Lear Corporation

Good morning and welcome to the Lear Corporation third 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 Lowenfeld, Vice President, Investor Relations. Sir, please go ahead.

Thanks, Jamie. Good morning, everyone, and thanks for joining us for Lear's third 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 accompanying 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 10Q 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 third 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.

Thanks, Ed, and good morning, everyone. Please turn to slide five, where I will provide a brief overview of our third quarter financial results. The third quarter was marked by the continuation of supply chain challenges the auto industry has been facing. Our financial results were negatively impacted, not only by significant volume reductions versus last year, but also by low visibility from our customers, leading to short notice production shutdowns. Slide six highlights numerous achievements in the quarter, including innovation, quality, awards, and strategic investments in both business segments. In the third quarter, Lear's sales growth outpaced the market by nine percentage points, with strong growth over market in both seating and e-systems. Continued new business wins, as well as products that are favorably aligned with the industry shift to electrification, are expected to deliver continued growth above market over the next several years. Last week, we announced the acquisition of substantially all of Kongsberg Automotive Interior Comfort Division, which will further strengthen our industry-leading seeding business. I will comment further on this acquisition a little bit later in the presentation. On the eSystems side, we announced agreements to form two separate joint ventures, which will further enhance our capabilities in electrification. The joint venture with Hulane, which we expect will close later this year, will further enhance our growing portfolio of connectors capabilities for both high voltage and low voltage applications. This joint venture, the joint venture with Shinri, will integrate complimentary portfolios of advanced onboard chargers from Lear and Shinri and increase access to a broad range of customers. We also continue to be recognized across both of our business segments for excellence in innovation and quality. We won our third consecutive Automotive News Pace Award and two Pace Pilot Awards, more than any other supplier. Lear has long been known as a leader in seed quality, and this year, we won more than twice as many seed quality awards from J.D. Power as any other company. We increased cash returns to shareholders in the quarter by doubling our dividend and buying back more stock. In total, we returned $100 million to shareholders during the quarter. We also increased our credit agreement to $2 billion and extended the maturity to 2026. With respect to capital allocation, we continue to follow a balanced plan that includes organic investment, inorganic investment, and returning excess cash to our shareholders. Turning to slide seven, our seating business continues to grow faster than the market, reflecting our strong position in SUVs, CUVs, and luxury vehicles. In the third quarter, seating growth over market was eight percentage points, reflecting new business on Ford Bronco and Bronco Sport, the Hyundai Tucson, and strong performance on the luxury brands in Europe. And seating also benefited from strong demand from GM's full-size SUVs. During the quarter, we were awarded key programs with GM, BMW, Stellanus, NIO, and Great Wall. And there are additional programs we expect to be sourced prior to the year end. We also received a new development award for our award-winning Configure Plus product. This award is with a European OEM and is expected to launch in 2026. Customer interest in our patent-protected Configure Plus product remains very high. We continue to move forward on key launches in the quarter, including a new plant in Canada to supply seats for GM's large pickup trucks at the reopened Ashworth plant. Other key ongoing launches are highlighted on the slide. A few weeks ago, we broke ground on our new energy-efficient JIT facility in Detroit to supply seats for GM's battery electric truck program. I've already touched on the innovation and quality awards we received in seating, but I want to spend a little bit more time explaining the Pace Pilot Award for thermal comfort. This new product that was developed jointly with GenTherm integrates intelligent climate control software into a complete seating system. The algorithms and software controls were developed by Lear, and they use a combination of occupant temperature data, seat position, and cabin temperature to optimize energy usage within the vehicle and keep passengers at an optimal temperature. Please turn to slide eight, where I will provide more details on the Kongsberg acquisition. Kongsberg is a recognized automotive supplier specializing in luxury comfort seating solutions. With strong market positions in massage, lumbar, seat heat, and ventilation systems, comfort features continue to be of increasing importance as automakers look to improve the driving experience through product differentiation, increased efficiency, and improved performance, especially in luxury SUV and electric vehicle segments. The company has almost 50 years of experience in seating comfort solutions, technical centers and sales offices in three different continents, and an experienced and dedicated team with approximately $300 million of annual revenue. Kongsberg has a well-balanced customer portfolio built on longstanding relationships with leading premium automakers. Kongsberg is a global leader in seat massage and has a number three position in lumbar and adjustable comfort. The company is a technology leader with expertise in pneumatic comfort systems and patented technology that enables superior performance, weight reduction, and packaging flexibility. In addition to performance benefits, there are also much quieter, which is even more important in electric vehicles where noise will be much more noticeable. Kongsberg also has a strong market position as the number two player in heat mats and the number four player in vent systems for thermal comfort. On slide nine, I will highlight how Kongsberg will enhance our competitive advantage in seating. This acquisition is consistent with other acquisitions we have made over the past decade to enhance our vertical integration capabilities. These moves have enhanced growth in margins and extend our market leadership in luxury and premium seating. This acquisition extends our capabilities in comfort systems solutions. Further, solidifying our position as the most vertically integrated seating supplier while bringing additional priceable content to our offerings. It strengthens our ability to serve EV luxury SUV customers and to provide them with the next level of vertically integrated design solutions. Integrating Kongsberg into Lear's operations solidifies our strategy to offer a complete suite of luxury comfort seating solutions to our OEM customers and ultimately to the consumer. This combination will enable Lear to improve overall seat system performance by offering more efficient, lower weight, and flexible packaging design solutions. The total addressable market for massage lumbar heat ventilation products is estimated at $2.5 to $3 billion. IHS trend data indicates this market will grow about two percentage points faster than the vehicle production over the next five years. Based on our assessments of industry megatrends, we expect the market could grow even faster in that timeframe and beyond. Customers are looking for features to improve the driving experience. As cars become smarter, a higher emphasis is being placed on interior comfort. We are already seeing this with luxury and EV customers, and we anticipate this trend and focus on interior comfort to further increase when autonomous cars come to market. We also expect increased adoption of seating comfort products beyond the luxury segments into higher volume vehicle segments. In addition, we believe that by creating a more efficient packaging solution, we will see more proliferation of seating comfort systems in the rear seats. And perhaps the biggest opportunity, which will unfold over a longer term, will come with the acceleration in electrification, which requires more efficient heating and cooling systems in the cabins. Our expertise in software and algorithms combined with heating and cooling products from Kongsberg and our other partners will position us as one of the leaders in this area. Slide 10 highlights Lear's leading performance in the latest J.D. Power U.S. Seat Quality and Satisfaction Study. For years, Lear has consistently been recognized by the industry experts and our customers as a leader in seat quality. In the latest J.D. Power Seat Quality Survey, Lehrer was the only seat supplier to win two first place awards. We also won five additional awards and more than twice as many total awards as any other seat supplier. Our leadership in luxury and SUVs was evident by the multiple awards in both categories. The breadth of our wins was notable as well, with awards for products with six different OEMs and in six of the seven different categories. Okay, please turn to slide 11 for an update of eSystems business. In the third quarter, eSystems sales grew nine percentage points faster than the market, reflecting new business on the Ford Bronco Sport and the Mustang Mach-E in North America, and strong performance in connection systems in Europe and with Geely and the Great Wall in China. We have won over $1 billion in business awards so far this year, over 80 percent, which are new for Lear. Based on awards of date, our 2022 to 2024 backlog is expected to be higher than our prior three-year backlog. We will update and provide details on our backlog on our next earnings call. With the momentum of new business wins, we expect our eSystems business to continue to grow faster than market for the next several years. Despite the industry slowdowns, we remain busy executing launches with Mercedes, Volvo, Jaguar, among others. We also are launching our initial programs with GM and Audi on our recent award-winning battery disconnect unit and our first to market 5G telematics control unit. Our connection systems business is on track to grow to approximately $600 million next year. Growing this part of our business is part of our strategy to increase the size and strength of our electrical distribution systems business and increase our margins. In addition to organic investments, we are entering into joint ventures and partnerships and making acquisitions to enhance our capabilities in connection systems. We already are seeing benefits from our M&N acquisition and are developing new high-speed connectors with IMS. And we are looking forward to closing the Hulane joint venture by the end of the year, which will increase our presence in connector catalogs. We're also making progress in our plan to grow our connection systems business to $900 million to $1 billion by 2025. We will continue to identify and pursue additional acquisitions and partnerships to accelerate this growth. On the power electronics side, the joint venture announced yesterday with Shinri will expand our capabilities and improve manufacturing and design efficiencies for onboard chargers. Now, please turn to slide 12 for a brief summary of our recent awards we have received on innovation and quality in these systems. They won our third consecutive automotive new PACE award for the battery disconnect unit we designed for GM. This product controls all power switching in and out of the battery pack. Our design incorporates breakthrough thermal management innovations, which improves the efficiencies of large and high performance electric vehicles. We will be supplying this part on the GMC Hummer EV, the Chevrolet EV Silverado, and other vehicles on GM's battery electric truck programs. We also are pursuing opportunities on strategic EV platforms with other customers. We also won a Pace Pilot Award for our 5G V2X Telematics Control Unit, a single state-of-the-art installation featuring nine antennas integrated onto one printed circuit board to support all next-generation wireless technologies. Our design removes the shark fin external antenna required on many vehicles today, reducing complexity and improving styling capabilities and aerodynamics, which is particularly important for EVs, where every element that increases range is critical. We have received interest from numerous customers to commercialize this technology. We also have been recognized by our customers for quality. A few weeks ago, we received the World Excellence Award from Ford for our plant in Pacheco, Argentina. And earlier this year, we received two plant quality awards from General Motors. And now I'd like to invite Jason to review our third quarter financial results and full year outlook.