Q3 2021 Lear Corp Earnings Call
Good morning, and welcome to the Lear Corporation third quarter 2021 earnings Conference call.
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At this time I'd like to turn the conference call over to Ed Lowe and Felts, Vice President Investor Relations. Sir. Please go ahead.
Thanks, Jamie good morning, everyone and thanks for joining us for Lear's third quarter 2021 earnings call.
Presenting today are Ray Scott Lee, our 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.
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 Alere 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 in 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 also want to remind you that during today's presentation, we will refer to non-GAAP financial metrics. You are directed to the slides in the appendix of our presentation for the reconciliation of non-GAAP items to the most directly comparable GAAP measures.
The agenda for today's call is on slide three first Ray will review highlights from the quarter and provide a business update Jason will then review our third quarter financial results and our full year 2021 outlook. Finally ray will offer some concluding remarks. Following the formal presentation, we would be happy to take your questions now I would like to invite ray to begin.
Thanks, Ed and good morning, everyone. Please turn to slide five.
Where I will provide a brief overview of our third quarter financial results. The third quarter was marked site.
The continuation of supply chain challenges the auto industry has been facing financial results were negatively impacted.
Not only by significant volume reductions versus last year, but also by low visibility from our customers.
Leading to short notice production shutdowns.
Slide six.
<unk> numerous achievements in the quarter.
Including innovation.
Quality awards and strategic investments in both business segments.
In the third quarter liter sales growth outpaced the market by nine percentage points with strong growth over market.
Ceding any systems.
<unk>, new business wins as well as products that are favorably aligned with the industry shift to electrification are expected to deliver continued growth above market over the next several years.
Last week, we announced the acquisition of substantially all of <unk> automotive interior comfort division.
Which will further strengthen our industry, leading seating business I will comment further on this acquisition a little bit later in the presentation.
On the systems side, we announced agreements to form two separate joint ventures, which will further enhance our capabilities in electrification the joint venture with who lane, which we expect will close later this year, we will further enhance our growing portfolio of connectors capabilities for both high voltage and low voltage applications.
This joint venture the joint venture, we Shouldnt read we integrate complementary portfolios of advanced onboard Chargers.
From Lear, and Chenier and increased access to a broad range of customers.
We also continue to be recognized across both of our business segments for excellence in innovation and quality we.
Our third consecutive automotive news pace award in two pace pilot Awards.
And then any other supplier.
Lear has long been known as a leader in C quality and this year, we won more than twice as many C quality awards from J D power as any other company.
We increased cash returns to shareholders in the quarter by doubling our dividend and buying back more stock.
In total we returned $100 million to shareholders during the quarter.
We also increased our credit agreement to $2 billion and extended the maturity to 2026 with respect to capital allocation. We continued to follow a balanced plan that includes organic investment inorganic investments and returning excess cash to our shareholders.
Yes.
Turning to slide seven our seating business continues to grow faster than the market, reflecting our strong position in Suvs <unk> and luxury vehicles in.
In the third quarter seeding growth over market was eight percentage points, reflecting new business and Ford Bronco and Bronco sport, the Hyundai Tucson and strong performance on the luxury brands in Europe, you're seeing also benefited from strong demand from Gm's full side sized Suvs.
During the quarter, we were awarded key programs with G M BMW still on us.
And great wall.
And there are additional programs, we expect to be sourced prior to the year end.
We also received a new development award.
For our award winning configure plus product This award with a European OEM. It is expected to launch in 2026.
Customer interest in our patent protected configure plus product remains very high.
We continue to move forward on key launches in the quarter, including a new plant in Canada.
To supply seats for Gm's large pickup trucks at the reopened Oswald plant.
Other key ongoing launches are highlighted on the slide.
A few weeks ago, we broke ground on our new energy efficient jet facility in Detroit to supply seats for Gms battery electric truck programs.
I've already touched on the innovation and quality awards, we received in seating, but I wanted to spend a little bit more time, explaining the pace pilot award for thermal comfort.
This new product that was developed jointly with <unk> integrates.
Intelligent climate control software into a complete seating system.
The algorithms and software controls were developed by Lear, and then use a combination of occupancy temperature data seed position in cabin temperature to optimize energy usage within the vehicle and keep passengers at an optimal temperature.
Please turn to slide eight where I will provide more details on the Cogs Berg acquisition.
Kongsberg as a recognized automotive supplier specializing in luxury comfort seating solutions.
With strong market positions and massage lumbar seat heat and ventilation systems.
Kurt features continued to be of increasing importance as automakers look to improve the driving experience through product differentiation in increased efficiency and improved performance, especially in luxury SUV in electric vehicle segments.
The company has almost 50 years of experience in seeding comfort solutions.
Solutions technical centers and sales offices in three different continents, and the experienced and dedicated team with approximately $300 million of annual revenue.
<unk> has a well balanced customer portfolio built on long standing relationships.
With leading premium automakers <unk> as a global leader in seat massage and he has a number three position in lumbar in adjustable comfort. The company is a technology leader with expertise in pneumatic comfort systems and patented technology that enables superior performance weight reduction in packaging.
Flexibility. In addition to performance benefits. There are also much player, which is even more important in electric vehicles, where noise will be much more noticeable.
Kongsberg also has a strong market position as the number two player in heat maps and the number four player in that systems for thermal comfort.
Okay.
On slide nine I will highlight how kongsberg will enhance our competitive advantage in seating. This acquisition is consistent with other acquisitions, we have made over the past decade to enhance our vertical integration capabilities.
These moves have enhanced growth and margins and extend our market leadership in luxury and premium seating. This acquisition extends our capabilities in comfort systems solutions further solidifying our position as the most vertically integrated seating supplier, while bringing additional price level content to our offerings is stretch.
As our ability to serve <unk> luxury SUV customers and to provide them with the next level of vertically integrated design solutions.
Integrating <unk> Bergen to Lear's operation solidifies, our strategy to offer a complete suite of luxury comfort seating solutions to our OEM customers and ultimately to the consumer.
This combination will enable lear to improve overall seat system performance by offering more efficient lower weight and flexible packaging design solutions.
The total addressable market for massage lumbar heat ventilation products is estimated at two $5 billion to $3 billion IHS trend data indicates this market will grow about two percentage points faster than the vehicle production over the next five years.
Based on our assessments of industry Megatrends, we expect the market to grow even faster in that timeframe and beyond customers are looking for features to improve the driving experience as cars become smarter a higher emphasis is being placed on interior comfort. We are already seeing this with luxury and EV customers.
And we anticipate this trend and focus on interior comfort to further increase when autonomous cars come to market.
We also expect increased adoption of seeding comfort products beyond the luxury segments into higher volume vehicles segments. In addition, we believe that by creating a more efficient packaging solution, we will see more proliferation of seeding comfort systems in the rear seats.
And perhaps the biggest opportunity, which will unfold over a longer term will come with the acceleration in electrification, which requires more efficient heating and cooling systems in the cabin IRA.
Our expertise in software and algorithms combined with heating and cooling products from <unk> and our other partners will position us as one of the leaders in this area.
Slide 10 highlights lear's, leading performance in the latest J D power U S seed quality and satisfaction study.
For your years Lear has consistently been recognized by the industry experts and our customers as a leader in seed quality in.
In the latest JD power seat quality survey.
Labor was the only seat supplier to win two first place awards. We also won five additional awards and more than twice as many total awards as any other seat supplier our leadership in luxury Suvs Suvs was evident by the multiple awards in both categories. The breath of our wins was notable as well with awards for products.
With six different Oems and in six of the seven different categories.
Okay. Please turn to slide 11 for an update of the systems business.
Yes.
In the third quarter E systems sales grew grew nine percentage points faster than the market.
Reflecting new business and the Ford Bronco sport and the Mustang Mach E <unk> in North America.
And strong performance in connection systems in Europe, and with <unk> and the great wall in China.
We have won over $1 billion in business awards. So far this year over 80%, which are new for Lear.
Based on awards to date, our 2022 to 2020 for backlog is expected to be higher than our prior three year backlog.
We will update and provide details on our backlog in our next earnings call.
With the momentum of new business wins, we expect our E systems business to continue to grow faster than market for the next several years <unk>.
Despite the industry slowdowns, we remain busy executing launches with Mercedes Volvo Jaguar Jaguar among others. We also are launching our initial programs with GM annuity on a recent award winning battery disconnect units and our first to market <unk> Telematics control unit.
Our our connection systems business is on track to grow to approximately $600 million next year.
Growing this part of our business as part of our strategy to increase the size and strength of our electrical distribution systems business and increased our margins.
In addition to organic investments, we are entering into joint ventures, and partnerships and making acquisitions to enhance our capabilities in connection systems.
We already are.
We are seeing benefits from our <unk> acquisition.
We are developing new high speed connectors with IMS.
And we are looking forward to closing the who lean joint venture by the end of the year, which will increase our presence and connector catalogs.
We're also making progress on our plan to grow our connection systems business to $900 million to $1 billion by 2025, we will continue to identify and pursue additional acquisitions or partnerships to accelerate this growth.
On the power electronics side, the joint venture announced yesterday was chenier will expand our capabilities improve manufacturing and design efficiencies for onboard Chargers.
Now please turn to slide 12 for a brief summary of our recent awards, we have received under innovation and quality new systems.
They are one our third consecutive automotive news pace award for the battery disconnect units, we designed for Jim.
This product controls all power switching in and out of the battery pack. Our design incorporates breakthrough thermal management innovations, which will which improves the efficiencies of large and high performance electric vehicles.
We will be supplying this part on the GMC Hummer EV, the Chevrolet EV Silverado and other vehicles on Gms battery electric truck programs.
We also are pursuing opportunities on strategic EV platforms with other customers.
We also won a pace pilot award for our five G. <unk> Telematics control unit a single state of the art installations, featuring nine antennas integrated onto one printed circuit board to support all next generation wireless technologies.
Our design removes the shark fin external antenna ricard required on many vehicles today, reducing complexity and improving styling capabilities in urodynamics, 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 also have been recognized by our customers for quality a few weeks ago. We received the World Excellence Award from Ford for our plant and Pacheco, Argentina and earlier. This year. We received two plant quality awards from General Motors and.
And now I'd like to invite Jason to review, our third quarter financial results and full year outlook.
Thanks, right Slide 14 shows vehicle production in key exchange rates for the third quarter.
The impact of continuing component shortages led to a significant reduction in global industry production in the third quarter, particularly in our two largest markets North America and Europe.
As a result global vehicle production in the third quarter decreased by 19% compared to 2020.
On Alere sales weighted basis global production declined by approximately 25%.
From a currency standpoint, the U S dollar continued to weaken against the euro and RMB compared to 2020.
Slide 15 highlights <unk> growth over market in the third quarter.
Total company growth over market was a strong nine percentage points with E systems growing nine points and seeding growing eight points above market respectively.
Growth over market in North America, 12 points reflected the benefit of new business in both segments and strong production on Gm's full size Suvs as well as Mercedes Suvs.
In Europe growth over market of five points was driven primarily by new business as well as strong performance in the luxury segment in seating.
Increased business and connection systems in Europe also contributed to the growth over market performance.
In China growth over market of four points resulted from strong production on BMW programs in seating and new business with Geely, great wall and these systems.
Year to date, <unk> sales have grown faster than the market by nine points with above market growth in both segments.
Slide 16 highlights our financial results for the third quarter of 2021 compared to 2020.
Our sales declined 13% year over year to $4 3 billion.
Excluding the impact of foreign exchange commodities and acquisitions sales were down by 16%, primarily reflecting lower production on Lear platforms, partially offset by the addition of new business.
Semiconductor shortages in the quarter negatively.
<unk> negatively impacted our revenue by approximately 24%.
Core operating earnings were $98 million compared to adjusted operating earnings of $327 million last year.
Reduction in earnings resulted from the impact of lower production volumes and higher commodity costs, partially offset by positive operating performance and the addition of new business adjust.
Adjusted earnings per share were <unk> 53.
As compared to $3 73, a year ago.
Third quarter free cash flow was negative $157 million.
Compared to $474 million in 2020.
Free cash flow was negatively impacted by lower earnings higher capital expenditures and an increase in working capital.
Working capital was higher in the quarter as volatility in customer production schedules resulted in elevated inventory levels.
Slide 17 explains the third quarter year over year variance in sales and adjusted operating margins in the seating segment.
Sales in the quarter were $3 2 billion.
A decrease of $526 million up 14% from the third quarter of 2020.
Excluding the impact of foreign exchange acquisitions, and commodities sales were down 16%.
The lower production, partially offset by the benefit of new business.
And CD production downtime in the third quarter related to semiconductor shortages reduced our sales by approximately $1 1 billion or 25%.
Core operating earnings were $144 million down $142 million from the third quarter of 2020.
Lower volume on their platforms and higher commodity costs, partially offset by positive net operating performance and margin accretive backlog.
Slide 18 provides detail for the third quarter, our year over year variance in sales and adjusted operating margins in our E systems segment.
Sales in the third quarter were $1 1 billion, a decrease of 9% from the third quarter of 2020.
Excluding the impact of foreign exchange acquisitions, and commodities sales were down 15% driven primarily by lower volumes somewhat offset by our strong backlog.
In E systems production downtime in the third quarter related to semiconductor shortages reduced our sales by approximately $300 million or 21%.
Core operating earnings were $23 million or two 1% of sales compared to $93 million in 2020.
The decline in earnings resulted primarily from lower volumes higher commodity costs and semiconductor and COVID-19 related premium costs. The decline was partially offset by margin accretive backlog and positive net performance.
Now please turn to slide 19, where I'll briefly talk about our balance sheet and liquidity.
Last week, our Treasury team took advantage of favorable market conditions, and our strong financial position to Opportunistically increase and extend our revolving line of credit.
The credit agreement was increased to $2 billion and the maturity was pushed out by more than two years to October 2026.
Our strong balance sheet supports investments in innovation and growth and positions <unk> to quickly execute bolt on acquisitions, such as the pending acquisition of Kongsberg Automotives insurer comfort division expected to close in the first quarter of 2022.
We continue to analyze additional organic and inorganic investments to strengthen both of our business segments.
At the same time.
We remain fully committed to returning excess cash to shareholders in the third quarter, we returned $100 million through continued share repurchases and the doubling of our quarterly dividend of <unk> 50 per share.
Slide 20 provides the assumptions for global vehicle production volumes and currencies that form the basis of our 2021 full year outlook.
We based our production assumption on several sources, including internal estimates customer production schedules and IHS forecasts.
Due to the ongoing supply disruptions, we expect full year 2021 global vehicle production to be roughly the same as 2020.
And generally in line with the most recent IHS forecast.
From a currency perspective, our 2021 outlook assumes an average euro exchange rate of.
$1 19 per euro and an average Chinese RMB exchange rate of 646 RMB to the dollar.
Slide 21 compares our updated outlook to our prior outlook for sales and core operating earnings we are reducing our outlook to reflect the impact of significant additional reductions in customer production schedules that have resulted from continuing component shortages.
We are forecasting sales in the range of $18 8 billion to $19 2 billion and operating income in the range of $750 million to $850 million.
Our 2021 outlook for core operating earnings at the midpoint is down $215 million to $800 million, primarily reflecting lower volumes and modestly higher commodity cost, partially offset by net performance improvements.
Slide 22 highlights a more detailed view of our updated financial outlook.
Despite the reduction to our revenue outlook, we are projecting the company to deliver full year growth over market of approximately eight percentage points. This reflects both the strength of our new business backlog as well as our strong customer program and product portfolio.
Adjusted net income is expected to be in the range of $420 million to $500 million down $180 million at the midpoint from our prior guidance, reflecting lower sales.
Our outlook for free cash flow for the year is expected to be approximately $175 million, which is lower than our prior outlook by $250 million, reflecting both lower earnings and higher working capital full.
Full year free cash flow could be further impacted by continuing production disruptions, which may lead to temporarily higher working capital.
While our outlook reflects our best insight into customer production plans for the remainder of the year. The production environment remains volatile as we've done in the past we plan to provide an update on our financial outlook during an Investor conference in early December, reflecting a new developments and industry conditions.
I'll turn it back to Ray for some closing remarks.
Thanks, Jason Michelle.
Please turn to slide 24, where I will conclude with some thoughts on the <unk> on our 2022 operating environment.
It's too early to provide guidance for next year, we thought this slides it might be a little bit helpful to indicate what trends we are tracking.
There are many positive drivers as we head into next year and beyond most importantly customer demand is strong.
And dealer inventories are extremely low this positions the industry for a strong recovery once we get beyond the short term supply constraints.
We have a strong product lineup, which is driving new business wins, we are laser focused on driving operational excellence and improvements that we have made in both business segments. This year will support margin improvements going forward.
The challenges are very similar to those we've we've faced over the last few quarters limited visibility on production schedules commodity and labor inflation and supply chain disruptions are expected to continue to impact the auto industry into 2022.
While no one in the industry is immune and is difficult to predict when production volumes will normalize I know that we have the right team and we have the right strategy in place to capitalize when the industry conditions do improve the.
The strength of our balance sheet, along with the cash generating capabilities of our business will continue to provide us with financial flexibility to support investments in our business, while returning capital to our shareholders.
In closing I want I want the team to know how proud I am of their performance and for the and for focusing on the things we can control and now we'd be happy to take your questions.
Ladies and gentlemen at this time, we'll begin the question and answer session.
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We'll pause momentarily to assemble the roster.
Our first question today comes from Joseph Spak from RBC. Please go ahead with your question.
Thank you and good morning, everyone.
Alright.
Good morning.
You previously for the third quarter talked about 20% to 24% Decrementals on the lowered sales guidance in the third quarter came in better than 13, So and you talked about some of the better performance.
If I compare your new implied fourth quarter guide versus I guess, what you were previously expecting for the fourth quarter. When you last reported its also that same sort of 23% decremental on the lower sales. So that sort of same range. You previously indicated for the third quarter I'm. Just wondering is there something in the fourth quarter that would prevent you from coming in better than you did.
In the third quarter I, just wanted to understand the operational differences between the fourth quarter in the third quarter.
Sure Joe Yeah, there's a couple of things going on here. So part of the performance in the third quarter was a result of commercial negotiations that we had anticipated closing in the fourth quarter and so are we.
Had a little bit of timing benefit from that in Q3. In addition to that because of the deteriorating outlook, we had some reductions in our incentive compensation.
And so that benefited the third quarter and won't in the four if those are the two primary factors to a lesser extent the mix.
Programs that we're running in the fourth quarter versus the third quarter is a little less.
Favorable for us so the volume component of the change in guidance is a little higher downward conversion in the fourth quarter than the third quarter.
Okay is there any way to quantify the commercial benefits are of incentive comp to the third quarter.
It's about 20 million of.
Favorability in the third quarter that that is offset as $20 million of unfavorable performance in the fourth quarter.
Okay.
And then just on thanks for the strategic color on Kongsberg.
I guess, just a couple points here I know they also sold two of your competitors I'm expecting that won't change is selling between seating suppliers is pretty standard, but if you could just confirm that and then I guess more importantly, it looks like they are running negative mid single digit margin. So how quick do you think you can get that <unk>.
<unk> is profitable with our scale and some deal synergies.
Yes.
To answer the first question, obviously this isn't our first acquisition, where we've had.
Vertical integration in this in the supply base today, we buy components through share components with some of our competitors and there hasnt been significant shifts in revenue even post acquisition. So I think that's a very.
Low risk if any risk at all.
The way I look at the opportunities to conquer Berg has done a nice job in their struggle with some of the same issues that we're all struggling with this year. So I think some of Thats just temporarily.
Putting pressure on the margins, but when I look at the opportunities when we can get into leveraging our purchasing strength our operational strength.
How we look at the business and be able to scale it.
And to help out with some of the scale.
Issues I think it is going to be a relatively quick turnaround I mean, that's when I. When I say quick I think six to 12 months level. Good idea of what we need to do we don't want to take another step back too and we've put a team in place shrank Arsenious here president of our seating business and we've been looking at this.
For quite some time, we've been studying the products we've been looking at areas of opportunities, where we can really dive in and get it CTO, which is V cost technology optimization. So we're already in the works I mean, we're working on different solutions different ways to make the system more efficient.
And drive value longer term and so I don't I don't see there is a long term issue I think it's more short term given some of the.
Economic climate that we're facing today, but more importantly, some of the things that we already have in process before we take over day. One so just to follow up on <unk> comments on the margin part of your question.
We do expect some modest margin dilution on seeding next year as a result of what you observed. There. We also are going to make some investments to integrate that business and as Ray said, we see a pretty quick turnaround in terms of that margin performance and we see over a two year period that that margin becomes accretive to <unk>.
Modestly as well the structural margin of the products in the <unk> business are very similar and perhaps in some cases, a little bit better than <unk>.
Our underlying seat business and so as a result of the combination of product synergies operational synergies purchasing synergies that Ray described we think that just the underlying structural margin of that business.
It will be at or above seat margins over time, and that's before even talking about revenue synergies that we see.
I appreciate the color guys.
Thanks, Joe.
Our next question comes from Dan Levy from Credit Suisse. Please go ahead with your question.
Hi, good morning, everyone and thank you Michael.
I'd like.
Unpack first growth over market.
Maybe you could just give us a sense of what's driven the thing I'd point to especially in seating it seems like you're tracking well over 10 points growth over market. The last four quarters and is this all I know mix should be favorable but it hit all favorable mix or are we seeing.
Share gains or incremental.
The vehicle content to reflect that figure so maybe give us some color on the growth of the market, which you're getting especially in seating.
Yes, a portion of it is market share gain our backlog in seating this year.
We announced at the beginning of year was $550 million at current volumes, it's about $500 million and so that's that's a key factor contributing to that growth over market, but it is also the product mix.
The strong production.
Gm's full size pickups, and Suvs relative to the market and other platforms in North America on the luxury side with Mercedes for example, and then just generally I think the luxury market in Europe and in Asia has held up better than the general market as customers prioritize there.
Most profitable vehicle lines and with our number one position in luxury we benefited from that I think if you look out to next year and a constrained production environment I wouldn't expect that to change much and so we should see some continued benefit from that product mix that we that we have.
Great. Thank you.
My My second question is on margins and maybe you can just.
Give us a sense of if you do.
If we just set pricing to where they are today.
What's the commodity hit into next year, what's the type of the magnitude of cost inflation that you're seeing I think on the last call. You said the $100 million of incremental commodities and just I guess, maybe more broadly on the margins in 'twenty two.
I know I know margins are generally going to be a function of the volume levels and also what's happening on that.
The cost inflation side should what what's the early sense of the type of pace of margin recovery, we were getting over it we will get in 2022 and this is going to ramp on a linear basis, depending on volume levels or are there other recoveries or efficiencies that could enable better margins sooner. So that there's not a large disparity between.
The entrant in the.
Entering an exit rate that you can have on margin.
Yeah, Dan its.
At this stage, obviously, it's <unk>.
Difficult to call a margin for next year and as you pointed out volumes are going to be the biggest driving assumption there, but we will.
We do expect if commodity costs remain at the same levels are at during the fourth quarter, where steel is at record highs, particularly in North America.
Leather hide prices are a little bit higher chemical prices were a little bit higher as we look at a full year impact of that next year, we would expect that.
That'd be about $130 million headwind for.
Proceeding now.
The positive side we.
We do expect about half of that to be offset by the lag in recovery from commodity cost increases that we saw this year. So.
So we do see.
Some headwind on commodities.
Over a year and seating as a result.
Of that loss so in E systems, where the vast majority of copper as past. This pass through the other factors to think about next year. So we have a very strong backlog rolling on wood, we announced our backlog earlier this year for 'twenty. Two we were calling for a $1 billion $1 75, and additional revenue next year.
From a backlog.
Our latest estimates are that havent tracking closer to 1 billion $2 50.
And that backlog will roll on at normal segment margins. So from exit rate standpoint that will be modestly accretive to margins in both segments next year.
In addition to that if you look at the operating performance of both segments. This year.
<unk> generated significant positive net operating performance that means all of the cost reduction activities commercial negotiations supplier negotiations have significantly exceeded our customer price reductions and labor and overhead inflation, we expect that to continue next year, perhaps not at the same access.
Great pace that we saw this year, where we've we've seen roughly a 100 basis points of net operating performance in both segments.
But we do expect to see some continued benefit from that as we look out to next year I'd say those are sort of the key drivers on one additional point Dan on E systems, we're continuing to grow our connection systems business.
That was a business that was around $450 million of sales in 2019, it's going to be at $600 million business based on our current volume outlook for next year.
And every <unk>.
$50 million of business, we're rolling on in that space is 10 to 20 basis points accretive to E systems margin. So.
That's an important catalyst as we look out to next year and beyond.
Okay, just to clarify for the quarter and year to date, the the magnitude of headwinds from cost inflation or.
Inefficiencies aside from just general production.
Yes so.
In both segments. It was it's been running around 15% to $20 million.
A quarter.
And in seating that was a number that was very similar to last year and these systems. It was about $12 million higher.
What we experienced in the in the third quarter, where you know.
That trap labor costs are more difficult to in a short notice volume.
Reduction by our customers. So that's had an impact on the system. So it was a little greater proportionately.
Proportionately than seating.
Great. Thank you very much.
Our next question comes from Colin Langan from Wells Fargo. Please go ahead with your question.
Oh, great. Thanks for taking my question.
Can we just actually quickly cover the commodity headwinds again, it's is the guidance still around $135 million up slightly from that for this year.
How should we think about it sequentially.
Q3 to Q4.
And just to clarify you said 130 million next year with half of that probably getting recovery.
Right.
Yes so.
In terms of the impact on this year, Colin it's a $185 million roughly 40 in the first half and 145.
In the second half of the year and as you look across from the third quarter to the fourth quarter and there is a about $30 million of incremental.
Commodity costs in our seating business.
<unk>.
Not much change from the third quarter to the fourth quarter.
And so what youre seeing there is skill, peaking in the fourth quarter, we've locked in prices for the fourth quarter.
Over the last four weeks the CRU index has come down modestly.
So we're expecting that to continue somewhat because we as we look out to next year.
But that is an increase.
On a net basis for us in seating are sequentially. In addition to that high prices coming off of all time lows.
Has an impact on the fourth quarter and we expect that to continue into the first part of next year, we have pass through agreements.
100% of that business. So that is a temporary phenomenon that will work itself out and then the timing of that pass through is anywhere from as little as three months to as much as 12 months 12 to 18 months, but mostly sort of six to nine months lag.
So thats the other factor.
Throughout this year and into next year.
Okay.
But you think as you said commodities and feeding up $30 million quarter over quarter, but when I look at your full year sort of the midpoint of the guidance.
Maybe I'm doing this wrong it looks like sales and margins are up sequentially.
Which.
I guess it would be surprising if you have that so it's up despite the.
The increase in commodity cost sequentially.
What would be driving that.
Yes, well the main driver from the third quarter, the fourth quarter as valley here.
So our revenue at the midpoint and seeding would be about $300 million.
Higher a little less than that.
Then the.
For the fourth quarter, but about 300 million higher than the third quarter. So that's that's the single biggest factor sequentially driving that that's helping to offset.
Commodities, so it's something like 150 basis points sequentially and volume.
Offset by 90 basis points in commodities that drive some modest improvement in operating margins in seating and in the fourth quarter versus the third.
Great. Thanks for taking my questions.
Yes.
Our next question question comes from John Murphy from Bank of America. Please go ahead with your question.
Good morning, guys.
A lot of that walks off but I was going to go through has been hit here for 2022, but I guess, maybe just a meter.
Mid and long term question.
As you are making any comments Berg acquisition, and making more acquisitions.
If you are a little bit more bolt on than usually transformative, but then become transformative like eagle Ottawa over time. So they are really good things I mean, as you think about the potential for content on an EV versus an ice.
It's often thought that E systems is where the big upside could be but it seems like what youre, indicating now is it over time, you think that there is a mix opportunity here on seating. So maybe in both segments you can give us sort of your thoughts about where this potential content is going to go in both.
<unk> and E systems, as we transition to more easy vehicles over time.
Yes.
Yeah.
We have been discussed.
Discussing this for some time and ex U.
We have been working on intuitive seating as youre aware for well over six years six to eight years and we do believe that this trend of much better smarter and more sophisticated seeds is going to be the trend as we move forward.
If I take a step back. This is just the next evolution within that with the acquisition of <unk>, We've designed systems that.
From a thermal comfort perspective, the drawl.
These are my own estimates given some of the information I have gathered for HVAC system draws 20% of the battery.
Life and so if we can design and that's the intent is design a much more efficient seat seating system that keeps and cools the occupant at the surface within the seat you can obviously increase range and increase efficiency within the vehicle and we do believe that that's a very important trend for our customers and consumers.
And so we've been working on that we've obviously done a significant amount of work we were recognized with our partnership with <unk> and we do believe that as a trend I think health and wellness is another step when you talk about massage systems within the.
The seat system and how you can.
Help out consumers be more alert much more aware.
Anticipate things, particularly as you get to vehicles that are much more engaged with our economy. So we believe that there's going to be a greater need and more content within the seat around autonomy and sophistication within the vehicle.
Dynamic safety is something that we've talked about significantly when the seat with a C. Can actually help protect you in the event of some type of collision both.
Where we're at in Frontward, So theres a number of different things that we've been working on are developed and have patents around within that space and we believe that content increases. So if you think about <unk>. For example, we talk about the short term, yes. There are short term things and <unk> is a great company.
It's great to welcome in the Lear family.
We see a much longer horizon with those capabilities where midterm.
We believe the efficiencies that can be designed within those different context as far as today all of those systems are designed independently. So design for manufacture ability is just at the last moment with the seat designer to plug in all these different systems theres multiple harnesses connectors.
Valves pumps motors, it's the most to me inefficient system I've ever seen and I think it makes so much sense to <unk>.
Those components with our architecture capabilities with software and with wiring capabilities combine them with our seat capabilities and make a much more efficient system longer term I think to your point as you can see we're always are turning on.
Features as a service in charging the customer if its heat and cool or if it's pneumatic lumbar's or lumbar's.
If there is a design and our intent to design a much more efficient packaging solution that then can be placed into every seeding situation within the vehicle not just fronts, but <unk> and then go across multiple <unk>.
Vehicles, not just luxury and.
So I do believe that debt.
Absolutely a trend that we're going to see continue I think.
Supplier that solves that problem is going to be in a great position and I believe it's going to be Lear, and we're focused on it and have been focused on it. So I think we're just at the.
The start of these trends within seating and I also think we configure plus I think that's something.
Something that we've done an incredible job I think this reconfigurability with power solutions with safety protocols is picking up incredible momentum as you transition to electric vehicles, our rails packaged perfectly into a flat load story and so the amount of features that now can be.
Interchangeable within the vehicle and now it's a $100 million today, we do believe it's going to be $500 million worth of revenue here in a short period of time and we just we just got a brand new contract with a great customer in Europe. That's looking at how they can take that across multiple platforms. So I think thats another.
Content CPB.
Secular growth story for Us and then.
Electrification, we've talked about I would tell you we have $250 million of awarded all electric.
Paul.
High power electrification right now that's 20% higher than what we were awarded last year and we still have two months left in the year to win more business that continues to grow our backlog and quoting programs is higher than it was last year. So the backlog is very strong we've talked about power distribution.
With the continuation of high power solutions with terminals connectors why it's so important for us and why I believe we've been incredibly successful like Jason said from $4 $50 million to $500 million $600 million next year and connector systems. These partnerships that we're establishing with battery Chargers and with her.
High voltage connector solutions in IMS with flat wire solutions is perfectly aligned with content growth and so we I believe we have a number of different secular growth stories that are key to our future and we're perfectly aligned as this shift from ICD goes and changes over to electric vehicles.
That's incredibly helpful. Thank you Ray.
Yep.
Our next question comes from David Kelley from Jefferies. Please go ahead with your question.
Hi, guys. This is Gavin Kennedy on for David.
You guys mentioned that commodity and labor inflation would be a challenge in 'twenty two.
Can you provide some more details on how you're thinking about labor. Specifically are you is your team is seeing labor shortages today.
And any thoughts you have on how the shortages might impact 'twenty to assume and labor, assuming we see a recovery an L. B P.
Yeah Labor has been a challenge is no question about it as far as.
I think it's generally it's across every industry and we have done different things with incentives and different compensation packages too.
You work with.
Different regions around.
Having employees in the facilities, but it has been a challenge I think it is going to continue to be a challenge I think we're we're looking at different creative solutions.
Not just compensation, but to make sure that we're working with our employees around the world.
To make sure they.
Fuel value.
The Big thing is making sure our employees feel valued and that they understand the importance of why they are there and we're listening to some of their concerns around what they need and it's not like I said all compensation Theres other things that we're trying to do was shift changes.
Allocating different times that workers could come in being very flexible and listening to different employees and it is.
Dependent on regions too I mean, North America is significantly different than Mexico, we don't have a significant issue relative to year over year in Mexico. It's more here in North America Europe has some issues and struggling Asia, we're not seeing significant issues. So it is more regionally focused too.
In terms of the impact on the outlook for 'twenty, two I would say, it's fairly modest so the biggest shortages.
Most costly shortages are more in the U S, where we have a very relatively low employment level.
And so I wouldn't say it moves the needle in terms of operating margins in either segment. Although it is a challenge as Ray described as we look out not just the balance of this year, but into next year.
Got it thanks for that and then switching gears in the connection systems business. It was good to see that layer is still on track for around 600 million in 'twenty. Two just was hoping you could provide some more commentary on how the recent JV with two lane fits into that connection system business.
And then alongside the Eminem Plastics acquisition would you expect further M&A and connection systems going forward I know you touched on you would look at it across both seating and E systems, but didn't know if you had any additional commentary here.
Yeah. The imminent acquisition has far exceeded our expectations already it's amazing how quickly we've been able to integrate that business, it's a great business and being able to vertical vertically integrate.
Revenue opportunities and grow that business and so that's been a great acquisition that again.
Remember that was primarily North America. So now we're taking those <unk>.
Great capabilities to Asia, and Europe, and I think.
Those are our own directed components, where we can source ourselves. So we have opportunities to grow that relatively quickly.
With the joint venture what that does is it opens up a catalog to us that we actually get to now share different resources. Some of the some of the limited growth that we're looking at within Asia was limited limited to the catalogs and the approval within those catalogs. So that I believe is going to be a great opportunity for us to not only expand our breath a different cut.
<unk> and remember one of our focus was was diversification of customer base, we're going to do that relatively quickly and also share best practices and ideas across different catalogs to grow our revenue and as far as acquisitions, Yes, I would love to do more acquisitions in the connectors business that gives us really good returns great Mark.
<unk> profile.
Extremely proud in a short period of time, how quickly we've been able to grow that business I know, there's a lot of concerns around can we really get into low voltage and high voltage connectors business given our scale.
We've proven that we can and so if there's opportunities that we can have a tuck in acquisition and connectors.
We absolutely look at that as an opportunity for Lear empower distribution I think across the whole is really changing dramatically and been a real big growth agent.
For Alere. So they are excited about the partnerships, we have and the acquisitions, we've had to date and.
Like I said I think we'll continue to exceed our expectations with growth within the connectors business.
Great. Thanks, everyone.
Yep. Thank you.
And ladies and gentlemen, our final question today will come from Douglas Sutton from Evercore ISI. Please go ahead with your question.
Hi team, Doug gotten here on for Chris Mcnally.
I just wanted to ask about capital allocation. So clearly the balance sheets in a strong position right. Now I was wondering if management can discuss just a little how it's thinking about capital allocation going forward and we're excited to see that $69 million buyback in Q3.
But there's been a history of higher buybacks prior so with the stock at about eight times 20 free cash flow. We were just curious it makes sense to drive a stronger accelerated buyback or how you go about thinking about that thank you.
Yeah, and we remain committed to returning excess cash to shareholders. I think if you look at the third quarter. It's a perfect synopsis of our view on capital allocation modest tuck in acquisitions, and returning excess cash to shareholders through a growing dividend and share repurchases and so to the extent industry conditions allow for.
Sure.
<unk> and the free cash flow generation profile of the business.
We very much would like to continue buying back stock and returning excess cash to shareholders and so as you look out through the remainder of this year and into next year, we're very committed to doing that we're in active discussions with our board ultimately that's a board decision, but we've had great support from our board in that regard and I would expect that to continue.
Thank you very much.
Thanks.
Okay.
Real quick I'm sure. It's just clear people on the phone now, but just want to say a couple of words.
First of all Kongsberg welcomed Lear family I know, we still got some more work to do here, but it's great to have you.
Part of the Lear family and I know, we're going to do great things together, so looking forward to continuing to grow that business.
Continuing to move.
Move in the right direction and to our partners, who lane and Chenier looking forward to those partnerships, they're great partnerships I know, we're going to both build to be successful and grow our business and to the Lear team I can't Thank you enough staying focused on the things we can control we're moving in the right direction. We have the right strategy. We have the right plan a short term issue.
Hughes will be behind us and at some point in <unk>.
We position this company for long term success. So I want to thank you for all your hard work and what Youre doing so I appreciate all your efforts so long ago.
Ladies and gentlemen, with that we'll conclude today's conference call. We do thank you for attending you may now disconnect your lines.