Good morning, and welcome to the Lear Corporation Third Quarter 2020 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Alicia Davis, Senior Vice President of Corporate Development and Investor Relations. Please go ahead.

Thanks, Andrea. Good morning, everyone and thanks for joining us for Lear’s third quarter 2020 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, including Frank Orsini, President of our Seating division and Carl Esposito, President of our E-Systems division, also have 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 would 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. First, Ray will review highlights from the quarter and provide a business update. Jason will then review our third quarter financial results and provide a full-year 2020 outlook. Finally, Ray will offer some concluding remarks. Following the formal presentation, we would be happy to take your questions. Now I would like to invite Ray to begin.

Thanks, Alicia and good morning everyone. Please turn to Slide 5. I’m going to provide some business highlights. We posted strong financial results in the third quarter, with both of our business segments recording margins in the high 7% range. Our sales grew faster than industry production, with especially strong growth over market in E-Systems of 12 percentage points. In March, in an abundance of caution, we drew $1 billion on our revolving credit facility. In the third quarter, based on our strong cash flow generation and our confidence in the business, we repaid all amounts outstanding on our revolver. We were also recognized by J.D. Power for the quality of our seats. We won 2 first-place awards this year and received more top 3 rankings than any other seat supplier. Earlier this month, we were proud to announce our pledge to continue our efforts to help create a cleaner environment. By 2030, we are targeting to use 100% renewable energy and cut carbon emissions in our manufacturing plants by 50%. By 2050, we aspire to be carbon-neutral with net-zero emissions. Looking at our performance this quarter, I couldn’t be more proud of the team and their accomplishments during these very challenging times. Please turn to Slide 6. I am going to provide a brief update of our industry-leading seating business. In Seating, which is our largest business with 75% of our total sales, we have a demonstrated record of delivering strong margins and significant free cash flow. The investments we have made to increase vertical integration and develop new technologies have driven profitable growth and increased market share. As the chart shows, our financial performance in Seating has been very consistent, even with lower volumes in recent years and during program changeover cycles. Looking forward, we are well-positioned to benefit from the secular trends of being a market leader in luxury seating and with a strong position in the European EV market on higher content CUVs and SUVs globally. We have the most complete capabilities of any seat supplier and a long history of operational excellence. Our customers continue to choose Lear as evidenced by our $700 million in net Conquest awards this year. We are continuing to invest in new technologies to expand our competitive advantages within the segment. Two examples of our advanced product technologies that continue to gain traction with customers are INTU Seating and ConfigurE+. INTU is an intelligent seating system that provides advanced solutions for wellness, comfort, sound, and safety. Interest is continuing to grow from our customers, and we have been awarded an advanced technology production contract. Engineering development programs are underway with multiple global OEMs. ConfigurE+, our tetherless electrified rail system, will launch in 2021 and 2023 with 2 global automakers. Our Seating team has done a remarkable job separating Lear from the competition and extending our clear leadership position in this segment. Slide 7 shows our E-Systems portfolio simplified into 3 focused product areas: electrical distribution and connection systems, electronic systems, and software and connected services. Today, about 75% of our business is in electrical distribution and connection systems, with the balance in electronic systems. We expect a relative mix of our business in electronic systems to increase over the next several years as the industry shifts to electric vehicles and connected cars. I will talk more about this in a few minutes. We have a long history in electrical distribution and connection systems, with capabilities to produce products both in low-voltage and high-voltage applications. We also have many years of experience producing and innovating in electric systems. We were the first to bring printed circuit board junction box technology to market in 1989. In 2012, we received a PACE Award for our development of the first solid-state junction box. Today, we are the only Tier 1 supplier with a full range of capabilities and expertise to be a full architecture solution provider for both electrical distribution systems and power electronics. Building upon our rich heritage in body electronics, we are concentrating our efforts in electronic systems on power distribution, battery management, and onboard charging systems for electric vehicles as well as a high-performance computing gateway and 5G communication modules. In addition to embedded software that enables our electronic systems hardware, we have enhanced our positions in software-only offerings through the acquisitions of Xevo and Exo. Software within the vehicle is rapidly growing as a key element of technology innovation as well as a cost-effective way to provide new features and functions. Our global team of software engineers is working to expand capabilities in vehicle networking, control algorithms, cybersecurity, and connectivity platforms and protocols. Slide 8 depicts the key components required for high-voltage electrical architecture. As described on our last earnings call, we have narrowed our E-Systems electrification portfolio based on a detailed analysis of the market. We have targeted specific areas where we have the right to win, which have strong growth potential in order to leverage our capital and engineering investments. For Lear, this includes high-voltage wiring and connection systems, power distribution boxes, onboard chargers, DC/DC converters, and battery management systems. Similar to the approach we have followed in our body electronics business, we are concentrating on providing our customers with tailor-made solutions for difficult problems. Our strategy is to focus on niche areas where we have deep expertise, such as network architecture, power distribution, and power management. We also are investing in areas to move up the value chain from component specialists to broader systems and domain experts. Over time, we expect vehicle electrical architecture to evolve as more content is integrated into multipurpose boxes and as software replaces some of the functionality in today’s architectures. As these trends develop, we will continue to be laser-focused on customizing product solutions to help our customers achieve faster charging times and longer vehicle ranges. Turning to Slide 9, I want to highlight the significant growth rates expected in the electric vehicle market. Today, full hybrids and electric vehicles account for 9% of all vehicles produced globally. Over the next 5 years, the market for these vehicles is expected to more than triple. While many auto suppliers have legacy products that will shrink with the decline of the internal combustion engine, Lear’s product portfolio in both Seating and E-Systems is powertrain agnostic. The story gets even better for Lear as the shift to electric vehicles provides a unique content growth opportunity. We see an opportunity for our E-Systems content to increase over 3x. Our low-voltage wiring and connection system content will remain largely intact with the shift to electric vehicles. The engine harness will no longer be needed, but electric vehicles still require low-voltage wiring and connection systems for many other applications. Lear stands to benefit from growth in the EV market, regardless of the propulsion system involved. Slide 10 shows what these positive trends could mean for Lear. This year, our electrification-related sales are forecasted to be about $250 million. By 2025, we expect our sales to grow to approximately $1 billion. Sales growth in our electrification business through 2025 is expected to add 300 basis points to our growth rate in our overall E-Systems business. We’ve already booked approximately 70% of the $1 billion in sales expected in 2025. Based on our quote pipeline and our average win rate, we are confident we will meet this target. We are experiencing increasing levels of quoting activity for electric vehicles. We are also seeing opportunities to expand our customer base, both with traditional customers and some of the newer EV companies. Electrification is a platform that we expect will continue to improve our customer diversification. As architectures are being redefined, this opens the door for Lear to both broaden its customer base and accelerate growth in E-Systems. In a short period, we have been very successful growing our electrification business, which is driving significant E-Systems growth over market. Looking at our 2025 estimated sales mix in electrification, we expect that about 60% of our business will be in electronics, with the remaining 40% in high-voltage wiring and connection systems. This is largely consistent with our product mix to date. We are at the beginning of the curve on EV adoption. We believe this drives a significant opportunity for Lear as the automakers need supplier partners that have the expertise to help them participate in the growing EV market. Lear has a long history of close collaboration with its customers as a full-service supplier with significant resources. We have design, engineering, manufacturing capabilities, as well as the ability to source and supply parts across the globe. As the EV market continues to mature, both established OEMs and new EV companies will need partners like Lear to be successful. Now I would like to invite Jason to review our third quarter financial results.

Thanks, Ray. Slide 12 shows vehicle production, key exchange rates for the third quarter. During the quarter, global vehicle production was down approximately 900,000 units or 4% compared to 2019. The majority of the production declines occurred in Europe, where production was down 8%, and in Asia outside of China. In North America, year-over-year production was up 1% as OEMs continued to rebuild inventories depleted during the COVID-related shutdowns. China production was up 9%, the second consecutive quarter of strong growth following COVID-related production shutdowns in the first quarter. From a currency standpoint, the U.S. dollar weakened against our major currencies. Slide 13 highlights our financial results for the third quarter. As Ray noted earlier, our businesses performed very well in the quarter. Our sales increased 2% to $4.9 billion. The increase in sales versus last year was driven by the strong backlog in both segments, which more than offset the impact of lower global production volumes. Core operating earnings were $327 million, down $11 million. The slight reduction in earnings was primarily due to the impact of lower industry volumes, which was largely offset by the margin-accretive backlog and positive operating performance. Adjusted operating margins were 6.7% for the quarter. Adjusted earnings per share were $3.73, up 5% from a year ago, primarily reflecting a lower effective tax rate. Third quarter free cash flow was $474 million compared to $193 million in 2019. The improvement in free cash flow primarily reflects favorable working capital in the quarter. Slide 14 explains the third quarter year-over-year variance in sales and adjusted operating margins in the Seating segment. Sales in the quarter were $3.7 billion, down 1% from the third quarter of 2019. Seating margins were 7.8% compared to 8.2% last year, reflecting lower volumes, partially offset by positive net performance. The positive performance was driven by a combination of lower SG&A and manufacturing costs including improvements resulting from our investments in restructuring as well as strong execution by our operating and commercial teams in a very challenging industry environment. This more than offset both selling price reductions and ongoing incremental costs associated with COVID-19. Slide 15 explains the third quarter year-over-year variance in sales and adjusted operating margins in our E-Systems segment. Sales in the third quarter were $1.2 billion, up 9% from the third quarter of 2019, reflecting our strong backlog partially offset by lower volumes. Growth over market was particularly strong in E-Systems at 12 percentage points, reflecting added content on the F-Series Super Duty and the ramp-up of the Land Rover Defender as well as new electrification and connectivity business coming online with Volvo Geely and Audi. E-Systems margins for the quarter were 7.7%. The increase in margins reflects a backlog that came in above segment margins and the impact of positive operating performance. This was offset partially by the negative impact of lower industry volumes. Despite the challenging operating environment, we continue to make progress on our overall E-Systems margin improvement plan. We have improved margins on underperforming programs and our backlog growth has been accretive to margins. While we are continuing to make significant incremental engineering investments to support our strong pipeline of new business, we have narrowed our product focus, which will lessen the impact on near-term margins. The improvements we have made thus far have been largely offset by the significant decline in industry volumes and ongoing costs associated with operating our plants during the COVID-19 pandemic. As industry volumes recover, we’re confident that the changes we are making to this business will result in improved margins. Please turn to Slide 16, where I will provide an update on our financial position. During the third quarter, we repaid $1 billion that we had drawn on the revolving credit facility in March and in an abundance of caution following the emergence of COVID-19. With the strong free cash flow generation in the third quarter, we ended the quarter with $3 billion in total liquidity, including our untapped $1.75 billion revolver and cash on hand of $1.25 billion. As shown on the upper right quadrant of the slide, we have a low-cost flexible debt structure and no significant near-term debt maturities. With improved free cash flow performance in the third quarter, we took the opportunity to unwind some of the austerity measures that we put in place earlier this year. During the quarter, we repaid salary that had been deferred by our non-management employees. If industry conditions remain stable, we plan to do the same for the rest of our employees later this year. With respect to capital allocation, our first priority remains investing in our core businesses through capital expenditures. We will also consider bolt-on acquisitions, but believe our businesses are well-positioned. We remain fully committed to maintaining investment-grade credit metrics. We also remain fully committed to returning excess cash to shareholders. Turning now to Slide 17. On March 26, we withdrew our 2020 outlook due to the significant level of business uncertainty caused by the COVID-19 pandemic. Over the last few months, industry conditions have stabilized somewhat, so we’ve decided to provide full-year 2020 guidance. However, uncertainties surrounding COVID-19 still exist and our outlook could be significantly impacted by industry disruptions beyond our control. Slide 17 shows the key assumptions for global vehicle production volumes and key currencies that form the basis of our 2020 full-year outlook. We base our production outlook on several sources, including internal estimates, customer production schedules, and IHS forecasts. Our full-year production outlook, which is shown on the slide, implies fourth-quarter global production that would be 8% lower than the fourth quarter of 2019. From a currency perspective, our 2020 outlook assumes an average euro exchange rate of $1.13 per euro and an average Chinese RMB exchange rate of RMB 7 to the dollar. For the fourth quarter, our outlook assumes an average euro exchange rate of $1.15 per euro. Slide 18 provides our financial outlook for 2020. Due to continued uncertainties about how the COVID-19 pandemic could impact our business, we have protected for some modest disruptions to our operations within our guidance ranges. To the extent that there are no disruptions, our financial results should be closer to the high end of the range. At the same time, it’s important to note that our guidance ranges do not assume any broad COVID-19 related production shutdowns in the fourth quarter. Our sales guidance was $16.35 billion to $16.5 billion. Core operating earnings are forecasted to be in the range of $520 million to $580 million. At the midpoint of the guidance, this implies margins in both business segments of approximately 7%, reflecting a 4% sequential decline in revenue from the third quarter of this year. Full-year free cash flow is forecasted to be in the range of $125 million to $175 million, implying free cash flow in the fourth quarter of approximately $150 million to $200 million. Now I will turn it back to Ray for some closing thoughts.

Thanks, Jason. And now turning to Slide 20, the steps that we took to prepare our plants to safely ramp up production following the COVID-19-related shutdowns and to position the company for success resulted in significantly improved third-quarter financial results. Although we still faced uncertainty related to COVID-19, I am confident that we have the right team in place to navigate through these very challenging times. We have a strong balance sheet, a long history of operational excellence, a strong strategic position in both of our business segments, both businesses are poised for continued profitable growth, and as I discussed, our E-Systems business is particularly well-positioned to benefit from the trends in electrification. We will continue to make targeted strategic investments that position Lear for continued market leadership and drive long-term value for our shareholders. Now, we would be happy to take your questions.

And our first question comes from Joseph Spak of RBC. Please go ahead.

Thanks. Good morning, everyone. Just first question, in the implied fourth-quarter guidance, it looks like you’ve taken a more conservative approach to some of the industry outlooks, maybe in Europe and China. Just wondering if you could comment on that and what you’re seeing that leads you to forecast that way?

Yes. Let me take a broader look, and then Jason can add a bit of the details. What we’re looking at is, one, I’d break it up into two different areas. One, you have demand, which is very strong. I think every customer is doing a nice job of replenishing their inventories, and so the demand is very strong. From my perspective, I know from our plans, we are running extremely well. We have done a nice job of getting back up and running. However, on the supply side, I see that the supply side holistically is very fragile. There are a lot of things that are at risk right now. I think we’ve seen some of the government restrictions, even some of the shutdowns by country. Chihuahua now is in a red status and still in discussions regarding what that might mean in the short term. Right now, it means 60% capacity; however, that could drop further. The whole supply chain is interconnected. Even though we’re confident in how our plants are running, we’ve done a remarkable job. I’ve been in the facilities, I’ve seen how they’re operating. Absenteeism still seems to be an issue throughout the supply base. There are just some uncertainties we are still hesitant about, even for the fourth quarter. However, as I said, I break it up into two issues; demand is very strong and the supply chain is very fragile. There are some things happening recently that are going to put more pressure on that supply chain. Jason, if you want to add a little bit?

Yes. I think, first of all, we withdrew guidance earlier in the year when the COVID-19 pandemic started. We thought it was important when we reinstated guidance to be a bit conservative or cautious, just given all the uncertainty that Ray outlined. We are confident in the demand side. It’s really a question of whether the supply base and the OEMs can hold it together through the end of the year. Perhaps there won’t be meaningful disruptions, and we’ll be fortunate and come out closer to the high end of the range. That would certainly benefit us. Regardless of where we end up in the range, I think both Seating and our E-Systems businesses are going to perform well. Even at the midpoint, which has the global industry down 8%, both businesses are around 7% operating margins, and at the high end, they’ll be in the mid-7s and closer to what we saw in the third quarter. So I think it’s cautious, but we are hopeful that we will favor the high end of that range.

Thanks, sir. Thanks for that color. The second question is on the information about E-Systems and your electrification exposure, so $250 million going to $1 billion in 5 years. Maybe you could just talk a little bit more about how the investment looks like to be able to achieve that? Like how much has been done already? Is it about scaling some of that investment or does more of that investment need to come online as the sales grow, and I guess, from both an R&D and a CapEx perspective?

Yes. Really, we have been investing in this portfolio of products over the last several years, and we have ramped up that investment from last year to this year. Even within this year, we’ve gradually stepped up our engineering investment. Looking at the fourth quarter, we have another increase in investment in engineering. Looking out to next year, while we are still finalizing our plans, we see a sequential increase in engineering. I wouldn’t say it’s as meaningful as what we’ve seen historically; it’s probably 40 to 50 basis points of margin headwind in E-Systems sequentially from the third to the fourth quarter and a similar sequential impact from the fourth quarter to next year. As that business scales up, that impact on engineering will diminish, and I think as we grow into that $1 billion of revenue, it should stabilize a couple of years out.

Okay. But it looks like – I mean, if I am reading your walks right, that the backlog is finally coming on at higher margins in the base business. So that should help offset some of that investment?

Yes. I think longer term, we are optimistic about the margin profile of that business. Our backlog has been accretive to segment margins both in the third quarter, and we see that again in the fourth quarter and looking out to next year. So we are optimistic on that front as well.

Our next question comes from Rod Lache of Wolfe Research. Please go ahead.

Good morning, everybody.

Hey, Rod.

I wanted to start with just a question on Seating. It looks like it had growth over market of around 2 points in the quarter. I would have expected that mix looks pretty good, and I was wondering if you could just give us some color on how that looks? I presume that the mix will be even better as you look out to Q4 with the comp against the GM strike. But any thoughts on what’s going on for growth there?

Yes. A couple of things. First of all, the fourth-quarter growth over market in Seating does look really strong on the back of North America, particularly the non-recurrence of the GM strike. We would expect almost 5% growth over market in the fourth quarter in Seating. It was a little light 1%, 2% in the third quarter, and that was really a function of Europe more than anything. A couple of our larger customers in Europe were a little slower to restart and ramp up production. JLR was a little bit light in the quarter. It’s a really important customer, a big business for us in Seating in Europe. That and Nissan both kind of weighed on that growth of a market figure proceeding in the third quarter; those were the two biggest factors.

Great. Thank you for that. And I had two questions on E-Systems. So number one, does getting to this mid-7% – 7.7% margin in E-Systems now kind of get you back on track to your original target of 10% by 2022? Can you talk a little bit about the bridge there? You still have some cost savings, I believe, and obviously a lot of backlog coming in here at decent incrementals? And then if you do get to that $1 billion of high voltage by 2025, can you just put some context around what the addressable market would be or what your market share would be roughly in that timeframe, more broadly?

Yes, Rod. Look, I’m going to take a step back on this one. It’s a good question because I do believe we have tremendous momentum. If you recall, we talked about some steps we are taking to get back on track, and it wasn’t that long ago that we talked about, obviously, putting a team in place, and we’ve done that. The team is doing a remarkable job; we’re seeing that with not just momentum in margin, but growth and the opportunities presented in front of us as far as future growth. We also talked about customer diversification, and it was an important part of the business. We were doing a good job of diversifying our customer base, but it also required investment, and we’re going to stay steadfast in investing in those customers because it’s key to our growth and also derisking how we look at our business. In a short period of time, this is amazing: In 2016, the top 3 customers represented about 60% of our overall business; by 2024, it’s already down to 45% and the overall business is growing. So they’re doing an incredible job of diversifying our customer base. We also talked about getting very focused on our business. We’ve spent the last 18 months really narrowing our focus in an area where we believe we have the right to win, and that’s really paying off. We have really focused capital and engineering needs on the products that we believe will be successful, not just from a profitability standpoint, but from a growth standpoint, and that’s in place now today. In addition to, we talked about the vertical integration, and that is happening quicker than I could imagine. On the last call, I mentioned $50 million of vertical integration of connectors that will launch within the next year. About 70% of that will launch over the next year. So that’s going really well along with new business wins in connectors. We have incredible momentum. I just wanted to take a step back; we’re seeing that right now in the performance. The team did a great job, 12% over market. From a growth perspective, margins are not only stabilizing, they’re improving. The new business that’s rolling on is accretive to our margins. We’re very confident and comfortable with where we are at. I think in respect of some of the things going forward, Jason, if you can give some insight, that would be helpful.

Yes. When we originally talked about that 7.5% to 10% margin progression over 3 years, that was last year. So as you mentioned, Rod, that would have been in 2022, we would have achieved that. I think the biggest question mark is industry volume. In terms of the building blocks that we are working on; improving margins on underperforming customers, vertical integration that Ray just described, and the change in mix of the business, all of those things are on track and perhaps in some cases, a little bit ahead of schedule. The real question as to when we get to 10%? I think it’s more a question of when industry volumes more fully recover. Is that late ‘22 or early ‘23? I’m not quite sure. However, as far as the things that we can control within that progression, we’re on track. In terms of the overall size of the EV market and what we’re going after and what that $1 billion represents, we’re not necessarily trying to grow with every customer on every subset of that opportunity. We’ve talked about high-voltage wire and connection systems being about 40% of that business and power electronics representing 60% of that business; it’s probably going to be a $30 billion, $40 billion global market, but we’re not going to try to sell to all OEMs and all product lines. I think that our share of high-voltage wire and connection systems will approach the same share that we have in the low-voltage side, which has been 6%. It will take some time to grow into that, but I think that’s a reasonable target for that part of the business.

Thanks for that. Just to clarify, I think you had like $115 million of remaining cost savings, but if we think about E-Systems specifically, the additional engineering spend versus cost reduction, is that kind of a wash and the big upside comes from some of those initiatives that you talked about, including new business launches, vertical integration, and overall market growth?

Yes. I think over time, those COVID-related costs will diminish, and that will be less of an impact, and you’ll see the full benefit of all those actions reflected in the margin. If you look at just next year, we’re planning, at this point, that some of that COVID-related costs will continue to weigh on margins a bit next year, although it will diminish significantly from what we’ve seen this year. If you take Seating and E-Systems together, our anticipated restructuring savings would more than cover the impact of the ongoing COVID costs that coupled with our customer recovery of those costs.

Okay, alright. Thank you.

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

Good morning, everybody. A first question, Ray, if you look at Slide 10, I mean you have software and connected services not on this slide. I am just curious, is this really just funneling in and focusing on the electrification opportunity or is something sort of changing in strategy where software connected services is being meaningfully de-emphasized over time relative to what you’ve been talking about?

Well, I think we’re focused on connectivity and electrification. I think the significant shift we’ve seen, I kind of think of it very similar to what happened with the CUV-SUV market; it is coming very fast. I think I talked about a slowdown during COVID of quoting activity as customers were repositioning and working remotely, but since the emergence of the customer’s reengagement, the pickup and quoting activity that we’ve seen in electrification is significant. We’re trying to highlight here, not de-emphasizing electronics and connectivity, but emphasizing the importance of where we play with electrification. We’re not focused across the board as a mega tier trying to sell a black box. We’re very concentrated on a boutique-type way to help our customers solve problems and what we’ve seen really since COVID emerged is customers coming to us in unique ways and asking for solutions to some of their issues relative to electrification. We think it’s important to show what’s going on with electrification, and that’s only going to continue to increase, and we want to be specific in areas where we’re participating. Those areas are very important because they create value for our customers and in turn, for Lear.

Okay. But it’s not meant to deemphasize software and connected services, right, this slide? I just want to make sure going forward.

No, not at all.

Perfect. Perfect. When I look at Slide 14, 15, Jason, I wonder if you could sort of unpack the bar there of volume mix and other. I’m really trying to understand mix and price in there, what those meant in the quarter? Because I think following up to Rod’s question, mix seems like it was very strong in the third quarter, but particularly for you, it should be even stronger in the fourth quarter. I think there is some significant questions about your fourth quarter implied guide being relatively very conservative, particularly when we consider this mix. So if you could just unpack price and mix in that column for Seating and Electronics on Slide 14, 15?

Yes. There hasn’t been a meaningful impact on pricing in either segment. As I mentioned, we more than offset that with our cost reduction program, and we covered the cost associated with operating in this COVID environment. So that price equation is working for us in the third quarter, and we see that continuing into the fourth. Regarding mix and how that may impact the business, I think you’re right. The setup is great for the fourth quarter. Particularly in Seating, we had a significant impact associated with the GM strike last year. Our North American sales will be up in Seating year-over-year, and our more vertically integrated GM full-size truck seating sales will be up. The underlying guidance for margin in Seating is more than 100 basis points better than last year, reflecting that favorable mix; nothing really remarkable in terms of the mix on the E-Systems side. Our guidance does assume that sales will actually be up in the fourth quarter, even at the midpoint in E-Systems; we’re expecting growth over market could be as much as 14 points in E-Systems in the fourth quarter, really on the back of a strong backlog.

Okay. And then maybe to follow-up on that, Jason, if you think about some of the cost – austerity costs that are being reversed, which is only fair to the people that bore the burden there. Is that significant headwind sequentially from the third quarter to the fourth quarter? How should we think about that third quarter, fourth quarter, and maybe going into 2021?

Yes. I think if you look at the impact of COVID and the offset plan, the net effect of that in the fourth quarter will be slightly better than the third quarter. The cost of operating in that environment will come down faster than the cost reduction programs reversing themselves. So, there’s a modest benefit sequentially. Looking out to next year, it’s a bit more complicated, lots of moving parts, but there’s a significant portion of the cost reduction program that we deployed earlier in the year that will reverse itself next year, and so there may be a slight overhang of net costs related to COVID as we think about 2021. Again, we’re right in the middle of our planning process, so we’ll have more to share on that in January when we issue guidance.

Okay. And then just lastly, if you could remind us, you said the high-voltage content per vehicle could be 3x what the low voltage is. Could you kind of sort of remind us what the dollar numbers are there roughly or potential?

Yes. We see it in a full electric vehicle that there’s about $2,000 of added content opportunity for us, about a quarter of that, or $500, would be high-voltage wire and connection systems. The other three-quarters, or $1,500, would be on the power electronics side.

Okay. And the basis for that on the low-voltage side on a relative basis would be about $700, is that what you’re saying?

Yes. We’ve talked about $700 historically. That’s really kind of our Europe and North America CPV for low-voltage wire and connection systems. I think globally, it’s probably more like $650 on our car lines and that will probably be $50 or so lower in a full electric vehicle.

Okay, great. Thank you very much, guys.

Yes, definitely.

Our next question comes from Brian Johnson of Barclays. Please go ahead.

Hi, team. This is Jason Stuhldreher on for Brian.

Hi.

I wanted to round out the discussion a little bit around the EV disclosures and the slide you put out, but maybe just a follow-up, helpful commentary on the content per vehicle. As we look out to mid-decade, when we look at the pie chart of electronics versus connection systems and wiring, when we look at that entire sales mix, I was wondering if you could help us with, within that $1 billion, how much do you expect to be specifically software-related? I think on the electronics side, at least right now, most of your products have some element of embedded software. As we scale power electronics, battery management systems, etcetera, does the software content increase? How much of that, the product in mid-decade, what percent of that is going to be software? To remind us, I don’t think there’s any software side, software content on the wiring side. But if you could just clarify that, that would be helpful.

Yes. Look, I want to take a little step back here because it is an exciting time in both segments, and having two segments like we have that are interconnected, but also perfectly aligned for the changes we're seeing with technology and innovation are key to our success going forward. I’d like to give you a more fulsome discussion around what we’re seeing not only within our products, but the changes in the future applications of Seating and E-Systems. So Frank, if you could give a little bit of insight to what you’re seeing in Seating. And then Carl, if you could talk a little bit about software, how embedded software is changing and how we’re really defining software? Some of the changes you’ve seen from the customers in respect to how they are coming to us looking for different solutions because it is changing dramatically.

Thank you, Ray, and good morning everyone. This is Frank Orsini speaking. So from a seating perspective, in particular to technology, we’re focused on differentiating our product lines through innovation. Ray mentioned in his presentation, we have a couple of very good examples of that. INTU Seating, where we’re embedding intelligent technology into our seat systems through 4 key pillars: wellness, safety, comfort, and sound is an excellent product for us. Then ConfigurE+, having the electrified rail system in Seating. Both these technologies are great examples of how innovation is giving us early access to our customer development programs. As a matter of fact, Ray and I recently were in the design studios with one of our largest customers, literally in the clays working through how these technologies can be implemented for production applications. But to dial in a little bit on both, INTU Seating provides tremendous content and value to the end consumer in the vehicle. Our wellness pillar, where we use biometric sensing technology to detect heart and respiratory rates, is directly correlated to driver stress and drowsiness detection, which is an advanced safety technology for our customers. It’s very sophisticated technology, a combination of hardware, software, and algorithms, but the INTU seating product is really going to be great in the future. ConfigurE+ is an electrified rail system, which is a patented cassette technology that allows us to attach the seats to the rails. It’s first to the market and has been completely developed in-house with our E-Systems team. I think the highlight is that it’s a tetherless system. With this, the seats are not hardwired to the vehicle; they’re connected through our cassette system, creating a platform for reconfigurability and flexibility. If you can power the rails, you can power the seats. Some of the content could include heat and cooling systems, airbags, which provides a content opportunity to Lear and margin performance opportunity as well. We booked about $100 million in sales through 2023 with two global customers on ConfigurE+. We’re really excited about what it means for us in the future. Innovation is driving growth in the Seating segment, expanding our competitive moat, and building our customer relationships, leading to growth opportunities in both our standard business and Conquest awards. With that, I’ll hand it over to Carl Esposito.

Thanks, Frank. Software is a really important part of our overall E-Systems strategy, and this will play out over the next 5 to 7 years. Our E-Systems hardware products are increasingly dependent on embedded software to perform their functions, and this quantity and level of that software in our hardware continues to increase as the computing power and capabilities increase within our products. For example, products such as our battery management system may have over a million lines of software, and that quantity increases for each new generation of products that we create for our customers. The automotive industry is transitioning from hardware-based functionality to software-based functionality. We’re seeing multiple software-only RFPs from our customers, depending on their vehicle architecture for either us supplying software to the customer independently or integrating other people’s software into our high-computing hardware. We’re seeing those opportunities from a software perspective. We’re positioning ourselves for this transition by making our software more affordable, modular, and extensible to meet our customers’ choices for embedded or independent software functionality. We’re really excited about the focused areas we’ve invested in and the growth opportunities ahead of us.

Thanks, Carl. Thanks, Frank. You can see how excited we are with the dynamics and changes in the auto space. Having two interconnected business segments that are perfectly aligned with the changes we are seeing in technology and innovation is key to our success moving forward.

Okay, great color. Appreciate it. Thank you.

Our next question comes from David Kelley of Jefferies. Please go ahead.

Hey, good morning everyone. Maybe just to start a question for Jason, could you update us on your capital allocation thoughts, maybe what you would be looking for to reinstate the dividend or kind of bring back the share repurchase program here?

Sure, yes. Our overall priorities on capital allocation remain the same. We’re going to invest in the business through CapEx to support growth in both segments to protect our competitive positions. We’re going to look at tuck-in M&A to further strengthen both segments. We’re going to maintain our investment-grade balance sheet metrics. Lastly, we’re committed to returning cash to shareholders. We talked about this on the prior earnings call, and it was a big deal for us to suspend the dividend. Our shareholders participated in the austerity plan that we put in place, and we have been unwinding that plan throughout the third quarter and into the fourth as industry conditions improved. What we look for is some signs of stability, consistency, and the ability to generate free cash flow consistently quarter-to-quarter. We’re nearly complete with 2021 planning, but we see a wide range of outcomes for next year. Even in the worst-case scenario or lower end of the range, we see the ability to generate consistent free cash flow quarter-to-quarter next year. The backdrop for reinstating the dividend is certainly in place. Ultimately, it’s a decision that our Board will make and we will be discussing that with them throughout the year.

Okay, got it. That’s helpful. Appreciate it. And then maybe just a follow-up, the last couple of quarters you have highlighted the connector content ramp and the wins that you’ve gotten in the space. Just curious; a couple of things here: do you find your selling connectors as part of a broader E-Systems solution set or are connectors being sold more on a component basis? Also, I was curious to hear if you’re winning more in high voltage versus low voltage and in the connector space?

We’re seeing both. We’re seeing vertical integration, where we can integrate components internally as part of our low-voltage and high-voltage wiring harnesses, as well as external distribution and sales to third parties. So we’re seeing both, and we’re increasing focus on those sales channels, both internally and externally.

Okay, got it.

If I can add to Carl's comments, we’re seeing significant customer engagement; the customers have opened up significantly. The catalogs that were closed are opening. This shift in flexibility was surprising. Identifying $50 million of vertically integrating our components was faster than I expected because of the willingness from our customers. They are looking for value propositions, which is precisely what we deliver. Our new applications create value for our customers and position us optimally for future growth.

Great. Thanks again. Appreciate it.

Our next question comes from Emmanuel Rosner of Deutsche Bank. Please go ahead.

Yes, good morning everybody. Thank you so much for all the color around what you will be focusing on within E-Systems and what is the portfolio. I wanted to dig a little bit deeper on this. Just curious about your rationale or philosophy for the choices made around what to emphasize or deemphasize? I’m also interested in the electronic components and trends for automakers in terms of in-sourcing versus outsourcing? I am certainly interested in integrated power modules and battery management systems, and to what extent that may or may not have influenced your decision of what you are focusing on?

We spend a significant amount of time studying the markets, not only studying the markets but our capabilities and competencies within our components. We looked at the investment required with the type of returns we would expect. After 18 months of granular work, we believe we have the right to win and will be most successful. Understanding how our customers need to create future value is aligned with our investments. This facilitates our focus on the opportunities for future growth in electrification and high-voltage applications.

We spent significant time looking at the portfolio and driving the strategy. The technology trends have been moving in the direction as expected; more software, more electronics, more high power that fits our investment thesis and differentiation. We’re focused on those areas we can be successful. If I think about the portfolio in a granular perspective, electrical distribution systems are growing, accelerating our core wiring business, increasing vertical integration to drive margin expansion. We’re adapting our portfolio to higher-speed signals and higher power densities, differentiating ourselves with high-voltage connectors that attract customers looking for that technology. We are also focused on areas where electrification will have advanced technologies and where we can differentiate with higher power densities. The abilities to integrate our products improve the charging time and vehicle range allowing unique integrations that differentiate us.

Thank you, team. As we conclude, I would suggest we take a moment to reflect on our accomplishments and look forward to the growth and opportunities before us. Our approach, investments, and collaborative relationships position us to navigate the challenges effectively and seize future growth.

The conference has now concluded. Thank you for attending today’s presentation, and you may now disconnect.