from an E-Systems margin perspective, it would be somewhat dilutive in 2020 and accretive thereafter to E-Systems margins.

--------------------------------------------------------------------------------

Raymond E. Scott, Lear Corporation - President, CEO, Director & Interim President of E-Systems [18]

--------------------------------------------------------------------------------

Dave, just to kind of round some things out, too, we've been very disciplined to our capital allocation, and this type of acquisition fits that perfectly. We've done a nice job with Arada and Autonet and EXO and now Xevo. And with Xevo, we've put ourselves -- that's -- we have a first-mover advantage. There's no one in that space today really except for Xevo. And so the response we've gotten back from the customer, and Dan and the team at Xevo have done a great job building that business. But now with the Lear leverage of us being able to make phone calls at the highest level within our customers and get immediate responses, I mean, John and I are going to sit down with an executive within a major OE to talk about the next steps. And I think shortly here we're going to announce and have a really nice announcement on Xevo with a really nice award. And so it's one of those type of acquisitions. It's perfectly aligned with what we've been doing as far as making sure we're driving value for our customers longer term and, obviously, driving value for Lear long term, and so this was something that I just think was a home run all the way around.

--------------------------------------------------------------------------------

Jeffrey H. Vanneste, Lear Corporation - Senior VP & CFO [19]

--------------------------------------------------------------------------------

I just -- I'll say one more thing of color on Xevo, and that is, obviously, we anticipate some huge opportunity for growth there. And the incremental margins on this business via that growth is much greater than the total company Seating or E-Systems. So the incremental growth profile here is pretty significant.

--------------------------------------------------------------------------------

David J. Tamberrino, Goldman Sachs Group Inc., Research Division - Equity Analyst [20]

--------------------------------------------------------------------------------

Yes. And that was going to be my follow-up on this because you're breakeven or was breakeven when you purchased it. Where do you think you need to grow revenue to in order to get that historical or tech-like licensing, 90% gross margins and significantly higher operating margins than what you currently earn for this business? What -- do you need to get to $400 million, $500 million? Do you need to get to $1 billion?

--------------------------------------------------------------------------------

John P. Absmeier, Lear Corporation - CTO [21]

--------------------------------------------------------------------------------

Well, I don't know exactly what those margins are, but I mean at 2020, assuming where we believe we're going to be in sales next year in 2020, it is only slightly -- we anticipate it being only slightly dilutive to E-Systems margins, and E-Systems margins are, whatever, 11%, 12% at that point. So you can see very quickly it's going to have a very accretive impact to that segment because of the growth trajectory of that business.

--------------------------------------------------------------------------------

Raymond E. Scott, Lear Corporation - President, CEO, Director & Interim President of E-Systems [22]

--------------------------------------------------------------------------------

Yes, and to get a little bit more inside this, too, because the recurring revenue streams, both in the software and the merchants, it isn't -- this is not as somewhat familiar as a traditional quoted program. There's -- we could get awarded programs at a much quicker rate. We could pick up merchants at a much faster pace. I think we've been somewhat conservative in our analysis, looking at the market. But this is a -- there's a number of ways to generate recurring revenue. So it's something that we've been doing a lot of work and lot of -- getting a lot of insight to how we can get that moving a lot faster than where we're at today.

--------------------------------------------------------------------------------

David J. Tamberrino, Goldman Sachs Group Inc., Research Division - Equity Analyst [23]

--------------------------------------------------------------------------------

Got it. And just one quick one. Your E-Systems, the net performance, the customer settlements and negotiations, does any of that have to do with higher price-downs?

--------------------------------------------------------------------------------

Jason M. Cardew, Lear Corporation - VP of Finance - Seating [24]

--------------------------------------------------------------------------------

Yes, a portion of that net performance really relates to the normal cyclicality of the price reduction happened at the beginning of the year and then our offsets being implemented throughout the year. Price reductions are slightly higher this year than last year but very much in line with what we've seen on average over the last 5 years. The balance of that really relates to some specific price increases on some electronic components where there's a shortage. We view that as something that will moderate over time, but that was the second driver of the net performance in the quarter.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

Your next question comes from the line of David Kelley from Jefferies.

--------------------------------------------------------------------------------

David Lee Kelley, Jefferies LLC, Research Division - Equity Analyst [26]

--------------------------------------------------------------------------------

Just a quick follow-up on that Xevo conversation. And looking at the slide deck, and I think you addressed -- mentioned an addressable market of about $5 billion by 2025. If we're thinking about the potential growth buckets for Xevo and a more integrated E-Systems platform, how much of it's tied to that software platform do you see going to further OEM penetration? And then how much do you see being bucketed more to reaching out to new merchants in that consumer side of the application?

--------------------------------------------------------------------------------

John P. Absmeier, Lear Corporation - CTO [27]

--------------------------------------------------------------------------------

Yes, so there's 2 elements of the revenue, as I mentioned. The Journeyware piece is a licensing revenue and that's a piece of embedded software that goes in the car. That's tied to vehicle sales. That is a portion of the addressable market, but it's the smaller portion of the addressable market. The larger portion of the addressable market is in the market piece, which -- it's not tied to SAR. It's not tied to vehicle sales. It's more tied to user engagement, which is tied to the user experience and the people actually adopting and using the technology as well as the number of merchant channels that we have. So different people have different likes and dislikes or have different things they prefer. So as we bring on more merchants and as the user experience continues to improve with more data and with more interaction, that is a much bigger piece, and it grows much faster. And again, it's not -- it's disconnected from annual vehicle sales.

--------------------------------------------------------------------------------

David Lee Kelley, Jefferies LLC, Research Division - Equity Analyst [28]

--------------------------------------------------------------------------------

Okay, great. And then as a follow-up, as we think about go-to-market with the merchant. Are you going direct to someone? I know Xevo has signed a Domino's partnership in the past, as an example. So are you reaching out direct to these merchants? Or maybe could you describe maybe high level kind of the 3-legged stool, the relationship between you, the merchant and then also bringing in the OEMs since they're clearly getting a cut of this as well.

--------------------------------------------------------------------------------

John P. Absmeier, Lear Corporation - CTO [29]

--------------------------------------------------------------------------------

Yes, that's a great question. Yes, Xevo does build and maintain relationships with the consumers, which is actually a huge value for the OEMs because most of these -- sorry, for most of these merchants -- it's a value for the merchants as well. Most of these merchants, they don't want to be tied to one brand or one platform. They want to have access to all cars. So Xevo provides that channel to multiple OEMs. And so the scale effect, something that the merchants look for, it's also an easier integration path because the way that the Journeyware software that's embedded in the car works is that you can just add more merchants, and without doing any software updates, deliver new content and new experiences because it resides in the cloud, and it's basically presented through the same software that exists in the car. So generally speaking, yes, the merchant channels are built and maintained by Xevo, and we'll continue to expand that. I think that answers your question.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

Your next question comes from the line of Armintas from Morgan Stanley.

--------------------------------------------------------------------------------

Armintas Sinkevicius, Morgan Stanley, Research Division - Associate [31]

--------------------------------------------------------------------------------

When we think about the -- sort of the divergence between the first and second half, what are your biggest areas of concern when you think about the ability to hit those second half numbers? I'm not questioning your ability to hit them, but I'm just curious what sort of front and center in your mind would -- keeps you up at night? And what gives you confidence in the ability to hit those second half numbers then?

--------------------------------------------------------------------------------

Raymond E. Scott, Lear Corporation - President, CEO, Director & Interim President of E-Systems [32]

--------------------------------------------------------------------------------

I think the first one is volume, just the production volume. I -- we look at the launches we're having, the anticipation of how the customers are building and hitting their numbers. I think that's probably the biggest attribute to the second half in terms to -- in terms of the revenue. I think as far as the work, though, we have to do. Our teams are doing a great job, I think, and we're very confident in the efficiencies and the cost drivers, the things that we can control. That's something that we do a really nice job of. So I'd say the biggest thing is really the production environment, the things that we've dealt with in the first half.

--------------------------------------------------------------------------------

Armintas Sinkevicius, Morgan Stanley, Research Division - Associate [33]

--------------------------------------------------------------------------------

Okay. And you've reduced the guidance as far as what you're expecting on the top platforms. North America, you mentioned from minus 5 to minus 6, China from minus 10 to minus 15. I guess the question is, what gives you confidence that those are the right levels? And so just following up on guidance, you've cut to the midpoint of revenue guidance, so you're saying that this cut to production has taken you from the high end to the low end -- to the midpoint, effectively. Is that correct?

--------------------------------------------------------------------------------

Jeffrey H. Vanneste, Lear Corporation - Senior VP & CFO [34]

--------------------------------------------------------------------------------

Yes, effectively, that is correct. Notwithstanding the impact of Xevo, which takes us to the low to midpoint pinch. What gives us comfort? It's ever-changing. But I think we've taken the position in terms of our forecasting, for example, in China and some other regions that our internal forecast for some of our key platforms would be down in excess of what IHS is saying. And unfortunately, in the first quarter, that was proven to be true that, in fact, some of the volumes on our key platforms were down greater than IHS. And our forecast continues to suggest that. I mean for example -- only one example, is if you look at Ford volumes in China and what IHS is suggesting on some of our key platforms there, they're suggesting those platforms are down 15% year-over-year, and we've got that line declining north of 40%. So we are taking a more conservative view as we have really in the last couple quarters, on volume. The problem has been, unfortunately, we've been more right than wrong.

--------------------------------------------------------------------------------

Operator [35]

--------------------------------------------------------------------------------

Your next question comes from the line of John Murphy from Bank of America Merrill Lynch.

--------------------------------------------------------------------------------

John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [36]

--------------------------------------------------------------------------------

Surprise, surprise. I've got another Xevo question. So when you think about this, to put it in terms that a dumb auto analyst like me can understand, basically you're taking a great technology that is somewhat silo-ed with GM in North America -- that's what it sounds like -- and taking it to all your other customers and going global with it. Is that a good simple way to explain it?

--------------------------------------------------------------------------------

John P. Absmeier, Lear Corporation - CTO [37]

--------------------------------------------------------------------------------

No. Actually, Toyota is the largest customer and GM is -- for Journeyware. GM is the largest customer for Market. So 2 of the largest automakers in the world are already strong customers of Xevo. There's also other customers that are deploying the technology. You can find out there's some information on Hyundai proof-of-concept. There's others OEMs in proof-of-concept now. And there's others OEMs that, as Ray alluded to, will be announced soon. So Xevo on its own has been doing a fantastic job of growing its scale and expanding. Most of that, however, is in the U.S. So what we think we're bringing is expanded reach globally into Europe and China. China is extremely important, and there's a need for it there because there isn't a global solution that can be deployed from U.S. to China to Europe in terms of ecosystem for connectivity services. Xevo offers that and can do it in any region based on that.

--------------------------------------------------------------------------------

Raymond E. Scott, Lear Corporation - President, CEO, Director & Interim President of E-Systems [38]

--------------------------------------------------------------------------------

Yes, just -- we think China is going to be the -- a big market for Xevo. And yes, to your point, I think we're a little bit further along or Xevo was further along with a number of key customers. And actually the relationship with Toyota is very strong, and that's where it originated. And so obviously, that puts us in a really good position with Toyota. But now taking that to Europe and taking it to China is really the next step. And like I mentioned, with our access to these OEs, and it's been absolutely overwhelming -- positively overwhelming. We've put some notes out. We got some meetings already scheduled. And this is something that can move relatively quickly too. What's nice about this is it's not like a traditional development program that takes 3 to 4 years through intense validation, those type of things. We can easily adapt this within the vehicles, making it something that can get on programs much quicker. And so that's what we're focused on.

--------------------------------------------------------------------------------

John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [39]

--------------------------------------------------------------------------------

So when you think about the competitive set, I just -- if you could sort of illustrate who you might be going up against there or if this is whitespace? And if we should also be thinking about sort of smartphones as potential competitors to this or potentially an opportunity for Xevo because it seems like a lot of this stuff is already going on, on my phone and a lot of our phones at this point. Just trying to understand how you kind of differentiate between in-vehicle and in-device and sort of who your competitive set is.

--------------------------------------------------------------------------------

John P. Absmeier, Lear Corporation - CTO [40]

--------------------------------------------------------------------------------

Yes, great question. So it is a whitespace in the vehicle. There are no direct competitors that are doing monetization of transactions like this today. The growth into the car is coming from the mobile phone, if you will. It's -- the biggest e-commerce and digital transactions are happening through mobile phone and web today. So this is taking dollars from those, but it can do that for a couple of reasons, one, I had mentioned that it's sort of a 3-legged stool. There's the car piece, the mobile piece and the cloud piece. So this Xevo application ties the 3 together. And when you look at the car you've got a lot more relevant information about what the user is doing, where they're going, how many people are in the car, how long they've been driving and other sensors. Hundreds of sensors in the car that you can use to make better suggestions and bring a better user experience to the user. It also eliminates a driver distraction issue with mobile phones in the car. So that's the way we're approaching it and looking at it. It's a better experience and a safer experience in using the phone. And it offers, again, more data and a better user experience. So that's how it's taking away.

--------------------------------------------------------------------------------

John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [41]

--------------------------------------------------------------------------------

Very interesting. Just a -- second question on the product cadence. It sounds like the GM changeover for their SUVs or downtime they're taking there was maybe a major impact on seating. Is that a correct assessment? And as that comes back online that may solve some of the issues that we're seeing in seating in the short term.

--------------------------------------------------------------------------------

Jason M. Cardew, Lear Corporation - VP of Finance - Seating [42]

--------------------------------------------------------------------------------

Yes, that was a significant impact in the first quarter. So you had the downtime in Arlington as they prepare to change over to T1. That won't happen until next year, but they had 3.5 down weeks, and they had a bit of a slow ramp-up coming out of those down weeks as well. And then you had a ramp-up of the second pickup truck plant with Silao coming online starting the very end of last year and into the first quarter this year. So we'll see improved volume sequentially in both of those facilities in the second quarter.

--------------------------------------------------------------------------------

John Joseph Murphy, BofA Merrill Lynch, Research Division - MD and Lead United States Auto Analyst [43]

--------------------------------------------------------------------------------

Okay. And then just lastly, you mentioned the backlog is much stronger in the second half versus first half. I think you've kind of given us the numbers in the past. But if you could just remind us sort of first half backlog roll-on and second half backlog roll-on, if you got that split.

--------------------------------------------------------------------------------

Jason M. Cardew, Lear Corporation - VP of Finance - Seating [44]

--------------------------------------------------------------------------------

Yes, it's basically 2/3, 1/3. 2/3 in the second half of the year.

--------------------------------------------------------------------------------

Operator [45]

--------------------------------------------------------------------------------

Your next question comes from the line of Rod Lache from Wolfe Research.

--------------------------------------------------------------------------------

Rod Avraham Lache, Wolfe Research, LLC - MD & Senior Analyst [46]

--------------------------------------------------------------------------------

On Xevo, just to follow up with one more thing. The $5 billion addressable market, I suspect is the amount of commerce in total that you are -- primarily that you're focusing on for 2025, and Xevo would do some share of that. Could you maybe just talk to us a little bit about what's sort of the conceivable target for revenue per vehicle that a company like Xevo could -- can achieve for the vehicles that it is exposed to?

--------------------------------------------------------------------------------

John P. Absmeier, Lear Corporation - CTO [47]

--------------------------------------------------------------------------------

Yes, it's a great question, Rod. It's hard to answer today. Again, it's dependent upon engagement and the number of merchants that you have. So we're still at an early stage. Today, the bigger part of the revenue that the company is generating is from the software licensing of the in-vehicle piece, the Journeyware piece. And so that scales with sales and the number of vehicles that it's in. And it's a typical type of software license with a service and maintenance fee over the life of the car. On the market side, as we start -- it's early days for that, so it's just ramping up. And as we improve the experience and bring in more data analytics and artificial intelligence that understands each user and as people interact with it more, it gets better and better and, therefore, the engagements gets higher. So it's tough to say at this stage exactly what that number is, but it's significant and it's higher than the licensing piece.

--------------------------------------------------------------------------------

Rod Avraham Lache, Wolfe Research, LLC - MD & Senior Analyst [48]

--------------------------------------------------------------------------------

Okay. So is it sort of a low single-digit percentage of the commerce that a company like Xevo would be targeting? Is that a way to think about that? Or could it be even higher than that?

--------------------------------------------------------------------------------

Jeffrey H. Vanneste, Lear Corporation - Senior VP & CFO [49]

--------------------------------------------------------------------------------

Yes, I think -- the number we're thinking about is $10 to $20.

--------------------------------------------------------------------------------

Rod Avraham Lache, Wolfe Research, LLC - MD & Senior Analyst [50]

--------------------------------------------------------------------------------

Okay, great. And just a follow-up on the seating decremental margin. Obviously, a lot of things going on in this particular quarter. I think over time, you've talked about something like a 20% decremental for that business. Is that still a reasonable number to use?

--------------------------------------------------------------------------------

Jason M. Cardew, Lear Corporation - VP of Finance - Seating [51]

--------------------------------------------------------------------------------

Yes, typically runs between $15 and $20. And depending on the profitability -- the underlying profitability of the programs, we model vertical integration of the platforms that are down.

--------------------------------------------------------------------------------

Rod Avraham Lache, Wolfe Research, LLC - MD & Senior Analyst [52]

--------------------------------------------------------------------------------

Okay, great. And then lastly, just talking about your exposures in Europe, some of the key platforms. There's obviously a lot of discussion right now that OEMs are having about how they're going to comply with new regulations, CO2 regs. And in some cases, you're seeing companies that are exiting segments altogether, Ford with the German plants over time, is an example. As you think about what you guys are on in Europe, are there -- is there a significant percentage of that, that you would say could be on the endangered list? Or how should we be thinking about some of the changes, just given the pretty high exposure you guys have to that market.

--------------------------------------------------------------------------------

Jason M. Cardew, Lear Corporation - VP of Finance - Seating [53]

--------------------------------------------------------------------------------

Our European business is very well diversified, perhaps better diversified than in any other region. So we don't see a disproportionate risk with our book of business there and any additional exposure to particular nameplates that are going to be canceled. I think that our book to business in general will hold up pretty well. It is a little bit weighted to the luxury side. JLR, the German OEMs are important customers for us. FCA and their premium brands are important customers for us. There's been really no discussion about elimination of nameplates or models within that group of customers.

--------------------------------------------------------------------------------

Operator [54]

--------------------------------------------------------------------------------

Your next question comes from the line of Itay Michaeli from Citi.

--------------------------------------------------------------------------------

Itay Michaeli, Citigroup Inc, Research Division - Director and VP [55]

--------------------------------------------------------------------------------

Just to go back to E-Systems. Just the decline in the base business, the $159 million year-over-year, could you just remind us in terms of your exposure, like how much E-Systems revenue is tied to past cars in North America and just some of the changeovers we're seeing in various customers? Just want to get a sense of how much of it is just -- to be tied to those changeovers.

--------------------------------------------------------------------------------

Jason M. Cardew, Lear Corporation - VP of Finance - Seating [56]

--------------------------------------------------------------------------------

So in the first quarter, the only significant change related to the path car for us in E-Systems was really that the buildout of the Focus. So that happened last year. So year-over-year, that had a pretty meaningful impact on the revenue in the quarter.

--------------------------------------------------------------------------------

Jeffrey H. Vanneste, Lear Corporation - Senior VP & CFO [57]

--------------------------------------------------------------------------------

And I think, Itay, what we've said before as well and really, it started with the third quarter last year, was, with respect to Ford and primarily Ford in China and the group of programs over there that we provide components from E-Systems on, had a very steep decline. And what -- we've seen that going into the first quarter. So any time you look at comps right now, from the first quarter this year to the first quarter last year, for example, the volume comp on some of those key programs, specifically Ford and China, show very significant volume reductions.

--------------------------------------------------------------------------------

Itay Michaeli, Citigroup Inc, Research Division - Director and VP [58]

--------------------------------------------------------------------------------

Got it. That's helpful. And when we think about the decremental margin in E-Systems, was there any product mix kind of change or issue in terms of Ts and Cs relative to wires or electronics that had an impact on either revenue or the margins in the quarter?

--------------------------------------------------------------------------------

Jason M. Cardew, Lear Corporation - VP of Finance - Seating [59]

--------------------------------------------------------------------------------

Further to Jeff's comments, we did see the sort of continuation of what we saw in the second half of last year with the reduction in -- steep reduction in Ford volumes in China. Those were mature higher-margin programs. So that led to a little bit higher downward conversion than our overall book of business. And there has been some weakness with Europe impacting our Ts and Cs business. That carries with it very high variable margins as well. Those probably will be the 2 outliers. And the rest of the volume reductions are sort of consistent with our overall underlying book of business in E-Systems. That business has variable margin that's in the 25% to 30% range. It's much higher than Seating, both because the underlying operating margins are higher, but also there's a little bit more capital intensity in that business and a little higher engineering and administrative infrastructure to support that business than we see in Seating.

--------------------------------------------------------------------------------

Jeffrey H. Vanneste, Lear Corporation - Senior VP & CFO [60]

--------------------------------------------------------------------------------

And Itay, I'd say one more thing as it relates to trying to quantify the sales -- year-over-year sales drop in E-Systems, that is FX. As a company, we're about 40% in Europe, but in E-Systems, we're probably north of 50%. So we're greater exposed in our E-Systems segment to top line decline as a result of FX. And given the margin profile of that segment and the fact that we're more vertically integrated in E-Systems in Europe with respect to terminals and connectors, the margin profile is going to be impacted because of that exchange.

--------------------------------------------------------------------------------

Itay Michaeli, Citigroup Inc, Research Division - Director and VP [61]

--------------------------------------------------------------------------------

That's very helpful. And then just maybe a question on Xevo. What's the kind of product road map for leveraging data in the car, location-based deals and offerings to engage the drivers and occupants? Is that already happening where that data and the location base is being levered to try to encourage engagement in transactions? Or is that down the road? And if so, kind of what's the timetable on that?

--------------------------------------------------------------------------------

John P. Absmeier, Lear Corporation - CTO [62]

--------------------------------------------------------------------------------

Yes, that's rolling out now. And that's a good question because, basically, I mentioned that's one of the synergy areas that we have. It's using information with GPS today that's not very accurate. But you can imagine like a fueling scenario where you're driving somewhere, the car knows where you're headed and knows that you might only have an 1/8 of a tank of gas. A relevant piece of information to get gas can be delivered to you in the car. And then once you arrive at the gas station, if you know which pump you're at, once you shift the car into park, the transaction can be immediately facilitated with one button click or maybe none. But that's rolling out now, and there's a lot of use cases that location are being used today, but it gets smarter and better over time.

--------------------------------------------------------------------------------

Operator [63]

--------------------------------------------------------------------------------

Your next question comes from the line of David Leiker from Baird.

--------------------------------------------------------------------------------

Joseph D. Vruwink, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Associate [64]

--------------------------------------------------------------------------------

This is Joe Vruwink for David. Just one quick clarification on E-Systems margin, which I hate to go back to the topic. But even though, Jeff, you give a lot of reasons for why profitability is maybe under pressure. It ultimately sounds like the move from 12% margin to low 11% is entirely Xevo. Is that correct?

--------------------------------------------------------------------------------

Jeffrey H. Vanneste, Lear Corporation - Senior VP & CFO [65]

--------------------------------------------------------------------------------

No. In fact none of it is due to that. So with respect to the margins that -- the margin guidance that we gave, 12%. Where we -- when it was January, we gave 12% full year. Now we're giving low 11%. That excludes the impact of Xevo, which is estimated to have roughly a 90 basis point dilutive impact on E-Systems margins.

--------------------------------------------------------------------------------

Joseph D. Vruwink, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Associate [66]

--------------------------------------------------------------------------------

Okay, got it. And then when thinking about E-Systems' backlog, and it was already set to be 2020 a bigger year than 2019. Xevo should add to that organically next year. Is there an additional consideration that has the backlog revenues flow on? It should be similar to the dynamics that are playing out in 2019 in terms of margin implications.

--------------------------------------------------------------------------------

Jeffrey H. Vanneste, Lear Corporation - Senior VP & CFO [67]

--------------------------------------------------------------------------------

Yes. And I think some of that is implied by the slide that Ray talked to, which is, just in the last couple of months we were awarded an incremental $150 million of E&C business. So yes, we fully anticipate as we've always said that, as the third year of the backlog becomes the second, and the second becomes the first, we will see growth in those backlog years. So nothing has changed from that perspective. In fact, as you say, Xevo should add backlog.

--------------------------------------------------------------------------------

Raymond E. Scott, Lear Corporation - President, CEO, Director & Interim President of E-Systems [68]

--------------------------------------------------------------------------------

Just one point I just want to make that I'm just -- in my summary in my slides were just electrification, connectivity, it doesn't include the traditional E-Systems business that we're quoting ongoing. And so what I want to do is give an update given some of the changes in some of the awards and the time of the awards. I want to give an update on what we consider to be the new technology drivers, which is electrification and connectivity. The team did an excellent job of capturing some really good wins for us.

--------------------------------------------------------------------------------

Operator [69]

--------------------------------------------------------------------------------

Our final question comes from the line of Joseph Spak from RBC Capital.

--------------------------------------------------------------------------------

Joseph Robert Spak, RBC Capital Markets, LLC, Research Division - Analyst [70]

--------------------------------------------------------------------------------

Thanks so much for fitting me in here, and your reward is yet one more Xevo question. John, you mentioned sort of China being a big opportunity, and I imagine that's sort of part of the rationale for the deal. I'm just curious about that market and the model there because my understanding is that consumer is much more tied to sort of the Chinese platforms like the WeChat, and sort of everything, everything sort of runs through that. So that sounds different than sort of how you've attacked the marketplace maybe in the U.S., where you can sort of pull individual brands onto the platform. Is that correct? And sort of what's the go-to-market strategy to get those Chinese -- if it is, what to get those Chinese market platforms onto the Xevo Market?

--------------------------------------------------------------------------------

John P. Absmeier, Lear Corporation - CTO [71]

--------------------------------------------------------------------------------

It's an excellent observation, and you're accurate. You're correct. So the model in China has to be different than in some of the Western markets mainly because, as you indicated, there's technology players that often aggregate a lot of the merchant channels already. So we have to work with those channels. And again, because we're bringing in relevant and contextual information about the car and the user, it affords a better user experience in the car, which the OEMs need to maintain their position and their customer satisfaction but also keep their brand identity. So Xevo offers that sort of window into the services and merchant channels that the OEMs can continue to brand as their own, and that's the same in China as it is here. The only difference is now the channels are through different partners in that region.

--------------------------------------------------------------------------------

Joseph Robert Spak, RBC Capital Markets, LLC, Research Division - Analyst [72]

--------------------------------------------------------------------------------

Okay. And so there is -- does that -- since so much of the power lies with those aggregates, are there additional challenges in getting them on to the platform? Or does it actually make it easier? Or what's your thinking there?

--------------------------------------------------------------------------------

John P. Absmeier, Lear Corporation - CTO [73]

--------------------------------------------------------------------------------

Yes, I'd say, it's early to answer that. I think that there's always going to be challenges. But again, the OEMs own the dashboard. They want to maintain that interface, and therefore, they want to have some level of control over it. So we know that using the car in the -- the phone in the car is very dangerous, and it contributes to a lot of safety issues, so being able to control that experience and control the interaction with those merchants is -- are something that the OEMs want to be able to design and facilitate for their users. So that's the reason why it will come in through the dashboard, if you will.

--------------------------------------------------------------------------------

Joseph Robert Spak, RBC Capital Markets, LLC, Research Division - Analyst [74]

--------------------------------------------------------------------------------

And then Jeff, just real quick. Cash flow in the quarter. I think first quarter is typically seasonally light. Is that just -- is that all that sort of drove the softer free cash flow's quarter? Was there anything else involved in that?

--------------------------------------------------------------------------------

Jeffrey H. Vanneste, Lear Corporation - Senior VP & CFO [75]

--------------------------------------------------------------------------------

Yes, actually versus what we thought, our cash flow came in a little bit better in the quarter than we had previously [envisioned.] I think a lot of that was due to the managing of inventory given the volume volatility. We did a great job. So we're fully confident in our full year free cash flow guidance. No story there.

--------------------------------------------------------------------------------

Raymond E. Scott, Lear Corporation - President, CEO, Director & Interim President of E-Systems [76]

--------------------------------------------------------------------------------

Okay. Thank you. Okay. With that, I think we're done with the Q&A portion. I want to thank everyone for participating today in our call and for all the good questions. And again, I want to welcome the Xevo team to the Lear family. I can't tell you how excited we are to continue to build on your success. And I think that's only going to be incredibly bright as we move forward and the opportunities that are going to be in front of us.

And to the whole Lear team, I want to thank everyone for your hard work and your commitment to doing the right things every single day and driving the business. We stay focused on our people, our operational excellence, innovation and technology, continuing to embed it in different ways that differentiates us and ensuring that we grow this business profitably.

So I want to thank you for all your work that you do every single day. So with that, thanks.

--------------------------------------------------------------------------------

Operator [77]

--------------------------------------------------------------------------------

This concludes today's conference call. You may now disconnect.