Lear Corp Q2 FY2025 Earnings Call

Good morning, everyone, and welcome to the Lear Corporation's Second Quarter 2025 Earnings Conference Call. Please note that today's event is being recorded. Now, I would like to hand it over to Tim Brumbaugh, Vice President of Investor Relations. Please continue.

Thanks, Jamie. Good morning, everyone, and thank you for joining us for Lear's Second 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.leer.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 second quarter and provide a business update. Jason will then review our financial results and provide an update on the 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 second quarter of 2025. They delivered $6 billion of revenue in the second quarter. Core operating earnings were $292 million, and our total company operating margin was 4.8%. Adjusted earnings per share was $3.47. Our operating cash flow was $296 million in the quarter, and our second quarter financial performance was generally in line with the second quarter of 2024 for all of our key financial metrics. Slide 6 summarizes key financial and business 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, growing our competitive advantage in operational excellence through IDEA by Lear, and supporting sustainable value creation with disciplined capital allocation. The momentum of positive net performance we delivered to start the year continued through the second quarter, contributing 45 basis points to Seating and 70 basis points to E-Systems margins. Efficiency improvements and savings from our investments in restructuring and automation are driving durable operating performance in both segments. Through the first half of the year, we delivered 85 basis points of net performance in Seating and 110 basis points in E-Systems. Although macro uncertainty remains, our confidence in our business enables us to restore our full year guidance. Our strong operating performance is expected to continue through the second half. As a result, we are increasing our full year net performance outlook by approximately $25 million to more than $150 million. Our strong free cash flow in the quarter and confidence in our long-term outlook allowed us to reinstate our share repurchase plan. We repurchased $25 million of shares in the quarter and $50 million in the first half while maintaining our dividend of $0.77 per share. Yesterday, we completed the refinancing of our $2 billion revolver, extending its maturity through July of 2030, further strengthening our liquidity position. For the last 2 years, we have partnered with Palantir to develop real-time data analytics and streamline our manufacturing and administrative processes. We extended our agreement for a long-term partnership to continue enhancing our digital and operational capabilities, which are driving efficiency gains in our manufacturing facilities and administrative functions. We continue to win new business in both segments. In Seating, we won a key conquest program in Asia with BMW, and we won key conquest awards in North America for seat components on the Ford F-150 and F-250 pickup trucks. Our modularity strategy continues to drive new business. In the quarter, we won two ComfortFlex and one ComfortMax Seat awards, including a key program with a luxury EV automaker, combining heat, ventilation, pneumatic lumbar and massage into the surface materials. We now have 24 total awards for ComfortFlex, FlexAir and ComfortMax Seat applications that will generate over $150 million of average annual revenue. In China, we won several awards with domestic Chinese automakers such as FAW, Leapmotor and XPeng. In E-Systems, we continue to win new business, including key conquest wire awards with a large global EV automaker. These programs start later this year, illustrating our ability to quickly launch new business. Our awards in E-Systems for the year are already approaching $1 billion in annual sales, with several additional opportunities expected to be sourced in the second half of this year. Slide 7 provides an update on the key metrics to track our progress on expanding margins and generating long-term revenue growth. For Seating, we won a conquest award in Asia with BMW and expect to quote additional conquest opportunities in the second half of this year and then into 2026. The quote pipeline remains very robust. And although the pace of new awards is improving, we continue to see some delays in sourcing as customers reevaluate their plans based on recent changes to trade or regulatory policies. In E-Systems, over 25% of our year-to-date awards have been for Conquest business, including two key programs with top global EV automakers during the second quarter. Customer interest in our innovative modular Seat products is growing. Three additional awards bring our total to 24 programs for ComfortFlex, ComfortMax seats and FlexAir products. Our strong relationships with Chinese domestic automakers continue to deliver new program wins. We will supply complete seats for several programs with FAW, Leapmotor and XPeng in China. The FAW award is the second conquest program with FAW this year. We remain selective in our business as we quote different Chinese domestic automakers to ensure we are partnering with customers that have a long-term sustainable future. We're only pursuing high-quality programs that can generate strong risk-adjusted returns in excess of our cost of capital. Investments in IDEA by Lear and our automation projects generated about $30 million of savings in the first half, with benefits expected to compound over the year. Restructuring investments contributed approximately $30 million in savings in the first half. Efficiency improvements in our operations allowed us to reduce our global hourly headcount by 4,400 in the first half, despite an increase in headcount due to the consolidation of our joint venture in China completed in the first quarter. Since the end of 2023, we have reduced our global hourly headcount by nearly 20,000 or 11%. The strong first half performance results on our scorecard metrics are the key enablers to improve margins and drive long-term growth in both segments. Slide 8 provides an overview of our partnership with Palantir. Over the past 2.5 years, we have leveraged Palantir's foundry, AIP and large language models to build robust real-time data management solutions. Adoption has been strong with more than 11,000 users driving over 175 active use cases across our organization. A key area of impact has been the work on the tariff response. Once new tariffs were enacted, our teams quickly developed a fully automated tariff data management system. This system enabled us to provide our customers with real-time documentation, speeding up the invoicing process while providing insight into our greatest mitigation opportunities. Beyond back-office improvements, Foundry has delivered significant value to our manufacturing operations. Foundry supports dynamic line balancing, optimizing throughput and efficiency on the shop floor in our just-in-time seating plants. The platform's multilingual capabilities enabled us to quickly standardize our processes globally. This partnership is complementary to our acquisitions and investments in automation we have made over the last several years. We look forward to building on this momentum in the years to come. Most importantly, it is our Lear team members who are driving these innovations and delivering measurable results. We are approaching enterprise-wide adoption and developing institutional knowledge that gives us a first-mover advantage in the automotive industry, which will be difficult to replicate. Turning to Slide 9, I will provide more detail on our operational and commercial actions driving our strong performance. We have increased our investment in restructuring to accelerate our footprint rationalization actions and reduce costs. We are prioritizing investment opportunities with the shortest payback periods to drive cost savings that will grow over time. As a manufacturing integrator, we are leveraging the key competencies we have built and acquired over the last several years to expand our automation capabilities through our facilities. By designing and utilizing purpose-built capital, we have developed proprietary solutions at a lower cost that will be difficult for any competitor to replicate. Our automation in the complete seat assembly plants, including end-of-line testing, finesse, sequencing and other applications, is driving significant efficiency gains. We are expanding the use of these systems more broadly in our facilities, starting in our highest cost regions. We are excited to open a new industry-first facility that will support the launch of automated ComfortMax seat assembly. We have fully automated the assembly of these modules, ensuring that no one touches the trim cover from the moment it is unpacked until the complete module is ready for shipment. This facility will be located right here in Michigan. In addition to our ComfortMax seat automation, this facility will be used to produce additional U.S. content, including FlexAir, our innovative foam alternative. Our product innovation and process improvements in seating have enabled us to reduce costs for new programs by 200 to over 500 basis points. This durable cost advantage will allow us to increase our industry-leading seat margins and continue to separate ourselves from our competitors. The investments in restructuring and automation contributed approximately $60 million in savings in the first half of this year. We estimate we will drive an additional $90 million in savings in the second half of this year. Our E-Systems team continues to improve efficiencies in our wire plants. June was one of the best efficiency months for North America wire since early 2019 due to our strong focus on execution in those operations over the last several quarters. Commercially, we are renegotiating pricing on existing underachieving programs. For future programs, we are reestablishing contract terms that will help us mitigate downside volume risk going forward. We're implementing stair-step pricing that will ensure strong returns at various volume levels for higher-risk programs. Some customers are willing to prepay for capital, especially for some of the vehicle programs that have higher riskier consumer demand profiles. We are being selective about the programs and customers we pursue. We are focused on bidding on programs that will generate higher risk-adjusted returns. We continue to build long-term relationships with our customers. Our focus is to pursue and grow business with the highest quality automakers and platforms. Our operational and commercial actions are driving consistent strong net performance and highlight our ability to execute our strategy in any macro environment. These strategic initiatives are enabling us to continue to expand our margins in both segments going forward. Now I'd like to turn the call over to Jason for a financial review.

Thanks, Ray. Slide 11 shows vehicle production and key exchange rates for the second quarter. Global production increased 3% compared to the same period last year, but was flat on a Lear sales weighted basis, driven by lower year-over-year production in North America and Europe. Production volumes declined by 3% in North America and by 2% in Europe, while volumes in China were up 9%. The U.S. dollar weakened against the euro and was flat against the RMB. Turning to Slide 12, I will highlight our financial results for the second quarter of 2025. Our sales were flat year-over-year at $6 billion. Excluding the impact of foreign exchange, commodities, tariff recoveries, acquisitions and divestitures, sales were down 1%, reflecting lower volumes on Lear platforms and the wind down of discontinued product lines in E-Systems, partially offset by the addition of new business in both of our business segments. Core operating earnings were $292 million compared to $302 million last year, driven by lower volumes on Lear platforms, partially offset by positive net performance and our margin-accretive backlog. Adjusted earnings per share were $3.47 as compared to $3.60 a year ago, reflecting lower adjusted net income, partially offset by the benefit of our share repurchase program. Second quarter operating cash flow was $296 million compared to $291 million last year, primarily due to improvements in working capital, partially offset by lower core operating earnings. Slide 13 explains the variance in sales and adjusted operating margins for the second quarter in the Seating segment. Sales for the second quarter were $4.5 billion, an increase of $27 million or 1% from 2024. Excluding the impact of foreign exchange, commodities, tariff recoveries, acquisitions and divestitures, sales were down 1% due to lower volumes on Lear platforms, including the Jeep Wagoneer and the impact from the Audi Q5 changeover in North America and several Mercedes and BMW programs in China, partially offset by the addition of new business. Adjusted earnings were $299 million, down $3 million or 1% from 2024, with adjusted operating margins of 6.7%. Operating margins were slightly lower compared to last year, reflecting lower production on key Lear platforms and changes in foreign exchange rates, partially offset by strong net performance in our margin-accretive backlog. Slide 14 explains the variance in sales and adjusted operating margins for the second quarter in the E-Systems segment. Sales for the second quarter were $1.6 billion, a decrease of $8 million or 1% from 2024. Excluding the impact of foreign exchange, commodities, tariff recoveries, acquisitions and divestitures, sales were down 5%. The decline in sales was driven by lower volumes on Lear platforms, including the Ford Escape in North America and several Audi and Volkswagen programs in China as well as the wind-down of discontinued product lines, partially offset by the addition of new business. Adjusted earnings were $76 million or 4.9% of sales compared to $82 million and 5.3% of sales in 2024. Lower operating margins were driven by the reduction of volumes on key Lear platforms and the wind down of discontinued product lines, partially offset by strong net performance, the roll-on of our margin-accretive backlog and the impact of foreign exchange. Slide 15 provides an update on our tariff exposure and the actions we are taking to mitigate the risk. As a reminder, our exposure is primarily in two areas: direct exposure, where we are the importer of record into countries with tariffs on components, and indirect exposure to vehicle production that may be disrupted by changes to tariff and trade policies. Since our last earnings call, there have been no meaningful changes to our direct exposure to tariffs. Over 90% of our direct imports from Mexico and Canada comply with USMCA requirements and therefore, remain exempt from automotive tariffs. Based on the current tariff policies and volume expectations, our gross direct tariff exposure is approximately $210 million for 2025. Contractual agreements with our customers allowed us to recover substantially all of the $63 million in tariff costs we incurred in the first half of the year. Our full year financial outlook assumes the continuation of tariff cost recovery agreements through the remainder of the year. There's been a lag in the cash repayment of tariff recoveries from our customers, which reduced our free cash flow in the second quarter. Our revised full year free cash flow forecast includes a $30 million impact from the lag in payments. Our indirect exposure to potential vehicle production disruptions has moderated somewhat, driven by further clarity in tariff policies and changes to customer production and footprint plans. Our estimated exposure is approximately $1.6 billion for 2025 from vehicles exported to the United States from Mexico and Canada. This is a decline of approximately $200 million, largely due to lower production on customer platforms produced in Mexico and Canada, a portion of which has been offset by higher production in the U.S. Our exposure to vehicles from Europe exported to the U.S. is about $975 million, of which approximately 37% are from the U.K. and covered by the trade agreement currently in place. Trade policies continue to evolve and could change our exposure over time. For example, the implementation of tariffs on copper and the increase in rates for steel could impact commodity prices. For copper, we purchased approximately 200 million pounds per year and have index and scrap recovery agreements that are intended to cover approximately 90% of our exposure. For steel, we purchased approximately 3 billion pounds per year. As with copper, approximately 90% of our steel exposure is indexed. As the largest U.S.-based automotive supplier, we continue to have conversations with the administration and other key elected officials to clearly explain how our supply chain has been optimized as well as the rationale for sourcing certain labor-intensive products from Mexico and Honduras. This ultimately ensures our customers can produce and sell vehicles at competitive prices in the U.S. market and globally. Some customers have announced plans to move some production into the U.S. We have the capability to support localized production of complete seats, especially for programs we currently supply and have available capacity for components such as our modular solutions, foam and structures. These moves by our customers create an opportunity to support additional volume for vehicles we supply today as well as win new business. We have taken proactive steps and moved aggressively to minimize our gross exposure. Our focus on automation and investments in digital tools such as foundry support the timely commercial recovery of tariff costs from our customers. While tariffs are impacting the entire automotive industry, Lear has taken a proactive approach to reduce the direct and indirect impact of tariffs through innovative solutions. Turning now to Slide 16. On our first quarter earnings call, we withdrew our 2025 outlook due to significant uncertainty caused by the ongoing international trade negotiations. Over these last few months, industry conditions have somewhat stabilized, allowing us to restore our full year 2025 guidance. Slide 16 provides global vehicle production volume and currency assumptions that form the basis of our full year outlook. We have updated our production assumptions, which are based on several sources, including internal estimates, customer production schedules and S&P forecasts. At the midpoint of our guidance range, we assume that global industry production will be flat compared to 2024 or down 2% on a Lear sales-weighted basis, driven primarily by lower volumes in our two largest markets, North America and Europe. From a currency perspective, our 2025 outlook assumes an average euro exchange rate of $1.11 per euro, reflecting the weakening U.S. dollar and an average Chinese RMB exchange rate of RMB 7.23 to the dollar. Slide 17 provides detail on our outlook for 2025. Key changes to the midpoint of our guidance include the following: our revenue is now expected to be approximately $22.8 billion, 2% higher than our previous guidance, driven by favorable foreign exchange, tariff recoveries and the impact of the consolidation of a seating joint venture in China, partially offset by the impact of lower production on several of their platforms. Core operating earnings are expected to be approximately $1.025 billion or $20 million lower than our previous guidance, driven by the impact of lower volumes, partially offset by favorable foreign exchange and continued improvements in our strong operating performance. We are increasing our outlook for restructuring costs by $40 million to accelerate our footprint rationalization actions and reduce costs. At the same time, we are lowering our outlook for capital spending by $35 million. Operating cash flow is expected to be in the range of $1 billion to $1.1 billion, and our free cash flow is expected to be $470 million at the midpoint of our guidance. Our free cash flow outlook includes $30 million of expected cash tariff recovery timing lag into 2026. We have included a detailed walk to the midpoint of our updated guidance from our prior guidance in the appendix. Slide 18 compares our 2024 actual results to the midpoint of our 2025 outlook. Year-over-year, revenue is expected to decline by $536 million, primarily due to the impact of lower production volumes on our programs as well as the divestiture of a non-core seating operation, partially offset by the addition of new business in both segments, tariff recoveries, and the impact of favorable foreign exchange. The midpoint of our core operating earnings outlook is expected to be $1.025 billion with operating margins of 4.5%, reflecting lower volumes on existing Lear platforms, partially offset by continued strong net performance and our margin-accretive backlog. We expect net performance to contribute 60 basis points of margin improvement in 2025, up $25 million from our prior outlook to over $150 million. This reflects the positive momentum in both our automation investments and restructuring actions. We have included detailed walks to the midpoint of our guidance for Seating and E-Systems in the appendix. Moving to Slide 19, we highlight our balanced capital allocation strategy. Yesterday, we successfully completed the refinancing of our $2 billion revolver, extending its maturity from 2027 to 2030. 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 $2.9 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. After a brief pause in share repurchase activity, we reinstated our repurchase program in June. During the second quarter, we repurchased $25 million worth of shares, bringing total repurchases for the first half of the year to $50 million. For the full year, we plan to repurchase $250 million worth of stock with additional repurchase opportunities depending on the level of free cash flow generation. Now I'll turn it back to Ray for some closing thoughts.

Thanks, Jason. Please turn to Slide 21. Our first half results illustrate our continued resilience in a volatile industry environment. Our strong relationships with our customers have been key to offsetting the impact of tariffs. We are focused on executing our strategic initiatives to improve our margin profile. We continue to win new business across our product lines in both segments despite slower-than-expected sourcing activity. 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 macro uncertainty. Our investments in restructuring and automation are driving strong operating performances. We are expanding our leadership in our operational excellence and improving the cost profile of our businesses, enabling us to generate sustainable margins and strong cash flow. And we will remain committed to returning excess cash to our shareholders. And now we'd be happy to take your questions.

Our first question today comes from Dan Levy from Barclays.

I wanted to first start with a question on the outlook as there is a meaningful deceleration in the margins in the second half. And I get it, the majority of that is coming from weaker volume, but the decrementals are a bit higher. Can you just talk about performance, which had been particularly strong in the first half, but maybe isn't contributing the same amount in the second half?

We had a very strong first half, with performance improving in both business segments. The progress made in the first quarter continued into the second quarter. It's important to note that our confidence in generating margin expansion increased based on our first-half results. We are effectively offsetting wage inflation and other economic factors, as well as customer price reductions, through our efficiency programs and negotiations with suppliers. This has enabled the full benefits of our IDEA by Lear savings and restructuring efforts to positively impact our bottom line, resulting in an additional $150 million in earnings for the year. As for the transition from the first half to the second half, I want to emphasize a couple of points. In the first quarter, we anticipated about 20 basis points of commercial recovery timing in Seating that ended up occurring earlier than expected. We saw a similar situation in the second quarter, totaling around 40 basis points of performance that was shifted from the second half to the first half. This decision was made because we wanted to ensure finalizing our recovery agreements on tariffs with customers, and we managed to secure nearly full recovery for tariffs and accelerate some commercial agreements. If we adjust for that timing, the performance in Seating would appear more similar between the first and second halves. In E-Systems, we had faced efficiency and launch challenges in our North America wire business last year, affecting our performance. The improvements we made in the second half of last year continued into the first half of this year, contributing to a strong performance in E-Systems. The second half comparison will be more difficult due to last year's stronger first half. Additionally, in the third quarter last year, Seating performed particularly well, which creates a tougher comparison for this year. We might see a slightly negative net performance in Seating this third quarter because of that. However, we are increasingly confident in our ability not only to deliver the $150 million this year but also to replicate this performance in future years, thanks to our pipeline of projects in IDEA by Lear and our restructuring program. We believe this will be a key strategy for improving margins in a challenging production environment.

And just to be clear, the second half number, which I think in the past, you said would be the right sort of exit rate jumping-off point for '26, that's probably not correct now. That would probably be too low for the jumping-off rate to do?

Yes. I think Dan, we had talked about the fourth quarter. Our target is to exit at 5%, and that would be a good launching point to model heading into 2026. Because of these commercial actions we pulled ahead to the first half, that makes that a little bit less helpful in terms of a modeling starting point. I would encourage the analysts and investors to think about our full year margin performance in both businesses as the right launching point for thinking through 2026 as a result of some of those timing differences.

Okay. Great. My second question is about your awards, particularly in Seating. Could you provide more details about the awards you received from Ford? Are they solely related to the components, or is there something more to it? Also, could you discuss modularity in general? It seems like GM and another entity are involved with TCS. What is the current situation there? Additionally, does reshoring influence how TCS fits into your strategy?

Yes. In response to your first question, the component business related to the F-150 and F-250 is performing well and is healthy in terms of returns, putting us in a strong position. We are currently in the process of quoting the just-in-time components for Ford Motor Company for the F-150 and F-250 models. We believe our competitive advantages, including our advancements in digital software development and automation, will allow us to maintain healthy margins. We're also continuing our work on thermal comfort components, and I mentioned that in Michigan, we have a facility showcasing a fully automated modular system. Our collaborations with Ford and General Motors, particularly one mid-cycle project with GM, demonstrate our capability for efficiency within these modular systems. Although we are still navigating this process, the scaling of onshoring efforts enhances our credibility in establishing a cost-effective system that can be applied across various programs. Some of our projects are mid-cycle, so we can even adjust within existing awarded programs if efficiency improves, which is precisely what our customers are seeking: cost efficiencies. Validating these efficiencies with major OEMs has always been part of our strategy, and we are progressing well. Over time, the demonstration of our automated systems through modular components will bolster our position further. I'm pleased with our achievements, including the 24 recent wins, and the combination of innovation and automation is resonating well as customers increasingly look to onshore and expand their capacity in the U.S. We will keep pushing forward, and I believe the upcoming innovation center in Michigan will significantly support our growth strategy within the thermal comfort system.

Our next question comes from Joe Spak from UBS.

Maybe, Ray and Jason, just to go back to some of the performance commentary. I just want to make sure I understand because you're saying now over $150 million for the year. I think you raised that $25 million, but it looks like you've done, by my math, $100 million or so or maybe more in the first half. So I just want to confirm that, that's sort of correct. And like of that $25 million that you raised, is that all in the back half? Or was some of that already realized maybe in the second quarter?

Yes, I believe it's a combination. The increase in our restructuring savings mainly occurs in the latter part of the year. In comparing performance between the first and second halves, we achieved 100 basis points of net performance in the first half and only 15 basis points in the second half, with 10 from Seating and 40 from E-Systems. If we were to adjust the timing of commercial settlements in Seating, we could estimate performance at 40 to 50 basis points in the second half. The 85 basis points generated in the first half for Seating would then be 45 basis points. Therefore, after accounting for the adjustments to commercial settlements, the performance is quite comparable between the two halves in Seating. The primary driver of the overall performance for the year is primarily the restructuring savings linked to the investment we are making in restructuring.

Okay. To follow up on Dan's questions about the F-150 announcement, is this a mid-cycle change or is it the next generation of the program? Ray, earlier this year when you provided the initial backlog, you mentioned there would be an updated backlog at some point during the year. I know you indicated there have been delays in sourcing, but it also seems like there has been some progress and updates. When can we expect an update on your backlog outlook?

Yes. We have secured the component business with Ford Motor Company for the next-generation F-150 and F-250. We have made significant progress with E-Systems, approaching $1 billion, which is impressive. I want to emphasize that we are focused on exceeding our cost of capital, and the programs we are winning in E-Systems will enhance our margins. This will lead to a backlog that increases at an accretive rate. In Seating, we anticipate more substantial awards in the second half of the year, and we are currently in the quoting process for the F-150 and F-250 with Ford Motor Company and other original equipment manufacturers. We should be prepared to provide an update around the third or fourth quarter of this year.

Our next question comes from Mark Delaney from Goldman Sachs.

I was hoping you could speak a bit more on your volume and sales outlook. The industry production environment has generally improved a little bit year-to-date, but volume mix and wind downs are a $1.3 billion headwind year-over-year in your guidance. I think incrementally, there's an additional $481 million you're planning on as a headwind from those buckets compared to your last outlook. So could you elaborate more on what Lear is seeing and why it's incrementally more of a headwind?

Yes. We did see a slight improvement in the second quarter from what we had initially anticipated. And so part of what we've embedded in the guidance is a little bit of caution around what we think our customers are going to do with their production schedules. We've got about a 2% discount to our customer schedules out through the balance of the third quarter into the fourth quarter from what they're suggesting their production will be. And that reflects some uncertainty around the level of imports, some of our European customers importing vehicles into the U.S., particularly in the EU, where they're faced with this 25% tariff. We've also reduced our volume assumption on a couple of programs due to impacts with our customers changing over from one model to the next. So for example, with Audi on the Q5, it's gone through a changeover here in the first half of the year. We ended up lowering our production assumption for the year to reflect that. I think that comes back next year. It's a great platform, a long history of success in the marketplace. The other is with JLR and the Range Rover, Range Rover Sport. We did reduce our volume assumption there. There was some volume loss during the changeover there. There's a mid-cycle change that's happening. They're launching some new versions of the vehicle, a plug-in hybrid, for example. And again, great demand for that program, but we were a bit cautious based on what we've seen recently with volumes there. And so those are the kind of the main changes that we made to our volume outlook. We also saw some weakness, which we highlighted in the second quarter, which continues into the full year with the Jeep Wagoneer. And obviously, Stellantis has announced a number of initiatives and changes around trying to stabilize sales here in the U.S. market. And we've seen some headwinds in terms of volume on certain of their platforms like the Wagoneer as a result of that. So it's a combination of some weakness that we see in the releases, but also some anticipated weakness that we've embedded in the outlook. And if you look at the sort of high end of our guidance range to the midpoint, that captures that 2% or so that we've discounted our customer schedules by.

Very helpful, Jason. My other question was around the conquest award that you picked up in wiring. Nice to see that come through. Can you help us better understand for that conquest award with the EV OEM that you spoke about this morning? How much revenue should we think about as that business ramps either in 2026 or 2027?

Yes, it accounts for approximately $50 million in additional revenue that will begin towards the end of this year, and you can expect to see the full impact of that in 2026 and 2027.

Yes, that was a nice win. As I mentioned, we're focused on returns, and it represents a good piece of business. It underscores our credibility in being competitive and efficient in our reputation. So, it was a strong victory for us in the second half, and I am very proud of the team for securing nearly $1 billion in backlog wins already this year. I expect them to continue winning in the second half. What I appreciate is that we are also seeing healthy returns.

Our next question comes from Emmanuel Rosner from Wolfe Research.

I wanted to discuss the transition from the first half to the second half, as you have provided valuable insights on this in Slide 27. When examining the way you've presented the shift, it's clear that the overall margin decrease is primarily due to volume and mix. While we did mention net performance, the margin reduction from the first half to the second is largely attributed to these factors. Specifically, a 90 basis point decline in volume and mix constitutes about a $1 billion headwind sequentially for EBIT, while your revenue projections for volume and mix are only expected to decrease by $600 million to $700 million. This results in a significant decremental effect. I'm looking to gain clarity on your assumptions for the second half. I recognize there is some caution regarding customer schedules, but I would like to understand why these decrementals are so pronounced.

Yes, I think the downward conversion is around 19% to 20%, which aligns with our historical variable margin. Emmanuel, I'm having difficulty following the calculations you're referencing. Regarding the $670 million reduction in sales, I believe it results in a $130 million decrease in operating income.

Yes, sorry about the math. I’m just curious if it seems like everything is very much volume-driven. Also, is there something impacting the decremental side, particularly in relation to potential EU imports which are usually higher-margin, especially comparing the first half to the second half?

There's nothing particularly unusual about that conversion; it aligns well with expectations. The net performance offset is not as significant as we typically observe or as we encountered in the first half of the year, mainly because a lot of the commercial negotiations were advanced to the first half. Overall, the conversion for the year regarding volume changes is better than in the second half. The margin contraction in the latter half is solely due to the lower assumed production volume, partly influenced by normal seasonal patterns. Approximately 70% of the $670 million or $475 million in revenue reflects regular seasonal declines attributed to summer shutdowns in Europe and less downtime in the U.S. during July. The remaining 30% is what we are currently analyzing as we look toward next year. There are a couple of unusual factors to consider. One involves the decreased volumes for JLR on the Range Rover and Range Rover Sport, which is a result of the changeover, along with reduced output on a few European programs likely affected by tariffs. We anticipate that these volumes will decrease, citing two examples: the Mercedes GLC, which is experiencing a sequential volume reduction, and the Defender with JLR. Approximately $100 million in revenue is affected in the first half as compared to the second half. While some of this is normal seasonality, we expect lower shipments from Europe to the U.S. due to tariffs. If the EU and the U.S. can finalize their trade talks at 15% instead of 25%, we would expect a recovery over time, especially looking towards 2026. These anomalies in the second half of the year are important to consider when modeling for 2026, and those are just a few examples.

Great. And then my second question was around the updated guidance on the cash flow side. I think some of the pieces that you've quantified for us was the lower EBIT guidance, but then also some timing on the tariffs. I think the first piece was $25 million, then another $30 million timing. Anything else that's sort of like contributing to the lower outlook on cash flow from operations versus the initial outlook?

It's essentially earnings and then the tariff assumption with higher restructuring cash investment of $40 million, mostly offset by lower CapEx of $35 million. So it's mostly earnings and tariff recovery timing. And on that assumption, there's a reasonable chance that we do better than that $30 million. We had to just strike the chalk line and make the call for today. But I'll just give you one example of how that number could improve. Once this credit program is finalized between our customers and the U.S. government, it's very likely that some of our wire harness imports will be tariff-free, duty-free. And some other components within Seating will also have that treatment. And so with those imports, instead of having to recover from the customer, you just won't incur the tariff upfront. I think we're at least 30, 60 days away from that being finalized, and we're hopeful that a significant portion of our imports are applied to that, that our customers apply the credits to those imports, and we reduce that cash exposure as a result of that. Frank and Nick and their teams are fighting to try and offset the under-recovery of tariffs due to timing of normal payment terms through other means, whether that's early tooling recoveries or engineering recoveries or other commercial settlements. So just it's an assumption, and we want to be clear that, that assumption is embedded in the guidance for awareness purposes for investors, but we hope to do better than that.

Our next question comes from James Picariello from BNP Paribas.

Just to follow on Mark's question with respect to core sales. The organic comp now runs a point lower versus the prior guide despite unchanged LVP. Can you just share what's assumed for the business wind-down piece within E-Systems? Year-to-date, it's $120 million. I believe the original guide had embedded just $75 million for the full year. So curious what's slated for the second half? And does this headwind completely neutralize for next year?

Sure, James. Yes, we have $146 million now for the full year. So it's still first half weighted, and that is a little bit worse than what we had previously guided to. So we have some of our lighting and audio programs and our Audi Gateway program that some of those are balancing out a little more quickly than we had initially anticipated. And in terms of what that means for future years, we did include some of those figures on our backlog slide on the fourth quarter earnings call. But our current thought process here is there's about $150 million that will wind down next year, roughly $200 million in '27, $135 million in '28 and then you're down to less than $100 million, and that last $100 million sort of dribbles out over a number of years. So it is a headwind to growth in E-Systems for the next couple of years, in particular, in '25 through '27, and then it moderates from there.

Understood. That's helpful. And then my follow-up is whether there are any updated thoughts on the backlog regarding the later years, particularly about what 2027 might look like at this point?

Yes. I think we're going to save that for, as Ray said, either later in the year or start of next year because we want to make sure it captures these programs that we're pursuing currently, particularly in Seating. We've had a nice start to the year in E-Systems with new business wins and a pretty significant portion of that is backlog. Most of that falls sort of outside of our normal 3-year window. I think it's mainly late '27 into '28, '29. The recent award that we just received with the global EV OEM does have a '26 benefit, but the others are a little bit later. So we'd like to have more clarity around the longer-term growth profile of the company before we go through a full update to the backlog. Of course, there are kind of puts and takes that happen throughout the year. And I will highlight that one headwind for the backlog for next year is the Stellantis announcement around their production change on the Ramcharger and the Ram REV. That Ramcharger was initially slated to launch this year that got pushed to the middle of next year and the Ram REV got delayed out another year. So we have the Seating on both and then we have the BDU on the Ram REV. So there is a bit of a reduction to be expected from that. Now it's also important to point out that we were able to offset that impact for this year with higher backlog on our Chinese domestic OEM business, in particular, with Xiaomi on the SU7 program, which had a fantastic first half of the year. So again, there are going to be puts and takes, but Stellantis did make that announcement after our first quarter earnings call, I think it was on May 15. And so I just want to make sure that's on everyone's radar screen.

I believe this is significant. As our customers evaluate their propulsion systems, including hybrids, battery electric vehicles, and internal combustion engines, there has been a delay in their business awards due to these decisions, influenced by policy changes that we are all aware of. Currently, our backlog and quoting pipeline in Seating is almost at a record high, around $7 billion. Frankie is very busy quoting numerous programs, and we have a lot of opportunities that we're extremely focused on. We have demonstrated our capabilities in this area. I emphasize to analysts and investors our investments as a manufacturing integrator; while many companies discuss automation and digital software, our ability to enhance efficiency on the plant floor sets us apart. We remain optimistic. However, we must navigate this quoting process carefully, as we have many quotes pending. We are strategic about our targets, favoring traditional, successful programs from the past, and being cautious with the regional programs we pursue. Timing is crucial since there are still shifts occurring, including policy or trade changes, but our focus remains sharp. We see promising opportunities ahead. As these opportunities materialize, we want to keep investors and analysts informed about the business we secure. When the time is right, we will provide further updates on the backlog and our successes. I am particularly proud of the E-Systems team, which performed excellently in the first half of the year with close to $1 billion in booked business. There remain opportunities for E-Systems for the rest of the year. Nick will need to be proactive in this area, and hopefully, we will soon provide an update on the backlog; the pipeline is certainly robust.

Our next question comes from Colin Langan from Wells Fargo.

Maybe just to start, I think I followed most of it, but could you clarify the changes in the operating income guidance? It seems like $25 million is due to performance, around $10 million is from FX improvement, and there’s about $55 million impact from lower volume compared to the previous guidance. Is that correct? If so, that $55 million appears to be a relatively small decremental impact on the sales decline. Are those the correct components?

Yes, I think you summed it up correctly. From the prior guidance, we're down $475 million due to volume and about $90 million of operating income on that, which is converting at 19%. Positive performance is at 25%, and we benefit from the Seating consolidation. However, there’s a bit of margin dilution from the tariff recovery, resulting in $210 million of revenue with no earnings attached. Additionally, foreign exchange is converting at about 7%, slightly stronger in E-Systems than in Seating.

Got it. And then with the recent trade deal with Japan, the sort of a growing view that we might end up at something like 15%. If that's the rate for your business in Honduras, would that be enough of a decline to make it sort of competitive? Or would you have to consider relocating? Any thoughts or color there?

I think it's 15%, 10%, I mean, those are all good numbers. We're still very, very competitive in Honduras at those rates and it will still be more competitive in Honduras. And so the footprint would be very efficient at that level.

Yes. Colin, we've had productive discussions with the administration and commerce recently, and they are paying attention to us. They seem to understand and align with our goal, which is to ensure that U.S.-made vehicles are competitive both domestically and globally. A crucial factor in achieving this is having components like wire harnesses produced in lower-cost locations. While we won't make any bold predictions about when harnesses might be removed from the annex, it makes logical sense to do so in order to maintain the competitiveness of U.S.-manufactured vehicles.

Yes, to Jason's point, the conversations are going extremely well with the administration and with other senators and congressmen we're meeting with, and we are starting to see interest. Remaining competitive in the U.S. and being able to export is a primary goal along with workers and other factors. This helps our case and emphasizes the importance of staying cost competitive in the U.S. regarding components. Thank you to everyone participating in the call today. I want to acknowledge the Lear team for an outstanding job in the first quarter. In the second quarter, we have some work to do for the remainder of the year, but I am really proud of everything we've accomplished, from addressing tariffs to how we've mitigated that challenge operationally. I mentioned our focus on operational excellence and automation in our manufacturing plants, the work done in Mexico, and the improvements in efficiency. Great job to the team, and I appreciate everything you are doing. Let's keep up the momentum in the second half. Thank you.

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.