Lear Corporation

Good morning, everyone, and welcome to the Lear Corporation fourth quarter and full year 2024 earnings conference call. All participants will be in a listen-only mode. If you need assistance, please say no to 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 Tim Brumbach. Vice President, Investor Relations. Please go ahead.

Thanks, Jamie. Good morning, everyone. And thank you for joining us for Lear's fourth quarter and full year 2024 earnings call. Presenting today are Ray Scott, Lear President and CEO, and Jason Cardew, Senior Vice President and CFO. Other members of Lear's senior management team have also joined us on the call. Following prepared remarks, we will open the call for Q&A. You can find a copy of the presentation that accompanies these remarks at ir.lear.com. Before Ray begins, I'd like to take this opportunity to remind you that as we conduct this call, we will be making forward-looking statements to assist you in understanding LEAR's expectations for the future. As detailed in our Safe Harbor Statement on slide two, our actual results could differ materially from these forward-looking statements due to many factors discussed in our latest 10Q and other periodic reports. I also want to remind you that during today's presentation, we will refer to non-GAAP financial metrics. You are directed to the slides in the appendix of our presentation for the reconciliation of non-GAAP items to the most directly comparable GAAP measures. The agenda for today's call is on slide three. Ray will review highlights from the year and provide a business update. Jason will then review our fourth quarter and full year financial results and provide our outlook for 2025. 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, Tim. Please turn to slide five. which highlights key financial metrics for the fourth quarter full year 2024. Lear generated $23.3 billion of revenue in 2024. Core operating earnings were $1.1 billion, or 4.7% of net sales for the year. Adjusted earnings per share was $12.62, an increase of 5% from last year. driven by the benefit of our share repurchase program and higher earnings. Operating cash flow was $1.1 million and free cash flow was $561 million in 2024. Slide six highlights the key financial and strategic initiatives we delivered on in 2024. As a reminder, we have four strategic priorities. One, innovation. Two, building on our automation and digitalization advantage through Idea by Lear. And three, improving our market share with growing customers. And four, delivering financial performance for our shareholders. Our execution on these key priorities enabled us to generate strong free cash flow conversion, meeting our target of 80% for the year, driven by our operating performance and inventory management. This allowed us to repurchase $400 million worth of shares. surpassing our $325 million target while maintaining our dividend. The restructuring and efficiency plans we implemented helped us reduce our global headcount by 15,000. Our headcount was reduced by 9% in seeding and 8% in these systems. These reductions exceeded the targets for both segments we laid out earlier in the year. We grew adjusted earnings per share for the fourth consecutive year. of 5% year-over-year. Our total company revenue outperformed the market by 2 percentage points. Sales in both segments beat the industry, with eSystems outperforming by 6 percentage points. While consolidated seeding outgrowth was less than 1 percentage point, it was 2 percentage points, including growth through our non-consolidated joint ventures. Additionally, we improved eSystems margins for the second consecutive year to over 5%. We clearly have more work to do, but we are executing our strategic and operational initiatives to drive margin improvements. Our growth with Chinese OEMs has been significant. We launched our seats on the Xiaomi Su7 and won new awards with BYD, Geely, and other Chinese domestic OEMs in seating, as well as Chang'an and Dongfeng in both seating in these systems. In these systems, we also won an award for a Geely program in Europe. displacing the current Chinese supplier who produces the same components for the local market. In terms of innovation, we introduced Idea by Lear and acquired WIP Automation to enhance our capabilities in automation and artificial intelligence, investing in these areas with proven returns. We recently announced the acquisition of StoneShield Engineering, which specializes in the development of automation technology for wire harness application. StoneShield's capabilities will further improve our efficiency and operational excellence in our wire harness assembly business, which is our most labor-intensive manufacturing process. We launched the industry-first ComfortFlex module and secured 19 contracts representing annual revenues of approximately $135 million. We validated the ComfortMax seat with Ford Motor Company, opening new growth opportunities. We recently received approval from General Motors to incorporate Lear's innovative Comfort Max seat solution into their midsize trucks. Through our partnership with GM, we are integrating thermal comfort components into Lear's trim covers in a modular solution to enhance occupant comfort by bringing the seat heat closer to the occupant while streamlining the manufacturing process. This will be the first Comfort Max seat application to enter the market with a scheduled launch mid-year 2025. Finally, we won our first program award for Bentley for our IN2 Health and Wellness Award in Software Technology. This is the first vehicle award from the agreement we announced during our seating product day in June of 2023, and we expect future vehicle awards and additional IN2 applications. Slide 7 highlights the actions we are taking to improve margins and cash flow generation in both business segments. In 2025, we are seeing incremental savings from our strategic actions we have been executing over the last few years. We are continuing to improve efficiency in our wire plants and are benefiting from lower launch and engineering costs. Although we are investing in automation, our capital efficiency from in-house capabilities and reuse allows us to maintain our CapEx spend below our targeted 3% of revenue. We are seeing the benefits from automation investments we have been making and expect approximately $75 million of cost savings in 2025, growing to an annualized savings of $150 million. We continue to optimize our capacity and move facilities to lower cost countries to mitigate wage inflation. and implement capital and automation actions in our new facilities. In 2024, we closed or sold 13 facilities, reducing our total facility count by 4% during a year when industry production was down 1%. This year, we are in the process of selling or closing an additional five facilities, primarily in Europe where we see the most excess capacity. As these savings are realized through the year, we expect operational margins to improve and target to exit 2025 with approximately a 5% run rate for the total company. We are investing in areas with proven returns, such as automation and efficiency through IDEA by Lear, and we'll continue with our capacity optimization strategy. We continue to grow with Chinese domestic automakers and are excited to see additional progress on potential new growth opportunities with Japanese automakers. The awarded programs for Comfort Flex and our Comfort Max Seed are starting to launch. The Conquest Awards we are pursuing will drive continued market share gains in both seeding and these systems. Our product and process innovations will help us win these programs as our customers are looking for suppliers that can deliver components that meet their quality and reliability metrics while delivering innovative products at a competitive cost. In the long term, our lower return non-core electronic products will build out. And as the next generation replacement programs launch in our core business, their pricing will fully reflect current economics, which has weighed on margins for the last couple of years. The combined effects of these actions will enable us to grow faster than the market while improving margins and cash flow generation, allowing us to continue to return capital to our shareholders. Okay, moving to slide eight. We highlight the sustainable cost advantage we have created through our product and process innovations in seating. Our Comfort Flex and Comfort Max Seat by Lear solutions can drive a 5% to 20% thermal comfort cost improvement by reducing components, weight, and complexity, while also enabling us to remove assembly labor from our just-in-time facilities. The savings potential is dependent on the scale of the complexity of the existing system, The systems with more components will result in higher potential savings. For example, there is greater opportunity for savings in a luxury three-row SUV with lumbar vent and massage systems compared to a mid-market vehicle that only has heater mats. Process improvements driven by our IDEA initiatives are estimated to reduce costs for the additional value-added content by approximately 10% to 20%. We expanded our FIGORA capabilities into all of our leather facilities, driving better utilization. Our rollout of our LearView defect detection and finesse operations, as well as designing a product to leverage our automation capabilities, is expanding our competitive advantage in seating. Product innovation and process improvements have allowed us to reduce seating costs for new programs by 200 to over 500 basis points. This durable cost advantage will allow us to increase our industry-leading seat margins and continue to separate ourselves from our competitors. And when combined with innovative designs that drive better efficiency and time dispensation, we're able to provide a better value proposition to our customers. Slide 9 provides an update on Lear's growth with Chinese domestic automakers. Lear has 30 years of automotive experience in China. Over that time, Lear has strengthened its local presence, built strong relationships with key customers, and has become a clear leader in luxury seating. In 2025, we have several launches with BYD, Geely, Xiaopeng, Chengon, Dongfang, and Neal. We also continue to see growth with additional sourcing opportunities with Xiaomi. The portion of our total revenue from Chinese domestic automakers grew from about 20% three years ago to approximately 33% in 2024, and increasing to more than 37% in 2025. With our current backlog and the new business opportunities we are pursuing, we expect 50% of our revenue in China to be from Chinese domestic automakers by 2027. China continues to be an important market for Lear and our relationships with key domestic automakers is driving consistent growth. Now please turn to slide 10, which provides details on the changes to our 2024 to 2026 sales backlog since it was originally announced last February. As a reminder, our sales backlog includes awarded programs net of any lost business and programs rolling off. It excludes pursued business net new business in our non-consolidated joint ventures and the roll off of the discontinued product lines in these systems. We typically provide an update on our sales backlog for the next three years at this time. However, we have limited visibility into 2027 due to the rapidly evolving industry environment and customer production plans. Our customers are reassessing the product and powertrain strategies due to the changes in customer demand and potential changes in regulations. which has led to a delay in new program sourcing activities and awards. As OEMs reassessed their powertrain strategies in 2024, they made significant cuts to EV production volumes, delayed EV launches, and canceled several programs. Throughout the course of the year, our 2024 backlog declined due to lower-than-expected volumes on programs including the Volvo EX90, Polestar 3, BMW EVs and several GM EVs, partially offset by stronger than expected volume on the Xiaomi Su-7 and the new vehicles for LEAP motor. The pace of the sourcing activity slowed significantly in 2024, resulting in a buildup of porting activity into 2025, including several large conquest opportunities in both segments. In 2025, we expect approximately $230 million of net new business compared to the $800 million we had expected when we provided our last backlog update at the start of 2024. The reduction is primarily driven by lower production assumptions for various vehicles, including the Ram Charger, Volvo EX90, the Polestar 3, and several GM EVs, as well as the launch delay of the Ram Rev. The decrease in our 2025 backlog is partially offset by an increase in our 2026 backlog from $800 million to approximately $1.1 billion. Several ICE programs that were expected to roll off by 2026 have been extended, including the Lincoln Aviator. In addition, new business awards with Chang'an, Leap Motors, and others are launching in 2026. Some programs that had been scheduled to launch in 2024 or 2025 are now expected to launch in 2026, such as the RAM-REV. We provided an overview of key program launches for 2025 for both segments in the appendix. The 2024 to 2026 sales backlog at our non-consolidated joint ventures increased by $100 million, From our prior update to $750 million, our non-consolidated joint ventures continue to win new business, particularly with Chinese domestic OEMs. BYD remains a pivotal customer, representing approximately 50% of our non-consolidated backlog. We are exploring options to consolidate selective seeding joint ventures, which also would increase our consolidated backlog. We anticipate the new program sourcing activity that was delayed in 2024 will resume in the coming months, and will result in increase to our backlog for 2027 and beyond. We expect to provide an update on the future three-year backlog later this year in 2025. Slide 11 outlines the key metrics investors can use to track our progress towards expanding margins and generating long-term revenue growth. For seeding, we have about $3 billion worth of conquest opportunities that we expect to quote throughout the year. And in these systems, we are pursuing two of our largest conquest opportunities in our history. We expect our customers to complete their award activity over the course of the year or early 2026, and we'll provide updates on key awards as the sourcing process is completed. We continue to see significant interest from our customers for innovative modular seed products. These opportunities along with continued growth with our core thermal comfort products are driving revenues from $630 million in 2024 to our target of $1 billion by 2027. Our pipeline of new business with Chinese domestic automakers is strong and growing. We will continue to give updates on growth and new awards with key customers, both in China and globally. We will also update our progress on the key metrics that will drive margin improvement. The investments we are making in idea and automation projects are expected to generate over $75 million of savings this year, growing to $150 million of annualized savings. The restructuring investments we are making will drive an additional $55 million of savings in 2025. The actions we are taking will continue to improve efficiency in our operations. In 2024, we were able to reduce headcount by 15,000 and are targeting a very similar reduction in 2025, allowing us to lower labor costs throughout our operations. You will see the benefits from these actions come through in the net performance we report on a quarterly basis. In 2024, we delivered 30 basis points of net performance in seeding, and 50 basis points of net performance improvement in these systems. In 2025, we expect to accelerate our positive net performance and deliver about 40 basis points in seeding and about 80 basis points of net performance improvement in these systems. Demonstrating strong performance on these metrics will put us on a clear path for sustained growth and improved margins. Margins for both segments are expected to improve throughout the year, and we expect the underlying core operating margin run rate to improve to approximately 5% for the total company as we exit 2025. Our focus is to continue to convert at least 80% of our adjusted net income to free cash flow, allowing us to continue returning capital to our shareholders through our repurchase program. The strong operating performance combined with our share repurchase will continue to drive earnings per share growth based on our outlook. EPS is on track to grow on average 19% per year from 2020 through 2025. Now I'd like to turn the call over to Jason for the financial review.