Lear Corporation

Good morning, everyone, and welcome to the Lear Corporation first quarter 2021 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Ed Lowenfeldt, Vice President of Investor Relations. Sir, please go ahead.

Thanks, Jamie. Good morning, everyone, and thanks for joining us for LEAR's first quarter 2021 earnings call. Presenting today are Ray Scott, LEAR President and CEO, and Jason Cardew, Senior Vice President and CFO. Other members of LEAR's senior management team have also joined us on the call. Following prepared remarks, we will open the call for Q&A. You can find a copy of the presentation that accompanies these remarks at ir.lear.com. Before Ray begins, I'd like to take this opportunity to remind you that, as we conduct this call, we will be making forward-looking statements to assist you in understanding LEAR's expectations for the future. As detailed in our safe harbor statement on slide two, our actual results could differ materially from these forward-looking statements due to many factors discussed in our latest 10-Q and other periodic reports. I also want to remind you that, during today's presentation, we will refer to non-GAAP financial metrics. You are directed to the slides in the appendix of our presentation for the reconciliation of non-GAAP items to the most directly comparable GAAP measures. The agenda for today's call is on slide three. First, Ray will review highlights from the quarter and provide a business update. Jason will then review our first quarter financial results and our full year 2021 outlook. 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.

All right. Thanks, Ed. Good morning, everyone. If you could please turn to slide five, I'm going to provide a brief overview of our first quarter financial results. The Lear team delivered strong results in the first quarter with sales of $5.4 billion and core operating earnings of $336 million, both up significantly versus last year. Lear's sales grew faster than industry production by 9 percentage points, reflecting above-market growth in both of our business segments. Adjusted operating margin was 6.3%, and EPS was $3.73. Slide 6 provides some business highlights from the quarter. I am very proud of what the team accomplished this quarter. We successfully navigated supply chain shortages, and related customer production shutdowns that made for a very difficult operating environment. At the same time, we remain focused on executing our strategic plan. Both business segments posted strong growth above market in the first quarter. In these systems, growth over market was 10 percentage points, our fourth consecutive quarter of double-digit growth over market. And seeding growth over market was 9 percentage points, In late March, we acquired M&M Plastics, a manufacturer of engineered plastic components for automotive electrical distribution applications. This acquisition is consistent with our strategy to increase vertical integration in these systems. We also have been selected as a PACE Award finalist by Automotive News for all three innovative technologies that we submitted for consideration. including our battery disconnect unit and our 5G V2X telematics control unit in these systems, and our in-tune thermal comfort technology in seating. Having won PACE awards for the past two years and being named a finalist for three awards this year is a testament to our leadership position in automotive supplier innovation. Over the years, Lear has consistently supported the communities around the world where we do business. In the first quarter, we were one of a very select group of companies in Juarez, Mexico, that was recognized for our continued support in the areas of education, health, and community management. But before I move on to the next slide, I want to highlight that we are closely monitoring the near-term supply challenges and higher commodity costs facing the auto industry. Our purchasing logistics and engineering teams are laser-focused on managing through this period to support our customers and manage our costs. We expect these issues will be transitory, and as such, we are continuing to invest to strengthen our business during these challenging times. Turning to slide seven, I will share the strategy that we are following to drive sustainable revenue growth and profitability at Lear's. We took advantage of the downtime last year to refine our strategy, which we built around four key pillars. In seeding, we want to extend and build on our leadership position by focusing on investments in technology and innovation, both organic and inorganic, that expand our capabilities and priceable features. In eSystems, we are focused on accelerating growth in connection systems and electrification to transform the business. And our core is our expertise in operational excellence. And we plan to extend our leadership position by continuing to invest in automation to make our factories more efficient. The fourth pillar is around sustainability, investing in products and processes that benefit the environment, as well as investing in our people. Getting results the right way has been a big part of our leadership model for a long time. We firmly believe Doing the right thing for our planet and our people is not only the right thing to do, but will support long-term value creation. Slide 8 highlights key drivers of our strategy in seeding, which are focused on increased vertical integration, disruptive innovation, and operational excellence. Over the last 10 years, we have made targeted investments to increase our vertical integration capabilities. Today, we have the most complete capabilities and more product knowledge than any other seed supplier. Going forward, we want to build on these strengths by continuing to develop products and processes that can't be replicated and that further separate Lear from our competition. Disruptive innovation means creating or acquiring technologies that further differentiate our seeds with proprietary features and functionalities. These new innovative products will help us capture market share and support margin growth. One example of a disruptive innovation that is driving growth today is our Configure Plus product. We won a PACE award in 2019 and is launching this year on a new Volkswagen commercial van in Europe. Excitement around Configure Plus is very strong, and we have seen significant uptick in customer interest in this proprietary technology. We also continue to explore applications for this technology beyond traditional auto manufacturers. such as last-mile delivery service providers, logistics providers, and autonomous vehicles. Another example of disruptive innovation is our Intu thermal comfort technology, which, as noted earlier, was recognized by Automotive News as a finalist for a Pace Pilot Award this year. This is the first time that Intu intelligent comfort control software has been integrated into a complete seating system to anticipate and meet occupant heating and cooling needs. This technology also optimizes efficiency of the vehicle heating and cooling systems by reducing energy consumption. I will touch on our operational excellence in more detail later, but what it means for the seating business is creating another path to unlock incremental value through innovative manufacturing processes. Lear aspires to be the largest, most profitable, sustainable seating company in the world, and I absolutely believe we have the right strategy in place. On slide nine, I will describe how we are proactively positioning our eSystems business for the future. This strategy is a natural extension of the operating plan we have been executing in eSystems over the past several years. Similar to seeding, vertical integration plays a major part in the eSystems strategy, particularly as it relates to strengthening our electrical distribution business. We are focusing on organic and inorganic investments, such as the recently announced M&N Plastics acquisition, to expand our product offerings and engineered components, including connection systems. Our customers are opening up their connector catalogs, and we are seeing an acceleration in opportunities to increase vertical integration. Over the past year, we have been winning new business, and our quote pipeline has more than doubled to over $250 million, including both commercial awards and insourcings. The auto industry is going through a historic transformation with a shift to electric vehicles. Electrification is driving higher content per vehicle, and we are concentrating on particular product lines where we believe we have a competitive advantage and will be successful. Our battery disconnect unit launching on the new GMC Hummer is a great example of a product that we believe will lead to additional opportunities across General Motors' future battery electric trucks and electric light commercial vans. We also are rapidly expanding our high voltage connection systems to address the accelerating industry shift towards electric vehicles. One of the building blocks of our strategy to improve these systems business that we discussed in 2019 was further diversifying our customer base. As a result of these efforts, we have made significant progress growing our business with Volvo Geely, Volkswagen, and General Motors over the last several years. Slide 10 highlights the operational excellence strategy pillar, which impacts the entire Lear enterprise. Today, Lear has a competitive advantage as one of the auto industry's recognized leader in operational excellence. We intend to maintain our superior position by increasing the use of advanced automation through our operation. We have established a dedicated organization, and we're adding resources focused on accelerating the deployment of best practices throughout our companies. Evolving and improving technology is providing new avenues to use artificial intelligence and make our factories more efficient and reduce our overall engineering costs. Along with data analytics, we are investing in innovation to keep improving our manufacturing process and better optimize logistics in our supply chain. In addition to internal improvements, we are also identifying potential acquisitions to help accelerate our progress and ensure that the improvements we are making remain proprietary to Lear. By driving improvements in operational excellence across Lear, we will serve our customers better in terms of cost, quality, and delivery targets. And at the same time, this will benefit margins by optimizing our cost structure to reduce defects. Moving to slide 11, now we'll talk about our fourth pillar of our strategy, integrating ESG across all of Lear. Last year, we centralized oversight and management of our ESG functions. ESG aligns with our core values at Lear, which includes creating a culture of innovation and inclusiveness and getting results the right way. And our product portfolio is well aligned with socially responsible industry trends like electrification, vehicle safety, and connectivity. Last October, we announced our pledge to continue our efforts to help create a cleaner environment. By 2030, we are targeting to use 100% renewable energy and cut carbon emissions in our manufacturing plants by 50%. And by 2050, we aspire to be carbon neutral with net zero emissions. Our people are what makes Lear a special place to work. And we have logged 3.7 million hours of employee training to help develop over the past two years and improve leadership, teamwork, culture, and engagement. We continue to embrace diversity, equity, and inclusion throughout our organization to promote teamwork, creativity, and innovation. Our 2020 sustainability report will be released soon, and it will describe many of these ESG initiatives in more detail, as well as provide additional metrics supporting the progress that we are making. Now I'd like to invite Jason to review the first quarter financial results.

Thanks, Ray. Thanks, Ray. Slide 13 shows vehicle production and key exchange rates for the first quarter. During the first quarter, global vehicle production increased by 14% compared to 2020, while on a Lear sales-weighted basis, global production increased by 6%. The increase of 6% reflects Lear's regional mix of business. The global increase in production was driven primarily by China, which was up 80% compared to last year. China's 2020 first quarter production was severely impacted by the pandemic. In North America, production was down 4% compared to a year ago, reflecting semiconductor shortages as well as other supply chain disruptions. Production on our top platforms was down only 1%. In Europe, industry production was flat, with Lear's top platforms up 4%. From a currency standpoint, the U.S. dollar weakened against our major currencies. Slide 14 highlights Lear's growth over market in the first quarter. Sales grew above market in both business segments and across each of our major markets. Total company growth over market was 9 percentage points, driven primarily by the impact of new business and e-systems and favorable platform mix and seating. Growth over market in e-systems and seating was 10 percentage points and 9 percentage points, respectively. Growth over market in North America of 9 percentage points reflected the strong volumes of GM's full-size pickup trucks and SUVs, as well as Ford and Mercedes SUVs. In Europe, above-market growth of 8 percentage points was driven primarily by strong performance in the luxury segment and growth in electrification. Our growth over market in China of 10 percentage points reflected strong relative demand for luxury vehicles that benefited both seating, anti-systems, as well as increased electrification business. The strong first quarter performance highlights that both business segments are well positioned to continue to benefit from key secular trends. Slide 15 highlights our financial results for the first quarter. Our sales increased 20% year-over-year to $5.4 billion, excluding the impact of foreign exchange, commodities, and acquisitions, sales increased by 15%, primarily reflecting increased production on key leader platforms and the addition of new business. Our customers experienced significant production disruptions caused by the shortage of semiconductor parts and other components, which impacted Lear's first quarter revenue by almost $400 million, or 7%. The production disruptions had a more significant impact on e-system sales than in seating. Core operating earnings were $336 million, up $131 million from last year. The increase in earnings resulted from favorable platform mix and the addition of new business. Positive operating performance in both business segments was offset by continued COVID-19 impacts, including premium costs related to component shortages, as well as higher commodity costs. Adjusted earnings per share were $3.73, up 82% from a year ago, and first quarter free cash flow was $135 million compared to $113 million in 2020. Slide 16 explains the first quarter year-over-year variance in sales and adjusted operating margins in the seeding segment. Sales in the quarter were $4 billion, an increase of 19% from the first quarter of 2020. Excluding the impact of foreign exchange, acquisitions, and commodities, sales were up 15%, reflecting higher production and the benefit of new business. Core operating earnings were $307 million, up $106 million from the first quarter of 2020. Seeding margins were 7.7 percent compared to 6 percent last year, reflecting higher volume on leader platforms. Higher commodity costs were offset by positive net operating performance. Slide 17 explains the first quarter year-over-year variance in sales and adjusted operating margins in our eSystems segment. Sales in the first quarter were $1.4 billion, an increase of 24 percent from the first quarter of 2020. Excluding the impact of foreign exchange, Acquisitions and commodities sales were up 17%, driven primarily by the strong backlog of new business as well as higher volume. For operating earnings increased from $53 million or 4.8% of sales in the first quarter of 2020 to $95 million or 7% of sales in 2021. The increase in earnings resulted primarily from higher volumes on their platforms and margin accreted backlog. favorable net operating performance was partially offset by increased engineering spending to support new business and higher commodity costs. Our financial results in the first quarter reflect the continuing progress we are making in these systems. Our operating performance was particularly strong in the quarter, especially when taking into account premium costs and inefficiencies related to the semiconductor shortages. Absent these transitory issues, our margins would have been in the high 7% range, despite higher commodity costs and additional engineering investment to support our strong backlog of new business. Now please turn to slide 18 where I will briefly talk about our balance sheet and liquidity. Our conservative capital structure allowed us to efficiently navigate the COVID crisis last year and now puts us in a strong position to fund organic and inorganic investments to support the strategic plan that Ray described earlier in the presentation. At the end of the quarter, we had $3.1 billion in total liquidity, including 1.75 billion available under our revolving line of credit. We have investment-grade credit ratings from all three major rating agencies, and in March, S&P upgraded our rating outlook to positive. If needed, we also have the capacity to take on additional debt while maintaining investment-grade credit metrics. With respect to capital allocation, our first priority remains reinvesting the cash we generate back into our core businesses. We also are targeting niche acquisitions to increase vertical integration capabilities in seeding, anti-systems, and to extend our leadership position in operational excellence. We remain fully committed to returning excess cash to shareholders via dividends and share repurchases. On slide 19, I will discuss the key drivers of our 2021 financial outlook. Lear's overall business is very well diversified, and despite the significant challenges across the auto industry, we have continued to post good financial results. Production disruptions have increased since earlier this year and are negatively impacting both business segments. However, the impact of lost production is expected to be more significant in our e-systems segment as it was in the first quarter. Commodity inflation will have a positive impact on revenues due to pass-through agreements on steel, copper, and other commodities. However, this will be dilutive to margins because of the increase in sales with no corresponding earnings benefit. With respect to the semiconductor shortages, Lear's purchasing and logistics teams are working very closely with both our traditional supplier partners as well as non-traditional sources to meet the needs of our customers. We will continue with this approach going forward until the supply chain challenges are behind us. Consistent with the first quarter, we have plans in place to offset a majority of the headwinds we are facing through improved operating performance in both business segments. As a result of the factors outlined, we expect seating margins to be higher than our prior outlook and eSystems margins to be lower. Despite the near-term challenges, we are extremely excited about robust consumer demand for new vehicles and expect to see strong industry growth over the next several years. We are confident we have the right strategy in place to continue to win new business and grow faster than the market while meeting or exceeding our operating margin targets in full segments. Slide 20 shows our updated financial outlook for 2021. At the midpoint of our guidance range, we are forecasting sales to increase by $450 million from our prior forecast of $20.75 billion and operating income to increase by $10 million from our prior forecast of $1.225 billion. We are increasing our full-year outlook for capital expenditures by $25 million, reflecting increased spending to support recent business wins in both segments. The full-year outlook for our effective tax rate was lowered to approximately 21%. Adjusted net income is expected to be in the range of $740 million to $870 million, up $15 million from our prior guidance. Now I'll turn it back to Ray for some closing thoughts.

Please turn to slide 22. Despite a difficult operating environment, we posted strong results in the first quarter. We completed our first acquisition of the year in March, and we see additional M&A opportunities throughout the balance of the year. I'm very proud of the recognition we received this quarter for innovation and supporting the communities where we live and work. I'm especially proud of the award. Because the award they received was a combination of corporate support, and the efforts from our employees to support the local community. There was chosen from more than 300 companies that applied for this award. We believe we have the right plan in place and we're executing on the four pillars of our strategy to drive profitable growth and deliver superior returns to our shareholders. And now we would be happy to take your questions.

Ladies and gentlemen, we'll now begin the question and answer session. To ask a question, you may press star and then one using a touch-tone telephone. If you are using a speakerphone, we do ask you please pick up the handset before pressing the keys to ensure the best sound quality. To withdraw your questions at any time, you may press star and two. Once again, that is star and then one to join the question queue. Our first question today comes from Joseph Spock from RBC Capital Markets. Please go ahead with your question.

Thanks, everyone. Good morning. Ray, you know, obviously really strong, you know, growth over market this quarter. I was wondering if, and I know this might be a little bit difficult, but maybe broad strokes, if you could sort of break it down even by segment, like how much is really pure content? How much do you think is your program mix or an exposure and how much is share gains? Because I know you mentioned some share gains in the deck.

Yeah, I think starting with seating, the growth over market is really driven by the platform mix more than anything. So, for example, in North America, GM full-size pickup trucks and SUVs had a very strong quarter, as well as the Ford Explorer, Mercedes GLE, and those are highly contented vehicles. as well. We didn't necessarily see a significant change in CPV on the platforms compared to what they were running before, but the fact that those platforms ran hotter than the market overall really benefited seating. In Europe, it was, again, platform mix for seating with vehicles like the Porsche Taycan that did especially well, and that really helped us And in China, it was luxury vehicles with Audi, BMW, Daimler, and that benefited both segments. In these systems, the growth of a market was really driven by the backlog, and in particular, electrification-related products and products really globally in that segment. So it's not so much a richer CPV on individual platforms, but more the mix of vehicles that we happen to be on running better than the underlying market.

Okay, thanks for that. And then the second question is, and you pointed to some additional pressures here over the balance of the year. You know, maybe, you know, can you sort of quantify, you know, things like the steel headwind or or some inflation on some of the foam products and the seats. And then also, while we're on the topic of commodities, I know you mentioned the copper pass-through effect. How much did that weigh on the margins in the quarter, and what do you expect that to be for the year?

Yeah, so maybe start with the last part of your question. So copper impacted these systems' margins by about 25 basis points in the quarter, and You know, we lock in copper three to six months in advance, and so there's a bit of a lag effect there. We see a more meaningful impact on the full-year copper. It'll be about a 50 basis point headwind for us year over year in these systems. On the steel side and in seeding and commodities generally, which really includes steel, it includes foam chemicals and, to a lesser extent, leather hides. We saw a 50 basis point impact in the first quarter, and we see that growing to about 60 basis points for the full year. So it has gotten a little bit worse than what we saw or anticipated earlier in the year and included in our guidance in February.

Thanks very much.

Thanks. Our next question comes from Rod Lash from Wolf Research. Please go ahead with your question.

Good morning, everybody. Just following up on Joe's question, I'm curious if you anticipate recovering the headwind from raw materials that you're seeing right now and presumably some of the headwind that you're experiencing from the disruptions. In other words, should we be thinking that next year you might be able to achieve unusually larger or should we be anticipating some investment in engineering or some of the growth initiatives you alluded to?

For commodities specifically, we would expect a tailwind heading into next year. Now, on copper, though, in these systems, the dilutive effect of the pass-through agreements, that will remain. That doesn't reverse course, but the portion, the 10% of our copper buy that we're responsible for, we would see that as non-recurring and perhaps even reversing course. heading into next year. So in isolation, commodities will be a positive year over year in both segments. We do expect to continue increasing our investment in engineering and e-systems, so there will be a modest headwind for that heading into next year. But it's a little bit early to get into a 22 guidance discussion at this point, probably, Rod.

Okay. And Just two other things. One is seeding backlog in the quarter added about 1% to growth. Is there some lumpiness in this year's launches? What are you sort of looking forward to later in the year? And secondly, I wanted to just clarify your comments about seeding margins being higher and e-systems being lower. You actually provided a few updates to margins over the course of Q1, so maybe you could just clarify which – What was the reference point that you're using for the higher and lower comment?

Okay. Well, starting with the backlog, there is some lumpiness there. Q1 is the lowest backlog quarter for seeding, and then it grows throughout the year. If you had the launch of the Fort Bronco, for example, a big program in the seed business. In these systems, the backlog is kind of the same number quarter to quarter throughout the year. In regards to margins, the reference point is 7.4% for seeding and 7.2% for eSystems. That's what we had assumed at the midpoint of our guidance range when we issued guidance in February. And I did talk about some developments throughout the quarter that were signaling some opportunities on the seeding side and some risk on the eSystems side. So the biggest driver of that, and we'll just take a step back and talk about more completely what has changed since we issued guidance, certainly the level of production disruptions have worsened, particularly for our eSystems business. If you look at the first quarter, we talked about a 7% impact on the overall company, but that was about 5% in seeding and 10% in eSystems. And if we look at the second quarter, We're expecting that 7% to be more like 14%, and the impact on each segment to roughly double as well from the first quarter. So it's something like 10% in seeding and 20% on the e-system side. So if you think about kind of sequentially what to expect from us on the revenue side, we expect at the midpoint to see revenue that's down 9% sequentially from Q1 to Q2. We think that's the peak revenue. of the shortage impact, and then we see a gradual recovery into the second half of the year from there. And so if you look at a 9% reduction in the second quarter, Rob, that gets you to something like $10.2 billion of revenue in the first half. That leaves you at roughly $10.5 billion in the second half. So we have some shortage-related disruptions continuing into Q3, and then we see the business sort of normalizing in the fourth quarter. And when we get back to more normal volumes in the fourth quarter, something that's closer to what we saw in the first quarter, we would expect seeding margins sort of in the 7.5% to 8% range, and e-systems in a range of 7% to 8%. And the reason for the wider range in e-systems, one, the volume reductions, given the variable margin of that business, have a more meaningful impact on the operating margins. But perhaps more importantly, as you're exiting the year, The timing of the commercial resolution and pass-through of the commodity increases will ultimately determine where we exit the year. There may be some of that that leaks into next year as well.

That's very helpful. Thank you.

You're welcome.

Our next question comes from David Kelly from Jefferies. Please go ahead with your question.

Hi. Good morning, everyone. Good morning. Good morning. Thanks for taking my questions. Just wanted to follow up on eSystems. I was hoping to drill down a bit on the outgrowth. We've heard from architecture and connector suppliers that observed some pull forward in volumes in Q1 or even some channel replenishment. Just curious if you're seeing that as well, given your mix of electronic systems and software being, I think, mid-20s percent or so.

We haven't seen any of that. We generally are selling directly to the OEMs. In some cases, we are selling to suppliers that then sell to the OEMs, but the impact of that would be very limited for our business, just generally speaking.

Okay, got it. Thank you. And then, Jason, you referenced a couple times ongoing EV strength as a driver of the outgrowth in Europe. I was just hoping you could give us a bit more color as to the impact there and how you're thinking about visibility to the balance of the year for EV exposure. It seems like customers are focusing on that segment even in light of the component shortages. So any color there would be great.

Yeah, so it's really a couple different things going on. In seating, it's electric vehicle platforms that we're on where they're holding up better than the market overall. As you mentioned, customers are really – investing in those platforms, protecting those platforms as they launch and as the market demand increases. So vehicles like the Porsche Taycan benefited from that. In these systems, it's more just the roll-on of the growth we have in electrification. If you recall, our $900 million backlog in these systems over three years, about half of that, $450 million of that, is in electrification. So it's just the beginning of that rolling on. And it was particularly strong in the first quarter. And I think, to your point, the customers are protecting those platforms maybe more than the other parts of their portfolio. And that's helped us. So, you know, vehicles like the Mustang Mach-E were very strong for us in these systems in the first quarter. And although we don't have high voltage content on that, we did benefit from higher volumes on an electric vehicle and low voltage content as well.

Okay, great. Thank you.

Thanks. Our next question comes from Dan Levy from Credit Suisse. Please go ahead with your question.

Hi. Good morning. Thank you for taking this question. First of all, maybe you could just give us a sense of your underlying end market assumptions. I think we know all of you and some of the other suppliers out there using a combination of the third-party forecasters and some of your own schedules, maybe you could just give us a sense of how much your forecast is embedding some of the more draconian outlooks that are out there, how much of this is more customer-specific versus more of an industry-wide phenomenon, and maybe how much volatility you'd expect to that end market outlook of yours.

Yeah, so of course we are using IHS, as others do, as one input in the thought process for our guidance. We also have good insight in both business segments with our customers in regards to their specific plans for the remainder of the year. And if you look at what the key customers have announced over the last several weeks in terms of the second quarter in particular, we have a pretty good line of sight. It's volatile still, but We have a line of sight on a more meaningful reduction in the second quarter than I think IHS and others are projecting. And I don't think that's unique to our portfolio. It may impact these systems more than seeding, but on balance between the two, I think it will be similar to the market overall. So what we've assumed here at the midpoint is a global industry volume increase of 9%. I think IHS is at 12%. So we've embedded a 3% reduction in industry production to factor in what we're anticipating and expecting as further announced downtime that hasn't been publicly announced at this point. Is there a chance that things do a little bit better than that? Absolutely, there's a chance of that. But given the situation that we're seeing in front of us right now, we thought that struck the right balance. And at the low end of the range, it protects for roughly a 5% additional reduction from what customers have announced over the final three-quarters of the year.

And given the significant stock replenishment that we have ahead in North America, especially in trucks, I assume there's no capacity constraint issues on your end?

No, there are no capacity constraints on our end. We managed to work very closely with suppliers and our customers to get through the first quarter without any direct disruptions to production, and that was no easy feat. That's for sure. There were shortages on foam chemicals that Frank and the seating team fought through and certainly improved. microchip-related shortages on the eSystems side that Carl and his team worked their way through. Just as a frame of reference, the electronics business of Lear is a relatively small business. When you look at the full book of business, it's 5% or 6% of our total portfolio, so there isn't as much direct exposure for us as some of the others in the space.

Great. And then my second question is on seeding specifically. And, you know, I think this has been largely accepted that seeding is not a product that automakers want to insource with some rare exceptions. It makes a lot more sense for an automaker to go get seeds from yourself or one of your competitors, given, you know, you have all the scale and competencies. But we did see, I think it was a month or two ago, an announcement between VW and Brose for seeding JV. So I guess my question is, is there any shift in philosophy by automakers toward uh, seat insourcing or how they're approaching, uh, seating. Cause I just thought that was an interesting announcement.

Yeah, actually, um, which seems just the opposite. I think the particular article that you're referencing is my understanding is actually, uh, it's a divestiture of what was in house in a combination, uh, with Brosa. So just, just kind of reflecting, um, their willingness to exit what was in-house. And I think generally what we're seeing is there's been a number of situations where customers direct a significant part of the bill of material. We're seeing that the customers now are willing to look at that differently, not necessarily a full-service design or outsourcing, but much more flexible when it comes to opportunities to create value. And I think when we talk about the investments that we're making in seating, it's aligned with how our customers are looking at creating value within the seating space. Like we talked about thermal comfort. We believe that an integrated solution of components in a more modular concept creates a significant value proposition for our customers. And they're absolutely forward-leaning. And matter of fact, I was on a call yesterday with one of the premier German OEs, and they're looking for solutions on where we can help them. And having that, when we talk about the need to be vertically integrated and have expertise, you can create solutions that create a value proposition from a cost, quality, and delivery standpoint. And so we're actually seeing customers looking at different options that are much more forward in that they want to outsource more because, again, they have a tremendous amount of, you know, investment going on in other parts of their business. And where they did have it in-source, they're looking at reallocating those engineers or at least the investment required to, you know, players that can still deliver a value proposition. So we've been happy to see the change that has been occurring with our customers.

Great. Thank you.

Thank you.

Thanks. Our next question comes from John Murphy from Bank of America. Please go ahead with your question.

Good morning, guys. I just wanted to ask a first question on seeding. I mean, how you're talking about mix makes a lot more sense to me based on what we all know, what's going on in the markets. But we haven't heard that quite as explicitly from other seating suppliers. They haven't highlighted mix as quite as strong. You know, is there something else that might be going on in other parts of the market where mix might not be as helpful for seating? It just seems kind of like an odd, you know, set of circumstances we're hearing from some other folks. And then also, you know, how much you know, higher when you're talking about margins on seeding? You know, are you kind of thinking, I mean, it's, you know, I mean, there's, I mean, you're talking about 7.4 plus, but I mean, you just did higher than that in the first quarter. So, I mean, how should we think about the actual sort of levels above that 7.4% you talked about?

Yeah, well, maybe I'll start with the last part of that question and Ray or Frank can talk about the first part. In terms of the operating margin, we intentionally stayed away from providing a pinpoint number. And really that's because of the of two things. The magnitude of the disruption that's going to take place in the second quarter, we see a meaningful reduction in volume in the second quarter, and depending on how that plays out by platform and how the second half plays out by platform, that can have a pretty significant impact on margins. The other key point is how the timing of our commercial negotiations around commodity inflation and other component price increases that that we're dealing with, and disruption costs that may be caused by a customer that has shut down or a supplier that shut us down. And so that will impact margins in both segments. We expect seeding to be meaningfully above the 7.4% for the full year, given all those puts and takes, but I don't want to put a precise number on it. We do feel comfortable saying, John, by the fourth quarter, things will settle down to a point where were solidly between 7.5% to 8%, similar to what we did in the first quarter. In terms of the mix and what others are saying, for us, it's more platform mix as opposed to mix within a platform and take rates of certain features within platforms. it's being on the right platforms for this market that we're benefiting more than anything there. I don't know.

Yeah, I just think we have the largest seat producer on premium platforms. And, you know, during this particular time, they're doing everything they can to protect those platforms. I think a great example is the T1 with General Motors, Mercedes with the crossovers. I mean, What we're seeing in being on those premium platforms is really helping seeding because those are the ones at all costs they're protecting. So in some cases, even reallocating components to make sure that business is running, and obviously it's a premier platform, but it's also a premium platform, but it's also something that we're doing internally too to make sure, like Jason mentioned, knocking on wood, we have not this year shut down customer due to supply shortage or material that we're responsible for. So, you know, I think the teams have done an excellent job of having insight, communicating with the customers, understanding where their priorities are, and in some cases making sure we're prioritizing along with that customer to ensure that those vehicles are being manufactured. And so it's a combination of the work that the team's doing here and what our customers are doing to protect their premium platforms.

That's helpful. Then just a second question. I mean, with everything that's going on right now, there's not been a lot of discussion around launch disruptions, but it's kind of hard to believe that there wouldn't be. So is that impacting eSystems, or is that potentially even impacting seeding? And is this just sort of based on what you're hearing, these sort of just tape delays, or are there any other kind of more draconian launch disruptions that are going on right now?

We haven't seen any delays that are meaningful on launches. In fact, I think generally speaking, customers are protecting those programs to the detriment maybe to some other older vehicles that are slower selling in the market. And so our backlog outlook is precisely the same numbers what we saw back in February. And in fact, the first quarter maybe came in a little bit stronger than we thought in these systems specifically.

Okay, that's helpful. And then just lastly on M&A, you alluded to vertical integration being part of the focus. I kind of always thought of it as a little bit more focused on tech. So is something shifting there, or what's the focus of M&A?

Well, I think it's a combination. We talked about the need to vertically integrate in wire harnesses, and I think M&M Plastics, with some of their superior injection molding capabilities, really opens a door for us that was somewhat closed, and there's a number of components that we outsource that are accretive in respect to margin. And those are controllable components, meaning we can source ourselves. So that's a simple make versus buy. That was a great acquisition. We believe we can accelerate the growth of that capability and competency, which will help to the bottom line of margin expansion within eSystems. As far as innovation, absolutely. Like I said earlier, with what we're doing with electrification, and I'm equally as excited with what we're doing in seating. I think the expansion of priceable features, our customers are looking at different value propositions, and having innovation that's embedded in components is absolutely essential, and I think it can figure plus. We are the only, and it's a proprietary technology innovation because we're able to take the capabilities in these systems and apply it to a track system so we electrified or powered the rails. So now you can send signal, data, power through the seats through a rail system that gives you incredible flexibility. And we're getting an incredible amount of pull. So it's a combination of both. And I think they're subtle in some respects, but very important to how we see innovation and tuck-ins where it expands our margin or at least grows our margin profile in electrification.

Okay, that's incredibly helpful. Thank you very much, guys.

Thank you.

Our next question comes from Brian Johnson from Barclays. Please go ahead with your question.

Yeah, two questions. So, you know, on the sitting side of the business, we've long been accustomed to backlog coming in at lower margins. Can you just confirm, when you look at the eSystems business, and I know you've said this is strategy, it does look like the new business is rolling on initially with decent margins?

Yes. In both business segments, the backlog was accretive to the underlying segment operating margins, and We're generally seeing that through the balance of the year. It should be right in line with the segment margins or maybe slightly higher on a full year basis as well. Some of the issues that we dealt with in prior years where we saw some programs rolling on lower than the programs they replaced, for example, that phenomenon has largely played out and we're generally seeing programs roll on in line or better than our segment margins.

And second question, just building on your description of the electrical architecture meeting with the seat in those rails, your competitor yesterday talked about a decent amount of traction they're getting in BEV vehicles. Can you talk about what you're doing with BEV vehicles? I know at one level seats are seats, but there are subtle differences in that rail system would actually seem to be an interesting option for an EV maker.

Yeah, Frank Garcini is here, and he's been working that very specifically. So I'm going to have him comment on that. Sure, thanks.

Thanks, Ray. Yeah, Brian, so we're seeing a lot of traction in the EV area. For us, it's a great opportunity. You know, we're talking right now about the Configure Plus system, which is a fantastic opportunity for EVs, autonomous vehicles, and things like that. But when it comes specifically to the EV market itself, Now, we have a lot to offer, so we're focusing heavily on lightweight structures, opportunities, and materials that we're using, sustainable surface materials for those products, which are very appealing to our customers. And then, of course, the future is extremely positive for the Intu product offering that Ray referenced. I just want to hit on that one more time because, you know, the thermal comfort technology that we're working on right now, as we mentioned, it directly applies to the EV products because it does help in terms of efficiently heating and cooling the occupant versus inefficiently heating and cooling the entire cabin does provide a benefit to the overall vehicle architecture power draw. So we have that ability to do that. And, you know, and we're winning business. I mean, we've been very successful in the EV market, the BE market. And, you know, I have a list of over 20 programs that we've won. over the last couple of years, and many of them are in launch mode and will be launching over the next couple of years. But we're seeing a lot of success, and I do believe it's being fueled by our technology and the product offering that we have, and that's where Intu Seating is completely aligned with that market trend.

Yeah, so we look at it, and Frank knows this, with the recyclability. We have some incredible properties, hopefully we'll announce here soon, within the seat world that are recyclable. We believe that's a big part of the electric story, and it has to be a big part of our story, so that's where our investment dollars are going right now. And when I talk about this modular concept, it is geared around electric vehicles where you can actually gain efficiencies through this heat and cool system and be able to satisfy the customer's needs within the seat. And this Configure Plus, like Frank mentioned, we are building it into battery vehicles today because of the complexity of the floor and where the battery is mounted, it offers a great solution to give flexibility of the seat. So we do believe that even though we talk agnostic that between ICE and BEV with seating, we think the seat itself is going to change, and that's where we're focused. And so we keep hitting on these innovation and technologies because we do believe they are the difference that is going to differentiate our seat system relative to the electric vehicle.

And just a very quick follow-up, is there any regulatory account of the parasitic loss of HVAC in the either European, Chinese, or U.S. range estimates? Obviously, a lot of controversy, especially about one OEM, about the difference between real range and government-estimated range, and it seems like your solution would help with real range, but I wonder if it helps with the regulatory standard of range.

You know, I'm not going to speculate. I'm not sure, but... You follow up on that question, but I'm not familiar with the answer. Okay, thanks. Yeah, thanks.

Our next question comes from James Piccarello from T-Bank Capital Markets. Please go ahead with your question.

Hey, good morning, guys. Within the top-line guidance, you raised the $450 million. Can you just break out what attributes to commodity pass-through? Because I'm just trying to get a sense for the revenue and EBIT revisions taken together, right? Revenue up $450, EBIT up $10. Just any color on the factors in play would be helpful.

Yeah, in terms of the overall bridge on revenues here, You talked about the disproportionate impact of production disruptions on e-systems versus seeding, and that's part of what's going on in terms of the operating margin impact because of the higher variable margin in e-systems. So we have revenue down about $250 million on the volume line in e-systems and up about $325 million in seeding. So the mix of those two is higher revenue of $75 million but slightly lower operating income. And then you have another $200 million for the company and foreign exchange that converts that at the segment margins. And then lastly, the commodity pass-through is $175 million when you compare it to what we got it to earlier in the year. So FX, the commodity, is the lion's share of the revenue change. And then in terms of the operating bridge, I gave you a couple pieces there, but the commodity impacts about $50 million. I talked about the change by segment earlier. And then we've offset that through favorable operating performance more on the seeding side than on any systems of roughly 50 million as well.

Got it. No, that's super helpful. As we think about your seedings, mixed benefit, you know, based on the models that are getting prioritized, right. The key platforms leader has exposure to all of that makes sense, but you know, is there any way to think about what this could entail from a headwind standpoint? You know, once industry production does normalize, I mean, you know, maybe the simplest exercise would be, you know, seating delivered nine points of outgrowth versus, you know, target of four points. So, you know, maybe it's a five-point headwind at some point in the future. Just, you know, curious your thoughts on that point.

Yeah. So the good news, I think, for us on this is the biggest driver is the GM full-size pickup trucks and SUVs, and their inventory levels are, you know, below historic levels, well below. And so I think that this above-market growth in seeding, that story continues into next year and beyond just because of the importance of that platform. There may be a partial offset to that on some of the other platforms that are driving it on the luxury side. Maybe there's half of that kind of steps back a bit. But we would expect a temporary benefit from mix on our above-market growth in seeding In fact, if you look at the full year, I think at the beginning of the year we were expecting two to three points of growth above market and seeding, and now it's probably six to seven points of growth above market. Unfortunately, on the other side, because of the disproportionate production disruptions on key platforms and customers within these systems, we expected nine to ten points of growth above market there, and it's more like three to four points as we see it today.

Thank you.

You're welcome.

Our next question comes from Emmanuel Rossner from Deutsche Bank. Please go ahead with your question.

Hi. Good morning, everybody.

Good morning. Morning.

First question on seeding. I think a big part of the success last year had to do with conquest business. Could you update us on how things have been going so far this year? And then also still on the topic of seeding, I guess, market share opportunity in seeding. So your larger global competitor has announced a little while ago divestment of its interest in this Chinese JV, which is the dominant market share in China. Any implication in terms of the market share opportunity for you in the region?

Okay, I almost forgot the first part of the question. Let's talk about the second one. You know, first of all, to the situation of the divestiture, the partnership between, I believe, Yang Feng and Addian is what you're referring to. That, to me, and I don't know all the details of it, puts us in a very good position. You know, the combination of those two companies in China was a formidable competitor. You know, the combination of relationships and manufacturing processes and scale was was something that we had to go up against. And so now that they've divested the partnership and it's more of an equal share, 20%, 20%, 20%, we feel that the playing field has been leveled and I'll give us 100% shots at being competitive there. So that opened up the door. I think equally as important is we've had to compete against both of those players and the combination of those competitors, and now Adiant has to compete against Yangfei on a global basis, and Yangfei is going to compete against Adiant, and they know each other pretty well, which we'll see how that works out. But I think the short answer is, yeah, a pretty good day for Lear Corporation when they divested of that partnership. And I think to the first question.

Yeah, in terms of the new business awards and conquest wins specifically, you know, we've had We had $700 million of net conquest awards last year and $300 million the year prior to that. Last year was an especially strong year, and if we were to speculate on what we can achieve this year and in future years, it would be closer to what we achieved two years ago. Roughly $300 million would be a reasonable target. Sourcing and seeding is pretty lumpy, and so there hasn't been any meaningful conquest awards in the first quarter. But we're actively competing on some of those platforms that will be sourced throughout this year.

Okay, that's helpful. And then also a market share question on the e-system side. I wanted to drill down a little bit more on your slide 9 and the strategy to position e-systems for the future, focusing specifically on the power distribution. Do you see an opportunity to have higher market share overall over time? in high voltage power distribution versus the one that you have currently in low voltage? And if so, what will be the drivers of that?

Yeah, it's a good question, Emmanuel. And it's pretty exciting. And like I said, first of all, in low voltage, it's amazing how our customers have opened up to Kellogg. We've never seen or experienced anything like this on the connection systems. And like I mentioned, it's up to $250 million this year both domestically what we can do in-house, and then, you know, what the customers are asking us to quote. So that's opening up. And I think what's an interesting point to reference is, you know, when we think about high power, and we've always had this catalog that we've had to deal with, that 80% of it was somewhat defined, limiting our ability to get in on low voltage. On high voltage connector systems, you know, only 20% of it's defined at this point. So What we're doing is investing our engineering dollars, and we've been very successful. We won an incredible piece of business with Volkswagen recently on the plug board, which was something that we believe, very similar to the battery disconnect, is once you're on a platform, that opens up multiple platforms and across multiple brands within Volkswagen. you know, we see opportunities there. We're seeing, uh, increased, um, quoting activities year over year. I think from electrification perspective, you know, we're seeing 33% year over year from last year. And that, that opportunity continues to, uh, really work well. And so, uh, We haven't given a number on what we're looking at.

Our low-voltage wire market shares has historically been 6% to 7%, and we would see an opportunity to do better than that in high voltage. Again, on the back of this connector catalog opportunity that Ray referenced, the fact that that's not in a catalog and you have a chance to design that and compete head-to-head with other companies, others in that space without them having the benefit of a catalog to pull from.

And one thing that's been nice is I know there's a lot of questions on insourcing, where customers want to do the engineering work, but wiring and engineer components has never been considered as far as the quotes that we're getting. And what's nice about it is on low voltage, when we talk about engineer components, like when we acquire M&N, and companies like that, is to get at that engineered percentage of the wire harness. And on high power, 50% of the wire is engineered components. So, again, wide open. We're making the acquisitions and investing organically to make sure we're positioned to continue to grow in that area of high-voltage wiring. Great.

Thanks for all the call.

All right. Thanks.

And our next question comes from Atei. Michele from Citi, please go ahead with your question.

Great, thanks. Good morning, everybody. Just two questions for me. First, just on trying to kind of interpret the Q1 results in the broader context of Lear's earnings power. And I guess if we exclude the COVID impact you've disclosed, I think it implies the margin may have been north of 8%. I think historically Q1 tends to be a little bit higher than a full year margin. So just curious as we think about the quarter's performance, you know, in a more normalized world, whether that kind of 8% plus is sort of indicative of the company's earnings power.

Yeah, I think if I just isolate the premium costs and ignore some of the commodities that may be transitory, you know, and the volume disruptions, both businesses ran in the high 7%, so just under 8%. And I think if you look at seeding, you know, we've talked in the past about 7.5% to 8.5%. And that's really based on the mix of business that we have today in terms of the level of vertical integration, the capital intensity of the products in that portfolio. And so to the extent we increase vertical integration through organic and inorganic growth on priceable features, as Ray described earlier, that could nudge the margin up to the higher end of that range. To the extent you're winning more businesses just in time without componentry, it's going to skew to the lower end of the range. And I think that range is important. so that we don't walk away from high-return business that might be just-in-time only without components. And at that range, we're earning well in excess of our cost of capital. We have a nice spread there. And so we're interested in any business in that range going forward. So we don't want to constrain that too much, obviously, you take. And then on eSystems, we talked about... Being in the 7% range this year, it's going to be a little bit lower because of the volume reductions that we've experienced here. But as we exit the year, that's still, I think, the right exit point, 78%. And then into next year, our objective is to get that business to 8% plus, 9% the following year, and then back to 10% in 2024. And we still see a robust plan that we're executing against allowing us to achieve that.

That's very helpful. Maybe just a quick follow-up, and I apologize if I missed it earlier, but can you just talk about the pace of bookings, quotings in Q1? Have things kind of gone back to normal, or there's still a fair amount of delays just given the situation?

I think it's largely returned to normal. We had a good first quarter again, particularly on the electrification side. We had 135 million new awards, and that's an average annual number. I know other Companies use kind of a program life number, so call that something like 600 million of awards if you look at it on a program life. So we had a really strong start to the year in these systems. In seeding, similar to our historical win rate and level of awards, about a half a billion of new awards in the first quarter. Very little on the conquest side, but good traction overall in securing our replacement programs.

terrific that's all very helpful thank you and ladies and gentlemen at this time we're going to be ending today's question and answer session i'd like to turn the floor back over to management for any closing remarks okay thank you and i'd like to thank everyone for attending the call today and i especially want to thank the lear team for an incredible quarter the hard work i know uh The team's been laser-focused on making sure we do everything to protect our customers, and you guys did one heck of a job managing that this quarter. And I also recognize the team down in Warrens, Mexico, for their outstanding recognition in what they accomplished and being recognized for it, and also the special recognitions that we got for innovation and technology. We're driving this company focused on integrating innovation and technology and being recognized by Automotive News and others for our ability to continue to drive innovation is a special award. So thanks to the team. Great job. Appreciate all your efforts. Thanks.

Ladies and gentlemen, with that, we'll conclude today's conference call. We thank you for attending. You may now disconnect your lines.