Lear Corporation (LEA) Earnings Call Transcript & Summary

Good afternoon, everyone. I'm Joe Spak, lead automotive research analyst here at RBC Capital Markets. And this afternoon, very pleased to have with us today at the 2020 Global Investor Conference, Lear, a leading provider of seats and electrical distribution technology. Please welcome us -- please have us -- please join me in welcoming CEO, Ray Scott; and CFO, Jason Cardew. The format is fireside chat. So we have some great questions we'll go through. I mean with that, first of all, Ray, Jason, welcome and thanks for joining us today.

Yes. Thanks for having us, Joe. It's an honor to be here.

Yes. And Ray, maybe to start to level-set, if you could start us off with the general state of the business. Exiting the quarter, you provided some second half commentary down 10% to 15% on a global basis. Now IHS was a little bit better than that at the time. They since raised their second half outlook as well. But any update you can provide in terms of what Lear is seeing, both from a regional perspective and maybe also from some of the programs that are more germane to Lear?

Yes. Thanks for the intro. And the way we've been looking at it is prepare for the worst and hope for the best. And we no longer have to hope. Definitely, things are coming in much better than we anticipated. I think a lot of it has to do with the efforts that we put in place during the downtime. Our plants seem to be running extremely well, though I thought there might be more start-ups, shutdowns, start-ups in respect to how we're getting our facility back and running, but we're running very efficiently. I think the teams are doing an incredible job protecting our employees and making sure that we're limiting any type of struggle within our plants, so allowing us to run more efficiently. And so with that said, I think, first, we're looking at what production would look like. As we are watching, a lot of them is really an early indication of filling the pipeline, getting them towards levels back up. But now we're seeing a much stronger demand heading into the fourth quarter with respect to not just the inventory but also on demand from consumers. And so we're very optimistic. Things look better in the third quarter and obviously heading into the fourth quarter. Now there's some uncertainty heading into 2021, but what we're focused on is the third and fourth quarter. And Jason can talk a little bit more. We're not going to get into guidance right now, but Jason will give a little more clarity around what we're seeing in the third and fourth quarter. But we are very optimistic. And given some of the austerity measurements we've put in place, we seem to be running extremely well. So with that said, like, we're just talking a little bit, Joe, I'm in a good place relative to how the company is performing.

Great. Is there any regional commentary or maybe some commentary on some of the key North American programs that we should think about when we think about Lear in the back half?

Yes. A couple of things. One, China actually is accelerating faster than I think we anticipated there from pre-COVID levels. So they're running extremely well. North America is back and running extremely well. And one of the biggest platforms that we're on, the T1, the General Motors truck program, is running extremely well. And it's one of the most vertically integrated programs we have, highest CPV. So we're really happy to be on that program given how successful they're doing in the market. And then we also have -- and we are well positioned with CUVs, SUVs in North America. And those seem to be doing really well today. And so it's going to be on those platforms. And like I said, the volumes are running well, and we're well positioned on the CUV/SUVs here in the U.S.

Got it. Yes, I want to talk a little bit about just sort of the other sort of near-term business thing, which is operating in this COVID world. And how do you balance easing some of the austerity measures that you've put in place to maximize profits and sort of cash flow when the world came to a halt with increasing PP&E, distancing in plants? So -- and as you just mentioned, the volume is coming back a little bit stronger. So some of those costs are not permanent, right? They need to sort of be layered back in. So how do you balance putting those back into the cost structure with the higher volume?

Yes. Joe, maybe just back up for a moment just to give you a little bit more color on what we're seeing in terms of the production environment in the third quarter and how it's building on raised COGS. And then we'll move to the COVID-related COGS and austerity measures a little more specifically. In terms of the third quarter production outlook, we talked about the second half being down 10% to 15%. And I think I just, at the time, was calling the third quarter down roughly 11%. The latest update from my end, just I think, now they have the third quarter down more like 6%. And if you look at our Lear sales weighted basis, it's more like 5%. So that's improved pretty dramatically from what we talked about at the second quarter earnings call. And both of our businesses are performing a little bit better than we had anticipated. Revenue in E-Systems, in particular, is coming in pretty strong in the quarter both because of production levels coming back a little faster than expected but also because the backlog is really strong in the quarter. And so you may recall from the second quarter, the growth above market in E-Systems at 11% and 3% in Seating, and I think the third quarter is going to be pretty similar to that. Particularly, E-Systems should be around 10%, and Seating may be a little bit lower than the second quarter, but both are continuing to grow faster than the market. And on the margin side, this has been just a great performance by both the Seating and E-Systems teams. And both businesses are now solidly back above 7%. And that certainly happened a little quicker than we would have initially expected, again, with the volumes coming back faster as a big help towards that. And so with that as a backdrop, we have started to kind of back off and unwind some of the austerity measures that we had put into place early in the pandemic when we thought volumes would be down 25% to 30% for the year. We're pretty aggressive in taking costs out. And now we're able to reverse some of that. So for example, some of the salary deferrals for our lower-level employees that we had planned on paying back next year, we're going to pay back in the third quarter. And so that's -- and certainly, the outlook is shaping up much stronger than we expected just a couple of months ago. If you look out to next year, the only real benefit we'll see continuing in the next year in terms of the austerity program is more the restructuring investment that we may be outside the restructuring from $100 million to $150 million for this year. I talked about that on the second earnings call. That's going to generate about $40 million in incremental savings in 2021 compared to 2020. The rest of the -- those austerity measures right there are more kind of nonrecurring. There may be a handful of items like travels and other things that we benefit from, but for the most part, we'll put those costs back in place to support back volumes rolling on.

Yes. So that 7% comment was encouraging to hear. And I think you've talked about some underlying improvement even in E-Systems. Earlier this year, I think it was just difficult to maybe see some of that given the pandemic. Is that sort of the right base you think to think about for '21?

Yes. It's ultimately going to depend on volumes. And we've talked about this in the past that a 10% volume reduction in E-Systems where their variable margins are 25% to 30% is a 250 basis point headwind on margins. So yes, if volumes do come back, then 7% to 8% is certainly the right number to think about for that business heading into next year. If volumes remain somewhat depressed, then you're going to favor the low end of that, maybe even a bit below that as we continue investing in engineering to grow that business.

And maybe just to close the loop on -- I know you're not going to sort of give formal '21 guidance, but you did mention some of the temporary measures you've taken. You mentioned some of the more structural cost savings. And I recognize that in any given quarter, maybe there's a little bit of mismatch between those 2. But overall, would you classify some of those structural cost savings as at least offsetting, if not more than offsetting some of the temporary cost measures that subside away?

Yes. I think that's a good way to look at it. We talked about the ongoing PPE and other premium costs of operating in this environment being around $25 million a quarter, and we thought we could offset or recover half of that. The other half of that would be offset through these continuing austerity measures carrying into next year and the benefit of the structural costs we're taking out.

Yes. Maybe we could move on to spend some time on your 2 segments, and we'll start with Seating. You recently discussed some Conquest wins in the first half, I think, about $700 million despite what's been described by many suppliers we've talked about as, quite honestly, a lower industry award environment as a lot of your customers are sort of either putting plans on hold or dealing with some larger issues, so the temporary delays there. So I think that $700 million number comes pretty encouraging in light of that. But will be -- would like to hear from you, I think, how you sort of think about the environment, the quoting environment, some of those Conquest wins. And what do you think help drive some of those wins for Lear?

Yes. It actually has been a really good year proceeding, particularly in Conquest wins, and there's a lot going on. And I think the way I look at it, it's a tribute to the years of investment that we've made in this team. Obviously, we've put an incredible infrastructure in place. Our operational excellence and our focus on execution is recognized by our customers. I think during this time, what's been interesting from my dialogue with the customers is, obviously, they're looking at suppliers that have strong financial positions. And albeit there was a quarter here that we went through some down volume, we're still in a very strong position relative to our peers. I think it's something that our customers are looking at. Where will Lear Corporation be in '22, '23, '24 relative to investment and investing into this? So I think we're getting recognized for our ability to weather the storm, weather it successfully in terms of financial position and the investments we've made. And so those dialogues have been going extremely well. I think this is, in a lot of respects, probably one of the best years we've had in Seating in terms of Conquest. And there's a lot of give and take. There's other programs that we still have that we're pulling for the remainder of this year that I'm optimistic about that we're having good dialogues with our customers. And so the year is not done. I'm hopeful that we'll continue to see continued wins. But I think it's tied to a lot of the reputation that we've built up over the years, Joe. I think it's our financial position and how they look at where we'll be in several years from now. And the technology that we bring them in respect to some of these integrated modules with intuitive seating, ConfigurE+, the value proposition, I think, resonates with them really well. So I'm still optimistic that we can still do more by the end of the year.

You mentioned some of those advanced technologies in Seating. And I think another thing that comes up in a lot of conversations with investors, particularly in North America, which is an important region for you, is vehicle mix. I think you're -- you've highlighted in the past you have a lot of exposure to pickup trucks, SUVs and crossovers, which are a larger and larger part of the market. I think that all it signals is it's sort of beneficial for you. One of the questions we get a lot is, what happens when sort of mix moves the other way? It's kind of an interesting question because a lot of your customers have stopped making passenger cars. So I'm not quite sure where they're going to go, but I guess there is the possibility that they move down on trim level mix. So I guess I want to better understand sort of how you're thinking about some of that shift in -- mix shift or affordability question in North America as you're planning the business going forward.

Yes. It's something -- we do a tremendous amount of work looking at where we're positioned today. We talked about it, customer diversification, regional approach, where we want to participate regionally and with what customers and by car, like SUV, CUV, passenger vehicles. And I'll tell you, what we've looked at is we did a nice job of accelerating our growth during a trend of CUV/SUV. And I think we did a really nice job of positioning ourselves in a lot of the content -- what's going on in those vehicles. Equally as important, we've looked at, if there is a trend or a shift back, how are we positioned? And I think we're in a good position even if there's a trend back in the passenger vehicles because we looked at our mix, even though we had acceleration of growth within CUV/SUV, we're still well positioned in luxury vehicles, either in CUV, SUV and in passenger vehicles. So we feel comfortable that even if there was a significant shift that we're well positioned in passenger vehicles to take advantage of that trend back to passenger vehicles.

Okay. And in terms of some of the new and sort of advanced technology, some of the configurable seating, et cetera, any update on consumer or customer interest and when we could see that enter the marketplace?

Well, we talked about ConfigurE+, which is the first powered rail system that allows the seat to move within the vehicle. And we have a production contract that goes -- well, actually, the vehicle goes into production in 2022.

'22.