Earnings Call Transcript - LEA Q2 2023

Ed Lowenfeld, Vice President of Investor Relations

Good morning, everyone, and thank you for joining us for Lear's second quarter 2023 earnings call. Presenting today are Ray Scott, Lear President and CEO; and Jason Cardew, Senior Vice President and CFO. Other members of Lear's senior management team have also joined us on the call. Following prepared remarks, we will open the call for Q&A. You can find a copy of the presentation that accompanies these remarks at ir.lear.com. Before we begin, I'd like to take this opportunity to remind you that as we conduct this call, we will be making forward-looking statements to assist you in understanding Lear's expectations for the future. As detailed in our safe harbor statement on Slide 2, our actual results could differ materially from these forward-looking statements due to many factors discussed in our latest 10-Q and other periodic reports. I also want to remind you that during today's presentation, we will refer to non-GAAP financial measures. You are directed to the slides in the appendix of our presentation for the reconciliation of non-GAAP items to the most directly comparable GAAP measures. The agenda for today's call is on Slide 3. First, Ray will review highlights from the quarter and provide a business update. Jason will then review our second quarter financial results. 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.

Raymond Scott, President and CEO

Thanks, Ed. Now please turn to Slide 5 which highlights key financial metrics for the second quarter. Lear's positive momentum accelerated in the quarter. $6 billion of total company revenue was a quarterly record, an 18% increase compared to last year. Core operating earnings were the highest in over 2 years, increasing by 61% from last year. Adjusted earnings per share increased 86% and operating cash flow improved significantly to $311 million for the quarter. Slide 6 summarizes key highlights from the quarter. Both Seating and E-Systems continued their positive momentum, with significant improvements in operating results for the quarter. Sales growth outperformed global industry production, driven by strong growth in E-Systems. The pace of new business awards continues to accelerate in these systems. The average annual revenue of awards we have won to date is over 50% more than last year. In Seating, we continue to build our thermal comfort capabilities. Today, we announced we are working with Valeo to explore opportunities to integrate Valeo's HVAC expertise with Lear's thermal comfort technologies to optimize heating and cooling within a vehicle. This energy-efficient solution is expected to improve comfort for the occupants while extending the range for electric vehicles. As announced during our Seating Product Day, we entered into a partnership with Bentley to provide the first commercial application for our INTU comfort and wellness technology. And we continue to return cash to shareholders. Year-to-date, we have repurchased over $63 million worth of stock in addition to our quarterly dividend. In early July, we published our 2022 sustainability report which highlights the progress we have made towards achieving our goals for climate, sustainable product development, and DEI initiatives. We continue to be recognized for our focus on our employees. Lear was named one of the top 200 Best Companies to Work For by U.S. News & World Report. In late June, we were excited to hold our first-ever Seating Product Day where we outline the steps we are taking to extend our leadership position in Seating. During the event, we highlighted innovative technologies and strategic initiatives that will enable us to continue to grow market share and expand our segment-leading margins. Slide 7 highlights the major announcements we made at our Seating Product Day. During that event, we described our plan to deepen and widen our competitive moat in Seating, as we change the sourcing model for thermal comfort components by offering a better value proposition to our customers. We increased Lear's 2023 outlook, along with our long-term market share and margin targets in Seating. We highlighted new business awards supporting the significant opportunities we have identified as we build out our Thermal Comfort Systems business. Our first production award for INTU and FlexAir demonstrates our success in bringing innovative technologies to market. INTU is our intuitive seating system and FlexAir is our sustainable foam alternative that is 100% recyclable and delivers a CO2 emissions improvement of 50% over traditional foam. Turning to Slide 8; I will provide some more details on the progress we have made in E-Systems. The second quarter's results marked our fourth consecutive quarter of year-over-year margin improvement in E-Systems and the business is on track for further improvements in the second half of this year. And our focus on core products where we can provide our customers with unique solutions has resulted in an acceleration of business awards. In wiring, we have won new contracts for both high voltage and low voltage harnesses with several OEMs, including our first wiring award with BMW. Consistent with our strategy, we continue to diversify our customer base and this award is another example of leveraging strong OEM relationships across business segments. A significant driver of the year-over-year growth in business awards is our electronics portfolio. As we mentioned last quarter, we expanded our leadership in high-performance BDUs with an award from Stellantis. During the quarter, we also began shipping preproduction parts for our ICBs to General Motors to support their planned ramp of the Ultium battery production. In total, 50% of our year-to-date awards are for electrification. We continue to execute our strategy to grow connection systems. During the quarter, we expanded our global engineered component capabilities by opening a plant in Morocco. We are also increasing our capabilities and capacity in China. These awards, along with the opportunities we are pursuing in the second half, put us on track to achieve our third straight year of $1 billion of sales backlog for E-Systems. Now, I'd like to turn the call over to Jason for the financial review.

Jason Cardew, Senior Vice President and CFO

Thanks, Ray. Slide 10 shows vehicle production and key exchange rates for the second quarter. Global production increased 15% compared to the same period last year and was also up 15% on a later sales-weighted basis. Volumes were higher in each of our key markets, with North America and Europe up 15% and China up 19%. From a currency standpoint, the U.S. dollar weakened against the euro and strengthened against the RMB compared to 2022. These two largely offset. Revenues in the quarter were also negatively impacted by other currencies which weakened against the dollar, including the South African rand and Korean won. Slide 11 highlights Lear's growth over market. For the second quarter, total company growth over market was 2 percentage points, driven by strong growth over market in E-Systems of 11 points. Growth over market was particularly strong in Europe and China. In Europe, sales outperformed the industry production by 6 points, with both business segments benefiting from higher volumes on the Land Rover, Range Rover, and Defender. New programs, such as the BMW 5 and 7 series in Seating and new wiring and electronics content on the Volvo XC40 and XC40 recharge in E-Systems contributed to the strong growth in the region as well. In China, growth over market of 10 points was driven by strong growth in both business segments. The growth in Seating resulted from the new Geely ZEEKR program and leather sales to BYD. In E-Systems, growth was driven by strong production on the Volvo XC40, XC40 Recharge, and the Polestar 2. In North America, total revenue grew more than 11%, excluding FX, commodity and acquisitions due to volume increases in new business in both segments. While Seating revenue increased by almost 9%, consistent with our expectations, unfavorable platform mix on several key programs resulted in total company growth that was 4 points lower than the industry. For the first half of the year, total company growth over market was 3 percentage points, with Seating growing 3 points above market and E-Systems growing 6 points above market. Turning to Slide 12; I will highlight our financial results for the second quarter of 2023. Sales increased 18% year-over-year to a record $6 billion. Excluding the impact of foreign exchange, commodities, and acquisitions, sales were up by 17%, reflecting increased production on key Lear platforms and the addition of new business in both segments. Our operating earnings were $302 million compared to $187 million last year. The increase in earnings resulted from the impact of higher production on Lear platforms and the addition of new business. Adjusted earnings per share improved significantly to $3.33 as compared to $1.79 a year ago. Operating cash flow generated in the quarter was $311 million compared to $11 million in 2022. The increase in operating cash flow was due to higher earnings and an improvement in working capital relative to last year. Improved working capital was driven primarily by the timing of customer and supplier payments as well as improved performance in both businesses with inventory management. Slide 13 explains the variance in sales and adjusted operating margins in the Seating segment. Sales for the second quarter were $4.5 billion, an increase of $594 million or 15% from 2022, driven primarily by an increase in volumes on Lear platforms and our strong backlog. Key backlog programs include the BMW 5 and 7 Series in Europe, the Chevrolet Colorado, GMC Canyon, and Mercedes EQE and EQS SUVs in North America as well as the Geely ZEEKR and NEO ES8 in China. Excluding the impact of commodities, foreign exchange, and acquisitions, sales were up 14%. Core operating earnings improved to $322 million, up $89 million or 38% from 2022, with adjusted operating margins of 7.2%. The improvement in margins reflected higher volumes on Lear platforms and our margin-accretive backlog. Favorable net performance was partially offset by higher engineering spending and launch costs to support Conquest and other new business awards. Slide 14 explains the variance in sales and adjusted operating margins in the E-Systems segment. Sales for the second quarter were $1.5 billion, an increase of $334 million or 28% from 2022. Excluding the impact of foreign exchange and commodities, sales were up 26%, driven primarily by higher volumes on key platforms and our strong backlog. Key backlog programs include the Volvo XC40 Recharge in Europe, new wiring programs with a global EV OEM in North America and Europe, the Buick Electra E5 in China, and the Ford Super Duty in North America. Core operating earnings improved to $63 million, or 4.1% of sales, compared to $24 million and 2% of sales in 2022. The improvement in margins reflected higher volumes on Lear platforms and a margin-accretive backlog, partially offset by the dilutive impact of passing through higher commodity costs to our customers, increased engineering and launch costs to support new programs, and the impact of foreign exchange. Looking ahead, net performance is expected to improve due to lower launch costs as well as efficiency improvements that started to deliver results late in the second quarter and will have a larger impact in the second half of the year. Now shifting to our 2023 outlook which was updated at our Seating Product Day on June 27. The Slide 15 provides global vehicle production volumes and currency assumptions that form the basis of our full year outlook. We base our production assumptions on several sources, including internal estimates, customer production schedules, and S&P forecast. At the midpoint of our guidance range, we assume that global industry production will be 4% higher than in 2022, or 5% higher on a Lear sales-weighted basis. At the high end of our guidance range, our global production assumptions are generally aligned with the S&P forecast. From a currency perspective, our 2023 outlook assumes an average euro exchange rate of $1.07 per euro and an average Chinese RMB exchange rate of RMB 6.96 to the dollar. This reflects exchange rates of US$1.05 per euro and RMB 7 to the dollar for the balance of the year. Slide 16 provides more detail on our current outlook. On June 27, we increased our 2023 outlook for net sales, core operating earnings, and free cash flow. As I will describe in more detail on the next two slides, the midpoint of our sales guidance includes $350 million of contingency for potential downtime from customer labor contract negotiations. To the extent customer production disruptions are minimal; we would expect sales, earnings, and cash flow to be closer to the high end of our guidance range. On the next two slides, I'll provide more details on the key assumptions reflected in our second half outlook for both Seating and E-systems. Slide 17 compares our second half outlook to our first half actual results for sales and core operating earnings in the Seating segment. We are forecasting the midpoint of our second half sales outlook to be approximately $8.1 billion, down $817 million from our first half actual results, reflecting lower volumes due to seasonal shutdowns in the third quarter in North America and Europe as well as the impact of foreign exchange. The midpoint of our revenue guidance in Seating protects for approximately $300 million for potential effects of customer labor negotiations. The midpoint of our second half operating income outlook is $522 million or 6.4%. At the high end of our guidance range, we expect Seating margins at 6.9% compared to 7% in the first half of the year. The reduction in operating income reflects the expected impact from lower volumes on our Seating platforms, partially offset by the benefit of commercial negotiations and improved operating performance as well as savings associated with restructuring actions to optimize capacity, improve efficiencies, and lower labor costs. We do expect lower margins in the third quarter due to seasonal volume and higher launch and engineering costs to support our strong new business backlog and recent Conquest awards. Slide 18 compares our second half outlook to our first half actual results for sales and core operating earnings in the E-Systems segment. We are forecasting the midpoint of our second half sales outlook to be approximately $2.75 billion, down $172 million from our first half actual results, reflecting lower volumes and the impact of foreign exchange. The midpoint of our revenue guidance in E-Systems protects for approximately $50 million for potential effects of customer labor negotiations. The midpoint of our second half operating income outlook is approximately $148 million or 5.4%, an increase of $36 million from our first half actual results. At the high end of our guidance range, we expect E-Systems margins of 5.8% compared to 3.8% in the first half of the year. We expect to offset the impact of reduced volumes through a combination of lower engineering and launch costs, performance improvements, and additional commercial recoveries. In addition, our wiring business was impacted by supply issues during the first half of the year, particularly in North America. We saw improvements in plant productivity and efficiencies in late June that carried into July. We expect improvements to continue through the second half of the year. Moving to Slide 19; we highlight our strong balance sheet and liquidity profile, a major competitive advantage for Lear in a rising interest rate environment. The acquisition of IGB was largely financed with a 3-year fully prepayable term loan. We do not have any near-term debt maturities. Our earliest bond maturity is in 2027 and our debt structure has a weighted average life of approximately 14 years. Our cost of debt is low, averaging approximately 4%. In addition, we have $2.9 billion of available liquidity. We remain committed to returning excess cash to our shareholders, having repurchased $63 million worth of stock in the first half of the year, and we continue to repurchase shares in the third quarter. Our current share repurchase authorization has approximately $1.2 billion remaining which allows us to repurchase shares through December 31, 2024. Now, I'll turn it back to Ray for some closing thoughts.

Raymond Scott, President and CEO

Thanks, Jason. Please turn to Slide 21. The second quarter results illustrate why I'm more confident in the opportunities for Lear and our industry than I have been in several years. We are focusing on areas we can control, while continuing to monitor industry and economic conditions that could impact our operations. In Seating, we are executing Phase 1 of our thermal comfort strategy, while continuing to develop modular solutions. Working with Valeo, we are exploring innovative ways to optimize occupant comfort while extending EV range. These unique solutions add value for our customers and increase the penetration rates of our thermal comfort components. In E-Systems, our focused product portfolio allows us to optimize our resources and improve margins. This quarter was a key inflection point to accelerate margin improvements through the second half of this year. Through our leadership and operational excellence, we have identified key efficiency opportunities that will improve our cost competitiveness to deliver improved margins and cash flow. I'd like to thank the team for a great first half, and I am confident we will continue to deliver on our goals going forward. And now we'd be happy to take your questions.

Operator, Operator

And the first question will come from James Picariello with BNP Paribas.

James Picariello, Analyst

Just with respect to the guide, based on the midpoint to high-end swing factors, Jason, I know you called this out but I just want to confirm what is baked into the midpoint of the guide with respect to the UAW labor disruptions potential?

Jason Cardew, Senior Vice President and CFO

Yes, James, we included $350 million at the midpoint of the guidance. So that's $300 million in Seating and $50 million in E-Systems. So our Seating revenue is more weighted to North America than our E-Systems revenue. It's about 45% of sales in Seating, about 30% of E-Systems. So that's why there's a disproportionate impact on Seating if there were to be a labor disruption.

James Picariello, Analyst

Okay. And that's already rolled into the LVP, the global LVP assumption of up 4?

Jason Cardew, Senior Vice President and CFO

Yes.

James Picariello, Analyst

Got it. I appreciate the insights regarding the first and second halves. However, on a year-over-year basis, how should we view the commodities impact by segment? To what extent have recoveries been negotiated for the second half? Could this figure change depending on the UAW outcome, or are the commercial negotiations mostly finalized?

Jason Cardew, Senior Vice President and CFO

So as I think about the second half, there is some level of commercial negotiation benefit factored into both segments. I think it's 60 basis points in E-Systems and 45 basis points in Seating. The bigger factors that are really going to drive that second half for us, particularly in E-Systems, are somewhat in our control. And we talked about specifically the efficiencies that we're expecting to see in North America, primarily in wire but also impacting our electronics business. And we really had an inflection point here in the second quarter that gives us a lot more confidence in the outlook for the balance of the year. We saw improvements in June. We saw those improvements and efficiencies continue in July. And so we're on a good trajectory as we head through the balance of the year in E-Systems to deliver that sort of 200-plus basis points of margin improvement in the performance categories that we outlined on the slide. In terms of commodities, specifically, really, that's reflected in the additional commercial negotiations that we expect to benefit in the second half of the year. That's really all we see with commodities. We don't see a lot of movement in raw material prices at this stage. Steel in North America seems to have stabilized. It's come down a little bit here in the third quarter so far. And towards the end of the second quarter, copper has been pretty stable as well; so not seen a lot of movement on raw materials. We are seeing a little bit of benefit on lower ocean freight rates and some of those things sort of on the periphery and not a real meaningful impact as we think about the balance of the year.

Operator, Operator

The next question will come from Emmanuel Rosner with Deutsche Bank.

Emmanuel Rosner, Analyst

Just to follow up on this topic of supply issues in wiring and electronics and the efficiencies that we're starting to see. Can you just provide a little bit more color on what the issue is basically where? And what you're currently seeing in terms of that situation?

Raymond Scott, President and CEO

Yes, the first half faced challenges due to some nonrecurring events that affected our operations. One major supplier had a fire that disrupted production by limiting our material supply. We are currently hiring and addressing the difficulties of efficiently staffing our facilities and training new employees. Our headcount was higher than necessary for our production levels, and we incurred some extra costs due to transportation, as we had to run our plants intermittently and use premium shipping to catch up. Most of these challenges from the first half have now dissipated. I'm excited about the improvements we are seeing; the second quarter exceeded our expectations despite earlier challenges. We're on target for better efficiency in our plants and have achieved 50% of the improvements needed so far, with good momentum heading into this quarter. We feel optimistic about the second half as we have control over these issues. While previously we were dealing with factors outside our control, now we can manage what we do well, which makes me feel positive about the upcoming months.

Emmanuel Rosner, Analyst

Great to hear. Then my second question is on the Seating margin outlook for this year and then your longer-term targets. I think this year's margin, if we went for net commodities and inflation, I think, would be something like maybe 8.3% in the outlook in 2023. I think, at the same time, the Seating Day you're targeting better than 8.5% sort of four years out. So what is the outlook for recovering over time some of these commodities and inflation inefficiencies? Is there sort of a path for that? And if that's the case, combined with a lot of volume and growth of the market over the next three to four years or so, why would the target just be similar to what you would be earning this year, if you went for these headwinds?

Jason Cardew, Senior Vice President and CFO

I want to take a moment to reflect on the outlook for 2024 and 2025. First, we need to focus on completing this year, as there is much work ahead to meet the guidance we've presented. For this year, the high end of our guidance for Seating is at 6.7%. We anticipate achieving over 8% in 2025, as we discussed during our Seating Product Day. This increase is partly due to volume and backlog, contributing about 60 basis points, with a similar impact from performance improvements. This performance includes recovering some of the wage and commodity cost inflation we've experienced. Additionally, we are focused on executing our restructuring plans and operational improvements across various components, GAV, and technology optimization initiatives that we pursue annually. We also expect a 20 basis point improvement in our Thermal Comfort Systems business, stemming from in-sourcing currently outsourced work, growing new business in that area, and relocating operations from higher-cost Eastern European plants to North Africa, which is in progress. Furthermore, we expect synergies as we merge the Kongsberg and IGB organizations. While the path from 6.7% to 8% in 2025 may not be a straight line, I do foresee a transition towards reaching our medium-term 8% target in Seating.

Operator, Operator

Our next question will come from Dan Levy with Barclays.

Dan Levy, Analyst

I wanted to start with a question about electric vehicles in general. We've seen some comments about reduced spending and slower progress from Ford and GM in various areas related to EVs. You've mentioned Ultium before, and it seems like its development is moving at a slower pace. Additionally, the Bolt is now included in their targets, even though it was initially expected to be phased out. How does this potential slowdown in the EV market from some of your customers affect you?

Raymond Scott, President and CEO

Well, a couple of things. One, we have really strong relationships with our customers and committed longer-term contracts with some of these awards. It's important to note that if there are changes or shifts that we work in a very collaborative way with our customers on any type of changes to their current strategies. I'm confident if there are shifts or changes within volume or ramp-up or product lines, we can work with our customers to balance those expectations regarding revenue. And so there have been changes. We've been very selective and specific on what customers we were quoting and how we're positioning our own business for long-term success, like the battery disconnect unit or the ICBs, where we can scale them across multiple platforms, multiple car lines, and multiple solutions. We continue to work with our customers as they work through their strategies, but I would say that it starts with a very good relationship with our customers and understanding where they're going longer term.

Jason Cardew, Senior Vice President and CFO

The only thing I would add, Dan, is that we are being very cautious with our investments in capitalizing these facilities for the ramp-up. Building on Ray's comments, I think the collaboration and communication with customers is essential here, and that's what we've been focused on ensuring clarity with them on our expectations and then being cautious on putting that new capital in place. We're confident that the volume will materialize and having a backstop of a commercial discussion with them once we put the capacity in place if the volumes don't materialize. We have seen a bit of an impact on revenue this year from the ramp-up of the battery electric truck platform. It wasn't meaningful in the backlog, but the volumes are a little bit lower, as GM suggested on their earnings call, a little bit lower in the first half than we originally expected, a little bit lower in their projections for the second half as well; so there's been a modest impact but not significant at this point. I think as we start planning for '24 and '25, we'll be spending a lot of time with customers, making sure that we're aligned on the capacity we put in place so that it mirrors what they intend to produce.

Dan Levy, Analyst

That's helpful commentary. And as a follow-up, you provided some encouraging commentary on the E-Systems backlog and winning a lot of awards; sometimes what we see with some suppliers is that an inflecting backlog can maybe limit the ability to achieve commercial recoveries. And right now, obviously, you have a significant path of commercial recoveries ahead on E-Systems. So what steps are you taking to make sure that as you do your backlog push, you can also get your commercial recoveries fully intact?

Raymond Scott, President and CEO

Well, I'll tell you, I'm encouraged by the way the customers are working with us. We typically separate backlog growth. We're not, in any respect, buying business for the ability to offset a commercial claim today. We need to get recovery. I'm absolutely confident that working with our customers, we will get a fair settlement. We tend to separate those issues relative to growth. I think the last three years have been indicative and representative of the relationships we have with our customers. We've been challenged now with chip situations and inflationary costs and labor cost increases, transportation costs, et cetera. Next year, even the business we've been rolling on in Seating, has been accretive to our margins. I think this is representative of our ability to negotiate in a fair way, getting a reasonable settlement that's fair for Lear Corporation, and still being able to win new business. Next year will witness the largest revenue growth in a single year at Lear Corporation. We've been able to manage those commercial negotiations and continue to win healthy business that we secure at an expected return for Lear Corporation. It doesn't go without challenges, but I do think customers are much more open and willing to negotiate these things than they have in the past. Initially, it was probably more transitory in some respects, but now we're working on fixed contracts and selling issues that are more sticky or longer term. We'll continue to work with our customers. We have great relationships with them. We solve problems for them. If you do that and continue to deliver at the best possible quality and expectations, they'll work with you.

Operator, Operator

The next question will come from Colin Langan with Wells Fargo.

Colin Langan, Analyst

Just a follow-up on the $350 million. I think you said in the midpoint of your sales guidance, how should we think about if there is no strike in an optimistic scenario? I mean what is sort of the decrementals on those sales that are embedded in guidance as well? Is that sort of the normal high teens decremental on those lost sales? Or is it maybe a bit worse because of maybe delayed recoveries or anything? And is that embedded in the guidance?

Jason Cardew, Senior Vice President and CFO

Yes. I think it depends on which customers are impacted and the level of vertical integration and underlying profitability on those platforms. We did see a little bit higher decremental margins during the GM strike in 2019 because that business in Seating, in particular, was the most vertically integrated of all the customers that we have. It's a little less so with Ford and Stellantis. So it depends on the customer that's impacted. Just to give you some frame of reference, each week of downtime, if all three customers were to go down, it's about $140 million of revenue. We'd expect that to convert around 25%, give or take. It could be a little bit higher, a little bit lower depending on the mix of programs and customers that are impacted.

Colin Langan, Analyst

And what is embedded in the guidance now around the 25% on the lost sales?

Jason Cardew, Senior Vice President and CFO

Yes. So if you do the math on the high end of the midpoint, we have embedded a little bit less than 20% on the downside conversion. Karl and Frank's teams have the playbook outlined on what we will do if a strike takes place. There are things that we can control on discretionary spending, certainly some customer negotiations or discussions. But we believe between the actions that we'll take and the impact of the lost variable margin on the lower volume would net into that sort of 20% range. That's the target that we're working towards.

Colin Langan, Analyst

If I compare the first half to the second half performance, especially in Seating, it suggests a significant underperformance. For instance, if you consider a market drop of around 2 in the first half, the second half could see your Seating down by approximately 8. What accounts for such a substantial underperformance when you've been growing faster than the market as you move into the second half?

Jason Cardew, Senior Vice President and CFO

Yes. So maybe if I could just give you some of the assumptions by region and help explain it. We have assumed that there would be about a 20% reduction in the Q1 platform from the first half to second half. There was downtime associated with the normal kind of summer shutdown in those facilities when you have the strike impact assumed in those facilities. And then, we've assumed slightly lower volumes on a weekly basis in the tail end of the year compared to what they ran in the first part of the year. That's probably the biggest driver. In Europe, we do assume that there's a bit of a slowdown in the strong growth we've seen from JLR on the Range Rover and the Defender programs, both are down north of 20%, again, partially driven by just normal seasonality. You have production downtime in August as those customers take their summer holidays. It's partially a result of that and a little bit of conservatism ultimately embedded in the forecast. We debated this for some time over the last couple of weeks, and we updated our guidance in conjunction with our Seating Product Day on June 27. We really made a back call in mid-June. I think conditions have improved over the last 45 days. If we were to have set our guidance assumption in conjunction with the earnings call, as opposed to the Seating Product Day, it probably would have been a little bit higher. That's why we spent so much time articulating the assumptions in the guidance and what the high end would look like; just to give investors and the analysts modeling this a sense of what could be possible in the second half of the year. It may look very different than what we've guided to at the midpoint.

Operator, Operator

The final question will come from Itay Michaeli with Citi.

Itay Michaeli, Analyst

Just had two questions. One, I was hoping you could maybe just help us a little bit with the cadence of E-Systems margin in Q3 and Q4, just given the ramp of efficiencies. And then just secondly, just hoping you could go back just to the comments on the assumption for T1 production in the second half of the year. Can you just clarify of that assumption, how much of that ties to what you're assuming for potential strike?

Jason Cardew, Senior Vice President and CFO

Yes. So maybe start with the second part of that question first. We've assumed effectively 2.5 weeks of strike for all GM, Stellantis, and Ford business. That's what comprises the $350 million. So that's the portion of the volume reduction in that platform that you would attribute to the strike. In terms of the E-Systems margin ramp, there's a negative in the third quarter on the seasonality of lower volumes. That's partially offset by the traction we have on both the wire efficiency improvements in Mexico as well as our expected commercial negotiations. We're not going to provide third quarter guidance at this point in time. There's a fairly wide range of outcomes there. I'd say kind of anywhere from flat to as high as 5%, depending on both those negotiations and the continued performance in our Mexico facilities. The fourth quarter would be a step-up from that to get to sort of that 5.4% to 5.8% range that we outlined for the second half overall.

Raymond Scott, President and CEO

Okay. I want to thank everyone for their incredible hard work. It was a very good quarter. Everyone came together. As always, there was a great effort by the employees of Lear Corporation, and I look forward to the second half and what we will accomplish. Thank you for a great quarter and for your work going forward.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.