Lear Corporation

Good morning, everyone, and welcome to the Lear Corporation fourth quarter and full year 2021 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please say no to 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 floor over to Ed Lowenfeld, Vice President, Investor Relations. Please go ahead.

Thanks, Jamie. Good morning, everyone, and thanks for joining us for LEAR's fourth quarter and full year 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 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 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. Ray will begin with the business update, including 2021 highlights, key upcoming launches, and a review of our 2022-2024 backlog. Jason will then review our financial results and full-year 2022 outlook. Finally, Ray will offer some concluding remarks. Following the formal presentation, we'd 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. I'm going to provide a brief overview of our full-year financial results. 2021 was an extremely challenging year as global vehicle production was significantly impacted by the semiconductor shortages and the COVID-19 pandemic. Commodity cost pressure and low visibility from our customers, resulting in short-term production shutdowns, led to a very difficult operating environment. Despite these challenges, we reported sales of $19.3 billion and core operating earnings of $826 million, both of which reflect significant improvements compared to the prior year. I'm extremely proud of the Lear team for their performance in 2021. We delivered solid financial results, increased our backlog, and announced key strategic acquisitions and partnerships that will position the company for long-term success. Slide six summarizes some business highlights from the year. Our sales growth outpaced the market by eight percentage points in 2021, with strong growth over market in both seeding and e-systems. In seeding, we increased our market share to 25%. Nice job, Frank. Thank you. Reflecting new business wins in our leadership position in luxury seeding. We also announced the Kongsberg acquisition, which by adding capabilities in massage, lumbar, heating, and ventilation systems, will further separate Lear as a seeding supplier with the most complete component capabilities. We continue to identify additional opportunities to extend our leadership position in seeding to increase market share and improve our industry-leading margins. On the eSystems side, we completed multiple transactions to increase our capabilities in connection systems. These actions and other opportunities that we have identified and are pursuing will improve our competitive position in electrical distribution and support our plan to improve margins in eSystems. We're honored to be recently featured on the 2022 list of America's most responsible companies by Newsweek. Lear was ranked in the top 5% of all companies evaluated. This ranking is based on a holistic view of corporate responsibility across 14 different industry and is a testament to our industry leading ESG initiatives at Lear. We also received multiple awards in 2021 from our customers in various industry publications. Highlights including receiving the most J.D. Power quality awards in seating and three Automotive News PACE awards for innovation in these systems and seating. During 2021, we took several actions to improve our financial flexibility. In addition to increasing our revolver credit facility to $2 billion, we issued new lower-cost debt and extended our debt maturities. We also returned $207 million of cash to shareholders through dividends and share repurchases in 2021. Slide seven highlights some of our key product launches and seeding this year. In addition to the just-in-time assembly for each of these programs, we also are delivering multiple components for these launches including leather, fabric, structures, cut and sew seat covers, and foam. We believe that our position as the most vertically integrated seat supplier provides a competitive advantage by improving the quality of our products and offering a better value proposition for our customers. Our pending acquisition of Kongsberg Comfort Systems Business is consistent with other acquisitions we've made over the past decade to expand our seat component capabilities and add innovative technologies to further differentiate our product offerings. By adding priceable features like thermal comfort capabilities to our portfolio, we believe the Kongsberg acquisition will enhance both top-line growth and margins over time. This slide also highlights Lear's position as the leader in luxury seating, with six of the eight key launches on both new vehicles and key replacement vehicles for Mercedes, BMW, and Land Rover. Also highlighted on the slide are new EV launches and conquest wins. We have won over $1 billion in net conquest wins since 2019, and four of those programs are launching this year, including the BMW X5 in China, the Chevrolet Colorado, the GMC Canyon in North America, and the BMW 7 Series in Europe. Turning to slide eight, I will highlight key upcoming product launches in these systems. We had a great year of business wins in eSystems in 2021, with $1.3 billion of new business awards. This was our best year of new business wins since 2014, and it represents a 45% increase from our awards in 2020. Carl, nice job. Thank you. The industry outlook for electric vehicles continues to grow, and Lear is benefiting as about half of the new awards And these systems represent content on electric vehicles, including high-voltage wiring and connection systems, as well as power electronics. This trend is also apparent in our upcoming launches for this year, with six of our eight key launches, which will include content in new electric vehicles. Key wire launches include our first high-voltage and low-voltage wiring products with a major global EV manufacturer. Late this year, we also will be providing high and low voltage products on the most sophisticated and largest wiring harness Lear has ever produced. This award for an autonomous and electric passenger vehicle is a reflection of the trust that our OEM partner has in Lear's design and manufacturing capabilities in wiring. Working on this program, we have learned a tremendous amount about high complex data rich architectures and that experience will prove invaluable as we design and develop more sophisticated electrical distribution systems in the future. As a frame of reference, this wire harness has two to three times the number of circuits as a typical wire harness program. Key electronic launches include our award-winning battery disconnect unit on the GMC Hummer pickup, the first of many derivatives on GM's battery electric truck platform. and a 5G telecommunications unit for Great Wall that will eventually be used on multiple models as we move forward. Now, please turn to slide nine, which shows our 2022 to 2024 backlog of approximately $3.3 billion. As a reminder, our sales backlog includes only awarded programs, net of any lost business and programs rolling off, and excludes pursued business and net new business in our non-consolidated joint ventures. The backlog increased $475 million compared to last year, despite lower industry volume assumptions for 2022 and 2023. From a segment perspective, our backlog is split roughly 70% in seeding and 30% in eSystems. The $2.3 billion seeding backlog reflects over $1 billion of net conquest awards as well as new electric vehicle programs for Volvo, Mercedes, General Motors, BMW, Geely, and Renault. In these systems, the billion-dollar backlog is split roughly equal between electrical distribution, which includes connection systems, and electronics. Approximately 50% of the backlog in these systems reflects products that support electric vehicles. These systems backlog is well-balanced by customer and by region and will support continued diversification of our customer base. Well, not shown on this slide, the 2022 to 2024 sales backlog for our non-consolidated joint ventures is an additional $570 million. Total backlog including these non-consolidated joint ventures is approximately $3.9 billion, which is roughly equal to the highest total backlog in our history. Consistent with historical experience, we expect the third year of our backlog to continue to grow as there are several programs that we are pursuing that will launch in 2024. Hold on, Jason. I want to pause for a moment. I'm going to go off script. I just want to say a few words. It's tough for me to get through that slide and not thank Carl, Frank, for all the hard work. Your teams did an incredible job. And to all the Lear employees on the phone, I talk about it all the time. It's been a tough year. 18 months, two years. But to have this type of recognition, I say the only rewards that are important are the rewards that we get in backlog. Profitable backlog to this company gives me extreme confidence that we're doing all the right things and we're going to have a great future. So I want to pause, say thank you to all the Elyria employees on the team. This was one heck of an accomplishment. I couldn't be more proud of what you have achieved to have record Backlog is something special. And so, Jason, I'm going to turn it over to you for a quick financial review.

Thanks, Ray. Slide 11 shows vehicle production and key exchange rates for the fourth quarter. The ongoing component shortages significantly reduced global industry production for the third consecutive quarter, particularly in our two largest markets, North America and Europe. As a result, global vehicle production in the fourth quarter decreased by 13% compared to the strong fourth quarter in 2020. On a Lear sales-weighted basis, global production declined by approximately 16%. From a currency standpoint, the U.S. dollar continued to weaken against the RMB, but strengthened against the euro compared to 2020. Slide 12 highlights Lear's growth over market for the full year as well as the fourth quarter. For the fourth quarter, total company growth over market was six percentage points, with seeding growing seven points above market and e-systems growing five points above market. For the full year, total company growth over market was a strong eight percentage points, with seeding growing nine points above market and e-systems growing five points above market. Growth over market in North America of 11 points for the year reflected the benefit of new business in both segments, from Ford, Hyundai, and Volkswagen. and strong production and seating on GM's full-size SUVs and pickups, as well as Mercedes and BMW SUVs. In Europe, growth over market of six points was driven primarily by new business, as well as strong performance in the luxury segment and seating, as well as new business and e-systems across multiple OEMs, such as JLR, Audi, Volvo, and Renault. In China, growth over market of two points resulted primarily from new business with forwarded seeding, and new business with Geely, Volvo, Great Wall, and Nissan and eSystems. Slide 13 highlights our financial results for the fourth quarter of 2021 compared to 2020. Our sales declined 7% year-over-year to $4.9 billion. Excluding the impact of foreign exchange, commodities, and acquisitions, sales were down by 10%, primarily reflecting lower production on later platforms, partially offset by the addition of new business. Poor operating earnings were $158 million compared to $330 million last year. The reduction in earnings resulted from the impact of lower production volumes and higher commodity costs, partially offset by positive operating performance in the addition of new business. Adjusted earnings per share were $1.22 as compared to $3.66 a year ago. Fourth quarter free cash flow was a use of $13 million compared to a source of $234 million in 2020. Free cash flow was negatively impacted by lower earnings, increased working capital, and higher capital expenditures. Slide 14 highlights our full year financial results for 2021 compared to 2020. Our sales increased 13% year-over-year to $19.3 billion, primarily reflecting the addition of new business, increased production on later platforms, the impact of foreign exchange and commodity pass-through. Excluding the impact of foreign exchange, commodities and acquisition sales were up 8%. Core operating earnings were $826 million compared to $614 million last year. The increase in earnings resulted from positive operating performance, the addition of new business, and the impact of higher production volumes, partially offset by higher commodity costs. Adjusted earnings per share were $7.94 as compared to $5.33 a year ago. Free cash flow generated for the year was $85 million compared to $211 million in 2020. Free cash flow was negatively impacted by increased working capital and higher capital expenditures, partially offset by higher earnings. Although we were able to significantly reduce inventory levels from the third quarter to the fourth quarter, working capital was higher than anticipated for the full year as a result of continued production disruptions at our customers. We anticipate an unwinding of the elevated working capital to take place throughout 2022. Slide 15 explains the full year variance in sales and adjusted operating margins in the seeding segment. Sales for 2021 were $14.4 billion, an increase of $1.7 billion, or 13% from 2020. Excluding the impact of foreign exchange, acquisitions, and commodities, sales were up 10%, reflecting higher production and the benefit of new business. Core operating earnings were $912 million, up $231 million from 2020, and adjusted operating margins improved by 90 basis points to 6.3%. The improvement in margins reflected primarily higher volumes on LEER platforms, margin accretive backlog, and positive net operating performance. partially offset by higher commodity costs. While steel costs increased throughout the year and reached record levels in 2021 before recently beginning to moderate, other commodity costs have continued to rise, such as foam chemicals and leather hides. Slide 16 explains the full year variance in sales and adjusted operating margins in the eSystems segment. Sales for the year were $4.9 billion, an increase of 12% from 2020. Excluding the impact of foreign exchange, acquisitions, and commodities, sales were up 5%, driven primarily by a strong backlog, partially offset by lower volumes on key platforms. Core operating earnings were $197 million, or 4.1% of sales, compared to 157 million and 3.6% of sales in 2020. Margins improved, primarily reflecting significant positive net operating performance, which more than offset the negative impact of higher commodity costs. And the margin benefit of the backlog largely offset the impact of lower production times. Now, please turn to slide 17, where I will briefly talk about our balance sheet and liquidity. During the year, our Treasury team took advantage of favorable market conditions and our strong financial position to further strengthen our capital structure and improve our debt maturity profile. We renegotiated our credit agreement to increase the revolver to $2 billion and extend its maturity by more than two years. We also completed a $700 million bond financing, the proceeds of which were used to repurchase $200 million of 2027 notes, repay the term loan that was scheduled to mature in 2022, and fund the pending Kongsberg acquisition. As a result of these actions, Lira has no outstanding debt maturities until 2027. We have a strong balance sheet and ample liquidity to make additional organic and inorganic investments that will strengthen both of our business segments. At the same time, we remain fully committed to returning excess cash to shareholders. During the fourth quarter, we increased our quarterly cash dividend to the pre-pandemic level of 77 cents per share. For the full year, we returned over $200 million of cash to shareholders through dividends and share repurchases. Now shifting to the outlook for this year, slide 18 provides global vehicle production volumes and currency assumptions that form the basis of our 2022 full-year outlook. We based our production assumption on several sources, including internal estimates, customer production schedules, and IHS forecasts. Though we expect the impact of supply chain disruptions on industry vehicle production to improve versus 2021, we do expect some additional downtime in 2022, particularly in the first half. At the midpoint of our guidance, we are assuming global industry production of 78.8 million units, which is about 2.4 million units lower than the IHS January forecast. From a currency perspective, our 2022 outlook assumes an average euro exchange rate of $1.12 per euro and an average Chinese RMB exchange rate of 6.35 RMB to the dollar. On slide 19, we outlined the broader industry factors as well as LEER-specific items we considered while developing our 2022 outlook. The chart is intended to highlight the implications of each of these issues on both our 2022 financial outlook as well as 2023 and beyond. While industry production volumes are continuing to recover, significant uncertainty around the pace of the recovery combined with accelerating inflationary cost pressures led us to issue a wider-than-normal full-year financial guidance range. I will start by discussing the key macroeconomic factors. We see incremental improvement in industry production levels this year, but still significantly constrained relative to demand. As a result, we expect a gradual but sustained recovery stretching into 2023 and well beyond. On the cost side, we will see an impact from elevated commodity prices, primarily in the first half of the year when compared to last year. While we are seeing prices softening from peak levels, particularly with steel, those costs remain well above historical levels. For steel, we ordinarily lock in six to 12 months requirement contracts before the beginning of each year. This year we have entered into contracts that protect our requirements while capturing the benefit of expected softening prices in subsequent quarters. In general, we expect that the first quarter reflects the peak margin headwind for higher commodity prices, net of commercial recoveries, with margins improving in the second quarter and then again into the second half of the year. We expect wage inflation, labor shortages, and other inflationary pressures in the supply chain to impact both material costs, as well as labor and overhead costs in our manufacturing facilities, where we are seeing higher utility costs, for example, as well as elevated logistics costs. As Ray highlighted earlier, there are a significant number of EV launches in 2022, which are important drivers of our strong new business backlog. This business is launching with strong margins in line with our segment averages, and as the number of EVs coming to market grows and penetration and volumes increase, This trend provides a CPV opportunity for both of our business segments. From a LEER perspective, we are taking action to capitalize on the industry tailwinds and mitigate the impact of the headwinds. Ray discussed our very strong three-year backlog, and we have a substantial pipeline of new opportunities the team is bidding on in 2022. While we do see a bit of a reversal from the favorable platform mix we experienced in 2021, particularly in seeding, Our estimated growth over market over a four-year period, 2019 through 2022, remains very strong, with total company growth over market of more than five percentage points, including these systems at nearly 6% and seeding at 5%. Specific to 2022, there are key program changeovers that are negatively impacting growth over market, such as Ford's Super Duty pickup in these systems. We are taking proactive steps to manage our capacity and cost structure and anticipate a second consecutive year of strong net operating performance. We plan to invest approximately $125 million in restructuring in 2022 to continue aligning our product portfolio and manufacturing footprint to current volume levels while improving flexibility to increase capacity and generate strong financial returns as the industry recovers further. Ray will talk more about that in a moment. Lastly, we are working closely with our customers to negotiate recoveries or work collaboratively on offsets to higher commodity prices and inflationary cost pressures. Over the last 10 years or so, we have worked to de-risk our business by developing contractual pass-through agreements on key commodities. These agreements cover the vast majority, but not all, of our steel, copper, leather hide, and chemical cost exposure. We continue to work closely with our customers on value-added value engineering ideas, cost technology optimization, and other means of helping offset significant inflationary pressures, as well as the impact of suboptimal production schedules. Again, our 2022 financial outlook ranges for revenue and earnings remain wide to appropriately reflect the uncertainty outlined on this slide. Slide 20 walks our 2021 actual results to the midpoint of our 2022 outlook for sales and adjusted margins. Year-over-year revenue is expected to grow by approximately $2.3 billion, and adjusted margins are expected to improve by 60 basis points due primarily to the increase in global volumes and our margin accretive backlog. Commodity costs and non-labor inflation driven by component, freight, and logistics cost increases are expected to negatively impact margins by 80 basis points. Slide 21 provides more details on our 2022 outlook. Our revenue outlook is expected to be in the 20.8 to $22.3 billion range with a midpoint of approximately $21.55 billion. Core operating earnings are expected to be in the range of $900 million to $1.2 billion. Adjusted net income is expected to be in the range of $525 million to $755 million. At the midpoint, This would imply an increase of 33% over 2021. Restructuring costs are expected to be approximately $125 million, and we are increasing our capital spending by $90 million to $675 million at the midpoint in order to support upcoming launches and growing backlog. Our outlook for free cash flow for the year is expected to be in the range of $300 million to $600 million. Now I'll turn it back to Ray for some closing thoughts.

Thanks, Jason. Turning now to slide 23, as we enter a new year, we continue to make investments to grow and strengthen our core businesses, extend our advantage in operational excellence, and develop and support our people. As always, we will continue to analyze our product portfolio to ensure we are making investments that will create the most value for our shareholders. In seeding, we're going to integrate the Kongsberg acquisition, which will further solidify our position as the leader in seeding. while bringing additional priceable content to our offerings. We believe this will enable Lear to improve overall seat system performance by offering more efficient, lower weight, and flexible packaging design solutions. We continue to identify additional opportunities to further strengthen our position in seating. In these systems, our efforts will focus on continued growth in connection systems, which is a critical component to improving margins. We made good progress improving our connection systems business last year, and we will be looking to identify additional value accretive investments in these systems, both organic and inorganic, in 2022. Lear has a long history of aggressively managing its manufacturing capacity and cost structure, and we believe that semiconductor availability and other supply constraints will continue to impact industry volumes. while inflationary pressures throughout the supply chain will continue. Also, we don't believe all of these issues will dissipate in the near to medium term. We are increasing our restructuring spending to increase flexibility, reduce costs, and improve efficiencies in our operations going forward. These actions will ensure we are able to flex capacity with industry volumes and better position the company for future profitability. And now we'd 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 on your touchtone telephones. If you are using a speakerphone, we do ask that you please pick up your handset before pressing the keys to ensure the best sound quality. To withdraw your questions, please press star and two. At this time, we'll pause momentarily to assemble the roster. Our first question today comes from Rod Lash from Wolf Research. Please go ahead with your question.

Good morning, everyone. A couple of questions. Your guidance for 2022, I just wanted to clarify a couple things. On the top line, you've got 767 from volume. It's about 4%. And I'm guessing that corresponds with your 6% volume guide minus 2% for price. and most likely your geographic mix is good, but customer mix or platform mix is not. Is that about right, and can you give us a sense of how to think about that, particularly the geographic and customer mix? And second, on the earnings bridge, you've got 70 basis points of margin, which – I just want to make sure I understand how you're portraying that margin bridge. If we were to include the 425 of positive revenue, then to get that magnitude of dilution, there'd have to be like a negative $130 million correspondingly on the EBIT. Maybe you could just elaborate on that.

Yeah, I'll start with the second question first. So, yes, your math is pretty close. It's about $140 million. between commodities and what we're calling non-labor related inflationary impact year over year. So the recovery assumption embedded in there is that we would offset about 75% of the total year over year impact. The total impacts on a gross basis is about 575 million, Rod. In regards to your second question on the revenue bridge, Yes, you're right. Volume mix does include the effect of pricing, you know, price downs as well as our offsets to price downs. So the net effect of that is less than 3%, but it is in that column of the bridge.

Okay. So just to clarify, Jason, I thought you had commented on something like a $65 million discount. commodity impact, maybe a little bit better than that. Maybe I misinterpreted that statement. And more importantly, if we think about the rate of margin improvement as we go forward, if it wasn't for this commodity impact, you'd be doing something like 130 basis points of margin improvement, not 60. Is that something we should be thinking about as we look forward to maybe 2023? Assuming you get another increment of production and pretty good backlog, or are there other things that we need to think about VZ margins?

Yeah, you may have to take a step back and just talk through commodities and what's happening there. Last year, we saw a $450 million gross impact. We recovered about 60% of that. The net impact is $185 million. It's a little more than 100 basis points for the company, more in seeding, less in e-systems. About 60% of that was steel, and then 10% copper, 20% chemicals, and 10% on leather hides. As we look at 2022 and what we were talking about several months ago, mainly related to steel and copper and what we saw in those markets until maybe a lesser extent chemicals and hides really haven't changed much. And so as we look at 2022, the outlook for steel is actually a little bit better than we had anticipated at that point in time. And so, again, the gross impact of roughly $575 million for this year and $140 million net, only about 15% of that or $20 million is steel. So we see the benefit of, you know, some additional pass-throughs from last year's increase and better contractual terms, you know, on this year's steel exposure, coupled with what we believe is going to be declining steel prices throughout the year, where the first quarter is sort of the peak impact, and then it works its way down throughout the balance of the year. You know, copper, chemicals, and hides are similar exposure to the prior year. The big difference for us this year is what we're seeing on components and yarn, resins, other components that we didn't see cost pressure on last year. And so, What we're experiencing now is, you know, on components where we have contractual protection, we're seeing suppliers, you know, trying to break those contracts. And, you know, our response to that, you know, depends on the nature of the supply agreement. So if it's a directed supplier, it's pretty straightforward. You're going to work with the customer to pass that through. In other cases where, you know, there's a large amount of steel embedded in a component and they have – you know, contractual responsibility for the buy, if the supplier is going to be bankrupt, that doesn't do you much good. So you have to protect supply and grant the increase. And so, you know, that's kind of a new dynamic that we're experiencing this year. And then, you know, we don't normally call out utility costs and ocean freight and those types of things, but the level of increase is so significant that that I thought it warranted highlighting as part of, you know, a headwind for this year. Now, you know, as you look at our history of net operating performance, we are able to offset much of this through our own performance improvement programs, whether that's restructuring or commercial performance in the teams or, you know, our operating performance. And so last year we offset all but, I think, 13 basis points. This year, you know, it's roughly 35 basis points. So you have about 50 basis points of margin headwinds between commodities and performance over a two-year period. I would expect to claw that back certainly in 2023 and likely more than that. And maybe I'll pause for a second and let Ray talk a little bit about the kind of commercial environment around this topic because I think it's really the most important point that we need to get across on this call.

Yeah, I think, Rod, and Jason mentioned it, there has been a significant shift that we're seeing relative to the supply base. You know, we've been in this, and we've been working with our customers, working with our suppliers for the last several years, and a lot of that was negotiated, and the team did a remarkable job. I mean, I think our purchasing team has done an incredible job of protecting production at the same time, negotiating what would be more transitory or temporary deals to get through a particular period of time, and that's what we were seeing from the supply base was more temporary, and that things would, from a commodity standpoint, inflationary cost perspective decrease over time. What we're seeing now is much more aggressive positions with the supply base looking for more fixed solutions. And to Jason's point, we have a tremendous amount of detail within the cost structure and a tight network between engineering, our purchasing group, our commercial and logistics team that tie this together and really put it in front of the customer, you know, 75% given whatever program is directed material. So we're seeing the negotiations go on because we're in really three-way party negotiations to solve those issues. And the aggressive behavior is getting to a point where it's stop ship threats with some of these directed suppliers. In these systems, albeit it's not as high, we still have 30% to 40% of our purchase material is directed. And so, like Jason said, that will be passed through to our customer. And there does seem to be the change where the Tier 2s and Tier 3s are in a position where it's financially, you know, they don't have the stability to really produce parts going forward. So one is a solution to get them to produce parts. Two is a longer-term solution, which is more of a fixed price increase. And so I think the big shift or change over what we've seen the last 18 months to really what we're seeing, and it started this year, maybe a little bit at the end of last year, was more of a longer-term fixed play on price solutions. And again, I don't think there's a, you know, you can talk about the semiconductors or you can talk about inflationary costs, but it's across the board. So if it's transportation and air, ocean, trucks, or if it's labor issues with labor increases, or just the lack of labor support. I mean, we've had a number of situations where suppliers or customers have had to go on down because they don't have labor to produce parts. That's a more recent occurrence, and that is becoming increasingly widespread. spread across the industry. What happens, obviously, you have intermittent shutdowns, which we're seeing again. I haven't seen a change. I wish I could say that I've seen a change from last quarter to this quarter coming into this year where customers are shutting down their facilities with zero or no time of notice. We're literally in plants building parts and getting notice that they're going down, which really creates that sticky labor situation, which again creates a a commercial issue from our supply base into the customer. So there's a number of different factors going on. We are handling it, I think, in a very, very specific way. It's very respectful to what's going on, but we're also, and we've had some, you know, for the majority of the part, success with our customers on getting recoveries, particularly 100% with the directed, but in our situations where we have costs, we've got some really good negotiations going on with our customers to resolve these because these are going to be much, what we believe, more fixed increases as opposed to temporary, which is what we were dealing with over the last 18 months.

Just to clarify, Ray, it sounds like you're optimistic about the ability to negotiate a recovery on that as you get it out to next year. What specifically in seeding are the You gave the categories, transportation, trucks, labor, things like that, but is it metals and mechanisms? Is it everything within the seating business where there's that magnitude of inflation that's become more permanent?

Jason, do you want to talk about the guidance perspective? Obviously, we put in our guidance what we anticipate both on the high and low end as far as how we're going to get at it this year, Rod, but I'd say sticky labor is one of the big ones that we're dealing with right now with capacity with our JIT facilities. Like I mentioned, you have hundreds of people standing around trying to build parts. That's probably one of the most impactful from a cost perspective that we're negotiating with our customers when you've capacitized to a certain level, and then you have thousands of employees sitting around, and then you have to bring them back in 24 hours or 48 hours to sit around again. That is probably one of the more costly issues that we have to encounter from a quarterly perspective. And then from a commodity perspective, we talked about steel. Fortunately, steel has gone down significantly. But across the board, like Jason mentioned, yarn, obviously leather was something that impacts us this year, particularly in the first half. And chemicals are issues. But I wouldn't say it's significantly – large as what we see just running our facilities in the JIT facilities?

I think components that are made with steel and resins are where we're seeing the kind of stickier, more permanent price increase requests. So even with steel coming down, you know, 30% in North America from that peak, it's still more than double its usual historical level. And so suppliers that Smaller suppliers that have a high percentage of steel as a component in their part is where we're seeing probably the most significant distress on the seeding side. And these systems, you know, parts that are made with copper and resins combined are where we're seeing pressure in addition to the obvious issues with microchip suppliers, which are more three-party discussions with our customers.

Thank you.

You're welcome.

Thanks, Rob.

Our next question comes from Joseph Spock from RBC Capital Markets. Please go ahead with your question.

Thanks. Good morning. I guess I was wondering if you could give a little bit more color of the margins by segment that you expect. And then specifically in e-systems, I know you've talked in the past about incrementals on that volume. But what's not really clear to me is sort of how much investment you're putting into e-systems and I'm wondering what that amount is for 22 and how that plays into the margins for that segment.

Yeah, so the margin range for each systems is, you know, sort of mid threes to a little less than 6% from the low end to the high end of the guidance range. And it's the math is 4.7% at the midpoint. We're seeing good conversion on volume any systems, you know, in the neighborhood of We're seeing good conversion on the backlog. It's converting at more than 10%. And so the biggest margin headwind, again, in these systems is going to be the net effect of these component and commodity increases, which is about a little more than 100 basis points of headwind. And then to a lesser extent, our continued investment in engineering in that segment. But, you know, that's much less. significant in terms of the basis point impact. You know, if I kind of step back and look at, you know, reading through this year what eSystems margins look like out in a more normal volume environment, you know, I think so at 4.7%, if you just add back, you know, volume at, say, 89 million units, that's 2023's, you know, IHS forecast, you know, that takes you to 7% by itself. And then clawing back a third of the commodity impact and half of the premium costs that we're continuing to incur in that business year at 8%. And with our continued growth and connection systems over the next couple of years, there's a very clear path back to 8.5%. So I think what's really weighing on that segment is less about investment, and more about the net effect of commodities and component cost increases.

Okay, thanks. And in seeding, sorry, the margin range?

So in seeding, the margin range is sort of mid-six to just over seven, you know, 6.8% at the midpoint.

Okay. And I guess the second question is, Just on within eSystems on Xevo, we heard from Sarence yesterday there was a canceled program with Xevo. What's the update on Xevo from the Lear perspective?

Yeah, I haven't heard about that. Not sure what Sarence is referring to. Let's get back to you on that, Joe. Yeah.

Okay. And is there an update just on the progress for that business? Yeah. and how that's sort of contributing to the go-forward trend for eSystems.

Yeah, so what we've done at this stage, Joe, is we've fully integrated that into eSystems and into the electronics business. And so, essentially, it's a little bit like some of the smaller acquisitions in electronics that we've had with XO, Arata, and others to just round out our software capability that's embedded on. on the electronic modules that we're selling. So, you know, not much of an update to provide specifically for you on that in terms of, you know, independent revenue or anything like that. Okay. Thank you.

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

Hi. Good morning, and thank you for taking the questions. I just want to go to your growth over market, which I'm calculating over, you know, on a weighted basis versus your end market expectations. It's like one point of growth over market. You just did eight points of growth over market in 2021. So maybe, you know, you could just give us a sense of that eight points of outgrowth, how much of that was unique, which, you know, which we'd be subject to payback, so to speak. And then I think you mentioned some items on mix and, you know, changeover, mentioned super duty, but just why only one point of outgrowth in 2022 and is the outlook beyond 2022 still for something in the mid single digit range?

Yeah, I'll start with the second part of that question first. Our outlook longer term really hasn't changed in either segment. I think if you look back again, you know, 2019 through 2022. It gives you a better sense of the growth potential of both business segments with each systems at six points of growth over market and seeding at five. And so this year, you know, it's a little bit lumpy because of changeovers and the benefit we had last year, particularly in seeding with the very favorable mix sort of reversing course. And I'll just give you a couple examples, talk about the changeover and the prepared remarks in these systems on the Ford Super Duty. But in addition to that, you know, Expedition Navigator, another large platform in that segment, the volumes are expected to be lower. In a North American market, then we're projected to grow at, you know, 12%, 13%. In seeding, We have Daimler changing over their SUVs in Tuscaloosa, not the GLE, GLS, but the new vehicles that they're introducing. There's two electric SUVs that will be launching at the tail end of this year. And so their volumes are down year over year after a record year last year, again, in the North American market that is growing at 12% or 13%. So it's just math at that point. In Europe, what we're seeing in terms of the IHS projections, which you know, underpin a lot of our assumptions on volumes is, you know, flattish or even lower volumes on some luxury platforms, you know, Porsche, Panamera, 911, Boxster, Cayman. You know, those platforms, Audi, Audi Q3 is another one that comes to mind. Again, in a region that is slated to grow 12% or 13%. So what you're seeing is the rotation back to mainstream vehicles. Now, that's the assumption we've made and our guidance. If you were to fast-forward 12 months, given the constraints due to the chip issue right now, I wouldn't be shocked to see our revenue come in at the midpoint and the industry volumes come in much lower, because we're starting to see some of that already where, given the constraints, OEMs are focusing on specific platforms that they, you know, that have the highest margins or do best for them. It's really kind of an unusual situation both last year and this year in terms of the significant outgrowth in seeding last year and the flattish growth this year relative to the market. I would attribute more to the unusual nature of what's happening with the chip shortage more than anything. If you take a step back, the biggest driver of seeding growth is the conquest wins. You know, we have a billion dollars in our backlog. over this next three years of business that we have taken from competitors, whether that's the Colorado Canyon here in North America that's launching at the tail end of this year, 7 Series, and then the 5 Series BMW in Europe, X5 in China. We have Volvo, significant business with Volvo that's starting to roll on more next year and the year after. They're all conquest wins, and we see significant opportunities to continue taking business from competitors given our unique value proposition, which is only strengthened through the acquisition of Kongsberg. And then on eSystems, you know, the underlying, you know, products that are in that segment are continuing to grow considerably fast in the market with the additional content, particularly on electric vehicles, which we've talked at length about in the past.

Okay. So just to unpack one of the points there, just to be clear, is this, contemplate, I mean, GM is your largest customer. I think there's something like 20% of your mix, and they're out there saying volume growth of 25 to 30. Does this contemplate, you know, an outlook like that from GM?

So at the high end of the range, we have something that resembles what GM is talking about on certain platforms like the full-size truck and SUVs. You know, we've been a little bit more cautious at the midpoint of our guidance range, and we're not reflecting the full customer projections at this point, just given what we experienced last year. And on other platforms that had a lot of downtime last year, we've sort of assumed that that is going to continue again because of the constraints in the marketplace. So, you know, the answer is yes and no on that. It depends on the platform, Dan.

Okay, great. Thanks. And then a follow-up, and I think you touched on it a little bit here. But you mentioned in your deck that your seeding market share is now 25% up from 23%. I think your long-term target is 27% or 28%. So maybe you could just unpack, you know, what is it that's driving continued market share gains in seeding? Is it just the vertical integration? Is it something on, you know, the cost side? You know, what's driving the market share winces?

Well, you know, I think it's a combination of a number of things. And we talk about this going back 10 years plus. And we obviously invested in the business to really be the most efficient, high-quality producer of seats in the world. And we're very disciplined with our approach and still are very disciplined with our approach on how we look at business and by customer, by region, by component, so that we get a fair return on invested capital and position that business for continued success. I think, you know, what we're seeing now is, one, we have an incredible reputation built on what I just mentioned of the investments that were made a long time ago of operational excellence and the continuation of Industry 4.0 and technology within our manufacturing plants to really have a superior manufacturing plan. And in addition to that, and I think what you've seen over the most recent three to four years is our investment in innovation and technology. And what we've done is we've been able to differentiate ourselves as just a pure JIT manufacturer, but bringing what we talk about as value solutions for our customers. Kongsberg is a great example. You know, we talk about intuitive seeding and Really, we've had engineering teams working on value propositions and solutions with innovation to change thermal comfort. And so those type of technologies or innovations allow us access into early development programs. And, you know, Frank Orsini is sitting here. He's the president of the seating group. And Frank and I have been in numerous meetings inside different customers' design studios talking about technology. For example, Configure Plus, where you have electrified power rails, which is a combination of these systems technology innovation, and Carl's here, to help us really differentiate our capabilities. So when you have those innovations and technologies, coupled with what we believe is the most efficient manufacturing processes and continuing to develop those technologies as we move forward, it's allowed us to grow, and it's profitable growth, too. I think that's another key element. As you look at the business, we're growing on what is arguably the most profitable seed business in the world, and we do not take business that doesn't generate the same margins or is accretive to what we're looking at. So we've been successful. We're continuing to invest. I think this Kongsberg acquisition is just another step in the right direction. We're going to continue to put investments organically or inorganically in areas where we can drive our manufacturing processes to be more efficient and or create very unique innovation and technologies our customers are looking for. That combination has worked. And I think back, Jason and I have talked about this, we've watched the margin expansion We've looked at the investment we've made at 10-plus years, and you can't just turn it on and think you're going to be a world supplier of just-in-time efficient seating systems without a long history. And so I'm proud of where we're at. Twenty-five percent was a great number when we got to roll that out this year, and you heard my comments on backlog. It is the greatest thank you from a customer, given the circumstances we're up again, to arguably, okay, volume adjusted. We had a record backlog. And that is something that I just look at and tell the team that when they award us profitable business, it's the best thank you we can get.

Got it. Thank you very much.

Yep.

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

Hey, good morning, guys. Maybe a follow-up on the earlier eSystems margin discussion, Jason. The 80 basis points of premium costs that wait on Q4, I was just hoping to get a bit more color on how you're thinking about that impact and trajectory into 22, and specifically in light of those semi and electronics and inflationary costs in the market, and just also was hoping to get more color on some of the reception to potential pass-throughs from your customers.

Yeah. So starting with the kind of the premium costs, we're expecting – That's what we incurred last year to continue again this year, a similar level of disruption and resulting premium freights, as Ray said, sticky labor and other inefficiencies impacting us sort of throughout this year. On the component side, you know, I think it depends on the nature of the supply arrangement and the component itself. So, for example, with microchips, it's generally a three-party discussion between the customer, us, and the supplier. And so it's really based on the availability of parts. And so the price increase has to be absorbed really at the customer level just to protect production. In the case of other directed supplier parts like terminals and connectors, again, it's more of a three-party discussion. But beyond that, we are seeing, you know, inflationary pressures on other components where we control the sourcing, and that is having, you know, a fairly meaningful impact on these systems, you know, for the year. The commodity impact is about 107 basis points year over year. So while the premium costs and those types of things haven't changed year over year, you know, the net effect of commodities after recovery has changed. Now, some of that I think will get passed through, in subsequent years. So some of this takes time and you're trying to balance your desire to grow the business and you're implementing cost reductions that maybe take time to fully offset the impact. So I think it's reasonable if you look out to next year that, you know, roughly a third of what we've incurred over the last two years in commodities should be offset. And we'll continue to improve upon that as the, you know, years go by. And ultimately, you know, everything we're quoting today really has kind of these higher cost levels factored in. And so as new programs launch, we would expect that the margin profile would be in line with our typical margins, depending on the underlying products going forward.

Okay, got it. That's really helpful. And maybe just a follow-up on your point at the time I'm going to pass through is, you know, if we take a step back, you know, eSystems backlogs ramping nicely, you have solid mix there. Is there anything structural that has changed the path to the 10% margin target you talked about for 2024, assuming, of course, we're back to some normalized level of LVP?

Yeah, I think the combination of You know, running at normal production rates, you know, so you're – you capacitize a plant for a certain volume. The customer has a planting volume, and then they adhere to it because they have availability of parts. You know, that coupled with some normalization on commodities and then also on premium costs, you know, those are the factors that are holding us back. The things that we can control we're doing very well with in terms of the net performance in the business, the growth in connection systems. All of those things are continuing to grow margins in line with what we had laid out, you know, over the last couple of years in terms of our longer-term plan to get to 10%. So nothing structurally is different than what we talked about previously.

Okay, got it. That's helpful. Thank you.

Our next question comes from Colin Langan from Wells Fargo. Please go ahead with your question.

Oh, great. Thanks for taking my questions. You mentioned earlier the potential to claw back or your expectation that next year you'll be able to claw back the commodity costs. I mean, are we talking the 185 last year and the 140 expected this year or part of that? How should we think about the good news we should be thinking about as you recover that?

Yeah, I'd love to be able to give you that level of granularity. We've modeled some different things and, you know, we're working hard to to pass this through as quickly as possible and offset what we can't pass through through our own investments in restructuring and other performance drivers. But as I start to think about sort of 23, 24, you know, what we're assuming is that roughly a half, a third to a half of that impact we would see unwinding itself in 23. That's our target as we sit here today, but there's a lot of moving parts, Colin, so it's difficult to put a pinpoint number on it.

And is that 185 and 140, we could add them together, or did you already start getting some of the 185 within this year?

I would look at those together. The cumulative effect on our business is $325 million, unwinding over multiple years. And part of that's got to come through some normalization of costs. So steel, for example, after peaking at the end of September last year, it's down a third in North America. Suggestions are that we will see more capacity coming online throughout this year and next year. So certainly over, I'd say, the next 24 months, you should see steel maybe not get back down to 2020 levels, but but certainly somewhere much closer to that zip code.

Okay. And in terms of growth over market, some different numbers were, I think, discussed on the call. So it's roughly about, you know, 10% growth, your assumption is 6% market. So your outlook is organically about 4% over market. And, you know, one, is that right? And then two, when I look at the slides, that volume slide is up four, so the backlog is, really driving that above-market growth. And I get the product mix, but, you know, why with geographies being higher in North America, Europe, those up 10%, wouldn't that overwhelm some of the product headwinds that you're highlighting? It seems to be underperforming. The volume seems surprising when North America, Europe are up 10, over 10.

Yeah, and so when we talk about growth over market, we do it on a sales-weighted basis. So the market we're talking about is growing faster than, you know, the 6% that the industry is growing because, as you point out, our two largest markets are growing at 12% and 13%. So, you know, the roughly, call it a point of growth over market is, you know, is relative to that sales-weighted basis, not the industry volume itself.

Okay.

Okay.

Got it. All right. Thanks for taking my question. You're welcome.

And, ladies and gentlemen, our final question this morning comes from Brian Johnson from Barclays. Please go ahead with your question.

Thank you. Just a couple questions, and, you know, again, around the topic of the day and inflation and margins. I was, and I apologize, a bit confused in the discussion earlier about your relations with the Tier 2s and the Tier 3s. You know, it's well known that you're less vertically integrated than the other competitor in C. You know, you mentioned some of those suppliers are struggling, but then how does that get reflected in the prices you paid? And in particular, you talked about moving to fixed-price contracts. It would seem like more indexing that's directly tied to what the OEM paid would be the solution there. So just wondering how that plays out and how, again, kind of thinking of 22, 23 margins, where that winds up.

Yeah, I think Ray's reference to fixed versus temporary is just a reflection of kind of the underlying inflation rates you're seeing in the U.S., you know, at 7%. It's, you know, because labor is the biggest input to that, eventually that works its way, you know, through to the price of all products, as you're seeing in the broader inflation rate. In terms of our level of vertical integration, I think Our level of vertical integration, if you look beyond structures, is beyond what others have in the space. And so a lot of what we're seeing is on that tier three level, you know, components into our seat component plants. So that could be, you know, wire and hog rings. It could be yarn that's an input in fabric. And, you know, even chemicals. that are used to topcoat leather. So things that ordinarily don't move around much, we're starting to see price increases on where we have contracts, but the suppliers are trying to break them. So ultimately, it's a negotiation with the supplier and then a negotiation back-to-back with our customers to try and pass through what we can. We've tried to put a balanced view of that into our outlook and which at the same time includes stretch on our end to perform and restructure the business to offset what we can't pass through. So it's difficult to say what the impact is going to be kind of quarter to quarter throughout this year, but we know on balance it's a challenging environment. We've captured what we think is a fair view of that in the outlook. And we would expect to see unwinding of that as we look out to next year and beyond.

Okay. And just a quick follow-up. If you think about the performance improvement walk, you know, typically that's a Lear strong point. In fact, in the past, I know you, you know, sometimes projects start at low margins and they get worked up. Is there any way to separate how much of that is the ongoing productivity and other reengineering improvements versus, the offset from inflationary wages and how that balance is working out?

Yeah, I'm not going to get into that level of detail, Brian, on the components of our performance, but they are generally a combination of plant efficiencies, negotiated price downs from our suppliers through purchasing, CTO and VAV on the commercial side working with our engineering group and our customers, to drive cost out and capture some margin benefit associated with that. You know, those are the primary drivers. We are seeing, to your, I think, maybe the underlying point of your question, we are seeing an elevated level of labor economics in our plants, which is lessening maybe that net performance beyond what it ordinarily would be. You know, I don't have that specific detail in front of me to break out.

Okay. And are the OEMs receptive to recovery of inflationary labor costs by the years or the subsuppliers?

Yeah, we have some good discussions with the customers and, you know, for the most part, you know, and again, I think to Jason's point, there's a number of ways and we, and you're right, we are very good at this. And this is something we take a lot of pride in is that we have a number of different actions. One, getting at the sticky labor, we're looking at how we can Flex our different facilities. We have a very unique position, and we talk about getting at our facilities. In South America, we're able to combine different product offerings, like wiring really fits well with the sequencing of wiring in just-in-time or trim. So we've done a nice job of consolidating some of our plans to flex them as we're seeing this persist, and we don't believe it's going to evaporate or go away in the near term. So we're going to take some of the actions on ourself and lower our costs. From a CTO cost technology optimization, we've queued up, you know, hundreds of millions of ideas. And those ideas are in front of the customer. We obviously validate them. We make sure that they understand what we're trying to do, what we're trying to achieve. And those are great, you know, commercial solutions for us to offset costs. And then we have this just negotiation that we talked about. We have incredible transparency. Our teams, both teams in purchasing, And these systems and seating are doing a remarkable job. And, you know, when Jason's talking about, we're talking about more of a fixed cost going forward as opposed to solutions that are more temporary in the price. We do have an enormous amount of transparency into the details when suppliers are bringing forward cost changes or cost price increases. And that's when we get into tier twos and threes and et cetera, because We really go through and audit every single position from if it's directed or not directed. And so we have a great process in place. And I think that also helps when we are able to negotiate a settlement with our customer. So last year, I think the teams did a remarkable job. I couldn't be more impressed. A lot of that was thinking that this might be temporary. And so some of the solutions with the suppliers and our customers We're under a temporary resolution or proposal or settlement. Now we're into a more longer term solution or what I say is fixed. And those conversations are going extremely well. And again, I think it's how you bring the information forward. I also think it's how you're flexible and solving your own problems first. We're not going to be a victim here. We have things that we can do and we are doing those like we announced with even our restructuring plan. And we've been very successful with the plans we did in South America. We've been working on that CTO VAV list for some time, and that is actually working to our advantage, too, because the customers are willing to work with us on solutions that lower cost. And so, you know, we've got work to do, like always, but we're very optimistic because we're very good at it. Okay. Thank you, Rich.

Yep. Thanks.

Okay. I think that's the last call. So I just want to conclude the call and, again, say thanks to all the Lair employees. It was fantastic. One heck of a year last year, everyone did a great job. Very optimistic about the future. Like I said, I think the backlog is just another indicator, barometer, you know, target of what we're trying to achieve. And profitable backlog is exactly the best accomplishment. And thank you from our customers. And so thank you to the teams on the phone. And look forward to seeing you soon.

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