Good morning and welcome to the Lear Corporation Second Quarter Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask question. Please note this event is being recorded. And now, I would now like to turn the conference over to Alicia Davis, Senior Vice President, Corporate Development and Investor Relations. Please go ahead.

Thanks, Paul. Good morning everyone, and thanks for joining us for Lear's second quarter 2020 earnings call. Presenting today are Ray Scott, Lear's President and CEO; and Jason Cardew, Senior Vice President and CFO. Other members of Lear’s senior management team including Frank Orsini, President of our Seating Divisions; and Carl Esposito, President of our E-Systems Division also have joined us on the call. Following prepared remarks, we will open the call for Q&A. You can find a copy of the presentation that accompanies these remarks at ir.lear.com. Before we begin, I'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. First, Ray will review highlights from the quarter and provide a business update. Jason will then review our second quarter financial results and that drive the key factors impacting the second half of 2020. 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, Alicia. Good morning everyone. I’ll be proud to begin the formal presentation and take a moment and say that everyone is staying safe and healthy. Our thoughts and prayers are all to those who have been impacted by COVID-19. Now if you could please turn to Slide 5, which provides some news and business highlights. The second quarter was among the most challenging in Lear’s history. Our financial results were significantly impact COVID-19 pandemic, which resulted in extended production shutdowns and a 46% year-over-year decline in global vehicle production for the quarter. Despite the challenging environment, we successfully executed on the near-term priorities we set forth on our first quarter earnings call. We demonstrated both our financial strength and resilience of our business model. We safely and effectively restarted operations, maintained ample liquidity, effectively manage costs, and continue to position the Company to take advantage of growth opportunities. We had another quarter of strong business wins including additional Conquest business in Seating. I am very proud of what the Lear team accomplished. During the quarter, we received a PACE Award for Xevo Market, a testament to our regulation and industry leadership. I am also proud of the fact that Lear was named GM Supplier of the Year for the 19th time in third consecutive year, and we continue to be recognized by many of our customers for safety and quality. As we discussed last quarter, we developed the safe work playbook, which provides a standardized approach to safely operate our facilities and include health and safety information related to plant operating protocols employee education and facility assessments. On April 6th, we published a playbook on our website. It has been downloaded almost 35,000 times and the response from our customers as well as manufacturing and non-manufacturing firms around the…

Thanks Ray. Slide 11 shows vehicle production and key exchange rates for the second quarter. In the quarter, global vehicle production was down 9.9 million units or 46% compared to 2019, as the industry was significantly impacted by extended shutdowns related to the COVID-19 pandemic. The majority of the production declines occurred in North America and Europe where production was down 69% and 63% respectively, whereas plant operations in these regions were closed for all of April and a portion of May and when they restarted there was a gradual ramp up of production over several weeks. These two regions normally account for over 75% of Lear sales. Global production declines on a Lear sales weighted basis where approximately 55%. Industry production in China recovered in the second quarter with growing 7% year over year. From a currency standpoint, all major currencies weakened against the U.S. dollar compared to last year. Slide 12 highlights Lear's growth over market in the second quarter. Sales grew above market in both Seating and E-Systems as well as in each of our major markets. Total company growth over market was 5% with E-Systems at 11% and Seating at 3%. Growth over market in North America of 6% reflected the strong performance of GM full size trucks, the Ford Explorer and Mercedes SUVs. China's 8% growth over market reflected strong relative demand for luxury vehicles that benefited both Seating and E-Systems. Slide 13 highlights our financial results in the second quarter which was significantly impacted by the COVID-19 pandemic. For the quarter, sales were $2.4 billion, down 2.6 billion or 51% from last year. The decline was driven primarily by lower production in all major markets, except for China. We did see a meaningful ramp-up in sales in the last few weeks of June. And…

Thanks Jason. Now turning to Slide 20. In summary, the second quarter was among the most challenging in our history. Our solid performance in the quarter demonstrated resilience in our financial strength in the face of the previously unimaginable scenario, and involving a global shutdown, leading to a 50% decline in revenue in the midst of the pandemic with many of our employees working remotely. And never in the history of the automotive industry, have we seen nearly simultaneously relaunch your plants around the world following an extended shutdown with extensive new health and safety protocols in place. I usually close earnings calls with a thank you for Lear team after the Q&A is done, but I think it's important I take time now, while everyone is still on the line to say thank you to the team. I cannot ask for more talented, committed or loyal teams. We have accomplished, what we have accomplished is incredible. And I'm extremely proud of how we are performing during this trying time. When the crisis began, we focused on three near-term priorities, ensuring the health and safety of our employees, preserving liquidity, and aligning our operations and strategic priorities with industry changes. And over the last few months, the team has worked tirelessly to implement the necessary protocols to safely and efficiently restart operations, effectively manage our costs, preserve Lear’s financial flexibility and position the Company to continue to take advantage of growth opportunities. We have now transitioned into the second stage of our COVID-19 response. The economic environment remains highly uncertain, and we do not know exactly how the pandemic will continue to affect our industry. However, with today's challenge cum opportunity, this crisis has brought clarity about what matters in our business as it relates to our strategy, competitive positioning, product portfolio our cost structure operations in our team. We are committed to executing against our strategic goals, while balancing short-term challenges with long term priorities. We will continue to make targeted strategic investments that position Lear for continued market leadership and drive long term value for our shareholders. And with that, we would be happy to take your questions.

We will now begin the question-and-answer session. [Operator instructions] Our first question today will come from Joseph Spak with RBC Capital Markets. Please go ahead.

First question is. Maybe you could talk a little bit more about the 8% margin commentary, ex-COVID? Is that just backing out some of the volume impact you associated with it as well as the cost in each of the segments?

Yes, Joe, that's exactly right. It's the net COVID costs that we talked about impacting both segments as well as just adjusting for volume, and the way we measured as we looked at what we were anticipating in terms of revenue in the quarter, prior to COVID, so when we set guidance to the beginning of the year and relative to where it came out and the way we've measured that.

And then as we think about each of the segments headed to the back half of the year, I mean, in Seating, is that right levels, that 8% level to think about, especially since you're lapping the GM strike in the fourth quarter? And then E-Systems, you talked about showing improvement going back to the back half of last year, and you mentioned some of these systems initiatives today. Should we think about 8% as the new sustainable target here as volume stabilizes for that segment?

I think, ultimately, it’s really a question of where volumes stabilized. So, we have seen an improvement sin production rates, heading into the third quarter in July, we're around 90%. Now, that's still a 10% difference from our historical run rates. So, the -- if you just look at the math on that the variable margins in Seating at 20% and E-Systems at 30% that trims about 135 basis points off the seat margins and about 250 basis points off the E-Systems margin, so at a 10% lower volume overall. So, I think that's probably sort of the right starting point, as we look to the third quarter. Now, if the volume environment improves, and it's down less than 10% then I would see upside to those numbers. The volumes were flat year-over-year then I think you've got the right idea on where we would end up, but I think we're a little ways away from that and there's still a great deal of strain in the whole supply chain right now. In particular, if you look at what's happening in Mexico, where you’re not able to have the full complement of employees in the plant yet. And so there's still a reasonable risk of disruption that could impact on. So, even if the demand is there and the OEMs are trying to replenish inventory levels, it's uncertain as to whether they're going to be able to continue running at the rate they want to, throughout the quarter. It's all worked out, then, certainly we would be back on track in terms of three operating margins for the business, but I think the volumes will be a little bit lower than what you're suggesting there, Joe.

Maybe I could just sneak one last one in. I know that your businesses are pretty just in time, but did you see any of your customers, take a little bit of excess inventory to gauge against any supply disruptions, to guard against new disruptions rather?

No, I think the initial wave was just filling the pipeline and getting inventories back to a level where we could resume production. And so now, I am not really seeing any buildup of inventory at all.

And our next question will come from Rod Lache with Wolfe Research. Please go ahead.

Two topics, one is, just electrification obviously is inflecting in terms of demand and also awards. Can you just give us a little bit of an updated view on what you currently expect growth of the market to be for E-Systems, the impact of electrification in that? And when you say that you're focusing on a few specific products within that, what is the content per vehicle associated with that?

So in terms of growth over market, Rod, we're still expecting six points plus in E-Systems, and that really is underpinned by the growth potential in electrification and connectivity. We have 450 million new business awards in those categories last year. 600 million of a 900 million backlog that we had announced in January was in electrification and connectivity. And even though that the quoting activity slowed down a little bit in the first half of the year, because of the COVID, we still had 170 million of awards in that space. And so, we see just a tremendous growth opportunity. The two biggest areas of growth within electrification for us are really high voltage wiring and connection systems, and then onboard chargers and battery management systems. Those are sorts of -- if you had to split the portfolio is nearly 50-50 between those two categories. And so that's where we're winning business today, that's what we’re rolling on in the backlog, and we see great potential with both those sub-segments today of electrification heading out of the next several years.

Yes. I think just to add little bit to that, too, just, Rod, why I think we're so optimistic and positive about the future growth prospects with these systems is, we talked a lot about being customer centric with maybe one or two major customers. And the need to really differentiate our customer base in and do this COVID, obviously, one benefit is we talked to our customers quite a bit. I talked to them quite frequently on everything that's going on with respect to what they see as far as current volume and long-term and even their product portfolio and some of the opportunities for investment. And we built up that customer base. I mean, we talked about the need to invest with those customers. And so for example, with Audi and Jag Land Rover and Geely and Volvo, we are investing in those companies and those customers over the last several years. And those are really starting to have some traction and some growth opportunities. So, I'm positive in respect to our growth and our ability to grow within electrification, because one, I'm hearing it from our customers, the need that they're looking for our products, but the actual awards that we're getting within that year end.

Just to clarify, I know you've said before that you have about $500 of content or addressable content and internal combustion. When you look at the high voltage systems that wiring terminals and connectors and chargers, what does that comes up to?

Yes, I would say on the low voltage side, it's more like $700 would be the average vehicles globally with North America being a little bit higher, Asia being a little bit lower than that. And on the high voltage side, in the areas of we're participating, we've got $1500 to $2,000 of content opportunity for vehicle.

Okay. And just lastly, could you just clarify I believe, at Slide 16, when you put $130 million on the right, not -- it includes both non-recurring and not going. What is the ongoing component? And how should we be thinking about that? Is that just more or less to offset the incremental COVID-related costs? Or are you actually coming up with additional cost savings that would allow you to get to these margins -- longer term margin targets at lower levels of revenue?

Yes, so I would say 75% of that $130 million is in the nonrecurring categories of salary deferrals and pay cuts, the lower incentives caps and temporary reductions in discretionary spending. The other 25% is reoccurring, and the biggest driver of that is, we've increased our restructuring investment by about $50 million this year and we expect to see about $40 million of savings from that as I look out for next year. And in particular, that investing is in two areas, one, lowering our SG&A costs. We've done a lot of work in that area over the years, but we did find an opportunity to lower costs at some of the administrative functions centralizing some functions and lower cost regions, taking some headcount out and the program management and sales side and a more permanent basis to realign to the lower volume environment. And then on the manufacturing side, really two areas of emphasis, one is getting the footprint right in Asia and E-Systems. We're closing three facilities over the course of the next six to nine months there, to better align our footprint with the business there, both improved the cost structure and the capacity utilization. And then on the Seating side, there's a couple of facilities that we're going to close in North America to improve an already strong footprint that we have here. So, you take those pieces together it’s about a quarter of that. Cost reduction program we see sort of continuing and helping offset both the ongoing costs of operating in this post COVID-19 environment and ultimately helping offset a little bit of the impact of the lower volumes as well.

And our next question will come from John Murphy with Bank of America. Please go ahead.

Good morning, guys. Just first -- good morning, Ray. Just first question on this North American content number, it was 528 in the quarter, up 20% year-over-year, very good performance. Obviously, mix is helping there, but just curious if you could parse out sort of mix as well as new business wins that are supporting that. And as we get into the second half of the year, as the anniversary the GM strike in the fourth quarter plus the launch of the SUVs at GM. I got to imagine there could be some upside to that CPV number as we go through the back half of the year. So just curious what you think about that number in the back half of the year? And then maybe beyond that, how sustainable this number is?

Yes, starting with the second quarter, really, it was driven by the strong mix in the region that was the biggest factor, but also kind of unique to Lear’s, you may recall, last year, Ford was going through a changeover in the Explorer and GM was finishing up their changeover on K2 to T1 on the pickup side. And so, we benefited from relatively strong volumes on those platforms compared to what the market is. And so, we have talked a lot about that last year sort of weighing on our growth in seating and that reverse course in the first half of this year. If we look out for the second half of this year, we do expect our growth over markets just generally speaking to continue, not nearly at the sort of 6% sales weight adjusted basis that we enjoyed in the first half or maybe a little bit less than that. And again, underpinned by the same thing that you described there, John, in terms of the mix in North America being particularly strong and weighted towards trucks and SUVs where we have a lot of content and a good book of business. But also our point out that, we see the luxury market in China continuing to do well into the third quarter. We saw that in the first quarter we saw it again in the second quarter where luxury sort of outperforming the broader market there, and both our business segments were overweight luxury, and maybe more so in team and he systems to both full segments to benefit from that as well.

Okay, that's incredibly helpful. And then just a second question around these Conquest wins in Seating, I think you said they were 500 million in the first quarter and 200 million in the second quarter. Just curious, how fast those roll on? Are they faster than sort of your typical new business wins because they're conquest? Or I mean, just how do those work? And how do those roll on over time?

Those are more traditional in that it's three to four years out.

Okay, gotcha. And it just lastly, you sort of talked a lot about M&A opportunity on the E-System side. But is there anything that you're seeing on the Seating side that would either be sort of tech acquisition or vertical integration or anything that you might do on the on the Seating side or M&A?

I mean, we look at all kinds of different things, but there's really nothing of any significance on the Seating side. There may be some smaller type of opportunities that might make sense for us to stabilize some of our business but they're smaller.

Our next question will come from David Kelly with Jeffries. Please go ahead.

Hey, good morning, guys. Appreciate you morning taking my questions. And appreciate the breakout of segment level net COVID cost. And just curious to how you see the moderation cadence they're impacting the second half? Or are you expecting more steady PEE-related costs and efficiencies through the fourth quarter? Or is this more of a wind down with a greater impact expected in the third quarter here?

Yes. So, the costs were disproportionately in the second quarter. The biggest piece of that was that semi-fixed labor costs due to contractual or statutory requirements to pay employees that weren't working plus the ramp-up production. So, it's sort of like having to go through a new program or new plant launch across all the manufacturing plants globally. We’re largely through that, unless of course, there's another way of shutdown. So, that was the vast majority of the cost, about 80% of the costs were non-recurring and in that category. The other 20%, which you're referring to is the PPE cost, and in some of the ongoing inefficiencies that we're going to see because social distancing in the plants and having to make some modifications to our processes. We do see those costs continuing into the second half of the year, so sort of in $25 million a quarter rate. And just like anything else, like commodities, or foreign exchange or inflation, that’s going to be part of our commercial discussions with our customers. We’re working collaboratively with them to try and find offsets and we're appropriate include that in the cost models going forward. I think it's reasonable to assume that we can offset a pass-through about half of that, but that will be across that we see continuing with the business, not just in the second half of the year, but likely into next year as well.

And then maybe switching gears, you’ve referenced expected CapEx uptick in the second half. Can you just talk about what you're seeing as it relates to planned customer launches in the back half of the year? Are you seeing any significant delays or cancellations?

No, we're not seeing any -- there's been some small delays, but really no major cancellations. So some of those tie directly to the downtime that we had in respect to COVID, but no significant program delays or cancellations for that matter.

And most of that we saw in advance of the first quarter earnings call when we talked about, a sort of a shifting of a month or two but there's nothing new since then.

And the next question will come from James Picariello with KeyBanc Capital Markets. Please go ahead.

Just going back to the restructuring savings and what are the permanent actions. I thought the last break you guys provided was maybe 60 million in incremental savings for this year with an additional 15 million for next year. Is that 60 million now 40 for 2021?

Yes, we’re -- so what we talked about the first quarter, we sort of reprioritized our original $100 million investment in restructuring to try and yield more savings in current year. So, that's part of it, and we are expecting a greater level of savings next year than we were three months ago, as a result of some of these plant closures that I've referred to a moment ago.

But with those savings be in addition to your normalized incremental margin or would this help offset in the uptick in engineering spend and spillover from PPE costs and the like?

That’s difficult to sort of bucket that. It's an incremental savings that we will enjoy next year. We haven't done our 2021 plan and it's obviously a better way to try and guide to next year. We're still trying to work our way through the balance of this year, but it will be a benefit to next year. And as I mentioned a minute ago, we do expect to see some ongoing costs related to PPE that will linger into next year as well as some inefficiencies. So, you've got some pluses and minuses heading into next year that are sort of unique outside of what we've described in the past in terms of just sort of our goal to have a net performance positive where we're funding our customer pricing each year and then the incremental investments that we may have for engineering to fund the backlog that's rolling on. Those would be independent of the more recent developments.

Understood. And just on the E-Systems vertical integration, so the 50 million that you brought in, was this achieved on legacy programs since 80% is already shipping next year? And just provide some color maybe on the product mix, it mainly terminals and connectors? And just what's the runway potential for this initiative and over what time frame?

That one, like I said, we're really excited what we've been able to achieve in such a short period of time and to answer your questions, it's a number of different engineered components, including T's and C's. And there are legacy programs or programs that are in production today. And so, when we described our ability to go after the vertical integration, the harness itself is probably 60% of the overall cost and 35% to 40% would make up these engineered components. And we have a right to play, and it's an opportunity for us to, like I said, increased our margin. And so, when we set out it was more on just programs that are in production and, we have a much higher number internally that we're tracking that we can go after. But I think the early indication and how successful we were, so quickly was surprising. And so, those are current program. Now, I will say this, and I think I said it before, where those type of programs we have to validate, we have to test, we have to get approval, those type of things. And that can range from any time period from six months to a year or longer, but boy did they really do a nice job of accelerating those things and getting those parts approved quickly and getting them vertically integrated into our harnesses. The longer duration of time takes, will take place when we're we have a program that we're engineering. And we've reached out to a number of customers. And I'm going to tell you that early feedback from our customers have been overwhelmingly positive. And there's some programs we're discussing right now they're in development that we can replace components that were either directed components from our customer, or engineered components outside of Lear’s engineered portfolio. And so, I think two things going on; one, the ability to quickly get at what is the legacy program or current program surprisingly quick and where are we getting great traction right now; and two, the amazing feedback we've gotten from our customers, when you have a full service type capability where you can source yourselves and the flexibility that we're allowing our customers want to create value, but more importantly, vertically integrate our engineered designs. And so those things are going extremely well, and we talked about those being a key to continue improve our margin within our E-Systems business.

And the next question will come from Brian Johnson with Barclays. Please go ahead.

Hi, team. This is Jason Store on for Brian. I appreciate all the color today. The new initiatives -- the initiatives in E-Systems, I was hoping to maybe drill in a little bit on electrification. I guess one question, as we think about win rate in 2019, which I think you've mentioned was around 40%. How does that compare to your win rate in the first half of this year? And I guess, as we go out to 2022 and 2023 timeframe that business approaches near $1 billion. Given your win rates, how would -- what I'm kind of trying to understand is, if we think about your positioning in traditional wire harnesses which maybe you're a number four player or something. Does, do -- are the ambition to be perhaps like a number three or even number two player in high voltage electrification because it seems like the win rate, if those continue might imply that?

Yes, well, first of all, yes, we do target to be in the top three. That's one thing that when we did this extensive study of our product portfolio and we mentioned it, it's an 18-month project that we really went into detail on our ability and our right to play within a product segment. What type of market share do we believe we could capture? Can we obviously outgrow the market, but also get really good returns? And so yes, we have set internal targets where we want to be in a position to be one or top three player. And so with that, we have looked at where we want to emphasize our investment and really focus on those areas of growth, and we do believe that we've been very successful in that area. And I think it's important to and I mentioned it earlier is that, E-Systems was primarily two customers of ours and we talked about the need to diversify our customer base. And that is so important and we have incredibly strong relationships with our customers. And now that we've extended out to Audi and Volkswagen and Jag Land Rover and Geely and Volvo, those platforms are now starting to build momentum with growth. And we talked about the need to invest, and it was the right thing to do it for time. Even though we had to sacrifice margin, we had to build up our reputation and our ability to supply them high quality components and products. And so, that's really starting to set the seeds for our growth and so we do feel very confident. We spend a tremendous amount of time focused on areas that we believe we absolutely have the right to play and we can win in.

Understood is very, very helpful. And then maybe just following along a similar theme, maybe in Seating, I know, there's been a lot of discussion around Conquest wins in the first half of this year, which is -- which has been -- which has been very constructive for certainly shareholders of Lear. As we think about the Seating business, is there -- should we think about any incumbent business that you may have lost as well as the Conquest business that you've won? Or is it -- are we really thinking about the shared, the win rate here, exceeding your current market share, and maybe there's some upside to proceeding growth in three to five year time frame ?

Well, yes. I mean, one, we said net new business awards. So there is business that we obviously will selectively in some cases choose to, not necessarily aggressively go after or for other reasons logistically or just competitively doesn't make sense for us. And so, yes, we consider everything when we talk about Conquest wins and the way we look at our backlog is not new business awards. And we have been very successful within the Conquest wins, but there are other businesses that, for financial reasons we don't think necessarily fit with our strategy long-term. But our -- we actually comfortable with our growth over market in that area and we've done a nice job of market share gains from 18% to 23%, during a time when there was a lot of irrational players out there and positioned us in a very good place today. And I think about that seat business, one, we have an incredibly recognized team, we have incredible talent. And that's very important and it's actually even more important when you go through a crisis like this. And two, on the operational excellence, we've been investing in that business for 10 plus years, and so, we have made very specific, targeted investments within that business that I do believe it creates like a moat around our ability to execute our products and we're recognized by our customers for that. And the last one is the product portfolio. I think, what is really impressive right now is we talked about embedding technology into our seat systems and that's exactly what we're doing. We have capabilities for these systems and our capabilities of our manufacturing within Seating, to embed technologies that create value for our customers. And so, why I believe we've been so successful, and the…

And the next question will come from Dan Levy with Credit Suisse. Please go ahead.

Hi, good morning everyone. First just a housekeeping. Could you maybe provide us a framework for when you might expect to pay down $1 billion revolver draw? And what do you need to achieve before you can reinstate the dividend?

Yes, so in terms of the revolver repayments, that is something that we'll likely end up doing at least partially in the third quarter and if not then in the fourth quarter. We expect to be free cash flow positive in the third quarter and substantially positive in the fourth quarter. And so, we'd like to have a cash balance of about a 250 billion. And so, we're about 500 million or so above that right now. So, we're approaching a point in time where we want to re return a portion of that revolver. And so, provided there are any surprises for the rest of the third quarter and into the fourth quarter, any new shut downs, we should be in a position to largely pay that back. And then, in regards to the longer term discussion around dividends and share repurchases, we're in a constant dialogue with the board on that topic. And really what we're looking for is a path to sustained free cash flow generation quarter in and quarter out. And we don't want to try and put it in prematurely and then have a setback where we're looking for some proof that the industry has recovered. And it doesn't have to go back to 2019 volume levels. I think we can be significantly profitable and generate significant free cash flow in a volume environment that sounds 10% from 2019 levels, but ultimately that's a decision by the board and the dialogue that we're in with the board constantly.

Thank you. That's helpful. Second. I just want us to follow up on seating and just touch on the $700 million a year-to-date accomplishment which is quite robust. Can you just give us a sense, what is driving this large uptick in Conquests wins? Why are customers going huge? Can you give us a sense of what type of margin profile you'd expect on the new business? Is this directionally, would you say from a margin perspective, a neutral or accretive or diluted to the existing seating margin profile that you have ex COVID?

Yes, just generally speaking, I would say it's in line with our existing segment margins. Ultimately, what we will determine that is the level of vertical integration and so just in time seeing program as a standalone, we can earn a return well in excess of our cost of capital at 5% or 6%. And so, it depends on the level of componentry. We ultimately are awarded in conjunction with that. In this case, there is some vertical integration with all three of the major Conquest awards we've had. And so, I would expect that the margins should be in line with the existing segments.

Sorry go ahead.

No, go ahead, who is that.

No, I was going to say, if you could just talk specifically to what vertical integration it is that you have? Is that on the seat structure side? Or is it more on leathers or material?

It depends on the program. So, there's three different awards and each of them has a different composition of vertical integration, but mostly trim or seat cover and foam that there are -- there is some seat structures and one of those three programs, but not the other two.

And our next question will come from Emmanuel Rosner with Deutsche Bank. Please go ahead.

I wanted to just follow up on the free cash flow outlook for the rest of the year. Could you give us some early sense of how much of the working capital drag you think you would be able to recapturing in the back half? And I guess overall, very encouraging to -- that you expect positive cash flow in the third quarter and substantially in the fourth quarter? And any early sense on whether on a full year basis that would enable you to be free cash flow positive?

Yes, so in regards to the third quarter, we expect to be sort of working capital neutral, maybe slightly positive and based on our outlook for production, the earnings generation will lead to the free cash flow generation in the quarter. And then in the fourth quarter, we see most if not all of the working capital use from the second quarter reversing itself and benefiting the fourth quarter. In terms of whether we can be free cash flow neutral or positive for the full year, ultimately, that's going to depend on the level of production in the second half of the year and maybe equally important, the timing of that production, to the extent when it happens in the quarter, just like we saw in the second quarter. When that production ramps up in the last couple of weeks of the quarter, all of that revenue is essentially sitting in receivables and collected down the road 30 to 45 days down the road. So if that happens again in the fourth quarter that would weigh on that working capital opportunity that I just described. But what we target is in a 20% revenue decline for the full year that we should be approaching free cash flow positive or free cash flow neutral. So sort of that -- the better end of that range of downtime to 15% little line with revenue that's down, roughly 20% year-over-year and give us a reasonable chance of getting back to that free cash flow neutral position. The other factors I just want to highlight is we did take a number of temporary measures to preserve liquidity in the second quarter, particularly salary deferrals and those things. And if we're in a position where the production environment is that strong, for the remainder of the year, we may look to unwind some of those as soon as the fourth quarter, particularly for lower level salaried employees when they want to do that earlier as sooner as we can do that, the better of course. So, that's another factor we have to keep an eye on as well, Emmanuel.

Okay, that's a great color. And I guess secondly, focusing on your -- the outlook of for your second half gross above market. Was hoping to focus maybe on the backlog outlook for the second half, obviously, you had three bros above market this quarter despite a negative backlog? How should we think about -- what does the backlog look like in the second half?

Yes, so the backlog was pretty weak for the first half of the year and negative, as you pointed out in the second quarter, and that's really a function of the business that rolled-off and then seeing some delays and programs rolling-on and rolling out in lower volumes. So, the second half backlog is considerably stronger. We're expecting somewhere between 500 and 600 million of full-year backlog. And so, the vast majority of that's going to hit in the second half of the year. And that will be a significant factor in the growth over market where the first half was more driven by mix than anything else.

And it's incredibly helpful in any breakdown by segments that you could provide?

Looking at the second half of the year, it’s -- in terms of the relative breakdown of it, it's more weighted to E-Systems in terms of their size -- their relative size of the Company today. In terms of absolute dollars, Seating is going be a bigger piece of it. But we do see stronger growth from the backlog on a relative basis in E-Systems in the second half. And it's a lot of those electrification platforms that are rolling on on-board chargers and other products that are working going on in the second half of the year that are driving that.

And the next question will come from Chris McNally with Evercore. Please go ahead.

If we just put together the couple of different points you've made on marginal over the course of the conference call. And if we look at the underlying that you're calling out for both Seating and E-Systems being 8%, obviously, there's puts and takes to next year. But is it fair to say that once we are at either pre-COVID revenue levels or maybe just global production that is pretty close to pre-COVID. That 8% is sort of a margin level that you would hope to achieve? So it may take some time with one or two years, but the underlying unit cost comes back, once we hit that revenue level that that 8% on the line would be, would be a good starting point?

Yes, I think I'm seeing that that's definitely the case in E-Systems. The other factor is to think about is the mix of whether that revenue comes back by production volumes going up or whether it’s backlog. So typically, you've got this detrimental margin, variable margin on the lower volumes of 30% and then you're rolling on backlog since the segment margin, let’s say, 8% to 12%. And so you can see a little bit of dilution as a result of that. So, it depends on how the mix of revenue shakes out looking out into futures. But generally speaking as volumes get back in 2019 levels then what we said is in Seating. We're very comfortable with the long-term margin range of 7.5% and 8.5%.That’s what we've run this business at for the most part of the last five years. And in E-Systems, we still see a longer term trajectory towards 10%. It’s sort of trough in the middle of last year at 7.6%. And we've been working our way up after this COVID setback. And we still are low on our way towards driving that incremental margin improvement over the next several years.

Okay. That's really helpful. And then just on a shorter term basis, you gave incremental margin from Q2 to Q3 and I think you mentioned in the 20% plus range. That's very helpful, obviously, maybe we're in this COVID environment with extra cost for longer than we realize. Is that sort of low to mid twenties, all things being equal as production gets better? Can we use that as a, sort of a sequential incremental margin or at least a rule of thumb or just a checkmark to kind of keep the quarterly numbers, as you think about the next four to six quarters?

To the extent that revenue increase is driven by volume recovering, yes, that's a good number to use. The other factor is, think about in the third quarter you had the weakening recently of the U.S dollar. And so, we may see a revenue tailwind in Q3 and Q4, but it's going to roll on our European segment margins overall. So call it 5% or so in today's volume environment. So that will be a little bit diluted to that sequential, incremental margin. On the other factor as well as whether that revenue comes back by volume or again by backlog and so there's the sequential incremental margins vary depending on the mix of volume versus backlog as well.

Great. If I can sneak in one quick second one on E-Systems, you've had great success with some of the big customers in Europe. Without even giving any names, could you please talk about have you made any progress with some of these super early stage start-ups that may not even be huge volumes, but predominantly in North America, we're seeing a lot of activity in launches. Has that business been awarded on for their electrical?

We've had some good conversations, but nothing of any significance that we would report as far as backlog. So -- but we are having good dialogue, good discussions, so we obviously remaining somewhat optimistic, but lot more work to be done there, but good conversations.

And the next question will come from Itay Michaeli with Citi. Please go ahead.

Just want to go back to new business win discussion. I was hoping on, if you can share on a total company basis, what Lear’s net new business wins look like in the first half of this year relative to the first half of the last year? Just maybe, Ray, how you're thinking about the growth over market longer term for the Company? I think back in 2018, it was about five points over market at the Investor Day kind of how you think about that in light of some of the Conquest wins as well?

Yes, I think it's a little bit early to provide the full backlog update at this point, Itay. But as Ray describe a moment ago, when we're reporting Conquests wins certain net of any losses. So you can use that as a proxy for backlog and what's just a bit unusual about the last 12 months is the extent of backlog we're seeing come through Conquest where historically it's been more customers introducing a new program and winning your share of that. So, I think it points to some market share opportunities and seating maybe beyond what we anticipated. We did have an ambitious target of going from 23% to 28% market share, and I think this helps us get there. And if we do achieve that that helps us get to the four to five points above market targeted growth opportunity that we've talked about in Seating. In E-Systems, more of the new business wins are coming in electrification connectivity. So, it's got so much Conquest because this is new content to the market and that's the biggest driver of the business we're winning right now in E-Systems.

Yes. To Jason's point, we're very comfortable. We're not -- we haven't changed our numbers. And I think as we continue to be successful in our growth, our trajectory will still be on track to what we committed to, and I don't think there's anything in front of us right now that would tell us otherwise.

It’s very helpful. And just lastly, going back to the free cash flow discussion for the year, Jason I was hoping, you can share roughly what you think CapEx might come in 2020 and then given the new business progress, maybe directionally, how we should think about that in absolute terms or percentage of revenue over the next couple of years?

Yes, I think, our original guidance this year was 600 million. We're targeting around 425 million of CapEx for the year at this stage with a heavy weighting to the second half of the year with Q2 being so well. And I think, sort of 3% of sales on a normalized basis is still a pretty good figure to use for the combined business going forward.

And our final question today will come from our Armintas Sinkevicius with Morgan Stanley. Please go ahead.

Great. Thank you. Appreciate you taking the question. I'm just trying to think through, how does Mexico look like, you have significant exposure you mentioned that as something you're watching here into the back half. Maybe you could provide us with, how things have gone since reopening in mid May and how they look like today?

That's a good question. And I think to kind of quickly say, we are pleasantly surprised overall with the performance in how we look at our business within our manufacturing facilities. It's gone extremely well. We do a nice job of being able to contact trace, minimize any type of exposure, stoppage spread and the number of issues that we have had been external to our facilities. And so we haven’t gone through what I thought we'd see is a lot of start stop, start stops. And so, it's been relatively smooth from that perspective. Now on the supply side, and we studied both obviously our own facilities and we have detailed reviews of how each plants doing internally to Lear. But on the supply side, it's gone extremely well better than I would have expected, still somewhat fragile, because all suppliers are not equal. And we are seeing different locations that are having different types of hotspots or incurring significant increases in cases, even outside the manufacturing plants. And so, even though we monitor our facilities very closely on a daily basis, in a weekly basis from an audit standpoint, we also keep a very close eye on our suppliers. And I would say that Mexico and I think I said it the last call, Mexico, unfortunately, doesn’t, in some respects even have the infrastructure that the U.S. might have. And in some respects, are probably six to eight weeks behind us. And so, we have some concerns around the world in different pockets based on different information and intelligence that we're gathering. And so even though we're running well, and overall, I think we're somewhat surprised at how well the overall supply chain is running. There's still pockets that we have a lot of concerns around, and we keep those very close and monitor them, making sure we can help out suppliers or infrastructure or help aid in any way that we can with PPE equipment to make sure that we can minimize any type of issues within our supply base. But, like I said, overall, somewhat surprised at how well things are going, but very cautiously concerned about certain areas in specific countries.

And then the other question I have is around incremental margin, once we get through COVID and you mentioned some of the detail around what the volume situation does to your margins. But once we get through this, should we be looking at this 20% to 30% variable margins for Seating and E-Systems? Or do these incremental margins start up a bit slower as you're starting to put costs back in the system as volumes pick-up, if you could help us think through that? I know it's a little bit early to think that far ahead, but just conceptually when COVID does come under control.

Yes, I think if you get to a point where those incremental costs are behind you, then you can think about the incremental margins being more in line with the segment variable margins. Again, our discussion on the split of whether that revenue is coming back through additional volume on existing platforms or if that revenues coming on, through backlog, backlog is going to roll on closer to the segment margin. And into the standard volume, it's going to roll on at variable margin and then you also have foreign exchange, which is kind of a recent development with the recent weakening of the U.S. was pretty significant over the last couple of weeks. And so that incremental revenue will come out at a lower margin as well.

But no reason to think it'd be any different than your variable margin today?

The volume piece of it, no.

Great. Thank you for taking questions.

Thanks. Okay, that should be it. I think the only ones left on the line at this time are Lear employees. And like I said earlier, thank you for everything you've done. It’s been absolutely impressive. I appreciate all the great work you've done, a great job, but we have more work to do. We have to continue to focus on what we can control. We're doing a really nice job, but I appreciate everything you're going to do as we move forward and continue to separate ourselves. So, thank you for everything you're doing. Bye.

The conference has concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.