Lear Corporation (LEA) Earnings Call Transcript & Summary

I think we're about ready to get going now with our next presentation, if we could. I'm Ryan Brinkman, Automotive Equity Research Analyst at JP Morgan. Very happy to have with us Lear for the first time at this conference, and John Absmeier as well, their Chief Technology Officer, with a long history in the auto industry on the technology side.

I thought maybe, John, a good first place to start would be, if you could please revisit that you've made a number of technology acquisitions in recent years. You've done Xevo, you've done Arada Systems, you've done EXO, others. They've increased your leverage to technology and growth themes within the industry, particularly connectivity, which is an interesting area. Maybe you could just provide an overview of some of these recent acquisitions?

Yes, definitely. So as you mentioned, we've done a handful of bolt-on acquisitions, starting with Autonet. Autonet was the first connectivity-related acquisition that we did in the new era of cellular connectivity in the car. And Autonet brought both WiFi and cellular, hardware and software capability to Lear. They had a platform that was basically ahead of the industry in terms of cellular connectivity in the car. Building on that, we bought Arada. And Arada was the next pearl in the string to bring V2X capability. So Arada had a focus on safety applications for connectivity, whereas Autonet had more of a consumer applications for connectivity. And then finally, EXO, which brings in a lot of the safety and localization for autonomous driving in ADAS. So with the 3 of them, it was sort of the foundation to build out on our capabilities in gateways and connectivity controllers that we were already participating in. So it's really taking our hardware electronics-based platform and growing in software and services capability on top of that for connectivity.

Interesting. Maybe if we could dig into the largest of those acquisitions, really, Xevo. Maybe talk about what capabilities that one added, and its 2 main product areas to Journeyware and Market, if you could delve into that?

Yes, sure. So Xevo is an exciting acquisition. We completed it last year, in April, I believe. And as you mentioned, Xevo is the biggest of those. Xevo is very complementary to connectivity and focused on the future of what we believe is a better user experience in the car and making every drive better in the car, which is our new mantra at Lear. And the idea behind Xevo is to bring a capability around software, around artificial intelligence, around data and how can we use and leverage all the data in the car to provide a better user experience to consumers, of course, through our OEM customers. So we're enabling, with Journeyware, bringing in services and bringing in commerce to the car. So you asked about the 2 different product areas of Xevo, number one is Journeyware, and that's really a -- it's a 3-part platform. It's embedded software in the car, it's mobile device software and it's cloud software that ties the experience together, both in and out of the car, to deliver any types of services. It could be navigation, it could be music streaming, it could be parking, et cetera. And the Market platform, on the flip side, is really delivering commerce opportunities. So highly contextual-based ability to buy services like gasoline or to buy products in the car like gasoline or quick-service foods and so on. So the 2 products are complementary. Journeyware is sort of the base to build out different offerings within the ecosystem. But the question about the acquisitions in Xevo, I think it might be important to mention, over the past few years, Lear has taken a much deeper focus on leveraging innovation and technology for our future and for growth. So my focus since I've joined has really been around how can we put a systematic process in place to leverage open innovation to deliver real business results. So looking a little bit further out on the horizon, really, in my opinion, takes 3 important efforts. One is having a dedicated organization in place that's looking a little bit beyond today's products and today's RFQs that are coming in the door from our customers. Secondly, it's venturing and partnering. And thirdly, it's incubating or allowing new businesses to grow without having to necessarily directly thrust them into the existing business lines. And we're looking at that across product, process and business model innovations. So some of the other maybe important pieces that haven't been highlighted as much in the venturing and partnering space, we've made investments in venture capital funds like Maniv Mobility, which is an Israel-based capital -- a venture capital fund that's looking at mobility, autonomy, connectivity, electrification, et cetera. And we also just announced this morning that we invested in Autotech Ventures, a Silicon Valley-based venture capital firm that's looking at the trends that are happening in automotive as well. And with those investments in venture funds, we get early access, we get visibility, we get partnership opportunity with start-ups and with entrepreneurs before they're really exposed broadly, which is very nice. So it's a strategic play, but of course, with financial opportunity as well. The second area is on accelerators and incubators. And we've announced partnerships with Techstars, which is a global incubator program as well as plug and play. And those -- similarly, they have less of a financial commitment, more of a partnership commitment with these companies and start-ups. And then finally, with partnerships like we announced last year with Gentherm.

Very interesting. Historically, Lear would generate revenue when shipping components, oftentimes on a just-in-time basis to -- from your factories to customers' assembly plant, it gets installed on the vehicle, and that's pretty much it, right? But with some of these newer technologies, does that open up the potential for different types of business models? So for example, the ability to earn aftermarket revenue from charging automakers for over-the-air updating or maybe going back to some of that Journeyware, Market stock charging, I don't know, retailers or service stations, Starbucks, I don't know, for directing traffic their way, et cetera. How do you think the margin profile and the cyclicality of some of these different models could compare to your more traditional business?

Yes. It's definitely an area that we're focused on. Xevo is a good example of that. EXO is also another good example of that, where it's a service that we provide with a software component in the car. That has to live throughout the life of the car. I think later on, we'll get into some of the architectural shifts that are happening in the car. But when you're able to define features and functions through software, you can make improvements over time to that. You can deliver new and different services. A good example is Journeyware, where we can bring in new and different content delivery to the infotainment system without doing an over-the-air update, just through a cloud change. Once the platform exists in the car, then we can push any type of information or activity or service that the OEM wants to deliver to the consumer. So when we think about this, it's a high-growth, high-margin, low capital-intensity business opportunities that, as you mentioned, Ryan, aren't necessarily tied to the SAAR, to the auto volumes. For example, we've launched -- we've announced, we've launched with Toyota, with FCA and with General Motors, with Xevo's products. And those backdate to connected cars, they're not just on new sales. They're on cars that are already connected and in the field for the past couple of years. So not only does it open up the fleet or the carpark that's out there, but it also allows us going forward to look at new services and new offerings that we can deliver.

Interesting. And shortly after acquiring Xevo, you'd mentioned some analysis about a $5 billion TAM for their product offerings. Just curious if you could share a little bit behind how you derived that figure and maybe how you're feeling about that TAM now relative to the time of acquisition. And then could you speak to who is the competition in this area? I think when you first announced Xevo, you said there was no competition for some of their product offerings. Just curious if there are still no competitors in that space, or you're starting to see more people enter?

Yes. So the $5 billion TAM, hit that pretty quickly and easily. We estimate by 2025, there'll be around 450 million connected vehicles out there in the fleet, so that's the basis for the TAM calculation. And we also estimate that with the Xevo products and service offerings, we can get somewhere around $10 a car. So I think the number is more like $11, but it's a $5 billion addressable market for the products and technologies and services that Xevo is offering and that they have on the road map. So to your second question, the competitive landscape, there's definitely entrants that are trying to come in. Today, Xevo is still the only in-vehicle e-commerce offering that we're aware of that's offering transaction opportunity in the dashboard. But -- so of course, it's a new space, it's very nascent, but we have a great first-mover advantage there, and we're trying to stay ahead of that. So the strategy has been to get as many OEMs on the platform as possible. So as I mentioned previously, we've announced -- Toyota was our first customer, then General Motors, then FCA with the Uconnect Market that just launched at the end of last year, and we announced Hyundai as well. There's other OEMs coming on the platform soon, which we'll announce when it's appropriate. But with that, we're able to then get on more and more cars. When we completed the acquisition, we were on about 25 million vehicles. When we announced at our third quarter earnings call last year, we were on 30-plus million. I think at the end of the year, we said around 33 million, and now we're on 37 million or more. So it's growing day by day as those cars are launching and as it's penetrating the carpark out there. The next step really is bringing on more services and more merchants to the platform that we can offer a better user experience, a delightful user experience to the consumer and be able to hone in on that with the data and information that we get from the cars out there. So ultimately, we want to make it a seamless, highly contextual, relevant experience in the car. We don't want to offer things in the car that are not relevant and that are going to annoy you. We want things that you can take action on that are meaningful and easy.

I see. And then next, I wanted to ask about connectivity in the context of safety because I think the investors oftentimes associate connectivity with infotainment, and that's certainly where it got its start in the car. But there's this huge and growing market for smart cars to be able to talk to each other, save lives, et cetera. Can you talk about your vehicle-to-infrastructure and your vehicle-to-vehicle communications capabilities, maybe how are these enhanced by, say, the Arada acquisition or others? And how do you think you're positioned in this vehicle, safety, connectivity space maybe relative to some of the competition that's out there?

Yes, good question. So when I think about connectivity, I can categorize it into the 3 main buckets. Number one is OEM connectivity. So when the OEMs want to use connectivity for warranty, maintenance, software updates for fixes, even understanding what their consumers are doing, et cetera, that's one element of connectivity. The second element of connectivity is consumer services. So delivering content, delivering navigation experiences, commerce opportunities, et cetera, so consumer consumption. And the third is safety. Now all 3 of these are leveraging the same transport mechanism, the same protocols in cellular, or in the case of safety, DSRC. However, in December, DSRC was -- the government changed the plan for DSRC in the United States and basically took away the protections on DSRC. So it's pretty clear that the industry is going in the direction of cellular. That's okay for us. We've developed our platforms to be agnostic to the protocol. So our Arada acquisition brought us a V2X platform as well as safety applications that run on that. And our Autonet acquisition brought us cellular capabilities for both the hardware and the software that runs that. Together with our gateway capabilities that we've been a leader in for a couple of decades and our connectivity control modules as well as our body and domain controller electronics expertise, we're bringing those all together to offer safety applications for V2X. Another key point is the EXO acquisition was an add-on to that safety capability. When you're in an ADAS system or an autonomous driving system, the car needs to know very accurately where it is. And so with the EXO acquisition, we can use off-the-shelf, low-cost automotive-grade GPS hardware with a proprietary software algorithm and solution that can deliver very accurate position of the vehicle so down to the lane level knowing where the vehicle is. And when you think about V2X, this is a nonline-of-sight sensor. So V2X uses wireless connectivity to know when things are going to happen that are not visible by a camera or a radar or a LIDAR, things that could be around the corner or a pedestrian walking out between a car, et cetera. So this is an important area for the future, especially as cars become more automated. We need to have redundancy in sensors. We need to have sensors that don't necessarily have to see what's happening to have some input to the solution for safety.

Interesting. And as we talk about over-the-air updating, as we talk about vehicle-to-vehicle, vehicle-to-infrastructure communications, it's very exciting because it could be a potentially huge market. Still, though, it opens up some significant questions, doesn't it, about safety, about cybersecurity. You see the media, the government talking about this time to time. Just curious if Lear has an answer to this industry problem?

Yes. I mean security and safety are 2 critically important things. We have an organization that supports product security -- cybersecurity, infrastructure cybersecurity and even process. Even in our plants, we have to be secure. Every RFQ that we get for electronics and software nowadays has an element of cybersecurity included. And so we have built a world-class organization that develops that for us. And not only that, but we've combined what's called functional safety with our cybersecurity organization so that it's addressed sort of at the same time. You design in a functionally safe manner, meaning you're making sure that these solutions are running to some statistical level that's acceptable for the application. So if it's Level 3, Level 4 autonomy, you're talking Six Sigma kind of operation levels. At lower levels, it may require a bit -- a little less. But having it secure and having it safe are critical. And with the way we think about it is it's like a house, right? Your front door, the main entry point might be your wireless connectivity. That's got to be extremely secure. You've got to have very strong protections there. But similarly, if your back window or if your dog door is not secured, your system is very vulnerable and an entry point is made or vulnerability is made through not protecting that. So when I say we're now including cyber in all of our RFQs for electronics and software, think about an onboard vehicle charger that plugs into the infrastructure. That isn't a vector for attack unless you protect it. So the way we look at it, again, is like securing the house. And we have to have protections on all the systems that could potentially be penetrated, and we do that with functional safety in mind as well. So I don't know if that answers your question.

No, it does. I think so far, we've been talking about the communication between the car and sources outside the car. Maybe to transition to sort of the core of your E-Systems business, which is the signal distribution within the car, and of course, the power distribution within the car as well. There's a lot changing there, too, isn't there? You've talked it before. I've heard you talk about the system of kind of bolting on more of these black boxes, control modules more and more onto the existing architecture, that that's broken, it's unsustainable, it doesn't just really scale anymore. Maybe just provide some background on kind of how we got to this point? And then what you think the way forward is for the industry and how Lear is positioned to deliver that solution relative to competition, et cetera?

Yes, it's a great question. So when you think about the electrical architecture and the electronics architecture of a car, it builds up from how do you connect the signals, which could be data or analog signals. Think about the power distribution. And those 2 things really drive how you lay out all the electronics and then where you put different functions and features in the car in different ECUs. And traditionally, as -- the last several decades, more and more electronification of the car has happened. We've added on features like electric seats and power windows. And in the beginning, those were features that the OEMs might offer in a high-end vehicle or in a certain market. They've now become ubiquitous, right? So it doesn't make sense to have 80-plus ECUs in the car. It makes sense to maybe take some of the functions and features that are now ubiquitous or have been democratized and up -- integrate them. In addition to that, because we have more compute availability, mainly because of mobile devices and cellphones and consumer electronics and so on, we can bring much higher levels of compute and memory into the car to the extent where we can now define features and functions in the car through software as opposed through individual black box hardware. So that requires some standardization of things like operating system and whatnot, but it enables a whole lot for the future architecture of the vehicle. And so what we're seeing is centralization happening, which opens up a lot of opportunities, it's very synergistic with both our wiring and Ts and Cs business as well as our electronics business for domain controllers, for body electronics, for connectivity, gateways, et cetera.

Interesting. And I think while most investors associate Lear, their -- your E-Systems business with advanced technology, innovation, et cetera, it seems that the Seating business, too, could be seeing a lot of change in the coming years. Maybe talk about the ways that, say, the move toward autonomous mobility could impact the automotive seating market's school of thought that maybe in the future we'll be sleeping in cars or working in cars, right? And what solutions is Lear bringing to the table when it comes to mobility?

Yes. We have a lot of technology around future seat. And in fact, Lear is the only company in the world that has both the electronics and electrical architecture capability as well as the seating capability. So when we're thinking about the future seat for robotaxis, for autonomous driving, for ubiquitous connectivity, for shared mobility, there's a lot of opportunity in content growth. And people are now defining their experience in the car through the interior. It's no longer necessarily about aesthetics and horsepower, it's about the user experience in the car. And so the seat is really the cradle of that user experience in the car, it's the device that you spend the most time in physical contact within the vehicle. And therefore, it's a great opportunity to embed sensors, to embed connectivity and to give users, again, a much better user experience. So a few of the things that we're doing, I'll start with robotaxis and sleeping in the car. We have designs, in fact, we have 2 OEM development programs that are driving towards robotaxi seats that provide privacy, that are reconfigurable, that deliver new services in the seat. And I've talked about the seat as a service, the new SaaS business model. We can now think about a seat not just as a onetime sale in a car but potentially as a onetime hardware sale with services and a life beyond, where, if you land from a long flight from -- coming back from CES and you're exhausted and you have an hour ride back to your house, maybe you want to get a massage in the shared car that you're taking home. You can enable that for a service fee. And so we're thinking about how we can monetize in the future. In addition to that, seats -- today's cars are used -- there's different statistics, but less than 10% of the time, mostly they're parked and not being used because they're individually owned. But when you start to utilize them much -- in much higher levels, like even, say, 50% or 75% of the time, the interior will wear out. And you could have things like spills or other accidents in the vehicle, where you don't want to take an asset out of use because there's this coffee spill. So we look at new design paradigms so that we can replace parts in the seat at a higher frequency. And this is completely changing how the seat is structured in the vehicle. The other half of that is some of the technology that goes in the seat, and we say the seat is transforming into an intelligent device. We're now embedding sensors and electronics at a much higher level in the seat, not just for adjusting the seat, but some of the -- we call Intu technologies that we have are things like BioBridge or biometric sensing, where we can look at heart rate, heart rate variability, respiratory rate, drowsiness, et cetera, and change the experience in the car by using that information or provide health and wellness opportunities for the users. We've also brought in a product called Proactive Comfort through our Intu portfolio. And Proactive Comfort uses some of those same sensors to adjust the seat before you know you're uncomfortable. So if you're driving in a specific way, or if you've been on a trip for a long time, or if your respiratory rate shows that you're getting tired, we can adjust the seat to facilitate for a more comfortable experience. A third one in the Intu is what we call modular heating and cooling. And our partnership with Gentherm has a big synergy with that, really looking at how can we highly integrate the heating and cooling system to make a micro climate in the seat. So you can now reduce the traditional HVAC system in the car for higher efficiency and even improved range on electrified vehicles. And in addition to that, provide a much better user experience, a much faster time to heat or cool your body and a much more pleasant heating and cooling experience. If you've ever had one today, most heat-cool systems in the car are sort of just integrated very mechanically. There's not a deep integration, and it's not understanding the human that's sitting in the seat individually. So with some of these smart sensors, electronics, software and thermal systems, we can make it much better. And then finally, our ConfigurE+ technology, which won the PACE Award in 2019, allows us to have an untethered seat in the car. So without having a wire that hooks to the floor of the car, we can have a seat that moves and is reconfigurable, can be replaced with different devices and so on.

Great. I have a couple more questions, but just thought to see if there are any in the audience? Maybe while the audience thinks of their next question, I would like to ask about wireless charging, something I haven't seen. I don't mean the wireless charging of your cellphone within the car, I mean the wireless charging of the car. I've seen that demoed at your product technology showcase in Southfield. Maybe just provide an overview there, what the interest amongst automaker customers has been and when we might actually see something like that?

Yes, so it's a tough problem. We have done a lot of development work in wireless charging of electric vehicles, and there's a few challenges to it. One is the electromagnetic radiation that comes from having a very high power transfer wirelessly. And so we've done a lot of work to, let's say, commercialize that and keep it designed within a range. The other problem is efficiency. And we've managed to get highly efficient in wireless charging, but it's still not as efficient as conductive charging. And so if you think about the challenges of an EV, the range, the energy management, conductive charging is still far and away the solution that's being adopted and deployed. In addition to that, the infrastructure is still being built up for EVs around the world. And conductive charging is the lowest cost solution to do that. And as this is a huge investment, we're seeing conductive charging taking much more -- by far and away the lion's share of the opportunity. However, when you start to talk about fully autonomous cars in the long, long future or cars that are even just autonomous to, say, in a parking lot or in a parking structure, it becomes clear that some means of automatically connecting the vehicle to the charging infrastructure is going to be required, whether it's a robotic conductive charging or a wireless charging. So that's still to play out. But we do have a significant amount of development in the wireless electric vehicle charging that we've done, but far and away, conductive charging is the leader there.

Interesting. There's a question in the audience.

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We are in production development with some seating concepts that are inward facing, but again, they're configurable even with privacy, but they're happening now. In the next 5 years, those things will come to light. It's still unclear whether -- I mean, honestly, autonomous driving technology is not ready yet. So before those seats and those interior solutions can launch, the technology of the vehicle has to work. So in the near term, in the next few years, these are small volume proof-of-concept-type programs. But longer term, we're ready for those, and they're, like I said, in production development now.

And I thought to maybe finish by circling back to when we started, you'd recapped the recent acquisitions that you've made. Maybe just talk a little bit about the thought process between how Lear decides to acquire a company versus gain access to a technology by maybe partnering with a company or maybe taking an equity stake in the company? And maybe touch on, again, that Autotech Ventures and how that may fit into your M&A strategy going forward?

Yes, great question. So some of the things that we've been doing besides investing in venture capital firms and with incubators and accelerators is direct equity investments in companies. So as we get exposure to these companies through our investments in VC funds or through accelerators and incubators, we find companies and technologies that are relevant for what we're doing. And in some cases, when there is a strategic benefit to investing, we're taking a noncontrolling equity interest in those companies. A couple of examples. We invested last year in a company called CelLink, which is flat flexible circuits in the car. And so there's been a lot of talk in the media about this. But with flat flexible circuits, there's a number of advantages that you can see. One is a massive weight reduction over traditional round wire, round copper wire. Additionally, there's a much easier integration mechanically in the car because if you have a flat wire, for example, it's not a bundle of round wires that you have to run, say, under a carpet in the car. And thirdly, there's a significant manufacturing installation advantage because it's just an adhesive that can stick to any panel inside the vehicle before the interior goes over it. So we see this as a big opportunity long term for our wiring and Ts and Cs business. And that's one investment that we made recently so that we get access and understanding into the process and the technology. Another is on the process side, a company called SoftWear, not software, W-A-R, but W-E-A-R. And SoftWear is a start-up company that's automating the sewing process. So using some of the same technologies and techniques that are being done in autonomous driving, using cameras and sensors and deep learning, artificial intelligence-based solutions to actually automate the sewing process. As one of the largest seat makers in the world, you can imagine we sew a lot of textiles, whether it's leather or fabrics or other. So being able to automate some of that makes it a much cost -- much more cost-effective and helps us, of course, improve our manufacturing process and conversion costs and so on. So that's another thing we're doing is taking equity stakes in start-ups, where it makes sense strategically. And all of these, we're constantly evaluating opportunities, whether it's an investment or partnership or on acquisition.

Interesting. It does look like we're out of time, so please join me in thanking John for all the great color he provided here today. Thank you. Really appreciate it.