Q3 2024 Lear Corp Earnings Call
Good morning, everyone and welcome to the Lear Corporation third quarter 2024 earnings Conference call all.
Speaker Change: All participants will be in a listen only mode.
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Speaker Change: I appreciate the presentation, there will be an opportunity to ask questions.
Speaker Change: Also note todays event is being recorded.
Speaker Change: At this time I'd like to turn the floor over to him brumbaugh.
Speaker Change: President Investor Relations. Please go ahead.
Tim Brumbaugh: Thanks, Jamie Good morning, everyone and thank you for joining us for Lear's third quarter 2024 earnings call presenting today are Ray Scott Lear, President and CEO, and Jason <unk> Senior Vice President and CFO other.
Tim Brumbaugh: Other members of Lear's Senior management team have also joined us on the call.
Tim Brumbaugh: Following prepared remarks, we will open the call for Q&A you can find a copy of the presentation that accompanies these remarks.
Tim Brumbaugh: <unk> Dot com.
Tim Brumbaugh: Before I 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.
Tim Brumbaugh: As detailed in our Safe Harbor statement on slide two our actual results could differ materially from those forward looking statements due to many factors discussed in our latest 10-Q and other periodic reports.
Tim Brumbaugh: 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.
Tim Brumbaugh: The agenda for todays call on slide three first wake 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 financial guidance.
Tim Brumbaugh: Finally, ray will offer some concluding remarks following the formal presentation, we'd be happy to take your questions.
Speaker Change: Like to invite ray to begin.
Ray Scott: Thanks, Tim Please turn to slide five which highlights key financial metrics for the third quarter of 2024.
Ray Scott: They are delivered $5 $6 billion of revenue in the third quarter, despite a very challenging production environment.
Ray Scott: Core operating earnings were $257 million or four 6% of net sales.
Adjusted earnings per share was $2 eight an increase of 1%.
Ray Scott: Driven by the benefit of our share repurchase program.
Ray Scott: Operating cash flow was $183 million in the third quarter free cash flow was $51 million.
Speaker Change: Slide six summarizes key business and financial highlights from the quarter total company revenue outperformed the market by three percentage points with sales in both segments, beating the industry.
Speaker Change: Five percentage points in these systems and three percentage points in seating revenue outperformed industry production in each of our major regions.
Speaker Change: During the quarter, we repurchased $209 million of shares and paid $43 million in dividends.
Speaker Change: We continue to repurchase additional shares throughout our quiet period, achieving the full year $325 million target communicated in our second quarter earnings call.
Speaker Change: Adjusted earnings per share grew by 1% in the third quarter driven by the benefits of our share repurchase program. Despite the decline the decline in the industry production.
Speaker Change: In China, our strong relationship with the domestic automakers led to significant new business awards in the quarter.
Speaker Change: In seating we won several new awards with BYD Xiaomi and series the new programs combined are expected to generate average annual sales of over $100 million.
Speaker Change: And these systems will be supplying wiring for for several upcoming platforms to the Dongfeng group.
Speaker Change: Our first comfort flex module launched in July with mobile.
Speaker Change: By combining heat ventilation and massage components into a more efficient solution, we reduced the thermal comfort part numbers shift to the just in time Assembly plant by 50% and our system enhance the end.
Speaker Change: Customer experience by improving pressure.
Speaker Change: And to the occupancy by 30%.
Speaker Change: Interest for our comfort Flex solutions continues to grow during the quarter. We were awarded our second program with a premium European OEM.
Speaker Change: We will provide the heat and pneumatics as well as other components in a comfort flex module for.
Speaker Change: For <unk>, we will be providing steering wheel heat combined with hands on detection sensors.
Speaker Change: Our innovative products continued to earn recognition from key industry groups.
Speaker Change: Zone control module, our U R. E systems team developed was named an automotive news pace Award finalist.
Speaker Change: It's highly configurable software increases the ability to scale.
Speaker Change: The unique design improves the flexibility to adapt to changes in the wire harness connectors, enabling increased automation for manufacturing. The first generation models are expected to launch in 2025 with plans for broader adoption.
Speaker Change: There continues to lead the J D power U S seed quality and satisfaction study with eight comp awards more than doubled the awards of any other seed supplier.
Speaker Change: They are swept the premium car category and won an additional three top three finish in the premium SUV category. These awards once again solidify our leadership in quality.
Speaker Change: Turning to slide seven.
Speaker Change: I will provide an update on the initiatives we are pursuing to achieve long term sustainable revenue and earnings growth through innovation in both our products and our processes.
Speaker Change: Our customers are reassessing their powertrain strategies to align with customer demand, while meeting regulatory requirements. Our product portfolio is large largely powertrain agnostic, allowing us to win new business for any new vehicle.
Speaker Change: Chinese domestic automakers continue to gain market share leveraging our relationships with key customers to win new business has been a priority for both seating and E systems are new business wins would be white D. Xiaomi series and the Dongfeng group a result of this effort.
Speaker Change: New programs with lethal motor Neil and Xiaomi were key contributors to our backlog this quarter, we're seeing additional opportunities as these automakers are looking to grow globally.
Speaker Change: Our focus on innovation and automation through idea by Lear is driving growth opportunities for our products, while further reducing our manufacturing cost.
Speaker Change: The internal design and superior execution of our new capital deployment, and our facilities allow us to bring products to market quicker, while reducing the cost.
Speaker Change: The efficiency actions, we have taken along with the investments in automation and restructuring have us on track to reach our head count targets for the year.
Speaker Change: These systems has already achieved a 6% reduction target and seating is on pace to meet or exceed its 8% target.
Speaker Change: Much of the improvement is coming from from our most labor intensive products, such as cut and sew wiring and other components facilities largely in Mexico as well as from our footprint actions in Europe.
Speaker Change: In seating the interest from our customers for our comfort flex and comfort mack's seat products continues to grow.
Speaker Change: The launch of the first comfort flex module and additional business wins illustrates the progress we have made.
Speaker Change: Our list of opportunities for comfort flex comfort Max and flex there has grown to 62 projects with 22 Oems.
Speaker Change: An increase of 40% since the end of 2023. These projects will enable us to achieve our $1 billion revenue target for thermal comfort by 2027.
Speaker Change: [noise] rear view is our AI based proprietary vision system technology.
Speaker Change: Leveraging the software capabilities, we have acquired over the last several years Lear view enables us to use low cost off the shelf cameras.
Speaker Change: To develop vision system solutions for many applications across both businesses. Our first application for Lear view enhances our trim defect detection to improve consistency and quality in our just in time plants, we've identified additional opportunities to utilize the near view such as for wire connection detection and other <unk>.
Speaker Change: A line testing application.
We continue to expand the use of the Gore automated leather cutting technology and are extending the use of Pelletier cloud based operating systems foundry for digital reporting.
Speaker Change: Our teams continue to develop new use cases for the foundry software to improve real time decision, making on the plant floor.
Speaker Change: And these systems are focused product portfolio has helped improve margins over the last two years.
Speaker Change: The growth of the connection systems capabilities, we acquired through M&A has been a key driver of that improvement.
Speaker Change: We continue to expand our vertical integration opportunities and extended our footprint to serve to serve the European market.
Speaker Change: The new innovations we are developing in our core products such as our pace Award finalist zone control module will continue to drive growth in these systems. The flexibility we are designing into our products allows us to increase the use of automation fair.
Speaker Change: Further improving the cost structure.
Speaker Change: Yeah.
Speaker Change: To offset labor inflation, we continue to aggressively shift our wiring operations to new low lower cost manufacturing locations. We are leveraging our footprint in north Africa to supply the European markets and.
Speaker Change: In North America, we are moving more wire wire operations to Honduras today, our head count is about 60% in Mexico and about 40% in Honduras.
Speaker Change: We expect the shift to 40% in Mexico, and 60% in Honduras over the next couple of years.
Speaker Change: Our focus on product and process innovation combined with restructuring our footprint to reduce excess capacity has us well positioned for any production environment.
Speaker Change: Slide eight.
Speaker Change: Excuse me.
Slide eight highlights lear's growth with Chinese domestic automakers.
Speaker Change: There has 30 years of automotive experience in China over that time, there has strengthened this local presence built strong relationships with key customers and has become the clear leader in luxury seating.
Speaker Change: Continued to grow with key established customers such as BYD Geely Cheng on the dengue Dongfang group and see additional opportunities with emerging automakers, such as Xiaomi, Neil Leap Motors and next thing.
Speaker Change: The new business wins with BYD are consistent with our target of supplying approximately 30% of their seats in the next few years.
Speaker Change: The portion of our total revenue from Chinese Domestics grew from about 20% in 2021 to roughly 30% in 2024 during that time, our total revenue in China grew from about 4 billion to approximately 5 billion. Despite the significant shift in market share from the multinational automakers to Chinese domestic ore.
Speaker Change: Yes.
Speaker Change: By 2027, we expect our revenue to grow on average 6% annual annually to approximately $6 billion. As a result, a portion of our revenue coming from Chinese domestic automakers is expected to approach 50%.
Speaker Change: China continues to be an important market for leer and our relationship with the key domestic automakers is driving consistent growth.
Speaker Change: And now I'd like to turn the call over to Jason for the financial review.
Jason: Thanks, Greg.
Jason: Slide 10 shows vehicle production in key exchange rates for the third quarter.
Jason: Global production decreased 5% compared to the same period last year. It was down 6% on alere sales weighted basis.
Jason: Production volumes decreased by 5% in North America, 6% in Europe, and 3% in China from a currency standpoint, the U S dollar weakened against both the Euro and RMB.
Jason: Yeah.
Jason: Slide 11 highlights lear's growth over market.
Jason: In the third quarter revenue outperformed the industry in both seating and E systems as well as in each of our major markets.
Jason: Total company growth over market was three percentage points was sitting at 3% of new systems at 5%.
Jason: Growth over market was particularly strong in North America at seven percentage points, reflecting favorable backlog and platform mix in both segments.
Jason: <unk> benefited from higher volumes on general Motors full size trucks and Suvs.
Jason: As well as conquest wins on the Jeep Wagoneer and Grand Wagoneer.
Jason: You mean systems business on the general Motors Altium platform, including the hiring of prologue inaccurate gtx as well as higher volumes on the general Motors.
Jason: Canyon and Ford Super duty contributed to the strong growth in the region.
In Europe sales outperformed industry production by two percentage points, driven by new conquest programs, including the BMW five series of 95 and seating as well as new business with BMW Renault and these systems.
Jason: Our volumes in several salons us BMW and VW programs negatively impacted seating platform mix in Europe.
Jason: In China revenue outperformed the market by one percentage point, driven by new business on the Xiaomi two seven and two leap motor programs in seating and the next thing Mona any systems.
Jason: Lower volumes in several GM programs in seating and a global programs and it systems offset a portion of the outperformance in China.
Jason: We continue to grow our share with key Chinese automakers, such as BYD, and Julie's, which will further improve our customer mix in China going forward. When you include revenue from our non consolidated joint ventures, our China growth over market improves by five points to 6% for the quarter.
Jason: Okay.
Jason: Turning to slide 12, I'll highlight our financial results for the third quarter of 2024.
Jason: Our sales declined 3% year over year to $5 $6 billion.
Jason: The impact of foreign exchange and commodities sales were also down 3%, reflecting lower volumes on their platforms, partially offset by the addition of new business in both of our business segments.
Jason: Core operating earnings were $257 million compared to 267 million last year.
Jason: Despite lower sales operating margins were flat year over year at four 6% driven by positive net performance in a margin accretive backlog.
Jason: Adjusted earnings per share were $2.89 as compared to $2 87, a year ago, reflecting the benefit of our share repurchase program.
Jason: Third quarter operating cash flow was $183 million compared to $404 million last year, primarily due to the impact of their fiscal calendar and the timing of customer collections.
Jason: Yeah.
Jason: Slide 13 explains the variance in sales and adjusted operating margins in the seating segment.
Jason: Sales for the third quarter were $4 1 billion, a decrease of $173 million or 4% from 2023.
Jason: Excluding the impact of foreign exchange and commodities sales were down 3% due to lower volumes on Lear platforms, partially offset by the addition of new business.
Jason: Adjusted earnings were $262 million down $13 million or 5% from 2023 with adjusted operating margins of six 4%.
Jason: Operating margins were flat compared to last year as the impact from lower production on key Lear platforms was offset by positive net performance in the roll out of our margin accretive backlog.
Jason: Slide 14 explains the variance in sales and adjusted operating margins in the E systems segment sales for the third quarter were $1 5 billion, a decrease of $23 million or 2% from 2023.
Jason: Excluding the impact of foreign exchange and commodity sales were down 1% driven primarily by lower volumes on their platforms, partially offset by our strong backlog.
Jason: Adjusted earnings were $74 million or 5% of sales compared to $79 million and five 3% of sales in 2023.
Jason: The decline in margins reflected lower volumes on Lear platforms, partially offset by a margin accretive backlog and strong net operating performance.
Jason: Now shifting to our 2024 outlook so.
Jason: Slide 15 provides global vehicle production volume and currency assumptions that form the basis of our full year outlook.
Jason: We've updated our global production assumptions, which are based on several sources, including internal estimates customer production schedules and S&P forecasts.
Jason: Our production assumptions are lower than the latest S&P forecast across our key regions.
Jason: Selecting our most recent customer production schedules and our expectations regarding near term market conditions.
Jason: At the midpoint of our guidance range, we assume that global industry production will be down 4% compared to 2023 and nearly four 5% on alere sales weighted basis.
Jason: This is lower than our prior guidance assumption of a 3% decrease in production volumes.
Jason: From a currency perspective, we are maintaining an average euro exchange rate of 1.5.
Jason: $5 per euro and an average Chinese RMB exchange rate of seven point to RMB to the dollar.
Jason: Slide 16 provides detail on our outlook for 2024.
Jason: Key changes to the midpoint of our guidance include the following our revenue is now expected to be approximately $23 billion core operating earnings are expected to be approximately one point over $7 billion.
Jason: We are reducing our outlook for capital expenditures by $75 million, primarily as a result of slower customer ramp up on various new vehicles.
Jason: Continue aggressively managing capacity utilization.
Jason: Operating cash flow is expected to be approximately 114 billion.
Jason: The midpoint of our full year free cash flow guidance remains at $560 million with the benefit of lower capital expenditures offsetting the impact of lower earnings.
Jason: Slide 17 compares our current outlook to our prior outlook for sales and core operating earnings we are forecasting the midpoint of our 2024 sales outlook to be down $400 million from our July outlook, primarily reflecting the impact of reductions in vehicle production volumes.
Jason: Mid point of our core operating earnings outlook is expected to be down $50 million from our prior outlook for.
Jason: The reduction in our core operating earnings outlook reflects the impact of lower volumes, partially offset by improvements in net performance.
Jason: Slide 18 provides detail on the drivers of that performance, our consistent investment and operational efficiency is positioned Lear is the most competitive supplier in terms of both quality and costs over the past three years, we have generated an average of 40 basis points of margin growth per you're beating and 50 basis points.
Jason: Pre or any systems through net performance in 2024, we expect 30 basis points of net performance in seating and 40 basis points in these systems driven by investments in advanced and advanced manufacturing and restructuring as well as from commercial recoveries.
Jason: This performance is expected to improve operating earnings by approximately $100 million, helping to partially offset the negative impact of lower industry volumes.
Jason: Through strategic acquisitions acquisitions of automation capabilities, we have transformed our manufacturing processes, resulting in improved quality and efficiency.
Jason: Appointment of these capabilities will allow us to accelerate our efforts and continue offsetting wage inflation, while supporting margin expansion in both segments.
Jason: Our plans to reduce head count by 8% in seating and 6% any systems as compared to the end of 2023 remain on track.
Jason: These restructuring actions will help to align capacity with demand, while shifting our footprint to regions with lower labor costs, including North Africa and Central America.
Jason: Our strong competitive position and the value proposition, we bring to our customers helps us with commercial negotiations to address changes in production volumes inflation and other matters.
Jason: Continue to focus on negotiating commercial agreements that ensure sustainable financial returns.
Jason: Moving to slide 19, we highlight our commitment to continue to return capital to shareholders.
Jason: In the third quarter, we accelerated share repurchases buying back $209 million worth of stock. We continued to repurchase shares in a quiet period and achieved our target for the year of $325 million with capacity for further repurchases in the fourth quarter.
Jason: Year to date, we have reduced our share count by more than four 5%, which will help drive EPS growth going forward.
Jason: Since initiating the share repurchase program in 2011, we have repurchased $5 $5 billion worth of shares and returned over 85% of free cash flow to shareholders through repurchases and dividends.
Jason: Our current share repurchase authorization has approximately $1 $2 billion remaining which allows us to repurchase shares through December 31 2026.
Jason: Yeah.
Jason: Now turning to slide 20.
Jason: This slide highlights the key factors that will impact our financial outlook for 2025 and beyond.
Speaker Change: In recent years, the automotive industry has faced a variety of challenges, including a global pandemic with semiconductor.
Speaker Change: Fluctuations in commodity prices and FX rates and elevated wage inflation to navigate these headwinds we introduce lear for a strategic initiative focused on improving capacity utilization from footprint optimization and increasing flexibility across the two business segments and.
Speaker Change: In addition, we streamlined our portfolio to prioritize investments in products that leverage our core capabilities and strengths in engineering and manufacturing.
Speaker Change: Currently macro conditions, including vehicle affordability as the regulatory environment and wage inflation continue to weigh on the automotive industry. The unprecedented transition to electric vehicles is cause near term uncertainty around vehicle production.
Speaker Change: As customers assessed their power train strategies, we have seen a delay in sourcing activity, particularly in North America and Europe.
Speaker Change: Consistent with our historical track record we have.
Speaker Change: Taking actions such as improving our operating performance optimizing our footprint through restructuring actions and resolving commercial negotiations with our customers.
Speaker Change: We continue to make significant progress through our idea by litter initiatives, including aggressive steps to accelerate the deployment of automation.
Speaker Change: These performance improvement actions, coupled with growth opportunities through innovative products conquest wins and customer diversification and position both businesses for sustained revenue growth and margin expansion now I'll turn it back to Ray for some closing thoughts thanks, Jason.
Ray Scott: Please turn to slide 22.
Ray Scott: Positioning itself for long term success and any industry environment through our continued focus on what we can control and the execution of our strategic initiatives in seating we are accelerating the deployment of our thermal comfort systems products. Our comfort flex module solutions are entering the market and we are continuing to win new business for future.
Ray Scott: Occasions in E systems, we are winning new business across all powertrains, resulting in strong growth, we continue to diversify our customer base in both seating and E systems and the.
Ray Scott: The relationships, we have built with Chinese domestic automakers is driving new business opportunities for both businesses and we are starting to see increased opportunities to grow with the Japanese Oems.
Ray Scott: The investments we are making in advanced manufacturing and capacity optimization is improving our cost structure and allows us to be the most competitive supplier in our key products.
Ray Scott: During the quarter, we accelerated the pace of our share repurchases to take advantage of the current share price as a result, we repurchased our target of $325 million worth of shares reducing the share count by over four 5% since the beginning of the year driving earnings per share growth, we remain committed to REIT.
Ray Scott: Turning excess cash to shareholders through our dividend and share repurchase repurchases and now we'd be happy to take your questions.
Speaker Change: Ladies and gentlemen, we will now begin the question and answer session to ask a question you May Press Star and then one on your Touchtone telephone.
Speaker Change: You are using a speaker phone, we do ask that you. Please pick up the handset prior to pressing the keys.
Speaker Change: Draw your questions you May press star two.
Speaker Change: At this time, we'll pause momentarily to assemble the roster.
Speaker Change: Our first question. This morning comes from Joe Spak from UBS. Please go ahead with your question.
Joe Spak: Hi, Thanks, good morning, everyone. Good.
Speaker Change: Morning, Joe.
Joe Spak: I guess just to start.
Joe Spak: You know what the implied fourth quarter guidance it looks like you've taken a.
Joe Spak: A pretty punitive view on fourth quarter production and I'm wondering if that's.
Joe Spak: You know something you're seeing specific to your customers or platforms. Some conservatism and then you know what are your sort of early indications here for for twenty-five because you've previously talked about.
Joe Spak: The backlog has been impacted by slower uptake it feels like in the quarters. Since then things have gotten worse now you're saying you know some sourcing activities being delayed I know there was a chance that you said that existing programs can be extended or higher volume on existing programs could occur, but you know just how do we sort of put all these pieces together as we start thinking about next year.
Speaker Change: Yeah lots of process there, Jeff start with the fourth quarter I think that in both of our businesses.
Joe Spak: Our interaction with our customers has.
Joe Spak: <unk> given us a pretty clear line of sight on what volumes are going to look like through the balance of the year and ended the fourth quarter did deteriorate pretty significantly even from what we were seeing sort of mid mid third quarter as we updated our our view on the or during the conference and at that point.
Joe Spak: And so we are seeing in the fourth quarter.
Joe Spak: About five 5% lower than IHS or almost 8% lower on alere sales weighted basis.
Joe Spak: And.
Joe Spak: Now, 11% lower in Europe, specifically, I think Europe is probably where the biggest disconnect wise between what IHS recipe, it's projecting and what we're seeing from our customers seeing and hearing.
Joe Spak: Europe, we have down year over year of about 19% in the fourth quarter, North American down, 9% and China down seven 6% and so that's what we've factored in I don't think its I would refer to it as conservative I believe it's balanced.
There are some platform is doing better than others, but that's how we're seeing the market overall.
Joe Spak: In terms of 2025 I'm sure. We will get this question a number of times and I think it will.
Joe Spak: We will reserve most of our comments regarding what's going to you know our revenue is going to look like next year.
Joe Spak: What our view is on industry volumes until we get to our fourth quarter earnings call, but I can spend a few minutes talking a little bit more about the sourcing environment, which we referred to.
Joe Spak: In the prepared remarks, and sort of what we're seeing in that regard.
Joe Spak: Not singling out one customer, but sort of speaking in generalities, the 2024, new business sourcing.
Joe Spak: That we expected at the start of the year has progressed much more slowly so programs that we expected to complete the sourcing process have been considerably lower than what we would see in a typical here and so what we're seeing.
Joe Spak: I think as the impact of all of our customers rethinking their powertrain strategy is trying to design costs out of their their battery systems in particular on Evs and we're seeing a lot of what we would call rsi's as opposed to RF queues and so that has led to a little bit slower longer.
Joe Spak: Quote process than we would.
Joe Spak: Narrowly.
Joe Spak: Expect to see just to give a little insight. The RFID is request for information and what we're seeing is there's a lot of different scenarios planning within the multinationals on.
Joe Spak: Like Jason explain for cost or efficiency or what the band really looks like so as opposed to a request for quote which leads to an award we're seeing a lot more in the pipeline are request for information.
Joe Spak: That didn't their modeling inside four different evaluations in building your models for what the vehicle cost and what the architecture will look like we have seen an acceleration in RFID as over the last several quarters and I think.
Joe Spak: That's prudent and I think it will lead to a more competitive offering with our key customers as new programs launch and so I don't I don't think it's a bad thing I think it's a good thing, but it will have an impact most likely in our three year backlog that we would report on our fourth quarter earnings call, but as we're thinking about.
Joe Spak: Our performance in both business segments, our win rate on business. That's been source, it's consistent with what we've seen in prior years and I think that's that's a key point and our competitive position in both business segments has improved dramatically.
Dramatically over the last 12 months I'll start with seating because of the investments we've made in product and process innovation more specifically, what we've done around thermal comfort in modularity and advanced manufacturing processes that really facilitates what we're trying to accomplish and automation and reduce our capital costs going forward.
Joe Spak: <unk> systems are leading manufacturing cost footprint.
Joe Spak: Physician, we have already in Honduras, the strong position, we have in North Africa, and then leveraging the relationships we have with the Chinese domestics, particularly on the CD side, that's really what's what's leading to that kind of increased population of conquest growth opportunities.
Joe Spak: Any system. So I think both businesses are really poised to generate significant growth over the midterm and long term.
Joe Spak: Near term, it's going to be really impacted by just the pace of some of the.
Joe Spak: Programs in the pipeline that are launching and I think similar to what we saw this year with our backlog. It came down meaningfully from what we released in February to kind of where we ended up.
Joe Spak: At this point I think our initial backlog for 'twenty four was $1 2 billion.
Joe Spak: We see that around $885 million now and as we look out to next year, we see a similar phenomenon in terms of just lower volumes and us and delayed launches on many of the programs that comprise.
Joe Spak: <unk> backlog and we'll provide a lot more details of course.
Joe Spak: In the fourth quarter earnings call.
Joe Spak: Yeah.
Speaker Change: That's an incredible amount of detail around you. So thanks for that if I could just ask one one other quick one here.
Speaker Change: If I look at slide eight on.
Speaker Change: On your China progress, which has obviously been pretty good at it does seem like.
Speaker Change: Youre, assuming like maybe like a 2% annual decline in China for the multinationals.
Speaker Change: So and I think we've seen greater declines to date. So are you are you expecting that to moderate over the period or so.
Speaker Change: Supplanted by maybe some share gains there.
Speaker Change: Yeah, we're expecting the share shift to continue.
Speaker Change: But at a more moderate pace than what we've seen over the last certainly the last 12 months 24 months.
We're building a plan in this timeframe that has about 10 points of additional share shift from traditional.
Speaker Change: Traditional customers to the Chinese domestics, so we were trying to be.
Speaker Change: I don't think that that's anything new.
Speaker Change: Thank you.
Speaker Change: The RFID that we're seeing there more around.
Speaker Change: Different architectures are different architectural designs different battery.
Speaker Change: Les outs in designs within the battery for efficiency.
Speaker Change: And those are taking a little bit longer time, as they're assessing different types of use.
Speaker Change: Use cases within the vehicle based on the design and the platform that they're they're they're looking to source and so.
Speaker Change: Think on the CD side has been.
Speaker Change: Somewhat.
Speaker Change: Full because it gives us an opportunity and frankly Frank here.
Speaker Change: And we've talked about it John is that we're in now with the modular concept with our capabilities around automation has been something that has been very unique to offer.
Speaker Change: <unk> that is somewhat.
Speaker Change: Not traditional in more innovative and it helps lower their overall cost and so on.
Speaker Change: On the systems side, it's more around the architecture and what Theyre looking at and how Theyre looking at future designs and how theyre looking at the battery and the seating side has been extremely helpful. Because it's kind of open the door.
Speaker Change: On a non traditional sourcing model.
Speaker Change: Right now we've had some very constructive positive meetings on how we can drive the modular solution to really drive out efficiency and really.
Speaker Change: Freedom or better cost better seat system, and that's why when we hit to the.
Speaker Change: Success, we're having now with the Japanese Oes, they've really opened up I was just in Japan, several weeks ago talking to key customers there on our innovation on the manufacturing side, they're looking for it.
Speaker Change: Then obviously, it's been very helpful with the Chinese domestics its been or its been the thing that's opened the doors are innovation and so I think the way we separate ourselves, particularly in seating with innovation with a module design automation.
Speaker Change: Co bots and robots those are commoditized to a point, where we can get those very efficiently. It is the software upgrade them. So when they talk about their view, we're writing our own software. The whip automation software company that we purchased gave us in house capabilities with AI algorithms software that allow us to differentiate.
Speaker Change: On the floor not just from an efficiency standpoint, but what we're seeing is the benefits with quality throughput ergonomics everything it hits them, all and we're keeping that all in house why we acquired these companies is we're not we're not using that and selling it to any of our competitors, it's very very distinctly dizzy.
Speaker Change: <unk> for our internal use and and.
Speaker Change: I think what's great too is we're seeing a serious reduction in capital cost because as we manufacture our own capital for our own use we're seeing.
Speaker Change: A 30%, 40% reduction in capital and the cost of capital to deploy it and I think we're going to continue to see that so to your original question yes.
Speaker Change: The goal is to continue to automate the areas that we are very labor intensive and that we can become much more efficient and we're doing that.
Speaker Change: But the benefits that we're seeing with capital costs going down the efficiencies the way we differentiate ourselves.
Speaker Change: The customers I think are very attractive.
Speaker Change: How we're laying out. These these RFID is because it's unique to Lear, we're not buying off the shelf stuff were buying things that we manufacture that we produce they are unique to our our own designs in our own manufacturing needs and so.
Speaker Change: Like I said.
Speaker Change: Patients is a word that I have a tough time, because it's all about golf basketball basketball fast, but as you walk into customers through it and they have an appreciation for it and they see it.
Speaker Change: Really understand how we're differentiating ourselves and the benefits they can get across the board with quality throughput.
Speaker Change: Even job satisfaction from our employee perspective has been incredible so.
Speaker Change: But our target is to.
Speaker Change: In parallel work both of them.
Speaker Change: You said, you're expecting a similar phenomenon in 2025 versus 24, I'm, hoping to better understand what you meant by that did you mean, you think you will see backlog revised down by something like 25% to 30% Youre seeing this year and I think it was $800 million at the start of the year or did you mean, you think net backlog heading into 'twenty five is still going to be an 800 million or so range.
Speaker Change: Like what Youre now expecting for 'twenty four thanks, Yeah. So mark again, we're not ready to provide a pinpoint number but we are seeing a meaningful reduction in the 800 million backlog that we had initially anticipated for next year and Thats really driven by.
Speaker Change: The assumptions around some of the key platforms.
And our backlog in particular.
Speaker Change: Lots of US we have the Ram charger and Ram Rev programs.
Speaker Change: Our assumption around the timing of those launches and the volumes in that first year.
Speaker Change: Was much higher and much sooner when we established the backlog so that would probably be the single biggest factor that's changed and then in terms of the similar phenomena that I was referring to.
Speaker Change: Programs like <unk>.
Speaker Change: <unk> 90, and Pollstar, three and some of the GM EV platforms.
Speaker Change: We're now expecting lower volumes on those platforms then.
Speaker Change: Then our initial backlog assume so we do expect to see that $800 million backlog move down.
Speaker Change: And a not insignificant way I don't again, I don't want to put a pinpoint number on it we're still working through it but it will it will come down.
Speaker Change: Thank you.
Our next question comes from Colin Langan from Wells Fargo. Please go ahead with your question.
Speaker Change: Oh got it thanks for taking my questions.
Speaker Change: Just.
Speaker Change: Earlier it was asked I just didn't get a clear answer or maybe I missed it I apologize if I did.
Speaker Change: About the Q4 margin I think it's something like four 2% at the midpoint of your current guide.
Speaker Change: You're at four eight for the year.
Speaker Change: I bet, so its not much of a as much of an issue.
Speaker Change: Yeah, we are seeing an easing of wage inflation, a modest reduction from what we experienced this year, we don't see it going back down to sort of that 2021, 'twenty two level, but we do expect it to be less of the headwind next year than what we experienced this year, so that we get a bit of a <unk>.
Speaker Change: Start on.
Speaker Change: Our net performance targets and both businesses next year as a result of that in terms of trying to call. The volume on our car lines for next year at this point I think it's premature theres just a lot of moving parts.
Speaker Change: Think about the election and everything else in front of us.
Speaker Change: So we will save that for the fourth quarter earnings call count.
Speaker Change: Okay, all right. Thanks for taking my questions.
Speaker Change: Do you.
Speaker Change: Our next question comes from James Picariello from BNP Paribas. Please go ahead with your question.
Speaker Change: Hi, everybody.
James Picariello: Regarding layers, China revenue mix go back to slide eight.
James Picariello: Thanks for this level of detail by the way again, if we if we look back to last year, you had roughly $4 9 billion in sales.
James Picariello: In China with about 60% of that consolidated and the different figure JV is there a similar consolidated versus JV breakout for your 2027 target and then can you just provide any color on the margin profile differences of your current domestic OEM relationships compared to the to the legacy business.
James Picariello: Yes.
Speaker Change: Yeah, I'll take the first part and then.
Speaker Change: Ray can take the second part of that in terms of the relationships.
Speaker Change: So we provided a number that includes consolidated non consolidated for 2027, and that's because it's a little bit of a moving target I mean, we're in discussions in certain JV.
Speaker Change: Relationships that we have right now where that could change.
Speaker Change: I like our growth opportunities, longer term there's no question about it.
Speaker Change: Appreciate that color, really helpful. So just not by back, she had targeted 325 million for the year. You've essentially achieved that of a full quarter early year. Just how soon you think about the rest of the year. Thanks.
Speaker Change: James, we have the capacity based on our free cash flow outlook for the year to do more in the fourth quarter. I think 50 to 100 million is a reasonable target as we look at our plans for the quarter. So I would expect something in that range.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Adam Jonas from Morgan's Family. Please go ahead with your question.
Speaker Change: Hey guys, good morning. It's William Taken on for Adam Jonas. I think, you know, I think Terifzer, a very topical conversation right now, especially with the election.
William Taken: I think it would be useful if you guys could talk about how you're going about managing any potential tariffs, especially I think with Mexico because I know you have a lot of footprint there. And if you guys don't want to give commentary that's fine, but I think it's very double.
Speaker Change: Yeah, I think with regards to Mexico, you know, the disruption of the auto industry.
Speaker Change: Auto-industrial overall would just would be significant. I think there's a very low likely hud of that happening. I think we have some time before.
Speaker Change: U.S. S.M.CA is going to be renegotiated.
Speaker Change: But at the same time, we do have the benefit of shifting footprint from Mexico to Honduras, so we're not just dependent on that region for low cost labor, but I would say that that our view at this point is that that's...
Speaker Change: a change in the terror, regimen, or scheme, and Mexico is unlikely.
Speaker Change: We got it, no that's all very helpful. I think on the EV side, you know, I think OEM, you see GM with their targets at their investor day. OEM type or focusing on getting to that gross margin positive on EVs.
Speaker Change: Because you guys see anything new in terms of price downs, decontenting anything that impacts you guys, you know, as OEMs, we're just trying to get to that gross margin positive.