Lear Corporation (NYSE:LEA) Q4 2022 Earnings Call Transcript February 2, 2023
Operator: Good morning, everyone, and welcome to the Lear Corporation Fourth Quarter and Full-Year Earnings Conference Call. . After today's presentation, there will be an opportunity to ask questions. 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 of Investor Relations. Sir, please go-ahead.
Ed Lowenfeld: Thanks, Jamie. Good morning, everyone, and thank you for joining us for Lear's fourth quarter and full-year 2022 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 has also joined us on the call. Following prepared remarks, we will open up the call for Q&A. You can find a copy of the presentation that accompanies these remarks at ir.lear.com. Before Ray begins, 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 year and provide a business outlook -- business update, excuse me. Jason will then review our fourth quarter financial results and our full year 2023 outlook. Finally, Ray will offer some concluding comments. Following the formal presentation, we'd be happy to take your questions.
Now I'd like to invite Ray to begin.
Ray Scott: Thanks, Ed. Now please turn to Slide 5, which highlights key financial metrics for the fourth quarter and full year 2022. Lear finished the year strong with our best quarterly results since the first quarter of 2021 and our fifth consecutive quarter of improved adjusted operating margins. Sales increased 10% to $5.4 billion and core operating earnings increased 67% to $265 million. For the full year, sales were $20.9 billion and core operating earnings were $871 million. Adjusted earnings per share increased 10% in 2022 to $8.72 per share. Operating cash flow increased 52% to over $1 billion in 2022 reflecting improved working capital management and higher earnings. Our cash flow performance is already beginning to benefit from the Lear Forward plan.
Slide 6 outlines key business and financial highlights from 2022, as well as a small sample of the many awards Lear received. We made progress on strengthening our product portfolio and business outlook in both business segments; in Seating the Kongsberg acquisition positions Lear as the only seating supplier with in-house capabilities in heating, ventilation, lumbar and massage. Since the acquisition of Kongsberg, we have been granted sourcing control on programs with seven customers and have won 30 new business awards on 22 platforms. Our leadership position in Seating innovation, quality and operational excellence is being recognized by our customers who awarded us over $700 million of conquest awards in 2022. In E-Systems we're selected by General Motors to supply our PACE Award winning Battery Disconnect Unit on all their full-size battery electric trucks and SUVs through 2030.
We also expanded our connection systems product portfolio to add Intercell Connect Board. We are actively pursuing additional business opportunities for both of these product lines. Sales growth in both business segments continues to exceed market growth with five points of outperformance in 2022. Financial results improved each quarter in 2022 and we expect further improvement this year. Free cash flow conversion improved to 73% and we returned almost $300 million of cash to our shareholders through our dividend and share repurchase programs. We continue to win accolades from various industry publications, including our most recent awards yesterday when Fortune Magazine once again named Lear to World's Most Admired Companies. Slide 7 highlights some of our key product launches in seating this year.
In addition to the just-in-time assembly for each of these programs, we're also delivering multiple components for these launches including thermal comfort systems, leather, fabric, structures, cut and sawn, seat covers and foam. We believe that our position as the most vertically integrated seat supplier provides a competitive advantage by improving the quality of our products and offering a better value proposition for our customers. Several conquest programs are launching this year including the BMW 5 Series and i5 in Europe, the Chevrolet Colorado and the GMC Canyon in North America and a major SUV program in North America that was awarded late in 2022 and that will be launching -- that we will be launching a new facility in 2023. Lear's best-in-class quality and craftsmanship drives our leading market position in luxury seating and we also have won significant new business on electric vehicles.
Turning to Slide 8. Now, I'll highlight key upcoming product launches in E-Systems. In 2022, we had another great year of new business wins in E-Systems that will continue to drive growth over market of six percentage points, including about $500 million of business for electrification projects including high voltage wiring and connection systems and battery disconnect units. This year we will be launching the award-winning battery disconnect unit on an additional GM BET derivatives including GMC Hummer SUV and Chevrolet Silverado EV. In early 2024, we will begin to produce the BDU at our new facility in Michigan. This new production facility will generate $500 million in annual electrification sales when it reaches full production. Late this year, we will be launching production on our Intercell Connect Board.
Annual sales are estimated to grow to approximately $150 million by 2026 and we are pursuing additional opportunities across our customer-base for this new product-line. The body control module, we are launching this year with the MINI Countryman, will be the first of many launches across numerous BMW and MINI platforms. We have several other product launches for electric vehicles in North America, Europe and Asia, some of which are highlighted on the slide. On Slide 9, I'm going to provide an update on the four pillars of our strategy, which we initially shared with you almost two years ago. We assess our strategic plan during the pandemic. With the objective to continue to position both Seating and E-Systems to achieve sustainable long-term growth in revenues, financial returns and free-cash flow generation as the industry transitions to electrification and recovers from the effects of the pandemic.
We have made significant progress on each pillar of our strategy and the actions we have taken to-date will serve as the foundation of our plan to deliver long-term profitable growth. Over the past 10 years, we have made targeted acquisitions to increase our component capabilities in seatings. These inorganic investments coupled with investments in innovation and technology have resulted in steadily increasing our market share in seating to 25%. Conquest wins have been a major factor driving market share gains. Since 2019, we are approaching $2 billion in conquest awards which supports our mid-term goal of achieving 28% market share . Many of these conquest wins resulted from customers asking Lear to quote business because of our strong reputation for quality, operational excellence and product execution.
The recently awarded SUV program in North America that we will be launching later this year is a good example. ConfigurE+ is the PACE Award winning Lear innovation that provides a wireless powered rail system that allows for easy repositioning of the seat in the vehicle. We are launching our second ConfigurE+ program this year on a Forward program. Other customers are showing interest in this product. And last month, Stellantis showed our technology in their new RAM 1500 Revolution BEV concept that debuted at the Consumer Electronics Show in Vegas. In E-Systems, we completed a detailed study to prioritize products where we can create the most value for our customers by concentrating engineering and capital investments on fewer products. We paved the way to win major new platform awards for Lear's Battery Disconnect Unit and Intercell Connect Board.
Later in the presentation, Jason is going to provide more details on how these programs will support sales growth and higher margins in E-Systems . Just last month, we learned that one of our customers in Asia had independently audit all major global seating suppliers, now Lear's quality was rated the best especially for luxury seating. To ensure we remain the leader in quality and operational excellence, last year we established Lear Forward plan, which will improve operational efficiencies across our business. Over the past two years we have made substantial progress on our ESG goals. We developed new products such as FlexAir and ReNewKnit in Seating to support our environmental goals. We also have improved energy efficiency in our operations and established aggressive climate goals to reduce carbon emissions and increase the use of renewable energy.
These efforts as well as well as increased communication in our sustainability report have resulted in significant improvement in our ESG ratings and multiple awards from leading industry publications. Now please turn to Slide 10 which shows our 2023 to 2025 backlog of approximately $2.85 billion. As a reminder, our sales backlog includes only awarded programs, net of any lost business and programs rolling-off and excludes pursued business and net new business in our non-consolidated joint ventures. We had a tremendous year of new business wins, our combined backlog for 2023 and 2024 increased by 22% to $2.5 billion and the 2024 backlog is a record for any single year. The Seating backlog benefits from $1.2 billion of net conquest awards. Also of note is that over 75% of our Seating backlog is for electric vehicles.
In E-Systems the three year backlog consists of 63% in wiring and connection systems with the balance in electronics, more than half of the E-Systems backlog is for electrification products led by battery disconnect units, high voltage wiring and connection systems. Total electrification sales in E-Systems in 2022 were $565 million and we are on-track to exceed our prior goal of $1.3 billion in 2025 which implies a 34% compound annual growth rate for the three year period. Consistent with historical experience, we expect the third year of our backlog to continue to grow as there are numerous programs we are pursuing that will launch in 2025. While not shown on the slide, the 2023 through 2025 sales backlog at our non-consolidated joint-ventures is additional $380 million.
Now I'd like to turn the call over to Jason for a financial review.
Jason Cardew: Thank you, Ray. Slide 12 shows vehicle production and key exchange rates for the fourth quarter. Global production increased 2% compared to the same period last year and was up 6% on a Lear sales weighted basis. Production volumes increased by 8% in North America and by 5% in Europe. Volumes in China were down 5%. The dollar strengthened significantly against the euro and RMB. Slide 13 highlights Lear's growth over market. For the fourth quarter total growth over market was seven percentage points, driven primarily by the impact of new business in both segments, E-Systems grew eight points above market and Seating grew seven points above market for the quarter. Growth over market was particularly strong in Europe.
In Seating new programs such as BMW 7 Series and iX and the Renault Megane eTech as well as higher volumes on the Nissan Qashqai and then Land Rover, Range Rover and Defender contributed to the growth over market. In E-Systems, strong growth over market was driven by new Volvo programs including the XC40 and XC40 Recharge and higher volumes on the Ford Cougar, and the Land Rover Defender and Range Rover. For the full year, global growth over market of five percentage points was driven primarily by our strong new business backlog. Turning to Slide 14, I'll highlight our financial results for the fourth quarter of 2022. Our sales increased 10% year-over-year to $5.4 billion, excluding the impact of foreign exchange, commodities and acquisitions, sales were up by 13%, reflecting the addition of new business in both of our business segments and increased production on key Lear platforms.
Core operating earnings were $265 million compared to $158 million last year. The increase in earnings resulted primarily from higher production on key Lear platforms, the addition of new business and favorable operating performance. Adjusted earnings per share improved significantly to $2.81 as compared to $1.22 a year ago. Operating cash flow generated in the quarter was $537 million, a significant increase from the $167 million generated in 2021. The increase in operating cash flow was due to an improvement in working capital and higher earnings. Slide 15 explains the variance in sales and adjusted operating margins in the Seating segment. Sales in the fourth quarter were $4 billion, an increase of $396 million or 11% from 2021 driven primarily by an increase in volumes on Lear platforms and our strong backlog.
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Excluding the impact of commodities, foreign-exchange and acquisitions, sales were up 14%. Core operating earnings were $275 million, up $76 million or 38% from 2021 with adjusted operating margins of 6.8%. The improvement in margins reflected higher volumes on Lear platforms, our margin accretive backlog and an improvement in commodity costs, partially offset by the impact of acquisitions. Strong net operating performance in the quarter, which included a $10 million benefit from the commercial settlement of a patent matter was offset by higher spending on engineering and launch costs to support our strong 2023 new business backlog and recent conquest awards. Slide 16 explains the variance in sales and adjusted operating margins in the E-Systems segment.
Sales in the fourth quarter were $1.3 billion, an increase of 8% from 2021, excluding the impact of foreign exchange and commodities, sales were up 12%, driven primarily by higher volumes on Lear platforms and our strong backlog. Core operating earnings improved to $64 million or 4.8% of sales compared to $38 million and 3% of sales in 2021. The improvement in margins reflected higher volumes on Lear platforms and our margin accretive backlog, partially offset by higher component cost net of customer recovery. The positive net performance was driven primarily by an increase in plant productivity and lower premium costs, which resulted from a modest improvement in the stability of customer production schedules. Moving to Slide 17, we highlight our strong balance sheet and liquidity profile, a major competitive advantage for Lear in a rising interest rate environment.
Our earliest outstanding debt maturity is in 2027 and overall, our low cost debt structure has a weighted-average life of more than 14 years. In addition, we have $3.1 billion of available liquidity. The level of unfunded pension and OPEB liabilities improved significantly over the past few years and is now only $119 million as at the end of 2022. Our focus is on growing and strengthening our core product lines to improve operating margins and cash flow generation. As we have previously stated, we are targeting to get back to an 80% cash conversion ratio. We are committed to return excess cash to our shareholders having repurchased $100 million of stock in 2022, along with our quarterly dividend. Our current share repurchase authorization has approximately $1.2 billion remaining.
Now shifting to our 2023 outlook. Slide 18 provides global vehicle production volumes and currency assumptions that form the basis of our full year outlook. IHS's latest production forecast assumes global production will increase 4% in 2023 and by 5% on a Lear sales weighted basis. At the midpoint of our guidance range, we assume that global production will be up 1% for the industry or by 2% on a Lear sales weighted basis. At the high end of our guidance range. Our global production assumptions are generally aligned with the IHS forecast. We expect production volumes to grow by 5% in North America, while remaining flat in both Europe and China. From a currency perspective, our 2023 outlook assumes average exchange rates of $1.5 per euro and 7 RMB to the dollar.
Slide 19 provides details of our 2023 outlook. Despite modest changes in industry volumes, we're expecting improved financial results. Our revenue outlook is expected to be in the $21.2 billion to $22.2 billion range. Our core operating earnings are expected to be in the range of $875 million to $1.075 billion. At the midpoint, this would imply an increase of 12% over 2022. Adjusted net income is expected to be in the range of $510 million to $670 million. Restructuring costs are expected to decrease to approximately $100 million. Despite expected higher capital investment to support launches and our growing backlog, our free cash flow guidance at the midpoint is expected to increase by over 17% over 2022 to about $450 million. The midpoint of our outlook, free-cash flow conversion would improve to 76%.
Slide 20 walks our 2022 actual results to the midpoint of our 2023 outlook. Year-over-year revenue is expected to grow by approximately $800 million and adjusted margins are expected to improve by 30 basis points, due primarily to our margin accretive backlog and a reduction in commodity costs. Engineering and launch costs are expected to increase in 2023 which reflects investment required to support significant new business that will go into production in 2023 and 2024. This includes a roughly $25 million investment to support a newly awarded SUV JIT Conquest program launching late in the year. Positive net operating performance reflects the benefits from our Lear Forward plan and other performance improvements, partially offset by elevated wage and overhead inflation, including a significant increase in hourly wage rates in Mexico.
We have included walks to the midpoint of our guidance for Seating and E-Systems in the appendix. Our overall guidance range is wide, reflecting the continued uncertainty around the macroeconomic outlook. At the high end of our range, which includes volumes largely aligned with IHS forecast, we would expect Seating margins in the high 6% range, E-Systems margins of approximately 5% and total company margins of 4.8%. Turning to Slide 21, we revisited the strategic pillars Ray previously discussed. On the next two slides, I will provide additional color on two of our strategic pillars. I'll discuss our growth plan for connection systems in electronics and E-Systems and how the Lear Forward plan will extend our leadership and operational excellence.
Slide 22 provides details on the actions we are taking to drive margin improvements in E-Systems. While there are several factors that will drive margin improvement in the medium term, including further recovery of industry volumes, I want to highlight two key strategic areas that we have made significant progress on which will drive a meaningful improvement in operating margins. We have been targeting high volume products in connection systems and electronics that are shared across large electric vehicle platforms. This strategy has resulted in developing new products such as Battery Disconnect Units, Intercell Connect Board and Battery Plug Boards that customers will share across many vehicles in their product portfolios. With our acquisition of M&N in 2021, we increased our engineered components capabilities in North America, we're expanding these capabilities in Morocco to support our European business with increased vertical integration by in sourcing connection systems and engineered components on programs where we already provide wire harnesses, we will improve our cost competitiveness and the margin profile of this business.
We expect organically increased revenues in connection systems, $750 million by 2025, which will improve E-Systems margins by about 100 basis-points. The second driver of margin improvement derives from our electronic strategy, we are focused on products that leverage our core capabilities and strengths in manufacturing and engineering. For example, our PACE award-winning BDU offers industry-leading thermal management innovations that enable electric vehicles to charge faster and drive farther. With the opportunities we have identified, we are targeting a 20% market share of Lear's addressable market for our BDU business. We've also begun to wind-down other parts of the electronics portfolio. We've spent the last three years studying the portfolio and the market opportunities to focus our investment on products with higher risk adjusted returns.
For products such as audio and lighting, onboard chargers, inverters, cord sets and certain other power electronics products, we will continue to support the programs that are in production, but we have ceased all new development work. This strategy allows us to reduce and redirect our engineering investments, lowering near-term spending. This combination of lower near-term investments and higher operating margins on new programs that are launching will improve E-Systems margins by an additional 125 basis points by 2025. These two strategic initiatives, which will improve margins by 225 basis points by 2025 combined with further recovery in industry volumes and stabilization of the production environment will allow us to achieve our medium-term target of 8% by 2025.
Please turn to Slide 23, On last quarter's earnings call, we introduced the Lear Forward plan, the plan is focused on driving efficiencies in our plants and across our segments. Our restructuring initiatives are designed to both improve efficiency and provide more long-term flexibility in our manufacturing facilities. We are applying what we learned by co-locating certain Seating and E-Systems operations in Brazil, to some locations in Mexico and Morocco in order to optimize our manufacturing footprint, capacity utilization and labor flexibility. We also have expanded our Industry 4.0 capabilities by acquiring Thagora and InTouch. These acquisitions increased our automation of surface material cutting and end of line quality checks in our GIP facilities, both of which will significantly reduce our manufacturing costs.
To improve cash flow, we continue to focus on driving down inventory levels and improving capacity utilization to reduce capital spending. For example, in Morocco, we were able to consolidate cut and sew operations in a fewer facilities and repurpose an idle plants to support new business and connection systems. The Lear Forward plan is already driving results. We estimate cash flow improve by about $50 million in the fourth quarter due to these initiatives. In 2023, we are estimating operating and administrative cost savings of about $50 million with incremental improvements in 2024 and 2025 as the initiatives we are taking fully ramp up. Now I'll turn it back to Ray for some closing thoughts.
Ray Scott: Thanks, Jason. Please turn to 25, which lists our key strategic priorities in 2023. We have made great progress positioning our Seating and E-Systems business for profitable growth. Integration of Kongsberg has exceeded our expectations and we are developing efficient modular solutions that will improve performance while reducing weight and complexity. Customers are very excited about our products and we believe our thermal comfort solutions business will support growth and margin improvement in seating. In E-Systems, we are ramping up production of both the BDU and Intercell Connect Boards. By focusing engineering and capital spending on fewer products across E-Systems, we are winning larger programs with higher financial return potential.
Our backlog is strong and we have additional opportunities in the pipeline. Looking out past 2023, we expect to benefit from the continued industry volume recovery, stabilization of production and higher Lear content as EVs continue to display its traditional ICE vehicles. Our Lear Forward plan is already providing benefits and we have additional actions in-store for 2023 to improve our operational efficiencies. And we will continue to focus on generating cash to fund investments in our business and return returns to shareholders. I want to thank our employees for driving Lear's many accomplishments in 2022 and I can't wait to see what we will accomplish in 2023 and beyond. Now we'd be happy to take your questions.
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