Lear Corporation (NYSE:LEA) Q1 2024 Earnings Call Transcript

Lear Corporation (NYSE:LEA) Q1 2024 Earnings Call Transcript April 30, 2024

Lear Corporation beats earnings expectations. Reported EPS is $3.18, expectations were $3.04. Lear Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to the Lear Corporation First Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] 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. Please go ahead.

Ed Lowenfeld: Thanks, Jamie. Good morning, everyone, and thank you for joining us for Lear’s first quarter 2024 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 metrics. 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 first quarter financial results. Finally, Ray will offer some concluding remarks. Following the formal presentation, we will be happy to take your questions. Now, I’d like to invite Ray to begin.

Ray Scott: Sure Ed, thanks. Please turn to Slide 5, which highlights key financial metrics for the first quarter of 2024. We started the year strong, delivering higher revenue and adjusted earnings in the first quarter compared to last year. Sales increased 3% to $6 billion, and core operating earnings grew by 6% to $280 million. Adjusted earnings per share was $3.18, an increase of 14%, driven by stronger operating performance and the benefit of our share repurchase program. Operating cash flow was in line with the first quarter of last year. Slide 6 summarizes key business and financial highlights from the quarter. The $6 billion in revenue was a record for the first quarter. Our sales outperformed industry production, driven by 10 points of growth over market in E-Systems.

The E-Systems team continues to drive improvements in the business, as evidenced by the seventh consecutive quarter with higher year-over-year margins. Yesterday, we announced the acquisition of WIP Industrial Automation to further strengthen our automation capabilities. WIP leverages robotics, automation and software to design turnkey solutions for complex industrial challenges that will help accelerate our automation initiatives globally. We continue to make progress in our thermal comfort strategy. Later this year, we will be launching component modules with Volvo and Lucid. Lear’s modular solutions reduce the number of parts, resulting in lower weight and complexity, while improving performance at a lower cost. The Volvo module combines seat heat, ventilation and massage, while the Lucid module combines ventilation, lumbar and massage.

In addition, we initiated the validation process with Ford Motor Company for our first complete seat module for a vehicle scheduled to launch in 2026. This opportunity is incredibly exciting for two reasons. First, it gives Lear design responsibility for the thermal comfort components and trim. Second, once validated, it will be the first automotive application fully integrating the thermal comfort components into the trim cover. This will allow us to reduce our complete seat assembly time in our JIT facilities. In China, we continue to diversify our customer base as we won our first complete seat program with FAW Toyota. And in E-Systems, our second wiring award with BMW is a result of a strong customer relationship that we have built. Our customers continue to recognize Lear as a leader in innovation and technology and quality.

For the seventh consecutive year, General Motors recognized Lear as Supplier of the Year. We remain committed to returning excess cash to our shareholders. In February, Lear’s Board approved and increased an extension to the company’s share repurchase authorization of $1.5 billion through the end of 2026. Okay. Turning to Slide 7. We are introducing IDEA by Lear, an important evolution in our strategy. Accelerating the adoption of digital tools and automation will extend our competitive advantage and enable us to more efficiently engineer and develop and manufacture innovative products that will drive profitable growth. Elevated wage inflation, geopolitical risk and uncertainty surrounding the pace of the EV transition, combined with the introduction of artificial intelligence, is creating new challenges and opportunities for automotive companies.

Those that adapt most effectively will be best positioned for significant growth and margin expansion. Lear has consistently invested in our products and processes to become a leader in operational excellence. With IDEA by Lear, we identified a broader opportunity to leverage new technologies to move faster and drive efficiencies in both businesses. Digital innovation combined with automation and robotics will allow Lear to streamline our processes while accelerating product development and reducing manufacturing costs. These tools improve ergonomics, quality and safety, resulting in higher job satisfaction for our employees while enhancing efficiencies at our plan. Slide 8 illustrates Lear’s long history of strategic investments to enhance our manufacturing capabilities.

Through our acquisitions, we brought key automation capabilities in-house, lowering our manufacturing costs. ASI’s automated material delivery, storage and retrievable systems have been deployed in all of our North American just-in-time facilities. ASI’s equipment has improved reliability, uptime and throughput within our plants. We will continue to automate material movement across our seating plants globally, as well as within E-Systems. The acquisition of InTouch added equipment to automate end-of-line testing to ensure all seat functions meet performance and quality specifications. The combination of ASI’s material movement capabilities with InTouch and aligned testing has allowed us to fully automate the final steps of our just-in-time seating assembly process.

Ultimately, we plan to automate from finesse [ph], the process to remove wrinkles from the seat covers, all the way to installation within the customer’s facility, resulting in significant manufacturing cost efficiencies and in quality improvements. Thagora’s use of vision systems and software, combined with precision cutting capabilities, optimizes utilization of leather heights, equipment uptime and productivity. We are expanding the first application of Thagora system across our leather facilities globally with additional performance improvements to be deployed over the next 18 months. We continue to evaluate additional tools to accelerate automation in our plans. And yesterday, we announced the acquisition of WIP Industrial Automation. WIP is a European supplier that leverages AI, vision systems and robotics to develop turnkey solutions to complex industrial problems.

WIP’s technology can be used in multiple applications in Seating and E-Systems and expands our automation footprint in Europe. Looking forward, we will continue to evaluate additional opportunities to accelerate the rollout of automation tools in both Seating and E-Systems. For example, last year, we started working with Palantir and completed four pilot programs utilizing their foundry software in our manufacturing facilities. These acquisitions, coupled with organic strategic initiatives, are key enablers to continue to expand our competitive advantage and leadership in operational excellence. Turning to Slide 9, I’d like to discuss several of the innovative products we have developed in recent years to expand our vertical integration capabilities in both Seating and E-Systems.

The combination of our engineering and manufacturing capabilities allows us to innovate and develop new product offerings to drive profitable growth. These products are accretive to our segment margin targets and offer an attractive value proposition for our customers. In Seating, our acquisition of Kongsberg Automotive Interior Comfort Systems, IGB and Grupo Antolin’s seating business provided valuable vertical integration capabilities. We are the only complete seat manufacturer with thermal comfort components allowing us to develop unique proprietary module solutions. The two recent component modularity awards in our first customer validation in process for our complete thermal comfort module are proof that our strategy is working. Our thermal comfort business is on track to achieve our target of $1 billion in revenue by 2027, with operating margins of 10%.

A technician installing a seat system in the interior of a car.

In E-Systems, the acquisition of M&N expanded our connection systems and engineered component portfolio. Combining the molding and overmolding capabilities from M&N with the precision stamping technology from Seating improve the cost competitiveness of our battery disconnect unit and Intercell Connect Board products. As volumes grow on the BDU and ICB, we expect these products will be a key driver of continued margin growth in E-Systems. The initiatives we are implementing through IDEA will allow us to innovate and engineer next-generation products faster with improved designs at a lower cost. Now I’d like to turn the call over to Jason for a financial review.

Jason Cardew: Thanks, Ray. Slide 11 shows vehicle production and key exchange rates for the first quarter. Global production decreased 1% compared to the same period last year and was flat on a Lear sales weighted basis. Production volumes increased by 1% in North America and by 5% in China, while volumes in Europe were down 2%. From a currency standpoint, the U.S. dollar weakened against the euro, but strengthened against the RMB. Slide 12 highlights Lear’s growth over market. For the first quarter, total company growth over market was 2 percentage points, with Seating flat and E-Systems growing 10 points above market. Sales outperformed industry production in every region. In North America, growth over market was 2 percentage points, reflecting favorable platform mix and backlog in E-Systems, partially offset by unfavorable platform mix in Seating.

Higher volumes on the Ford Escape and Super Duty, as well as the Chevrolet Colorado and GMC Canyon, contributed to the E-Systems growth. Lower volumes on Lear platforms such as the Audi Q5 and the build-out of the Chrysler 300, Dodge Charger and Challenger impacted Seating in North America. Europe growth over market was 1 percentage point, with both business segments benefiting from higher volumes on the Land Rover Range Rover and Range Rover Sport. In China, revenue growth outperformed the market by 1 percentage point, driven by conquest programs in Seating, such as the BMW 5 series and i5. Turning to Slide 13, I will highlight our financial results for the first quarter of 2024. Sales increased 3% year-over-year to $6 billion, a first quarter record.

Excluding the impact of foreign exchange, commodities and acquisitions, sales were up 2%, reflecting the addition of new business in both of our business segments. Core operating earnings were $280 million, compared to $263 million last year. The increase in earnings resulted primarily from positive net performance and the addition of new business. Adjusted earnings per share improved to $3.18, as compared to $2.78 a year ago, primarily reflecting higher earnings and the benefit of our share repurchase program. Reported earnings per share, which are not shown on the slide, were lower year-over-year. Higher core operating earnings were offset by operational restructuring charges and other special items, which totaled $74 million, primarily reflecting future plant closures in Europe to improve our manufacturing cost structure and impairment charges related to Fisker.

First quarter operating cash flow was in line with last year, reflecting higher core operating earnings, partially offset by higher cash restructuring. Slide 14 explains the variance in sales and adjusted operating margins in the Seating segment. Sales for the first quarter were $4.5 billion, an increase to $25 million or 1% from 2023, driven primarily by our backlog, acquisitions and commercial recoveries, partially offset by lower volumes on their platforms. Excluding the impact of commodities, foreign exchange and acquisitions, sales were flat. Core operating earnings were $295 million, down $5 million or 2% from 2023, with adjusted operating margins of 6.6%. Operating margins were down slightly compared to last year as a benefit of our net performance, including lower commodity costs, and our margin-accretive backlog was offset by unfavorable platform mix.

Slide 15 explains the variance in sales and adjusted operating margins in the E-Systems segment. Sales for the first quarter were $1.5 billion, an increase of $124 million or 9% from 2023. Excluding the impact of foreign exchange and commodities, sales were up 10%, driven primarily by an increase in volumes on Lear platforms and our strong backlog. Core operating earnings improved significantly to $77 million or 5.1% of sales compared to $49 million and 3.5% of sales in 2023. The improvement in margins reflected higher volumes on Lear platforms, strong net operating performance and our margin-accretive backlog. Now shifting to our 2024 outlook. Slide 16 provides global vehicle production volume and currency assumptions that form the basis of our full year outlook.

We have updated our global production assumptions, which remain generally aligned with the latest S&P forecast. At the midpoint of our guidance range, we assume that global industry production will be flat compared to 2023 on a Lear sales weighted basis. We are maintaining the same exchange rate assumptions of an average euro exchange rate of $1.09 per euro and an average Chinese RMB exchange rate of RMB 7.15 to the dollar. Slide 17 provides detail on our outlook for 2024. Our first quarter results were consistent with our expectations, and we are maintaining the full year guidance range as outlined during our last earnings call on February 6. Total company operating margins are on track to achieve the midpoint of our guidance of 5.1% for the full year.

Second quarter margins are expected to be flat to slightly up in both segments compared to the first quarter. While we continue to make progress operationally and in our commercial negotiations, we are also facing, as expected, higher hourly labor costs from contracts that take effect in the second quarter, as well as modestly higher engineering costs. While the vast majority of our contractual labor cost increases took effect in the beginning of the year, certain contracts become effective in the second quarter. In the second half of the year, we expect margins to improve through a combination of operating actions, including the benefit of automation and restructuring actions, as well as commercial negotiations. Restructuring costs were elevated in the first quarter, reflecting future plant closures in Europe to improve our manufacturing cost structure.

Our restructuring cost guidance for the full year remains unchanged. Despite our expectations for flat industry volumes, we are forecasting our fourth consecutive year of higher sales and operating earnings. Earnings per share will increase due to the higher earnings as well as a lower share count from our share repurchase program. Moving to Slide 18, we highlight our commitment to continue to return capital to shareholders. Since initiating the share repurchase program in 2011, we have repurchased over $5.2 billion worth of shares and returned approximately 85% of free cash flow to shareholders through repurchases and dividends. We are targeting free cash flow conversion of approximately 85% in 2024, which will support continued share repurchases.

We remain committed to returning excess cash to our shareholders, having repurchased $30 million worth of stock in the first quarter and continued to repurchase additional shares throughout our quiet period. In February, Lear’s Board increased the share repurchase authorization to $1.5 billion and extended the authorization period through December 31, 2026. Now, I’ll turn it back to Ray for some closing thoughts.

Ray Scott: Thank you, Jason. Please turn to Slide 20. We started the year off strong with first quarter record revenue and continued margin improvements in E-Systems. As Jason just mentioned, our Board approved an increase and extension of our repurchase plan, reaffirming our commitment to returning cash to shareholders. Both businesses continue to diversify their customer base with key awards, and our momentum in Thermal Comfort Systems is accelerating. Beginning with our Lear Forward initiative, we identified creative solutions to reduce cost and improve operational efficiencies. We also identified a much larger opportunity to accelerate the use of [ph] automation and digital tools. IDEA by Lear is a significant evolution of our broader strategy to grow Seating and E-Systems and extend our leadership positions in – position in operational excellence.

Accelerating the use of vision systems, robotics and software will enhance our competitive advantage and enable innovation to further drive returns and improve margins. And now we’d be happy to take your questions.