Q4 2022 Lear Corp Earnings Call
Okay.
Good morning, everyone and welcome to the Lear Corporation fourth quarter and full year earnings Conference call.
All participants will be in a listen only mode.
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After todays presentation, there will be an opportunity to ask questions.
Please also note today's event is being recorded.
At this time I'd like to turn the floor over to at low and felt vice President of Investor Relations. Sir. Please go ahead.
Thanks, Jamie Good morning, everyone and thank you for joining us for Lear's fourth quarter and full year 2022 earnings call.
Presenting today are Ray Scott Mair, President and CEO , and Jason Carter, 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.
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Before we begin I'd like to take this opportunity to remind you that as we conduct this call we will be making forward looking statements to assist you in understanding lear's expectations for the future.
As detailed in our Safe Harbor statement on slide two our actual results could differ materially from these forward looking statements due to many factors discussed in our latest 10-Q and other periodic reports.
I also want to remind you that during today's presentation, we will refer to non-GAAP financial metrics. You are directed to the slides in the appendix of our presentation for the reconciliation of non-GAAP items to the most directly comparable GAAP measures.
The agenda for today's call is on slide three first Ray will review highlights from the year and provide our business outlook.
Our business update excuse me, Jason will then review our fourth quarter financial results and our full year 'twenty three outlook finally, ray will offer some concluding comments.
Following the formal presentation, we'd be happy to take your questions now I would like to invite ray to begin thanks Ed.
Now please turn to slide five which highlights key financial metrics for the fourth quarter and full year 2022.
They are finished the year strong with our best quarterly result, since the first quarter of 2021.
And our fifth consecutive quarter of improved adjusted operating margins.
Sales increased 10% to $5 4 billion and core operating earnings increased 67% to $265 million.
For the full year sales were $20 9 billion.
Core operating earnings were $871 million.
Adjusted earnings per share increased 10% in 2022 to $8 72 per share.
Operating cash flow increased 52% to over one $1 billion in 2022.
Reflecting improved working capital management and higher earnings.
Our cash flow performance is already beginning to benefit from Alere forward plan.
Slide six outlines key business and financial highlights from 2022 as well as a small sample of the many awards they are received.
We made progress on strengthening our product portfolio and business outlook in both business segments.
<unk> the Comverge acquisition positions Lear is the only CD supplier with in house capabilities and heating ventilation.
Lumbar and massage.
Since the acquisition of Kongsberg, we've been granted sourcing control on programs with seven customers and have won 30, New business Awards, our 'twenty two platforms.
Our leadership position in seating innovation quality and operational excellence is being recognized by our customers who awarded us over $700 million.
Conquest awards in 2022.
In E systems, we are selected by general Motors to supply our pace award winning battery disconnect units another full sized battery electric trucks and Suvs through 2030.
We also expanded our connection systems product portfolio to add Intercell connect boards.
Actively pursuing additional business opportunities for both of these product lines.
Sales growth in both business segments continues to exceed market growth.
With five points of outperformance in 2022.
Financial results improved each quarter in 2022, and we expect further improvement this year.
Free cash flow conversion improved to 73% and we returned almost $300 million of cash to our shareholders through our dividend and share repurchase programs.
We continue to win accolades from various industry publications, including our most recent award yesterday when Fortune magazine once again named layer to its most admired companies.
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Slide seven highlights some of our key product launches in seating. This year. In addition to the just in time assembly for each of these programs. We're also delivering multiple components for these launches, including thermal comfort systems leather fabric structures cut and sew seat covers in fall.
We believe that our position as the most vertically integrated seat supplier provides a competitive advantage by improving the quality of our products and offering a better value proposition for our customers.
Several conquest programs are launching this year, including the BMW five series and the <unk> in Europe , The Chevrolet, Colorado, and the GMC Canyon in North America, and a major SUV program in North America that was awarded late in 2022 and that will be launching that we will be launching a new facility in 2023.
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There is best in class quality, and craftsmanship drives our leading market position in luxury seating and.
And we also have won significant new business on electric vehicles.
Turning to slide eight I will highlight key upcoming product launches and new systems. In 2022, we had another great year of new business wins in each systems that will continue to drive growth over market of six percentage points, including about $500 million of business for electrification products, including high voltage.
Wiring and connection systems and battery disconnect units.
This year, we will be launching the award winning battery disconnect units.
And an additional <unk> <unk> derivatives, including the GMC Hummer SUV and the Chevrolet Silverado.
In early 2024 will begin to produce the btu at our new facility in Michigan. This new production facility will generate $500 million in annual electrification sales when it reaches full production.
Late this year, we will be launching production on or Intercell connect board.
Annual sales are estimated to grow to approximately $150 million at 2026.
We're pursuing additional opportunities across our customer base for this new product line.
The body control module, we are launching this year with the mini countryman will be the first of many launches across numerous BMW and mini platforms.
We have several other product launches for electric vehicles in North America, Europe , and Asia, some of which are highlighted on the slide.
On slide nine I wanted to provide an update on the four pillars of our strategy, which we initially shared with you almost two years ago.
We assessed our strategic plan during the pandemic, but the objected to continue to position both seating and E systems to achieve sustainable long term growth in revenues.
Financial returns and free cash flow generation as the industry transitions to electrification and recovers from the effects of the pandemic.
We have made significant progress on each pillar of our strategy and the actions we have taken to date will serve as the foundation of our plan to deliver long term profitable growth.
Over the past 10 years, we have made targeted acquisitions to increase our component capabilities with CBS .
These inorganic investments coupled with investments in innovation and technology have resulted in steadily increasing our market share exceeding 25%.
Conquest wins had been a major factor driving market share gains since 2019, we are approaching $2 billion in conquest awards, which supports our mid term goal of achieving 28% market share.
Many of these conquest wins resulted from customers asking lear to quote business because of our strong reputation for quality operational excellence and project execution.
Recently awarded SUV program in North America that will be launching later this year is a good example.
Configured plus as the pace award winning Lear innovation that provides a wireless powered rail system that allows for easy repositioning of the seed in the vehicle.
We are launching our second configure plus program this year on a forward program.
Other customers are showing interest in this product in last month's Bill honest showed our technology in their new Ram 500 Revolution Bev concept that debuted at the consumer electronics show in Vegas.
In E systems, we completed a detailed study to prioritize products, where we can cut the.
We can create the most value for our customers.
By concentrating engineering and capital investments on fewer products with <unk>.
Paved the way to win major new platform awards familiar as battery disconnect units and in yourself connect board.
Later in the presentation, Jason is going to provide more details on how these programs to support sales growth and higher margins in E systems.
Just last month, we learned that one of our customers in Asia had independently audited all all major global seating suppliers now layers quality was rated the best especially for luxury seating.
To ensure we remain the leader in quality and operational excellence last year, we established Alere forward plan, which will improve operational efficiencies across our business.
Over the past two years, we have made substantial progress on our ESG goals.
Develop new products, such as flex, there and renew knit and seatings and support our environmental goals.
We also have improved energy efficiency in our operations and established aggressive climate goals to reduce carbon emissions and increase the use of renewable energies.
These efforts as well as well as increased communication in our sustainability report have resulted in significant improvement in our ESG ratings and multiple awards from leading industry publications.
Now please turn to slide 10, which shows our 2023 to 2025 backlog of approximately $2 $85 billion.
As a reminder, our sales backlog includes only awarded programs net of any lost business and programs rolling off and excludes pursued business and net new business in our non consolidated joint ventures.
We had a tremendous year of new business wins are combined backlog for 2023, and 2024 increased by 22% to $2 5 billion.
And the 2020 for backlog is a record for any single year.
The seating backlog benefits from $1 $2 billion of net conquest awards.
Also of note is that over 75% of our seating backlog is for electric vehicles.
In E systems. The three year backlog consists of 63% in wiring and connect and connection systems with the balance in electronics more than half of E systems backlog is for electrification products led by battery disconnect units high voltage wiring and connection systems.
Total electrification sales in E systems in 2022.
$565 million and we're on track to exceed our prior goal of $1 $3 billion in 2025.
Which implies a 34% compound annual growth rate for the three year periods.
Consistent with historical experience, we expect a third year of our backlog to continue to grow as there are numerous programs. We are pursuing that will launch in 2025.
While not shown on slide the 2023 through 2025 sales backlog at our non consolidated joint ventures, as additional $380 million and I'd like to turn the call over to Jason for a financial review.
Thank you right Slide 12 shows vehicle production in key exchange rates for the fourth quarter.
Oil production increased 2% compared to the same period last year and was up 6% at Alere sales weighted basis production volumes increased by 8% in North America and by 5% in Europe .
Signs in China were down 5%.
The dollar strengthened significantly against the euro and RMB.
Slide 13 highlights sclerous growth over market for the fourth quarter total growth over market of seven percentage points, driven primarily by the impact of new business in both segments. These systems grew eight points above market and seeding grew seven points above market for the quarter.
Growth over market was particularly strong in Europe , and seeding new programs such as the BMW seven series and IX and there were no <unk> E Tech as well as higher volumes on the Nissan cash Guy and a land Rover range Rover and defend our contributed to the growth over market.
Any systems strong growth over market was driven by new Volvo programs, including the <unk> 40, and <unk> 40, recharge and higher volumes on the Ford Cougar and the land Rover defender and range Rover for the full year global growth over market of five percentage points was driven primarily by our strong new business backlog.
Turning to slide 14, I'll highlight our financial results for the fourth quarter of 2022.
Our sales increased 10% year over year to $5 4 billion.
Excluding the impact of foreign exchange commodities and acquisitions sales were up by 13%, reflecting the addition of new business in both of our business segments and increased production on key Lear platforms.
Core operating earnings were $265 million compared to $158 million last year.
The increase in earnings resulted primarily from higher production on key Lear platforms. The addition of new business and favorable operating performance.
Adjusted earnings per share improved significantly to $2 81.
As compared to $1 22, a year ago.
Operating cash flow generated in the quarter was $537 million a significant increase from the 167 million generated in 2021 the.
The increase in operating cash flow was due to an improvement in working capital and higher earnings.
Slide 15 explains the variance in sales and adjusted operating margins in the seating segment.
Sales in the fourth quarter were $4 billion, an increase of $396 million or 11% from 2021, driven primarily by an increase in volumes on their platforms and our strong backlog excluding.
Excluding the impact of commodities foreign exchange and acquisitions sales were up 14%.
Core operating earnings were $275 million up $76 million or 38% from 2021.
With adjusted operating margins of six 8%.
The improvement in margins reflected higher volumes on their platforms are margin accretive backlog and an improvement in commodity costs, partially offset by the impact of acquisitions.
Strong net operating performance in the quarter, which included a $10 million benefit from the commercial settlement of a patent matter was offset by higher spending on engineering and launch costs that support our strong 2023, new business backlog and recent conquest awards.
Slide 16 explains the variance in sales and adjusted operating margins in E systems segment.
Sales in the fourth quarter were $1 3 billion, an increase of 8% from 2021, excluding the impact of foreign exchange and commodities sales were up 12% driven primarily by higher volumes on Lear platforms, and our strong backlog.
Core operating earnings improved to $64 million or four 8% of sales compared to $38 million and 3% of sales in 2021.
The improvement in margins reflected higher volumes on their platforms and our margin accretive backlog, partially offset by higher component costs net of customer recovery.
The positive net performance was driven primarily by an increase in plant productivity and lower premium costs, which resulted from a modest improvement in the stability of customer production schedules.
Moving to slide 17, we highlight our strong balance sheet and liquidity profile, a major competitive advantage for Lear in a rising interest rate environment.
Our earliest outstanding debt maturities in 2027, and overall, our low cost debt structure has a weighted average life of more than 14 years and.
In addition, we have $3 1 billion of available liquidity.
The level of unfunded pension and <unk> liabilities improved significantly over the past few years and is now only $119 million at the end of 2022.
Our focus is on growing and strengthening our core product lines to improve operating margins cash flow generation. As we have previously stated we are targeting to get back to an 80% cash conversion ratio.
We are committed to return excess cash to our shareholders shareholders, having repurchased $100 million of stock in 2022.
Along with our quarterly dividend.
Current share repurchase authorization has approximately $1 $2 billion formation.
Now shifting to our 2023 outlook.
<unk> provides global vehicle production volumes and currency assumptions that formed the basis of our full year outlook Ihs's latest production forecast assumes global production will increase 4% in 2023 and by 5% on Alere sales weighted basis at the midpoint of our guidance range, we assume that global production will be up 1%.
For the industry or by 2% on Alere sales weighted basis at the high end of our guidance range. Our global production assumptions are generally aligned with the IHS forecast.
We expect production volumes to grow by 5% in North America, while remaining flat in both Europe and China.
From a currency perspective, our 2023 outlook assumes average exchange rates of $1 five per euro and seven RMB to the dollar.
Yes.
Slide 19 provides the details of our 2023 outlook.
Slight modest changes in industry volumes, we are expecting improved financial results our.
Our revenue outlook is expected to be in the 21 to $22 $2 billion range. Our core operating earnings are expected to be in the range of $875 million to $1 $75 billion.
At the midpoint this would imply an increase of 12% over 2022.
Adjusted net income is expected to be in the range of $510 million to $670 million restructuring costs are expected to decrease to approximately $100 million.
Despite.
<unk> higher capital investment to support launches in our growing backlog, our free cash flow guidance at the midpoint is expected to increase by over 17% over 2022 to about $450 million the midpoint of our outlook free cash flow conversion would improve to 76%.
Slide 20 walks, our 2022 actual results of the midpoint of our 2023 outlook.
Year over year revenue is expected to grow by approximately $800 million and adjusted margins are expected to improve by 30 basis points due primarily to our margin accretive backlog and a reduction in commodity costs.
Engineering and launch costs are expected to increase in 2023, which reflects investment required to support significant new business that will go into production in 2023.
In 2024. This includes a roughly $25 million investment to support our newly awarded SUV jet conquest program launching late in the year.
Positive net operating performance reflects the benefits from our Leer floor plan and other performance improvements, partially offset by elevated wage and overhead inflation, including a significant increase in hourly wage rates in Mexico.
We have included walks to the midpoint of our guidance for seating and E systems in the appendix.
Our overall guidance range is wide, reflecting the continued uncertainty around the macroeconomic outlook.
At the high end of our range, which includes volumes largely aligned with IHS forecast, we would expect CD margins in the high 6% range E systems margins of approximately 5% and total company margins of four 8%.
Turning to slide 21, we revisit the strategic pillars Ray previously discussed.
Next two slides I will provide additional color on two of our strategic pillars.
I will discuss our growth plan for connection systems and electronics in E systems, and how therefore plan will extend our leadership and operational excellence.
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Slide 22 provides details on the actions we are taking to drive margin improvements in these systems.
While there are several factors that will drive margin improvement in the medium term, including further recovery of industry volumes.
Highlight two key strategic areas that we have made significant progress on which will drive a meaningful improvement in operating margins.
We have been targeting high volume products and connection systems that electronics that are shared across large electric vehicle platforms. This strategy has resulted in developing new products such as battery disconnect units in our silicon exports and battery plug boards that customers will share across many vehicles and their product portfolios.
With our acquisition of <unk> in 2021, we increased our engineered components capabilities in North America, we're expanding these capabilities in Morocco to support our European business with increased vertical integration by in sourcing connection systems and engineered components on programs, where we already provide wire harnesses.
We'll improve our cost competitiveness and the margin profile of this business we.
We expect to organically increase revenues and connection systems $750 million by 2025, which will improve the systems margins by about 100 basis points.
The second driver of margin improvement derives from our electronics strategy.
Focused on products that leverage our core capabilities and strengths in manufacturing and engineering for example, our pace award winning Btu offers industry, leading thermal management innovations that enable electric vehicles to charge faster and drive further with the opportunities. We have identified we are targeting a 20% market share of layers addressable market.
But for a btu business.
We have also begun to wind down other parts of the electronics portfolio. We spent the last three years studying the portfolio and the market opportunities to focus our investment on products with higher risk adjusted returns for products, such as audio and lighting onboard Chargers and burgers CT sets and certain other power electronics products, we will continue to.
Support the programs that are in production, but we have ceased all new development work. This strategy allows us to reduce and redirect our engineering investments lower near term spending this combination of lower near term investment and higher operating margins on new programs that are launching will improve E systems' margins by an additional 125.
Basis points by 2025.
These two strategic initiatives, which will improve margins by 225 basis points by 2025 combined with further recovery in industry volumes and stabilization of the production environment will allow us to achieve our medium term target of 8% by 2025.
Please turn to slide 23.
On last quarter's earnings call. We introduced the Alere forward plan. The plan 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're applying what we learned by co locating certain seating and E systems operations in Brazil. So some locations in Mexico in Morocco in order to optimize our manufacturing footprint and capacity utilization and labor flexibility.
Also have expanded our industry four <unk> capabilities by acquiring <unk> and in touch these acquisitions increased our automation of surface material cutting and end of line quality checks and our jet facilities, both of which will significantly reduce our manufacturing cost to.
To improve cash flow, we continue to focus on driving down inventory levels and improving capacity utilization to reduce capital spending for example in Morocco, we were able to consolidate cut and sew operations into fewer facilities and repurpose and idled plant to support new business and connection systems.
Therefore plan is already driving results, we estimate cash flow improved by about $50 million in the fourth quarter due to these initiatives in 2023, we are estimating operating and administrative cost savings of about $50 million with incremental improvements in 2024 and 2025 as the initiatives we are taking fully ramp up.
Now I'll turn it back to Ray for some closing thoughts.
Jason Please turn to slide 25, which lifts our key strategic priorities in 2023.
We have made great progress positioning our seating and E systems business for profitable growth integration of Concord has exceeded our expectations and we are developing efficient modular solutions that will improve performance, while reducing weight and complexity.
<unk> are very excited about our products and we believe our thermal comfort solutions business will support growth and margin improvement in seating.
In E systems, we are ramping up production of both the Btu Intercell connect boards.
Focusing engineering and capital spending on fewer products across these systems.
We're winning larger programs with higher financial return potential.
Our backlog is strong and we have additional opportunities in the pipeline.
Looking out past 2023, we expect to benefit from the continued industry volume recovery and stabilization of production.
And higher mirror content as Evs continue to displace traditional IC E vehicles.
Our alere forward plan is already providing benefits.
And we have additional actions in store for 2023 to improve our operational efficiencies.
And we will continue to focus on generating cash to fund investments in our business and return returns to shareholders I want to thank our employees for driving near as many accomplishments in 2022.
Can't wait to see what we will accomplish in 2023 and beyond now we'd be happy to take your questions.
Ladies and gentlemen, we will now be getting a question and answer session.
To ask a question you May press Star and then one on a touchtone telephone.
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Momentarily to assemble the roster.
Our first question today comes from Rod Lache from Wolfe Research. Please go ahead with your question.
Good morning, everybody.
I'm curious about.
Maybe a little bit more insight into the bridge for 2023, you'd previously talked about the second half of 2022 as being a pretty good indicator of the launch point for margins.
Proceedings in the mid sixes in E systems is in the mid fours in the back half and when I look at slides 30, and 31, it looks like similar margins into two.
2023 versus the back half.
Can you, maybe just give us a little bit more color on on Hawaii from this point, which reflects some recoveries that the improvement in 2023 would be a little bit more modest.
Yeah, So I think starting with the second half.
22 seating margins were six 7% that that included about 300 basis points of timing benefits. So for example on the commodity recovery and negotiations with whether they typically had happened later in the year and have an impact that relates to earlier in the year as well as that.
Patent matter that was settled so the starting point proceeding goes we're seeing many systems.
Six 4% as sort of the.
Watching points.
Second half of the year and then we had some margins flat year over year from there now the <unk>.
Biggest negative driver from the second half.
To the full year of 2003 as launch and engineering costs and <unk>.
One thing we didn't know.
At the Investor Conference I spoke at an early December was that we were going to be awarded.
Our new conquest program that would have a very short development cycle.
And we take over production at the end of 2023, and so there's about $25 million of launch and engineering costs in the seating business associated with that.
And overall, it's about a 15 basis point.
Impact on margins year over year, and 10 basis points from the second half.
For the full year.
2023, and then that's offset by.
A modest net positive performance overall with another 10 basis points.
Or sell so volume and mix backlog is largely neutral and seeding from second half of 'twenty two to the full year of 2003 and he systems. Our second half margins were four 4%. So we do have a modest increase in operating margins at the midpoint of the guidance to $4 five for 2023, and that's really driven by.
Volume mix and backlog are about 20 basis points performance was about 10 basis points and then that's partially offset by higher engineering and launch costs sequentially again from the second half.
2022, the full year 'twenty three of about 20 basis points I will point out that.
At the high end of our guidance range. There is 40 basis points of additional margin opportunity and seeding and 50 basis points in E systems, if industry production more closely aligns with the IHS outlook.
Okay. That's that's helpful and.
Maybe you could also clarify for US you talked about.
On your third quarter earnings call about $340 million of inflation that you had absorbed in that.
Maybe a half to two thirds of it would be recovered over the next two years is that.
The $25 million that you're indicating for this year.
Kind of a sign that this is going to be a little bit more challenging or was that always something that was going to be more.
More lagged.
Yes, I think our general view.
The recovery or offset of commodity cost increases it's roughly the same I think it's roughly half over.
The next two to three years is how I would characterize it today.
And really I think at this stage, we kind of shift more from contractual direct recovery to more of a negotiated recovery and so it is sort of have to combine our LTA price down negotiations with with all of the claims that we have on our end which include higher commodity.
Cause higher wage inflation.
Pact of.
Unstable production environment, and and so are our offset plan is a combination of recovery from the customer and continuing to generate net positive performance in both business segments and I think if you look back over the last two years, just sort of step back and look at the overall math the commodity impact net of recoveries.
He has been about 200 basis points for the company, we've offset about 100 basis points of that through performance improvements in both segments. So the net effect on margins in those two categories sort of gathered is about 100 basis points. I think if you look at 'twenty three 'twenty four 'twenty five I would expect that we will have fully recovered that 100 basis points over.
That that time period, it's a little bit slower to start I think in 'twenty three because in addition to the commodity issue that we've been dealing with and the unstable production environment now we have sort of.
Additional layer of wage inflation.
I would characterize.
Well above what we've historically experienced that by itself right its about $85 million impact just looking at.
Salary and hourly wage inflation and 23% compared to 22.
That's the impact that we see in 2023 I think.
It doesn't show up in the other central banks to their jobs and inflation comes down a little bit you'll see that wage inflation normalize a bit more if you look at 24, and 25 and that will give us a chance that there's a lot that that net performance really show itself.
Margin accretion.
No.
With all that said, we're still very confident and fully committed to margin expansion in both segments. We see 8% is a reasonable margin target in both seating and E systems in that 2025 time period, and we expect to take a meaningful step up from the mid point of guidance that we've just issued for this year.
Through 2024, it may not be directly linear, but it's going to be pretty close I think as you look out over the next three years.
Okay. Thanks for that and just to clarify that when you. When you said you expect to recover half.
Of this over the next two to three years, that's a combination of internal productivity plus external recoveries or is that just the recovery part of it.
I would say, it's both of those lines get blurred the longer time it.
It goes by here, it's those are the raw materials and wage inflation become part of that annual basket of goods and you're negotiating with your customers. So it's a little more difficult to delineate between the two baskets.
Alright, thank you.
Yes.
Our next question comes from Mark Delaney from Goldman Sachs. Please go ahead with your question.
Yes, hi, good morning, and thank you very much for taking the questions first on the backlog. The three year forward backlog I believe is now $2 $85 billion I think last year. It was three three if I heard correctly in the prepared remarks, you talked about over 20% growth in backlog over the next couple of years, just maybe can you help us better understand what's going on with the three year.
Number and how much it is perhaps changes in overall end market assumptions.
Yes, So let me start with talking about 2023.
2023 backlog that we issued last year was $1 $4 50, it's now a $1 billion. So it's down by 450 million $300 million of that is considering a $150 million of that is in these systems and it's really attributed to two changes in our customers' production plans.
Starting with Volvo the original production plan for South Carolina had a different mix of vehicles and what they are ultimately going to produce and so in seating we have <unk> 90.
SUV electric SUV and the polestar three.
But the ramp up of those is a little bit later than it was when that was originally awarded so the impact on 2023 backlog is about $165 million.
And the impact of the overall change in their production plan has a negative impact of about $100 million of the three year backlog.
The second issue is with Gm's ramp up of the battery electric trucks and factory zero and the equinox CV in Mexico, the assumptions that we would use.
Last year compared to now resulted in about $150 million reduction to the seating backlog.
In 2023, but no impact to the three year backlog in fact, it might be slightly positive overall for those programs.
Those two things taken together about $315 million, that's been partially offset by this new conquest award, which is going to launch at the very tail end of the year. It's about a $50 million improvement net FX is a negative as well and a systems over that same time period or in 'twenty three were down about $100 million that's all.
Also due to the ramp up timing on the G. On battery electric truck platform saw a $40 million impact and then to a lesser extent theres an impact on Volvo.
The Volvo production plan in North America, as well now if you look out over a three year time period backlog in these systems was 25 million higher than it was last year and it's the second largest back three year backlog that we've ever had in E systems and if you look at seatings backlog for three years at $1 eight it's higher than the 10.
Your average that we've had in the <unk> business. So it does support that continued growth over market that we have demonstrated over the last 10 years in the seat business.
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Gains in market share. So in addition to that I will point to 2025 being very light given that theres lots of sourcing activity in both segments.
That will impact that number and we would expect to see that number considerably higher when we issue a new three year backlog 12 months from now.
Thank you for all those details with respect to the 8% E systems margin target in 2025. Thank you for all the details you gave on that could you elaborate a bit more on how much incremental bookings may be needed in order to get there and also what type of global production environment may be necessary in order to hit that 8% target. Thank you.
Yes, as we model 2025, where we're using IHS the stage, which is I think it's 89 million units in 2025, and there is there's really no new business required beyond what's already been booked in E systems.
To achieve that so it's largely kind of come through the <unk>.
Improvement plan, we outlined protection systems in electronics and the growth in both of those areas combined with improvements in volume and commodity recovery and performance driven by restructuring and other investments, we're making in the wire business.
Thank you.
Youre welcome.
Our next question comes from John Murphy from Bank of America. Please go ahead with your question.
Hi, good morning, guys.
One real quick one on the balance sheet first on slide 17, I mean, you have shown you have tons of liquidity.
Room to work with I am just curious what you think of us as sort of your leverage targets and how much room, you might have to either buy back shares or get more aggressive on.
Accretive acquisitions over time, and you seem like you have a lot of room.
Yeah, I would agree with that especially as earnings continue to recover over time, our target leverage ratio of one five times.
Ebitdas I think as well.
We will give us some additional room to lever up if we stopped that.
Found it necessary to do so I would say in the near term John our focus is really on free cash flow generation, returning excess cash to shareholders through share repurchases and the dividend there isn't anything big on the on the near term horizon that we see as necessary or really attractive.
And so if we're going to do anything on the M&A side, I think it's going to be more along the lines of what you've seen us do over the last couple of years more tightened I think just the tuck in acquisitions that debt.
We have done historically and more recently.
<unk>.
Produced great results I think when we think about think about the industry four <unk> and the acquisitions, we made there to really turn our business around the operational efficiency and really driving our cost within our facilities.
We exceeded our expectations at the Kongsberg acquisition, it's amazing with their customers the type of.
Momentum were getting getting it within the thermal comfort management systems. So the RGB, which is still we still have to close that one out is going to only continue to help our our position as the leader.
And vertically integrated components within seats, but more importantly around the technology of the seat as we move forward and the new contracts. We've been awarded do give us the sourcing controls. So we can.
<unk>, we're investing in is the ability to create those modular.
Systems that integrate the components a bag in a blower that just blows cold and hot air into trim cover and foam that's very unique to two to Lear Corporation and so those type of investments are paying dividends and the investment within connection systems like we saw with <unk>.
Intercell connect boards.
The electronic.
Annick components that we're vertically integrating with M&A and having that bus bar capability is very unique in the over molding capabilities and our connection systems is really making a difference on how we can continue to drive down costs in our own product, but also the improvements within manufacturing so.
We like the position we're in we like what we've been doing thats been very successful and there really isn't anything on the horizon that I would say is a major acquisition that they can see smaller tuck in acquisitions that continue to drive our strategy forward and position there for the success that we've seen and I'll tell you and I think to the investments that we're making with this very unique I think first first ever.
In the market.
Changeover on the seat business that we were awarded late last year into this year, where theres a lot more opportunities we're seeing in front of us and so we see investment and we're only going to invest in products that get us good returns and so we're not buying business.
This is a very unique program in seating that were awarded.
And we're investing in a brand new facility with the top of the line capital to make sure that we're efficient and there's other opportunities that we're looking at in.
In Europe and in North America that are very similar in nature and those investments.
Obviously expand our EBIT or EBITDA and are good investments and in our wheelhouse of where we're doing a nice job too.
And then just that's very helpful. And then quickly just a second question on on Evs here.
We're getting real price actually come out of the biggest player in the market people are responding and in China now in the U S.
What could a surge in EV volumes in 2023 mean for you are you set up to benefit from that and have the capacity.
To handle that or is that something.
It might might pass you by and just curious if you think about the current environment. It seems like it could be very advantageous for the E systems side, but also maybe even on the on the seating side as well.
I think on both I think we've talked about 67% of our new backlog was in an electric vehicle.
And seating so that's setting up proceeding very well and I think you need systems equally.
As far as the investments.
It's taken a step back when we talked about the strategy and really focusing on what we believe were core components that werent going to in sourced or.
Engineered by our customers and we have a shot at scaling properly. So the facilities that we're setting up the facility in Michigan. It designed exactly around that we talked about on an annual basis of $500 million revenue, but we can expand that for additional capacity and the focus that we're getting very granular in our approach.
Being very efficient at our engineering, our capital that we're spending to capitalize on the ability to scale is exactly where we're going so yes <unk> accelerate.
We are in a very good position both of these systems and in seating based on the backlog that we've seen in seating and the percentage of wins that we've gotten in the market.
But to be clear and in the near term this might be happening like as we're as we're speaking have you seen anything in schedules as far as the mix change here in the short run or are these pricing actions something that are still kind of on the common in releases that you might see in the coming months.
Well, we are seeing customers ask for additional capacity for example, Florida.
On the Mustang Mach E. We've had we've increased capacity in the near term to support a ramp up in volume there. So I think selectively with certain customers.
We are seeing an acceleration of volume potentially that may benefit later this.
This year and into next year and we're in those discussions right now as far as expanding our capacity with each one of those customers.
That's very helpful. Thanks, guys.
Welcome.
Our next question comes from James Picariello from BNP Paribas. Please go ahead with your question.
Hi, Good morning, guys good morning.
How many years.
Just on the year's growth over market backdrop on a core basis.
If we exclude the commodities and back in addition to FX and acquisitions here at the midpoint is just under 5% growth over market something like $4 seven.
Yes.
That compares to your weighted global VP of course.
Plus 2%. So can you unpack, what's driving that at this point or so of lower outgrowth. This year is it seating content mix is it the pushout of certain launches in your backlog just how would you characterize the puts and takes thanks, yeah. So James C E systems growth over market, we would expect this year to continue.
But at six points above market consistent with the last what we've experienced over the last three or four years, we have grown at six points above market over the last four year time period 19, 2021 'twenty two.
We do see that moderating in 'twenty three to about two points of growth over market and so the company growth of America would moderate to three points now the backlog in seating and strong and that that by itself contributes four points of growth over market, but the offset to that is our assumption around key platforms.
In North America in particular, so we have the north American market up 5%, whereas the number of our top platforms down and on average our top platforms in North America are down about 2%. So that's the biggest factor driving that the GM full size pickup trucks and Suvs. For example, we have that we've assumed that that's going to be flat year over year.
That may turn out to be a conservative assumption, that's what we've assumed coming off a really strong year last year for that platform. We've got the Audi Q five Jeep compass.
Four explore all down at <unk>.
That's up and so it's really the mix of production on some of our.
Existing platforms, that's driving that.
As we look out to 2024 and you look again at our backlog point out that we would expect growth over market could be as much as seven points.
If you just look at the value of the backlog at 1 billion and a half with seating that six points above market and any systems that 10 points of growth above market, just driven by the backlog again, it's our.
Core platforms are more closely aligned with market overall.
Okay. No. That's super helpful. And then just to size up the net commodities headwind impact entering 'twenty three.
Maybe my apologies if I missed this but can you just confirm.
What is the expectation in terms of that commodity cost recovery for 'twenty. Three and then is this something where we should be thinking about the cumulative impact over the last couple of years and something that continually gets recovered or by the time, we get to 'twenty four or it's a clean slate.
We really shouldn't be thinking about the bridge in that regard.
Yes.
So James I did talk about that a little bit earlier, but.
So the two year impact from 'twenty, one 'twenty. Two we had previously said was $340 million, we ended up a little bit better than that at $335 million, we expect to see about $30 million of that unwind itself and in 2023, largely driven by lower steel costs in North America.
As we fast forward to 'twenty, four and 'twenty five.
What I would encourage you to do and sort of look at that in conjunction with our ability to deliver margin improvement through net performance our cost reduction programs, our commercial negotiations more broadly.
So I would expect to see margin growth in both segments of around 50 basis points. Each year in 2425 as a result of that so its sort of indirect commodity recovery and other performance taken together.
Thank you.
Youre welcome.
Our next question comes from David Kelley from Jefferies. Please go ahead with your question.
Hey, good morning, guys, maybe a follow up on the earlier <unk> discussion with the electrification and sales ramping any of the.
The CAGR out there can you walk us through impact on E systems margins today, and maybe how you see that evolving as you continue to aggressively scale the business.
Yes, so the impact on margins is sort of embedded in those two data points that we shared with you our connection systems and electronics because much of the electronics growth that we outlines for 25 years.
The battery disconnect units.
Attributed to 125 basis points margin expansion three systems overall electronics growth and then also on the connection systems side. The bulk of that growth is going to come through all that.
Trick vehicles, the Intercell connect for being the most significant growth within that and then also the plug board so.
Those are the two key drivers and then we have the benefit of volume and wire.
On.
Rick vehicle platforms, we do it we do see growth there as well but.
I don't have a specific basis point impact to highlight for that.
David.
Okay got it that's helpful. And then I appreciate the color on the E systems margin expansion plan.
Pacifically on the connection systems build out.
How much of that do you see yourself kind of able to do in house today versus the need to do additional bolt on acquisitions, whether it be in terminals or connector type product areas.
Well I think.
We have great capabilities organically.
If there is an opportunity for like I said earlier for a tuck in acquisition that would continue to enhance our growth.
We spend our margin it makes sense, we would do that but to the whole lane partnership that we recently established.
The extended our ability to.
Grow our business and grow that partnership and then I think with the <unk> acquisition the over molding capabilities of the bus bars. These are becoming much more sophisticated we have in house capabilities. The plug board for Volkswagen was probably one of the most sophisticated connection systems.
What would be an EV.
Space and we were awarded that program that program continues to grow because it gets scaled across multiple platforms. So nothing is limited us from growing in that area.
That we don't have in house. It would just be if there was an opportunity to expand quicker.
Inorganically, where it would fit it might make sense, but we have all the capabilities in house and we've done a nice job growing that business and we've talked about the growth there its been incredible over the last several years and the $750 million revenue target for connection systems. In 2025 does not include any inorganic growth.
Okay got it that's super helpful. Thanks, guys.
Welcome.
Our next question comes from Emmanuel Rosner from Deutsche Bank. Please go ahead with your question.
Hello, Thank you very much and good morning.
Florida.
Wanted to follow up with you on some of the close of the market.
I appreciate all the detail you gave on the backlog and even some of the reconciliation towards the 2023 growth over market.
What do you feel on now sort of the right normalized growth of our market profile for both of your segments or if I can do them on an ongoing basis, and then to what extent you see mix could sort of play and ongoing.
No headwind no tailwind.
In that I understand the 2023 dynamics, but just generally speaking is that a big factor.
Yeah, Matthew I think that the mix factor mix impact in 'twenty three is probably the peak negative impact, we would see and see it and if you look out $24 25, and I would expect that to moderate.
Somewhat and I think that four points of growth over market in seating over the long term.
Is it still the right.
Assumption to model and as Ray alluded to earlier, we are seeing more interest from customers to take over business from competitors, either midstream or in the next generation than we've ever seen before and Thats coming on the heels of $2 billion nearly $2 billion of conquest awards over the last four years.
I think the.
The <unk> team has performed at a very high level. They continue to customers are recognizing that.
The competitive position, we put ourselves in through the acquisitions as Ray mentioned again with Kongsberg in the thermal copper capabilities on top of everything else we've got there.
Certainly supports continued market share gains and you may have noticed the change in tone somewhat on the 28% market share goal. That's a that's a midterm goal that's not the final goal, we see more runway to grow market share beyond 28% in seating and that would also support that four points of growth over market.
And these systems when you look at the backlog over the next three years and six points of growth over market is probably.
Maybe a little bit light and maybe a little bit we may end up a little bit higher than that but I think long term. That's a fair assumption to make as we continue to benefit from the shift to electrification and taken market share elsewhere.
Any systems.
Okay, Great and I guess, then just drilling a little bit more on the.
The factors in in 2023, so I think you.
You spoke about some of.
The key platforms in North America.
<unk> down I think the backlog each sales for 2023 was it seems like it was pushed off maybe on the electric vehicle.
Electric trucks from GM.
Can you just sort of like over the years.
Some receivers headwinds due to mix this year.
Yes, I think I think you just you just described it and some of the platforms that we're expecting to be lower that are important platforms for us today, they're still high volume.
Explorer, we're calling that down 4% I think IHS has it up but our guidance assumes it's down 4%.
Jeep Compass, we're assuming that that's going to be down about 24%.
And Audi Q, five or expecting that to be down about 20%. So north American market that is growing at 5% that sort of weighs on the growth of the market in seating in particular.
And then in terms of the backlog shift in 2023, you alluded to the GM program, but there was also a change in volvo's manufacturing plants that they had originally planned to to build.
The <unk> 90 in South Carolina, when that program was awarded to US and then later made the decision to shift to the only the electric vehicles, so that E X 90.
The pulsar three and so the combined effect of that is lower revenue both in 'twenty three and over the three year time period associated with that award.
Okay. That's super helpful and there was a very quick one.
The engineering launched being sort of a.
I guess.
Earnings and margin headwinds in 2023, despite what is essentially a comparable backlog versus last year.
Is this because of this program that's coming in on the.
The shorter timeframe.
Yes that is the driver that's there's a $25 million investment in engineering and launch associated with that and it over a very compressed.
Time period.
And so that that is that that is the.
The primary driver of the higher launch engineering in seating as we look out to next year. In addition to that engineering in general is up a bit more.
And thats tied to some of the some other conquest awards that were received that will launch in the 25 26 time period in Europe .
In seating as well Emmanuel will talk more about the launch we're working with our customer right now after the first quarter on this launch that will take place.
This year about the specifics.
We can't talk about it on this particular call, but hopefully after the first quarter, we can give a little bit more detail and clarity on specifically what program, we're talking about and where.
Volume in those type of things.
Understood. Thank you.
Yes.
Our next question comes from Adam Jonas from Morgan Stanley . Please go ahead with your question.
Hey, everybody you had a competitor on earlier earlier this morning.
<unk> guided to a negative 1% global production.
And while acknowledging that chip supply broadly scanning.
Materially better year on year, they did highlight that.
And that there are certain systems and chips specific situations that do remain problematic.
And our leading to supply disruption I was curious if that was consistent with your view and could you could you specifically tell us what your OEM customers are struggling with right now.
Type of chip or module or system is problematic.
Prevent.
Growth on that week comp thanks.
Got it.
It is better Theres no question about it.
We look back from where we were last year to this year. There is no question that our customers are much more sophisticated I think what we're seeing now.
The over ordering of all kinds of chips across the board putting tremendous pressure on supply has been reduced there are still issues relative to very specific chips.
And usage by.
Particular products.
And that could get in the specifics of what chips I do know that we're in a much better situation, but there are situations, where we're finding a shortfall of supply.
Relative to chips I think the communication between.
The customer and the tier one and the chip manufacturer is significantly improved.
Even though the industry as a whole has improved there are pockets, where refining shortage of particular chips now I do know that capacity more capacity is coming online this year I think.
Our customers are more optimistic about how things are going to move.
From the first quarter, the second quarter and the second half of this year should should improve significantly but we are at this stage right now in the first quarter seeing shutdowns due to shortages of chips and Theyre very selective chips and I don't have the specifics of what those chips are but we are still seeing shortages and its more sporadic.
And we that's helpful.
Helpful. So that was going to ask when did you think that would alleviate you're suggesting second half but it.
Didn't know if you wanted to develop that a little more based on the schedules and discussions of what youre seeing what youre between your tier twos and what you're hearing from the tier ones is that kind of a payout ratio.
The latter part of the air.
There's capacity that comes online I think that there is alternative designs that are coming online. There is like I said, a much more sophisticated process now what's required the over ordering in the system kind of shutdown all chips I think has improved significantly so.
From the way I'm looking at from what I am getting feedback from Oems and also suppliers are chip manufacturers as the second half should be better.
Thank you very much.
And our final question today comes from Colin Langan from Wells Fargo. Please go ahead with your question.
Hey, guys. This is closer to Suez filling in for Collyn.
Based on the price concessions you hadn't done a really great job at gaining market share.
You don't you guys think that this kind of gives you guys more leverage when you go into negotiations with your OEM customers.
[laughter] yeah.
There's a mic.
Jason talked about Theres, a basket of ways that we can negotiate all kinds of things and I will say this that.
No.
We've been at this for two and a half years with some of the commodity inflationary costs labor shortfalls will cease supply things the customers a lot more willing to look at alternatives and ways to negotiate solutions across the board.
Yeah.
We have not been in a position where you have to buy business and we're going after business just for the sake of buying business through productivity or paying for it.
And I think the team has done a remarkable job of having balance between what our productivity deals are in offsetting.
Some of the commodity increases transportation increases shutdowns those type of things. So it is used in a very <unk>.
Collaborative way with our customers to help offset some of the issues we've been talking about in <unk>.
The customers have been receptive to working with us.
Given some of the different situations that.
We've been able to help them out with either through supply or through launch or through production. So it continues to be a relationship game and making sure you're balancing between productivity and some of the issues that you are confronted with on a cost side.
Okay cool that's.
That's helpful and then.
Lastly, just on labor I think you called out $85 million impact in 2023.
I think recently in Mexico, there is a minimum wage increase of 20% is that baked into that $85 million number.
Yes, it's one of the factors baked into that and.
The minimum wage increase of 20% has sort of an indirect impact on us most of our or many of our.
Wage groups in Mexico are well above the minimum wage and so there.
Some compression in the wage scales, but it's not it's not a 20% increase per se in our Mexico labor rates across the board, it's less than that.
You call it like 10.
But I'm not going to get into a specific percentage for that.
And that market share.
Sure sure sure.
Taking my questions.
Yeah Youre welcome.
And just I think that's it and probably the only one left on the phone are the Lear team and I just want to again say thank you for your incredible accomplishments last year, it's amazing what the team has done collectively around the world and we're going to have our challenges this year, but I know this team is absolutely capable.
To accomplish some of the great things, we did last year and.
Just wanted to say thank you for everything that you're doing.
Thanks.
Yeah.
And ladies and gentlemen, with that we'll conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.