Good morning and welcome to the Lear Corporation Third Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please also note today's event is being recorded. At this time, I'd like to turn the conference call over to Ed Lowenfeld, Vice President of Investor Relations. Sir, please go ahead.

Thanks, Jamie. Good morning, everyone, and thanks for joining us for Lear's third quarter 2021 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-Q and other periodic reports. I also want to remind you that during today's presentation, we will refer to non-GAAP financial metrics. You are directed to the slides in the appendix of our presentation for the reconciliation of non-GAAP items to the most directly comparable GAAP measures. The agenda for today's call is on Slide 3. First, Ray will review highlights from the quarter and provide a business update. Jason will then review our third quarter financial results and our full year 2021 outlook. Finally, Ray will offer some concluding remarks. Following the formal presentation, we'll be happy to take your questions. Now I'd like to invite Ray to begin.

Thanks Ed and good morning everyone. Please turn to Slide 5 where I will provide a brief overview of our third quarter financial results. The third quarter was marked by the continuation of supply chain challenges the auto industry has been facing. Our financial results were negatively impacted not only by significant volume reductions versus last year but also by low visibility from our customers leading to short notice production shutdowns. Slide 6 highlights numerous achievements in the quarter including innovation, quality, awards, and strategic investments in both business segments. In the third quarter Lear's sales growth outpaced the market by 9 percentage points with strong growth over market in both seating and E-Systems. Continued new business wins, as well as products that are favorably aligned with the industry shift to electrification, are expected to deliver continued growth above market over the next several years. Last week we announced the acquisition of substantially all of Kongsberg Automotive's interior comfort division, which will further strengthen our industry-leading seating business. I will comment further on this acquisition a little later in the presentation. On the E-Systems side, we announced agreements to form two separate joint ventures which will further enhance our capabilities in electrification. The joint venture with Hu Lane, which we expect to close later this year, will enhance our growing portfolio of connector capabilities for both high voltage and low voltage applications. This joint venture with Shinry will integrate complementary portfolios of advanced onboard chargers from Lear and Shinry and increase access to a broad range of customers. We also continue to be recognized across both of our business segments for excellence and innovation in quality. We won our third consecutive Automotive News PACE award and two PACEpilot awards, more than any other supplier. Lear has long been known as a leader in seat quality, and this year we won more than twice as many seat quality awards from J.D. Power as any other company. We increased cash returns to shareholders in the quarter by doubling our dividend and buying back more stock. In total, we returned $100 million to shareholders during the quarter. We also increased our credit agreement to $2 billion and extended the maturity to 2026. With respect to capital allocation, we continued to follow a balanced plan that includes organic investment, inorganic investment, and returning excess cash to our shareholders. Turning to slide 7, our seating business continues to grow faster than the market, reflecting our strong position in SUVs, CUVs, and luxury vehicles. In the third quarter, seating growth over market was 8 percentage points, reflecting new business on the Ford Bronco and Bronco Sport, the Hyundai Tucson, and strong performance from the luxury brands in Europe. Seating also benefited from strong demand from GM's full-sized SUVs. During the quarter, we were awarded key programs with GM, BMW, Stellantis, Nio, and Great Wall. There are additional programs we expect to be sourced prior to the year end. We also received a new development award for our award-winning ConfigurE+ product. This award is with a European OEM and is expected to launch in 2026. Customer interest in our patent-protected ConfigurE+ product remains very high. We continue to move forward on key launches in the quarter, including a new plant in Canada to supply seats for GM's large pickup trucks at the reopened Oshawa plant. Other key ongoing launches are highlighted on the slide. A few weeks ago we broke ground on our new energy-efficient jet facility in Detroit to supply seats for GM's Battery Electric Truck programs. I've already touched on the innovation and quality awards we received in seating, but I want to spend a little bit more time explaining the PACEpilot award for Thermal Comfort. This new product that was developed jointly with Gentherm integrates intelligent climate control software into a complete heating system. The algorithms and software controls were developed by Lear and use a combination of occupant temperature data, seat position, and cabin temperature to optimize energy usage within the vehicle and keep passengers at an optimal temperature. Please turn to Slide 8, where I will provide more details on the Kongsberg acquisition. Kongsberg is a recognized automotive supplier specializing in luxury comfort seating solutions with strong market positions in seat size, lumbar, seat heat, and ventilation systems. Comfort features continue to be of increasing importance as automakers look to improve the driving experience through product differentiation, increased efficiency, and improved performance, especially in luxury SUV and electric vehicle segments. The company has almost 50 years of experience in seating comfort solutions, with tactical centers and sales offices in three different continents and an experienced team with approximately $300 million of annual revenue. Kongsberg has a well-balanced customer portfolio built on longstanding relationships with leading premium automakers. Kongsberg is a global leader in seat massage and holds the number three position in lumbar and adjustable comfort. The company is a technology leader with expertise in pneumatic comfort systems and patented technology that enables superior performance, weight reduction and packaging flexibility. In addition to performance benefits, they're also much quieter, which is even more important in electric vehicles where noise will be much more noticeable. Kongsberg also has strong market positions as the number two player in heat mats and the number four player in vent systems for thermal comfort. On Slide 9 I will highlight how Kongsberg will enhance our competitive advantages in seating. This acquisition is consistent with other acquisitions we have made over the past decade to enhance our vertical integration capabilities. These moves have enhanced growth, margins, and extended our market leadership in luxury and premium seating. This acquisition extends our capabilities in comfort systems solutions, further solidifying our position as the most vertically integrated seating supplier while bringing additional priceable content to our offerings. It strengthens our ability to serve EV and luxury SUV customers, providing them with the next level of vertically integrated design solutions. Integrating Kongsberg into Lear’s operations solidifies our strategy to offer a complete suite of luxury comfort seating solutions to our OEM customers and ultimately to the consumer. This combination will enable Lear to improve overall seat system performance by offering more efficient, lower weight, and flexible packaging design solutions. The total addressable market for massage, lumbar, heat, and ventilation products is estimated at $2.5 billion to $3 billion. IHS trend data indicates this market will grow about 2 percentage points faster than the vehicle production over the next five years. Based on our assessment of industry megatrends, we expect the market to grow even faster in that time frame and beyond. Customers are looking for features to improve the driving experience as cars become smarter, and a higher emphasis is being placed on interior comfort. We're already seeing this with luxury and EV customers, and we anticipate this trend and focus on interior comfort to further increase when more autonomous cars come to market. We also expect increased adoption of seating comfort products beyond the luxury segments into higher volume vehicle segments. In addition, we believe that by creating a more efficient packaging solution, we will see more proliferation of seating comfort systems in the rear seats. Perhaps the biggest opportunity, which will unfold over a longer term, will come with the acceleration in electrification, which requires more efficient heating and cooling systems in the cabin. Our expertise in software and algorithms combined with heating and cooling products from Kongsberg and our other partners will position us as one of the leaders in this area. Slide 10 highlights leading performance from the latest J.D. Power USC quality and satisfaction study. For years, Lear has consistently been recognized by industry experts and our customers as a leader in seat quality. In the latest J.D. Power seat quality survey, Lear was the only seat supplier to win two first-place awards. We also won five additional awards, and more than twice as many total awards as any other seat supplier. Our leadership in luxury and SUVs was evident by the multiple awards we received in both categories. The breadth of our wins was notable, as well, with awards for products from six different OEMs in six out of seven different categories. Please turn to Slide 11 for an update of the E-Systems business. In the third quarter, E-Systems sales grew 9 percentage points faster than the market, reflecting new business on the Ford Bronco Sport and the Mustang Mach-E in North America, along with strong performance in connection systems in Europe and with GLE and the Great Wall in China. We have won over $1 billion in business awards so far this year, over 80% of which are new for Lear. Based on awards to date, our 2022 to 2024 backlog is expected to be higher than our prior three-year backlog. We'll update and provide details on our backlog in our next earnings call. With the momentum of new business wins, we expect our E-Systems business to continue to grow faster than market for the next several years. Despite the industry slowdowns, we remain busy executing launches with Mercedes, Volvo, Jaguar, among others. We also are launching our initial programs with GM and Audi on a recent award-winning battery disconnect unit and our first to market 5G telematics control unit. Our connection systems business is on track to grow to approximately $600 million next year. Growing this part of our business is part of our strategy to increase the size and strength of our electrical distribution systems business and increase our margins. In addition to organic investments, we are entering into joint ventures and partnerships and making acquisitions to enhance our capabilities in connection systems. We already are seeing benefits from our M&N acquisition and are developing new high-speed connectors with IMS. We are looking forward to closing the Hu Lane joint venture by the end of the year, which will increase our presence in connector catalogs. We're also making progress on our plan to grow our connection systems business to $900 million to $1 billion by 2025. We will continue to identify and pursue additional acquisitions or partnerships to accelerate this growth. On the power electronics side, the joint venture announced yesterday with Shinry will expand our capabilities, improving manufacturing and design efficiencies for onboard chargers. Now please turn to Slide 12 for a brief summary of our recent awards we have received on innovation and quality systems. Lear won our third consecutive Automotive News PACE award for the battery disconnect unit we designed for GM. This product controls all power switching in and out of the battery pack. Our design incorporates breakthrough thermal management innovations that improve the efficiencies of large and high-performance electric vehicles. We'll be supplying this part on the GMC Hummer EV, the Chevrolet EV Silverado, and other vehicles in GM's battery electric truck programs. We are also pursuing opportunities on strategic EV platforms with other customers. We also won our PACEpilot award for our 5G V2X Telematics Control Unit, a single state-of-the-art installation featuring nine antennas integrated onto one printed circuit board to support all next-generation wireless technologies. Our design removes the shark fin external antenna required on many vehicles today, reducing complexity and improving styling capabilities and aerodynamics, which is particularly important for EVs where every element that increases range is critical. We have received interest from numerous customers to commercialize this technology. We also have been recognized by our customers for quality. A few weeks ago, we received the World Excellence Award from Ford for our plant in Pacheco, Argentina and earlier this year we received two plant quality awards from General Motors. And now I would like to invite Jason to review our third quarter financial results and full-year outlook.

Thanks Ray. Slide 14 shows vehicle production and key exchange rates for the third quarter. The impact of continuing component shortages led to a significant reduction in global industry production in the third quarter, particularly in our two largest markets, North America and Europe. As a result, global vehicle production in the third quarter decreased by 19% compared to 2020, and on a Lear sales weighted basis, global production declined by approximately 25%. From a currency standpoint, the U.S. dollar continued to weaken against the Euro and RMB compared to 2020. Slide 15 highlights Lear’s growth over market in the third quarter. Overall company growth over market was a strong 9 percentage points, with E-Systems growing nine points and seating growing eight points above market respectively. Growth over market in North America of 12 points reflected the benefit of new business in both segments and strong production on GM's full-size SUVs, as well as Mercedes SUVs. In Europe, growth over market of five points was driven primarily by new businesses while strong performance in the luxury segment and seating. Increased business in connection systems in Europe also contributed to the growth over market performance. In China, growth over market of four points resulted from strong production on BMW programs in seating and new business with GLE and Great Wall in E-Systems. Year-to-date, Lear’s sales have grown faster than the market by nine points that was above market growth in both segments. Slide 16 highlights our financial results for the third quarter of 2021 compared to 2020. Our sales declined 13% year-over-year to $4.3 billion. Excluding the impact of foreign exchange, commodities, and acquisitions, sales were down by 16%, primarily reflecting lower production and Lear platforms, partially offset by the addition of new business. Semiconductor shortages in the quarter negatively impacted our revenue by approximately 24%. Core operating earnings were $98 million compared to adjusted operating earnings of $327 million last year. The reduction in earnings resulted from the impact of lower production volumes and higher commodity costs, partially offset by positive operating performance and addition of new business. Adjusted earnings per share were $0.53 as compared to $3.73 a year ago. Third quarter free cash flow was negative $157 million compared to $474 million in 2020. Free cash flow was negatively impacted by lower earnings, higher capital expenditures, and an increase in working capital. Working capital was higher in the quarter as volatility in customer production schedules resulted in elevated inventory levels. Slide 17 explains the third quarter year-over-year variance in sales and adjusted operating margins in the seating segment. Sales in the quarter were $3.2 billion, a decrease of 526 million, or 14% from the third quarter of 2020. Excluding the impact of foreign exchange, acquisitions, and commodities, sales were down 16%, reflecting lower production, partially offset by the benefit of new business. In seating, production downtime in the third quarter related to semiconductor shortages reduced our sales by approximately $1.1 billion, or 25%. Core operating earnings were $144 million, down $142 million from the third quarter of 2020. Lower volume on their platforms and higher commodity costs were partially offset by positive net operating performance and margin-accretive backlog. Slide 18 provides details for the third quarter year-over-year variance in sales and adjusted operating margins in our E-Systems segment. Sales in the third quarter were $1.1 billion, a decrease of 9% from the third quarter of 2020. Excluding the impact of foreign exchange, acquisitions, and commodities, sales were down 15%, driven primarily by lower volumes somewhat offset by a strong backlog. In E-Systems, production downtime in the third quarter related to semiconductor shortages reduced our sales by approximately $300 million, or 21%. Core operating earnings were $23 million or 2.1% of sales compared to $93 million in 2020. The decline in earnings resulted primarily from lower volumes, higher commodity costs, and semiconductor and COVID-related premium costs; the decline was partially offset by margin-accretive backlog and positive net performance. Now please turn to Slide 19 where I'll briefly talk about our balance sheet and liquidity. Last week our treasury team took advantage of favorable market conditions and our strong financial position to opportunistically increase and extend our revolving line of credit. The credit agreement was increased to $2 billion, and the maturity was pushed out by more than two years to October of 2026. Our strong balance sheet supports investments in innovation and growth and positions Lear to quickly execute bolt-on acquisitions, such as the pending acquisition of Kongsberg Automotive’s Interior Comfort Division, expected to close in the first quarter of 2022. We continue to analyze additional organic and inorganic investments to strengthen both of our business segments. At the same time, we remain fully committed to returning excess cash to shareholders. In the third quarter, we returned $100 million through continued share repurchases and the doubling of our quarterly dividend of $0.50 per share. Slide 20 provides the assumptions for global vehicle production volumes and currencies that form the basis of our 2021 full year outlook. We've based our production assumption on several sources, including internal estimates, customer production schedules, and IHS forecasts. Due to the ongoing supply disruptions, we expect full year 2021 global vehicle production to be roughly the same as 2020 and generally in line with the most recent IHS forecasts. From a currency perspective, our 2021 outlook assumes an average Euro exchange rate of $1.19 per Euro, and an average Chinese RMB exchange rate of RMB6.46 to the dollar. Slide 21 compares our updated outlook to our prior outlook for sales and core operating earnings. We are reducing our outlook to reflect the impact of significant additional reductions in customer production schedules that have resulted from continuing component shortages. We are forecasting sales in the range of $18.8 billion to $19.2 billion and operating income in the range of $750 million to $850 million. Our 2021 outlook for core operating earnings at the midpoint was down $215 million to $800 million, primarily reflecting lower volumes and modestly higher commodity costs, partially offset by net performance improvements. Slide 22 highlights a more detailed view of our updated financial outlook. Despite the reduction to our revenue outlook, we are projecting the company to deliver full year growth over market of approximately eight percentage points. This reflects both the strength of our new business backlog, as well as our strong customer program and product portfolio. Adjusted net income is expected to be in the range of $420 million to $500 million down $180 million at the midpoint from our prior guidance reflecting lower sales. Our outlook for free cash flow for the year is expected to be approximately $175 million, which is lower than our prior outlook by $250 million reflecting both lower earnings and higher working capital. Full year free cash flow could be further impacted by continuing production disruptions, which may lead to temporarily higher working capital. While our outlook reflects our best insight into customer production plans for the remainder of the year, the production environment remains volatile. As we've done in the past, we plan to provide an update on our financial outlook during an investor conference in early December, reflecting new developments and industry conditions. Now I will turn it back to Ray for some closing remarks.

Thanks, Jason. Nice job. Please turn to Slide 24 where I will conclude with some thoughts on our 2022 operating environment. While it's too early to provide guidance for next year, we thought this slide might be a little bit helpful to indicate what trends we are tracking. There are many positive drivers as we head into next year and beyond. Most importantly, customer demand is strong and dealer inventories are extremely low. This positions the industry for a strong recovery once we get beyond the short-term supply constraints. We have a strong product lineup, which is driving new business wins. We are laser focused on driving operational excellence, and the improvements we've made in both business segments this year will support margin improvements going forward. The challenges are very similar to those we've faced over the last few quarters; limited visibility on production schedules, commodity and labor inflation, and supply chain disruptions are expected to continue to impact the auto industry into 2022. While no one in the industry is immune and it is difficult to predict when production volumes will normalize, I know that we have the right team and we have the right strategy in place to capitalize when the industry conditions do improve. The strength of our balance sheet, along with the cash generating capabilities of our business will continue to provide us with financial flexibility to support investments in our business while returning capital to our shareholders. In closing, I want the team to know how proud I am of their performance and for focusing on the things we can control. And now we'd be happy to take your questions.

Our first question today comes from Joseph Spock from RBC. Please proceed with your question.

Thank you. Good morning, everyone. Jason, you previously for the third quarter talked about 22% to 24% decrementals on the lowered sales guidance, and the third quarter came in a little bit better at 13%, so and you talked about some of the better performance. If I compare your new implied fourth quarter guide versus what you were previously expecting for the fourth quarter when you last reported, it's also that same sort of 23% decremental on the lower sales, so that is sort of the same range you previously indicated for the third quarter. I'm just wondering, is there something in the fourth quarter that would prevent you from coming in better than you did in the third quarter? I just want to try to understand the operational differences between the fourth quarter and the third quarter?

Sure, Joe. Yeah, there's a couple of things going on here. So part of the performance in the third quarter was a result of commercial negotiations that we had anticipating closing in the fourth quarter. And so we had a little bit of timing benefit from that in Q3. In addition to that, because of the deteriorating outlook, we had some reductions in our incentive compensation accruals. And so that benefited the third quarter and won't in the fourth. Those are the two primary factors. To a lesser extent, the mix of programs that were running in the fourth quarter versus the third quarter is a little less favorable for us. So the volume component of the change in guidance is a little higher downward conversion in the fourth quarter than the third quarter.

Okay. Is there any way to quantify the commercial benefits or the incentive comp to the third quarter?

It's about $20 million of favorability in the third quarter that is offset as $20 million of unfavorable performance in the fourth quarter.

Okay. And then just on, thanks for the strategic color on Kongsberg. I guess just a couple points here. I know they also sold to your competitors. I'm expecting that won't change as selling between seating suppliers is pretty standard, but if you could just confirm that? And then I guess more importantly, it looks like they're running negative mid-single-digit margins, so how quick do you think you can get that business profitable with their scale and some deal synergies?

Yeah. To answer the first question, obviously this isn't our first acquisition where we've had vertical integration. In the supply base today, we typically buy components and share components with some of our competitors, and there hasn't been significant shifts in revenue even post-acquisition. So I think that's a very low risk, if any risk at all. The way I look at the opportunities, Kongsberg has done a nice job and they're struggling with some of the same issues that we're all struggling with this year. So I think some of that is just temporarily putting pressure on the margins, but when I look at the opportunities there, I believe we can leverage our purchasing strength and operational strengths, and I think it will be a relatively quick turnaround. I mean, that's when I say quick, I think the timeframe will be about 6 to 12 months to see substantial improvements. We've put a team in place. Frank Orsini is here, President of our seating business, and we've been looking at this for quite some time. We've been studying the products, and we've been identifying areas of opportunities where we can really dive in and optimize costs and technology. So we're already in the works. I mean, we're working on different solutions, different ways to make the system more efficient, and drive value longer term. So I don't see that as a long-term issue. I think it's more short-term given some of the economic climate that we're facing today. But more importantly, some of the things that we already have in process before we take over day one.

So just to follow-up on Ray’s comments on the margin part of your question, we do expect some modest margin dilution on seating next year as a result of what you observed there. We will make some investments to integrate that business. And, as Ray said, we see a pretty quick turnaround in terms of that margin performance. Over a two-year period, we expect that margin to become accretive to seating modestly as well. The structural margin of the products in the Kongsberg business are very similar and perhaps in some cases a little bit better than our underlying seat business. As a result of the combination of product synergies, operational synergies, purchasing synergies that Ray described, we think that the underlying structural margin of that business will be at or above seat margins over time. That's before even talking about revenue synergies that we anticipate.

Appreciate the color, guys.

Yup. Thanks, Joe.

Our next question comes from Dan Levy from Credit Suisse. Please go ahead with your question.

Hi, good morning everyone, and thank you. So I'd like to unpack first the growth over market. Maybe you could just give us a sense of what's driven this, and I'd point to especially in seating. It seems like you're tracking well over 10 points growth over market the last four quarters. Is this all, I know mix should be favorable, but is it all favorable mix, or are we seeing share gains or incremental vehicle content to reflect those figures? So just maybe give us some color on the growth over market that you're getting, especially in seating.

Yeah, a portion of it is market share gain. Our backlog in seating this year that we announced at the beginning of the year was $550 million. At current volumes, it's about $500 million. So that's a key factor contributing to that growth over market. However, it is also due to the product mix, strong production in GM's full-size pickups and SUVs relative to the market, along with other platforms in North America on the luxury side with Mercedes, for example. Just generally, I think the luxury market in Europe and in Asia has held up better than the general market as customers have prioritized their most profitable vehicle lines. And, with our number one position in luxury, we've benefited from that. I think if you look out to next year in a constrained production environment, I wouldn't expect that to change much. And so we should see some continued benefit from that product mix that we have.

Thank you. My second question is about margins. Could you provide an overview of the current pricing, the impact of commodities for next year, and the extent of cost inflation you are experiencing? In the last call, you mentioned an additional $100 million in commodity costs. Looking more broadly at margins in 2022, I understand they will depend on both volume levels and cost inflation trends. What is your early assessment of the margin recovery pace for this year? Will it increase linearly with volume levels, or are there other improvements or efficiencies that might lead to better margins sooner, reducing the gap between entry and exit margin rates?

Yeah, Dan, at this stage, obviously it's difficult to call a margin for next year, and as you pointed out, volumes are going to be the biggest driving assumption there. But we will and we do expect if commodity costs remain at the same level they're at during the fourth quarter, particularly where steel is at record highs, especially in North America, leather prices are a little bit higher, and chemical prices are a little bit higher as well. As we look at a full year impact of that next year, we would expect that it would be about a $130 million headwind for seating. Now, on the positive side, we do expect about half of that to be offset by the lagging recovery from commodity cost increases that we saw this year. So we do see some headwind on commodities year-over-year in seating as a result of that, but less so in E-Systems where the vast majority of time has passed through. The other factors to consider next year include our very strong backlog rolling on. We announced our backlog earlier this year for 2022 and were calling for $1.175 billion in additional revenue next year from our backlog. Our latest estimates track closer to $1.250 billion, and that backlog will roll on at normal segment margins. Therefore, from an exit rate standpoint, that will be modestly accretive to margins in both segments next year. Additionally, if you look at the operating performance of both segments this year, they've both generated significant positive net operating performance. This means that all the cost reduction activities, commercial negotiations, and supplier negotiations have significantly exceeded our customer price reductions and labor and overhead inflation. We expect that to continue next year, though perhaps not at the same accelerated pace that we saw this year, where we witnessed approximately 100 basis points of net operating performance in both segments. But we do expect to see some continued benefits as we look out to next year. I'd say those are sort of the key drivers. Furthermore, on E-Systems, we're continuing to grow our connection systems business. That was a business that was around $450 million in sales in 2019, and it's projected to be a $600 million business based on our current volume outlook for next year. Every $50 million of business we're rolling on in that space is 10 to 20 basis points accretive to E-Systems margins. So, that's an important catalyst as we look out to next year and beyond.

Thanks. Just to clarify, for the quarter and year-to-date, what's the magnitude of headwinds from cost inflation or inefficiencies aside from general production?

In both segments, it has been around $15 million to $20 million per quarter, and in seating, that number was quite similar to last year. These systems experienced about $12 million more than what we saw in the third quarter, where the trap labor costs were more challenging due to sudden volume reductions from our customers. This had an impact on these systems, and it was proportionately greater than in seating.

Great. Thank you very much.

Our next question comes from Colin Langan from Wells Fargo. Please go ahead with your question.

Oh, great. Thanks for taking my question. Can we just actually quickly go for the commodity headwinds again? Is the guidance still around $135 million for this year? How should we think about it sequentially from Q3 to Q4? Just to clarify, you said $130 million next year with half of that probably getting recovery?

Right. So, in terms of the impact on this year, Colin, it's $185 million, so roughly $40 million in the first half and $145 million in the second half of the year. When looking across from the third quarter to the fourth quarter, there's about $30 million of incremental commodity cost in our seating business. E-Systems sees not much change from the third quarter to the fourth quarter. So what you're seeing there is steel peaking in the fourth quarter; we've locked in prices for that. Over the last four weeks, the crew index has come down modestly, which we expect to continue somewhat as we look out to next year. But that is an increase on a net basis for us and seating sequentially. On top of that, high prices scaling back from all-time lows also have an impact in that fourth quarter, and we expect that to persist into the first part of next year. We have pass-through agreements on nearly 100% of that business. This is a temporary phenomenon that will work itself out, and the timing of that pass-through is anywhere from as little as three months to as much as 12-18 months.

Just as a follow-up, you think you just said, commodities in seating is up $30 million quarter-over-quarter? When I look at your full year sort of midpoint of the guidance, it looks like sales and margins are up sequentially, which would be a bit surprising if you have that. So it's up, despite the increase in commodity costs sequentially, and what would be driving that improvement?

Yeah, well, the main driver from the third to fourth quarter is volume. Our revenue at the midpoint in seating would be about $300 million higher, a little less than that, then the fourth quarter would be about $300 million higher than the third quarter. That's the single biggest factor sequentially driving that, offsetting commodity impacts. So it's something like 150 basis points sequentially in volume, offset by 90 basis points in commodities, which drives the modest improvement in operating margins and seating in the fourth quarter versus the third.

Great, perfect. Thanks for taking my questions.

Our next question comes from John Murphy from Bank of America. Please go ahead with your question.

Hi, good morning, guys. I think a lot of the walk stuff that I was going to go through has been hit here for 2022. But I guess maybe just a mid and long term question as you're making the Kongsberg acquisition and making more acquisitions, it seems a little bit more bolt-on than usually transformative, but then becomes transformative like Eagle Ottawa over time. So they're really good things. I mean, as you think about the potential for content on an EV versus an ICE, it's often thought that E-Systems is where the big upside could be, but it seems like what you're indicating now is that over time you think that there's a mix opportunity here on seating. So maybe in both segments, you can give us sort of your thoughts about where this potential content is going to go in both seating and E-Systems as we transition to more EV vehicles over time?

Yeah, we've been discussing this for some time and have been working on intuitive seating for well over six years. We do believe that the trend of much smarter, more sophisticated seats is going to be the future. If I take a step back, this is just the next evolution within that with the acquisition of Kongsberg. We've designed systems where, from a thermal comfort perspective, the HVAC system draws 20% of the battery life. If we can design a much more efficient seating system that heats and cools the occupant at the surface, we can obviously increase range and efficiency within the vehicle. This is a very important trend for our customers and consumers. We've done significant work and are recognized with our partnership with Gentherm. We believe this trend will continue; health and wellness is another aspect. When talking about massage systems within the seat system, it's about enabling consumers to be more alert and more aware, particularly as you get vehicles that are more engaged with autonomy. Thus, we believe there will be greater need and more content within the seat around autonomy and sophistication. Dynamic safety is something we've discussed significantly, where the seat can help protect you in the event of some type of collision from both rearward and frontward impact. So there are a number of different things we're developing and have patents around within that space, and we believe that content's going to continue to increase. If you think about Kongsberg, for example, we talk about short-term aspects of Kongsberg as a great company that's now part of the Lear family. However, we see a much longer horizon with those capabilities where midterm we believe efficiencies can be designed within those different contexts. Nowadays, these systems are designed independently, leading to inefficiencies. It makes sense to take those components and combine them with our architecture capabilities and seating, allowing for a more efficient system across multiple platforms, not just luxury. Long-term, we believe features-as-a-service, charging the customer for heating and cooling, pneumatic lumbar, and the design should allow us to extend those solutions into every seating situation within the vehicle. Our ConfigurE+ product has shown incredible momentum due to its reconfigurability with power solutions, along with safety protocols. We believe this will jump from $100 million today to approximately $500 million in revenue soon. We've just secured a new contract with a strong customer in Europe looking to utilize this across multiple platforms. Regarding electrification, we currently have $250 million of awarded high-power electrification, which is 20% higher than last year's awards. Our backlog in quoting programs is higher than it was last year. We're excited about this momentum:

That's incredibly helpful. Thank you, Ray.

Yep.

Our next question comes from David Kelley from Jefferies. Please go ahead with your question.

Hi, guys. This is Gavin Kennedy on for David. You mentioned that commodity and labor inflation would be a challenge in 2022. Can you provide some more details on how you're thinking about labor specifically? Is your team seeing labor shortages today, and any thoughts you have on how the shortages might impact 2022 and the labor moving forward if we see a recovery in LVP?

Yeah, labor's been a challenge, there's no question about that. As far as I think it's general, it's crossed every industry, and we've implemented different incentives and compensation packages to optimize employee retention in our facilities. It has been a challenge, and I believe it will continue. We're exploring creative solutions, not just regarding compensation but also making sure our employees feel valued. I mean, that’s the big thing — making sure our employees feel valued and heard regarding their concerns. It's not all about compensation; we're looking at shift changes and being flexible with workers' hours. It varies by region too; North America is significantly different than Mexico where we don't have a significant issue year-over-year. Europe has some struggles and Asia isn't facing many problems. It is regionally focused.

Got it. Thanks for that. Then switching gears in the connection systems business, it was good to see that Lear is still on track for around $600 million in 2022. Could you provide commentary on how the recent JV with Hu Lane fits into that connection system business? Alongside the M&N plastics acquisition, do you expect further M&A in connection systems moving forward?

Yeah. The M&N acquisition has far exceeded our expectations already. We've integrated that business quickly and effectively, optimizing revenue opportunities while growing that business. This acquisition was primarily North American-focused; our goal is to now replicate those capabilities in Asia and Europe. The joint venture opens up a catalog for us, enabling us to better share resources. Some of the limited growth we'd anticipated in Asia was limited to the catalogs so the expansion will present opportunities for diversifying our customer base while sharing best practices for effectively growing revenue. As for acquisitions we are open to further M&A opportunities in the connectors business that drives excellent returns and has a strong margin profile. We've proven our ability to enter the low-voltage and high-voltage connectors market with scale, and any tuck-in acquisitions in connectors will be evaluated.

Great. Thanks, everyone.

Yeah, thank you.

Ladies and gentlemen, our final question today will come from Douglas Dutton from Evercore ISI. Please go ahead with your question.

Hi team, Doug Dutton here on for Chris McNally. I just wanted to ask about capital allocation. The balance sheet is currently strong. Could you discuss how management is thinking about capital allocation going forward? We were excited to see that $69 million buy back in Q3, but there's been a history of higher buybacks prior. So, just talking about eight times the 2023 cash flow, we're curious if it makes sense to drive a stronger accelerated buyback or how you go about thinking about that?

We remain committed to returning excess cash to shareholders. If you look at the third quarter, it succinctly reflects our view on capital allocation: modest tuck-in acquisitions and returning excess cash to shareholders through a growing dividend and share repurchases. To the extent the industry conditions allow for an improvement in free cash flow generation, we would like to continue repurchasing stock and return excess cash to shareholders. We're currently engaging in discussions with our Board. Ultimately, it's the Board's decision, but we've enjoyed great support from our Board in this respect, and we expect that to continue.

Thank you very much.

Okay, just real quick. I'm sure it’s just Lear people on the phone now but just want to say a couple words. First of all Kongsberg, welcome to the Lear family. I know we still got some work to do here but it's great to have you as part of the Lear family, and I know we're going to do great things together. So I'm looking forward to continuing to grow that business and moving in the right direction. To our partners Hu Lane and Shinry, I look forward to those partnerships. They're great partnerships and I know we’re going to be successful and grow our business. To the Lear team, I can't thank you enough for staying focused on the things we can control. We're moving in the right direction with the right strategy and the right plan. These short-term issues will be behind us at some point, and we'll position this company for long-term success. Thank you all for your hard work.

Ladies and gentlemen, with that we will conclude today's conference call. We thank you for attending. You may now disconnect your lines.