Lear Corporation

Good morning, everyone, and welcome to the Lear Corporation third quarter 2023 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 floor over to Ed Lowenfeld, Vice President, Investor Relations. Please go ahead.

Thanks, Jamie. Good morning, everyone, and thank you for joining us for LEAR's third quarter 2023 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 we begin, 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 into the most directly comparable GAAP measures. The agenda for today's call is on slide three. First, Ray will review highlights from the quarter and provide a business update. Jason will then review our third quarter financial results and provide an update on our full year 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. Now please turn to slide five, which highlights key financial metrics for the third quarter. There had another strong quarter with double-digit increases in sales and operating earnings. Total company revenue was $5.8 billion, a 10% increase compared to last year. Core operating earnings increased by 14% from last year to $267 million. Adjusted earnings per share increased 23%, and operating cash flow improved significantly to $404 million for the quarter. Slide 6 summarizes key highlights from the quarter. The third quarter marked our fifth consecutive quarter of year-over-year improvements in both revenue and operating income. Our seating team demonstrated their industry-leading operating capabilities by successfully launching the Wagoneer and Grand Wagoneer just-in-time programs. This was an important conquest win and an unprecedented mid-cycle transition of a very complex luxury seating program. Our thermal comfort integration and innovation continues to gain traction. During the quarter, we leveraged our strong relationship and were awarded our first ventilation program with General Motors. The customer response to our expanded thermal comfort capabilities has been tremendous. and we will continue to work with existing and new customers to add Lear content. Key third parties continue to recognize our leadership in quality and innovation. Lear once again received more than twice as many J.D. Power seed quality awards as any other supplier, including first place awards in both luxury categories. RenewNet, our fully recyclable suede alternative, that will start production next year was named as an Automotive News Pace Award finalist. In these systems, we continue to diversify our customer base with new wiring awards with Renault and Geely. Our strong performance allowed us to increase the pace of share repurchases. In the quarter, we repurchased approximately $75 million worth of stock, more than we repurchased in the first and second quarters combined. I couldn't be more proud of Lear team. Not only did they execute during the quarter, but their employees always support the communities where they live and work. The team in Morocco established a special fund to help those impacted by the devastating earthquake. Slide 7 provides more detail on the progress we have made in seeding. In addition to the launch of the Wagoneer and the Grand Wagoneer, we launched the seeds for the BMW 5 Series in Europe. Both vehicle launches were key conquest awards from competitors. We continue to grow with BYD with several current and upcoming launches such as the seat assembly for the BYD seal, as well as component sales such as leather for the BYD DENVA D9. Our leadership and quality and operational excellence once again was recognized by J.D. Power. Our four best in segment and nine total top three awards were more than twice as many as any other seat supplier. We are in first place in both luxury categories. The seats for the Porsche 718 won in the luxury car category, while the seats for the Range Rover Sports won in the luxury SUV category. In total, we have won four of the seven awards across the two luxury categories, further evidence of our leadership in this segment. For new knit, our fully recyclable suede alternative is gaining traction with both our customers and with third parties. Renew NIT will start production next year on three programs with three different OEMs. We're in discussions to expand Renew NIT to additional vehicle lines with these customers and have seen increasing interest from other customers. Momentum has increased rapidly and we see great opportunity for additional awards in the coming months. The level of innovation for Renew NIT. led to Automotive News to name it a PACE Award finalist for 2023. The winners will be named later next year. Slide 8 provides an update of the significant progress we are making in all phases of our thermal comfort strategy. We continue to optimize our manufacturing footprint and thermal comfort systems organization. Our new facility in North Africa provides a low-cost alternative to our current locations. To date, we have conducted technical reviews with our thermal comfort capabilities with 14 OEMs. Positive feedback from these reviews affirm our confidence in our strategy. The strong relationships we have built with our customers make it easier to drive growth opportunities for our thermal comfort components. During the quarter, we won a ventilation award with General Motors. This breakthrough win for Lear opens the door for additional growth opportunities for ventilation and other thermal comfort products with our largest seat customer. Once validated, our components can be sourced across an OEM's entire vehicle portfolio. Having sourcing control for the thermal comfort components allows for quicker proliferation, particularly for programs that we are just in time supplying. The interest level of our modular innovation has accelerated. Our timing is perfect, as our customers are looking for solutions to reduce our complexity and cost. while also offsetting the impact of elevated wage inflation. Today we have 21 development contracts for component modularity and FlexAir solutions. And we previously announced that we are on track to launch our first production application for FlexAir during the first quarter next year. Working with a premium European OEM, we combine pneumatic, lumbar, massage, heat, and ventilation into a single modular solution. We estimate this module will reduce part complexity by 50% in the just-in-time plan, while lowering cost and improving performance for the end consumer. We are on track to have this module fully validated by our customer by the middle of next year. The response for our complete seat modularity has been overwhelmingly positive. As a result, we are accelerating the timeline we expect to deliver this solution from 2027 to 2026. The initial results from the seven development projects in process for existing customers have been outstanding. Our complete seat module has significantly improved the thermal comfort performance when compared to individual components. The airflow from our ventilation systems increased by up to 55%. The heat solution increases the temperature by up to 85% more than the current solution after only one minute, improving the time to sensation. And we've increased the intensity of the massage system by up to 150% compared to the current component solution, allowing the module to provide a much more therapeutic experience. Our customers are looking for these solutions. We have been meeting with the customers at the top levels within the organizations, and the feedback has been extremely positive. The momentum has shifted from Lear pushing these concepts to our customers really pulling us and asking us to move faster and driving our internal organizations to implement our complete seed solution. Lear's module solutions will provide a cost savings opportunity to our customers while expanding seeding margins. Turning to slide nine, I will provide a new systems update. The third quarter marked our fifth consecutive quarter of year-over-year margin improvement in these systems. The increase in industry volume combined with our efficiency improvements in margin and creative backlog allowed us to achieve our highest operating margins in these systems in more than two years. Based on the midpoint of our current outlook, the second half margin this year is on track to be more than 100 basis points better than last year. The new connection systems plant in North Africa is currently producing pre-production components. This facility is key to expanding our engineering component capabilities and will support our new vertical integration opportunities in Europe, an important driver of our margin expansion plan. We continue to win new business in both wiring and connection systems. Key awards include a conquest award with Renault and an award with a new EV with Geely. These awards, along with the opportunities we are pursuing in the fourth quarter, keep us on track to achieve our third straight year of a $1 billion three-year backlog in these systems. The improvement over the last several quarters is a result of the strategy we developed in 2019 and implemented over the past three years by streamlining our portfolio to focus on high growth and high return products. and deemphasizing non-core product lines, we have optimized our resources and continue to win new business in our key product areas. There's still a lot of work to be done, but we continue to make meaningful progress towards our margin targets. Now I'd like to turn the call over to Jason for a financial review.

Thanks, Ray. Slide 11 shows vehicle production and key exchange rates for the third quarter. Global production increased 4% compared to the same period last year and was up 8% on a Lear sales-weighted basis. Production volumes increased by 9% in North America and by 6% in Europe, while volumes in China were down 1%. From a currency standpoint, the U.S. dollar weakened against the euro but strengthened against the RMB compared to 2022. Slide 12 highlights Lear's growth compared to the market. Total company revenue growth flagged the market by one percentage point, primarily driven by unfavorable platform mix and several key programs in North America. The largest driver of the unfavorable platform mix reflected downtime in seating at General Motors' full-size truck plants. Excluding the impact of the downtime, total company sales growth would have been in line with the overall market. The UAW strike at GM's Wentzville facility and Ford's Chicago facility also had a modest negative impact on seeding revenue. In these systems, growth of the market of three percentage points was driven by our backlog in all regions, as well as favorable platform mix in Europe. Europe sales outperformed industry production by eight points, with both business segments benefiting from higher volumes on the Land Rover Range Rover, Range Rover Sport, and Defender. New conquest programs such as the BMW 5 and 7 series in seeding and new business with the global OEM as well as BMW, Mercedes and Fisker and eSystems contributed to the strong growth in the region as well. Through the first three quarters, total company growth over market was two percentage points with seeding growing one point above market and eSystems growing five points above market. Turning to slide 13, I will highlight our financial results for the third quarter of 2023. Sales increased 10% year over year to $5.8 billion. Excluding the impact of foreign exchange, commodities, and acquisitions, sales were up 7%, reflecting increased production on key leader platforms and the addition of new business in both segments. Core operating earnings were $267 million compared to $235 million last year. The increase in earnings resulted from the impact of higher production on leader platforms and the addition of new business. Adjusted earnings per share increased 23% to $2.87 as compared to $2.33 a year ago. In addition to higher core earnings, our adjusted EPS benefited from higher equity earnings and a lower share count, reflecting the benefit of our share repurchase program. Operating cash flow generated in the quarter was $404 million compared to $252 million in 2022. The increase in operating cash flow was due to an improvement in working capital and higher earnings relative to last year. Slide 14 explains the variance in sales and adjusted operating margins in the seeding segment. Sales for the third quarter were $4.3 billion, an increase of $397 million, or 10%, from 2022, driven primarily by an increase in volumes on later platforms and our strong backlog. Key backlog programs include the BMW 5 and 7 Series and Dodge Hornet in Europe, the Chevrolet Colorado, GMC Canyon, and Mercedes EQE SUV in North America, as well as the Geely Zeekr and leather sales for the BYD Denza D9 program in China. Excluding the impact of commodities for exchange and acquisition, sales were up 6%. Poor operating earnings improved to $275 million, up 20 million, or 8%, from 2022, with adjusted operating margins of 6.4%. As expected, operating margins were modestly lower due to the impact of higher engineering spending and launch costs to support new business awards. This was partially offset by the benefit from higher volumes on their platforms and a margin of creative backlog. Heating margins in the third quarter were negatively impacted by production disruptions related to the UAW strike, GM full-size truck downtime, and volume reductions in premium costs related to shipping delays at the Mexican border. Slide 15 explains the variance in sales and adjusted operating margins in the eSystems segment. Sales for the third quarter were $1.5 billion, an increase of $143 million, or 11%, from 2022. Excluding the impact of foreign exchange and commodities, sales were up 9%, driven primarily by our strong backlog and higher volumes on key platforms. Key backlog platforms include new programs with the global EV OEM and Cisco in North America and Europe, as well as the Ford Super Duty truck and GM Hummer EV and Silverado EV in North America. Our operating earnings improved to $79 million, or 5.3% of sales. compared to $53 million and 3.9% of sales in 2022. The improvement in margins reflected higher volumes in LEER platforms and a margin accreted backlog in improvement in commodity costs and strong net operating performance. The positive net performance was driven primarily by efficiency improvements at our North American manufacturing facilities, resolution of key commercial negotiations with customers facilitating recovery of costs due to commodities, and wage inflation, and restructuring savings. Moving to slide 16, we highlight our strong balance sheet and liquidity profile, a major competitive advantage for LEER in today's higher interest rate environment. We do not have any near-term debt maturities. Our earliest bond maturity is in 2027, and our debt structure has a weighted average life of approximately 13.5 years. Our cost of debt is low, averaging approximately 4% In addition, we have $3 billion of available liquidity. We are on track to meet or exceed our target of 80% free cash flow conversion for the year. We remain committed to returning excess cash to our shareholders and accelerated our share repurchases in the third quarter. During the quarter, we repurchased $75 million of stock, which was more than the first and second quarters combined. Our current share repurchase authorization has approximately $1.1 billion remaining. which allows us to repurchase shares through December 31st, 2024. Now shifting to our 2023 outlook. Slide 17 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 S&P forecasts. At the midpoint of our guidance range, we assume that global industry production will be 7% higher than in 2022, an increase of three percentage points, or two points on a Lear sales-weighted basis from our prior guidance, reflecting higher production in Europe and China. Our global production assumptions are generally aligned with the latest S&P forecast. From a currency perspective, our 2023 outlook assumes an average euro exchange rate of $1.08 per euro and an average Chinese RMB exchange rate of 7.02 RMB to the dollar. Slide 18 provides more detail on our current outlook. We are increasing our 2023 outlook for net sales, core operating earnings, and free cash flow from the midpoint of our prior outlook. We are increasing our outlook for restructuring costs by $25 million to fund investments that will optimize the manufacturing footprint of our new thermal comfort segment and to reduce capacity in Europe to better align with current and future customer production plans. At the same time, we are reducing our outlook for capital spending by $25 million, primarily as a result of slower customer ramp-up plans on various new electric vehicles. In the third quarter, we lost approximately $25 million of revenue due to the UAW strike. Based on the plans that are on strike as of today, we are losing approximately $60 million of revenue per week. Based on the late news from last night, the revenue impact will drop to $35 million per week once Ford resumes production. Consistent with our prior guidance, the full-year financial outlook assumes a $350 million revenue impact from industry disruptions related to the ongoing UAW strike, including approximately $325 million in the fourth quarter. Through the end of this week, the cumulative revenue impact of the UAW strike is approximately $170 million. This leaves approximately $180 million of revenue contingency for the remainder of the fourth quarter. Slide 19 highlights our fourth quarter outlook for sales and core operating earnings conceding in these systems, as well as the outlook excluding the assumed impact of the ongoing UAW labor strike. In seeding, the midpoint of our fourth quarter revenue outlook includes approximately $230 million of assumed loss revenue from industry disruptions related to the UAW strike. The midpoint of our fourth quarter operating income outlook is 6.8%, including negative margin impact of approximately 70 basis points due to the assumed strike impact. The midpoint of our fourth quarter revenue outlook includes approximately $95 million of assumed loss revenue related to the UAW strike. The midpoint of our fourth quarter operating income outlook for each systems is 5.5%, including negative margin impact for approximately 90 basis points due to the assumed strike impact. In the appendix of the presentation, we included a summary of our current full-year outlook for CD&E systems revenue and operating margins as well as a full-year outlook that removes the assumed impact of the UAW strike. At the midpoint of our guidance, our full-year seating margins are forecasted at 6.8%, our eSystems margins at 4.6%, and total company margins at 4.8%. This is an improvement of 10 basis points from the prior outlook for seating and total company margins. Excluding the impact of the strike, full-year margins would be 7% in seating, 4.9% in eSystems, and 5% for the total company. Now I'll turn it back to Ray for some closing thoughts.

Thanks, Jason. Please turn to slide 21. Our third quarter results provided another clear example of our ability to deliver strong performance in a very volatile industry environment. In seeding, we are accelerating the pace of innovation for thermal comfort systems. The response from our customers and the demand for our modular solutions has been overwhelmingly positive. These systems, our execution and focus on efficiencies continues to drive margin improvement. We're on pace to improve margins again in the fourth quarter. Our Lear Forward initiatives have yielded savings in excess of our goal for this year by streamlining processes and changing plant layouts to optimize plant capacity and accelerate automation to address labor shortages and improve efficiencies. These results put us on track to achieve our target cash conversions, allowing us to continue to return capital to shareholders. Now we'd be happy to take your questions.

Ladies and gentlemen, we'll now begin the question and answer session. To ask a question, you may press star and then one on 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 best sound quality. To withdraw your questions, 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. Our first question today comes from Rod Lash from Wolf Research. Please go ahead with your question.

Good morning, everybody. Sorry, it was muted.

Hey, Rod.

Good morning. I wanted to ask you about the E-Systems performance obviously came in better than expected. I presume that that was partly related to recoveries, but it looks like, as well, you've got a pretty strong exit rate, 6.4% in the fourth quarter, excluding the strike. Can you maybe just speak to whether we should be looking at that level of profitability as a reasonable launching point for modeling 2024 And then just to the extent that some of that improvement going forward is going to be driven by recoveries, just characterize how those discussions are going, just particularly in light of the pressures that some of the OEMs are seeing on labor and other areas.

There's a lot to unpack there, Rod. I'll start maybe with the third quarter eSystems performance. When we issued kind of a mid-quarter update on what we're expecting in these systems. We talked about 4.75% operating margins. The primary improvement from that point until the end of the quarter was really a lesser impact from the strike and slightly stronger volumes. The commercial recoveries and the operating performance was directly in line with the targets we had established and was meaningful in terms of both sequential improvement in performance and year-over-year improvement in performance. As we think about what that may mean for the business as we look out to next year, I think the right way to model these systems is to look at the second half forecast of both the third quarter actuals and our outlook for the fourth quarter, which right now sits at 5.4%. Now, that does include the impact of the labor strike It also includes some out-of-period benefit from the commercial negotiations that happened in the third quarter and that we anticipate happening in the fourth quarter. If you normalize for all that, the real run rate in the second half of the year in these systems is about 5.5%. I think that's the right launching point as you look out into 2024 for that business. I would say overall, we're quite optimistic. pleased with the progress we've made both operationally, particularly in North America where we were struggling with efficiencies that we talked about earlier in the year, but also in our commercial negotiations. We completed some really important negotiations in the quarter that I think established a nice precedent going forward for us to give us a little more predictability. That said, we do anticipate that there will be challenges with that as we look out to next year. but we're very happy with the performance thus far in these systems.

Yeah, I think, you know, Rod, you know, when we simplified this portfolio, and I've said it before that we're trying to be everything to everybody and started de-emphasizing areas that we quite candidly couldn't compete in longer term with the type of investment dollars that were required, it's really paying dividends. And so the simplification of the product portfolio, clarifying it, allowing us to grow profitably in those areas, and we are growing. I mean, what I'm really excited about is that three years of consecutive billion dollars of backlogged businesses gives us a lot of confidence that we're in the right area, we have a right to grow in those areas, and we can generate good returns. You know, the diversification, the customer diversification was a key part of our strategy, and we're doing a really nice job of diversification across Geely, you know, we talked about Jag Land Rover, Volkswagen, European OEs just continue to accelerate a diversification across customers. And the vertical integration. I mean, it's a really, in a time right now, when customers are looking for solutions, you know, it's really opening their eyes to different possibilities of what we can do, both from a T's and C's perspective, but also engineer components. And so We just had a great review with one of our major customers to really talk about what we can do to lower their overall cost, but also help us expand our margins within these systems. A lot of the aspects of what we put in with the strategy are really starting to pay off. We have a lot more confidence that we'll continue on this path. Got more work to do, Rod. There's no question we're going to work hard on our efficiencies, our improvements, some of the commercial negotiations. really confident in where we're at.

Yeah, I think, you know, people highlight that eSystems is sort of a show-me story. I think we're starting to prove that the plan that Ray just laid out is working. You know, our operating margins for the second half of the year are 200 basis points higher than our full-year margins were last year, 160 basis points higher than they were in the first half of this year. So we are, you know, third quarter is both an inflection point and another proof point with a fifth straight quarter of year-over-year margin expansion in eSystems. So we've made a lot of progress there.

Yeah, it sounds like you've got a lot of momentum there on the margins as well as the wins. I was just hoping that lastly you can address just one thing you can't control is the timing of launches in EVs, which has been obviously a good part of the backlog. Can you maybe just give us some color on what you're seeing and how we might want to just calibrate the backlog that we've been seeing just to the reality of pushouts here or there? How significant is that?

Yeah, as you know, Rod, we'll formally update our three-year backlog on our fourth quarter earnings call at the beginning of next year. But we continue to win new business at a pace that would support delivering a three-year backlog for 24 to 26 that was similar to the most recent backlog we've We've published $2.85 billion overall, $1.8 billion in seeding, and $1.5 billion in each systems, just given the wins that we've experienced so far this year. With that being said, our plan for 24 that we released at the beginning of this year was for a $1.5 billion backlog in 2024. It would have been the single biggest year in our history. I think some of the announcements from customers, what GM talked about on their earnings call, sort of delaying some of the launches, maybe reducing near-term volumes. Ford's done the same. Others have as well. We would expect that that will have a negative impact on the first year of the backlog in 2024. We still feel confident that the three-year backlog overall will hold up. And our electrification revenue in these systems in particular is holding up towards that $1.3 billion target that we had established for 2025. So we're still seeing really solid growth there with new wind sort of offsetting some of the impact of the volume changes. But if I look at our 2044 backlog specifically, you know, 75% or so of our new business winds and seating were on electric vehicle platforms. And I would expect, based on all those announcements, that you could see, you know, a 20% or so reduction in that first year with much of that made up in the second and third year of the backlog. So, yes, you're right. Rod, there is an expected impact next year, but I think over the three-year period, we still feel pretty good about the growth outlook.

Okay, great. Thank you.

You're welcome. Thanks, Rod.

Our next question comes from John Murphy from Bank of America. Please go ahead with your question.

Good morning, guys. I just had two quick follow-ups to Rod's question there and then one other. On the backlog, I mean, if EVs are pushed out, presumably there's other vehicles on the ICE side that are still made, so on the net backlog, things might not change or actually could potentially be for the better. Is that a fair way to think about that?

Yeah, I think absolutely. I think that coupled with what may happen with the strike, the longer it were to continue this year on certain platforms, that could benefit next year on ICE vehicles specifically. I think that on a real broad base, that's a reasonable assumption that we would also stronger ice volumes to partially offset.

Yeah. And then on the eSystems margins, I mean, could you just remind us the target and the timeframe as to what level and where you're trying to get?

Yeah, our target is 8% in 2025. And as we've said before, it's not linear between this year and 2025, but we do expect to have a meaningful improvement in operating margins next year. With the run rate at 5.5% in the second half of the year, we would expect to continue improving that in the next year. Now, the backlog will benefit operating margins. There's a number of puts and takes. It's obviously too early to give guidance, but I'd be disappointed if we didn't have something with a six in front of it somewhere in the range next year in these systems.

Then just lastly on thermal, you're making great progress there. A billion dollars in 2027, 10% margins is really great to hear. But it seems like it might be a far larger opportunity over time. As you look at the way that thermal is set up in your sheets versus the antiquated HVAC system that exists right now in ICE, in EVs, is there a potential real content grab And efficiency, you know, gain that you could make yourselves and help out the automakers in saving money and then, you know, improving efficiency of powertrain in the entire vehicle in a big way. Because you didn't talk about that. And that seems like a really big deal that this thermal system could shift from the antiquated running off the ice engine to, you know, something all new in your seats.

I think we've talked about a partnership and a project we're working on with Thaleo that I think will help us more fully exploit that opportunity. I think you're right, longer term, that does create additional growth potential on the thermal comfort component specifically. We've already embedded a $400 million roughly revenue increase in the thermal comfort systems business over the next four years, so we've got a pretty aggressive target. I think longer term, Where we see even more growth opportunity is in modularity, and so sort of an extension of what we're doing in thermal comfort, but then incorporating our FlexAir products and seat covers on programs where we don't have the JIT necessarily. I see that as a path to increasing market share in our seating business overall. We've talked about going from 26% to 29% market share in seating by 2027. We also see having roughly a third or 32% of the total seat market when you consider the component sales independent of JIT that we sell to our competitors that are directed by our customers. I don't see any reason why that number can't continue to grow three, four, five years down the road as well. Our target is certainly much more ambitious to maybe capture 35% or 40% of that total seat market I think that's the real long-term growth driver for the business.

We had a really good review in what we're doing. Again, I'd say we're conservative in how we're laying this out because we're in the process right now of even validating what Jason just mentioned on a fully modular concept. The timing, obviously, we put this strategy in place eight years ago. We've been building up pieces. to really give us the complete ability to look at this thing from a manufacturing component perspective and the engineering designs to a modular system that's integrated right into traditional foam or flex air into the actual trim cover itself. So all those components layered together really gets you the savings. And saying the other day, the timing, there's a lot of pressure right now on cost and labor scarcity and different challenges within the manufacturing plant. Couldn't be better timed. And when we had this review with this major customer, I mentioned that it became more of a we're pushing to a pull. How fast can you go? How fast can you go? So we're putting out timing based on validation within modular systems, but it's how fast the customer can go too. And so we're really focused on putting it in a perspective on how we can get this in. But once you get it into a platform, it goes across multiple vehicles. That's where you really get the synergies. You really get the benefits. So something that can be, you know, a $5 or $10 million savings can grow exponentially when you start talking about across all their different vehicle lines. And we've been receiving incredible feedback, and I think the timing is perfect. I mean, the timing has been when the customers are coming in asking for, we need more help on the cost side, we have a great really layup in front of them to say, not only do you get a better customer feature, it's a savings benefit. and labor efficiencies and the savings within the components themselves. So then consumer benefits, our customers benefit, and we love it because we get to expand our margins.

And it's not an insignificant benefit. We can see savings up to 20% on the relevant components in a fully featured vehicle system. And in most programs, 10% to 15%. So this is a meaningful opportunity. So not only does it improve the performance and sustainability of the seat, it also lowers the cost for customers.

Yeah, looking forward to hearing more about it over time. Thank you so much, guys. Thank you.

Our next question comes from James Piccirillo from BMP Paribas. Please go ahead with your question.

Hey, good morning, everyone. It's great to see the early momentum in thermal comfort. I think as of last quarter, right, Lear had one source in control with seven OEMs. Now that number is nine. You now have 21 development contracts versus 16 last quarter. Can you just speak to the strength in the pipeline here to sustain this type of quarterly buildup in momentum as we think about next year? Thanks.

Yeah, I think that the traction we have is, as Ray mentioned, it's starting to become a pull from customers. And so the demand for customers wanting to learn more about the product has really been a positive surprise to us. And maybe, Frank, if you want to elaborate on some of the things we're seeing, some of the interest we're seeing from customers in these technical reviews.

Yeah, absolutely. As both Ray and Jason have mentioned, the reception from the customer has been really fantastic. And to Jason's point just now, James, we've had a lot of technical reviews on a global basis. We have a lot of customer engagements or tracking, all of that, as a team to make sure we understand. We're getting tremendous activity with not only our commercial discussions, but our technical discussions and validation development projects that we're working on. We're extremely encouraged by the global reception, too, of this product. We're working with Asian customers. We're working with customers in Europe and here in North America. It's really cross-border. As we will continue through the quarters, I believe the momentum is just going to continue to build.

I think the swing is we're still quoting individual components, but every JIT program that we've been awarded, we have source and control. That's what's been nice. That's a major shift. JIT suppliers that don't have this capability don't get that flexibility. It varies. That's one thing that We're right now in the process of these development programs. We're focused on making sure those go off, and we execute those flawlessly. The rest of it, as we continue to build across multiple car lines, independent if we have the JIT, is what's picking up steam as they're starting to see the benefits and then asking us to quote across seat systems that aren't even being quoted yet today.

Yeah, that's really helpful. And just a quick one on the commodity side. How should we be thinking about the earnings impact in the fourth quarter? And I know it's early, but just given current spot pricing and what you already have locked in on the metal side for CD, how could we start thinking about next year's setup on the commodities front? Thanks.

Thanks. Yeah, there's been a modest softening in commodities in general. North America, Europe steel prices have drifted down a bit. That benefited us a little bit in the third quarter. Fourth quarter, we had a pretty strong recovery quarter last year. And so year over year, commodities may be a modest headwind just as a result of the level of recovery received last year versus this year. As we look out to next year, I think We don't see a meaningful positive or negative at this stage. We do see steel as an opportunity. And then kind of on the flip side and maybe a little bit outside of your question around commodities is wage inflation is something that we're very focused on in terms of maybe a bit of a headwind. And similar to what we experienced this year where we saw fairly significant increases in hourly wages in Mexico and Eastern Europe, Those pressures look to continue next year. We've had really good dialogue with our customers, and there's a sharing mechanism and pass-through mechanism in most cases now on that. But that's another factor to think about as you start to model 24 and beyond. Thanks. You're welcome.

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

Oh, great. Thanks for taking my questions. Sort of following up on that, any color on how cost recoveries are trending with customers since they're obviously going to be under a bit of cost pressure themselves? Has that changed at all? And the recoveries you got this year, how much is piece price so you don't have to renegotiate versus sort of lump sum where, I guess, January 1, you'd probably have to have discussions again about getting recoveries?

Yeah, I'll go ahead and start it. I think the... The negotiations have been ongoing and I haven't seen a significant change on how we were negotiating for recovery. The customers are very sophisticated and in some cases have very sophisticated models on what is in as far as some of the labor economics or even the commodity costs within our components. And so those are ongoing. And to answer your question, we have seen an increased request more on let's call it design changes and design reductions within the product lines, that they are under more pressure on that side of the equation. But one thing we've talked about before, being the most competitive, cost competitive company in the world has been our focus. That puts you in a very good position when you are negotiating through some of these more challenging, difficult negotiations. So we do have evidence binders, very detailed. analysis, those type of modeling scenarios. We haven't seen the negotiations slow down on that side. The side that we're probably seeing more impactful right now is just their willingness to look at alternative designs or what we'll call VAB or product designs that can get at cost. Some of them have changed their targets internally that are more aggressive than they were this year heading into next year. We're embracing that. We actually think that we have our whole culture is built on being the most cost competitive. We have a couple different things that we do internally with cost technology optimization. We have these coliseum events that are very rigorous in that we have no excuse boards, that we have queues of ideas. There's enough inefficiencies in the value chain across the board to drive opportunities. That's something we pride ourselves on. Like I was just mentioning, we just had a major coliseum event with one of our customers that we generated over, you know, between $60 and $70 million of opportunities within the year. And what I like about it, boy, do they react positively. You know, and I think traditionally it's been, you know, it's too risky. We don't really want to do that right now. We'll come back to you. Maybe elements of it does get approved. But, boy, they're taking a much more different look at different ideas. That's where we push our vertical integration. And that's been our strategy is how we engineer our own components to create a value proposition. And so we're picking up a lot of steam on the side of engineering our own products, terminals, connectors, engineering components and wiring, vertical integration with trim covers or things like flex air or foam, the modularity. Those are all working right into our wheelhouse. So there is a pickup of momentum from our customers, but we also feel that we're in a really good position to create a value proposition for both companies.

And overall, the year kind of played out the way we expected. It's about a $25 million benefit in a full year basis on commodities between lower cost and recoveries. So it's a solid improvement year over year.

And any color on the amount that are piece price versus lump sum that need to be renegotiated?

Yeah, I think we're seeing a trend towards piece price generally. And there may be agreements like in the third quarter we had an agreement with a customer that had a lump sum and a piece price component to it because It went back to earlier in the year, and the lump sum just covered the earlier part of the year, but the PO price has been adjusted going forward. I think that there's an increased willingness in general for customers to do that, particularly where it's sticky inflation or sticky commodity increases where there isn't any reversal in sight over time. If it's something that's more transitory, then that would set itself up for more of recovery, but where it's more permanent, like wage inflation, for example, you're seeing piece price adjustments.

And just lastly on FX as we think about into next year, I think you had some pretty good protection this year from some of your hedges. How should we think about sort of currency risk as those roll off, or do they roll off into next year?

Yeah, so our largest exposure is the PATO, and we do have a pretty aggressive hedge program in place, a 24-month ruling hedge program that largely insulated us from that issue this year. There's still a $20 million impact for us, and much worse than we had anticipated when we set guidance at the beginning of the year, and we've had to sort of absorb that as the year's gone on. As we look out to next year, If you would have asked me that question three months ago, I probably would have felt worse about it than I do today with the peso at 1830. It's a manageable issue for us as I look out for next year. It's still a meaningful impact and a little bit worse than what we experienced this year, but manageable. We've locked in 75% of our exposure for next year already. By the end of this year, we'll have 85% or so locked in. we're going to be in a pretty good position to continue to mitigate that risk.

Got it. All right, thanks for taking my questions. You're welcome.

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

Hi, good morning. Thanks for taking the question. I wanted to start first ignoring First, I want to start with a question on e-systems. And I think you mentioned earlier, Jason, just that, you know, we should think about next year with a six-handle on e-systems margins. You provided some commentary some time ago that, you know, there's a path to 8% by 2025, and I think the biggest piece of this is volume and backlog. And I think that the difference is that, you know, we're now sitting here in – You know, an LVP environment that's arguably much higher than what most of us anticipated, call it six to nine months ago, you know, schedules seem to be much more stable. So should we still think about, you know, that path to 8% as being intact, especially as now LVP seems to be at least, for now, outperforming to the upside?

Yeah, I think that there really isn't anything that has changed from the time we set that target. I'd say maybe the only exception would be to the last question we had from Colin on foreign exchange, a little bit of a headwind on transactional FX. And we have, obviously, wire is a labor-intensive business, so it's sort of a dual headwind of FX and wage inflation. Outside of that, I'd say that the story is intact. The performance that we can control has improved consistent with our expectations. The recoveries on commodities are in line with our expectations. Volumes are recovering sort of consistent with what we had anticipated. The backlog is rolling on with margins that we had based that outlook on. I think the last piece of that is maybe the stability of the production environment. While we've seen meaningful improvement this year from last year, there still has been disruptions that leads to some inefficiencies in the plants that are a little bit outside of our control. That would be one other factor to think about. I think the backlog in 24, as I mentioned earlier, will be negatively impacted by some of the customers' revised launch plans and some of the key programs that were embedded in our backlog. As you know, the GM BDU and InterCell Connect board, for example, is a big part of the eSystems backlog. And those volumes are going to be lower in 2024 and probably in early 2025, given the current plans there. So that'll have a little bit of an impact. But we've seen, again, just a really nice improvement from 2022 So 2023, you know, 110 basis points full year, year over year, 200 basis points full year last year to the second half of this year, you know, 160, 170 basis points first half to second half this year. We really have a nice trajectory set up here going into next year. And, you know, there's a lot of moving parts and we're working through our plans for next year, but we do feel confident that we can continue that momentum into next year and continue working towards that target.

So, If we're just conceptually thinking about that bridge to 25, is it fair to say that better LVP, slightly more stable LVP, more than outweighs Mexican peso and some lighter EV volume on the backlog?

Yeah, I think, Dan, it's probably a little bit early to get into that level of granularity. So I'd rather save that for the fourth quarter earnings call.

got it okay thank you and then as a follow-up wanted to follow up on uh seeding and uh and the tcs strategy and i think one of the points you mentioned from the seeding day back in june was that by having the full vertical integration that you now could see more complete systems sourcing this is obviously a bit of a shift from what oems have done in the past where uh much more of a direct sourcing model. In your conversations with customers, are you seeing more data points that they are willing to change that sourcing model and source more of a complete system?

Yeah, that's exactly what we're seeing. On the programs we've been awarded, from a competitive perspective, in the contract itself, the language reads we have the sourcing control over those components. And so we'll, in parallel paths, do the traditional system along with a much more technical system or innovative system with the modularity that we talked about. Now what we're doing is just taking that across multiple vehicle lines, even in the case where we don't have a just-in-time award. We're seeing that trend. Like I mentioned in my portion of the dialogue was It went from us pushing to now them coming to us and pulling it and saying, how quickly can you go across multiple vehicle lines? Because they see the real savings when we can take it across significant volumes. And so we're lining up our quotes in a particular way where it was individual to a seed program. Now we say, listen, if you take this and extrapolate across multiple car lines, here's your savings. And the benefits of what we are talking about with 50% part reductions, much more efficient system, just from a therapeutic standpoint, from a heat standpoint, from a time to sensation perspective, a weight perspective, you can then start plugging that into different alternative systems within the vehicle itself, where it's been limited, maybe not even offered in rear seats or in other vehicle options within the vehicle itself. And so, I mean, that is the plan. That's exactly what we're doing. And the important part that we're focused on is executing the validation and getting that done. And we said, you know, sometime mid-year, next year, we'll have the validation, you know, done. And that's through our customers. And so that has been validated through their own internal specifications and requirements. And that's a very important part of what we're focused on.

So there's been nine customers, as we highlighted in the prepared slides. for today that have granted us source and control. That's nearly all the JIT programs that we've been awarded since the acquisition of IGV have included source and control for us of thermal comfort components.

Great. Thank you. That's very helpful. Thanks.

And our next question comes from Emmanuel Rosner from Deutsche Bank. Please go ahead with your question.

Thank you very much. A couple of follow-ups around the EV exposure and, I guess, potential risk from some of the slowdown in near-term investments by the automakers. Would you be able to remind us or quantify your content exposure to Altium specifically? If I'm not mistaken, I think that you've won a significant amount of business. including multiple parts, I guess, of the vehicle. Can you maybe just quantify this first? Remind us what you're supplying on Altium and how much that's roughly worth per vehicle.

So on Altium, we have on the battery electric truck platform, the battery disconnect unit. And we haven't quantified the CPV, but we've talked about BDUs generally $600 to $800 of content per vehicle. Not saying that's the CPV on that program, but just kind of holistically looking across the market. And then we also have the InterCell Connect board, which is a much lower CPV than the BDU, but that's on various Altium platforms. It's not 100% of the volume. It's dual source. And so, as I mentioned to the earlier question, we do expect to see lower revenue on the GM BDU in 24 and probably 25, given the announcement that they've made. But as we've looked at our $1.3 billion revenue target for electrification products generally, we are in line with our previous expectations. So we've had new business awards with other customers since that target was established that have offset the impact of lower expected revenues on the BDU.

Okay, that's helpful. One quick follow-up. Do you supply wire harnesses also on Altium?

We do not. Well, we do have low-voltage wire on certain GM EV programs, but not high-voltage at this point.

Understood. And then just as a quick follow-up, so I appreciate the comment around being on track for sort of like the mid-decade target on EV, but can you just go back over the mass around the – the 2024 EV exposure, because as you mentioned before, it's not just in eSystems, it's also obviously some EV platform, you know, within sitting. So can you just go back over sort of like the exposure you have there?

Yeah. And again, we'll provide a fuller update on the backlog as we always do on the fourth quarter earnings call, late January, early February. What I tried to do today is just highlight for the analyst modeling next year and for the investors listening to the call, that obviously the announcements by our customers would have an impact on the backlog that we had previously projected for 2024. It was previously estimated we'd have $1.5 billion in revenue. We don't have a precise update to that, but most of the seeding revenue in the backlog is on electric vehicles. because most of the new vehicles customers are launching are electric vehicles, and then any systems we've already talked through, the GMBDU specifically. I think it's reasonable for one to assume, based on all the comments that customers have made, that the backlog for 24 would be 20% or so less than what we expected. We've continued to win business at a pace that would allow for the three-year backlog that we published in February to be similar to the three-year backlog we published in February of this year, which is $2.85 billion overall for the company, $1.8 billion in seeding, and $1.05 billion in e-systems. There may be a little bit of mix between the two segments, but I think that's a reasonable expectation for the total backlog based on everything we're seeing, including the revisions to the volumes that I described for electric vehicles.

That's extremely helpful. Thank you.

You're welcome.

And ladies and gentlemen, our final question today will come from Joseph Spott from UVS. Please go ahead with your question.

Thanks everyone for squeezing me in. Jason, maybe just to follow on one last thing on the BEV units. Like if the units are, like I understand it's a little bit lower in 24 and 25, but like if it's, sustained lower than what you assumed, you know, for over a number of years from when you've been on the business. Do you have any recourse in that contract to either recover costs or raise the piece price for what is produced?

Yeah, absolutely, Joe. You know, the customers have been very, you know, cooperative, collaborative with regards to changes in their production plan. They understand the investments that we've made. They've worked with us. That's part of what allowed us to reduce the capital spending this year, push it out, may eliminate it if the volumes don't materialize. So we're being much more deliberate in putting new capacity in. And then, of course, there are discussions around piece price tied to volume changes as well. So that's absolutely the case. And one point I also want to highlight, when we established our backlog and published that last year, We weren't using customer planning volumes directly. We, of course, discount those. Even given that, we believe that the volumes that they'll come out with in their plans for next year may still be lower even than the discounted volumes we used in our backlog.

Perfect. And if I could sneak one in just on the strike as we sort of look like we're starting to get back to work and hopefully that expands. One of the things we've been hearing about is a little bit more sort of maybe pain in the Tier 2, Tier 3 level. Are you seeing any stress in your suppliers that would either add some cost or make a ramp up a little bit slower?

I think that we've seen pressure in the lower tiers over the last two years with commodities and inflation, and certainly this didn't help. I wouldn't say that the strike has gone on long enough or been deep enough to have a meaningful impact on that at this point. Maybe around the edges we're seeing some modest effects from that. I think in seeding, one thing that helps us too is the vertical integration capabilities across the whole seed. Where we do have distrust in the supply base, we also have that flexibility to bring products in-house. You know, we've done that from time to time as well, where you've had a distressed supplier on an important program. We've brought that in-house to solve the issue. So we have other ways to remedy that, too.

Okay, perfect. Thank you.

Okay, great. I think probably the only ones left on the call at this point are the Lear team. And so I'll say a few words. One, great quarter, you guys. Everyone worked extremely hard, despite some difficulties. external challenges we were faced with. A really nice quarter. I want to thank you for all your hard work. And again, just we talk about it, the incredible recognition, not only from our customers, but J.D. Power and the recognitions that we get from third party just continue to validate what a great job we're doing and how we're focused to continue to drive excellence. I want to thank the team. I mean, I don't think everyone appreciates, except for the team that's been working on it nonstop, the incredible, unprecedented work launch that we had with the Wagoneer and Grand Wagoneer. Frank, the team did a great job. Industry first, never been done, and just, don't want to jinx this, but incredible job. Really, really special. And I just want to, again, just recognize the team, the overall performance on OI and generating that cash. Really nice job, and I know we will, but let's finish this year strong. We've got one more quarter left, but let's Let's kick into another gear and get this quarter done. Thanks, you guys.

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