Q1 2022 Lear Corp Earnings Call
Okay.
Good morning, everyone and welcome to the Lear Corporation first quarter earnings Conference call.
All participants will be in a listen only mode.
If you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
Please also note today's event is being recorded.
At this time I'd like to turn the conference call over to Ed lowest Bell Vice President Investor Relations. Sir. Please go ahead.
Thanks, Jamie good morning, everyone and thanks for joining us for Lear's first quarter 2022 earnings call.
Examine today are Ray Scott Mair, President and CEO , and Jason <unk> Senior Vice President and CFO . Other members of Lear's Senior management team have also joined us on the call.
Following prepared remarks, we will open the call up for Q&A.
You can find a copy of the presentation that accompanies these remarks at IR at <unk> Dot com.
Before Ray begins I'd like to take this opportunity to remind you that as we conduct this call we will be making forward looking statements to assist you in understanding lear's expectations for the future.
Details on 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 todays call on slide three.
First Ray will review highlights from the quarter and provide a business update.
Next Jason will provide an update on the progress we've made in electrification before reviewing our first quarter financial results and our full year 'twenty two 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 before I begin, let's take a brief moment to extend my sympathies to all those impacted by the devastating where in Ukraine.
<unk> contributed to the Red Cross to support medical relief efforts, we will continue to provide support for our employees impacted by this war I'm. So proud of the Lear team.
We have provided much needed support to many of those impacted by the war.
Now please turn to slide five.
I will provide a brief overview of our first quarter financial results in a very challenging environment marked with significant production declines late in the quarter cost inflation continued semiconductor disruptions. The Lear team posted solid results in the first quarter.
Sales were $5 2 billion.
Core operating earnings were $184 million.
Despite lower production volumes than the fourth quarter of 2021, both seating and E systems delivered better financial performance sequentially in the first quarter of 2022.
Slide six outlines key business highlights from the quarter. Once again led our sales outperformed the industry in the first quarter with above market growth in both seating and E systems.
Year to date business awards totaled over $1 2 billion.
Which will support continued growth in both business segments, the pace of business wins is accelerating.
Power Awards, this year <unk> or <unk>.
Increased significantly from the same time last year.
We also recently won another significant conquest award in seating that will launch in North America in 2024.
<unk> systems, we won a significant new electrification award in connection systems for a battery module connector.
<unk> expertise in metal stampings.
Connection systems, and electrical architecture, along with molding capabilities of Eminem positioned us to win this award.
This battery module connector is another example of our E systems and seating teams working collaboratively to support our customers and create a value proposition.
On February 28, we completed the previously announced Kongsberg interior comfort acquisition.
This acquisition will further advance our seat component capabilities into specialized thermal comfort seating solutions that will further differentiate our product offerings and improved seat systems performance in packaging.
Yeah.
We also continue to receive recognition across.
Businesses from industry partners. Two recent awards highlighted here include GM supplier of the year and fortune magazines worlds world's most admired companies.
Yeah.
On slide seven I wanted to describe in more detail. Some of the factors that are impacting the industry and how we are proactively facing these challenges.
The industry lost over one 7 million units of vehicle production in the first quarter alone due to the semiconductor disruptions the war in Ukraine, and the Covid Lockdowns in China.
As we look ahead, we expect that the volume recovery will be muted in the near term and that industry conditions will continue to be challenging well into 2023.
Other over.
Other headwinds include elevated commodity costs rising input costs and the strengthening of the U S dollar.
As we navigate through this more complex and volatile environment, we remain very focused on controlling what we can including aggressive aggressive cash management and working collaboratively with our customers to reduce costs.
We have stepped up our restructuring spending this year to further streamline our business and improve efficiencies.
This focus on operational excellence and process improvements runs deepen our DNA at layer and we will continue to be a leader.
A great example is in Brazil.
Where we combine portions of our seating and E systems operations into one location to create a more flexible and efficient environment. We're taking what we learned in Brazil to other manufacturing facilities and are now beginning to explore quoting future programs with our customers across our two segments.
We have a unique advantage is there are certain manufacturing processes across our two businesses that can be co located to lower our costs and flex our labor within one manufacturing plant.
We're continuing on the path we started a couple of years ago to review each product in the portfolio.
And to target our investment dollars in areas that provide the best returns consistent consistent with this strategy, we have begun to exit certain product lines in E systems, including traction inverters cord sets and audio and lighting.
When the industry recovers and volumes return to trend levels. We are confident that our focus on improving our cost structure today, coupled with the targeted investments in seating and E systems will increase profitability and financial returns.
Turning to our seating business on slide eight.
We've had a great start to the year with new business wins in all regions, including multiple awards on Suvs, <unk> and electric vehicles and the Conquest Award I mentioned earlier supports our growing.
Jet market share net conquest awards, so far this year total about $200 million.
Our key ongoing and upcoming launches over the next couple of months are all on track, including the Mercedes EQT and EQM SUV the range Rover sport.
And the BMW X five and seven series.
Building upon our 19, our 2019 pace award winning configure plus technology layer was named as a finalist for an automotive news pace pilot award for our occupant safety system, which was co developed with being here.
It is the first ever safety system designed for removal seating.
This system expands our configure plus product offerings and enhances our overall capabilities.
It is the seat supplier with the most complete component capabilities.
Lear has created a unique value proposition for our customers.
By designing and sourcing components that historically have been directed.
We can build seats with better performance at a competitive cost as a result, certain customers are increasingly willing to consider alternative designs and let lear directly source more seed components.
This will allow us to provide superior products for our customers as well as protect our and expand our market share.
Slide nine provides an update on our colleagues Borg acquisition, which was completed on February 28 <unk>.
The integration is ahead of schedule and the business is already tracking above our initial estimates in the short and in.
In the short time, we have owned the business. We have already won two new seat heat awards with a global electric vehicle manufacturer for the for vehicles produced in the United States and China.
The Kongsberg acquisition puts us in a position.
The <unk> acquisition puts us in a position to use our complete seat expertise to efficiently integrate massage lumbar heat and ventilation components.
<unk> unique foam and trim covers as the only seating supplier with these capabilities. We can create a modular thermal comfort solution that achieved world class performance and reduces part complexity and cost today.
To date, the total addressable market for thermal comfort solutions is expected to grow about two percentage points faster than the vehicle production.
We are confident that this market will grow even faster is lear's improvements to package and performance allow these luxury features to proliferate to the second row into more mainstream high volume programs.
On slide 10, I will provide a brief update on our E systems business, which continues to benefit from new business Awards strategic trends transactions, we completed last year and the industry shift to electrification content increases.
The battery disconnect units, we engineered and designed for General Motors Battery Electric truck platform is in production on the GMC Hummer and volumes are scaling as GM expands its product portfolio.
Since we bought <unk> last year, we have grown the business and identified product expansions using their technology, we continue to see additional growth and cost savings opportunities and our expanding eminent operations internationally to support these efforts.
The joint venture with who lane has accelerated growth and increased our capabilities and connection systems, we already have identified and implemented solutions to us who lane connectors rather than buying from our competitors.
We also recently won a new business award with <unk> in China for a sub assembly that includes a wire harness.
And our connector for our high speed data solution.
Key launches in these systems are on track, including new low voltage and high voltage wiring for global manufacturer of electric vehicles in the United States and Europe .
Looking ahead, we expect that industry trends will continue to support from the above market growth in E systems.
Moving to slide 11, I will highlight products to support our rapid growth in electrification as well as some of our key new product launches.
The industry shift to electric vehicles is accelerating with traditional customer increase.
Increasing their investment in racing to increase production and new electric vehicle companies entering the automotive market. Our electrification business is growing rapidly and we are busy quoting a robust pipeline of new products.
The shift to electrification add significant content opportunity for Lear is electric vehicles require incremental high voltage wiring high voltage connection systems and power electronics.
Other than the content related to the engine much of the low voltage wiring content on an ice vehicle is still required on electric vehicles.
And we have also been very successful winning low voltage wiring on electric vehicles.
The products, we are prioritizing to support electrification include high voltage wire harnesses.
And connection systems integrated power modules and battery disconnect units tip.
Typical content per vehicle ranges are shown here, but actual ctv's can vary significantly based on the level of complexity and the size of the battery.
Battery module connectors provide electrical and mechanical connections between the battery cells within the battery module.
Battery packs consist of hundreds of sells packaged into a dozen or more modules with multiple battery module connect connectors required for each battery system. We.
We see strong growth opportunities as electric vehicles adoption is accelerating.
Integrated power modules combine onboard Chargers, DC, DC converters and high voltage power distribution content in a single smaller package that saves cost and weight.
These parts are critical to manage power throughout the vehicle inefficient charging.
Better disconnect units control all power switching in and out of Libya The electric vehicle.
The GMC hummer pickup as one of the first full size trucks coming to market and we learned a lot engineering and designing the battery disconnect units.
On this brand new platform.
We believe that the experience we gained over the last several years will be invaluable as we bid on other larger performance vehicles coming to market.
Now I'd like to turn the call over to Jason to provide a more detail on the electrification business and review, our first quarter financial results and discuss our 2022 outlook.
Thanks, Brian turning to Slide 13, let me take a moment to provide some additional detail on our progress in electrification.
As Ray just noted our E systems portfolio, and wiring and connection systems and power electronics are all aligned to benefit from the industry's rapid shift to electrification.
New business awards for electrification increased by almost 50% from 2020% to 2021% to $324 million.
And for 2022, we're currently targeting $500 million in New awards more than twice, what we achieved in 2020.
Our core pipeline continues to grow and at $2 billion for 2022 is more than three times that of two years ago.
The current core pipeline is split roughly 65% power electronics and 35% high voltage electrical distribution systems. Historically, we have won approximately 30% to 35% of business we are quoting.
<unk> revenue is expected to grow at a 37% average annual rate from 2020 through 2025 at last year's these systems product day, we had targeted revenue of $1 billion for 2025 as you can see from the chart. We've already achieved our original target and have now increased the 2025 target.
By 30% to $1 3 billion.
Given the accelerating quote pipeline combined with our growing capabilities in electrification products, we would anticipated additional profitable revenue growth of more than $1 billion in this area between 2026 and 2030.
Slide 14 shows vehicle production in key exchange rates for the first quarter gold production decreased by 4% compared to 2021 industry volumes were again significantly impacted by semiconductor shortages and to a lesser extent by the warrant Ukraine and Covid related production shutdowns in China.
And Alere sales weighted basis global production decreased by 7% year over year.
From a currency standpoint, the U S dollar weakened against the RMB, but strengthened against the euro compared to 2021.
Slide 15 highlights sclerous growth over market.
For the first quarter sales outperformed global industry production by four percentage points, driven primarily by the impact of new business in both segments with Seaton growing five points above market any systems growing one point above market.
Growth over market in North America, seven points reflected the benefit of new business in both segments from Ford and General Motors, and strong production and seeding Gms midsize crossovers and full size Suvs as well as an Audi <unk> and Mercedes Suvs.
In Europe sales outperformed industry production by seven points, driven primarily by new business strong performance in the luxury segment in seating and above market production any systems across multiple Oems such as Ford Volkswagen Jaguar land Rover and Renault.
Our China business lagged industry growth estimates by 12 points due to unfavorable platform mix driven partially by customer production shutdowns that results from government mandated COVID-19 lockdowns.
Slide 16 highlights our financial results for the first quarter of 2022 compared to 2021.
Our sales declined 3% year over year to $5 2 billion.
Excluding the impact of foreign exchange commodities and acquisitions sales were down by the same 3%, reflecting primarily lower production on Lear platforms, partially offset by the addition of new business.
Core operating earnings were $184 million compared to $336 million last year.
The reduction in earnings resulted from the impact of lower production on their platforms and higher commodity costs, partially offset by positive operating performance and the addition of new business.
Adjusted earnings per share were $1 80, as compared to $3 73, a year ago.
Operating cash flow generated in the quarter was $221 million compared to $148 million in 2021.
The decrease in operating cash flow was due to lower earnings partially offset by favorable working capital.
We improved working capital is driven primarily by our aggressive management of inventory levels and a difficult production environment as well as the timing of customer receipts and supplier payments.
Free cash flow was $90 million compared to $135 million last year as capital spending and increased to support new launches.
Slide 17 explains the variance in sales and adjusted operating margins in the seating segment.
Sales for the first quarter were $3 9 billion, a decrease of $83 million or 2% from 2021, driven primarily by lower volumes on Lear platforms, partially offset by the strong backlog.
The increase in sales stoots commodity increases in Cogs and the Kongsberg acquisition was offset by the foreign exchange impact core.
Core operating earnings were $218 million down $89 million from 2021, and adjusted operating margins were five 6%.
The decline in margins reflected primarily lower volumes on Lear platforms, and higher commodity costs, partially offset by positive net operating performance and margin accretive backlog.
Slide 18 explains the variance in sales and adjusted operating margins in E systems segment.
Sales for the first quarter were $1 3 billion, a decrease of 5% from 2021.
Excluding the impact of commodities foreign exchange and acquisitions sales were down 7% driven primarily by lower volumes on key platforms, partially offset by a strong backlog.
Core operating earnings were $42 million or three 2% of sales compared to $95 million and 7% of sales in 2021.
The decline in margins reflected primarily lower volumes on their platforms and higher commodity costs, partially offset by positive net operating performance and margin accretive backlog.
Now shifting to our 2022 outlook Slide 19 provides global vehicle production volumes and currency assumptions that form the basis of our full year outlook.
We base our production assumptions on several sources, including internal estimates customer production schedules and IHS forecasts.
At the midpoint of our guidance range, we assume that global industry production will be 3% higher than in 2021.
This is lower than our prior guidance assumption of 6%.
The change in outlook is driven primarily by industry disruptions in Europe related to the warrant Ukraine, and recent and continuing production shutdowns in China due to the increase in COVID-19 cases.
<unk> mandated lockdowns.
The high end of our outlook remains consistent with Ihs's forecast for industry production of up 5% compared to 2021.
From a currency perspective, our 2022 outlook now assumes an average euro exchange rate of $1 nine per euro.
[noise] down down from $1 12 per euro in February .
Our assumption for the average Chinese RMB exchange rate is 645 or RMB to the dollar compared to our prior assumption of 635 RMB to the dollar.
Slide 20 compares our current outlook to our prior outlook for sales and core operating earnings.
We are forecasting the midpoint of our 2022 sales outlook to be approximately $28 million down $750 million from our February outlook, reflecting the impact of the additional reductions in customer production schedules.
Continued elevated commodity costs and changes in FX.
The midpoint of our operating income outlook is approximately $865 million down $185 million from our prior outlook.
The decline in the operating income outlook reflects the impacts due to lower volumes modestly higher commodity costs and a change in FX rates.
We have plans in place to offset the impact of higher commodity costs through a combination of performance improvements and additional commercial recoveries.
We continue to take steps through restructuring actions to increase synergies between businesses and increased flexibility across our workforce, allowing us to improve operating margins and an industry environment faced with ongoing supply constraints and uneven customer production schedules.
Slide 21 provides more detail on our 2022 outlook key changes include the following our revenue outlook is now expected to be in the 24 to $21 $2 billion range core operating earnings are expected to be in the range of 765 million to $965 million.
We are increasing our restructuring costs by $25 million from our prior guidance to $150 million.
As I previously mentioned these additional restructuring actions will provide long term flexibility and improves efficiencies.
Operating cash flow is expected to be in the range of $875 million with a 112 5 billion.
Now I'll turn it back to Ray for some closing thoughts.
Thanks, Jason turning to slide 23, our.
Operating in this environment is an easy there is well equipped to handle these challenges as we have an experienced leadership team and extremely strong financial position.
We have a long history of operational excellence and aggressively managing our cash flow.
And we are leveraging these strengths to position the business to optimize performance in the past year, we have increased sales, while reducing head count and we are aggressively implementing plans to further improve efficiencies across the enterprise as we continue to review the product portfolio, we will likely accelerate investment in certain areas.
While deemphasizing or winding down parts of our product portfolio that are underperforming.
We are executing our strategic initiatives to profitably grow.
Perhaps a bit profitably grow our core seating and E systems business I am confident that the investments we are making today will position both businesses to benefit when the long anticipated industry recovery arrives our strong business wins. So far this year has evidenced that our products are in high demand.
And then we have the right plan in place.
In closing I want to thank the Lear team for continuing to execute in a very extremely challenging environment and now we'd be happy to take your questions.
Ladies and gentlemen at this time well begin the question and answer session to ask a question you May Press Star and then one using your Touchtone telephone.
You are using a speaker phone, we do ask that you. Please pick up the handset prior to pressing the key to ensure the Baxter quality.
So enjoy your question you May press Star two.
Once again that is star and then wanted to join the question queue at.
At this time, we will pause momentarily to assemble the roster.
And our first question today comes from Colin Langan from Wells Fargo. Please go ahead with your question.
Great. Thanks for taking my questions.
Just to just for color.
Your raw material guidance actually only increased 10 basis points, that's surprising given how raw material <unk>.
Formed.
Why the small change is it.
Baked in a lot is it that you're just getting a lot more customer coverage.
How should we be thinking about that.
Yes, Cowen so the there was a fairly meaningful change in the gross impact on commodities and you see that in the revenue line. So there's about $130 million of additional total costs most of which are recoverable.
Given the contractual arrangements that we have in place and the negotiations that are ongoing to the net impact was was pretty modest.
For us the biggest driver of that increase in the gross exposure.
Steel.
Which is a little less than $50 million higher for the full year and.
And then components.
Supplier component cost increases, which are also about $50 million to a lesser extent, we do see slightly higher cost for chemicals utilities and freight.
And if you look at the nature of our recovery agreements, particularly on steel lots of.
And most of the customers are now on some sort of index and our paths for agreement there and so and <unk>.
Some of the component increases around directed content and so there is.
Mechanical way to pass that through and so that's why the impact on the <unk>.
Operating earnings is pretty modest relative.
Two the gross impact.
And that commodity bucket that also includes these other input costs I mean, a lot of other suppliers are calling out labor freight and energy I think you mentioned frame or is that just not that meaningful for you guys.
Yes for US we don't put all the inflationary costs in there we don't have labor inflation in there, but we are including.
<unk> and freight we did we did see a meaningful increase in utility costs.
In the first quarter and we're assuming that that is going to continue particularly in Europe , where there was essentially a doubling of the costs there.
And so that's.
That's also in that bucket, but it's largely just material related.
Adjustments.
And just lastly, kind of going back to the commodities. It seems I think roughly 100 million headwind in Q1, and I think the guidance translates to about 160 for the year. So how should we be thinking about that.
The margin impact as it plays out is it tougher in Q2 and then it starts maybe being a positive by Q4 or how should we think of the cadence of the <unk>.
Quantity.
Yes, if you look at it on a year over year basis. The biggest impact is clearly in the first quarter about a little more than $90 million in and as you progress through the year second and third quarter would be roughly half of that a little more than 50 in Q2 $44 million or so in the third quarter fourth quarter will actually be favorable year over year you may recall.
All that at the end of last year, we had we saw a significant run up in steel and also higher copper cost and we do see those moderating.
For us the peak steel costs were in the fourth quarter of last year in the first quarter of this year.
In North America, we have.
<unk>.
The contract that calls for.
An adjustment each quarter based on the trailing three months changes in the CRU index and so as a result of that our second quarter steel costs are actually quite a bit lower 30, 40% lower in North America than anywhere in the first quarter.
And when we see that not that downward trend not necessarily continuing into the second half of the year, but sort of somewhere in between the first and second quarter.
It's what we would expect in the second half based on what we're seeing in the market right now.
And then in Europe and steel just gave you some additional color there we have a <unk>.
Six month contract and so the first half of the year, we're expecting to be.
A little bit higher than it was at the second half of last year in the second half of this year given what's happening recently with the warrant Ukraine, it's going be a similar impact maybe even slightly worse in the second half of the year in Europe .
Great. Thank you for taking all my questions.
Our next question comes from Rod Lache from Wolfe Research. Please go ahead with your question.
From from your perspective about the timeframe at this point for recovering the margin targets at.
At one point you were thinking that you can get back to 7% or so in the 2024 time frame.
If we look.
A little bit further back in terms of commodities I think over the past two years, you had like a 150 basis points of margin pressure.
For commodities.
What's realistic for regaining that.
And whats the timeframe and whats happening kind of behind the scenes in negotiations.
Yes.
But I'm not going to go ahead to start I'll, let Jason fill in some of the.
The numbers around when we're going to get back and how we're seeing the business financially, but let me take a step back to and I think you recall very clearly when we talked about.
What we're going to do as far as the systems business was obviously set the organization up defined it very clearly into product groups that we're focused on return on invested capital and obviously, that's all behind US we also talked about.
And making sure that we werent.
Working through long, maybe has been making quick decisions on the product portfolio and where we had the right to play and where we can win and I think we've done an excellent job there and make big debt is translating in the growth that we're seeing we talked about the shift of wiring to electronics of us a more of a 60 40 relationship.
And we're on track there to continue to grow both business segments, but get a better balance between electronics and power distribution in connection connection systems.
And so all of those are moving in the right direction I think what we've seen from from our perspective is actually some of those or even moving faster than we expected I think the growth looking at $2 billion of quoted activity in electronics is something that we didn't even anticipate and if you just look at the doubling effect.
The quote pipeline and that's because we're getting in and getting accepted in different quotes.
By different customers and so we started with a very select customer base and we've been able to expand that not just the traditional oes, but the new entrants as well in electrification. So that's really positive and we've done an extensive amount of work on looking at the roll on roll off a lot of the programs that we.
We talked about were first generation and in some respects over engineered for the right intent to protect our customers and protect our reputation and make sure that we're delivering.
The most robust product. The next generation of products are coming online in some cases third or fourth are much more efficient and we're seeing the margin expansion on those rollout programs are really accretive to the backlog. So we're excited about that and the connectors business, we talked about and I think theres a lot of speculation on it could.
We grow that business and I'll tell you it's with the partnerships we've established with Eminem plastics that we just acquired the growth has been incredible and really supporting the vertical integration play to expand the margins. So from a business strategy. We are on track and in some cases I think we're ahead.
Head of where we would have thought and I think one of the most exciting things is like we just mentioned is at two 2 billion pipeline that we're seeing this year is significantly higher than we've seen any year and we've been winning at a clip of 30% to 35%. So we're very confident that we'll continue to grow and expand our electronics capabilities along with the vertical integration.
Wiring and so.
Yeah, and Rod maybe before getting too.
Reaffirming the 2024 operating margin targets for the company talk a little bit about how we see margins progressing this year, because I think it helps inform what the future looks like.
As well so.
Obviously, we released the first quarter results today as we look at the second quarter, we do expect to see continued pressure on.
Lower volumes, particularly as a result of the Covid related Lockdowns in China that has had a pretty significant impact on both segments as.
As well as weaker volumes in Europe impacting both segments and so.
We expect operating margins to be down slightly from the first quarter. The second quarter, we expect revenues to be down slightly from the first quarter and second quarter in both both segments. The first quarter in seating that also benefited from the timing of commercial settlements and so you may recall, when we guided to.
2022.
In the fourth quarter earnings call, we talked about seating margins declining from the fourth quarter. The first quarter. They actually came in slightly better than last year and so there is about 40 basis points of kind of timing benefit that got pulled ahead from the second quarter.
Ended the first quarter, and so that'll weigh a little bit on seating in the second quarter as we look out at the second half of the year, we do see a modest improvement in industry volumes. The bigger driver is the pass through of our commodity cost increases.
Two customers and in seating, it's more pronounced in each systems in terms of the timing of that so the second half.
The benefit of some of the mechanical and contractual agreements, we have on leather and steel.
Full effect of that sort of.
Shows itself in the second half of the year and that coupled with modestly lower commodity costs and things like steel that we expect in the second half with lead CD margins to be up about 200 basis points from the first half the second half.
And sort of in that 7% or maybe even slightly better range as we exit the year in E systems, we see the benefit of the backlog rolling on in.
Higher volumes in the second half.
And they're sort of in the 4% to 5% range as they exit the year and so that's sort of the launching pad number as you look out to next year in 2024.
And so as you think about 2024 and the 7%.
<unk> that we had previously communicated.
That's based on three three.
Three key drivers one industry volumes. So if you look at IHS projections for 2004. They are at around 90 million units were at 77.
<unk> 5 million units. This year is about 16% increase in industry volumes, we would expect between now and 'twenty four as the chip shortage and other issues in the supply chain resolve themselves in our key markets North America, Europe , and China, that's more like 19% and so if you see that type of volume increase between.
Now and then.
That by itself gets the company back in that sort of 7% range.
You discount that somewhat the second drivers the commodity and inflationary cost pass throughs, the cumulative effect of that on our results through the end of this year.
$340 million, there's going to be some unwinding of that that happens.
Again, mechanically and contractually next year.
And then the remainder of it works its way into our pricing structure as new business rolls off and those contracts are adjusted to current.
The current economics in the marketplace and then the third driver is what we're doing in terms of our own that performance you saw the positive net performance in both segments in the first quarter you saw all of last year. We expect that to continue we expect positive net performance in both segments for the full year of this year and as we continue to restructure the business.
We've seen an opportunity to reduce both administrative costs.
Through additional synergies between segments and also we see a chance to reduce labor and overhead costs longer term as we combine certain operations building off of that.
The first sort of pilot if you called that in Brazil, where we combined.
Wiring in the facility. So all of those things taken together give us a real high degree of confidence in that 24 outlook. In addition to <unk> comments about the strong growth that we're seeing particularly in electrification and the profitability of that new business that's rolling on.
Okay. So when you when you say.
I mean at the end of this year, you'll still have $340 million that you have sort of absorbed of commodities and some of that.
<unk> next year can you just unpack that a little bit for us what's what's realistic for Rick.
Recoveries in the short term and I presume that when you're saying that.
The rest of it is going to require new contracts that's like.
Presumably like.
Another four years or so until it is fully recovered or am I right am I misinterpreting that.
Well, if you think about the backlog that's rolling on should be reflective of the new economics, and then as programs changeover, yes that will take a little bit longer.
We don't have a precise number I think it's a little bit early but.
I would expect to see.
A half to two thirds of that go away over a two to three year period, and then maybe that last.
A third or so lags a little bit more in that four year time horizon that you described as programs changeover.
Okay.
Thanks.
For clarifying that and just lastly.
This is.
Sort of a recurring theme that you've got some conquest here.
Now another piece of business I presume it.
$200 million a year, maybe 200000 unit a year.
Program.
What's kind of driving that.
Is there something that you're offering here from a product perspective or technical perspective or is there some other factor.
At this point still resulting in these conquests.
Yes, I think in this case it was our footprint and we have an advantage and where the customer is located in production of this product and we had an existing footprint that we were able to to leverage and provide a more competitive.
Cost offering and I think it's also a result of the strong relationship that we built with this customer and cultivated with this customer as a result of our strong quality performance and engineering performance with that and we've executed well on on programs that we have with this customer today and we were rewarded for that.
Accordingly, and I would just add to that.
Everyone. Every one of the conquest wins are slightly different but there does seem to be that value proposition rod that we're able to and I think it's very important the reason why we're vertically integrated to the level that we are in and being able to manufacture our own components to create a.
Value proposition that is like I talked about with thermal management. It's a very important driver that we've been able to differentiate ourselves even early on right now even with the most recent acquisition of Kongsberg that when you walk into a customer and you can.
Tell them and talk to them about a value proposition that incorporates a number of different components and I do believe the seat design.
When you pull it apart as inefficient you create a modular solution that creates a better sensation for the customer.
Higher quality and it's more efficient from a cost standpoint so.
Jason had the example in the most recent one that was really a relationship that we had outstanding reputation for delivery and quality and built up in.
<unk> really build credibility around what we could do for them longer term, but with other customers. This vertical integration does differentiate us and even to the extent like I said in my presentation their willingness to open up the directed door is open and we're seeing we're reporting it in.
Our contracts in some extent.
We were awarded the business our ability to source our own components, because if you think about seating seating, it's about 80% of the components.
I think it would be easy to get some of this pass through right now an 80% directed.
Negotiating hard with them to get it all but.
Being able to open that door and be able to supply a solution that creates a value proposition is very unique and Frank and I are taken off this afternoon to go meet with customers.
Immediately to talk about what we can do with thermal management and how efficient it is and what we can do on future platforms, where last week with another customer talking to them about it so theyre very intrigued and interested in how we can help solve what is a problem today and differentiate I believe our brand to our customers and it has helped us.
Yes interesting.
Happening and jet as well at this point thanks for that.
Yep.
Our next question comes from Emmanuel Rosner from Deutsche Bank. Please go ahead with your question.
Thank you very much.
Hoping to follow up on some of.
The numbers in the commodities.
Exposure and the headwind for the year. So I think previously last quarter. You had said you are assuming a $575 million gross impact if im not mistaken $140 million.
Net.
So what is sort of like the new.
I guess, what is that what's newly embedded in the revised guidance.
And I think you said 130 million higher on the gross side is this not all locked in and it just seems fairly modest compared to sort of like the initial exposure. So is it not all locked in based on the on the existing contract.
Yes, so the gross impact now Emmanuel $695 million, so that's up.
120, $130 million from our prior outlook and and so thats largely driven by steel and either.
Granted or anticipated component cost increases and then to a lesser extent, what we're seeing in utilities, particularly.
In Europe , and then a little bit on the chemical side those are the the four contributing factors.
Driving that increase so you may recall, we had.
Embedded in everything that we were aware of plus some anticipated increases in the initial guidance, we had a significant assumption and therefore that and so I think maybe some other suppliers were a little maybe more aggressive in their initial assumptions and are seeing a bigger increase but I think thats at the 695.
$5 million we've captured.
The likely outcome of the gross impact.
For us this year.
Thanks, and then on a net basis I think you were assuming.
140 previously is now about 160.
It's a $1 55 now so it's up about 15 about.
Little less than 10 of that steel side of its utilities and then.
Chemicals are the balance.
Okay perfect.
And then second question.
Gross over market could you may be.
Speaking a little bit about how you see that play out.
For the year by segment, obviously some of the <unk>.
Geographical moves are having some.
And the impact at 5% and city this quarter, but only one in E systems, how would you see that play out for the year.
Yes, So let me start by providing some additional color on the first quarter, we had really strong growth over market in seating and in North America and Europe in particular.
In China, we had pretty weak growth over market.
And we were actually negative, 17% and I think that was largely a result of the location of the premium German OEM facilities and their supply base. So they were impacted earlier by the Covid mandated lockdowns in China and they are still impacted so download BMW.
You already whereas the Chinese domestic suppliers actually.
15% increase in production in the quarter the premium German Oems all saw double digit reductions and we do expect that to continue into the second quarter just based on the current restrictions in place so that will weigh on.
Seeding growth over market and to a lesser extent E systems as.
As well in North America, and seeing what we saw was the benefit of a strong backlog with for the Mavericks Bronco rolling on.
And also a recovery with GM on the equinox terrain, which had a lot of downtime last year.
And so that benefited us and then the full size Suvs.
We're ramping up in the first quarter last year and now are at full production. So that all helped US strong production from Audi Q, five Jeep Compass, Mercedes CLS and Bronco sport. So a lot of lot of different drivers of that and we expect that to moderate as we progress through the balance of the year. So some of it was just.
A weak comparison point in the first quarter of last year for those platforms.
And these systems kind of the opposite going on here. So we had negative growth over market in North America, and Thats, primarily driven by <unk>.
<unk> planned changeover of the Super duty in the mid cycle change on the expedition navigator. So they took some downtime that was planned in January I think three weeks and in addition to that were impacted by the chip shortage. So those platforms were down between 30% and 50% depending on the individual Caroline that really weighed.
<unk> systems growth over market that.
Corrects itself in the second and third quarter, we would expect improvements there, but then again in the fourth quarter. Those same platforms will be down year over year as Ford does in fact changeover to the new Super duty.
Launch impacts volume on all of those platforms.
In Europe , we saw strong growth over market in both segments and seeding we see the benefit of our backlog in a number of EV launches BMW IX.
The wagon version of the Thaicom.
Mercedes EQM and EQT.
And we also saw strong volumes.
Mercedes GLC C class and 911 are all up.
In a weak market.
So on the systems side, we saw the benefit of our strong backlog with Volvo.
The first quarter and also the Ford focus and Cougar, which had very weak production in the first quarter of last year and so we would expect that portion to moderate as we progress through the year, where the comparisons will be a little tougher.
So we would expect based on our current set of assumptions embedded in the guidance that our growth over market will be lower.
And the next three quarters than it was in the first quarter. However, as I said on the fourth quarter earnings call to the extent customers.
Our forces and allocation and they prioritize.
Their most profitable platform sort of like they did last year, then that could benefit us, particularly on the seating side, where are our portfolio benefited throughout 2021 from that allocation process.
Okay, great. Thanks for all the color.
No problem.
Our next question comes from Dan Levy from Credit Suisse. Please go ahead with your question.
Hi, good morning.
Thank you for taking the questions.
What.
Revisit the guidance and the revision.
And youre, saying commodity doesn't sound like it's much worse than the prior outlook, maybe $15 million to $20 million drag.
I think what does that imply.
The decremental margin on the lost sales related purely to volume.
Excluding the extra cost in ethylene and the commodity pass through something like 20%, which is actually not bad given what's happening in China and Europe .
That a fair assessment that the Decrementals just on that loss volume alone or maybe not.
Harsh is one third.
What's driving that.
Yes.
Yes, actually you have to break it down a little further than to look at foreign exchange and volumes.
On the volume line itself, we did convert at 27% from the prior guidance and so it's a little higher than normal.
Mainly because of the weighting the systems so more than half of the production volume reduction is in any systems. Despite the fact that it's a third the size of the seat business.
So that normally converts between 25 and 30 and at this.
Set of assumptions by program, it's just under 30% and then seeding, which typically converts at 15% to 20% we're converting.
20%.
Primarily because our China business does tend to run a little bit higher margin.
Than the average in seating that's a factor in just the mix of programs and the level of vertical integration of the programs that are down in North America and Europe is also a factor thats driving that so I would say ordinarily the 'twenty to 'twenty, 2% average converge.
Right on volume between the two segments as is a good assumption to model, but it's a little bit higher global heavier in.
In this case from our prior guidance.
Okay.
On a go forward basis.
And I know you addressed some of this in.
Prior question, but if we just keep cost adds as it is.
So the incremental margin on any volume recovery, that's still going to be in that 2022% range call. It 15% to 20 for E systems.
25 to 30 for 15 to 20 preceding 25% to 34.
Hmm.
Yes, so I think.
It's important also to look at how that industry volume comes back online so to the extent, it's volume increases on existing platforms and youre spot on Dan Thats. The margin you should expect as that volume comes back.
To the extent it comes through backlog that are typically rolls on more in the 10% range slightly at or above the segment margins.
In both segments, so it depends but it should largely be.
Increasing volumes on existing platforms.
Drive the volume increase that we expect over the next two years.
Great. Thank you and as a follow up.
I want to go to slide.
Seven Youre mitigation actions.
Hey, maybe you could just give us a sense on the cost side, you are talking about some footprint consolidation and restructuring.
I guess, we were under the impression that you were fairly optimized. So how much is there in terms of low hanging fruit versus stuff that needs real restructuring expenses is going to be a little tougher to execute and then maybe you can also address the point on the exiting low return product lines what products are those exactly how much of that of revenue <unk>.
For the margin and what's the impetus for exiting these products now.
Yes.
Okay.
I think there's been a lot that's changed and you're right. We're at a very efficient company historically, obviously focused on operational excellence.
A crisis, where they say don't never waste a good crisis and what happened.
In South America.
Because of the volatility around volume production.
Changes in schedules those type of things.
We looked at how we could combine different administrative rules between these systems and seating and for example, engineering purchasing logistics right now we have decentralized organization within seating and E systems that are somewhat autonomous and independent and so in South America.
We found there were some real nice synergies between the groups from application engineering shared resources on logistics administrative roles, both sales and marketing finance those type of things. So we're able to get some some.
Continuation of being more efficient in the manufacturing and I think the bulk of the opportunity really became clearer in manufacturing we combined.
In some cases like wiring has KSA, which is very similar to just in time.
On the wiring side and our just in time manufacturing capabilities, we combined the two product groups together to really utilize intake.
Full advantage of our efficiencies within our plan one thing we recognize yes, we were able to scale and get gain efficiencies between the two product groups.
It helped efficiency within the product itself, but then we were able to flex our labor and I think something Thats really important now and what we're seeing is our customers are definitely moving away from what used to be a global platform to a more localized.
Manufacturing footprint and so we're aggressively looking at how we can flex our footprint do you see the always moving to up facilities that can run both ice and electric vehicles and then switch between different platforms. So what we're doing is very proactively saying okay.
We ran a pilot is that just you want to call. It in South America that worked extremely well for us.
Can we take that and extrapolate that across our both our business segments and so we're working aggressively we brought in an outside consultant Bain, who is helping us really organized.
Some of the actions that we're going to be taking and we're going to have we're going to analyze the data study it make sure that we're making the right decisions, but what we are finding and Frank and Carla here that we are being called into a lot of meetings with our customers on how we can localize material close to their manufacturing facilities with the ultimate flexibility.
If you can take different product lines, and flex your labor and be able to drive efficiencies and get better utilization.
A win win and so we're actually <unk>.
One case, where right now we are quoting a customer.
With the idea of.
Coupling these product lines together for efficiencies with flexibility and so they're very interested in it we think that there is real opportunity here will be the only company in the world that can flex our plans like this when you talk about wiring and just in time and other components with trim, we have a global footprint.
Set up we just kind of look at it reshape it for localization and our customers' needs flex around their manufacturing plants and so like I said I think administratively.
There are some opportunities we can still drive and that's what we're doing we're doing that right now we've been working on it for several years, we continue along the process, but operationally I think we.
We're studying it right now, but we think there's big opportunities or to Dan.
Building off of that I think.
In particular, the point that <unk> made around flexibility. If you think about the industry shift from ice to electric vehicles.
What we're seeing is typically lower volume platforms and these new electric vehicles, and we think over time.
There will be lower volumes on existing ice platform. So having an ability to have a flexible manufacturing process that can service multiple customers multiple programs in a flexible manner to move head count between programs I think positions us to lower our cost.
And still service our customers.
Over the coming 345 years, so this isn't something where youre going to see an immediate benefit it's more anticipating the way the industry is evolving in <unk>.
<unk> of that.
We are now in our third year of lower industry volumes and so part of this is just taking a better control of our own cost structure to adjust to the lower volume environment.
And then in regards to your question about exiting product lines. So the most significant of which is audio and lighting, that's about a $200 million business for us today, and it's not a an immediate exit at the harvesting of that business and so it's a reallocation of the engineering talent to product.
In electrification and <unk>.
Core electronic products and away from audio and lighting, which will ramp down over a five year <unk>.
Horizon than there is.
Some restructuring associated with that mostly just the closure of one factory in Europe .
The other exits around CT sets and Inverters.
The revenue on those programs more modest so the most significant is the audio and lighting.
Exit and I think just to I mean, we've been very selective on where we're spending our engineering dollars that the world is changing extremely quick, particularly in these systems business.
We've tried to highlight very specifically where were focused on power.
Power electronics, when we talk about in some of these are engineered programs. When we talk about the battery disconnect units that we've been engineering and designing for last several years. We've gained extensive knowledge in patents and expertise around that and we see that accelerate that scenario, we're going to focus integrated power modules.
That is something we're very good at with our thermal management, our efficiencies our ability to deliver our cost management.
We've picked up some really nice wins in that area and we see that continuing to be an area of investment for us and the battery module.
<unk>, we just recently won a really good program and Thats relatively new but man, we have great capabilities. When we talk about across Leer and I mentioned, it with our ability with structures and then the combination of the imminent acquisition and our own internal power management capabilities.
Hit a home run there and that could.
Couldn't be more proud of the team for what we want so we are being very selective we understand the need to look at areas, where we can grow profitably and what's exciting like I mentioned earlier is the new business is rolling on and new systems. In particular is accretive and it is the next generation of derivatives and.
In engineering changes that we've made that are much more efficient and so we're going to be selective we have like Jason just mentioned, we've targeted business were winding down and we're going to focus on where we can grow the business profitably.
If I could just clarify I know you raised your restructuring costs here.
Based on what Youre, saying here, but what does this imply for go forward restructuring costs beyond this year.
I wouldn't yes, I think it's too early to say, Dan and it depends on the map.
Magnitude of the opportunity and as we've said in the past, we typically target a one to two year payback on our restructuring investments and so.
It depends on how much of this opportunity fits into that that payback equation.
But I wouldn't.
Adjust your model at this stage for a meaningful change in restructuring without also.
Adjusting the earnings that result from those same actions and that sort of one to two year payback.
Target range.
Great. Thank you.
Hello.
Ladies and gentlemen, our final question today comes from John Murphy from Bank of America. Please go ahead with your question.
Good morning, guys.
Did you say.
First question I mean, you haven't really addressed the fact that the schedules are incredibly volatile right now and thats, creating issues for you, but if you think about this.
Combination with raws spiking at sort of antithetical to the beauty of the seeding model right that you have a variable cost structure.
And can pass through a lot of Iran. Raw material cost so rates I mean, you can call with Raj just on timing and Youre getting caught in the volatility which means that your cost essentially become fixed so I'm just curious.
Do you think about that I mean, it sounds like you've got a lot of consultants running around telling you that things have changed but they have and it's just these market conditions that are really creating a variable cost structure.
We're making something look more fixed than it traditionally is in as things normalize these issues will work out.
How are you thinking about this because I mean.
It seems like it's just at the moment the model as it seems a little bit wonky, but the model really is quite good when things normalize.
Yeah, I don't disagree with you clarified on the consoles I think theres some areas, where we can gain benefits and Jason alluded to it is going to be over time, but it does play into some of the requests from our customers on having a more flexible manufacturing footprint so set that aside.
Do agree with you.
And I look at this way though.
It can be very clear I've told everyone where that could be a victim.
I could sit here and hope that okay. This this half was better than the next half for this year, but we got to start operating and whats in front of us and that's exactly what we're doing and I do think there's opportunities within seating to really rationalize what where and how we're running our facilities, but yes it would be.
<unk> is a good business when we look at it and we do have.
Good customer relationships. So we are negotiating those settlements as far as inflationary costs all customers are slightly different on how they're handling it.
But I do believe over time, we're going to get some reasonable agreement with each one of our customers on the jet model and it is a bureau cost structure that we have been balancing the best of our ability right now.
Yeah, and I think the only thing I would add the reason to bring and help us.
Exposing our thought process to some outside expertise, it's really arms and legs to help us.
Accelerate the plan and evaluate different.
Alternative and this is being done I think in a very proactive manner.
Trying to anticipate where the industry is going over the next five years to make sure that our our footprint and our approach to manufacturing.
Puts us in a position to continue taking share in both segments.
CNN in E systems, where we are seeing significant growth in both cases.
Okay. That's helpful. And then just a second question on the vertical integration and Youre going deeper in that direction. It seems like your customers are receptive to that.
We've kind of over the last few decades for this go back and forth right on vertical too.
Not.
I'm just curious.
What do you think has changed here.
To get vertically integrated youre going to want to make more money for more value add but the automakers are traditionally pulled the sheet apart and tried to price pieces.
Lee.
Why is this really kind of changing in the munis direction at the moment I know you bring a lot of the table you can do a lot of the integration and the product work yourself, but I mean traditionally they've gone in the other direction I just are they just show.
Tied up with EV and EV investments Youre right Theyre. Finally, Shane here you guys are very competent this you take it or what's changed at the moment.
Yes.
Through all those cycles to where it has gone up and down and back and forth. We have control. We don't have control of it I think what I'm seeing now and what I'm hearing from the customers is.
One is your 0.1, they have a tremendous amount of.
Investment in work that they are focused on other parts of the business and so they are in need of resources that are in need of redeploying.
Our human capital in different ways to focus on some of the technologies and the changes within the vehicle, but I also think what is really important I think to talk about is creating that value proposition you have to give them an appreciation for our value proposition that works for both parties.
What we're doing and I look at the seat and I've been around a long time, where the seat has been layered on component on component on component on component with not a holistic look at how you really pull.
<unk> all together in the most efficient manner and I think that the thermal comfort management system is a great example, why we've gotten recently to customers that are willing to allow us to source those components.
Obviously, you have to meet the specification the quality requirements and costs and all that fun stuff, but.
It's the combination of foam and trim and plus pads and then you start taking the components that are the blowers in the bags and the heat modules in the electric harnesses and you start looking at those there.
We can cut 50% of the part usage I mean, obviously that ties into efficiency, that's the value proposition and it's from an efficiency standpoint from a consumer standpoint cost standpoint much superior.
So that's what I'm seeing is that if you give them a value proposition that says listen here's your targets.
Can meet your targets and I can give you this value proposition, which increase efficiency is more from a customer perspective appealing.
And that's what that's what I'm, saying so.
There is now I also think that they have other things are focused on I think coming in with a proposal to help them kind of say okay. You go deal with that there's a benefit there too, but I think it's a value proposition that we're offering them in combination with our expertise.
And then just lastly on E systems, I mean, the rebalancing of the portfolio. It sounds like you're getting more aggressive there and that makes it a lot of sense Im just.
Where you think this ultimately lands and who the competitive set is I mean I can you.
Jimmy gentlemen, we own.
<unk>.
I mean, you've been playing with all these companies and going up against them for a long time, but it sounds like youre getting into heavier space I'm. Just curious if you are running into new competitors and how far you can you can take this and what Youre right to play is as you get into.
More high voltage and in more complex or simplified architectures.
Well, we've been going head to head against some of the traditional names that you mentioned in winning business and so we can compete against those guys.
Every day and there are new entrants and new competitors coming into the space and I think when we think through and let's just take a break it down we broke it down to power distribution and connectors and we've done an incredible job competing against the traditional and that's more of a traditional space not seeing a lot of new entrants there, but the combination.
<unk> acquiring <unk> and then also partnering with.
Some.
Companies that allow us to use their library has accelerated our vertical integration play in wiring and on the electronic side I think what's important.
Before we are trying to be everything to everybody and the world has kind of changed with some of the technology innovation within electronics and we've really honed in on what we believe is our core competencies and where we can deliver again that value proposition and I mentioned in power electronics.
It's really integrated power modules.
We've been in that business back to the original volt days and so we have tremendous experience on battery Chargers, what we're doing with DC DC converters battery monitoring systems now those have all come together under integrated power module and so I think our vast knowledge and expertise over the years has helped us continue to grow that business.
And then really getting focused on where our core capabilities are.
I mentioned.
I don't think we're going to be everything to everybody, but where we participate we're really damn good at it and that's been successful for us and so.
The slide that I had in the deck on page 11 was really intended to really.
Describe where we're focused battery disconnect units, we're doing a great job there, we see proliferation across customers and platforms within general Motor's integrated power modules. We've done a nice job. There. We are leader was the technologies, particularly around 22 kilowatt capabilities and our efficiencies and thermal management there and.
New battery module connectors business. We just won was a combination of all of our expertise and I think it put us in a very unique position and I think we can go up against anyone in those areas that we've been winning and what's been great and I think it's important when we talk about the backlog of quoting pipeline, it's $2 billion.
When we started talking about it was $200 million it was $500 million it was growing but we werent Ian on the.
The ability to technically quote these capabilities with our customers. We've expanded the proliferation of customers. We started very selectively with Volvo Jaguar land Rover, and we've quickly expanded across multiple customers.
Opened net quoting pipeline to get in to participate and technical reviews and quotes that significant and so now pushing Karl I said, okay. It's doubled every year that I'm expecting 4 billion next year. So he hasn't given me the green light on that but I think it's just an example of how we've been able to really.
Proliferate across customers with our technical expertise, but yes, theres a lot out lot of competitors out there, but we've done a remarkable job of growing that business.
Great. Thank you very much guys.
Thank you guys. Thank you.
Okay. So I think probably the only one left on the phone is the Lear team I just want to thank you for all your hard work another tough quarter, but.
Really good results given what we're facing and thank you for all your efforts and your hard work.
Ladies and gentlemen, the conference has now concluded we do thank you for attending today's presentation. You may now disconnect your lines.