Lear Corporation Morgan Stanley's 14th Annual Laguna Conference

All right. Good morning, everyone. For those that don't know me, I'm Andrew Prococo. I lead autos research here at Morgan Stanley. Up next, pleased to be joined by Ray Scott, President and CEO of Lear, Jason Cardew, CFO, and Jared Fedele, sorry, Vice President of Finance of Seating and E-Systems. Thank you guys for joining this morning. Maybe just to kick us off, Ray, if you want to just give us a general update in terms of what you're seeing in the business, how the year has gone, and kind of how you see the business transforming over time, and then we can kind of continue the conversation from there.

Yeah, thanks. It's great to be here, and it's hard to believe it's already middle of September. Looking back at this year, one, I couldn't be more proud of the team. The first half of this year was record revenue, $12 billion plus. Continued to execute on our core operating income improvement and what we're doing there. EPS up 23%, so really delivering on the measurables we've put in place. When I think about where we're at, it's been this transformation within our manufacturing processes around IDEA by Lear. We opened up the advanced manufacturing center this year, which has just been incredible for not just the investor group, but also our customers. Having one location where we can really display our technologies and what we're doing in the manufacturing environment around automation and the digital transformation has been special, and that's really helped us with growth.

You think about the growth and the most recent announcements that we've had with the Ford F-250, F-350 program, one of the, I think, legendary programs in North America that is going to be great for our business long term. The most recent award with the Audi business that we just announced, and we're continuing. We just had the largest India win that we've ever had in history with Mahindra since our Q2 earnings announcement. The wins continue, and they're very strategic, very selective, very specific on where we really want to grow, how we want to grow, with which customers we want to grow. The combination of what we're doing with technology innovation, not just on the product side, but I think equally as important on the manufacturing side, is really starting to take shape with our customers with growth.

The recognitions we get with the Supplier of the Year, both in Seating and E-Systems, I believe confirms what we're doing and how we're differentiating ourselves. We still have a lot of work to do in the remainder of this year, but I'm proud of the accomplishments that we've managed already this year.

That is great. Maybe Jason, for you, if we could zoom in a little bit in terms of the quarter. I think at least the demand in the U.S. has held up better than I think anyone is expecting it to. Obviously, the global business, China dynamics is obviously very much in flux. If you could just help us think of the setup as you see it today relative to maybe what you framed a few weeks ago on the earnings call, what are some of the puts and takes that you are maybe seeing across the business for the third quarter?

Sure, Andrew. We shared a framework of our third quarter outlook on our second quarter earnings call. We expected revenue of $5.8 billion-$5.9 billion, Seating margins in the low to mid 6s, and E-Systems margins in the low 4% range. The quarter is playing out essentially in line with what we had anticipated at that point in time. As you highlighted, there has been a very resilient market here in North America, some weakness in China. You look at retail sales in China were down 21% in July and 23% in August. That is certainly presenting some pressures on volumes in the China market.

As we sit here today, we are right in line with that framework, maybe a little towards the low end in terms of the revenue, closer to $5.8 billion than $5.9 billion, but really solid performance by the team on the things that we can control and execute on. As Ray said, we are continuing to hit on all cylinders, both in terms of growth and performance.

That is great. On the inflationary side, I think we have heard from some of your peers and some of the OEMs that that continues to be a pressure for the business. From your perspective, understand most of your costs have some level of pass-through, but any updates in terms of what you are seeing there? Maybe it is more of a fourth quarter dynamic than it is a third quarter dynamic, but just curious how the inflationary environment has kind of shaped up versus your prior expectations and how that might impact the P&L over the next few quarters.

Yeah, I think over the last 10 years, we've worked very hard to put in place pass-through mechanisms with our customers, and we've largely insulated ourselves from the direct impact of that. Sometimes there's a timing lag. We don't see anything in terms of the current market dynamics on inflation that'll impact the outlook for the second half of the year at this stage, though.

Okay, that's great. Ray, you brought up some of the recent wins that you've had in your initial remarks. You've obviously shown clear progress in terms of the significant conquest wins that you've had across both Seating and E-Systems. Maybe just talk a little bit about why you've been able to win some of those awards. What have you been leading with to essentially get some of that business to Lear? What are customers essentially looking for at this point when they're thinking about giving out programs to suppliers? I'm also curious how that differs by region. North America versus China versus Europe, I'm assuming all have slightly different approaches to how they look at the market. So how are you kind of approaching it from your perspective?

It's a good question, and we've done a remarkable job, and I think this really is the credibility that we want to make sure that we are communicating to the investor group. It is around the investments we've made. The Audi win, the Ford new business that we won, the NCAR, the truck business that we won in wiring are really around this focus that our customers have around technology and innovation. The domestic Chinese have really, I think, sparked a change, not just with the domestic Chinese and how they think about technology specifications, the ability to drive different modular concepts for efficiency, customer preferences, weight, all the different ingredients that our customers are looking for to improve their products are aligning with what we've been at for 10 years.

This journey we've been at to really change our manufacturing process around automation and the digital transformation has really started at a perfect time. The work that we've put in place, the importance of us having an advanced manufacturing center in place where we can show what's in production and what is the next generation of technology that will be implemented in our manufacturing plants, have been the key. As we go through our customers right now, the alignment has been perfect. We've been at this journey, and now our customers are looking at how we can change specifications, how we can get at these changes within the manufacturing plant to really change efficiencies within their products. They do a tremendous amount of work.

The amount of work that when we go through these quote processes and the feedback we get from our customers on, "You are truly doing things that your competitors are not doing." Their need for that innovation and technology is at an all-time high. We are being very selective. I think what is important, what we learned as EVs really collapsed in North America, was how we select programs, the programs we go after have a legacy to them, of a consistency in volume. When we are going to invest capital, we want to make sure we are betting on the right platforms, right programs by region. We have been very selective on these programs that we are winning. We won $2.9 billion. 2.3 of that is in Seating. $500 million-plus is in E-Systems. E-Systems had arguably the best awards last year of $1.4 billion.

Us being very selective, being recognized as having this ability to have technology as a differentiator has really paid off. This Audi business, which I think it was interesting, I think about it all the time, there is a lot of skepticism around can you really change the model itself, the sourcing model, from directed to your control? Audi, we have sourcing control over the comfort features. We have a ComfortFlex system that will combine lumbar and massage. When we bought I.G. Bauerhin and Kongsberg, we needed that engineering capability. When others talk about a modular solution, if you are using other components that are not yours, it is not a true modular solution the way we define it. That is what is differentiating us. Having 45 contracts, that is so important to the credibility that we talk about how we are differentiating ourselves.