Lear Corporation (LEA) Earnings Call Transcript & Summary

Good afternoon. Thank you for joining us, I'm Ryan Brinkman, the U.S. autos analyst at JPMorgan. We're going to get going with our next presentation here with Lear Corporation. Very happy to have with us Frank Orsini, Executive Vice President and President of the Seating Division at Lear; and Carl Esposito, Senior Vice President and President of E-Systems; as well as John Absmeier, Chief Technology Officer. So Frank, Carl and John, thanks so much for joining us.

Thanks for having us.

Thanks, Ryan.

Great. I think maybe a good place to start is with some questions around the growth over market. Lear has been successful in growing faster than the industry and both business segments really. Frank and Carl, can you maybe give us an update on some of the drivers behind this above-market growth and your thoughts on how Lear is positioned to continue to realize above-market growth?

Yes. Well, I'll go ahead and begin, Ryan. And again, thank you for having us here today. We really appreciate the opportunity to present. If you just think about the Seating business overall, we have had success growing above market, as you mentioned. And I think the key for us is we're winning business in all of our key markets across the globe. There's a number of reasons for that. As you mentioned. I think, first and foremost, if you take a look at how we're structured as a company, on the seating side, we are the most vertically integrated seat company in the world. And when you position yourself to have material science knowledge in every aspect of the business, whether it be the foam, the frames, leather, fabric, everything, you really build a platform where we have an opportunity to create a crafted product. And craftsmanship is extremely important in seating. It's helped us gain a leadership position in the luxury and premium segments. And it's also, I believe, helping fuel our Conquest wins that we've had recently over the last 18 months. So for us, it's a combination of operational excellence, making sure we're continuing to deliver for our customers and performing very strong in launches. It's about delivering a quality product, a crafted product. And it's also maintaining very, very strong customer relationships. And that's something that we take a lot of pride in. The other thing I'd just add to that, too, is we've had a good track record of growing above market. I think it's going to absolutely continue. We're very confident in our ability to continue to grow the business. And I think there's a lot of reasons for that as well. I think there's market opportunities for Lear, on the seating side, where Asia and China are still big open markets for us. There are segments that are going to provide [indiscernible] EV market, SUVs, things of that nature. And we're going to talk a little bit today about technology INTU seating, ConfigurE+, both of those are really great technologies that we believe are going to help fuel our growth and we believe will position us to continue to grow above market. So from a seating perspective, pretty excited about what the future looks like.

From an E-Systems perspective, E-Systems is really the electronics, the wiring, connection systems and software portfolios that we offer through strong customer relationships and operational excellence, as Frank mentioned, really applicable to my business at E-Systems. That helps us understand the customer needs and make our technology investments really ahead of the customer requirements and customer needs. And our portfolio is very well positioned in the high-growth areas of the market. The EV and the hybrid aspects of the market and the electronics, the software, the wiring systems that we provide are really well positioned. Cars will only see an increase in the need for technologically advanced high-voltage, low-voltage wiring. Low-voltage, high-voltage and high-speed connection systems, more powerful electronics, faster connectivity and increasing levels of software. And we saw difficult problems for our customers. We're often asked to solve difficult technical problems for our customers around high-power density, compact packaging, challenging schedules for our customers, and that's really a strong area we grow above market. We're continuing that investment in technology and talent in our footprint to make sure that we have those leading-edge solutions for our customers in those growth areas that they're looking for. And we're not really a black box provider. We integrate different functions in different pieces of the electronics in the vehicle. And as the vehicle becomes more integrated, we can offer a bigger collection of products. And for example, something like an onboard charger. We were the first mass market onboard charger back in 2008 with the Chevy Volt. Now we've integrated that with a DC/DC converter. And some customers want that integrated with DC power switching or high-voltage power switching. We can combine different pieces of the portfolio in unique ways to solve customer needs. That's how we grow above market.

I'd love to follow-up on that a little bit, Carl, just in terms of the various different E-Systems products that facilitate vehicle electrification. I think in your last earnings call, you talked about targeting specific areas where you have a right to win. Maybe you can elaborate on what you mean by that? And just talk a little bit about your products that facilitate electrification.

Sure. So we really have a very broad portfolio in the electrification space. And those products support sustainability efforts by enabling those hybrid and electric vehicles to operate more efficiently and more safely. And we have scalable solutions as well as customers continue to increase the voltage, increase the current in the range of those vehicles. And by integrating, as I mentioned earlier, integrating different products and technologies together, onboard charging and power switching, DC/DC conversion, we're able to drive more integration, more efficiency in the power electronics, which drives increased range, increased charging speeds for -- that what our customers are looking for. And we've seen power densities increase 10x going to 20x starting with our entries back in 2008 and that deeper level of integration. We also look around what does the whole vehicle require and what does the vehicle require in terms of the wiring systems and the wiring network in the systems, the connectivity and communication systems in the vehicle, and also the software platforms. And so things like battery management systems that monitor and manage the battery in the vehicle increasingly critical to make sure that the battery is operating in its most efficient and optimal space, time, temperature and power charging levels, we provide that kind of software and computing capabilities. We also focus on customers and products where we have that right to win based on our experience, our past, but also where we can earn returns in excess of our cost of capital. And that requires smart decisions on our part. And we're focused on getting in early with core design products like the GM Hummer battery disconnect unit, right? Actually, one of the physically largest products we've ever made. Also the Volkswagen main battery connectors. These are products and programs that are just starting out on a long life. We have over 12 different OEM customers with 16 different programs for on electrification, including GM, JLR, Volvo, Polestar, Lotus, Mazda, and we're launching 19 programs over the next 3-year time period with electrification electronics. We're really excited about where we are in that space.

Great. Clearly, there is a lot of increasing need to handle more and more power distribution within the vehicle because of the vehicle electrification, the powertrain electrification we've been talking about. Also, a growing creature comforts, 32-way power seats, things like that. Also, though, there's the signal distribution within the car and without the car too, right? Can you talk a little bit about the portion of the business of the E-Systems business that deals with interacting with the outside world? Are there areas maybe you'd like to highlight where Lear is introducing new products or technology along those lines?

Sure. So we handle the network in the car with the computer systems, electronics, the wiring systems and the connection systems that we have. But we've also been in the telecommunications connectivity business for over 5 years. And we've seen an evolution of product technologies from 4G to 5G and are offering 5G technologies now to our customer base around the communication modules and the central compute modules that really leverage that long experience in the activity in the electronics in the vehicle. And some of the unique things that we're doing now is integrating the multiple radio and connectivity sources on the vehicle, the 5G, GPS, GNSS, V2X data link. We're integrating those from electronics and software perspective, and we're also working on integrating those from an antenna perspective. And our customers have said, we want to get rid of the shark fin. We want to get rid of all the antennas that are proliferating on the vehicle. And so we've been able to come up with very unique and formal antenna technology that allows a much deeper integration of the antennas on the vehicle, which increases the aesthetics of the vehicle, increases the ease of installation of all those different radio systems and combine that with the electronics and the software into one compact packaging. That kind of innovation will help drive forward the level of connectivity in vehicles.

Great. And maybe, John, over to you. I'd love to hear a little bit about Lear's approach to driving innovation, provide any updates on activity within the, what you call the Lear Innovation Ventures. Maybe you could talk, too, a little bit about how you leverage open innovation with respect to sort of build versus buy decisions and any kind of time horizon you could put on that.

Yes. Sure. So Lear is absolutely committed to innovation. It's part of our culture. And we drive that through both our product and process. When I say process, meaning both manufacturing and business processes. And even in a difficult year like 2020, we continue to prioritize and invest in areas that would have a real business impact. We continue with our [ LP ] investments in a couple of venture capital firms. We've talked about Maniv and Autotech ventures, as well as trucks. And those provide early access, a lot of deal flow. We see hundreds of companies every year that allow us to keep a finger on the pulse, if you will, of what's happening to inform the direction of our road maps and also to bring in new innovations and ideas to our customers around our product offerings. We also, of course, continue with our internal R&D efforts. But just to give you a couple of examples from a product perspective. Last year, we announced an investment in a company called CelLink, and CelLink makes flat, flexible circuits that are lighter weight, are great for space-constrained applications as well as areas where you want to automate manufacturing, so the ability to install the harness in a much easier way. And this, of course, enables and adds to both our electrification capabilities as well as our electrical distribution systems and especially around collaborating with CelLink on connection systems for flat and flexible circuits. So we see this as an opportunity for Lear to position ourselves and enable ourselves to be a leader in that flat cable technology, which as we optimize the architecture of the car, which I think we'll talk about today, is a big enabler. On the process side, we have over 200 manufacturing plants around the world. We produce millions and millions of parts every year. And so the complexity as well as the importance of our manufacturing portion of our capabilities is critical. And so as we think about building on our core foundation of operational excellence and manufacturing process, we've taken a keen focus on Industry X.0 or Industry 4.0, Industry 5.0, many acronyms out there, but let's just call it future factory. And looking at what technologies in automation, in data, in sensors, in artificial intelligence, things that are happening on the mobility and product side of our business also are happening in the manufacturing process side of our business. So in 2020, we joined the Centrepolis Industry 4.0 Accelerator. This kind of goes along with that open innovation theme of working with VCs and accelerators and incubators to get access to technology early and to work with these start-up companies to bring proofs of concept into our plants and our facilities and really vet them possibly in advance of them being ready for prime time, and most of them are in advance of that stage. We also announced an investment, a direct equity investment in a process company called SoftWear, it's W-E-A-R, not A-R-E, that's automating the sewing process. So as you know, we make a lot of surface materials in our Seating business that require a lot of sewing. And if we can automate that process, it provides a significant efficiency optimization in our manufacturing. And so that's just some examples of where we're innovating and leveraging that ecosystem to bring it back around to the idea of the make versus buy decisions. As a Tier 1, we're a complex systems integrator. So we're constantly looking at what pieces do we make and what pieces do we buy. And on different time horizons, we're generally answering RFQs and quotes to customers in the 1- to 4-year time horizon. And so the business units are looking in that time frame to quote business. And from an innovation perspective, we're kind of looking at the 4- to 10-year horizon so that we can prepare, both on a product and a process front.

Now some of the comments you made there could be a good segue into how you see vehicle electrical architectures evolving over time. How do you expect to capitalize upon those opportunities? Where are you focusing your efforts? What are some of the factors that position Lear to be successful as the big architecture does evolve?

I will touch base on that, and then John can follow-on as well that from the E-Systems perspective, the experience in electrification, connectivity, software that we're delivering today as well as all the electronics modules and electronics computers we're doing today, will continue to evolve. We'll get more connected with higher speed that data buses will get more connected with the outside world with that 5G high-speed connectivity. We'll become more secure with more cybersecurity hardening and cybersecurity embedded in all of those computers and networks. And as that car goes through that digital transformation, that architecture is going to centralize like we've seen in other industries. The computers will get more powerful and will integrate, previous hardware functions will become software functions. And we will see where software functions will replace a large number of hardware on pieces in the vehicle. And what we're doing is positioning our software and our software capabilities and that domain knowledge around those functions to be able to place and host that software in different architectures as those architectures move forward. This will take a lot of time. Different OEMs are going to move at different speeds in terms of what gets integrated where. And so we're working with those customers, as John said, in the 5- and 10-year time horizons so that we can adapt and make our architectures flexible. Some customers are going to still want a more federated-type architecture with dedicated electronics boxes, and other customers we see are integrating more functions. And just as I talked about on the electrification side, where we're seeing those power electronics integrate more deeply, we're seeing the vehicle electronics, like we have a long history with integrating more deeply as well. Those software computers will be able to be updated over the air much more readily and fast to continue to evolve the capabilities and the vehicle value over time in a much more dynamic way than there is today. And we're providing all that infrastructure, those computers, that software and connectivity. John, do you want to?

Yes. So I guess the way I think about it, the way I would position it, we have the baseline of the architecture and the electrical distribution and connection systems, electronics and software. And the transformation of the car that's happening, it's a digital transformation. If you think back decades and decades, the car was a -- and still is, frankly, a mechanical device where we added on electrical systems and electronics and smeared software across the top to make it function. And frankly speaking, that architecture is now broken. As we bring more technologies in, we want to bring more sensors, higher levels of computing, which now will enable us to integrate the functions and features that have become ubiquitous that have been democratized into bigger computers. And so Lear's advanced network architecture concept conceives of 3 main pillars, which are the computing, the network or the data, and power scaling, we call adaptable power scaling. And if you look across those 3 areas, we have the foundation of the capability to do architecture, electronics and the software that's both embedded in the vehicle as well as now as it reaches out and touches the cloud. And the biggest change that's happening is it's now a software platform or the software-defined car that is defined as a software platform. And then you're adding on electrical and electronic systems, and ultimately, mechanical systems to make it work. So it's opposite -- it's a complete paradigm shift from how a car was conceived before. And as Carl alluded to, now with centralization, we're virtualizing these features. And instead of connecting them with a serial data bus called CAN, that's sort of like dial-up modem, we now are connecting them with both high-speed wired connections like Ethernet and high-speed wireless connections as well. So this evolution, as Carl referenced now, enables us to keep the car and the features and functions alive over the life of the car and of course, support the OEMs in this endeavor.

That's very helpful. Maybe over to you, Frank. I'd love to hear more about ConfigurE+ product. Maybe just tell us a little bit about how that works, which vehicles or segments is it aimed at? And curious if there are any new applications that you're exploring.

Yes. Thank you, Ryan. So ConfigurE+ is a combination of a patented cassette system that attaches to a patented electrified rail system. And the technology is really interesting. It's first to market. It's a PACE Award winner last year. Very proud of that. And one of the highlights, too, for us is it was all developed in-house. Carl's team helped us bring this product to market. So it was very, very good collaboration from the E-Systems team and the Seating business to bring this, as I mentioned, to the market. We're going to be launching it actually this year. A big highlight of the actual technology itself is it's a tetherless system. In other words, right now, today, seats have to be hardwired into the vehicle somehow some way. The fact that the powered rails carry that power action, you can now remove the seats and reconnect them through the rail system. And when you connect them, there's a connection system that we've designed. It's patented, as I mentioned, you now have powered seats and you can reconfigure. It's extremely flexible. And when you mentioned, Ryan, like what are some of the applications? Well, for the future, it's rideshare, it's autonomy, things of that nature. Today, it's passenger vans. It's transport vans where you can have multiple roles of seating that can see this technology come to fruition. And I think the real interesting thing for us is the powering of the rails allows us to add content to those seats in the rear row. So you could add power adjustments. You can add heat and cool technology. We have examples of where we're looking at charging smart devices through our seat systems because they're powered. So there's a lot of opportunity there. We've won about $100 million of business with this technology through 2023, and we think it has tremendous applications in the automotive industry to continue to grow. Lastly, just one more comment on ConfigurE+ is -- and John and I, John Absmeier and I have been working on this is, we think it has reached beyond just the obvious automotive applications. The idea of having a solution for the commercial fleet vehicles or the delivery service vehicles and what that could look like is, if you have these powered rails in the rear of a delivery service vehicle, for example, you can really provide some value in how the logistics are happening within the vehicle. The idea of having cargo management solutions and how the materials are presented to the driver so that their stops are more efficient. And we're trying to enhance their business model so that they can be more effective in what they do, I think is very compelling. And it's something that, as I mentioned, John and I are focused on, we're working on the teams with solutions in this area. So it has some incredible automotive applications, and I also think it has some different model applications like delivery service applications as well.

And if I can add...

Yes, please.

I'd add one thing too, Ryan. So the bottom line is its configurability and customization. If you think about platforms that are coming out for mobility as a service for different types of applications, whether it's a passenger where you want to be able to personalize the space or personalize the comfort experience, or whether it's a cargo or logistics use case where you want to optimize material handling or how you manage logistics within the vehicle. The powered rail allows us to put different types of cassettes and different types of use cases in action in a vehicle space. So it's super cool.

Interesting. Maybe also an update on the INTU products within Seating, highlight some of the areas where you're concentrating your efforts there. You recently discussed the benefits of how you might be able to reduce energy usage within the seat. It could be of particular interest for battery electric vehicles, very focused on range, et cetera. Any color you can provide there?

Yes. Absolutely. So the INTU seating product, Ryan, is it's an intelligent seat system. It's powered by software and sensors and modules. And we have 4 key pillars there. We've got comfort, safety, wellness and sound. So you can imagine the market we're trying to capture is heavily aligned with the industry megatrends of connectivity and electrification, as you mentioned. So if you just take the comfort pillar where within that product offering, we have advanced heating and cooling solutions. That applies directly to the EV market, as you mentioned. When you think about our ability to create microclimates for the person using the vehicle, that gives us a really good opportunity to create some true value for the consumer and for the customer. So what happens is, by heating and cooling the occupant themselves, we're able to optimize the power draw off the vehicle. As opposed to inefficiently heating and cooling the entire vehicle cabin, we're directly heating and cooling the occupant themselves. And when you do that, what you're doing is you're creating thermal efficiency within the vehicle. And that thermal efficiency kind of shows itself and manifest in the sense that less power draw off the vehicle means that, that architecture can be optimized. That power can be thrown back to other contents within the vehicle, and we can heat and cool that passenger extremely efficiently. And when you do that, ultimately, what you're doing is you're giving power back to the vehicle, you're extending range. So this notion of having a comfort product that allows for advanced heating and cooling solutions that optimizes the energy usage and energy consumption in the vehicle or battery range for that matter, makes this very valuable technology for not only the consumers, but ultimately, our customers.

Yes. I can relate to that. When I first heard about it, because we also cover Gentherm, I was thinking, "Oh, this is something that's going to go and -- so some barebones electric vehicle. They're downsizing my HVAC system, but then I actually sat and they're blowing warm air on your neck and you're feeling really comfortable. At the same time, your battery electric vehicle can go more miles." So yes, it seems to be a really interesting product. Another announcement that you had recently was this collaboration with REEF. I think that comes through the Xevo business. So I'd love to get any kind of an update on Xevo, the latest you're seeing there with the journey where and market aspects of the business. And as well as REEF, which I know relates to finding parking spots and availability, et cetera. Any sort of general update on Xevo, John?

Yes. We continue to find traction with both automakers and ecosystem partners as we evolve the Xevo platform. We see the market really evolving very quickly as connectivity is becoming ubiquitous. It's becoming democratized across all vehicles, and it's becoming a profit center as opposed to a cost center for many carmakers. And so we're seeing that as a big turning point over the last couple of years. Xevo, in particular, as of now, we're deployed on nearly 50 million vehicles, so we continue to expand our penetration, and that's been a big focus of ours for the past couple of years. And now really, we're working towards the next generation of that platform to make it easier to use more intuitive and more convenient for consumers to access digital services, their lifestyle applications and other content delivery through the car. And so REEF is exactly in that direction. As you alluded to, REEF is a parking supplier or a parking vendor. They manage over 4,500 parking solutions around the U.S. and Canada and also in Europe. And this enables us to give users through the dashboard, the ability to find, pay for reserve parking without having to deal with going to the kiosk or swiping your card at the entrance or exit, et cetera. And even en route, you can reserve that parking. So it's a great convenience. And again, it's an addition to this platform evolution that we're seeing. We also announced yesterday a collaboration with Grubhub and FCA, where we're launching the Grubhub capability through the dashboard of the car with FCA on Uconnect. And that's going to enable users to buy food and beverage through Grubhub in their dashboard for both pickup and delivery. So it's a super convenient feature. Fuel has been one of the commerce applications that we've seen a lot of use for. And especially with COVID and the ability to have contactless transactions, people are using that more so that they don't have to swipe a card or interact with another person from the safety of their vehicle.

Very interesting. And I remember when you purchased Xevo, you've given some thoughts about the total addressable market there. I don't know if you have any sort of updated view or if you could remind us and seems you keep finding sort of additional use cases. I'm just curious if your view for the addressable market has maybe changed over time.

Well, as I mentioned, the platform is evolving and the market is evolving. Software and services is a new space in auto. So as we start to find that path, we are finding new things happening. But we're still -- the market rationalization that we gave 1.5 years ago or whatever was -- we expected around 450 million connected cars and a $10 to $15 per car opportunity. And I think we still believe that, that's the market opportunity at this stage. Now what makes up that $10 to $15 of content or service is the part that's evolving.

Got it. Thanks so much. Looks like we are about out of time here. So John, Frank and Carl, I want to thank you for spending the time with us and providing all the great color that you did.

Thank you, Ryan.

Great afternoon. Thank you, Ryan.

Thank you.

You too. Take care. Thank you.