Lear Corporation (LEA) Earnings Call Transcript & Summary

[Audio Gap] of Deutsche Bank's Global Automotive Conference. My name is Emmanuel Rosner. I'm the lead U.S. autos and auto technology here at Deutsche Bank. As you all know, Lear is a global leader in the supply of automotive seating and electrical architecture as well as electronics, a fast-growing player in electronics, vehicle electrification and connectivity. The company has also recently made a number of Seating acquisitions, with continuously working on repositioning its E-Systems segment for the long-term growth. So I'm extremely pleased to be joined this morning by Ray Scott, who's CEO of the company; and Jason Cardew, who's CFO of the company, for a fireside chat. So this will be the format for this morning's session. We'll start with some of my prepared questions, but we'll also open it up for any of your questions. So we'll have some mics. Just raise your hand if you have a question, and we'll bring you on. So with that, thanks for being here.

Emmanuel, it's great being here. As I said, I don't think we've been -- we weren't here since February of 2020. So thank you for being here today, and it's really exciting to have a face-to-face fireside chat. So thank you.

Yes. Appreciate your support and definitely a real treat to see you all in person. Maybe to set the stage, can we speak a little bit about the environment you're seeing and you're operating in? Can you provide an update on the -- what you're seeing in terms of the impact of the China COVID shutdown as well as the indirect impact from the Ukraine war in Europe on production in the second quarter and through the rest of the year?

Sure. Yes. As we had anticipated, the second quarter started out pretty rough with China lockdowns continuing to impact production, particularly around Shanghai. We had anticipated China production to be about 10% lower in the quarter and Europe to be down about 5%. And overall, we had expected revenues to be down slightly from the first quarter to second quarter. The midpoint of our guidance was $5.1 billion revenue in the second quarter, and we're tracking right in line with that. As we sit here today, lots of moving parts. China is a bit better than we had anticipated and what we embedded in our guidance. North America is a little bit worse. So a bit of a mixed bag there. Seating is a little bit better. E-Systems a little bit worse, but generally in line with what we expected. Operating income at the midpoint of our guidance is about $170 million. We're at or maybe just slightly below that now. And so operating margins about 10 basis points lower than the first quarter sequentially. So overall, it's a tough environment, but about what we expected. And as a result, as we look at the full year, we're still comfortable with our expectation of the 3% global industry growth. And as we look at the second half of the year, we do see the environment improving a little bit. We have modest growth in revenue from the first half to the second half factored into our guidance, and we expect that to be realized. With that, we see a little bit more clarity on our full year free cash flow. And so we've gotten back into our share repurchase program. The Board authorized an extension of that, and we've been taking advantage of the depressed stock price here in the second quarter. Second quarter free cash flow is going to be a bit weak just because of the COVID shutdowns in China impacting inventory levels. But as we look at the full year, we're still comfortable with our guidance around for cash flow as well.

All right. That's great to hear. So overall, second quarter may be the trough in terms of both industry expectations as well as your performance and with somewhat cautious optimistic view moving into the back half of the year...

Yes. It's about right.

Okay. Now let me ask you about the other piece of the supply chain, the semiconductor shortage. How has that progressed since the start of the year as far as impact on industry production but also on your revenue? Are you seeing signs of green shoots, things improving sequentially or not yet?

I'll start, and Jason, you can talk a little bit in more detail. But as far as -- we are fortunate or unfortunate, whatever you want to say, but having our power electronics business, we were early in the situation of understanding the shortage of the chip situation way back in 2020. And so when we were looking at it at the end of '20, and I guess it's all relatively based on how bad it did get, it's better. We are seeing some better signs of allocation of parts. But right now, what I think is a little bit more challenging is other issues relative to supply. If China shuts down the front end or back end processing, inventory levels are so short that it obviously creates a disruption within our customers. And so even though I think there's more clarity because the customers are more sophisticated with how they're allocating and looking at chip manufacturing and capacity, there are other issues that are creating problems within the chip supply and some other unrelated chip supply issues that we're struggling with, with what's going on in Europe and then the most recent shutdown in China. So although it's better, there are still some short-term challenges that we're facing.

Understood.

Yes. I mean I think that in terms of pure numbers of lost vehicles, second quarter is about half what it was in the first quarter, but that's been more than offset by the effects of the COVID shutdown or lockdowns in China and the implications of the Russian invasion of Ukraine in Europe as well.

So what IHS is describing, which is essentially just, I don't know, 600,000 or 700,000 units lost this quarter versus like double that in the first, that about -- that's about consistent with...

With 2 weeks to go yet in the quarter, yes, I'd say it's reasonable.

Got it. Now you've been targeting 7% plus company operating margins in the 2024 time frame. How are you thinking about this now? And what do you need to see in order to get back here on a go-forward basis?

Yes. We still feel very good about that target that we talked about for 2024. And so if you look at the drivers of that, the biggest driver is going to be volume and more so on the E-Systems side than Seating because we've had fairly favorable mix in Seating throughout this period of low industry volume. The second component of that is passing through some of the commodity cost increases that we've had to absorb. So we've had about $340 million between last year and this year. If we can pass through roughly half of that, that combined with some of the commodity costs starting to pull back a bit. Look at steel in North America. It had tripled at one point now. It's pulled back nearly 50% from its peak. I think that will certainly be a contributing factor. And then also the premium costs. As production normalizes, stabilizes, there's a pretty significant impact from the effects of the stop-start in production, sticky labor, things like that, that we see going away over time. So those are the first 2 drivers. And that really alone gets us comfortably to the 7% for the company overall. And then the last piece, which is within our control, is net performance and what we're doing to offset customer price reductions, labor and other economics. And if you look at the last -- over the last 3 years, both segments have generated positive net operating performance, Seating more so than E-Systems, but both have been positive. We'd expect that to continue, partially on the back of our additional investment in restructuring that we announced on the first quarter earnings call. And so that will pay dividends as we look out to next year and in 2024 as well.

And I guess specifically in Seating, I think you had mentioned the Seating margin could exit the year around 7% or more. How should we think about Seating margins in a more normalized environment? Should we still expect volumes to roll on at 15% to 20% incremental margin? Is there sort of like a natural ceiling there? Like what's the normalized?

Yes. I think 7.5% to 8.5% is the right range as we look out for the next couple of years. I think with the acquisition of Kongsberg and the pending acquisition of IGB and some of the things that we're doing with the product there, we do see a path above 8.5%, maybe a little bit further out. And I think 15% to 20% variable margin is still the right thing to model as you think about our revenue growth over the next couple of years if it's volume. If it's backlog, that's going to roll on closer to 10%. So all the building blocks are in place to get that business back to 7.5% to 8.5% as soon as next year. And we expect to exit this year right around 7%. And as some of the contractual mechanisms on commodity recovery play out through the balance of the year and our negotiations with our customers continue to play out in the second half of the year, those are the 2 biggest factors that will drive operating margins from the mid-5s to 7%-ish in the second half of the year.

I guess maybe I'll just jump through this one on the negotiation with customers since you actually mentioned them. I mean I know we're speaking to a lot of auto suppliers. They're all extremely busy with it for all the right reasons. It goes all the way up. I think it's at the top level of the organization both on the supplier side and the automaker side. So I guess how are these discussions going? Is there a good reception with the auto makers?

Good reception. You're right. It goes to the top of the house in both organizations. And I think every customer is handling it slightly different. And I do believe that those that are a little bit more pragmatic and proactive are -- you can see it in their efficiency and what they're producing as far as vehicles. And each one of them are understanding there's an issue that needs to be resolved. Some of them are a little bit more proactive in getting those things resolved. But across every customer, we're working with them. And I do believe that we pride ourselves on a customer relationship that has differentiated our company, and we do it in a very respectful way. So there's different ways of getting at it. One is the flat-out contractual increase. There's offsets with BAV and levers that we can pull. There's de-rating a plant for more efficiency. So we're hitting every one the different levers to get these resolved. And I feel very confident that we're going to be able to get to a reasonable resolution for both parties. And so I think last year, I think I've said this before, was more of a thought that this was temporary, that we would solve it in a quarter, and that's what we did. The net performance last year was a lot of constructive work with our customers to get that resolved in a temporary fashion. Today, it's a much more fixed contract base going forward so that we see this increase year-over-year, and those negotiations are progressing positively.

Great. Just following up quickly on this. So even -- so as you're successful, let's say, or constructive with these negotiations that would sort of like secure your outlook for this year, some of the margin expectation. I think on the last earnings call, you also made -- suggested that you have the opportunity potentially in 2023 to sort of like recoup some of the cumulative margin headwinds that you've had from inflation. How would you go about that?

Yes. And I think part of it is the commodity cost subsiding. If you just, again, look at steel, it has pulled back dramatically, and that will have a year-over-year benefit for the portion that we haven't recovered. And some of our recovery mechanisms are on a lag, could be 6 to 12 months. And so some of it is just contractual benefit that we'll see next year relative to this year as that gets passed through. And I think as the backlog rolls on, as new programs roll on, if there's major changes on programs, that's an opportunity to have the discussion to true up on current economics with our customers. And that's an important part of what we're doing this year is to ensure that as you look out at '23, '24, '25, and new programs roll on that they reflect current economics.

Okay. If I remember, it was a big -- it was a fairly big number. Did you suggest potentially 2 serves of the cumulative headwind could be an opportunity?

I think if you look at it over a 2-year period, what I talked about a moment ago, getting to 7% operating margins for the company, even if we get half of that back, coupled with volumes growing consistent with IHS' projection, which is, what, 16%, 17% they're expecting between '22 and '24, and I think in our largest markets, it's almost 20%. So if we get that level of volume recovery, coupled with passing through half of the commodity cost increase, we get back to 7%. So it's difficult to call it with any precision at this stage because the negotiations are all ongoing. But I think that's a reasonable expectation investors can have on what we're going to deliver over the next 2 years.

Understood. And I guess shifting to E-Systems then, what are the primary drivers there in the near term to improve E-Systems margin from the 4% to 5% exit rate that you're projecting for this year and, I guess, improve that going forward?

Yes. So it's a little bit different than Seating. As you look out over the next 2 years, E-Systems was disproportionately impacted by the chip shortage just given the mix of platforms and customers that they have. And so more of the recovery in margins over the next couple of years will come through volume. I think over the next 2 years, it's about 300 basis points of margin accretion as volumes recover and the backlog rolls on. The backlog programs have been rolling on 10% or north of 10%. Those 2 things taken together, we see about 300 basis points of margin improvement over that next 2-year time period. The last piece of it, though, is, again, getting the commodity cost pass-through and seeing the premium costs subside. And that's roughly another 100 basis points. So there's a pretty clear path from sort of the 4% range this year to 8% over that time period just with those 2 factors. In addition to that, we have growth in our Connection Systems business over that time period, and every 50 basis -- or every $50 million of revenue growth in connection systems, about 10 basis points of margin accretion. And so we see that as another kind of catalyst for margins even in the near term improving in E-Systems.

Understood. I guess shifting back to maybe the growth profile here. So in seating, you've consistently delivered some pretty solid growth of the market over the last few years. I think the first quarter was around 5%. What would you say are the drivers of this? And do you view these as sustainable?

Yes. I think the team has done a remarkable job, and we talked about our strategy, seeing obviously the most vertically integrated seat manufacturer in the world. And I think that contributes to our ability to go in and solve and create value proposition for our customers. We talked about the market share, and we've grown from 18% to 23% to most recently 25% market share with a target of 28%. And I feel comfortable and confident with the things that we're doing where we continue to gain market share. I mean most recently, we talked about the $1 billion Conquest wins over a short period of time. We're already off to a great start this year with $200 million of Conquest wins. So that's taking away from very fierce competitors that are trying to protect that business, and we're doing it at an acceptable return and target that we have set up for internal disciplines and targets for financial returns in our company. But when I look at Seating and one thing we'll talk a little bit about is the vertical integration capabilities that we have and the most recent acquisition with Kongsberg and IGB. What we're looking at -- we've been studying this for some time. This isn't something that just became apparent to us, we've been working on this even when Jason and I were in Seating for 7 years. The seat today is set up and is designed for individual components. And that efficiency helps layer on these components in the seat. Well, when you look at the overall holistic look at the seat, it's not that efficient. What we've done is we're designing with not only internally, but with these acquisitions, a much more thorough efficient system for a pneumatic lumbar, the heat and cool elements, the thermal comfort solutions. And I do believe -- what's nice about seats is seats are agnostic if it's electric vehicles or if it's ICE vehicles. And one thing that's constant is us as customers and our OEM customers want a more efficient system. And so we're going to continue to vertically integrate. We believe that differentiates our company. We believe that the continued vertical integration of these components into a modular concept, we have targets to reduce components in that modular concept of 50%. We believe it'll also reduce significantly the cost in the weight. And so when we look at the individual components that we have today with Kongsberg and IGB, we're targeting from a value proposition of being able to reduce that 10% from a value proposition to our customer just from the efficiencies that we're seeing that we can design more efficient components. When you integrate -- when you get into a just-in-time facility, there's a tremendous amount of labor that builds that module in the seat. And by designing a system that is built for manufacturability efficiency within the JIT facility, there's an additional 10%, we believe, we can take out. And then there's 5% to 10% when you get into the modular construct that we're designing. And so we're in the late stages of this development program. Our customers couldn't be more excited. I mean that's, Emmanuel, one thing. With these acquisitions that we've seen, I think everyone understands the need to design a more efficient seat system with these type of capabilities. And that gives us early access into our customers. And so when we're in talking to our customers, we're in the design studios. If you're just assembling seats, you don't get that access. And so with ConfigurE+, where you can reconfigure the seats, and we've done a great job of growing that business, to repositioning the company for this thermal comfort management system, it's going to continue to help us grow our business. And right now, we're looking at thermal comfort products growing at 2% above market. We think that's only limited because of the cost in the mass and the packaging. When you can free that up and allow your customer to reposition these type of features throughout the vehicle, not just front rows or just a driver, but within the second row and the third row, that's where the market really expands for us. And so we're looking at this long term. These acquisitions are going to only help us differentiate our company. The integration of the different components is not just limited to the thermal components. It's the integration within the foam and the trim are essential because those are key ingredients for time to sensation, how you reduce your mass, how you reduce your cost. We've -- like I said, we're in the late stages of really taking this thing and creating a value proposition for our customer. And I think -- and I'm hopeful that we'll be able to announce some development programs and hopefully some production programs in the near future that will continue to separate us from our competition, but also help us grow. And that modular concept is agnostic to JIT. And so we can supply -- listen, Jason always talks about it, supplier sells first, create a way to differentiate ourselves. But longer term, that module is being designed to fit on like a top head -- on any type of frame that's manufactured around the world. And so we could be the sole producer of a modular component that goes into different JIT assemblies. And so we've talked about it. Our seat strategy is to continue to differentiate yourself through innovation technology. I think the world is right if you talk about electric vehicles or you talk about ICE vehicles for thermal management because that pull of electricity on that battery is essential. And when we can actually help our customers reduce that pull as far as what energy they're using and redesign the seat so that you take care of that customer in that position, it's a home run. And so when you can walk in and talk about all these different problems that you're solving, you can create a value proposition that differentiates you. And you're the only one that owns it. It's a good position to be. Now the other side, I think when we talk to our customers, our operational excellence and the way we focus on operational excellence has really helped us gain access and grow our business from some -- when I talk about some of these Conquest wins. Our quality -- we just got recognized by Silanis yesterday for a quality award. Unfortunately, I couldn't be there, but got recognized by Silanis, we got recognitions from General Motors. Just continuing to focus on delivering the best products from an operational perspective is at the core of our company. We're going to maintain that and investing in it for well over 20 years, and we're going to continue to build that reputation. So listen, I couldn't be more excited about our core with Seating. And I think the acquisitions that we're doing, and we have hopefully some announcements soon that we can talk about, continuability of sustainability, recyclability, what we're doing with the value proposition with innovation technology, how we're differentiating ourselves with these modular concepts, I think it's going to be a brand-new world in 2025 when you think about seating. And I think these -- the content and options and features that customers want, perfect, because I -- we know it. We sit in the seat every day. It should be much more intuitive, much smarter, much more better when you talk about noise and time to sensation and more efficient. So yes, I couldn't be more positive about Seating.

Yes. And I appreciate the very, very detailed answer to this opportunity. The -- what would you say is then a reasonable target for Seating growth over market?

Yes. I think we've talked about 4 percentage points of growth over market, maybe a little bit more than that over time. And some of that is -- will come through content per vehicle growth. We've seen historically 1% to 1.5% through that CPV growth. And the balance is going to come through the market share gains that we're well on our way to achieving. As Ray mentioned, we've got a 28% target. And then this thermal comfort business that we've acquired, it's about $500 million of revenue between Kongsberg and IGB. We see that business by itself growing to $800 million or so over the next 4 or 5 years. So that's -- it's a growth business in and of itself. And the margin profile of that business, particularly with the synergies between the 2 companies and synergies with Lear, the structural margin of that business will be a bit higher than currency margins as well.

I think it's one thing to point out that -- talked about is we won 2 major Tier 1 contracts just-in-time assembly. And in that contract, we were able to write very specifically that we have the ability to source Lear components with thermal management. And so we can have a dual path in respect to what was traditionally a directed component. Why talk about the customers are excited? We said, listen, these are the requirements, these are specifications you're going to meet, global management, that's within our control. But we have 2 major contracts right now that we have the ability to source ourselves all the components within thermal management. And so that's the start. And what gives us credibility, we had credibility with our own house of the software and the capabilities that we had within Lear. But the Kongsberg and IGB acquisition gives us the credibility and the resources with engineering. When you talk about pneumatic lumbars, you talk about heat and cool systems, ventilation systems, not just within the seat, but within other elements of the vehicle, the steering columns and other panels. And so it gives us that flexibility to solve that problem. But also we're already seeing contracts that are written with our ability to source ourselves not directed. And that's a big step. And I think generally, our customers right now, obviously, with the investment that they have to put in electrification, connectivity, autonomous, they're looking for areas, that a Tier 1 that has this type of capability that can solve all their problems from sustainability, recyclability, thermal management, they're giving us more responsibility. And so what was 80%, I think, is the directed content in seating today, we're starting to see that shift in the allocation of allowing a full-service supplier take over more ownership. Now you have to hit all the requirements of quality and specifications and costs and all that fun stuff. But when you can solve it holistically, that's where the efficiencies come in. And I think -- I hope everyone appreciates that when these individual components are stacked up, they are not designed the most efficient way. Love to take everyone through a JIT plant and you see the work that goes into putting these parts together, you have duplicate harnesses, duplicate modules, pneumatic pumps. We're going to fix it. And it's -- and that's what we're seeing right now. So the new contracts we quote, we quote with the intent to source ourselves the content within the vehicle.

And then shifting E-Systems and electrification. As you continue to reposition the E-Systems business for long-term growth, what are the primary drivers to reach the outline targets of $7.5 billion in revenues, maybe 10% operating margin at some point? What is the expected margin profile of some of your primary product lines there?

Do you want to start on that?

Yes. Go ahead.

See, we've got 9 minutes.

Okay. Yes. So if we look out over the next 3 or 4 years and work our way towards that $7.5 billion target, there's 3 main drivers on the revenue side in E-Systems. One, our growth in electrification. We've talked about that on the last earnings call. We had established just last year a target in 2025 of $1 billion of revenue in that space. We've already achieved that through the current awards. We've upped that target to $1.3 billion. So that's going to be a key catalyst of growth over the coming 4 or 5 years. The second is in connection systems. We've established a target of $1 billion of revenue in connection systems. It's about a $500 million business this year. We had anticipated it being a little bit larger this year. But due to the industry volume reductions, it's in that $500 million range. We had a recent award of interconnect board that's roughly $150 million of revenue if you look out at the peak revenue year 3 or 4 years out. So we're well on our way to achieving that growth target as well. And then also on just low-voltage wiring, we're seeing a real opportunity to increase our market share. We have a strong #4 position there, 7% to 8%. We see an opportunity for that to grow through new customers that we've added to the portfolio. We didn't have a lot of wire business with General Motors. We're seeing a lot of growth with GM and other new customers. And so those are the 3 sort of key components of the revenue side of it. And if you look at the margin side, again, I sort of walked you to an 8% number through the volume increases and passing through the commodities that will happen between '22 and '24. The last leg of that margin growth from, say, 8% to 10% is going to come through mainly 2 things: one, the growth in connection systems. Again, if we hit our $1 billion target, that's roughly 100 basis points of margin expansion. And then the growth in electronics, as that business continues to scale up, that has a little bit higher margin profile than our underlying wire business. And I think that's sort of the last leg that gets us to 10%.

Yes. I think just -- I'm watching the clock here, too. But when I think about E-Systems back in 2019, we really did a deep dive of where we're at, what we need to do to really generate double-digit margin. And we looked at it, we looked to study the portfolio. And there's businesses we said, listen, we're going to deemphasize parts of the business. And there's areas that we absolutely need to invest in because the growth engines and the type of returns that we're seeing played right into what our core competencies were. And I couldn't be more proud of the team of what we have accomplished. So we did split into power distribution, connection systems and electronics. And each part of that business is focused on return on invested capital. And even though we're going through some issues outside of our control, it doesn't necessarily reflect the progress we've made. I'm seeing some great steps, the most recent award with Volkswagen with the plugboard. I mean that's a very sophisticated connector business. And in power electronics or electric distribution, 80% of that catalog is unwritten. And so getting in and getting those designs done helps us take that project across not just one customer, but multiple customers. The battery disconnect, the Hummer that's sitting out there. We supply the battery disconnect, which is integrated into the battery. That's a very sophisticated electronic/connector component, and it's very unique, and we designed that for General Motors. And hopefully, if we do everything right and continue to focus on quality, like I said earlier, what we do is core of our business, we'll win the next generation of products that go along across that Hummer vehicle. And if you think about the connection systems, I mean, just a short period of time ago, we were looking at, okay, what did we do here? It's $500 million. Today, we have a clear path to get to $1 billion, and that is accretive to our overall margins. And so things are moving. And I'll tell you the most exciting thing, it wasn't that long ago, I was talking about our quoted pipeline of $600 million. The acceleration of electrification in our core components is up to $2 billion this year. And we have been winning at a clip of 30% to 35%. And we get very, very focused on our relationships with our customers and the business for quoting. That's not the whole quote pipeline if you were to take every single quote from every single manufacturer around the world. That's where we focus our attention and where we've done a nice job of growing and where we think we can get a reasonable return. And so everything that we put in place back in '19, from studying the product portfolio, being very, very selective in where we're going to invest, the growth engines that we believe are successful based on our capabilities is working. And so I couldn't be more proud of the team. I know that we have -- and this acceleration of electrification only helps us. And I think we're going to continue to really shift to connections. And the partnerships that we have with Hu Lane and IMS are going to continue to generate. We found 1,800 different connectors that we could share. And then we have direct sourcing responsibility for that. So we just integrated in our own components. The lack of catalog within the electrification of high-power wiring is open, and we just won an interconnect board that took all of our competencies from structures to M&N to our own integration of our components within E-Systems with connectors and won a very, very specialized interconnect board for a key customer. And so we're going to keep working this plan, and we've set our sights on being very successful in connection systems, the vertical integration of engineered components and electrification.

That's great. And maybe just in the last few minutes remaining, I want to open it up to you all, see if you have any questions you'd like to ask. Right here. You have a microphone in the front.

On the battery disconnect awards, we just heard from BorgWarner, they're working on a BDS unit. [ Vision ] talks a lot about their wireless battery disconnect system. Just curious how you're seeing competition develop for electrification products, whether it's higher than your typical ICE portfolio, is because people are chasing new catalogs, because the number of components is declining, and how you think about differentiating your battery disconnect system from the other ones on the market.

Well, I think when we think about how we differentiate ourselves, we've been developing products, and we're the supplier of the original [ boat ] for General Motors. So we've been designing high-power components for over 10 years. And I know there's some early -- or late entrants that are trying to develop these type of capabilities in this area. So one, I think why we were awarded General Motors the battery disconnect was because of our internal capabilities to work in a unique environment under a time frame that had to be accelerated to get it into production. And we did a great job. A matter of fact, there was an internal recognition within GM that the battery disconnect was awarded and recognized for accomplishments. So I think it's our capabilities and knowledge. I think it's the ability to work within that high-power area, and I think that comes with the experience that we had previously. But we are seeing a number of different competitors that are coming in relatively later to that area, but I -- our teams and our capabilities around the world, I think, is why we're winning business. And that ability to work in a very flexible environment that isn't a black box design but something that you can work in a collaborative cooperative way with our customers is very unique.

A question from Chris?

Is the fact that commodity costs are coming back down complicating your ability to negotiate recoveries? I could imagine purchasing organizations pointing at the charts saying, look guys, I don't see a problem. This is coming back down. So give me a call in 6 months and we'll see where it is.

Yes. I think we saw that last year. I think we've all come to the fact that this is going to be prolonged in some respects, meaning they could come back down, but they're still not going to be down to the level that we've seen historically. And so each customer, we're negotiating somewhat differently. Some of them are -- there's some type of share or, say, skin in the game on both sides directed to me. It's a 100% pass-through that -- and in wiring -- in seating, like I said, 80% of the seat is directed. In wiring, it's more like, what is...

50%.

50% is directed. So that takes away part of the negotiation. The rest, we have contract language that will help out with some of the inflationary costs, but it's the other controlled components. And those are all being negotiated slightly different. But I think -- now I think the big difference between last year and this year is the OEs are realizing that this is an issue that's going to have to be resolved, not just in today's contract, but in future contracts. And so we're kind of targeting 2 different steps here. One is get it resolved today. And then as new programs are rolling on, making sure that, that either similar or different agreement is placed for the new business we're going to be launching at the end of this year or in the next year or the following year. That's our focus. It's -- we're doing it simultaneously.

Awesome. We're a little bit over time. So I would like to thank you both. Thank you so much for joining us here in New York and for your insights and for your time. Thank you, everybody, for joining and participating in this session. And please join me in thanking the Lear team for their time and insight. Thank you.

Thanks, guys. Appreciate it.