Q1 2021 Lear Corp Earnings Call
[music].
Good morning, everyone and welcome to the Lear Corporation first quarter 2021 earnings Conference call.
All participants will be in a listen only mode.
If you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be and opportunity to ask questions.
Please also note today's event is being recorded.
At this time I'd like to turn the conference call over to and low and felt.
This president of Investor Relations Sir Please go ahead.
Thanks, Jamie good morning, everyone and thanks for joining us for Lear first quarter 2021 earnings call presenting today are Ray Scott near President and CEO, and Jason <unk>, Senior Vice President and CFO and.
Other members of Lear's Senior management team have also joined us on the call.
Following prepared remarks, we will open the call for Q&A.
You can find a copy of the presentation that accompanies these remarks at IR Dot Lear Dot com.
Before Ray begins I'd like to take this opportunity to remind you that as we conduct this call we will be making forward looking statements to assist you and understanding lear's expectations for the future.
As detailed in our Safe Harbor statement on slide two our actual results could differ materially from these forward looking statements due to many factors discussed in our latest 10-Q and other periodic reports I.
And 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 and 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 three for.
First Ray will review highlights from the quarter and provide a business update Jason will then review our first quarter financial results and our full year 2021 outlook for.
Finally, ray will offer some concluding remarks following the formal presentation, we would be happy to take your questions now I'd like to invite ray to begin.
Great. Thanks, Ed.
Everyone. If you could please turn to slide five I'm going to provide a brief overview of our first quarter financial results.
Lear team delivered strong results and the first quarter with sales of $5 4 billion and core operating earnings of $336 million, both up significantly versus last year.
Lear sales grew faster than industry production by nine percentage points, reflecting the above market growth and both of our business segments. Adjusted operating margin was six 3% and EPS was $3 73.
Slide six provides some business highlights from the quarter.
I'm very proud of what the team accomplished this quarter, we successfully navigated supply chain shortages and related customer production shutdowns that made for a very difficult operating environment at the same time, we remain focused on executing our strategic plan.
Both business segments posted strong growth above market and the first quarter.
And these systems growth over market was 10 percentage points, our fourth consecutive quarter of double digit growth over market.
And seeding growth over market was nine percentage points.
In late March we acquired Eminem plastics, a manufacturer of engineered plastic components.
For automotive electrical distribution and applications.
This acquisition is consistent with our strategy to increase vertical integration and the systems.
We also had been selected as a pace award finalist by automotive news for all three innovative technologies that we submitted for consideration.
Including our battery disconnect units.
<unk> telematics control unit and new systems.
And our into thermal comfort technology and seating.
And one pace awards for the past two years and being named a finalist for three awards. This year is a testament to our leadership position and automotive supplier innovation.
Over the years Lear has consistently supported the communities around the world and we do business.
And the first quarter, we were one of a very select group of companies and whereas Mexico that was recognized for our continued support and the areas of education health and community management.
So before I move onto the next slide I wanted to highlight that we are closely monitoring the near term supply challenges.
And higher commodity cost base and the auto industry are purchasing logistics and engineering teams are laser focused on managing through this.
To support our customers and manage our costs.
We expect these issues will be transitory and as such we are continuing to invest to strengthen our business. During these challenging times.
Turning to slide seven and I will share the strategy that we're following to drive sustainable revenue growth and profitability at Lear.
We took advantage of the downtime last year to refine our strategy, which.
Which we built around four key pillars and.
And seating you'd wanted to extend and build on our leadership position by focusing on investments and technology and innovation.
Both organic and inorganic that expand our capabilities and price will features.
And the systems, we are focused on accelerating growth and connection systems and electrification to transform the business.
And our Corp is our expertise and operational excellence.
And we plan to extend our leadership position by continuing to invest and automation to make our factories more efficient.
The fourth pillar is around sustainability and investing in products and processes that benefit the environment as well as investing and our people getting.
Getting results the right way has been a big part of our leadership model for a long time, we firmly believe doing the right thing for our planet and our people is not only the right thing to do that will support long term value creation.
Slide eight highlights key drivers of our strategy and seating, which are focused on increased vertical integration disruptive innovation and operational excellence over the last 10 years, we have made targeted investments to increase our vertical integration capabilities.
Today, we have the most complete capabilities and more product knowledge and any other seat supplier going forward one build on the strength by continuing to develop products and processes that can't be replicated and net further separate lear from our competition.
Disruptive innovation means creating or acquiring technologies that further and further differentiate our seats with proprietary features and functionalities.
These new innovative products will help us capture market share and support margin growth.
One example of it.
Disrupt disruptive innovation is driving growth today, as our configure plus product.
We want to pace award in 2019 and is launching this year and a new Volkswagen commercial van and Europe <unk>.
Site in and around configure plus there is very strong and.
And we are seeing significant uptick and customer interest and this proprietary technology.
We also continue to explore applications for this technology beyond traditional auto manufacturers, such as last mile delivery service providers logistics providers and autonomous vehicles.
Another example of disruptive innovation is our into thermal comfort technology, which as noted earlier was recognized by automotive news as a finalist for a peace pilot award this year.
This is the first time that into intelligent comfort control software has been integrated into a complete seating system to anticipate and meet occupant seating cooling needs.
This technology also optimizes the efficiency of the vehicle heating and cooling systems by reducing energy consumption.
I will touch on our operational excellence and more detail later, but what it means for seating for the seating business is creating another path to unlock incremental value through innovative manufacturing processes.
Lear aspires to be the largest most profitable and sustainable ceding company and the world and I absolutely believe we have the right strategy in place.
On slide nine and I will describe how we are proactively positioning our E systems business for the future.
And this strategy is a natural extension of the operating plan, we have been executing and these systems over the past several years.
Similar to seating vertical integration plays a major part and east system strategy.
Particularly as it relates to strengthening our electrical distribution business.
We are focusing on organic and inorganic investments such as the recently announced M&A and plastics acquisition to.
And to expand our product offerings and engineered components, including connection systems.
Our customers are opening up their connector catalogs, and we are seeing an acceleration and opportunities to increase vertical integration.
Over the past year, we have been winning new business and our pipeline has more than doubled to over $250 million, including both commercial awards and in sourcing.
The auto industry is going through a historic transformation with a shift to electric vehicles.
Electrification is driving higher content per vehicle and we are concentrating on particular product lines, where we believe we have a competitive advantage and will be successful.
Our battery disconnect units launching and the new GMC Hummer is a great example of a product that we believe will lead to additional opportunities across general motors future battery electric trucks and electric light commercial bands.
We also are rapidly expanding our high voltage connection systems to address the accelerating industry shifts towards electric vehicles.
One of the building blocks of our strategy to improve E systems business that we discussed in 2019 was further diversifying our customer base.
And as a result of these efforts we have made significant progress growing our business with global jewelry, Volkswagen and general motors over the last several years.
Slide 10 highlights the operational excellence.
Our strategy pillar, which impacts the entire Lear enterprise today.
Good day, and Lear has a competitive advantages one of the autos and auto industries recognized leader and operational excellence winter.
And we intend to maintain our superior position by increasing the use of advanced automation and through our operations. We have established a dedicated organization and we are adding resources focused on accelerating the deployment and best practices throughout our company.
Evolving and improving technology is providing new avenues to use artificial intelligence and make our factories more efficient.
And reduced our overall engineering costs.
Along with data analytics, we are investing and innovation to keep improving our manufacturing process and better optimize logistics and our supply chain.
In addition to internal.
Internal improvements we are also identifying potential acquisitions to help accelerate our progress and ensure that the improvements we are making remain proprietary to lear.
And by driving improvements and operational excellence across Lear, we will serve our customers better in terms of cost quality and delivery targets.
And at the same time this will benefit margins by optimizing our cost structure to reduce deaths defects.
Moving to slide 11.
Talk about our fourth pillar of our strategy integrating ESG across all of Lear Lee.
Last year, we centralized oversight and management of ESG function ESG aligns with our core values at Lear, which includes creating a culture of innovation and inclusiveness and getting results the right way and.
Our product portfolio is well aligned with social and socially responsible industry trends like electrification.
Vehicle safety and connectivity.
Last October we announced our pledged to continue our efforts to help create a cleaner environment.
By 2030, we are targeting to use 100% renewable energy and cut carbon emissions and our manufacturing plants by 50%.
And by 2050, we aspire to be carbon neutral with net zero emissions.
Our people are what makes Lear, a special place to work and we have logged $3 7 million hours of employee training to help develop over the past two years and improved leadership teamwork culture and engagement we.
We continued to embrace diversity equity and inclusion throughout our organization to promote teamwork and creativity and innovation.
Our 2020 sustainability report will be released soon and it will described many of these ESG initiatives and more detail as well as provide additional metrics supporting the progress that we're making.
Now I'd like to invite Jason to review the first quarter financial results.
Thanks Ryan.
<unk> 13 shows vehicle production and key exchange rates for the first quarter.
During the first quarter global vehicle production increased by 14% compared to 2020, while and Alere sales weighted basis global production increased by 6%.
Increase of 6% reflects layers regional mix of business the.
The global increase and production was driven primarily by China, which was up 80% compared to last year.
China's 2021st quarter production was severely impacted by the pandemic.
And North America production was down 4% compared to a year ago, reflecting semiconductor shortages as well as other supply chain disruptions.
Production at our top platforms was down only 1% and.
And Europe industry production was flat with lear's top platforms up 4%.
From a currency standpoint, the U S dollar weakened against our major currencies.
Slide 14 highlights lear's growth over market and the first quarter.
Sales grew above market and both business segments and across each of our major markets total company growth over market was nine percentage points, driven primarily by the impact of new business and these systems and favorable platform mix and seating.
Growth over market and E systems, and seating was 10 percentage points and nine percentage points respectively.
Growth over market in North America of nine percentage points reflected the strong volumes of Gm's full size pickup trucks, and Suvs as well as Ford and Mercedes Suvs and Europe above market growth of eight percentage points was driven primarily by strong performance and the luxury segment and growth and electrification.
Our growth over market in China, 10 percentage points reflected strong relative demand for luxury vehicles.
And a fitted both seating and E systems as well as increased electrification business for.
The strong first quarter performance highlights and both business segments are well positioned to continue to benefit from key secular trends.
Slide 15 highlights our financial results for the first quarter.
Our sales increased 20% year over year to $5 4 billion, excluding the impact of foreign exchange commodities and acquisitions sales increased by 15%, primarily reflecting increased production on key Lear platforms and the addition of new business.
Our customers experienced significant production disruptions caused by the shortage of semiconductor parts and other components, which impacted <unk> first quarter revenue by almost $400 million for.
For 7%.
Production disruptions had a more significant impact on the system sales than in seating.
Core operating earnings were $336 million up 131 million from last year.
The increase in earnings resulted from favorable platform mix and the addition of new business.
Positive operating performance and both business segments was offset by continued COVID-19 impacts, including premium costs related to component shortages and.
As well as higher commodity costs.
Adjusted earnings per share for $3 73.
Up 82% from a year ago, and first quarter free cash flow was $135 million.
Compared to 113.002 million 20.
Slide 16 explains the first quarter year over year variance and sales and adjusted operating margins and the seating segment sales.
Sales and the quarter were $4 billion and increase of 19% from the first quarter of 2000 and twice.
Excluding the impact of foreign exchange acquisitions, and commodities sales were up 15%, reflecting higher production and the benefit of new business.
For operating earnings were $307 million up $106 million from the first quarter of 2020.
Seating margins were seven 7% compared to 6% last year, reflecting higher volume on Lear platforms and harriss.
Higher commodity costs were offset by positive net operating performance.
Yes.
Slide 17 explains the first quarter year over year variance and sales and adjusted operating margins and our <unk> systems segment.
Sales and the first quarter were $1 4 billion and increase of 24% from the first quarter of 2020.
Excluding the impact of foreign exchange acquisitions, and commodities sales were up 17% driven primarily by the strong backlog of new business as well as higher volume.
For operating earnings increased from $53 million or for 8% of sales and the first quarter of 2000 $20 million to $95 million or 7% of sales and 2021.
The increase in earnings resulted primarily from higher volumes on Lear platforms and margin accretive backlog.
<unk> net operating performance was partially offset by increased engineering spending to support new business and higher commodity costs are.
Our financial results and the first quarter reflect the continuing progress we are making any systems.
Our operating performance was particularly strong in the quarter, especially when taken into account and premium costs and inefficiencies related related to the semiconductor shortages absent. These transitory issues our margins would have been in the high 7% range, despite higher commodity costs and additional engineering investments to support our strong backlog of new business.
Ms.
Now please turn to slide 18, where I will briefly talk about our balance sheet and liquidity.
And our conservative capital structure allowed us to efficiently navigate the COVID-19 crisis last year, and now puts us and a strong position to fund organic and inorganic investments to support the strategic plan that Ray described earlier and the presentation.
At the end of the quarter, we had $3 $1 billion and total liquidity, including $1 75 billion available under our revolving line of credit.
We have investment grade credit ratings from all three major rating agencies, and and March S&P upgraded our rating outlook to positive.
And if needed. We also have the capacity to take on additional debt, while maintaining investment grade credit metrics.
With respect to capital allocation, our first priority remains reinvesting the cash regenerate back into our core businesses. We also are targeting niche acquisitions to increase vertical integration capabilities and seating Andy systems and to extend our leadership position and operational excellence.
We remain fully committed to returning excess cash to shareholders via dividends and share repurchases.
On slide 19, I will discuss the key drivers for 2021 financial outlook.
There is overall business is very well diversified and despite the significant challenges across the auto industry. We have continued to post good financial results.
Production disruptions of increase since earlier this year and are negatively impacting both business segments. However, the impact of lost production is expected to be more significant and our E systems segment as it was and the first quarter cash.
Moderate inflation will have a positive impact on revenues due to pass through agreements on steel copper and other commodities. However, this will be dilutive to margins because of the increase in sales with no corresponding earnings benefit.
With respect to the semiconductor shortages theres purchasing and logistics teams are working very closely with book, both our traditional supplier partners as well as non traditional sources to meet the needs of our customers. We will continue with this approach going forward until the supply chain challenges are behind us.
Consistent with the first quarter, we have plans in place to offset a majority of the headwinds we are facing through improved operating performance and both business segments.
As a result of the factors outlined we expect seating margins to be higher than our prior outlook and E systems margins to be lower.
Despite the near term challenges, we are extremely excited about robust consumer demand for new vehicles and expect to see strong industry growth over the next several years.
We are confident we have the right strategy in place to continue to win new business and grow faster than the market, while meeting or exceeding our operating margin targets in both segments.
Slide 20 shows our updated financial outlook for 2021 at the midpoint of our guidance range. We are forecasting sales to increase by $450 million from our prior forecast of $20 75 billion and operating income to increase by $10 million from our prior forecast of one to two 5 billion.
We are increasing our full year outlook for capital expenditures by $25 million.
Reflecting increased spending to support recent business wins and both segments.
For full year outlook for our effective tax rate was lowered to approximately 21 per cent adjust.
Adjusted net income is expected to be and a range of $740 million to $870 million up $15 million from our prior guidance.
Now I'll turn it back to Ray for some closing thoughts.
Jason.
Please turn to slide 22.
Despite a difficult operating environment, we posted strong results and the first quarter. We completed our first acquisition of the year in March and we see additional M&A opportunities throughout the balance of the year I'm very proud of the recognition. We received this quarter for innovation and supporting the communities, where we live and work and.
Especially proud of the <unk> because of the award. They received was a combination of corporate support and the efforts from our employees to support the local community.
There was chosen for more than 300 companies that applied for this award.
We believe we have the right plan in place and we're executing on the four pillars of our strategy to drive profitable growth and deliver superior returns to our shareholders.
And now we would be happy to take your questions.
Ladies and gentlemen, we will now begin the question and answer session to ask a question you May Press Star and then one using a touchdown and telephone if you are using a speaker phone and we do ask you. Please pick up the handset before pressing the keys to ensure the best sound quality.
John your questions at any time, you May press star two.
Once again that is star and then one to join the question for you.
Our first question today comes from Joseph Spak from RBC Capital markets. Please go ahead with your question.
Thanks, everyone and good morning.
And obviously.
Obviously really strong.
Growth over market this quarter.
I was wondering if and I know this might be a little bit difficult, but maybe broad strokes, if you could sort of break it down.
And even by segment like how much is really pure content. How much do you think is your program mixture and exposure and how much of share gains because I know you mentioned, some some share gains and the deck.
Yeah I think.
And starting with seating.
And growth over market is really driven by the platform mix more than anything. So for example, and in North America GM full size pickup trucks, and Suvs had a very strong quarter.
And as well as the Ford explorer.
Mercedes Jelly and those are highly contented vehicles.
As well, we didn't necessarily see a significant change and CTV on the platforms compared to what they were running before but the fact that those.
Platforms ran hotter than the market overall, and really benefited seating and Europe. It was again platform mix for seating with vehicles like the force of Thaicom and that did especially well and that really helped us and.
And China, It was luxury vehicles with Audi and BMW, Daimler and that benefited both segments and the systems the growth over market was really driven by the backlog.
And in particular.
Electrification related products and products really globally.
And that segment. So it's not so much a richer CTV and individual platforms with more the mix of vehicles that we happen to be on running better than the underlying market.
Okay. Thanks for that and then the second question is and.
And you pointed to some.
Additional pressures here.
Over the balance of the year.
Maybe.
Can you sort of quantify.
And things like a steel headwind or for some inflation on some of the foam products and seats and and then also.
While on the topic of commodities and I know you mentioned the copper pass through effect.
How much did that weigh on the margins and the quarter and what do you expect that to be for the year.
Yeah, So maybe I'll start with the last part of your question. So.
Copper impacted E systems' margins by about 25 basis points and the quarter and we lock and copper at three to six months and advance and so theres a bit of a lag effect there we see a more meaningful impact on the full year copper, it's a it'll be about a 50 basis point headwind for us year over year.
And he systems and the steel side and in seating and commodity is generally which really includes steel.
And it includes a foam chemicals and to a lesser extent leather hides.
And we saw a 50 basis point impact and the first quarter and we see that growing to about 60 basis points.
And for the for the full year. So it has gotten a little bit worse, and what and what we saw for anticipated earlier in the year and included in our guidance in February.
Thanks very much.
Thanks.
Our next question comes from Rod Lache from Wolfe Research. Please go ahead with your question.
Good morning, everybody.
And.
Following up on Joe's question.
Curious if you anticipate recovering the headwind from raw materials that you're seeing right now and.
And presumably some some of that headwind and you're experiencing from the disruptions and other words should we be thinking that next year, you might be able to achieve unusually larger.
Incrementals or should we be anticipating some investment in engineering or for some of the growth initiatives you alluded to.
And for commodity specifically, we would expect a tailwind heading into next year now and <unk>.
Copper, though and in E systems, the dilutive effect of the pass through agreements that will remain that doesn't reverse course, but the portion of the 10% of our copper buy that that we're responsible for and we would see that as nonrecurring and perhaps even reversing course heading into next year, so and isolation that will be a positive cash.
And there'll be a positive year over year and both segments. We do expect that to continue increasing our investment and engineering and E systems. So there will be.
For a modest headwind for that and heading into next year.
But it's you know, it's a little bit early to get into our 'twenty two guidance discussion at this point probably rod.
Okay and.
Just two other things one is seating backlogged and and in the quarter out and about 1% to growth is there. Some lumpiness in this year's launches what are you sort of looking forward to later in the year and and secondly.
I wanted to just clarify your comments about seating margins being higher and E systems being lower.
And you actually provided a few updates to margins over the course of Q1, and so maybe you could just clarify which.
What was the reference point.
Thank you were using it for the higher and lower comment.
Yeah, Okay, well starting with the backlog there is some lumpiness. There Q1 is the lowest backlog quarter for seating and.
And then it grows throughout the year. If you had the launch of the for Bronco for example, a big program and a.
Seat business and these systems backlog is kind of the same number quarter to quarter throughout the year and regards to margins the reference point.
And as seven 4% for seating and seven 2% three systems. That's what we had assumed at the midpoint of our guidance range.
And when we issued guidance in February and and I did talk about some developments throughout the quarter that we're signaling some.
Opportunities on the seating side and some.
Risk on the system side. So the biggest driver of that and we would just take a step back and talk about <unk>.
More completely what is what has changed.
Since we issued guidance.
Certainly the level of production disruptions.
Have have worsened, particularly for our E systems business and if you look at the first quarter, we talked about a 7% impact on the overall company, but that was about 5% and seating and 10% of any systems and if we look at the second quarter, we're expecting that 7% to be more like 14%.
And the impact on each segment to roughly double as well from the first quarter, so something like 10% and seating and and 20% on the system side. So if you think about kind of sequentially what to expect from us and the revenue side, we expect that the midpoint to see revenue that's down 9% sequentially for.
Q1 to Q2, we think that's the peak.
Of the shortage impact and then we see a gradual recovery into the second half.
The year from there and so if you look at a 9% reduction and the second quarter from that gets you to something like $10 2 billion of revenue and the first half that leaves you roughly $10 5 billion and the second half. So we had some.
Shortage related disruptions continuing into Q3, and then we see the business sort of normalizing in the fourth quarter and and when we get back to more normal volumes and the fourth quarter something that's closer to what we saw and the first quarter, we would expect seating margins sort of and the seven 5% to 8% range and and <unk> systems and a range of seven to eight.
Percentage and the reason for the wider range and E systems, one the volume reductions given the variable margin for that business have a more meaningful impact and on the operating margins, but perhaps more importantly, as you're exiting the year.
Timing does the commercial resolution and pass through the commodity increases and.
We will ultimately determine where we exit the year there may be some of that that leaks into next year as well.
That's very helpful. Thank you.
You're welcome.
Our next question comes from David Kelley from Jefferies. Please go ahead with your question.
Hi, good morning, everyone and.
Good morning, gentlemen.
Thanks for taking my questions just wanted to follow up on <unk>.
These systems and was hoping to drill down a bit on the outgrowth and we've heard from architecture and connector suppliers that observe some pull forward and volumes in Q1 or even some channel replenishment and just curious if youre seeing that as well given your mix of electronic systems and software.
And we're being I think mid twenty's per cent or so.
No we haven't seen any of that and you know we generally are selling directly to the Oems and some cases, we are selling to suppliers and then sell to the Oems, but the impact of that would be a.
Very limited for our business just generally speaking.
Okay got it. Thank you and then Jason you referenced a couple of times on going to EV strength as a driver of the outgrowth in Europe.
Was just hoping you could give us a bit more color as to the impact there and how youre thinking about visibility to the balance for the year for E. B exposure. It seems like customers are focusing on.
On that segment, even in light of day component shortages, so any color there would be great.
Yes, so it's really a couple of different things going on and seating. It's electric vehicle platforms that were on where they are holding up better than the market. Overall as you mentioned customers are really.
Investing in those platforms protecting those platforms as they as they launch and as the market demand increases so vehicles like the portion pack and benefited from that and.
And the systems, it's more just the roll on of the growth we have in electrification. If you recall, our $900 million backlog any systems over three years about half of that $450 million of that is and electrification. So it's just the beginning of that rolling on.
And and it was particularly strong and in the first quarter and I think to your point that customers are protecting those platforms may be more than the other parts of their portfolio and that that has helped us. So you know vehicles like the Mustang Mach E were very strong for us and any systems in the first quarter and although we don't have high voltage content on that.
It did benefit from higher volumes on and electric vehicle and low voltage content as well.
Yes.
Okay, great. Thank you.
Thanks.
Our next question comes from Dan Levy from Credit Suisse. Please go ahead with your question.
Hi, Good morning, Thank you for taking the question.
First one maybe you could just give us a sense of your underlying end market assumptions.
And I think we know all of you.
You and and some of the other suppliers out there even combination.
The third and third party forecasters and from drilling schedules and maybe you could just give us a sense and how much your forecast is embedding.
Some of the more draconian outlooks that are that are out there and how much of this is more customer specific vs.
Hum versus more of an industry wide phenomenon and maybe how much volatility you would expect to that end market out and what that viewers.
So of course, we are using IHS and others do as one input and the thought process for our guidance. We also have.
It's a good insight and both business segments with our customers and regards to their specific plans for the remainder of the year. So and if you look at what the key customers have announced over the last several weeks in terms of the second quarter. In particular, we have a pretty good line of sight, it's volatile still but we have a line of sight.
More meaningful reduction and the second quarter than I think IHS and others are projecting and and I don't think that's unique to our portfolio. It may impact the systems more than seating, but on balance between the two I think it'll be similar to the market.
Overall.
And so what we've assumed here at the midpoint is a global industry volume increase of 9% I think IHS is at 12%. So we've embedded a 3%.
Reduction in industry production.
And two to factor in what we're anticipating and expecting is further announced downtime that's that hasn't been publicly announced at this point.
Is there a chance that things do have a little bit better and that absolutely. There is a chance to that but given the low.
The situation that we're seeing in front of us right now and.
And we thought that was the right struck the right balance and and at the low end of the range look.
For tax for roughly a 5% additional reduction from what customers have announced over the final three quarters of the year.
And and given the significant stock replenishment that we haven't had in North America, especially and and trucks I assume theres no capacity constraint issues on your end.
No there are no capacity constraints on our and we manage to.
Worked very closely with suppliers and our customers to get through the first quarter without any direct disruptions to production and and that was no easy feat that that's for sure there were shortages and foam chemicals that and Frank and the seating team fought through and and certainly a microchip related shortages and the.
The E systems side that Karl and his team worked their way through.
And just as a frame of reference.
And the electronics business of Lear is a.
Typically small business when you look at the full book of business, it's five or 6% of our total portfolio. So there are there isn't as much direct exposure for us is some of the others and the space.
Great and.
And then my second question is on seating, specifically and I think it's been.
And largely accepted that seating and is not a product set that automakers want to in source with rare exception sneak a lot more cash.
For an automaker can go get seats from yourselves. So one of your competitors given you have all the skills and competencies.
But we did see I think it was a month or two ago and announcement between VW and brothers for seating JV. So I guess my question is.
Is there any shift in philosophy by automakers toward.
Pete and sourcing or how they're approaching.
And because I just thought that was an interesting announcement.
Yeah actually.
We've seen just the opposite and I think that particular article that you're referencing is my understanding is actually.
It's a divestiture what was in house and a cash.
Combination with Rosa so.
Just kind of reflecting.
Their willingness to exit.
What was was in house and I think generally and what we're seeing is.
Theres been a number of situations where.
Customers direct are.
A significant part of the bill of material.
We're seeing.
The customers now are willing to look at that differently not necessarily a full service <unk>.
Design or outsourcing, but much more flexible and when it comes to opportunities to create value and I think when we talk about.
The investments that we're making in seating it's aligned with how our customers are looking at creating value within the <unk> space.
We talked about thermal comfort, we believe that and integrated solution.
And of components.
And a more modular concept and it creates a significant value proposition for our customers and they are absolutely forward leaning and matter of fact zone on our call yesterday was one of the premier of German Oes and Theyre looking for solutions, where we can help them and.
And having that when we talk about the need to be vertically integrated and have expertise you can create solutions that create a value proposition from a cost.
And our quality and delivery standpoint, and so we're actually seeing customers looking at different options that are much more.
Forward and that they want to outsource more because again they have a tremendous amount of.
Investment going on and other parts of their business and where they did have an in source theyre looking at reallocating those engineers or at least the investment required to.
Players that can still deliver a value proposition so.
We've been happy to see the change that.
Has been occurring with our customers.
Great. Thank you.
Thank you thanks.
Our next question comes from John Murphy from Bank of America. Please go ahead with your question.
Good morning, guys just wanted to ask a first question on on on seating.
I mean, how you are talking about mix makes a lot more sense.
For me based on what we all know and what's going on and the markets. We havent heard that quite as explicitly from other seating suppliers. They haven't highlighted makes us quite as strong.
And you do something else it might be going on in other parts of the market where mix might not be as helpful. For seating. It just seems kind of odd.
A set of circumstances, we're hearing from some other folks and then also you know how much.
Higher when you were talking about margins on seating.
And are thinking I mean, it's you know I mean, there's and I mean, you're talking about some point for plus but I mean, you just did higher than that and the first quarter. So I mean, how should we thinking about the actual sort of levels above that seven 4% and talked about.
Yeah, well, maybe I'll start with the last part of that question and then rare Frank and talk about the first part.
And in terms of the operating margin.
<unk> stayed away from providing a pinpoint number and really that's because of the of two things.
The magnitude of the disruption that's going to take place and the second quarter, we see a meaningful reduction in volume and the second quarter and and depending on how that plays out by platform and how the second half plays out by platform that can have a pretty significant impact on margins. The other key point is how we.
And the timing of our commercial negotiations around commodity inflation and other component price increases that.
And that we're dealing with and disruption costs and it may be caused by a customer that has shut down of our supplier that shut us down and and so the that will impact margins in both segments, we expect seating to be meaningfully above the $7 four per cent for the full year, given all those puts and <unk>.
But I don't want to put a precise number on it we do feel comfortable saying John by the fourth quarter and things will settle down to a point, where we're solidly between 75% to 8% similar to what we what we did and the first quarter in terms of the mix and what other others are saying.
For us it's it's more platform mix as opposed to mix within a platform and take take rates of certain features within platform. So it's being on the right platforms for this market.
We're benefiting.
And more than anything there and I don't know yeah. I just think we are the largest.
Producer and premium platforms and.
And during this particular time, they're doing everything they can to protect those platforms and I think because of the great. Examples of the T. One agenda.
General Motors Mercedes for the crossovers I mean, what we're seeing and and being on those premium platforms is is really helping seating because those are the ones that all costs. They are protecting so and some case, even reallocating components to make sure that business is running and and obviously, it's a premier.
Platform, but it's also a premium platform, but it's also something that we're doing internally to to make sure like Jason mentioned.
Knocking on wood, we have not this year shutdown.
Customer due to supply shortage or material that we're responsible for so I think the teams have done an excellent job of.
Having insight communicating with the customers understanding where their priorities are and and.
And in some cases, making sure we're prioritizing along with that customer to ensure that those vehicles are being manufactured and so it's a combination of the work that the team is doing here and what our customers are doing to protect their.
Premium platforms.
Okay. That's helpful. And then just a second question and I mean with everything that's going on right now there's not been a lot of discussion around once disruptions, but it's kind of hard to believe that there wouldn't be so is that impacting E systems or is that potentially impacting seating and any and is this just sort of it.
And based on what Youre hearing these search tape delays or are there any other kind of more draconian launch disruptions that are going on right now.
And we haven't seen any delays that are meaningful and launches in fact, I think generally speaking customers and protecting those programs.
And to the detriment maybe to some other older vehicles that are slower selling and the market and so our backlogs are outlook is.
Precisely the same numbers, what we saw.
Back in February and in fact, the first quarter, maybe came in a little bit stronger than we thought and.
<unk> systems specifically.
Okay. That's helpful and then and then just lastly on M&A.
And you alluded to and vertical integration and being part of the focus I kind of always thought of it as a little bit more focused on tech so something shifting there or.
Or what's the focus for M&A.
Well I think it's a combination we talked about the need to vertically integrate and wire harnesses and I think and then and plastics with some of their superior and.
Injection molding capabilities really opens the door for us it was somewhat closed and and Theres a number of components that we outsource that are accretive and respect of margin and those those are.
Controllable components, meaning we can source ourselves. So that's a simple make versus buy that was a great acquisition. We believe we can accelerate the growth of that capability and competency which will help.
And to the bottom line margin expansion within these systems as far as innovation and absolutely. We like I said earlier with what we're doing with electrification and and EM is.
Equally as excited with what we're doing and seating I think the expansion of price and will features our customers are looking at different value propositions and and having innovation that's embedded in components is absolutely essential and.
And I think it configure plus we are the only proprietary technology innovation, because we were able to take the capabilities and these systems and apply to attract systems, we electrified or powered the rails. So now you can send a signal that power through the seats through a rail system that gives you incredible flexibility and.
Were getting incredible amount of pool. So it is it's a combination of both net and I think there are subtle in some respects, but very important to how we see innovation and tuck ins, where it expands our margin or at least it grows our margin profile in electrification.
Okay, that's and credit that's incredibly helpful. Thank you very much guys.
Okay.
Okay.
Our next question comes from Brian Johnson from Barclays. Please go ahead with your question.
Yeah, a few questions so and the seating side of the business, we've long been accustomed to.
Log coming in at lower margins and.
Can you just confirm when you look at the E systems business and and.
I know you've said this is a strategy. It does look like the new business is rolling on and I initially with decent margins.
Yeah.
Yes, and both business segments and the backlog was accretive to the underlying segment operating margins and we're generally seeing that through the balance of the year.
Should be right in line with the segment margins or maybe slightly higher on a full year basis as well so.
Some of the issues that we dealt with and.
And prior years, where we saw.
Some programs rolling on lower than the programs. They replace for example, you know that that phenomenon has largely played out and we're generally seeing programs rollout and in line or better than our segment margins.
And second question just building on your description of the electrical architecture meeting with the seat and those rails your competitor yesterday talked about.
Decent amount of traction, they're getting and Bev vehicles can you talk about what you're doing with that vehicles and I know I.
One level seats or seats, but there are subtle differences and that rail system would actually seem to be and interesting option for D V maker.
Eminent Frank Orsini is here and he is working that very specifically, so I'm gonna have him comment on that sure. Thanks, Rick Yeah, Brian So we are seeing.
A lot of traction and the EV area for us it's a great opportunity, we're talking right now about the configure plus system, which is a fantastic.
Take opportunity for Evs autonomous vehicles, and things like that but when it comes specifically to the market itself and we have a lot to offer so we're focusing heavily on.
Lightweight structures opportunities and materials that we're using sustainable surface materials for those products, which are very appealing to our customers and then of course the future is extremely positive for the into product offering and Ray referenced I just wanted to hit on that one more time, because the thermal comfort.
Technology that we're working on right now as we mentioned it's directly applies to the EV products because it does help in terms of.
Efficiently heating and cooling the occupant vs inefficiently heating and cooling the entire cabin does provide a benefit to the overall vehicle architecture powered drop and so we have that ability to do that and and we're winning business I mean, we've been very successful and the EV market.
The bass market and you know I have a list of over 20 programs that we've won over the last couple of years and many of them are in launch mode, and we will be launching over the next couple of years, but we're seeing a lot of success and I do believe its being fueled by our technology and the product offering that we have and that's where into seating is completely aligned with that.
Market for them. So we look at it and Frank knows this with the Recyclability, we have some incredible price properties hopefully will non mounts here soon within the seat world. There are recyclable and we believe that's a big part is still electric story and it has to be a big part of our story. So that's where our investment dollars are going right now and then and when.
And talking about this modular concept. It is geared around electric vehicles, where you cannot cheat gain efficiencies through this heat and cool system and be able to.
I will satisfy the customers.
Our niche within women and see and.
This configure plus like Frank mentioned, we are building it into.
Re vehicles today, because of the complexity and the floor and where the batteries mounted it offers a great solution to give flexibility of the seat. So we do believe that even though we talk agnostic between IC and Bev with seating. We think the seat itself is going to change and that's where we're focused.
And so we keep hitting on these innovation and technologies, because we do believe there.
The difference.
<unk>, our seat system relative to the electric vehicle and.
Just a very quick follow up is there anything regulatory account of the parasitic losses of HVAC and they either European and Chinese or U S range estimates, obviously, a lot of controversy and especially about one oh, yeah I'm about the difference between real range and government estimated range and it seems like your solution would help with real range.
But I wonder if it helps with the regulatory standard of branch.
I'm not going to speculate on and I'm not sure but you.
And your follow up on that question, but.
I'm not I'm not familiar with the answer.
Okay.
Carl.
Yes. Thanks.
Yes.
Yeah.
Our next question comes from Jamie Baker.
Low from Keybanc capital markets. Please go ahead with your question.
Hey, good morning, guys.
And then within those within the topline guidance you raised the $450 million and can you just break out what attributes to commodity pass through because I'm, just trying to get a sense for the revenue and EBIT provisions taken together revenue up for 50, EBITDA 10, and you just any color on the factors and play with it would be helpful.
Yeah in terms of the overall bridge on on revenues.
You talked about the disproportionate impact of production disruptions on E systems versus seating and that's part of what's going on in terms of the operating margin impact because of the higher variable margin and.
And the system. So we have revenue down about $250 million on the volume line any systems and up about $325 million and seating. So the mix of those two is higher revenue of $75 million, but slightly lower operating income and then you have another 200 million for the company and foreign exchange that converts at that's it.
Segment margins and then lastly, the commodity pass through is $175 million.
And when you compare it to what we guided to earlier and they're so FX and commodity is the lion's share of the revenue change and then in terms of the operating.
Bridge and I gave you a couple of pieces, there, but the commodity impacts about $50 million and talked about the change by segment earlier and.
And we've offset that through favorable operating performance more on the seating side than on the systems of roughly $50 million as well.
Got it that's super helpful.
As we think about your seedings mixed benefit.
Just on the models that are getting prioritize right to keep platforms Lear has exposure to it and all of that makes sense, but is there any way to think about what this could entail from a headwind standpoint once industry production does normalize I mean, maybe the simplest exercise would be seating delivered nine points of outgrowth for seats.
Target of four point, so maybe it's a five point headwind at some point in the future just curious your thoughts on that point.
Yeah. So the good news I think for US and this is the biggest driver is the GM full size pickup trucks, and Suvs and where inventory levels are.
Below historic levels, well below and so I think that this above market growth and seating.
Story continues.
And the next year and beyond.
Because of the importance of that platform there may be a partial offset to that and some of the other platforms that are driving it on the luxury side and maybe there is.
Half of that kind of stuff.
Steps back a bit.
But we would expect.
A temporary benefit from mix and our above market growth and seating and in fact, if you look at the full year I think at the beginning of the year, we were expecting two and three points of growth above market and seating and now its probably six to seven points of growth above market.
And unfortunately on the other side.
Cause of the disproportionate production disruptions on key platforms and customers with any systems, we expected, 9% to 10 points of growth above market, there and it's more like three to four points.
As we see it today.
Thank you.
And welcome.
Our next question comes from Emmanuel Rosner from Deutsche Bank. Please go ahead with your question.
Hey, good morning, everybody.
Good morning.
First question on our seating I think a big part of.
The success last year and had to do.
Conquest business could you update us on how things have been going so far this year and then also stone and a company called for them.
I guess market share opportunity in seating so.
Your larger global competitor and so.
That's a little while ago divestment or if its.
Interest and these are Chinese JV.
And you know dominant market share in China, and the implication in terms of the market share opportunity for you and the region.
And it.
Okay.
Okay, I almost forgot the first part of it.
And talk about the second one.
Yeah.
First of all.
As to the situation of the divestiture of the partnership between.
Believe Yang thing and and Andy and just what Youre referring to.
That to me and I don't know all the details of it puts us in a very good position there.
A combination of those two companies and China was a formidable competitor and you know the combination of relationships and manufacturing processes and scale.
It was something that.
We had to go up against and so now that they've divested of the partnership and its more of an equal share, 20%, 20%, 20%, we feel that the playing field has been.
Leveled and and.
And that will give us 100%.
Shots and being competitive there so that opened up the door I think equally as important is we've had to compete against both of those players and the combination of those competitors and now Eddie and has to compete against Shang Fang and a global basis and doing things, we would compete against adient and they know each other pretty well.
And see how that how that works out, but I think the short answer is yes, a pretty good day for Lear Corporation win when they divested of that partnership and.
For the first question and.
Terms of the new business awards and conquest wins, specifically, we've had a we had $700 million of net conquest awards last year and $300 million a year prior to that last year was an especially strong year and if we were to speculate on what we can achieve this year and in future years, it would be closer to what.
We achieved two years ago, roughly $300 million would be a reasonable target.
Sourcing of seating is pretty lumpy and so there hasn't been any meaningful conquest awards and.
In the first quarter, but we're actively competing on some of those platforms that will be sourced throughout this year.
Okay. That's helpful. And then also a market share question and then on the E systems side.
And when could you drill down a little bit more on your slide nine and B.
Strategy to position these systems for the future focusing specifically on the power distribution.
Do you see an opportunity to have higher market share overall overtime.
And the high voltage power distribution versus the ones that you have currently in low voltage and if so in what will be the drivers of that.
It's a good question the menu and.
And it's pretty exciting and like I said first of all and low voltage it's amazing how the R. R.
Customers have opened up the catalog, we've never seen or experienced anything like this and the connection systems and.
Like I mentioned, it's up to $250 million this year both.
What we can do and in house and then.
And what the customer address and support so that's opening up and I think what's an interesting.
0.2 references.
We think about high power.
And we've always had this this catalog that we've had to deal with that 80% of it was somewhat defined limiting our ability to get in a low voltage and high voltage connector systems.
And only 20% of is defined at this point. So what we're doing is investing our engineering dollars and we've been very successful we wanted and incredible.
Piece of business with Volkswagen recently on the.
Book, Bloodborne, which was something that we believe very similar to the battery disconnect is once you're on a platform that opens up multiple platforms and across multiple brands within Volkswagen and so we see opportunities there we're seeing increased <unk>.
Coating activities year over year, I think from electrification perspective, you know, we're seeing 33% year over year from last year and that opportunity continues to really work well and so it's trying to and number we haven't given a number on what were low.
Voltage wire market share as it has historically been 6% to 7% and we would see and opportunity to do better than that and high voltage again and the back of this connector catalog opportunity that that ray referenced the fact that that's not in a catalog and you have a chance to design that and compete.
And to head with other.
And others in that space without them, having the benefit of our catalog to pull from and.
And one thing that's been nice is I know, there's a lot of questions and in sourcing.
And where customers want to do the engineering work, but wiring and and engineered components is never.
And considered as far as.
The quotes that were getting and and what's nice about it is on low voltage and when we talk about engineered components, we acquire them and and and companies like that is to get at that engineered percentage of the wire harness and high power and 50% of the wire is engineered components. So again wide open and we're making the acquisitions.
And investing organically to make sure we're positioned to continue to growth in that area of high voltage wearing.
Great. Thanks for all the color.
Thanks.
And our next question comes from a day.
Mike Mcauley from Citi. Please go ahead with your question.
Great. Thanks, Good morning, everybody just two questions for me.
And that's just on kind of interpret the Q1 results and a broader context of Levered earnings power and I guess, if we exclude the COVID-19 impact do you disclose and I think and part of the margin maybe north of 8% I think historically Q1 tends to be a little bit higher than.
Full year margins I'm, just curious as we think about the quarters performance.
And we're more normalized world, whether that kind of 8% plus and sort of indicative of the company's earnings power.
Yeah, I think if I just isolate the premium cost and ignore some of the commodity that may be transitory.
And the volume disruptions, both businesses ran and the high seven and so just to just under 8% and.
And I think if you look at seating.
We've talked in the past about 758, and 5% and that's really based on the mix of business that we have today in terms of the level of vertical integration and the capital intensity of the products and that and that portfolio and so to the extent, we increased vertical integration through organic and inorganic growth on price for features as Ray described earlier.
And that could nudge the margin up.
For the higher end of that range to the extent youre winning more business. That's just in time without componentry, and it's going to skew to the low end of the range and I think that range is important so that we don't walk away from high return.
Business.
That might be just in time, only without our components and at that range.
And well in excess of our cost of capital and a nice spread there and so we're interested in any business and that range going forward. So we don't want to constrain that.
You know too much obviously, you take and then and he systems and we've talked about.
Being in the 7% range this year and it's gonna be a little bit lower because of the volume reductions that we've experienced here.
But as we exit the year, that's still I think the right exit 0.7% to 8% and then into next year. Our objective is to get that business to 8% plus.
9% for the following year, and then back to 10% and 2024, and we still see a robust plan that we're executing against allowing us to achieve that.
That's very helpful. Maybe just a quick follow up and I apologize if I missed it earlier, but can you just talk about the pace of your.
Bookings coatings, and Q1, if things come and gone back to normal or there's still a fair amount of delays just just given the situation.
I think it's largely returned to normal we had a good first quarter again.
And particularly on the electrification side, we had $135 million of New awards and that's an average annual number I know other companies use kind of a program life number so call that something like $600 million.
And the awards that you look at and our program life. So we had a really strong start to the year and the systems and seating similar to our historical win rate and level of awards.
And a half a billion of new awards and in the first quarter.
You know very little on the Tankless side, but but good traction overall and <unk>.
Carrying a replacement programs.
Terrific. That's all very helpful. Thank you.
And ladies and gentlemen at this time, we're going to be ending today's question and answer session I'd like to turn the floor back over to management for any closing remarks, okay. Thank you and I'd like to thank everyone for attending the call today and.
I, especially want to.
Thank the Lear team for an incredible quarter. The hard work I know the teams and laser focused and making sure we do everything to protect our customers and you guys did a one heck of a job.
Managing net this quarter and also recognize the team down and whereas Mexico for their outstanding recognition and what they accomplished and.
And being recognized for it and also the special recognitions that we got for innovation and technology. We are driving this company focused on integrating innovation and technology and being recognized.
And by automotive news and others for our ability to continue to drive innovation as a special Special awards. So thanks for the team great job.
I appreciate all your efforts thanks.
Ladies and gentlemen, and with that we'll conclude today's conference call. We thank you for attending you may now disconnect your lines.