Good morning and welcome to the Lear Corporation Second Quarter 2023 Earnings Conference. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Ed Lowenfeld, Vice President of Investor Relations. Please go ahead, sir.

Thanks, Jeff. Good morning, everyone and thank you for joining us for Lear's second quarter 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 the call for Q&A. You can find a copy of the presentation that accompanies these remarks at ir.lear.com. Before we begin, I'd like to take this opportunity to remind you that as we conduct this call, we will be making forward-looking statements to assist you in understanding 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. 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 second quarter financial results. 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, Ed. Now please turn to Slide 5 which highlights key financial metrics for the second quarter. Lear's positive momentum accelerated in the quarter. $6 billion of total company revenue was a quarterly record, an 18% increase compared to last year. Core operating earnings were the highest in over 2 years, increasing by 61% from last year. Adjusted earnings per share increased 86% and operating cash flow improved significantly to $311 million for the quarter. 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 is over 50% more than last year. 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 Day, we entered into a partnership with Bentley to provide the first commercial application for our INTU comfort and wellness technology. And we continue to return cash to shareholders. Year-to-date, we have repurchased over $63 million 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. Lear was named one of the top 200 Best Companies to…

Thanks, Ray. Slide 10 shows vehicle production and key exchange rates for the second quarter. Global production increased 15% compared to the same period last year and was also up 15% on a later sales weighted basis. 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 to strengthen against the RMB compared to 2022. These two largely offset. Revenues in the quarter were also negatively impacted by other currencies which weakened against the dollar, including the South African rands and Korean won. Slide 11 highlights Lear's growth over market. For the second quarter, total company growth over market was 2 percentage points, driven by strong growth over market in E-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 5 and 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 10 points was driven by strong growth in both business segments. The growth in Seating resulted from the new Geely ZEEKR program and leather sales to BYD. In E-Systems, growth was driven by a strong production on the Volvo XC40, XC40 Recharge and the Polestar 2. In North America, total revenue grew more than 11%, excluding FX, commodity and acquisitions due to volume increases in new business in both segments. While Seating revenue increased by almost 9%, consistent with our expectations, unfavorable platform mix on several…

Thanks, Jason. Please turn to Slide 21. The second 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 component. 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 am confident we will continue to deliver on our goals going forward. And now we'd be happy to take your questions.

[Operator Instructions] And the first question will come from James Picariello with BNP Paribas.

Just with respect to the guide, based on the midpoint to high-end swing factors, Jason, I know you 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?

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

Okay. And that's already rolled into the LVP, the global LVP assumption of up 4?

Yes.

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 are the commercial negotiations largely locked in?

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 in E-Systems, are somewhat in our control. 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 second quarter that gives us a lot more confidence in the outlook for the balance of the year. We saw improvements in June. 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 in E-Systems to deliver that sort of 200-plus basis points of margin improvement in the performance categories that we outlined on the slide. 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 third quarter so far. And towards the end of the second quarter, copper has been pretty stable as well; so not seen 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 on the periphery and not a real meaningful impact as we think about the balance of the year.

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

Just to follow up on this topic of supply issues in wiring and electronics and the efficiencies that we're starting to see. Can you just provide a little bit more color on what the issue is basically where? And what you're currently seeing in terms of that situation?

Yes, Emmanuel, the first half was more challenged with some of these, call it, nonrecurring events or cost events that we're struggling with. There was a fire with one of our major suppliers that impacted production in 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 the 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 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, is gone. And so the challenges that we saw in the first half were due to those type of circumstances. What we're seeing right now and why I got more excited, Jason said it again, is the inflection point. The second quarter 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 of inefficiencies 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 already good momentum heading into this quarter of seeing the trajectory or the improvement trajectory of efficiencies at our plants. And so we're very optimistic about the second half. We have work to do. But what's nice about this, Emmanuel, is that it's in our control. There for a period of time, there was 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. It'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.

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 Seating Day you're targeting better than 8.5% sort of 4 years out. And so what is the outlook for recovering over time some of these commodities and inflation inefficiencies. Is there sort of like the path 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 would be earning this year, if you went for these headwinds?

Yes. I think maybe just to 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 on 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. 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 improvement plans that we have in place operationally on components that we buy, GAV 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; as we fully combined 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 in a step towards achieving that medium-term target of 8% in Seating. And I misquote, the 6.7% of the midpoint of the guidance range, not -- 6.9% is the high end of the guidance range, just to clarify that.

Our next question will come from Dan Levy with Barclays.

I 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 Ultium in the past and that seems to be -- there seems to be some signs that that's going a little more slowly. Bolt is being included now in their targets when that was just supposed to be discontinued. So to what extent does this maybe slowdown in the pace of EV from some of your customers impact you?

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 or 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. 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 them across multiple platforms, 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 in 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 a 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. 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 been a modest impact but not significant at this point. I think as we start playing for '24 and '25, 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.

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 an inflecting 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 push, you can also get your commercial recoveries fully intact?

Well, I'll tell you, I'm encouraged by the way the customers are working with us. 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. And 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. I think the last 3 years is kind of indicative and represents the relationships, the good relationships we have with our customers. We've been challenged now with chip situations and inflationary costs and labor cost increases, transportation costs, et cetera. And next year and even the business we've been rolling on in Seating, has been accretive to our margins. And I think representative of 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 will be the largest growth -- revenue growth in a single year at Lear Corporation. 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. 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.

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

Just a follow-up on the $350 million. I think you said in the midpoint of your sales guidance, how should we think about if there is no strike in an optimistic scenario? I mean what is sort of the decrementals on those sales that are embedded in guidance as well? Is that sort of the normal high teens decremental on those lost sales? Or is it may be a bit worse because of maybe delayed recoveries or anything? And is that embedded in the guidance?

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 in Seating, in particular, 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 customers were to go down, it's about $140 million of revenue. We'd expect that to convert around 25%, 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.

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

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 Karl 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 -- but we believe between the actions that we'll take and the impact of the lost variable margin on the lower volume would net into that sort of 20% range. That's the target that we're working towards.

Got it. And if I look at the first half to 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 first half, second half-ish and your Seating would be down around 8. Why would you expect such a big underperformance because you've been growing above market in the second -- into the second half?

Yes. So maybe if I could 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 Q1 platform. platform from the first half to second half. There was downtime associated with the normal kind of summer shutdown in those facilities when 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 first part of the year. 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 holidays. 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, we updated our guidance in conjunction with our Seating Product Day on June 27 and we really made back 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 call, as opposed to the Seating Product Day, probably it 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. It may look very different than what we've guided to at the midpoint.

The final question will come from Itay Michaeli with Citi.

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?

Yes. So maybe start with the second part of that question first. So we've assumed effectively 2.5 weeks of strike for all GM, Stellantis and Ford business. That's what comprises the $350 million. 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, it's -- there's a negative in the third quarter 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. So there's a -- we're not going to provide third 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 fourth quarter 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.

Okay. Well, let's say that -- just assume that the Lear 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, a great effort by great employees of Lear Corporation and look forward to really the second half and what we're going to accomplish. So thank you for a great, great quarter and thanks for your work going forward.

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