Lear Corporation

Good morning, everyone, and welcome to the Lear Corporation first quarter 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 first quarter 2022 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 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. Next, Jason will provide an update on the progress we've made in electrification before reviewing our first quarter financial results and our full year 22 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. Good morning, everyone. Before I begin, I want to take a brief moment to extend my sympathies to all those impacted by the devastating war in Ukraine. The air has contributed to the Red Cross to support medical relief efforts and will continue to provide support for our employees impacted by this war. I'm so proud of the Lear team who have provided much needed support to many of those impacted by the war. Now, please turn to slide five, where I will provide a brief overview of our first quarter financial results. In a very challenging environment marked with significant production declines late in the quarter, cost inflation and continued semiconductor disruptions, the Lear team posted solid results in the first quarter. sales were $5.2 billion and core operating earnings were $184 million. Despite lower production volumes than the fourth quarter of 2021, both seeding and these systems delivered better financial performance sequentially in the first quarter of 2022. Slide six outlines key business highlights from the quarter. Once again, Lear's sales outperformed the industry in the first quarter with above-market growth in both seating and e-systems. Year-to-date business awards totaled over $1.2 billion, which will support continued growth in both business segments. The pace of business wins is accelerating, and our awards this year have increased significantly from the same time last year. We also recently won another significant conquest award in seating. that will launch in North America in 2024. In eSystems, we won a significant new electrification award in connection systems for a battery module connector. Lear's expertise in metal stampings, connection systems, and electrical architecture, along with molding capabilities of M&N, positioned us to win this award. This battery module connector is another example of our eSystems and seating teams working collaboratively to support our customers and create a value proposition. On February 28th, we completed the previously announced Kongsberg interior comfort acquisition. This acquisition will further advance our seat component capabilities into specialized thermal comfort seating solutions that will further differentiate our product offerings and improve seat systems performance and packaging. We also continue to receive recognition across businesses from industry partners. Two recent awards highlighted here include GM Supplier of the Year and Fortune Magazine's World's Most Admired Companies. On slide seven, I want to describe in more detail some of the factors that are impacting the industry and how we are proactively facing these challenges. Industry lost over 1.7 million units of vehicle production in the first quarter alone due to the semiconductor disruptions, the war in Ukraine, and the COVID lockdowns in China. As we look ahead, we expect that the volume recovery will be muted in the near term and that industry conditions will continue to be challenging well into 2023. Other headwinds include elevated commodity costs, rising input costs, and the strengthening of the U.S. dollar. As we navigate through this more complex and volatile environment, we remain very focused on controlling what we can, including aggressive cash management and working collaboratively with our customers to reduce costs. We have stepped up our restructuring spending this year to further streamline our business and improve efficiencies. This focus on operational excellence and process improvements runs deep in our DNA at Lear, and we will continue to be a leader. A great example is in Brazil, where we combine portions of our seeding and eSystems operations into one location to create a more flexible and efficient environment. We're taking what we learned in Brazil to other manufacturing facilities and are now beginning to explore quoting future programs with our customers across our two segments. We have a unique advantage as there are certain manufacturing processes across our two businesses that can be co-located to lower our costs and flex our labor within one manufacturing plant. We're continuing on the path we started a couple years ago to review each product in the portfolio and to target our investment dollars in areas that provide the best returns. Consistent with this strategy, we have begun to exit certain product lines in these systems including traction inverters, cord sets, and audio and lighting. When the industry recovers and volumes return to trend levels, we are confident that our focus on improving our cost structure today, coupled with the targeted investments in seating in these systems, will increase profitability and financial returns. Turning to our seating business on slide eight, We've had a great start to the year with new business wins in all regions, including multiple awards on SUVs, CUVs, and electric vehicles. And the Conquest Award I mentioned earlier supports our growing JIT market share. Net Conquest Awards so far this year total about $200 million. Our key ongoing and upcoming launches over the next couple months are all on track, including the Mercedes-Benz EQE, and EQS SUV, the Range Rover Sport, and the BMW X5 and 7 Series. Building upon our 2019 PACE Award-winning Configure Plus technology, Lear was named as a finalist for an Automotive News PACE Pilot Award for our occupant safety system, which was co-developed with B&R. It is the first-ever safety system designed for removable seating. This system expands our Configure Plus product offerings and enhances our overall capabilities. As the seed supplier with the most complete component capabilities, Lear has created a unique value proposition for our customers. By designing and sourcing components that historically have been directed, we can build seeds with better performance at a competitive cost. As a result, certain customers are increasingly willing to consider alternative designs and let Lear directly source more seed components. This will allow us to provide superior products for our customers as well as protect and expand our JIT market share. Slide 9 provides an update on our Kongsberg acquisition, which was completed on February 28th. Integration is ahead of schedule, and the business is already tracking above our initial estimates. In the short time we have owned the business, we have already won two new seat heat awards with a global electric vehicle manufacturer for vehicles produced in the United States and China. The Kongsberg acquisition puts us in a position to use our complete seat expertise to efficiently integrate massage, lumbar, heat, and ventilation components with unique foam and trim covers. As the only seating supplier with these capabilities, we can create a modular thermal comfort solution that achieves world-class performance and reduces part complexity and cost. Today, the total addressable market for thermal comfort solutions is expected to grow about two percentage points faster than the vehicle production. We are confident that this market will grow even faster as Lear's improvements to package and performance allow these luxury features to proliferate to the second row and to more mainstream high-volume programs. On slide 10, I will provide a brief update on our eSystems business, which continues to benefit from new business awards, strategic transactions we completed last year, and the industry shift to electrification and content increases. The battery disconnect unit we engineered and designed for General Motors' battery electric truck platform is in production on the GMC Hummer, and volumes are scaling as GM expands its product portfolio. Since we bought M&N last year, we have grown the business and identified product expanses using their technology. We continue to see additional growth in cost savings opportunities and are expanding M&N operations internationally to support these efforts. The joint venture with Hulane has accelerated growth and increased our capabilities in connection systems. We already have identified and implemented solutions to use Hulane connectors rather than buying from our competitors. We also recently won a new business award with Geely in China for a sub-assembly that includes a wire harness and a connector for a high-speed data solution. Key launches in these systems are on track, including new low-voltage and high-voltage wiring for global manufacture of electric vehicles in the United States and Europe. Looking ahead, we expect that industry trends will continue to support the above-market growth in these systems. Moving to slide 11, I will highlight products that support our rapid growth in electrification, as well as some of our key new product launches. The industry shift to electric vehicles is accelerating, with traditional customers increasing their investment and racing to increase production and new electric vehicle companies entering the automotive market. Our electrification business is growing rapidly, and we are busy quoting a robust pipeline of new products. The shift to electrification adds significant content opportunities for Lear, as electric vehicles require incremental high-voltage wiring, high-voltage connection systems, and power electronics. Other than the content related to the engine, much of the low-voltage wiring content on an ICE vehicle is still required on an electric vehicle. We have also been very successful winning low voltage wiring on electric vehicles. The products we are prioritizing to support electrification include high voltage wire harnesses and connection systems, integrated power modules, and battery disconnect units. Typical content per vehicle ranges are shown here, but actual CPVs can vary significantly based on the level of complexity and the size of the battery. Battery module connectors provide electrical and mechanical connections between the battery cells within the battery module. Battery packs consist of hundreds of cells packaged into a dozen or more modules, with multiple battery module connectors required for each battery system. We see strong growth opportunities as electric vehicles' adoptions accelerate. Integrated power modules combine onboard chargers, DC-DC converters, and high-voltage power distribution content in a single smaller package that saves cost and weight. These parts are critical to manage power throughout the vehicle and efficient charging. Battery disconnect units control all power switching in and out of the electric vehicle. The GMC Hummer pickup is one of the first full-size trucks coming to market, and we learned a lot engineering and designing the battery disconnect unit on this brand-new platform. We believe that the experience we gained over the last several years will be invaluable as we bid on other larger performance vehicles coming to market. Now I'd like to turn the call over to Jason to provide more detail on the electrification business and review our first quarter financial results and discuss our 2022 outlook. Jason Gildea Thanks, Ray.