Lear Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 27, 2023

Key Takeaways

  • Lear delivered a strong Q1 with sales up 12% to $5.8 billion, core operating earnings up 43% to $263 million, and adjusted EPS rising 54% to $2.78.
  • The acquisition of IGB completes Lear’s vertical integration in thermal comfort systems, adding active cooling, steering wheel heating, and occupant detection sensors alongside Kongsberg’s capabilities.
  • Lear is innovating with fully integrated seat modules—combining ventilation, lumbar, and massage features, plus Flex Air recyclable foam—with 15 development projects on 41 car lines and 100% sourcing control from seven OEMs.
  • Conquest wins accelerated in the quarter, including full-seat awards for the Wagoneer and Grand Wagoneer; Lear has secured over $2 billion in conquest business since 2019 and expects more market share gains.
  • Despite mixed commodity and FX headwinds, Lear kept its full-year outlook unchanged, relying on a modest industry recovery, negotiated cost pass-throughs, and the Lear Forward initiative targeting $50 million in savings.
AI Generated. May Contain Errors.
Earnings Conference Call
Lear Q1 2023
00:00 / 00:00

There are 8 speakers on the call.

Operator

Good morning, everyone, and welcome to the Lear Corporation First Quarter 2023 Earnings Conference Call. All participants will be in a listen only mode. 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.

Operator

Sir, please go ahead.

Speaker 1

Thanks, Jamie. Good morning, everyone, and thank you for joining us for Lear's Q1 2023 earnings call. Presenting today are Ray Scott, Lear President and CEO and Jason Cardew, Senior Vice President and CFO. Other members of Lear's senior management team have also joined us on the call. Following prepared remarks, we will open up the call for Q and A.

Speaker 1

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 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 2, our actual results could differ materially from these forward looking statements due to many factors discussed in our latest 10 Q and other periodic reports. I also want to remind you that during today's presentation, we will refer to non GAAP financial metrics.

Speaker 1

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 3. First, Ray will review highlights from the quarter and provide a business update. Jason will then review our Q1 financial results. Finally, Ray will offer some concluding remarks.

Speaker 1

Following the formal presentation, we would be happy to take your questions. Now, I'd like to invite Ray to begin. Thanks,

Speaker 2

Ed. Now please turn to Slide 5, which highlights key financial metrics for the Q1. They started the year strong, delivering significant increases in both revenue and earnings in the Q1 compared to last year. Sales increased 12 percent to $5,800,000,000 and core operating earnings increased 43% to $263,000,000 Adjusted earnings per share increased 54 percent to $2.78 per share. Slide 6 outlines key highlights from the quarter.

Speaker 2

Both Seating and E Systems had significant growth over market and higher margins as compared to last year. In Seating, we are excited to announce that The Conquest award we mentioned on our last earnings call is for the Wagoneer and Grand Wagoneer. They will be producing complete seats in key thermal components for these vehicles, with production beginning later this year. This Conquest award Is another example of Lear's strong reputation for quality, operational excellence and product execution as we expand our strong relationship partnership with Stellantis. In E Systems, we continue to increase momentum in electrification with additional awards for 2 of our innovative products.

Speaker 2

Stellantis recognized our advanced technical capabilities as the premier supplier of high performance battery disconnect units and selected Lear to supply the BDU for a new electric vehicle. And we continue to increase our InterCell Connect Board backlog with the award of additional volumes from General Motors to support their Altium battery platform. Our customers continue to recognize Lair for innovative technology and quality. For the 6th consecutive year, We are recognized as a Supplier of the Year for General Motors. I'm excited that we completed the acquisition of IGB, which will play a key role in expanding our Thermal Comfort Systems business and increasing our market share and margins in Seating.

Speaker 2

I want to thank everyone who supported this transaction. There was a lot of hard work and significant time spent to close this deal. I couldn't be more proud to welcome the IGB team to the Lear family. Slide 7 provides a business profile of IGB and highlights the benefits of the transaction. IGB brings new technologies to Lear, including active cooling, steering wheel heating and occupant detection sensors.

Speaker 2

This transaction also complements the product capabilities we acquired from Kongsberg and add scale to our growing thermal comfort systems business. IGB has a well balanced customer base consisting of many of the world's largest global OEMs. This acquisition Is the latest and final piece of our comprehensive thermal comfort strategy to extend Lear's leadership as the most vertically integrated automotive seat supplier, increase market share and further strengthen our industry leading margin and return profile. Lear is the only company with this expertise to complete incomplete seats as well as comprehensive thermal comfort systems capabilities. These unique capabilities will drive transformation of the thermal comfort systems market by creating innovative designs that will improve performance, efficiency and comfort while reducing weight and cost.

Speaker 2

On Slide 8, I will walk you through the evolution of our thermal conference systems product strategy. Today, many OEMs design and source each thermal component individually and package them together by layering them on top of each other. Several of these features rely on sub components that are redundant, increasing the number of parts and requiring more space for packaging. The acquisitions of Kongsberg and IGB as well as the work we have done internally over the last 10 years developing into Seating provide a broad based capability to improve this model. At the time, leveraging best practices across Combined organization will improve efficiency and increase flexibility in our manufacturing facilities.

Speaker 2

Following the Kongsberg acquisition, Our team has been working diligently to design more efficient thermal comfort modules by combining common functions across multiple components. For instance, we're developing a system that integrates ventilation with the lumbar and the massage modules. We also are developing innovative solutions to move thermal comfort components closer to the occupant by integrating them directly into the trim covers. This will improve the performance of thermal comfort systems by increasing the speed sensation for the occupant. This also reduces the size of packaging within the seat, which facilitates integration of these features into the rear seats.

Speaker 2

Another innovative product we developed is Flex Air, A foam alternative that is 100% recyclable. Flex air reduces CO2 emissions by up to 50% and mass by up to 20% compared to traditional used in today's applications. These innovations are gaining traction with our customers. We currently have 15 development projects in process on 41 different car lines with 7 OEMs for our various thermal comfort systems. Because our customers recognize the benefit of more efficient thermal comfort systems, they have begun to grant sourcing control of these products to Lear.

Speaker 2

Since Lair is the only JIT supplier with these capabilities, the additional sourcing control is limited just to us. This gives us an advantage in the marketplace and we can provide higher performing and more efficient solutions to our customers. The final phase of our strategy is to combine our component modular solutions with our Flex Air Foam alternative and shrimp cover capabilities. To develop a fully integrated seed module by incorporating all of the thermal comfort components into an efficient modular design, We can drive significant part reduction in mass savings while enhancing the comfort for the occupant. These improvements will further reduce the cost of the thermal comfort system to our customers while increasing the value proposition for Lear Corporation.

Speaker 2

Slide 9 provides a pro form a outlook of our combined thermal comfort portfolio. The addition of the IGB product portfolio gives us strong market position in each of the key thermal comfort the combined TCS business to $550,000,000 We expect this to grow to approximately $800,000,000 by 2027. Revenue growth will come from a combination of industry factors and innovation. The overall thermal comfort market is estimated to grow over 2 percentage points faster than the vehicle production. With improved packaging, better performance and reduced costs, We are confident that the market will grow more quickly as take rates increase and these products proliferate beyond the luxury segment and into the rear seat applications.

Speaker 2

Historically, our customers granted sourcing control for thermal comfort components on about 30% of the JIT programs. Given our increased capabilities, our opportunity to direct this sourcing has grown. 7 major customers have granted us 100 percent sourcing control for future thermal comfort systems. The unique competitive advantage we have developed in thermal comfort systems allows us to provide a better value proposition for our customers, which our competitors cannot match. Longer term, in addition to driving higher market share, we believe that our thermal comfort system strategy has the potential to drive our overall seating profitability above our current 7.5% to 8.5% margin target.

Speaker 2

Turning to Slide 10, I will highlight some key business awards from the Q1. The Conquest win for the Wagoneer and the Grand Wagoneer is a significant program that was included in our 3 year backlog we announced in February. We also won an award to provide seats on a second program launching in late 2024. We estimate that combined revenue for these two programs Could reach approximately $600,000,000 in 20.27. Since 2019, we have won $2,000,000,000 in Conquest Awards.

Speaker 2

It's a big number, Frank.

Speaker 3

Thank you.

Speaker 2

Nice job. Given our strong pipeline of conquest opportunities we are pursuing, We expect this momentum to continue and result in additional market share gains. For each systems, we continue to win awards in electrification as well as for high voltage and low voltage wiring on several EV platforms. The pace of new business wins in E Systems this year is well ahead of where we were last year at this time. Just last week, we were awarded The additional volume awarded by General Motors for the ICB is another example of their confidence in our technical capabilities and increasing the value of our overall program.

Speaker 2

Our expected 2025 revenue on the platform has increased to $50,000,000 to over $100,000,000 We had expected this program to generate annual revenues of approximately $150,000,000 With the added volume, we now see peak revenue reaching $250,000,000 Now I'd like to turn the call over to Jason for the financial review. Thank you, Ray. Slide 12 shows vehicle production and key exchange rates for the Q1. Global production increased 6% compared to the same period last year and was up 8% on a Lear sales weighted basis. Production volumes increased by 10% in North America and by 17% in Europe, while volumes in China were down 8%.

Speaker 2

The dollar strengthened against both the euro and RMB. Slide 13 highlights Lear's growth over market. For the Q1, total company growth over market was 6 percentage points, driven by favorable platform mix and the impact of new business in both segments, with Seating growing 6 points above market and E Systems growing 4 points above market. Growth over market was particularly strong in Europe And in China. In Europe, sales outperformed industry production by 12 points with both business segments benefiting from higher volumes on the Land Rover Range Rover and Defender.

Speaker 2

New programs such as the BMW 7 Series in seating and new wiring and electronics Content on the Volvo XC40 and XC40 Recharge and E Systems contributed to the strong growth in the region as well. In China, growth over market of 8 points resulted from strong production on the Mercedes C Class and E Class in seating in the Volvo XC40 and XC40 Recharge Mini Systems. Our North America business lagged industry growth estimates by 1 percentage point. This is driven by unfavorable platform mix, primarily related to the changeover of the Ford Escape and E Systems, which was partially offset by the benefit of new business. Turning to Slide 14, I will highlight our financial results for the Q1 of 2023.

Speaker 2

Sales increased 12% year over year to $5,800,000,000 Excluding the impact of foreign exchange, commodities and acquisitions, sales were up by 14%, reflecting increased production on key leader platforms and the addition of new business. Core operating earnings were $263,000,000 compared to $184,000,000 last year. The increase in earnings resulted from the impact of higher production on their platforms and the addition of new business, partially offset by the impact from foreign exchange. Adjusted earnings per share improved significantly to $2.78 as compared to $1.80 a year ago. 1st quarter operating cash flow was a use of $36,000,000 Operating cash flow was negatively impacted in the quarter by the timing of customers' receipts as compared to last year and a significant increase in sales late in the quarter.

Speaker 2

Our outlook for full year operating and free cash flow is unchanged. Slide 15 explains the variance in sales and adjusted operating margins in the Seating segment. Sales for the Q1 were $4,500,000,000 an increase of $540,000,000 or 14% from 2022, driven primarily by an increase in volumes on their platforms and our strong backlog. Excluding the impact of commodities, Foreign exchange and acquisitions, sales were up 15%. Core operating earnings improved to $300,000,000 up $83,000,000 or 38% for 2022 with adjusted operating margins of 6.7%.

Speaker 2

The improvement in margins reflected higher volumes on their platforms and an improvement in commodity costs, partially offset by higher engineering spending and launch costs to support our strong new business backlog in recent Conquest awards as well as the impact of foreign exchange and acquisitions. Slide 16 explains the variance in sales and adjusted operating margins in the E Systems segment. Sales for the Q1 were $1,400,000,000 an increase of $97,000,000 or 8% from 2022. Excluding the impact of foreign exchange and commodities, sales were up 12%, driven primarily by higher volumes on key platforms and our new business backlog. Core operating earnings improved to $49,000,000 or 3.5 percent of sales compared to $42,000,000 3.2 percent of sales in 2022.

Speaker 2

The improvement in margins reflected higher volumes on Lear platforms and our margin accretive backlog, partially offset by higher commodity costs, net of customer recovery, The impact of foreign exchange and elevated launch costs. Moving to Slide 17, We highlight our strong balance sheet and liquidity profile, a major competitive advantage for Lear in a rising interest rate environment. The acquisition of IGB will be financed with a 3 year fully prepayable term loan. 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 14 years.

Speaker 2

Our cost of debt is low, averaging approximately 4%. In addition, we have $2,900,000,000 of available liquidity. We remain committed to returning excess cash to our shareholders, having repurchased $25,000,000 worth of stock in the Q1 along with our quarterly dividend. Our current share repurchase authorization has approximately $1,200,000,000 remaining, which allows us to repurchase shares through the end of 2024. Now turning to Slide 18.

Speaker 2

This slide highlights the key factors that will impact our financial outlook. While our Q1 results were strong and industry production volumes are continuing to recover, There is still uncertainty around the pace of the recovery and overall global macro environment. As a result, we are not changing our full year outlook at this time. We expect a modest improvement in industry production levels this year, while remaining well below prior peak levels. We expect a gradual but sustained recovery stretching into 2024 and beyond.

Speaker 2

The outlook for commodity costs is somewhat mixed. While we did see a significant reduction in steel prices late last year, prices in North America have since rebounded. We are seeing some moderation in select chemical commodity prices as well as freight and logistics costs, but also experiencing higher component costs as our supply base contends with higher labor costs. On the positive side, we expect to largely offset the headwinds we're facing through improved operating performance and negotiated sharing agreements with our customers. In addition, we're benefiting from resilient demand on luxury vehicles and other key platforms, as well as our margin accretive backlog.

Speaker 2

As we weigh these risks and opportunities, we continue to take aggressive steps to improve our competitive position and financial performance. We also continue to make significant progress through our Leer Forward initiatives, including aggressive steps to improve capacity utilization and working capital management and remain on track to meet or exceed our $50,000,000 savings target for the year. These performance improvement actions coupled with strategic investments in key products such as thermal comfort systems and high voltage connection systems have positioned both businesses for sustained revenue growth and margin Now I'll turn it back to Ray for some closing thoughts. Thanks, Jason. Please turn to Slide 20.

Speaker 2

The Q1 was a great start to the year. Both business segments saw year over year margin growth with strong growth over market. Our Leer Forward plan continues to yield results. The team has identified and implemented actions that will reduce costs and improve operating cash flow. We continue to win business in both Seating and E Systems and our pipeline of new opportunities is very strong.

Speaker 2

Closing the IGB transaction was the final piece required to solidify our thermal comfort system strategy. With this completed, we are looking forward to giving you a comprehensive update of our Seating business with a particular focus on thermal comfort. On June 27, We'll be hosting a Seating Product Day on the Lear campus in Southfield, Michigan. We look forward to seeing many of you in person. In closing, I want to thank the Lear team for their tireless efforts that resulted in another strong quarter.

Speaker 2

I firmly believe we have the best team in the industry, and I am proud to work with you each and every day. Now we'd be happy to take your questions.

Operator

And ladies and gentlemen, we'll now begin that question and answer session. Our first question comes from John Murphy from Bank of America. Please go ahead

Speaker 4

Good morning, guys. Maybe just ask one simple one first just on schedule stabilization. I'm just wondering if you could Kind of highlight how much they've stabilized in the Q1, how much sort of the disruption cost you last year and what you expect to not reoccur this year?

Speaker 2

Look, actually this year, I always say everything is all relative. This year is a lot better year than last year. We talked about just stable production from our customers. We're getting a lot better clarity around if there is going to be downtime so that we can respond a lot quicker in respect to what we can do internally from an efficiency standpoint. So much more clarity around the production environment, although there's been Still some short notice, but much better than it was last year.

Speaker 2

As far as the financials, Frank

Speaker 3

Jason, you can go through that.

Speaker 2

Yes, really it was we didn't see a meaningful premium cost in the quarter. It did improve versus the prior year. We've seen a gradual improvement, John, as you look at sort of first half of last year to the second half of last year and then again into the Q1. As Ray mentioned, we're still incurring some premium costs. We're still seeing some stop start production from our customers, Some challenges with some of the new programs that our customers are changing over and some challenges with our supply base, which weighs a little bit on the conversion rates you see with Zai'am and the backlog, but certainly less meaningful than what we

Speaker 4

Okay. And then just a second question on IGB in the acquisition there. Is there a greater opportunity on content with EVs as you're looking at sort of the in seat HVAC systems essentially What you have on the ICE? And I think you also I just want to follow-up on something I think you mentioned that you said CD margins, Which are targeted 7.5% to 8.5% eventually. There could be upside to that 7.5% to 8.5% because of IGB.

Speaker 4

I just Wanted to kind of clarify that statement as well or confirm it.

Speaker 2

Yes. John, I'm glad you asked the question. 1, I couldn't be more excited. This is a big day for Lear Corporation. This has been 10 years in the works.

Speaker 2

And going back, we're just discussing amongst the team here before the call. At 10 years, we looked at the inefficiencies within the seat and when we talk about these priceable features and content within the seat, how they could completely revamped and redesigned for packaging and efficiency and cost and mass and weight. And so All those elements are particularly of interest to our customers on EV vehicles. 1, just the draw of and use of the battery consumption, the better use of the combination of HVAC and seat for the occupant within the seat. The packaging that we're going to able to proliferate these, I think, across multiple different Seat sets and I think equally as important, not just luxury vehicles, but be able to use them in more mid vehicle ranges because we're going to have a much more efficient system.

Speaker 2

So short term, we're looking at this thing. It is just we have this in 3 phases. 1 is Just doing a really good job with our purchasing leverage, the ability to scale things properly with our manufacturing facilities on the Traditional parts and they're both great, great companies and they complete what we're really focused on. We also protect ourselves with almost 400 patents on the new design that I was referring to as far as we get into these modular components. And we believe that that's going to allow us to grow.

Speaker 2

And those components that we're referring to are accretive In respect to margins, so our goal is to offer our customers a great value proposition, but also more importantly to us is expand our margin. And that's really the intent of this and it really culminated in the acquisition of IGB. Kongsberg was a great acquisition. IGB is a great acquisition, but now we're well rounded in what we're going to do as far as priceable features within the seat system. The only thing I would add, Ray, to what was important about IGB, it brought steering wheel heat and panel heating, which I think also plays an important role as you think about reducing the use of the HVAC and the impact on the battery and shifting that to other Parts of the interior that are more efficient for heating and cooling the occupants.

Speaker 2

So that's an important additional product capabilities that we were after with IGB. John, we talked about the Investor Day we're going to have 2. We don't share a lot publicly for competitive reasons. But when you see what we're talking about as far as the transformational Change of the components, when we put this in front of the customers, Frank's here. It's a lay up.

Speaker 2

I mean, it's amazing. It is It's not traditional for us to get 100 percent of sourcing control on these programs. We're getting it because of the acquisitions we've made and the capabilities we have and the vision of the value that we can create. And so at the Investor Day, we are really excited about being able to disclose a little bit more about what we've been working on for over 10 years and the change in the seat system and how we believe that can I think this $2,500,000,000 to $3,000,000,000 market You grow faster when you actually have a system that creates a significant value for your customers?

Speaker 4

And if I could just sneak one more in on the iCB and Tercel Connect Boards. You seem like you're winning more and more on the Ultium platform. I mean, that is a platform. So I'm just curious, when you think about that, how much share do you have On that Ultium platform as far as you can tell on what you've won so far. I mean is that being dual sourced or are you sole sourced

Speaker 3

on that? What's the story there?

Speaker 2

It's dual sourced today, and we have a strong position with General Motors on that particular component. Roughly 50%. Yes, 50%.

Speaker 4

Okay, great. Thank you very much guys.

Speaker 2

Yes.

Operator

And our next question comes from Rod Lache from Wolfe Research. Please go ahead with your question.

Speaker 5

Good morning, everybody.

Speaker 6

Good morning, Rod.

Speaker 5

So I had a couple of things I wanted to ask about. The E Systems margins currently running at 3.5%, you had guided to 4.5% For the year. And I was just hoping you could give us a little bit of color on what changes from here, thoughts on incremental margins? Does your guidance still hold because the obviously the exit rate would be quite a bit higher to make it average that? And then on Seating, Is it typical that incremental margins on new business would come in, in the mid-6s?

Speaker 5

Or is that something that we should extrapolate from?

Speaker 2

Yes, Lee, I'll start with the second part of the question first, Rod. So Seating backlog has been rolling on in the 8% to 10% range. And I think if you look out over the next couple of years, we would anticipate that that's about the rate it would Roll on, sometimes you have a blip in a quarter where you have a mix of what has rolled off versus what's rolled on, but it's Generally in that 8% to 10% range is what we're seeing. If you look at the last number of quarters, that's what we've converted that. In terms of E Systems margins, you're right.

Speaker 2

We do expect to see higher margins in the second half of the year than the first half of the year, so at 3.5 here in the Q1. If we look out in the Q2, the midpoint of our guidance, we would expect Similar margins, maybe slightly higher in these systems in the second quarter, which means the second half needs to be roughly 5.5%. There's a number of catalysts to that. 1, our launch costs in the first half of the year are much higher than they'll be in the second half of the year. We're going through not just launching the backlog, but We had significant new program changeovers.

Speaker 2

So the Ford Escape, which I referenced in the prepared remarks, but also the Colorado Canyon With GM is a big program for E Systems. So those two programs, we had a significant investment in launch costs in the beginning part of the year That will be less in the second half of the year. In addition to that, we're in deep discussions, negotiations with our customers on Commodity and Inflation Recovery. We did a nice job in the quarter, but we have a lot of work to do there and we're confident that we'll achieve The assumptions that we've outlined for commodities, any systems for the full year. In addition to that, you have your normal seasonality.

Speaker 2

And so you had the LCA agreements that are contractual that we approved in the 1st part of the year, Q1, Q2 that get negotiated throughout the year and then offset through our own cost reduction actions, restructuring actions, normal plant efficiencies, purchase savings with our supply base. And as is typically the case, particularly in these systems, you see that stuff sort of layered on throughout the year. And those things taken together, We believe get us to about 5.5% for the second half of the year. And I would say the range is 5.5% to 6% in the Q4, maybe even a little bit beyond that as we exit the Air and E Systems.

Speaker 5

Okay. Thanks for that. And I didn't quite understand the kind of the net of the puts and takes that you were mentioning on commodities. Maybe you could Just elaborate on that. And it sounded like the there's a little bit of caution in your tone, Not surprising just in light of macro, but you had given an indication about potentially coming in at the higher end Of your guidance range earlier in the year, are you seeing anything in terms of customer schedules or mix It is resulting in that?

Speaker 5

Or is that just conservatism?

Speaker 2

Yes. I would characterize it more as caution and conservatism at this stage. Nothing has Change from when I spoke at investor conference earlier in the quarter. As we sit here today, if The conditions from the Q1 hold up for the balance of the year, and there isn't a significant pullback in demand that impacts production or Disruption due to the labor negotiations in the U. S.

Speaker 2

And Canada that impacts production. Those things don't happen, then we see the revenue at the high end of the guidance range, maybe even a little bit beyond that. Now, to provide a little bit more color on that point, it's kind of an important point. So we have a relatively conservative assumption on foreign exchange at $105,000,000 for the full year. 107 in the Q1 that implies a little less than 105 for the balance of the year.

Speaker 2

And if you just kind of modeled out The last 5 days average exchange rates revenue would be about $300,000,000 higher than what we have included in the guidance and That would convert at the company margin overall. In addition to that, you asked about commodities. One thing that we experienced in the Q1 that we now are expecting to continue is elevated revenue as Both are the directed suppliers. So suppliers that our customers source directly and negotiate pricing directly with Are getting price increases and we're just kind of an administrator in the middle passing that through. So you're seeing Additional revenue without earnings as our direct to suppliers negotiate with our customers, that's a new development as we started the year and That's nearly $200,000,000 of revenue.

Speaker 2

And as we're seeing additional pressure on component cost increases in our business, particularly in E Systems, We're negotiating pass through agreements on that. We see almost $100,000,000 of additional revenue from that. The commodities and FX taken together and the fact that IGB closed a little bit earlier, we see about dollars 500,000,000 to $600,000,000 of sort of revenue tailwinds that may not have a lot of earnings associated with that. So we may see Conditions hold up consistent with the Q1 revenue that's at or above the high end of the range with earnings that are at the high end or maybe a little bit lower than that as some new developments happen with commodities. So then speaking specifically about commodities, what's changed from our original guidance there.

Speaker 2

We lock in our North America steel price 1 quarter at a time. And so the Q1 was really based on the Q4. And so we saw a nice reduction and nice benefit In the Q1. 2nd quarter is based on the average price in the Q1. So that is going up sequentially.

Speaker 2

We've assumed that that's where it continues into the second half and then by the Q4, it comes back down. Based on that assumption, the net effect For steel, instead of being a $30,000,000 benefit, is now about a $20,000,000 benefit. So A little bit of an impact for the unrecovered portion of steel. We're seeing some favorability in chemical costs, freight and logistics, That's helping to offset the higher steel. And then we're seeing some pressure on component costs.

Speaker 2

Again, more so these systems than in seating, Particularly with insulated wire, that part of the supply base is a bit more challenged. I think you see evidence of that. The challenges with Leoni that are very public. And so we are seeing some pressure on costs there, but we're also working with our customers on negotiating

Speaker 5

Thanks for that. Just to clarify, no you didn't mention any transactional Impact from the FX, just given your peso exposure, is that essentially hedged?

Speaker 2

Yes. So For the full year, we're about 85% hedged on the peso and on most of our currency pairs were 60% to 85% sort of the range. We are a little less hedged in the Q1, so we just see a little impact there. We don't see it as significant for the full year at this point in time. And we have a rolling 24 month hedge program.

Speaker 2

So we've locked in about 40% of that exposure for next year as well, which should help. But so as we sit here today, it's not a meaningful issue. It's maybe $10,000,000 for the full year relative to what we expected at the start of the year.

Speaker 5

Great. Thank you.

Speaker 2

You're welcome.

Operator

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

Speaker 6

Hi, good morning. Thank you for taking the question. Sorry, I jumped on late, and I know you talked a bit about E Systems, but maybe you could just address in the quarter, the conversion was on volume mix and on backlog, which is meaningfully lower than what you had seen in prior quarters. So maybe you could just get a bit into the conversion on E Systems within the quarter?

Speaker 2

Yes. Part of that is the mix of revenue by region. And so in North America, wire, we tend to have a little higher variable margin profile than in Europe and in Asia. And so given the changeover activity on these key platforms like the Ford Escape and The GM Colorado Canyon midsize pickup program, so revenue was down on those and up on our European programs and a little bit in Asia. And so that's really The driver is sort of mix of program by region.

Speaker 2

Backlog, as we look out for the balance of the year, we expect that to continue to roll on sort of the 10% range in E Systems. So we feel pretty good about how the backlog is rolling on. And see that as continuing to be accretive to margins in E Systems.

Speaker 6

Understood. Thank you. And then just as a follow-up, I know you said that for commodities, you're now assuming $20,000,000 for the year versus the prior outlook, $30,000,000 tailwind. Maybe you could just remind us within that number, what you're assuming on recoveries for non raw material items, be it maybe some of the pass through components, which you said you're seeing some recoveries there or freight or most notably labor on your end. Are you assuming within that recoveries for labor where I know you would assume there was going to be some wage inflation on your side.

Speaker 2

Yes. I think, Dan, at this point, we want to be a bit careful on that for competitive reasons, but we are in negotiations with our customer on labor. And oftentimes in both business segments, We have we work with models that our customers have. And so the model has a labor rate input. Yes.

Speaker 2

And so that has certainly provided an opportunity for us to have a dialogue with our customers. There's a certain level of wage inflation that's our responsibility. We Each year and we offset it through productivity. What we're after is really the extraordinary wage inflation in places like Mexico where there was A significant increase in wage costs. In terms of the component Cost increases and recovery of that, we're expecting between 90%, 95% of that will be recovered within the year.

Speaker 2

So we're not expecting that to be a significant headwind. We're expecting nearly 100% on the seating side because most of that is on direct components where our customers negotiating with The supplier directly. In these systems where there's a little less that's directed, there's more work to do in those negotiations, but we still see A high level of recovery happening this year.

Speaker 6

And could you just clarify within the $20,000,000 if there's a gross number on that? That's the net, a gross number.

Speaker 2

Our gross impact for this year, we're estimating at this point is about $200,000,000

Speaker 6

Okay, got it. Thank you.

Speaker 2

Welcome.

Operator

And our next question comes from James Picariello from BNP Paribas. Please go ahead with your question.

Speaker 2

Hi, good morning everyone. Good morning. So on the E Systems commodities and component sourcing headwind, the $5,000,000 or $6,000,000 headwind for the quarter. Can you just confirm what does that impact look like through the rest of the year

Speaker 3

for eSystems?

Speaker 2

Yes. It's we see it as a little less for the balance of the year than it was in the Q1. I think the first and second quarter will Similar and then more of the recovery will happen in the second half of the year. So for the full year, we don't expect it to be $5,000,000 if you were to extrapolate the $6,000,000 that we expect it to be less than that with the benefit of that happening in the second half. Right.

Speaker 2

And there's some associated recovery tied to the lessening effect in the second half? Or is it just expectation on pricing? It's recovery that drives the difference first half to second half. Okay. And then for IGB, Will the initial contribution margin for that business trend similarly to what Kongsberg what we saw with Kongsberg last year, Losing about, I don't know, dollars 5,000,000 a quarter initially.

Speaker 2

And then just on that point, it's pretty clear you view Thermal Comfort as margin additive to Lear Seating business over time. Can you maybe just speak to or confirm the timeline on when those businesses can get there? Thanks. Yes. I think that we still have some work to do on the purchase accounting that could lead to a slight change in this.

Speaker 2

But we do expect The margins in Thermal Comfort to be roughly breakeven this year. And we're going through some restructuring now. We Ray referenced the Purchasing synergies, we're seeing some opportunities there. And so we're on track for the combined business to be profitable next year. We had talked originally about it being accretive to seed margins in 'twenty four.

Speaker 2

We still see that probably in the second half or towards the tail end of 'twenty four because it just took longer for the IGB regulatory approval and closing to get over the finish line. When we talked about 'twenty four being accretive, we had assumed that that point that it would be kind of the full year this year in our hands, and it's obviously 4 months later than that. So we still see this business being accretive to seat margins. And so I think contribution margins are going to be similar Seating are a little bit higher, so in the 20% range, 20%, 25% even on certain programs. And so over time, as we grow that business, The impact on seat margins will continue to increase and culminate with pushing that 7.5% to 8.5% range above 8.5%.

Speaker 2

We'll save some of the Details around that for the Investor Day in June, but we're excited to talk about that in a little bit more detail at that point. Understood. Thanks.

Operator

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

Speaker 3

Thank you very much. Well, something to put maybe a final point on Your outlook and I guess what's assumed in there. Q1 played out, I guess, a bit better than Expected and then you were even proving back in March. But now based on the unchanged outlook, you'd be basically assuming Sequential deterioration in profit, at midpoint or maybe sort of like stable versus the Q1 at the high end and that's despite obviously improving margins in E Systems, for example. So can you maybe just holistically talk about how you see sort of The rest of the year play out, where are the areas of caution that would essentially keep you, I guess, a bit more cautious now?

Speaker 2

Yes. I think the caution is just around the production volume assumption that we have a pretty good handle on the rest of the drivers. And just so mechanically, by holding the full year with such a strong Q1, what it suggests is that the second quarter will be about 2.5% lower. I think the industry volumes are down about 2.5% in the second quarter from the Q1. There are fewer workdays in Europe, in North America.

Speaker 2

So we think that makes sense. So say $125,000,000 to $200,000,000 lower than the Q1 revenue. And if that holds, then that suggests a fairly sizable Contingency, so to speak, on production volumes for the second half of the year, too, would imply pretty low revenue in the second half of the year. Again, it's early. There are so many geopolitical, macroeconomic factors in play.

Speaker 2

We just thought it was prudent to hold serve at this point. And if conditions hold up like the Q1, we would certainly look to raise our outlook in the on the 2nd quarter earnings call.

Speaker 3

Understood. And then I guess one follow-up on E Systems. So based on your outlook, maybe even slight 5 point Percent margins in the second half, obviously, quite a bit more upside needed towards some of your midterm target. So as we look past, I guess, the second half of the 4th quarter exit rates, is the main driver there just adding more revenues and operating leverage? Or are there any other big factors to get you to your midterm view?

Speaker 2

Yes. We talked about this, I think, on the Q4 earnings call and certainly in other settings, we've described sort of that Bridge from 4.5% this year to 8% in 2025. So you can look at 2 different ways. One way is just looking at sort of volume and back We see that as 250 basis points of the improvement from 23 to 25 and then 100 basis points of net performance. So this year net performance is sort of negligible in both segments.

Speaker 2

We see it as 50 basis points positive In 2024 and 2025 through a combination of lower inflation, some continued success on passing through higher commodity costs and just fully realizing the benefits of our restructuring program and other cost reduction initiatives without that added weight of Extraordinarily high wage inflation that we saw this year. Another way to look and to think about these systems Progression from 23 to 25. If you look at it by business segment, we talked about 100 basis points of the improvement being driven by The growth in Connection Systems and certainly this additional volume with GM on the InterCell Connect Board helps there. So We had previously expected $285,000,000 of additional revenue there. It's going to be a little bit more than that now with the additional volume awarded on that platform.

Speaker 2

That's 100 basis points. You look at our core Electronics and what we're doing with that business, we see 125 basis points of margin growth over that 2 year time period in Electronics and then that sort of leaves 125 basis points for the wire business, which is a combination of net performance and stronger volumes.

Speaker 3

Perfect. Thank you so much.

Speaker 2

You're welcome. Thanks.

Operator

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

Speaker 7

Great. Thanks for taking my questions. Just wanted to follow-up. I'm not sure if I heard it right. You said there's $200,000,000 of gross Commodity headwind, but you still expect a net positive of 'twenty.

Speaker 7

I guess I'm a little confused because I thought back in 'twenty one, was about $450,000,000 and you got $185,000,000 net. So what gives you we did it. 1, did I mishear that? And so what gives you confidence that you could sort of get that much recovery versus the past or are the contracts different now given the last couple of years changes?

Speaker 2

Part of it is the lag effect. So you're seeing some recovery in the 1st part of this year, for example, that relates to higher steel costs that existed last Sure. And so there's a bit of a lag benefit that we're seeing. And the balance of it really is we've worked hard Get as many of our components on an index agreement as we can to try and kind of insulate us from that risk. And so as there are changes that take place, That makes it a little bit more straightforward to pass it through.

Speaker 2

It does make it easy looking at Karl and Frank and certainly a ton of work by the team on both business segments. The other big factor though, probably the more important factor is that we see about 180,000,000 of directed supplier increases where it's just a one for one pass through. So That's really what's driving the increase. And so there's no impact on OI. So it's 100% pass through.

Speaker 2

So It's a little bit misleading from that standpoint. And if you go back to what we anticipated at the beginning of the year, we expected the gross impact to be favorable, so $105,000,000 because of what was happening with steel. And so now that has swung all the way in the other direction We're seeing the gross impact that's unfavorable by $200,000,000 That's a $300,000,000 change again and with $180,000,000 of that in Seating on direct to suppliers that's just passed through.

Speaker 7

Got it. Okay. And then the Last quarter, you talked about $85,000,000 in gross labor cost headwinds. That's incremental to the 200 you're talking about in commodities, right, they're not overlapping. And then Any color on how that's progressing?

Speaker 7

Has the majority of that already hit? So you're working to get recoveries through the rest of the year on that? Or does more of that come later in the year?

Speaker 2

The labor inflation on the hourly side mostly hit at the beginning of the year. Now some of the salary programs have various effective dates around the world. But some are in January and some are later. The discussions with the customers started in the Q1 and will continue, I think, through the balance of the year. It's not going to be all done in the Q2.

Speaker 2

It's going to take time And some of it could even leak into next year. So it's a difficult discussion with the customers. And Ultimately, we have to be the most competitive option for them and we are. We have world class footprint in both segments and I think that's supportive of Our negotiations to pass these excess costs through over time.

Speaker 7

And just one quick follow-up. Where does that All in the walks, is that under net performance if I look at Slide 15 and 16 because I don't even think there's net performance on 15. So which buckets does that added cost fall

Speaker 2

That is in the net performance. You're correct, Hal.

Speaker 7

Okay. Thanks for taking my questions.

Speaker 2

You're welcome.

Operator

And our final question today comes from Adam Jonas from Morgan Stanley. Please go ahead with your question.

Speaker 3

Kyle, this is Matthias on behalf of Adam. We're just curious to see if You guys have seen any measurable change or slowdown in the production or orders for EVs by OEMs this year.

Speaker 2

No, we're not. I'm not seeing that. I mean across the board, it's still Heavy push from all of our customers on EV and it was some customers even additional capacity And quotes are out for additional volume. So we haven't seen the demand side change at all from our perspective, particularly with the talking to the OEMs. So no changes.

Speaker 3

Okay. Thank you. And then a quick follow-up. Can you say that the chip shortage is over now or is there still

Speaker 2

Yes, I'm hesitant. That one's engraved in me for a long time. I'd say that We're in a much better position. What I would tell you is that what we're experienced is there's still at the Brokers, there's premium costs that we're trying to negotiate. There might be chips that are available through other outlets that we can get our hands on, but There's still premiums associated with those chips.

Speaker 2

So that hasn't necessarily dissipated. But I'd say generally, and I think it's all relative to Where we were a year ago, we're in a much better position. There's still certain chips that are tougher to get, but I think Holistically across all chips, we're in a much better position.

Speaker 7

Great.

Speaker 2

Thank

Speaker 3

you so much.

Speaker 2

Yes. Thank you. Is that the last one? Okay. So I think, Jason, nice job today.

Speaker 2

Really nice job. A lot of heavy lifting Nice job, the team here and appreciate all the hard work for everyone left on the phone. The Lair team, incredible quarter. I appreciate all the hard work That you're doing every single day, really good work. And again, just want to welcome the IGB family into the Lear family.

Speaker 2

We're really excited. I mean, this could be a transformational change for us. We've been working on this for over 10 years. And I think that the 2 very strategic Acquisitions of IGB and Kongsberg were complete. We can now move on this thing and frankly get those margins up.

Speaker 2

And so

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