Q4 2021 Lear Corp Earnings Call
Okay.
Good morning, everyone and welcome to the Lear Corporation fourth quarter and full year 2021 earnings conference call.
All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
Also note todays event is being recorded.
At this time I'd like to turn the floor over to you had low and fellow Vice President Investor Relations. Please go ahead.
Thanks, Jamie good morning, everyone and thanks for joining us for Lear's fourth quarter and full year 2021 earnings call.
Resenting today are Ray Scott Lear, President and CEO , and Jason <unk> Senior Vice President and CFO . Other members of Lear's 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 <unk>.
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 Ray will begin with a business update including 2021 highlight key upcoming launches and a review of our 2022 2024 backlog. Jason will then review our financial results and full year 2022 outlook. Finally, ray will offer some concluding remarks following the formal presentation.
<unk>, we'd 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.
I'm going to provide a brief overview of our full year financial results.
2021 was an extremely challenging year as global vehicle production was significantly impacted by the semiconductor shortages and the COVID-19 pandemic.
Commodity cost pressure and low visibility from our customers.
<unk> and short term production shutdowns led to very difficult operating environment.
Despite these challenges we reported sales of $19 3 billion.
Core operating earnings of $826 million, both of which reflect significant improvements compared to the prior year.
I am extremely proud of the Lear team for the performance of 2021, we delivered solid financial results increased our backlogs and announced key strategic acquisitions and partnerships that will position the company for long term success.
Slide six summarizes some business highlights from the year, our sales growth outpaced the market by eight percentage points in 2021.
With strong growth over market in both seating and E systems and.
In seating, we increased our market share to 25% shelf, Frank Thank you, reflecting new business wins, and our leadership position in luxury seating.
We also announced the Kongsberg acquisition.
Which by adding capabilities in massage lumbar heating and ventilation systems will further separate Lear is the seating supplier with the most complete component capabilities.
We continue to identify additional opportunities to extend our leadership position in seating.
To increase market share and improve our industry leading margins.
On the systems side, we completed multiple transactions to increase our capabilities and connection systems.
These actions and other opportunities that we've identified and are pursuing will improve our competitive position and electrical distribution and support our plan to improve margins in E systems.
Yeah.
We are honored to be recently featured on the 2022 list of America's most responsible companies.
By Newsweek.
Lear was ranked in the top 5% of all companies evaluated.
This ranking is based on a holistic view of corporate responsibility across 14 different industry.
And as a testament to our industry, leading ESG initiatives at Leer.
We also received multiple awards in 2021 from our customers and various industry publications.
Highlights, including receiving the most J D power quality awards in seating and three automotive news pace awards for innovation in E systems.
Yes.
During 2021, we took several actions to improve our financial flexibility.
In addition to increasing our revolver credit facility to $2 billion, we issued new lower cost debt and extend our debt maturities.
We also returned $207 million of cash to shareholders through dividends and share repurchases in 2021.
Slide seven highlights some of our key product launches in seating this year.
In addition to the just in time assembly for each of these programs. We also are delivering multiple components for these launches, including leather fabric structures cut and sew covers and phone.
We believe that our position as the most vertically integrated seed supplier provides a competitive advantage.
By improving the quality of our products and offering a better value proposition for our customers.
Our pending acquisition of Kongsberg comfort systems business is consistent with other acquisitions, we've made over the past decade to expand our seat component capabilities and an innovative technologies to further differentiate our product offerings.
By adding price double features like thermal comfort capabilities to our portfolio. We believe that Kongsberg acquisition will enhance both topline growth and margins over time.
This slide also highlights lear's position as the leader in luxury seating with six of the eight key launches on both new vehicles in key replacement vehicles for Mercedes BMW and.
Land Rover.
Also highlighted on the slide our new EV launches and conquest wins.
We have won over $1 billion in net conquest wins since 2019 and four of those programs are launching this year, including the BMW X five in China, The Chevrolet, Colorado, The GMC Canyon in North America in the BMW seven series in Europe .
Turning to slide eight I will highlight key upcoming product launches and new systems.
We had a great year of business wins, and new systems in 2021 with $1 $3 billion of New business Awards.
This was our best year of new business wins since 2014 and it represents.
A 45% increase from a rewards in 2020 Karl Thanks, Joe Thank you.
The industry outlook for electrical electric vehicles continues to grow and Lear is benefiting as about half of the New awards in these systems represent content on electric vehicles, including high voltage wiring and connection systems as well as power electronics.
This trend is also apparent in our upcoming launches for this year with six.
Of our eight key launches.
Which will include content and new electric vehicles.
Key wire launches include our first high voltage and low voltage wiring products with a major global EV manufacturer.
Late this year, we also will be providing high and low voltage products on the most sophisticated and largest wiring harness Lear has ever produced this award for an autonomous and electric passenger vehicle is a reflection of the trust that our OEM partner has in lear's design and manufacturing capabilities and wiring.
Working on this program, we have learned a tremendous amount about high complex data rich architectures.
Net experience will prove invaluable as we design and develop more sophisticated electrical distribution systems in the future.
As a frame of reference this wire harness has two to three times the number of circuits as a typical wire harness program.
Key electronic launches include our award winning battery disconnect units on the GMC Hummer pickup the.
The first of many derivatives on Gms battery electric truck platform.
In a five G telecommunications unit for great wall that will eventually be used in multiple models as we move forward.
Now please turn to slide nine which shows our 2022 to 2024 backlog of approximately $3 $3 billion.
As a reminder, our sales backlog includes only awarded programs net of any <unk>.
The loss business and programs rolling off and excludes pursued business and net new business in our non consolidated joint ventures.
Backlog increased $475 million compared to last year, despite lower industry volume assumptions for 2022 and 2023 from.
From a segment perspective, our backlog is split roughly 70% in seating and 30% new systems.
The $2 $3 billion seating backlog reflects over $1 billion of net conquest awards as well as new electric vehicle programs for Bowdle, Mercedes General Motors, BMW Geely and Renault.
And he systems the $1 billion.
Backlog is split roughly equal between electrical distribution, which includes connection systems and electronics approximately 50% of the backlog any systems reflects products that support electric vehicles. These systems backlog is well balanced by customer and by region and will support continued diverse.
Application of our customer base.
While not shown on this slide the 2022 to 2024 sales backlog for our non consolidated joint ventures, as an additional $570 million.
Total backlog, including these non consolidated joint ventures is approximately $3 9 billion, which.
Which is roughly equal to the highest total backlog in our history.
Consistent with historical experience, we expect the third year of our backlog to continue to grow as our several programs that we are pursuing that will launch in 2024, well on Jason I want to pause for a moment I'm going to go off script I just wanted to say a few words, it's tough for me to get to that slide and not think.
Carl Frank for all the hard work your teams did an incredible job in total alere employees on the phone I talk about it all the time, it's been a tough 18 months two years, but to have this type of recognition I said the only rewards that are important are the rewards will be getting backlog profitable backlog. This company gives me.
Extreme confidence that we're doing all the right things and we're going to have a great future. So I want to pause and say thank you to all of the Lear employees on the team. This was one heck of an accomplishment I couldn't be more proud of what you have achieved.
To have record backlog is something special and so Jason I'm going to turn it over to you for a quick financial overview.
Yes.
Thanks Ray.
Slide 11 shows vehicle production in key exchange rates for the fourth quarter.
The ongoing component shortages significantly reduced global industry production for the third consecutive quarter, particularly in our two largest markets North America and Europe .
As a result global vehicle production in the fourth quarter decreased by 13% compared to the strong fourth quarter in 2020.
On Alere sales weighted basis global production declined by approximately 16% from.
From a currency standpoint, the U S. Dollar continued to weaken against the RMB strengthened against the euro compared to 2020.
Slide 12 highlights lear's growth over market for the full year as well as the fourth quarter.
For the fourth quarter total company growth over market was six percentage points with seating growing seven points above market in E systems growing five points above market for the full year total company growth over market was a strong eight percentage points with Seaton growing nine points above market and these systems growing five points above market.
Growth over market in North America of 11 points for the year reflected the benefit of new business in both segments from Ford Honda and Volkswagen and strong production in seating on Gm's full size, Suvs and pickups as well as Mercedes and BMW Suvs.
In Europe growth over market of six points was driven primarily by new business as well as strong performance in the luxury segment in seating as well as new business in these systems across multiple Oems such as J L. R. Audi <unk> and Renault and China growth over market of two points resulted primarily from new business with <unk>.
It's seeding a new business with Julie Volvo, Great wall and Nissan any systems.
Slide 13 highlights our financial results for the fourth quarter of 2021 compared to 2020.
Our sales declined 7% year over year to $4 9 billion, excluding the impact of foreign exchange commodities and acquisitions sales were down by 10%, primarily reflecting lower production on Lear platforms, partially offset by the addition of new business.
Core operating earnings were $158 million compared to $330 million last year.
The 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.
Adjusted earnings per share were <unk>.
22, as compared to $3 66, a year ago.
Fourth quarter free cash flow was a use of $13 million compared to a source of $234 million in 2020.
Free cash flow was negatively impacted by lower earnings increased working capital and higher capital expenditures.
Slide 14 highlights our full year financial results for 2021 compared to 2020.
Our sales increased 13% year over year to $19 $3 billion, primarily reflecting the addition of new business.
Increased production on Lear platforms, the impact of foreign exchange and commodity pass through.
The impact of foreign exchange commodities and acquisition sales were up 8%.
Core operating earnings were $826 million compared to $614 million last year.
The increase in earnings resulted from positive operating performance. The addition of new business and the impact of higher production volumes, partially offset by higher commodity costs.
Adjusted earnings per share were $7 94, as compared to $5 33, a year ago free cash flow generated for the year was $85 million compared to $211 million in 2020.
Free cash flow was negatively impacted by increased working capital and higher capital expenditures, partially offset by higher earnings.
Although we were able to significantly reduce inventory levels from the third quarter to the fourth quarter working capital was higher than anticipated for the full year as a result of continued production disruptions at our customers.
Anticipate an unwinding of the elevated working capital to take place throughout 2022.
Slide 15 explains the full year variance in sales and adjusted operating margins in the seating segment.
Sales for 2021 were $14 4 billion, an increase of $1 7 billion or 13% from 2020.
Excluding the impact of foreign exchange acquisitions, and commodities sales were up 10%, reflecting higher production and the benefit of new business.
Core operating earnings were $912 million up $231 million from 2020, and adjusted operating margins improved by 90 basis points to six 3%.
The improvement in margins reflects primarily higher volumes on Lear platforms margin accretive backlog and positive net operating performance, partially offset by higher commodity costs.
While steel costs increase throughout the year and reached record levels in 2021 before recently beginning to moderate other commodity costs have continued to rise such as foam chemicals and leather hides.
Slide 16 explains the full year variance in sales and adjusted operating margins in the system segment.
Sales for the year were $4 9 billion in.
An increase of 12% from 2020.
Excluding the impact of foreign exchange acquisitions, and commodities sales were up 5% driven primarily by our strong backlog, partially offset by lower volumes on key platforms.
Core operating earnings were $197 million or four 1% of sales compared to $157 million and three 6% of sales in 2020.
Margins improved primarily reflecting significant positive net operating performance, which more than offset.
The negative impact of higher commodity cost and the margin benefit of the backlog largely offset the impact of lower production volumes.
Now please turn to slide 17, where I will briefly talk about our balance sheet and liquidity.
During the year, our treasury team took advantage of favorable market conditions, and our strong financial position to further strengthen our capital structure and improve our debt maturity profile.
We renegotiated our credit agreement to increase the revolver to $2 billion and extended its maturity by more than two years.
We also completed a $700 million bond financing the proceeds of which were used to repurchase $200 million of 2027 notes repay the term loan that was scheduled to mature in 2022 and fund the pending Kongsberg acquisition acquisition.
As a result of these actions has no outstanding debt maturities until 2027.
We have a strong balance sheet and ample liquidity to make additional organic and inorganic investments that will strengthen both of our business segments. At the same time, we remain fully committed to returning excess cash to shareholders.
During the fourth quarter, we increased our quarterly cash dividend to the pre pandemic level of <unk> 77 per share for the full year, we returned over $200 million of cash to shareholders through dividends and share repurchases.
Now shifting to the outlook for this year Slide 18 provides global vehicle production volumes and currency assumptions that form the basis of our 2022 full year outlook.
We based our production assumption on several sources, including internal estimates customer production schedules and IHS forecast.
No we expect the impact of supply chain disruptions on industry vehicle production to improve versus 2021, we do expect some additional downtime in 2022, particularly in the first half.
At the midpoint of our guidance, we are assuming global industry production of $78 8 million units, which is about $2 4 million units lower than the IHS January forecast.
From a currency perspective, our 2022 outlook assumes an average euro exchange rate of $1 12 per euro and an average Chinese RMB exchange rate of 635 RMB to the dollar.
On slide 19, we outlined the broader industry factors as well as Lear specific items, we considered while developing our 2022 outlook.
Chart is intended to highlight the implications of each of these issues on both our 2022 financial outlook.
As well as 2023 and beyond.
While industry production volumes are continuing to recover significant uncertainty around the pace of the recovery combined with accelerating inflationary cost pressures.
Let us to issue a wider than normal full year financial guidance range.
I will start by discussing the key macroeconomic factors.
We see incremental improvement in industry production levels this year, but we still see.
Significantly but still.
Significantly constrained relative to demand as.
As a result, we expect a gradual but sustained recovery stretching into 2023 and well beyond.
On the cost side, we will see an impact from elevated commodity prices primarily in the first half of the year when compared to last year.
While we are seeing prices softening from peak levels, particularly with steel those costs remained well above historical levels.
For steel, we ordinarily lock in six to 12 months requirement contracts before the beginning of each year.
This year, we have entered into contracts that protect our requirements, while capturing the benefit of expected softening prices in subsequent quarters.
In general we expect the first quarter reflects the peak margin headwind for higher commodity prices net of commercial recoveries with margins improving in the second quarter, and then I'll get into the second half of the year.
We expect wage inflation labor shortages and other inflationary pressures in the supply chain to impact both material cost as well as labor and overhead costs in our manufacturing facilities, where we're seeing higher utility costs for example, as well as elevated logistics costs.
As Ray highlighted earlier, there are significant number of <unk> launches in 2022, which are important drivers of our strong new business backlog. This.
This business is launching with strong margins in line with our segment averages and as the number of evs coming to market growth and penetration and volumes increase this trend provides a CTV opportunity for both of our business segments.
From Alere perspective.
We are taking action to capitalize on the industry tailwind.
Mitigate the impact of the headwinds right.
<unk> discussed our very strong three year backlog and we have a substantial pipeline of new opportunities. The team is betting on in 2022.
While we do see a bit of a reversal from the favorable platform mix, we experienced in 2021, particularly in seeding our estimated growth over market over a four year period 2019 through 2022 remains very strong with total company growth over market of more than five percentage points.
<unk> systems at nearly 6% and 5%.
Specific to 2022, there are key program changeovers that are negatively impacting growth over market such as Ford Super duty pickup in E systems.
We are taking proactive steps to manage our capacity and cost structure and anticipate a second consecutive year of strong net operating performance.
We plan to invest approximately $125 million in restructuring in 2022 to continue aligning our product portfolio and manufacturing footprint to current volume levels, while improving flexibility to increase capacity and generate strong financial returns as the industry recovers further.
Ray will talk more about that in a moment.
Lastly, we are working closely with our customers to negotiate recoveries or work collaboratively on offsets to higher commodity prices and inflationary cost pressures over the last 10 years or so we have worked to derisk our business by developing contractual pass through agreements on key commodities. These.
These agreements cover the vast majority, but not all of our steel copper leather hide and chemical cost exposure. We continue to work closely with our customers on value added value engineering ideas cost technology optimization and other means of helping to offset significant inflationary pressures as well as the impact of sub <unk>.
<unk> production schedules.
Again, our 2022 financial outlook ranges for revenue and earnings remain wide to appropriately reflect the uncertainty outlined on this slide.
Slide 20 walks, our 2021 actual results to.
The midpoint of our 2022 outlook for sales and adjusted margins.
Your over year revenue is expected to grow by approximately $2 3 billion and adjusted margins are expected to improve by 60 basis points due primarily to the increase in global volumes and a margin accretive backlog.
Commodity costs and non labor inflation, driven by component freight and logistics cost increases are expected to negatively impact margins by 80 basis points.
Slide 21 provides more details on our 2022 outlook.
Our revenue outlook is expected to be in the 28 to $22 $3 billion range with a midpoint of approximately 21 $55 billion.
Core operating earnings are expected to be in the range of $900 million to $1 2 billion.
Adjusted net income is expected to be in the range of 525 million.
$755 million at the midpoint this would imply an increase of 33% over 2021 <unk>.
Restructuring costs are expected to be approximately $125 million and we are increasing our capital spending by $90 million to $675 million at the midpoint in order to support upcoming launches and growing backlog.
Our outlook for free cash flow for the year is expected to be in the range of 300 million to $600 million.
Now I'll turn it back to Ray for some closing thoughts thanks, Jason.
Turning now to slide 23, as we enter a new year, we continue to make investments to grow and strengthen our core business extend our advantage in operational excellence and develop and support our people as always we will continue to analyze our product portfolio to ensure we are making investments that will create the most value for our shareholders.
Yeah.
In seating, we're going to integrate that Kongsberg acquisition.
Which will further solidify our position as the leader in seating, while bringing additional price of oil content to our offerings.
We believe this will enable <unk> to improve overall seat system performance by offering more efficient lower weight and flexible packaging design solutions, we continue to identify additional opportunities to further strengthen our position in seating.
In E systems, our efforts will focus on continued growth and connection systems, which is a critical component to improving margins. We made good progress improving our connection systems business last year, and we will be looking to identify additional value accretive investments in E systems, both organic and inorganic in too.
'twenty two.
Lear has a long history of aggressively managing its manufacturing capacity and cost structure, and we believe that semiconductor availability and other supply constraints will continue to impact industry volumes.
Inflationary pressures throughout the supply chain will continue.
Also we don't believe all of these issues will dissipate in the near to medium term.
We are increasing our restructuring spending to increase flexibility and reduce cost and improve efficiencies in our operations going forward. These actions will ensure we are able to flex capacity with industry volumes and better position the company for future profitability.
And now we'd be happy to take your questions.
Ladies and gentlemen, we will now begin the question and answer session Basket question, You May Press Star and then one on your Touchtone telephone.
If you are using a speaker phone, we do ask that you. Please pickup your handset before pressing the keys to ensure the best sound quality.
All your questions. Please press star two.
At this time, we will pause momentarily to assemble the roster.
Our first question today comes from Rod Lache from Wolfe Research. Please go ahead with your question.
Good morning, everyone.
A couple of options.
Your guidance for 2022, I just wanted to clarify a couple of things on there.
Topline you've got 767 from volume.
It's about 4% and I'm guessing that corresponds with your 6% volume guide minus 2% for price.
And and most likely your geographic mix is good but customer mixes our platform mix is not.
Is that about right and can you give us some sense of the how to think about that particularly that the geographic and customer mix and second on the.
On the earnings bridge you've got.
70 basis points.
Margin, which it did.
And I just want to make sure I understand how you're portraying that that margin bridge. If we were to include the 425 of positive revenue than to get that magnitude of dilution there would have to be like a negative 130 million correspondingly on the EBIT.
Maybe you could just elaborate on that.
Yeah, I'll start with the second question.
So yes, your math is pretty close it's about $140 million between commodities and we're calling non labor related inflationary impact year over year. So the.
Recovery assumption embedded in there is that we would offset about 75%.
Total year over year impact the total impacts on a gross basis is about $575 million Brad.
In regards to your second question on the revenue bridge.
Yes, Youre right volume mix, although there does include the effect of pricing.
Price downs as well as our offsets the price downs.
So the net effect of that is less than 3%, but it is in that.
At that column of the bridge.
Oh, Okay. So just to clarify.
Jason I thought you had commented on something like a 65 million dollar commodity impact, maybe a little bit better than that maybe I misinterpreted that statement and more importantly.
If we think about the rate of margin improvement as we go forward if it wasn't for this commodity impact.
You'd be doing something like 130 basis points of margin improvement not 60.
Is that something we should be thinking about as we look forward to maybe 2023.
Assuming you get another increment of production in and pretty good backlog or are there other things that we need to think about <unk> margins.
Yeah, maybe I'll just take a step back and just talk through commodities and what's what's happening there last year, we saw a $450 million gross impact we recovered about 60% of that the net impact was $185 million.
Little more than a 100 basis points for the company more in ceding less of new systems.
60% of that was was steel.
And then 10% and copper, 20% chemicals and 10% on leather hides as we look at 2022 and what we were talking about several months ago, mainly related to steel and copper and what we saw in those markets until maybe a lesser extent chemicals and hides really haven't changed much.
And so as we look at 2022 the outlook for steel is actually a little bit better than we had anticipated at that point in time, and so again, the gross impact of roughly $575 million for this year and 140 million net about only about 15% of that or $20 million as steel. So we we see the <unk>.
Benefit of some.
Some additional pass throughs from last year's increase.
And better contractual terms.
This year's steel exposure, coupled with what we believe is going to be declining steel prices throughout the year, where the first quarter is sort of the peak impact and then it works its way down throughout the balance of the year.
Copper chemicals, and hides or similar exposure to the prior year. The big difference for US. This year is what we're seeing on components.
<unk> yarn resins other other other components that we didn't see cost pressure on last year and so what we're experiencing now.
On components, where we have contractual protection, we're seeing suppliers.
Trying to break those contracts and our response to that.
It depends on the nature of the supply agreement. So if it's a directed supplier.
Straightforward youre going to work with the customer to pass that through and.
In other cases, where there's a large amount of steel embedded in our component.
And they have contractual responsibility for the bi.
The supplier is going to be bankrupt that doesn't do much. Good. So you have to protect supply and grant increased and so that's kind of a new a new dynamic that we're experiencing this year.
Then you know we don't normally call out utility costs in ocean freight and those types of things, but the level of increase is so significant that I thought it warranted highlighting is part of a headwind for for this year.
Now.
As you look at our history of of net operating performance, we are able to to offset much of this through our own performance improvement programs, whether thats restructuring or commercial performance and the team's R.
Our operating performance.
And so last year, we offset all of it but I think 13 basis points this year.
It's roughly 35 basis points. So you got about 50 basis points of margin headwind between commodities and performance over a two year period I would expect to claw that back certainly in 2023 and likely more than that.
Maybe I'll pause for a second and let ray talk a little bit about the kind of commercial environment around this topic, because I think it's it's really the most important point that we need to get across in this call Yeah, I think rod.
Jason mentioned it there has been a significant shift that we're seeing relative to the supply base.
It is we've been in this and we've been working with our customers working with our suppliers for the last several years and a lot of that was negotiated and the team did a remarkable job I mean, I think our purchasing team has done an incredible job of protecting <unk>.
Production at the same time negotiating what would be more transitory or temporary deals to get through a particular period of time and that's what we're seeing from the supply base was more temporary and that things would from a commodity.
Inflationary cost perspective.
The decrease over time, what we're seeing now is much more aggressive positions with the supply base looking for more fixed solutions.
And to Jason's point, we have a tremendous amount of detail.
Within the cost structure.
Tight network between engineering, our purchasing group or commercial and logistics team that tied us together.
Really put it in front of the customer you know, 75% given whatever program is directed material. So we're seeing the negotiations go on because we're in really three way party negotiations to solve those issues.
And the aggressive behavior is getting to a point, where it's stop ship threats.
With some of these directed suppliers in.
These systems, albeit it's not as high we still have 30% to 40% of our purchase material is directed and so like Jason said that will be passed through to our customer and there does seem to be the change where the tier twos and tier threes are in a position where it's financially.
In.
They don't have the ability to really produce parts going forward. So one is the solution to get them to produce parts too as a longer term solution, which is more of a fixed price increase and so I think the big shift or change.
What we've seen in the last 18 months to really what we're seeing in it.
Started this this this year.
Maybe a little bit at the end of last year was more of a longer term fixed play on price solutions and again I don't think there's a you can talk about the semiconductors or you can talk about inflationary costs, but it's across the board.
Transportation and air Ocean.
Trucks or if it's labor.
Issues with labor increases or just the lack of labor.
Support I mean, we've had a number of situations where suppliers or customers have had to gone down because they don't have.
Labor to produce parts and that's a more recent occurrence and that is becoming increasing Lee.
It's spread across the industry. What happens obviously, you have intermittent shutdowns, which were seeing again, so I haven't seen a change.
I wish I could say that I've seen a change from last quarter this quarter coming into this year, where.
<unk> are shutting down their facilities was zero or no time of notice. So we're literally in plants building parts and getting noticed that theyre going down.
Which really creates that sticky labor situation, which again creates a commercial issue from our supply base into the customers. So there's a number of different factors going on we are handling it I think.
In a very very specific way, it's very respectful to what's going on but we're also and we've had some.
For the majority of the park's success with our customers on getting recoveries, particularly a 100% with the directed but.
There are situations, where we have cost we think we've got some really good negotiations going on with our customers to resolve these because these are going to be much. What we believe more fixed increases there as opposed to a temporary which is what we were dealing with over the last 18 months.
Just to clarify right it sounds like you're you're optimistic about the ability to negotiate a recovery on that.
You get it out to next year, what specifically in seating are that.
You gave the categories transportation trucks labor things like that but is it metals and mechanisms is it everything.
And then the seating business where there's.
That magnitude of inflation, that's become more more <unk>.
Permanent.
Jason do you want to talk about the guidance perspective, obviously, we put in our guidance what we anticipate both on the high end low end as far as how we're going to get it this year right.
I'd say, it's sticky labor is one of the big ones that we're dealing with right now with capacity with our jet facilities. When you like I mentioned you have hundreds of people standing around trying to build parts. That's probably one of the most impactful from a cost perspective that we're negotiating with our customers. When you have capacity to a certain level and then you have.
<unk> of employees sitting around.
And then you have to bring them back in 24 hours or 44 hours 48 hours to sit around again that is probably one of the more.
Costly issues that we have to encounter from a quarterly perspective, and then from a from a.
Commodity perspective, we talked about steel Fortunately steel has gone down significantly but across the board like Jason mentioned yarn.
Obviously leather was something impacts this year, particularly in the first half.
Chemicals are issues, but I wouldn't say it's significantly.
Large as what we see just running our facilities and the jet facilities components that are that are made with steel and resins are where we're seeing the kind of stickier more permanent price increase requests.
So even with steel coming down.
30% in North America from that peak, it's still more than double its usual historical level and so suppliers that.
Smaller suppliers.
A high percentage of steel as a component in their part.
It's where we're seeing probably the most significant distress on the seating side any systems parts that are that are made with copper and resins combined are where we're seeing pressure. In addition to the obvious issues with microchip suppliers, which are more three party discussions with our customers.
Okay. Thank you.
Youre welcome Thanks, Rob.
Our next question comes from Joseph Spak from RBC Capital markets. Please go ahead with your question.
Thanks, Good morning.
I guess I was wondering if you could if you could give.
Do you have a little bit more color of.
The margins by segment that you expect.
And then specifically.
In E systems.
You've talked in the past about incrementals on that volume.
It's not really clear to me is sort of how much investment you are putting in T systems, and I'm wondering what that amount.
The amount is for 'twenty, two and how that plays into the margins for that segment.
Yeah. So the the margin range for E systems is sort of mid threes to a little less than 6% from the low end to the high end of the guidance range and it's.
The math is four 7%.
At the midpoint, we're seeing good conversion on volume many systems.
In the neighborhood of 27% were seeing good conversion out of the backlog is converting at more than 10%.
And so the.
The biggest margin headwind again in E systems is going to be the.
The net effect of these component and commodity increases, which is about a little more than 100 basis points of headwind and then to a lesser extent our continued investment in engineering.
In that segment.
It's much less significant in terms of the basis point impact.
If I just kind of step back and look at reading through this year, what E Systems' margins look like.
Out in a more normal volume environment.
I think so at four 7% if you if you just add back volume, let's say 89 million units.
20 threes.
Forecast.
That takes you to 7% by itself and then climb back.
A third of the commodity impact and half of the premium costs that were continuing to incur in that business, you're at 8% and with our continued growth in connection systems.
Over the next couple of years, there's a very clear path back to eight 5%.
So I think.
What's really weighing on that segment is less about investment.
And more about the net effect of commodities and component cost increases.
Okay. Thanks.
And seating sorry, the margin range.
So in seeding the margin range is sort of mid six to just over seven six.
Six 8% at the midpoint.
Okay.
And I guess the second question is.
Just on within E systems in vivo, we heard from Sharon's yesterday, there was a cancelled program what was evo what what's the update.
Zero from an affiliate perspective.
Yeah I haven't heard.
I haven't heard about that not sure what <unk> referring to.
To get back to you on that Joe.
Okay and is there an update just on the progress for that for that business.
And how that sort of contributing to the go forward.
And for E systems.
Yeah, So what we've done at this stage.
Joe as we've fully integrated that into your systems and into the electronics business and so essentially it's a little bit like some of the smaller acquisitions and electronics that we've had with XO marotta.
And others to just round out our software capability and that's embedded on the electronic modules that we're selling.
So not much of an update to provide specifically for you on that in terms of.
Independent revenue or anything like that.
Okay. Thank you.
Our next question comes from Dan Levy from Credit Suisse. Please go ahead with your question.
Hi.
Good morning.
Thank you for taking my questions.
I just wanted to go to your <unk>.
Gross.
The market, which I'm calculating over.
Weighted basis versus.
Versus your end market expectations like one point of growth over market.
You just did eight points of growth over market in 2021. So maybe you could just give us a sense of of that that eight points of outgrowth, how much of that was.
Was unique which you know.
Which may be subject to payback so to speak and then I think you mentioned some items on mix in <unk>.
<unk> mentioned, the Super duty, but just.
Why only one point of outgrowth in 2022 and is the outlook beyond 2022 still for something in the mid single digit range.
Yeah, I'll start with the second part of that question first our outlook longer term really hasnt changed.
Either segment I think if you look back again.
2019 through 2022, it gives you a better sense of the growth potential of both business segments with E systems at six points of growth over market in and sitting at five and so this year, it's a little bit.
Bumpy because of changeovers and the benefit we had last year, particularly the seating with the very favorable mix sort of reversing course and I'll just give you a couple of examples talked about the changeover in the prepared remarks in these systems on the.
The Ford Super duty, but in addition to that expedition navigator. Another large platform in that segment. The volumes are expected to be lower in the north American market that were projected to grow at 12% to 13%.
In seating we.
Have dominant or changing over their suvs and tuscaloosa, not the <unk>, but the new vehicles that they're introducing theres two electric Suvs that we'll be launching at the tail end of this year and so their volumes are down year over year after a record year last year.
In the North American market that is growing at 12 or 13%. So there is just it's just math at that point in Europe , what we're seeing in terms of the IHS projections, which underpin a lot of our assumptions on volumes is flattish or even lower volumes on some luxury platforms Porsche panamera.
911 Baxter came in.
Those platforms. So the Audi Audi Q3 is another one that comes to mind.
It is a region that is.
Slated to grow 12, or 13% so what you're seeing is the rotation back to mainstream vehicles now that's the assumption we've made in our guidance. If you were to fast forward 12 months given the the constraints due to the chip issue right now I wouldn't be shocked to see our revenue come in at the midpoint.
The industry volumes come in much lower because we're starting to see some of that already where given the constraints. Oems are are focusing on specific platforms that they have the highest margins where do best for them. So.
It's really kind of an unusual situation both last year and this year in terms of the significant outgrowth in seeding last year in the flattish growth this year relative to the market I would attribute more to the unusual nature of what's happening with the chip shortage more than anything if you take a step back the biggest driver.
Seeding growth as the conquest wins, we have a $1 billion of are in our backlog over the next three years of the business that we have taken from competitors, whether that's the Colorado Canyon here in North America is flashing at the tail end of this year seven series and then the five series BMW.
In Europe .
Five in China, we have Volvo significant business with Volvo that starting to roll on more next year and the year. After that are all conquest wins, and we see significant opportunities to continue taking business from competitors given our unique value proposition, which has only strengthened through the acquisition of <unk>.
And then on E systems the underlying.
Products that are in that segment.
Our continuing to grow considerably faster than the market with the additional content, particularly on electric vehicles, which we've talked at length about in the past.
Okay. So just to unpack.
One of the points there just to be clear does this contemplate a GM and your largest customer I think there was something like 20% of your mix and they are out there, saying volume growth of 25 to 30 does this contemplate.
It looks like that from GM.
So at the high end of the range, we have something that resembles what Jim was talking about on certain platforms like the full size truck and Suvs, we'd been a little bit more.
Cautious at the midpoint of our guidance range and were not reflecting the full <unk>.
Customer projections at this point, just given what we experienced last year and and on other platforms.
It forms.
Had a lot of downtime last year, we sort of assume that that is going to continue again because of the constraints in the marketplace. So yes. The answer is yes or no on that depends on the platform.
Okay. Okay, great. Thanks, and then a follow up and I think you were you touched on it a little bit here.
You mentioned in your deck that Youre ceding market share is now 25% up from 23, I think your long term targeting 27 or 28%. So maybe you could just unpack what is it that's driving continued.
Market share gains in seating is it just is it the vertical integration.
Hang on.
The cost side.
What's driving the market share wins.
Well I think it's.
A combination of a number of things.
We talk about this.
Going back 10 years, plus and we obviously invested.
And in the business to really be the most efficient high quality producers seats in the world.
We are very disciplined with our approach and still are very disciplined with our approach on how we look at business by customer by region by component. So that we get a fair return on invested capital.
And position that business for continued success I think what we're seeing now is one we have an incredible reputation built on what I just mentioned of the investments that were made.
Long time ago of operational excellence and the continuation of.
Industry, 4.0, and technology within our manufacturing plants to really have a superior manufacturing plan.
In addition to that and I think what you've seen over the most recent three to four years is our investment in innovation and technology and what we've done is we've been able to differentiate ourselves as just a pure manufacturer, but bringing what we talked about value solutions for our customers.
Kongsberg is a great example, we talked about intuitive seating and really we've had engineering teams working on value propositions and solutions we.
Innovation to change thermal comfort and so those type of <unk>.
<unk> technologies or innovations allow us access into early development programs, Frank Orsini sitting here who's the president of the seating group and Frank and I have been in numerous meetings inside inside.
Our customers design studio is talking about technology for example, configure plus where you have electrified power rails, which is a combination of these systems technology innovation and Carlos here to help us really differentiate our capabilities. So when you have those innovations and technologies coupled with what.
We believe is the most efficient manufacturing processes and continuing to develop those technologies.
As we move forward, it's allowed us to grow in its profitable growth too I think that's another key element as you look at the business. We're growing on what is arguably the most profitable seat business in the world and we do not take business that doesn't generate.
<unk> margins or is accretive to what we're looking at so we've been successful and continue to invest I think this <unk> acquisition is just another step in the right direction and we continue to put investments organically or inorganically in areas, where we can drive our manufacturing processes to be more efficient.
And or create very unique innovation and technologies. Our customers are looking for that combination has worked.
I think back Jason I've talked about this we've watched the margin expansion. We've looked at the investments. We've made at 10 plus years and you can't just turn it on and think you're going to be a worlds.
<unk> just in time efficient seating systems without a long history, and so I'm proud of where we're at 25% was a great number when we got to roll that out this year and you heard my comments on backlog. It has the greatest thank you from a customer given the circumstances were up again to arguably okay volume adjusted we had.
Our record backlog.
And that is something that I just look at until the team that when they award us profitable business is the best. Thank you we can get.
Got it thank you very much.
Yep.
And our next question comes from David Kelley from Jefferies. Please go ahead with your question.
Hey, good morning, guys, maybe a follow up on the earlier E systems margin discussion Jason.
80 basis points of premium costs that weighed on Q4, I was just hoping to get a bit more color on how youre thinking about that impact in trajectory into 'twenty two.
Specifically in light of the semi and electronics and inflationary cost in the market and just also was hoping to get more color on some of the reception to potential pass throughs from from your customers.
Yes.
Starting with the kind of the premium cost we're expecting that's what we incurred last year to continue again this year a similar level of disruption.
The resulting premium freights as Ray said sticky labor and other inefficiencies.
Impacting us sort of throughout throughout this year on the components side.
I think it depends on the nature of the supply arrangement and the component itself.
So for example, with micro chips, that's generally a three party discussion between the customer and.
Supplier.
And so it's really.
Based on the availability of parts and so the price increase has to be absorbed really at the customer level just to protect.
Production.
In the case of other directed supplier parts like terminals and connectors again, it's more of a three party discussion.
But beyond that we are seeing inflationary pressures on other components, where we control the sourcing and that is having a fairly meaningful impact.
<unk> systems for the year, the commodity impact is about 107 basis points year over year, so while the premium costs and those types of things haven't changed year over year.
Net effect of commodities after recovery cash changed now some of that I think will get pass through in subsequent years. So some of this takes time and you are trying to balance your desire to grow the business and you're implementing cost reductions that maybe take time to fully offset the impact.
So I think it's reasonable if you look out.
Two next year that roughly a third of what we have incurred over the last two years and commodities should be offset.
And we will continue to improve upon that as the years go by and ultimately everything were quoting today really has kind of these higher cost levels factored in and so as new programs launch.
We would expect that the margin profile would be in line with with our typical margins depending on the underlying products going forward.
Okay got it that's really helpful and maybe just a follow up on your point that the timing of the pass throughs.
Take a step back you know your systems backlogs ramping nicely solid mix. There is there anything structural that has changed the path to the 10% margin target you've talked about for 2024, assuming of course, we're back to some normalized level of MVP.
Yeah, I think it's the combination of.
Running at normal production rates.
The capacity of the plant for a certain volume of the customer has a planning volume and then they adhere to it because they have availability of parts.
That coupled with some normalization on commodities and then.
Also on premium costs.
Those are the factors that are holding us back the things that we can control, we're doing very well with in terms of the net performance in the business the growth in connection systems. All of those things are continuing to grow margins in line with what we had laid out.
Over the last couple of years in terms of our longer term plan to get to 10%. So nothing structurally is different than what we what we've talked about previously.
Okay got it that's helpful. Thank you.
Our next question comes from Colin Langan from Wells Fargo. Please go ahead with your question.
Oh, great. Thanks for taking my questions.
You mentioned earlier.
The potential to claw back or your expectation that next year, you'll be able to claw back the commodity costs. I mean are we talking 185 last year and the 140 expected this year or part of that how should we think about the the good news we should be thinking about as you recover that.
Yeah.
Love to be able to give you that level of granularity and we've modeled some different things.
We're working hard to to pass this through as quickly as possible and offset.
What we can't pass through through our own investments in restructuring and other performance drivers.
As I start to think about sort of 'twenty three 'twenty four what we're assuming is that roughly a half.
Third to a half of that impact we would see.
Unwinding itself in 'twenty three that that's our target as we sit here today, but there's a lot of moving parts Colin so it's difficult to put a pinpoint number on it.
Okay and is that 185 and $1 40, we can add them together or did you get some of the 185 within this year.
I would look at those together the cumulative effect on our business of $325 million.
Widening over over multiple years.
And part of that has got to come through some normalization of <unk> costs. So steel for example.
After peaking at the end of September last year, its down a third in North America.
Suggestions are that it will we will see more capacity coming online throughout this year and next year. So certainly over I'd say the next 24 months you should see steel maybe not get back down to 2020 levels, but but certainly somewhere much closer to that Zip code.
Okay.
And in terms of growth over market of some different numbers are I think discussed on the call it's roughly about.
10% growth your assumption of 6% markets here your outlook is organically about 4% over market.
And what is that right and then two when I look at the slides that volume flying is up four so the backlog is really driving that above market growth.
And I get the product mix, but why with geographies being higher in North America, Europe , those up 10% when that overwhelmed some of the product headwinds.
Highlighting it seems to be underperforming the volume seem surprising one North America and Europe were up 10 overtime.
Yeah, and so when we talk about growth over market, we do it on a sales weighted basis. So if the market were talking about is growing faster than the 6% that the industry is growing because as you point out our two largest markets are growing.
12, and 13% so roughly call it a point of growth over market is.
It is.
Relative to that sales weighted basis, not the industry volume itself.
Okay. Okay got it alright, thanks for taking my questions.
Youre welcome.
And ladies and gentlemen, our final question. This morning comes from Brian Johnson from Barclays. Please go ahead with your question.
Thank you.
Just a couple of questions again around the topic of the day and inflation and margins.
I was and I apologize a bit confused in the discussion earlier about your relations with the tier twos and tier threes.
It's well known that Youre less vertically integrated than any other competitor in seat.
You mentioned some of those suppliers are struggling but then how does that get reflected in the prices you paid and in particular, you talked about moving to fixed price contracts. It would seem like more indexing that's directly tied to what the OEM paid would be the solution. There. So just wondering how that plays out and how again.
Thinking of 'twenty, two 'twenty, three margins where that winds up.
Yeah, I think raise reference to fixed versus temporary it's just a reflection of kind of the underlying inflation rates youre seeing in the U S at 7%.
Because labor is the biggest input to that eventually that works its way through to the prices of all products as youre seeing in the broader inflation rate in terms of.
Our level of vertical integration I think our level of vertical integration. If you look beyond structures is beyond what others have in the space and so a lot of what we're seeing is on that tier.
The tier three level components into our our seat component plants, so that could be.
Wire and hog rings, it could be yarn, that's an input and fabric.
And and.
Even chemicals that are used to topco leather.
So things that ordinarily don't move around much.
We're starting to see.
Price increases, where we have contracts, but the suppliers are trying to break that so it's ultimately it's it's a negotiation with the supplier and then a negotiation back to back with our with our customers to try and.
Pass through what we can we've tried to put a balanced view of that into our outlook, which is at the same time.
Includes stretch on our end too to perform and restructure the business to offset what we can't pass through so.
It's difficult to say.
What the impact is going to be kind of quarter to quarter throughout this year, but we know on balance it's a challenging challenging environment. We've captured what we think is a fair view of that in the outlook and we would expect to see unwinding of that as we look out to next year and beyond.
Okay, and just a quick follow up if you think about the performance improvement work.
Typically that's a lear's strong point in fact in the past I know you sometimes projects start at low margins and they get worked up.
Is there any way to separate how much of that is the ongoing productivity and other reengineering improvements versus the offset from inflationary wages and how that balance is working out.
Yeah, I'm not going to do.
Get into that level of detail Brian .
Components of our our performance, but they are generally a combination of plant efficiencies negotiated price downs from our suppliers through purchasing.
<unk> on the commercial side, working with our engineering group and our customers.
To drive cost out and capture some margin benefit associated with that those are the primary drivers. We are seeing to your tier I think maybe the underlying point of your question. We are seeing an elevated level of labor economics in our plants and our plants, which is lessening maybe that net performance.
Beyond what is ordinarily would be.
But I don't have that that specific.
Detail in front of me to break out.
Okay.
Ams receptive to recovery of inflationary labor cost by the insurers are the sub suppliers.
Yes.
We're having some good discussions with the customers.
For the most part of it.
And again, I think to Jason's point Theres, a number of ways and we and you're right. We are very good at this and this is something we take a lot of pride in is that we have a number of different actions one getting at the sticky labor. We're looking at how we can flex our different facilities, we have a very unique position and we talk about getting at our facilities in South America, we're able to <unk>.
And bind different product offerings like our wiring really fits well with the sequencing and the wiring and just in time or trim. So we've done a nice job of consolidating some of our plans to flex them as we're seeing this persist and we don't believe it's going to evaporate or go away in the near term. So we're going to take some of the actions on ourselves.
And lower our cost from a CTO cost technology optimization, we've queued up.
Hundreds of millions of ideas and those ideas are in front of the customer. We obviously validate them, we make sure that they understand what we're trying to do what we're trying to achieve and those are great.
No.
Commercial solutions for us to offset costs and then we have this just.
<unk> that we talked about we have incredible transparency our teams both teams and purchasing in E systems and seating are doing a remarkable job.
When Jason's talking about when we're talking about more of a fixed cost going forward as opposed to solutions that are more temporary in the price. We do have an enormous amount of transparency into the details when suppliers are bringing forward cost changes or cost price increases and that's when we get into tier twos.
<unk> and et cetera, because we really go through an audit every single.
Physician from if it's directed or not directed and so we have a great process in place and I think that also helps when we are able to negotiate a settlement with our customers. So last year I think the teams did a remarkable job I couldnt be more impressed law that was thinking that this might be temporary so some of the solutions with the <unk>.
Players and our customers were under a temporary resolution or proposal or settlement now we're into a more.
Longer term solution or what I say is fixed.
And those conversations are going extremely well and again I think it's how you bring the information for it and I also think it's how you are flexible installed in your own problems first we're not going to be a victim here. We have things that we can do and we are doing those like we announced with even our restructuring plan and we've been very successful with the plans. We did in South America and we've been working on <unk>.
List for some time and that is actually working to our advantage to because the customers are willing to work with us on solutions that lower cost and so we've got work to do like always but we're very optimistic because we're very good at it.
Okay. Thank you Ray.
Yep. Thanks, Okay. I think that's the last call. So I just want to conclude the call and again say thanks to all of the Lear employees. It was one heck of a year last year, everyone did a great job and very optimistic about the future like I said I think the backlog is just another indicator barometer.
Yeah.
<unk>.
A target of what we're trying to achieve and profitable backlog is exactly the best accomplishment and thank you from our customers and so.
Thank you to the teams on the phone and look forward to seeing you soon.
Yeah.
Ladies and gentlemen, with that we'll conclude today's conference call. We do thank you for attending today's presentation.
May now disconnect your lines.