LEAR CORP Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Lear delivered $5.6 billion in revenue in Q3 despite challenging production, with core operating earnings at $257 million (4.6% of net sales).
• Repurchased $209 million of shares and paid $43 million in dividends, achieving the full-year $325 million share repurchase target.
• Strong new business in China: Seating won awards from BYD, Xiaomi, and Seres, with new programs expected to generate over $100 million in average annual sales; E-Systems supplying wiring to Dongfeng Group.
• ComfortFlex Module launched with Volvo, reducing thermal comfort part numbers by 50% and enhancing end-customer experience.
• Zone Control Module named Automotive News PACE Award Finalist; Lear leads J.D. Power U.S. Seat Quality and Satisfaction Study with eight top awards.
• Initiatives like Idea by Lear for innovation and automation, headcount reductions on track (8% in Seating, 6% in E-Systems), and growth in China with domestic automakers.

Segment Performance

• Seating: Sales for the third quarter were $4.1 billion, a decrease of $173 million (4% YoY). Excluding foreign exchange and commodities, sales were down 3% due to lower volumes but offset by new business. Adjusted earnings were $262 million, down $13 million (5% YoY), with adjusted operating margins of 6.4%. Operating margins were flat YoY due to lower production on key platforms offset by positive net performance and margin accretive backlog.
• E-Systems: Sales for the third quarter were $1.5 billion, a decrease of $23 million (2% YoY). Excluding foreign exchange and commodities, sales were down 1% due to lower volumes but offset by strong backlog. Adjusted earnings were $74 million (5% of sales), down from $79 million and 5.3% YoY in 2023. Margins declined due to lower volumes but were offset by margin accretive backlog and strong net operating performance.

Guidance

• Updated global production assumptions: Industry production down 4% YoY, Lear sales weighted down nearly 4.5%.
• Revenue expected ~$23 billion, core operating earnings ~$1.07 billion.
• Capital expenditures reduced by $75 million due to slower customer ramp-up and capacity management.
• Operating cash flow expected ~$1.14 billion, full-year free cash flow midpoint $560 million.
• Sales outlook midpoint down $400 million from July, core operating earnings midpoint down $50 million, with net performance expected 30 basis points in Seating and 40 basis points in E-Systems in 2024.

Risks

• Challenges include global pandemic, semiconductor issues, commodity price fluctuations, wage inflation, vehicle affordability, and regulatory environment.
• Delay in sourcing activity due to customers rethinking powertrain strategies, leading to slower quote processes and more request for information (RFI) than request for quote (RFQ) scenarios.

Question and Answer

• Q: Joe Spak from UBS asked about fourth quarter guidance and 2025 outlook A: Jason Cardew and Ray Scott responded, discussing fourth quarter production declines in various regions and 2025 challenges due to customer powertrain strategy rethinking and slower sourcing activity.
• Q: John Murphy from Bank of America asked about bidding processes and automation A: Ray Scott and Jason Cardew addressed RFI/RFQ dynamics, dual design solutions, and automation efforts, emphasizing patience and unique modular innovation driving opportunities.
• Q: Mark Delaney from Goldman Sachs asked about growth over market and backlog A: Jason Cardew spoke about growth over market challenges in the near term but confidence in long-term conquest opportunities, and backlog reductions due to platform launch timing and volume changes.
• Q: Colin Langan from Wells Fargo asked about Q4 margins and 2025 A: Jason Cardew explained Q4 margin sequential changes due to lower revenue and unique commercial negotiations, with 2025 expectations based on run rates of Seating and E-Systems.
• Q: James Picariello from BNP Paribas asked about China revenue mix and margins A: Jason Cardew and Ray Scott discussed China revenue mix uncertainties and strong relationships/innovation driving growth with domestic Chinese automakers and potential outside China expansion.
• Q: Trevor Young from Barclays asked about share shift in China and corporate EBIT A: Jason Cardew addressed 10 points of share shift in China by 2027 and corporate EBIT expectations, noting choppiness but stable near-term outlook.