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Good morning, and welcome to the Lear Corporation Fourth Quarter and Full year 2020 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference over to Alicia Davis, Senior Vice President, Corporate Development and Investor Relations. Please go ahead.
Thanks, Kate. Good morning, everyone and thanks for joining us for Lear’s fourth quarter and full year 2020 earnings call. Presenting today are Ray Scott, Lear President and CEO and Jason Cardew, Senior Vice President and CFO. You can find a copy of the presentation that accompanies their remarks at ir.lear.com. Following prepared remarks we will open the call for Q&A.
Before we begin, I would 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 will review highlights from the quarter and full year and provide a business update. Jason will then review our fourth quarter financial results, 20021 outlook and 2021 through 2023 backlog. Finally, Ray will offer some concluding remarks. Following the formal presentation, we would be happy to take your questions.
Now I would like to invite Ray to begin.
Thanks Alicia and good morning everyone. Now please turn to slide 5. I am going to provide a brief overview of our fourth quarter and full year financial results. We finished the year strong with sales of $5.2 billion and core operating earnings of $330 million in the fourth quarter. Adjusted operating margin was 6.3% and EPS was $3.66. For the full year sales were $17 billion and core operating earnings were $614 million. I am very proud of everything the team accomplished during the very challenging year. We delivered solid operating performance, one significant new business in both business segments and continue to execute on our key strategic growth objectives which will position the company for long-term success.
Slide 6 provides 2020 business highlights. Net sales grew faster than industry production by 6 percentage points reflecting above market growth in both of our business segments. Our E-Systems business which grew 10 percentage points faster than the market in 2020 is benefiting from the shift to electric vehicles, the trend that we expect will support significant above market growth for the next 10 years and beyond. Despite a slowdown in the overall quoting activity in 2020 related to the pandemic today we're announcing $2.8 billion of backlog which reflects conquest wins in seating and significant new awards in electrification. Jason will discuss the backlog in more detail later in the presentation.
Last year we won business on significant electrification platforms, including the highly complex battery disconnect unit with General Motors for the GMC Homer EV and a plugboard connector for Volkswagen modular electric vehicle platform that connects the battery to several high voltage wire harnesses. The engineering work we are doing on these programs for GM and Volkswagen is expected to create opportunities to win additional business as derivatives are added to these new EV platforms.
We also won business with a customer who requested not to be named to provide high-voltage and low-voltage wiring harnesses for new electric vehicle launching this year.
Finally, we received over 60 awards in 2020, including the JD Power Quality awards in seating and The Pace award in the E-system that we noted earlier in this year recognizing Lear for our ESG efforts, operational excellence, innovation, quality and safety.
Slide 7 highlights a few of the key program changeovers in seating as well as new program launches that are part of our 2021 backlog. Over the last 10 years we have made targeted investments to increase our vertical integration capabilities. As a result we had the most complete capabilities of any seat supplier which is apparent in the diversity of our products we are launching in 2021.
In addition to our traditional zip business we may component such as water fabric, foam and structures both for internal use and for sale to our seating competitors. These component capabilities combined with our INTU suite of technology products allow us to partner with our customers early in the vehicle design and development process, providing us with a distinct competitive advantage as we did our new business.
Also of note this year is the launch of our first ConfigurE+ product for the new Volkswagen commercial van in Europe. We have another ConfigurE+ program launching with a North American OEM in 2023 and many other OEMs have expressed interest in this technology. We also are exploring additional applications for our ConfigurE+ technology beyond the traditional automotive such as for the last mile delivery service providers, logistic providers and [autonomous] vehicles.
Slide 8 highlights key upcoming E-systems launches which in addition to our traditional product lines includes new electrification and conductivity business. Our electrification launches include nine separate programs across Europe, Asia and North America. I will talk more about our product focus areas in electrification in the next few slides.
Slide 9 highlights Lear electrification product portfolio and shows how this business has developed since we are one of the industry's first suppliers of high voltage wiring and charging systems for over 10 years now.
In 2008, GM chose Lear to supply electrical distribution system for the Chevy Volt where we developed the first mass-market onboard charger and supplied high voltage wiring and connectors. By 2010 we were supplying five customers with electrification content. Over the past few years we conducted an extensive study of the market concentrating on growth prospects and competitive dynamics. Through these efforts, we've identified the product segments where we can leverage our core capabilities and generate attractive financial returns on a sustained basis.
This exercise culminated in Lear choosing three product families on which to focus. Power electronics, battery management systems and high voltage wiring and connection systems. Today Lear is the only tier 1 supplier with the full range of capabilities and expertise to be a full architecture solutions provider for both electrical distribution systems and power electronics. Using our vast experience we can integrate different functions in different pieces of the electronics in the vehicle reducing weight and increasing efficiency which translates in the longer EV ranges and faster charging and the trend towards highly integrated power electronic solutions plays well to our strengths and we can offer different pieces of that portfolio in unique ways to solve customer needs.
Most high-voltage connectors are being customized for applications to support unique designs at each OEM. These connectors require greater complexity and leverages are position as the provider of the highest power density solution in the industry. As industry transitions to electric vehicles within a strong competitive position and standard benefit as high power connector catalogs develop over time.
Battery management systems are increasingly critical components for electrical vehicles and ensure that the battery is operating as efficiently as possible which maximize driving range. These highly software intensive products had millions of lines of code. In our experience here combined with our domain knowledge will be invaluable as software continues to replace hardware in the electrical architecture.
In 2021 we will be providing electrification content to 17 different customers and over 90 vehicle models reflecting significant expansion and diversification of our customer base. Based on business we have already been awarded. We will have a very active launch schedule for the foreseeable future. I'm really excited about the opportunities this provides for our E-systems business.
Okay slide 10 depicts the key components required for a high-voltage electrical architecture which we reviewed in detail on our third quarter earnings call. We are showing the slide again today to reinforce how we have narrowed our focus on the areas where we can best leverage our core competencies. As shown earlier in the presentation we have upcoming launches in all of these product areas.
On slide 11 we highlighted the growth potential in electrification. In 2020 electrification sales totaled $270 million. This year we expect this business to grow to almost $400 million and within three years we expect the business to grow to $700 million. All of this business has already been awarded.
Looking out a little further we are targeting $1.4 billion of business by 2026 which would represent a 32% compounded annual growth rate in electrification from 2020 and will contribute 3 percentage points of growth over market for each systems overall. This growth reflects both traditional customers who are investing in this new electric vehicle offerings as well as companies new to the industry. As shown here annual quoting activities for electric vehicles continues to accelerate, we expect quoting activity in 2020 will increase throughout the year end as we pursue additional opportunities with existing new customers.
Win rates on pursued business are targeted in the 25% to 35% range. That is consistent with our historical levels which will result in a continued growth over market for our E-systems business and for Lear overall.
As OEMs increasingly commonize their new vehicle architectures we find those awards to be particularly valuable. We are engineering and manufacturing components such as the main battery connectors and the battery disconnect units that are being designed in the customers’ basic battery packs.
Engineering unique designs, executing for our customers and providing differentiated technology is expected to support future growth as these core elements are reused for different vehicles on common architectures.
We are working with many potential customers including new electric vehicle companies and technology enablers such as battery makers to show them the value of our technology offerings. Our many years of experience in electrification and the family of products we have developed provides a platform for growth where companies entering the vehicle electrification market.
Recently we secured a new electric vehicle customer who valued our experience, capabilities and the ability to ramp production quickly integrating both wiring and connection systems and building on our global footprint. While this NEV manufacturer has asked us to keep this program confidential, we expect similar opportunities to present themselves going forward as startups and established OEMs prioritize industry expertise, engineering capabilities and speed to market.
Now I'd like to turn the call over to Jason for a financial review.
Thanks Ray. Slide 13 shows vehicle production and key exchange rates for the fourth quarter. During the fourth quarter global vehicle production was up approximately 2% compared to 2019. On a Lear sales weighted basis global production declined by 2%, the reduction of 2% reflects both Lear's regional mix of business and Lear's fourth quarter fiscal calendar which had three fewer days in 2020 compared to 2019.
In North America, production was relatively flat compared to a year ago. Production on our top platforms was up 5% as the prior year period was negatively impacted by the GM strike. In Europe industry production was up 1% and in China production increased 5%. From a currency standpoint the U.S. dollar weakened against our major currencies.
Slide 14 highlights Lear's growth over market in the fourth quarter and full year 2020. In the fourth quarter sales grew above market in both seating and E-systems as well as in each of our major markets. Total company growth over market was 8 percentage points driven primarily by the impact of new business in both segments. The E-system growth over market was 11 percentage points in the quarter and seating outgrowth was 7 percentage points.
On a regional basis North America growth over market benefited from the non-reoccurrence of the GM strike in 2019 and new business awards. In the rest of the world new business awards were the primary driver of growth over market. For the full year growth over market was 6 percentage points reflecting 10 percentage points in these systems and 4 percentage points in seating.
Slide 15 highlights our financial results for the fourth quarter. Our sales increased 9% to $5.2 billion. Excluding the impact of foreign exchange and acquisition sales increased by 6% primarily reflecting the addition of new business in both business segments.
Core operating earnings were $330 million up $89 million. The increase in earnings reflects the margin-accretive backlog and positive operating performance in both business segments partially offset by net COVID related costs. In 2019 fourth quarter operating earnings were negatively impacted by lower volumes associated with the GM strike.
Adjusted operating margins were 6.3% in the fourth quarter compared to 5% a year ago. Adjusted earnings per share were $3.66 up 39% from a year ago primarily reflecting higher earnings. Fourth quarter free cash flow was $234 million compared to $291 million in 2019. The decrease in free cash flow primarily reflects the reversal of COVID-19 austerity measures which were implemented earlier in the year to conserve cash.
Slide 16 highlights our financial results for the full year. Sales, earnings and free cash flow decreased significantly from a year ago primarily reflecting significant volume reductions related to COVID-19. Despite a reduction in core operating earnings of almost $700 million and the actions we took to preserve cash allowed us to generate free cash flow of over 200 million in 2020.
Slide 17 explains the fourth quarter year-over-year variance in sales and adjusted operating margins in the seating segment. Sales in the quarter were $3.9 billion up 7.5% from the fourth quarter of 2019. Excluding the impact of foreign exchange sales were up 5.5% reflecting the benefit of new business. Seating margins were 7.6% compared to 5.9% last year reflecting positive operating performance, benefits from the non-recurrence of the GM strike in 2019 and the margin-accretive backlog partially offset by net COVID related costs.
Despite the challenges of operating in the COVID-19 pandemic our seating business continues to pose strong financial results. Over the past decade our seating business has consistently delivered returns in excess of our cost of capital and generated strong free cash flow allowing us to continue investing in this business to further strengthen our industry leading position.
Slide 18 explains the fourth quarter year-over-year variance in sales and adjusted operating margins in our E-systems segment. Sales in the fourth quarter were $1.3 billion up 13% from the fourth quarter of 2019. Excluding the impact of foreign exchange sales were up 9% driven primarily by the impact of new business and our growing electrification business.
Core operating earnings increased from $92 million or 7.7% of sales in the fourth quarter of 2019 to $103 million or 7.6% of sales in 2020. The increase in earnings resulted primarily from improved net operating performance including restructuring savings and the benefit of new business. We continue to make progress on our overall assistance margin improvement plan. Despite the challenging operating environment and resulting premium costs we were able to deliver margins largely in line with the fourth quarter of 2019 while funding additional engineering investments that support our fast-growing backlog especially in electrification.
Slide 19 shows the assumptions for our global vehicle production volumes and currencies that form the basis of our 2021 full year outlooks. Based on production outlook on several sources including internal estimates, customer production schedules and IHS forecasts. At the midpoint of our guidance range we estimate a 9% increase in global production or approximately 13% on a Lear sales weighted basis.
By region we expect production to increase 20% in North America, 10% in Europe and 3% in China. At the high end of our range we are forecasting global production increased by 12%, 2 percentage points lower than IHS this January forecast.
Our vehicle production outlook reflects some anticipated disruptions to near-term production resulting from shortages of certain electronic components as well as other risks posed by the ongoing COVID-19 pandemic. From the currency perspective our
2021 outlook assumes an average Euro exchange rate of the $1.18 per Euro and an average Chinese RMB exchange rate of 6.65 RMB to the dollar both up about 4% from 2020.
Slide 20 provides our financial outlook for 2021. Our sales guidance is $19.8 billion to $20.8 billion, an increase of 19% at the midpoint compared to 2020. Excluding the favorable impact of foreign-exchange sales are expected to be up 17% at the midpoint of our guidance reflecting primarily higher production volumes and a benefit of our $1 billion backlog in 2021.
We expect sales to grow faster than the market again in 2021 with total company outgrowth of approximately 4 to 5 percentage points and E-systems outgrowth of approximately 10 percentage points. Core operating earnings are forecasted to be in the range of $1.13 billion to $1.3 billion. The midpoint of our guidance range reflects full-year seating and E-systems adjusted operating margins in the low to mid 7% range. Segment operating margins in the first quarter are likely to be lower than a full year outlook primarily reflecting premium cost and production disruptions associated with the industry-wide semi conductor shortage.
At this point we expected disruptions on a relative basis to have a more significant impact on E-systems and seating. Restructuring costs are expected to be approximately $100 million in 2020. Capital spending is forecasted $600 million or about 3% of sales. Free cash flow forecasted to be in the range of $550 million to $700 million. One final item I want to highlight that we expect our headquarters spending to increased to approximately $70 million per quarter in 2021 reflecting the unwinding of austerity measures, increase investments in IT and higher compensation expense.
Slide 21 shows our 2021 to 2023 backlog of $2.8 billion. It's important to note that our sales backlog includes only awarded programs, net of any lost business and programs going off and excludes pursue business and net new business and are not consolidated joint ventures.
Backlog increased by more than $100 million compared to last year, despite pandemic shutdowns impacting [employing] activity last spring and lower industry volume assumptions.
From the segment perspective our backlog is split roughly 2/3, 1/3 between seating and E-systems respectively. The seating backlog includes a portion of the countless awards we announced last year as well as our first ConfigurE+ product launch for a VW commercial van would start production later this year in Europe and our E-system segment we continue to win new business aligned with emerging industry trends, especially in vehicle applications which represents approximately 50% of the backlog in that segment.
Consistent with historical experience we expect the third year of our backlog to continue to grow as there are still several programs that we are pursuing that will launch in 2023.
Now I will turn it back to Ray for some closing thoughts.
Thanks Jason. Turing now to slide 23. It is in a very exciting time in the [auto] industry. As global production volumes are growing and the transition to electric vehicles is accelerating. Lear is well-positioned to benefit from both of these trends and I am very optimistic about the year ahead. We have strong momentum in both our business segments. We plan to continue to invest in our core businesses. Areas of focus include strengthening of vertical integration capabilities in seating to deepen and widen the mode around the business to protect our competitive advantage.
Growing our wiring business and connection systems business and continue to accelerate our position of electrification and across both businesses investing in our operations to remain the leader in operational excellence. As part of this strategy we are going to concentrate on the types of investments that have worked for us in the past.
We are planning to hold an Investor Day in the fourth quarter, at which point numbers of Lears's senior management team will provide an in-depth review of the company's long-term vision and growth strategy, product segments and financial objectives. And I hope we can do this in person and now I'd be happy to take your questions. Thank you.
We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Rod Lache from Wolfe Research. Go ahead.
Good morning everybody. I had a couple questions on EV. Just first of all externally it looks like the landscape of potential customers for you is expanding almost every day. There is another company that's going public and we've estimated that they've raised something like $40 billion new entrants over the past year. So we're just hoping you might be able to characterize what the process is for you as you're looking at this expanded universe do you have to expand your application engineering team to support a lot more platforms? What do you pick and choose? How do you guys approach this?
Well, yes. It's a good question and we have spent a significant amount of time given the complexity in the number of new entrants in electrification and I think first of all Rod when you think back it wasn't that long ago we're talking about quoting $300 million of business and we talked about being very selective in growing our and expanding our customer base and I think we've done a remarkable job. I think back to when we're on five different customers and now we're expanding that to 17 and we were selective through that process. Really focused on different components that we felt we could scale and that as derivatives were being introduced we could given that we meet all the criteria from the customer expand that product line across multiple platforms.
As new entrants are coming in we do study and do a lot of work around the long-term viability, the strategic nature of the new entrants into the market and where we think they'll be positioned long term and we do take that into consideration when we look at risk and rewards on where we're going to put our capital.
And so that is a part of the equation that it's something that we do consider and I think we've been very successful. If you look at the expansion of customers we've been very selective. We have invested where we think we can win and put ourselves in a position like I said.
Rod what's interesting is this battery disconnect unit it used to be originally the bulkhead disconnect unit that we designed for the original Volt and we've been in this business for well over 13 years. So we have a tremendous amount of experience around the technology and innovation within the electrification area where we focus our products and now it's the battery disconnect and what we're hopeful on the Hummer that that as that platform accelerates across different vehicle lines that we put ourselves in the best position to win those derivatives and that's how we look at it Rod and then as new customers come in a very similar approach; how can we best position our products where we create value and create a longer term scale within that vehicle line.
Great. Thank you and just to follow up on that, you've mentioned before that the addressable content for you on EV is over $2000, can you just maybe characterize what your average content might be or the number of vehicles you might be on when you get to if you hit that 1.4 billion revenue and I was wondering if Jason might be able to just give us a quick word on the semiconductor shortage? Aside from obviously production volatility, are there other things that are affecting you like premium freight or other things that might we might consider to be temporary?
Yes, let me start with the last question first there. So we are incurring some modest premium cost that is not the significant issue for us today and if you look at our two business segments and seating the impact of the semiconductor disruption is really driven by the loss item.
On the E-systems side we have that plus we do buy those parts and use them directly and components that we sell to customers and so there is a 24/7 effort by [indiscernible] and the E-systems team to secure parts to protect customer production so there is an extraordinary effort underway.
And there are some premium costs that hasn't been overly meaningful; the bigger impact has certainly been just the variable margin associated with the loss production but that's not to say that there isn't a bit of risk associated with that. There hasn't been a big impact.
In regards to the average content it really just it depends on the program and the customer but technically we are not being awarded the complete complement of power electronics, wiring connection system at an individual program. So all those content opportunities $2000 or more at each vehicle, the average content is going to be half that in most cases. In some cases we are just providing connector systems it may be $100-$200. So there's a fairly wide range when it comes to electrification [indiscernible].
And just to add to that Rod, I think what's important when we talk about the 101 with having power electronics, power distribution, connector systems we are not naive to think that customers are going to source because of risk and other factor share wallet, those type of things the complete architecture. We do believe by having the domain knowledge in the expertise with software and the ability to drive efficiency and cost gives us an advantage on the individual components and how they quote.
So we are after the whole architecture. We want to win it all. I mean that will be great that's how we have positioned ourselves. However, we do put ourselves in a position where we can design the most optimal components understanding the power distribution across those components and so what we do when we quote we do have the ability to understand the values that reflect the component that we are quoting like a battery charging system or battery disconnect system or battery management system.
I mean that expertise coupled with what we have with wiring and connectors gives us a distinct advantage and I think through the Volkswagen award what's beautiful about this electrification is that it's kind of a clean sheet there is an catalog that exists and so why this significance is so important for us on winning that connector business with Volkswagen is because we believe there is a legacy there that we believe that connector system will be used for years and go across multiple platforms successfully and so having that early adapter knowledge when we are working on this 13 years ago and being able to continue to gain experience I think that we are just working on it 3 KW charger now we are in development on a 22 KW.
And it's across every one of our different product lines that we are in the next generation of technology and innovation. I believe this trains moving and if you're not on it, you are not to get back on it because it's happening so quick and so the investment we talked about in respect to pressuring the short-term margins we are not going to take business that doesn't meet our targeted returns or exceeds them.
So what I am excited about is that I get to see the programs that we are launching. I get to review the financials and my commitment to the company and to our investors is that we are going to be smart about where we invest. We want to make a fair return. But we also have to focus on delivering these things and executing them to deserve the right to participate in the next generation of products and that's been our focus and I will tell you the quoting activity we discussed daily is accelerating such a pace and we talked about the business we won just a month ago was a new EV that's going to be launching this year.
They are thoroughly impressed with our capabilities and that was something that we targeted. The team did a remarkable job of gaining that business in a short period of time.
Great. Thank you.
Our next question is from Joseph Spak from RBC Capital Markets. Go ahead.
Good morning. Thanks Ryan and Jason for all the details. I guess just the maybe the first question to start with the backlog which I know was upper versus last year even though industry production was lower. It does seem like maybe some of the backlog for seating shifted from ‘21 to ‘22. So I was wondering if you could talk a little bit of what's going on there and then the electrification I am sorry the E-systems backlog is pretty flat and again I know the production is lower. But you just sort of talk about all this quoting and win activities. So is that an issue where it's really going to impact that ‘23 open year-end and beyond that, we should see acceleration as you continue to report the backlog in future years?
Yes. Let me start with that and Jason and then you can kind of talk about the seating and the E-systems but yes I think the pandemic did impact the quoting activity. There was a period of time that particular on the electrification things were slowed down, I am not going to say impact was significant but did impact the timing awards and obviously we were announcing backlog. There is a significant amount of business that work in process right now of quoting that were I will say somewhat carried over from last year and it's a significant number and so when we are looking at a quoting pipeline we have done a nice job like I said of and we used our historical numbers in the 25% to 35% range of successful wins.
We want to win it if it financially makes sense, but some of that was just due to the delay and the carryover but I don't again, what we were seeing is an acceleration and we were really building up resources around what not only we were seeing today, but what we believe we are going to see in the next couple years.
In terms of the numbers starting with seating 2021, we were estimating $825 in 2021 at 550 now. That primarily the timing of launches so at a number of programs at the onset of COVID there are number of announcements or customers delayed the launch dates and so things that were scheduled to ramp up in the fourth quarter last year and in the beginning of ‘21 got pushed into the middle of ‘21 a number of programs and so you see kind of the corresponding benefit from that in 2022.
So that's the main factor going on there. In terms of E-systems I think we are at the cost of an opportunity to increase the backlog and you see that the relatives [indiscernible] 2021 there are a still a lot of were, 2023 I should say there is a still a lot of programs that we are quoting and we’ve awarded a program in December of last year that is launching this year. I think there could be more opportunities like that that we see in ‘22 and ‘23 driving the backlog up further and certainly just this overall explosion and opportunity on the quote pipeline and electrification is going to drive the backlog up in E-systems. I think as Ray said there was a slow period the first half of 2020 where there wasn't much business awarded and that's weight on the amount of source last year but there is a lot going on now and there is ample opportunity to continue driving the backlog up.
Yes. It does seem like the design cycle for electric program is faster. Second question is you mentioned a bunch of sort of investment support electrification initiative, I think you even said it was a little bit headwind in the fourth quarter. Maybe if you can quantify that but I guess more importantly how do you view that in ‘21 and going forward to support all their efforts and then maybe just also [‘21] on E-systems margins. Is there not a dollar impact but is there a margin impact from copper that's sort of embedded in the guidance?
Yes. So in terms of the engineering investment and I really put kind of engineering and launch together we have got 45 to 50 basis points of incremental costs in E-systems in ‘21 as a result of that. On the commodity side it's about a 20 basis points impact for the recent increase in copper and that's mostly transitory there. 90% of our copper exposures is passed through to our customers where the quarter lag and sort of the modest impact from that and then the balance of the impact is from the 10% that we control. So that's the impact we have factored in Joe into our outlook for E-systems.
Thank you very much.
Our next question is from James Picariello from KeyBank. Go ahead.
Hey good morning guys.
Good morning James.
Previously you separated out the ENT portion of the E-systems backlog. Can you provide that breakout within 900 million, I believe last year you accounted for about two thirds with electrification sitting at 400 million. So any color there will be helpful.
Yes. On electrification it's about $450 million, 50% of the $900 million and then we have just under 1$00 million of connectivity. So about $540 million, I think is the number between the two in the 900 million backlog.
Got it. Okay. And then if I look at slide 10 as we think about Lear's capital allocation capacity. The bolt-on M&A strategy component within that are there any product verticals within that bottom portion outside of Lear's current portfolio that could make sense bringing in house one day?
No I think that we've consciously made the decision to either de-emphasize or not participate in certain product categories. As we said in the prepared remarks we spent the last two years really studying this market and what we're looking for is an alignment of our core capabilities with where the customer needs us and so the areas that we're investing provide that value proposition for us and I think that's what gives us the confidence in both the margin profile that business longer term and our ability to generate returns on a sustained basis.
So components more closely tied to the battery and inverters. We don't think we can be competitive in that. We're not going to make investments here. We think there is ample opportunities in the top part of that chart.
Interesting. Thanks.
Yes. Thanks.
Our next question is from David Kelley from Jefferies. Go ahead.
Hey good morning team and thanks for taking my questions.
Good morning.
Just looking at the operating earnings guide applies a bit lower margin relative to the second half run rates, you referenced premium freight cost but there are a number of moving parts, the COVID costs continuing but also austerity unwind and then of course ramping sales. Just wondering if you could provide a bit more color on some of the puts and takes and maybe how you're thinking about cadence as some of these supply chain costs hopefully normalized in the second half of the year?
David is your question about the company overall?
Yes. Thanks Jason.
Yes. So if you look at the second half of 2020 we ran at about 6.5% total company. The biggest headwind comparing that to what we see for 2021 is really volume. So even though volumes are up year-over-year compared to the second half of last year they're actually down about 5% and so while revenues are increasing that's really driven by the backlog. Backlog's rolling on at segment margins but you have this lower volume rolling off that variable margins again relative to the second half of last year's run rate.
COVID and other premium costs related to the semiconductor issue we have embedded in both segments guidance. We have about a 40 basis point headwinds in E-systems and 25 basis points in seating but relative to the second half of last year they're actually both a bit favorable and the company is about 15 basis points favorable from the second half fund rate because of the non-recurrence of the high level of public premium costs we incurred last year.
Commodities are about a 25 basis point headwind for us relative to the second half of last year more in seating than E-systems because of steel. Engineering is about a 20 basis point headwind really driven primarily by E-systems and then offsetting some of that is restructuring in the net performance in the business. We have 55 million of incremental restructuring savings factored into our outlook and you do the math on that David and you you're down about 50 basis points at the midpoint of our guidance range relative to the second half run rate.
Okay. Perfect. That's super helpful. Thank you and then not surprisingly I also have an EV question. So as we've reached some EV revenue scale let's say to a billion based on your 2025 target A, [indiscernible] content per vehicle B, I would assume product mix underlying is also favorable. I was curious how are you thinking about the margin opportunity for high voltage electrification here relative to your core E-systems portfolio?
Overall it's better and part of our goal in improving the E-system's margin profile over the coming years is shifting that mix from 75% wiring connection systems and 25% electronics to 65/35 that happens gradually if you look out to 2025. I think we're approaching that target allocation and that's a key factor that will underpin our ability to get back to 10% and beyond and we do see a higher margin profile in the EV business in general than we do in the segment overall. About 60% of our electrification business today is electronics. 40% wiring connection systems and we see that sort of continuing into the future and that's the main factor driving the split on the business shifting more to electronics and a little bit less on wire overall.
And I think just to add to that it's why we're so confident in that business and it really is to the point Jason mentioned we strategically looked at that business and said it was primarily wiring and we had some expertise in electronics but it was a small portion of that business. So we relied heavily on the wiring and what we did was we said listen we're going to transition to like Jason said 75% or 80% of our business was wiring too. 65% still growing the legacy business and we're still confident we're going to grow that business but accelerating the electronics business where there is a larger profile in margin expansion opportunity and what's happening is we're getting at that if you look at the timeline in our internal numbers quicker than we anticipated.
And I think on the wiring side we've talked about this the importance of the connectors and the engineer components and we're also accelerating that part of our business and so we still have a lot of work to do but everything that we put in place strategically to look at our business in a 65/35 percentage of business between electronics and wiring is working.
And so this acceleration of electrification is only helping that and so we do believe that that will come on and it is coming on at higher margins and the acceleration of vertical integration and wiring is also accelerating. So that's why we're very confident in what we're doing and I think so far the team has done an excellent job of executing to the plan but like I said we've got more work to do.
All right. Great. Thanks for the color.
Yes. Thanks.
Our next question is from Dan Levy from Credit Suisse. Go ahead.
Good morning. Thank you for taking the question.
Good morning.
I wanted to start with seating which people seem to forget is the vast majority of your business. So far no questions on seating here. You talked a lot about Conquest business in the past year and I know you have I think the 27% or 28% share target maybe you could just give us a mark to market on where you stand on share gains in seating; how much of this is reflected in the backlog, what's the opportunity for further share gains and as we think of that backlog coming on I assume it's going to be hitting at a margin comparable to what you have today.
Yes. So in terms of our market share we ended 2020 at 23% so we're still at the same rate we were previously but we did grow share when you look at Europe and North America combined we grew share there. Really it's a matter of kind of the mix of business we have in seating relative to the global mix and China held up better than North America and Europe and that weighed on the market share a bit.
We have a 28% target. We are very confident in that the Conquest wins last year and what's in the backlog this year will contribute to market share growth and in the backlog is rolling on last year and this year at the segment margins in some cases slightly better than that. The main factor of course that will determine that is primarily the mix of vertical integration versus zip. So zip program may roll on close to the lower end of our 7.5% to 8.5% operating margin target range in seating and in a more vertically integrated program is going to roll on at the higher end of that or maybe even a little bit beyond that.
And I think moving forward I mean last year was a good year. Frank and the team did a
great job of Conquest wins, net wins in respect to Conquest and then I think the year prior to that we won around 300 million and I think as we look into this year there's opportunities for us and I think it'd be on the lower range for looking between $700 million and $300 million somewhere between that number of what we consider to be possibilities this year.
Great and it sounds like most of those opportunities are based on vertical integration I mean that's sort of the play I'm picking up more share here?
Yes it I think it goes a little bit more than that in that we talk about the vertical integration and the ability to get in and work early with the customer on design and solve for solutions and/or problems and we have good insight into where we think we have those opportunities and then when I talk about those numbers those are line-of-sight targets that we're working with our customer on that. They've given us some indication that we have to be obviously meet all their criterias of competitiveness but they're giving us insight into where they think we should be positioned based on their share of wallet and other factors and so we do have a high confidence but again we got to go do our job and we got to work it and make sure that we're executing and it does play into the things that you're mentioning with the having those ability to have that vertical integration does give us a competitive advantage.
Great and then just a second question in parallel to electrification we've obviously seen a number of automakers talk about overhauled electrical architectures. Could you just maybe discuss what this means for you on net content as we're talking about the observation content opportunity maybe give us a sense of how much that incremental content factors in content reduction on wiring, copper and those architectures overhauled and then what you've seen from automakers who may want to bring some of the electrical architecture content in-house will control more of the value add? Thank you.
I'd say just generally speaking we're seeing stable electrical content in our core business. There may be a slight reduction in low voltage wire over the next five years. More fundamental changes to that space likely happen further out what we've modeled is perhaps a 10% reduction over the next 5 to 10 years in low voltage content which is more than offset by the high voltage opportunities that we have. We don't see any risk of insourcing if I understood the last part of your question on that portion of the business and on the power electronics side we focused on things that we think the customers want to buy from the outside and partner with suppliers on and align with our capabilities. So we see a very low risk of insourcing of those components.
Dan I think when we talked earlier about how we strategically select and look at customers it's important to point out that every customer has a different strategy and this isn't a universal way of how they're going after electrification and so we spend a fair amount of time where we can look at engineered components by Lear and even though listen if we do value-added assembly or we do build a print we'll look at those and quote them if it makes sense financially then we're willing to take them, but we are much more focused on aligning ourselves with customers and their overall architecture and so all of them are different. They are all completely different. There is no universal way of how they're looking at it and they're all looking at it differently longer term and so we spend a fair amount of time looking at where we can design and engineer components that fit the architecture over a longer period of time.
Great. Thank you.
Yes. Thank you.
Our next question is from Ryan Brinkman from JP Morgan. Go ahead.
Hi, thanks for taking my question.
Hey Ryan.
Hi, maybe just starting with your ‘21 outlook being based on 9% global industry growth versus IHS expectation for I think 14% how much of that difference is a result of your specific geographic or customer weightings versus more conservative underlying industry assumptions perhaps something from the semiconductor shortage or other macro factors?
Yes. It's 100% the latter there. So we have essentially a 5% cushion between IHS projection for the global market and what we've used to underpin our guidance in and it's a combination of three things one the near-term issues with the semiconductor shortage and we have seen reductions in the first quarter releases and outlooks from our customers. If you look at IHS just as an example I think that their recent estimate was 3% to 4% impact on the first quarter production.
We're seeing more announcements beyond that. So I would say it's likely going to exceed that. So that's one factor. Second factor is just the ongoing risk of the pandemic itself we saw some modest disruption in production in China the first part of the year as they went into a shutdown in certain regions and that impacted supply and then the third factor is just demand and how things hold up overall. We've been a bit cautious given this uncertain period we've just gone through over the last 12 months. We thought that was the prudent thing to do with the stage in the year.
Very helpful. Thank you. And then just in thinking about your high voltage portfolio as outlined on slide 10, do you have today all the pieces that you desire or which represent go to market synergies with the rest of your electrification portfolio or are there other aspects of high voltage electrical architecture you may wish to expand into and if so what would be the best way to do that do you think organically or inorganically?
Well, you know what we have all the capabilities in what's highlighted here in Lear's portfolio and we're obviously have developed and been in development not just on the previous generation but future generations and in development contracts with customers today and launching in any one of these things.
To answer your question, obviously software is an important ingredient and we continue to build our capabilities and competencies around the software within those areas. That's an area of the continued interest for us. We've organically done it but if there's an opportunity inorganically to accelerate that that would be one opportunity.
I think within connectors; connectors are very important. We have incredible capabilities within a company we purchased [indiscernible] with our grounding capabilities and with our power to scale capabilities and we think that's a continued area of focus. I think within the areas that we're looking at here with power distribution, battery disconnect, battery management system we're very well equipped to continue to be successful in those areas but I'd look at the like I said software an important area and the connectors and in even though we have a leading position with the capabilities I mentioned we'd love to see that part of the portfolio accelerate.
Great. Thank you.
Our next question is from Evan Silverberg from Morgan Stanley. Go ahead.
Hey guys good morning.
Good morning.
Quick question for you. Wondering what Lear's capability in flexible printed circuit boards are and when do you see such technology entering production? Thanks.
Yes. That's a good question. And we have experience we actually we've have had a couple development programs with some OEMs that we're working with on the technology and we also have a partnership with a company that actually is in production and so from a couple of different areas we're working on the capabilities and we're actually going into production in a limited way this year.
And so the way I look at it is one there is a lot of different solutions. Flat wire is one solution. I think it works nicely in certain applications. Obviously the traditional wiring, copper clad, Ethernet there's all kinds of different opportunities to and the one thing we're seeing is increased demand for function and features and power solutions.
And so I think it's something that makes sense. We're not seeing a significant pull from our customers. There is certain applications in the headliner, engine components, door panels those type of things where we're working on different designs but and there is obviously another new entrant that is really working on it but I do see that it makes sense in certain applications but I also think some of the redundancy and safety mechanisms and features within the vehicle are still going to require some of the traditional wire albeit probably more limited and then other solutions like I mentioned. So we're working across a vast variety of different technologies and innovation and I think at the end of the day to answer your question it's going to be a combination.
Okay. Great. Thank you very much.
Yes. Thanks.
Okay. That's, if I could real quick just closing comments. Do we have one more? Okay, just real quick. I want to thank everyone for participating today. I appreciate your time. Obviously a very exciting time in our industry and I will sopeak, to the team that's on the phone. I am very optimistic. We positioned ourselves to be in a great position. We have a lot of work to do. But we just have to execute. So I want to thank everyone for participating in the call and look forward to 2021.
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