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spk08: 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.
spk01: 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.
spk10: 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.
spk00: Turning to slide 13, let me take a moment to provide some additional detail on our progress in electrification. As Ray just noted, our eSystems portfolio in wiring, connection systems, and power electronics are all aligned to benefit from the industry's rapid shift to electrification. New business awards for electrification increased by almost 50 percent from 2020 to 2021 to $324 million. And for 2022, We're currently targeting $500 million in new awards, more than twice what we achieved in 2020. Our quote pipeline continues to grow, and at $2 billion for 2022, it's more than three times that of two years ago. The current quote pipeline has split roughly 65% power electronics and 35% high-voltage electrical distribution systems. Historically, we have won approximately 30% to 35% of business we are quoting. Electrification revenue is expected to grow at a 37% average annual rate from 2020 through 2025. At last year's eSystems product day, we had targeted revenue of $1 billion for 2025. As you can see from the chart, we've already achieved our original target and have now increased the 2025 target by 30% to $1.3 billion. Given the accelerating quote pipeline combined with our growing capabilities in electrification products, we would anticipate additional profitable revenue growth of more than a billion dollars in this area between 2026 and 2030. Slide 14 shows vehicle production and key exchange rates for the first quarter. Global production decreased by 4% compared to 2021. Industry volumes were again significantly impacted by semiconductor shortages and to a lesser extent by the war in Ukraine and COVID-related production shutdowns in China. On a Lear sales-weighted basis, global production decreased by 7 percent year-over-year. From a currency standpoint, the U.S. dollar weakened against the RMB but strengthened against the Euro compared to 2021. Slide 15 highlights Lear's growth over market. For the first quarter, sales outperformed global industry production by four percentage points, driven primarily by the impact of new business in both segments, with the seeding growing five points above market and these systems growing one point above market. Growth over market in North America, seven points, reflected the benefit of new business in both segments from Ford and General Motors, and strong production in seating on GM's midsize crossovers and full-size SUVs, as well as on Audi, Stellantis, and Mercedes SUVs. In Europe, sales outperformed industry production by seven points, driven primarily by new business, strong performance in the luxury segment in seating, and above-market production in these systems across multiple OEMs, such as Ford, Volkswagen, Jaguar Land Rover, and Renault. Our China business lagged industry growth estimates by 12 points due to unfavorable platform mix driven partially by customer production shutdowns that result from government-mandated COVID lockdowns. Slide 16 highlights our financial results for the first quarter of 2022 compared to 2021. our sales declined 3% year-over-year to $5.2 billion. Excluding the impact of foreign exchange, commodities, and acquisitions, sales were down by the same 3%, reflecting primarily lower production on their platforms, partially offset by the addition of new business. Core operating earnings were $184 million compared to $336 million last year. The reduction in earnings resulted from the impact of lower production on their platforms and higher commodity costs, partially offset by positive operating performance and the addition of new business. Adjusted earnings per share were $1.80, as compared to $3.73 a year ago. Operating cash flow generated in the quarter was $221 million, compared to $248 million in 2021. The decrease in operating cash flow is due to lower earnings, partially offset by favorable working capital. The improved working capital is driven primarily by our aggressive management of inventory levels in a difficult production environment, as well as the timing of customer receipts and supplier payments. Free cash flow was $90 million compared to $135 million last year as capital spending increased to support new launches. Slide 17 explains the variance in sales and adjusted operating margins in the seeding segment. Sales for the first quarter were $3.9 billion, a decrease of 83 million, or 2%, from 2021, driven primarily by lower volumes on their platforms, partially offset by the strong backlog. The increase in sales due to commodity increases and the Kongsberg acquisition was offset by the foreign exchange impact. Core operating earnings were $218 million, down $89 million from 2021, and adjusted operating margins were 5.6%. The decline in margins reflected primarily lower volumes on litter platforms and higher commodity costs, partially offset by positive net operating performance and margin accretive backlog. Slide 18 explains the variance in sales and adjusted operating margins in the eSystems segment. Sales for the first quarter were $1.3 billion, a decrease of 5% from 2021. Excluding the impact of commodities, foreign exchange, and acquisitions, sales were down 7%, driven primarily by lower volumes on key platforms, partially offset by a strong backlog. Core operating earnings were $42 million, or 3.2% of sales, compared to $95 million and 7% of sales in 2021. The decline in margins reflected primarily lower volumes on later platforms and higher commodity costs, partially offset by positive net operating performance and margin of creative backlog. Now shifting to our 2022 outlook. Slide 19 provides global vehicle production volumes and currency assumptions that form the basis of our full year outlook. We base our production assumptions on several sources, including internal estimates, customer production schedules, and IHS forecasts. At the midpoint of our guidance range, we assume that global industry production will be 3% higher than in 2021. This is lower than our prior guidance assumption of 6%. The change in outlook is driven primarily by industry disruptions in Europe related to the war in Ukraine and recent and continuing production shutdowns in China due to increasing COVID-19 cases and government-mandated lockdowns. The high end of our outlook remains consistent with IHS's forecast for industry production of up 5% compared to 2021. From a currency perspective, our 2022 outlook now assumes an average euro exchange rate of $1.09 per euro, down from $1.12 per euro in February. Our assumption for the average Chinese RMB exchange rate is 6.45 RMB to the dollar compared to our prior assumption of 6.35 RMB to the dollar. Slide 20 compares our current outlook to our prior outlook for sales and core operating earnings. We are forecasting the midpoint of our 2022 sales outlook to be approximately $20.8 billion, down $750 million from our February outlook, reflecting the impact of the additional reductions in customer production schedules, continued elevated commodity costs, and changes in FX. The midpoint of our operating income outlook is approximately $865 million, down $185 million from our prior outlook. The decline in the operating income outlook reflects the impact due to lower volumes, modestly higher commodity costs, and a change in FX rates. We have plans in place to offset the impact of higher commodity costs through a combination of performance improvements and additional commercial recoveries. We continue to take steps through restructuring actions to increase synergies between businesses and increase flexibility across our workforce, allowing us to improve operating margins in an industry environment faced with ongoing supply constraints and uneven customer production schedules. Slide 21 provides more detail on our 2022 outlook. Key changes include the following. Our revenue outlook is now expected to be in the $20.4 to $21.2 billion range. Core operating earnings are expected to be in the range of $765 million to $965 million. We are increasing our restructuring costs by $25 million from our prior guidance to $150 million. As I previously mentioned, these additional restructuring actions will provide long-term flexibility and improve efficiencies. Operating cash flow is expected to be in the range of $875 million to $1.125 billion. Now I'll turn it back to Ray for some closing thoughts. Thanks, Jason.
spk10: Turning to slide 23. While operating in this environment isn't easy, we're as well equipped to handle these challenges as we have an experienced leadership team and extremely strong financial position. We have a long history of operational excellence and aggressively managing our cash flow. And we are leveraging these strengths to position the business to optimize performance. In the past year, we have increased sales while reducing headcount. And we are aggressively implementing plans to further improve efficiencies across the enterprise. As we continue to review the product portfolio, we will likely accelerate investment in certain areas while de-emphasizing or winding down parts of our product portfolio that are underperforming. We are executing our strategic initiatives to profitably grow our core seeding in these systems business. I'm confident that the investments we are making today will position both businesses to benefit when the long anticipated industry recovery arrives. Our strong business win so far this year is evidence that our products are in high demand and that we have the right plan in place. In closing, I want to thank the LEAR team for continuing to execute in a very extremely challenging environment. And now we'd be happy to take your questions.
spk08: Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question, you may press star and then one using a touch-tone telephone. If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the keys to ensure the background quality. To withdraw your question, you may press star and two. Once again, that is star and then one to join the question queue. At this time, we'll pause momentarily to assemble the roster. And our first question today comes from Colin Langan from Wells Fargo.
spk03: Please go ahead with your question. Great. Thanks for taking my questions. Just for color, You know, your raw material guidance actually only increased 10 basis points, but surprising given how raw materials have performed. I mean, why the small change? Is it you had already baked in a lot? Is it that you're just getting a lot more customer coverage? How should we be thinking about that?
spk00: Yeah, Calum, so there was a fairly meaningful change in the gross impact on commodities, and you see that in the revenue line. So, There's about 130 million of additional total costs, most of which are recoverable, given the contractual arrangements that we have in place and the negotiations that are ongoing. So the net impact was pretty modest. You know, for us, the biggest driver of that increase in the gross exposure was really steel, which is, you know, a little less than 50 million higher for the full year. And then components, supplier component cost increases, which are also about $50 million. To a lesser extent, you know, we do see slightly higher costs for chemicals, utilities, and freight. And if you look at, you know, the nature of our recovery agreements, particularly on steel, most of the customers are now on some sort of indexing or pass for agreement there. And some of the component increases are on directed content, and so there's a mechanical way to pass that through. And so that's why the impact on the operating earnings is pretty modest relative to the gross impact.
spk03: And that commodity bucket, that also includes these other input costs. I mean, a lot of other suppliers are calling out labor, freight, and energy. I think you mentioned freight, or is that? just not that meaningful for you guys.
spk00: Yeah, for us, we don't put all the inflationary costs in there. We don't have labor inflation in there, but we are including utilities and freight. We did see a meaningful increase in utility costs in the first quarter, and we're assuming that that is going to continue, particularly in Europe, where there was essentially a doubling of the cost there. And so that's... You know, that's also in that bucket, but it's largely just material-related adjustments.
spk03: And just lastly, kind of going back to commodities, it seems I think roughly 100 million headwind in Q1, and I think the guidance translates to about 160 for the year. So how should we be thinking about the net margin impact as it plays out? Is it tough in Q2 and then starts maybe being a positive by Q4, or how should we think of the cadence of the commodity?
spk00: Yeah, if you look at it on a year-over-year basis, the biggest impact is clearly in the first quarter, about a little more than $90 million. And as you progress through the year, second and third quarter will be roughly half that, a little more than $50 million in Q2, $40 million or so in the third quarter. Fourth quarter will actually be favorable year-over-year. You may recall that at the end of last year, we saw a significant run-up in steel and also higher copper costs, and we do see those moderating. For us, the peak steel costs were in the fourth quarter of last year and the first quarter of this year. In North America, we have a contract that calls for an adjustment each quarter based on the trailing three months changes in the crew index. And so as a result of that, our second quarter steel costs were actually quite a bit lower, 30%, 40% lower in North America than they were in the first quarter. And when we see that downward trend not necessarily continuing in the second half of the year, but sort of somewhere in between the first and second quarter is what we would expect in the second half based on what we're seeing in the market right now. And then in Europe, on steel, just to give you some additional color there, we have a six-month contract. And so the first half of the year, we're expecting to be you know, a little bit higher than it was the second half of last year. And the second half of this year, given what's happening recently with the war in Ukraine, it's going to be a similar impact, maybe even slightly worse than the second half of the year in Europe.
spk03: Great. Well, thank you for taking all my questions.
spk08: Yeah, no problem. Our next question comes from Rod Lash from Wolf Research. Please go ahead with your question.
spk04: Hi, everybody. I was hoping you could just give us a sense from your perspective about the timeframe at this point for recovering the margin targets. At one point, you were thinking that you can get back to 7% or so in the 2024 timeframe. And more specifically, if we look a little bit further back in terms of commodities, I think over the past two years, you had like 150 basis points of margin pressure. commodities, what's realistic for regaining that? What's the time frame and what's happening kind of behind the scenes in negotiations?
spk10: I'm going to go ahead and start. I'll let Jason fill in some of the numbers around when we're going to get back and how we're seeing the business financially. But let me take a step back, too, and I think you recall very clearly when we talked about What we're going to do as far as the systems business was obviously set the organization up, define it very clearly into product groups that were focused on return on invested capital. And obviously that's all behind us. We also talked about making sure that we weren't working through long maybes, but making quick decisions on the product portfolio and where we had the right to play and where we could win. And I think we've done an excellent job there. And I think that is translating in the growth that we're seeing. We talked about the shift of wiring to electronics, more of a 60-40 relationship, and we're on track there to continue to grow both business segments but get a better balance between electronics and power distribution and connection systems. And so all those are moving in the right direction. I think what we've seen from our perspective is, Actually, some of those are even moving faster than we expected. I think the growth, you know, looking at $2 billion of quoted activity in electronics is something that we didn't even anticipate. And if you just look at the doubling effect of the quote pipeline, and that's because we're getting in and getting accepted in different quotes by different customers. And so we started with a very select customer base, and we've been able to expand that, not just the traditional OEs, but the new entrants as well in electrification. So that's really positive. And we've done an extensive amount of work on looking at the roll-on, roll-off. A lot of the programs that we launched we talked about were first generation. And in some respects, over-engineered for the right intent to protect our customers and protect our reputation and make sure that we're delivering the most robust product. The next generation of products that are coming online, in some cases third or fourth, are much more efficient. And we're seeing the margin expansion on those roll-on programs really accretive to the backlog. So we're excited about that. And the connectors business, you know, we talked about, and I think there's a lot of speculation on could we grow that business. And I'll tell you, with the partnerships we've established with M&M Plastics that we just acquired, the growth has been incredible and really supporting the vertical integration play to expand the margins. So from a business strategy, we're on track. And in some cases, I think we're ahead of where we would have thought. And I think one of the most exciting things is like we just mentioned is that $2 billion pipeline that we're seeing this year is significantly higher than we've seen any year. And we've been winning at a clip of 30 to 35%. So we're very confident that we'll continue to grow and expand our electronics capabilities along with the vertical integration and wiring. And so Let's go ahead.
spk00: Yeah, and, Rod, maybe before getting to reaffirming the 2024 operating margin targets for the company, talk a little bit about how we see margins progressing this year because I think it helps inform what the future looks like as well. So, obviously, we released the first quarter results today. As we look at the second quarter, we do expect to see continued pressure on lower volumes, particularly in as a result of the COVID-related lockdowns in China that have had a pretty significant impact on both segments, as well as weaker volumes in Europe impacting both segments. And so we expect operating margins to be down slightly from the first quarter. The second quarter, we expect revenues to be down slightly from the first quarter and second quarter in both segments. The first quarter in seeding also benefited from the timing of commercial settlements. And so you may recall when we guided to 2022 on the fourth quarter earnings call, we talked about seating margins declining from the fourth quarter to the first quarter. They actually came in slightly better than last year. And so there's about 40 basis points of kind of timing benefit that got pulled ahead from the second quarter into the first quarter. And so that'll weigh a little bit on seating in the second quarter. As we look out at the second half of the year, we do see a modest improvement in industry volumes. The bigger driver is the pass-through of our commodity cost increases to customers. And in seeding, it's more pronounced than in each systems in terms of the timing of that. So the second half, you have the benefit of Some of the mechanical and contractual agreements we have on leather, on steel, the full effect of that sort of shows itself in the second half of the year. And that, coupled with modestly lower commodity costs on things like steel that we expect in the second half, would lead seating margins to be up, you know, about 200 basis points from the first half to the second half, you know, and sort of in that 7 percent or maybe even slightly better range as we exit the year. In these systems, we see the benefit of the backlog rolling on and higher volumes in the second half, you know, and they're sort of in the 4% to 5% range as they exit the year. And so that's sort of the launching pad number as you look out to next year in 2024. And so as you think about 2024 and the 7% target that we had previously communicated, you know, that's based on three key drivers. One, industry volumes. You know, so if you look at IHS's projections for 24, they're at around 90 million units. We're at 77.5 million units this year, so it's about 16% increase in industry volumes. We would expect between now and 24 as the chip shortage and other issues in the supply chain resolve themselves. And in our key markets, North America, Europe, and China, that's more like 19%. And so if you see that type of volume increase between now and then, you know, that by itself gets the company, you know, back in that sort of 7% range. If you discount that somewhat, you know, the second driver is the commodity and inflationary cost pass-throughs. The cumulative effect of that on our results through the end of this year is $340 million. There's going to be some unwinding of that that happens, again, mechanically and contractually next year. And then the remainder of it works its way into our pricing structure as new business rolls on and those contracts are adjusted to the current economics in the marketplace. And then the third driver is what we're doing in terms of our own net performance. You saw the positive net performance in both segments in the first quarter. You saw it all of last year. We expect that to continue. We expect positive net performance in both segments for the full year of this year. And as we continue to restructure the business, we see an opportunity to reduce both administrative costs through additional synergies between segments, and also we see a chance to reduce labor and overhead costs longer term as we combine certain operations building off of that. You know, the first sort of pilot, if you call it that, in Brazil, where we combined jet and wiring in a facility. So all those things taken together give us a real high degree of confidence in that 24 outlook, in addition to Ray's comments about the strong growth that we're seeing, particularly in electrification and the profitability of that new business that's rolling on.
spk04: Okay. So when you say, I mean, at the end of this year, you'll still have $340 million that you've sort of absorbed of commodities, and some of that unwinds next year. Can you just unpack that a little bit for us? What's realistic for recoveries in the short term? And I presume that when you're saying that the rest of it's going to require new contracts, that's like a presumably like another four years or so until it's fully recovered, or am I misinterpreting that?
spk00: Well, if you think about the backlog that's rolling on, it should be reflective of the new economics. And then as programs change over, yes, that will take a little bit longer. We don't have a precise number. I think it's a little bit early. But I would expect to see a half to two-thirds of that go away over a two- to three-year period, and then maybe that lasts longer. A third or so, you know, lags a little bit more in that four-year time horizon that you described as programs change over.
spk04: Okay. Thanks for clarifying that. And just lastly, this is sort of a recurring theme that you've got some conquest here and now another piece of business. I presume it's 200 million a year or maybe a 200,000 unit a year kind of program that What's kind of driving that? Is there something that you're offering here from a product perspective or technical perspective, or is there some other factor that's at this point still resulting in these conquests?
spk00: Yeah, I think in this case it was our footprint, and we had an advantage in where the customer was located in production of this product and We had an existing footprint that we were able to leverage and provide a more competitive cost offering. And I think it's also a result of the strong relationship that we built with this customer and cultivated with this customer as a result of our strong quality performance and engineering performance with them. We've executed well on programs that we have with this customer today. and we were rewarded for that accordingly.
spk10: And I'd just add to that, and every one of the conquest wins are slightly different, but there does seem to be that value proposition, Rod, that we're able to, and I think it's very important. The reason why we're vertically integrated to the level that we are and being able to manufacture our own components to create a value proposition that is, You know, like I talk about with thermal management, it's a very important driver that we've been able to differentiate ourselves, even early on right now, even with the most recent acquisition at Kongsberg, that when you walk in to a customer and you can, you know, tell them and talk to them about a value proposition that incorporates a number of different components, and I do believe the seat design, when you pull it apart, is inefficient. You create a modular component. solution that creates a better sensation for the customer. It's higher quality and it's more efficient from a cost standpoint. So, you know, Jason had the example on the most recent one that was really a relationship that we had an outstanding reputation for delivery and quality and built up and really built credibility around what we could do for them longer term. But with other customers, This vertical integration does differentiate us. And even to the extent, like I said in my presentation, their willingness to open up the directed door is open. And we're seeing, we're putting it in our contracts in some extents. We're awarded the business our ability to source our own components. Because you think about seeding, seeding is about 80% of the components. And, you know, I think it would be easy to get some of this pass-through right now when 80% is directed. But we're negotiating hard with them to get it all. But being able to open that door and be able to supply a solution that creates a value proposition is very unique. And, you know, Frank and I are taking off this afternoon to go meet with customers immediately to talk about what we can do with thermal management and how efficient it is and what we can do on future platforms. And we were last week with another customer talking to him about it. So they're very intrigued and interested in how we can help solve what is a problem today and differentiate, I believe, our brand to our customers, and it's helped us.
spk04: Yeah, interesting that that's happening in JIT as well at this point. Thanks for that. Yep.
spk08: Our next question comes from Emmanuel Rosner from Deutsche Bank. Please go ahead with your question.
spk06: Thank you very much. I was hoping to follow up on some of the numbers in the commodities market. exposure and the headwind for the year. So I think previously, last quarter, you had said you were assuming a $575 million gross impact, if I'm not mistaken, $140 million net. So what is sort of like the new, I guess, what's newly embedded in the revised guidance? And I think you said $130 million higher on the growth side. Is this not all It just seems fairly modest compared to sort of like the initial exposure. So is it not all locked in based on an existing contract?
spk00: Yeah, so the gross impact now, Emmanuel, is $695 million. So it's up $120 or $130 million from our prior outlook. And so that's largely driven by steel and either – granted or anticipated component cost increases, and then to a lesser extent what we're seeing in utilities, particularly in Europe, and then a little bit on the chemical side. Those are the four contributing factors driving that increase. So you may recall we had, you know, embedded everything that we were aware of plus some anticipated increases in the initial guidance. You know, we had a significant assumption in there for that. And so I think maybe some other suppliers were a little maybe more aggressive in their initial assumptions and are seeing a bigger increase. But I think that at the $695 million, we've captured the likely outcome of the gross impact for us this year.
spk05: Thanks. And then on a net basis, I think you were assuming $140 million previously. Is it now about $160 million?
spk00: It's 155 now, so it's up about 15, about a little less than 10 of that steel, five of its utilities, and then comicals are the balance.
spk05: Okay, perfect.
spk06: And then second question, gross over market. Could you maybe speak a little bit about how you see that play out for the year, the buy segment, obviously? Some of the geographical moves are having some you know, impact with 5% in seeding this quarter, but only one in eSystems. How would you see that play out for the year?
spk00: Yeah, so maybe start by providing some additional color on the first quarter. You know, we had really strong growth over market in seeding, and in North America and Europe in particular. In China, we had, you know, pretty weak growth over market in seeding. We were actually negative 17%. And I think that was largely a result of the location of the premium German OEM facilities and their supply base. So they were impacted earlier by the COVID-mandated lockdowns in China, and they're still impacted. So Daimler, BMW, Audi, whereas the Chinese domestic suppliers actually saw, you know, a 15% increase in production in the quarter. The premium German OEMs also saw double-digit reductions. And we do expect that to continue into the second quarter just based on the current restrictions in place. So that will weigh on seeding growth over market and, to a lesser extent, e-systems as well. In North America, in seeding, what we saw was the benefit of, you know, strong backlog with Ford, the Mavericks, Bronco rolling on. And also a recovery with GM on the Equinox and Terrain, which had a lot of downtime last year. And so that benefited us. And then, you know, the full-size SUVs were ramping up in the first quarter last year, and now we're at full production. So that all helped us. Strong production from Audi on the Q5, Jeep Compass, Mercedes GLS, and Bronco Sports. A lot of different drivers of that. And we expect that to moderate production. as we progress through the balance of the year. So some of it was just, you know, kind of a weak comparison point in the first quarter of last year for those platforms. And these systems kind of have the opposite going on here. So we had negative growth over market in North America, and that's primarily driven by, you know, Ford's planned changeover of the Super Duty and the mid-cycle change on the Expedition Navigator. So they took some downtime that was planned in January, I think three weeks, and in addition to that, were impacted by the chip shortage. So those platforms were down between 30% and 50%, depending on the individual car line. And that really weighed on each system's growth over market. That corrects itself in the second and third quarter. We'd expect improvements there. But then again, in the fourth quarter, those same platforms will be down year over year as Ford does, in fact, change over to the new Super Duty. And that launch impacts the volume on all those platforms. In Europe, you know, we saw strong growth over market in both segments. In seating, we see the benefit of our backlog and a number of EV launches, BMW iX, the wagon version, the Taycan, the Mercedes EQS and EQE. And we also saw strong volumes on Mercedes GLC, C-Class, and 911 are all up in a weak market. And so... On the systems side, we saw the benefit of our strong backlog with Volvo that benefited the first quarter and also the Ford Focus and Cougar, which had very weak production in the first quarter of last year. And so we would expect that portion to moderate as we progress through the year where the comparisons will be a little tougher. And so we would expect, based on our current set of assumptions embedded in the guidance, that our growth over market will be lower in the next three quarters than it was last in the first quarter. However, as I said on the fourth quarter earnings call, to the extent customers are forced into an allocation and they prioritize their most profitable platforms sort of like they did last year, then that could benefit us, particularly on the seeding side where our portfolio benefited throughout 2021 from that allocation process.
spk05: Okay, great. Thanks for all the calls. No problem. Okay.
spk08: Our next question comes from Dan Levy from Credit Suisse. Please go ahead with your question.
spk09: Hi, good morning, and thank you for taking the questions. I want to just revisit the guidance and the revision. You know, you're saying commodities doesn't sound like it's much worse than the prior outlook, maybe a $15, $20 million drag. I think what that implies is the decremental margins on the lost sales related purely to volume So excluding the extra cost and excluding the commodity pass-through, something like 20%, which is actually not bad given what's happening in China and Europe. So is that a fair assessment that the decrementals just on that lost volume alone are maybe not as harsh as one may have feared? And what's driving that?
spk00: Yeah, so you actually have to break it down a little further, Dan, to look at foreign exchange and volume. So on the volume line itself, we did convert at 27% from the prior guidance, and so it's a little higher than normal, mainly because of the weighting to e-systems. So more than half of the production volume reduction is in e-systems, despite the fact that it's a third the size of the seat business. And so that normally converts, you know, between 25 and 30. And at this set of assumptions by program, it's just under 30%. And then in seeding, which typically converts at 15 to 20%, we're converting, you know, above 20%, primarily because our China business does tend to run a little bit higher margin, you know, than the average in seeding. That's a factor in just the The mix of programs and the level of vertical integration of the programs that are down in North America and Europe is also a factor that's driving that. So I would say ordinarily, you know, the 20 to 22% average conversion rate on volume between the two segments is a good assumption to model, but it's a little bit higher, a little heavier in this case from our prior guidance.
spk09: Okay, and on a go-forward basis, you know, and I know you addressed some of this in a prior question, but if we just keep cost as it is, so the incremental margin on any volume recovery, that's still going to be in that 20%, 22% range, call it 15% to 20% for e-systems, 15% to 20% for seating, 25% to 30% for e-systems.
spk00: Yeah, so I think it's important also to look at how that industry volume comes back online. So to the extent its volume increases on existing platforms, then you're spot on, Dan. That's the margin you should expect is that volume comes back. To the extent it comes through backlog, then it typically rolls on, you know, more in the 10% range, slightly at or above the segment margins. you know, in both segments. So it depends, but it should largely be increasing volumes on existing platforms that would, you know, drive the volume increase that we expect over the next two years.
spk09: Great. Thank you. And as a follow-up, I want to go to slide seven, your mitigation actions. A, maybe you could just give us a sense on the cost side. You're talking about some footprint consolidation and some restructuring. I guess we were under the impression that you were fairly optimized. So how much is there in terms of loading versus stuff that needs real restructuring expenses? It's going to be a little tougher to execute. And then maybe you can also address the point on the exiting low return product lines. What products are those exactly? How much of that of revenue do those account for the margin? And, you know, what's the impetus for exiting these products now?
spk10: Yeah, well, one, I think there's been a lot that's changed. And you're right, we're a very efficient company, historically, obviously focused on operational excellence. And, you know, a crisis, what they say, don't ever waste a good crisis. And what happened was in South America, Because of the volatility around volume production, you know, changes in schedules, those type of things, we looked at how we could combine different administrative roles between these systems and seating. And, for example, engineering, purchasing, logistics, right now we have decentralized, you know, organization within seating in these systems that are somewhat autonomous and independent. So in South America, we found there were some real nice synergies between the groups, from application engineering, shared resources on logistics, administrative roles, both sales and marketing, financials type of things. So we were able to get at some, you know, continuation of being more efficient. In the manufacturing, I think the bulk of the opportunity really became clear in manufacturing. We combined, you know, in some cases like wiring has KSK, which is very similar to just-in-time on the wiring side, and our just-in-time manufacturing capabilities. We combined the two product groups together to really utilize and take full advantage of our efficiencies within our plant. One thing we recognize, yes, we were able to scale and gain efficiencies between the two product groups. and it helped efficiency within the product itself. But then we were able to flex our labor. And I think something that's really important now and what we're seeing is our customers are definitely moving away from what used to be a global platform to a more localized manufacturing footprint. And so we're aggressively looking at how we can flex our footprint You see the OEs moving to facilities that can run both ice and electric vehicles and then switch between different platforms. So what we're doing is very proactively saying, okay, we ran in pilot, if that's what you want to call it, in South America that worked extremely well for us. Can we take that and extrapolate that across both our business segments? And so we're working aggressively. We brought in an outside consultant, Bain, who's helping us really organize some of the actions that we're going to be taking. And we're going to analyze the data, study it, make sure that we're making the right decisions. But what we are finding, and Frank and Carl are here, that we're being called into a lot of meetings with our customers on how we can localize material close to their manufacturing facilities with the ultimate flexibility. Well, if you can take different product lines and flex your labor and be able to drive efficiencies and get better utilization it's it's a win-win and so we're actually in one case right now we're quoting a customer with the idea of coupling these product lines together for efficiencies with flexibility and so they're very interested in it we think that there's there's real opportunity here uh we'll be the only company in the world that can flex our plants like this. When you talk about wiring and just in time and other components with trim, we have a global footprint that's set up. We just kind of look at it, reshape it for localization and, and, and our customers needs flex around their manufacturing plants. And so, like I said, I think administratively, yeah, there's some opportunities we can still drive and that's what we're doing. We're doing that right now. We've been working on it for several years. We continue along the process, but operationally, I think we,
spk00: We're studying it right now, but we think there's big opportunities there. So, Dan, just building off of that, I think in particular the point that Ray made around flexibility, if you think about the industry shift from ICE to electric vehicles, what we're seeing is typically lower volume platforms on these new electric vehicles. And we think over time there will be lower volumes on existing ICE platforms. So having... and ability to have a flexible manufacturing process that can service multiple customers, multiple programs in a flexible manner to move headcount between programs, I think positions us to lower our costs and still service our customers over the coming three, four, five years. So this isn't something where you're going to see an immediate benefit. It's more anticipating the way the industry is evolving In addition to that, you know, we're now in our third year of lower industry volumes, and so part of this is just taking a bit of control of our own cost structure to adjust to the lower volume environment. And then in regards to your question about exiting product lines, so the most significant of which is audio and lighting. That's about a $200 million business for us today. And it's not an immediate exit. It's a harvesting of that business. And so it's a reallocation of the engineering talent to products and electrification and other core electronic products and away from, you know, audio and lighting, which will ramp down over a five-year time horizon. And there is, you know, some restructuring associated with that, mostly just the closure of one factory in Europe. You know, the other... exits around cord sets and inverters, the revenue on those programs is more modest. So the most significant is the audio and lighting exit.
spk10: And I think just to – I mean, we've been very selective on where we're spending our engineering dollars, and the world is changing extremely quick, particularly in the systems business. And, you know, we've tried to highlight very specifically where we're focused on power electronics when we talk about – Engineered programs, when we talk about the battery disconnect unit that we've been engineering and designing for the last several years, we've gained extensive knowledge and patents and expertise around that, and we see that accelerate. That's an area we're going to focus. Integrated power modules, that is something we're very good at with our thermal management, our efficiencies, our ability to deliver, our cost management. We picked up some really nice winds in that area, and we see that continuing to be an area of investment for us. And the battery module connectors, we just recently won a really good program, and that's relatively new. But, man, do we have great capabilities when we talk about across Lear, and I mentioned it. With our ability with structures and then the combination of the M&N acquisition and our own internal power management capabilities, We hit a home run there, and that couldn't be more proud of the team for what we won. So we are being very selective. We understand the need to look at areas where we can grow profitably. And what's exciting, like I mentioned earlier, is the new business that's rolling on in these systems in particular is a creative, and it's the next generation of derivatives and engineering changes that we've made that are much more efficient. We are going to be selective. We have, like Jason just mentioned, we've targeted business. We're winding down, and we're only going to focus on where we can grow the business profitably.
spk09: If I could just clarify, I know you raise your restructuring costs here based on what you're saying here, but what does this imply for go-forward restructuring costs beyond this year?
spk00: I wouldn't – I think it's too early to say, Dan, and it depends on the – magnitude of the opportunity. And as we've said in the past, you know, we typically target a one to two-year payback on our restructuring investments. And so it depends on how much of this opportunity fits into that payback equation. But I wouldn't, you know, adjust your model at this stage for a meaningful change in restructuring without also adjusting the earnings that result from those same actions in that sort of one- to two-year payback target range.
spk09: Great. Thank you.
spk08: You're welcome. And, ladies and gentlemen, our final question today comes from John Murphy from Bank of America. Please go ahead with your question.
spk07: Good morning, guys. Just a first question. I mean, you haven't really addressed the fact that the schedules are incredibly tight volatile right now, and that's creating, you know, issues for you. But if you think about this, you know, in combination with raw spiking, it's sort of antithetical to the beauty of the seeding model, right, that you have a variable cost structure, you know, and can pass through a lot of your raw material costs, right? So, I mean, you're getting caught with raws just on timing, and you're getting caught on the volatility, which means that your variable costs essentially become fixed. So I'm just curious, Ray, how you think about that. I mean, it sounds like you've got a lot of consultants running around telling you that things have changed, but they haven't. It's just these market conditions that are really creating a variable cost structure or making something look more fixed than it traditionally is, and as things normalize, these issues will work out. I mean, how are you thinking about this? Because, I mean, it seems like it's just at the moment that the model seems a little bit wonky, but the model really is quite good
spk10: when things normalize yeah i i don't disagree with you know clarifying the consultants i think there's some areas where we can gain benefits and jason alluded to it is going to be over time but it does play into some of the requests from our customers on having a more flexible manufacturing footprint so set that aside i i do agree with you you know uh and i look at this way though i'm i'm to be very clear. I've told everyone we're not going to be a victim. I mean, you know, I'm not going to sit here and hope that, okay, this half is better than the next half or this year is better. We've got to start operating in what's in front of us. And that's exactly what we're doing. And I do think there's opportunities within seating to really rationalize what we're and how we're running our facilities. But yeah, it would be, seating is a good business when we look at it. We do have good customer relationships, and we are negotiating those settlements as far as inflationary costs. All customers are slightly different in how they're handling it, but I do believe over time we're going to get some reasonable agreement with each one of our customers on the JIT model, and it is a variable cost structure that we have been balancing to the best of our ability right now.
spk00: Yeah, I think the only thing I would add, the reason to bring in help is exposing our thought process to some outside expertise. It's really arms and legs to help us accelerate the plan and evaluate different alternatives. And this is being done, I think, in a very proactive manner. trying to anticipate where the industry is going over the next five years to make sure that our footprint and our approach to manufacturing, you know, puts us in a position to continue taking share in both segments and seeing end in these systems where we are seeing significant growth in both cases.
spk07: Okay, that's helpful. And then just a second question on the vertical integration and you're going deeper in that direction. It seems like your customers are receptive to that. You know, we've kind of, you know, over the last few decades heard this go back and forth, right, on, you know, vertical to, you know, not. I'm just curious, you know, what do you think has changed here? I mean, and obviously as you get vertically integrated, you're going to want to make more money for more value add, but the automakers have traditionally, you know, pulled the seat apart and tried the price pieces. you know, separately, I mean, why is this really kind of changing in the, you know, in this direction at the moment? I know you bring a lot of to the table. You can do a lot of the integration and the product work yourself, but I mean, you know, traditionally they've gone in the other direction. I just, you know, are they just so, you know, tied up with AV and EV investments? They're like, they're, they're finally saying here, you guys are very competent. This you take it or what's changed at the moment.
spk10: Yeah. And I've lived through all those cycles too, where it's gone up and down back and forth, you know, we have control, we don't have control. I think what I'm seeing now and what I'm hearing from the customers is one is your point. One, they have a tremendous amount of investment and work that they're focused on other parts of the business. And so they're in need of resources. They're in need of redeploying their human capital in different ways to focus on some of the technologies and the changes within the vehicle. But I also think what is really important. I think I talk about is creating that value proposition. You have to give them an appreciation for a value proposition that works for both parties. And what we're doing, and I look at the seat, and I've been around a long time, where the seat has been layered on component, on component, on component, on component, with not a holistic look at how you really pull those all together in the most efficient manner. And I think the thermal comfort management system is a great example and why we've gotten recently two customers that are willing to allow us to source those components. You obviously have to meet the specification, the quality requirements and costs and all that fun stuff. But, you know, it's the combination of foam and trim and plus pads. And then you start taking the components that are the blowers and the bags and the heat modules and electric harnesses, and you start looking at those, we can cut 50% of the part usage. I mean, obviously that ties into efficiency. That's the value proposition, and it's from an efficiency standpoint, from a consumer standpoint, a cost standpoint, much superior. And so that's what I'm seeing, is that if you give them a value proposition that says, listen, here's your targets, I can meet your targets, and I can give you this value proposition, which creates efficiency and is more, from a customer perspective, appealing. And that's what I'm seeing. And so there is, and I also think that they have other things they're focused on. I think coming in with a proposal that helps them kind of say, okay, you go deal with that, there's a benefit there, too. But I think it's that value proposition that we're offering them in combination with our expertise there.
spk07: And then just lastly on e-systems, I mean, the rebalancing of the portfolio, it sounds like you're getting more aggressive there, and that makes a lot of sense. You know, I'm just curious where you think this ultimately lands and who the competitive set is. I mean, Izaki, Semitomo, Leone, you know, Aptiv, you know, TE. I mean, you've been playing with all these companies and going up against them for a long time, but it sounds like you're getting into headier space. I'm just curious if you're running into new – and how far you can take this and, you know, what your right to play is as you get into, you know, more, you know, high voltage and more complex or simplified, you know, architectures?
spk10: Well, we've been going head-to-head against some of the traditional names that you mentioned in winning business, and so we can compete against those guys individually. every day. And there are new entrants and new competitors coming into the space. And I think when we think through, let's just take it, break it down. We broke it down to power distribution and connectors. And we've done an incredible job competing against the traditionals. And that's more of a traditional space, not seeing a lot of new entrants there. But the combination of us acquiring M&N and then also partnering with some companies that allow us to use their library has accelerated our vertical integration play in wiring. And on the electronic side, I think what's important, I think before we were trying to be everything to everybody, and the world's kind of changed with some of the technology innovation within electronics, and we've really honed in on what we believe is our core competencies and where we can deliver, again, that value proposition. And I mentioned in power electronics, you know, it's really integrated power modules. We, you know, we've been in that business, you know, back to the original Volt days. And so we had tremendous experience on battery chargers, what we're doing with DC, DC inverters, battery monitoring systems. Now those have all come together under an integrated power module. And so I think our vast knowledge and expertise over the years has helped us continue to grow that business. And then really getting focused on where our core capabilities are. Like I mentioned, you know, I don't think we're going to be everything to everybody, but where we participate, we're really damn good at it. That's been successful for us. The slide that I had in the deck on page 11 was really intended to really describe where we're focused. Battery disconnect units, we're doing a great job there. We see proliferation across customers and platforms within General Motors. Integrated power modules have done a nice job there. We're a leader with the technologies, particularly around 20 to kilowatt capabilities in our efficiencies and thermal management there. And this new battery module connectors business we just won was a combination of all of our expertise. And I think it put us in a very unique position. And I think we can go up against anyone in those areas that we've been winning. And what's been great, and I think it's important, when we talk about the backlog or quoting pipeline, it's $2 billion. And when we started talking about it was $200 million, it was $500 million, it was growing. But we weren't in on the ability to technically quote these capabilities with our customers. We've expanded the proliferation of customers. We started very selectively with Volvo Jag Land Rover, and we've quickly expanded across multiple customers and opened that quoting pipeline to get in to participate in technical reviews and quotes. That's significant. And so I'm pushing, I said, okay, if it's doubled every year, then I'm expecting $4 billion in next year. So he hasn't given me the green light on that, but I think it's just an example of how we've been able to really proliferate across customers with our technical expertise. But yeah, there's a lot of competitors out there, but we've done a remarkable job of growing that business.
spk07: Great. Thank you very much, guys.
spk10: Thank you. Okay, so I think probably the only one left on the phone is the leader team. I just want to thank you for all your hard work. Another tough quarter, but really good results given what we're facing, and Thank you for all your efforts and your hard work.
spk08: Ladies and gentlemen, the conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your lines.
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