Good morning, everyone and welcome to the Lear Corporation First Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please also note, today’s event is being recorded. At this time, I’d like to turn the conference call over to Ed Lowenfeld, Vice President of Investor Relations. Sir, please go ahead.

Thanks, Jamie. Good morning, everyone, and thanks for joining us for Lear's first quarter 2021 earnings call. Presenting today are Ray Scott, Lear President and CEO; and Jason Cardew, Senior Vice President and CFO. Other members of Lear senior management team have also joined us on the call. Following prepared remarks, we will open the call for Q&A. You can find a copy of the presentation that accompanies these remarks at ir.lear.com. Before Ray begins, I'd like to take this opportunity to remind you that as we conduct this call, we will be making forward-looking statements to assist you in understanding Lear's expectations for the future. As detailed in our safe harbor statement on Slide 2, our actual results could differ materially from these forward-looking statements due to many factors discussed in our latest 10-Q and other periodic reports. I also want to remind you that during today's presentation, we will refer to non-GAAP financial metrics. You are directed to the slides in the appendix of our presentation for the reconciliation of non-GAAP items to the most directly comparable GAAP measures. The agenda for today's call is on Slide 3. First, Ray will review highlights from the quarter and provide a business update. Jason will then review our first quarter financial results and our full year 2021 outlook. Finally, Ray will offer some concluding remarks. Following the formal presentation, we would be happy to take your questions. Now I'd like to invite Ray to begin.

Thanks, Ed. Good morning, everyone. If you could please turn to Slide 5, I'm going to provide a brief overview of our first quarter financial results. The Lear team delivered strong results in the first quarter with sales of $5.4 billion in core operating earnings of $336 million, both up significantly versus last year. Lear sales grew faster than industry production by nine percentage points, reflecting above market growth in both of our business segments. Adjusted operating margin was 6.3% and EPS was $3.73. Slide 6 provides some business highlights from the quarter. I'm very proud of what the team accomplished this quarter. We successfully navigated supply chain shortages and related customer production shutdowns that made for a very difficult operating environment. At the same time, we remain focused on executing our strategic plan. Both business segments posted strong growth above market in the first quarter. In E-Systems, growth over market was 10 percentage points, our fourth consecutive quarter of double-digit growth over market. In Seating, growth over market was nine percentage points. In late March, we acquired M&N Plastics, a manufacturer of engineered plastic components for automotive electrical distribution applications. This acquisition is consistent with our strategy to increase vertical integration in E-Systems. We have also been selected as a PACE award finalist by Automotive News for all three innovative technologies that we submitted for consideration, including our battery disconnect unit and our 5G V2X telematics control unit in E-Systems and our INTU Thermal Comfort technology in Seating. Winning PACE awards for the past two years and being named finalists for three awards this year is a testament to our leadership position in automotive supplier innovation. Over the years, Lear has consistently supported the communities around the world where we do business. In the first quarter, we were one of a very select group of companies in Juarez, Mexico that was recognized for our continued support in the areas of education, health, and community management. However, I want to highlight that we are closely monitoring the near-term supply challenges and higher commodity costs facing the auto industry. Our purchasing, logistics, and engineering teams are laser-focused on managing through this period to support our customers and manage our costs. We expect these issues will be transitory and as such, we are continuing to invest to strengthen our business during these challenging times. Turning to Slide 7, I will share the strategy that we're following to drive sustainable revenue growth and profitability at Lear. We took advantage of the downtime last year to refine our strategy, which we built around four key pillars. In Seating, we want to extend and build on our leadership position by focusing on investments in technology and innovation, both organic and inorganic that expand our capabilities in priceable features. In E-Systems, we are focused on accelerating growth in connection systems and electrification to transform the business. Our core is our expertise in operational excellence, and we plan to extend our leadership position by continuing to invest in automation to make our factories more efficient. The fourth pillar is around sustainability, investing in products and processes that benefit the environment as well as investing in our people. Getting results the right way has been a big part of our leadership model for a long time. We firmly believe that doing the right thing for our planet and our people is not only the right thing to do, but will support long-term value creation. Slide 8 highlights key drivers of our strategy in Seating, which are focused on increased vertical integration, disruptive innovation, and operational excellence. Over the last 10 years, we have made targeted investments to increase our vertical integration capabilities. Today, we have the most complete capabilities and more product knowledge than any other seat supplier. Going forward, we want to build on these strengths by continuing to develop products and processes that can't be replicated and that further separate Lear from our competition. Disruptive innovation means creating or acquiring technologies that further differentiate our seats with proprietary features and functionalities. These new innovative products will help us capture market share and support margin growth. One example of disruptive innovation that is driving growth today is our ConfigurE+ product. We won a PACE award in 2019 and are launching this year on a new Volkswagen commercial van in Europe; excitement around ConfigurE+ is very strong. We have seen significant uptick in customer interest in this proprietary technology. We also continue to explore applications for this technology beyond traditional auto manufacturers, such as last-mile delivery service providers, logistics providers, and autonomous vehicles. Another example of disruptive innovation is our INTU Thermal Comfort technology, which as noted earlier, was recognized by Automotive News as a finalist for a PACE Pilot award this year. This is the first time that INTU intelligent comfort control software has been integrated into a complete seating system to anticipate and meet occupant heating and cooling needs. This technology also optimizes the efficiency of a vehicle's heating and cooling systems by reducing energy consumption. I will touch on our operational excellence in more detail later, but what it means for seating and for the seating business is creating another path to unlock incremental value through innovative manufacturing processes. Lear aspires to be the largest, most profitable, sustainable seating company in the world. I absolutely believe we have the right strategy in place. On Slide 9, I will describe how we are proactively positioning our E-Systems business for the future. This strategy is a natural extension of the operating plan we have been executing in E-Systems over the past several years. Similar to seating, vertical integration plays a major part in the E-Systems strategy, particularly as it relates to strengthening our electrical distribution business. We are focusing on organic and inorganic investments, such as the recently announced M&N Plastics acquisition, to expand our product offerings in engineered components, including connection systems. Our customers are opening up their connector catalogs, and we are seeing an acceleration in opportunities to increase vertical integration. Over the past year, we have been winning new business and our core pipeline has more than doubled to over $250 million, including both commercial awards and in-sourcing. The auto industry is going through a historic transformation with the shift to electric vehicles. Electrification is driving higher content per vehicle, and we are concentrating on particular product lines where we believe we have a competitive advantage and will be successful. Our battery disconnect unit launching on the new GMC Hummer is a great example of a product that we believe will lead to additional opportunities across General Motors’ future battery electric trucks and electric light commercial vans. We are also rapidly expanding our high voltage connection systems to address the accelerating industry shift towards electric vehicles. One of the building blocks of our strategy to improve these systems business that we discussed in 2019 was further diversifying our customer base. As a result of these efforts, we have made significant progress growing our business with Volvo, Geely, Volkswagen, and General Motors over the last several years. Slide 10 highlights the operational excellence strategy pillar, which impacts the entire Lear Enterprise. Today, Lear has a competitive advantage as one of the auto industry's recognized leaders in operational excellence. We intend to maintain our superior position by increasing the use of advanced automation across our operations. We have established a dedicated organization and are adding resources focused on accelerating the deployment of best practices throughout our company. Evolving and improving technology is providing new avenues to use artificial intelligence to make our factories more efficient and reduce our overall engineering costs. Along with data analytics, we are investing in innovation to keep improving our manufacturing processes and better optimize logistics in our supply chain. In addition to internal improvements, we are also identifying potential acquisitions to help accelerate our progress and ensure that the improvements we are making remain proprietary to Lear. By driving improvements in operational excellence across Lear, we will serve our customers better in terms of costs, quality, and delivery targets. At the same time, this will benefit margins by optimizing our cost structure to reduce defects. Moving to Slide 11, now we'll talk about our fourth pillar of our strategy, integrating ESG across all of Lear. Last year, we centralized oversight and management over the ESG function. ESG aligns with our core values at Lear, which includes creating a culture of innovation and inclusiveness, and getting results the right way. Our product portfolio is well aligned with socially responsible industry trends like electrification, vehicle safety, and connectivity. Last October, we announced 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. Our people are what makes Lear a special place to work. We have logged 3.7 million hours of employee training to help develop over the past two years and improve leadership, teamwork, culture, and engagement. We continue to embrace diversity, equity, and inclusion throughout our organization to promote teamwork, creativity, and innovation. Our 2020 sustainability report will be released soon, and it will describe many of these ESG initiatives in more detail, as well as provide additional metrics supporting the progress that we are making. Now I'd like to invite Jason to review the first quarter financial results.

Thanks, Ray. Slide 13 shows vehicle production and key exchange rates for the first quarter. During the first quarter, global vehicle production increased by 14% compared to 2020. On a Lear sales weighted basis, global production increased by 6%. The increase of 6% reflects Lear’s regional mix of business. The global increase in production was driven primarily by China, which was up 80% compared to last year. China's 2020 first-quarter production was severely impacted by the pandemic. In North America, production was down 4% compared to a year ago, reflecting semiconductor shortages, as well as other supply chain disruptions. Production on our top platforms was down only 1%. In Europe, industry production was flat with Lear’s top platforms up 4%. From a currency standpoint, the U.S. dollar weakened against our major currencies. Slide 14 highlights Lear’s growth over market in the first quarter. Sales grew above market in both business segments and across each of our major markets. Total company growth over market was 9 percentage points driven primarily by the impact of new business in E-Systems and favorable platform mix in Seating. Growth over market in E-Systems and Seating was 10 percentage points and 9 percentage points, respectively. Growth over market in North America of 9 percentage points reflected the strong volumes of GM's full-size pickup trucks and SUVs, as well as Ford and Mercedes SUVs. In Europe, above market growth of 8 percentage points was driven primarily by strong performance in the luxury segment and growth in electrification. Our growth over market in China, 10 percentage points, reflected strong relative demand for luxury vehicles that benefited both Seating and E-Systems, as well as increased electrification business. The strong first quarter performance highlights that both business segments are well positioned to continue to benefit from key secular trends. Slide 15 highlights our financial results for the first quarter. Our sales increased 20% year over year to $5.4 billion. Excluding the impact of foreign exchange, commodities, and acquisitions, sales increased by 15%, primarily reflecting increased production on key Lear platforms and the addition of new business. Our customers experienced significant production disruptions caused by the shortage of semiconductor parts and other components, which impacted Lear’s first quarter revenue by almost $400 million or 7%. The production disruptions had a more significant impact on E-Systems sales than in Seating. Core operating earnings were $336 million, up $131 million from last year. The increase in earnings resulted from favorable platform mix and the addition of new business. Positive operating performance in both business segments was offset by continued COVID-19 impacts, including premium costs related to component shortages, as well as higher commodity costs. Adjusted earnings per share were $3.73, up 82% from a year ago, and first-quarter free cash flow was $135 million compared to $113 million in 2020. Slide 16 explains the first quarter year-over-year variance in sales and adjusted operating margins in the Seating segment. Sales in the quarter were $4 billion, an increase of 19% from the first quarter of 2020. Excluding the impact of foreign exchange, acquisitions, and commodities, sales were up 15%, reflecting higher production and the benefit of new business. Core operating earnings were $307 million, up $106 million from the first quarter of 2020. Seating margins were 7.7% compared to 6% last year, reflecting higher volume on platforms. Higher commodity costs were offset by positive net operating performance. Slide 17 explains the first quarter year-over-year variance in sales and adjusted operating margins in our E-Systems segment. Sales in the first quarter were $1.4 billion, an increase of 24% from the first quarter of 2020. Excluding the impact of foreign exchange, acquisitions, and commodities, sales were up 17%, driven primarily by the strong backlog of new business, as well as higher volume. Our operating earnings increased from $53 million or 4.8% of sales in the first quarter of 2020 to $95 million or 7% of sales in 2021. The increase in earnings resulted primarily from higher volumes on Lear platforms and margin-accretive backlog. Favorable net operating performance was partially offset by increased engineering spending to support new business and higher commodity costs. Our financial results in the first quarter reflect the continuing progress we are making on E-Systems. Our operating performance was particularly strong in the quarter, especially when taking into account premium costs and inefficiencies related to the semiconductor shortages. Absent these transitory issues, our margins would have been in the high 7% range, despite higher commodity costs and additional engineering investment to support our strong backlog of new business. Now, please turn to Slide 18, where I will briefly talk about our balance sheet and liquidity. Our conservative capital structure allowed us to efficiently navigate the COVID crisis last year, and now puts us in a strong position to fund organic and inorganic investments to support the strategic plan that Ray described earlier in the presentation. At the end of the quarter, we had $3.1 billion in total liquidity, including $1.75 billion available under our revolving line of credit. We have investment-grade credit ratings from all three major rating agencies, and in March, S&P upgraded our rating outlook capacities. If needed, we also have the capacity to take on additional debt while maintaining investment-grade credit metrics. With respect to capital allocation, our first priority remains reinvesting the cash generated back into our core businesses. We are also targeting niche acquisitions to increase vertical integration capabilities in Seating and E-Systems and to extend our leadership position in operational excellence. We remain fully committed to returning excess cash to shareholders via dividends and share repurchases. On Slide 19, I will discuss the key drivers of 2021 financial outlook. There is overall businesses, very well diversified and the significant challenges across the auto industry, we have continued to post good financial results. Production disruptions have increased since earlier this year and are negatively impacting both business segments. However, the impact of lost production is expected to be more significant in our E-Systems segment, as it was in the first quarter. Commodity inflation will have a positive impact on revenues due to pass-through agreements on steel, copper, and other commodities. However, this will be diluted to margins because of the increasing sales with no corresponding earnings benefit. With respect to the semiconductor shortages, our purchasing and logistics teams are working very closely with both our traditional supplier partners, as well as non-traditional sources to meet the needs of our customers. We will continue with this approach going forward until the supply chain challenges are behind us. Consistent with the first quarter, we have plans in place to offset a majority of the headwinds we are facing through improved operating performance in both business segments. As a result of the factors outlined, we expect Seating margins to be higher than our prior outlook and E-Systems margins to be lower. Despite the near-term challenges, we are extremely excited about robust consumer demand for new vehicles and expect to see strong industry growth over the next several years. We are confident we have the right strategy in place to continue to win new business and grow faster than the market, while meeting or exceeding our operating margin targets in both segments. Slide 20 shows our updated financial outlook for 2021. At the midpoint of our guidance range, we forecast sales to increase by $450 million from our prior forecast of $1.225 billion. We are increasing our full year outlook for capital expenditures by $25 million, reflecting increases to support recently increasing lengths. The full year outlook for our effective tax rate was lowered to approximately 21%. Adjusted net income is expected to be in the range of $740 million to $870 million, a $15 million increase from our prior guidance.

So, Jason, if you could please turn to Slide 22, despite a difficult operating environment, we posted strong results in the first quarter. We completed our first acquisition of the year in March, and we see additional M&A opportunities throughout the balance of the year, and I’m very proud of the recognition we received this quarter for innovation and supporting the communities where we live and work. I'm especially proud of the recognition because the award they received was a combination of corporate support and the efforts from our employees to support the local community. They were chosen from more than 300 companies that applied for this award. We believe we have the right plan in place, and we are executing on the four pillars of our strategy to drive profitable growth and deliver superior returns to our shareholders. And now, we would be happy to take your questions.

Our first question today comes from Joseph Spak from RBC Capital Markets. Please go ahead with your question.

Thanks everyone. Good morning. Ray, obviously really strong growth over market this quarter. I was wondering if – and I know this might be a little bit difficult, but maybe broad strokes, if you could sort of break it down even by segment, like how much is really pure content, how much do you think is your program mix or an exposure, and how much is shared gains? Because, I know you mentioned some shared gains in the deck.

Yes, I think starting with Seating, the growth over market is really driven by the platform mix more than anything. For example, in North America, GM's full-size pickup trucks and SUVs had a very strong quarter as well as the Ford Explorer, Mercedes, and Geely. Those are highly contented vehicles as well. We didn't necessarily see a significant change in CPV on the platforms compared to what they're running before, but the fact that those platforms ran hotter than the market overall really benefited Seating. In Europe, it was again platform mix proceeding with vehicles like the Porsche Taycan that did especially well and that really helped us. In China, it was luxury vehicles with Audi, BMW, and Daimler that benefited both segments. In E-Systems, the growth of the market was really driven by the backlog and in particular electrification-related products and products really globally in that segment. So it's not so much a richer CPV on individual platforms, but more the mix of vehicles that we happened to be on running better than the underlying market.

Okay. Thanks for that. And then the second question is – and you pointed to some additional pressures here over the balance of the year. Maybe can you sort of quantify things like the steel headway or some inflation on some of the foam products in the seats? And then also, well on the topic of commodities, I know you mentioned the copper pass-through effect. How much did that weigh on the margins in the quarter and what do you expect that to be for the year?

Yes. So maybe to start with the last part of your question. Copper impacted E-Systems margins by about 25 basis points in the quarter. We lock in copper three to six months in advance, and so there is a bit of a lag effect there. We see a more meaningful impact on the full year, copper will be about a 50 basis headwind for us year-over-year in E-Systems. On the steel side and commodities generally, which really includes steel, foam chemicals, and to a lesser extent, leather hides, we saw a 50 basis point impact in the first quarter and we see that growing to about 60 basis points for the full year. So it has gotten a little bit worse than what we saw or anticipated earlier in the year and included in our guidance in February.

Thanks very much.

Thanks.

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

Good morning, everybody. Just following up on Joe's question, curious if you anticipate recovering the headwind from raw materials that you're seeing right now. Should we be thinking that next year you might be able to achieve unusually larger incrementals, or should we be anticipating some investment in engineering or some of the growth initiatives you alluded to?

Yes, for commodity specifically, we would expect a tailwind heading into next year. Now on copper though in E-Systems, the dilutive effect of the pass-through agreements will remain that doesn't reverse course, but the portion, the 10% of our copper by that, that we're responsible for. We would see that as non-recurring and perhaps even reversing course heading into next year. So in isolation, that will be a positive – commodities will be a positive year-over-year in both segments. We do expect to continue increasing our investment in engineering in E-Systems, so there will be a modest headwind for that heading into next year, but it's a little bit early to get into 2022 guidance discussion at this point.

Okay. And just two other things, one is Seating backlog in the quarter added about 1% to growth. Is there some lumpiness in this year's launches? What are you sort of looking forward to later in the year? And secondly, I wanted to just clarify your comments about Seating margins being higher and E-Systems being lower. You actually provided a few updates to margins over the course of Q1. So maybe you could just clarify which it – what was the reference point that you're using for the higher and lower comment?

Yes. Okay, let's start with the backlog. There is some lumpiness there. Q1 is the lowest backlog quarter for Seating and then it grows throughout the year. If you had the launch of the Ford Bronco, for example, it was a big program in the seat business. In E-Systems, the backlog is kind of the same number quarter-to-quarter throughout the year. In regards to margins, the reference point is 7.4% for Seating and 7.2% for E-Systems. That's what we had assumed at the midpoint of our guidance range when we issued guidance in February, and I did talk about some developments throughout the quarter that were signaling some opportunities on the Seating side and some risk on the E-Systems side. The biggest driver of that, maybe just take a step back and talk about more completely, what has changed since we issued guidance. Certainly, the level of production disruptions have worsened, particularly for our E-Systems business. If you look at the first quarter, we talked about a 7% impact on the overall company, but that was about 5% in Seating and 10% in E-Systems. If we look at the second quarter, we're expecting that 7% to be more like 14%, and the impact on each segment to roughly double as well from the first quarter, so something like 10% in Seating and 20% on the E-System side. If you think about kind of sequentially, what you expect from us on the revenue side, we expect that the midpoint to see revenue that's down 9% sequentially from Q1 to Q2. We think that's the peak of the shortage impact, and then we see a gradual recovery into the second half of the year from there. When we get back to more normal volumes in the fourth quarter, something that's closer to what we saw in the first quarter, we would expect Seating margins to be in the 7.5% to 8% range and E-Systems in a range of 7% to 8%. The reason for the wider range in E-Systems, one, the volume reductions given the variable margin of that business have a more meaningful impact on the operating margins, but perhaps more importantly, as you're exiting the year, the timing of the commercial resolutions in pass-through of the commodity increases will ultimately determine where we exit the year. There may be some of that that leaks into next year as well.

That's very helpful. Thank you.

You're welcome.

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

Hi, good morning, everyone. Thanks for taking my questions. Just wanted to follow up on E-Systems, was hoping to drill down a bit on the outgrowth. We've heard from architecture and connectors suppliers that observed some pull forward and volumes in Q1, or even some channel replenishment. Just curious if you're seeing that as well, given your mix of electronic systems and software being I think mid-20% or so.

We haven't seen any of that. We generally are selling directly to the OEMs. In some cases, we are selling to suppliers that then sell to the OEMs, but the impact of that would be very limited for our business just generally speaking.

Okay. Got it. Thank you. And then Jason, you referenced a couple of times ongoing EV strength as a driver of the outgrowth in Europe. I was just hoping you could give us a bit more color as to the impact there and how you're thinking about visibility to the balance of the year for EV exposure, it seems like customers are focusing on that segment even in light of the component shortages. So any color there would be great.

Yes. It's really a couple of different things going on in Seating, it's electric vehicle platforms that we're on, where they're holding up better than the market overall. As you've mentioned, customers are really investing in those platforms, protecting those platforms as they launch and as market demand increases. Vehicles like the Porsche Taycan benefited from that. In E-Systems, it's more just the roll-on of the growth we have in electrification. If you recall our $900 million backlog in E-Systems, over three years, about half of that $450 million is in electrification, so it's just the beginning of that rolling on. This was particularly strong in the first quarter. Customers are protecting those platforms maybe more than the other parts of their portfolio, and that's helped us. Vehicles like the Mustang Mach-E were very strong for us in E-Systems in the first quarter. Although we don't have high voltage content on that, we did benefit from higher volumes on an electric vehicle and low voltage content as well.

Okay, great. Thank you.

Thanks.

Our next question comes from Dan Levy from Credit Suisse. Please go ahead with your question.

Hi, good morning, thank you for taking the question. First one, maybe you could just give us a sense of your underlying end market assumptions. I think we know all of you and some of the other suppliers out there even combination of the third-party forecasters and some of your own schedules. Maybe you could just give us a sense of how much your forecast is embedding. Some of the more draconian outlooks that are out there. How much of this is more customer-specific versus more of an industry-wide phenomenon? And maybe how much volatility you'd expect to that end market outlook of yours?

Yes. Of course, we are using IHS, as others do, as one input in the thought process for our guidance. We also have good insight in both business segments with our customers regarding their specific plans for the remainder of the year. If you look at what the key customers have announced over the last several weeks, particularly regarding the second quarter, we have a pretty good line of sight. It's volatile still, but we have a line of sight on a more meaningful reduction in the second quarter than I think IHS and others are projecting. I don't think that's unique to our portfolio. It may impact E-Systems more than Seating, but on balance between the two, I think it will be similar to the market overall. At the midpoint, we have assumed a global industry volume increase of 9%. I think IHS is at 12%, so we've embedded a 3% reduction in industry production to factor in what we're anticipating and expecting as further announced downtime that hasn't been publicly announced at this point. Is there a chance that things do a little bit better than that? Absolutely. There is a chance of that, but given the situation that we're seeing in front of us right now, we thought that was the right balance. And at the low end of the range, it protects for roughly a 5% additional reduction from what customers have announced over the final three quarters of the year.

And given the significant stock replenishment that we have had in North America, especially in trucks, I assume there are no capacity constraint issues on your end.

No, there are no capacity constraints on our end. We managed to work very closely with suppliers and our customers to get through the first quarter without any direct disruptions to production. That was no easy feat, that’s for sure. There were shortages on foam chemicals that Frank and the Seating team fought through, and certainly microchip-related shortages on the E-System side that Carl and his team worked their way through. Just as a frame of reference, the electronics business of Lear is a relatively small business when you look at the full book of business, it's 5% or 6% of our total portfolio, so there isn't as much direct exposure for us as some of the others in the space.

Great. And then my second question is on Seating specifically. I think it's been largely accepted that Seating is not a product that automakers want to insource with some exceptions. It makes a lot more sense for an automaker to get seats from yourselves or one of your competitors, given you have all the scale and competences. But we did see, I think it was a month or two ago, an announcement between VW and Brose for a seating JV. So I guess my question is, is there any shift in philosophy by automakers toward seat insourcing or how they're approaching seating? Because I just thought that was an interesting announcement.

Yes, actually, we see just the opposite. My understanding is that the particular article that you're referencing is actually a divestiture of what was in-house in a combination with Brose. So just kind of reflecting their willingness to exit what was in-house. I think generally, what we're seeing is there have been a number of situations where customers direct a significant part of the bill material. We're seeing that the customers now are willing to look at that differently; not necessarily a full service design or outsourcing, but much more flexible when it comes to opportunities to create value. When we talk about the investments we’re making in Seating, they’re aligned with how our customers are looking at creating value within the Seating space. We talked about thermal comfort. We believe that an integrated solution of components in a more modular concept creates a significant value proposition for our customers. They are forward-leaning. I was on a call yesterday with one of the premier German OEMs, and they're looking for solutions on where we can help them. Having that, when we talk about the need to be vertically integrated and have expertise, you can create solutions that create a value proposition from a cost, quality, and delivery standpoint. We're actually seeing customers looking at different options that are much more forward-focused and that they want to outsource more because they have tremendous investments going on in other parts of their business.

Great. Thank you.

Thank you.

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

Good morning, guys. Just wanted to ask a first question on Seating. I mean, how you're talking about mix makes a lot more sense to me, based on what we all know what's going on in the markets. But we haven't heard that quite as explicitly from other seating suppliers; they haven't highlighted mix as quite as strong. Is there something else that might be going on in other parts of the market where mix might not be as helpful for seating? It just seems like an odd set of circumstances we're hearing from some other folks. And then also, how much higher when we were talking about margins on Seating, are you kind of thinking? I mean, you talked about 7.4% plus, but I mean, you just did higher than that in the first quarter. So, how should we be thinking about the actual sort of levels above that 7.4% you talked about?

Yes. Maybe I'll start with the last part of that question, and Ray or Frank can talk about the first part. In terms of the operating margin, we intentionally stayed away from providing a pinpoint number. That's really because of the magnitude of the disruption that’s going to take place in the second quarter. We see a meaningful reduction in volume in the second quarter, and depending on how that plays out by platform and how the second half plays out by platform, it can have a pretty significant impact on margins. The other key point is how the timing of our commercial negotiations around commodity inflation and other component price increases that we're dealing with and disruption costs that may be caused by a customer that has shut down or a supplier that shut us down. That will impact margins in both segments. We expect Seating to be meaningfully above the 7.4% for the full year, given all those puts and takes. I don’t want to put a precise number on it, but I felt comfortable saying that by the fourth quarter, things will settle down to a point where we’re solidly between 7.5% to 8% similar to what we did in the first quarter. In terms of the mix and what others are saying, for us, it’s more platform mix as opposed to mix within a platform and take rates of certain features within platforms. It’s being on the right platforms for this market that we’re benefiting more than anything there.

I just – I think we have the largest seat producer on premium platforms, and during this particular time, they're doing everything they can to protect those platforms. So I think the great examples of the T1 with General Motors, Mercedes with crossovers. What we're seeing in being on those premium platforms is really helping Seating because those are the ones that all costs they're protecting. In some case, even reallocating components to make sure that business is running. Obviously, it's a premiere platform, but it's also a premium prep platform. We're doing an excellent job of having insight, communicating with the customers, understanding where their priorities are. In some cases, making sure we're prioritizing along with that customer to ensure that those vehicles are being manufactured. It’s a combination of the work that the team is doing and what our customers are doing to protect their premium platforms.

That's helpful. Then just the second question. With everything that's going on right now, there has not been a lot of discussion around launch disruptions, but it's kind of hard to believe that there wouldn't be. So is that impacting E-Systems or is that potentially even impacting Seating? And is this just sort of, based on what you're hearing, these sort of just tape delays? Or are there any other kinds of more draconian launch disruptions that are going on right now?

We haven't seen any delays that are meaningful on launches. In fact, I think generally speaking, customers are protecting those programs to the detriment, maybe to some other older vehicles that are slower selling in the market. Our backlog outlook is precisely the same numbers as what we saw back in February. In fact, the first quarter maybe came in a little bit stronger than we thought in E-Systems specifically.

Okay. That's helpful. And then just lastly, on M&A, you alluded to vertical integration being part of the focus. I kind of always thought of it as a little bit more focused on tech. So, something shifting there or what's the focus of M&A?

I think it's a combination. We talked about the need to vertically integrate in wire harnesses. The acquisition of M&N Plastics, with some of their superior injection molding capabilities really opens a door for us that was somewhat closed. There are a number of components that we outsource that are accretive in respect to margin. Those are controllable components, meaning we can source ourselves. That's a simple make versus buy. That was a great acquisition. We believe we can accelerate the growth of that capability and competency, which will help the bottom line of margin expansion within E-Systems. As far as innovation, absolutely. As I said earlier, with what we're doing with electrification, I’m equally excited with what we're doing in Seating. The expansion of price features our customers are looking at different value propositions, and having innovation embedded in components is absolutely essential. I think it ConfigurE+, we are the only – it's a proprietary technology innovation because we were able to take the capabilities in E-Systems and apply it to a track system. We electrified or powered the rails. Now you can send signal, data, power through the seats, through a rail system that gives you incredible flexibility. We are getting an incredible amount of pull, so it's a combination of both. They are subtle in some respects, but very important to how we see innovation in tuck-ins where it expands our margin or at least it grows our margin profile in electrification.

Okay. That's incredibly helpful. Thank you very much, guys.

Thank you.

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

Yes. Two questions. So on the Seating side of the business, we've long been accustomed to backlog coming in at lower margins. Can you just confirm when you look at the E-Systems business? And I know you've said this is strategy, it does look like the new businesses rolling on initially with decent margins.

Yes. In both business segments, the backlog was accretive to the underlying segment operating margins. We're generally seeing that through the balance of the year. It should be right in line with the segment margins or maybe slightly higher on a full year basis as well. Some of the issues that we dealt with in prior years where we saw some programs rolling on lower than the programs they've replaced, for example, that phenomenon has largely played out, and we're generally seeing programs roll on in line with or better than our segment margins.

And second question, just building on your description of the electrical architecture meeting with the seat in those rails, your competitor yesterday talks about a decent amount of traction they're getting in BEV vehicles. Can you talk about what you're doing with BEV vehicles? Have one level seat or seats, but there are subtle differences in that rail system that would actually seem to be an interesting option for an EV maker.

Sure. Thanks, Ray. Yes, Brian. So we're seeing a lot of traction in the EV area. For us, it's a great opportunity. We're talking right now about the ConfigurE+ system, which is a fantastic opportunity for EVs, autonomous vehicles, and things like that. When it comes specifically to the EV market itself, we have a lot to offer. So we're focusing heavily on lightweight structures, opportunities, and materials that we're using, sustainable surface materials for those products, which are very appealing to our customers. The future is extremely positive for the INTU product offering that Ray referenced because the thermal comfort technology we’re working on right now, as we mentioned, it directly applies to the EV products. It helps efficiently heat and cool the occupant versus inefficiently heating and cooling the entire cabin. This provides a benefit to the overall vehicle architecture power draw. We have the ability to do that. We're winning business. We've been very successful in the EV market over the last couple of years, and many of them are in launch mode and will be launching over the next couple of years. We're seeing a lot of success, and I do believe it's being fueled by our technology and the product offering that we have. That's where into Seating is completely aligned with that market trend.

We looked at it, and Frank knows this with the recyclability. We have some incredible properties that we’ll hopefully announce soon within the seat world. They are recyclable. We believe that this is a big part of the electric story and it has to be a big part of our story. Our investment dollars are going right now there into this modular concept; it’s geared around electric vehicles where you can gain efficiencies through this heat and cool system and meet the customer’s needs within the seat. ConfigurE+ like Frank mentioned, we are building it into battery vehicles today because of the complexity of the floor and where the battery is mounted. It offers a great solution to give flexibility of the seat. We do believe that even though we talk agnostic that between ICE and BEV with seating, the seat itself is going to change, and that's where we're focused. We keep hitting on these innovations and technologies because they are the differences that will differentiate our seat system relative to the electric vehicle.

And just a very quick follow-up. Is there any regulatory account of the parasitic loss of HVAC in the either European, Chinese, or U.S. range estimates? Obviously, a lot of controversies, especially about one OEM about the difference between real range and government estimated range. It seems like your solution would help with real range, but I wonder if it helps with the regulatory standard of range.

I'm not going to speculate on that right now. I'm not sure. But your follow-up on that question is something I can look into.

Our next question comes from James Picariello from KeyBanc Capital Markets. Please go ahead with your question.

Hey, good morning, guys.

Good morning.

Within the top line guidance, you raised $450 million. Can you just break out what attributes to commodity pass-through? Because I'm just trying to get a sense for the revenue and EBIT revisions taken together. Revenue up $450 million, EBITDA up $10 million, just any color on the factors in play would be helpful.

Yes. In terms of the overall bridge on revenues, you talked about the disproportionate impact of production disruptions on E-Systems versus Seating. That's part of what's going on in terms of the operating margin impact because of the higher variable margin in E-Systems. We have revenue down about $250 million on the volume line in E-Systems and up about $325 million in Seating. The mix of those two is higher revenue of $75 million, but slightly lower operating income. You have another $200 million for the company in foreign exchange that converts as a segment margin. Lastly, the commodity pass-through is $175 million when you compare it to what we guided to earlier in the year. FX and commodity is the lion's share of the revenue change. In terms of the operating bridge, we had a couple of pieces there, but the commodity impacts were about $50 million. I talked about the change by segment earlier. We offset that through favorable operating performance, more on the Seating side than on E-Systems of roughly $50 million as well.

Got it. No, that's super helpful. As we think about Seating's mixed benefit based on the models that are getting prioritized, right, the key platforms Lear has exposure to, all of that makes sense. But is there any way to think about what this could entail from a headwind standpoint, once industry production does normalize? I means maybe the simplest exercise would be Seating delivered nine points of outgrowth versus target of four points. So, maybe it's a five-point headwind at some point in the future. Just curious your thoughts on that point.

Yes. The good news, I think for us on this is the biggest driver is the GM full-size pickup trucks and SUVs, and their inventory levels are below historic levels, well below. So I think that this above market growth in Seating, that story continues into next year and beyond just because of the importance of that platform. There may be a partial offset to that on some of the other platforms that are driving it on the luxury side, maybe there's half of that kind of steps back a bit. But we would expect a temporary benefit from mix on our above market growth in Seating. In fact, if you look at the full year, I think at the beginning of the year, we were expecting two to three points of growth above market in Seating. Now it's probably six to seven points of growth above market. Unfortunately, on the other side, because of the disproportionate production disruptions on key platforms and customers within E-Systems, we were expecting nine to ten points of growth above market there. It’s more like three to four points as we see it today.

Thank you.

You're welcome.

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

Hi, good morning, everybody.

Good morning.

First question on Seating, I think a big part of the success last year had to do with Conquest business. Could you update us on how things have been going so far this year? And then also still on the topic of, I guess, market share opportunity in Seating. So your larger global competitor has announced a little while ago, divestment of its interest in this Chinese JV, which has dominant market share in China, any implication in terms of the market share opportunity for you in the region?

Okay. I almost forgot the first part of that. I’ll talk about the second one. To the situation of the divestiture of the partnership between, I believe, Yanfeng and Adient is what you’re referring to. To me, that puts us in a very good position. The combination of those two companies in China was a formidable competitor with the combination of relationships, manufacturing processes, and scale. We had to go up against it. Now that they’ve divested the partnership and it’s more of an equal share, we feel that the playing field has been leveled. That’s opened a door. We've had to compete against both of those players and the combination of those competitors. Adient has to compete against Yanfeng on a global basis and Yanfeng is going to compete against Adient. They know each other pretty well, which we’ll see how that works though. Yes, a pretty good day for Lear Corporation when they divested of that partnership. That’ll give us 100% shots at being competitive there. Regarding Conquest wins specifically, we had $700 million of net Conquest awards last year and $300 million the year prior to that. Last year was an especially strong year. If we speculate on what we can achieve this year and in future years, $300 million would be a reasonable target. Sourcing of Seating is pretty lumpy and so there haven’t been any meaningful Conquest awards in the first quarter. But we’re actively competing on some of those platforms that will be sourced throughout this year.

Okay. That’s helpful. And then also a market share question then on the E-Systems side. I wanted to drill down a little bit more on your Slide 9 and the strategy to position E-Systems for the future, focusing specifically on the power distribution. Do you see an opportunity to have higher market share overall – over time in high voltage power distribution versus the one that you have currently in low voltage? And if so, what will be the drivers of that?

Yes. It’s a good question, Emmanuel. It’s pretty exciting. First of all, low voltage – it’s amazing how our customers have opened up the catalog. We’ve never seen or experienced anything like this on the connection systems. It’s up to $250 million this year, both what we can do in-house and what the customers are asking us to quote. That’s opening up. An interesting point to reference is, when we think about high power, 80% of it was somewhat defined, limiting our ability to get in on low voltage. On high voltage connector systems, only 20% of it is defined at this point. What we’re doing is investing our engineering dollars, and we’ve been very successful. We won an incredible piece of business with Volkswagen recently on the plugboard, something that we believe very similar to the battery disconnect; once you’re on a platform, it opens up multiple platforms and across multiple brands within Volkswagen. We see opportunities there. The quoting activities are increasing year-over-year; from an electrification perspective, we're seeing 33% year-over-year growth. That opportunity continues to work well. One thing that’s been nice is, I know there’s a lot of questions on insourcing, where customers want to do the engineering work, but wiring in engineered components has never been considered as far as the quotes we’re getting. On high power, 50% of the wire is engineered components. So again, it’s wide open. We're making the acquisitions and investing organically to ensure we're positioned to continue to grow in that area of high voltage.

Great. Thanks for the call.

And our next question comes from Itay Michaeli from Citi. Please go ahead with your question.

Great. Thanks. Good morning, everybody. Just two questions for me. Just first on, trying to kind of interpret the Q1 results in a broader context of Lear's earnings power. If we exclude the COVID impact, you've disclosed the implies the margin may have been north of 8%. I think historically Q1 tends to be a little bit higher than full year margins. Just curious, as we think about the quarter's performance, it ended up were more normalized world, whether that kind of 8% plus is sort of indicative of the company's earnings power.

Yes. I think if I just isolate the premium cost and ignore some of the commodities that may be transitory and the volume disruptions, both businesses ran in the high 7%, so just under 8%. If you look at Seating, we've talked in the past about 7.5% to 8.5%, and that's really based on the mix of business that we have today in terms of the level of vertical integration, the capital intensity of the products in that portfolio. To the extent, we increased vertical integration through organic and inorganic growth on price full features, as Ray described earlier, that could nudge the margin up to the higher end of that range. To the extent we're winning more businesses just in time with our component ready, it's going to skew to the lower end of the range. That range is important so that we don't walk away from high return business that might be just in time only with our components. At that range, we're earning well in excess of our cost of capital. We have a nice spread there. So we're interested in any business in that range going forward. We don't want to constrain that too much. And then E-Systems, we talked about being in the 7% range this year. It's going to be a little bit lower because of the volume reductions that we've experienced here. As we accept the year, that’s still, I think, the right exit point 7% to 8%, and then into next year, our objective is to get that business to 8% plus 9% for the following year and then back to 10% in 2024. We still see a robust plan that we're executing against, allowing us to achieve that.

That's very helpful. Maybe just a quick follow-up. I apologize if I missed it earlier, but can you just talk about the pace of your bookings, quoting in Q1? Are things kind of gone back to normal or are there still a fair amount of delays, just given the situation?

I think it's largely returned to normal. We had a good first quarter, particularly on the electrification side. We had $135 million of new awards, and that's an average annual number. Other companies use kind of a program life number, so call that something like $600 million of awards if you look at our program life. We had a really strong start to the year in the systems. In Seating, similar to our historical win rate and level of awards, about $0.5 billion of new awards in the first quarter, very little on the Conquest side, but good traction overall in securing our replacement programs.

Terrific. That's all very helpful.

And ladies and gentlemen, at this time, we're going to be ending today's question-and-answer session. I'd like to turn the floor back over to management for any closing remarks.

Thank you. I'd like to thank everyone for attending the call today and especially want to thank the Lear team for an incredible quarter of hard work. I know the teams are laser-focused on making sure we do everything to protect our customers, and you did one heck of a job managing that this quarter. I also want to recognize the team down in Juarez, Mexico for their outstanding recognition and what they accomplished. They received recognition for the corporate support and the efforts from our employees to support the local community. We were chosen from more than 300 companies that applied for this award. We believe we have the right plan in place, and we are executing on the four pillars of our strategy to drive profitable growth and deliver superior returns to our shareholders. Thank you.

Ladies and gentlemen, with that, we'll conclude today's conference call. We thank you for attending. You may now disconnect your lines.