Q3 2022 Lear Corp Earnings Call
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Okay.
Good morning, everyone and welcome to the Lear Corporation third quarter 2022 earnings Conference call.
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After todays presentation, there will be an opportunity to ask questions.
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At this time I would like to turn the conference call over to Ed Lowe and Bell Vice President of Investor Relations. Sir. Please go ahead.
Thanks, Jamie Good morning, everyone and thank you for joining us for Lear's third quarter 2022 earnings call.
Presenting today are Ray Scott, Mair, President and CEO , and Jason <unk>, Senior Vice President and CFO .
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 at IR Dot Dot com.
Before we begin I'd like to take this opportunity to remind you that as we conduct the call we will be making forward looking statements to assist you in understanding lear's expectations for the future.
Detailed in our Safe Harbor statement on slide two our actual results could differ materially from these forward looking statements due to many factors discussed in our latest 10-Q and other periodic reports.
I also want to remind you that during today's presentation, we will refer to non-GAAP financial metrics.
You are directed to the slides in the appendix of our presentation for a reconciliation of non-GAAP items to the most directly comparable GAAP measures.
The agenda for today's call is on slide three first Ray will review highlights from the quarter and provide a bit of conductor.
Jason will then review our third quarter financial results and our full year 2022 outlook finally, ray will offer some concluding remarks.
Following the formal presentation, we'll be happy to take your questions now I would like to invite rates began.
Thanks, Ed now please turn to slide five.
Where I will provide a brief overview of our third quarter financials, and our financial results improved significantly in the third quarter.
Reflecting higher production volumes.
Our strong new business backlog.
Sales increased 23%.
To $5 2 billion.
And core operating earnings more than doubled to $235 million.
Operating margins improved in both seating and E systems to the best levels in over a year.
With further improvements expected in the fourth quarter.
Operating cash flow improved to $252 million in the third quarter, reflecting higher earnings.
And improved working capital management.
Okay.
Yeah.
Slide six outlines recent key business highlights.
Their sales outperformed the industry again in the third quarter and year to date, we have grown faster than the market by four percentage points, reflecting outperformance in both business segments.
These systems, we recently announced the most significant new electrification award to date.
We will supply general motors with their proprietary battery disconnect units for all battery electric truck derivatives and Gms, all <unk> battery platform through 2030.
We also continued to receive recognition across our business segments from leader leading industry publications.
In the latest JD power C quality study they have received more than twice as many awards as any other seed supplier and one third of the total awards granted.
This is the second year in a row, we have far outpaced our competitors and another indication of our leadership position in operational excellence and quality.
We won an automotive news pace pilot award for configure plus with Zonal safety technology.
This smart wireless technology, which is the first ever passive safety system designed for removal of seating automatically activate safety features in the second and third row.
Vehicle based on detected location of the occupants.
This solution further strengthens our pace award, winning configure plus product offerings.
Which is in production today with Volkswagen.
Configure plus brings unparalleled safety ease of use and functionality to the vehicle seating.
Utilizing long rail is embedded in the floor seats can be placed in any location with all mechanical and electrical connections secured automatically.
During the quarter. We also joined climate groups or are you 100 initiative by.
By integrating our energy efficient playbook and renewable energy strategy across the company, we plan to source, 100% renewable energy for electric powered consumption at our global sites by 2030.
Okay.
Slide seven provides an update on key initiatives in seating.
During the third quarter, we launched production at our new seating Assembly plant in Detroit that is supplying seats for the GMC Hummer EV pickup truck being produced at Gms factories zero.
This plan also produce seats for several other GM electric vehicle programs that will be produced at factories zero.
The new facility was designed to be aligned with our industry four <unk> and ESG strategies will allow for scalable manufacturing and flexibility in production.
ESG is one on <unk>, four strategic pillars, and an area of emphasis for our customers.
We're looking to for the supply base to four innovation innovative solutions you've.
In seating, we have made significant progress developing sustainable solutions to differentiate lear as a market leader.
In recent months, we have one development contracts with two global automotive leaders for flex there.
There is a 100% recyclable non film alternative that will reduce <unk> emissions by 50%.
<unk> by 20% and improved breathability, which will improve comfort performance.
Our renew knit sustainable swayed alternative material is a first to market automotive textile that is fully recyclable and it's end of life composed of 100% recycled plastic bottles renew knit fibers are spun from polyester yarn and finished with a phone free recycled.
Backing this product will launch in seating and door panel applications, where the premium automaker in 2024.
Thermal comfort system.
Systems is lear's newest division dedicated to developing full system seeding comfort with complete modularity.
By integrating our existing seating capabilities with thermal comfort systems.
We'll extend our competitive advantage and leader leadership position in seating.
Our system reduces complexity and cost while offering superior performance efficiency and comfort.
Specifically, our newly designed seating system can reduce sub components by 50% and increased airflow by 40% directly to the occupant, which creates a better time to sensation.
Our design focus is on heating and cooling the occupant rather than the entire cabin, which can help improve energy efficiency, resulting in improved battery range.
With our thermal comfort system expertise <unk> is the only CD manufacturer poised to capitalize on the market trends in Evs, ridesharing and second and third ROE comfort, while also achieving greater design cost production and energy efficiency.
Based on the benefits of our salute that our solution provides several customers have recently awarded just in time to time contracts to Lear.
It include design and sourcing responsibility for the thermal comfort systems.
We expect this trend to continue and will provide opportunities to increase our market share in both just in time Assembly and thermal comfort solutions and improved seatings margins.
Turning to E systems on slide eight I will highlight two products, we developed for general motors that are driving growth in electrification.
Battery disconnect units are the primary interface between the electric vehicles battery pack and the electrical system.
Bayer has produced bdus for multiple customers, but the pace award winning Btu, we designed for the GMC Hummer pickup enables high performance and Leverages, our energy efficient design to improve range and produce faster charging.
They are integrated to battery disconnect units into one system.
42, parallel 400 volt systems, enabling safe and rapid charging.
Innovation features flat flexible wires that quickly dissipate heat for improved thermal management and reduced component weight.
We also are manufacturing key components in house, such as bus bars and engineered components.
<unk> achieved a 20% weight reduction of 32% size reduction and 135% improvement in power transfer as compared to traditional competitor offerings.
GM recently awarded Alere the Btu.
All full size Suvs and trucks.
Built on its Altium electric vehicle platform through 2030.
<unk> decision to source the Btu on a long term basis allows <unk> to invest in product and process innovations, which will drive improvements in cost and quality throughout the program life.
We are investing in new debt, we are investing in a new dedicated facility in Michigan to produce the beta use and other electrification components. This site is expected to generate $500 million in annual electrification sales when it reaches full production.
The second product I want to highlight our intercell connect boards, which are the electrical and mechanical connection system that brings individual batteries together into an integrated battery module to enable high voltage power for the vehicle.
Multiple modules are combined to support various sizes, the Alton opium battery packs and depending on the individual vehicle platform battery size requirements. This can require up to 24 icb's per vehicle.
Our IC BS are produced through our fully automated assembly process, which with approximately 60% of the components being manufactured by Alere.
This level of vertical integration of highly engineered components, such as molded stamped insulated and conducting technologies, including bus bars positioned us to win this award.
The initial award is expected to generate over $100 million in annual sale.
Sales with production beginning in late 2023.
Our technology is adaptable to technology roadmaps across evolving customers' needs and we are pursuing additional business opportunities with a broad range of customers for this newly developed ICB product line.
Now I'd like to turn the call over to Jason to review the third quarter financial results in more detail.
Thank you Rex.
Slide 10 shows vehicle production in key exchange rates for the third quarter.
Coal production was up 29% compared to Q3, 2021 and up approximately 25% on alere sales weighted basis.
Volumes were higher in each of our key markets with North America up 24% Europe up 20% in China up 35%.
During the quarter U S dollar strengthened significantly against the euro and the RMB impacting our financial results primarily on a translation basis.
Slide 11 highlights lear's growth over market.
For the third quarter total company growth over market was one percentage point, driven primarily by new business in both segments.
These systems grew two points above market, while seeding grew just slightly above the market for the quarter.
Through the first three quarters Soliris grown four points faster than the market, what's seeding growing four points and the systems growing three points over market.
Look at the last three years, both business segments have grown at an average rate of six points above the market.
The six points of growth over market and seeding has been achieved through market share gains and new program awards reflected in our backlog.
As well as favorable platform mix.
We estimate that our backlog in 2020 through 2022 represents approximately four points of seatings growth over market and favorable platform mix represents the balance.
We anticipate continued market share gains and strong backlog over the next two years, but would not anticipate the favorable mix to continue.
Turning to slide 12, I'll highlight our financial results for the third quarter of 2022.
Our sales increased 23% year over year to $5 2 billion.
Excluding the impact of foreign exchange commodities and acquisitions sales were up by 26%, reflecting primarily higher production on Lear platforms, and the addition of new business.
Core operating earnings were $235 million compared to $98 million last year.
The increase in earnings resulted from the impact of higher production on Lear platforms, and the addition of new business, partially offset by the impact from foreign exchange.
Adjusted earnings per share improved significantly to $2 33, as compared to <unk> 53, a year ago.
Operating cash flow generated in the quarter was $252 million compared to a use of cash of $4 million in 2021.
The increase in operating cash flow was due to higher earnings and an improvement in working capital relative to 2021.
We improved working capital was driven primarily by our aggressive management of inventory levels and a difficult production environment.
Yeah.
Slide 13 explains the variance in sales and adjusted operating margins in the seating segment.
Sales for the third quarter were $3 9 billion and.
An increase of $722 million or 23% from 2021, driven primarily by an increase in volumes on their platform and our strong backlog.
Excluding the impact of commodities foreign exchange and acquisition sales were up 26%.
Core operating earnings were $255 million up $111 million from 2021 with adjusted operating margins of six 6%.
The improvement in margins reflected higher volumes on Lear platforms are margin accretive backlog and an improvement in commodity costs, partially offset by negative net performance and the impact from foreign exchange and acquisitions.
That performance was dilutive to margins largely due to a year over year increase in engineering spending as well as higher launch costs for our new program launches.
Slide 14 explains the variance in sales and adjusted operating margins in E systems segment.
Sales for the third quarter for $1 4 billion.
An increase of 23% from 2021 <unk>.
Excluding the impact of foreign exchange and commodity sales were up 28% driven primarily by higher volumes on key platforms and our strong backlog, partially offset by the impact of foreign exchange.
Core operating earnings were $53 million or three 9% of sales compared to $23 million and two 1% of sales in 2021.
The improvement in margins reflected primarily higher volumes on litter platforms at a margin accretive backlog, partially offset by higher commodity costs and the impact from the strengthening U S. Dollar.
The commodity cost impact was driven by a combination of the reevaluation of our copper inventory as well as increased component costs, partially offset by negotiated pass through agreements with our customers.
The positive that performance was driven primarily by an improvement in plant productivity and lower premium costs, which resulted from a modest improvement in the stability of customer production schedules.
Now shifting to our 2022 outlook.
Slide 15 provides global vehicle production volumes and currency assumptions that form the basis of our full year outlook at.
At the midpoint of our guidance range, we assume that global industry production will be 6% higher than in 2021, an increase from our prior guidance.
We have reduced our outlook for North America, and Europe , while increasing the outlook in China.
The high end of our outlook remains consistent with Ihs's forecast for industry production of up 7% compared to 2021.
Our production outlook on Alere sales weighted basis is an increase of 5% year over year in line with our August outlook.
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 five per euro, which reflects our fourth quarter exchange rate assumption of <unk> 99 per euro.
Slide 16 provides more detail on our current outlook.
We are reiterating our guidance for all key metrics.
While we did see a modest improvement in the stability of customer production in the third quarter industry conditions remained challenging including the continuation of short notice downtime announcements from customers in all regions.
Slide 17 highlights our strong balance sheet and liquidity profile, which is a competitive advantage for us and the current rising interest rate environment.
We do not have any near term outstanding debt maturities. Our earliest debt maturity is in 2027 and overall our debt structure has a weighted average life of almost 15 years.
Our cost of debt is low averaging less than 4%. In addition, we have $2 8 billion of available liquidity.
Our focus is on growing and strengthening our core product lines to improve operating margins and cash flow generation.
As we have previously stated we are targeting to get back to an 80% cash conversion ratio over the next two years driven by improved operating performance synergies across our two businesses.
Savings from our restructuring actions and optimization of our manufacturing footprint.
We executed several tuck in acquisitions to bolster the thermal comfort capabilities in seating and increase our product offerings in electrification and connection systems any systems.
While we continue to invest in industry for now we don't anticipate any additional acquisitions in the near term.
Yeah.
We are committed to return excess cash to our shareholders, having repurchased about $75 million worth of stock year to date, and we continue to repurchase shares in the fourth quarter.
Slide 18 illustrates the Lear specific drivers that will improve margins over the next couple of years.
Within the portfolio, we continue to focus on products and customers that will support strong long term financial returns.
We continue to win key new business and connection systems and electrification as highlighted by the expansion of our Btu awards as well as through innovative products like our <unk> connect board.
And seating development of our modular solution will allow us to reduce cost and mass while increasing profitability. Our thermal comfort business is on track to be accretive to see the margins in 2024.
We continue to wind down our underperforming product lines and replace that revenue with margin accretive backlog.
We've been focused on what we can control. We've recently completed a comprehensive review of our manufacturing operations and cost structure and have initiated a plan called therefore, which is focused on driving efficiencies in our plants and across our segments.
Our restructuring initiatives are designed to both improve efficiency and provide more long term flexibility in our manufacturing facilities.
We've taken what we've learned from combining portions of seating and E systems operations and one South American facility and are applying those learnings to our facilities in Mexico and Morocco.
To improve cash flow, we are focused on driving down inventory levels that remain elevated due to unstable production schedules and improving capacity utilization to reduce capital expenditures.
These lear specific drivers will improve margins and free cash flow generation.
Further improvements in industry volumes and moderation in commodity costs and labor inflation would lead to significant further margin and cash flow expansion.
Now I'll turn it back to Ray for some closing thoughts. Thanks, Jason Please turn to slide 20, which highlights how lear is strategically positioned to drive value for our shareholders.
Our product portfolio is powertrain agnostic well positioned for the shift to electrification, but also poised to continue to benefit from the production of Ice's vehicles.
Both of our business segments have outperformed industry growth rates by six percentage points over the past three years.
We are the leader in automotive seating with a growing 25% market share where is the largest provider of seats for luxury vehicles and we have consistently been recognized by J D power as the quality leader, our financial returns and seating lead the industry and we are investing in innovation.
To further separate layer is the leading seating supplier <unk>.
Electrification to other added content in the vehicle will drive growth in these systems.
And we expect margins to grow as we increase scale and vertical integration across our portfolio of products.
We are winning significant new business through innovative products such as the Btu.
And the ICB and are identifying additional opportunities across these product lines we.
Have a long history of driving operational excellence, and we will continue to improve manufacturing flexibility and efficiency across our operations.
We have a strong balance sheet with no near term debt maturities and have locked in a low cost debt structure that protects us from rising interest rates we.
We are targeting 80% cash conversion.
And have programs in place to return excess cash to shareholders through quarterly dividends and share repurchases.
As we work through the challenging industry conditions, we are proactively taking steps to position <unk> for future success.
Couldn't be more proud to lead the Lear team I want to thank all of our employees for their dedication and hard work.
And now we'd be happy to take your questions.
Ladies and gentlemen at this time, we will begin the question and answer session.
To ask a question you May press Star and then one on your Touchtone phones. If you are using a speaker phone. We do ask you. Please pickup your handset prior to pressing the key to ensure the best sound quality.
So it's all your questions you May press star in Q.
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Our first question today comes from Joseph Spak from RBC. Please go ahead with your question.
Thanks, so much everyone.
And Jason I guess I first wanted to dive into some of your comments on.
Mix.
And.
How do you expect that to play out right now enter into 'twenty three it sounded like you didn't really expect it some of the benefits you've seen to continue as obviously, you even a little bit of a headwind.
In the quarter. So maybe you could just talk a little bit more about that and maybe if you could quantify the impact you see for next year that'd be helpful.
So Joe it's probably a little bit early to provide pinpoint guidance for next year, but the point of that sharing that slide with investors. Today. It was really just to quantify how much of our growth over market in seating over the last three years has been a result of platform mix.
And customers prioritizing their most profitable platforms and how that's benefited our seat business and so.
What we've experienced over the last three years is roughly two points of that growth over market has been driven by mix. As this give you. An example, the other GM full size truck and SUV platform I think the volumes are higher in 2022 than they were in 2019.
In North American market that is down significantly over that time period and also some of the luxury platforms.
The audit Q five for example is up over that time period. So we would expect to see.
Continued strength from those platforms, they're still great platforms for our customers, but we wouldn't expect to see continued growth.
Consistent with say the North American market growth rates overall over the next couple of years not sure that that that benefit on wines, but it's unlikely to continue at that pace. That's really the primary point, we wanted to communicate.
Got it.
And then just the second question was I was wondering if you could update us on.
Some of your conversations with your customers on recoveries, maybe within each segment, how much within that volume mix other was.
Was some of the recoveries.
Can you sort of talk about whether that was in period or a retroactive and how we should think about that.
Dynamic going forward.
Yes, I think.
If you look at probably the best way to look at that is if youre thinking about how to model next year.
If you look at our second half outlook.
Most of the commodity recovery in the second half of the year does it relates to the second half, but in the seating business. In particular, there is about a 30 basis point margin benefit for commodity recovery that we received in the second half of it relates to the first half and so if you look at our guidance for the full year.
We have seen in the second half of the year at six 7%.
Just under 7% in the fourth quarter.
And.
If you strip out that 30 basis points, it's more like six 4% is sort of the right launching pad is still into next year any systems, it's fairly clean with some of that same timing benefit in commodity recovery being offset by the revaluation of our copper inventory and so we have.
Assumed.
Margins in the second half of the year in E systems.
Four 3% and would expect that to be sort of a good launching point for 2023 for modeling purposes, and then do the math on the company overall, it's roughly four 5%.
<unk> in the second half of the year.
And as what we've embedded in our guidance range.
If you want to elaborate on the recoveries, yes as far as the conversations with the customers and I think Joe you've heard me say this before last year. We obviously were in for different negotiations at different points and even earlier this year and I think the majority of that customers were.
In a mindset of these are more transitory and kind of wait and see on getting some of these things resolved where I believe right now the majority of our customers are more in line with.
A general policy and guidelines for how they'll resolve it and so I think thats, a very constructive and positive move in respect to this from our perspective now.
There are different areas that.
We are going to have to do.
Drive efficiencies labor being one that we have to work on labor and some of the labor cost, but some of the more fixed cost the inflationary cost of commodity costs.
Have been defined.
In either some type of share agreement or recovery agreement and so.
I see that as a very positive move.
Even though there is a lot of work still to be done at least generally the customers are more willing to sit down and negotiate a longer term basis and I also think that combined with that you can solve these issues.
It depends on how you respond to your customers.
With threats or other.
Ways of.
Getting the customer to pay shutdown shutdowns those type of things that we're seeing other our other suppliers.
Yes.
<unk> behaviors as far as how they're getting at the negotiations when we've taken an approach that lets balances, saying, let's work with them.
Collaborate list and we have a tremendous amount of CTO.
<unk> as we call it negotiation that we can work into cutting costs, along with solving some of the piece price issues and then obviously focused on growth. So we've taken a much more balanced approach, but the good news is the customers are much more willing to look at.
Guidelines or policies that they put in place for resolving these things and that's been a very positive move that I've seen from the customers over a prior to say the last six to eight months.
Okay, and sorry, just to be clear in those sales walks for the segments like in any systems.
<unk> covered in that commodity bucket is where those recoveries are that's not just straight the straight sort of movement in copper. It also compensates you for other inflationary costs you may have incurred.
Yeah, that's correct that's okay, they're both in that bucket and just just to also Joe real quick to clarify my comments regarding the second half operating margins. The company overall in our guidance would be at four 7% and it would be about a 20 basis point sort of out of period recovery for the company overall, so as you're looking at.
And for next year, the right launching point would be about four 5% for the company. Okay. Thank you very much.
And our next question comes from John Murphy from Bank of America. Please go ahead with your question.
Good morning, guys I just wanted to follow up on that question from Joe on the on the recoveries.
It sounds like the automakers have been a lot more.
Understanding about the volatility in your schedules and the problems that's created from you.
So just curious.
What kind of recovery, you're getting from that and then also when do you see these schedules stabilizing I don't think in the current releases you believe that there is going to be stabilization, maybe in the near term or maybe you do but.
And when you actually get stabilization as opposed to maybe even real recovery in absolute terms.
I think the recovery, we're actually seeing some recovery so I think as I mentioned earlier.
Each customer has different policies and each customers are treating these recoveries slightly different but they are rare.
Recognizing that there needs to be a mechanism for recovery and there might be timing elements that or ways that we resolve it because there is a direct correlation in some respects to allocation or supply issues based on.
How we're negotiating some of these settlements either with directed suppliers or with our own.
Source suppliers, so that recognition of resolving it.
I think a very positive change from our customers.
And respect.
Again I think.
We're still seeing allocation problems, we're still seeing.
Cut downs in respect of our customers.
Around the world in and we're seeing those things.
In different ways, and so I haven't seen a significant shift I wish I could sit here and say that I'm very optimistic about the second or third or fourth quarter next year. I think these type of allocation issues are going to be with us for the short to mid term and maybe all the way through next year.
So I don't see that changing significantly from where we're at today.
And maybe just to follow up on that though I mean, if were somewhat constrained environment and it seems like demand is reasonably okay at least relative to the supply.
A question around mix might.
It might be or sort of spec.
Speculation around mix might not be that bad just because we're so constrained I mean, how do you how.
Do you think about mix going negative do you think that like volumes need to be up 10, 20% for mix to go negative and we see something thats, 5% to 10% update.
It might still be pretty pretty darn strong for you just how do you think about that.
Go forward.
Yes, I think thats, the right way to look at it.
A more significant industry recovery say 810, 12% over a couple of years in North America, and Europe , Thats, where there could be a little bit of unwinding of the mix benefit that we enjoyed for the past three years, if it's two.
345% in that range, certainly going to be less pronounced than maybe not a factor at all.
Okay, and then just lastly on the Btu I mean, it sounds like that goes through 2030, youre kind of highlighting that as a longer term program, but as we start thinking about that as being sort of more of the powertrain as opposed to the electrical system or seeding those contracts have traditionally been sort of 7% to 15 years as opposed to sort of four to five right I mean, it spans two to three products.
Cycles vehicle product cycles as opposed to one product cycle. So do you believe as you get into the electrical system more around the powertrain, specifically that you might have a lot longer term contracts and the economics might be a lot better for you because like you said you can work on these efficiencies for a longer period of time.
Yes, I think Thats why we were very specific.
How we.
Describing that because it is a unique type of contracts, particularly around the difference between seating and E systems and that's exactly the intent is that we are working in a very collaborative way with general Motors, we're able to drive out efficiencies over a much more longer term and we understand exactly.
Our vision of where we're going to be.
After 2030 and so.
Those type of contracts are exactly the type of expectation I think we have internally because the investment that's required.
Type of capital outlay that we're putting in place.
And the longer term vision. So we can really scale that properly and get the benefits that our customers are looking for and then what we're looking for as far as a fair return. So we couldn't be more excited about that btu. It was.
Really.
A nice bit of work that the engineering team did here at Lear Corporation along with.
Exclusive collaboration with general Motors to really get at an efficient system.
That's exactly how we're looking at it.
Those capabilities that we have with the patents.
Technologies and the way, we're automating that facility can help us across multiple customers too.
Great. Thank you very much guys.
Thanks.
And our next question comes from Colin Langan from Wells Fargo. Please go ahead with your question.
Oh, great. Thanks for taking my questions.
Any update on the commodity headwind for the year I think last quarter, you said it was $155 million.
720 growth are those are still the same numbers any day.
Okay.
Yes, the $155 million that number is still where we're at what we have seen is a little bit of movement between seating and E systems. Both both in terms of the gross impact and.
The net impacts of seating is about $10 million better than.
We had thought when we sat here on our second quarter earnings call. In E systems is about 10 million worse on a net basis and Thats really a result of steel coming down a little bit and thats benefiting seating and then any systems.
The effect of the <unk>.
Well, one the copper revaluation of the inventory in the quarter, which also has an impact on the second half overall and then also some component cost increases that were working through negotiations with our suppliers on in the commercial recovery associated with those we have seen.
Some movement, there as well, but overall on a net basis, it's unchanged Colin.
And on a gross.
When I look at Q4.
On a gross basis, it's come up a little bit as well so.
That's still a decent number.
It may it may be as much as $10 million to $15 million higher than that.
Got it.
And you mentioned very clearly that the base exiting this year second half is four 5%.
How should we be thinking about the puts and takes in to next year from this space I mean production in the second half is actually a little bit higher than the full year.
Is there more help from production schedules stabilizing next year.
And is there going to be more help into next year.
From cost savings from some of the pricing or is that kind of already in your second half.
So just trying to think about how we should think about it Todd.
Yes, I want to be careful not to get into detail discussion on 23 provide.
Providing guidance, but I can share a couple of <unk>.
Comments that should be helpful. One was the run rate as we exit the year or the other I think if you look at our backlog, we announced the backlog for 'twenty three of $1 $4 50, and then another $600 million in 'twenty four.
So $2 billion of business rolling on.
Over the next two years.
We have seen a little bit of movement in the backlog number itself. This year lower volumes, maybe slower ramp ups on some of the new programs that have launched.
So we are above 100, I think $135 million lower this year on our backlog and we see a similar phenomenon next year, where that that backlog number is going to be a little bit lighter than what we had previously anticipated, but it is still be a strong number for the company overall and particularly over that two year period, I think $2 billion over 'twenty three 'twenty four assault.
Something that.
Investors can expect to see so I think that that will provide a benefit our margins on our backlog of rolling on at or above segment margin targets in both seating and E systems, we expect that to continue and that'll be a tailwind for next year.
If you look at commodities certainly we've seen kind of a mixed bag there steel in North America has come down by more than half from its peak. So that's that's a positive Europe steel has come down but not nearly as much. So a little more uncertainty around that copper has come down by $1 and so we shouldnt see a modest benefit from that next year.
But on the oil based commodities we're still.
<unk> seen a lot of pressure there, so foam chemicals, VR and things like that resins, which impacts both segments. I think we will continue to be a factor next year in <unk>.
While maybe not.
The headwind it certainly won't be a tailwind.
As we look out to next year, you will see some benefit from the restructuring program, we have in place, but as you.
Highlighted count and some of that is also reflected in our second half run rate.
So at this point, that's probably all were comfortable sharing for next year.
It's difficult to say, what's going to happen in the production environment, but as we highlighted in our prepared remarks, and ray talked about a moment ago, we're still seeing.
Customers shutdown on short notice, we're still seeing the effects of the chip shortage.
At our operations and then lastly, I guess, yeah foreign exchange the strong U S. Dollar is certainly going to weigh on revenues for next year and I'm not sure as I look at the analysts'.
Spectation for next year that thats been factored in yet.
Year over year that would likely be a bit of a headwind, particularly on the revenues not so much on margins.
Okay.
Got it alright, thanks for taking my questions.
Youre welcome.
Our next question comes from Emmanuel Rosner from Deutsche Bank. Please go ahead with your question.
Alright. Thank you very much maybe just picking up where you just lesser elsewhere on the Collins question.
One additional factor I think you had mentioned in the past.
Your goal to try to recover some of these on recovery.
<unk> from the last few years over a number of years going forwards.
Is that something that you would still view it as a tailwind as we move into 2023.
Yes, we've talked manual about half to two thirds of that unwinding through a combination of recoveries in moderation of the commodity cost themselves. So on the the recovery portion of that there should be a modest improvements still as previously communicated over the next two years and some of the.
Commodities, where theres a longer.
A negotiation period or lag on the recovery.
Some of our European steel programs.
<unk>.
Some of the other contracts that are a little longer lag period will take longer to negotiate so some of those should should benefit us in 'twenty three and 'twenty four.
Okay.
Sure.
And then just rewinding back on the quarter itself and I apologize if I missed it.
I joined a little bit late.
It seems like your earnings performance played out quite a bit better than what you maybe were previewing sometime in September .
Can you maybe go back over.
<unk> played out better.
And expected.
And to what extent is that sort of like.
Sustainable trend.
Yes, two things happen one production held up a little bit better than what we were anticipating so I think when we spoke at that conference we were mired in some.
Very recent announcements from customers that were weighing on production schedules and that it did improve a bit towards the very tail end of the quarter.
That's one the second is the timing of some of our commercial negotiations really both in seating and E systems.
Benefited the third quarter and so some of the things that we had anticipated happened in the fourth quarter ended up getting pulled into the third quarter.
And that improved the results in both segments and Thats also the reason why we're holding guidance for the full year as opposed to raising it.
That that stronger than expected third quarter.
Okay, that's very clear and then.
One just final point of clarification, so your slide about.
<unk> over market on slide 11, and then again I apologize if I missed that earlier on but.
So I guess, a little bit softer than what you generally targeting it seems like this was impacted by unfavorable platform mix.
This is not something that you would expect recurring on a go forward basis it seems like.
Are you still targeting $4, 6% growth above market looking at it.
Yes, I think if you look long term at both segments four points of growth over market in seating and six points of growth over market in the system.
It's still the right way to model it in the over the next two or three years, you may see some moderation in that seat growth rate because of the mixed benefit we've enjoyed.
Over the last three years and so I'm not sure if you.
Cost of the first.
One of your colleagues had.
On that topic.
Give you. The same example, again the GM full size truck production in 2019 compared to 2022, it's increased over that time period.
In the North American market is to clients and so that that's a mixed benefit.
To us and so what we've said is that roughly two points of the growth over market over the last three years and seeding has been attributable to two that mixed benefit I'm, not suggesting that will unwind necessarily but I wouldn't expect it to continue.
And if there is a very strong recovery in industry production.
In North America, and Europe over the next three years, then I think that there will be some unwinding of that there is a limit to how much some of those platforms could go up because customers have run them at near full production over the last two years, despite the shortage of components they prioritize those products.
And so that that's what we're trying to communicate Emmanuel.
Okay, great. Thank you very much.
Youre welcome.
And our next question comes from Mark Delaney from Goldman Sachs. Please go ahead with your question.
Yes. Good morning, Thanks, very much for taking the questions I think it was the first quarter when the company raised its 2025 electrification target to $1 3 billion and I think about 1 billion had been awarded at that point and as you think about some of the new bookings you have been able to announce including the btu and in particular, but some others as well I mean, it would seem like there is perhaps some upside potential to that $1 3 billion.
Target based on the awards strengths, so hoping you could give some more color on that.
Yes, Mark.
Exactly right so year to date in electrification, we have had more than $400 million.
New business Awards, that's annual revenue.
And we had targeted $500 million of the year. So we're a little bit ahead of.
That pace that we were looking for.
If you look at the 2025 targets that we raised from 1 billion to $1 three earlier in the year.
We see a very clear path to a $1 three and slightly beyond that at this point based on.
That general Motors battery disconnect unit awards, and the interconnect board and ourselves to that Port Award earlier in the year those two things taken together likely push us above the $1 3 billion in 2025.
That's helpful. And then you mentioned Alere forward strategy in your prepared comments I was hoping you can share some more color on what sort of financial implications there could be perhaps in terms of margin improvement as you fully execute on that program. Thank you.
Yeah, Mark we'll talk more fully about that on the fourth quarter earnings call. When we issue guidance for next year, but yes.
Some of the.
More encouraging aspects of the project from my standpoint.
What we're doing in Morocco in Mexico, where we've taken a fresh look at our capacity utilization at our manufacturing strategy. Both in terms of how we oversight those facilities in the region and whether there could be more shared overhead across segments, but also the capacity utilization effects of the lower <unk>.
Industry volumes over the last couple of years sort of wringing out some of that excess capacity in and using that as a lever to reduce.
New Capex to support programs that are launching over the next two to three years I can't tell you we're going to go through.
We have internal targets here that would.
Expressed externally at another time, but right.
Right now the discovery that we're going through obviously, we had a pilot program down in South America that worked extremely well and when you look at the opportunities that we've identified already we have teams in Morocco and teams and macro Mexico right now sharing best practices. So we can get at these immediately but the shared resources between E systems and seating is a.
Opportunity for us the working capital in the inventory and what we're going to do and share with transportation transportation loads. How were looking cross each one of the different divisions is we've been able to recognize opportunities there in our free cash flow.
The particular situation and capital and that's just not the capital we have on the ground today, where we're looking at reusing capital, but extending capital life and then also reusing.
Buildings and facilities that we have so we don't have to make the future investments as we're looking at.
<unk> potential.
Situations heading into next year. So we have a team on this a dedicated team of Alere teams are the best individuals in the company that are focused on this crossing diff, both the different divisions and we have internal targets that we're marching to and we're going to hit those numbers and we'll share more about our findings and what we are.
What we are targeting in the 2023 guidance.
Did you disclose that.
Thank you.
Our next question comes from David Kelley from Jefferies. Please go ahead with your question.
Hi team. This is Gavin Kennedy on for David Kelly.
Good luck to your electrification and connection systems traction to date.
Our connection systems, specifically is it still tracking towards $500 million in 2022, and $1 billion by 2025, and if so any incremental color on what youre bidding on and where you see the biggest opportunities would be great.
Yes. So the 2022 outlook is still right around $500 million. If you look out to 2025, I think we talked about $900 million to $1 billion, depending on how much inorganic growth.
We've had and so we don't have any inorganic opportunities on the near term radar. So if you exclude that I think.
Look at what's happening with foreign exchange rates and volume industry volume outlooks for that time period I think they are in Europe and North America. For example, 25% is something like 13 or 14% lower than what we saw at the beginning of the year that may weigh on the number a little bit, but I think in terms of the new business wins.
Organic growth that we had targeted we're right on track and.
And perhaps a little bit ahead of schedule with the Intercell can export award and the magnitude of that.
I think just to add to that as.
We laid out a very specific plan in 2019, a strategic plan and what we're going to do in these systems and we're marching right right along that path and I couldnt be more proud of what we've accomplished and despite some of the industry challenges maybe not reflected.
The margins at this time, but when you when you take a step back we've strengthen the organization we brought in very selective.
Individuals that are focused on key elements of our business, we talked about realigning the business around not just product.
ROIC, but region and customer and that's intact and in place did a very comprehensive product portfolio, where were trying to be everything to everybody and we've narrowed our scope and we've looked at where we have the right to win and we've defined it very clearly youll power distribution T's, and C's and very selective electronics in may and I couldnt be more excited about how we're way.
And each one of those different areas and what we talked about was how we can expand margins. It was really that grow fixed exit strategy or mentality and that's exactly what we're doing we're deemphasizing parts of our business and winding it.
We're fixing parts of our business that we have in place right now with our customers and then we're growing in the areas that we've talked we've touched on and the other element that we touched on was this customer diversification. It's amazing how quickly. We've moved went from one customer that represented anywhere from 30% to 35% of our overall <unk>.
Systems business at one point to a much more balanced customer portfolio.
In the future General motors could be our largest customer.
Represented where we really didn't have a lot of business. So we've done a nice job of expanding our customer portfolio.
The thing that we talked about was this power distribution versus selected by electronics vertical integration our integration in some of these components were talking about with bus bar capabilities that others are acquiring companies that get that capabilities. We have it in house the over molding with eminent plastics that we acquired was one of the main reasons, we were able to secure this business where.
Talking about and what a great acquisition that was which was somewhere around $50 million, we've got targets that expand that well above $100 million and the t's and c's with the plug bar that we won which is the main main interface with the battery and the vehicle plug buyers are major Ts and CS business that we won with Volkswagen and now the most recent awards that we have.
We've announced I couldnt be more excited around what we're doing and how we're really focused on power distribution teases sees very selective t's and C's and then also very selective electronics is playing out well and then I think some of these key like I said, the key acquisitions and partnerships. We've done a nice job with very selective partners are going to help us gain access into Ts and CS is.
Already working well for us.
Also the acquisition eminent so that's resulting in profitable growth in the backlog it's been incredible over the last several years.
We're very confident going forward that we continue to win now that we have some these first to market capabilities that we can stretch across other customers and other products within customers portfolio. So.
Really really excited.
Now, we just got to get that margin governance. So that's the next step and we continue to work it.
Yeah.
Thanks, Thats really helpful context, and then in regards to acquisitions, which you just mentioned you mentioned in the prepared remarks.
Anticipate any additional M&A in the near term.
Simply a digestion phase given the number of acquisitions to date, and then looking out a year or two what potential M&A M&A opportunities would encourage <unk> to get more acquisitive. Thank you yes.
Right now we've done a nice job with I consider to be smaller tuck in acquisitions account for acquisition in seating with thermal comfort was a homerun I mean, that's a great company that gave us immediate credibility like I said, we won multiple programs now having that in house capability not working with outside companies.
Companies to win the thermal comfort designs and more importantly, sourcing that design and so obviously, bringing that in house was a big one obviously, we're still going through the process of IGD.
Active cooling as some of the other elements that I think will complement what we did with kongsberg in so that ones in the pipeline right now we got it we got to finish that one that's hopefully will be done by sometime next year first quarter, maybe or hopefully sooner, but that's going to continue to complement what we're doing with thermal comfort because I absolutely believe.
What we're doing there and how thats, good differentiate lear and help us really.
Expand our margins because it really is something that customers are interested in not just our OE customers, but the end consumers on a much more efficient system. When we talk about time to sensation and we cut right through that and when we talk about what's important is the element that we've done organically.
Polyethylene or this flex error that is revolutionary is first to market it changes the whole foam.
Context of what we're doing as far as recyclable.
I mentioned earlier Kutztown cotr missions by 50% the combination of those with form and trim in the thermal comfort is good and then.
E systems, I think we did a nice job with Eminem.
We're doing a nice job of organically investing in what I said is vertically integrating the components around multi capabilities and bus bars and if there is any area right now.
<unk> be a continuation of small tuck in would be and just continue to secure our industry, leading operational excellence and smaller things like industry four.
We're really looking at how we can create a modular system that is much more flexible agile.
And gets at some of the customer needs and changes, but also protects our core competency which is operational excellence.
Those will be smaller.
Great. Thank you.
And our final question. This morning comes from Chris Mcnally from Evercore. Please go ahead with your question.
Thanks, So much Tim and I apologize for the Manhattan question period at the end I'm going to ask about commodities and global markets. So on on commodity specifically looking at E systems.
210 basis points year over year in Q3, I think on the last call you had talked about almost 95% sort of the commodity it would come in in the first half and I'm. Just curious if we focus on E systems, because I think it's such a big part of the story is the margin increase how much of the hit down in raw materials is scale.
<unk>.
<unk> lagged.
As opposed to you already know that youre going to have the recovery coming in the next two quarters based on on contract and how much you actually have to go out and negotiate pricing from here. So that's the first one.
Yes.
Half of the commodity impact for new systems was the copper revaluation in the quarter and so it really inflated the margin impact and then youll see the benefit.
Of that over the next several quarters as we consume that inventory and our copper costs go down the other half is related to the component cost increases and.
We've been in negotiations for much of the year.
It isn't so much to new to the third quarter as if.
If you look at it.
Year over year basis.
There was very little in the third quarter of last year that impacted us and if you go if you fast forward from Q3 to Q4, we do expect some moderation.
That and so.
A combination of the.
Copper reevaluation sort of inflating the number.
And just the timing of our negotiations both with suppliers and customers and if you look out to next year I wouldn't expect that level of headwind certainly to continue.
And I would expect that over time, we will we will see that moderate overall.
Oh.
You're putting that together that makes that makes sense and then growth over market completely understand the discussion, particularly around seating think about sort of 4% backlog growth no longer having that bump above that because of mix, but if we look at Q3, where you had specifically in North America.
A negative growth over market I know, there's a lot of weird things when when the volumes up so much should we expect though that even in the short term growth over market and feeding gets back to sort of that three 4% or is there anything next quarter or two where the mix is still an issue because we are still seeing pretty good production.
Schedules on some of those platforms that you spoke about intake into Q4, so proceedings in growth over market get back into the positive.
In the fourth quarter.
Yes, it could get back to a positive number in the fourth quarter and I think youll see less mix impact, but you could see some mix impact continue.
In the near term say over the next couple of quarters.
Okay. So maybe just something slightly less than 4%. Okay. Thanks, so much team.
Yes.
Okay.
And ladies and gentlemen at this time, we're going to end today's question and answer session I would like to turn the floor back over to Ray Scott for closing comments, yes. Thanks.
Sure that the Alere employees are the ones still on the phone I just wanted to extend my appreciation and thank you for a great quarter and again I want to thank you for working with our customers to create a value proposition. The btu. The ICB seek team just thank you for working with the customers in a collaborative way and I think the results speak for <unk>.
Themselves I appreciate all your hard work and dedication and I appreciate it.
Talk to you later.
And ladies and gentlemen, with that we'll conclude today's conference call and presentation. We do thank you for joining you may now disconnect your lines.