Thank you for standing by, and welcome to the Lear First Quarter 2020 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please follow the operator's instructions. And now, I would like to hand the conference over to your speaker today, Ms. Alicia Davis, Senior Vice President, Investor Relations and Corporate Development. Thank you. Please go ahead, ma'am.

Thanks, Cath. Good morning, everyone, and thanks for joining us for Lear's first quarter 2020 earnings call. We will begin today's call with prepared remarks from Ray Scott, Lear's President and CEO; and Jason Cardew, Senior Vice President and CFO. You can find a copy of the presentation that accompanies these remarks at ir.lear.com. Following the presentation, we will open the call for Q&A. 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-K and other periodic reports. I also want to remind you that during today's presentation, we will refer to non-GAAP financial metrics. You are directed to the slides in the Appendix of our presentation for the reconciliation of non-GAAP items to the most directly comparable GAAP measures. The agenda for today's call is on Slide 3. Ray will begin with some introductory comments and provide an overview of the quarter. Jason then will review our first quarter financial results and outline the series of steps we have taken to preserve cash and maximize financial flexibility in the current environment. Finally, Ray will provide a business update and discuss our efforts related to employee health and safety, strategy and the community. Following the formal presentation, we would be happy to take your questions. Now I'd like to invite Ray to begin.

Thanks, Alicia, and good morning, everyone. Before I begin the formal presentation, I would like to say a few words about the current crisis. The COVID-19 pandemic has taken a tremendous toll on people around the globe. Our thoughts and prayers go out to those that have been impacted. We stand together with those on the frontlines battling this terrible virus. I want to take a moment to acknowledge our employees around the world. This crisis has tested us all, and I want to thank our employees for their efforts and commitment during these unprecedented times. Okay, now if we could please turn to Slide 5. It has been a very challenging start to the year. Industry disruptions related to the COVID-19 pandemic have impacted our operations in all of our major markets, and we expect additional challenges in the coming months. We have remained focused on controlling what we can and moving the business forward. We have a very talented and skilled senior management team, each of us with decades of industry experience; most of us were here during the 2008/2009 financial crisis. We learned valuable lessons from that time. But we also understand that what we're facing today is much more complex. We have a strong balance sheet, ample liquidity, a solid foundation, operational excellence, and a highly experienced management team. We're well-positioned for the challenges. As a team, we have developed three near-term business priorities: ensuring the health and safety of our employees, preserving liquidity, and aligning our operations with industry changes while remaining focused on long-term strategic opportunities. We believe that by executing on these priorities, we will successfully navigate the current crisis and emerge as an even stronger industry leader post-COVID-19. Before Jason begins, I'd like to provide a brief overview of the quarter. Earlier this morning, we released our first quarter 2020 financial results, a summary of which is shown on Slide 6. With sales of $4.5 billion in the quarter, we had growth over market of 11%. Excluding the impact of COVID-19, operating margins in both our Seating and E-Systems revenues would have exceeded 8%, a solid performance by both divisions. We were recently recognized by Automotive News with a 2020 PACE Award for Xevo market. This is Lear's second consecutive PACE Award, a testament to our continued industry leadership, as the PACE Award is recognized around the world as a benchmark for automotive supplier innovation. Now I'd like to invite Jason to provide a review of our financial results.

Thanks, Ray. Slide 8 shows vehicle production volumes and key exchange rates for the first quarter. In the first quarter, global vehicle production was down 5.1 million units or 23% compared to 2019, as the industry was significantly impacted by COVID-19 related shutdowns. In China, production was down 47% as plants were generally shut down for the month of February and a portion of March. In mid to late March, other markets, including Europe and North America, also experienced similar shutdowns. Production in Europe and North America was down 19% and 10% year-over-year respectively for the quarter. From a currency standpoint, major currencies continued to weaken against the U.S. dollar. Slide 9 highlights our financial results for the first quarter. For the quarter, sales were $4.5 billion, down $702 million or 14% from last year, driven by production declines in all our major markets and the negative impact of foreign exchange, partially offset by growth from our backlog. Excluding the impact of foreign exchange and acquisitions, sales were down 12%, which reflects 11% growth above market. While operating earnings were $205 million, down $173 million, primarily due to the decrease in sales; somewhat offset by positive overall operating performance. Adjusted operating margins were 4.6% in the quarter. We estimate that the negative impact of COVID-19 on our sales and core operating earnings in the first quarter was approximately $900 million and $200 million respectively. First quarter free cash flow was positive $113 million compared to negative $71 million in 2019. The improvement in free cash flow was primarily the result of favorable working capital, including increased cash collections due to a later quarter close date in 2020, partially offset by lower earnings. Slide 10 explains the first quarter year-over-year variance in sales and adjusted operating margins in the Seating segment. Sales in the quarter were $3.4 billion, down 14% from the first quarter of 2019. Excluding the impact of foreign exchange, sales were down 12%, reflecting growth over market of 11%. In the first quarter, Seating margins were 6% compared to 7.6% last year, reflecting lower volumes, partially offset by margin accretive backlog and positive operational performance. Excluding the impact of COVID-19, segment margins would have been above 8%. Slide 11 provides the first quarter year-over-year sales and adjusted operating margin walk for our E-Systems segment. Sales in the first quarter were $1.1 billion, down 12% from the first quarter of 2019. Excluding the impact of foreign exchange and acquisitions, sales were also down 12%, reflecting growth over market of 11%. E-Systems margins were 4.8%. The margins were primarily impacted by lower volumes and negative net performance in the Xevo acquisition. Excluding the impact of COVID-19, segment margins would have been over 8%. On March 26, we withdrew our 2020 guidance due to the significant uncertainty caused by the COVID-19 pandemic. However, we thought it was important to provide an update on our liquidity provision and describe the steps we've taken to reduce costs and preserve cash in this environment. Now, please turn to Slide 12. Over the past decade, Lear has maintained a conservative capital structure to ensure we have ample liquidity to manage and invest in our business throughout the entire automotive cycle. This slide highlights Lear's strong balance sheet, which positions us well to navigate through these unprecedented times. In mid-February, before the severity of the COVID-19 crisis was apparent, we proactively entered the credit markets to refinance $650 million in bonds due in 2025. The bond refinancing resulted in extending our weighted average bond maturity to over 14 years and reducing the weighted average interest rate on our outstanding debt to under 3.5%. In February, in addition to the bond refinancing, we also extended the maturity on our $1.75 billion revolver to August 2024. And with our first bond maturity in 2027, we're confident in our ability to manage our debt requirements and interest obligations. As CFO, one of my top priorities is aggressively managing our cash and liquidity position. And we're continuing to take proactive steps to minimize cash usage while industry production is severely depressed. But we've done extensive scenario modeling and even under the most extreme scenarios, we will continue to have sufficient liquidity. We paid a cash dividend and repurchased shares in the first quarter. In March, the board made the difficult, but we believe prudent decision to suspend both share repurchases and dividend payments. This is not a decision taken lightly, the one that became necessary as the urgency of the situation and the impact on the economy from COVID-19 became clear. With our strong balance sheet, ample liquidity, and no significant near-term debt maturities, we're comfortable; we can not only weather the storm, but also continue making targeted investments that support the long-term growth potential of both our business segments. On Slide 13, I wanted to take a moment to share our philosophy on managing costs and preserving cash in this environment. The cost reduction programs were designed to carefully balance the need for preserving cash while also protecting our world-class operating performance and the longer-term value creation potential of the company. By retaining our salaried workforce, we were able to use the downtime to prepare the new safe workplace protocols and to relaunch our factories in the most efficient manner. Other team members have been working closely with our supply chain to ensure all suppliers can safely and efficiently relaunch production. And finally, we have established a team to evaluate long-term strategic priorities in light of the disruptive force of COVID-19. With respect to other cost reduction actions, while we have moved aggressively to reduce R&D and other discretionary costs, we're positioning our projects to be quickly resumed when industry conditions warrant it. We're investing in strategic areas and thoughtfully deferring lower-priority projects. We're closely monitoring economic conditions in overall new vehicle demand. And if we determine that production cuts are likely to become more permanent, we will take decisive action to further reduce capacity through additional investments in restructuring. Slide 14 highlights specific actions we identified and began implementing quickly as the devastating impact of COVID-19 on the global economy became apparent. We created several models to estimate the financial impact on our business. And these scenarios continue to evolve as we carefully monitor both our customers' production schedules and overall global economic conditions. We've taken a layered approach to identifying and executing actions to reduce costs and increase cash flow. All the items shown in Phase 1 and most of the items in Phase 2 have already been implemented. And as you can see, all stakeholders, including our employees, board members, and stockholders have been impacted by these cost-saving actions. As noted earlier, our liquidity position is strong, allowing us to act in a measured way as we gain a better sense of how prolonged the impact of COVID-19 will be on our industry. We have more levers to pull and the items shown in Phase 3 are increasingly aggressive actions we have identified that we can take if needed. During the Great Recession in 2008 and 2009, we took out significant costs by reducing capacity, consolidating our global footprint, and right-sizing our program engineering, capital spending, and SG&A, and we're prepared to take similar steps again, as appropriate. We did numerous things right during the financial crisis, but we also learned some valuable lessons. Our experience tells us that it is prudent to take highly targeted cost reduction actions to ensure that we're not damaging our market position or hindering growth during the recovery. As Ray will discuss later in the presentation, we believe significant business opportunities will arise as a result of industry shifts post-COVID-19. We want to be sure that our cost reduction actions are not so drastic that they affect our ability to innovate today, keeping us from fully executing our strategic plan in the future. Before I leave this slide, I'd like to discuss decremental margins. Our decremental margin in the first quarter compared to 2019 was 25%. This is higher than our usual variable margin, partially due to the nature of the shutdown of production as a result of COVID-19. In certain locations, we're required to pay our hourly employees for a period of time upon layoff. When production resumes, it is important to note that the decremental margins will be impacted by other costs as we adapt to the new operating environment. We anticipate increased costs for personal protective equipment for our employees, and temporary inefficiencies resulting from restarting the entire global automotive value chain. We would expect that process to be somewhat similar to the inefficiencies typically associated with a new production facility ramping up. The cost savings measures outlined in Slide 14 are intended to help us achieve decremental margins for the remainder of the year of approximately 20% to 22%. Once we have a clear view of future industry production levels, we will take actions as necessary to right-size production capacity with the goal of further improving decremental margins. Now I'd like to turn it over to Ray to provide a business update.

Thanks, Jason. Nice job. Turning now to Slide 16. As I said earlier on the call, we have three near-term business priorities. At Lear, we have no higher priority than protecting the health and safety of our employees. Members of the Lear team around the world have been working hard to develop and implement leading-edge safety protocols in all of our facilities globally. As a leadership team, we understand that we have to manage the current challenges due to COVID-19 while positioning the company for long-term success. We're prepared to act strategically and opportunistically when it is appropriate. Slide 17. On Slide 17, I will provide some background on the Safe Work Playbook that we published on Lear's website on April 6. After COVID-19 surfaced in China and started to spread globally, we realized that our plant processes would have to adapt quickly to this new environment. With no off-the-shelf solution, we took best practices and recommendations from the CDC and the World Health Organization along with lessons learned from our plants in China and elsewhere and developed a Safe Work Playbook. The Playbook was designed to standardize best practices for our global operations and give our local management teams the tools that they needed. It is a plan to protect our people and minimize the chance of spreading the virus in our plant and office locations. As we have seen, this virus is very unpredictable; the best practices and protocols we have in place today will change as we continue to learn from the medical community and our experiences at our own facilities and locations around the world. The Playbook has been downloaded over 23,000 times from our website, and the response from around the world has been overwhelming. We will continue to share our best ideas and we will seek input from others as well. We understand that this Playbook isn't a failsafe, and we have no ego. If we find a better practice out there, we will update the Playbook for use within our own facilities globally. Now turning to Slide 18, never in the history of the auto industry have we seen an extended global shutdown followed by a nearly simultaneous relaunch of our plants around the world. Restarting production on this scale is a monumental task, maybe even more challenging due to the need to add safety protocols to minimize the potential spread of the virus. It's more important than ever to have significant operational expertise during these unprecedented times. Lear has a long history of operational excellence with highly detailed procedures and consistency applied across our global manufacturing locations. This experience was invaluable to us as we developed a sophisticated plan for how to execute the Playbook. The Playbook alone is useful, but without an established framework and protocols and the disciplines and the tools to execute the plan, success will be limited. I'm very impressed with what the team did to design a plan that allows us to restart and run our manufacturing facility safely and ensure the well-being of our employees. The early feedback from our employees and the plants that have reopened has been overwhelmingly positive. We will face challenges along the way, but with the right disciplines in place, I'm confident that the Playbook will help us operate our plants more safely and optimize efficiently as we transition to the new work environment. Turning to Slide 19, the 2008/2009 financial crisis taught us the importance of staying focused, not only on what is immediately in front of us, such as the day-to-day operational challenges in liquidity management, but also on innovation, technology, and long-term strategy. The COVID-19 pandemic will have far-reaching and long-lasting impacts on our global economy and society and broad implications for Lear's business. While it is too soon to note precisely how we will see the industry change as a result of the upheaval, I have created a senior level team that is evaluating potential changes in the industry landscape, shifts in technology megatrends, and new business opportunities for both Seating and E-Systems in a post-pandemic world. This team is working closely with our business unit leaders to ensure that Lear's strategy evolves with potential market and industry shifts due to COVID-19. While managing our business day-to-day requires our immediate attention, we're also committed to positioning Lear to capitalize on future strategic growth opportunities. Though we would scale back some near-term R&D, we will continue to support investments that will be important for executing our long-term strategic plan. Given our financial strength, flexibility, and market position, we're well equipped to drive change and adapt as the industry evolves. Slide 20 describes initiatives taken by Lear to support the battle against COVID-19, including donating masks and other personal protective equipment to hospitals, first responders, and communities in need. In February, we identified a need for masks to protect our employees and families in China. As a testament to our ability to innovate and adapt, the Lear team worked across the globe quickly to design, engineer, and ramp up the production of masks. I'm amazed at the way the Lear team came together to develop this in-house solution, which put us in a position to help our employees and their families as well as those on the frontline of this crisis. We're on pace to produce over 1 million masks per week. Building on Lear's strong culture of supporting the communities where we live and work, our employees, acting on their own, also have found ways to use their resources and skills to help their local areas. I'm so proud of the team and what they have accomplished during this time. Now turning to Slide 21. In summary, the first quarter was marked by significant industry disruptions unlike anything we've ever experienced. But what the team accomplished from an operational standpoint—especially with nearly everyone working remotely—was truly remarkable. I believe this was the best performance we've ever had collectively as a team. Near-term, we remain focused on three priorities: the health and safety of our employees, managing our liquidity and financial flexibility, and operational and strategic planning. While significant near-term challenges remain, I continue to be impressed by the dedication to resolve our employees worldwide. I remain confident in our ability to successfully navigate this crisis and position the company for long-term success. Now we would be happy to take your questions.

Please follow the operator's instructions. And your first question comes from the line of Joseph Spak from RBC Capital Markets. Your line is now open.

Jason, maybe to start, I appreciate your comments on the decremental margins. I was wondering if you could just spend another second on it because I know there's some maybe some rounding and you're just using sort of estimates but decremental margin on the COVID information you provided was like 22%, which is actually better than the 25% that you experienced in the quarter. So can you just talk a little bit about what's sort of going on there? And I guess more importantly, how you see that decremental margin performing as you move into the second quarter when the regional mix changes?

Sure. So in the first quarter, Joe, in addition to the impact of COVID-19, you had the usual volume and mix fluctuations that happened prior to that, you had a layer of customer pricing and performance on our side. And so you had all those other factors that impacted the results. But if you look at it by segment, in Seating, obviously we had better conversion year-over-year than in E-Systems where we continue to see the same effect that we saw in the third quarter and fourth quarter last year, the changeover of new programs from the old model to the new model rolling on a slightly lower margin. So that's really the main thing sort of diluting the year-over-year conversion that you see in the first quarter. So that 25% is not necessarily attributed to just COVID-19; it's also all the other fundamentals that are happening with the business. As we look forward, for the balance of the year, our normal variable margin is about 22% or 23% in both businesses combined. We expect to see about a three-point impact on that for the combined effect of sort of the one-time cost of PPE and other costs we're going to incur to prepare our facilities to relaunch in this post-pandemic environment. And then we expect to see about a two-point impact as a result of the inefficiencies associated with running production at less than full capacity for an extended period of time. And that's why we described it as similar to what you see in a new facility ramp-up; you're going to have what we've seen, for example, in Europe. Many of our plants restarted production last week on one shift but ran at 20% or 30% of the normal volume levels. So you have your full complement of labor and overhead in the plant, but you're only seeing 20% or 30% of your normal production output. And over time, that will diminish but we believe that could be in the neighborhood of $100 million over the remainder of the year. So that's the other factor. So that takes your decremental margin from 23% up to 26%. Now working in the other direction, we have our cost reduction program, which we're expecting to see savings of about $250 million for the full year as a result of those plans. And we designed that plan to operate in an environment where volumes were down 25% to 30%. So if you do the math on that, if volume is down 25%, that'd be about a $5 billion reduction in revenue; that works out to about a 50 basis point improvement or five-point improvement in margins taking you from 26% down to 21%. If you assume a 30% reduction in volume for the full year or $6 billion in revenue then that cost reduction program would be worth about four points. So that's hence the range of 20% to 22%. Those are sort of the big puts and takes, Joe.

Really, really appreciate the color. Ray, maybe just bigger picture. You mentioned some of the actions that Lear took during the financial crisis. If I look at your Slide 14 to date, there's been some tactical restructuring. It seems like you could still do more especially if you sort of need to move on to Phase 3; I guess the same with SG&A savings. Is that really, that stuff is in the additional leverage bucket just because things happen so fast and you haven't had a chance to plan and implement? Or is it really only truly needed if things get much worse? And if it's the latter, like why wouldn't you still try to take the opportunity to get us some more savings here as you sort of reevaluate everything?

Yes, it's a good question. And I think I look at this way—in 2008/2009, it is nothing like what we're experiencing today. 2008/2009 was really a financial crisis that cut demand immediately. Obviously, we could really cut our costs based on our customers cutting their programs and then really getting at our overall cost. This obviously is more of a supply issue right now. We know it will lead to a demand issue, but that isn't really clear today on what is going to and how demand is going to be impacted. Jason and I work through this and really put a plan in place that we looked at from different phases. We had different models that we had built up on different scenarios based on what the demand would look like. What we don't want to do in this scenario is something that we learned from in 2008 and 2009. We did get very aggressive with our cost cutting, and when volumes did come back, we were not in a position to take advantage of those. What we want to do is be mindful of that. We do believe there's more cutting and cost cutting that we're going to have to do. I think we have to be much more selective and tactical about that. I think demand will come back in particular programs. But the question is, is this a V, U, or L shaped scenario? As we start to get more visibility on that, we can be much more aggressive; or if it steps back quicker, we want to be in a very good position—a strong position to gain those benefits. I think we're going to know more—we know a little bit more what seems to be every single week, but we did take a very tactical and strategic approach on how this is impacting our business and what the potential demand is going to look like in the next several quarters.

And your next question comes from the line of Rod Lache from Wolfe Research. Your line is now open.

Good morning, everybody. Just wanted to follow up on Joe's question, just understanding that you and I think a lot of suppliers are kind of in a holding pattern because you have to be ready if production does recover. I was just hoping you can maybe just clarify for us if you did determine that revenue were to stay at maybe like the Q1 run rate for a while. So you're annualizing it at just $18 billion. Can you just clarify how we should be thinking about the margin recovery from here, from what we were observing in the quarter? Should we be—is there an incremental like $250 million annualized savings versus what we were observing in the quarter? And should we be mitigating that by some of the PPE costs and other inefficiencies that you see? I'm not sure if those are viewed as permanent?

Yes, I would say first of all, just in terms of adjusting the business to a lower volume environment, we have queued up a number of restructuring plans that are ready to go once we have a little better sense of what the run rate looks like coming out of the crisis. And so those are geared towards taking structural cost out on a more permanent basis to improve that decremental margin in the first half, second half of 2021. So we can take those actions. In the meantime, though, what we've done is we have cut capital spending, and we're putting less capacity in place, particularly in the component plants, anticipating that there will be some near-term weakness in volume at least into 2021. So that will be a factor that will further improve the decremental margins if you look out to next year. In terms of the permanency of the cost reduction actions, most of what we've done here with our cost reduction program is temporary in nature. So I wouldn't look at that as something that will repeat itself next year; a lot of costs that we've taken out, we won't put back in until volumes come back. So some of it will carry into next year if volumes remain weak. But much of that will come back in as volumes recover. We would target enough of that to cover any ongoing costs that we see from operating our facilities differently because of the results of the pandemic. So I would say the goal would be for that to be sort of a push, Rod, if you just look at the incremental costs that are on a permanent basis due to COVID-19, and then the permanent impact of some of the cost reduction efforts that we put in place this year, sort of balancing out.

Okay. I guess I'm just trying to ask the question a little bit differently. You're talking about margins for the segments that could have been north of 8%. Had it not been for this impact of COVID? Are you able to, at this lower revenue base, given enough time, restructure to those kinds of margins—8% or better, I guess is ultimately my question?

Yes, I wouldn't say that that's something we can do in a one or two quarter time period, but over a 12 to 18 month time period, that would absolutely be the objective, and a lot of the restructuring programs that we have queued up, as I mentioned a moment ago, are designed to do just that—allow us to earn similar operating margins in a lower volume environment. I don't think it'll be precisely the same. The 8% plus that we saw in the first quarter, excluding the impact of COVID-19, it'll probably be a little bit lower than that. But that's the overall objective of what we're doing with restructuring. So I would probably caution you from trying to put a precise number on operating margins by segment next year. I think there's just too many moving parts right now, but the longer-term goal would be to do just that.

Okay. Just lastly, Ray, would you mind just giving us some perspective on what you're hearing from your customers on the production trajectory from here and any thoughts on Mexico for you, which has been an issue, I think for a number of suppliers?

Yes, from our customers, a lot of our conversations that I've had with the customers have been regarding readiness—getting up and running. And I'll say generally across the board, they're very optimistic. Obviously talking about the demand, they believe there's demand there. So we've done and had a number of conversations with our customers regarding getting our plants up and running to the volumes that they are requesting. And I'll tell you, the early indication coming out of Europe is very positive, albeit not at the levels they would like to see. I'm very optimistic given we've been up for two weeks now, and we've been able to run our facilities; the supply chain has been able to run somewhat efficiently. They seem to be doing a nice job of producing vehicles. We'll start running production here on the 18th. Some of our other customers, I was just down in Tuscaloosa last week with what's going on with Daimler, and they were actually trying to push volume and get volume up. They seem to be running very well. So I think generally optimistic and working with our customers closely on the stated volume that they'd like to see, but they do actually believe that the volume and demand is there. In respect to Mexico, Mexico has been challenging for us. We have 170,000 employees around the world and over 240 facilities. Unfortunately, in the ware region, we've been hit pretty hard by this virus. We've been down; we haven't been running our production—our production has been shut down for over six weeks. I think this virus has spread. Obviously, it started with China, then went to Korea, then to Italy, then through Europe, into North America. Now I believe Mexico is probably three weeks, four weeks behind North America. I still think they're going to have some challenges. We're acting very aggressively with our protocols and making sure we have a safe work environment. We're bringing our workers in to show them the steps that we're taking. But we can't do anything as far as manufacturing because the orders are—we can't manufacture components or material. But I do believe that Mexico is behind the curve in respect to this virus and we're starting to see some of that in particular regions with hotspots.

And your next question comes from the line of Dan Levy from Credit Suisse. You may ask your question.

Good morning. I wanted to just start with a question on the outgrowth. I mean, the outgrowth you had in the first quarter was a lot higher than the typical quarterly pace we'd seen in the past. Can you just provide a little more color on the drivers of the outgrowth, especially in China—in North America—were customers doing any stocking up pre-downturn? If there was a one-time benefit, should we expect any payback in future quarters? Just a broad color on what drove the outgrowth in the quarter?

Yes, so in China, the main driver is particularly with the premium customers have held up better than everyone else in that market. We have a really strong business with Daimler and BMW in particular, and they had a very strong first quarter. That's the biggest driver of what we saw in terms of outgrowth in China. In North America, we talked a lot about this last year—that we were going to change over our major platforms—and that we would eventually get through that, and in fact, we did. You saw really strong performance from GM's full-size trucks. The Ford Explorer was up significantly year-over-year; it's a big platform for us as well. We had strong backlog in both Seating and the E-Systems in the first quarter that was predominantly in North America. So those are the big drivers, Dan.

And no one-time benefits in there?

No.

Okay. And then just one small follow-up on that. Can we extrapolate this type of outgrowth to future quarters or was this just you got really lucky with the mix this quarter?

Well, I think there's so much uncertainty as to when customers will launch that you have that added complexity around who's going to be able to ramp up and whether they're going to see any setbacks with their production because of the pandemic. But I would say in China, we're seeing into the second quarter a similar phenomenon where the premium customers seem to be producing at a higher rate than the rest of the market. So we would expect to see some continued benefit—particularly in our Seating business—in China as a result of that. I think also in North America, to the extent everyone can ramp back up, there's tremendous pent-up demand for the GM full-size truck platform, which is our largest platform. So that could lead to some further outgrowth in North America as well.

Okay, great. And then just a second question on the tax spend which it sounds like you've temporarily pulled back, which makes sense in this environment. The longer-term focus is still intact. One could make the argument that given the predominant exposure for the company's Seating, which is much less capital intensive, you probably have some leeway to more aggressively cut back on spend if you want. So what is the ability to cut back on spend? Or is it just it's still the view that the future opportunities in E-Systems—in electrification and connectivity—that shouldn't be compromised? And so you're still—it's only going to be very modest cuts to tax spend or R&D spend—really just on the margin?

Yes, I think again, like we said, we're being very strategic in our approach that we're spending in technology and innovation, and we do believe that we will continue to benefit. Looking at the megatrends, we don't see significant shifts; China, for example, is well on their way; Europe is in a good position. So we see the megatrends still being in place. Now, with that said, I think every customer is different, and they have different liquidity needs, and they're going to look at their capital differently post this virus. What we're doing is really looking at how we place our technology, where we place our technology, and who will place our technology with—and so we believe the megatrends are still going to be intact and that investments that we're talking about support those megatrends. We believe connectivity is still going to be important in the future. If you step back now, you're going to lose your position; it was very similar to what we're talking about with 2008/2009. If you backed off too much, you lost some real good business growth opportunities above market. We're being very selective, we do believe in the megatrends and positioning ourselves in particular regions and with particular customers because they're not all equal. We do believe that when we do emerge, we'll be in a good position to continue our growth trajectory.

And your next question comes from the line of Emmanuel Rosner from Deutsche Bank. You may ask your question.

Hi, I was intrigued by your comments in the prepared remarks where you say you think there will be some new business opportunities post-COVID as the industry shifts. Can you just elaborate a little bit more? I know you just said the megatrends are not changing; any sort of shifts to look forward, any things that may change on a go-forward basis, and how does that actually provide you these opportunities?

Yes, it's a good question and it's somewhat speculative on my part. But I do believe if we focus on the customer and add value to our customers, we believe we can put ourselves in a position to win business. Let me give you a couple of examples. There are some shifts and changes with some of our customers in full-service, design responsibility for Seating. Right now, Seating consists of 60%, maybe 70% directed components and components that are directed outside of our capabilities. We are seeing shifts that are leading us to in some cases being awarded full-service, being the most vertically integrated Seat Company in the world. It puts us in a really good position to go in and help our customers as they start to rethink through their spend and their engineering dollars that we can help them. I think another great example is we talked about engineering components in the wiring business. The team with Carl Esposito and Mike Balsei were doing a great job of winning engineered components, which increases our content and also our margin profile. They were doing a nice job prior to COVID. I believe it's an opportunity for us to talk to our customers to accelerate those opportunities because they can benefit from a value proposition. And I think just generally the world's changing just from a hygiene standpoint. Are there opportunities? We're talking to our customers right now about infection resistant materials and antibacterial relative to the interiors, how consumers' behavior changes. So that's why we set up a very specific team that's aligned with our overall strategy to help develop plans that we can accelerate our growth. I believe sitting here and thinking that the world is going to stay the same way is not the right approach. Being much more aggressive—in a proactive approach to help our customers because I do believe there's very good needs where we can help them. We have $100 million of what we call cost technology optimization in front of our customers. I’m hopeful and we saw it back in 2008/2009; they were much more flexible on implementing ideas, value-added, or value-engineered. We've worked hard on building a queue, like I said, of $100 million worth of ideas that we can help our customers, at the same time help Lear benefit with growth, additional content, and margin opportunities. We have a number of different opportunities that we're working on, thinking through that the team has done an excellent job of being very focused and making sure we're watching all the different behavioral issues that might occur and then capitalizing on those.

Okay, that's interesting. And then the—I was curious in terms of the new business launches, outlook for the year. Are you seeing things progressing pretty much on time? Any launches, any delays or cancellations in launches? Obviously, the backlog you reported was about $130 million in the quarter. I think your initial guidance for the year was $825 million. I'm assuming that you're just for new volume and the new reality but directionally speaking, is the business you're anticipating this year still launching this year?

Yes, let me hit the first part and then Jason will follow up with some details. I know a lot of the discussions, like I said Emmanuel, have been around just restart quality, PPE equipment, making sure our supply chain and everything's in place. What we've gotten from our customers now in respect to delays or cancellations is the time that we were all sheltered in place and down—those timelines have kind of shifted by the same amount of time that we've been down. A lot of programs have moved in respect to the time that we've been down. As far as cancellations, we've seen some derivatives and smaller programs—those types of things that have been canceled but nothing significant. I think of it this way, you have a five-year window; you want it to be pretty much intact with just the delays I talked about because of the time we've been down—no significant cancellations. I believe our customers are reprioritizing their capital needs and looking at years three, four, and five. But we don't have that insight at this time. I do think and believe they are reconsidering some of their product planning in respect to this crisis. As far as some of the details, Jason?

There haven't been any significant program delays on programs in the backlog per se. But I would expect that over time, we would see some shifting of programs that were planned to launch later in this year slipping into the beginning of next year. The bigger issue is certainly going to be the level of overall production volumes. Looking at the second quarter alone, we're anticipating somewhere in the neighborhood of a 60% to 70% reduction in volume from what we'd previously expected—which will have a meaningful impact on the backlog. It's just a matter of seeing how the ramp-up progresses into the third and fourth quarter and ultimately how demand holds up. We would expect that there'll be further volume reductions in the second half of the year, certainly as well, and we're building our plans based on that.

And your next question comes from the line of Itay Michaeli from Citi. Your line is now open.

Just a couple of questions. First for Jason, going back to the decremental margin for the rest of the year, the 20% to 22%, can you break that out by the two segments? Then also, if you could share any kind of directional color around how we should think about CapEx and working capital in Q2 and then maybe beyond that as well?

Okay. Well, maybe I'll start with the second part of the question first and come back to the decremental margins. In the first quarter, as I mentioned out in the prepared remarks, we did see a benefit from working capital in Q1 as a result of the late quarter end. Our quarter ended on April 4, and so some of our customer collections that ordinarily would happen in the second quarter happened in the first quarter. We see about a $50 million headwind in the second quarter due to working capital as a result of that, that by itself. There will be an additional headwind on working capital in the second quarter due to the restart of production as we're bringing material in anticipation of our customers ramping up. There's a high likelihood we will incur some of those cash disbursements in the second quarter and not see the full benefit on receivable collections until the third quarter. I plan on another $50 million to $100 million for that. So I would see a working capital headwind in the $100 million to $150 million range in the second quarter. We've taken steps to try and offset that; we've cut capital spending. We believe we can take 20% out of that number without damaging any of our operating plans, mainly because of the lower overall volumes that we're seeing in the industry and some delays on programs that were slated to launch later this year and even in the beginning of next year, allowing us to push that capital spending out. That will help a little bit; we're trying to realize the majority of that benefit as much as possible in the second quarter to help offset the cash burn—that's going to happen in the second quarter due to working capital and the anticipated losses in the quarter due to the very low production volumes. In terms of decremental margins between the two segments, overall—we've talked about this in the past—Seating runs between 15% and 20% and E-Systems between 25% to 30%. So the spread we would see for this year will be very similar to that between the two segments.

That's very helpful. Just a follow-up for Ray: maybe an update on just your new business discussions; any improvement in the level of activity and win rates and awards in Q2 versus Q1? How are you directionally thinking about the 2022 backlog and your ability to kind of build that up this year?

We had a great quarter—this first quarter. We had a tremendous amount of new business wins—primarily Conquest wins. We’re on pace and had a good start to the year until obviously the pandemic hit. We're looking forward to making some announcements here. Jason, do you want to add any color with the New Business Awards?

Yes, we had a great first quarter before this recent slowdown. So we had over $900 million of New Business Awards in Seating in the first quarter, including almost $500 million of Conquest awards. We've been talking about this for a number of quarters, waiting for this to happen. We saw it begin last year; last year we had $300 million of Conquest awards, so we had $500 million in the first quarter. We're pretty excited about that. In E-Systems, we saw a similar pace to New Business Awards. In the first quarter, we had more than $250 million in total New Business Awards. We have seen a slowdown in the sourcing process just as a result of people working remotely, so we would expect to see the total awards for the year maybe down a little bit as a result of that—certainly for the second quarter and maybe even into the third quarter. But overall, our pipeline is strong in both segments, so the underlying fundamentals of growth are certainly still in place in both segments.

Even in the downtime and working remotely, we had some really good conversations with some key customers on some business that we're quoting and big programs. I'm optimistic. I think in general, like Jason mentioned, just because everyone's working remotely and some efficiencies as far as some of the quoting for process, things did slow up. But in respect to some of the bigger programs we were quoting and working on, those were pretty much intact. We're working aggressively on getting the customers what they needed as far as technical specs in quote-related materials. So it was moving despite the fact that we’re working remotely and having good conversations with our customers.

And your next question comes from the line of Brian Johnson from Barclays. Your line is now open.

Thank you. You sort of touched on this, but just trying to get some further color; your balance sheet is in a quite different place than what you had in obviously 2009/2010. Plus, you're standing with customers is kind of a blue-chip supplier with balance sheets quite different. Given that you kind of hinted at perhaps using it for M&A, thinking about that, where would you see the opportunities between further vertical integration in Seating versus E-Systems? Would you be looking more at bite-sized things using cash on hand or perhaps larger using a combination of stock and cash?

Yes, it's a good question. At this time, it's too early. Right now, we are now focusing on getting these plants up and running. But we are keeping an eye on different types of opportunities that might present themselves; but obviously it's too early in that process to start looking at any type of M&A. We're mindful of that and making sure we're looking at the different opportunities that might present themselves. In respect to where it would be more of what we've been doing, I think we've done a nice job of this string of pearl approach getting very good complementary type companies that can help us grow. We've talked about the areas. We're doing a nice job of building up our software capabilities; we're doing a nice job. We've talked about the vertical integration and the need to become more vertical in the E-Systems area of electronics and powering and solutions. We think there might be some opportunities there. But that's—we're really strong in Seating. We think that we have a very strong position. We believe opportunities will present themselves and we're looking at this in Seating. Still, it's very much intact with the strategy we had prior to COVID, but just being very mindful of what's going on in the industry and how the landscape is changing. In the event, like I said, when the opportunity is right, we want to make sure that we can take advantage of them.

Okay. And just as a quick follow-up, you talked about being vertically integrated, which I agree with. Yet your biggest competitor is also vertically integrated up into the seat structures and metals business that they by their own admission and playing numbers have struggled with. Would you be looking at taking over any of those plants, or alternatively do you have any desire to deepen your kind of metal bending work going on?

No, no, no. We—we have good competencies in a good business. In structures, we have no intent to strategically grow that business; we're well-positioned for what we need to have the design capabilities to allow us the ability to grow. But we have other areas. When we think about the things that we're doing in Seating with ConfigurE+, which is a great feature that allows the consumer to move throughout the vehicle gives you flexibility—that's a great area for us. We continue to look at biometrics and smart seats in adding content where we can create value and give our customers technology and innovation. We see more of the integration of software and embedded technology to help our customers differentiate their products. That's really where our value proposition is. If we're to focus on in, there are a number of similarities with what we're doing in E-Systems. That’s why we’re in such a great position to really create that intelligent seat system, which we're really doing a nice job of getting design contracts and contracts with our customers on those applications. That's where our focus is. We believe there's value creation through the content features that our customers can differentiate their products—not within the component area of structures.

And your next question comes from the line of James Picariello from KeyBanc Capital Markets. You may ask your question.

Just on Xevo, how should we think about break-even timing there? The original expectation I believe was for some kind of an accretive impact beginning in 2021. So I'm curious what that timeline might look like from here given the unique situation.

Yes, I think that business is impacted by volume as well certainly this year, just due to the licensing revenue impact due to reduction in our expectation for volumes for the full year. So we will likely lose money on that business for this year. Looking out to next year, we do see a glide path to profitability and beyond that into 2022, we would expect it to be accretive. I think it will take a little bit longer to get there, but not much different than what we initially had anticipated.

Got it, that's helpful. And then just thinking about E-Systems in the quarter's decrementals, how much of the impact attributed to your higher margin Legacy China business and the obvious industry pressures in the quarter? And maybe just an updated sizing of what that mix comprises for the segment, for the legacy segment?

The biggest issue in the first quarter in terms of the margin compression there in E-Systems is—it's a continuation of what we saw throughout last year. Q1 of last year, we were at 11% operating margins in E-Systems. That was sort of that last quarter that had the legacy impact of higher margin programs. As those programs launch throughout the year last year, we saw that number come down in the second quarter, and then it stabilized at that rate. If you look on a sequential basis, it's very much in line with what we saw in the fourth quarter. So we're not seeing any more sequential margin erosion due to new business launching; it’s launching consistent with our existing margins in the segment. But it's more just the fact that the first quarter of last year at above 11% was that last high watermark quarter we had in E-Systems. It's not China; it's more in North America, in Europe where we had a changeover from an old platform to a new platform where the new margins are very good, but they're a little bit lower than the outgoing program. We would expect over time to see those margins come back close to or in line with what they were previously. We're six to 12 months into most of those programs that changed over, so we do need some time before we will see that margin come all the way back.

Got it. That's really helpful. And just a quick follow-on to that, when thinking about 2021 and the base business for E-Systems, excluding new business backlog, how should we think about the incrementals into next year on that base business given the dynamic changes that have been experienced over the last 18 months? Thanks.

The businesses launching in the backlog generally is in line with the segment's overall averages. We see that expanding over time as the share of electrification or power electronics and connectivity products start to take up a bigger proportion of the backlog. If you look out towards the second half of next year into 2022, you'll start to see, I think, some margin accretion through the backlog as a result of that. But on our core wire business, it's sort of rolling on consistent with our historical margins that we've seen over the last 12 months.

Thanks. Operator?

We lost our operator.

Okay. Well, I think something happened to our operator, but I apologize for getting cutoff. At this time, I'd just like to say thank you for the whole Lear team. I mean, it was an incredible quarter working remotely. I know the hours that everyone put in; it was truly remarkable. I know we built an incredible team, and it shows in the execution and what we delivered. We have the right priorities, there's no question about it. I absolutely am passionate about the things that we're doing, the way we're handling this, and the passion and the attitude within the organization. I just want to say thank you to the whole team for everything you've done.

And this concludes today's conference call. Thank you for participating. You may now disconnect.