LEAR CORP Q2 FY2025 earnings call

• Strategic priorities: Extending global leadership in Seating, expanding margins in E-Systems, growing competitive advantage in operational excellence through IDEA by Lear, and supporting sustainable value creation with disciplined capital allocation. - First half performance: Positive net performance contributed 85 basis points in Seating and 110 basis points in E-Systems margins. - New business wins: Seating won key conquest programs in Asia with BMW, and in North America for seat components on Ford F-150 and F-250; 24 total awards for ComfortFlex, FlexAir and ComfortMax Seat applications generating over $150 million of average annual revenue. E-Systems won new business including key conquest wire awards with a large global EV automaker. - Partnership with Palantir: Extended long-term partnership to enhance digital and operational capabilities, driving efficiency gains. - Restructuring and automation: Increased investment in restructuring, prioritizing short payback period opportunities; leveraging automation capabilities in manufacturing, with new industry-first facility for automated ComfortMax seat assembly, contributing to cost savings.

Seating segment: Sales for the second quarter were $4.5 billion, an increase of $27 million or 1% from 2024. Excluding certain impacts, sales were down 1% due to lower volumes on Lear platforms, partially offset by new business. Adjusted earnings were $299 million, down $3 million or 1% from 2024 with adjusted operating margins of 6.7%. E-Systems segment: Sales for the second quarter were $1.6 billion, a decrease of $8 million or 1% from 2024. Excluding certain impacts, sales were down 5%. Adjusted earnings were $76 million or 4.9% of sales compared to $82 million and 5.3% of sales in 2024.

• Restored full year guidance, increasing full year net performance outlook by approximately $25 million to more than $150 million. - Reinstated share repurchase plan, repurchased $25 million of shares in the quarter and $50 million in the first half. - Completed refinancing of $2 billion revolver, extending maturity through July of 2030. - Global production increased 3% compared to same period last year but flat on Lear sales weighted basis; U.S. dollar weakened against euro and flat against RMB. - Full year financial outlook assumes continuation of tariff cost recovery agreements; revised full year free cash flow forecast includes $30 million impact from lag in tariff payments. - Updated production assumptions: Global industry production flat or down 2% on Lear sales-weighted basis, average euro exchange rate $1.11 per euro, average Chinese RMB exchange rate RMB 7.23 to the dollar.

• Tariff exposure: Direct exposure approximately $210 million for 2025, indirect exposure approximately $1.6 billion for 2025 from vehicles exported to U.S. from Mexico, Canada and Europe; trade policies evolve and could change exposure, e.g., tariffs on copper and increase in steel rates impact commodity prices; some customers move production into U.S., creating both opportunities and risks.

Q: Wanted to first start with a question on the outlook as there is a meaningful deceleration in the margins in the second half. And I get it, the majority of that is coming from weaker volume, but the decrementals are a bit higher. Can you just talk about performance, which had been particularly strong in the first half, but maybe isn't contributing the same amount in the second half?

A: Sure. Yes. So as you highlighted, we had a very strong first half in that performance really in both business segments. And so the progress we made in the first quarter really continued into the second quarter. And before I go through kind of that first half, second half, I think it's important to highlight that our confidence in our ability to generate margin expansion through that performance really increased based on the results that we experienced in the first half of the year. And just to really emphasize this, what is effectively happening here now is we're able to offset the full effect of our wage inflation and other economics as well as our customer contractual price reductions through our normal efficiency programs and commercial negotiations, negotiations with our suppliers and other cost reduction programs like that, which allows the full effect of our idea by Lear savings in automation and restructuring savings to fall through to this bottom line. And that's generating $150 million of additional earnings here for the full year. Now in terms of what's going on from the first half to the second half, I think it's important to highlight a couple of points here. First of all, as I mentioned in the first quarter call, we had about 20 basis points in Seating of commercial recovery timing that we had expected to happen later in the year and got pulled into the first quarter. We saw a similar phenomenon in the second quarter, about 20 basis points as well. So there's about 40 basis points of Seating performance -- net performance in the first half of the year that was sort of retimed from the second half of the year to the first half of the year. And that was intentional. At the start of the quarter, we weren't sure if we were going to be able to finalize all our recovery agreements on tariffs with our customers. So we were very aggressive in trying to close out these commercial issues. And as it turns out, we were able to both secure full -- nearly full recovery for tariffs in the first half of the year and pull ahead some of these commercial agreements. So if you normalize for that, the first half, second half net performance in Seating would be similar. Now in E-Systems, you may recall last year, we talked about some of the efficiency issues and launch issues that we had in our North America wire business at the start of the year. And so part of that net performance calculation is what happened in the prior year. So in the first half, we had a weaker first half in E-Systems last year. And so the efficiency improvements that we drove in the second half of last year and then continued on into the first half of this year really led to that strong net performance in the first half for E-Systems. And in the second half, the comps become a little bit more challenging. So that's kind of another key factor that's driving that. And while we're talking about that sort of comparison year-over-year, in the third quarter, we had a particularly strong third quarter last year in Seating. And so the net performance that we expect year-over-year is going to be weighed down in the third quarter of this year as a result of that tough comparison. We had a high level of commercial settlements in the third quarter last year. And in fact, we may end up with a slightly negative net performance in Seating in the third quarter as a result of that. But in terms of the kind of structural underlying drivers of performance, we're increasingly confident in our ability to not just deliver the $150 million this year. But as you think about '26 and '27, we think we can replicate that for the next several years based on the pipeline of projects that we have in idea by Lear and our restructuring program. We're increasingly confident in our ability to use that as a key lever to improve margins in an uncertain production environment.

Q: And just to be clear, the second half number, which I think in the past, you said would be the right sort of exit rate jumping off point for '26, that's probably not correct now. That would probably be too low for the jumping off rate to do?

A: Yes. I think Dan, we had talked about the fourth quarter. Our target is to exit at 5% and that, that would be a good launching point to model heading into 2026. Because of these commercial actions we pulled ahead to the first half, that makes that a little bit less helpful in terms of a modeling starting point. I would encourage the analysts and investors to think about our full year margin performance in both businesses as the right launching point for thinking through 2026 as a result of some of those timing differences.

Q: Second question is on your awards and specifically in Seating, if you could double-click on the awards you got from Ford, is that just on the components, or is there any [indiscernible] there? And maybe you could just talk broadly about the modularity. It seems like GM, someone else is doing, the TCS there. So what is the uptake? And does reshoring at all change any of the way that TCS plays into the strategy?

A: Yes. Dan, to your first question, the component business is a structures business on the F-150, F-250. And so it was a good business, a healthy business from a return standpoint, puts us in a good position. We're still in the process of quoting the just-in-time business with Ford Motor Company on the 150, 250 that's in process right now. And obviously, we can -- the reason we're illustrating a lot of our advantages that we believe we have competitively with efficiency through if it's the digital software development that we've done or the automation is, I think, putting us in a very competitive position at a level that we can still maintain healthy margins. And so that is in process right now. The continuation of the thermal comfort components, what's nice about that, I mentioned in my narrative around the ability we're going to have here in Michigan, a facility that illustrates the complete modular system being automated. And we have with Ford and with General Motors, and then one of them with General Motors is a mid-cycle implementation that demonstrates our ability to really get efficient on the modular component with thermal comfort systems. And so it's a process. We're still going through it, but I think the ability to scale the onshoring that we're seeing, I think, really adds to the credibility of how we can replicate a very cost-efficient system that can be scaled across multiple programs. And I think the uniqueness like I mentioned, some of these programs are mid-cycle. So we can disrupt even an awarded program. And if the efficiency is there, and that's what our -- that's exactly what our customers are looking for. They're looking for cost efficiencies that can be generated. So introducing those, getting them validated with the key OEMs has always been our strategy. And we're right where we need to be. I think over time, as we illustrate this automated system through the modular components will only help strengthen our position. And so I feel good where we're at. Like we've had some nice wins, I mentioned the 24 wins. I think a combination of the innovation and the combination of the automation are really playing nice as customers are looking at onshoring and continue to expand capacity needs here in the U.S. And so we'll continue to work it. I'm happy in where we're at. I think that the next step of this innovation center that we're putting here in Michigan to demonstrate it for analysts and for investors and for customers is going to really, really, I think, help us propel the growth strategy within the thermal comfort system.