Lear Corporation (NYSE:LEA) Q1 2024 Earnings Call Transcript

Lear Corporation (NYSE:LEA) Q1 2024 Earnings Call Transcript April 30, 2024

Lear Corporation beats earnings expectations. Reported EPS is $3.18, expectations were $3.04. Lear Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to the Lear Corporation First Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] 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: Thanks, Jamie. Good morning, everyone, and thank you for joining us for Lear’s first quarter 2024 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 metrics. You are directed to the slides in the appendix of our presentation for the reconciliation of non-GAAP items to the most directly comparable GAAP measures. The agenda for today’s call is on Slide 3. First, Ray will review highlights from the quarter and provide a business update. Jason will then review our first quarter financial results. Finally, Ray will offer some concluding remarks. Following the formal presentation, we will be happy to take your questions. Now, I’d like to invite Ray to begin.

Ray Scott: Sure Ed, thanks. Please turn to Slide 5, which highlights key financial metrics for the first quarter of 2024. We started the year strong, delivering higher revenue and adjusted earnings in the first quarter compared to last year. Sales increased 3% to $6 billion, and core operating earnings grew by 6% to $280 million. Adjusted earnings per share was $3.18, an increase of 14%, driven by stronger operating performance and the benefit of our share repurchase program. Operating cash flow was in line with the first quarter of last year. Slide 6 summarizes key business and financial highlights from the quarter. The $6 billion in revenue was a record for the first quarter. Our sales outperformed industry production, driven by 10 points of growth over market in E-Systems.

The E-Systems team continues to drive improvements in the business, as evidenced by the seventh consecutive quarter with higher year-over-year margins. Yesterday, we announced the acquisition of WIP Industrial Automation to further strengthen our automation capabilities. WIP leverages robotics, automation and software to design turnkey solutions for complex industrial challenges that will help accelerate our automation initiatives globally. We continue to make progress in our thermal comfort strategy. Later this year, we will be launching component modules with Volvo and Lucid. Lear’s modular solutions reduce the number of parts, resulting in lower weight and complexity, while improving performance at a lower cost. The Volvo module combines seat heat, ventilation and massage, while the Lucid module combines ventilation, lumbar and massage.

In addition, we initiated the validation process with Ford Motor Company for our first complete seat module for a vehicle scheduled to launch in 2026. This opportunity is incredibly exciting for two reasons. First, it gives Lear design responsibility for the thermal comfort components and trim. Second, once validated, it will be the first automotive application fully integrating the thermal comfort components into the trim cover. This will allow us to reduce our complete seat assembly time in our JIT facilities. In China, we continue to diversify our customer base as we won our first complete seat program with FAW Toyota. And in E-Systems, our second wiring award with BMW is a result of a strong customer relationship that we have built. Our customers continue to recognize Lear as a leader in innovation and technology and quality.

For the seventh consecutive year, General Motors recognized Lear as Supplier of the Year. We remain committed to returning excess cash to our shareholders. In February, Lear’s Board approved and increased an extension to the company’s share repurchase authorization of $1.5 billion through the end of 2026. Okay. Turning to Slide 7. We are introducing IDEA by Lear, an important evolution in our strategy. Accelerating the adoption of digital tools and automation will extend our competitive advantage and enable us to more efficiently engineer and develop and manufacture innovative products that will drive profitable growth. Elevated wage inflation, geopolitical risk and uncertainty surrounding the pace of the EV transition, combined with the introduction of artificial intelligence, is creating new challenges and opportunities for automotive companies.

Those that adapt most effectively will be best positioned for significant growth and margin expansion. Lear has consistently invested in our products and processes to become a leader in operational excellence. With IDEA by Lear, we identified a broader opportunity to leverage new technologies to move faster and drive efficiencies in both businesses. Digital innovation combined with automation and robotics will allow Lear to streamline our processes while accelerating product development and reducing manufacturing costs. These tools improve ergonomics, quality and safety, resulting in higher job satisfaction for our employees while enhancing efficiencies at our plan. Slide 8 illustrates Lear’s long history of strategic investments to enhance our manufacturing capabilities.

Through our acquisitions, we brought key automation capabilities in-house, lowering our manufacturing costs. ASI’s automated material delivery, storage and retrievable systems have been deployed in all of our North American just-in-time facilities. ASI’s equipment has improved reliability, uptime and throughput within our plants. We will continue to automate material movement across our seating plants globally, as well as within E-Systems. The acquisition of InTouch added equipment to automate end-of-line testing to ensure all seat functions meet performance and quality specifications. The combination of ASI’s material movement capabilities with InTouch and aligned testing has allowed us to fully automate the final steps of our just-in-time seating assembly process.

Ultimately, we plan to automate from finesse [ph], the process to remove wrinkles from the seat covers, all the way to installation within the customer’s facility, resulting in significant manufacturing cost efficiencies and in quality improvements. Thagora’s use of vision systems and software, combined with precision cutting capabilities, optimizes utilization of leather heights, equipment uptime and productivity. We are expanding the first application of Thagora system across our leather facilities globally with additional performance improvements to be deployed over the next 18 months. We continue to evaluate additional tools to accelerate automation in our plans. And yesterday, we announced the acquisition of WIP Industrial Automation. WIP is a European supplier that leverages AI, vision systems and robotics to develop turnkey solutions to complex industrial problems.

WIP’s technology can be used in multiple applications in Seating and E-Systems and expands our automation footprint in Europe. Looking forward, we will continue to evaluate additional opportunities to accelerate the rollout of automation tools in both Seating and E-Systems. For example, last year, we started working with Palantir and completed four pilot programs utilizing their foundry software in our manufacturing facilities. These acquisitions, coupled with organic strategic initiatives, are key enablers to continue to expand our competitive advantage and leadership in operational excellence. Turning to Slide 9, I’d like to discuss several of the innovative products we have developed in recent years to expand our vertical integration capabilities in both Seating and E-Systems.

The combination of our engineering and manufacturing capabilities allows us to innovate and develop new product offerings to drive profitable growth. These products are accretive to our segment margin targets and offer an attractive value proposition for our customers. In Seating, our acquisition of Kongsberg Automotive Interior Comfort Systems, IGB and Grupo Antolin’s seating business provided valuable vertical integration capabilities. We are the only complete seat manufacturer with thermal comfort components allowing us to develop unique proprietary module solutions. The two recent component modularity awards in our first customer validation in process for our complete thermal comfort module are proof that our strategy is working. Our thermal comfort business is on track to achieve our target of $1 billion in revenue by 2027, with operating margins of 10%.

In E-Systems, the acquisition of M&N expanded our connection systems and engineered component portfolio. Combining the molding and overmolding capabilities from M&N with the precision stamping technology from Seating improve the cost competitiveness of our battery disconnect unit and Intercell Connect Board products. As volumes grow on the BDU and ICB, we expect these products will be a key driver of continued margin growth in E-Systems. The initiatives we are implementing through IDEA will allow us to innovate and engineer next-generation products faster with improved designs at a lower cost. Now I’d like to turn the call over to Jason for a financial review.

Jason Cardew: Thanks, Ray. Slide 11 shows vehicle production and key exchange rates for the first quarter. Global production decreased 1% compared to the same period last year and was flat on a Lear sales weighted basis. Production volumes increased by 1% in North America and by 5% in China, while volumes in Europe were down 2%. From a currency standpoint, the U.S. dollar weakened against the euro, but strengthened against the RMB. Slide 12 highlights Lear’s growth over market. For the first quarter, total company growth over market was 2 percentage points, with Seating flat and E-Systems growing 10 points above market. Sales outperformed industry production in every region. In North America, growth over market was 2 percentage points, reflecting favorable platform mix and backlog in E-Systems, partially offset by unfavorable platform mix in Seating.

Higher volumes on the Ford Escape and Super Duty, as well as the Chevrolet Colorado and GMC Canyon, contributed to the E-Systems growth. Lower volumes on Lear platforms such as the Audi Q5 and the build-out of the Chrysler 300, Dodge Charger and Challenger impacted Seating in North America. Europe growth over market was 1 percentage point, with both business segments benefiting from higher volumes on the Land Rover Range Rover and Range Rover Sport. In China, revenue growth outperformed the market by 1 percentage point, driven by conquest programs in Seating, such as the BMW 5 series and i5. Turning to Slide 13, I will highlight our financial results for the first quarter of 2024. Sales increased 3% year-over-year to $6 billion, a first quarter record.

Excluding the impact of foreign exchange, commodities and acquisitions, sales were up 2%, reflecting the addition of new business in both of our business segments. Core operating earnings were $280 million, compared to $263 million last year. The increase in earnings resulted primarily from positive net performance and the addition of new business. Adjusted earnings per share improved to $3.18, as compared to $2.78 a year ago, primarily reflecting higher earnings and the benefit of our share repurchase program. Reported earnings per share, which are not shown on the slide, were lower year-over-year. Higher core operating earnings were offset by operational restructuring charges and other special items, which totaled $74 million, primarily reflecting future plant closures in Europe to improve our manufacturing cost structure and impairment charges related to Fisker.

First quarter operating cash flow was in line with last year, reflecting higher core operating earnings, partially offset by higher cash restructuring. Slide 14 explains the variance in sales and adjusted operating margins in the Seating segment. Sales for the first quarter were $4.5 billion, an increase to $25 million or 1% from 2023, driven primarily by our backlog, acquisitions and commercial recoveries, partially offset by lower volumes on their platforms. Excluding the impact of commodities, foreign exchange and acquisitions, sales were flat. Core operating earnings were $295 million, down $5 million or 2% from 2023, with adjusted operating margins of 6.6%. Operating margins were down slightly compared to last year as a benefit of our net performance, including lower commodity costs, and our margin-accretive backlog was offset by unfavorable platform mix.

Slide 15 explains the variance in sales and adjusted operating margins in the E-Systems segment. Sales for the first quarter were $1.5 billion, an increase of $124 million or 9% from 2023. Excluding the impact of foreign exchange and commodities, sales were up 10%, driven primarily by an increase in volumes on Lear platforms and our strong backlog. Core operating earnings improved significantly to $77 million or 5.1% of sales compared to $49 million and 3.5% of sales in 2023. The improvement in margins reflected higher volumes on Lear platforms, strong net operating performance and our margin-accretive backlog. Now shifting to our 2024 outlook. Slide 16 provides global vehicle production volume and currency assumptions that form the basis of our full year outlook.

We have updated our global production assumptions, which remain generally aligned with the latest S&P forecast. At the midpoint of our guidance range, we assume that global industry production will be flat compared to 2023 on a Lear sales weighted basis. We are maintaining the same exchange rate assumptions of an average euro exchange rate of $1.09 per euro and an average Chinese RMB exchange rate of RMB 7.15 to the dollar. Slide 17 provides detail on our outlook for 2024. Our first quarter results were consistent with our expectations, and we are maintaining the full year guidance range as outlined during our last earnings call on February 6. Total company operating margins are on track to achieve the midpoint of our guidance of 5.1% for the full year.

Second quarter margins are expected to be flat to slightly up in both segments compared to the first quarter. While we continue to make progress operationally and in our commercial negotiations, we are also facing, as expected, higher hourly labor costs from contracts that take effect in the second quarter, as well as modestly higher engineering costs. While the vast majority of our contractual labor cost increases took effect in the beginning of the year, certain contracts become effective in the second quarter. In the second half of the year, we expect margins to improve through a combination of operating actions, including the benefit of automation and restructuring actions, as well as commercial negotiations. Restructuring costs were elevated in the first quarter, reflecting future plant closures in Europe to improve our manufacturing cost structure.

Our restructuring cost guidance for the full year remains unchanged. Despite our expectations for flat industry volumes, we are forecasting our fourth consecutive year of higher sales and operating earnings. Earnings per share will increase due to the higher earnings as well as a lower share count from our share repurchase program. Moving to Slide 18, we highlight our commitment to continue to return capital to shareholders. Since initiating the share repurchase program in 2011, we have repurchased over $5.2 billion worth of shares and returned approximately 85% of free cash flow to shareholders through repurchases and dividends. We are targeting free cash flow conversion of approximately 85% in 2024, which will support continued share repurchases.

We remain committed to returning excess cash to our shareholders, having repurchased $30 million worth of stock in the first quarter and continued to repurchase additional shares throughout our quiet period. In February, Lear’s Board increased the share repurchase authorization to $1.5 billion and extended the authorization period through December 31, 2026. Now, I’ll turn it back to Ray for some closing thoughts.

Ray Scott: Thank you, Jason. Please turn to Slide 20. We started the year off strong with first quarter record revenue and continued margin improvements in E-Systems. As Jason just mentioned, our Board approved an increase and extension of our repurchase plan, reaffirming our commitment to returning cash to shareholders. Both businesses continue to diversify their customer base with key awards, and our momentum in Thermal Comfort Systems is accelerating. Beginning with our Lear Forward initiative, we identified creative solutions to reduce cost and improve operational efficiencies. We also identified a much larger opportunity to accelerate the use of [ph] automation and digital tools. IDEA by Lear is a significant evolution of our broader strategy to grow Seating and E-Systems and extend our leadership positions in – position in operational excellence.

Accelerating the use of vision systems, robotics and software will enhance our competitive advantage and enable innovation to further drive returns and improve margins. And now we’d be happy to take your questions.

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Q&A Session

Operator: [Operator Instructions] And our first question today comes from Joe Spak from UBS. Please go ahead with your question.

Joe Spak: Thanks. Good morning, everyone.

Ray Scott: Good morning, Joe.

Joe Spak: I guess just to start, 10% growth over market in E-Systems, good start to the year. Can you just, again, sort of go over the drivers there again and how we should really think about the balance of the year in cadence? Because it looks like you’ve got a little bit of a tougher year-over-year comp, if you will, next quarter and then maybe a little bit easier in the back of the half. But some color on sort of what you’re expecting in that business for this year would be helpful.

Jason Cardew: Yes. There really were two drivers in the first quarter. It was a combination of the backlog and some favorable production volumes on some of our top platforms, which we highlighted in the prepared remarks. As we look at the balance of the year, I think you sized it up about right, we do expect that 10 points of growth over market to moderate, and we would expect for the full year to be about five points of growth over market in E-Systems. So strong solid year overall, but certainly the first quarter will be the highest from a growth over market perspective based on our assumptions right now.

Joe Spak: Okay. And then if I could, just one, I guess, a little bit bigger picture. You talked about the restructuring. It sounds like it’s related to some European plant actions. So can you just remind us of, I guess, restructuring plans for the year, if you think you need to do more there? And then also, Ray, you talked about IDEA by Lear, higher automation. You had a recent string of acquisitions there, and also some organic efforts. How should we think about this going forward? Like as you automate and automate more, should we also expect a corresponding increase in restructuring to implement that automation?

Jason Cardew: Let me start with the restructuring outlook for this year. Our guidance is $125 million, and we did – it was very front-end loaded as expected. In the second quarter, it will be likely pretty significant as well. And really, focused on Europe. We’re still, what, 20 – more than 20% below the production peak in the European market from 2017 and I think still 18% lower than where that was pre-COVID. And so we’ve been steadily restructuring our operations to realign to the lower volumes in Europe. But we also see tremendous opportunity to reduce costs by shifting our footprint from Eastern Europe to North Africa. And we’re doing that pretty much across the board. When we acquired IGB and Kongsberg, they did have some higher cost facilities in Eastern Europe.

We have launched a new facility in Tunisia that will significantly improve the performance of that business. We’re also moving seat covers from Eastern Europe to North Africa. We’re moving wire pretty aggressively from Eastern Europe to Morocco. And so there’s still a lot of kind of runway there in terms of just an opportunity to reduce our manufacturing costs through shifting the footprint. So it’s a combination of those two things. And then the third point on restructuring is just the impact of some of our customers’ sourcing decisions. And so for example, we’ve had programs where the customer has built out in a production plant where we had the JIT business today, and they’re not replacing it or they’re replacing that program in a different facility.

And so it’s resulted in the closure of a couple of our just-in-time plants in Europe, which won’t really have an operating income benefit associated with them, but it’s an action we have to take nonetheless. So those are sort of the kind of the drivers of restructuring. Maybe Ray could talk a little bit about IDEA.

RayScott: Yes. I think what’s important, and we’ve been working on this strategy for multiple years, and I think the inorganic nature of bringing in some very, very selective partners and acquisitions has really helped us really discover opportunities even within how we purchase capital. And capital, as we’re looking at capital, is coming in significantly lower as we’re designing our own specific capital for own specific needs around multiple different platforms. And so we’re seeing benefits on lower capital cost, the efficiencies within the plant and how we scale these things across the different facilities, both in E-Systems and Seating, not only improve the cost, the reduction of labor heads within the plants, but also the work that is there is much better improved from ergonomics, safety, throughput, quality.

So those are generating great benefits for us. And the way we’re looking at this, and I described it in my overview, is plants that are in existence today, particularly, like an example, with a just-in-time facility, where we’re able to automate from finesse all the way until the customer’s delivery is a significant opportunity, because labor is very scarce today around the world, that helps us gap out from an efficiency standpoint. And it’s deployed in a way that we have a customer contract and we’re focused on those particular contracts that we have in place. And so we are very selective on where we’re deploying the capital. It’s based on customer needs and volume at that particular time, and it is very selective how we’re implementing it.

So it has been very beneficial short term. And I think that, I do believe this, that companies that are looking at this very, very proactively and strategically will be in a much better position three years to five years from now. This labor scarcity is a real issue. And it isn’t just selective to one area. It’s around the world. And the attractiveness of manufacturing jobs is declining and the need for output or manufacturing is increasing. And so those that are in a much more flexible, better position when it comes to automation, and IDEA or Industry 4.0, are going to survive. And so it’s been very successful. It’s one of the reasons why we look at our quarter-over-quarter expectations and improvements, not just this year but the out years.

It’s really paying dividends.

Jason Cardew: Yes. In terms of the last part of your question, how it will impact restructuring going forward, I wouldn’t say that near term it’s a meaningful impact on restructuring. A lot of the head count changes that happen as a result of automation will come out through normal attrition. There is turnover in our facilities. And so that is a factor as well. It’s not to say that there won’t be some level of restructuring, but it’s not going to move the needle in the near term.

Joe Spak: Okay. Thanks a lot guys.

Jason Cardew: Welcome.

Operator: Our next question comes from John Murphy from Bank of America. Please go ahead.

John Murphy: Good morning, guys. Just want to follow up on…

Jason Cardew: Hey, John.

John Murphy: Good morning – question on this automation front. I mean, could you give us a rough estimate of how much of your operating cost is made up by labor? And then as you think about automation, does that ultimately over time just replace it one for one? Or is there an opportunity to potentially take those costs down on a net basis? Obviously, recognize one would be capitalized, one would be operating expense. But just long term, what the delta could ultimately be?

Jason Cardew: Yes. In terms of – I’d rather not go into specifics on labor as a percentage of sales, but each subset of the Seating and E-Systems business is a little bit different. For example, in electronics, there’s very little labor content today, it’s already fully automated. I will say our most automated – our most labor-intensive operations are in wire and cut and sew. And we’re working on automation solutions that will have a meaningful impact on labor content there longer term. In the near term, the biggest benefits are coming in our just-in-time seat plants, where you’re seeing sort of the full effect of the acquisitions from ASI and InTouch, and now WIP, helping to accelerate our ability to automate a lot of the steps in the just-in-time seat process.

In addition to that, modularity is a big driver of taking labor out of the higher-cost JIT facilities as well. And then with Thagora and what we’re doing with – on the leather side, we’re also seeing significant improvements in labor costs in that part of the business. The way we’re primarily looking at automation, John, is a catalyst for offsetting wage inflation and driving higher margins longer term, driving that positive net performance in both business segments. That’s what we’re focused on.

Ray Scott: Yes. I think, John, and we’ve talked a little bit about this, is this automation, not only does it change the manufacturing footprint and the concept of how you manufacture products in the plant, but the product itself. I think the significant announcement that we made on the development program with Ford Motor Company is significant because we will automate that module. The automation of the components into the trim cover will be automated. The redeployment of that labor out of a JIT facility into what we consider to be more of a spoke-and-hub concept where you can scale it properly across multiple platforms is the future. And so it’s a combination. What we love is our design, engineering and manufacturing capabilities, coupled with this advanced and really quick pace of technology and innovation within the manufacturing plant.

They fit together. The partnership that we have with Palantir, with what we’re doing on the shop floor, what we’re doing with the digital systems and automation, it’s coupled with our designs. And so everything that we’re doing, the acquisitions we’ve made on the product side, were complementary to what we’re doing on the manufacturing side. And I couldn’t be more happy with where we’re at or excited with where we’re at with the modular concept in Seating. Every customer is moving at a little different pace. Some are still sourcing individual components, which is fine, but we have 11 customers that we’re working on right now with modular concepts that combine that automation within the plant with the components itself and the product itself.

And so we’re just going to keep steadfast on what we’re doing. We know that the success we’ve had in a short period of time will continue to accelerate. But it is a combination of the manufacturing plant, coupled with our expertise in engineering design and changing the product designs for a much more modular approach, is where we’ll be successful.

John Murphy: Great. And I hate to put you on this, but I mean, it sounds like you guys are doing all the right stuff. But I mean, is this ultimately, Ray, as you think about this sort of a necessary course of action to remain competitive and grow the business over time? Or do you think you can pick up a couple of hundred basis points of margin expansion from this automation, add these automation actions alone? I mean I’m just trying to understand where ultimately the – I mean you’re doing all the right stuff clearly and probably with the curve or way ahead of the curve on this stuff. I just trying to understand where it’s going to land or you think it’s going to land.

Jason Cardew: John, I’ll start. Ray probably has some additional comments. But I look at this as a key enabler to achieving the margin targets we’ve communicated, the midterm target in Seating of 8% and 7% in E-Systems – I’m sorry, 8% in E-Systems as well, and 8.5-plus percent longer term in Seating. And so it’s not necessarily 100 basis points or 200 basis points beyond that. It’s a key, I think, a competitive differentiator that allows us to grow the business, achieve the four points and six points of growth over market targets that we’ve established in both segments, and a key enabler to hit the margin targets that we’ve communicated.

John Murphy: Okay.

Ray Scott: Right. I love the way Jason goes at it and it’s good. But I’m going to tell you that I love what we’re doing in the manufacturing side. We have to move faster, and we’re pushing harder. I agree that right now, we haven’t changed our targets long term. I think there’s a benefit, obviously, to gapping out where we’re at short term. But I think longer term, to John, to answer your question, it is about survival. I think that those companies that have this capability will be the companies that survive, and then there’ll be the companies that did not move in this direction fast enough and we’ll be looking on the outside looking in. And so one is the short term, how we get at some of the expectations. When you can go in and tell your customer that you are the most cost competitive in the world, it’s a powerful statement.

And you can do that with analytics and data, it’s strong, both commercially and how you win business. And I think we’ve proven both sides of those. Longer term, I think those companies that have this advantage will be the one standing. And so we’re pushing fast we’re thinking differently, and we’re driving accountability throughout the organization. So we want to outperform those numbers. I think this is an area that we can accelerate. But right now, we’re staying steadfast short term on the targets that we’ve given.

John Murphy: Okay. That’s helpful. Just one follow-up. On the Tier 2 and 3 supply base, they’re facing the same labor challenge as well. And we’re hearing a little bit of stress down there below you guys, Tier 2 and 3 supply base, really because of labor shortages as well and cost of labor. I just wonder if you could comment on that, what you’re hearing more lately, and if that is constraining production right through the value chain, or is that something that you guys are able to handle with the help of your automaker customers?

Ray Scott: No, I think what you’re hearing is accurate. I think throughout the supply chain, labor scarcity is a significant issue. And it depends on regions, but it’s generally across the board, when you talk about just different types of metrics based on turnover or absenteeism or lack of workers. And so that is an issue. We’re working with our suppliers. We’ve been able to balance it, but it has been an issue, I think, throughout the supply base for all OEMs that we’re seeing.

Jason Cardew: I would say, just to add to that, the level of component cost inflation that we’re seeing this year is less than what we’ve experienced over the last number of years. So you’re seeing some moderation on the commodity side, and then maybe some acceleration on the labor side, and the two are slightly positive when taken together overall.

John Murphy: That’s incredibly helpful. Thank you, guys.

Ray Scott: Yes. Thanks.

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

Colin Langan: Thanks for taking my questions. One, maybe if you could talk a little bit about the cadence of margins through the year. You called out in your commentary an increase in labor and engineering into Q2. I would have expected maybe margins improved. Is that going to offset? Any way to quantify how much of a drag that might be as we think sequentially?

Jason Cardew: Yes. So we didn’t provide pinpoint guidance for each quarter, but we did say we do expect both segments to be flat or slightly up in the second quarter. And so the sort of composition of that, you have volume and backlog, which we think will be a tailwind from Q1 to Q2. We do expect revenues to be higher in the second quarter than the first quarter. And then we do expect the margin increase associated with the volume to be offset by the wage economics and engineering. So those two are sort of a push, and the higher margins in the second quarter result more from the operating actions and the commercial negotiations that are ongoing. So some of the restructuring savings associated with the actions we took at the end of last year and the beginning of this year, various performance improvement actions that we’re taking in our entire business.