Lear - Q3 2023
October 26, 2023
Transcript
Operator (participant)
Good morning, everyone, and welcome to the Lear Corporation Q3 2023 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the Star key followed by 0. After today's presentation, there will be an opportunity to ask questions. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Ed Lowenfeld, Vice President, Investor Relations. Please go ahead.
Ed Lowenfeld (VP of Investor Relations)
Thanks, Jamie. Good morning, everyone, and thank you for joining us for Lear's Q3 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 Ray begins, I'd like to take this opportunity to remind you that as we conduct this call, we will be making forward-looking statements to assist you in understanding Lear's expectations for the future. As detailed in our Safe Harbor statement on slide 2, our actual results could differ materially from these forward-looking statements due to many factors discussed in our latest 10-Q and other periodic reports.
I also want to remind you that during today's presentation, we will refer to non-GAAP financial metrics. You are directed to the slide in the appendix of our presentation for the reconciliation of non-GAAP items to the most directly comparable GAAP measures. The agenda for today's call is on slide 3. First, Ray will review highlights from the quarter and provide a business update. Jason will then review our third quarter financial results and provide an update on our full-year outlook. 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.
Ray Scott (President and CEO)
Thanks, Ed. Now, please, turn to slide 5, which highlights key financial metrics for the third quarter. Lear had another strong quarter, with double-digit increases in sales and operating earnings. Total company revenue was $5.8 billion, a 10% increase compared to last year. Core operating earnings increased by 14% from last year to $267 million. Adjusted earnings per share increased 23%, and operating cash flow improved significantly to $404 million for the quarter. Slide 6 summarizes key highlights from the quarter. The third quarter marked our fifth consecutive quarter of year-over-year improvements in both revenue and operating income. Our seating team demonstrated their industry-leading operating capabilities by successfully launching the Wagoneer and Grand Wagoneer Just-in-Time programs. This was an important conquest win and an unprecedented mid-cycle transition of a very complex luxury seating program.
Our thermal comfort, integration, and innovation continues to gain traction. During the quarter, we leveraged our strong relationship and were awarded our first ventilation program with General Motors. The customer response to our expanded thermal comfort capabilities has been tremendous, and we will continue to work with existing and new customers to add Lear content. Key third parties continue to recognize our leadership in quality and innovation. Lear, once again, received more than twice as many J.D. Power Seat Quality Awards as any other supplier, including first-place awards in both luxury categories. ReNewKnit, our fully recyclable suede alternative that will start production next year, was named as an Automotive News PACE Award finalist. In E-systems, we continue to diversify our customer base with new wiring awards with Renault and Geely. Our strong performance allowed us to increase the pace of share repurchases.
In the quarter, we repurchased approximately $75 million worth of stock, more than we repurchased in the first and second quarters combined. I couldn't be more proud of the Lear team. Not only did they execute during the quarter, but Lear employees always support the communities where they live and work. The team in Morocco established a special fund to help those impacted by the devastating earthquake. Slide 7 provides more detail on the progress we have made in Seating. In addition to the launch of the Wagoneer and the Grand Wagoneer, we launched the seats for the BMW 5 Series in Europe. Both vehicle launches were key conquest awards from competitors. We continued to grow with BYD, with several current and upcoming launches, such as the seat assembly for the BYD Seal, as well as component sales, such as leather for the BYD Denza D9.
Our leadership in quality and operational excellence once again was recognized by J.D. Power. Our 4 best in segment and 9 total top three awards were more than twice as many as any other seat supplier. We are in first place in both luxury categories. The seats for the Porsche 718 won in the luxury car category, while the seats for the Range Rover Sport won in the luxury SUV category. In total, Lear won 4 of the 7 awards across the two luxury categories. Further evidence of our leadership in this segment. ReNewKnit, our fully recyclable suede alternative, is gaining traction with both our customers and with third parties. ReNewKnit will start production next year on 3 programs with 3 different OEMs. We're in discussions to expand ReNewKnit to additional vehicle lines with these customers and have seen increasing interest from other customers.
Momentum has increased rapidly, and we see great opportunity for additional awards in the coming months. The level of innovation for ReNewKnit, led to Automotive News to name it a PACE Award finalist in 2023. The winners will be named later next year. Slide 8 provides an update of the significant progress we are making in all phases of our thermal comfort strategy. We continue to optimize our manufacturing footprint and thermal comfort systems organization. Our new facility in North Africa provides a low-cost alternative to our current locations. To date, we have conducted technical reviews with our thermal comfort capabilities with 14 OEMs. Positive feedback from these reviews affirm our confidence in our strategy. The strong relationships we have built with our customers make it easier to drive growth opportunities for our thermal comfort components.
During the quarter, we won a ventilation award with General Motors. This breakthrough win for Lear opens the door for additional growth opportunities for ventilation and other thermal comfort products with our largest seat customer. Once validated, our components can be sourced across an OEM's entire vehicle portfolio. Having sourcing control for the thermal comfort components allows for quicker proliferation, particularly for programs that we are just-in-time supplying. The interest level of our modular innovation has accelerated. Our timing is perfect as our customers are looking for solutions to reduce part complexity and cost, while also offsetting the impact of elevated wage inflation. Today, we have 21 development contracts for component modularity and FlexAir solutions, and we previously announced that we are on track to launch our first production application for FlexAir during the first quarter next year.
Working with a premium European OEM, we combine pneumatic, lumbar, massage, heat, and ventilation into a single modular solution. We estimate this module will reduce part complexity by 50% in the Just-in-Time plant, while lowering cost and improving performance for the end consumer. We're on track to have this module fully validated by our customer by the middle of next year. The response for our complete seat modularity has been overwhelmingly positive. As a result, we are accelerating the timeline we expect to deliver this solution from 2027 to 2026. The initial results from the seven development projects in process for existing customers have been outstanding. Our complete seat module has significantly improved the thermal comfort performance when compared to individual components. The airflow from our ventilation systems increased by up to 55%.
The heat solution increases the temperature by up to 85% more than the current solution after only 1 minute, improving the time to sensation. We've increased the intensity of the massage system by up to 150% compared to the current component solution, allowing the module to provide a much more therapeutic experience. Our customers are looking for these solutions. We have been meeting with the customers in at the top levels within the organizations, and the feedback has been extremely positive. The momentum has shifted from Lear pushing these concepts to our customers really pulling us and asking us to move faster and driving their internal organizations to implement our complete seat solution. Lear's modular solutions will provide a cost savings opportunity to our customers while expanding seating margins. Turning to slide 9, I will provide an E-Systems update.
The third quarter marked our fifth consecutive quarter of year-over-year margin improvement in E-Systems. The increase in industry volume, combined with our efficiency improvements and margin accretive backlog, allowed us to achieve our highest operating margins in E-Systems in more than two years. Based on the midpoint of our current outlook, the second half margin this year is on track to be more than 100 basis points better than last year. The new Connection Systems plant in North Africa is currently producing pre-production components. This facility is key to expanding our engineering component capabilities and will support our new vertical integration opportunities in Europe, an important driver of our margin expansion plan. We continue to win new business in both wiring and connection systems. Key awards include a conquest award with Renault and an award with a new EV with Geely.
These awards, along with the opportunities we are pursuing in the fourth quarter, keep us on track to achieve our third straight year of a $1 billion three-year backlog in E-Systems. The improvement over the last several quarters is a result of the strategy we developed in 2019 and implemented over the past three years. By streamlining our portfolio to focus on high growth and high return products and de-emphasizing non-core product lines, we have optimized our resources and continue to win new business in our key product areas. There's still a lot of work to be done, but we continue to make meaningful progress towards our margin targets. Now, I'd like to turn the call over to Jason for a financial review.
Jason Cardew (Senior VP and CFO)
Thanks, Ray. Slide 11 shows vehicle production and key exchange rates for the third quarter. Global production increased 4% compared to the same period last year and was up 8% on a Lear sales weighted basis. Production volumes increased by 9% in North America and by 6% in Europe, while volumes in China were down 1%. From a currency standpoint, the U.S. dollar weakened against the euro, but strengthened against the RMB compared to 2022. Slide 12 highlights Lear's growth compared to the market. Total company revenue growth lagged the market by 1 percentage point, primarily driven by unfavorable platform mix on several key programs in North America. The largest driver of the unfavorable platform mix reflected downtime in seating at General Motors full-size truck plants.
Excluding the impact of the downtime, total company sales growth would have been in line with the overall market. The UAW strike at GM's Wentzville facility and Ford's Chicago facility also had a modest negative impact on Seating revenue. In E-Systems, growth of the market of 3 percentage points was driven by our backlog in all regions, as well as favorable platform mix in Europe. Europe sales outperformed industry production by 8 points, with both business segments benefiting from higher volumes on the Land Rover, Range Rover, Range Rover Sport, and Defender. New conquest programs such as the BMW 5 Series and 7 Series in Seating and new business with the global EV OEM, as well as BMW, Mercedes-Benz, and Fisker, and E-Systems, contributed to the strong growth in the region as well.
Through the first three quarters, total company growth over market was 2 percentage points, with Seating growing 1 point above market, and E-Systems growing 5 points above market. Turning to Slide 13, I will highlight our financial results for the third quarter of 2023. Sales increased 10% year-over-year to $5.8 billion. Excluding the impact of foreign exchange, commodities, and acquisitions, sales were up 7%, reflecting increased production on key Lear platforms and the addition of new business in both segments. Core operating earnings were $267 million compared to $235 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 increased 23% to $2.87, as compared to $2.33 a year ago. In addition to higher core earnings, our adjusted EPS benefited from higher equity earnings and a lower share count, reflecting the benefit of our share repurchase program. Operating cash flow generated in the quarter was $404 million, compared to $252 million in 2022. The increase in operating cash flow was due to an improvement in working capital and higher earnings relative to last year. Slide 14 explains the variance in sales and adjusted operating margins in the Seating segment.
Sales for the third quarter were $4.3 billion, an increase of $397 million or 10% from 2022, driven primarily by an increase in volumes on Lear platforms and our strong backlog. Key backlog programs include the BMW 5 Series and 7 Series and Dodge Hornet in Europe, the Chevrolet Colorado, GMC Canyon, and Mercedes EQE SUV in North America, as well as the Geely Zeekr and leather sales for the BYD Denza D9 program in China. Excluding the impact of commodities, foreign exchange, and acquisition, sales were up 6%. Core operating earnings improved to $275 million, up $20 million or 8% from 2022, with adjusted operating margins of 6.4%.
As expected, operating margins were modestly lower due to the impact of higher engineering spending and launch costs to support new business awards. This was partially offset by the benefit from higher volumes on their platforms and our margin accretive backlog. Seating margins in the third quarter were negatively impacted by production disruptions related to the UAW strike, GM full-size truck downtime, and volume reductions and premium costs related to shipping delays at the Mexican border. Slide 15 explains the variance in sales and adjusted operating margins in the E-Systems segment. Sales for the third quarter were $1.5 billion, an increase of $143 million or 11% from 2022. Excluding the impact of foreign exchange and commodities, sales were up 9%, driven primarily by our strong backlog and higher volumes on key platforms.
Key backlog platforms include new programs with the global EV OEM and Fisker in North America and Europe, as well as the Ford Super Duty truck and GM Hummer EV and Silverado EV in North America, where operating earnings improved to $79 million or 5.3% of sales, compared to $53 million and 3.9% of sales in 2022. The improvement in margins reflected higher volumes on Lear platforms and our margin accretive backlog, an improvement in commodity costs and strong net operating performance. The positive net performance was driven primarily by efficiency improvements at our North American manufacturing facilities, resolution of key commercial negotiations with customers, facilitating recovery of costs due to commodities and wage inflation and restructuring savings.
Moving to Slide 16, we highlight our strong balance sheet and liquidity profile, a major competitive advantage for Lear in today's higher interest rate environment. 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 13.5 years. Our cost of debt is low, averaging approximately 4%. In addition, we have $3 billion of available liquidity. We are on track to meet or exceed our target of 80% free cash flow conversion for the year.... We remain committed to returning excess cash to our shareholders and accelerated our share repurchases in the third quarter. During the quarter, we repurchased $75 million of stock, which was more than the first and second quarters combined.
Our current share repurchase authorization has approximately $1.1 billion remaining, which allows us to repurchase shares through December 31, 2024. Now, shifting to our 2023 outlook. Slide 17 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 forecasts. At the midpoint of our guidance range, we assume that global industry production will be 7% higher than in 2022, an increase of three percentage points or 2 points on a Lear sales-weighted basis from our prior guidance, reflecting higher production in Europe and China. Our global production assumptions are generally aligned with the latest S&P forecast.
From a currency perspective, our 2023 outlook assumes an average euro exchange rate of $1.08 per euro and an average Chinese RMB exchange rate of 7.02 RMB to the dollar. Slide 18 provides more detail on our current outlook. We are increasing our 2023 outlook for net sales, Core Operating Earnings, and Free Cash Flow from the midpoint of our prior outlook. We are increasing our outlook for restructuring costs by $25 million to fund investments that will optimize the manufacturing footprint of our new Thermal Comfort Systems segment and to reduce capacity in Europe to better align with current and future customer production plans. At the same time, we are reducing our outlook for capital spending by $25 million, primarily as a result of slower customer ramp-up plans on various new electric vehicles.
In the third quarter, we lost approximately $25 million of revenue due to the UAW strike. Based on the plants that are on strike as of today, we are losing approximately $60 million of revenue per week. Based on the late news from last night, the revenue impacts will drop to $35 million per week once Ford resumes production. Consistent with our prior guidance, the full-year financial outlook assumes a $350 million revenue impact from industry disruptions related to the ongoing UAW strike, including approximately $325 million in the fourth quarter. Through the end of this week, the cumulative revenue impact of the UAW strike is approximately $170 million. This leaves approximately $180 million of revenue contingency for the remainder of the fourth quarter.
Slide 19 highlights our fourth quarter outlook for sales and core operating earnings in Seating and E-Systems, as well as the outlook excluding the assumed impact of the ongoing UAW labor strike. In Seating, the midpoint of our fourth quarter revenue outlook includes approximately $230 million of assumed lost revenue from industry disruptions related to the UAW strike. The midpoint of our fourth quarter operating income outlook is 6.8%, including negative margin impact of approximately 70 basis points due to the assumed strike impact. In E-Systems, the midpoint of our fourth quarter revenue outlook includes approximately $95 million of assumed lost revenue related to the UAW strike. The midpoint of our fourth quarter operating income outlook for E-Systems is 5.5, including negative margin impact of approximately 90 basis points due to the assumed strike impact.
In the appendix of the presentation, we included a summary of our current full-year outlook for Seating and E-Systems revenue and operating margins, as well as a full-year outlook that removes the assumed impact of the UAW strike. At the midpoint of our guidance, our full-year Seating margins are forecasted at 6.8%, our E-Systems margins at 4.6%, and total company margins at 4.8%. This is an improvement of 10 basis points from the prior outlook for Seating and total company margins. Excluding the impact of the strike, full-year margins would be 7% in Seating, 4.9% in E-Systems, and 5% for the total company. Now I'll turn it back to Ray for some closing thoughts.
Ray Scott (President and CEO)
Thanks, Jason. Please, turn to slide 21. Our third quarter results provided another clear example of our ability to deliver strong performance in a very volatile industry environment. In Seating, we are accelerating the pace of innovation for thermal comfort systems. The response from our customers and the demand for our modular solutions has been overwhelmingly positive. E-Systems, our execution and focus on efficiencies continues to drive margin improvement. We're on pace to improve margins again in the fourth quarter. Our Lear Forward initiatives have yielded savings in excess of our goal for this year by streamlining processes and changing plant layouts to optimize plant capacity and accelerate automation to address labor shortages and improve efficiencies. These results put us on track to achieve our target cash conversions, allowing us to continue to return capital to shareholders. And now we'd be happy to take your questions.
Jason Cardew (Senior VP and CFO)
Ladies and gentlemen, we'll now begin the question-and-answer session. To ask a question, you may press star and then one on a touch-tone telephone. If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the keys to ensure the best sound quality. To withdraw your questions, you may press star and two. Once again, that is star and then one to join the question queue. At this time, we'll pause momentarily to assemble the roster
Operator (participant)
...Our first question today comes from Rod Lache from Wolfe Research. Please go ahead with your question.
Rod Lache (Managing Director and Senior Analyst)
Good morning, everybody. Sorry, it was muted.
Jason Cardew (Senior VP and CFO)
Hey, Rod. Good morning.
Rod Lache (Managing Director and Senior Analyst)
Wanted to ask you about the E-Systems performance, obviously came in better than expected. I presume that that was partly related to recoveries, but it looks like as well, you've got a pretty strong exit rate, 6.4% in the fourth quarter, excluding the strike. Can you maybe just speak to whether we should be looking at that level of profitability as a reasonable launching point for modeling 2024? And then just to the extent that some of that improvement look going forward is gonna be driven by recoveries, just characterize how those discussions are going, just particularly in light of the pressures that some of the OEMs are seeing on labor and in other areas.
Jason Cardew (Senior VP and CFO)
There's a lot to unpack there, Rod.
Ray Scott (President and CEO)
Yeah. Yeah.
Jason Cardew (Senior VP and CFO)
I'll start, maybe with the third quarter E-Systems performance. When we issued kind of a mid-quarter update on what we were expecting in E-Systems, we talked about 4.75% operating margins. The primary improvement from that point until the end of the quarter was really a lesser impact from the strike and slightly stronger volumes. The commercial recoveries and the operating performance was directly in line with the targets we had established and was meaningful in terms of both sequential improvement in performance and year-over-year improvement in performance.
As we think about what that may mean for the business as we look out to next year, I think the right way to model E-Systems is to look at the second half forecast of both third quarter actuals and our outlook for the fourth quarter, which right now sits at 5.4%. Now, that does include the impact of the labor strike. It also includes some out-of-period benefit from the commercial negotiations that happened in the third quarter and that we anticipate happening in the fourth quarter. If you sort of normalize for all that, the real run rate in the second half of the year in E-Systems is about 5.5%. So I think that's the right launching point as you look out into 2024, you know, for that business.
I would say overall, we're quite pleased with the progress we've made, both operationally, particularly in North America, where we were struggling with efficiencies that we talked about earlier in the year, but also in our commercial negotiations. We completed some really important negotiations in the quarter that I think established a nice precedent going forward for us, give us a little more predictability. That said, we do anticipate that there will be challenges, you know, with that as we look out to next year. But we're very happy with the performance thus far in E-Systems.
Ray Scott (President and CEO)
Yeah, I think, you know, Rod, you know, when we simplified this portfolio, and I've said it before, that we're trying to be everything to everybody and started de-emphasizing areas that we, quite candidly couldn't compete in longer term with the type of investment dollars that were required, it's really paying dividends. And so the simplification of the product portfolio, clarifying it, allowing us to grow profitably in those areas, and we are growing. I mean, what I'm really excited about is that 3 years of consecutive $1 billion of backlog businesses gives us a lot of confidence that we're in the right area, we have a right to grow in those areas, and we can generate good returns.
You know, the diversification, the customer diversification was a key part of, our strategy, and we're doing a really nice job with diversification across Geely. You know, we talked about, Jag Land Rover, Volkswagen, European OEs, just continue to accelerate a diversification across customers. And the vertical integration, I mean, it's a really... And, and in, in a time right now, when customers are looking for solutions, you know, it's really opening, their eyes to different possibilities of what we can do, both from a T's and C's perspective, but also engineered components. And so we just had a great review with one of our major customers, to really talk about what we can do to lower, you know, their overall cost, but also help us expand our margins within E-Systems.
A lot of the aspects of what we put in with the strategy are really starting to pay off. We have a lot more confidence that we're gonna continue on this path. Got more work to do, Rod. I mean, there's no question. We're gonna work hard on our efficiencies, our improvements, some of the commercial negotiations, but really confident in where we're at.
Jason Cardew (Senior VP and CFO)
Yeah, I think, you know, people highlight that E-Systems is sort of a show me story. I think we're starting to prove that the plan that Ray just laid out is working. You know, our operating margins for the second half of the year are 200 basis points higher than our full year margins were last year, 160 basis points higher than they were in the first half of this year. So we are, you know, third quarter is both an inflection point and another proof point, with the fifth straight quarter of year-over-year margin expansion in E-Systems. So we've made a lot of progress there.
Rod Lache (Managing Director and Senior Analyst)
Yeah, it sounds like you've got a lot of momentum there on the margins as well as the wins. I was just hoping to lastly, you can address, so one thing you can't control is just the timing of launches in EVs, which has been obviously a good part of the backlog. Can you maybe just give us some color on what you're seeing and how we might want to just calibrate the backlog that we've been seeing just to the reality of pushouts here or there? How significant is that?
Jason Cardew (Senior VP and CFO)
Yeah. As you know, Rod, we'll formally update our three-year backlog on our fourth quarter earnings call at the beginning of next year. But we continue to win new business at a pace that would support delivering a three-year backlog for 2024-2026 that was similar to the most recent backlog we published, $2.85 billion overall, $1.8 billion in Seating and $1.05 billion in E-Systems, just given the wins that we've experienced so far this year. With that being said, our plan for 2024, you know, that we released at the beginning of this year, was for a $1.5 billion backlog in 2024, would've been the single biggest year in our history.
I think some of the announcements from customers, you know, what GM talked about on their earnings call, sort of delaying some of the launches, maybe reducing near-term volumes. Ford's done the same, others have as well. We would expect that that will have a negative impact on the first year of the backlog in 2024. We still feel confident that the 3-year backlog overall will hold up, and our electrification revenue in E-Systems, in particular, is holding up towards that $1.3 billion target that we had established for 2025. So we're still seeing really solid growth there with new wins, sort of offsetting some of the impact of the volume changes. But if I look at our 2024 backlog specifically, you know, 75% or so of our new business wins in Seating were on electric vehicle platforms.
I would expect, based on all of those announcements, that you could see, you know, a 20% or so reduction in that first year, with much of that made up in the second and third year of the backlog. Yes, you're right, Rod, there is an expected impact next year, but I think, over the three-year period, we still feel pretty good about the growth outlook.
Rod Lache (Managing Director and Senior Analyst)
Okay, great. Thank you.
Jason Cardew (Senior VP and CFO)
You're welcome.
Ray Scott (President and CEO)
Thanks, Rod.
Operator (participant)
Our next question comes from John Murphy from Bank of America. Please go ahead with your question.
John Murphy (Managing Director and Equity Research Analyst)
Good morning, guys. I just had two, quick follow-ups to Rod's, Rod's question there, and then one other. On the backlog, I mean, if EVs are pushed out, presumably there's other vehicles on the ICE side that are, that are still made. So on, on the net backlog, you might not... You know, things might not change or actually, you know, could potentially be for the better. Is, is that a, a fair way to think about that?
Jason Cardew (Senior VP and CFO)
Yeah, I think absolutely. And I think that coupled with what may happen with the strike, you know, the longer it were to continue this year on certain platforms, that could benefit next year on ICE vehicles specifically. So I think that on a real, kind of broad base, that's a reasonable assumption that we would also expect stronger ICE volumes to partially offset that.
John Murphy (Managing Director and Equity Research Analyst)
Yeah. And then on the E-Systems margins, I mean, could you just remind us the target and the timeframe as to where, when you're, you know, what level and where you're trying to get?
Jason Cardew (Senior VP and CFO)
Yeah, our target is 8% in 2025, and as we've said before, you know, it's not linear between this year and 2025. But we do expect to have a meaningful improvement in operating margins next year. You know, with the run rate of 5.5% in the second half of the year, we would expect to continue improving that into next year. Now, the backlog will benefit operating margins. You know, there's a number of puts and takes, it's obviously too early to give guidance, but I'd be disappointed if we didn't have something with a 6 on, in front of it, somewhere in the range next year in E-Systems.
John Murphy (Managing Director and Equity Research Analyst)
Then just lastly on thermal. You know, you're making, you know, great progress there. $1 billion in 2027, 10% margins is fantastic, you know, it's really great to hear. But it seems like it might be a far larger opportunity over time. As you look at the way that thermal is set up in your seats versus the antiquated HVAC system that exists right now in ICE and EVs, you know, is there a potential real content grab and efficiency, you know, gain that you could make yourselves and help out the automakers in saving money, and then, you know, improving efficiency of powertrain in the entire vehicle in a big way?
Because you didn't talk about that, and that seems like a really big deal that this thermal system could shift from the antiquated, running off the ICE engine to, you know, something all new in your seats.
Jason Cardew (Senior VP and CFO)
Yeah, and I think, you know, we've talked about a partnership and a project we're working on with Valeo that I think will help us more fully exploit that opportunity. I think you're right, longer term, that does create additional growth potential on the thermal comfort components specifically. You know, we've already embedded a $400 million, roughly, you know, revenue increase in the thermal comfort systems business over the next four years, so we've got a pretty aggressive target. I think longer term, where we see even more growth opportunity is in modularity, and so sort of an extension of what we're doing in thermal comfort, but then incorporating our FlexAir products and seat covers on programs where we don't have the JIT necessarily. I see that as a path to increasing market share in our seating business overall.
You know, we've talked about going from 26%-29% by 2027. You know, we also see having roughly a third or 32% of the total seat market when you consider the component sales independent of JIT that we sell to our competitors, that are directed by our customers. I don't see any reason why that number can't continue to grow, you know, three, four, five years down the road, as well. And our target is certainly much more ambitious to maybe capture 35% or 40% of that total seat market over time. I think that's the real long-term, you know, growth driver for the business.
Ray Scott (President and CEO)
And just, we had a really good review on what we're doing and again, I'd say we're conservative in how we're laying this out, because we're in the process right now of even validating what Jason just mentioned on a fully modular concept. And, you know, the timing, obviously, we put this strategy in place eight years ago, and we've been building up pieces to really give us the complete ability to look at this thing from a manufacturing component perspective and the engineering designs to a modular system that's integrated right into traditional foam or FlexAir into the actual trim cover itself. So all those components layered together really gets the savings.
You know, I was saying the other day, the timing, you know, there's a lot of pressure right now on costs and labor scarcity and different challenges within the manufacturing plant. Couldn't be better timed. When we had this review with this major customer, you know, I mentioned that it became more of a we're pushing to a pull. How fast can you go? How fast can you go? We're putting out timing based on validation within modulars, modular systems, but, you know, it's how fast the customer can go, too. We're really focused on putting it in a perspective on how we can get this in. But once you get it into a platform, it goes across multiple vehicles. That's where you really get the synergies. That's really, you really get the benefit.
So something that can be, you know, a $5 million or $10 million saving can grow exponentially when you start talking about across all their different vehicle lines. And we've been receiving incredible feedback, and I think the timing is perfect. I mean, the timing has been... When the customers are coming in asking for, "We need more help on the cost side," we have a great really lay up in front of them and say, "Not only do you get a better customer feature, it's a savings in labor efficiencies and a savings within the components themselves." So the end consumer benefits, our customers benefit, and we love it because we get to expand our margins.
Jason Cardew (Senior VP and CFO)
It's not an insignificant benefit. You know, we can see savings up to 20% on the relevant components in a fully featured vehicle system. In most programs, you know, 10%-15%. So this is a meaningful opportunity. So not only does it improve the performance and sustainability of the seat, it also lowers the cost for customers.
John Murphy (Managing Director and Equity Research Analyst)
Yeah, looking forward to hearing more about it over time. Thank you so much, guys.
Ray Scott (President and CEO)
Thank you.
Jason Cardew (Senior VP and CFO)
Thank you.
Operator (participant)
Our next question comes from James Picariello from BNP Paribas. Please go ahead with your question.
James Picariello (Equity Research Analyst)
Hey, good morning, everyone.
Ray Scott (President and CEO)
Morning.
James Picariello (Equity Research Analyst)
It's great to see the early momentum in thermal comfort. You know, I think as of last quarter, right, Lear had one sourcing control with 7 OEMs. You know, now that number's 9. You now have 21 development contracts versus 16 last quarter. Can you just speak to the strength in the pipeline here and, you know, to sustain this type of, you know, quarterly buildup in momentum, you know, as we think about next year? Thanks.
Jason Cardew (Senior VP and CFO)
Yeah, I think that, you know, the traction we have is, as Ray mentioned, it's starting to become a pull from customers. And so the demand for, you know, customers wanting to learn more about the product, is really been a positive surprise to us. And maybe, Frank, if you want to elaborate on some of the things we're seeing, and some of the interests we're seeing from customers in these technical reviews.
Frank Orsini (EVP and President, Seating)
Yeah, absolutely. As both Ray and Jason have mentioned, the reception from the customer is has been really fantastic. And to Jason's point just now, James, we've had a lot of technical reviews on a global basis. We have a lot of customer engagements. We're tracking all of that as a team to make sure we understand. But we're getting tremendous activity with not only our commercial discussions, but our technical discussions and validation development projects that we're working on. So, you know, we're extremely encouraged by the global reception, too, of this product. We're working with Asian customers, we're working with customers in Europe and here in North America, and it's really across the board. And I guess, as we will continue through the quarters, I believe the momentum is just gonna continue to build.
Ray Scott (President and CEO)
Yeah. So I think the swing is we're still quoting individually, individual components, but every JIT program that we've been awarded, we have sourcing control. And so that's what's been nice, is that's a major shift. And not every, well, JIT suppliers that don't have this capability don't get that flexibility. It varies. So that's one thing that we're right now in the process of these development programs. You know, we're focused on making sure those go off and we execute those flawlessly. And the rest of it, as we continue to build across multiple car lines, independent, if we have the JIT, is what's picking up steam, as they're starting to see the benefits and then asking us to quote across carline or seat systems that aren't even being quoted yet today.
James Picariello (Equity Research Analyst)
Yeah, that's really helpful. And just a quick one on the commodity side. How should we be thinking about the earnings impact in the fourth quarter? And then I know it's early, but just given current spot pricing and what you already have locked in on the metal side for CD, how could we start thinking about next year's setup on the commodities front? Thanks.
Jason Cardew (Senior VP and CFO)
Yeah, there's been a modest softening in commodities in general. North America, Europe, steel prices have drifted down a bit. That benefited us a little bit in the third quarter. Fourth quarter, you know, we had a pretty strong recovery quarter last year. And so year over year, commodities may be a modest headwind, just as a result of the level of recovery received last year versus this year. As we look out to next year, you know, I think we don't see a meaningful positive or negative at this stage. We do see steel as an opportunity.
You know, and then kind of on the flip side, and maybe a little bit outside of your question around commodities is wage inflation, you know, something that we're very focused on in terms of, you know, maybe a bit of a headwind. And similar to what we experienced this year, where we saw fairly significant increases in hourly wages in Mexico and Eastern Europe, those pressures look to continue next year. We've had really good dialogue with our customers, and there's a sharing mechanism and pass-through mechanism in most cases now on that. But, you know, that's another factor to think about as you start to model 2024 and beyond.
Ray Scott (President and CEO)
... Thanks.
Jason Cardew (Senior VP and CFO)
You're welcome.
Operator (participant)
Our next question comes from Colin Langan from Wells Fargo. Please go ahead with your question.
Colin Langan (Director and Senior Equity Analyst)
Oh, great. Thanks for taking my questions. Sort of following up on that, any color on how cost recoveries are trending with customers since they're obviously going to be under a bit of cost pressure themselves? Has that changed at all? And of the recoveries you've gotten this year, how much is piece price, so you don't have to renegotiate versus sort of lump sum, where I guess January one, you'd probably have to have discussions again about getting recoveries?
Ray Scott (President and CEO)
Yeah, I'll, I'll go ahead and start it. I, I think the negotiations have been ongoing, and I haven't seen a significant change on how we're negotiating for recovery. The customers are very sophisticated, and in some cases have very sophisticated models on what is in as far as some of the labor economics or even the commodity costs within our components. And so those are ongoing. And to answer your question, we have seen an increase, request more on, let's call it, design changes and design reductions within the product lines, that they are under more pressure on that side of the equation.
But you know, one thing we've talked about before, you know, being the most competitive, cost competitive company in the world has been our focus. That puts you in a very good position when you are negotiating through some of these more challenging, difficult negotiations. So we do have evidence binders, very detailed analysis, those type of modeling, scenarios. So we haven't seen the negotiations slow down on that side. The side that we're probably seeing more impactful right now is just their willingness to look at alternative designs or, you know, what we'll call VA/VE or product designs that can get at cost. I mean, some of them have changed their targets internally, that are more aggressive than they were this year, heading into next year. And we're embracing that.
We actually think that we have. Our whole culture is built on being the most cost competitive. We have a, you know, a couple different things that we do internally with Cost Technology Optimization. We have these Coliseum events that are very rigorous, and that we have no excuse boards, that we have queues of ideas. There's enough inefficiencies in the value chain across the board to drive opportunities, and so that's something we pride ourselves on. Like I was just mentioning, we just had a major Coliseum event with one of our customers that we generated over, you know, between $60 million and $70 million of opportunities within the year. And what I like about it, boy, did they react positively. You know, and I think traditionally it's been, you know, "It's too risky. We don't really want to do that right now.
We'll come back to you." Maybe elements of it does get approved, but boy, they're taking a much more different look at different ideas. That's where we push our vertical integration, and that's been our strategy, is how we engineer our own components to create a value proposition. And so we're picking up a lot of steam on the side of engineering our own products, terminals, connectors, engineer components and wiring, vertical integration with trim covers or, you know, things like FlexAir or foam, the modularity. Those are all working right into our wheelhouse. So there is a pickup of momentum from our customers, but we also feel that we're in a really good position to create a value proposition for both companies.
Jason Cardew (Senior VP and CFO)
Overall, the year kind of played out the way we expected. It's about a $25 million benefit on a full year basis on commodities between lower cost and recoveries. So it's, you know, solid, solid improvement year over year.
Colin Langan (Director and Senior Equity Analyst)
Any color on the amount that are piece price versus lump sum that need to be renegotiated?
Jason Cardew (Senior VP and CFO)
Yeah, I think we're seeing a trend towards piece price generally. And, you know, there may be agreements, like in the third quarter, we had an agreement with a customer that had a lump sum and a piece price component to it because it went back to earlier in the year, and the lump sum just covered the earlier part of the year, but the PO price has been adjusted going forward. And I think that there's an increased willingness in general for customers to do that, particularly where, you know, it's sticky inflation or sticky commodity increases, where there isn't, you know, any reversal in sight over time. And if it's something that's more kind of transitory, then that would set itself up for more of a lump sum recovery.
But where it's more permanent, like wage inflation, for example, you're seeing piece price adjustments.
Colin Langan (Director and Senior Equity Analyst)
And just lastly, on FX, as we think about into next year, I think you had some pretty good protection this year from some of your hedges. How should we think about sort of currency risk as those roll off, or do they roll off into next year?
Jason Cardew (Senior VP and CFO)
Yeah. So our largest exposure is the peso, and we do have a pretty aggressive hedge program in place, a 24-month rolling hedge program that largely insulated us from that issue this year. It is still a $20 million impact for us and much worse than we had anticipated when we set guidance at the beginning of the year. And, you know, we've had to sort of absorb that as the year's gone on. As we look out to next year, you know, if you would have asked me that question three months ago, I probably would have felt worse about it than I do today. With the peso at 18.30, it's a manageable issue for us as I look out to next year.
It's still a meaningful impact and a little bit worse than what we experienced this year, but manageable. And, you know, we've locked in 75% of our exposure for next year already, and by the end of this year, we'll have 85% or so locked in. So we're going to be in a pretty good position to continue to mitigate that risk.
Colin Langan (Director and Senior Equity Analyst)
... Got it. All right, thanks for taking my question.
Jason Cardew (Senior VP and CFO)
Yeah, you're welcome.
Operator (participant)
Our next question comes from Dan Levy from Barclays. Please go ahead with your question.
Dan Levy (Senior Equity Research Analyst)
Hi, good morning. Thanks for taking the question.
Jason Cardew (Senior VP and CFO)
Good morning.
Dan Levy (Senior Equity Research Analyst)
Wanted to start first, good morning. First, want to start with a question on E-Systems. And I think you mentioned earlier, Jason, just that, you know, we should think about next year with a six handle on E-Systems margins. You provided some commentary some time ago that, you know, there's a path to 8% by 2025, and I think the biggest piece of this is volume and backlog. And I think that the difference is that, you know, we're now sitting here in, you know, an LVP environment that's arguably much higher than what most of us anticipated, call it 6-9 months ago. You know, schedules seem to be much more stable.
Should we still think about, you know, that path to 8% as being intact, especially as now LVP seems to be, at least for now, outperforming to the upside?
Jason Cardew (Senior VP and CFO)
Yeah, I think that there really isn't anything that has changed from the time we set that target. I'd say maybe the only exception would be to the last question we had from Colin on foreign exchange, you know, a little bit of a headwind on transactional FX, and we have obviously, wire is a labor-intensive business, so it's sort of a dual headwind of FX and wage inflation. Outside of that, I'd say that the story is intact. The performance that we can control has improved consistent with our expectations. The recoveries on commodities are in line with our expectations. Volumes are recovering, sort of consistent with what we had anticipated. The backlog is rolling on with margins that we had based that outlook on.
I think the last piece of that is maybe the stability of the production environment. And while we've seen meaningful improvement this year from last year, there still has been disruptions that leads to, you know, some inefficiencies in the plants that are a little bit outside of our control. I'd say that'd be one other factor to think about. And I think the backlog in 2024, as I mentioned earlier, will be negatively impacted by some of the customers' revised launch plans on some of the key programs that were embedded in our backlog. As you know, the GM BDU and Intercell Connect Board, for example, is a big part of the E-Systems backlog, and those volumes are going to be lower in 2024 and probably in early 2025, given the current plans there.
So that'll have a little bit of an impact, but, you know, we've seen, again, just a, a really nice improvement from 2022 to 2023, you know, 110 basis points full year, year over year, 200 basis points full year last year to the second half of this year, you know, 160, 170 basis points, first half to second half this year. We really have a nice trajectory set up here going into next year. And, you know, there's a lot of moving parts, and we're, we're working through our plans for next year, but we do feel confident we can continue that momentum into next year and, and continue working towards that target.
Dan Levy (Senior Equity Research Analyst)
So if we're just conceptually thinking about that bridge to 25, is it fair to say that better LVP, slightly more stable LVP, more than outweighs Mexican peso and some lighter EV volume on the backlog?
Jason Cardew (Senior VP and CFO)
Yeah, I think, Dan, it's probably a little bit early to get into that level of granularity. So I'd rather save that for the fourth quarter earnings call.
Dan Levy (Senior Equity Research Analyst)
Got it. Okay, thank you. And then as a, as a follow-up, wanted to follow up on, seating and, and the TCS strategy. And I think one of the points you mentioned from the seating day back in June was that, by having the full vertical integration, that you now could see more complete systems sourcing. This is obviously a bit of a shift from what OEMs have done in the past, where, much more of a direct sourcing model. You know, in your conversations with customers, are you seeing more data points that they are willing to change that sourcing model and source more of a complete system?
Jason Cardew (Senior VP and CFO)
Well, yeah, that's exactly what we're seeing. On the programs we've been awarded, we're, you know, from a competitive perspective, in the contract itself, the language reads, we have the sourcing control over those components, and so we'll in parallel path, do the traditional system along with a much more tactical system or innovative system with the modularity that we talked about. And now what we're doing is just taking that across multiple vehicle lines, even in the case where we don't have the just-in-time award. And we're seeing that trend. And like I mentioned in my portion of the dialogue was, you know, it went from us pushing to now them coming to us and pulling it and saying: How quickly can you go across multiple vehicle lines?
Because what they see the real savings when we could take it across significant volumes. And so we're lining up our quotes in, in a particular way where it was individual to a seat program. Now we say, "Listen, if you take this and extrapolate across multiple car lines, here's your savings." And the benefits of what we are talking about with 50% part reductions, much more efficient system, you know, just from a therapeutic standpoint, from a heat standpoint, from a time to sensation perspective, a weight perspective. You can then start plugging that into different alternative systems within the vehicle itself, where it's been limited, maybe not even offered in rear seats or in other vehicle options within the vehicle itself. And so-
Joseph Spak (Executive Director and Senior Equity Research Analyst)
... I mean, that is the plan. That's exactly what we're doing. And the important part that we're focused on is executing the validation and getting that done. And we said mid-year, you know, sometime mid-year, next year, we'll have the validation, you know, done, and that's through our customers. And so that has been validated through their own internal specifications and requirements, and that's an important, a very important part of what we're focused on.
Jason Cardew (Senior VP and CFO)
So there's been 9 customers, as we highlighted in the prepared slides for today, that have granted us sourcing control. That's nearly all the JIT programs that we've been awarded since the acquisition of IGB, have included sourcing control for us of thermal comfort components.
Dan Levy (Senior Equity Research Analyst)
Great. Thank you. It's very helpful.
Jason Cardew (Senior VP and CFO)
Thanks.
Operator (participant)
Our next question comes from Emmanuel Rosner from Deutsche Bank. Please go ahead with your question.
Emmanuel Rosner (Director and Senior Equity Research Analyst)
Thank you very much. Couple of follow-ups around the EV exposure and, you know, I guess, potential risk from some of the slowdown in near-term investments by the automakers. Would you be able to remind us or quantify your exposure to your content exposure to Ultium specifically? If I'm not mistaken, I think that you've won a significant amount of business, you know, including you know multiple parts, I guess, of the vehicle. Can you maybe just quantify this for us? Remind us what you're supplying on Ultium and how much that's roughly worth per vehicle.
Jason Cardew (Senior VP and CFO)
So on Ultium, we have, on the battery electric truck platform, the battery disconnect unit, and we haven't quantified the CPV, but we've talked about BDU is generally, you know, $600-$800. It's content per vehicle. Not saying that's the CPV on that program, but just kind of holistically looking across the market. And then we also have the Intercell Connect Board, which is a much lower CPV than the BDU, but that's on various Ultium platforms. It's not 100% of the volume. It's dual sourced. And so as I mentioned to an earlier question, you know, we do expect to see lower revenue on the GM BDU in 2024 and probably 2025, given the announcements that they've made.
As we've looked at our $1.3 billion revenue target for electrification products, generally, we are in line with our previous expectations. So we've had new business awards with other customers since that target was established, that have offset the impact of lower expected revenues on the BDU.
Emmanuel Rosner (Director and Senior Equity Research Analyst)
Okay, that's helpful. One quick follow-up. Do you supply wire harnesses also on Ultium?
Jason Cardew (Senior VP and CFO)
We do not. Well, we-
Emmanuel Rosner (Director and Senior Equity Research Analyst)
Okay.
Jason Cardew (Senior VP and CFO)
We do have low voltage wire on certain GM EV programs, but not high voltage at this point.
Emmanuel Rosner (Director and Senior Equity Research Analyst)
Understood. And then just as a quick follow-up, so I appreciate the comments around being on track for sort of like the, the mid-decade target on EV, but can you just go back over the math around the, the 2024, EV exposure? Because, as you mentioned before, it's not just, E-Systems, it's also obviously some EV platform, you know, within seating. So can you just go back over sort of like the, the exposure you have there?
Jason Cardew (Senior VP and CFO)
Yeah, and again, we'll provide a fuller update on the backlog as we always do on the fourth quarter earnings call, late January, early February. What I tried to do today is just highlight for the analysts modeling next year and for the investors listening to the call, that obviously the announcements by our customers would have an impact on the backlog that we had previously projected for 2024. It was previously estimated we'd have $1.5 billion of revenue. We don't have a precise update to that, but most of the seating revenue in the backlog, it's on electric vehicles, because most of the new vehicles customers are launching are electric vehicles. And then in E-Systems, we've already talked through the GM BDUs specifically.
I think it's reasonable for one to assume, based on all the comments that customers have made, that the backlog for 2024 would be 20% or so less than what we expected. At the same time, we've continued to win business at a pace that would allow for the three-year backlog that we published in February to be similar to the three-year backlog we published in February of this year, which is $2.85 billion overall for the company, $2.8 billion in Seating and $1.5 billion in E-Systems. There may be a little bit of mix between the two segments, but I think that's a reasonable expectation for the total backlog based on everything we're seeing, including the revisions to the volumes I described for electric vehicles.
Emmanuel Rosner (Director and Senior Equity Research Analyst)
That's extremely helpful. Thank you.
Jason Cardew (Senior VP and CFO)
You're welcome.
Operator (participant)
Ladies and gentlemen, our final question today will come from Joseph Spak from UBS. Please go ahead with your question.
Joseph Spak (Executive Director and Senior Equity Research Analyst)
Thanks everyone for squeezing me in. Jason, maybe just to follow on one last thing on the BEV units. Like, if the units are... Like, I understand it's a little bit lower in 2024 and 2025, but, like, if it's sustained lower than what you assumed, you know, for over a number of years from when you bid on the business, do you have any recourse in that contract to either recover costs or raise the piece price for what is produced?
Jason Cardew (Senior VP and CFO)
... Yeah, absolutely, Joe. You know, the customers have been very, you know, cooperative, collaborative with regards to changes in their production plan. They understand the investments that we've made. They've worked with us. That's part of what allowed us to reduce the capital spending this year, push it out, may eliminate it if the volumes don't materialize. So we're being much more deliberate in putting new capacity in. And then, of course, there are discussions around piece price tied to volume changes, as well. So that's absolutely, absolutely the case. And, you know, one point I also want to highlight, when we established our backlog and published that last year, we weren't using customer planning volumes directly. We, of course, discount those.
Even given that, we believe that the volumes that they'll come out with in their plans for next year may still be lower even than what the discounted volumes we used in our backlog.
Joseph Spak (Executive Director and Senior Equity Research Analyst)
Perfect. And if I could sneak one in just on, you know, on the strike as we sort of look like we're starting to get back to work and, you know, hopefully, that expands. You know, one of the things we've been hearing about is a little bit more sort of maybe pain in the Tier 2, Tier 3 level. Like, are you seeing any stress in your suppliers that would either add some cost or make a ramp up a little bit slower?
Jason Cardew (Senior VP and CFO)
I think that we've seen pressure in the lower tiers over the last two years with commodities and inflation, and certainly this didn't help. I wouldn't say that the strike has gone on long enough or been deep enough to have a meaningful impact on that at this point. Maybe around the edges, we're seeing some modest effects from that. And I think, you know, in Seating, one thing that helps us, too, is the vertical integration capabilities across the whole seat. So you know, where we do have disruption in the supply base, we also have that flexibility to bring products in-house. You know, we've done that from time to time as well, where you've had a disrupted supplier on an important program, we've brought that in-house to solve the issue.
We have other ways to remedy that, too.
Joseph Spak (Executive Director and Senior Equity Research Analyst)
Okay, perfect. Thank you.
Jason Cardew (Senior VP and CFO)
You're welcome, Joe.
Ray Scott (President and CEO)
Okay, great. I think, probably the only ones left on the call at this point are the, the Lear team, and so I'll say a few words. One, great quarter, you guys. Everyone worked extremely hard, despite some, external challenges we were faced with, a really nice quarter. I want to thank you for all your hard work. And again, just we talk about it, the incredible recognition, not only from our customers, but, you know, J.D. Power and the recognitions that we get from third party just continue to validate what a great job we're doing and how we're focused to continue to drive excellence. I want to thank the team.
You know, I mean, I don't think everyone appreciates, except for the team that's been working on it nonstop, the incredible unprecedented launch that we had with the Wagoneer and Grand Wagoneer. Frank, the team did a great job. Industry first, never been done, and just don't want to jinx this, but incredible job. Really, really special. And I just want to, again, just recognize the team, the overall performance on OI and generating that cash. Really nice job, and I know we will, but let's finish this year strong. We got one more quarter left, but let's kick it in another gear and get this quarter done. Thanks, you guys.
Operator (participant)
Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your line.