Lear generates higher profits and revenue, but EV backlog shrinks

Lear Corp. continued to build its bottom line in the fourth quarter, but the supplier’s business backlog shrunk amid a pullback on electric vehicles.

The longtime seating and electrical components said net income during the recent quarter rose 7 percent to $127 million while revenue improved 9 percent to $5.8 billion.

For all of 2023, Lear said adjusted net income grew nearly 40 percent to $710 million on revenue that gained 12 percent to a record $23.5 billion.

Executives pointed to two main issues the company faces: wage inflation and EV uncertainty. The latter they have only so much control over, but taming wage inflation is a key priority, and a big part of the answer is automation, CEO Ray Scott said.

“Our focus this year is on accelerating automation to address wage inflation and improve efficiencies in our plants,” Scott said Tuesday on a call with investment analysts.

CFO Jason Cardew said wages are increasing at twice the clip of the typical 3%-4 percent annual hike, which is having a substantial impact on the bottom line. As a result, officials are trying to automate the labor-intensive cut-and-sew trim operations, which account for 30 percent of the seating business, as well as the wire and trim operations, which are 90 percent of the e-systems business.

Labor costs are a big concern despite the company sourcing 85 percent of its more than 160,000 global work force from low-cost countries. Wage inflation around the world, including in manufacturing-rich Mexico, has created headaches for many suppliers.

The company’s goal is to offset half of the wage inflation through operational efficiencies, such as automation, while covering the rest through commercial negotiations with automakers, the executives said.

Conquest win

On operational efficiencies, Scott took a victory lap on a big conquest win from last year when Lear took over the Wagoneer and Grand Wagoneer programs, which was bleeding Forvia of tens of millions of dollars before it brokered an exit with Stellantis.

“Unprecedented. Never done before in the history of seating,” Scott said. “We had our capital. We wouldn’t even take the capital from our competitor because it was that bad from a throughput standpoint and how it was working within their facility.

"We produced more output than they could ever produce in their three years of trying to hit their daily volumes. Our quality — our customers said it was superior to our competitor that was producing those parts for years. That gives me excitement.”

Lear, which completed its acquisition of I.G. Bauerhin in Germany, is in the validation stage of thermal comfort solutions with 11 customers, Scott said. Key launches this year include the just-in-time thermal comfort business on the Ram 1500 REV and 1500 Ramcharger and the just-in-time trim business for the Chevrolet Equinox and GMC Terrain.

Lear’s backlog for 2024 and 2025 had previously been pegged at $1.5 billion, but it shrank to $1.2 billion as automakers pulled back on EV launch plans. Dramatically lower EV volumes and projections have left suppliers financially vulnerable.

Lear executives said they are addressing the issue through negotiations with customers and by reining in spending. The company cut capital expenditures by $50 million last year, Cardew said.

“Certainly as volumes are lower, we’re having discussions with all of our customers about the impact on fixed overhead and the investments that have been made previously that will result in higher prices until those volumes come back,” Cardew said.

Customer discussions

Scott added that there are “heavy discussions” with customers not only about the EV situation but also labor economics.

Lear’s planned $80 million battery parts plant in Independence Township, which was to supply General Motors' Orion Assembly, was put on hold, though the company has declined to comment on it. Build-out of that plant was to have started last spring, but the township hasn’t heard from the supplier in nearly a year, according to a township official.

An EV slowdown isn’t a nightmare scenario, though, because that will likely mean more internal combustion engine and hybrid sales, and no matter the powertrain, the car needs seats.

More ICE business could be a boost for the company, the executives said.

“I think our customers over the first two quarters will start clarifying the specifics,” Scott said. “Informally, we’ve gotten some feedback that they are internally across the board looking at how they’re going to position between hybrids, electric vehicles and the continuation in some cases of ICE vehicles.

"What’s nice about the continuation of ICE vehicles, those are usually longer in the tooth. … We hope to keep running those things.”

Shares in Lear rose 0.3 percent to $134.82 in late afternoon trading on Tuesday.

Lear,in suburban Detroit, ranks No. 10 on the Automotive News list of the top 100 global suppliers with worldwide sales to automakers of $20.9 billion in 2022.