Lear Corporation

Good morning, and welcome to the Lear Corporation Second 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 note, this event is being recorded. I would now like to turn the conference over to Ed Lowenfeld, Vice President, Investor Relations. Please go ahead.

Thanks, Matt. Good morning, everyone, and thanks for joining us for LEAR's second 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 up the call for Q&A. You can find a copy of the presentation that accompanies these remarks at ir.lear.com. 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 LEER'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. Jason will begin by reviewing our second quarter financial results and our full year 2022 outlook. Ray will then provide a business update highlighting the industry environment and the steps we are taking to position Lear for success. Following the formal presentation, we would be happy to take your questions. Now, I'd like to invite Jason to begin.

Thanks, Ed, and good morning, everyone. Please turn to slide five, where I will provide a brief overview of our second quarter financial results and other recent company highlights. In a second quarter with ongoing COVID and semiconductor disruptions, cost inflation, and a strengthening dollar, the leader team posted solid results, which exceeded our expectations. Sales were $5.1 billion, and core operating earnings were $187 million. Despite lower production volumes than the first quarter, total company operating income and margins improved sequentially. During the second quarter, we returned almost $100 million in cash to shareholders through dividends and share repurchases. Looking forward, we continue to win new business in both business segments with key wins in the quarter, including an electrification award in connection systems in North America and multiple awards with domestic OEMs in China in both seating and e-systems. We are continuing to take steps to reduce costs and improve our manufacturing flexibility. Ray and I will both cover this topic in more detail later in the presentation. At the same time, we continue to invest in our core product lines and our manufacturing capabilities to strengthen the business. In May, we announced a definitive agreement to acquire IGB, a leading German supplier of automotive seat heating, ventilation, active cooling, and steering wheel heating. This acquisition, once completed, will expand Lear's product capabilities in active cooling and complement existing offerings in specialized thermal comfort seating solutions that improve vehicle performance and packaging. Our growing expertise in thermal comfort has already resulted in JIT seating contracts that allow Lear to direct the sourcing of these components, and we expect this trend to continue as we design and engineer a more efficient system that reduces complexity and total cost. Our customers continue to recognize Lear for outstanding quality at our manufacturing plants in both business segments. Over the last three months, we won the Best Supplier in Quality Award from Stellantis, as well as multiple plant quality awards from GM and Ford. We released our 2021 sustainability report during the second quarter, highlighting progress on our renewable energy strategy, innovative green products, supplier sustainability, and diversity, equity, and inclusion efforts. Slide 6 shows vehicle production and key exchange rates for the second quarter. Global production was up 1% compared to Q2 2021 and up approximately 2% on a Lear sales-weighted basis. Volumes in North America were up 12%, while industry production in Europe decreased 5% compared to 2021. COVID-related production shutdowns led to volumes that were 3% lower in China. From a currency standpoint, the U.S. dollar significantly strengthened against the euro, and to a lesser extent, the RMB, compared to 2021. Slide 7 highlights SLIR's growth over market. For the second quarter, total company growth over market was 6 percentage points, driven primarily by the impact of new business in both segments, with seeding growing 6 points above market and e-systems growing 5 points above market. Growth over market in North America of three points reflected the benefit of new business in both segments, as well as strong volumes on key LEAR platforms, such as Ford's Explorer and Escape, the Chevrolet Equinox and GMC Terrain, the Hyundai Tucson, and the Chevrolet Colorado and GMC Canyon. In Europe, growth over market was 16 points, driven primarily by strong performance on platforms for Mercedes, Nissan, and Stellantis in seating, and Ford, BMW, and JLR in these systems. In addition, new business was strong in both segments, particularly with Mercedes and BMW. Our China business lagged industry growth by eight points due to unfavorable platform mix driven by customer production disruptions from government-mandated COVID lockdowns in both segments, which disproportionately impacted the global OEMs. eSystems' growth over market in China was slightly positive as our strong backlog more than offset the unfavorable platform mix. Slide 8 explains the variance in sales and adjusted operating margins in the seeding segment. Sales for the second quarter were $3.9 billion, an increase of $266 million, or 7%, from 2021, driven primarily by our strong backlog and an increase in volumes on their platforms. Excluding the impact of commodities, foreign exchange, and acquisitions, sales were up 8%. Core operating earnings were $233 million, down $29 million from 2021, and adjusted operating margins were 6%. The decline in margins reflected primarily higher commodity costs, partially offset by higher volumes on LEER platforms, and our margin accretive backlog. As we previously communicated, the Kongsberg acquisition is slightly dilutive to current margins, but will be accretive to seating margins in the future as industry volumes improve and we implement our planned growth and cost synergies. Net performance was dilutive to margins largely due to increased premium costs and higher labor costs that resulted from late notice, customer downtime, and the extensive production disruptions in China. Slide 9 explains the variance in sales and adjusted operating margins in the e-system segments. Sales for the second quarter were $1.2 billion, an increase of 4% from 2021. Excluding the impact of foreign exchange and commodity cost pass-throughs, sales were up 5%, driven primarily by our backlog and higher volumes on key platforms. Core operating earnings were $24 million, or 2% of sales, compared to $41 million and 3.5% of sales in 2021. The decline in margins reflected primarily higher commodity costs and the impact from the strengthening dollar in partially offset by higher volumes on their platforms and margin accretive backlog. The decline in net performance was driven primarily by an increase in premium costs. Excluding premium costs, net performance was positive in the quarter. Slide 10 illustrates our focus on driving operating efficiencies and increasing free cash flow generation in a challenging industry environment. We are working to optimize our footprint and remove any excess capacity while ensuring we can support higher volumes as the industry recovers. We currently have enough capacity within our existing footprint to support our growing backlog as well as the projected growth in industry volumes over the next several years. We are focused on making our manufacturing footprint more flexible so we can improve efficiencies across both segments within specific regions. We are streamlining our portfolio to focus on our core product lines where we have a competitive advantage and see strong market growth. And we are investing in key growth areas such as thermal comfort and seating and connection systems and e-systems. This focused product strategy will drive revenue growth and higher operating margins in both segments. Working closely with our customers, both business segments are aggressively targeting inventory reductions despite our expectation for continued production disruptions in the second half of this year. We are also taking a clean sheet approach to our capital expenditure plan, where a footprint optimization will allow us to redeploy existing capital to support growing volumes and reduce the need for new manufacturing facilities to support our new business backlog. We anticipate that this approach will allow us to continue launching our near-record backlog while maintaining capital spending near historical levels. Through these actions, we will improve our cash flow generation. Over the next two years, we expect to see our free cash flow conversion rates return to approximately 80%, an improvement from our more recent free cash flow conversion of 65% to 70%. In the last two years, we saw opportunities in executed tuck-in acquisitions in seeding and any systems to expand our thermal comfort and engineered components capabilities. We do not expect to execute any significant near-term acquisitions, allowing us to return more of the excess cash generated to shareholders. In the second quarter, we took advantage of the current market conditions and repurchased $50 million worth of shares. We've continued to repurchase shares into the third quarter. Now shifting to our 2022 outlook. Slide 11 provides global vehicle production volumes and currency assumptions that form the basis of our full-year outlook. At the midpoint of our guidance range, we assume that global industry production will be 3% higher than in 2021, in line with our prior outlook. We have reduced our outlook for North America and Europe while increasing the outlook in China. 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, as the dollar continues to strengthen, we have updated our assumptions. Our 2022 outlook now assumes an average euro exchange rate of $1.06 per euro, driven by a second-half assumption of $1.02 per euro. The RMB is expected to be an additional modest headwind as our assumption has changed from flat to down 2%. Slide 12 compares our second-half outlook to our first-half actual results for sales and core operating earnings. We are forecasting the midpoint of our second half sales outlook to be approximately $10.5 billion, up $242 million from our first half actual results, reflecting higher volumes, a full six months of Kongsberg results, and an increase in commodity pass-throughs partially offset by changes in FX. The midpoint of our second half operating income outlook is $494 million, an increase of $123 million from our first half actual results. The improvement in operating income reflects the expected impact from higher volumes and the combination of moderating commodity costs and increased customer-passer agreements, partially offset by the change in FX rates. Slide 13 provides more detail on our current outlook. While we acknowledge that there remains macroeconomic uncertainty impacting our industry, our strong performance in the second quarter relative to our prior expectations combined with actions we have taken to improve our cost structure, increases our confidence in our financial outlook. As such, we are maintaining our guidance at the midpoint of our prior range for net sales, core operating earnings, adjusted net income, and free cash flow. Now I'd like to turn the call over to Ray to provide an update on our view of the macro environment and the steps we're taking to prepare Lear to be successful in any scenario. Thanks, Jason.