This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

Lear Corporation
7/25/2025
Good morning, everyone, and welcome to the Lear Corporation's second quarter 2025 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please see a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note that today's event is being recorded. At this time, I'd like to turn the floor over to Tim Brumbaugh, Vice President, Investor Relations. Please go ahead.
Thanks, Jamie. Good morning, everyone, and thank you for joining us for Lear's second quarter 2025 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.leer.com. Before Ray begins, I'd like to take this opportunity to remind you that as we conduct this call, we'll be making forward-looking statements to assist you in understanding LEER's expectations for the future. As detailed in our state harbor statement on slide two, our actual results could differ materially from these forward-looking statements due to many factors discussed in our latest 10-K 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 second quarter and provide a business update. Jason will then review our financial results and provide an update on the full year guidance. 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 second quarter of 2025. They delivered $6 billion of revenue in the second quarter. Core operating earnings were $292 million, and our total company operating margin was 4.8%. Adjusted earnings per share was $3.47. Our operating cash flow was $296 million in the quarter, and our second quarter financial performance was generally in line with the second quarter of 2024 for all of our key financial metrics. Slide six summarizes key financial and business highlights from the quarter. As a reminder, our strategic priorities continue to be extending our global leadership position in seeding, expanding margins in these systems, growing our competitive advantage and operational excellence through IDEA by Lear, and supporting sustainable value creation with disciplined capital allocation. The momentum of positive net performance we delivered to start the year continued to the second quarter. contributing 45 basis points to seeding and 70 basis points to each system's margins. Efficiency improvements and savings from our investments in restructuring and automation are driving durable operating performance in both segments. Through the first half of the year, we delivered 85 basis points of net performance in seeding and 110 basis points in each systems. Although macro uncertainty remains, our confidence in our business enables us to to restore our full year guidance. Our strong operating performance is expected to continue through the second half. As a result, we are increasing our full year net performance outlook by approximately $25 million to more than $150 million. Our strong free cash flow in the quarter and confidence in our long-term outlook allowed us to reinstate our share repurchase plan. We repurchased $25 million of shares in the quarter. and $50 million in the first half, while maintaining our dividend of 77 cents per share. Yesterday, we completed the refinancing of our $2 billion revolver, extending its maturity through July of 2030, further strengthening our liquidity position. The last two years, we have partnered with Palantir to develop real-time data analytics and streamlining our manufacturing administrative processes. We extended our agreement for a long-term partnership to continue to enhancing our digital and operational capabilities, which are driving efficiency gains in our manufacturing facilities and administrative functions. We continue to win new business in both segments. In seeding, we won a key conquest program in Asia with BMW, and we won key conquest awards in North America for seed components on the Ford 150, F-150 and F-250 pickup trucks. Our modularity strategy continues to drive new business. In the quarter, we won two Comfort Flex and one Comfort Max seat award, including a key program with a luxury EV automaker, combining heat, ventilation, and pneumatic lumbar, and massaged into the surface materials. We now have 24 total awards for ComfortFlex, FlexAir, and ComfortMax seat applications that will generate over $150 million of average annual revenue. In China, we won several awards with domestic Chinese automakers, such as FAW, Leap Motor, and Xiaoping. In these systems, we continue to win new business, including key conquest wire awards with a large global EV automaker. These programs start later this year, illustrating our ability to quickly launch new business. Our awards in these systems for the year are already approaching $1 billion in annual sales, with several additional opportunities expected to be sourced in the second half of this year. Slide 7 provides an update on the key metrics to track our progress on expanding margins and generating long-term revenue growth. Proceedingly won a conquest award in Asia with BMW and expect to quote additional conquest opportunities in the second half of this year and into 2026. The quote pipeline remains very robust and although the pace of new awards is improving, we continue to see some delays in sourcing as customers reevaluate their plans based on recent changes to trade or regulatory policies. In these systems, over 25% of our year-to-date awards have been for conquest business, including the two key programs for the top global EV automakers during the second quarter. Customer interest in our innovative modular seat products is growing. Three additional awards brings our total to 24 programs for comfort flex, comfort max seats, and flex air products. Our strong relationships with Chinese domestic automakers continue to deliver new program wins. We will supply complete seats for several programs with FAW, Leaf Motor, and Xiaoping in China. The FAW award is the second conquest program with FAW this year. We continue to be selective in our business as we quote different Chinese domestic automakers to ensure we are partnering with customers that have a long-term sustainable future. We're only pursuing high-quality programs that can generate strong risk-adjusted returns in excess of our cost of capital. Investments in IDEA by Lear and our automation projects generated about $30 million of savings in the first half, with benefits expected to compound over the year. Restructuring investments contributed approximately $30 million in savings in the first half, Efficiency improvements in our operations allowed us to reduce our global hourly headcount by 4,400 in the first half, despite an increase in headcount due to the consolidation of our joint venture in China completed in the first quarter. Since the end of 2023, we have reduced our global hourly headcount by nearly 20,000, or 11%. The strong first half performance results on our scorecard metrics are the key enablers to improve margins and drive long-term growth in both segments. Slide 8 provides an overview of our partnership with Palantir. Over the past two and a half years, we have leveraged Palantir's foundry, AIP, and large language models to build robust real-time data management solutions. Adoption has been strong. with more than 11,000 users driving over 175 active use cases across our organization. A key area of impact has been the work on the tariff response. Once new tariffs were enacted, our teams quickly developed a fully automated tariff data management system. This system enabled us to provide our customers with real-time documentation, speeding up the invoicing process while providing insight into our greatest mitigation opportunities. Beyond back office improvements, Foundry has delivered significant value to our manufacturing operations. Foundry supports dynamic line balancing, optimizing throughput and efficiency on the shop floor in our just-in-time seating plans. The platform's multilingual capabilities enabled us to quickly standardize our processes globally. This partnership is complimentary to our acquisitions and the investments in automation we have made over the last several years. We look forward to building on this momentum in the years to come. Most importantly, it is our Lear team members who are driving these innovations and delivering measurable results. We are approaching enterprise-wide adoption and developing institutional knowledge that gives us a first mover advantage in the automotive industry, which will be difficult to replicate. Turning to slide nine, I will provide more detail on our operational and commercial actions driving our strong performance. We have increased our investment in restructuring to accelerate our footprint rationalization actions and reduce costs. We are prioritizing investment opportunities with the shortest payback periods to drive cost savings that will grow over time. As a manufacturing integrator, we are leveraging the key competencies we have built and acquired over the last several years. to expand our automation capabilities through our facilities. By designing and utilizing purpose-built capital, we have developed proprietary solutions at a lower cost that will be difficult for any competitor to replicate. Our automation in the complete seat assembly plans, such as end-of-line testing, finesse, sequencing, and other applications, is driving significant efficiency gains. We are expanding the use of these systems more broadly in our facilities, starting in our highest cost regions. We are excited to open a new industry-first facility that will support the launch of automated ComfortMax seat assembly. We have fully automated the assembly of these modules, ensuring that no one touches the trim cover from the moment it is unpacked until the complete module is ready for shipment. This facility will be located right here in Michigan. In addition to our ComfortMax seat automation, this facility will be used to produce additional U.S. content, including FlexAir, our innovative foam alternative. Our product innovation and process improvements in seating have enabled us to reduce 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. The investments in restructuring and automation contributed approximately $60 million in savings in the first half of this year. And we estimate we will drive an additional $90 million in savings in the second half of this year. Our eSystems team continues to improve efficiencies in our wire plants. June was one of the best efficiency months for North America wire since early 2019 due to our strong focus on execution in those operations over the last several quarters. Commercially, we are renegotiating pricing on existing underachieving programs. For future programs, we're reestablishing contract terms that will help us mitigate downside volume risk going forward. We're implementing stair-step pricing that will ensure strong returns at various volume levels for higher risk programs. Some customers are willing to prepay for capital, especially for some of the vehicle programs that have higher riskier consumer demand profiles. There is being selective about the programs and customers we pursue. We are focused on bidding on programs that will generate higher risk adjusted returns. We continue to build long-term relationships with our customers. Our focus is to pursue and grow business with the highest quality automakers and platforms. Our operational and commercial actions are driving consistent strong net performance and highlight our ability to execute our strategy in any macro environment. These strategic initiatives are enabling us to continue to expand our margins in both segments going forward. Now I'd like to turn the call over to Jason for a financial review.
Thanks, Ray. Slide 11 shows vehicle production key exchange rates for the second quarter. Global production increased 3% compared to the same period last year, but was flat on a sales-weighted basis, driven by lower year-over-year production in North America and Europe. Production volumes declined by 3% in North America and by 2% in Europe, while volumes in China were up 9%. The U.S. dollar weakened against the euro and was flat against the RMB. Turning to slide 12, I will highlight our financial results for the second quarter of 2025. Our sales were flat year over year at $6 billion, excluding the impact of foreign exchange, commodities, tariff recoveries, acquisitions, and divestitures. Sales were down 1%, reflecting lower volumes on LEER platforms and the wind down of discontinued product lines in these systems, partially offset by the addition of new business in both of our business segments. Our operating earnings were $292 million compared to $302 million last year, driven by lower volumes on LEER platforms partially offset by positive net performance and our margin accretive backlog. Adjusted earnings per share were $3.47 as compared to $3.60 a year ago, reflecting lower adjusted net income, partially offset by the benefit of our share repurchase program. Second quarter operating cash flow was $296 million compared to $291 million last year, primarily due to improvements in working capital, partially offset by lower operating earnings. Slide 13 explains the variance in sales and adjusted operating margins for the second quarter in the seeding segment. Sales for the second quarter were $4.5 billion, an increase of 27 million, or 1%, from 2024. Excluding the impact of foreign exchange, commodities, tariff recoveries, acquisitions, and divestitures, sales were down 1%. Due to lower volumes on LEER platforms, including the Jeep Wagoneer, and the impact from the Audi Q5 changeover in North America, and several Mercedes and BMW programs in China, partially offset by the addition of new business. Adjusted earnings were $299 million, down 3 million or 1% from 2024, with adjusted operating margins of 6.7%. Operating margins were slightly lower compared to last year, reflecting lower production on key layer platforms and changes in foreign exchange rates, partially offset by strong net performance in our margin accreted backlog. Slide 14 explains the variance in sales and adjusted operating margins for the second quarter in the e-system segment. Sales for the second quarter were $1.6 billion, a decrease of 8 million, or 1%, from 2024. Excluding the impact of foreign exchange, commodities, tariff recoveries, acquisitions, and divestitures, sales were down 5%. The decline in sales was driven by lower volumes on their platforms, including the Ford Escape in North America, and several Audi and Volkswagen programs in China, as well as the wind down of discontinued product lines, partially offset by the addition of new business. Adjusted earnings were $76 million, or 4.9% of sales, compared to $82 million and 5.3% of sales in 2024. Lower operating margins were driven by the reduction of volumes on key leader platforms and the wind down of discontinued product lines, partially offset by strong net performance, the roll on of our margin accretive backlog, and the impact of foreign exchange. Slide 15 provides an update on our tariff exposure and the actions we are taking to mitigate the risk. As a reminder, our exposure is primarily in two areas, direct exposure, where we are the importer of record into countries with tariffs on components, and indirect exposure to vehicle production that may be disrupted by changes to tariff and trade policies. Since our last earnings call, there have been no meaningful changes to our direct exposure to tariffs. Over 90% of our direct imports from Mexico and Canada comply with USMCA requirements and therefore remain exempt from automotive tariffs. Based on the current tariff policies and volume expectations, our gross direct tariff exposure is approximately $210 million for 2025. Contractual agreements with our customers allowed us to recover substantially all of the $63 million in tariff costs we incurred in the first half of the year. Our full-year financial outlook assumes a continuation of tariff cost recovery agreements through the remainder of the year. There's been a lag in the cash repayment of tariff recoveries from our customers, which reduced our free cash flow in the second quarter. Our revised full-year free cash flow forecast includes a $30 million impact from the lag in payments. Our indirect exposure to potential vehicle production disruptions has moderated somewhat, driven by further clarity in tariff policies and changes to customer production and footprint plans. Our estimated exposure is approximately $1.6 billion for 2025 from vehicles exported to the United States from Mexico and Canada. This is a decline of approximately $200 million, largely due to lower production on customer platforms produced in Mexico and Canada. a portion of which has been offset by higher production in the US. Our exposure to vehicles from Europe exported to the US is about $975 million, of which approximately 37% are from the UK and covered by the trade agreement currently in place. Trade policies continue to evolve and could change our exposure over time. For example, the implementation of tariffs on copper and the increase in rates for steel could impact commodity prices. For copper, we purchase approximately 200 million pounds per year and have index and scrap recovery agreements that are intended to cover approximately 90% of our exposure. For steel, we purchase approximately 3 billion pounds per year. As with copper, approximately 90% of our steel exposure is indexed. As the largest U.S.-based automotive supplier, we continue to have conversations with the administration and other key elected officials to clearly explain how our supply chain has been optimized as well as the rationale for sourcing certain labor-intensive products from Mexico and Honduras. This ultimately ensures our customers can produce and sell vehicles at competitive prices in the U.S. market and globally. Some customers have announced plans to move some production into the U.S. We have the capability to support localized production of complete seats, especially for programs we currently supply, and have available capacity for components such as our modular solutions, foam, and structures. These moves by our customers create an opportunity to support additional volume for vehicles we supply today, as well as win new business. We have taken proactive steps and moved aggressively to minimize our gross exposure. Our focus on automation and investments in digital tools such as Foundry support the timely commercial recovery of tariff costs from our customers. While tariffs are impacting the entire automotive industry, Lear has taken a proactive approach to reduce the direct and indirect impact of tariffs through innovative solutions. Turning now to slide 16. On a first quarter earnings call, we withdrew our 2025 outlook due to significant uncertainty caused by the ongoing international trade negotiations. Over the last few months, industry conditions have somewhat stabilized, allowing us to restore our full-year 2025 guidance. Slide 16 provides global vehicle production volume and currency assumptions that form the basis of our full-year outlook. We have updated our production assumptions, which are based 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 flat compared to 2024, or down 2% on a linear sales-weighted basis, driven primarily by lower volumes in our two largest markets, North America and Europe. From a currency perspective, our 2025 outlook assumes an average Euro exchange rate of $1.11 per Euro, reflecting the weakening U.S. dollar and an average Chinese RMB exchange rate of 7.23 RMB to the dollar. Slide 17 provides detail on our outlook for 2025. Key changes to the midpoint of our guidance include the following. Our revenue is now expected to be approximately $22.8 billion, which is 2% higher than our previous guidance, driven by favorable foreign exchange, tariff recoveries, and the impact of the consolidation of a seeding joint venture in China, partially offset by the impact of lower production on several of their platforms. Core operating earnings are expected to be approximately $1.025 billion or $20 billion lower than our previous guidance driven by the impact of lower volume partially offset by favorable foreign exchange and continued improvements in our strong operating performance. We are increasing our outlook for restructuring costs by $40 million to accelerate our footprint rationalization actions and reduce costs. At the same time, we are lowering our outlook for capital spending by $35 million. Operating cash flow is expected to be in the range of $1 to $1.1 billion, and our free cash flow is expected to be $470 million at the midpoint of our guidance. Our free cash flow outlook includes $30 million of expected cash tariff recovery timing lag into 2026. We have included a detailed walk to the midpoint of our updated guidance from our prior guidance in the appendix. Slide 18 compares our 2024 actual results to the midpoint of our 2025 outlook. Year over year, revenues expected to decline by $536 million, primarily due to the impact of lower production volumes on our programs, as well as the divestiture of a non-core seeding operation, partially offset by the addition of new business in both segments, tariff recoveries, and the impact of favorable foreign exchange. The midpoint of our core operating earnings outlook is expected to be $1.025 billion with operating margins of 4.5%, reflecting lower volumes on existing leader platforms, partially offset by continued strong net performance and our margin accretive backlog. We expect net performance to contribute 60 basis points of margin improvement in 2025, up $25 million from our prior outlook to over $150 million. This reflects the positive momentum in both our automation investments and restructuring actions. We've included detailed walks to the midpoint of our guidance for seeding, anti-systems, and the appendix. Moving to slide 19, we highlight our balanced capital allocation strategy. Yesterday, we successfully completed the refinancing of our $2 billion revolver, extending its maturity from 2027 to 2030. We have a strong balance sheet and liquidity profile, which is a significant competitive advantage for us in today's uncertain environment. We do not have any near-term outstanding debt maturities. Our earliest bond maturity is in 2027, and our debt structure has a weighted average life of approximately 12 years. Our cost of debt is low, averaging approximately 4%. In addition, we have $2.9 billion of available liquidity. Our capital allocation priorities remain consistent. We're focused on generating strong cash flow, investing in the core business to drive profitable growth, and returning excess cash to shareholders. After a brief pause in share repurchase activity, we reinstated our repurchase program in June. During the second quarter, we repurchased $25 million worth of shares, bringing total repurchases for the first half of the year to $50 million. For the full year, We plan to repurchase $250 million worth of stock with additional repurchase opportunities depending on the level of free cash flow generation. Now I'll turn it back to Ray for some closing thoughts.
Thanks, Jason. Please turn to slide 21. Our first half results illustrate our continued resilience in a volatile industry environment. Our strong relationships with our customers have been key to offsetting the impact of tariffs. We are focused on executing our strategic initiatives to improve our margin profile. We continue to win new business across our product lines in both segments, despite slower than expected sourcing activity. We have a strong balance sheet with no near-term debt maturities that allows us flexibility in our capital allocation strategy and positions us well to navigate macro uncertainty. Our investments in restructuring and automation are driving strong operating performances. We are expanding our leadership in our operational excellence and improving the cost profile of our businesses, enabling us to generate sustainable margins and strong cash flow. We will remain committed to returning excess cash to our shareholders. And now we'd be happy to take your questions.
Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question, you may press star and then one on your touchtone phones. If you are using a speakerphone, we do ask that you please pick up your 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. We'll pause momentarily to assemble the roster. And our first question today comes from Dan Levy from Barclays. Please go ahead with your question.
Hi, good morning. Thanks for taking the question. I wanted to first start with a question on the outlook as there is a meaningful deceleration in the margins in the second half. And I get it. The majority of that is coming from weaker volume. But the decrementals are a bit higher. Can you just talk about performance, which had been particularly strong in the first half, but maybe isn't contributing the same amount in the second half?
Sure. Yes, as you highlighted, we had a very strong first half in that performance, really, in both business segments. And so the progress we made in the first quarter really continued into the second quarter. And, you know, before I go through kind of that first half, second half, I think it's It's important to highlight that our confidence in our ability to generate margin expansion through that performance really increased based on the results that we experienced in the first half of the year. And, you know, just to really emphasize this, what is effectively happening here now is we're able to offset the full effect of our wage inflation and other economics, as well as our customer contractual price reductions through our normal efficiency programs and commercial negotiations, negotiations with our suppliers and other cost reduction programs like that, which allows the full effect of our idea by Lear of savings in automation and restructuring savings to fall through to the bottom line. And that's generating $150 million of additional earnings here for the full year. Now, in terms of what's going on from the first half to the second half, I think it's important to highlight a couple of points here. First of all, as I mentioned in the first quarter call, we had about 20 basis points in seeding of commercial recovery timing that we had expected to happen later in the year, got pulled into the first quarter. We saw similar phenomena in the second quarter, about 20 basis points as well. So there's about 40 basis points of seedings performance, net performance in the first half of the year. It was sort of re-timed from the second half of the year to the first half of the year. And that was intentional. At the start of the quarter, we weren't sure if we were going to be able to finalize all our recovery agreements on tariffs with our customers. So we were very aggressive in trying to close out these commercial issues. And as it turns out, we were able to both secure nearly full recovery for tariffs in the first half of the year and pull ahead some of these commercial So if you normalize for that, the first half, second half net performance and seeding would be similar. Now in these systems, you may recall last year we talked about some of the efficiency issues and launch issues that we had in our North America water business at the start of the year. And so part of that net performance calculation is what happened in the prior year. So in the first half, we had a weaker first half in eSystems last year. And so the efficiency improvements that we drove in the second half of last year and then continued on into the first half of this year really led to that strong net performance in the first half for eSystems. And in the second half, the comps become a little bit more challenging. So that's kind of another key factor that's driving that. And while we're talking about that sort of comparison year over year, in the third quarter, we had a particularly strong third quarter last year in seeding. And so the net performance that we expect year over year is going to be weighed down in the third quarter of this year as a result of that tough comparison. We had a high level of commercial settlements in the third quarter last year. And in fact, we may end up with slightly negative net performance in seeding in the third quarter. as a result of that. But in terms of the kind of structural underlying drivers of performance, we're increasingly confident in our ability to not just deliver the $150 million this year, but, you know, as you think about 26 and 27, we think we can replicate that, you know, for the next several years based on the pipeline of projects that we have in IDEA by Lear and our restructuring program. You know, we're increasingly confident in our ability to use that as a key lever to improve margins in an uncertain production environment.
And just to be clear, the second half number, which I think in the past you said would be the right sort of exit rate jumping off point for 26, that's probably not correct now? That would probably be too low for the jumping off rate to 26?
Dan, we had talked about the fourth quarter. Our target is to exit at 5% and that that would be a good launching point to model heading into 2026. Because of these commercial actions we've pulled ahead to the first half, that makes that a little bit less helpful in terms of a modeling starting point. I would encourage the analysts and investors to think about our full year margin performance in both businesses as the right launching point for thinking through 2026 as a result of some of those timing differences.
Okay, great. Thank you. Second question is on your awards, and specifically in seeding, if you could double-click on the awards you got from Ford, is that just on the components, or is there any JIT there, and maybe you could just talk broadly about, you know, the modularity. It seems like on GM, you know, someone else is doing the TCS there. So what is the uptake and does reshoring at all change any of the way that, you know, TCS plays into the strategy?
Yeah, Dan, your first question, the component business is a structures business on the F-150, 250. And so it was a good business, a healthy business from a return standpoint, puts us in a good position. We're still in the process of quoting the just-in-time business with Ford Motor Company on the 150-250. That's in process right now. And, you know, obviously we can, you know, the reason we're illustrating a lot of our advantages that we believe we have competitively with efficiency through if it's the digital software development that we've done or The automation is, I think, putting us in a very competitive position at a level that we can still maintain healthy margins. So that is in process right now. The continuation of the thermal comfort components, what's nice about that, I mentioned in my narrative around the ability we're going to have here in Michigan a facility that illustrates the complete modular system being automated. And we have with Ford and with General Motors, and then one of them with General Motors is a mid-cycle implementation that demonstrates our ability to really get efficient on the modular component with thermal comfort systems. And so it's a process. We're still going through it. But I think the ability to scale the onshoring that we're seeing, I think, really adds to the credibility of how we can replicate a very cost-efficient system that can be scaled across multiple programs. And I think the uniqueness, like I mentioned, some of these programs are mid-cycle. So we can disrupt even an awarded program. And if the efficiency is there, and that's exactly what our customers are looking for. They're looking for cost efficiencies that can be generated. So introducing those, getting them validated with the key OEMs has always been our strategy. And we're right where we need to be, I think, over time as we illustrate this automated system through the modular components will only help strengthen our position. And so I feel good where we're at. We've had some nice wins. I mentioned the 24 wins. I think a combination of innovation and a combination of the automation are really playing nice as customers are looking at onshoring and continue to expand capacity needs here in the US. We'll continue to work it. I'm happy in where we're at. I think that the next step of this innovation center that we're putting here in Michigan to demonstrate it for analysts and for investors and for customers is going to really, really, I think, help us propel the growth strategy within the thermal comfort system. Great. Thank you.
Our next question comes from Joe Spock from UBS. Please go ahead with your question.
Thanks. Good morning. Maybe, Ray and Jason, just to go back to some of the performance commentary, I just want to make sure I understand because you're saying now over $150 million for the year. I think you raised that $25 million, but it looks like you've done, by my math, $100 million or so or maybe more in the first half. I just want to confirm that that's sort of correct. Of that $25 million that you raised, is that all in the back half or was some of that already realized maybe in the second quarter?
Yeah, I think that it's a combination. You know, to the extent we've increased our restructuring savings, Joe, that falls mostly in the back half of the year. And in terms of, you know, the, again, just on the math, first half to second half, so we had 100 basis points of net performance in the first half. We had... just 15 basis points of net performance in the second half. But that's 10 in seeding and 40 in these systems. The 10 in seeding, you know, if you were to kind of retime those commercial settlements and rebalance them throughout the year, we would be at 40 to 50 basis points in the second half of the year. The 85 basis points we generate in the first half of the year in seeding would be, you know, 45 basis points. So it's sort of, similar performance first half to second half in seeding after you adjust to those commercial settlements. And so then the real benefit you're seeing hitting that performance for the full year is primarily restructuring savings associated with that additional investment we're making in restructuring.
Okay. And then just to follow up on Dan's questions on some of the F-150 announcement, is that Is that a mid-cycle change, or is that the next generation of the program? And Ray, earlier in the year, when you gave that initial backlog, you did talk about an updated backlog at some point during the year. And I know you mentioned there's been delays in sourcing, but it does also seem like there's been some progress and updates. So I was wondering when we could expect an update to your backlog outlook.
Yeah, the component business that we won with Ford Motor Company is the next generation F-150 and the 250. So we will, I think we're at that point. We talked also about e-systems being a little bit earlier, and we did a great job. We're almost at a billion dollars. I think it's incredible what e-systems has done, and I just want to remind everyone that you know, we're really focused on earning above our cost of capital. So these programs that we're winning in these systems are accretive to the margin. So we're going to have this backlog that will be coming on at an accretive rate. And then in seeding, we talked about there's going to be more significant awards in the second half. And so we're going to get to that point. We're in that process right now. I just mentioned that we're in the quoting process for the 150 and 250 with Ford Motor Company and other companies. OEMs to date. So I think we'll be ready to give an update a little bit more around probably the third quarter, fourth quarter of this year. Okay.
Thank you.
Our next question comes from Mark Delaney from Goldman Sachs. Please go ahead with your question.
Yes. Good morning. Thank you for taking the questions. You can speak a bit more on your volume and sales outlook. The industry production environment has generally improved a little bit year to date, but volume mix and wind downs are a $1.3 billion headwind year over year in your guidance. I think incrementally there's an additional $481 million you're planning on as a headwind from those buckets compared to your last outlook. So could you elaborate more on what Lear is seeing and why it's incrementally more of a headwind?
Yeah, we did see a slight improvement in the second quarter from what we had initially anticipated. And so part of what we've embedded in the guidance is a little bit of caution around what we think our customers are going to do with their production schedules. We've got about a 2% discount to our customer schedules out through the balance of the third quarter into the fourth quarter from what they're suggesting their production will be in And that reflects some uncertainty around the level of imports, some of our European customers importing vehicles into the U.S., particularly in the EU, where they're faced with this 25% tariff. We've also reduced our volume assumption on a couple of programs due to impacts with our customers changing over from one model to the next. So, for example, with Audi on the Q5 model, gone through a change over here in the first half of the year. We ended up lowering our production assumption for the year to reflect that. I think that comes back next year. It's a great platform, long history of success in the marketplace. The others with JLR and Range Rover, Range Rover Sport, we did reduce our volume assumption there. There was some volume loss during the change over there. There was a mid-cycle change that's happening. They're launching some some new versions of the vehicle, a plug-in hybrid, for example. And again, great demand for that program, but we were a bit cautious based on what we've seen recently with volumes there. And so those are kind of the main changes that we made to our volume outlook. We also saw some weakness, which we highlighted in the second quarter, which continues into the full year with the Jeep Wagoneer. And obviously Stellantis has announced a number of initiatives and changes around trying to stabilize sales here in the US market. And we've seen some headwinds in terms of volume on certain of their platforms like the Wagoneer as a result of that. So it's a combination of some weakness that we see in the releases, but also some anticipated weakness that we've embedded in the outlook. And if you look at that sort of high end of our guidance range to the midpoint, that captures that 2% or so that we've discounted our customer schedules by.
Very helpful, Jason. Thanks for that. My other question was around the Conquest Award that you picked up in wiring. Nice to see that come through. Can you help us better understand for that Conquest Award with the EVOEM that you spoke about this morning, How much revenue should we think about as that business ramps either in 2026 or 2027? Thanks.
Yeah, it's about $50 million of additional revenue that will start at the very tail end of this year, and you should see the full effect of that into 2026 and 2027.
Yeah, that was a nice win. That was, like I said, we're focused on returns, and it's a good piece of business, and I think it just goes to – you know, the credibility that we have as far as being competitive and being very efficient in the reputation. So it was a nice second half win for us. But I also, like I said, very, very proud of the team for the nearly $1 billion backlog wins already this year. And so I'm anticipating more, put more pressure on Nick and the team to win more in the second half. And what I like about it is what we're seeing is it's healthy returns for us too.
Thank you.
Thanks, Brad.
Our next question comes from Emmanuel Rossner from Wolf Research. Please go ahead with your question.
Great. Thanks so much. I was hoping to focus on the first half to second half walk. You're providing some really good color on this on slide 27. That's where I wanted to focus on. So honestly, when you look at the way you framed it from first half to the second half, the entire margin drop is basically volume and mix. I mean, yes, we spoke about net performance and stuff, but basically first half to second half, the margin decline is really volume and mix. But a 90 basis point decline in volume and mix, that's like a billion dollar headwind, you know, sequentially to the EBIT. but your volume and mix your revenue assumption is only, you know, going down by like six, $700 million. So it's like 150% decremental on this. So just trying to understand within your assumptions for the second half, um, I understand some caution on some of your customer schedules, but what do these decremental look like and, and, and why are they so high?
I think, um, you know, the, the downward conversion is, is, uh, 19, 20%, something like that. It's pretty much in line with our historical variable margin. So it's, Emmanuel, I'm not quite following the math that you're using there, but on the 670 million reduction in sales, I think it's 130 million lower operating income.
Sorry about the math. Just curious if there's any... It seems like it's all volume-driven very much, and so just curious if... On the decremental side, especially since you're talking about potential EU imports and those are, you know, typically maybe higher margin business, if there's something that is also impacting on the decremental side, first half versus second half?
Yeah, there's nothing really unusual in terms of that conversion. It's pretty much in line. You know, there isn't as much net performance offset there. as you normally would see or what we saw in the first half of the year because we had so much of that commercial negotiation pulled forward into the first half of the year. So overall conversion for the year on volume changes is better than the second half is. And you're exactly right. The margin contraction in the second half is entirely driven by the lower production volume assumption. And some of that's just the normal seasonality, I think, 70% of that $670 million or $475 million of revenue is just your normal seasonal reductions that we see with the summer shutdowns in Europe and, to a lesser extent, downtime in the U.S. that is taken in July. And so it's really the other 30% that we're thinking through and wrestling with as we think about the business next year. And I think there's two things. within that that are sort of unusual. One is what we're seeing with the lower GLR volumes on the Range Rover, Range Rover Sport that's driven by the changeover, and then some lower volume on a handful of programs from Europe that we think are tariff-driven. and we've taken the assumption that those volumes are going to come down somewhat. I'll give you two examples. With the Mercedes GLC, we have a sequential volume reduction there, and the Defender with JLR, so about $100 million of revenue, first half, second half. Some of that, again, is normal seasonality, but the balance of that is we believe our expectation is lower shipments from Europe to the U.S. that are tariff-driven. Now, If the EU and the U.S. finalize their trade negotiations and we end up at 15% instead of 25%, that should come back. And I would expect over time that will come back, especially as you look out to 2026. So there are some definite kind of anomalies in the second half of the year that I think are important to strip out as you're modeling 2026. Those are a couple examples.
Great. Yeah, thanks for the comment. And then my second question was around the updated guidance on the cash flow side. So I think some of the pieces that you've quantified for us was, you know, the lower EBIT guidance, but then also some timing on the tariffs. I think the first piece was 25, then, you know, another 30 million timing. Anything else that's sort of like contributing to the lower outlook on cash flow from operations, uh, versus the, um, you know, versus the initial outlook.
It's essentially earnings. Um, and, and then the tariff assumption with, uh, higher restructuring cash investment of 40 million, mostly offset by lower cap backs of 35 million. So it's, it's mostly, um, earnings and tariff recovery timing. And on that assumption, there's a reasonable chance that we do better than that $30 million. We had to just strike the chalk line and make the call for today, but I'll just give you one example of how that number could improve. Once this credit program is finalized between our customers and the U.S. government, it's very likely that some of our wire harness imports will be tariff-free, duty-free, and some other components within seating will also have that treatment. And so with those imports, instead of having to recover from the customer, you just won't incur the tariff up front. I think we're at least 30, 60 days away from that being finalized, and we're hopeful that a significant portion of our imports are applied to that, that our customers apply the credits to those imports, and we reduce that cash exposure as a result of that And Frank and Nick and their teams are fighting to try and offset the under-recovery of tariffs due to timing of normal payment terms, you know, through other means, whether that's, you know, early tooling recovers or engineering recovers or other commercial settlements. So just it's an assumption, and we wanted to be clear that that assumption is embedded in the guidance for awareness purposes for investors, but we hope to do better than that.
Understood. Thank you.
Our next question comes from James Piccarillo from BMP Paribas. Please go ahead with your question.
Hi, everyone. Just to follow on Mark's question with respect to core sales, the organic comp now runs a point lower versus the prior guy despite unchanged LVP. Can you just share what's assumed for the business wind-down piece within eSystems? Year-to-date, it's $120 million. I believe the original guide had a bet at just $75 million for the full year. So curious what's slated for the second half, and does this headwind completely neutralize for next year?
Thanks. Sure, James. Yeah, we have $146 million now for the full year. So it's still first-half weighted, and that is a little bit worse than what we had previously guided to. So we have... some of our lighting and audio programs and our audio gateway program, but some of those are bouncing out a little more quickly than we had initially anticipated. And in terms of, you know, what that means for future years, we did include some of those figures on our backlog slide on the fourth floor earnings call. But our current thought process here is there's about 150 million that will wind down next year, roughly 200 million in 27. $135 million, $28 million, and then you're down to less than $100 million, and that last $100 million sort of dribbles out over a number of years. So it is a headwind to growth in these systems for the next couple of years in particular, in 2025 through 2027, and then it moderates from there.
Understood. That's helpful. And then my follow-on, are there any updated thoughts on the backlog with respect to the out years, like particularly for the introduction of what 2027 might look like at this point? Thanks.
Yeah, I think we're going to save that for, as Ray said, either later in the year or start of next year, because we want to make sure it captures these programs that we're pursuing currently, particularly in seeding. We've had a nice start to the year in these systems with new business wins, and a pretty significant portion of that is backlog. Most of that falls sort of outside of our normal three-year window. I think it's mainly late 27 into 28, 29. The recent award that we just received with the Global EV OEM does have a 26 benefit, but the others are a little bit later. So we'd like to have more clarity around the longer term growth profile of the company before we go through a full update to the backlog. You know, of course, there are kind of puts and takes that happen throughout the year. And, you know, I will highlight that, you know, one headwind for the backlog for next year is Solantis announcement around their production change on the RAM charger and the RAM rev. That RAM charger was initially slated to launch this year. That got pushed to the middle of next year and the Ram Rev got delayed out another year. So we have the seating on both and then we have the BDU on the Ram Rev. So there is a bit of a reduction to be expected from that. Now, it's also important to point out that we were able to offset that impact for this year with higher backlog on our Chinese domestic OEM business, in particular with Xiaomi on the SU-7 program, which had a fantastic first half of the year. So again, there's going to be puts and takes, but Stellantis did make that announcement after our first quarter earnings call. I think it was on May 15th, and so I just want to make sure that's on everyone's radar screen.
But I do think it's important, and as our customers, and they are, re-evaluating their propulsion systems across hybrid valves and ice, And there has been a delay in some cases of how they're awarding business based on these decisions with policy and some of the changes that we all are aware of. Our backlog right now, quoting pipeline and seeding is near a record high. We're at, what, seven? Seven billion. Seven billion or so. Frankie's really busy quoting a lot of programs. We got a lot right now that we have in front of us that we're very, very focused on. I think we have proven that. And the reason I illustrate to analysts and to investors the investments we've made as a manufacturing integrator. I know a lot of companies talk about, yeah, we're in automation and we're doing digital software. And they may be. But our ability to really drive efficiency at a plant floor level is differentiating us. And so we're optimistic. We still have to get through this quoting process. We have a lot of quotes in front of us. We're very specific on who we're targeting. We obviously like the traditional historical programs that have been successful for a longer period of time. We're being very cautious around the type of programs where we're quoting from a regional perspective. We're lasered in. And why I talk about the timing is there's still some movement within it. You know, they're still looking at different, you know, changes to policy, like I said, or trade, but we're very focused. And I think we have some really good opportunities in front of us. And as those opportunities emerge, we do want to be clear to investors and analysts on the business we win. So when it's appropriate, we will come out and talk a little bit more around the backlog and the success. But I do Keep saying this, I'm very proud of the eSystems team. They really did a nice job in the first half of this year. I guess they had close to a billion dollars of book business. And we still have opportunities in eSystems for the remainder of the year. So Nick's got to get busy on that, and he will. And hopefully we'll be out soon with an update to the backlog. But it's a robust pipeline, that's for sure.
Thank you. Our next question comes from Colin Langan from Wells Fargo. Please go ahead with your question.
Oh, great. Thanks for taking my questions. Maybe just to start, just to clarify the, I think I followed most of it, but the puts and takes and the change from the prior to the current operating income guidance, I think $25 million is performance. It looks like something like $10 million is FX improvement offset by $55 million-ish in sort of lower volume impact. from the prior guide. Is that right? And then if that's right, the 55 seems like a pretty low decremental on the sales decline. Are those the right pieces, I guess?
Yeah, I think you summed it up correctly there. So let's look at my notes here. So from the prior guidance, we're down $475 million due to volume. and about $90 million of OI on that, and that's converting at 19%. And then positive performance is $25. You get the benefit of the seeding consolidation, and then you have a little bit of margin dilution from the tariff recovery. So you have $210 million of revenue with no earnings attached to it. That's the basic bridge, and then FX is $10. you know, converting at about 7%, a little bit stronger in these systems than in seeding.
Got it. And then with the recent trade deal with Japan is sort of a growing view that we might end up at something like 15%. If that's the rate for your business in Honduras, would that be enough of a decline to make it sort of competitive or would you have to consider relocating? Any thoughts or color there?
I think it's 15%, 10%. I mean, those are all good numbers. We're still very, very competitive in Honduras at those rates and still be more competitive in Honduras. And so the footprint would be very efficient at that level.
And Colin, we've had, I think, some very productive conversations with the administration, with Commerce over the last several weeks and they're listening to us and I think they understand and share the same objective we do, which is to have U.S. manufactured vehicles be competitive in the U.S. and on the global stage. And one of the key drivers of that is having components like wire harnesses manufactured in lower cost locations. So we're not going to make any predictions, any bold predictions on removal of harnesses from the annex or when that might happen. But, you know, if logic prevails here, that seems to make a lot of sense to protect the competitiveness of U.S. manufactured vehicles.
Yeah. And so, yeah, to Jason's point, we have had the conversations are going extremely well with the administration and with other senators and congressmen that we're meeting with. And we are starting to see interest. To Jason's point, you know, Remaining competitive here in the U.S. and being able to export is a primary goal, along with workers and other things. But it does help our case and help the fact that we have to remain very cost competitive here in the U.S. around components.
All right. Thanks for taking my questions. Thanks, Scott. Okay. I think that's it.
Go ahead. Okay. Just I think... Thank you for everyone participating in the call today. Just want to thank the Lear team. Outstanding job. First quarter, second quarter, we've got some work to do in the remainder of the year, but really proud of everything we've accomplished from the tariffs to how we've mitigated that challenge to what we're doing operationally. I talk about this operational excellence and automation and what we're doing within our manufacturing plants, the work that was done down in Mexico and improvements around efficiencies. Great job to the team. I appreciate everything you're doing. Let's keep it up in the second half. Thank you.
Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.