Q2 2022 Lear Corp Earnings Call
Good morning, and welcome to the Lear Corporation second quarter 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. Please note. This event is being recorded.
I would now like to turn the conference over to Ed Modem felt vice President of Investor Relations. Please go ahead.
Thanks, Matt Good morning, everyone and thanks for joining us for leaders second quarter 2022 earnings call.
Presenting today are Ray Scott Lear, 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 up the call for Q&A you can find a copy of the presentation that accompanies these remarks.
<unk> Dot Alere dot com.
I'd like to take this opportunity to remind you that as we conduct this call we will be making forward looking statements to assist you in understanding lear's expectations for the future.
As detailed in our Safe Harbor statement on slide two our actual results could differ materially from these forward looking statements due to many factors discussed in our latest 10-Q and other periodic reports I also want to remind you that during today's presentation. We will refer to non-GAAP financial metrics you are directed to the slides in the.
Appendix of our presentation.
Conciliation of non-GAAP items to the most directly comparable GAAP measures.
The agenda for today's call is on slide three Jason.
Jason will begin by reviewing our second quarter financial results and our full year 2022, our.
Ray will then provide a business update highlighting the industry environment and the steps we are taking to position Lear for success.
Following the formal presentation, we'd be happy to take your questions now I would like to invite Jason to the guests.
Thanks, Ed and good morning, everyone.
Please turn to slide five where I will provide a brief overview of our second quarter financial results and other recent company highlights.
In the second quarter with ongoing Covid in semiconductor disruptions cost inflation and a strengthening dollar the lear team posted solid results, which exceeded our expectations.
Sales were $5 $1 billion in core operating earnings were $187 million.
Despite lower production volumes in the first quarter total company operating income and margins improved sequentially.
During the second quarter, we returned almost $100 million in cash to shareholders through dividends and share repurchases.
Looking forward, we continue to win new business in both business segments with key wins in the quarter, including electrification award in connection systems in North America, and multiple awards with domestic Oems in China in both seating Andy systems.
We are continuing to take steps to reduce costs and improve our manufacturing flexibility.
Ray and I will both cover this topic in more detail later in the presentation at.
At the same time, we continue to invest in our core product lines and our manufacturing capabilities to strengthen the business in May we announced a definitive agreement to acquire I G. B.
Leading German supplier of automotive seat heating ventilation and cooling in steering wheel heating.
This acquisition once completed will expand their product capabilities in active cooling and complement existing offerings and specialized thermal comfort seating solutions that improve vehicle performance and packaging.
Our growing expertise in thermal comfort has already resulted in jet seating contracts that allow there to direct the sourcing of these components and we expect this trend to continue as we design and engineer a more efficient system that reduces complexity and total cost.
Our customers continue to recognize later for outstanding quality at our manufacturing plants in both business segments over the last three months. We won the best supplier in quality award from still a lot to us as well as multiple plant quality awards from GM and Ford.
We released our 2021 sustainability report during the second quarter highlight and progress on our renewable energy strategy innovative green products supplier sustainability and diversity equity and inclusion efforts.
Slide six shows vehicle production in key exchange rates for the second quarter.
Gold production was up 1% compared to Q2, 2021 and up approximately 2% on alere sales weighted basis.
Volumes in North America were up 12%, while industry production in Europe decreased 5% compared to 2021.
Covid related production shutdowns led to volumes that were 3% lower in China.
From a currency standpoint, the U S dollar significantly strengthened against the euro and to a lesser extent the RMB compared to 2021.
Yeah.
Slide seven highlights lear's growth over market for.
For the second quarter total company growth over market was six percentage points, driven primarily by the impact of new business in both segments, but seating growing six points above market and he systems growing five points above market.
The growth over market in North America of three points reflected the benefit of new business in both segments as well as strong volumes on key Lear platforms, such as far as explorer and escape the Chevrolet Equinox, and GMC terrain, the Hyundai Tucson, and the Chevrolet, Colorado and GMC Canyon.
And Europe's growth over market was 16 points driven primarily by strong performance on platforms for Mercedes Nissan and still onto since ceding and Ford BMW in jail or any systems. In addition, new business was strong in both segments, particularly with Mercedes and BMW.
Our China business lagged industry growth by eight points due to unfavorable platform mix driven by customer production disruptions from government mandated COVID-19 lockdowns in both segments, which disproportionately impacted the global Oems.
Systems growth over market in China was slightly positive as our strong backlog more than offset the unfavorable platform mix.
Slide eight explains the variance in sales and adjusted operating margins in the seating segment.
Sales for the second quarter were $3 $9 billion, an increase of 266 million or 7% from 2021, driven primarily by our strong backlog and an increase in volumes on their platforms.
Excluding the impact of commodities foreign exchange and acquisitions sales were up 8%.
Core operating earnings were $233 million down $29 million from 2021, and adjusted operating margins were 6%.
The decline in margins, reflecting primarily higher commodity costs, partially offset by higher volumes on lear platforms, and our margin accretive backlog.
As we previously communicated the Kongsberg acquisition is slightly dilutive to current margins, but will be accretive to see the margins in the future as industry volumes improve and we implement our planned growth and cost synergies.
That performance was dilutive to margins largely due to increased premium costs and higher labor costs that resulted from late notice customer downtime and the extensive production disruptions in China.
Slide nine explains the variance in sales and adjusted operating margins in the E systems segment.
Sales for the second quarter were $1 $2 billion, an increase of 4% from 2021.
Excluding the impact of foreign exchange and commodity cost pass throughs sales were up 5% driven primarily by our backlog and higher volumes on key platforms.
Core operating earnings were $24 million or 2% of sales compared to $41 million and 3.5% of sales in 2021, the decline in margins reflected primarily higher commodity costs and the impact from the strengthening dollar.
Partially offset by higher volumes on their platforms and margin accretive backlog.
The decline in that performance was driven primarily by an increase in premium costs, excluding premium costs net performance was positive in the quarter.
Slide 10 illustrates our focus on driving operating efficiencies and increasing free cash flow generation and a challenging industry environment.
We are working to optimize our footprint and remove any excess capacity, while ensuring we can support higher volumes as the industry recovers.
We currently have enough capacity within our existing footprint to support our growing backlog as well as the projected growth in industry volumes over the next several years, we are focused on making our manufacturing footprint more flexible. So we can improve efficiencies across both segments within specific regions.
We are streamlining our portfolio to focus on our core product lines, where we have a competitive advantage and see strong market growth and we.
We're investing in key growth areas, such as thermal comfort in seating and connection systems in E systems.
This focused product strategy will drive revenue growth and higher operating margins in both segments.
Working closely with our customers both business segments are aggressively targeting inventory reductions. Despite our expectation for continued production disruptions in the second half of this year.
We are also taking a clean sheet approach to our capital expenditure plan, where our footprint optimization will allow us to redeploy existing capital to support drawing volumes and reduce the need for new manufacturing facilities to support our new business backlog.
We anticipate that this approach will allow us to continue launching our near record backlog, while maintaining capital spending near historical levels.
Through these actions, we will improve our cash flow generation over the next two years, we expect to see our free cash flow conversion rates returned to approximately 80% and improvements from our more recent free cash flow conversion of 65% to 70%.
And the last two years, we saw opportunities and executing tuck in acquisitions and seeding any systems to expand our thermal comfort in engineered components capabilities, we do not expect to execute any significant near term acquisitions, allowing us to return more of the excess cash generated shareholders.
In the second quarter, we took advantage of the current market conditions and repurchased $50 million worth of shares we've continued to repurchase shares into the third quarter.
Okay.
Now shifting to our 2022 outlooks.
11 provides global vehicle production volumes and currency currency assumptions that form the basis of our full year outlook at the midpoint of our guidance range, we assume that global industry production will be 3% higher than in 2021 in line with our prior outlook, we have reduced our outlook for North America, and Europe , while increasing the outlook in <unk>.
China.
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 as the dollar continues to strengthen we have updated our assumptions. Our 2022 outlook now assumes an average euro exchange rate of $1 six per your euro driven by a second half assumption of $1 two per euro.
The RMB is expected to be an additional modest headwind as our assumption has changed from flat to down 2%.
Slide 12 compares our second half outlook to our first half actual results for sales and core operating earnings.
We are forecasting the midpoint of our second half sales outlook to be approximately $10 $5 billion up $242 million from our first half actual results, reflecting higher volumes a full six months of <unk> results and an increase in commodity pass throughs, partially offset by changes in FX.
The midpoint of our second half operating income outlook is $494 million, an increase of $123 million.
From our first half actual results.
The improvement in operating income reflects the expected impact from higher volumes and the combination of moderating commodity costs and increased customer pass through agreements, partially offset by the change in FX rates.
Slide 13 provides more detail on our current outlook, while we acknowledge that there remains macroeconomic uncertainty impacting our industry. Our strong performance in the second quarter relative to our prior expectations combined with actions, we have taken to improve our cost structure increases our confidence.
And our financial outlook as such we are maintaining our guidance at the midpoint of our prior range for net sales core operating earnings adjusted net income and free cash flow.
Now I'd like to turn the call over to Ray to provide an update on our view of the macro environment and the steps, we're taking to prepare layer to be successful in any scenario.
Thanks, Jason Please turn to slide 15, which highlights key industry factors and how they might be impacted by macroeconomic and industry specific conditions.
Over the past few years, the automotive market has experienced significant volatility.
Recessionary industry volumes.
Industry production is tracking below 80 million units for the third consecutive year.
And for the last three years production volumes have averaged 13% below pre bad pandemic levels.
We have been able to partially offset the impact to our business by improving efficiencies in both business segments and working.
<unk> way with our customers and suppliers.
Cumulative total company net performance benefited margins by approximately 115 basis points over the past two years.
Which offset about two thirds of the commodity headwinds.
Over the same timeframe.
Looking forward the industry should benefit from factors, such as historically low inventories and aging fleet and <unk>.
Pent up demand at the same time, however, rising interest rates inflationary pressures and other factors are driving recession fears and the broader economy.
Well, it's difficult to predict in the near term, we do know that the shape of the automotive industry recovery will impact industry volumes commodity costs supply constraints and customer production schedules.
Lower recovery could bring more stability to the industry of supplier supply constraints are reduced and production schedule stabilize.
We have seen recently, a slowing global economy can have an immediate and significant impact on commodity costs.
North America's Steel for example has declined by more than 50% from its peak and copper has come down by more than 25%.
We would expect oil costs to moderate in a recession, which could lead to lower cost for resin based products and transportation.
In addition, we expect that our customers would use incentives to stimulate demand if industry conditions worsen.
As we weigh these risks and opportunities we continue to take aggressive steps to position leader to manage in all scenarios and to improve our competitive position and financial performance.
Turning to slide 16, I will describe our key areas of focus and how the actions. We are taking are expected to improve profitability and shareholder returns.
Since the beginning of Covid the Covid pandemic in early 2020.
We have been taking advantage of the downturn to focus and strengthen our product portfolio, our talent and our balance sheet over the past two years, we have continued to hone our strategy, which will position the business to generate increasing amounts of cash throughout the business cycle.
We're streamlining our product portfolio to align with our core strengths and are focusing our efforts, where we can add value for our customers.
You're seeding, we will leverage our growing thermal comfort capabilities to increase market share improve profitability and expand our competitive moat in E systems. We are focused on increasing our market share and connection systems battery disconnect units and wiring to drive revenue growth and margin expansion.
We're a leader in operational excellence and we are leveraging these strengths to position the business to optimize performance.
Recently reduced nonmanufacturing salaried head count by approximately 3%.
We're identifying additional head count and S. G. H S G&A synergies across the two business segments that will further reduce costs.
We have frozen salaried hiring except for very critical head count related to particular projects.
Our restructuring actions, we are taking in our manufacturing operations improved capacity utilization and flexibility.
And we are prioritizing capital spending and investing in industry four point only actions to improve plant efficiencies. In addition to organic investments. We have made two small strategic acquisitions to accelerate our industry 4.0 efforts, we acquired ESI a few years ago and in May we acquired the Gora, which.
Improved manufacturing operations through scalable smart manufacturing tools.
We returned all of our cash we generated in 2020 and 21 to the shareholders and going forward. We expect to continue to return a majority of our free cash flow to our shareholders.
Both business segments are well positioned and we don't expect any significant acquisitions in the near term.
We are concentrating our efforts on improving performance in any operating environment, increasing returns on capital and reducing enterprise risk.
In closing I want to thank the Lear team for their continued efforts and for delivering better results than expected in the second quarter.
And now we'd be happy to take your questions.
Yeah.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our rush.
And our first question will come from Justice Spak with RBC capital markets. Please go ahead.
Hi, Thanks, so much everyone for the update.
Rain, Jason I, you know want one thing we've heard through earnings season is a number of suppliers getting getting pricing or a recovery used to help offset some of the the cost pressures we've seen I didn't hear you explicitly.
<unk> mentioned I was just wondering if that if that did help organic growth in the quarter and if so by how much and what's the sort of expectation for the back half.
Yeah, So Joe we.
If we strip out commodity pass throughs from our organic growth. So when you talk about growth over market that snap part of the equation. So it did it was that a factor in our strong growth over market in the quarter.
Okay, and and and and any recoveries for some of the the.
Non commodity inflationary pressures.
Yeah. So you know we're we're on track with the plan that we had laid out on the prior earnings call. We have seen a modest increase in the gross impact and we've seen a comparable increase in our recovery. So the net impact we're expecting from commodities and inflation is still a $155 million for the full year.
Gross impacts now about 720.
$20 million, so up a little bit from what we talked about previously in terms of the recovery rates for each of the categories. There. There are generally in line with our with our prior guidance.
Overall, so we are having pretty good success commercially and Ray I don't know if you want to add yeah. I think I think I mentioned this before two and last year was more of a.
Negotiation by quarter.
And more of a temporary resolution this year.
As far as the collaboration it's much more permanent than in a fixed within the price going forward and I think the success that we've had and it differs by different area. If it's sticky labor issue, which is one of the bigger issues that were.
Struggling with today with the intermittent downtime and start times of the different facilities or a different customers.
We have different ways to resolve that one is obviously we were getting paid for it in a different percentage of what the cost is in the others. We are able to go and take some of the some of the cost within our own control and be radar plants and so that's one way we're solving that but we have set precedents with the majority of our customers on how we're going to hand.
And we talked about transportation very similar.
There's a percentage of what we get recovered in what we do is work on different transportation lanes and reduce our costs.
Consolidated different components to reduce our costs. So that's going well and I think generally you know we've done a nice job with some of the commodity cost increases across the board and some of that has a lag a lagging issue, but we've been successful and so we are it's a big focus we've been focused on it for now two years Derisking.
The company is something that we take as a priority to make sure that we're getting the contracts.
Updated to the increased cost pressures that we're seeing and then also balancing growth I couldnt be more proud of you know Jason mentioned earlier, you know we have the highest level of our backlog during all of these different negotiation. So there's different ways you can handle it and I know some of our competitors are talking about 100% recovery, but I'll tell you the majority of the cusp.
<unk> are looking at a collaborative share agreement and working in a more cooperative way as opposed to a 100% recovery and that's what we've been doing and so I'm very confident that we have all the pieces in place to continue successfully working with our customers and balancing not only the recovery, but our growth profile going forward.
Okay.
Thanks for that and just a second question on on your your comments on the different scenarios that could play out and obviously, there's a lot of moving pieces here, but even if you look at you know your your sort of recessionary scenario. You know you have commodity costs coming down supply constraints easing and a more stable production schedule.
Obviously volume is a big factor, but as you mentioned you know there there's some pretty low inventories and volumes are already at a low level. So it is there.
A a path here, where even if in sort of this slower growth.
Environment that margins actually hold up.
Yeah, I think Joe.
<unk> heard a lot of different definitions on what recession is and I think I must stay with one that I've heard recently is if you feel like you're in a recession or a recession I feel like we've been particularly the supply base has been a recession for two years and our biggest challenge has been what I referred to as the sticky labor the intermittent down.
Downtime and when you have employees in our plan and you brought them into work and then you have to send them home.
And if that issue recedes or dissipates, that's a significant probably one of the biggest challenges we've had over the last two years.
Transportation costs go down and we're seeing that right now we're seeing improvements within our own facilities with labor I mean, we were struggling for last two years with turnover and we're starting to see that a relatively flat to improving and so that's something that it's a positive sign the commodity increases and it's amazing.
Using how quickly that's turned around.
These things that were significant headwinds become tailwind and so yeah, I think even if you even if volumes.
Don't necessarily increase, but we have a more steady stable environment with decreasing cost.
Could you know significant help our margin profile.
Thanks Pat.
Yep.
Our next question will come from Rod Lache with Wolfe Research. Please go ahead.
Okay.
Good morning, everybody.
Just.
Following up on Joe's question on commodities and recoveries it sounds like most of the year over year headwind is now in the rearview mirror in Q1 and Q2 as things stand now.
Can you maybe just provide some color.
All right.
Great.
For steel and other commodities at current levels how would.
Things kind of flow through into next year.
Yeah, right, Yeah, just starting with sort of a calendar <unk> that the commodity impact about 95% of the year over year and taxes in the first half. So just 5% in the second half and in the fourth quarter it should be slightly positive.
Year over year now the benefit of the recent reduction in North America steel in particular in copper globally, there will be a lag effect that we won't see much.
Until next year in terms of the benefit from that but.
I think what what you could expect over over time is if you just look at the negative impact of those two commodities you know it was the steel impacts of 130 million nuts between 'twenty, one and 'twenty two so.
Yeah, that's split between Europe , and North America, and Europe's a little bit higher net impact than North America. So as North America comes down we would expect to see that that hit that we took over the last two years unwind a copper is a little less impactful you know, it's about a $30 million cumulative impact.
Two year. So if it comes back down to 2020 levels, we would see about a $30 million benefit over time.
You would also see some margin benefit as well as the reversal of the pass through of higher copper cost.
It goes back in the other direction. So you can see revenues come down without an operating income reduction for that piece as well.
Or are you still expecting that to flow through over the course of maybe two years.
Yeah, you know in terms of the the the total impact we haven't we haven't put a specific time frame I think we've talked about perhaps half of that unwinding over the next two years and the balance after that.
You know if commodities were to remain elevated that was sort of the basis of that comment if commodities come down then we could see more of that unwind sooner, but that's certainly a possibility I think there are portions of this that wont unwind.
The higher utility costs some of the higher component costs that are a result of inflationary increases in the supply base. I think are any of the you know some of the labor related and.
And inflationary increases maybe a little stickier so.
So I'm not expecting all of that to come back, but I still think it's reasonable to assume that half of the 340 million comes back over the next two years.
Okay, and then I'm looking at the.
First half second half bridge on slide 12.
And was curious about how you're thinking about net performance for the first half the second half.
Because it looks like the Incrementals are sort of in the high teens similar to what we would typically see in <unk>, but I didn't see anything explicitly.
Did here for performance and.
Maybe if you as you're answering that.
What are you hearing if anything regarding European production in the back half is obviously companies are kind of bracing for just some potential disruptions due to natural gas shortages.
Yeah, So what we've factored into the second half if we look at both businesses sequentially. The biggest driver that's going to be volume and it's more so in E systems and seating. So it's 50 basis points or so and see it in at 150 basis points of margin accretion in any systems in the second half of the year and that's because.
As you know they were the systems business was disproportionately impacted by some of the downtime in Europe and in China in.
In the first half of the year so.
Any systems, Europe , and China represent almost 60% of that business and see it and it's just a little bit more than 40%. So that's part of the volume differential also the back the backlog is more backend loaded in E systems than in seating that was a little bit more ratable across the quarters and see it in and so that's.
Embedded in that 150 basis points as well as the roll on of the backlog in E systems commodities will be slightly positive on the performance side.
We are expecting a modest improvement but for.
But offset by slightly higher engineering costs, and so that's sort of a wash as we look at first half to second half and then FX has more of a negative impact on E systems and seating again, because more of their business to more of their profitability is.
In Europe , and China, combined so they're more exposed to the strengthening U S dollar.
Okay. Thanks for that and just lastly that comment you made on slide 16 about SG&A.
SG&A and overhead synergies between the segments is there.
Additional cost savings that youre alluding to.
Prospectively.
Yeah. So we took an action in the second quarter quarter that.
Well well yields.
Some improvement in SG&A, both in the second half of this year and then on a full year basis next year.
Roughly yeah.
$40 million $35 million to $40 million in annual savings with half of that hitting this year and then the balance next year. In addition to that we do see.
Other opportunities that we're exploring that will likely happen at the tail end of this year or beginning of next year and ran I think I'm, sorry, I think rod.
Fortunate and you're going to take advantage of the position. We're in we do have some opportunities to scale across both divisions.
Redefined in some respects purchasing engineering.
<unk>.
Even if it finance and HR across the two different groups and so we took the what we'll call phase one steps and then now we're looking at additional actions.
Administratively I think more importantly, what we've discovered and I think we talked about in last call was is the ability because of our vertical integration in the nature of our business not just necessarily being wiring or just get the ability to win in certain regions.
Consolidate manufacturing our.
Products and so we can and we are looking now Mexico, Morocco, and how we can consolidate if there is a.
A continuation or a drop in volume how we can consolidate quickly within our facilities to gain efficiencies and in even if volumes stay the relative level at where they're at today or even go slightly up we're still in a position to take those those steps and so I think administratively yes, there's some actions that we can still take two.
Two.
Drive cost, but I think more importantly, what we're discovering is there's some flexibility in our manufacturing plants.
As we look at particular regions to consolidate different products within <unk>.
<unk> within a region and we've done a little bit of that work already kind of proved it out in South America and now when we're looking at different areas, particularly Mexico, Morocco to do some further consolidation and still have the capacity if volumes were to snap back in the luxury to supply our customers parts, but just drive more.
Fishing season within our manufacturing plants.
Thank you.
Thanks Rod.
Our next question will come from it came to Kelly with Citi. Please go ahead.
Great. Thanks, good morning, everyone.
Good morning good.
If you go back to slide 12, and thanks for the second half upgrades.
Thinking about <unk> growth over market in the second half of the year and it looks like the the volume mixed backlog.
It's about 5% growth relative to each one with which he was sort of similar to what you're looking for for L. D. P. Second half of the year, maybe just talk about the puts and takes off of.
Platform makes it I think about G O M and H two.
Yeah, So our growth over market performance in the first half was a little bit better than we expected and particularly in seating.
We ended up at five 5% in the first half and we do see that moderating a little bit in the second half.
Continued to benefit from our strong portfolio with GM on the full size trucks and and then also a luxury vehicles generally and I think that's that's been a factor plus the backlog.
Any systems, we had three points of growth over market in the first half we expect that to be about two points in the second half so about two and a half of a full year basis.
Two things going on there one we see the benefit of a stronger backlog in the second half of the year in E systems, where roughly two thirds of the backlogs in the second half, but then that's partially offset by some changeover activity on some key platforms work, that's fords doing what the expedition navigator and Super duty that will.
<unk> volume in the fourth quarter on those platforms.
So that's kind of how we see growth growth over market shaping up so it's about 4% total company full year is what we would expect 3.5% to 4%.
Great. That's very helpful and just as a quick follow up and apologies if I missed it earlier.
Any additional color on just the cadence of the second half Q3, Q4, So Q4 should have some benefits in commodities and to be in.
Terms of the kind of path.
Cadence between the two quarters.
Yeah, you know as we've seen in the first half. This year you know, we performed a little bit better in terms of the timing of our commercial settlements that helped the first half and so that took a little bit of that.
Proven that we're expecting in the second half and pulled it ahead. So that's difficult to say exactly how it will play out again in Q3 and Q4, but what I can say is that margins will be better if conditions and volumes hold up in the third quarter versus the second quarter, and then they'll be better again in the fourth versus the third.
In terms of order of magnitude, it's a bit difficult to call right now, but we would expect you know 100 basis points or more of margin improvement.
Any system sequentially and a little less than that probably have that in seating you know from Q2 to Q3 as we sit here today.
Perfect. That's very helpful. Thank you.
Yeah.
Our next question will come from Colin Langan with Wells Fargo. Please go ahead.
Taking my question.
And if I missed that.
Actually it's slide 12.
Sales is going up 240 million operating income on 21st half to second half or something of that range.
If you adjust for commodities, maybe that's a 35 million.
No recovery.
Yeah, Hi.
5% contribution margin.
Adjusting commodity.
What would drive that margin or what am I kind of missing in that math.
Well so sequentially you know theres pretty good conversion of volume on the additional sales so what's going in the other directions foreign exchange, taking revenue down sequentially in the the margin impact of that but I think the conversion rates are generally in line with our typical.
<unk> variable margin on the volume component of that and our Oxford segment operating margins and the backlog component of that backlog is a meaningful portion of that $480 million revenue growth first half first half the second half and that first bar on the chart.
Okay got it.
And I think in mid June .
051 in sales, which obviously had a bit lower on operating income I thought was one seven.
It actually seemed like they were more back and take that and then there was good news.
Well, what has driven us to put our performance in it.
Or just or some of the customer recoveries coming through at the end of the quarter.
Yes, the second part certainly turned out better than we had anticipated I think when we provide.
Provided an update at a conference in June we talked about.
$170 million or so of operating income, maybe a little bit lower than that.
And we came in at 187, so almost $20 million higher than we were seeing at that point in time and that really was a result of the timing of some of the commercial negotiations, particularly on the seating side. So things that we had anticipated happening in the third quarter got pulled ahead to the second quarter and mix worked.
In our favor a bit.
As well.
Seating again relative to what we were seeing at the time.
Yeah. Those are the two factors that led to the outperformance from what we were previously expecting.
Yeah.
All right and just lastly, M&A is a bit of a drag on them.
Too big of a surprise, but.
Theres another thermal deal coming is that also kind of be a negative contributor and how long would it take to get these businesses to your your normal level of profitability.
Yeah. So it will be a similar drag you know some of the impact of <unk>. This year is the integration costs. So we have about $7 million of costs that we're investing to integrate those facilities and their operations more broadly into into Lear and so that.
Reverses itself next year and as we look out into 2024 at that point, it's in line or accretive to margins.
With Kongsberg in with IGD.
I think it would be a similar.
Time lag so about two years post acquisition, we would see that as being accretive.
The operating margins and and one of the benefits of acquiring bolt there will be some synergies there.
The businesses and and with our existing operations as well so 'twenty 'twenty four 2025, the combined business will be accretive to seat margins based on our plan and Colin just a I think it's important to mention this.
The strategic positioning of those two acquisitions and obviously, we can and will continue with the great products that they manufacture today individually, but what's been extremely exciting is the customer's response to those acquisitions.
The combination we've talked about it was the thermal comfort is the ability to really create a value proposition for our customers with the combination.
Lumbar.
Active cooling and heat.
And it's a unique position that we hold with the integration of these components into other seat components, such as the phone pad trim in the frame.
And we were recently awarded two seat programs big seat programs and one of the things that we were able to differentiate ourselves in this program and allow for us.
To be more efficient from a cost weight part number perspective was the ultimate design, which is the combination of these components into a system or a module.
And we are getting overwhelmingly positive feedback from our customers and so you know individually those two businesses and the synergies that those coming together will help drive our margins what's more important about those acquisitions was the strategic position, we are putting the company in and I'll tell you.
We've been into customers shrank and I had been flying out meeting with all the customers at the highest levels. It is overwhelmingly positive and it's differentiating US right now and for the first time, we've seen our ability now to source design and engineer those components. The two major programs and I think there's a third one on the way hopefully soon.
We have full control.
That's a significant shift in our customer's behavior as far as product sourcing and we can do that because we are lowering it is more efficient cost it's more efficient from time to sensation, we've been developing this system for.
Well over eight years and what the credibility of having these two powerful companies from a reputation perspective coming in along with the engineering work that we did to integrate these into C components is differentiating our business and so our focus is 28% market share and I'll tell you I'm very positive we keep this type of.
Differentiation is going to make the difference with us gaining that market share and its been overwhelming so far so I couldnt be more happy on where we're at we've got some work to do in the short term to get these things accretive from a margin perspective, but long term, we're getting some real positive feedback.
Oh, great. Thanks for taking my question.
Thanks.
Our next question will come from John Murphy with Bank of America. Please go ahead.
Good morning, guys.
Surprisingly I have a follow up on slide 15, and slide 12. So I appreciate all the information and the answers so far but I was just curious if you can remind us where your target margins are for seating and E systems and as we look at this I mean, I think what everybody is trying to get at is it seems like we're at the nadir.
LOE in.
In margins and as volume slowly recover in raws ease we're already seeing some.
Small explosion you in your margins.
First half to second half, but over the coming sort of 12 to 24 months as things normalize to some extent you might get a faster return to your target and normal. So I'm. Just curious if you can remind us where those margins are and if you really do you believe anywhere at this low in margins and crawling out of the out of the gutter and ultimately to these targets.
Pretty quickly.
Yeah, I do see us sort of at trough margins, particularly on the system side seating has rebounded pretty quickly.
Already in terms of the target margins for each of our segments. We've talked about seven five to eight 5% in CD and so I think we we are on a nice trajectory to get back into that range.
Sooner rather than later, but I think longer term the points Ray just made on thermal comfort will allow us to perhaps breached the high end of that range, but above eight 5% and that's certainly our objective.
With these systems, we've talked about structurally that that's a 10% business in the right volume and commodity environment.
We're a ways off from that at this point, but as we look at volumes recovering commodity costs moderating a stability in the production schedule pass of the things that we're doing to control.
Our cost and drive growth with connection systems.
We do see margins recovering over the next two years in E systems sort of in that 7% to 8% range.
With some reasonable level of volume at that point in time now that's a little bit lower than what we had expected in 'twenty four but a lot has changed over the last two years certainly.
And I think it should be a nice a.
A nice study.
Linear.
Increase in that that margin from where it's at now through the second half improvement into next year and then to 24.
That's very helpful and maybe then just a second question around volatility and schedules I mean, you've kind of mentioned it but how damaging has that been to margins here in the short run and even without a significant recovery in volume. If you just got some better stability and releases how helpful would that be to margins alone before me.
Even start talking about volume recovery.
Yes, it's almost 90 million of Unrecovered costs that we have embedded in our outlook for this year.
For those stop start another premium costs.
We have been in negotiations with our customers. We have recovered a lot. That's the net effect of of the negotiations and the whats taken place in the production environment. So certainly.
We see some of that continuing in the second half of this year and even into the into 'twenty three but if you look out to 'twenty four I would expect a $90 million improvement in the business.
As a result of that.
Overhang going away so.
Is it simply just from a normalization of schedules and and things actually coming through as their stated to you you think you'd get a $90 million bounce back in NOI and operating income Yep, Yep, I guess running our plant.
Awesome very helpful guys. Thank you so much.
Thanks Yep. Thank you.
Our next question will come from Emmanuel Rosner with Deutsche Bank. Please go ahead.
Well, thank you very much good morning, everybody.
Emmanuel.
So actually I wanted to follow up on one of your last points here around the target margins for E systems, a 73% of the next couple of years you said.
A lot of.
A lot has changed in the last couple of years, which is obviously very true can.
Can you, maybe just be a little bit more specific in terms of.
What has changed in terms of the systems outlook is it the microenvironment and industry disruptions is it the product mix the investments needed in E systems, I guess, how much is specific to leer versus sort of like.
This sort of environment that you're operating in.
Yeah, I would say that the changes that I was describing are entirely industry related I think if you look at IHS projections for volumes in 'twenty, four and $88 7 million units. If you go back a couple of years, certainly were expecting a higher level of global industry volume.
Then that so that's that's the first factor the second factor is higher.
Higher commodity costs and so.
And what I described.
Assume that a portion of that.
Unwind itself over the next two years and a portion remains.
And so if volumes were to get back to where we had anticipated.
For 24, when we looked at this 18 months ago, and if commodity costs were to get back to where they were 18 months ago, you know those two things.
Can you help me bridge from the 8% to 9% range and then the balance is work we still have to do we've seen some nice growth in our connection systems business.
If I look at.
23, and 'twenty four we're expecting that business to grow by 50% over the next two years from roughly $500 million this year to $750 million and 24.
On its way to our $1 billion target that we talked about we had talked about $900 million to $1 billion in 'twenty five we now see a 1 billion is a very reasonable number in 'twenty six.
Underpinned by this.
The interconnect Board award that we had.
Announced on our prior earnings call, that's certainly going to be.
Factor that allows us to continue increasing margins in scaling of our electronics business as we've talked about in the past.
As a further tailwind to margins expanding in that segment and then some of the things that we're doing with restructuring and combining certain administrative functions and manufacturing operations across the businesses will certainly be accretive margins notch.
Just any systems, but in both segments.
And I think all of those things taken collectively with.
More reasonable volume environment in commodity environment sort of gets us back to that 9% to 10% that we had talked about as a longer term target for the segment.
That's very helpful. Just a quick follow up on this.
In terms of the engineering expense for E systems as it is it generally stabilized at where you wanted it to be as a percentage of revenue do you think that.
This could still be sort of a headwind to margin as you continue investing there.
I think that it has stabilized and sort of peaked as a percentage of sales.
We're relatively flat now this year.
With last year on engineering in that segment, although the second half is higher than the first half.
And so there may be a little bit of run rate increase in that on that line item heading into next year, but I'd say, we're generally seeing what we had expected 18 months ago in terms of engineering spend.
In that segment.
Okay, Great and then one quick follow up on the first half to second half walk again.
Can you help me with the commodities.
In terms of.
Or is it largely I mean, I guess, it's maybe a little bit smaller.
On a sequential basis than I would have expected in the context of not just some of the spot prices coming down but also may see some recoveries coming in with a lag and it seems like that.
It may be sort of like talk a little bit about whats behind sort of like this 75 basis points sequential improvement.
I know you mentioned some of the recoveries play that maybe faster in the second quarter or is that is that a bit.
Big driver of that.
Yes, that's the primary driver we don't see much benefit.
From the change in the spot price we blocked in.
Most of the steel for this year, we do have a little bit of upside in North America in the fourth quarter.
Koppers basically hedged through the end of the year, we theres a small amount that's that's still open.
But that benefit the immediate benefit is sort of offset by the inventory revaluation.
And so that's why you'll see more of the benefits next year early next year from that.
Okay.
Thank you so much.
Youre welcome.
Our next question will come from David Kelley with Jefferies. Please go ahead.
Hey, good morning, Ray and Jason Thanks for taking my question I was hoping to follow up on the growth over market discussion and specifically what you're seeing in China can you walk us through if you saw any signs of outgrowth normalization as those lockdowns were lifted and production started to ramp.
In June and then maybe if you could give us a sense of how youre thinking about some of the outgrowth opportunities in China into the back half of the year that'd be great.
Yeah, So China growth for us will be better in the second half of the year.
If you look at the first half.
Production.
The Chinese domestic Oems certainly held up better than the non Chinese a global OEM. So we saw for example in Q2, the domestics were up 7% and the global Oems were down 12% and that really weighed on our growth over market.
In China, if you look at the second half of the year that normalizes a bit in the the growth rates between the two sets of Oems are more similar in addition to that we have some nice backlog rolling on in China, and any systems, we have the Volvo XC 40, recharge electric version of the <unk> 40.
With a lot of content on that battery disconnect units better management system onboard Chargers and wire.
And a number of other volatile programs, where the power electronics are ramping up and so that sort of drives a lot of the E systems backlog and growth in the tail end of the year and so that factor as well, but we do see generally speaking the global Oems, who have sort of resume normal production rates.
So customers for us like Mercedes.
M W. Audi.
G.
Had we see improvements in the operating environment in the second half relative to the first half and.
Certainly.
Shortage chip shortage issues and stop start issues are a risk in that market as they are elsewhere.
But we do see more of a normalization of the customer mix in the second half.
Yeah.
Okay got it. Thank you and then maybe a quick question on capital allocation.
The share repurchase.
The cadence was stepped up in the quarter. It sounds like that's continued into into Q3 and might be an increased focus point as you Digest. Some recent acquisition. So can you just talk about the buyback opportunity in the current macro and if you plan to be more opportunistic there.
Yes, we do intend to be more opportunistic and certainly we will be discussing that with the board at our next board meeting again and they they were supportive of the action we took in the second quarter and here at the start of the third quarter. So that's certainly an increased focus for us as we look out over the next 12 months to 18 months.
We don't see a need for any significant acquisitions in the near term and I think that provides us an opportunity to return more cash to shareholders as we see improvements in free cash flow in the back half of the year and into next year.
Certainly free cash flow has been under pressure because of the stop start nature of production and the additional inventory that were holding as a result of that we do see some improvements in that in the second half and as we continue to improve there we will be opportunistic with share repurchases they'll be very clear I mean, our focus is obviously driving our plan.
We're focused on that free cash flow getting our inventory levels back to more normal levels and then returning.
Our cash back to our shareholders and I don't see any meaningful or significant acquisition on the horizon and so we're gonna buckled down and make sure we're driving our business for cash I mean, we've talked about it all the time and focus on our inventory levels and what we can do to improve our free cash flow number and get back to a more normal level of <unk>.
<unk> of our Hawaii, but more importantly make sure we're investing in the right part of our business which is.
At this time to turn it back to shareholders.
Okay got it thanks guys.
Thank you.
Yes.
Our final question will come from James Picariello with PND pair of boss. Please go ahead.
Yeah.
Hey, good morning, guys.
Uh huh.
Revisiting the second half.
Would you expect a pretty linear.
Ramp from a topline perspective, <unk> just based on the timing of your backlog and the commodity recovery.
Recovery pass through and then also from a margin perspective, I just want to clarify.
For the third quarter E systems up about 100 basis points through Q versus <unk>.
And seating about half that because I'm just on the E systems point I think it was mentioned previously that you know it was.
Maybe pointing towards 4% for the full year from a margin perspective free system does that is that still the case.
Okay.
Starting with the question on revenues, so we see revenues up modestly from the second quarter to the third quarter.
And so you have the stronger dollar weighing on the results you have a little bit of volume, but you also have seen.
The seasonal shutdowns, particularly in Europe that kind of weighs on the revenue in the third quarter.
So we see a steeper increase in revenue in the fourth quarter as you get past that normal seasonality.
And our strongest backlog quarter as the fourth quarter.
As well overall.
In terms of operating margins, yeah, you've got it basically right.
The third quarter, we're not providing precise guidance at this point just because of the lumpiness of some of the commercial negotiations between the third and the fourth quarter. We do see both segments are better in E systems in particular up about 100 basis points Cds, it's probably anywhere from 25 to 75 basis point.
<unk>.
Improved from the second or third quarter, assuming the U.
Cadence of those commercial settlements happened as expected.
Okay, and then just any systems for the for the full year I think the second half was talked about in that 4% to 5% range for the second half it seems as though maybe that's coming in.
A little bit lower or is that a fair assessment.
And we have these systems at about 4% for the second half and are approaching.
Approaching five in the fourth quarter sort of how we see it and and so for the full year of the math works out to about three 3%.
Understood. That's helpful. And then just on the $40 million in annualized SG&A savings.
Any breakout in terms of what that would look like for the segments is it more more focused on E systems relative relative to the size of the business or not necessarily.
No I'd say, it's fairly ratable.
Including in our headquarter so not just in seating and E systems, but also some of that shows itself in the headquarters number as well.
Okay. Thanks, guys.
Youre welcome.
Okay.
Thank you.
Okay.
Lear team I just want to thank you for a great quarter, obviously exceeded our expectations you guys did a great job appreciate all the hard work, we've got more work to do for the remainder of the year, but the one thing to note and I say it all the time, we couldn't I couldn't be more proud of the team being recognized for all of their great accomplishments from our customers not just with the business backlog, but also.
The recognition for quality and other recognitions within our plants just shows the great work that Youre doing every day I appreciate all the hard work and thank you for all your results.
Yeah.
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