Lear : TRANSCRIPT Wells Fargo Industrials Conference June 11 2025

Published: 2025-06-13 08:10:25 ET LEA

Published on 06/13/2025 at 08:10

Transcript

Lear Corporation

Wells Fargo Industrials Conference

June 11, 2025

Jason M. Cardew

Senior Vice President & Chief Financial Officer, Lear Corp.

Jared Anthony Fedele

Vice President, Finance, Lear Corporation

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Colin M. Langan

Analyst, Wells Fargo Securities LLC

Colin M. Langan

Analyst, Wells Fargo Securities LLC

Yeah. Why don't we kick off the next fireside chat? Very excited to host our next group, which is Lear, leading supplier of seating and electronics, as you probably know. Really it stood out, I think, over the last year for their ability to cut cost. Pretty impressive job last year, taking a significant margin from performance.

And today, we're here with Jason Cardew, CFO and Lear's VP of Finance, Jared Fedele.

Colin M. Langan

Analyst, Wells Fargo Securities LLC

Maybe to kick it off, why don't we just start with any opening remarks on how things are going in particular with Q2?

Jason M. Cardew

Senior Vice President & Chief Financial Officer, Lear Corp.

Yeah. Thanks, Colin, for hosting us today. Second quarter has really sort of continued the positive momentum

that we had built in the first quarter, strong operating performance, particularly in the things that we can control. We've made a lot of progress on our restructuring efforts on automation. We continue to have strong net performance from our wire business in Mexico, which struggled last year. That's the efficiency improvements that we saw in the first quarter and towards the second half of last year, sort of continued into the second quarter. So, a lot of positive momentum around operating performance and net performance, as you alluded to.

In terms of the financial results that we expect in the second quarter, we did withdraw guidance for the full year on our first quarter earnings call, but we are seeing another solid quarter. In the second quarter, we expect revenues of $5.9 billion in the quarter, operating income of $260 million to $270 million, so operating margin sort of in the mid-4s, free cash flow of $50 million to $100 million. Strong enough performance that we're now ready to restart our share repurchases. And so, we're looking to do that. Coming out of this discussion today, probably, target around $25 million of repurchases in the quarter. So, similar to what we did in the first quarter.

And we're also seeing a very strong new business pipeline. Our quote activities remain at a high level. So, we're very confident in our ability to continue to win business and grow our tariff negotiations, which I know we'll talk about more in a few minutes, have gone very well. We don't expect any leakage really in the second quarter. So, everything's on track and progressing in a positive manner right now.

Colin M. Langan

Analyst, Wells Fargo Securities LLC

I think you said that you would reinstate guidance in Q2 earnings. So what gives you that confidence?

Jason M. Cardew

Senior Vice President & Chief Financial Officer, Lear Corp.

Yeah. We fully expect to be able to reinstate guidance on the second quarter earnings call. Now, something could change between now and then, but our current plan is to do that. And we do see - we have pretty good visibility into the second half of the year. Our initial guidance had anticipated lower production year-over-year in the second half. And so, as we look at the second half, there have been some modest changes in our customers' plans, but really not outside of what we had anticipated previously at this point.

Colin M. Langan

Analyst, Wells Fargo Securities LLC

So, your schedules at this point haven't materially changed...

Jason M. Cardew

Senior Vice President & Chief Financial Officer, Lear Corp.

Yeah. There's been a handful of disruptions in the second quarter, but nothing significant.

Colin M. Langan

Analyst, Wells Fargo Securities LLC

And how should - there's still a lot of uncertainty. How should we think about incrementals and decrementals? And then, I think you even mentioned last quarter call concerns - potential trim issues, mix issues. Is that playing out? Or how should we think about that?

Jason M. Cardew

Senior Vice President & Chief Financial Officer, Lear Corp.

Yeah. I'll start with the last part of that question first. We did identify one change was particularly around the take rate for rear seat entertainment systems in one vehicle line where that part was imported at a very high tariff rate. And there was a reduction in the take rate. It's really been isolated to that. We were closely monitoring customer schedules, but we haven't seen any signs of mix erosion beyond that. So, that's - I would take it as a positive or encouraging sign.

In terms of the incremental and decremental margin expectations, given the volatility in the production environment, I think it is important to sort of level set that for investors, so they can build their models on what to expect from Lear for this year and beyond.

In seating, our variable margins range from 15% to 20%. That's consistent with what we've said in the past. But we do have programs below that and above that. And the key driver or determining factor there is the level of vertical integration. So if you have a just-in-time seating program without any componentry, you may have a variable margin that's more like 10% to 15%. If you have a program that is just-in-time seating plus seat covers, plus leather, plus foam, plus structures, you certainly could be in that 20% to 30% range.

So, it just really depends on the level of vertical integration, on the program in seating. And on average, that seems to work out for the 15% to 20%. Again, though, it also depends on the region. North America and Asia tend to have higher margins in our seat business; Europe tends to be a little bit lower than the average; and South America is generally in line with the average.

In E-Systems, the range is typically 20% to 25%. The biggest factor there is both vertical integration and the region where we see the production. So, our European wire margins or margins in E-Systems are a little bit higher than North America. So, volumes are down in that market. It would tend to have a bigger impact than, say, North America or Asia. So, that's kind of it in a nutshell.

Colin M. Langan

Analyst, Wells Fargo Securities LLC

Got it. Can you remind us your tariff exposure? I think you said you were 94% USMCA-compliant. So, how should we think about Honduras - potentially, I guess, challenge now. At one point, we thought it was good news.

Jared Anthony Fedele

Vice President, Finance, Lear Corporation

Yeah. And I appreciate the question, Colin. So from a gross tariff exposure for 2025, we're looking at about a

$200 million impact. That's without recovery. And we kind of look at that in two different ways. Half of that $100

million is from our business in Honduras. That's getting hit with the auto Section 232 tariffs at 25%. Now, in Q1, when we first spoke about this, we had customer agreements for about 90% recoverability of that. Where we stand today, we're almost at 100%. So, the team's done a phenomenal job, working with the customer, getting agreements in place to offset that risk, which is fantastic.

The remaining 100%, again, in Q1, we kind of split it out as to 50/50, meaning 50% of that remaining $100 million was with directed suppliers. They have customer agreements, direct pass-through, no risk to Lear Corporation. Where we stand today, it's about 60/40 now, with some of the changes that have happened with the reciprocal tariffs and everything. So, it's 60% directed that has customer recoverability pass-through. About 40% that we're left dealing with, working with our customers with negotiations and agreements. And quite frankly, I mean, we owe it to our customers to mitigate as much as humanly possible from a tariff standpoint. But our position hasn't changed. We're still going after 100% recoverability on anything tariff-related, and the team's doing a fantastic job getting there.

And then, to your earlier point on where are we at with USMCA, we still have that focus, that laser focus on making sure everything we have is USMCA-certified in Mexico and Canada. And we are over 90%, which is great. And from this time kind of last year, we were only at 77% in 2024. So over the last year, the team has made great strides in getting that up into this kind of over 90% rate, which is fantastic.

Colin M. Langan

Analyst, Wells Fargo Securities LLC

Do you have anything else that - we know about - Mexico, Honduras are obviously the biggest. Anything, like, anywhere else in the world and then, like, China in particular, a tiny amount depending on where the tariff plan maybe it'll be a little less now or bigger. Historically, it could be a big impact. Do you have anything that was in that initial $200 million that was from China because that had an outsized impact...

Jared Anthony Fedele

Vice President, Finance, Lear Corporation

Yeah. So, the regional breakdown of kind of where we say - you are correct. I mean, we import from Mexico, Canada, Honduras, we have Europe and Africa, and very little from China. I mean, we've got about - if you go kind of down the list, from Mexico about $2.8 billion of imports into the States from Mexico. And that depends, fluctuates a little bit based on volume. Seating is around $2 billion of that. E-Systems is around $800 million of that. Again, it flexes with the volume.

Majority of it is trims, seat covers, structures, thermal comfort components. And on the E-Systems side, it's really wire harnesses. Canada, about $100 million impact from - excuse me, of imports into the US. Honduras, about

$625 million, recoverability with almost 100% right now. Europe and Africa is about $100 million, $150 million of imports. And a majority of the stuff we get from Europe is directed from our customers. And China is really not monetary, really. It's nothing in the grand scheme of things for us. So, not too much, which is good.

Colin M. Langan

Analyst, Wells Fargo Securities LLC

And I think as you're expecting full recoveries, any long-term risk of having to resource? And then, I guess, the news this morning, we were talking right before about GM, maybe it's actually good news for you. How should we be thinking about the long-term implications here, because maybe your footprint is an advantage to win some business and there might be some cost of having to shift business.

Disclaimer

Lear Corporation published this content on June 13, 2025, and is solely responsible for the information contained herein. Distributed via Public Technologies (PUBT), unedited and unaltered, on June 13, 2025 at 12:09 UTC.