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spk11: Good morning and welcome to the Lear Corporation first quarter 2024 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.
spk06: Thanks, Jamie. Good morning, everyone, and thank you for joining us for LEER's first quarter 2024 earnings call. Presenting today are Ray Scott, Senior President and CEO, and Jason Cardew, Senior Vice President and CFO. Other members of LEER'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.leer.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 slide in the appendix of our presentation for the reconciliation of non-GAAP items to the most directly comparable GAAP measures. The agenda for today calls on slide three. First, Ray will review highlights from the quarter and provide a business update. Jason will then review our first quarter financial results. Finally, Ray will offer some concluding remarks. Following the formal presentation, we'd be happy to take your questions. Now I'd like to invite Ray to begin. Thanks, John. Thanks.
spk07: Please turn to slide five, which highlights key financial metrics for the first quarter of 2024. Lear started the year strong, delivering higher revenue and adjusted earnings in the first quarter compared to last year. Sales increased 3% to $6 billion, and core operating earnings grew by 6% to $280 million. Adjusted earnings per share was $3.18, an increase of 14% driven by stronger operating performance and the benefit of our share repurchase program. Operating cash flow was in line with the first quarter of last year. Slide 6 summarizes key business and financial highlights from the quarter. The $6 billion in revenue was a record for the first quarter. Our sales outperformed industry production, driven by 10 points of growth over market in each systems. The systems team continues to drive improvements in the business. as evidenced by the seventh consecutive quarter with higher year-over-year margins. Yesterday, we announced the acquisition of WIP Industrial Automation. To further strengthen our automation capabilities, WIP leverages robotics, automation, and software to design turnkey solutions for complex industrial challenges that will help accelerate our automation initiatives globally. We continue to make progress in our thermal comfort strategy. Later this year, we will be launching component modules with Volvo and Lucid. Their modular solutions reduce the number of parts, resulting in lower weight and complexity while improving performance at a lower cost. The Volvo module combines seat heat, ventilation, and massage, while the Lucid module combines ventilation, lumbar, and massage. In addition, We initiated the validation process with Ford Motor Company for our first complete seat module for a vehicle scheduled to launch in 2026. This opportunity is incredibly exciting for two reasons. First, it gives Lear design responsibility for the thermal comfort components and trim. Second, once validated, it will be the first automotive application fully integrating the thermal comfort components into the trim cover. This will allow us to reduce our complete seat assembly time in our JIT facilities. In China, we continue to diversify our customer base as we won our first complete seat program with FAW Toyota. And in eSystems, our second wiring award with BMW is a result of a strong customer relationship that we have built. Our customers continue to recognize Lear as a leader in innovation and technology and quality. For the seventh consecutive year, General Motors recognized Lear as supplier of the year. We remain committed to returning excess cash to our shareholders. In February, Lear's board approved an increase and an extension to the company's share repurchase authorization of $1.5 billion through the end of 2026. Okay, turning to slide seven, we are introducing IDEA by Lear. and an important evolution in our strategy. Accelerating the adoption of digital tools and automation will extend our competitive advantage and enable us to more efficiently engineer and develop and manufacture innovative products that will drive profitable growth. Elevated wage inflation, geopolitical risk, and uncertainty surrounding the pace of the EV transition, combined with the introduction of artificial intelligence, is creating new challenges and opportunities for automotive companies. Those that adapt most effectively will be best positioned for significant growth and margin expansion. Lear has consistently invested in our products and processes to become a leader in operational excellence. With Idea by Lear, we identified a broader opportunity to leverage new technologies to move faster and drive efficiencies in both businesses. Digital innovation combined with automation and robotics will allow Lear to streamline our processes while accelerating product development and reducing manufacturing costs. These tools improve ergonomics, quality, and safety, resulting in higher job satisfaction for employees while enhancing efficiencies at our plant. Slide 8 illustrates LEER's long history of strategic investments to enhance our manufacturing capabilities. Through our acquisitions, we brought key automation capabilities in-house, lowering our manufacturing costs. ASI's automated material delivery, storage, and retrieval systems have been deployed in all of our North American just-in-time facilities. ASI's equipment has improved reliability, uptime, and throughput within our plants. We will continue to automate material movement across our seating plans globally as well as within eSystems. The acquisition of InTouch added equipment to automate end-of-line testing to ensure all seat functions meet performance and quality specifications. The combination of ASI's material movement capabilities with InTouch's end-of-line testing has allowed us to fully automate the final steps of our just-in-time seating assembly process. Ultimately, we plan to automate from finesse, the process to remove wrinkles from the seat covers, all the way to installation within the customer's facility, resulting in significant manufacturing cost efficiencies and quality improvements. The GOR's use of vision systems and software, combined with precision cutting capabilities, optimizes utilization of leather heights, equipment uptime and productivity. We are expanding the first application of the GORA system across our leather facilities globally, with additional performance improvements to be deployed over the next 18 months. We continue to evaluate additional tools to accelerate automation in our plans. And yesterday, we announced the acquisition of WIP Industrial Automation. WIP is a European supplier that leverages AI, vision systems, and robotics to develop turnkey solutions to complex industrial problems. WIP's technology can be used in multiple applications in seating and e-systems and expands our automation footprint in Europe. Looking forward, we will continue to evaluate additional opportunities to accelerate the rollout of automation tools in both seating and e-systems. For example, last year we started working with Palantir and completed four pilot programs utilizing their foundry software in our manufacturing facilities. These acquisitions, coupled with organic strategic initiatives, are key enablers to continue to expand our competitive advantage and leadership in operational excellence. Turning to slide nine, we'd like to discuss several of the innovative products we have developed in recent years to expand our vertical integration capabilities in both seeding and eSystems. The combination of our engineering and manufacturing capabilities allows us to innovate and develop new product offerings to drive profitable growth. These products are accretive to our segment margin targets and offer an attractive value proposition for our customers. In seating, our acquisition of Kongsberg Automotive Interior Comfort Systems, IGB, and Grupo Antolin's seating business provided valuable vertical integration capabilities. We are the only complete seat manufacturer with thermal comfort components, allowing us to develop unique proprietary module solutions. The two recent component modularity awards and our first customer validation in process for our complete thermal comfort module are proof that our strategy is working. Our thermal comfort business is on track to achieve our target of $1 billion in revenue by 2027 with operating margins of 10%. In these systems, the acquisition of M&M expanded our connection systems and engineered component portfolio. Combining the molding and overmolding capabilities from M&M with the precision stamping technology from seeding improved the cost competitiveness of our battery disconnect unit and Intercel Connect Board products. As volumes grow on the BDU and ICB, we expect these products will be a key driver of continued margin growth in these systems. The initiatives we are implementing through IDEA will allow us to innovate and engineer next generation products faster with improved designs at a lower cost. Now I'd like to turn the call over to Jason for a financial review. Thanks, Ray.
spk08: Slide 11 shows vehicle production and key exchange rates for the first quarter. Global production decreased 1% compared to the same period last year and was flat on a Lear sales-weighted basis. Production volumes increased by 1% in North America and by 5% in China, while volumes in Europe were down 2%. From a currency standpoint, the US dollar weakened against the euro but strengthened against the RMB. Slide 12 highlights Lear's growth over market. For the first quarter, total company growth over market was two percentage points, with seeding flat and these systems growing 10 points above market. Sales outperformed industry production in every region. In North America, growth over market was two percentage points, reflecting favorable platform mix and backlog in these systems, partially offset by unfavorable platform mix and seeding. Higher volumes on the Ford Escape and Super Duty as well as Chevrolet Colorado and GMC Canyon contributed to the eSystems growth. Lower volumes on their platforms such as the Audi Q5 and the build out of the Chrysler 300, Dodge Charger and Challenger impacted seating in North America. Europe's growth over market was one percentage point with both business segments benefiting from higher volumes on the Land Rover Range Rover and Range Rover Sport. In China, Revenue growth outperformed the market by one percentage point, driven by conquest programs in seeding, such as the BMW 5 Series and I-5. Turning to slide 13, I will highlight our financial results for the first quarter of 2024. Sales increased 3% year over year to $6 billion, a first quarter record. Excluding the impact of foreign exchange, commodities, and acquisitions, sales were up 2%, reflecting the addition of new business in both of our business segments. Core operating earnings were $280 million compared to $263 million last year. The increase in earnings resulted primarily from positive net performance and the addition of new business. Adjusted earnings per share improved to $3.18 as compared to $2.78 a year ago, primarily reflecting higher earnings and the benefit of our share repurchase program. Reported earnings per share, which are not shown on the slide, were lower year over year. Higher core operating earnings were offset by operational restructuring charges and other special items which totaled $74 million, primarily reflecting future plant closures in Europe to improve our manufacturing cost structure and impairment charges related to FISCR. First quarter operating cash flow was in line with last year, reflecting higher core operating earnings partially offset by higher cash restructuring. Slide 14 explains the variance in sales and adjusted operating margins in the seeding segment. Sales for the first quarter were $4.5 billion, an increase of 25 million, or 1%, from 2023, driven primarily by our backlog, acquisitions, and commercial recoveries, partially offset by lower volumes on their platforms. Excluding the impact of commodities, foreign exchange, and acquisitions, sales were flat. Core operating earnings were $295 million, down 5 million or 2% from 2023, with adjusted operating margins of 6.6%. Operating margins were down slightly compared to last year as the benefit of our net performance, including lower commodity costs and our margin accreted backlog, was offset by unfavorable platform mix. Slide 15 explains the variance in sales and adjusted operating margins in the eSystems segment. Sales for the first quarter were $1.5 billion, an increase of 124 million, or 9%, from 2023. Excluding the impact of foreign exchange and commodities, sales were up 10%, driven primarily by an increase in volumes on LEER platforms and our strong backlog. Core operating earnings improved significantly to $77 million, or 5.1% of sales, compared to 49 million and 3.5% of sales in 2023. The improvement in margins reflected higher volumes on LEER platforms, strong net operating performance, and our margin accretive backlog. Now shifting to our 2024 outlook. Slide 16 provides global vehicle production volume and currency assumptions that form the basis of our full year outlook. We have updated our global production assumptions, which remain generally aligned with the latest S&P forecast. At the midpoint of our guidance range, we assume that global industry production will be flat compared to 2023 on a linear sales-weighted basis. We are maintaining the same exchange rate assumptions of an average euro exchange rate of $1.09 per euro and an average Chinese RMB exchange rate of 7.15 RMB to the dollar. Slide 17 provides detail on our outlook for 2024. Our first quarter results were consistent with our expectations and we are maintaining the full year guidance ranges outlined during our last earnings call on February 6th. Total company operating margins are on track to achieve the midpoint of our guidance of 5.1% for the full year. Second quarter margins are expected to be flat to slightly up in both segments compared to the first quarter. While we continue to make progress operationally and in our commercial negotiations, We are also facing, as expected, higher hourly labor costs from contracts that take effect in the second quarter, as well as modestly higher engineering costs. While the vast majority of our contractual labor cost increases took effect in the beginning of the year, certain contracts become effective in the second quarter. In the second half of the year, we expect margins to improve through a combination of operating actions, including the benefit of automation and restructuring actions, as well as commercial negotiations. Restructuring costs were elevated in the first quarter, reflecting future plant closures in Europe to improve our manufacturing cost structure. Our restructuring cost guidance for the full year remains unchanged. Despite our expectations for flat industry volumes, we are forecasting our fourth consecutive year of higher sales and operating earnings. Earnings per share will increase due to the higher earnings as well as the lower share count from our share repurchase program. Moving to slide 18, we highlight our commitment to continue to return capital to shareholders. Since initiating the share repurchase program in 2011, we have repurchased over $5.2 billion worth of shares and returned approximately 85% of free cash flow to shareholders through repurchases and dividends. We are targeting free cash flow conversion of approximately 85% in 2024, which will support continued share repurchases. We remain committed to returning excess cash to our shareholders, having repurchased $30 million worth of stock in the first quarter and continued to repurchase additional shares throughout our quiet period. In February, LERA's board increased the share repurchase authorization to $1.5 billion and extended the authorization period through December 31st, 2026. Now I'll turn it back to Ray for some closing thoughts.
spk07: Thanks, Jason. Please turn to slide 21. We started the year off strong with first quarter record revenue and continued margin improvements in these systems. As Jason just mentioned, our board approved an increase and extension of our repurchase plan, reaffirming our commitment to returning cash to shareholders. Both businesses continue to diversify their customer base with key awards, and our momentum in thermal comfort systems is accelerating. Beginning with our Lear Forward initiative, we identified creative solutions to reduce cost and improve operational efficiencies. We also identified a much larger opportunity to accelerate the use of automation and digital tools. IDEA by Lear is a significant evolution of our broader strategy to grow seating in these systems and extend our leadership position in operational excellence. Accelerating the use of vision systems, robotics, and software will enhance our competitive advantage and enable innovation to further drive returns and improve margins. And now we'd be happy to take your questions.
spk11: Ladies and gentlemen, at this time we'll begin the question and answer session. To ask a question, you may press star and 1 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. At this time, we'll pause momentarily to assemble the roster. And our first question today comes from Joe Spock from UBS. Please go ahead with your question.
spk09: Thanks. Good morning, everyone.
spk11: Good morning, Joe.
spk09: I guess just to start, 10% growth over marketing systems, good start to the year. Can you just, again, sort of go over the drivers there again and how we should really think about the balance of the year in the cadence? Because it looks like you've got a little bit of a tougher year of your comp, if you will, next quarter, and then maybe a little bit easier in the back of the half. But some color on sort of what you're expecting in that business for the year would be helpful.
spk08: Yeah, there really were two drivers in the first quarter. It was a combination of the backlog and some favorable production volumes on some of our top platforms, which we highlighted in the prepared remarks. As we look at the balance of the year, I think you sized it up about right. We do expect that 10 points of growth over market to moderate, and we would expect for the full year to be about five points of growth over market in each system. Strong, solid year overall, but certainly the first quarter will be the highest from a growth over market perspective based on our assumptions right now.
spk09: Okay. And then if I could just one, I guess, a little bit bigger picture. You know, you talked about the restructuring. It sounds like it's related to some European plan actions. So can you just remind us of, I guess, restructuring plans for the year if you think you need to do more there? And then also, Ray, you talked about Idea by Lear, higher automation. You had a recent string of acquisitions there, also some organic efforts. How should we think about this going forward? As you automate and automate more, should we also expect a corresponding increase in restructuring to implement that automation?
spk08: Let me start with the restructuring outlook for this year. Our guidance is $125 million. And we did, you know, it was very front-end loaded, as expected. And the second quarter will be likely pretty significant as well. And really, it's focused on Europe. You know, we're still, what, 20, more than 20% below the production peak in the European market from 2017, and I think still 18% lower than where that was pre-COVID. And so we've been steadily... restructuring our operations to realign to the lower volumes in Europe. But we also see tremendous opportunity to reduce costs by shifting our footprint from Eastern Europe to North Africa, and we're doing that pretty much across the board. When we acquired IGV and Kongsberg, they did have some higher cost facilities in Eastern Europe. We have launched a new facility in Tunisia that will significantly improve the performance of that business. We're also moving sea covers from Eastern Europe to North Africa. We're moving wire pretty aggressively from Eastern Europe to Morocco. And so there's still a lot of kind of runway there in terms of just an opportunity to reduce our manufacturing costs through shifting the footprint. So it's a combination of those two things. And then the third point on restructuring is just the impact of some of our customers' sourcing decisions For example, we've had programs where the customer has built out in a production plant where we had a JIT business today, and they're not replacing it or they're replacing that program in a different facility. It's resulted in the closure of a couple of our just-in-time plants in Europe, which won't really have an operating income benefit associated with them, but it's an action we have to take nonetheless. Those are the drivers of restructuring.
spk07: Maybe Rick can talk a little bit about IDEA. Yeah, I think what's important, and we've been working on this strategy for multiple years, and I think the energetic nature of bringing in some very, very selective partners and acquisitions has really helped us really discover opportunities even within how we purchase capital. as we're looking at capital is coming in significantly lower as we're designing our own specific capital for our own specific needs around multiple different platforms. And so we're seeing benefits on lower capital costs, the efficiencies within the plant, and how we scale these things across the different facilities, both the neat systems and seating, not only improve the cost, the reduction of labor heads within the plants, but also the work that is there is much better improved from ergonomics, safety, throughput, quality. Those are generating great benefits for us. The way we're looking at this, and I described it in my overview, is plants that are in existence today, particularly like an example with a just-in-time facility where we're able to automate from finesse all the way to the customer's delivery is a significant opportunity because labor is very scarce today around the world. that helps us gap out from an efficiency standpoint and it's deployed in a way that we have a customer contract and we're focused on those particular contracts that we have in place. We are very selective on where we're deploying the capital. It's based on customer needs and volume at that particular time and it is very selective how we're implementing it. It has been very beneficial short term. I do believe this, that companies that are looking at this very, very proactively and strategically will be in a much better position three to five years from now. This labor scarcity is a real issue, and it isn't just selective to one area. It's around the world, and the attractiveness to manufacturing jobs is declining, and the need for output or manufacturing is increasing. Those that are in a much more flexible, better position when it comes to automation and idea or industry 4.0 are going to survive. It's been very successful. It's one of the reasons why we look at our quarter over quarter expectations of improvements, not just this year, but the out years. It's really paying dividends.
spk08: In terms of the last part of your question and how it will impact restructuring going forward, I wouldn't say that near term it's a meaningful impact on restructuring. A lot of the headcount changes that happen as a result of automation will come out through normal attrition. You know, there is turnover in our facilities. And so that is a factor as well. It's not to say that there won't be some level of restructuring, but it's not going to move the needle in the near term.
spk09: Thanks a lot, guys.
spk11: You're welcome. Our next question comes from John Murphy from Bank of America. Please go ahead.
spk02: Good morning, guys. I just want to follow up on it. Joe, good morning. A question on this automation front. I mean, could you give us a rough estimate of how much of your operating cost is made up by labor? And then if you think about, you know, automation, does that ultimately over time just replace it one for one? Or is there an opportunity to potentially take those costs down on a net basis? Obviously, recognize one would be capitalized, one would be operating expense, but just, you know, long term, you know, what the delta could ultimately be.
spk08: Yeah, in terms of, I'd rather not go into specifics on labor as a percentage of sales, because each subset of the seeding and eSystems business is a little bit different. You know, for example, in electronics, there's very little labor content today. It's already fully automated. I will say our most labor-intensive operations are in wire and cut and sew, and we're working on automation solutions that will have a meaningful impact on labor content there. longer term. In the near term, the biggest benefits are coming in our just-in-time seed plants where you're seeing sort of the full effect of the acquisitions from ASI and InTouch and now WIP helping to accelerate our ability to automate a lot of the steps in the just-in-time seed process. In addition to that, modularity is a big driver of taking labor out of the higher cost JIT facilities. as well, and then with Tagore and what we're doing on the leather side, we're also seeing significant improvements in labor costs in that part of the business. The way we're primarily looking at automation, John, is a catalyst for offsetting wage inflation and driving higher margins longer term, driving that positive net performance in both business segments. That's what we're focused on.
spk07: talk a little bit about this, is this automation, not only does it change the manufacturing footprint and the concept of how you manufacture products in the plant, but the product itself. I think the significant announcement that we made on the development program with Ford Motor Company is significant because we will automate that module. The automation of the components into the trim cover will be automated. The redeployment of that labor out of a JIT facility into what we consider to be more of a spoken hub concept where you can scale it properly across multiple platforms is the future. It's a combination. What we love is our design, engineering, and manufacturing capabilities coupled with this advanced and really quick pace of technology and innovation within the manufacturing plant. They fit together. the partnership that we have with Palantir, with what we're doing on the shop floor, what we're doing with the visual systems and automation, it's coupled with our designs. And so everything that we're doing, the acquisitions we've made on the product side, were complementary to what we're doing on the manufacturing side. And I couldn't be more happy with where we're at or excited with where we're at with the modular concept and seating. Every customer is moving at a little different pace. Some are still sourcing individual components, which It's fine, but we have 11 customers that we're working on right now with modular concepts that combine that automation within the plant with the components itself and the product itself. We're just going to keep steadfast in what we're doing. We know that the success we've had in a short period of time will continue to accelerate, but it is a combination of the manufacturing plant coupled with our expertise in engineering design and changing the product designs for a much more modular approach is where we'll be successful.
spk02: Great. I hate to put you on this, but it sounds like you guys are doing all the right stuff, but is this ultimately, Ray, as you think about this, a necessary course of action to remain competitive and grow the business over time, or do you think you could pick up a couple hundred basis points of margin expansion from this automation you know, add these automation actions alone. I mean, I'm just trying to understand where, you know, ultimately the, I mean, you're doing all the right stuff clearly and probably with the curve or way ahead of the curve on this stuff. I'm just trying to understand where it's going to land or you think it's going to land.
spk08: John, I'll start. Ray probably has some additional comments, but I look at this as a key enabler to achieving the margin targets we've communicated, the midterm target in seeding of 8% and 7% in these systems. I'm sorry, 8% in these systems as well and 8.5 plus percent longer term in seeding. It's not necessarily 100 base points, 200 base points beyond that. It's a key, I think, competitive differentiator that allows us to grow the business, achieve the four points and six points of growth over market targets that we've established in both segments, and a key enabler to hit the margin targets that we've communicated.
spk07: I love the way Jason goes at it, and it's good, but I'm going to tell you that I love what we're doing in the manufacturing side. We have to move faster and we're pushing harder. I agree that right now we haven't changed our targets long term. I think there's a benefit obviously to gapping out where we're at short term, but I think longer term, John, to answer your question, it is about survival. I think that those companies that have this capability will be the companies that survive and then there'll be the companies that did not move in this direction fast enough and will be looking on the outside, looking in. One is short-term, how we get at some of the expectations. When you can go in and tell your customer that you are the most cost-competitive in the world, it's a powerful statement. You can do that with analytics and data. It's strong, both commercially and how you win business. I think we've proven both sides of those. Longer term, I think those companies that have this advantage will be the one standing. We're pushing fast, we're thinking differently, and we're driving accountability throughout the organization. We want to outperform those numbers. I think this is an area that we can accelerate, but right now we're staying steadfast short-term on the targets that we've given.
spk02: That's helpful. Just one follow-up. On the Tier 2 and 3 supply base, they're facing the same labor challenges as well, and we're hearing a little bit of stress down there below you guys, Tier 2 and 3 supply base, really because of labor shortages as well and cost of labor. I just wonder if you could comment on that, what you're hearing more lately, and if that is constraining production right through the value chain, or is that something that you guys are able to handle with the help of your automaker customers?
spk07: I think what you're hearing is accurate. I think throughout the supply chain, labor scarcity is a significant issue. And it depends on regions, but it's generally across the board when you talk about just different types of metrics based on turnover or absenteeism or lack of workers. And so that is an issue. We're working with our suppliers. We've been able to balance it. But it has been an issue, I think, throughout the supply base for all OEMs that we're seeing.
spk08: I would say, just to add to that, the level of component cost inflation that we're seeing this year is less than what we've experienced over the last number of years. So you're seeing some moderation on the commodity side and then maybe some acceleration on the labor side, and the two are slightly positive when taken together overall.
spk02: That's incredibly helpful. Thank you, guys.
spk11: Yep, thanks. Our next question comes from Colin Langan from Wells Fargo. Please go ahead with your question.
spk00: Thanks for taking my questions. One, maybe if you could talk a little bit about the cadence of margins through the year. You called out in your commentary an increase in labor and engineering into Q2. I would have expected maybe margins improve. Is that going to offset any way to quantify how much of a drag that might be as we think sequentially?
spk08: Yeah. So, you know, we didn't provide pinpoint guidance for each quarter, but we did say we do expect both segments to be flat or slightly up in the second quarter, and So the sort of composition of that, you have volume and backlog, which we think will be a tailwind from Q1 to Q2. We do expect revenues to be higher in the second quarter than the first quarter. And then we do expect the margin increase associated with the volume to be offset by the wage economics and engineering. So those two are sort of a push in the higher margins in the second quarter. result more from the operating actions and the commercial negotiations that are ongoing. Some of the restructuring savings associated with actions we took at the end of last year and beginning of this year, various performance improvement actions that we're taking in our entire business. Thermal comfort, for example, I talked about shifting the footprint from Eastern Europe to North Africa, but we also have additional synergies integrating IGB and Collinsburg into We also have lower operating costs in our leather business from deployment of the Tagora technology. And then we have lower labor costs in Europe through the deployment of Palantir's foundry tool in our European seeding plants that will sort of benefit us as we move throughout the year. As we look at the second half compared to the first half, we do expect revenues to be flat to slightly up from the first half to the second half. really driven by the backlog being favorable and more back-end loaded and offset by lower production volumes assumed in the second half of the year. So you have the normal seasonality in Europe and to a lesser extent in North America with downtime around the middle of the year into August in Europe and then just fewer production days, say, in the fourth quarter than the second quarter that lead to that lower production volume overall. And then perhaps maybe a little bit of a a hedge just on demand-related volume assumptions in the tail end of the year where there could be a little bit of upside if demand holds up. I think if you look at IHS's volume cadence, kind of quarter to quarter, our revenues will sort of mirror that, at least the volume assumptions on our platforms will sort of mirror that throughout the year.
spk00: Just to follow up, you said flat to slightly up quarter over quarter, but revenue up Does that mean percent margins are flat to down?
spk08: Again, Collins, we weren't looking to provide pinpoint guidance, but we would expect operating margins to be higher in the second quarter than the first quarter. I think it's also important to point out that we have a number of commercial negotiations that are ongoing. And so I would say that there's a wider range than usual in both of our business segments in terms of how this will play out quarter to quarter, maybe a little choppier than it ordinarily would. We're very focused on sustainable agreements, piece price adjustments with our customer to reflect things like wage inflation rather than lump sum. We're not going to sacrifice on a deal to hit a number in a quarter. We're focused on doing the right thing for the business for the long term. That could lead to a little bit of choppiness in the quarter. As we always do, Later in the quarter, we'll provide an update at a public investor event on how we see the quarter playing out.
spk00: Got it. And just lastly, any color on the recovery? Some of the automakers are making pretty aggressive comments around like no more claims. Is there any change in terms of your expectations for recoveries at this point?
spk07: Yeah, no, we haven't. I mean, yeah, okay, there's different customers handled the negotiations differently. We've always kind of clearly communicated that and But from our perspective, there hasn't been significant changes. When you boil it down, we said this before, we have a lot of data and facts around being very cost competitive. I think when you have situations and you're going in asking for a recovery and you're not cost competitive, you're not minding your own house, you don't have your own costs under control, and asking for additional other costs, it makes it very challenging for resolution or clarity on how you resolve it. Our position is always be the most cost-competitive, have the data, have the facts, present your case, and we've been very successful. To Jason's point, there's a time element on how we negotiate across the board. Like I said, I don't see significant changes in how we're negotiating with our customers. We're resolving them, but we will not take a bad deal where we might feel pressured into resolving it for only quarterly results. We're doing it with the intent to protect the business make sure that we're driving sustainability and it's the best result for Lear Corporation based on the facts. Each customer handles it differently. Some are more open externally and focused on how they're setting it up, but we haven't seen significant changes and I think we're in a good position. I think each one of our negotiations are moving in the right direction. I'm very optimistic about it, but it's more, like Jason said, the timing of how we want to resolve these We will not jump at a particular time event to try to resolve something quickly to set up a quarter or resolve it in a quarter. So we're focused on long-term.
spk00: Got it. All right, thanks for taking my questions.
spk11: You're welcome. Our next question comes from James Piccirillo from BMP Paribas. Please go ahead with your question.
spk05: Hey, good morning, everybody. Morning. Good morning. Just on the new business backlog contribution across the two segments, is the $700 million proceeding and $500 million free system still the right number? I mean, I know you touched on this, but can you just speak to the visibility in the stronger run-up of new launches embedded for the remainder of the year, given the slower start, which, to be fair, has been experienced across the broader supply chain in the first quarter?
spk08: I'd say overall, we're not updating the full year backlog, but there have been some changes. I'll just give you one example, of course, with Fisker having no releases that we can see and no plans to restart production. There was a modest impact on the backlog. We were pretty conservative in our volume assumption around that, so I think it's just about $35 million of revenue that won't materialize. So that's a bit negative on the backlog. We're seeing a nice ramp up on other programs that are important to the backlog. On eSystems, we have the Blazer EV, the Honda Prolog, and the Acura ZDX. Those began ramping up the very tail end of last year and have steadily increased in volumes throughout the first quarter. Now into the second quarter, they've taken another step up. That's an important driver of eSYS's backlog. Also, GM's ramp-up of the battery electric trucks driving the BDU revenue, so we have pretty good visibility, at least through the second quarter, of how many of those are going to be produced. On the seating side, the BMW 5 Series and i5 is launching as anticipated. The other programs in the seating backlog are performing consistent with what we expected. maybe modest change that we've seen, which has an impact on both business segments, is the timing and volume associated with the Volvo EX90 launch. I think they've talked about that publicly. There's some software challenges or other issues that they're working through that may impact the volumes on that platform. But as we looked at the backlog combined with our production assumptions on existing platforms, we felt very comfortable maintaining the midpoint of our full year guidance overall.
spk05: Got it. That's super helpful. And then just an update on two pieces in the guide. I think you had embedded a transactional FX headwind to $70 million. Just curious what your assessment is there with the first quarter behind us. And then looking at Lear's commodities and net performance bucket combined, which totaled almost $30 million positive in the quarter. Can you just strip out commodities within that and what's assumed for the full year on commodities? Thanks.
spk08: Yeah, so in terms of transactional effects, there's been really no change in our full year guidance or full year assumption. What we're seeing unfold here in the first quarter into the second quarter is consistent with what we guided to, and so our hedge program is working as anticipated, and the impact is still in that $75 million range for the full year. In terms of commodities, we expect a modest positive impact for the full year, which is more in seeding than in these systems. The net performance that we're guiding to for the full year is really driven in these systems more by what's happening on the operations side. We talked a lot about restructuring and how that's impacting seeding, but also in these systems we're seeing the benefit of our restructuring savings. some improvements in our North America wire business. We have a lot of launch activity, so as the year progresses, we expect to see meaningful improvements in operating costs in that subsegment of these systems as well. That's a key driver or enabler of the net performance we see in these systems. We really see strong performance across the board in these systems. I think that was on full display. during the first quarter, and we expect more of the same as the year progresses.
spk05: Sure. Thanks.
spk08: You're welcome.
spk11: Our next question comes from Chris McNally from Evercore. Please go ahead with your question.
spk10: Thanks so much, Tim. I wanted to zoom out and maybe just do a little bit more of a high-level question, particularly around e-systems and electrical architecture. We've definitely been receiving lots of investor questions around sort of new zonal architectures, if you look at VW, you know, working with Xpeng in China, and just a feel that China may be moving to sort of zonal architectures quicker than expected. I know you can't talk about specific customers, specific programs, but would love to just have you opine on, you know, the content opportunity for Liur, particularly in China, in some of these new electrical architecture systems. Are they being done more in-house? you know, is there opportunity for sort of, you know, next-gen technology from Lear itself? Because it seems like every couple of years, we always have this discussion around, you know, will wiring and traditional legacy tier ones get priced out of new architectures? And it doesn't seem to play out. So we just wanted to give you guys the floor to talk about, you know, what we see in China over the next couple of years.
spk07: Yeah, I'm going to, Carl Esposito's here. I'm going to let him kind of field that question.
spk01: We're actually working on three zonal architecture programs already with a number of customers from a technology and architecture perspective outside of China. I think that we'll see some of those architectures migrate into China and some domestic development. Our teams are on the ground there communicating with customers to see where there are business opportunities for us. We're fully participating in that shift to zonal architectures. We talked about each customer is going to move at a different pace. and those new architectures are going to migrate at different levels of integration. We're participating in that part of the market.
spk07: I think if there's any trends, picking up from some of the trends that we saw in seeding, particularly with the Chinese, the domestic OEMs, is that initially there may be some insourcing or design engineering work that's done in-house, but the trend is that it has moved out. particularly with seeding, what we saw was our innovation technology really resonated well with the domestics on the ground. They're one of the fastest growing seed of high premium seeding within China. I think we're seeing that very similar in these systems. Initially, there's technology moves that may occur outside of China, but then will quickly be replicated or moved to China. And I think we're going to see a very similar trend. And we're already picking up additional quotes within China on some of that technology innovation.
spk08: The Chinese domestic kind of core of the eSystems business is really with Geely and their family of brands, Volvo, Polestar, Lincoln Co., et cetera, FAW, and Great Wall, and SAIC maybe to a lesser extent. And so we haven't seen that change in that customer group. So that's really where we have the most exposure. We don't have business with Xiaoping, so we're not involved in that architecture change specifically.
spk10: And if I could just do a follow-up, because it's a great point that we hear often, whether it be seats, airbags, ADOTs, that there's often this two-stage kind of application of Chinese growth where there is a lot done. in-house but when they sort of either scale or go to export markets that they're using more western suppliers and is that an issue of of quality or some just that they basically learn that to scale there's some components that they really should not be working on internal and and they can give it to the western suppliers who are doing this globally because your comments on europe being ported over to to china is one that we hear across multiple kind of advanced components
spk07: Yeah, I think it's a combination, you know, and it depends on the customer. You know, there's particular customers reporting right now in Europe that are moving to Eastern Europe that are experienced on the ground. We have tremendous knowledge with labor, manufacturing, infrastructure we have in place. And then you have the technology side. When I talk about the seeding, we've done an excellent job of growing with the domestics and seeing opportunities continue to expand around technology and innovation. And when I talk about modular seating or I talk about the technology that we're able to bring within the components, we are one of the largest, if not the largest premium seat supplier to the domestics in China. So we're in a very good position there. So I think it depends on the application. It depends on the location of where they're moving. But for a lot of reasons, just our capabilities and knowledge on the ground in the region are looking to expand. but also our product and innovation within our manufacturing plants are very helpful for them.
spk08: Just to kind of add to Ray's point there, and I think the evidence that it's partially a technology motivation by the customers, if you look at the business we're winning, with BYD, for example, it's on the higher end. We've just won some additional business on their Denza brand, which is a higher end brand. We're launching with Mi Auto, Xiaomi's auto arm, the SU-7, which is a fantastic product, but they came to us because of our technology and innovation capabilities, NIO and the ES8 as well. So we're seeing not just when the Chinese domestics move outside of China, but even within China on their higher end products, they're gravitating to us specifically. I'm not sure if it's to Western suppliers generally, but to Lear specifically because of our unique capabilities in seeding.
spk07: And I think just to add to that, the speed to market. I mean, how fast they're moving and having that innovation readily available both on the automation side within the manufacturing plants, but in the product side. So having that that knowledge and capability that's readily available is very important to them.
spk10: Great. Thanks so much.
spk07: Thank you.
spk11: And our final question today comes from Dan Levy from Barclays. Please go ahead with your question.
spk04: Hi. Trevor Young on for Dan today. Appreciate you taking the call, taking the questions. First, I wanted to ask about seeding, particularly around the mixed impacts on 1Q. Looks like you called out negative platform mix across pretty much every region. And the $144 million volume in mixed headwind you included in the 1Q bridge, it looks pretty substantial versus the 2024 bridge you set up for the full year in January. So I assume you're expecting mixed headwinds to soften throughout the year. Is there anything driving these mix, offsetting these mixed headwinds beyond just easier comps?
spk08: Yeah, you know, North America is where we saw this was most pronounced, and it's a combination of mix and the backlog. So, you know, backlog is a combination of programs rolling off that either built out or we lost and new business rolling on. So, for example, in the first quarter, we saw the effects of the Solantis programs from Brampton, you know, the 300, the Charger, the Challenger roll off. We also had an unexpected reduction in the Audi Q5 volumes. They had a strike in their assembly plant that went on for four or five weeks. Those two taken together were about $100 million impact on revenue, and so we had negative growth over market in North America and seeing what would have been positive absent those two items. As we look at the balance of the year, we do expect growth over market to improve. Pretty significantly for the full year in seeding, we see it at about three points of growth over market from flat in the first quarter. The biggest driver of that is going to be the backlog as it scales up throughout the year, and then sort of the non-recurrence of that unusual item with Audie on the Q5 where they lost a lot of volume in the first quarter, down for almost a third of the quarter.
spk04: That's very helpful. Thank you. And then as a follow-up, just wanted to ask if you could describe the smoothness and or efficiency of customer production in 1Q relative to recent quarters beyond the impacts of the strike. And then just how you're thinking about your expectation assumed in the guide for production smoothness as we move throughout the year.
spk08: Yeah, it's definitely improved from a year ago. And we saw steady improvements throughout last year. And we're seeing that continue into the first part of this year. We're through four months now, and we're definitely seeing an improvement in the stability of production globally. That's not to say there aren't going to be one-off issues. There have been some disruptions with a handful of customers for a variety of reasons, but it's less impactful than what we saw last year and certainly two years ago.
spk04: That's helpful. Thank you.
spk08: You're welcome. Thank you. Okay. Okay. Do you want to go ahead and lay out this? Yeah, I think that's the end of the formal presentation. It's probably just Lear employees that are still on the call. We want to take a second here to congratulate Ed Lohenfeld on his retirement. This is his last week at Lear after a successful 20-year career here in Treasury and IR and HR. He's done a little bit of everything for us. He's been an important part of the team, important part of the finance organization, and great support to me personally in the role, and I wish him all the best.
spk07: Ed, you've left Lear in a better place. Your work has been outstanding. I've enjoyed working with you. I want to thank you for all your years of service here at Lear. It's been great knowing you, and I wish you all the luck in your new retirement life.
spk06: Thank you very much. I appreciate it. Lear's been a great place to work, and I see great things ahead.
spk08: Fortunately, we have great depth in our finance organization, and so we have two people. Ed's shoes are so big, it took two to fill them. We've got Tim Brumbaugh, who will be the primary interface with investors, taking over for Ed, and Marianne Wieterschein, who's our treasurer, will have overall responsibility for both Treasury and the IR function. So congratulations to both of you.
spk07: Yeah, congratulations, guys. Okay, thanks. Lear team, thank you very much. Good quarter. Looking forward to continuing our success. Thank you.
spk11: Ladies and gentlemen, that does conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.
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