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

Thanks, Cath. Good morning, everyone, and thanks for joining us for Lear's first quarter 2020 earnings call. We will begin today's call with prepared remarks from Ray Scott, Lear's President and CEO; and Jason Cardew, Senior Vice President and CFO. You can find a copy of the presentation that accompanies these remarks at ir.lear.com. Following the presentation, we will open the call for Q&A. Before we begin, I'd like to take this opportunity to remind you that as we conduct this call, we will be making forward-looking statements to assist you in understanding Lear's expectations for the future, as detailed in our Safe Harbor statement on Slide 2. Our actual results could differ materially from these forward-looking statements due to many factors discussed in our latest 10-K and other periodic reports. I also want to remind you that during today's presentation, we will refer to non-GAAP financial metrics. You are directed to the slides in the Appendix of our presentation for the reconciliation of non-GAAP items to the most directly comparable GAAP measures. The agenda for today's call is on Slide 3. Ray will begin with some introductory comments and provide an overview of the quarter. Jason then will review our first quarter financial results and outline the series of steps we have taken to preserve cash and maximize financial flexibility in the current environment. Finally, Ray will provide a business update and discuss our efforts related to employee health and safety, strategy and the community. Following the formal presentation, we would be happy to take your questions. Now I'd like to invite Ray to begin.

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

Thanks, Ray. Slide 8 shows vehicle production volumes and key exchange rates for the first quarter. First quarter, global vehicle production was down 5.1 million units or 23% compared to 2019, as the industry was significantly impacted by COVID-19 related shutdowns. In China, production was down 47% as plants were generally shutdown for the month of February and a portion of March. In mid to late March, other markets including Europe and North America also experienced similar shutdowns. Production in Europe and North America was down 19% and 10% year-over-year respectively for the quarter. From a currency standpoint, major currencies continued to weaken against the U.S. dollar. Slide 9 highlights our financial results for the first quarter. For the quarter, sales were $4.5 billion down $702 million or 14% from last year, driven by production declines in all our major markets and the negative impact of foreign exchange, partially offset by growth from our backlog. Excluding the impact of foreign exchange and acquisitions sales were down 12%, which reflects 11% growth above market. While operating earnings were $205 million, down $173 million primarily due to the decrease in sales somewhat offset by positive overall operating performance. Adjusted operating margins were 4.6% in the quarter. We estimate that the negative impact of COVID-19 on our sales and core operating earnings in the first quarter was approximately $900 million and $200 million respectively. First quarter free cash flow was positive $113 million compared to negative $71 million in 2019. The improvement in free cash flow was primarily the result of favorable working capital, including increased cash collections due to a later quarter close date in 2020, partially offset by lower earnings. Slide 10 explains the first quarter year-over-year variance in sales and adjusted operating margins in the Seating segment. Sales in the…

Thanks, Jason. Nice job. Turning now to Slide 16. As I said earlier on the call, we have three near-term business priorities. At Lear, we have no higher priority than protecting the health and safety of our employees. Members of Lear team around the world have been working hard to develop and implement leading-edge safety protocols in all of our facilities globally. As a leadership team, we understand that we have to manage the current challenges due to COVID-19 while positioning the company for long-term success. We're prepared to act strategically and opportunistically when it is appropriate. Slide 17. On Slide 17, I will provide some back ground under the Safe Work Playbook that we published on Lear's website on April 6. After COVID-19 surfaced in China and started to spread globally, we realized that our plant processes would have to adapt quickly to this new environment. With no off-the-shelf solution, we took best practices and recommendations from the CDC and the World Health Organization along with lessons learned from our plants in China and elsewhere and developed a Safe Work Playbook. The Playbook was designed to standardize best practices for our global operations, and give our local management teams the tools that they needed. It is a plan to protect our people and minimize the chance of spreading the virus in our plant and office locations. As we have seen this virus is very unpredictable, the best practices and protocols we have in place today will change as we continue to learn from the medical community and our experiences at our own facilities and locations around the world. Playbook has been downloaded over 23,000 times from our website, and response from around the world has been overwhelming. We will continue to share our best ideas and we will seek…

[Operator Instructions]. And your first question comes from the line of Joseph Spak from RBC Capital Markets. Your line is now open.

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

Sure. So in the first quarter, Joe, in addition to the impact of COVID-19, you had the usual volume and mix fluctuations that happened prior to that, you had a layer of customer pricing and performance on our side. And so you had all those other factors that impacted the results. But if you look at it by segment, in Seating, obviously we had better conversion year-over-year than in E-Systems where we continue to see the same effect that we saw in the third quarter and fourth quarter last year, the changeover of new -- of programs from the old model to the new model rolling on a slightly lower margin. So that's really the main thing sort of diluting the year-over-year conversion that you see in the first quarter. So that 25% is not necessarily attributed to just COVID-19, it's also all the other fundamentals that are happening with the business. As we look forward, for the balance of the year, our normal variable margin is about 22% or 23% in both businesses combined. And we expect to see about a three point impact on that for the combined effect of sort of the one-time cost of PPE and other -- and other costs we're going to incur to prepare our facilities to re-launch in this post-pandemic environment. And then we expect to see about a two point impact as a result of the inefficiencies associated with running production at less than full capacity for an extended period of time. And that's why we described it's similar to what you see in a new facility ramp-up, you're going to have what we've seen for example, in Europe. Many of our plants, restarted production last week on one shift but ran at 20% or 30% of the normal volume levels.…

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

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

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

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

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

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

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

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

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

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

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

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

And no, no one-time benefits in there?

No.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Thanks. Operator?

We lost our operator.

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

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