Good morning, and welcome to the Lear Corporation First Quarter 2024 Earnings Conference Call. [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. .

Thanks, Jamie. Good morning, everyone, and thank you for joining us for Lear's first quarter 2024 earnings call. Presenting today are Ray Scott, 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. .

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 MSIs. .

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 [ satisfication ] 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 finesse 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 quality improvements. .

Thagora's use of vision systems and software, combined with precision cutting capabilities, optimizes utilization of leather hides, 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 4 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's 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%..

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. .

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. .

Slides 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 of $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 continue 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. .

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 conducive 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 -- 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. .

[Operator Instructions] And our first question today comes from Joe Spak from UBS. .

I guess just to start, 10% growth over market in E-Systems, good start to the year.

Can you just, again, sort of go over the drivers there again and how we should really think about the balance of the year in cadence? Because it looks like you've got a little bit of a tougher year-over-year comp, if you will, next quarter and then maybe a little bit easier in the back of the half.

But some color on sort of what you're expecting in that business for this year would be helpful. .

Yes. There really were two drivers in the first quarter. It was a combination of the backlog and some favorable production volumes on some of our top platforms, which we highlighted in the prepared remarks.

As we look at the balance of the year, I think you sized it up about right, we do expect that 10 points of growth over market to moderate, and we would expect for the full year to be about 5 points of growth over markets in E-Systems. .

So strong solid year overall, but certainly the first quarter will be the highest from a growth over market perspective based on our assumptions right now. .

Okay. And then if I could, just one, I guess, a little bit bigger picture. You talked about the restructuring. It sounds like it's related to some European plant actions.

So can you just remind us of, I guess, restructuring plans for the year, if you think you need to do more there?.

And then also, Ray, you talked about IDEA by Lear, higher automation. You had a recent string of acquisitions there, and also some organic efforts.

How should we think about this going forward? Like as you automate and automate more, should we also expect a corresponding increase in restructuring to implement that automation?.

Let me start with the restructuring outlook for this year. Our guidance is $125 million, and we did -- it was very front-end loaded as expected. In the second quarter it will be likely pretty significant as well. And really, focused on Europe.

We're still, what, 20 -- more than 20% below the production peak in the European market from 2017 and I think still 18% lower than where that was pre-COVID. And so we've been steadily restructuring our operations to realign to the lower volumes in Europe..

But we also see tremendous opportunity to reduce costs by shifting our footprint from Eastern Europe to North Africa. And we're doing that pretty much across the board. When we acquired IGB and Kongsberg they did have some higher cost facilities in Eastern Europe.

We have launched a new facility in Tunisia that will significantly improve the performance of that business. We're also moving seat covers from Eastern Europe to North Africa. We're moving wire pretty aggressively from Eastern Europe to Morocco.

And so there's still a lot of kind of runway there in terms of just an opportunity to reduce our manufacturing costs through shifting the footprint. So it's a combination of those two things. .

And then the third point on restructuring is just the impact of some of our customers' sourcing decisions.

And so for example, we've had programs where the customer has built out in a production plant where we had the JIT business today, and they're not replacing it or they're replacing that program in a different facility, and so it's resulted in the closure of a couple of our just-in-time plants in Europe, which won't really have an operating income benefit associated with them, but it's an action we have to take nonetheless.

So those are sort of the kind of the drivers of restructuring..

Maybe Ray could talk a little bit about IDEA. .

Yes. I think what's important, and we've been working on this strategy for multiple years, and I think the inorganic nature of bringing in some very, very selective partners and acquisitions has really helped us really discover opportunities even within how we purchase capital.

And capital, as we're looking at capital, is coming in significantly lower as we're designing our own specific capital for own specific needs around multiple different platforms.

And so we're seeing benefits on lower capital cost, the efficiencies within the plant and how we scale these things across the different facilities, both in E-Systems and Seating, not only improve the cost, the reduction of labor heads within the plants, but also the work that is there is much better improved in ergonomics, safety, throughput, quality.

So those are generating great benefits for us. .

And the way we're looking at this, and I described it in my overview, is plants that are in existence today, particularly, like an example, with a just-in-time facility, where we're able to automate from finesse all the way until the customer's delivery is a significant opportunity, because labor is very scarce today around the world, that helps us gap out from an efficiency standpoint.

And it's deployed in a way that we have a customer contract and we're focused on those particular contracts that we have in place. .

And so we are very selective on where we're deploying the capital. It's based on customer needs and volume at that particular time, and it is very selective how we're implementing it. So it has been very beneficial short term. .

And I think that, I do believe this, that companies that are looking at this very, very proactively and strategically will be in a much better position 3 to 5 years from now. This labor scarcity is a real issue. And it isn't just selective to one area. It's around the world.

And the attractiveness of manufacturing jobs is declining and the need for output or manufacturing is increasing. And so those that are in a much more flexible, better position when it comes to automation, and IDEA or Industry 4.0, are going to survive. .

And so it's been very successful. It's one of the reasons why we look at our quarter-over-quarter expectations and improvements, not just this year but the out years. It's really paying dividends. .

Yes. In terms of the last part of your question, how it will impact restructuring going forward, I wouldn't say that near term it's a meaningful impact on restructuring. A lot of the head count changes that happen as a result of automation will come out through normal attrition. There is turnover in our facilities. And so that is a factor as well.

It's not to say that there won't be some level of restructuring, but it's not going to move the needle in the near term. .

Our next question comes from John Murphy from Bank of America. .

Just want to follow up on question on this automation front.

I mean, could you give us a rough estimate of how much of your operating cost is made up by labor? And then as you think about automation, does that ultimately over time just replace it one for one? Or is there an opportunity to potentially take those costs down on a net basis? Obviously, recognize one would be capitalized, one would be operating expense.

But just long term, what the delta could ultimately be?.

Yes. In terms of -- I'd rather not go into specifics on labor as a percentage of sales, but each subset of the Seating and E-Systems business is a little bit different. For example, in electronics, there's very little labor content today, it's already fully automated.

I will say our most automated -- our most labor-intensive operations are in wire and cut and sew. And we're working on automation solutions that will have a meaningful impact on labor content there longer term. .

In the near term, the biggest benefits are coming in our just-in-time seat plants, where you're seeing sort of the full effect of the acquisitions from ASI and InTouch, and now WIP, helping to accelerate our ability to automate a lot of the steps in the just-in-time seat process.

In addition to that, modularity is a big driver of taking labor out of the higher-cost JIT facilities as well. And then with Thagora and what we're doing with -- on the leather side, we're also seeing significant improvements in labor costs in that part of the business..

The way we're primarily looking at automation, John, is a catalyst for offsetting wage inflation and driving higher margins longer term, driving that positive net performance in both business segments. That's what we're focused on. .

Yes. I think, John, and we've talked a little bit about this, is this automation, not only does it change the manufacturing footprint and the concept of how you manufacture products in the plant, but the product itself.

I think the significant announcement that we made on the development program with Ford Motor Company is significant because we will automate that module. The automation of the components into the trim cover will be automated.

The redeployment of that labor out of a JIT facility into what we consider to be more of a spoke-and-hub concept where you can scale it properly across multiple platforms is the future. And so it's a combination. .

What we love is our design, engineering and manufacturing capabilities, coupled with this advanced and really quick pace of technology and innovation within the manufacturing plant. They sit together.

The partnership that we have with Palantir, with what we're doing on the shop floor, what we're doing with the digital systems and automation, it's coupled with our designs. And so everything that we're doing, the acquisitions we've made on the product side, were complementary to what we're doing on the manufacturing side.

And I couldn't be more happy with where we're at or excited with where we're at with the modular concept in Seating. .

Every customer is moving at a little different pace. Some are still sourcing individual components, which is fine, but we have 11 customers that we're working on right now with modular concepts that combine that automation within the plant and with the components itself and the product itself. .

And so we're just going to keep steadfast on what we're doing. We know that the success we've had in a short period of time will continue to accelerate. But it is a combination of the manufacturing plant, coupled with our expertise in engineering design and changing the product designs for a much more modular approach, is where we'll be successful. .

Great. And I hate to put you on this, but I mean, it sounds like you guys are doing all the right stuff.

But I mean, is this ultimately, Ray, as you think about this sort of a necessary course of action to remain competitive and grow the business over time? Or do you think you can pick up a couple of hundred basis points of margin expansion from this automation, add these automation actions alone? I mean I'm just trying to understand where ultimately the -- I mean you're doing all the right stuff clearly and probably with the curve or way ahead of the curve on this stuff.

I just trying to understand where it's going to land or you think it's going to land. .

John, I'll start, Ray probably has some additional comments. But I look at this as a key enabler to achieving the margin targets we've communicated, the midterm target in Seating of 8% and 7% in E-Systems -- I'm sorry, 8% in E-Systems as well, and 8.5-plus percent longer term in Seating.

And so it's not necessarily 100 basis points or 200 basis points beyond that. It's a key, I think, a competitive differentiator that allows us to grow the business, achieve the 4 points and 6 points of growth over market targets that we've established in both segments, and a key enabler to hit the margin targets that we've communicated. .

Right, and then -- I love the way Jason goes at it and it's good. But I'm going to tell you that I love what we're doing in the manufacturing side. We have to move faster, and we're pushing harder. I agree that right now, we haven't changed our targets long term. I think there's a benefit, obviously, to gapping out where we're at short term.

But I think longer term, to John, to answer your question, it is about survival. I think that those companies that have this capability will be the companies that survive, and then there'll be the companies that did not move in this direction fast enough and we'll be looking on the outside looking in. .

And so one is the short term, how we get at some of the expectations. When you can go in and tell your customer that you are the most cost competitive in the world, it's a powerful statement. And you can do that with analytics and data, it's strong, both commercially and how you win business. And I think we've proven both sides of those. .

Longer term, I think those companies that have this advantage will be the one standing. And so we're pushing fast, we're thinking differently, and we're driving accountability throughout the organization. So we want to outperform those numbers. I think this is an area that we can accelerate.

But right now, we're staying steadfast short term on the targets that we've given. .

Okay. That's helpful. Just one follow-up. On the Tier 2 and 3 supply base, they're facing the scene labor challenge as well. And we're hearing a little bit of stress down there below you guys, Tier 2 and 3 supply base, really because of labor shortages as well and cost of labor.

I just wonder if you could comment on that, what you're hearing more lately, and if that is constraining production right through the value chain, or is that something that you guys are able to handle with -- to help your automaker customers. .

No, I think what you're hearing is accurate. I think throughout the supply chain, labor scarcity is a significant issue. And it depends on regions, but it's generally across the board, when you talk about just different types of metrics based on turnover or absenteeism or lack of workers. And so that is an issue. We're working with our suppliers.

We've been able to balance it, but it has been an issue, I think, throughout the supply base for all OEMs that we're seeing. .

I would say, just to add to that, the level of component cost inflation that we're seeing this year is less than what we've experienced over the last number of years. So you're seeing some moderation on the commodity side, and then maybe some acceleration on the labor side, and the two are slightly positive when taken together overall. .

Our next question comes from Colin Langan from Wells Fargo. .

One, maybe if you could talk a little bit about the cadence of margins through the year. You called out in your commentary an increase in labor and engineering into Q2. I would have expected maybe margins improved.

Is that going to offset? Any way to quantify how much of a drag that might be as we think sequentially?.

Yes. So we didn't provide pinpoint guidance for each quarter, but we did say we do expect both segments to be flat or slightly up in the second quarter. And so the sort of composition of that, you have volume and backlog, which we think will be a tailwind from Q1 to Q2. We do expect revenues to be higher in the second quarter than the first quarter.

And then we do expect the margin increase associated with the volume to be offset by the wage economics and engineering. .

So those two are sort of a push, and the higher margins in the second quarter result more from the operating actions and the commercial negotiations that are ongoing.

So some of the restructuring savings associated with the actions we took at the end of last year and the beginning of this year, various performance improvement actions that we're taking in our entire business..

Thermal Comfort, for example, I talked about shifting the footprint from Eastern Europe to North Africa, but we also have additional synergies integrating IGB and Kongsberg into Lear. We also have lower operating costs in our leather business from deployment of the Thagora technology.

And then we have lower labor costs in Europe through the deployment of Palantir's foundry tool in our European seating plants that's going to -- that will sort of benefit us as we move throughout the year. .

As we look at the second half compared to the first half, we do expect revenues to be flat to slightly up from the first half to the second half, really driven by the backlog being favorable and more back-end loaded, and offset by lower production volumes assumed in the second half of the year.

So you have the normal seasonality in Europe and, to a lesser extent, in North America, with downtime around the middle of the year and into August in Europe, and then just fewer production days, say, in the fourth quarter than the second quarter that lead to that lower production volume overall.

And then perhaps maybe a little bit of a hedge just on demand-related volume assumptions in the tail-end of the year where there could be a little bit of upside if demand holds up. .

I think if you look at IHS's volume cadence kind of quarter-to-quarter, our revenues will sort of mirror that, at least the volume assumptions on our platforms, will sort of mirror that throughout the year. .

Just to follow up. You said flat to slightly up quarter-over-quarter, but revenue up.

Does that mean percent margins are flat to down?.

Again, Colin, we weren't looking to provide pinpoint guidance, but we would expect operating margins to be higher in the second quarter than the first quarter. .

I think it's also important to point out that we have a number of commercial negotiations that are ongoing. And so I would say that there's a wider range than usual in both of our business segments in terms of how this will play out quarter-to-quarter, maybe a little choppier than it ordinarily would.

We're very focused on sustainable agreements, piece price adjustments with our customer to reflect things like wage inflation rather than lump sum. And we're not going to sacrifice on a deal to hit a number in a quarter. We're focused on doing the right thing for the business for the long term.

And so that could lead to a little bit of choppiness in the quarter. .

And as we always do, later in the quarter, we'll provide an update at a public investor event on how we see the quarter playing out. .

Got it. And just lastly, any color on the recovery. Some of the automakers are making pretty aggressive comments around like no more claims.

Is there any change in terms of your expectations for recoveries at this point?.

Yes. No, we haven't. I mean, yes, okay, there's different customers handle the negotiations differently. We've always kind of clearly communicated that..

But from our perspective, there hasn't been significant changes. When you boil it down, we said this before, we have a lot of data, in fact, from being very cost competitive.

I think when you have situations and you're going in asking for a recovery and you're not cost competitive, you're not mining your own house, you don't have your own costs under control, and asking for additional other costs, it makes it very challenging for resolution or clarity on how you resolve it.

Our position is always be the most cost competitive, have the data, have the facts, present your case. And we've been very successful. .

To Jason's point, there's a time element on how we negotiate across the board. And like I said, I don't see significant changes in how we're negotiating with our customers. We're resolving them. But we will not take a bad deal where we might feel pressured into resolving it for only quarterly results.

We're doing it with the intent to protect the business, to make sure that we're driving sustainability and is the best result for Lear Corporation based on the facts. .

And so each customer handles it differently. Some are more open externally and focused on kind of how they're setting it up. But we haven't seen significant changes. And I think we're in a good position. I think each one of our negotiations are moving in the right direction. I'm very optimistic about it.

But it's more, like Jason said, the timing of how we want to resolve these. We will not jump at a particular time event to try to resolve something quickly to set up a quarter or result in the quarter. So we're focused on long term. .

Our next question comes from James Picariello from BNP Paribas. .

Just on the new business backlog contribution across the 2 segments.

Is the $700 million for Seating, and $500 million for E-Systems still the right number? And I mean, I know you touched on this, but can you just speak to the visibility in the stronger run-up of new launches embedded for the remainder of the year given the slower start, which, to be fair, has been experienced across the broader supply chain in the first quarter?.

Yes. I'd say overall, we're not updating the full year backlog, but there have been some changes. I'll just give you one example, of course, with Fisker, having no releases that we can see and no plans to restart production. There was a modest impact on the backlog. We were pretty conservative in our volume assumption around that.

So I think it's just about $35 million of revenue that won't materialize. So that's a bit negative on the backlog. .

We're seeing a nice ramp up on other programs that are important to the backlog. On E-Systems, we have the Blazer EV, the Honda Prologue and the Acura ZDX. Those began ramping up the very tail-end of last year, and it steadily increased in volumes throughout the first quarter, and now into the second quarter, they've taken another step up.

That's an important driver of E-Systems backlog. Also GM's ramp-up of the battery electric trucks driving the BDU revenue. So we have pretty good visibility, at least through the second quarter of how many of those are going to be produced. .

On the Seating side, the BMW 5 series and i5 is kind of launching as anticipated. The other programs in the Seating backlog are performing consistent with what we expected. The only other maybe modest change that we've seen, which has an impact on both business segments, is the timing and volume associated with the Volvo EX90 launch.

I think they've talked about that publicly. There's some software challenges or other issues that they're working through that may impact the volumes on that platform. .

But as we look at the backlog combined with our production assumptions on existing platforms, we felt very comfortable maintaining the midpoint of our full year guidance overall. .

Got it. That's super helpful. And then just an update on two pieces in the guide. I think you had embedded a transactional FX headwind to $70 million. Just curious what your assessment is there with the first quarter behind us. .

And then looking at Lear's commodities and net performance bucket combined, which totaled almost $30 million positive in the quarter, can you just strip out commodities within that and what's assumed for the full year on commodities?.

Yes. So in terms of transactional FX, there's been really no change in our full year guidance or full year assumption. What we're seeing unfold here in the first quarter into the second quarter is consistent with what we guided to. And so our hedge program is working as anticipated, and the impact is still in that $75 million range for the full year. .

In terms of commodities, we expect a modest positive impact for the full year, which is more in Seating than in E-Systems. And so the net performance that we're guiding to for the full year is really driven in E-Systems more by what's happening on the operations side.

And we talked a lot about restructuring and how that's impacting Seating, but also in E-Systems we're seeing the benefit of our restructuring savings..

We're also seeing some improvements in our North America wire business. We have a lot of launch activities. So as the year progresses, we expect to see meaningful improvements operating costs and that sort of subsegment of E-Systems as well, and that's kind of a key driver or enabler of the net performance we see in E-Systems. .

But we really see strong performance kind of across the board in E-Systems. And I think that was on full display during the first quarter, and we expect more of the same as the year progresses. .

Our next question comes from Chris McNally from Evercore. .

I wanted to zoom out and maybe just do a little bit of more of a high-level question, particularly around E-Systems and electrical architecture.

We've definitely been receiving lots of investor questions around sort of new zonal architectures, if you look at VW, working with XPENG in China, and just a feel that China may be moving to sort of zonal architectures quicker than expected..

I know you can't talk about specific customers, specific programs, but I would love to just have you opine on the content opportunity for Lear, particularly in China, in some of these new electrical architecture systems. Are they being done more in-house? Is there opportunity for sort of next-gen technology from Lear.

It's -- because it seems like every couple of years, we always have this discussion around well wiring and traditional legacy Tier 1s get priced out of new architectures, and it doesn't seem to play out. So I just wanted to give you guys the floor to talk about what we see in China over the next couple of years. .

Yes, I'm going to -- Carl Esposito is here. I'm going to let him kind of field that question. .

Yes. We're actually working on three zonal architecture programs already with a number of customers from a technology architecture perspective outside of China. And so I think that we'll see some of those architectures migrate into China and some domestic development.

And our teams on the ground there are communicating with customers to see where there are business opportunities for us. But we're fully participating in that shift to zonal architectures. .

And we were talking about each customer kind of move at a different pace. And those zonal architectures are going to migrate at different levels of integration. So we're participating in that part of the market. .

I think if there's any trends picking up from some of the trends that we saw in Seating, particularly with the Chinese, the domestic OEMs, is that initially there may be some in-sourcing or design engineering work that's done in-house. But the trend is that it has moved out.

I mean particularly with Seating, what we saw was our innovation technology really resonated well with the domestics on the ground. And we are one of the fastest-growing seat of high premium seating within China. .

And I think we're seeing that very similar in E-Systems, that initially there's -- the technology moves that may occur outside of China, but then will quickly be replicated or moved to China. And I think we're going to see a very similar trend. And we're already picking up additional quotes within China on some of that technology innovation. .

The Chinese domestic kind of core of the E-Systems business is really with Geely and their family of brands, Volvo, Polestar, Lynk & Co, et cetera, FAW and Great Wall, and SAIC maybe to a lesser extent. And so we haven't seen that change in that customer group. So that's really where we have the most exposure. We don't have business with Xiaopeng.

So we're not -- we're not involved in that architecture change specifically. .

And if I could just do a follow-up, because it's a great point that we hear often, whether it be seats, airbags, ADAS, is that there's often this 2-stage kind of application of Chinese growth where there is a lot done in-house, but when they sort of either scale or go to export markets, that they're using more western suppliers..

And is that an issue of quality or some just that they basically learned that, to scale, there's some components that they really should not be working on internal and they can give it to the Western suppliers who are doing this globally? Because your comments on Europe being ported over to China is one that we hear across multiple kind of advanced components.

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Yes, I think it's a combination. It depends on the customer. There's particular customers we're quoting right now in Europe that are moving to Eastern Europe that, our experience on the ground, we have tremendous knowledge with labor, manufacturing, the infrastructure we have in place. And then you have the technology side..

When I talk about the Seating, we've done an excellent job of growing with the domestics and seeing opportunities continue to expand around technology and innovation.

And when I talk about modular seating or I talk about the technology that we're able to bring within the components, we are one of the large, if not the largest, premium seat supplier to the domestic in China. So we're in a very good position there. .

So I think it depends on the application. It depends on the location of where they're moving. But for a lot of reasons. Just our capabilities and knowledge on the ground in the region we're looking to expand, but also our product and innovation within our manufacturing plants are very helpful for them. .

And just to kind of add to Ray's point there, and I think the evidence that it's partially a technology motivation by the customers. If you look at the business we're winning. With BYD, for example, it's on the higher end where we've just won some additional business with -- on their Denza brand, which is a higher-end brand.

We're launching the -- with Mi Auto, Xiaomi's auto arm, the SU7, which is a fantastic product, but they came to us because of our technology and innovation capabilities, NIO and the [ ESAF ] as well..

So we're seeing not just with the Chinese domestics move outside of China, but even within China on their higher-end products, gravitating to us specifically. I'm not sure if it's the western suppliers generally, but to Lear specifically, because of our unique capabilities in Seating. .

And I think just to add to that, the speed to market, I mean, how fast they're moving and having that innovation readily available both on the automation side within the manufacturing plants, but on the product side. So having that knowledge and capability that's readily available is very important to them. .

And our final question today comes from Dan Levy from Barclays. .

Trevor Young on for Dan today. First, I wanted to ask about Seating, particularly around the mix impacts on 1Q.

It looks like you called out negative platform mix across pretty much every region, and the $144 million in volume and mix headwind you included in the 1Q bridge, it looks pretty substantial versus the 2024 bridge you set out for the full year in January..

So I assume you're expecting mix headwinds to soften throughout the year.

Is there anything driving these mix -- offsetting these mix headwinds beyond just easier comps?.

Yes. North America is where we saw this was most pronounced. And it's a combination of mix and the backlog. So backlog is a combination of programs rolling off that either built out or we lost and new business rolling on.

So for example, in the first quarter, we saw the effects of the Stellantis programs from Brampton, the 300, the Charger, the Challenger roll off. .

We also had an unexpected reduction in the Audi Q5 volumes. They had a strike in their assembly plant that went on for 4, 5 weeks. Those two taken together were about $100 million impact on revenue. And so we had negative growth over market in North America, and would have been positive absent those two items..

As we look at the balance of the year, we do expect growth over market to improve pretty significantly. For the full year in Seating, we see it at about 3 points of growth over market from flat in the first quarter.

And the biggest driver of that is going to be the backlog as it scales up throughout the year, and then sort of the nonrecurrence of that unusual item with Audi on the Q5 where they lost a lot of volume in the first quarter, down for almost 1/3 of the quarter. .

That's very helpful. And then as a follow-up, I just wanted to ask if you could describe the smoothness and/or efficiency of customer production in 1Q relative to recent quarters beyond those -- beyond the impacts of the strike.

And then just how you're thinking about your expectation assumed in the guide for production smoothness as we move throughout the year?.

Yes, it's definitely improved from a year ago, and we saw a steady improvement throughout last year. And we're seeing that continue into the first part of this year. We're through 4 months now. And we're definitely seeing an improvement in the stability of production globally. That's not to say there aren't going to be one-off issues.

There have been some disruptions with a handful of customers for a variety of reasons, but it's less impactful than what we saw last year and certainly 2 years ago. .

Okay.

Do you want to go ahead and [indiscernible]?.

Yes, I think that's the end of the formal presentation, and it's probably just Lear employees that are still on the call. We want to take a second here to congratulate Ed Lowenfeld on his retirement. This is his last week at Lear after 20 -- successful 20-year career here in Treasury and IR and HR.

He's done a little bit of everything for us, he's been an important part of the team, important part of the finance organization and great support to me personally in the role, and I wish him all the best. .

Yes. Ed, as you've left Lear in a better place, your work has been outstanding. I've enjoyed working with you. I want to thank you for all your years and service here at Lear. It's been great knowing you, and I wish you all the luck in your new retirement life. .

Thank you. Thank you. very much. I appreciate it. Lear has been a great place to work, and I see great things ahead. .

And fortunately, we have great depth in our finance organization. And so we have 2 people. Ed's shoes are so big, it took 2 to fill them. We've got Tim Brumbaugh being the primary interface with investors, taking over for Ed, and Marianne Vidershain, who is our Treasurer, will have overall responsibility for both treasury and the IR function.

So congratulations. .

Lear team, thank you very much. Good quarter. Looking forward to continuing our success. Thank you. .

Ladies and gentlemen, that does conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines..