Q2 2021 Lear Corp Earnings Call
Yeah.
Okay.
Good morning, and welcome to the Lear Corporation second quarter 2021 earnings Conference call.
Participants will be in a listen only mode should you need assistance, placing all conference specialist by pressing the star key followed by zero.
After todays presentation, there will be and opportunity to ask questions.
And please note today's event is being recorded.
At this time I'd like to turn the floor over to you and low and sound Vice President of Investor Relations. Please go ahead.
Thanks, Jamie good morning, everyone and thanks for joining us for Lear second quarter 2021 earnings call.
There's nothing today are Ray Scott Mair, President and CEO, and Jason <unk> Senior Vice President and CFO. Other members of Lear's Senior management team have also joined us on the call.
And we prepared remarks, we will open up the call for Q&A.
You can find a copy of the presentation that accompanies these remarks and I are not Lear dot com.
Before we begin I'd like to take this opportunity to remind you that as we conduct this call we will be making forward looking statements to assist you and understanding lear's expectations for the future as detailed in our safe Harbor statement on slide 2.
Results could differ materially from these forward looking statements due to many factors discussed in our latest 10-Q and other periodic reports and.
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 and on Slide 3 first Ray will review highlights from the quarter and provide a business update and Jason will then review our second quarter financial results and our full year 2021 outlook and finally Ray will offer some concluding comments following the formal presentation, we would be happy to take your questions now I would like to.
And in fact rates and again.
Thanks, Ed and good morning, everyone. If you could please turn to slide 5 I'm on.
And I'll provide a brief overview of our second quarter financial results and a very challenging environment marked by component shortages and significant production disruptions. The Lear team delivered solid results and the second quarter with sales of $4.8 billion and core operating earnings of $233 million.
Our financial performance improved significantly versus last year and the global pandemic led to extended production shutdowns in North America, and Europe, adjusted operating margin and the second quarter was 4.9% and earnings per share was $2.45 zone.
Yeah.
Slide 6 provides some business highlights from the quarter I'm very proud of what the team accomplished.
For the second quarter in a row, we successfully navigated supply chain shortages and related customer production shutdowns.
Lear sales growth outpaced the industry by 11 percentage points and the second quarter.
We continue to focus on executing our strategic plan, which includes developing innovative products and technologies across both business segments, and investing and our manufacturing operations to extend our competitive advantage and operational excellence.
Our backlog is growing driven by new business wins, and both seating and E systems I will comment further on some of these product wins on the next few slides.
We're honored debt there was named as general Motors supplier of the year for the fourth consecutive year and from.
The 20th time overall, and Additionally, we received and Overdrive Award from General Motors for developing innovative second row seating functionalities and Gm's full size trucks, and creating the Lear safe work Handbook and sharing it with the industries and made we released our updated sustainability.
Reported.
Highlighting our growing portfolio of green technologies achievements, and dirt diversity, and human rights and governance and our ambitious climate change goals.
During the quarter, we began to repurchase shares for the first time since suspending share repurchase and early 2020, we.
We spent $31 million on share repurchases in the quarter and since the end of the quarter, we have repurchased an incremental $40 million worth of stock.
Our balance sheet and financial flexibility remains strong and over the last few months, Moody's and Fitch upgraded <unk> credit rating outlook.
With respect to capital allocation, we have a balanced plan that includes organic investment inorganic investments and returning excess cash to our shareholders.
Turning to slide 7 and our seating business performed extremely well despite challenging industry conditions, our sales grew well and access the market, reflecting our strong position.
Vs <unk> and luxury vehicles.
And margins remained strong despite significant downtime across the industry and seating alone production downtime and the second quarter related to semiconductor shortages and reduced our sales by approximately $660.660 million.
We're 15% despite the lower volume and.
And predictable schedules.
Seating posted 7.3% adjusted operating margins, demonstrating the strength and resilience of this business.
We continue to move forward on key launches and the quarter, including the Ford Bronco, where Lear was awarded a full service supply contract and is responsible for designing and engineering complete seat system.
We also are excited about the new plant, we're building and Detroit to supply seats for General Motors Battery Electric truck programs. This plant is expected to be 1 of Lear is most energy efficient plants in North America.
Awarded battery electric truck programs to date include the GMC Hummer, EV pickup and the GMC Hummer EV Suvs.
Slide 8 highlights our E systems business, where innovation and technology is driving new business Awards.
And receiving industry recognition.
Earlier this year 2 new products designed by our E systems team were named Pace Award finalist.
First the battery disconnect controls all power switching in and out of the battery pack.
New design incorporates breakthrough thermal management innovations, which improves the efficiency of large and high performance electric vehicles.
The first commercial application of this technology will be launched later this year on the GMC Hummer.
Coming years, we will be bringing our btu to market on multiple derivatives on gm's ultimate altium platform, including the Chevrolet Silverado.
We also are pursuing opportunities on strategic EV platforms with other customers.
Secondly, lear's 5 G V to X.
Telematics control units removes the need for shark fin external antennas on many vehicles today.
By integrating up to 10 antennas into the printed circuit board.
Our design reduces complexity and improved styling capabilities and euro dynamics, which is particularly important for evs, where every element that increases range is critical.
We have received interest from numerous customers to commercialize this technology.
We are we also are designing and developing electric architectures for autonomous vehicles with 2 major Oems.
Non of electrical distribution content and these vehicles.
Exceeds anything we've previously produced.
Our our quoting pipeline across these systems business is strong and in addition to the high voltage opportunities related to growing EV market. We also are seeing significant business wins on the low voltage side of our business.
Increasing feature.
Increasing features continue to drive higher circuit counts, which we expect will more than offset any wire and content reductions related to optimize architectures. We continue to make progress winning business on electric vehicles with 55% of our year to date awards on EV platforms.
Our connection systems growth plan is on track and year to date, we have won an incremental $45 million of commercial and vertical integration awards through a combination of vertical integration, New business awards, and the M and and plastics acquisition, we are expecting this business to growth and a 10% CAGR.
From 2019 to 2022.
We continue to pursue additional acquisitions and partnerships in connection systems to accelerate our growth. The recently announced IMS connector systems partnership will increase our access to specialized high speed data connectors.
Will prove more important as vehicle data requirements continue to grow.
I'm very confident about the long term growth prospects and east systems. Our backlog is strong content opportunities are growing and we remain on track for 6 percentage points of growth over market for the next several years.
Now I'd like to invite Jason to review, our second quarter financial results and full year outlook.
Thanks Ray.
Slide 10 shows vehicle production and key exchange rates from the second quarter.
During the second quarter of 2020 industry production in North America, and Europe was negatively impacted by extended Covid pandemic related shutdowns.
While the second quarter of 2021 industry production volumes rebounded from 2020 total production and the quarter was negatively impacted by component shortages, particularly those related to semiconductors.
Global vehicle production and the second quarter increased by 51% compared to 2000 and 'twenty on Alere sales weighted basis global production increased by 72%.
From a currency standpoint, and U S dollar weakened against our major currencies compared to last year.
Slide 11 highlights lear's growth over market and the second quarter.
Total company growth over market was a strong 11 percentage points, driven primarily by favorable platform mix and new business.
While our seating business benefited from customers prioritize and production of full size truck and SUV platforms. These systems business mix was disproportionately impacted by supply chain disruptions, particularly with some of the segment's largest customers and in China.
New business and the systems and the quarter, partially offset the impact of the supply chain disruptions.
Growth over market in North America of 24 percentage points, reflecting the benefit of new business and both segments and strong production on Gm's full size pickup trucks, and Suvs as well as Audi Mercedes and Hyundai Suvs.
And Europe growth over market of 10 percentage points was driven primarily by new business.
<unk> strong performance and the luxury segment.
Our China business lagged the market by 5 percentage points due to lower volumes on our key platforms.
Yeah.
Slide 12 highlights our financial results for the second quarter of 2021 compared to 2020.
Our sales increased 95% year over year to $4.8 billion.
Excluding the impact of foreign exchange commodities and acquisitions sales increased by 83%, primarily reflecting increased production on Lear platforms and the addition of new business.
Our customers experienced significant production disruptions, which reduced second quarter revenue by approximately $1 billion.
Core operating earnings were $233 million compared to an adjusted operating loss of $248 million last year.
The increase in earnings resulted from strong operating performance higher volumes favorable platform mix and the addition of new business, partially offset by higher commodity costs and premium costs related to component shortages.
Adjusted earnings per share were $2.45.
Up from a loss of $4.14 a year ago.
We generated $120 million of free cash flow and the second quarter compared to a $611 million cash use and 2020.
Slide 13 explains the second quarter year over year variance and sales and adjusted operating margins and the seating segment sales.
Sales and the quarter were $3.6 billion and increase of $1.9 billion or 106% from the second quarter of 2020 excluding.
Excluding the impact of foreign exchange acquisitions, and commodities sales were up 95%, reflecting higher production and the benefit of new business.
Core operating earnings were $262 million up $364 million from the second quarter of 2020.
Higher volume on Lear platforms positive net operating performance and margin accretive backlog more than offset the impact of higher commodity costs during the quarter.
Seating margins were 7.3% and quarter, despite lost volume of approximately $660 million and 15% due to semiconductor supply shortages.
Slide 14 explains the second quarter year over year variance and sales and adjusted operating margins and our E systems segment.
Sales and the second quarter were $1.2 billion and increase of 67% from the second quarter of 2020, excluding.
Excluding the impact of foreign exchange acquisitions, and commodities sales were up 51% driven primarily by higher volumes and and.
And it's from backlog.
Customer downtime related to the semiconductor shortages negatively impacted these system sales by $360 million or 24% and the second quarter.
Our operating earnings were $41 million or 3.5 percentage of sales compared to adjusted operating losses of $91 million and 2020.
The increase in earnings resulted primarily from higher volumes net operating performance and margin accretive backlog.
Beginning on slide 15, I will discuss some key drivers impacting our updated 2021 financial outlook.
While our financial outlook and May reflected significant customer downtime due to component shortages and the extent of the disruptions worsens considerably and the last several weeks of the second quarter and has continued into August we.
We expect to see modest improvements and the production environment starting in September with a gradual improvement continuing throughout the remainder of the year.
However, the production environment remains volatile with continuing impacts from government mandated shutdowns due to COVID-19, and certain markets and lingering effects and very low inventory levels and various components, particularly semiconductor parts.
Based on the most recent customer announcements, we are lowering the midpoint of our sales outlook by $650 million versus what we expected when we provided our earnings outlook and mix.
Slide 16 highlights the recent run up and steel costs, which is another factor negatively impacting our 2021 outlook.
The chart shown here illustrates the trend and U S Hot rolled steel prices as indicative of the broader impact rising steel prices are having on our operations, which is a combination of hot and cold rolled steel globally.
Set for a few short duration price spikes U S. Hot rolled steel costs have remained and the $400 to $700 per ton range for the last 4 years.
Steel prices began to rise late last year and have continued to break records each months and 2021.
Historically, the typical spike above $900 and flat to 2 to 6 months, we're now 7 months into the current cycle.
And we're somewhat insulated from higher steel prices and the first half of 2021 due to advanced contracts, which were negotiated late last year, however, and the <unk>.
Second half of the year, we are experiencing significant headwinds from higher steel prices and the point of reference still prices are $600 to $700 per ton higher and industry experts were expecting back in may when we issued our prior financial outlook.
Slide 17 summarizes the changes to our global industry production outlook, which reflects ongoing production disruptions due primarily to semiconductor part shortage.
At the high end of our outlook range.
<unk> second half production to be lower than what IHS is projecting and by about 3%.
Reflecting customer downtime announced in late July and into August and.
The midpoint and low end of our outlook reflects range reflects additional production downtime beyond what has been announced today.
We've included more detail about our assumptions for global vehicle production volumes and currencies that formed the basis of our 2021 full year outlook on slide 25, and the appendix section of the presentation.
Slide 18 shows our revised range of sales and operating earnings outcomes from the full year.
On the sales side the range of outcomes is dependent primarily on the extent of future unannounced production disruptions.
And on the operating earnings side. The range is dependent on the extent of future production disruptions customer mix and the timing of commodity cost recoveries.
And given the uncertainty and production schedules and I also want to briefly touch on what we're expecting from the third quarter.
And at the midpoint of our outlook range, we're expecting sales to be less and $4.7 billion, reflecting chip related production disruptions impacting many of our higher content platforms as well as normal seasonal downtime and Europe.
For core operating earnings the midpoint of our outlook is $150 million, which reflects the impact of higher commodity costs and unfavorable platform mix.
The third quarter to be the low point from revenue and core operating earnings, reflecting the impact of production disruptions and higher commodity costs.
Slide 19 compares our updated outlook to our prior outlook for sales and core operating earnings we are forecasting sales and the range of $19.7 billion to $20.5 billion and operating income and the range of $920 million to $1, 1.1 billion.
Our 2021 outlet for core operating earnings at the midpoint is down $210 million to 1 point or $1.5 billion.
Reflecting lower volumes and higher net commodity costs.
The economic recovery.
As well as supply chain shortages and has driven higher commodity costs across the board, including for steel from chemicals, and resins and transportation costs have also been impacted.
The impact on higher commodity costs will be partially offset by continued strong operating performance and both business segments.
The total company year over year impact of higher commodity cost is forecasted to be approximately $175 million.
We continue to work with our customers and suppliers to mitigate the impact of the higher steel and other commodity costs through commercial negotiations and leveraging our scale V and other specification changes and alternative sourcing.
Our detailed 2021 financial outlook as shown on slide 26, and the appendix.
Slide 20 summarizes the key factors that will impact there's longer term financial outlook. Despite the near term supply driven challenges, we're very optimistic about the next few years.
Global industry demand remains strong and when coupled with record low inventory levels. We expect production rates will grow significantly over the next several years. We also anticipate that commodity costs will moderate over time as supply and demand imbalances are addressed.
Covid premiums should also diminish as we enter 2022, despite the recent uptick to the Delta variant as more of the global population gets vaccinated.
The increased penetration of electric vehicles, where we're seeing the premium names at the forefront will provide additional opportunities and seating where we have the luxury market leader.
Are your systems business is also positioned to benefit from higher content related to electrification and the proliferation of other safety and comfort features.
Looking at the items Lear can control, our strong backlog and focus on vertical integration has allowed us to generate strong cash flow and margin. Despite the recent challenges we have plans in place to enhance margins and both segments through increased vertical integration development of new innovative products and continuing to separate ourselves as leader and operational excellence.
Through increased investment and our manufacturing facilities.
In addition, we have plans to make inorganic investments and both business segments, which will provide additional opportunities opportunities to drive incremental growth and higher margins.
Now please turn to slide 21, where I will briefly talk about our balance sheet and liquidity.
Our strong balance sheet, and free cash flow generation and support investments and innovation and growth and positions Lear to quickly execute bolt on acquisitions to increase our vertical integration capabilities and both businesses and execute our long term growth strategy.
At the same time, we remain fully committed to returning excess cash to shareholders via dividends and share repurchases now I'll turn it back to Ray for some closing thoughts thanks, Jason and this job turning to slide 23 and <unk>.
So proud of the team's performance this quarter and for executing our plan and the face of the component shortages and significant production downtime.
While continuing continued supply chain and volatility is driving uncertainty and in the near term I remain confident that Lear is well positioned to benefit from the industry recovery, we expect over the next several years.
Our financial position is strong and we will continue to make investments to strength in both business segments, while returning excess cash to shareholders.
We are laser focused on executing our strategy to drive profitable growth and deliver superior returns to our shareholders.
But before.
And when I do want to pause for a moment before we move on to questions and I do want to take the time to recognize our team in Mexico that our range for thousands of COVID-19 vaccines.
Vaccines to be provided to Lear employees family members war as residents and and.
Employees and other suppliers on a few weeks ago the team transformed our plant parking lots and opened warehouse spaces and the vaccination centers and coordinated the inoculation of over 25000 people over the course of a week.
And I think this is just another example of the great work. Our teams are doing around the world to support the communities, where we live and work and I do want to.
Thank you for all your hard work and the great work that you've been doing and now we'd 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 on and 1 on you touched on telephones and.
Or are you using a speaker phone and we do ask that you. Please pick up your handset before pressing the keys.
To withdraw your question you May press Star and 2.
Once again that as Stein and 1 to ask a question at this time, we will pause momentarily to assemble the roster.
And our first question today comes from Colin Langan from Wells Fargo. Please go ahead with your question.
Oh, great. Thanks for taking my question day count.
Hey, good morning.
Maybe if you could talk about commodity costs I think you said, it's 175 million that's the cumulative of year over year hit.
And in your guidance how much is it year to date, I think I'm coming out with something closer to $50 and that means quite a bit and the second half, but maybe my numbers and wrong and can you just remind us you know.
And what is sort of the hedging.
And offsets that might be coming sort of how much of here.
And this is hedged and any thoughts on how this might run into 2022 from a commodity side.
Sure and it's starting with the cadence of the commodity impact so it's $135 million for the full year about 40 of that was on the first half and $95 million of that is on the second half largely driven by the run up and steel and the fact that we had locked in on much of our buy and the first half of the year.
And in terms of hedging and we don't do much in terms of hedging either steel or copper, our best hedge really as our commercial agreements with our customers. So on the copper side about 90% of our copper buy is on an index and our pass through agreements with our customers. Some cases there is a.
You know 3 or 6 month lag, but most of it is pass through quite quickly.
On the steel side and about 85% of our biases insulated either by customer agreements or <unk>.
And what are the supplier owns on set by and about 15% of that is our exposure.
In terms of what we see going into next year.
And it's a bit early to talk about guidance for next year, but certainly we're exiting the second half of the year at a higher rate for for steel and then we started the year. So I would expect there'd be a cost headwind for that.
On the recovery side because of the lag and some of the recovery on steel and we'll see a benefit next year that will partially offset that.
In terms of copper and we see the low point or the <unk>.
Most significant impact and the third quarter and and that improves and the fourth quarter again as the pass through mechanisms take effect and I wouldn't expect a meaningful impact next year for copper and copper has come down off of its all time highs, which I think were reached in April and May of this year.
And so we would expect if anything maybe a little bit of a tailwind on capital.
Got it and when and when I look at the guidance reduction I.
And the Decrementals at the mid point seem to be like a little over 30% it seems a bit high but it's.
Other than I guess, it looks like on it and you said and $95 million increase in commodity and how that would make that decremental on 'twenty and any other factors to be thinking about that would impact.
How do we think first half to second half decremental.
And from the first half to the second half, yes, there's 2 things going on and 1 is.
Lower lower volume so.
If I look at our change in sales first half actuals to the second half mid points of reduction sales of $130 million. It was actually an increase in sales for the commodity pass through about $55 million and then volume mix and everything else is a negative $185 million. So convert that it's about $40 million of operating income commodities.
And a $95 million higher and it leaves about $10 million of favorable incremental operating performance sequentially from the first half and second half.
Okay, Alright, thanks for taking my question.
No problem mixed zone.
Our next question comes from John Murphy from Bank of America. Please go ahead with your question.
And good morning, everyone. This is aileen Smith on for John.
Laurie a question good morning.
Question around the semiconductor shortage, obviously, we heard from 1 of your major customers earlier, this week and and they're really bearing the brunt of downtime and second half, particularly on the truck side, where you have a lot of content, which is partially a function of them pulling forward. Some chips, but then also COVID-19 outbreaks that are forcing incremental downtime on.
And given there are some pretty wide indications on the production outlook and the second half of the year how much of your outlook revision and would you say is more attributable to that 1 major customer of yours versus what the function of broader industry dynamics and all automakers getting hit on just that make standard.
Yeah. So certainly the announcement earlier in the week with 1 of our largest customers was a factor, but we're seeing something a little bit more pervasive and so it's impacting all of our customers' production and the second half of the year.
And really what we see as sort of a continuation of the impact that we've experienced and the second quarter and the second quarter, we saw and impact of about $1 billion and revenue at the midpoint of our guidance, we're expecting a similar.
Impact and the third quarter, so the second and third quarter sort of become the trough before it recovers.
In the fourth quarter, so it's not any 1 customer and it's really a pervasive issue across the whole supply chain.
To add to that and.
And again I think this is an industry issue and I think Lear has a perspective.
<unk> systems, that's somewhat unique RBC.
We're on.
Call the daily with a micro chip suppliers.
And our customers and so we have unique intelligence and insight kind of generally gauge what's going on across the industry and around the world and and what started was as a wafer capacity constraint and has quickly moved into the back end processing of mic.
<unk> chips and the big issue today is the amount of downtime, that's being taken with Covid related cases, and increases with shutdowns and the clean rooms and areas like Malaysia, and Thailand. If you think about the micro chip manufacturers. The majority of them do the back end processing.
Out of.
And out of Asia, and so as they go down and I believe there is.
A multiplier effect because there is no inventory and the pipeline and vehicles are built up today that are requiring replacement parts and impacts on a multiple level and so we're still seeing that we're still seeing a number of key.
Microprocessors and chip manufacturers that are having to go down for.
For a number of different reasons, and so taking that into consideration.
And it helped us understand what and how we look at the second half of the year and it isn't 1 particular customer and our customers are much more sophisticated I will say that the communication and dialogue. We've had there are much more sophisticated.
In respect to chip the chip needs. It has now become the backend processing of the microchip and.
And we don't see that dissipating.
Jason day nice job of showing what's had occurred over the last day weather weeks and less love weeks 10 weeks. We have received notices of continued downtime and and so to me. It's 3 key points 1 the answer around real supply and demand with all the different releases, there and the system too.
And when will the COVID-19 related items with shutdowns and the back end of the processors processing.
Be alleviated and 3 the time is required to get back to more of a traditional inventory level and so even though we're in a much better position to we probably work and believe it or not several months ago wafer production seems to be more stable. The sophistication level on how we're looking at shifts to the sales and the chips that are required.
And is much much better and if we can get through some of these like I said COVID-19 related issues that are causing the backend processing behind us we should be and are better positioned and that's why we're looking at this.
Getting worse, and the third quarter, and and some improvement and the fourth quarter.
Okay, Great that's very helpful color and that's it.
I wanted to ask a bigger picture question, particularly as we think about the government push on Evs and the bite administration and in Europe, and China are heating up.
Remember and important chart from the he said from day, a couple of months ago, I'm, specifically referencing <unk> broad product capabilities across electrification with high voltage wiring and connection system battery and its battery management systems, and and others and how it stacks up versus some of your competitors that only offer 1 or a few of these.
<unk> to customers on it.
And the focus on Evs from automakers is ramping up and a pretty significant way are you finding that your broad product portfolio and a key competitive advantage and the bidding process and are you.
Finding traction for winning multiple product customers, where you can offer a more holistic solution.
Yeah, that's a great question and.
And I have Frank Orsini here, and Carlos you see though I'm going to let them kind of on the ground and work on it every day give some insight and I will say this just before we get into this we've won as much business today and electrification and we did all last year and so we absolutely are couldnt be more excited about the acceleration of electrification and our.
And and how we're differentiating ourselves and crossing over and seating I think its outstanding because there's some really cool things we have that we've we've patented and they're very unique for electric vehicles, and so I'm Gonna go ahead, and let Frank and Carl will take that 1.
Sure. So from electrification perspective, we really do see that broad portfolio is an advantage.
Not only and and all the different types of products that we offer but from a technology evolution. We also see a greater integration of those products and so we're a few years ago, there might be a separate onboard charger and a separate DC to DC converter. For example, 2 separate boxes, we're seeing those types of products integrate more deeply as the electronics.
The power systems get more efficient and we can packages it was and the smaller.
Smaller packages and more efficient products for our customers. So we definitely see that debt broad portfolio, integrating and integrating and the ways of.
The products that we have.
For our customers, we also get to take a whole system view of the electrification and the vehicles looking at the low voltage wiring, which is critically important and electric vehicle the high voltage wiring and connection systems and all of the electronics that go into those vehicles and how can we package those more efficiently and more effectively not only from.
And from the electronics from the debt.
The packaging the connection systems and also even as Ray mentioned the air dynamics now with some of the things we're doing from integrating antennas on the vehicle and making the vehicle more efficient all of that leads to greater range faster charging times and more performance for the vehicles and that's what our customers are looking for.
<unk> from <unk>.
From a seating perspective.
As Ray mentioned, we're really focused on innovation.
And we mentioned in the past we're.
Laser focus on a couple of key areas price.
<unk> features and contents will remain a priority for us and as you mentioned and your question.
BBB platforms are of great importance to our growth strategy. So we have a technology called configure plus nits and pace award winning technology fully developed in house that we're on.
A little background on that and it's a powered reconfigurable fully patented rail and cassette system and highlighted the technology is our seats do not have to be hardwired or tethered to the vehicle.
The concert itself, which is patented allows us to connect to the power to the vehicle and the reason and that's important as it gives us ultimate flexibility and when you think about it.
And I can be platform and the solutions required for EV platforms were flat load floor solutions become more important with batteries packaging constraints and and.
And as customers redesign those floor strategies are configured plus packages perfectly within those tightened environment constraints.
So it really is an ideal solution for the EBIT market and we've been very successful with it so far we've been awarded over $100 million of business.
With 2 global Oems, we are actually launching the platform right now with VW on the bully.
Multi band platform with VW and over the next 5 to 6 years, we think it has the potential to grow and excess of half a billion dollars, but we do have a number of active customer engagements going on right. Now we have multiple RFID with Oems on a global basis, we're actually and 1 expert development phase on North America.
And the <unk> platform with this technology.
Gonna be shipping prototypes to some of our European customers early next year and we have 1 really interesting work stream that we're on right now with.
OEM, where they're looking at a daytime and nighttime application for vehicle where.
During the day, we could provide our configure plus system with our seats for passenger movement on <unk>.
Ride sharing things of that nature, and then at night time.
We're working on a cargo management solutions and adapt to the rails and concert where we would serve to service them in a last mile delivery scenario. So.
And so the vehicle can be used 24 hours.
And that's a pretty interesting technology force again, those would ideally be EV platforms as well so as Ray mentioned it it is going to provide a lot of opportunity for us and we're very excited about what that looks like and the future, whereas you can see the room right now because we all have smiles, we love, what's going on with our technology and innovation and our growth strategy, It's amazing on the system side.
And what's coming at Us and I mentioned, how excited we are around electrification and <unk> and this configure plants. Just has so many different applications and it's exciting to build deliver and electric vehicle and a very unique weighted I believe will change the way you look at seating and and.
Cargo management, so really exciting stuff. Thanks for the question.
Great. Thanks for taking the questions.
Our next question comes from David Kelley from Jefferies. Please go ahead with your question.
Hi, good morning, everyone. Thanks for taking my questions.
And maybe good morning, and just maybe to start a follow up on the earlier decremental second half margin discussion I guess his schedule is clearly still touch and go I think planning visibility seems to be low for everyone. So could you talk about the labor and plant and efficiencies specifically.
And and realizing you have your margin enhancement plans as well, but is there much opportunity to drive some efficiencies and the back half of the year given the ongoing choppy macro.
Yeah, certainly that makes it more challenging David but I'll point out and.
And it doesn't really come through and the material, we provided but the operating performance in both segments. This year.
Remarkable and it's the most significant net positive operating performance I think we've ever achieved and that's a testament to Frank and Carl's teams and what they're doing day to day and the facilities now in terms of managing the.
Short short notice shutdowns, certainly that does add labor costs.
On to our operations, but we've taken measures to try and offset that using nutrition to lower our head count and our higher labor content facilities, particularly and you think about seat covers and wire harnesses that are very labor intensive.
The most significant step we can take is really just lowering the head count and trying to rebalance to a lower production rates in the meantime, and and still being prepared for volumes to recover which are coming back and the fourth quarter. So there is some call. It sticky labor trap labor costs that we're incurring that make it more challenging but the <unk>.
Fight that both segments are generating significant operating improvements.
Okay, great, Thanks, Jason and and maybe 1 more follow up and I appreciate slide 18, and kind of and initial book at the Q3.
Midpoint wanted to ask about the E systems margin trajectory and and clearly we have rising input costs, but from a mix standpoint should we start to see some improvement from the second quarter given your your customer waiting specifically and in <unk>.
America.
Yes, we do anticipate some improvement and the mix of where the downtime is showing up in the systems business, and perhaps and stalling a bit and the other direction on the seating side given the importance of general motors to seating seating business and those volumes for example on a full size truck and SUV.
We're still going to be quite strong, but you heard the announcement that they made.
<unk> made recently is the downtime thats been taken thus far here and the third quarter, so thats going to flow a little bit of pressure on the mix and seating, but generally on the systems side. There was a modest improvement and mix as we look at North America second quarter to third quarter, and and Europe, a little bit as well.
Okay, Great. That's helpful. Thanks for taking my questions.
And from David.
Our next question comes from Brian Johnson from Barclays. Please go ahead with your question.
Yes. Thank you I was struck by the strong seat margins relative to your largest competitor.
Can you maybe go into some of the things and I know, it's our job to N lives.
And the competitor, but that led to better than feared after yesterdays.
Results from your competitor performance and seating is it just that you had platforms that were less up and down is it that you're less exposed to metals G. A better recovery mechanisms or what was it.
Well I think 1 day.
Sure.
Take this 1 and 1.
It's years.
The work and the investment we've put in seating and and we've been investing and that business well.
Well over 10 years with the improvements we've made with capital with our layouts with our plants.
And the investments, we've made and getting very granular and the details on return on invested capital byproduct and having those tough discussions with the customers to fix the business.
Going forward and that.
And that took place.
Over 10 years, and I do think debt.
Really a credit to the seat visits a day and hard work that they're doing it is incredible.
How they are performing given all the different on.
And the expected downtime and the downtime that they are being hit with it and I also think big part of it and we've talked about this we find structures and metals to be.
Important and core competency, but we didn't grow at all cost we maintained a relatively good sized the structures business because of these type of situations and so I do think that that helps us significantly we do have very good customer relationships. So we are and we're planning on going in and and having some discussions with our customers and <unk>.
The performance that we've.
Elevated over the past years will help us there, but I think it's a combination of everything you mentioned and and it has continued to be very resilient and so it's a lot of different effort and I'm sure. Our competitors are listening so I don't Wanna get and all the details, but we've put a tremendous amount of effort and that business to put it in a position that it is now.
Just say the outstanding hard work that the teams do and we talk about war work, we have more opportunities to continue to get cost out and there was a.
Significant amount of more work, we can do but the work that they've done and how quickly. They respond is absolutely amazing to me and so part of it is just the incredible team that we have and and knowledge that we have so let's go on into it but we are very proud of the resiliency and their ability to produce during uncertainty.
Okay, and just a quick follow on and I'll walk through the Chicago Auto show.
Were thankful to get in between all of these COVID-19 waves.
I was struck by the touch screen controller seats on some upper and SUV models, particularly the Grand Wagoneer and not sure. If that's your platform and not but the broader question and it does that kind of touch screen.
Control of seats and kind of reinforce your position with your E systems or is it really no different than having the complicated.
Touch knobs, and dials and kind of BEC leavers that you see on most cars.
No, it's actually as to kind of it it's in line with our intuitive seat that work that we're doing we believe that there is a.
And number of feature content, if you're here, we're focused on it isn't on features and contents and the seat and I think we talked about embedding technology. It's exactly that we think there is a number of opportunities we're presenting our customers that will help the consumer and respect to comfort features thermal comfort.
Their content.
And we believe is.
Right right on line with what we're doing with intuitive seating and so now we've looked at applications like that we're looking at applications like that but.
But we do think Theres a number of additional opportunities I don't know if you guys want to comment a little bit I think it also shows the level of integration and that drives and the vehicle higher speed connections from a wire and perspective more technology into the data communications data networks and commute computer.
Networks and the vehicle.
It's 1 of the reasons why we're investing in and working with things like the IMS connection systems for high speed Ethernet connections because those types of touchscreen controllers more integrated features and the vehicle drives more data flow throughout the vehicle more data routing and computer communications and those are dry both the wiring and connection.
Systems and also the low voltage electronics for us yes.
Highlight Brian to Ray's point.
And I highlighted configure plus a minute ago, but into is a great product force Ray mentioned.
On thermal comfort that we're working on but proactive comfort is exactly what you described we have applications that work on touch screens, we have applications that work off your cell phone and part of the part of the drive is to put sensors and technology and software.
Into our intelligence seating so that it is more intuitive and adjust automatically to our consumers for the preferences. So.
It's very similar to what we're doing and the market today and yes. It works with touch screen and it can work with the the hard wired systems that are in place today as well and we've discussed this too we think that's a unique competitive advantage for Lear Corporation.
Interconnectedness between E systems and seating have already proven that we cannot just we can not just commercialize it but extend our ways of differentiating our seat products because they are interconnected we do believe that the intuitive seating is the future of seating and that the combination of <unk> systems and we have teams that are.
We're working on the technology, we talked about embedding this innovation in the seats of the future. So we're excited like I said to continue to differentiate ourselves and we have a unique position in that space to continue to do that.
Thank you.
Our next question comes from Joseph Spak from RBC Capital markets. Please go ahead with your question.
Hi, Thanks, good morning, everyone.
If we could just go back and Holistically.
Listen to everything you said about the issues and the back half with.
Commodities and mix and and we sort of look at the midpoint of your third quarter guidance at $150 million and core operating earnings.
On the animal for us like that seems to suggest maybe like.
You know, maybe 5 or 6% margin and seating, which would have to mean that E. Systems is breakeven is that correct and if so what's what's driving.
The breakeven and in E systems.
Yes, it's actually a little bit better and better than that Joe.
I'd say seating and it will be between 5% and 6% and Andy systems will be between let's say 2 and half from 3.5% and the.
Third quarter.
The biggest factor any systems. In addition to the volume reduction is.
The low point on commodity until the full effect of the higher copper price for the first time being realized and actual and material costs in our plants and the third quarter.
This year, because we had bought ahead.
Earlier in the year and lessen some of the impact of higher copper prices earlier in the year and then the fourth quarter and you get the pass through benefit of that and so you have 2 things happening from the third quarter, the fourth quarter, yet volume recovering and the benefit of the commodity pass through agreements taken.
Taking effect and that leads to a pretty significant step back up from the third quarter, the fourth quarter and we would expect both segments at this guidance.
This volume level.
To be right around 7% and the fourth quarter, maybe a little bit less than that but close to 7%.
Okay and chasing that that's very helpful. I appreciate that.
And then just on I know, you and I'm really talking about 'twenty 2 on on the.
Commodities, but I think I just want to make sure I got this right you said $175 million commodity hit.
For the year.
95 of which in the back half so I mean, it's as simple as if we wanted to assume that commodity to just did not move from here, which is obviously, an oversimplified and consumption.
And that there would be an incremental 15 million dollar commodity headwind into the first half of 'twenty, 2 or can we not do that math.
I think the way we were looking at the math that you just said that the second half commodity costs were to hold for all of next year.
That would be about $100 million impact and.
Offsetting that you have the benefit of some of the delayed recovery mechanisms and some cases and some of our commercial agreements have a 3.6 or even 12 month lag you will see a benefit that will partially offset that and I also think debt.
Hard to see steel remaining at the level its at and so there should be some moderation from these all time highs that we're experiencing here and the back half of the year, but if it does remain at that level. That's that's sort of the math there now we are taking steps.
And commercially to try and improve upon that 15% exposure, we have with steel we have negotiations with several customers right briefly alluded to that earlier and glass.
Domestic debt, we're going to improve upon that exposure and this and this business I think more of that steel responsibility belongs with with the customers and and we've been working on that for cash and 10.12 years and we have I think put ourselves in a pretty good position relative to the competition, but I think we can even.
And do more there and then outside of your sort of index.
Indexing and pass through agreements and at the beginning of next year, we'll be starting our annual price reduction and discussions with our customers and so it still remains at this level, we will have another opportunity to try and negotiate some offsets to that and now you've got to balance the backlog and growth and other aspects of the relationship.
But I think we will have a chance to deal with this if that cost remains at that elevated level.
Okay. Thanks for that color as well and I appreciate it.
No problem.
Our next question comes from Dan Levy from Credit Suisse. Please go ahead with your question.
Hi, good morning, and.
Thanks for taking my question.
Sorry.
And beat a dead horse on the commodity side, but and.
And just I just wanted to understand the sensitivity on on that $95 million and comment.
Is that just purely based on where prices are today.
Day, you know what is that embedding in terms of recovery and and just to be clear you know like what's your visibility on the $95 million meaning.
And let's let's say price has happened and I know no 1 knows what's going to happen on prices, but let's say prices do come down how much do you get immediate relief or is that relief on on a lag. So what's your visibility on that on that $95 million and.
That cash.
Yes, so it's a bit of a mixed bag so and.
Europe for example, and we've locked in the steel costs for the remainder of the year. So we have a 100% line of sight on that and.
North America, we blocked and the third quarter and we have some exposure good and bad to the fourth quarter. So we've made an assumption on what the market is going to do there and embedded that and the outlook. So I'd say the vast majority of the $95 million, we have a clear line of sight on.
And Dan.
Okay. So.
Getting to the prior comments you gave on quarterly margin 5 to 6 years seating the 2 to 3 for E systems. It sounds like barring some some large uptick in volume and so for a lot of performance.
Probably not going to see a lot of <unk>.
Outside to those figures for the third quarter or is that a day or something.
Yes, I think the biggest opportunity and the third quarter would be a production.
Stabilized at the current what's been currently announced so the high end of our guidance range effectively and Embeds everything that we've we're aware of.
And so I think that that may be a bit optimistic, but theres, certainly a chance that and conditions improve and production stabilizes and that could be upside I think the prudent assumption is that more and more in line with the midpoint that we will see continued disruption.
And July is probably the worst months, we've seen of the year and I think June and August probably similar so that really it really comes down to September and whether things stabilize or not and as Ray mentioned the difficult part is on semiconductor parts, where there's no buffer and the system. There is no inventory and so any new.
<unk> balance to take place, where the backend processing is happening and southeast Asia, we do and immediate disruption and production and so that's that's what gives us the hesitation around being a little bit more optimistic for the third quarter and.
At this point.
Great.
And then thank you and then my follow up is on E systems.
And we knew that in the past quarter 1 of your.
1 of your large customers.
Highlighting what are their investor day, and so they are overhauled electrical architecture and.
And then and this seems to be like an industry trend and just more central compute much less and wiring. So maybe you can just remind us because you've obviously given us a good sense on what your opportunity is.
And with electrification and <unk>.
Parallel is we have this trend and overhauled architectures with more central compute.
How does E systems content.
James.
And especially as there is just less wiring content.
Yes.
It's a good question and we've spent a significant amount of time understand this and no.
And where we can position ourselves for continued growth and Carlos here I'm going to let Karl kind of give you a little insight and how we're looking at it.
And to grow our business.
From an architecture perspective, we see that architecture changeover happening over the next kind of 15 plus years and there'll be some early adopters and there'll be a lot of folks that will continue to use legacy architectures or do a lot of hybrid things and so we see.
And that move to zonal controller central computing will improve the optimization of the electrical architecture, but at the same time, what we're seeing is a growth and circuit counts actually where we're adding more content and the vehicle with more safety sensors active safety sensors and even autonomy.
A lot more high speed signals and the vehicle.
And that's offsetting some of the integration of the data networks.
Well positioned I think on the electronic side with our body domain controller and software expertise.
Participate and these new architectures and we're responding right now to a number of customer proposals for for some of these new architecture. So we're we're definitely and the mix and talking with our customers about these changes and from an architecture perspective, we also see that most of the high volume customers will select and element of these architectures independently not everything from 1 supplier.
Flyer and that includes both software and hardware sourcing.
Kind of Federated procurement approaches they have historically done and were.
We're excited about the change from a technology perspective.
And the electronics, we're excited about that and put that change drives from the wiring and connection systems parts of the portfolio and as Ray mentioned some of these autonomous programs that we're working on really get your early insight into the technologies required and to the architecture is required and EBIT unique manufacturing requirements and capabilities. We are developing as we're working on these programs.
With our customers. Some of these wiring harnesses are ours, the largest and most complex harnesses, we've ever built and we're maturing and developing both the manufacturing as well as the sub component technologies, So really exciting about the change and the architectures, where we're there right along with our customers and helping them to find those new.
Pictures on the electronics side on the power side and looking at the whole system optimization and what.
It's nice that Carl mentioned and I mentioned earlier is that we do have with 2 major oes development contracts and autonomous vehicles, and so a lot of the new architecture technical.
Technology and capabilities are in some respects being applied and we can.
You can look at what we're doing with IMS and our partnership there to get high speed data.
Knowledge capabilities. So we can grow within the connectors part of that business and our continued acceleration of components within wiring and both high power and low voltage and so we see this transitioning occurring we do believe that we have.
And incredible capabilities that will.
We will fit with the new architectures, and we're continuing to develop and our capabilities as we move along.
Great. Thank you.
And ladies and gentlemen on the last question for today comes from Emmanuel Rosner from Deutsche Bank. Please go ahead with your question.
Yeah good morning.
Morning.
Hi, I was hoping to just wanting a little bit more on I guess, how much of your cautious second half volume view is dependent on.
Industry wide factors versus sort of view on customer and and as equal mix can you maybe frame it in terms of growth over market.
And you know outperform on that metric pretty materially in the first half of the year.
How do you think about and maybe in the back half of the year.
Yes, so emmanuel and the first half of the year our growth over market was about 9 percentage points total company and as I look at the second half.
Does moderate it's right around 5%.
And so the full year.
<unk> 7 percentage points of growth over market, which is consistent with what we talked about back in may. So that is that is part of.
Part of what's going on and if you look at the second half of the year and and in particular, if you look at our revenue in North America relative to what's happening on the market, it's down a little bit.
And so that's that's probably a big factor.
But I still believe that.
The assumption we've made at 6% for total industry growth for the full year debt.
That's our food and balanced view of the current circumstances that we're seeing as ray outlined just because of the tremendous uncertainty around.
Semiconductor parts and the backend processing and unexpected shutdowns debt.
You know very well it might occur over the coming weeks and months.
And that's great color.
Would you have good second half.
Breakdown between.
Seating and E systems for the 5 points of gross of on marketing.
Yes, so seating there will be a little bit higher than that.
And E systems will be a little bit lower than that <unk> systems growth of a market will be better and the second half and the first half though.
Okay.
That's great to hear and.
And then.
And my follow up question is on your slide 20, which.
And I really appreciate youre, including and at this and investors show and you're very focused on what some of the Crunch Heico's mean for next year and then and then the out here.
Was hoping you could walk through some of those but on this and.
Some of the factors on the slide but I get it.
Overall is the process is a plus for US is that is the sense overall that 2020 to some of these headwinds will still be there, but sequentially better than 22, and 1 and then the full normalization.
<unk> and happens in 2023 or I guess, how should we how should we understand the slide and.
And that's kind of how we were looking at and Emmanuel and certainly we expect 2022.2 to grow relative to 2021.
Supply chain challenges should should be alleviated somewhat but I don't think youre going to see.
And industry that has the ability to fully meet consumer demand because of ongoing supply chain shortages and until you get to 2023 and maybe the back half of 2022, you get closer to that.
And so that is the kind of thought process on how we laid that out.
And thank you so much.
Youre welcome.
Okay.
And that.
Okay.
Okay.
Just to wrap things up 1 and it's probably just lear employees on the call at this time.
I wanted to say, thank you I couldn't be more proud the team we could just continue to focus on what we can control and we do an outstanding job the performance and the operations are just absolutely incredible and.
And I know, there's things outside of our control, but the things we do control, we do a remarkable job and I want to thank the teams around the world for your performance operations and the work debt purchasing is doing and both business segments. I would tell you just can't believe what <unk> been doing to protect our customers and.
It's being recognized on our customers. If there is a silver lining and we have and incredibly tight relationship with our customers because of the work that youre doing and the teams are doing it will be recognized at some point I believe it I believe you can do the right things that there will be a time. When you are recognized and I believe that will be a recognition through growth and will continue to grow.
This business the special Thank you to Mexico, you guys. Just continue to impress me the team down there. Thank you so much for the inoculations and vaccinations and shot.
The initiative to do the right thing and that's what we're about is outstanding and I. Appreciate all the work around the world. We're growing this business. We are staying focused on our strategy and good things are bound for Lear Corporation. So thank you for all your effort.
Ladies and gentlemen that does conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.