Lear Corporation (LEA) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the Lear Corporation Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, today's event is also being recorded. At this time, I'd like to turn the floor over to Tim Brumbaugh, Vice President, Investor Relations. Please go ahead.

Thanks, Jamie. Good morning, everyone, and thank you for joining us for Lear's Second Quarter 2026 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 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 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-K 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 second quarter results and provide an update on our full year guidance. Finally, Ray will offer some concluding remarks. Following the formal presentation, we would be happy to take your questions. Now I'd like to invite Ray to begin.

Thanks, Tim. Please turn to Slide 5, which highlights our key financial metrics for the second quarter. We are continuing its momentum in the second quarter, delivering meaningful year-over-year improvement across all metrics. Sales increased 3% to $6.2 billion driving record first half revenue of over $12 billion. Core operating earnings were $313 million, a 7% increase in the quarter and approximately 9% for the first half of the year. . Adjusted earnings per share reached $4.28, a 23% increase from the second quarter of 2025. Building on the strong growth we delivered in the first quarter. Operating cash flow increased 55% to $461 million, with free cash flow increasing 69% to $288 million for the quarter. Slide 6 summarizes our key business and financial highlights for the quarter. We continue to execute on each of our 4 strategic priorities: extending our global leadership in Seating, expanding E-Systems margins growing our competitive advantage and operational excellence through idea by Lear and supporting sustainable value creation with disciplined capital allocation. During the quarter, we continued our momentum of winning key awards in both segments, generating approximately $2.9 billion of business awards year-to-date, with more than $2.3 billion in Seating and over $500 million in E-Systems. Over 50% of this business is for new and conquest programs. Our leadership in Seating continued this quarter, highlighted by a significant set of awards with audio. Two of the programs are conquest wins of existing vehicles in Europe. -- and the third is for a future program in North America. In addition to complete seats, each program includes ComfortFlex application, combining our lumbar and message. FlexAir will also be incorporated into the third row of 1 vehicle. Winning these awards required an extraordinary effort. Ultimately, it was our industry-leading automation capabilities combined with our track record of quality and efficiency that secured these wins. One of our largest awards in recent history. Additional seating wins include complete seats for a Hyundai program in North America as well as Comfort Flex awards with BMW and a North American EV automaker. In total, we won 7 new awards for Comfort Flex and Flex are applications this quarter, bringing our total modular and innovative seed product awards to 45 Automotive News recognized Lear's leadership by naming our modular Thermal Comfort Systems, a finalist for 2026 PACE Award. Our momentum with Chinese automakers continued in both segments. Leapmotor awarded us a complete seat program for their expansion into South America, an important win as Chinese automakers grow their global footprints. In E-Systems, we continue to drive growth in our core products by securing a wire harness awards in a luxury Chinese automaker and BAIC. We continue to accelerate our capabilities through IDEA by Lear. Particularly in automation and digital tools. During the quarter, we opened our Rochester Hills advanced manufacturing integration center, hosting both customer visits and our first investor visit, with an overwhelmingly positive response. This facility showcases some of our key product and process innovations while serving as a working manufacturing facility. Notably, the FlexAir award announced today will be produced there. The progress we have made across these strategic pillars is driving our financial performance. Our strong first half has given us confidence to raise full year guidance for revenue, operating income and free cash flow. We will cover the specific revisions later in the call. Growth over market was approximately 2 percentage points for the total company in the quarter despite headwinds from program roll-offs such as the Escape and the Corsair and the wind-down of our noncore E-Systems products. Seating grew approximately 3 percentage points above market. Total company margins expanded 20 basis points year-over-year, while E-Systems margins expanded a significant 90 basis points, driven by a strong 155 basis points of net performance. Seating net performance was 40 basis points, in line with our full year target. These efforts collectively drove free cash flow growth of $117 million in the quarter. which supports our capital allocation strategy, focused on accelerated share repurchases. We repurchased $100 million of shares in the second quarter. bringing our repurchases in the first half of the year to $175 million. Given our strong cash flow and first half execution, we are raising our full year repurchase target to at least $350 million. The combination of strong financial results and disciplined capital allocation continues to drive consistent earnings per share. Our second quarter EPS increased by 23% year-over-year. reflecting our continued commitment to creating value for our shareholders. Our second quarter outperformance and full year guidance raise are a direct result of our consistent execution across our key strategic priorities. Slide 7 provides a further breakdown of our progress on delivering long-term revenue growth and margin expansion. Nearly half of our year-to-date seating awards have been for new or conquest programs providing a strong foundation for future growth. In the quarter, we secured the most significant Seating conquest opportunity in our 2026 pipeline with the Audi business win. Our remaining 2026 pipeline is robust, including several new and conquest opportunities. Over 90% of the year-to-date business awards in E-Systems have been for either new or conquest programs. In the quarter, Lear was awarded a replacement wire program with Renault, which included additional content previously supplied by another supplier. Several key new and conquest opportunities are expected to be awarded in the second half of this year. The rollout of our Thermal Comfort modular solutions continues to accelerate. The 7 wins this quarter bring our total ComfortFlex, ComfortMax and FlexAir Awards to 45, with 17 programs currently in production and an additional 11 launching by year-end. Our strategic focus on Chinese automakers continues to generate new business. The Leapmotor award marks our first win with a Chinese automaker in South America, opening additional opportunities we are currently pursuing in that region. In E-Systems, we secured awards with a luxury Chinese automaker and a nonconsolidated award with BAIC. We remain on track to deliver $75 million in IDEA savings this year. having achieved approximately $35 million in the first half with savings expected to build in the second half. Restructuring savings from last year's investments Combined with actions this year are expected to total $80 million. Through the second quarter, we have generated $50 million in savings, more than half of our full year target. Our first half net performance keeps us on track to achieve our full year margin expansion targets. Seating delivered approximately 25 basis points in the first half. while E-Systems is ahead of their full year target, having generated approximately 100 basis points. Our IDEA by Lear savings and efficiency gains are expected to accelerate in the second half to help us achieve our full year net performance targets, which supports margin expansion in both segments. Turning to Slide 8. I will provide an update on 2 key initiatives that highlight the strength of our IDEA by Lear framework. During the quarter, we opened our advanced manufacturing integration center in Rochester Hills, a facility to showcase our industry-leading capabilities in automation and digital tools across both seating and the systems. The transformation began with the installation of our fully automated ComfortFlex in ComfortMax, seat and flex air assembly lines. Customer feedback was extremely positive, but we envision something bigger. We expanded the center to highlight examples of automation we are deploying across our global facilities. While some are prototypes, several are production-ready and being rolled out across many of our manufacturing plants today. We added displays showcasing digital tools and automation of components in both Seating and E-Systems as well as just-in-time seating assembly. One highlight of the tour is a demonstration of our automated wire taping capability technology we gained through the acquisition of StoneShield. To put this into context, nearly 20% of our direct labor in wiring is in tape application alone. It is one of the most attractive areas to automate and one of the most difficult. We are planning to launch the first production application next year. In Seating, we are highlighting our 2D and 3D automated sewing capabilities. Like taping and wire harness assembly trim cover sewing is a labor-intensive operation. We have over 18,000 employees in our trim cover sewing operations globally. So the opportunity is significant. Automated tune flat sowing is in production today. We have over 200 automated sewing cells globally, reducing our labor in these applications by 50%. And 3D selling is more complex. But by combining our material handling expertise and our manufacturing integration capability, we believe we have a path to an automated solution. To bring in our just-in-time automation story to Rochester Hills, we installed cells demonstrating our automated seat finesse and end-of-line testing capabilities. Globally, we have over 50 automated seat finesse cells and over 40 end-of-line testing cells either in production or being deployed, delivering a combined $14 million in annual savings. Since the beginning of June, we have hosted 11 customer meetings in an initial investor visit, and the feedback has been outstanding. Customers have told us directly there's no automotive supplier in our product segments doing more to accelerate the use of automation than Lear. The Automotive News PACE judge is also toward the facility to see our automated ComfortFlex and ComfortMax lines firsthand, which was instrumental in Lear being named a finalist for a 2026 PACE Award. IDEA by Lear is truly a global framework, deployed across all regions and both segments. I want to share another example of that leadership. During the quarter, we successfully piloted a lights-out shift, using 12 fully automated injection molding machines at our connection systems plant in Wismar, Germany, producing low-voltage and high-voltage connectors. Lights out-automate automation of this kind is only possible when digital tools and automated inspection and packing systems are fully integrated to monitor and manage the process in real time. This is exactly what idea by Lear enables. This is a powerful proof point, demonstrating the art of the possible when our full suite of manufacturing integration capabilities is brought together to enable a new operating model. We will continue to refine these solutions and pursue additional opportunities for similar automation across our portfolio of products. Our commitment to automation, AI and digital tools is driving real tangible operating performance. positioning Lear years ahead of our competition. I couldn't be more proud of the work that we've done and the team has done to continue to extend our leadership position and look forward to demonstrating it to additional customers and investors in the months ahead. With that, I'll turn it over to -- turn the call over to Jason for a financial review.

Thanks, Ray. Slide 10 shows vehicle production and key exchange rates for the second quarter. Global production was flat compared to the same period last year and was down less than 1% on a Lear sales weighted basis. Production volumes were flat in North America but decreased by 2% in Europe and 4% in China. U.S. dollar weakened against both the euro and the RMB. Turning to Slide 11. I will highlight our financial results for the second quarter of 2026. Our sales increased 3% year-over-year to $6.2 billion. Organic sales were up 1%, reflecting the addition of new business in Seating. Core operating earnings were $313 million compared to $292 million last year, driven primarily by strong net operating performance. Adjusted earnings per share were $4.28 a as compared to $3.47 a year ago, reflecting higher earnings and the benefit of our accelerated share repurchase program. Second quarter operating cash flow increased to $461 million up from $296 million last year due to higher core operating earnings and an improvement in working capital. This improvement was partially driven by a reduction in inventories as our idea by Lear initiatives continue to improve inventory management as well as from the timing of tariff payments and rate cuts. Slide 12 explains the variance in sales and adjusted operating margins for the second quarter in the Seating segment. Sales for the second quarter were $4.6 billion, an increase of $150 million or 3% from 2025. Organic sales were up 2%, reflecting the addition of new business, including the Series M6 and M7 in China, the BMW iX3 in Europe and the Jeep Cherokee in North America, partially offset by lower volumes on it platforms in China. Adjusted earnings were $312 million, up $13 million or 4% compared to 2025 with adjusted operating margins of 6.7%. Operating margins were flat compared to last year as the benefit of net performance in our margin-accretive backlog were offset by lower volumes on Lear platforms and the impact of foreign exchange. Slide 13 explains the variance in sales and adjusted operating margins for the second quarter in the E-Systems segment. Sales for the second quarter were $1.6 billion, an increase of $28 million or 2% from 2025. Organic sales were down 2%, driven by lower volumes on Lear platforms, including several VW programs in China and the Mustang Make in North America, as well as the build-out of the Ford Escape, Focus and Lincoln Corsair reflected in our backlog. Adjusted earnings were $91 million or 5.8% of sales compared to $76 million and 4.9% of sales in 2025. Operating margins -- higher operating margins were driven by a strong operating performance, partially offset by the build-out of the programs in our backlog and the wind down of discontinued product lines and lower volumes on their platforms. E-Systems net operating performance exceeded our initial target through the first half, demonstrating strong execution across the segment. We expect this positive momentum to continue through the remainder of the year. Slide 14 provides global vehicle production volume and currency assumptions that form the basis of our 2026 full year outlook. Our production assumptions are based on several sources, including internal estimates, customer production schedules and mobility global forecast. At the midpoint of our guidance range, we assume that global industry production will be down less than 2% on a Lear sales weighted basis compared to 2025, down from 1% in our prior outlook, primarily due to lower production assumptions for China, partially offset by higher volumes in North America. We have adjusted our currency estimates, which now assumes an average euro exchange rate of $1.16 per euro and an average Chinese RMB exchange rate of RMB 6.82 to the dollar. Slide 15 provides an update to our full year 2026 outlook. Our current outlook assumes no changes to current tariff policies or significant industry-wide disruptions. Our strong financial results in the first half of the year give us confidence to increase our 2026 outlook for net sales for operating earnings and free cash flow from the midpoint of our prior outlook. The primary adjustment to the midpoint of our guidance are as follows: Revenue is now expected to be approximately $23.8 billion or 1% higher than our previous guidance of $23.6 billion. Our operating earnings are expected to be approximately $1.14 billion or 2% higher than our prior guidance of $1.15 billion. Operating cash flow is expected to be approximately $1.3 billion, and our free cash flow is expected to be approximately $640 million at the midpoint of our guidance, a $40 million increase reflecting higher earnings and improved working capital. Slide 16 compares our July 2026 outlook to the midpoint of our prior outlook. We increased our revenue midpoint by approximately $165 million, driven by higher production volumes and Lear programs, favorable foreign exchange and commodity pass-through impacts partially offset by the effects of changes in U.S. tariff policy. The midpoint of our core operating earnings outlook has increased by $25 million to $1.14 billion with operating margins of 4.8%. And -- the improvement is primarily due to higher production volumes on Lear platforms. We've included detailed walks to the midpoints of our guidance for Seating and E-Systems in the appendix. Slide 17 compares our second half outlook to our first half actual results for sales and core operating earnings. We are forecasting the midpoint of our to be approximately $11.7 billion down $289 million from our first half actual results, primarily driven by 3 factors: lower volumes from seasonal shutdowns in the third quarter, particularly in Europe, fewer production days due to Lear's fiscal calendar and planned downtime associated with the changeover of GM's full-size trucks. These revenue headwinds are expected to be partially offset by the addition of new seating business and the nonrecurrence of the onetime adjustments to reverse EPA-related tariff recoveries and the application of import adjustment credits applied retroactively and recorded in the first quarter. The midpoint of our second half operating income outlook is $529 million. with operating margins of 4.5%. The reduction in operating income reflects the expected impact from lower volumes on Lear platforms, partially offset by strong net performance driven by Idea initiatives, restructuring savings and commercial negotiations. Detail walks to the midpoints of our second half outlook for Seating and E-Systems are included in the amendments. Moving to Slide 18, we highlight our balanced capital allocation strategy. Our balance sheet and liquidity profile continues to be a significant competitive advantage for us. Our cost of debt is low, averaging less than 4%, and our debt structure has a weighted average maturity of approximately 11 years. In addition, we have $3 billion of available liquidity. Our capital allocation priorities remain consistent. We are focused on generating strong cash flow, investing in the core business to drive profitable growth and returning excess cash to shareholders. During the second quarter, our strong cash flow enabled us to accelerate our share repurchases to $100 million worth of stock, bringing total repurchases for the first half of the year to $175 million and we continued to repurchase additional shares throughout the quiet period. For the full year, we plan to repurchase at least $350 million worth of stack. Since initiating the share repurchase program in 2011, we have repurchased $6.1 billion worth of shares and returned over 85% of free cash flow to shareholders through repurchases and dividends. Our current share repurchase authorization has approximately $600 million remaining, which allows us to repurchase shares through December 31, 2026. Now I'll turn it back to Ray for some closing thoughts.

Thanks, Jason. As we reflect on the second quarter, I'm very proud of what our team has accomplished. We delivered record first half revenue of over $12 billion, grew our core operating earnings by approximately 9% and increased our adjusted earnings per share by 23%, all while navigating a dynamic and uncertain operating environment. Our results this quarter demonstrate the strength of our strategy and the quality of our execution. We are winning meaningful new business with Audi, Leapmotor and with customers around the world, while simultaneously expanding margins, accelerating automation and returning significant capital to our shareholders. IDEA by Lear is not a future initiative. It is delivering real measurable results today from our advanced manufacturing integration center in Rochester Hills to light out pilot in Wismar, we are proving that Lear is years ahead of our competition in operational excellence. We entered the second half of 2026 with confidence. We have raised our full year guidance, we have momentum in both segments, and we have a clear and disciplined path to creating long-term value for our shareholders, our customers and our employees. We will now open up the call for your questions.

[Operator Instructions] Our first question today comes from Dan Levy from Barclays.

Thank you for taking the questions. I wanted to start with the question of just unpacking first half to second half, and I see on Slide 17, thank you've laid out some of the dynamics if we just do some of the back of the envelope on the implied volume decline and what you're getting versus performance, it does imply sort of a steeper decremental margin on that lost volume. So maybe you can just unpack why that volume piece is so heavily outweighing the performance? And maybe just any other comments on what other might be within that performance? What are you assuming in sort of the EPA tariff refunds, et cetera?

Yes. Dan, if you look at the change in operating income relative to sales first half to second half, it does appear to be heavier downward conversion than you would ordinarily expect. And there are some unusual factors that are driving that even outside of volume backlog and the wind down you have, for example, the impact of the tariff refunds. So you have a $190 million higher revenue in the second half versus the first half just because of that with no earnings attached to it. But if you just sort of combine that volume mix, backlog wind down together, the sales reduction is about $664 million. And the downward conversion on that is still a bit heavy at 25% or $167 million. And if you unpack that into sort of the basic building blocks of that, you have your typical variable margin conversion on both the volume reduction and the wind down, partially offset by the backlog rolling on at or above our segment average margins. And so what's happening there as you have, for example, with our new business with Audi in Europe, you have a new facility, you have a new fixed cost structure. And so you have that volume rolling on at segment margins. and you have volume reductions on existing platforms rolling off a variable margin at the variable margin. And so the combination of the 2 is what's leading to that a bit heavier than ordinary conversion. I think that the other thing to highlight here, too, is this first -- in the first half to second half dynamic is there's 2 unique factors that are particularly impacting the second half. We have one is the change in our fiscal calendar, which ended up putting more workdays in the first quarter and fewer work days into the fourth quarter just as we roll forward our typical 4-4-5 calendar. That was the impact that resulted from that. And we highlighted that on our first quarter earnings call where we benefited a little bit on the volume line as a result of that. The other factor is GM's changeover of the full-size pickup that starts in the second half of this year. And so that's a heavily vertically integrated platform -- and so that -- the conversion on that is a little bit heavier than, say, an average program in our Seating business. And so I think the other important point, looking at first half to second half is that once you work through the impact of lower volumes, partially offset by the backlog is that there is strong net operating performance factored into the second half outlook with 55 basis points of improvement sequentially -- both business segments have sequential improvements in operating performance that we're anticipating. And so the momentum that we have built carried into this year from a strong finish to last year and the strong performance in the first half of this year. we see that continuing in the second half of the year. So we do expect that to be positively impacting the second half of the year. And your follow-up question was on the IEEPA tariffs. Can you just repeat that? I missed the last part.

I think -- it was just the impact of IEEPA, but I think you addressed that as far as the refunds piece. As a follow-up wanted to ask the margin question zooming out. But I think the challenge that you've had in the past is you put up very good net performance, but there's just been number of different issues between volume mix that have weighed down the margins. And so I guess, zooming out here, what is the potential now for finally, net performance to begin to outweigh volume mix dynamics and to grind that broader margin outlook higher? And maybe you could double-click specifically on E-Systems is where I think last month, you talked about path to 8% that was somewhat volume dependent, but it sounds like there's a few things going on there.

Yes. I think we were anticipating a question on this, and I'm going to go into a little bit more detail than the question you've just asked. We're in the middle of our planning process for 2027. So obviously, we're thinking about the revenue outlook for next year and margin outlook in both businesses, not just next year but over the next several years. And so a subset of this will be what we see specifically for E-Systems. But let me just kind of take a step back and talk about what we're seeing in terms of our outlook for growth and what that may mean for margins longer term in both businesses. We have tremendous positive momentum with new business awards and conquest words in both business segments. The strategy that we outlined several years ago and been executing against that is has really been validated through the new business awards that we've announced over the last several earnings calls. What we're doing with Idea by Lear has positioned us as the clear industry leader in Seating, through both product and process innovation and our intense focus on quality, cost and our manufacturing footprint in E-Systems has led to important new business awards in that segment as well. Our customers have clearer strategies for their future products. And as a result, the cadence of sourcing is stabilized and more closely resembles what we experienced before sort of that start-stop transition of the industry from ICE to EVs. And as a result of that, we have more clarity in our 3-year outlook for revenues, and we plan to return to our historical practice of providing a 3-year backlog with our fourth quarter earnings call and our initial 2027 guidance early next year. As we sit here today, we see a very robust 2029 backlog, very likely better than either '27 or '28 backlog, which collectively are also looking robust. On our fourth quarter earnings call, we announced the North America Truck Conquest award and seeding the largest in our history, -- plus the GM Orion, full-size truck and SUV award. On our first quarter call, we announced the GMT1 SUV Wire Award and the key Electronics award with a North American OEM. On this call, we announced the key award with Audi both conquest and new. And over the last 3 earnings calls, we've announced a significant number of new awards with the Chinese OEMs in China and outside of China. On the last call, we said our 2026 to '28 backlog had improved by $400 million from what we had on contract at the start of the year. That's still the case, perhaps maybe a bit more weighted towards '28 than '27 as we initially saw it. But with all that said, the full benefit of the strategy and the resulting new business awards will really show itself in 2029. 2028 will also be a pretty solid year. But 2029 is the year where a lot of this new business launches and the full revenue and earnings power associated with that will show up. Sort of offsetting that robust backlog in the near term, we have a few factors to work through. We have the wind down of the noncore electronics products you highlighted sort of obscuring the net performance in E-Systems. That's $90 million of revenue that goes away this year, $235 million next year that will weigh on the 2027 revenue outlook. We also have a little bit of a challenging setup on production volumes on key programs, which, again, we're in the middle of the planning process, and this will continue to be fluid. But just a couple of things to highlight there. And if you look at Mobility Global's forecast, I think you'll see this as well. JLR's had a fantastic year recovering from that cyber impact last year that disrupted their production Ford on the Explorer and Stellantis with the Jeep Grand Wagoneer also had really strong years. So collectively, I think we expect those 3 platforms to pull back a bit going into next year. you heard General Motors' comments about the full-size truck and SUV volumes being sort of flat next year with this year as they change over to the new model and launch Orion before going higher in 2028. And lastly, you've seen significant weakness in the China domestic market through the first half of this year in some of our important European customers have talked about lower volumes in that market. So as we finalize our revenue outlook for next year, those are just a few examples of what we're working through. And of course, other changes could be announced between now and the end of the year. For example, I wouldn't be surprised to see try and step in and do something to try and repair the weak demand environment that exists in that market. Now on the margin side, and what we're seeing coming into -- going into next year and beyond, Frank and Nick's teams have made tremendous progress on idea savings, restructuring savings and other after collectively have us on track to meet or exceed the 40 and 80 basis points of net performance in C&E systems, respectively, this year. We have a very robust pipeline of new opportunities and we expect another 40 and 80 basis points in C&E systems net performance next year. And that net performance underwrites a multiyear plan of margin improvement in E-Systems in particular. We're not happy with where margins are right now in that business. We've made meaningful progress in the first half of the year. We do have the fact that the wind down of products that we exited plus the build-out of the escape course are focus sort of offsetting the benefit of net performance. But as we get through that sort of next couple of years, complete the wind down, you'll be able to more fully see the margin power potential in the systems of net performance. And so it's not likely in '27, but as you progress through that '27, '28, '29 time frame, we do expect steady improvement in operating margins, any systems in particular and really for the company overall.

Our next question comes from Joe Spak from UBS.

Thanks, Jason, and that is incredibly detailed. So maybe just shifting gears a little bit back to '26. I know you provided a lot of sort of the changes in the outlook now versus prior and half-over-half. I guess now versus prior, though, is compared to February, and I know you sort of had already previously talked about sort of the change in tariff recoveries. Was there any sort of change there? Is the half-over-half benefit on tariff recovery is really just a function of like it's less of a headwind half over half. And then maybe finally, like previously you talked about $400 million of cushion on either side of the guidance and how you raised the bottom end. So some of that cushion is taken away. But would be curious to sort of get your sense of what type of cushion you think is left in the full year view?

Sure. Starting on the tariff side, it's really the refunds that we recorded in the first quarter that related to 2025, both on the IEEPA tariffs and then the export credits. And so -- the only thing that's changed with tariffs in our outlook is the impact of the 301 tariffs and 122 tariffs were -- are about $40 million less than what we had assumed. So now the year-over-year impact on revenue is about $40 million more than it was previously. Nothing else has changed in terms of how it impacts earnings. It's just a mechanical impact on revenue. In terms of the guidance, I think what you outlined is exactly what we had said previously. The only thing that has changed, Joe, from sort of mid-second quarter and from our first quarter earnings call, is the magnitude of the weakness in China. And so that is really influencing the magnitude of our guidance raise. And had it not been for the sort of pervasive weakness in that market, we likely would have raised guidance a little bit more today and also probably would have felt better today about the high end of the guidance range. And you just look at domestic sales in China, they're down 20% through the first half of the year. I think as the first half is playing out, the expectation was that by the time you get to the middle of the year and into the second half of the year, there would be an improvement in demand in that market and a recovery in sales. And what we've embedded into our guidance is continued weakness in China in the second half of the year, particularly on our global customers, but also, in certain cases, and select Chinese automakers as well. And so that's probably the biggest thing that has changed. And in terms of where we end up within the range that we're guiding to today, I think that's probably the biggest wildcard. If China steps in and does something to incentivize vehicle purchases, and volumes recover, that could push us back towards the high end of the guidance range. We've seen incredible resilience in the North America market, particularly on the truck side. So if that also could drive us to the high end of the range. And then the low end of the range is in place to protect against perhaps economic weakness stemming from the continued conflict in Iran and the impact that, that may have and vehicle purchase decisions in North America or Europe because of affordability or other associated reasons. So that's what we've tried to protect for at the low end of the guidance range. And we think as we sit here today, we're pretty balanced at the midpoint. We're hopeful that some changes happen that drive us towards the high end, and we've protected for maybe some unexpected begins at the low end.

Okay. And then, Ray, you mentioned the let motor win in South America, and you sort of -- I think you alluded to some also potential future business there. And I'm just curious, like my assumption would be that you've got some existing and maybe excess capacity in South America. So -- is this sort of an opportunity to sort of refill some of those facilities there? Or is there additional investment needed like major investment needs, I guess, to sort of take on that business?

No, there's no major investment required. We do have capacity that's available to us. But I think something that's been an important ingredient that not only Leapmotor, but with Audi was our capabilities, our technology or innovation. I think we've done a really nice job of -- with the Chinese and with the traditional OEMs to separate ourselves, when it comes to efficiency, our customers at this point, obviously, there's a lot of pressure on cost innovation, implementation of speed to market. And everything that we've been really developing internally through acquisitions, organic positioning ourselves with human capital around software development, digital tools and capital helps us. And so yes, there's -- it's not going to be a major investment because we do have open capacity. But in addition to that, one of the right spots is just the recognition we're getting from our customers is the Audi win was -- I mean equally as important as 1 of the wins we talked about earlier this year. It was a significant win, and it was really valued from Audi's perspective and based on our capabilities. And I think generally, I used the word survival mentality in a lot of respects in the most diplomatic way that we can, but the companies that are differentiating themselves with technology. It's very attractive to the Chinese OEMs. And now more importantly, even to the traditional OEMs, and it's really how we've been able to think separate ourselves. So there was a simple answer to your question, but I did want to expand on it because there's a lot that's going into how the OEs are looking at the supply base differently and the needs that they have for technology. And so the importance of what we've been investing in over the last 10 years around digital AI tools and automation couldn't be more important and critical to how our growth is, and Jason mentioned it, man, I'm happy where we're at with our growth. And you look at contracts in hand, starts in '28, '29 and '30 mean we're in a solid position of real strong growth. And so -- the teams here right now, we're continue to push it. They're doing a great job. I think there's going to be more good news in the second half. We just have to lock down those contracts.

Just to add one thing to Ray's comments on the award of Leapmotor in South America we are the, by far, the largest seat supplier in that market. We do have capacity. In this particular case, we motors will be building this vehicle in Stellantis facility where we have the seats today. And so the capital investment is pretty limited. As a result of that, we have the capacity in place. And this is the first program of what may be several programs ultimately that can be produced in the same just-in-time footprint that we have today. .

Our next question comes from Itay Michaeli from TD Cowen.

Just -- just a couple of follow-ups. First, just on the second half outlook in China. I was hoping you could maybe quantify a bit more roughly as to kind of how you're thinking about the assumptions for domestic sales there and production in the midpoint of your guide. It looks like overall volume mix, second half is down 6% year-over-year. Just be curious how much of that is tied to China?

Yes. I think the biggest challenge that we see is in the China market. Historically, the fourth quarter is very strong in China. So it's tempers the weakness that I'm describing somewhat. But what the Chinese automakers have done has supplemented the weak demand in the domestic market with a ratcheting of exports. And so the Chinese automakers are exporting more than the global automakers from that market. Although the global automakers also export from that market, and that helps to offset maybe some of the weak domestic demand. But I think the China market is what we're most focused on as we sort of assess the range of outcomes for the balance of this year. And so we have built into our guidance a continuation of the weakness that we saw in the first half of the year continuing into the second half of the year. Now what we didn't talk about and it didn't include in the material, but in our nonconsolidated joint venture joint ventures in China. We do see a bit of an offset to that. We actually saw revenue growth in the second quarter in our nonconsolidated JVs. And so if you look at growth over market on that basis rather than just a consolidated business, there's a little bit of an offset, and that's highly concentrated with Chinese OEM business for us. So I expect weakness to continue in the domestic market. I don't have any specific figures to share with you. I guess maybe one other data point that's sort of embedded in our outlook is continued share shift from traditional customers to the Chinese automakers. And as we revised our guidance for the year, that the percentage market share change went from roughly 1.5% this year to 3%. And so when we came into the year, we expected global customers to lose about 1.5% share to the Chinese. And now we've embedded 3%. So we've tried to capture what's happening in that market, but it's very dynamic. And I think another important point there is we have been very successful at growing with the Chinese automakers we've got $550 million of new business awards year-to-date. So what's that almost 20% of our new business awards have been with the Chinese automakers and less than 10% of our revenue today is with Chinese OEMs. So a disproportionate share of our growth is with the Chinese automakers, which I think helps us longer term, we're well on track to get to 50% of our revenue being with the Chinese automakers in 2027, and then that inflects much higher as you kind of work your way through the long-range planning time horizon, say, over the next 3 years. So I think we're doing the right things. We're focusing on the right customers -- we certainly could grow faster with them if we chose to, but we're protecting returns. Our return expectation is unchanged. The margin profile of our business in that market is relatively unchanged and strong -- and that's sort of the way we're looking at that market.