Lear Corp Q1 FY2025 Earnings Call

Good morning everyone and welcome to the Lear Corporation First Quarter 2025 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. I would now like to turn the conference call 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 first quarter 2025 earnings call. Presenting today are Ray Scott, Lear's 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 first quarter results and provide an update on the factors impacting 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 key financial metrics for the first quarter of 2025. We delivered $5.6 billion of revenue in the first quarter. Core operating earnings were $270 million, and our total company operating margins improved to 4.9%, near our previously targeted exit run rate of 5% despite a challenging production environment. Adjusted earnings per share was $3.12. Operating cash flow was a use of $128 million in the first quarter. Slide 6 summarizes key business and financial highlights from the quarter. As a reminder, our strategic priorities continue to be extending our global leadership position in Seating, expanding margins in E-Systems through our focused product portfolio, growing our operational excellence and competitive advantage through IDEA by Lear, and supporting our sustainable value creation with disciplined capital allocation. Our execution on these key priorities enabled us to improve our operating margins in both Seating and E-Systems as well as for the total company in the quarter despite the challenging market conditions. This improvement was driven by historic levels of positive net performance, contributing 125 basis points to Seating and 155 basis points to E-Systems margins. Efficiency improvements, particularly in E-Systems, and savings from our investments in restructuring and automation in both segments are driving durable operating performance. This was our best single quarter of net performance since the second quarter of 2021. We are extending our global leadership position in Seating, winning two new ComfortFlex programs and a new Global Seat program with key Chinese domestic automakers. For Volvo, we will provide a ComfortFlex module combining ventilation and pneumatic lumbar support. We will also supply our combined steering wheel heat and hands-on detection module for a second program with Hyundai. This award illustrates how winning and validating a module for a customer can lead to the sourcing of additional programs. The performance improvements driven by our ComfortFlex modules are gaining recognition from third parties such as Motor Trend. In a recent review of the Lucid Gravity, Motor Trend noted the massage seats for both front passengers were nothing short of exceptional, offering a deeper and more therapeutic experience than most rivals. We supply the ComfortFlex module that combines heat, ventilation, lumbar and massage for the Lucid Gravity. In China, we won several awards with domestic Chinese automakers, such as BYD, FAW, and Xiaopeng. In April, we took operating control of one of our joint ventures in China, which supplies seats on two key programs for BYD. Consolidating this joint venture is expected to add approximately $70 million to our reported revenue for 2025. In E-Systems, we continue to win new business across all our focused product lines. The awarded business totaling more than $750 million in annual sales was the most in any quarter in more than a decade. In wiring, we won two key awards with Ford and BMW. For Ford, we won a large award for a program with production in North America, including conquest volume incremental to the portion we currently supply. We were awarded our third major wire harness program with BMW, launching in 2028 and building on the momentum we have with BMW. This is our first BMW wire award in China. Our teams continue to develop innovative solutions. This quarter, we were awarded a second-generation battery disconnect unit with a key customer by providing an enhanced design relative to the current generation. Our innovation continues to be recognized by third parties. Our zone control module won a PACE Award from Automotive News. Its highly configurable software increases scalability and enables flexibility in wire harness designs. I'd like to congratulate the team for this incredible honor. The first quarter results highlights our ability to execute our strategy in any macro environment. During the quarter, we repurchased $25 million worth of shares, demonstrating our confidence in our long-term outlook for the company. Slide 7 provides an update on the key metrics we introduced during our last quarterly earnings call, which investors can use to track our progress on expanding margins and generating long-term revenue growth. For Seating, we still expect to quote up to $3 billion in conquest opportunities this year, with most programs awarded in the second half. While the quote pipeline remains robust, customers have delayed sourcing on some programs into 2026, and there could be more as customers reevaluate their plans based on the recent changes to tariff policies. In E-Systems, approximately 20% of our first quarter awards were for Conquest business, including incremental content on the existing Ford wire programs. We continue to pursue additional conquest opportunities. Customer interest in our innovative module seat product is growing. Two additional awards for our ComfortFlex modules bring our total to 21 programs for ComfortFlex, ComfortMax seat, and FlexAir products and our robust pipeline of development projects will lead to further program wins. Our strong relationships with Chinese domestic automakers continue to deliver new program wins. We will supply complete seats for several programs with BYD, FAW and Xiaopeng in China and continue our discussions with BYD to support their global growth outside of China. The FAW award is Conquest business, and we are actively quoting additional opportunities with both FAW and Xiaopeng as well as other Chinese domestic customers that we expect will be sourced in the coming quarters. Our first quarter performance was driven by strong performance across the key metrics we previously outlined as enablers to improve margins in both segments. Investments in IDEA by Lear and our automation projects generated $11 million of savings in the first quarter with benefits compounding over the year. Restructuring investments contributed $12 million of savings in the first quarter. Efficiency improvements in our operations allowed us to reduce our global hourly headcount by 3,600 in the first quarter, primarily in Mexico and Eastern Europe. Since the end of 2023, we have reduced our global hourly headcount by nearly 19,000 or 10%. Our strategic actions drove our strong net performance in the quarter. We are on pace to deliver at least 40 basis points in Seating and 80 basis points of net performance in E-Systems this year. And lastly, the 4.9% operating margin we delivered in the first quarter increases our confidence that we can continue to expand margins in both business segments over time. Turning to Slide 8. The global trade landscape is shifting rapidly, and tariffs are at the forefront of these changes. I will provide an overview of our exposure and the proactive steps we are taking to mitigate the risk. Our exposure is primarily in two areas; direct exposure, where we are the importer of record in countries with tariffs on the components and indirect exposure to the vehicle production that may be disrupted due to tariffs or softening demand. The tariff impact was minimal in the first quarter, and we are working with our customers to ensure full recovery of the costs we incurred. Our direct exposure is primarily in Mexico and Honduras. On an annual basis, we import into the United States from Mexico approximately $2.8 billion of components, where either Lear or suppliers provide the parts and Lear is the importer of record. These components are primarily trim and structures in seating and wire harnesses in E-Systems. Approximately 94% of the components imported into the U.S. from Mexico and Canada are USMCA compliant, a significant increase from approximately 77% that were fully compliant at the end of 2024 due to the work that we have done to ensure all compliant parts are certified. On an annual basis, we import approximately $625 million of components from Honduras, primarily wire harnesses in E-Systems, which are subject to the Section 232 tariffs. We already have customer commitments in place, which cover more than 90% of the Honduras exposure and expect to complete agreements with customers for the remaining 10% in the coming days. Changes to North American production due to customer schedules or softening customer demand is our primary indirect tariff exposure. Approximately $1.8 billion of our 2024 North American sales was derived from vehicles exported to the United States from Mexico and Canada. Additional indirect exposure is on European vehicles exported to the U.S. Of approximately $8 billion of sales in Europe for 2024, about $1 billion or 13% were on vehicles exported to the U.S. We have taken proactive steps and moved aggressively to minimize our gross exposure. Our first step was to build a team of 60 individuals from across the organization focused on measuring our exposure through our supply chain development processes to track and report our cost and execute our mitigation actions. Our continued focus on automation and investments we made in digital tools such as foundry have enabled us to quickly develop operational capabilities to track the impact of tariffs and support our commercial recovery plans with our customers. Our message to customers has been very clear. 100% of all tariffs must be recovered. At the same time, the team has worked very aggressively to provide solutions to minimize the overall exposure for our customers. Innovative designs, engineering changes and alternative sourcing options can reduce the overall tariff cost.

Thanks Ray. Slide 10 shows vehicle production and key exchange rates for the first quarter. Global production increased 1% compared to the same period last year, slightly better than expected due to higher production in all regions, but still down 5% on a Lear sales weighted basis, driven by lower year-over-year production in North America and Europe. Production volumes declined by 5% in North America and by 7% in Europe, while volumes in China were up 12%. The U.S. dollar strengthened against both the euro and the RMB. Slide 11 highlights Lear's growth over market. In the first quarter, sales performed in line with global industry production with Seating growth over market in line and E-Systems down 1%. Excluding the impact of the wind down of discontinued product lines, E-Systems growth over market would have been 4%. In Europe, sales outperformed industry production by 2 percentage points, driven by new business with BMW and Renault and E-Systems as well as higher volumes in several Mercedes and Land Rover programs in Seating. North America revenue growth lagged the market by 2 percentage points, reflecting lower volumes on Lear platforms such as the Jeep Wagoneer and Ford Explorer and Aviator in Seating and the Ford Escape in E-Systems. New Seating and E-Systems business on the Volvo EX90 and the Chevrolet Equinox EV in Seating offset a portion of the underperformance in the region. Our China business lagged industry growth estimates by 5 percentage points, driven by lower volumes on several BMW programs in Seating and the wind down of onboard charger business for several JLR programs in E-Systems. New business on the Xiaomi SU7 and two leap motor programs in Seating and the Xiaopeng Mona in E-Systems offset a portion of the underperformance in China. We continue to grow our share with key Chinese automakers such as BYD and Geely, which will further improve our customer mix in China going forward. We recently took operating control of the Seating joint venture in China supporting two BYD programs, which will have a positive impact on our consolidated growth over market going forward and provide investors with a clear view of the strength of our competitive position in this key market. Turning to Slide 12, I'll highlight our financial results for the first quarter of 2025. Our sales declined 7% year-over-year to $5.6 billion. Excluding the impact of foreign exchange, commodities, acquisitions, and divestitures, sales were down 5%, reflecting lower volumes on Lear platforms, partially offset by the addition of new business in both of our business segments. Core operating earnings were $270 million compared to $280 million last year, driven by lower volumes on Lear platforms, partially offset by positive net performance in our margin-accretive backlog. Adjusted earnings per share were $3.12 as compared to $3.18 a year ago, reflecting lower adjusted net income, partially offset by the benefit of our share repurchase program. First quarter operating cash flow was a use of $128 million. As expected, operating cash flow was negatively impacted in the quarter by the timing of the close of this quarter as compared to last year and higher cash restructuring costs, which will further improve our cost structure going forward. Slide 13 explains the variance in sales and adjusted operating margins for the first quarter in the Seating segment. Sales for the first quarter were $4.2 billion, a decrease of $327 million or 7% from 2024. Excluding the impact of foreign exchange, commodities, acquisitions and divestitures, sales were down 5% due to lower volumes on Lear platforms, partially offset by the addition of new business. Adjusted earnings were $280 million, down $15 million or 5% from 2024, with adjusted operating margins of 6.7%. Operating margins were higher compared to last year, reflecting strong net performance, partially offset by lower production on Lear platform. Slide 14 explains the variance in sales and adjusted operating margins in the E-Systems segment for the first quarter. Sales for the first quarter were $1.4 billion, a decrease of $108 million or 7% from 2024. Excluding the effects of foreign exchange, commodities, acquisitions, and divestitures, sales were down 5%, mainly due to the winding down of discontinued product lines and lower volumes on Lear platforms, though this was somewhat offset by new business additions. Adjusted earnings were $74 million, or 5.2% of sales, compared to $77 million and 5.1% of sales in 2024. Operating margins increased compared to last year, reflecting strong net performance and the benefits of our margin-accretive backlog, despite lower production on Lear platforms and the discontinuation of certain product lines. The strong net performance in this quarter was driven by operational improvements across all regions, which we expect will lead to lasting improvements in our margins moving forward. Slide 15 provides an update on our full-year outlook. While our first-quarter results were solid and we have made significant progress on our operational improvement initiatives, ongoing international trade negotiations have created considerable uncertainty in both the global economy and the automotive sector. As Ray mentioned earlier, we are managing two exposures: the direct impact of tariffs and the indirect impact on production volume and mix. We are confident in our ability to recover the indirect impact and the direct impact of tariffs. This has been our stance from the beginning, and we have made considerable headway in our negotiations with customers. However, the indirect consequences tied to production volume and mix remain unclear. External production forecasts have worsened since February, and we believe that OEMs will need time to adjust their production and mix strategies in light of the recent changes in global trade policy. On a positive note, we anticipate that the recent decline of the U.S. dollar will positively affect our full-year results, and we continue to make progress negotiating with customers to recover the full cost of tariffs. Additionally, significant advances in our operational performance initiatives are on track for the net performance targets we established at the start of the year. We are increasing our investment in restructuring to accelerate our footprint rationalization actions and reduce costs. At the same time, we are lowering our capital spending by roughly the same amount as we adjust our new capacity and other discretionary capital investments in response to the weaker industry production outlook. While as a result of the uncertainty in the industry, we are not reaffirming our 2025 full-year outlook, we do remain confident we can deliver the operating performance improvements highlighted on our last earnings call. We typically speak at a public investor conference during each quarter, and we'll use those opportunities to provide updates on the business, and we'll reintroduce our full-year outlook when we have increased clarity from customers on their production plans for the remainder of the year. Moving to Slide 16, we highlight our balanced capital allocation strategy. We have a strong balance sheet and liquidity profile, which is a significant competitive advantage for us in today's uncertain environment. We do not have any near-term outstanding debt maturities. Our earliest bond maturity is in 2027, and our debt structure has a weighted average life of approximately 12 years. Our cost of debt is low, averaging approximately 4%. In addition, we have $2.8 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 quarter, we repurchased $25 million worth of shares. Our current share repurchase authorization has approximately $1.1 billion remaining, which allows us to repurchase shares through December 31st, 2026. We are temporarily pausing share repurchase activity to ensure we maintain our strong liquidity position during this period of uncertainty. Based on recent developments, we believe this pause will be short and are planning to reinstate share repurchases as soon as visibility improves. Now, I'll turn it back to Ray for some closing thoughts.

Thanks Jason. Please turn to Slide 18. Our first-quarter results provided another clear example of our ability to deliver strong performance in a volatile industry environment. We continue to execute on our strategic initiatives to position the company for revenue growth and margin improvement. In Seating, we are winning new business in thermal comfort and expanding our presence with Chinese domestic customers. Motor Trend recognized the performance improvements we can deliver through our ComfortFlex and ComfortMax seat module solutions. In E-Systems, our historic quarter of business wins, particularly in wiring and the next-generation battery disconnect unit sets us up for long-term revenue growth of our focused product portfolio. The Automotive News PACE Award for our zone control module highlights the innovation our teams are developing for our customers. Extending our leadership in operational excellence through our investments in IDEA by Lear is driving margin improvement throughout the business. We have a strong balance sheet with no near-term debt maturities that allows us flexibility in our capital allocation strategy and positions us well to navigate tariff-related industry headwinds. As we work through challenging industry conditions, we are proactively taking steps to position Lear for future success, and we're committed to keeping the investor community updated in the current dynamic environment. I couldn't be more proud to lead the Lear team, and I want to thank all our employees for their dedication and hard work. And now, we'd be happy to take your questions.

We will now begin the question-and-answer session. And our first question today comes from Joe Spak from UBS. Please go ahead with your question.

Thanks. Good morning everyone. Ray, I guess, first question, have you seen any meaningful changes to the production schedules yet? Or are you just anticipating this? And the reason I ask is it just seems interesting that the further we get into earnings season here, the more guidance withdrawals we're getting. So, I'm wondering if we're seeing some more breaking changes to the schedules.

Yes, I think we have seen changes announced throughout the last four or five weeks. I wouldn't say that there has been any recent uptick in the number of announcements, but the environment remains pretty dynamic. And maybe, Joe, I'll just take a minute to explain our thought process on why we decided to withdraw guidance at this point. As a result of having our call a little bit later in the cycle, we've had the benefit of hearing from our customers, what they're saying on their calls. We've seen some positive developments in terms of the cost of tariffs for the industry. And certainly, this industry has faced challenges over the last five years from COVID to the chip shortage issue and supply chain disruptions. But I think this is really a very different situation. And as we were thinking about how to guide in this environment and what would be helpful to investors, what we struggled with is the wide range that we would end up guiding to, to account for all the variability in the production outlook. There's really three variables that remain right now. First, how do the end consumers respond to price increases, higher pricing in the market, which seems likely to happen. Then how do our customers react to those changes? Do they have a preference for market share? Or do they try and capture some price benefit in the opportunity for their margins associated with that? And then lastly, what additional trade policies are enacted by the U.S. or our trading partners as these negotiations evolve. And listening to our customers' earnings calls, you could hear the sort of tension in that decision-making framework between market share and margins that they're working through. And so given that uncertainty and what their plans are, we thought that we ended up with too wide of a range to be helpful for investors. And so until there's visibility, at least on those first two variables, we're not in a position to provide guidance that would be useful, I think, for investors. Now, we have fairly decent clarity and visibility on the second quarter, but there still are changes coming. And we are presenting at an investor conference in the second week of June, June 10th or 11th, and we will provide more clear guidance on the second quarter, specifically at that event once we see a little bit more visibility on the items I just mentioned.

Thank you for the information. For my second question, I want to clarify something regarding tariffs. It seems that based on your disclosure, Honduras is a significant factor. Is it possible for your customers to become the importer of record or to be recognized as an approved importer so they can claim the 3.75% reimbursement? Additionally, considering the exposure in that country and the expectation that reimbursement may decrease in a year or potentially disappear in two years, is that where most of the work needs to happen? Ray, I know you mentioned the possibility of relocating some production.

Yes, to address your first point, Joe, the team has done an impressive job of presenting all options to our customers, including who will be the importer of record based on location. This is definitely something we are discussing and considering with our customers. As for the movement of parts and manufacturing, those aspects are what we are currently evaluating. It's still a competitive location for us. As Jason pointed out, there is still a lot of work ahead to determine how this will ultimately play out. The key factor will be the reciprocal tariff for those components in Honduras, and we are actively having discussions with our customers about this. Jason, would you like to add anything?

Yes. And our understanding, Joe, on the 3.75% exemption credit, so to speak, is that the OEMs, our customers, can indicate which of their components can be given that exemption. And so I think a product like wire harnesses has a fairly high likelihood of being a product that would be imported to the U.S. tariff-free, whether we're the importer of record or the customer is. I don't think that, that necessarily has to shift from us to our customer in order to take advantage of that new rule there. And just to kind of go back to your first comment in regards to Honduras, yes, it is our most significant exposure. And since I'm sure this is a question that is going to come up as the call progresses, I can address that. Now, overall, we see our gross tariff costs at about $200 million. And so about half of that is Honduras. And that's because the wire harnesses are on the annex that accompanies the Section 232 auto tariffs, and so they're subject to the 25% tariff. We think it's highly likely that, that tariff rate is adjusted, because wire harnesses really don't have a place on that annex in the same way engines or transmissions or other highly technical parts do. I think it's kind of misplaced. And you've heard customers and others advocate for that change. So, as a result of that, you would then revert to the 10% tariff rate, the reciprocal tariff rate that's in place with Honduras. And at a 10% rate, Honduras is still competitive with Mexico. And so we think, ultimately, that's where it ends up, but there's clearly some uncertainty on how long that process takes to get there.

I think it's important to emphasize that we have clearly communicated to our customers our expectation of a full recovery on the components, whether direct or indirect. Most of our customers have agreed to recover 100% of the components that we can directly source. I am very confident about achieving full recovery overall, and I believe the team has effectively communicated our expectations while making significant improvements in that area. Additionally, I see potential benefits from alternative solutions, especially in terms of relocating components. We have a strong manufacturing presence in the United States, and we can shift production to the U.S. for certain components like foam, textiles, and stampings. The teams have performed admirably, and I feel confident because discussions are proceeding very well, showing solid progress. The work done with E-Systems on wire harnesses demonstrates the level of outcomes we anticipate across the board from all our customers.

Approximately all the detail guys.

Thanks Joe.

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

Hi, good morning. Thanks for taking the question. I wanted to start with a question on the outlook. And I recognize there's uncertainty and you'll provide us with an update, but maybe we could just go back to the original outlook that you provided. And just give us a sense because it feels like you're getting most of the recoveries on the tariffs, and you say you expect 100% recoveries. But what is the lower end of your outlook contemplating as far as LVP by region? And maybe you could just talk about maybe some of the pluses and minuses outside of tariffs that we've seen versus the guidance that you provided back in February?

Yes, Dan, our February guidance contemplated production down 1% globally and down 2% on a Lear-weighted basis. And so I think we had $1 billion range on revenue. So, there'll be another 2% roughly decline there beyond that. So, let's call it 4% down on a Lear-weighted basis. And the other kind of key assumption affecting the top line would have been around the foreign exchange rates. We had the euro at 1.04 and the RMB at 7.30. So, I think we're going to see some top line improvement as a result of FX. You're going to see some revenue as a result of the pass-through of tariffs, and then you're going to see some reduction in revenue associated with the volume reductions that are anticipated and some of which have been announced and are taking place here in the second quarter. Just the North America market is probably the biggest question mark. S&P's forecast is for 14 million units, I believe, of production, and we were at 15 million in the prior guidance. So that's the biggest risk factor if you look at what the external prognosticators are suggesting. And as we think about where the kind of puts and takes are, I think we're looking at Europe, we're looking at vehicles produced in Mexico and Canada, and then we're looking at vehicles produced in Japan and Korea that are imported into the U.S. And so what our customers ultimately decide to do, again, around market share versus margin preservation is going to have a profound impact on the volumes of vehicles imported into the U.S. market and ultimately on the production of vehicles that we supply parts to. And so that's the big variable that's difficult to predict. In terms of the other things we can control, we talked about tariff cost and recoveries. We expect full recovery. We don't see that as a particularly large issue. In terms of our cost structure, in general, we are on track to deliver the commitments we made around automation and restructuring savings and our other efficiency program improvements. I certainly don't want to lose sight of the very strong first quarter we had in both business segments. It really increased our confidence in being able to achieve the full year guidance that we provided for net performance, which was 40 basis points in Seating and 80 basis points of margin improvement in E-Systems for that performance. We far exceeded that in the first quarter. So the things that we can control remain well on track and maybe a little bit ahead of where we started the year.

Great. Thank you. And maybe just a follow-up question. And if you could just maybe double-click on the pieces that are driving the performance. But broadly, it feels like the tariffs just place an added pressure on both the Seating and Electrical Architecture wire harness businesses, which as it was, these are tight margin businesses to begin with. You've laid out a series of all of these strategic actions. How are you starting to see this play into maybe separating yourselves from the pack and taking share? I know you referenced that you won some awards in E-Systems?

Well, first of all, it was a great quarter. I think the E-Systems team did a remarkable job, not just when we talk about expanding our margins and operational excellence and what they did as far as performance, but the growth side, it was a really good quarter for us. And I think it comes down to a couple of things. One, the performance and how they're performing with a particular OE. I do think that we can't overlook the innovation and capabilities that we've been able to deliver, both on the product side, and I think equally as important is the operational side. It's interesting. We've been really strategically looking at how we can change our operational excellence in advanced automation and software development, some of the things we've mentioned with how we're designing different efficiencies on the plant floor. That allows us to be extremely competitive and still get a return above our cost of capital. That's everything we're focused on. And I think those elements that we've been working on for more than 10 years are really starting to show the benefits in the operations today. We really put ourselves out there as far as being able to track us to our investors and show how we're performing from a net performance perspective and the team did a great job. But it also shows up in growth, because we can quote business where we still get a return above our cost of capital as we're introducing new technology innovation on the plant floor. And so I think that's an important message because we've been talking about that for some time, and we're seeing the conviction in how we're delivering not just from a performance standpoint, but from a growth perspective. And so we absolutely believe that, that is something that we can continue to do. It puts us in a great position today and currently as we expand our margins, but more importantly, as we're winning new business.

Great. Thank you.

Our next question comes from Emmanuel Rosner from Wolfe Research. Please go ahead with your question.

Great. Thank you so much. I was actually hoping to follow up on the cost performance, which obviously was quite impressive in the quarter. And so you mentioned an accelerated investment in restructuring. Curious to what extent you could still inflect up the benefit from these actions still this year, especially in case some of these indirect tariff impact come and the volume plays out sort of weaker. Do you have any room to offset some of that with accelerated benefits on the net performance side, basically higher than your initial guidance?

Yes, that's certainly our goal. And we're looking to increase our restructuring investment this year by between $30 million and $40 million. And some of that will produce an immediate benefit to our cost structure. And so there will be some additional net performance that results from that investment in restructuring. Now we are dialing back our capital spending as well by a similar amount. And most of that relates to capacity that we don't need as a result of lower volumes and some discretionary spending. But a little bit of it is also on the automation side where you have some longer payback projects that we're going to push out to next year. Emmanuel, what we really did is just kind of took a step back and looked at all of the investment opportunities that we have across both our capital expenditure program and our restructuring program and force rank those based on payback and sort of reprioritized our investments. And that led to some, again, additional investment in restructuring and a little lower investment in CapEx. But the net effect of that should be positive for our performance this year.

Yes, I think it's important to emphasize that during this time of uncertainty, our main focus is on operational excellence. As Jason mentioned, we are concentrating on capital deployment based on expected returns and figuring out how to accelerate specific areas of our products, regions, or manufacturing facilities. Our second priority is maintaining a strong balance sheet. We are very disciplined about the capital we are looking at and how we are allocating it, especially as we consider potential changes in volume. We're committed to managing our capital costs in light of the volumes we anticipate and are focused on cash management. Our commercial agreements aim for complete recovery while minimizing any cash impact related to addressing commercial issues. We treat operational and commercial disciplines with equal importance as we pursue these goals. Finally, we have strategic options as a large U.S.-based company that we believe we can leverage. Over time, we'll see how upcoming rebates will influence our positioning for our customers. Throughout our discussions with customers, we've gained valuable insights from experiences during the COVID pandemic and the decline in EV volumes. Our focus is on ensuring that if we deploy capital, the terms and conditions must yield returns exceeding our cost of capital, taking volume and capital deployment into account. We view this as an opportunity to revisit terms and conditions with our customers, as we've learned a lot over the past five years and those conditions need to evolve, particularly in relation to suppliers and long-term investments. I'm very proud of our team's innovative ideas and engineering solutions, which have put us in a better position to advance our current priorities.

Thank you for the information. I have two quick follow-up questions. First, aside from the impact on industry volumes, do you foresee any risk related to the current uncertainty affecting the backlog or the backlog you revealed last quarter? Second, regarding the balance sheet, I appreciate your ongoing commitment to returning excess cash to shareholders. Are you considering pausing the buyback while assessing the outlook for free cash flow this year, or will it continue as planned?

Yes, Emmanuel, I'll start with the second question first. We are pausing our share repurchases here for a short period of time until there is more visibility on the production environment. And we believe that we will be brief, and we hope to restart that soon once we have a better understanding of our customers' production plans for really the second half of the year. In terms of the backlog, I think it's too early to provide an update on the 2-year backlog. We announced the 2025, 2026 backlog. But certainly, the award in wire and the other awards in E-Systems in general in the quarter will help the longer-term growth rate of that business. $150 million of the $750 million of new business awards were Conquest awards. So, those are market share gains. Those will drive growth for the business longer term. And I think once we sort of get through this wind down of products that we're exiting in E-Systems, you'll see a return to the more normalized growth rates we've enjoyed over the last five or six years in that segment.

Thank you.

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

Great. Thanks for taking my questions and congrats on a pretty good margin in the quarter. Just wondering, I think a couple of weeks before the quarter ended, you were talking about a low 4% and you ended at 4.9%. What came in so much better at the end of the quarter to kind of get you so much higher than what you were thinking?

Yes, there were really two things that happened. The production held up better than we had anticipated and what we were seeing at that time, particularly in Asia, we saw a very, very strong March, much better than we had expected. And then in addition to that, we did see a little bit of a pull ahead of some of our commercial performance in the Seating segment, in particular. And so there's probably 20 basis points of that net performance that we delivered in the first quarter that we had anticipated in the second quarter and beyond. And so those are the two primary factors. And then just generally speaking, just strong operating performance in both business segments. It doesn't often happen that way where you get sort of everyone performing at such a high level simultaneously, and that's what we had. We had great performance in both Seat and E-Systems and really across all regions. And so it's just a testament to the strong finish to the quarter for the team more than anything.

I appreciate the recognition, as I share the same sentiment. I felt very positive about the first quarter. However, we are currently facing uncertainty in the industry due to the indirect situation surrounding tariffs. This does highlight that even in a challenging quarter marked by production volatility, we can still perform well. I believe the operational teams in both Seating and E-Systems did an excellent job, and I was very pleased with the results.

Got it. That's helpful color. And just talking on performance, as I covered a couple of times on the call already. But if I look at the initial full year guide, I think it implied something like $130 million, 55 basis points. I believe you got more than half of that already in Q1. Is that what you were anticipating? I mean, I guess it sounds like from comments earlier that performance is actually coming in stronger. And should we interpret that as that if it wasn't for tariffs, you'd actually be raising guidance today?

Yes, I think that certainly, the first quarter came in better than we expected, and that could lead to an improved number for the full year. But there's still lots of moving parts that we're managing here. And I think your math is right. More than half of our full year net performance was achieved in the first quarter or what we had guided to previously. Now, part of that is kind of that year-over-year look at the business. And so the first quarter in E-Systems, in particular, last year was pretty weak. We had very high launch costs, we had some efficiency issues in our North America operations, which we talked about throughout last year. Those improved significantly from the first half of last year to the second half of last year. And so the comp gets a little harder in the second half of the year than it was for the first half, Colin. So, that's also a driver.

I mean would you have raised guidance if it wasn't for the tariff issue? Or is that just too early to say?

That's a theoretical question. I mean, if there wasn't this level of volume uncertainty, we certainly wouldn't have been talking about lowering guidance.

I'll put it this way. We would have been very confident in the year. We would have been in a good position, especially coming out of that first quarter.

Got it. Thanks for taking my questions.

You're welcome.

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

Good morning guys. Just a very simple question to start. When you think about doing winding wiring harnesses in Honduras, I just wonder, Ray, if you could walk us through sort of the evolution of how that wound up being in Mexico and then got pushed down to Honduras from a labor cost perspective, but also maybe a labor availability perspective as well?

We've done a lot of work with Washington to explain wire harnesses, which are similar to trim covers. These are labor-intensive and not very appealing jobs that need to be relocated from the annex. The shift was driven by labor arbitrage and the need for sufficient labor. Our facilities can host between 5,000 and 6,000 employees, operating multiple platforms to maximize efficiency for our customers. Moving from Mexico to Honduras was primarily about continuing the labor arbitrage. Honduras serves as an excellent location for us, offering high quality, low absenteeism, and good job satisfaction and work environment. It’s an ideal spot. We discussed migrating more of our business to Honduras but paused that until we gain clarity on future developments. We transitioned from Juarez in Central Mexico to further south in Honduras, and this move has been very beneficial for our wire harness operations.

Okay. Maybe just a follow-up. When you consider wiring harness and other manufacturing done outside the U.S., what are the challenges of bringing it back to the U.S.? Is it primarily related to labor costs or availability? And how much do you think can be automated? I'm just trying to understand the situation better.

Yes. No, that's a good question. And I think the first roadblock would be the labor scarcity, the labor issue of attracting that type of work here in the U.S. The way I describe it, there are very attractive jobs that are very sophisticated, technical. We do just-in-time assembly of seats here in the U.S. and UAW represented workers, great work. That type of work makes a lot of sense. I think when you look at a wire harness, it is very labor-intensive. The automation is coming. It's going to take some time. It's not quite there yet. There's some very challenging aspects of a harness. Even though we've made significant improvements with automation in harnesses, it's not quite there yet. So, I think the roadblocks really are the labor scarcity, the workforce development that would be required to bring those type of jobs here. I think the attractiveness from a workers' perspective would be extremely low, very tough. And the technology just quite isn't there yet to bring and automate a major wire. I mean these harnesses are hundreds of pounds. They're extremely labor-intensive as you're doing the taping and the crimping and the assembly of the harness itself. And so those are probably the big roadblocks that I think would be a very tough move to move to the United States.

Okay. And then just another question. You highlighted and it was incredibly helpful, the tariff commentary, $1 billion of parts that are coming across the Atlantic from Europe on European produced vehicles. Some of those might not make it here, might be fewer. But in reality, there might be market share shifts that occur in the U.S. market that offset that. So, could you kind of remind us generally what's coming across the pond there? And then also maybe your exposures here in North America, because there might be a really good story to market share gains from your domestic automakers as well as a result of that.

Yes, John, just to clarify, so that's $1 billion of revenue that's associated with parts we sell to customers for vehicles produced in Europe and imported into the U.S. So it's not part imports. Yes. So the biggest component of that is with Jaguar Land Rover, the Range Rover, Range Rover Sport, Defender, that whole product lineup. And we just saw that they announced that they're restarting shipments into the U.S. So, they're going to continue participating in this market. And then the VW Group and their luxury brands, Audi and Porsche in particular, and then to a lesser extent, Mercedes and Stellantis. And with Mercedes, they've also announced the move of one of their key programs, which we have the seating for in Europe to Tuscaloosa. And so we see over time that we will likely benefit from that business that's relocated from Europe into the U.S. as our customers adjust their footprint. And then in terms of who benefits here in the U.S., I don't want to go too far down that path. But I think our largest platform in the U.S. market is the GM full-size SUV program that's produced down in Arlington, Texas. But we also have the Ford Explorer. We have business with Hyundai, with BMW, with lots of customers here that have a domestic footprint that could benefit longer term from this tariff regime. So, it's hard to say exactly how it's going to play out, but those are some of the highlights of programs that may be impacted.

It's reasonable to suggest that the uncertainty in the guidance isn't solely negative; it could potentially be positive as well.

Yes, that's right. I think, if you look at the GM full-size SUV inventory levels, I think that came out again yesterday or day before, 30 days on hand. Yes, certainly, it seems like there could be some opportunities as well, and that affected our thought process around not reaffirming guidance.

Okay. And then just lastly, it sounds like there's some program extensions and stuff that's getting pushed out on wins. Can you just remind us, as programs are extended, if we're looking at a five to six-year program that goes to seven or maybe eight years, whatever it may be, what are the requirements for refurbishing tooling or extending tooling and other plant equipment for another year or two? Are there big capital commitments or is this more of a gravy situation for you?

No, we actually view this situation positively. They are extending programs that have been around for a while. We've successfully implemented VAV engineering changes to achieve cost savings. We appreciate this development. While there may be some adjustments needed for certain capital investments, there is no significant need for reinvestment. We can continue operating with the existing capital, and this also allows us to review and renegotiate contracts since they need to be extended. Therefore, we have the opportunity to reassess the current terms and conditions.

Okay, very helpful. Thanks guys.

Thank you.

And ladies and gentlemen, with that, we'll be wrapping up today's question-and-answer session. I'd like to turn the floor back over to Ray Scott for any closing remarks.

Yes. Thank you. And I'd like to thank everyone for participating in the call today. I'd also like to thank the Lear employees that are on the call. You guys did a great job in the first quarter. I couldn't be more proud of the work that you're doing and an exceptional job on what we're doing as far as the organization and really protecting the company with tariffs and costs and giving our customers options to mitigate their own costs. And so I appreciate all the hard work, so proud of the work that you've done and thank you.

And ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.