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. All lines have been placed on mute to prevent any background noise. For those of you on the stream, please take note of the options available in your event console.

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

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 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..

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 a heavy launch activity.

Because of Lear 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 in a moment - as I will discuss in a moment, we have seen significant increase in our backlog and quoting activity in electrification and connectivity. Two 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 to our financial strength, Moody's upgraded Lear's credit rating.

And earlier this month, Lear was recognized by Automotive News with the PACE Award for ConfigurE+, our powered adaptable seat rail system.

This technology, which was jointly developed by engineers in Lear's Seating and E-Systems divisions allows the seat to be easily reconfigured within the vehicle and customize 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 and software, services and data analytics, as well as our market position in connectivity.

And 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 cost 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 and 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 plant costumer downtime and 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 two 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 it 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 quarter 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 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 three 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..

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 two 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.

It's 12-year history with Toyota has given Xevo the experience and know-how required to deliver automotive quality software, something most startups 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 assistance 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 consumers 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 currently 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.

Position Lear for profitable growth within the connectivity mega trend, 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..

Thanks John. 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 of 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 a first quarter year-over-year sales and adjusted operating margin walk for our E-System 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.

The 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 in 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 Xivo and despite the forecasts 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 Xivo acquisition.

Due primarily to the weaker production environment, we now estimate 2019 sales will be at the midpoint of the guidance range.

Core operating earnings, including the impact of the Xivo acquisition, which we estimate will have a dilutive impact of approximately 15 basis points and overall company margins will now be between the low-end and mid-point of our guidance range.

From a segment margin perspective, excluding the impact of the Xivo 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 Xivo 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-system's 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-system's 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 are 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 three 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..

Thanks Jeff. I'm very optimistic about Lear 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 in a long history of operational excellence.

We also continued 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 an 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 Mega Trends. 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 Lear family. We look forward to continue to build on the great business you 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..

[Operator Instructions] Your first question comes from the line of Brian Johnson from Barclays. Your line is now open..

Ray, just be -- will be very interested in a more detailed discussion of the margins in E-Systems both this quarter and next quarter and just maybe even stepping back for something that used to be running about a couple of 100 basis points higher in margin.

And 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 ROI, I see your business perhaps you, since there has been a change of management in a new leader namely you, maybe was quoted too low..

I've had some time -- and I've spent some time obviously in E-Systems and I just want to be very clear, there is no operational issues. I mean, the good news is, we have an incredible team over there.

I mean, I've surrounded myself with the 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 its exceptional. And in addition to that, now with Xevo coming on board. And Dan and his team, we spent some time with Dan -- within the ranks within Xevo, he had 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 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 on board, albeit are coming in at a less margin to what was traditionally the margins for this segment is 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 are too relying on maybe one or two key customers. Now, we are introducing Audi and Geely and Volvo and a number of other key customers.

And with that there is a -- I 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 these customer launches and driving that margin up with those customers, I don't know if Jason if you want to elaborate a little more by the sequential order of the….

Yes, in terms of what we expect to see happen throughout the year, Brian, as Jeff alluded to, we do expect margins in the second quarter to decline, that's really driven by three factors, we have lower volumes expected in that business in the second quarter, we have a change over 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 cost to 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 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 of some of the same factors. So volumes will 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 and 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..

So just a follow-up, as I look at the contribution and 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 backlog in seating, which is above segment margins and historically we've thought about seating is 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 or just not going to be 14% contributors over their lifetime?.

No, typically, and we've said this in the past that typically when a program comes on board, it comes on at a level that's lower than the overall segment average at that time. And then overtime 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 cost 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, it's a testament to the type of business we're winning.

What 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 programs. So that program that rolled off for us was low margin program, with our low margin program.

So backlog is a combination of roll-off and roll-on and we rolled off a very low margin program in seating..

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

Could you just -- I 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?.

Yes, so here's a tale of the tape on Xevo, 18 sales were like we had it 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 this the accounting requires that you capitalized certain intangible assets and then 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 capitalize 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 margin by roughly 90 basis points..

So if we kind of revisit, okay go ahead….

No, I just wanted to say that supporting all that, again that amortization is non-cash-based. So it doesn't affect the EBITDA, but it does affect the OI..

Understood. So if I just think about the margin framework by segment, it sounds like – it seems like exceeding 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 margin, the new updated margin target for the full year for E-Systems?.

So I think let me give you a little broader explanation as to our overall guidance now versus what we anticipated and what we initially gave guidance in January. And I think that the main headline 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 1.9 million units, lower than what their estimate was in January and effectively what that says it's 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 then what – and delayed launches now than what we had anticipated in January.

So that's the primary driver of the topline, which obviously flows down to the older line and sequentially, I think we 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 – 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 margins in the second half of the year will be higher than that full year average.

In E-Systems which - finally getting to your question is the volume scenario and ultimately 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..

Your next question comes from the line of David Tamberrino from Goldman Sachs. Your line is now open..

Great and thank you very much for that very detailed response to the last question. Probably knocked out like four or five questions in the queue..

We are pleased..

Yes, so I'll turn it to John. A lot of acquisitions we asked about at the Investor Day last year.

I don't think it was really fit to be discussed just yet because he 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 timeline to really see that the accretive to the company as opposed to talking about E-Systems margins being a little bit worse now?.

Yes so, David thanks it's a good question. I think as you know, the architecture of the car is evolving and as that 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 and body computers and connectivity evolved 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 - as part of our seating offering as well as how E-Systems content changes as a result of that. So with respect to win, it's accretive or how it changes I'm going to turn it to Jeff for that question..

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 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..

Got it..

And I think Dave, Dave just to kind of round some things up to – we've been very disciplined to our capital allocation in this type of acquisition fits that's perfectly. We've done a nice job with the Arada and Autonet and EXO and now Xevo, and with Xevo, we've put ourselves that's 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 in 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 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 really nice award.

And so it's one of those type of acquisitions, it was 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 is something, I just think was a home run all the way around..

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 that the incremental growth profile here is pretty significant..

Yes, 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 tech like licensing 90% gross margins and a significantly higher operating margins has been what you currently earn for this business.

What is it’s 400, 500 it’s indicative now $1 billion?.

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% to 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..

And to get little more insight in this too, because the recurring revenue streams both in the software and the merchants. It isn't this is not, it’s somewhat familiar it’s a traditional quarter program, we could get awarded programs at a much quicker rate we could pickup merchants at a much faster pace.

I think we've been somewhat conservative in our analysis looking at the market, but this is, there is 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..

And just one quick one, your E-Systems, the net performance, the customer settlement negotiations did any of that have to do with higher price downs?.

Yes, a portion of that net performance really relates to the normal cyclicality of the price reduction happening 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 five years.

The balance of that is really relates to some specific price increases on some electronic components where it’s a shortage we view that as something that will moderate over time. So that was the second driver of the net performance in the quarter..

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

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 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?.

Yes, so there's two elements of the revenue as I mentioned the journey where pieces is the 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 a smaller portion of the addressable market.

The larger portion of the addressable market is in the market piece which it's not tied to SAAR, 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..

And as a follow-up as we think about go-to-market with the merchant. Are you going to rack to someone I know Xevo has signed a Domino's partnership in the past as an example.

So are you reaching out to rack to these merchants or maybe could you describe maybe high level kind of the three-legged stool, the relationship between you, the merchant and then also bringing in the OEMs since they are clearly getting a cut of this as well?.

Yes, that's a great question. Yes, Xevo does build and maintain the relationships with the consumers, which is actually a huge value for the OEMs. Because most of these merchants, it's a value for the merchants as well. Most 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 is something that the merchants look for.

It's also an easier integration path, because the way that the journey where 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 will continue to expand that. I think that answers your question..

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

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, what keeps you up at night and what gives you confidence in the ability to hit those second half numbers then?.

Yes, I think the first one is volume, the production volume. We look at the launches we 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 of the revenue. I think as far as the work that we have to do, and our teams are doing a great job.

I think we're very confident in the efficiencies in the cost drivers and the things that we can control that's something that we do a really nice job. So I'd say the biggest thing it’s really the production environment, the things that we've dealt with in the first half..

And you've reduced the guidance as far as what you're expecting on the top platforms, North America you've mentioned from minus 5 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 is taking you from the high-end to the low end – to the midpoint effectively, is that correct?.

Yes, effectively, that is correct, notwithstanding the impact of Xevo, which takes us to the low to mid-point range. What gives us comfort it’s never ever changing but I think we've taken the position in terms of our forecasting.

For example in China and in 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 we're down greater than IHS and our forecast continues to suggest that.

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 that they're suggesting those platforms are down 15% year-over-year. And we've got that volume 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..

Your next question comes from the line of John Murphy from Bank of America/Merrill Lynch. Your line is now open..

As price have got another Xevo question, so when you think about this to put it in terms done lot rounds like me can understand. Basically you're taking a great technology that is somewhat siloed with GM in North America is 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?.

No, actually Toyota is the largest customer and GM is for Journey GM is the largest customer for market so - two 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 some information on Hyundai proof of concept.

There is other OEMs in proof of concept now and there's other OEMs that as Ray alluded to it will be announced. 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 in the Europe and China.

China is extremely important and there is 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..

We think China is going to be the big market for Xevo and 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 were 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 Xevo's and it's been absolutely overwhelming -- positively overwhelming. We've put some notes out, we got some meetings are scheduled and this is something that can move relatively quickly to it.

What says about this is, it's not like a traditional development program that takes three to four years through intense validation and 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..

So when you think about the competitive set, I just could if you could sort of illustrate you might be going up against there or if this is white space 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 the stuff is already going on in my phone and a lot of our phones at this point trying to seeing how you kind of differentiate between vehicle and in device and sort of your competitive set is?.

Yeah. Great, great question. So it is the white space 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 reasons. One, I had mentioned that it's sort of a three-legged stool. There's the car piece, the mobile piece and the cloud piece.

So this Xevo application ties the three 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 others 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..

Very interesting. I just a second question on the product cadence.

It sounds like the GM changeover for their SUVs, our downtown or taking there was, it was maybe a major impact on ceding it, is that a correct assessment and as that comes back online that may solve some of the issues that we're seeing in seeding in the short term?.

Yes, that was a significant impact in the first quarter. So you had the downtime in Arlington as they prepare to change over the Tier 1 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 have the ramp up of the second pickup truck plants that out coming online starting very end of last year and into the first quarter of this year. So we'll see improved volumes sequentially in both of those facilities in the second quarter..

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 get that split?.

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

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

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 can achieve for the vehicles that it is exposed to?.

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 the 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, gets better and better and therefore the engagements get 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 fees..

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, what would it could it be even higher than that?.

The number, we're thinking about is $10 to $20..

And just a follow-up on the seeding detrimental margin, obviously a lot of things going on in this particular quarter. I think over time you've talked about something like a 20% detrimental for that business.

Is that still a real -- reasonable number to use?.

Yes, typically runs between 15 and 20 and depending on the profitability, underlying profitability this program to level vertical integration of the platforms that are down..

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 happening about how they're going to comply with new regulations [indiscernible] and in some cases, you're seeing companies that are exiting segments altogether forward with the German plants over time as 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 that the pretty high exposure you guys have to that market..

Our European business is very well oversight perhaps better diversified than any other region. So we don't see a disproportionate risk with our book of business there, any additional exposure to particular nameplates are going to be cancelled. I think that our book of 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..

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

Just to go back to E-Systems just that the decline in the base business, I think $159 million year-over-year. Could you just remind us in terms of your exposure that how much E-Systems revenue was tied to pass cars in North America.

And just some of the changeovers we're seeing at various customers just want get a sense of how much of it is just to be tied to those changeovers?.

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

And I think Itay, what we said before, as well and really started with the third quarter last year was with respect to forward and primarily for to 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, anytime you look at comps right now from the first quarter of this year, the first quarter last year for example, the volume comp and some of those key programs, specifically for in China show very significant volume reductions..

And then we would you 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?.

Yes, further to Jeff's comments, we did see sort of continuation of what we saw in the second half of last year with the reduction in steep reduction in import volumes in China. Those were mature higher margin programs of that - that led to a little bit higher downward conversion than our overall book-to-business.

And there has been some weakness with Europe impacting our Ts and Cs business, that carries with a very high variable margins as well as probably the two outliers. And the rest of the volume reductions sort of consistent with our overall underlying book to 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 and we see in seating..

Itay, I'd say one more thing, as it relates to -- trying to quantify the sales year-over-year sales drop in the E-System that is FX. As the company, we're about 40% in Europe, but in E-Systems we were probably north of 50%. So we're later exposed in our E-Systems segment to top line declines as a result of FX.

And given the margin profile of that segment in the fact that we are 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..

And just maybe a question on Xevo.

What's the kind of product roadmap for leveraging data in the car location-based deals and offerings to engage that the drivers and occupancy that already happening where that data and the location basis being levered to try to encouraged engagement and transactions or is that down the road, and if so, kind of what's the timetable on that?.

Yes, that's rolling out 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 fueling scenario where you're driving some more of the car knows where you're headed, and knows that you might only have an eight 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 ship 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 is a lot of use cases that location are being used today, but it gets smarter and better over time..

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

This is Joe Vruwink for David. Good morning. Just one quick clarification on E-Systems margin, which I hate to go back to the topic.

But even though, Jeff, you gave a lot of reasons for why profitability is maybe under pressure, ultimately sounds like the move from 12% margin to lower 11% is entirely Xevo, is that correct?.

No, in fact, none of that is due to that. So with respect to the margins that the margin guidance that we gave 12%, when in January, we gave 12% full year now we’ve given lower 11% that excludes the impact of Xevo, which is estimated to have roughly 90 basis point dilutive impact on E-Systems margins..

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?.

Yes, and I think some of that is implied by the slide that Ray talk to which is just in the last couple 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 is changed from that perspective and back, as you say Xevo should add backlog.

Well, just one point, I just want to make that I'm just in my summary and 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 in 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 conductivity, the team did an excellent job of capturing some really good wins for us..

Our final question comes from the line of Joseph Spak from RBC Capital. Your line is now open..

Thanks so much for fitting me in here. And your reward is yet one more is Xevo question. John, you mentioned certain 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 the consumer is much more tied to sort of the Chinese platforms like the WeChat and sort of everything sort of runs through that. So that sounds different than sort of how you attack the marketplace maybe in the U.S.

where you could sort of pull individual brands onto the platform.

Is that correct and sort of what's the go-to-market strategy to get those sort of Chinese if it is, what get those Chinese market platforms onto the Xevo market?.

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 channel already. So we have to work with those channels.

And again, because we're bringing in relevant and contextual information about the car in 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 branded their own and that's the same in China as it, it's here, the only difference is now the channels are through different partners in that region..

And so there is -- does that since so much of the power lies with those with those aggregators, are there additional challenges and getting them onto the platform as or does it actually make it easier or what's sort of your thinking there?.

Yes, I'd say it's early to answer that. I think that there is always going to be challenges but again the OEMs on 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 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 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..

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 flows quarter was there anything else in the quarter?.

Actually in versus what we thought, cash flow came in a little bit better in the quarter, then we have previously invent engine. 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..

With that, I think we're done with the Q&A portion. I want to thank everyone for participating today on our call and for the good questions.

And again, I want to welcome the Xevo team to their family, I can't tell you outside 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 in driving the business.

We stay focused on our people, our operational excellence, innovation, in technology, continuing to embedded 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..

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