Q3 2023 Lear Corp Earnings Call
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Good morning, everyone and welcome to the Lear Corporation third quarter 2023 earnings Conference call.
All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
As a note todays event is being recorded.
At this time I'd like to turn the floor over to add low and felt vice President Investor Relations. Please go ahead.
Thanks, Jamie.
Morning, everyone and thank you for joining us for Lear's third quarter 2023 earnings call presenting today are Ray Scott Mair, President and CEO and Jason <unk> Senior Vice President and CFO. Other members of Lear's Senior management team have also joined us on the call.
Following prepared remarks, we will open the call for Q&A.
You can find a copy of the presentation that accompanies these remarks IR dot dot com.
Before we begin I'd like to take this opportunity to remind you that as we conduct this call we will be making forward looking statements to assist you in understanding lear's expectations for the future and.
Detailed in our Safe Harbor statement on slide two.
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 directly 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 quarter and provide a business update.
Jason will then review our third quarter financial results and provide an update on our full year outlook.
Finally, ray will offer some concluding remarks following the formal presentation, we would be happy to take your questions now I would like to invite ray to begin thanks Ed.
Now please turn to slide five which highlights key financial metrics for the third quarter.
<unk> had another strong quarter with double digit increases in sales and operating earnings.
Total company revenue was $5 8, billion% to 10% increase compared to last year core operating earnings increased by 14% from last year to $267 million.
Adjusted earnings per share increased 23% and operating cash flow improved significantly to $404 million for the quarter.
Slide six summarizes key highlights from the quarter third quarter marked our fifth consecutive quarter of year over year improvements in both revenue and operating income.
Our seating team demonstrated their industry, leading operating capabilities by successfully launching the wagoneer and Grand Wagoneer just in time programs.
This was an important conquest win and an unprecedented mid cycle transition of a very complex luxury seating program.
Our thermal comfort integration and innovation continues to gain traction.
During the quarter, we leveraged our strong relationship and we were awarded our first ventilation program with General Motors.
The customer response to our expanded thermal comfort capabilities has been tremendous.
And we will continue to work with existing and new customers to add their content.
Key third parties continue to recognize our leadership in quality and innovation.
They are once again received more than twice as many J D power C quality awards as any other supplier.
<unk> first place awards in both luxury categories.
Renew net are fully recyclable suede alternative that will start production next year was named as an automotive news pace Award finalist.
In E systems, we continue to diversify our customer base with new wiring award with Renault and Gili.
Our strong performance allowed us to increase the pace of share repurchases in the quarter, we repurchased approximately $75 million worth of stock.
More than we repurchased in the first and second quarters combined.
I couldnt be more proud of the Lear team not only did they execute during the quarter.
Alere employees always support the communities, where they live and work the team in Morocco, a stab as a special fund to help those impacted by the devastating earthquake.
Sure.
Slide seven provides more detail on the progress we have made in CD.
In addition to the launch of the Wagoneer and Grand Wagoneer, We launched the seats for the BMW five series in Europe.
Both vehicle launches were key conquest awards from competitors, we continue.
To grow with BYD with several current and upcoming launches such as the seat assembly for the BYD seal.
As well as components sales such as leather for the BYD Denver D. Nine.
Our leadership in quality and operational excellence once again was recognized by J D power.
Our four best in segment and nine total top three awards were more than twice as many as any other seed supplier.
We are in first place in both luxury categories.
<unk> for the portion of 718, one in the luxury car category, while the seats for the range Rover sports one in the luxury SUV category.
In total were one four of the seven awards across the two luxury categories.
Further evidence of our leadership in this segment.
The unit are fully recyclable swayed alternative is gaining traction with bolt, both our customers and with third parties.
Renew knit, we'll start production next year on three programs with three different Oems.
We are in discussions to expand renew net two additional vehicle lines with these customers and have seen increasing interest from other customers.
Momentum has increased rapidly and we see great opportunity for additional awards in the coming months.
The level of innovation for renewing it.
The lead led to automotive news to name at a pace award finalist for 2023, the winners will be named.
Later next year.
Slide eight provides an update of the significant progress, we're making in all phases of our thermal comfort strategy.
We continue to optimize our manufacturing footprint and thermal comfort systems organization.
Our new facility in North Africa provides a low cost alternative to our current locations.
To date, we have conducted technical reviews with our thermal comfort capabilities with 14 Oems positive feedback from these reviews affirm our confidence in our strategy.
The strong relationships, we have built with our customers make it easier to drive growth opportunities for our thermal comfort components.
During the quarter, we won a ventilation award with General Motors.
This breakthrough win for Lear opens the door for additional growth opportunities for ventilation and other thermal comfort products with our largest seat customer.
Once validated our components.
Can be sourced across and Oems entire vehicle portfolio.
Having sourcing control for the thermal comfort components allows for quicker proliferation, particularly for programs that we are just in time supplier.
The interest level of our modular innovation has accelerated our timing is perfect as our customers are looking for solutions to reduce product complexity and cost while also offsetting the impact of elevated wage inflation.
Today, we have 21 development contracts for component modularity and flex their solutions and we previously announced that we are on track to launch our first production application for <unk> during the first quarter next year.
Working with a premium European OEM, we combined pneumatic lumbar massages heat and ventilation into a single modular solution.
We estimate this module will reduce part complexity by 50% and adjust in time plant, while lowering cost and improving performance for the end consumer.
We are on track to have this module fully validated by our customer by the middle of next year the.
The response for our complete seat modularity has been overwhelmingly positive.
As a result, we are accelerating the timeline, we expect to deliver this solution from 2027 to 2026.
The initial results from the seven development projects in process for existing customers have been outstanding.
Our complete seat module has significantly improved the thermal comfort performance when compared to individual components.
The air flow from our ventilation systems increased by up to 55% the heat solution increases the temperature by up to 85%.
More than the current solution after only one minute improving the time to sensation and we've increased the intensity of the massage system by up to 150% compared to the current component solution, allowing the module to provide a much more therapeutic experience.
Our customers are looking for the solutions, we have been meeting with the customers.
At the top levels within the organizations.
And the feedback has been extremely positive the momentum has shifted from Lear, pushing these concepts to our customers really pulling us and asking us to move faster and driving their internal organizations to implement our complete <unk> solution.
Theres module solutions.
We will provide a cost savings opportunity to our customers, while expanding seating margins.
Turning to slide nine I will provide in these systems update the third quarter marked our fifth consecutive quarter of year over year margin improvement in these systems.
The increase in industry volume combined with our efficiency improvements and margin accretive backlog allowed us to achieve our highest operating margins in these systems and more than two years.
Yeah.
Based on the midpoint of our current outlook. The second half margin. This year is on track to be more than 100 basis points better than last year.
The new connection systems plant in North Africa is currently producing preproduction components.
This facility is key to expanding our engineering component capabilities and will support our new vertical integration opportunities in Europe.
An important driver of our margin expansion plan.
We continue to win new business in both wiring and connection systems.
Key awards include our conquest award with Renault.
And the award with a new EV with.
Gili.
These awards along with the opportunities we are pursuing in the fourth quarter keep us on track to achieve our third straight year.
And $1 billion three year backlog in these systems.
And implemented over the past three years by streamlining our portfolio to focus on high growth and high return products and deemphasizing non core product lines, we have optimize our resources and continue to win new business in our key product areas.
There's still a lot of work to be done, but we continue to make meaningful progress towards our margin targets now I would like to turn the call over to Jason for a financial review. Thanks.
Alright.
Slide 11 shows vehicle production in key exchange rates for the third quarter.
Coal production increased 4% compared to the same period last year and was up 8% at Alere sales weighted basis.
<unk> volumes increased by 9% North America, and by 6% and Europe, while volumes in China were down 1% from a currency standpoint, the U S dollar weakened against the euro but strengthened against the RMB compared to 2022.
Slide 12 highlights lear's growth compared to the market.
Total company revenue growth lagged the market by one percentage point, primarily driven by unfavorable platform mix on several key programs in North America.
The largest driver of the unfavorable platform mix reflected downtime in seating at general Motors full size truck plants, excluding the impact of the downtime total company sales growth would have been in line with the overall market.
The UAW strike at GM Swan style facility in Ford Chicago facility also had a modest negative impact on <unk> revenue and.
<unk> systems growth over market of three percentage points was driven by our backlog in all regions as well as favorable platform mix in Europe.
Europe sales outperformed industry production by eight points with both business segments benefiting from higher volumes on our land Rover range Rover range Rover sport and defender.
Conquest programs, such as the BMW, five and seven series in seating and new business with a global OEM as well as BMW, Mercedes and fifth or any systems contributed to the strong growth in the region as well.
The first three quarters total company growth over market was two percentage points with seating growing one point above market any systems, drawing five points above market.
Turning to slide 13, I will highlight our financial results for the third quarter of 2023.
Sales increased 10% year over year to $5 8 billion.
Excluding the impact of foreign exchange commodities and acquisitions sales were up 7%, reflecting increased production on key Lear platforms and the addition of new business in both segments.
Core operating earnings were $267 million compared to $235 million last year.
The increase in earnings resulted from the impact of higher production at Lear platforms, and the addition of new business.
Adjusted earnings per share increased 23% to $2 87.
As compared to $2 33, a year ago.
In addition to higher core earnings our adjusted EPS benefited from higher equity earnings and a lower share count, reflecting the benefit of our share repurchase program.
Operating cash flow generated in the quarter was $404 million compared to $252 million in 2022.
The increase in operating cash flow was due to an improvement in working capital and higher earnings relative to last year.
Slide 14 explains the variance in sales and adjusted operating margins in the seating segment.
Sales for the third quarter were $4 3 billion, an increase of $397 million or 10% from 2022, driven primarily by an increase in volumes on their platforms and our strong backlog.
T backlog programs include the BMW, five and seven series and <unk> in Europe, The Chevrolet, Colorado, GMC Canyon, and Mercedes EQ Suvs in North America, as well as the <unk> and weather sales for the <unk> program in China.
Excluding the impact of commodities foreign exchange and acquisitions sales were up 6%.
Core operating earnings improved to $275 million up $20 million or 8% from 2022 with adjusted operating margins of six 4%.
As expected operating margins were modestly lower due to the impact of higher engineering spending in launch costs to support New business Awards. This was partially offset by the benefit from higher volumes on their platforms in a margin accretive backlog.
He didn't margins in the third quarter were negatively impacted by production disruptions related to the UAW strike at GM full size truck downtime and volume reductions in premium costs related to shipping delays at the Mexican border.
Slide 15 explains the variance in sales and adjusted operating margins in E systems segment sales for the third quarter were $1 5 billion, an increase of $143 million or 11% from 2022.
Excluding the impact of foreign exchange and commodities sales were up 9% driven primarily by our strong backlog and higher volumes on key platforms.
<unk> backlog platforms include new programs with the global EV, OEM and Cisco in North America, and Europe, as well as the Ford Super duty truck GM, Hummer, EV and Silverado heavy in North America.
Core operating earnings improved to $79 million or five 3% of sales compared to $53 million and three 9% of sales in 2022.
The improvement in margins reflected higher volumes on Lear platforms in a margin accretive backlog and improvement in commodity cost and strong net operating performance.
The positive net performance was driven primarily by efficiency improvements at our North American manufacturing facilities resolution of key commercial negotiations with customers facilitating recovery of costs due to the commodities and wage inflation and restructuring savings.
Moving to slide 16, we highlight our strong balance sheet and liquidity profile, a major competitive advantage for Lear in today's higher interest rate environment.
We do not have any near term debt maturities. Our earliest bond maturities in 2027, and our debt structure has a weighted average life of approximately 13 five years.
Our cost of debt as well averaging approximately 4%. In addition, we have $3 billion of available liquidity.
We are on track to meet or exceed our target of 80% free cash flow conversion for the year.
We remain committed to returning excess cash to our shareholders and accelerated our share repurchases in the third quarter during the quarter, we repurchased $75 million of stack, which was more than the first and second quarters combined.
Our current share repurchase authorization is approximately $1 $1 billion remaining which allows us to repurchase shares through December 31 2024.
Now shifting to our 2023 outlook.
Slide 17 provides global vehicle production volumes currency assumptions that formed the basis of our full year outlook, we base our production assumptions on several sources, including internal estimates customer production schedules and S&P forecast at.
At the midpoint of our guidance range, we assume that global industry production will be 7% higher than in 2022, an increase of three percentage points or two points on alere sales weighted basis from our prior guidance, reflecting higher production in Europe and China.
Our global production assumptions are generally aligned with the latest <unk> forecast.
From a currency perspective, our 2023 outlook assumes an average euro exchange rate of $1 eight per euro and an average Chinese RMB exchange rate of 700 to RMB to the dollar.
Slide 18 provides more detail on our current outlook, we are increasing our 2023 outlook for net sales core operating earnings and free cash flow from the midpoint of our prior outlook.
We are increasing our outlook for restructuring costs by $25 million to fund investments that will optimize the manufacturing footprint of our new thermal comfort segment and to reduce capacity in Europe to better align with current and future customer production plants. The same time, we are reducing our outlook for capital spending by $25 million.
Primarily as a result of slower customer ramp up plans on various new electric vehicles.
In the third quarter, we lost approximately $25 million of revenue due to the UAW strike.
On the plants had on strike as of today, we are losing approximately $60 million of revenue per week.
Based on the late news from last night, the revenue impacts will drop to $35 million per week once forward resumes production.
Consistent with our prior guidance full year financial outlook assumes a $350 million revenue impact from industry disruptions related to the ongoing UAW strike, including approximately $325 million in the fourth quarter.
Through the end of this week the cumulative revenue impact of the UAW strike has approximately $170 million.
This leaves approximately $180 million of revenue contingency for the remainder of the fourth quarter.
Slide 19 highlights our fourth quarter outlook for sales and core operating earnings in seating and E systems as.
As well as the outlook, excluding the assumed impact of the ongoing UAW labor strikes.
And seeding the midpoint of our fourth quarter revenue outlook includes approximately $230 million of assumed loss revenue from industry disruptions related to the UAW strike.
The midpoint of our fourth quarter operating income outlook of six 8%, including negative margin impact of approximately 70 basis points due to the assumed strike impact any.
Any systems the midpoint of our fourth quarter revenue outlook includes approximately $95 million of assumed loss revenue related to the UAW strike.
The midpoint of our fourth quarter operating income outlook for <unk> systems with five 5%.
Including negative margin impact of approximately 90 basis points due to the assumed strike impact.
In the appendix of the presentation. We included a summary of our current full year outlook for <unk> systems revenue and operating margins as well as our full year outlook that removes the assumed impact of the UAW strike.
At the midpoint of our guidance our full year seating margins are forecasted at six 8% our E systems margins at four 6% and total company margins at four 8%.
This is an improvement of 10 basis points from the prior outlook proceeding and total company margins, excluding the impact of the strike full year margins would be 7% in seating for 9% of new systems and 5% for the total company now ill turn it back to Ray for some closing thoughts.
Jason Please turn to slide 21, our third quarter results provided another clear example of our ability to deliver strong.
Performance in a very volatile.
Industry environment in seating, we are accelerating the pace of innovation for thermal comfort systems response from our customers and the demand for our modular solutions has been overwhelmingly positive.
Systems, our execution and focus on efficiencies continues to drive margin improvement we are on pace to improve margins again in the fourth quarter. Our alere forward initiatives have yielded savings in excess of our goal.
For this year by streamlining processes.
And changing plant layouts to optimize plant capacity and accelerate automation to address labor shortages and improve efficiencies.
These results put us on track to achieve our target cash conversion, allowing us to continue to return capital to shareholders and now we'd be happy to take your questions.
Ladies and gentlemen, we will now begin the question and answer session.
Ask a question you May press Star and then one other question on telephone if you are using a speaker phone. We do ask you. Please pick up the handset prior to pressing the keys to ensure the best sound quality.
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Again that is star and then one to join the question queue. At this time, we will pause momentarily to assemble the wrong.
Our first question today comes from Rod Lache from Wolfe Research. Please go ahead with your question.
Good morning, everybody, Hey, Rob it's Mark.
Wanted to ask you about the.
E Systems' performance, obviously came in better than expected I presume that that was partly related to recoveries, but it looks like as well you've got a pretty strong exit rate six 4% in the fourth quarter, excluding the strike.
Could you maybe just speak to whether we should be looking at that level of profitability.
Yes.
A reasonable launching point for.
For modeling.
24.
Then just to the extent that some of that improvement look going forward as well.
Going to be driven by.
Recoveries.
Just characterize how those discussions are going just particularly in light of the pressures that some of the Oems are seeing on labor and in other areas.
There's a lot to unpack there.
Yeah, I'll start maybe with the third quarter E systems performance when we yes.
Issued kind of a mid quarter update on what we're expecting in these systems, we talked about 475% operating margins. The primary improvement from that point until the end of the quarter was really a lesser impact from the strike and slightly stronger volumes the commercial recoveries in the operating performance was directly in <unk>.
Line with the.
The targets, we had established was meaningful in terms of bolt sequential improvement in performance and year over year.
Improvement in performance as we think about what that May mean for the business as we look out to next year I think the right way to model these systems to.
To look at the second half Forecastable third quarter, actuals, and our outlook for the fourth quarter, which.
Right now sits at five 4%.
Does include the impact of the labor strike. It also includes some out of period benefit from the commercial negotiations that happened in the third quarter and that we anticipate happening in the fourth quarter. If you sort of normalize for all that the real run rate in the second half of the year any systems is about five 5%. So I think thats the right launching point is.
You look out into 2024.
For that business I would say overall, we're quite pleased with the progress we've made both operationally, particularly in North America, where we're struggling with efficiencies that we talked about earlier in the year, but also in our commercial negotiations we completed some really important negotiations in the quarter, but I think establish a nice precedent going.
For us give us a little more predictability.
That said, we do anticipate that there will be challenges with that as we look out to next year.
But we're very happy with the performance, thus far and he says I think.
Rod you know when we simplified the portfolio and as I've said it before that we're trying to be everything to everybody and started deemphasizing areas that we.
Quite candidly couldnt compete in longer term with the type of investment dollars that were required is really paying dividends and so the simplification of the product portfolio clarifying it allowing us to grow profitably in those areas and we are growing.
Im really excited about is that.
Three years of consecutive billion back.
Good returns.
It's a really in a time right now where customers are looking for solutions, it's really opening their eyes to different possibilities of what we can do both from a ts.
Ts and CS perspective, but also engineered components and so we just had a great review with one of our major customers.
To really talk about what we can do to lower their overall cost, but also help us expand our margins with the new systems and so a lot of the aspects of what we put in with the strategy of really starting to pay off and so we have a lot more confidence that we can continue on this path and we will work to do Rod I mean, there's no question, we're going to work hard on our efficiencies or improvements.
Some of the commercial negotiations, but really confident where we're at I think people highlights that E systems is sort of a show me story I think we are starting to prove that the plan that ray just laid out is working our operating margins for the second half of the year, a 200 basis points higher than our full year margins were last year of 106.
Basis points higher than they were in the first half of this year. So we are third quarter as both an inflection point and another proof point with the fifth straight quarter of year over year margin expansion in each system. So we've made a lot of progress there.
Yes, it sounds like you've got a lot of momentum there.
On the margins as well as the wins I was just hoping to lastly, you can address just one thing you can't control.
The timing of launches.
<unk>, which has been obviously a good part of the backlog can you maybe just give us some color on what youre seeing and how we might want to just calibrate the backlog that we've been seeing just the reality of push outs here or there how significant is that.
Yes, as you know Rod, we'll formally update our three year backlog at our fourth quarter earnings call at the beginning of next year, but.
We continue to win new business at a pace that would support delivering a three year backlog for 24% to 26% was similar to the most recent backlog.
We published $2 $85 billion overall, $1 8 billion in seating and a $1 $50 million in E systems.
Just given the wins that we've experienced so far this year with that being said.
Our plan for 24 that we released at the beginning of this year was for a $1 $5 billion of backlog in 2024 would have been the single biggest year in our history and I think some of the announcements from customers.
<unk> talked about on their earnings call sort of delaying some of the launches maybe reducing near term volumes <unk> done the same others have as well.
Would expect that that will have a negative impact on the first year of the backlog in 'twenty four we still feel confident that the three year backlog overall.
Holdup in our electrification revenue in E systems in particular is holding up towards that $1 3 billion target that we had established for 2025. So we're still seeing really solid growth there with new wins sort of offsetting some of the impact of the the volume changes, but if I look at our 2044 backlog specifically.
75% ourselves, our new business wins in seating, we're on electric vehicle platforms and I would expect based on all of those announcements that you could see a 20% or so reduction in that first year with much of that made up in the second and third year of the backlog. So yes, youre right rather there is an expected impact.
Next year, but I think over the three year period, we still feel pretty good about the growth outlook.
Okay, great. Thank you.
Welcome Thanks, Rob.
Our next question comes from John Murphy from Bank of America. Please go ahead with your question.
Good morning, guys I just had two quick follow ups or Rod <unk> question, There and then one other.
On the backlog I mean, if he visa or pushed out presumably due to other vehicles on the ice side that are still made on the net backlog.
You might not things might not change or actually could potentially be for the battery is that a fair way to think about that.
I think absolutely.
Think that coupled with what may happen with the strike the longer it were to continue this year on certain platforms that could benefit next year.
Vehicles, specifically, so I think that.
It kind of broad base, that's a reasonable assumption that we would also expect stronger ice volumes, partially offset.
Yeah.
And then on the E systems margins I mean can you just remind us the target and the timeframe as to when you what level and where you are trying to get.
Yes, our target is 8% in 2025 and as we've said before is that linear between this year and 25, but we do expect to have a meaningful improvement in operating margins next year. The run rate of five 5% in the second half of the year, we would expect to continue improving that.
Into next year now the backlog will benefit operating margins. There is a number of puts and takes obviously too early to give guidance, but I'd be disappointed if we didn't have something with a six in front of it but somewhere in the range next journey systems.
And then just lastly on thermal.
You're making great progress near $1 billion in 2027, 10% margins.
Really great to here, but it seems like it might be a far larger opportunity over time as you look at the way. The thermal is set up in your in your seats versus the antiquated HVAC system that exists right now and ice in Evs is there a potential real content grab.
And efficiency.
Gain that you could make yourselves and how about the automakers and see any money and then improving efficiency of powertrain and the entire vehicle <unk>.
In a big way because you didn't talk about that and that seems like a really big deal that this thermal system could shift from antiquated running off the ice engine.
All new in your seats.
Yeah, and I think we've talked about that partnership.
The projects, we're working on with Folio that I think will help us more fully exploit that opportunity I think you're right longer term that does create additional growth potential on the thermal comfort components specifically.
You've already embedded a $400 million roughly revenue increase in the thermal comfort systems business over the next four years. So we've got a pretty aggressive target I think longer term, where we see even more growth opportunity is in modularity and so sort of an extension of what we're doing in thermal comfort with that.
Incorporating our flex air products and.
In seat covers on programs, where we don't have the jet necessarily I see that as a path to increasing market share in our seating business overall, and we've talked about going from 26% to 29% market share in seating.
By 2027.
We also see having roughly a third of 32% of the total seat market. When you consider the component sales independent of Jets that we sell to our competitors that are directed by our customers I don't see any reason why that number can't continue to grow.
345 years down the road as well and.
Our target is certainly much more ambitious to maybe capture 35% or 40% of that total seat market over time I think thats.
The real long term growth driver for the business and just.
We had a really good review and what we're doing and again I'd say, we're conservative in how we are willing to sell because we're in the process right now.
Even validating what Jason just mentioned on a fully modular concept.
The timing, obviously, we've put the strategy in place eight years ago, and we build in building up pieces to really give us the complete ability to look at this thing from a manufacturing component perspective, and the engineering designs to a modular system that's integrated right into.
Traditional form or flex air into the into the actual trim cover itself. So all of those components layered together really gets to the savings.
No.
I would say the other day the timing there is a lot of pressure right now and on costs and labor scarcity and different challenges within the manufacturing plant couldn't be better timing and when we had this review with this major customer.
I mentioned that it became more of a we're pushing to a pull can how fast can you go how fast can you go so we're putting out timing based on validation with a modular modular systems, but it is how fast the customer can go to and so we're really focused on putting it in a perspective on how we can get to say, but once you get it into a platform it goes across.
Multiple vehicles, that's where you really get the synergies that's really you really get the benefit so something that can be <unk>.
Dollars or $10 million Mercedes can grow exponentially when you start talking about across all of their different vehicle lines and we've been receiving incredible feedback and I think the timing is perfect.
Timing has been when the customers are coming in and asking for we need more help on the cost side, we have a great really lay up in front of them say not only do you get a better customer feature.
It's a savings in labor efficiencies and savings within the components themselves. So then consumer benefits our customers benefit and we love it because we get to expand our margins.
An insignificant benefit we could see savings up to 20%.
On the relevant components in a fully featured vehicle system and in most programs.
10% to 15%. So this is a meaningful opportunity so not only is it important to improve the performance and sustainability.
Of the seat.
It also lowers the cost for customers.
Yes, looking forward to hearing more about it over time. Thank you so much guys.
You.
Our next question comes from.
James Picariello from BNP Paribas. Please go ahead with your question.
Hey, good morning, everyone.
It's great to see the early momentum in thermal comfort.
I think as of last quarter, you had one source controllers seven Oems.
Now that number is nine.
21 development contraction or 16 last quarter can you just speak to the strength in the pipeline here.
To sustain this type of quarterly buildup in momentum.
As we think about next year. Thanks.
Yes, I think thats. The traction we have is as Ray mentioned thats, starting to be kind of a pull from customers and so the demand for.
Customers wanting to learn more about the product.
It has really been a positive surprise to us and maybe Frank if you want to elaborate on some of the things we're seeing some of the interest we're seeing from customers in these tactical reviews, yes, absolutely.
As both rate and Jason had mentioned that the reception from the customer has been really fantastic.
And to Jason's point, just now James we took care of a lot of technical reviews on a global basis.
We have a lot of customer engagements are tracking all of that as a team to make sure we understand who we are.
We're getting tremendous activity with not only our commercial discussions about our technical discussions and validation development projects that we're working on so.
We're extremely encouraged by the global reception to have this product, we're working with Asian customers, we're working with customers in Europe and here in North America, and it's really cross border I guess.
We will continue through the quarters I believe the momentum is just going to continue to build so I think the swing is we're still quoting individually individual components, but every jet program that we've been awarded we are sourcing control and so that's what's been nice is that's a major shift and not every well just suppliers that don't have this capability.
Don't get that flexibility.
It varies.
So that's one thing that we are right now in the process of these development programs.
Focused on making sure those go off and we execute those flawlessly and the rest of it as we continue to build across multiple car lines independent if we have the jet is what's picking up steam as they are starting to see the benefits in and asking us to quote across car line.
Seat systems that aren't even being quoted yet today.
Yes, that's really helpful.
Just a quick one on the commodity side, how should we be thinking about the earnings impact in the fourth quarter and then I know, it's early but just given current spot pricing and what you already have locked in on the metals side proceeding.
Can we start thinking about next year's setup on the commodities front. Thanks.
Yes, there's been a modest softening in commodities in general North America, Europe steel prices have drifted down a bit that benefited us a little bit in the third quarter.
Fourth quarter, we had a pretty strong recovery quarter last year, so year over year commodities, maybe a modest headwind just as a result of the level of recovery received last year versus this year as we look out to next year I think we don't see a meaningful positive or negative.
At this stage, we do see steel as an opportunity.
And then kind of on the flip side and maybe a little bit outside of your question around commodities as commodities is wage inflation is something that we're very focused on.
In terms of maybe a bit of a headwind and similar to what we experienced this year, where we saw fairly significant increases in hourly wages in Mexico and eastern Europe. Those pressures look to continue next year, we've had really good dialogue with our customers and there is a sharing mechanism in pass through mechanism in most cases.
Now on that but that's another factor to think about as you as you start to model 'twenty four and beyond.
Thanks.
Youre welcome.
Our next question comes from Colin Langan from Wells Fargo. Please go ahead with your question.
Oh, great. Thanks for taking my questions.
Sort of following up on that any color on how cost recoveries are trending with customers since they're obviously going to be under a bit of cost pressure themselves has that changed at all.
The recoveries you got this year, how much is piece price. So you don't have to renegotiate versus sort of lump sum, where I guess January one you probably have to have discussions account about getting recoveries.
Yes.
Go ahead and start.
<unk>.
The negotiations have been ongoing and I haven't seen a significant change in how we are negotiating for a recovery that the customers are very sophisticated.
And in some cases have very sophisticated models on what is in as far as some of the labor economics or even.
Commodity costs within our components and so those are ongoing.
Answer your question, we have seen an increase.
Quest more on let's call it design changes in design.
Reductions within the product lines that they are under more pressure.
That side of the equation.
But.
One thing we've talked about before being the most competitive cost competitive company in the world has been our focus that puts you in a very good position. When you are negotiating through some of these more challenging difficult negotiations.
So we do have evidenced binders very detailed analysis those type of modeling.
<unk> also.
We haven't seen the negotiations slowdown on that side the side that we're pricing more impactful right now its just their willingness to look at alternative designs or what we'll call BBB or product designs that can get at cost I mean, some of them have changed their targets internally.
Our more aggressive than they were this year heading into next year.
Embracing that we actually think that we have our whole culture.
Culture is built on being the most cost competitive we have.
A couple of different things that we do internally with cost technology optimization. We had these coliseum events that are very rigorous in that we have no excuse boards that we have cues of.
Ideas theres enough inefficiencies in the value chain across the board to drive opportunities and so that's something we pride ourselves on Mike I was just mentioning we just had a major coliseum event with one of our customers that we generated over between $60 million to $70 million of opportunities within the year and what I like about it boy do they.
They react positively.
Traditionally it's been it's too risky we don't really want to do that right now we will come back to you maybe elements of it does get approved but boy. They are taking a much more different look at different ideas, that's where we push our vertical integration and thats been our strategy is how we engineer own components to create a value proposition and so we're picking up a lot of steam on the side.
Engineering, our own products terminals connectors and components and wiring vertical integration with shrimp covers or things like flex are from the modularity. Those are all working right into our wheelhouse. So there is a pickup of momentum from our customers, but we also feel that we're in a really good position to create a value proposition.
For both companies and overall the year kind of played out the way, we expected about a $25 million benefit from a full year basis on commodities between lower costs and recoveries. So it's.
Improvement in year over year.
And any color on the amount that are.
Pes price versus lump sum that need to be renegotiated. It yes, I think we're seeing.
The trend towards peace price generally and there may be agreements like in the third quarter. We had an agreement with a customer that had a lump sum in the piece price component to it because it went back to earlier in the year and the lump sum just covered in the earlier part of the year, but the appeal prices been adjusted going forward.
That there is an increased willingness in general.
For customers to do that particularly where.
It's sticky inflation are sticky commodity increases where there isn't.
Any reversal in sight.
Overtime and if it's something that's more kind of transitory that would set itself up for more of a lump sum recovery, but where it's more permanent like wage inflation for example, youre seeing piece price adjustments.
And just lastly on.
FX as we think about into next year.
I think you had some pretty good protection this year from some of your hedges how should we think about.
See risk as those roll off or do they roll off into next year.
Yes, so our largest exposures.
The peso and we do have a pretty aggressive hedge program in place a 24 month rolling hedge program that largely insulated us.
From that that issue this year, it's still a $20 million.
<unk> for us in much worse than we had anticipated when we set guidance at the beginning of the year.
We've had this sort of absorbed that as the year has gone on as we look out to next year.
If you would have asked me that question three months ago, I, probably would've felt worse about it than I do today with the peso at 18 30.
It's a manageable issue for us as I look out to next year, it's still a meaningful impact in a little bit worse than what we experienced this year.
But but manageable and we've locked in 75% of our exposure for next year already and by the end of this year, we will have 85% or so locked in so we.
We're going to be a pretty good position to continue to to mitigate that risk.
Got it alright, thanks for taking my questions.
Youre welcome.
Okay.
Our next question comes from Dan Levy from Barclays. Please go ahead with your question.
Hi, good morning, Thanks for taking.
Taking the question.
I wanted to start first.
Okay.
I just wanted to start with that with a question on E systems and I think you mentioned earlier, Jason just that.
We should think about next year with a six handle on E systems margins.
You provided some commentary some time together.
Path to 8% by 'twenty, five and I think the biggest piece of it is volume and backlog and.
I think.
Different occasions that we're now sitting here in.
And that will be P environment, that's arguably much higher than what most of us anticipated call. It six to nine months ago.
Schedule seem to be much more stable.
So.
Should we still think about about that path to 8% as being intact, especially as now <unk> seems to be at least.
Now Alan.
Performing to the upside.
Yes, I think that there really isn't anything that has changed from the time, we set that target I would say maybe the only exception would be to the last question we had from Cowen.
Foreign exchange, a little bit of a headwind on transactional FX and we have.
Obviously wire is a labor intensive business, so it's sort of a dual headwind of FX.
And wage inflation.
Outside of that I'd say that the story is intact the performance.
That we can control has improved consistent with our expectations of recoveries on commodities.
Are in line with our expectations.
<unk> are recovering sort of consistent with what we had anticipated the backlog is rolling on with margins that we had based that outlook on.
I think the last piece of that is maybe the stability of the production environment and while we have seen meaningful improvement this year from last year, they're still has been disruptions.
That leads to some inefficiencies in the plants.
A little bit outside of our control I'd say that'd be one one other factor to think about and I think the backlog in 'twenty four as I mentioned earlier will be negatively impacted by some of the customers revised launch plans on some of the key programs that were embedded in our in our backlog as you know the GM Btu and <unk>.
Entresol Kodak Port for example is a big part of that.
Systems backlog and those volumes are going to be lower in 'twenty form probably in early 'twenty five given the current plans there so that'll have a little bit of an impact, but we've seen again, just a really nice improvement from 2022 to 2023 110 basis points full year year over year 200 basis.
<unk> full year last year to the second half of this year 160, 170 basis points first half the second half of this year, we really have a nice trajectory setup here going into next year.
Theres a lot of moving parts and we're working through our plans for next year, but we do feel confident that we can continue that momentum into next year.
Kidney and working towards that target.
So we're just conceptually thinking about that bridge to 25 is it fair.
Fair to say that better LDP slightly more stable LDP more than outweighs.
Mexican peso and some lighter EV volume on the backlog.
Yes, I think it's probably a little bit early to get into that level of granularity.
I'd, rather save that for the fourth quarter earnings call.
Got it okay. Thank you and then as a follow up I wanted to follow up.
On seating.
And the Tcs strategy and I think one of the points you mentioned from the seating day back in June was that.
By having the full vertical integration that you can now see more complete systems. So we're saying this is obviously a bit of a shift from what.
And we have done in the past where.
Much more of a direct sourcing model in your conversations with customers are you seeing more data points that they are willing to change that sourcing model and source more of a complete system.
Yes, that's exactly what we're seeing on the programs we've been awarded.
From a competitive perspective.
In the contract itself. The language reads, we have the sourcing control over those components and so we will in parallel path do the traditional system, along with a much more tactical system or innovative system with the modularity that we talked about.
And now what we're doing is just just taking that across multiple vehicle lines. Even in the case, where we don't have adjusted time award and we're seeing that trend.
Mentioned.
In my.
A portion of the dialog was.
It went from us pushing to know them coming to us and pulling it and seeing how quickly can you go across multiple vehicle lines because they see the real savings when we can take it across <unk>.
Significant volumes and so we're lining up our quotes.
In a particular way where it was individual to our seed program now we say listen if you take this and extrapolate across multiple car lines here's.
Here's your savings and the benefits of what we're talking about with 50% part reductions much more efficient system.
Just from a therapeutic standpoint from a heat standpoint from a time to sensation perspective of weight perspective, you can then start plugging that into different alternative systems within the vehicle itself, where its been limited maybe not even offered in rear seats or in other vehicle options within within the vehicle itself and so.
That is the plan that's exactly what we're doing and the important part that we're focused on is executing the validation and getting that done and we said.
Very important part of what we're focused on that and customers as we highlighted on the.
In the prepared slides for today that have granted us sourcing control.
Nearly all of the jet programs that we've been awarded since the acquisition of <unk> have included.
Sourcing control for us of thermal comfort components.
Great. Thank you that's very helpful. Thanks.
Thanks.
And our next question comes from Emmanuel Rosner from Deutsche Bank. Please go ahead with your question.
And I guess potential risk from some of the slowdown in near term investments by the automakers.
Would you be able to remind us or quantify your exposure to your content the exposure to <unk>.
Altium specifically.
If I'm not mistaken I think that you.
You have won a significant amount of business.
Including.
Multiple parts I guess of the.
The vehicle can you maybe just quantify this first to remind us what you're supplying on Belgium, and how much that's roughly <unk> <unk> per vehicle.
And also can we have the battery electric truck platform. The battery disconnect units and we haven't quantified the CTV, but we've talked about BD is generally six to $800 of content per vehicle that saying thats the CTV on that program.
Kind of Holistically looking across the markets.
And then we also have the Intercell connect board, which is a much lower CTV, then btu, but that's on various RCM platforms, it's not 100% of the volume.
Dual source.
So as I mentioned.
On your question, we do expect to see lower revenue on the <unk>.
<unk> and 'twenty, four and probably 25, given the announcements that they've made but as we've looked at our $1 $3 billion revenue target for electrification products generally.
We are in.
In line with our previous expectations. So we've had new business awards with other customers.
Since that target was established that have offset the impact of lower expected revenues on video.
Okay. That's helpful. One quick follow up did you just shipped by wire harnesses.
<unk>.
We do next.
Well, we do have low voltage.
Sure.
Certain G.
EV programs, but not high voltage at this point.
Understood.
And then just as a quick follow up so I appreciate it.
The comments around being on track for sort of the mid decade targets on EBIT can you just go back over the mass around the.
The 2024.
In E systems itself. So obviously, some EP platform within seating. So can you just go back over a sort of an exposure you have there.
Yes, and again, we'll provide a fuller update on the backlog as we always do in the fourth quarter earnings call late January early February.
What I tried to do today is just highlight for you analysts modeling next year and for the investors listening to the call that obviously the announcement by our customers would have an impact on the backlog that we had previously <unk>.
Projected for 2024 was previously estimated we have $1 $5 billion of revenue, we don't have a precise update to that but most of the seating revenue and.
And the backlog was around electric vehicles.
Because most of the new vehicles customers are launching are electric vehicles.
And then any systems, we've already talked through.
The <unk>, specifically and so I think it's reasonable for one to assume based on all the comments that customers have made.
The backlog for 'twenty, four would be 20% or so less than what we expected at the same time, we've continued to win business at a pace that would allow for the three year backlog that we published in February to be similar to the three year backlog. We published in February of this year, which was $2 $85 billion overall for the company.
Seating and $1 5 billion in any system, there may be a little bit of mix between the two segments, but I think that's a reasonable expectation for the total backlog based on everything we're seeing including the revisions to the volumes that I described for electric vehicles.
That's extremely helpful. Thank you.
Youre welcome.
And ladies and gentlemen, our final question today will come from Joseph spot from UBS. Please go ahead with your question.
Thanks, everyone for squeezing me in.
Jason maybe just to.
To follow on one last thing on the Bev.
That's like it.
If the units are like I understand it's a little bit lower in 'twenty four 'twenty five but like if it's sustained at lower than what you assumed.
You know for over a number of years from when you bid on the business do you have any recourse in that contract.
The recover costs or raise the piece price for what is produced.
Yes.
Cooperative collaborative with regards to changes in their production plan.
They understand the investments that we've made they've worked with US that's part of what allowed us to reduce the capital spending this year pushed it out may eliminated if the volumes don't materialize. So we're being much more deliberate in putting new capacity in <unk> and then of course, there are discussions around piece price tied to volume changes.
As well so that's absolutely absolutely the case.
And one point I also want to highlight when we established our backlog and published that last year, we werent using customer planning volumes directly.
Of course discount those.
Even given that we believe that the volumes that they will come out with and their plans for next year may still be lower even though the discounted volumes, we used in our backlog perf.
Perfect and if I could sneak one in just on.
On the.
The strike as we sort of look like we were starting to get back to work and hopefully that expands.
<unk>.
One of the things you've been hearing about is a little bit more sort of maybe pain in the tier two tier three level like are you seeing any any stress in your suppliers that would either add some cost or or make a ramp up.
<unk> a little bit slower.
Yes, I think that we've seen pressure in the lower tiers over the last two years with commodities inflation and certainly this didn't didn't help I wouldn't say that that the strike has gone on long enough or been deep enough to have a meaningful impact on that at this point maybe around the edges, we're seeing some.
Modest effects from that and I think.
One thing that helps us too is the vertical integration capabilities across the whole seat, so where we do have distress in the supply base. We also have that flexibility to bring products in house, we've done that from time to time as well, where you've had a distressed supplier and an important program. We brought that in house to solve the issue. So.
Okay, Great I think probably the only ones left on the call at this point or the Lear team and so I'll say a few words one great quarter. You guys said, everyone worked extremely hard to displace them.
External challenges, we are faced with a really nice quarter I want to thank you for all your hard work and again, just we talk about it the incredible recognition not only from our customers, but J D power and the recognition that we get from third party just continue to validate that what a great job, we're doing and how we're focused to continue to drive excellence.
I think the team I mean, I don't think everyone appreciates except for the team that's been working nonstop incredible unprecedented launch that we had with the wagoneer and Grand Wagoneer, Frank the team did a great job industry <unk> never been done.
Again, just recognize the team's overall performance NOI.
And generating that cash really nice job.
I know we will finish this year strong we got one more quarter left but let's.
Let's kick it into another gear and get this quarter done. Thanks, you guys.
Yes.
Ladies and gentlemen, with that we'll conclude today's conference call and presentation. We thank you for joining you may now disconnect your lines.