Q2 2025 Lear Corp Earnings Call
Yeah.
Speaker Change: Good morning, everyone and welcome to the Lear Corporation second quarter 2025 earnings Conference call.
Speaker Change: All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
Speaker Change: After todays presentation, there will be an opportunity to ask questions. Please note that today's event is being recorded.
Speaker Change: At this time I'd like to turn the floor over to Tim from Bot, Vice President Investor Relations. Please go ahead.
Tim Bot: Thanks, Jamie Good morning, everyone and thank you for joining us for Lear's second quarter 2025 earnings call presenting today are Ray Scott Lear, President and CEO, and Jason <unk> Senior Vice President and CFO. Other members of Lear's Senior management team have also joined us on the call.
Tim Bot: Following prepared remarks, we will open the call for Q&A you can find a copy of the presentation that accompanies these remarks at IR at <unk> Dot com.
Tim Bot: Before we begin I'd like to take this opportunity to remind you that as we conduct this call we'll be making forward looking statements to assist you in understanding lear's expectations for the future.
Speaker Change: As detailed in our Safe Harbor statement on slide two our actual results could differ materially from these forward looking statements due to many factors discussed in our latest 10-K and other periodic reports.
Speaker Change: I also want to remind you that during today's presentation, we will refer to non-GAAP financial metrics. You are directed to the slides in the appendix of our presentation for the reconciliation of non-GAAP items to the most directly comparable GAAP measures.
Speaker Change: The agenda for today's call is on slide three first Ray will review highlights from the second quarter and provide a business update.
Speaker Change: <unk> will then review our financial results and provide an update on the full year.
Speaker Change: Our guidance.
Speaker Change: Finally, ray will offer some concluding remarks following the formal presentation, we would be happy to take your questions now I'd like to invite ray to begin.
Speaker Change: Good.
Speaker Change: Please turn to slide five which highlights key financial metrics for the second quarter of 2025.
Speaker Change: They're delivered $6 billion of revenue in the second quarter core operating earnings were $292 million.
Speaker Change: And our total company operating margin was four 8%.
Speaker Change: Adjusted earnings per share was $3 47.
Speaker Change: Our operating cash flow was $296 million in the quarter and our second quarter financial performance was generally in line with the second quarter of 2024 for all of our key financial metrics.
Speaker Change: Slide six summarizes key financial and business highlights from the quarter as a reminder, our strategic priorities continue to be <unk>.
Speaker Change: Our global leadership position in seating expanding margins in E systems.
Speaker Change: Growing our competitive advantage and operational excellence through idea by Alere and supporting sustainable value creation with disciplined capital allocation.
Speaker Change: The momentum of positive net performance, we delivered to start the year continued through the second quarter contributing 45 basis points to seating and 70 basis points. These systems margins.
Speaker Change: Patiency improvements and savings.
Speaker Change: From our investments in restructuring and automation are driving durable operating performance in both segments.
Speaker Change: Through the first half of the year, we delivered 85 basis points of net performance in seating and a 110 basis points of new systems.
Speaker Change: Although macro uncertainty remains our confidence in our business enables us to restore our full year guidance.
Speaker Change: Our strong operating performance is expected to continue through the second half as a result, we are increasing our full year net performance outlook by approximately $25 million.
Speaker Change: So more than $150 million.
Speaker Change: Our strong free cash flow in the quarter and confidence in our long term outlook allowed us to reinstate our share repurchase plan, we repurchased $25 million of shares in the quarter.
Speaker Change: $50 million in the first half, while maintaining our dividend of <unk> 77 per share.
Speaker Change: Yesterday, we completed the refinancing of our $2 billion revolver extending its maturity through July of 2030 further strengthening our liquidity position.
Speaker Change: The last two years, we have partnered with Pelletier to develop real time data analytics, and streamlining our manufacturing and administrative straight of processes.
Speaker Change: We extended our agreement for a long term partnership to continue to enhancing our digital and operational capabilities, which are driving efficiency gains in our manufacturing facilities and administrative functions.
Speaker Change: We continue to win new business in both segments.
Speaker Change: We want to we want a key conquest program in Asia with BMW.
Speaker Change: We won key conquest awards in North America, Bresee components done before 150 <unk>.
Speaker Change: Once the ft.
Speaker Change: F 250 pickup trucks.
Speaker Change: Modularity strategy continues to drive new business in the quarter, we won two comfort flex and one comfort Mack's seat award.
Speaker Change: <unk>, a key program, where the luxury E D automaker, combining heat ventilation and pneumatic lumbar and massaged into the surface surface materials.
We now have 24 total awards for comfort Flex flex there income from mack's seat applications that will generate over $150 million.
Speaker Change: Of average annual revenue.
Speaker Change: In China, We won several awards with domestic Chinese automakers, such as F. A W leap motor and shopping.
Speaker Change: In E systems, we continue to win new business, including key conquest wire awards with a large global EV automaker. These programs start later this year illustrating our ability to quickly launch new business.
Speaker Change: Our awards in <unk> systems for the year are already approaching.
Speaker Change: $1 billion in annual sales with several additional opportunities is expected to be sourced in the second half of this year.
Speaker Change: Slide seven provides an update on the key metrics to track our progress on expanding margins and generating long term revenue growth.
Speaker Change: For seating we wanted conquest award in Asia, with BMW and expect a quote additional conquest opportunities in the second half of this year and then into 2026.
Speaker Change: The pipeline remains very robust and although the pace of New awards is improving we continue to see some delays in sourcing as customers reevaluate their plans based on recent changes to trade a regulatory policies.
Speaker Change: Any systems in over 25% of our year to date awards had been for conquest business, including.
Speaker Change: The two key programs with the top global E D automakers during the second quarter.
Speaker Change: Customer interest in our innovative modular seat products is growing three additional awards brings our total to 24 programs, where our comfort flex comfort Mac seats.
Speaker Change: Flex air products.
Speaker Change: Our strong relationships with Chinese domestic automakers continue to deliver new program wins.
Speaker Change: We will supply a complete seats for several programs with VW leap motor and shall paying in China Yeah.
Speaker Change: <unk> Award is the second conquest program with <unk> this year.
Speaker Change: We continue to be selective in our business.
Speaker Change: As we quote different Chinese domestic automakers to ensure we are partnering with customers that have a long term sustainable future.
Speaker Change: We're only pursuing high quality programs that can generate strong risk adjusted returns in excess of our cost of capital.
Speaker Change: Yeah.
Speaker Change: Investments in idea by Alere and.
Speaker Change: Our automation projects generated about $30 million of savings in the first half.
Speaker Change: With benefits expected to compound over the year.
Speaker Change: Restructuring investments contributed approximately $30 million in savings in the first half.
Speaker Change: Efficiency improvements in our operations allowed us to reduce our global hourly head count by 4400 in the first half.
Speaker Change: Despite an increase in head count due to the consolidation of our joint venture in China completed in the first quarter.
Speaker Change: Since the end of 2023, we have reduced our global hourly head count by nearly 20000.
Speaker Change: Or 11%.
Speaker Change: The strong first half performance results on our scorecard metrics.
Speaker Change: Are the key enablers to improve margins and drive long term growth in both segments.
Speaker Change: Slide eight provides an overview of our partnership with Palin tier.
Speaker Change: Over the past two and a half years, we have leveraged <unk> foundry.
Speaker Change: And large language models to build robust real time data management solutions.
Speaker Change: Adoption has been strong with more than 11000 users driving over 175 active use cases across our organization.
Speaker Change: A key area of impact has been the work on the tariff response once new tariffs were enacted our teams quickly developed a fully automated tariff data management system. This system enabled us to provide our customers real time documentation.
Speaker Change: Speeding up the invoicing process, while providing insight into our greatest mitigation opportunities.
Speaker Change: Beyond back office improvements foundry has delivered significant value to our manufacturing operations.
Speaker Change: Foundry supports dynamic line balancing optimizing throughput inefficiency on the shop floor in our just in time just in time seating plants.
Speaker Change: The platforms multi lingual capabilities enabled us to quickly standardize our processes globally.
Speaker Change: Partnership is complementary to our acquisitions and investments in automation, we have made over the last several years, we look forward to building on this momentum in the years to come. Most importantly, it is our Lear team members, who are driving these innovations and delivering measurable results.
Speaker Change: We are approaching enterprise wide adoption and developing institutional knowledge that gives us a first mover advantage in the automotive industry, which will be difficult to replicate.
Speaker Change: Turning to slide nine I will provide more detail on our operational and commercial actions driving our strong for poor performance.
Speaker Change: We've increased our investment in restructuring to accelerate our footprint rationalization actions and reduce costs. We are prioritizing investment opportunities with the shortest payback periods to drive cost savings that will grow over time.
Speaker Change: As a manufacturing integrator, we are leveraging the key competencies, we have built and acquired over the last several years to.
Speaker Change: To expand our automation capabilities through our facilities by designing and utilizing purpose built capital. We have developed proprietary solutions at a lower cost that will be difficult for any competitor to replicate.
Speaker Change: Our automation.
Speaker Change: In the in the complete seat assembly plants, such as end of line testing finesse sequencing and other applications is driving significant efficiency gains.
Speaker Change: We are expanding the use of these systems more broadly in our facilities starting in our highest cost regions.
Speaker Change: We are excited to open a new industry first facility that will support the launch of automated Kompromat seat Assembly.
Speaker Change: We have fully automated the assembly of these modules ensuring that no one touches the trim cover from the moment is on path towards the complete module is ready for shipment. This facility will be located right here in Michigan.
Speaker Change: In addition to our comfort mack's seat automation. This facility will be used to produce additional U S content, including flex there.
Speaker Change: Our innovative foam alternative.
Speaker Change: Our product innovation and process improvements in seating have enabled us to reduce costs or new programs by 200 to over 500 basis points. This durable cost advantage will allow us to increase our industry, leading seat margins and continue to separate ourselves from our competitors.
Speaker Change: The investments in restructuring and automation contributed approximately $60 million in savings in the first half of this year.
Speaker Change: And we estimate we will drive an additional $90 million in savings in the second half of this year.
Speaker Change: Our E systems team continues to improve efficiencies in our wire plants June was one of the best efficiency months for North America wire since early 2019 due to our strong focus on execution in those operations over the last several quarters.
Speaker Change: Commercially we are renegotiating pricing on existing Underachieving programs.
Speaker Change: Our future programs, we are reestablishing contract terms that will help us mitigate downside volume risk going forward.
Speaker Change: We're implementing stair step pricing that will ensure strong returns at various volume levels for high higher risk programs. Some customers are willing to prepay for capital, especially for some of the vehicle programs at highest higher riskier consumer demand profiles.
Speaker Change: There is being selected blew out the programs and customers. We pursue we are focused on bidding on programs that will generate higher risk adjusted returns.
Speaker Change: We continue to build long term relationships with our customers.
Speaker Change: Our focus is to pursue and grow business with the highest quality automakers and platforms.
Speaker Change: Our operational and commercial actions are driving consistent strong net performance.
Speaker Change: Hi, and highlight our ability to execute our strategy in any macro environment Easter.
Jason: These strategic initiatives are enabling us to continue to expand our margins in both both segments going forward now I'd like to turn the call over to Jason for a financial review.
Jason: Thanks right.
Jason: Slide 11 shows vehicle production key exchange rates for the second quarter.
Jason: Oil production increased 3% compared to the same period last year, but was flat on alere sales weighted basis, driven by lower year over year production in North America and Europe.
Jason: Production volumes declined by 3% in North America, and by 2% in Europe, while volumes in China were up 9%.
Jason: In the U S dollar weakened against the Euro and was flat against the RMB.
Jason: Turning to slide 12, I will highlight our financial results for the second quarter of 2025 or.
Jason: Our sales were flat year over year at $6 billion, excluding the impact of foreign exchange commodities tariff recoveries acquisitions and divestitures.
Jason: Sales were down 1%, reflecting lower volumes on Lear platforms, and the wind down of discontinued product lines. In these systems, partially offset by the addition of new business in both of our business segments.
Jason: Our operating earnings were $292 million compared to $302 million last year, driven by lower volumes on their platforms, partially offset by positive net performance and our margin accretive backlog.
Jason: Adjusted earnings per share were $3.47 as compared to $3.60 a year ago, reflecting lower adjusted net income partially offset by the benefit of our share repurchase program.
Jason: Second quarter operating cash flow was $296 million compared to $291 million last year, primarily due to improvements in working capital, partially offset by lower core operating earnings.
Jason: Slide 13 explains the variance in sales and adjusted operating margins for the second quarter in the seating segment sales.
Jason: Sales for the second quarter were $4 $5 billion, an increase of $27 million or 1% from 2024.
Jason: Excluding the impact of foreign exchange commodities tariff recoveries acquisitions, and divestitures sales were down 1% due to lower volumes on Lear platforms, including the Jeep wagoneer and the impact from the Audi Q five changeover in North America.
Jason: And several Mercedes and BMW programs in China, partially offset by the addition of new business.
Jason: Adjusted earnings for $299 million down $3 million or 1% from 2024 with adjusted operating margins of six 7%.
Jason: Operating margins were slightly lower compared to last year, reflecting lower production on key Lear platforms and changes in foreign exchange rates, partially offset by strong net performance and our margin accretive backlog.
Jason: Slide 14 explains the variance in sales and adjusted operating margins for the second quarter and the system segment sales.
Jason: Sales for the second quarter were $1 6 billion, a decrease of $8 million or 1% from 2024.
Jason: Excluding the impact of foreign exchange commodities tariff recoveries acquisitions and divestitures sales were down 5%.
Jason: The decline in sales was driven by lower volumes on their platforms, including the Ford escape in North America, and several Audi and Volkswagen programs in China as well as the wind down of discontinued product lines, partially offset by the addition of new business adjusted earnings were $76 million or four 9% of sales compared to $82 million and $5.
Jason: 3% of sales in 2024.
Jason: Lower operating margins were driven by the reduction of volumes on keeler platforms, and the wind down of discontinued product lines, partially offset by strong performance the rollout of a margin accretive backlog and the impact of foreign exchange.
Jason: Yeah.
Jason: Slide 15 provides an update at our tariff exposure and the actions we are taking to mitigate the risk.
Jason: As a reminder, our exposure is primarily in two areas direct exposure, where we are the importer of record into countries with tariffs on components and indirect exposure to vehicle production that may be disrupted by changes to tariffs and trade policies.
Jason: Since our last earnings call There've been no meaningful changes to our direct exposure to tariffs over 90% of our direct imports from Mexico, and Canada comply with U S MCA requirements and therefore.
Jason: Remain exempt from automotive tariffs.
Jason: Based on the current tariff policies and volume expectations, our gross direct tariff exposure is approximately $210 million for 2025.
Jason: Contractual agreements with our customers allowed us to recover substantially all of the $63 million in tariff costs, we incurred in the first half of the year.
Jason: Our full year financial outlook assumes a continuation of tariff costs recovery agreements through the remainder of the year.
Jason: There's been a lag in the cash repayment of tariff recoveries from our customers, which reduced our free cash flow in the second quarter our.
Jason: Our revised full year free cash flow forecast includes a $30 million impact from the lag in payments.
Jason: Our indirect exposure to potential vehicle production disruptions has moderated somewhat driven by further clarity and tariff policies and changes to customer production in footprint plants are.
Jason: Our estimated exposure is approximately $1 $6 billion 2025.
Jason: From vehicles exports to the United States from Mexico, and Canada.
Jason: This is a decline of approximately $200 million largely due to lower production on customer platforms produced in Mexico, and Canada, a portion of which has been offset by higher production in the U S.
Jason: Our exposure to vehicles from Europe exported to the U S is about $975 million of which approximately 37% are from the U K and covered by the trade agreement currently in place.
Jason: Trade policies continue to evolve and could change our exposure over time for example, the implementation of tariffs on copper an increase in rates for steel could impact commodity prices for copper, we purchased approximately 200 million pounds per year and have index and scrap recovery agreements that are intended to cover approximately nine.
Jason: 80% of our exposure for.
Jason: For steel, we purchased approximately 3 billion pounds per year as with copper approximately 90% of our steel exposure is index.
Jason: As the largest U S based automotive supplier, we continue to have conversations with the administration and other key elected officials to clearly explain how our supply chain, it's been optimized as well as the rationale for sourcing certain labor intensive products from Mexico and Honduras.
Jason: This ultimately insurers our customers can produce and sell vehicles at competitive prices in the U S market and globally.
Jason: Some customers have announced plans to move some production into the U S.
Jason: We have a capability to support localized production of complete seats, especially for programs. We currently supply and have available capacity for components, such as our modular solutions foam and structures.
Jason: These moves by our customers create an opportunity to support additional volume for vehicles, we supply today as well as win new business.
We have taken proactive steps and moved aggressively to minimize our gross exposure.
Jason: Focus on automation and investments in digital tools, such as foundry support the timely commercial recovery of tariff costs from our customers.
Jason: While tariffs are impacting the entire automotive industry Lear has taken a proactive approach to reduce the direct and indirect impact of tariffs through innovative solutions.
Jason: Turning now to slide 16.
Jason: Our first quarter earnings call, we withdrew our 2025 outlook due to the significant uncertainty caused by the ongoing international trade negotiations.
Jason: Over the last few months industry conditions have somewhat stabilized, allowing us to restore our full year 2025 guidance.
Jason: Slide 16 provides global vehicle production volume and currency assumptions that form the basis of our full year outlook.
Jason: We have updated our production assumptions, which are based on several sources, including internal estimates customer production schedules and S&P forecast.
Jason: At the midpoint of our guidance range, we assume that global industry production will be flat compared to 2024 are down 2% on alere sales weighted basis, driven primarily by lower volumes in our two largest markets North America and Europe.
Jason: From a currency perspective, our 2025 outlook assumes an average euro exchange rate of $1 11 per euro, reflecting the weakening U S dollar and an average Chinese RMB exchange rate of 723 RMB to the dollar.
Jason: Slide 17 provides detail on our outlook for 2025 P.
Jason: Key changes to the midpoint of our guidance include the following.
Jason: Our revenue is now expected to be approximately $22 8 billion, 2% higher than our previous guidance driven by favorable foreign exchange tariff recoveries and the impact of the consolidation of our seating joint venture in China, partially offset by the impact of lower production on several of their platforms.
Jason: Core operating earnings are expected to be approximately one point, <unk> $5 billion or $20 million lower than our previous guidance.
Jason: Driven by the impact of lower volume, partially offset by favorable foreign exchange and continued improvements in our strong operating performance.
Jason: We are increasing our outlook for restructuring costs by $40 million to accelerate our footprint rationalization actions and reduce costs at the same time, we are lowering our outlook for capital spending by $35 million.
Jason: Operating cash flow is expected to be in the range of 1% to $1 $1 billion and our free cash flow is expected to be $470 million at the midpoint of our guidance.
Jason: Our free cash flow outlook includes $30 million of expected cash tariff recovery timing lag into 2026.
Jason: We have included a detailed walk to the midpoint of our updated guidance from our prior guidance in the appendix.
Jason: Slide 18 compares our 2004 actual results to the midpoint of our 2025 outlook.
Jason: Year over year revenue is expected to decline by $536 million, primarily due to the impact of lower production volumes on our programs as well as the divestiture of a noncore seating operation partially offset by the addition of new business in both segments tariff recoveries and the impact of favorable foreign exchange.
Jason: The midpoint of our core operating earnings outlook is expected to be $1.025 billion with operating margins of four 5%.
Jason: Reflecting lower volumes on existing litter platforms, partially offset by continued strong net performance in a margin accretive backlog.
Jason: We expect net performance to contribute 60 basis points of margin improvement in 2025 up $25 million from our prior outlook to over $150 million.
Jason: This reflects the positive momentum in both our automation investments and restructuring actions.
Jason: We have included detailed walks to the midpoint of our guidance for seeding any systems in the appendix.
Jason: Moving to slide 19, we highlight our balanced capital allocation strategy.
Yesterday, we successfully completed the refinancing of our $2 billion revolver, extending its maturity from 2027 to 2030.
Jason: We have a strong balance sheet and liquidity profile, which is a significant competitive advantage for us today in today's uncertain environment.
Jason: We do not have any near term outstanding debt maturities. Our earliest bond maturity is in 2027 and our debt structure has a weighted average life of approximately 12 years.
Jason: Our cost of debt as well averaging approximately 4%. In addition, we had $2 $9 billion of available liquidity.
Jason: Our capital allocation priorities remain consistent.
Jason: On generating strong cash flow investing in the core business to drive profitable growth and returning excess cash to shareholders.
After a brief pause in share repurchase activity, we reinstated our repurchase program in June.
Jason: During the second quarter, we repurchased $25 million worth of shares bringing total repurchases for the first half of the year to $50 million for the full year, we plan to repurchase $250 million worth of stock with additional repurchase opportunities depending on the level of free cash flow generation.
Speaker Change: Now I'll turn it back to Ray for some closing thoughts.
Ray Scott: Thanks, Jason Please turn to slide 21.
Ray Scott: Our first half results illustrate our continued.
Ray Scott: In a volatile industry environment.
Ray Scott: Strong relationships with our customers have been key to offsetting the impact of tariffs. We are focused on executing our strategic initiatives to improve our margin profile.
Ray Scott: To win new business across our product lines in both segments, despite slower than expected sourcing activity.
Ray Scott: Strong balance sheet with no near term debt maturities that allows us flexibility in our capital allocation strategy and positions us well to navigate macro uncertainty.
Ray Scott: Our investments in restructuring and automation are driving strong operating performances.
Ray Scott: We are expanding our leadership in our operational excellence.
Ray Scott: Proving the cost profile of our businesses.
Ray Scott: Enabling us to generate sustainable margins and strong cash flow and.
Ray Scott: And we will remain committed to returning excess cash to our shareholders and now we'd be happy to take your questions.
Speaker Change: Ladies and gentlemen at this time, we'll begin the question and answer session to ask a question you May Press Star and then one on your Touchtone phones. If you are using a speaker phone. We do ask that you. Please pickup your handset prior to pressing the keys to ensure the best sound quality.
Speaker Change: To withdraw your question you May press Star two.
Speaker Change: Once again that is star and then one to join the question queue, we will pause momentarily to assemble the roster.
Speaker Change: And our first question today comes from.
Speaker Change: Dan Levy from Barclays. Please go ahead with your question.
Hi, good morning, Thanks for taking the question.
Speaker Change: Wanted to first.
Speaker Change: Start with a question on the outlook has there is a meaningful deceleration in the margins in the second half and I get it the majority of that is coming.
Speaker Change: Coming from.
Speaker Change: Weaker weaker volume, but the decrementals are a bit higher.
Speaker Change: Can you just talk about performance, which had been particularly strong in the first half, but maybe it didn't contributing the same amount in the second half.
Speaker Change: Oh sure.
Speaker Change: Yeah, So as you.
Speaker Change: Highlighted we had a very strong first half and that performance really in both business segments and so that the progress we've made in the first quarter really continued into the second quarter and before I go through kind of that first half second half I think it's it's important to highlight that our confidence in our ability to generate margin.
Speaker Change: Expansion through performance.
Speaker Change: Really increase based on the results that we experienced in the first half of the year and just to really emphasize that's what it is effectively happening here now as we're able to offset the full effect of our wage inflation and other economics as well as our customer contractual.
Speaker Change: Price reductions through our normal efficiency programs and commercial negotiations negotiations with our suppliers.
Speaker Change: And other cost reduction programs like that which allows the full effect of our.
Speaker Change: Idea by Alere savings and automation.
Speaker Change: Restructuring savings to fall through to the bottom line and Thats generating $150 million of additional earnings here for the full year.
Speaker Change: In terms of what's going on from the first half to the second half I think it's a it's important to highlight.
Speaker Change: Couple of points here.
Speaker Change: The ball.
Speaker Change: And in the first quarter call, we had about 20 basis points in seating.
Speaker Change: Commercial recovery timing that we had expected to happen later in the year. It got pulled into the end of the first quarter. We saw a similar phenomenon in the second quarter.
Speaker Change: 20 basis points as well so it was about 40 basis points of Seatings performance net performance in the first half of the year. It was sort of re time from the second half of the year. So the first asking here and that was intentional.
Speaker Change: Part of the quarter, we Werent sure. If we were going to be able to finalize all of our recovery agreements on tariffs with our customers. So we were very aggressive in trying to close out this commercial issues and as it turns out we were able to both secure full or nearly full recovery for for tariffs in the first half year and.
Speaker Change: Pull ahead some of these commercial agreements so.
Speaker Change: Normalized for that.
Speaker Change: The first half second half net performance in seating would be similar now in E systems, you may recall last year, we talked about some of the.
Speaker Change: Efficiency issues and launch issues that we had in our North America wire business at the start of the year and so part of that net performance.
Speaker Change: Calculation is what happened in the prior year. So in the first half we had a weaker first half in the system.
Speaker Change: Systems last year, and so the efficiency improvements that we drove in the second half of last year, and then continue that into the first half of this year really led to that strong net performance in the first half for your systems and in the second half the comps become a little bit.
Speaker Change: More challenging.
Speaker Change: That's kind of another key factor that's driving that.
Speaker Change: We're talking about that sort of comparison year over year.
In the third quarter, we had a particularly strong third quarter last year in seating.
Speaker Change: And so the net performance that we expect year over year.
Speaker Change: It's going to be way down in the third quarter of this year as a result of that.
Speaker Change: Tough comparison, we had a high level of commercial settlements in the third quarter last year and in fact, we may end up with a slightly negative net performance in seating and in the third quarter as a result of that but in terms of the kind of structural underlying drivers of performance. We're increasingly confident in our ability to not just deliver.
Speaker Change: The $150 million this year, but as you think about 26 and 27, we think we can replicate that.
Speaker Change: For the next several years based on the pipeline of projects that we have an idea by Alere and our restructuring program. We are increasingly confident in our ability.
Speaker Change: To use that as a key lever to improve margins in an uncertain production environment.
Speaker Change: Okay, and just to be clear. This is the second half number which I think in the past you said would be the right sort of exit rate jumping off point for 'twenty six.
Speaker Change: Probably not not correct now that would probably be too low for the jumping off rate yeah I think.
Speaker Change: And we had talked about the fourth quarter, our target is to exit at 5% and that that would be a good launching point to model heading into 2026.
Speaker Change: These commercial auctions, we've pulled ahead to the first half debt that makes that a little bit.
Speaker Change: Less helpful in terms of our modeling starting point I would encourage.
Speaker Change: The analysts and investors to think about our full year margin performance in both businesses as the right one.
Washington point for thinking through 2026.
Speaker Change: As a result of some of those timing differences.
Speaker Change: Okay, great. Thank you.
Speaker Change: Second question is on your awards and specifically in seating if you could double click on the award you got from Ford is that just on the components or is there any any hit there and maybe you could just talk broadly about the modularity it seems like.
G and.
Speaker Change: Someone else is doing the tcs there. So what is the uptake and does re shoring at all change any of the way that.
Speaker Change: Tcs plays into the strategy.
Dan Levy: Yeah, Dan to your first question the component business as the structures business on the F $152 50.
Speaker Change: It was a good business.
Speaker Change: The business from a return standpoint puts us in a good position, we're still in the process of quoting.
Speaker Change: The just in time business with Ford Motor Company on the $1 $52 50, that's in process right now.
Speaker Change: And.
Speaker Change: We can.
Speaker Change: The reason, we're illustrating a lot of our advantages that we believe we have competitively with efficiency through it is the digital software development that we've done or the automation is I think putting us in a very competitive position.
Speaker Change: At a level that we can still maintain a healthy margin and so that is in process right now.
Speaker Change: The.
Speaker Change: A continuation of.
The thermal comfort components, what's what's nice about that I mentioned in my narrative around the ability. We're gonna have here in Michigan facility that illustrates the complete modular.
Speaker Change: System being automated and we have.
Speaker Change: With Ford and with General Motors, and then one of them one of them with General Motors is a mid cycle.
Speaker Change: Implementation that demonstrates our ability to really get efficient on the modular component with.
Speaker Change: Thermal comfort systems and so it's a process, we're still going through it but I think the ability to scale the onshoring that we're seeing.
Speaker Change: It really adds to the credibility of how we can replicate a very cost efficient system that can be scaled across multiple programs and I think the uniqueness.
Speaker Change: Ill.
Speaker Change: I mentioned.
Speaker Change: Some of these programs are mid cycle. So we can disrupt even awarded program and if the efficiencies there and that's what our that's exactly what our customers are looking for they're looking for.
Speaker Change: Cost efficiencies that can be generated so introducing those getting them validated with the key Oems at all it has always been our strategy.
Speaker Change: And we're right, where we need to be I think over time as we illustrate this this automated system through the modular components will only help strengthen our position and so I feel good where we're at like we've had some nice wins I mentioned, the 24 wins I think a combination of innovation and the combination of the automation.
Speaker Change: Are really playing nice as customers are looking at onshoring and.
Speaker Change: And continue to expand capacity needs here in the U S and so we'll continue to work it.
Speaker Change: I'm happy with where we're at I think that the.
Speaker Change: The next step of this this this innovation center that we're putting here in Michigan to demonstrated for analysts and for investors and for customers is going to really really.
Speaker Change: I think help us propel the growth strategy within the thermal comfort system.
Speaker Change: Great. Thank you.
Speaker Change: Our next question comes from.
Joe Spark: Joe Spark from UBS. Please go ahead with your question.
Joe Spark: Thanks, Good morning.
Speaker Change: Maybe.
Speaker Change: And Jason just to go back to some of the performance.
Speaker Change: Terry I, just want to make sure I understand because you're saying now over 150 million for the year I think you raised that 25, but it looks like you've done if by my math.
Speaker Change: <unk> million dollars or so or maybe more in the first half.
Speaker Change: So I just wanted to confirm that that's sort of correct and like all of that 25 that you raised is that is that all in the back half or was some of that already realized maybe in the second quarter.
Speaker Change: Yes, I think that it's a combination to the extent we've increased our restructuring savings Joe that that falls, mostly in this in the back half of the year.
Speaker Change: And in terms of the again just on the.
Speaker Change: The math first half to second half. So we had 100 basis points of net performance in the first half we have.
Speaker Change: Just 15 basis points and that performance in the second half.
Speaker Change: That's that's 10 in seating and 40 in the systems, the tender and seeding a few where that kind of re time those commercial settlements.
Speaker Change: Rebalance them throughout the year, we would be at 40 40 to 50 basis points in the second half of the year.
Speaker Change: 85 basis points, we generated in the first half year in seating would be 45 basis points. So that's sort of.
Speaker Change: Similar performance first half the second half in C D and after you adjust for those those commercial settlements and so then the real benefit youre seeing hitting our performance for the full year is primarily restructuring savings.
Speaker Change: With that additional investment we're making in restructuring.
Speaker Change: Okay.
Speaker Change: And then just.
Speaker Change: The.
Speaker Change: It's a follow up on Dan's questions on some of the F. 150 announcement does that is that is and is that a mid cycle change or is that the next generation of of of the program and you know ray like earlier in the year you sort of you know when you gave that sort of initial backlog you did sort of talk about <unk>.
Speaker Change: An updated backlog at some point during the year and I know you mentioned there has been delays in sourcing, but it does also seem like there's been some progress an update so I was wondering when we could expect an update to your backlog outlook.
Speaker Change: Yes, it did.
Speaker Change: The.
Speaker Change: Component business that we want with Ford Motor Company is the next generation F 150.
Speaker Change: The $2 50, so we.
Speaker Change: We will I think.
Speaker Change: We're at that point.
Speaker Change: We talked also about E systems being a little bit earlier, and we did a great job. We're almost at $1 billion I think it's incredible what E systems has done and I just want to remind everyone that.
Speaker Change: We're really focused on earning above our cost of capital. So these programs that we're winning in these systems are accretive to the margins. So we're going to have this this this backlog that will be coming on at an accretive rate and then in seating we talked about there's going to be more significant awards in the second half and so we're going to get to that point we're in.
Speaker Change: That process right now.
Speaker Change: Just mentioned that we're in the quoting process for the $1 50, and $2 50 with Ford Motor company to another.
Speaker Change: Oems to date.
Speaker Change: So I think we'll be ready to give an update a little bit more around probably the third quarter fourth quarter of this year.
Speaker Change: Okay. Thank you.
Speaker Change: Our next question comes from Mark Delaney from Goldman Sachs. Please go ahead with your question.
Mark Delaney: Yes, good morning, and thank you for taking the questions.
Mark Delaney: You can speak a bit more on your volume and sales outlook. The industry production environment has generally improved a little bit year to date, but volume mixing wind downs or a $1 3 billion headwind year over year in your guidance I think incrementally theres, a additional $481 million you're planning on as a headwind from those buckets compare to your last outlook.
Mark Delaney: Could you elaborate more on what we're seeing and why it's incrementally more of a headwind.
Mark Delaney: Yeah, we did see a slight improvement in the.
Mark Delaney: In the second quarter from what we had initially anticipated and so.
Mark Delaney: Part of what we've embedded in the guidance is a little bit of caution around what we think our customers are going to do with their production schedules, we've got about a 2% discount to our customer schedules.
Mark Delaney: All through the balance of the third quarter into the fourth quarter from somewhat.
Mark Delaney: They're suggesting where production will be in and that reflects some uncertainty around the level of imports some of our European customers important vehicles into the U S, particularly in the EU, where their face it was 25% tariff.
Mark Delaney: We've also reduced our volume assumption.
Mark Delaney: A couple of programs due to impacts with our customers' changing over.
Mark Delaney: From one model to the next so for example, with Audi in the Q five has gone through a changeover here in the first half of the year, we ended up lowering our production assumption for the year to reflect that I think that comes back next year, It's a great platform long history of success.
Mark Delaney: In the marketplace and the others with jail or in the range Rover range Rover sport.
Mark Delaney: Did reduce our volume assumption there there was some volume loss during changeover. There there was a mid cycle change that's happening and they're launching some some new versions of the vehicle plug in hybrid for example.
Mark Delaney: Again, great demand for that program, but we were a bit cautious based on what we've seen recently with volumes there and so those are the kind of the main changes that we made to our volume outlook.
Mark Delaney: Also saw some weakness, which we highlighted in the second quarter, which continues into the portfolio with the Jeep Wagoneer and obviously still licenses are announced a number of.
Mark Delaney: Initiatives and changes around trying to stabilize sales here in the U S market and we've seen some some headwinds in terms of volume on certain of their platforms like the wagon here as.
Mark Delaney: As a result of that so it's a combination of.
Mark Delaney: Some weakness that we see in the releases, but also some anticipated.
Mark Delaney: Weakness that we've embedded in the outlook and if you look at that sort of high end of our guidance range to the midpoint that that captures that that 2% or so that we've discounted our customer scheduled style.
Speaker Change: Very helpful. Jason Thanks for that my other question was around the conquest award that you picked up in wiring nice to see.
Mark Delaney: See that come through.
Mark Delaney: Can you help us better understand for that conquest award with the OEM that you spoke about this morning.
How much revenue should we think about as that business ramps either in 2026 or 27.
Mark Delaney: Yeah, that's a it's about $50 million of.
Mark Delaney: Additional revenue that will start at the very tail end of this year and you should see the full effect of that into 'twenty six 'twenty seven.
Mark Delaney: Yeah that was a nice win that was like I said, we're focused on returns and it's a good good good piece of business and I think it just goes to the credibility of that we have as far as being competitive and efficient being very efficient in the reputation so as the nice nice.
Mark Delaney: Second half wind for us, but I also like I said very very proud of the team for the nearly $1 billion of backlog wins already this year and so I'm anticipating more put more pressure on Nick and the team to win more in the second half and what I like about it is what we're seeing is is healthy returns for us too.
Mark Delaney: Thank you.
Nick: Thanks, Bob.
Speaker Change: Our next question comes from Emmanuel Rosner from Wolfe Research. Please go ahead with your question.
Emmanuel Rosner: Great. Thanks, so much.
Speaker Change: I was hoping.
Speaker Change: Hoping to focus on the first half to second half walk.
Speaker Change: You'll providing some really good color on this and on slide 27, and so that's where I wanted to focus on.
Speaker Change: So it looks so honestly when you look at the way you framed it from first half to the second half.
Speaker Change: Entire margin drop is basically volume in mix I mean, yes, when you spoke about the Mets performances.
Speaker Change: Basically first half to second half the margin.
Speaker Change: Decline is really volume and mix, but a 90 basis point decline in volume and mix that's like a.
Speaker Change: $1 billion headwind sequentially, Judy EBIT, but your volume and mix and revenue assumption is only going down, but I'd like to say $700 million. So it's not the 150% decremental on this so just trying to understand within your assumptions for the second half.
Speaker Change: I understand some caution on some of your customers schedules, but what do these decrementals look like and why are they so high.
Speaker Change: Yeah I think.
Speaker Change: The downward conversion is is.
Speaker Change: 19% something like that it's pretty much in line with our historical variable margins. So it's.
Speaker Change: Emmanuel I'm not quite following the math that you're using there, but on the $670 million reduction in <unk>.
Speaker Change: And sales I think it's a $130 million lower operating income and ASR and then I'm sorry by the math just just curious if theres any it seems like you sold volume driven very much and so just curious if on the decremental side, especially since you are talking about potential EU imports and those are.
Speaker Change: Typically maybe higher margin business. If there is something that is also impacting on the decremental side first half versus second half.
Speaker Change: Yeah, there's nothing really unusual in terms of that conversion, it's pretty much in line.
Speaker Change: There isn't as much net performance offset.
Speaker Change: As you would normally see or what we saw in the first half of the year.
Speaker Change: Because we had so much of that commercial negotiation pulled forward into the first half of the year. So overall conversion for for the.
Speaker Change: For the year on volume changes is better than the second half and you're exactly right. The margin contraction in the second half as is entirely driven by the lower production volume assumption and some of that just the normal seasonality I think 70% of that $670 million or $475 million.
Speaker Change: Revenue is just your normal seasonal reductions that we see with the summer shutdowns in Europe and to a lesser extent downtime in the U S that is taken in July and so the other it's really the other 30%.
Speaker Change: We're thinking through and wrestling with as we.
Speaker Change: Think about the business next year and I think there's two things.
Speaker Change: Within that that are sort of unusual one as well.
Speaker Change: Seeing what.
Speaker Change: Lower.
Speaker Change: Jill our volumes on a range Rover range Rover sport, that's driven by the changeover.
Speaker Change: And then.
And then some lower volume on a handful of programs from Europe.
Speaker Change: We think our tariff driven and we've taken the assumption that those volumes are going to come down somewhat.
Speaker Change: Give you a few examples with the Mercedes TLC, we have sequential volume reduction there.
Speaker Change: The defender with <unk>, so about $100 million of revenue first half second half some of that again is normal seasonality, but the balance of that.
Speaker Change: We believe.
Speaker Change: Our expectation is lower.
Speaker Change: Our shipments from Europe to the U S tariff driven now the EU and the U S. Finalize their trade negotiations and we ended up at 15% or 25% that should come back and I would expect over time that will come back, especially as you look out.
Speaker Change: Two 2026, so there are some definite kind of anomalies in the second half of the year that I think are important to strip out as you're modeling 2026. Those are a couple of examples.
Speaker Change: Great Yeah, thanks for the color.
Speaker Change: And then.
Speaker Change: My second question was around the updated guidance.
Speaker Change: On the cash flow side, so I think some of the pieces that you quantified for us was in the.
Speaker Change: The lower EBIT guidance, but then also some timing on the tariffs I think the first piece was 25 and then another 70 million timing anything else that's terrific contributing.
Speaker Change: The lower outlook on cash flow from operations versus the versus.
Speaker Change: This is the initial outlook.
Speaker Change: And it's essentially earnings and then the tariff assumption with.
Speaker Change: Higher restructuring cash investment of $40 million, mostly offset by lower capex of $35 million.
Speaker Change: It's mostly <unk>.
Speaker Change: Our earnings and tariff recovery timing.
Speaker Change: That assumption.
Speaker Change: There's a reasonable chance that we do better than that $30 million, we had to just strike a trough joplin and make the call for four four today, but.
I'll just give you. One example of how that number could improve once this credit program is finalized between our customers in the U S government, it's very likely that some of our wire harness imports will be.
Tariff free duty free and some other components within seating will also have that.
Speaker Change: And so with those imports.
Speaker Change: Instead of having to recover from the customer you're just falling further tariff upfront I think we are at least 30 60 days away from that being finalized.
Speaker Change: And we're hopeful that.
Speaker Change: A significant portion of our imports are are applied.
Speaker Change: To that you know that our customers apply the credits to those imports and we reduce that cash exposure as a result of that.
Speaker Change: And Frank and Nick and their teams are fighting.
Speaker Change: To try and offset the under recovery of tariffs due to timing of normal payment terms through other means whether thats early.
Speaker Change: Early tooling recoveries of engineering recoveries or other commercial settlements. So just it's an assumption and we wanted to be clear that that assumptions embedded in the guidance for awareness purposes or for investors, but we hope to do better than that.
Speaker Change: Understood. Thank you.
Speaker Change: Well, our netting smit.
Speaker Change: Our next question comes from James Picariello from BNP Paribas. Please go ahead with your question.
James Picariello: Hi, everyone.
James Picariello: Just to follow on March question with respect to core sales the organic comp now runs a point lower versus the prior guide despite unchanged.
James Picariello: Could you just share what's assumed for the business wind down piece within E systems year to date, it's a $120 million I believe the original guide had a better just $75 million for the full year. So curious whats slated for the second half and does this headwind completely neutralized for next year. Thanks.
James Picariello: <unk>.
James Picariello: Sure James.
James Picariello: 146 million now for the full year. So it is still first half weighted and that is a little bit worse than what we had previously.
James Picariello: <unk> guided to so we have some of our lighting and audio programs in our audit Gateway program.
James Picariello: Some of those are balancing out a little more quickly than we had initially anticipated.
James Picariello: In terms of what that means for future years. We did include some of those figures.
James Picariello: Our backlog slide in the fourth quarter earnings call, but our current thought process here is there's about $150 million that will wind down next year roughly $200 million in 2730 $5 million 28, and then youre down to less than $100 million in that that last hundred million.
James Picariello: So the triples out over a number of years. So it is a headwind to growth in these systems for the next couple of years in particular 25 through 27, and then it moderates from there.
James Picariello: Understood. That's helpful. And then my follow up are there any updated thoughts on back on the backlog with respect to the out years, particularly for the introduction of what 2027 might look like at this point. Thanks.
James Picariello: Yeah, I think we're going to save that for when he said either later in the year start of next year.
James Picariello: Because we want we want to make sure that captures these.
James Picariello: Programs that we're pursuing.
James Picariello: Currently, particularly in seating we've had a nice start to the year any systems with new business wins, and it's a pretty significant portion of that as backlog.
James Picariello: Most of that falls sort of outside of our normal three year window I think it's mainly late 27% to 28 29.
James Picariello: The recent award that we just received with the global EV OEM does have a 26 benefit but the others are a little bit later, so we'd like to have more clarity around.
James Picariello: The longer term growth profile of the company before we go through a full update to the backlog.
James Picariello: Of course, there are kind of puts and takes that happened throughout the year.
James Picariello: I will highlight that.
James Picariello: One one headwind for the backlog for next year.
James Picariello: This aligns us announced announcement around their production change on the Ram Charger and the Ram Rev that Ram charter was initially slated to launch this year that got pushed to the middle of next year and the Ram Rev got delayed out another year. So we have the ceiling on both and then we have the btu on the ramp so there is a bit of a <unk>.
James Picariello: Reduction thats to be expected.
James Picariello: From that now it's also important to point out that we were able to offset that.
James Picariello: That impact for this year.
James Picariello: With a higher backlog on a.
James Picariello: Chinese domestic OEM business in particular with Xiaomi on the seven program, which had a fantastic first half of the year. So again, we're going to be puts and takes but.
James Picariello: Still lots of us did make that announcement after our.
James Picariello: First quarter earnings call, because I may 15th and so I just want to make sure. That's on everyone's radar screen, but I do think it's important and it is our customers and they are reevaluating their propulsion systems across hybrid.
James Picariello: And ice and there has been a delay in some cases of how they are awarding business based on these decisions with policy and some of the changes that we all are aware of.
James Picariello: Our our.
James Picariello: Backlog right now quoting pipeline in seating is near a record high we were at.
James Picariello: Seven 7 billion or $7 billion. So Frank is really busy quoting a lot of programs. We got a lot right now that we have in front of us that we're very very focused on I think we have.
James Picariello: <unk> proven that and the reason I illustrate.
James Picariello: To listen to investors the investments we've made as a manufacturing integrator I know a lot of companies talk about yeah. We're in automation, we're doing digital software and they may be but our ability to really drive efficiency.
James Picariello: At our plant floor is differentiating us and so we're optimistic we still have to get through this quoting process. We have a lot of quotes in front of us.
James Picariello: We're very we're very specific on who we're targeting we obviously like the traditional historical programs that have been successful over a longer period of time, we're being very cautious around the type of programs, where we're quoting from a regional perspective, we're laser it in and we and why I talk about the timing is there.
James Picariello: There's still some movement within it there's still looking at different.
James Picariello: Changes to policy like I said are or trade, but.
James Picariello: We're very focused and I think we have some really good opportunities in front of us as those opportunities emerge we do want to be clear to investors and analysts on the business. We win so when it's appropriate we will come out and talk a little bit more around the backlog and the success, but I do keep saying this I'm very proud of the E systems team. They really did a nice job in the first half.
This year I guess, they are close to $1 billion of.
Our book business.
James Picariello: And we still have opportunities in E systems for the remainder of the year. So next guy get busy on that and he will end.
James Picariello: Hopefully we will be out soon with an update to the backlog, but it's a robust pipeline there is for sure.
James Picariello: Yeah.
Speaker Change: Thank you.
James Picariello: Yeah.
Colin Langan: Our next question comes from Colin Langan from Wells Fargo. Please go ahead with your question.
Colin Langan: Oh, great. Thanks for taking my questions.
Speaker Change: Maybe you can just clarify the I think I followed most of it but the puts and takes in the change from.
Speaker Change: From the prior to the current operating income guidance, I think $25 million as performance it looks like something like $10 million FX improvement offset by 55 million ish and sort of lower volume impacts from the prior guide is that right and then if that's right that $55 seems like a pretty low decremental on the sales decline.
Speaker Change: Fine.
Speaker Change: Yeah.
Speaker Change: Alright.
Speaker Change: Yeah, I think I think summed it up.
Speaker Change: Correct there no.
Speaker Change: My my notes here.
Speaker Change: So from the prior guidance.
Speaker Change: Sure.
Speaker Change: We're down $475 million due to volume and about $90 million of ROI on that.
Speaker Change: And thats converting at 19% so.
Speaker Change: And then positive performance is 25 to get the benefit of.
Speaker Change: The <unk> consolidation and then you have a little bit of margin dilution from the tariff recovery. So you get $210 million revenue with no no earnings attached to it that's the basic bridge and then FX is converting at about 7% a little bit stronger than any systems.
Speaker Change: In seating.
Speaker Change: Got it.
Speaker Change: And then with the recent trade deal in Japan is sort of a growing view that we might end up at something like 15%.
Speaker Change: If that's the right for your business in Honduras would that be enough of a decline to make any sort of competitive or whether you'd have to consider relocating any thoughts or color there.
Speaker Change: I think at 15%, 10% I mean those are all good numbers were still very very competitive in Honduras at those rates.
Speaker Change: It will still be more competitive.
Speaker Change: In Honduras, and so with the footprint would be.
Speaker Change: It's very efficient at that level so.
Speaker Change: And Collin we've had I think some very productive conversations with the administration with sports commerce over the last several weeks and they're listening to us and I think they understand.
Speaker Change: And share the same objective, we do which is.
Speaker Change: To have U S manufactured vehicles be competitive in the U S and on the global stage and one of the key drivers of that is having components like wire harnesses manufactured in in lower cost locations. So we're not going to make any predictions any bold predictions.
Speaker Change: The removal of harnesses from the antics of when that might happen, but yes.
Speaker Change: If logic prevails here that seems to make a lot of sense.
Speaker Change: Tax the competitiveness of U S manufactured vehicles, and so yes to Jason's point, we have had the conversations are going extremely well.
Speaker Change: With the administration and with.
Speaker Change: Senators and congressmen that we're meeting with.
Speaker Change: And we are starting to see interest to Jason's point.
Speaker Change: The.
Speaker Change: Remaining competitive here in the U S and be able to export is a primary goal along with workers and other things.
Speaker Change: But it does help our case and help the fact that we have to remain very cost competitive here in the U S around components.
Speaker Change: Alright, Thanks for taking my question.
Speaker Change: Thanks, Phil.
Speaker Change: That's it.
Speaker Change: Okay just I.
Speaker Change: I think.
Speaker Change: Thank you for everyone participating in the call today, just want to thank the Lear team outstanding job.
Speaker Change: First quarter second quarter, we've got some work to do it and the remainder of the year, but really proud of everything we've accomplished from.
Speaker Change: The tariffs how we've mitigated that that challenge to what we're doing operationally to talk about this operational excellence and automation and what we're doing within our manufacturing plants to work that was done down in Mexico and improvements around efficiencies great job to the team I appreciate everything you're doing.
Speaker Change: Keep it up in the second half thank you.
Speaker Change: Ladies and gentlemen, with that we'll conclude today's conference call and presentation. We do thank you for joining you may now disconnect your lines.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: [noise].