Lear Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2023

There are 8 speakers on the call.

Operator

Morning, and welcome to the Lear Corporation Second 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 note this event is being recorded. I would now like to turn the conference over to Mr.

Operator

Ed Lowenfeld, Vice President of Investor Relations. Please go ahead, sir.

Speaker 1

Thanks, Jeff. Good morning, everyone, and thank you for joining us for Lear's Q2 2023 earnings call. Presenting today are Ray Scott, Leer 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 and A.

Speaker 1

You can find a copy of the presentation that accompanies these remarks at ir. Leer.com. Before we begin, I'd like to take this opportunity to remind you 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 measures.

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 Q2 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.

Speaker 2

Thanks, Ed. Now please turn to Slide 5, which highlights key financial metrics for the Q2. Lear's positive momentum accelerated in the quarter. $6,000,000,000 of total company revenue was a quarterly record and an 18% increase compared to last year. Core operating earnings We're the highest in over 2 years, increasing by 61% from last year.

Speaker 2

Adjusted earnings per share increased 86% and operating cash flow improved significantly to $311,000,000

Speaker 3

for the quarter.

Speaker 2

Slide 6 summarizes key highlights from the quarter. Both Seating and E Systems continued their positive momentum With significant improvements in operating results for the quarter. Sales growth outperformed global industry production, driven by strong growth in E Systems. The pace of new business awards continues to accelerate in these systems. The average annual revenue of awards we have won to date It's over 50% more than last year.

Speaker 2

In Seating, we continue to build our thermal comfort capabilities. Today, we announced we are working with Valeo to explore opportunities to integrate Valeo's HVAC Expertise with Lear's thermal comfort technologies to optimize heating and cooling within a vehicle. This energy efficient solution is expected to improve Comfort for the occupants while extending the range for electric vehicles. As announced during our Seating Product Dave, we entered into a partnership with Bentley to provide the first commercial application for our IntuComfort and Wellness technology. And we continue to return cash to shareholders.

Speaker 2

Year to date, we have repurchased over $63,000,000 worth of stock in addition to our quarterly dividend. In early July, we published our 2022 sustainability report, which highlights the progress we have made towards achieving our goals for climate, sustainable product development and DEI initiatives. We continue to be recognized for our focus on our employees. Weir was named 1 of the top 200 Best Companies for Workforce by U. S.

Speaker 2

News and World Report. In late June, we were excited to hold our first ever Seating Product Day, where we outlined the steps we are taking to extend our leadership position in Seating. During the event, we highlighted innovative technologies and strategic initiatives that will enable us to continue to grow market share and expand our Segment Leading Margins. Slide 7 highlights the major announcements we made at our Seating Product Day. During that event, we described our plan to deepen and widen our competitive moat in seating.

Speaker 2

As we change the sourcing model for thermal comfort components by offering a better value proposition to our customers. We increased Lear's 2023 outlook along with our long term market We highlighted new business awards supporting the significant opportunities we have identified as we build out our thermal comfort systems business. Our first production award for Intu and Flex Air demonstrates our success bringing innovative technologies to market. Intu is our intuitive seating system and Flex Air is our sustainable foam alternative that is 100% recyclable and delivers a CO2 emissions improvement of 50% over traditional foam. Turning to Slide 8, I will provide some more details on the progress The 2nd quarter's results marked our 4th consecutive quarter of year over year margin improvements in E Systems And the business is on track for further improvements in the second half of this year.

Speaker 2

Our focus on core products where we can provide our customers with unique solutions Has resulted in an acceleration of business awards. In wiring, we have won new contracts for both high voltage and low voltage harnesses with several OEMs, including our first wiring award with BMW. Consistent with our strategy, we continue to diversify our customer base And this award is another example of leveraging strong OEM relationships across business segments. A significant driver of the year over year growth in business awards is our electronics portfolio. As we mentioned last quarter, we expanded our leadership in high performance BDUs with an award from Stellantis.

Speaker 2

During the quarter, we also began shipping preproduction Parts for our ICBs to General Motors to support their planned ramp of the Altium battery production. In total, 50% of our year to date awards are for electrification. We continue to execute our strategy to grow connection systems. During the quarter, we expanded our global engineered component capabilities by opening a plant in Morocco. We're also increasing our capabilities and capacity in China.

Speaker 2

These awards, along with the opportunities we are pursuing in the second half, put us on track to achieve our 3rd straight year of $1,000,000,000 of sales backlog for E Systems. Now, I'd like to turn the call over to Jason for the financial review. Thanks, Ray. Slide 10 shows vehicle production and key exchange rates for the Q2. Global production increased 15% compared to the same period last year and was also up 15% on a Leer sales weighted basis.

Speaker 2

Volumes were higher in each of our key markets with North America and Europe up 15% and China up 19%. From a currency standpoint, the U. S. Dollar weakened against the euro, The strength and against the RMB compared to 2022 is too largely offset. Revenues in the quarter were also negatively impacted by other currencies Weakened against the dollar, including the South African Rand and Korean Won.

Speaker 2

Slide 11 highlights Lear's growth over market. For the Q2, total company growth over market was 2 percentage points, driven by strong growth over market in knee systems of 11 points. Growth over market was particularly strong in Europe and China. In Europe, sales outperformed the Industry production by 6 points with both business segments benefiting from higher volumes on the Land Rover Range Rover and Defender. New programs such as the BMW 57 Series in seating and new wiring and electronics content on the Volvo XC40 and XT-forty Recharge and E Systems contributed to the strong growth in the region as well.

Speaker 2

In China, Growth over market of 10 points was driven by strong growth in both business segments. The growth in seating resulted from the new Geely Zeeker program and leather sales to BYD. N. E. Systems growth was driven by a strong production on the Volvo XC40, XC40 Recharge and the Polestar 2.

Speaker 2

In North America, total revenue grew more than 11% excluding FX, Commodity and acquisitions due to volume increases and new business in both segments. While Seating revenue increased by almost 9%, Consistent with our expectations, unfavorable platform mix on several key programs resulted in total company growth that was 4 points lower than For the first half of the year, total company growth over market was 3 percentage points with Seating growing 3 points above market and these systems growing 6 points above market. Turning to Slide 12, I will highlight our financial results for the Q2 of 2023. Sales increased 18% year over year to a record $6,000,000,000 Excluding the impact of foreign exchange, commodities and acquisitions, Sales were up by 17%, reflecting increased production on key Lear platforms and the addition of new business in both segments. Our operating earnings were $302,000,000 compared to $187,000,000 last year.

Speaker 2

The increase in earnings resulted from the impact of higher production on their platforms and the addition of new business. Adjusted earnings per share improved significantly to $3.33 as compared to $1.79 a year ago. Operating cash flow generated in the quarter was $311,000,000 compared to $11,000,000 in 2022. The increase in operating cash flow was due to higher earnings and an improvement in working capital relative to last year. Improved working capital was driven primarily by the timing of customer and supplier payments as well as improved performance in both businesses with inventory management.

Speaker 2

Slide 13 explains the variance in sales and adjusted operating margins in the Seating segment. Sales for the Q2 were $4,500,000,000 an increase of $594,000,000 or 15% from 2022, driven primarily by an increase in volumes on their platforms and our strong backlog. Deep backlog programs include the BMW 5 and 7 Series in Europe, The Chevrolet Colorado, GMC Canyon and Mercedes EQE and EQS SUVs in North America as well as the Geely Zeker and Neo ES8 in China. Excluding the impact of commodities, foreign exchange and acquisitions, sales were up 14%. Core operating earnings improved to $322,000,000 up $89,000,000 or 38 percent from 2022 with adjusted operating margins of 7.2%.

Speaker 2

The improvement in margins reflected higher volumes on Lear platforms and our margin accretive backlog. Favorable net performance was partially offset by higher engineering spending and launch costs to support conquest and other new business awards. Slide 14 explains the variance in sales and adjusted operating margins in the E Systems segment. Sales for the Q2 were $1,500,000,000 an increase of $334,000,000 or 28 percent from 2022. Excluding the impact of foreign exchange and commodities, sales were up 26%, driven primarily by higher volumes on key platforms and our strong backlog.

Speaker 2

Key backlog programs include the Volvo XC40 Recharge in Europe, new wiring programs with a global EV OEM in North America and Europe, The Buick Electra E5 in China and the Ford Super Duty in North America. Core operating earnings improved to $63,000,000 or 4.1 percent of Sales compared to $24,000,000 and 2 percent of sales in 2022. The improvement in margins reflected higher volumes on their platforms and our margin accretive back Partially offset by the dilutive impact of passing through higher commodity costs to our customers, increased engineering and launch costs to support new programs and the impact of foreign exchange. Looking ahead, net performance is expected to improve due to lower launch costs as well as efficiency improvements that started to deliver results late in the second quarter and will have a larger impact in the second half of the year. Now shifting to our 2023 outlook, which was updated at our Seating Product Day on June 27.

Speaker 2

Slide 15 provides global vehicle production volumes and currency assumptions that form the basis of our full year outlook. We base our production assumptions on several sources, including internal estimates, customer production schedules and S and T forecasts. At the midpoint of our guidance range, we assume that global industry production will be 4% higher than in 2022 or 5% higher on a Lear sales weighted At the high end of our guidance range, our global production assumptions are generally aligned with the S and P forecast. From a currency perspective, our 2023 outlook assumes an average euro exchange rate of $1.07 per euro And an average Chinese RMB exchange rate of RMB 6.96 to the dollar. This reflects exchange rates of 1.05 per euro and RMB 7 to the dollar for the balance of the year.

Speaker 2

Slide 16 provides more detail on our current outlook. On June 27, we increased our 2023 outlook for net sales, core operating earnings and free cash flow. As I will describe in Detail on the next two slides, the midpoint of our sales guidance includes $350,000,000 of contingency for potential downtime from customer labor contract negotiations. To the extent customer production disruptions are minimal, we would expect sales, Earnings and cash flow to be closer to the high end of our guidance range. On the next two slides, I'll provide more details on the key assumptions reflected in our second half outlook for both Seating and E Systems.

Speaker 2

Slide 17 compares our second half outlook to our first half actual results for sales and core operating earnings in the Seating segment. We are forecasting the midpoint of our second half sales outlook To be approximately $8,100,000,000 down $817,000,000 from our first half actual results, reflecting lower volumes Due to seasonal shutdowns in the Q3 in North America and Europe, as well as the impact of foreign exchange. The midpoint of our revenue guidance and seating protects for approximately $300,000,000 for potential effects of customer labor negotiations. The midpoint of our second half operating income outlook is $522,000,000 or 6.4%. At the high end of our guidance range, we expect seating margins at 6.9% compared to 7% in the first half of the year.

Speaker 2

The reduction in operating income reflects the expected impact from lower volumes on our seating platforms, partially offset by the benefit of commercial negotiations and improved operating performance as well as savings associated with restructuring actions to optimize capacity, improve efficiencies and lower labor costs. We do expect lower margins in the Q3 due to seasonal volume and higher launch and engineering costs Support our strong new business backlog and recent Conquest Awards. Slide 18 compares our second half outlook to our first half actual results for sales and core operating earnings in the E Systems segment. We are forecasting the midpoint of our second half sales outlook to be $2,750,000,000 down $172,000,000 from our first half actual results, reflecting lower volumes and the impact of foreign exchange. The midpoint of our revenue guidance in these systems protects for approximately $50,000,000 for potential effects of customer labor negotiations.

Speaker 2

The midpoint of our second half operating income outlook is approximately $148,000,000 or 5.4 percent, an increase of $36,000,000 from our first half At the high end of our guidance range, we expect eSystems margins of 5.8% compared to 3.8% in the first half of the year. We expect to offset the impact of reduced volumes through a combination of lower engineering and launch costs, performance improvements and additional commercial recoveries. In addition, our wiring business was impacted by supply issues during the first half of the year, particularly in North America. We saw improvements in plant productivity and efficiencies in late June that carried into July. We expect improvements to continue through the second half of the year.

Speaker 2

Moving to Slide 19, we highlight our strong balance liquidity profile, a major competitive advantage for Lear in a rising interest rate environment. The acquisition of IGB Was largely financed with a 3 year fully prepayable term loan. We do not have any near term debt maturities. Our earliest bond maturity is in 2027 and our debt structure has a weighted average life of approximately 14 years. Our cost of debt is low, averaging approximately 4 In addition, we have $2,900,000,000 of available liquidity.

Speaker 2

We remain committed to returning excess cash to our shareholders, Having repurchased $63,000,000 worth of stock in the first half of the year, and we continue to repurchase shares in the 3rd quarter. Our current share repurchase authorization has approximately $1,200,000,000 remaining, which allows us to repurchase shares through December 31, 2024. Now I'll turn it back to Ray for some closing thoughts. Thanks, Jason. Please turn to Slide 21.

Speaker 2

The 2nd quarter results illustrate why I'm more confident in the opportunities for Lear and our industry than I have been in several years. We are focusing on areas we can control, while continuing to monitor industry and economic conditions that could impact our operations. In Seating, we are executing Phase 1 of our thermal comfort strategy, while continuing to develop modular solutions. Working with Valeo, we are exploring innovative ways to optimize occupant comfort while extending EV range. These unique solutions add value for our customers and increase the penetration rates of our thermal comfort components.

Speaker 2

In E Systems, Our focused product portfolio allows us to optimize our resources and improve margins. This quarter was a key inflection point to accelerate margin improvements through the second half of this year. Through our leadership and operational excellence, we have identified key efficiency opportunities that will improve our cost competitiveness to deliver improved margins and cash flow. I'd like to thank the team for a great first half and I'm confident we will continue to deliver on our goals going forward. And now we'd be happy to take your questions.

Operator

We will now begin the question and answer session. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from James Picariello with BNP Paribas. Please go ahead.

Speaker 1

Hi, good morning guys.

Speaker 2

Good morning.

Speaker 3

Just with respect to the guide, based on the midpoint to high end swing factors, and Jason, I know you We called this out, but I just want to confirm, what is baked into the midpoint of the guide with respect to The UAW labor disruptions potential? Thanks.

Speaker 2

Yes, James, we included $350,000,000 at Midpoint of the guidance, so that's $300,000,000 in Seating $50,000,000 in E Systems. So our Seating revenue is more weighted to North America than our eSystems revenue. It's about 45% of sales in Seating, 30% of these systems, so that's why the disproportionate impact on seating if there were to be a labor disruption.

Speaker 3

Okay. And that's already rolled into the LVP, the global LVP assumption of UP4?

Speaker 2

Yes.

Speaker 3

Got it. And then just I appreciate the first half to second half bridges that are provided, but on a year over year basis, How should we be thinking about the commodities impact by segment? And to what extent are recoveries already negotiated for the back half? I mean, could this number Move around depending upon the UAW outcome or the commercial negotiations largely

Speaker 2

locked in? Thank you. So as I think about the second half, there is some level of commercial negotiation benefit factored into both segments. I think it's 60 basis points in E Systems and 45 basis points in Seating. The bigger factors that are really going to drive that second half for us, Particularly, these systems are somewhat in our control.

Speaker 2

And we talked about specifically the efficiencies That we're expecting to see in North America, primarily in wire, but also impacting our electronics business. And we really had an inflection point here in the 2nd quarter, that gives us a lot more confidence in the outlook for the balance of the year. We saw improvements in June. We We saw those improvements and efficiencies continue in July. And so we're on a good trajectory as we head Through the balance of the year, any systems to deliver that sort of 200 plus basis points of margin improvement in the Performance categories that we outlined on the slide.

Speaker 2

In terms of commodities specifically, really that's reflected in the additional Commercial negotiations that we expect to benefit the second half of the year. That's really all we see with commodities. We don't see a lot of movement in Raw material prices at this stage, steel in North America seems to have stabilized. It's come down a little bit here in the Q3 so far and towards the end of the second quarter. CAFR has been Pretty stable as well.

Speaker 2

So not seeing a lot of movement on raw materials. We are seeing a little bit of benefit on lower ocean freight rates and some of those things Sort of around the periphery and not a real meaningful impact as we think about the balance of the year.

Speaker 3

Thanks.

Speaker 2

You're welcome.

Operator

The next question will come from Emmanuel Rosner with Deutsche Bank. Please go ahead.

Speaker 4

Thank you so much. Just first to follow-up on this topic of supply issues In wiring and electronics and the efficiencies that you're starting to see, can you just provide a little bit more color around what the issue is Basically, where and what you're currently seeing in terms of that situation?

Speaker 2

Yes. Emmanuel, the first half was More challenged with some of these, call it, non recurring events or cost events that we're struggling with. There was a fire with 1 of our major Pliers that impacted production at our facilities just because of the ability to get material. We are staffing up and launching and the challenges of getting labor in an efficient manner within our facilities and just Training of that labor and the ability for us to get the headcount in was At a higher level than what the production volumes were. And then there's just some premium costs that got associated with the transportation Cost because when you're running in an inefficient environment like that, you're running your plants intermittently and then shipping out and then having to catch up and shipping those parts Through Premium Transportation, a lot of that, if not most of it is dissipated, it's gone.

Speaker 2

And so the challenges that we saw in the first half Due to those type of circumstances, what we're seeing right now and why I couldn't be more excited, Jason Said it again, it was a it's a inflection point. The Q2 exceeded our own internal expectations despite those challenges. And what we're seeing right now early indications is we're on track, on target for these improvements, I mean, efficiencies within our plants. We had if you think through from last to the early part of this year, we've already achieved 50% of the improvements required with Maurie, good momentum heading into this quarter of seeing the trajectory of the improvement, trajectory of efficiencies at our plants. And so We're very optimistic about the second half.

Speaker 2

We have work to do. But what's nice about this, Emmanuel, is that it's in our control. Therefore, a A period of time, there's a lot of things that we're working and working with suppliers or transportation companies or downtime with our customers. These are things that we can control and we're good at. And so I feel very positive and optimistic about The second half because it's in our backyard.

Speaker 2

There's things that we're good at. And so we did manage through those things, but we are seeing a much Brighter future in some of those challenges that we had in the first half. I don't

Speaker 4

know if you want to add anything else. That's great to hear. Then my second question is on the Seating margin outlook for this year and then your longer term targets. I think This year's margin, if we went for net commodities and inflation, I think would be something like maybe 8.3% in the outlook In 2023, I think at the same time, the sitting there, I think you're targeting better than 8.5% 4 years out. And so what is the outlook for recovering over time some of these Commodities and inflation inefficiencies.

Speaker 4

Is there sort of like a pass for that? And if that's the case, Combined with a lot of volume and growth of the market over the next 3 to 4 years or so, why would the target just be similar to What you'd be earning this year if you went for these headwinds?

Speaker 2

Yes. I think maybe just take a step back. As I look out to 2024 and 2025, obviously we've got to finish up this year and there's a lot of work to do to deliver the guidance that we've outlined Today, if you look at the high end of the guidance range, Seating is at 6.7% for this year. And As we communicated in the Seating Product Day, we have a line of sight 8% plus in 2025. A portion of that as we outlined during that discussion is driven by volume and backlog about 60 basis points, Similar amount on performance.

Speaker 2

And that performance, Emmanuel, includes clawing back continue to claw back Some of the wage inflation that we've absorbed, some of the commodity costs that we've absorbed, a portion of it is attributed to that. And then the balance of that is really Just executing on our restructuring plans and other improvements plans that we have in place operationally on components that we buy, DAB or cost technology optimization, cost reduction activities that we do year in and year out. And then the last piece of that margin improvement is 20 basis points that we attributed to Improvements in the Thermal Comfort Systems business, which is going to come through a combination of in sourcing business To ourselves that's currently purchased on the outside, new business growth in that segment, the restructuring benefit of shifting work from higher cost Eastern European plants to North Africa, which we're in the middle of doing right now, And then other synergies since we fully combine the Kongsberg and IGB organizations. So there's a pretty clear line of sight to that 20 basis Points as well. So as I think about this year to next year, it's not necessarily linear from 6.7% To 8% in 2025, but I would expect to see a step up and a step towards achieving that medium term target of 8% in seating.

Speaker 2

And I misspoke. The 6.7% is the midpoint of the guidance range, not 6 points 6.9% is the high end of the guidance range, just to clarify that. Thanks.

Speaker 4

Perfect. Thanks for the color.

Operator

Our next question will come from Dan Levy with Barclays. Please go ahead.

Speaker 5

Hi, good morning. Thank

Speaker 2

you. Good morning. Good morning, Dan.

Speaker 5

Good morning. Wanted to start first just with a question on EV broadly. We've seen, I guess, some commentary from on pullback in spend, slower ramps from Ford and GM, just in a variety of areas on the EV front. You've talked about Opiant in the past And that seems to be there seem to be some signs that that's going a little more slowly. BOLT is being Included now in their targets when that was supposed to be discontinued.

Speaker 5

So to what extent does this maybe slowdown in the pace of

Speaker 2

Well, a couple of things. One, we have Really strong relationships with our customers and committed longer term contracts with some of these awards. And I think it's important To note that if there are changes or shifts that we work in a very collaborative way with our customers on any type of changes to their current strategies. And so I'm confident if there are shifts For changes within volume or ramp up or product lines that we've been able to work with our customers to really Balance those type of expectations out in regards to revenue. And so there have been changes.

Speaker 2

We've been very selective and very specific on what customers were Quoting and how we're positioning our own business for a longer term success like the battery disconnect unit or the ICBs where we can scale those across multiple platforms, multiple Multiple car lines and multiple solutions. And so, we continue to work with our customers as they work Through their own strategies, but I would say that it starts with a very good relationship with our customers And understanding where they're going longer term. Yes. The only thing I would add, Dan, is that we are being very cautious With our investments and capitalizing these facilities for the ramp up and just building on Ray's comments, I think The collaboration and communication with customers is essential here and that's what we've been focused on, being clear with them on our Expectations and then being cautious on putting that new capital in place, so we're confident that the volume will materialize And having a backstop of commercial discussion with them once we put the capacity in place if the volumes don't materialize. We have seen a bit of an impact on revenue this year from the ramp up of the battery electric truck platform.

Speaker 2

It wasn't meaningful in the backlog, but the volumes are a little bit lower as GM suggested on their earnings call, A little bit lower in the first half than we originally expected, a little bit lower in their projections for the second half as well. So there's It's a modest impact, but not significant at this point. I think as we start planning for 2024 2025, We'll be spending a lot of time with customers making sure that we're aligned on the capacity we put in place, so that it mirrors what they intend to produce.

Speaker 5

Thank you. That's helpful commentary. And as a follow-up, you provided some encouraging commentary on the E Systems backlog and winning a lot of awards. Sometimes what we see with some suppliers that I think backlog can maybe limit the ability to achieve commercial recoveries. And right now, obviously, you have a significant path of commercial recoveries ahead on E Systems, so what steps are you taking to make sure that as you do your backlog plus you can also get your commercial recoveries fully intact.

Speaker 2

Well, I'll tell you, I'm encouraged by the way the customers And we typically separated backlog growth. We're not in any respect buying business for The ability to offset a commercial claim today. We need to get recovery. I'm absolutely confident that working with our customers, we will get a fair settlement. And so we tend to separate those issues relative to growth.

Speaker 2

I think the last 3 years is kind of indicative and represents Shift the good relationships we have with our customers. We've been challenged now with shift situations and inflationary costs and labor costs Increases transportation costs etcetera. And next year and even the business we've been rolling on in seating has been accretive to our margins. I think representative Our ability to negotiate in a fair way, get a reasonable settlement that's fair for Lear Corporation and still be able to win new business. Next year, We'll be the largest growth revenue growth in the single year at Lear Corporation.

Speaker 2

And so we've been able to manage Those commercial negotiations and continue to win healthy business that we get at an Expected return for Lear Corporation. So it doesn't go without challenges, but I do think the customers are much more open and willing To negotiate these things than they have in the past. I think initially, it was probably more transitory in some respects, but now We're really working on fixed contracts and selling issues that are more sticky or longer term and bucketing those separately. So We'll continue to work with our customers. We have great relationships with our customers.

Speaker 2

We solve problems for them. And if you do that and continue to deliver at the best Possible quality and expectations, they're going to work with you. Great. Thank you. Yes.

Speaker 2

Thank you.

Operator

The next question will come from Colin Langan with Wells Fargo. Please go ahead.

Speaker 6

Great. Thanks for taking my questions. Just a follow-up on the $350,000,000 I think you said it's in the midpoint of your sales guidance. How should we think about if there is no strike and an optimistic scenario? I mean, what is sort of the decrementals on those Sales that are embedded in guidance as well.

Speaker 6

Is that sort of the normal high teens decremental on those lost sales? Or is it maybe a bit worse Because of maybe delayed recoveries or anything and is that embedded in the guidance?

Speaker 2

Yes, I think it depends on which customers impacted in the level of vertical Integration and underlying profitability on those platforms. We did see a little bit higher Decremental margins during the GM strike in 2019 because that business and Seating in Ticlar was the most vertically integrated of all the customers that we have. It's a little less so with Ford and Stellantis. So it depends on the customer that's impacted. And just to give you kind of some frame of reference, each week of downtime, if all three Commerce were to go down, it's about $140,000,000 of revenue and we'd expect that to convert around 25%, give Give or take, it could be a little bit higher, a little bit lower, depending on the mix of programs and customers that are impacted.

Speaker 6

And what is embedded in the guidance now around the 25% on the lost sales?

Speaker 2

Yes. So if you do the math on the High end of the midpoint, we have embedded a little bit less than 20% on the downside conversion. So we've got both Carl and Frank's Teams have the playbook outlined on what we will do if a strike takes place. There are things that we can control on discretionary spending, Certainly, some customer negotiations or discussions. And so we believe between the actions that we'll take And the impact of the loss variable margin on the lower volume would not into that sort of 20% range.

Speaker 2

That's The target that we're working towards.

Speaker 6

Got it. And if I look at the first half The second half walk, particularly in seating, it implies a pretty large underperformance. I mean, so I think the market, if you're thinking 4 is maybe down 2 1st half, second half ish and your seating would be down around 8. Why would you expect That's a big underperformance because you've been growing above market in the second into the second half.

Speaker 2

Yes. So it's So maybe if I can just give you some of the assumptions by region and help explain it. But we have assumed that there would be about a 20% reduction in the T1 platform from the first half to second half. There was downtime associated with the normal Kind of summer shutdown in those facilities, then you have the strike impact assumed in those facilities. And then we've assumed slightly lower volumes on a weekly basis in the tail end of the year compared to what they ran in the 1st part of the year.

Speaker 2

That's probably the biggest driver. In Europe, we do assume That there's a bit of a slowdown in the strong growth we've seen from JLR on the Range Rover and the Defender programs, both are down North of 20%, again, partially driven by just normal seasonality. You have production downtime in August as those customers take their summer holiday. So it's partially a result of that and a little bit of conservatism Ultimately embedded in the forecast. We debated this for some time over the last couple of weeks.

Speaker 2

We Updated our guidance in conjunction with our Seating Product Day on June 27, and we really made that call in mid June. And I think conditions really have improved over the last 45 days. And if we were to have set our guidance assumption in conjunction with the earnings calls Post the theme product, they probably would have been a little bit higher. And that's why we spent so much time sort of articulating the assumptions in the Guidance and what the high end would look like just to give investors and the analysts that are modeling this a sense of What could be possible in the second half of the year may look very different than what we've guided to at the midpoint. Got it.

Speaker 6

All right. Thanks for taking my questions.

Operator

The final question will come from Ittai Micali with Citi. Please go ahead.

Speaker 7

Great. Thanks. Good morning, everyone.

Speaker 2

Good morning. Good morning.

Speaker 7

Just had two questions. One, I was hoping you could maybe just help us a little bit with the Cadence of E Systems margin in Q3 and Q4 just given the ramp of efficiencies. And then just secondly, just hoping you could go back just to the comments on the Assumption for T1 production second half of the year. Can you just clarify of that assumption, how much of that ties to what you're assuming for potential strike?

Speaker 2

Yes. So maybe start with the second part of that question first. So we've assumed effectively 2.5 weeks Strike for all GM, Stellantis and Ford Business. That's what Comprises of $350,000,000 So that's the portion of the volume reduction in that platform that you would attribute to the strike. In terms of the E Systems margin ramp, there's a negative in the Q3 on the seasonality of lower volumes And then that's partially offset by the traction we have on both the wire efficiency improvements in Mexico as well as our expected commercial negotiations.

Speaker 2

So there's a we're not going to provide 3rd quarter Guidance at this point in time, there's a fairly wide range of outcomes there. I'd say kind of anywhere from flat To as high as 5%, depending on both those negotiations and the continued performance in our Mexico facilities. And then the Q4 would be a Step up from that to get to sort of that 5.4% to 5.8% range that we outlined for the second half overall.

Speaker 7

That's very helpful. Thank you.

Speaker 2

Okay. Well, That said, I just assume that the Leer team is on the phone, and I just again want to thank everyone for their incredible hard work. It was A very good quarter. Everyone came together as always great effort by great employees of Lear Corporation and look Look forward to really the second half and what we're going to accomplish. So thank you for a great quarter and thanks for your work going forward.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
Lear Q2 2023
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