Lear Corporation

Good morning and welcome to the Lear Corporation second quarter earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. And I would now like to turn the conference over to Alicia Davis, Senior Vice President, Corporate Development and Investor Relations. Please go ahead.

Thanks, Cole. Good morning, everyone, and thanks for joining us for Lear's second quarter 2020 earnings call. Presenting today are Ray Scott, Lear President and CEO, and Jason Cardew, Senior Vice President and CFO. Other members of Lear's senior management team, including Frank Orsini, President of our Feeding Division, and Carlos Rodito, President of our E-Systems Division, also have joined us on the call. Following the 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 Faith Harper 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 three. First, Ray will review highlights from the quarter and provide a business update. Jason will then review our second quarter financial results and describe 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. Before I begin the formal presentation, I want to take a moment and say that we hope everyone is staying safe and healthy. Our thoughts and prayers go out to those that have been impacted by COVID-19. Now if you could please turn to slide five, which provides some recent business highlights. The second quarter was among the most challenging in Lear's history. Our financial results were significantly impacted by the 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 the resilience of our business model. We safely and efficiently restarted operations, maintained ample liquidity, effectively managed costs, and continued to position the company to take advantage of growth opportunities. And we had another quarter of strong business wins, including additional conquest business and seeding. I'm very proud of what the Lee team accomplished. Then the quarter, we received a Pace Award for Ziva Market, a testament to our innovation and industry leadership. I'm also proud of the fact that Lee was named GM Supplier of the Year for the 19th time in the 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. It includes health and safety information related to plant operating protocols, employee education, and facility assessments. On April 6th, we published the 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, and around the world has been overwhelming. We are particularly proud that we have played a role in helping keep people safe around the globe. I want to take a moment now to discuss an important new initiative at Lear. I've been deeply affected on a personal level by the recent events that have highlighted the ongoing racial injustice in our society. And I'm not alone. It has affected the entire Lear family. At Lear, we have a longstanding commitment to a workplace that is diverse, equitable, and inclusive. But following these troubling events, we knew we had to do more. So building on our strong foundation in diversity, equity, and inclusion, we launched the Drive, Educate, Fund initiative. Through this initiative, Lear will drive change by developing impactful ways to help end racial injustice in society, educate by accelerating our in-house training to be sure that we, as an organization, continue to foster diversity, equity, and inclusion with our own community, and fund by providing both financial and non-financial resources to nonprofits devoted to achieving racial equity. As a team, we are committed to helping drive change in this important area. And now if you could please turn to slide six. During the quarter, our business was impacted by production shutdowns in our two major markets, North America and Europe. Almost all of Lear's operations outside of China were closed for all of April and a portion of May. After manufacturing restrictions were eased, we concentrated our efforts on safely and efficiently restarting operations. As production resumed, our plants came back online gradually, and we saw weekly improvements in capacity utilization and business performance. Then in the month of June, we reached a turning point. We started the month at similar levels to May, but by the end of the month, most of our plants in our major markets were operating at or near pre-COVID levels. Slide 7 provides an update on the seeding business. In seeding, we achieved solid growth over market of three percentage points. Our solid growth over market was driven in part by strong performance of the key platforms in North America, including GM's full-size trucks and Mercedes and Ford SUVs. In addition, we enjoy a strong market position in luxury brands in China, and the premium market outperformed the overall market in China during the quarter. Decremental margins year over year were 20%, despite significant incremental costs in the quarter. Our ability to flex our cost structure in the current volume environment and aggressively manage variable costs and overhead lessened the financial impact of the severe production disruptions we experienced. which allowed us to continue investing in the business during the downturn. I now want to provide an update on our innovation efforts in seeding. We have made investments in technology that enable us to grow and capture market share. We have used our unique capabilities in seeding engineering and design and electronics to create a broad portfolio of innovative solutions featuring intelligent seeds of the future. Two examples of our advanced product technologies include Intube, an intelligent seating system that provides advanced solutions for wellness, comfort, sound, and safety. And Configure Plus, a PACE award-winning, patented, state-of-the-art rail system that is configurable, electrified, and ideal for shared mobility applications. Even though the Intube technologies are still in the early stages of development, we have been awarded two advanced technology production contracts, and have 10 engineering development programs underway with seven different global OEMs. We are very encouraged by these development programs because such programs often lead to production awards in the future. Configure Plus is also in the early stages, but we have achieved some commercial success. As the product is on platforms slated to launch in 2021 and 2023 with two global automakers, Just two years ago, this technology was in development, and now we expect to generate more than $100 million of annual revenue by the year 2023. We're very excited about the opportunity here because we believe there will be a number of fast followers as other customers adopt the technology as we move towards production. We believe we will be able to continue to increase our market share in seeding, not only because of our quality and operational excellence, but also because of our unique ability to innovate and offer creative, value-enhancing solutions to our customers. In the second quarter, we again achieved significant new business wins, including conquest wins. On our last earnings call, we announced that we had almost $500 million of conquest awards in the first quarter. In the second quarter, we secured an additional $200 million in net conquest awards. I'm very proud of what the team accomplished as we continued to focus on quality, execution, and driving value for our customers. Slide 8 provides an eSystems business update. During the second quarter, eSystems achieved growth over market of 11 percentage points. The strong growth over market was driven by a combination of launching products in our electrification portfolio, strong volume on the Ford F-Series Super Duty, and our position with luxury brands in China. We're beginning to see the benefits of our growing electrification portfolio and the increased diversification of our customer base. To better align our operations with the production environment, we accelerated restructuring actions during the quarter. We optimized global capacity and our footprint through plant consolidation and other repositioning actions, particularly in Asia. Through these actions, we were able to lower our cost structure, driving improved margins, and positioning ourselves for future growth. During the quarter, we continued to focus on electrification and connectivity, with approximately 40% of our year-to-date awards coming in these two high-growth business areas. As we've discussed previously, increased vertical integration in our wire harness business is a key component of our e-systems improvement plans. And our efforts have been very successful thus far, as we have exceeded our internal targets in this area. Year to date, we have vertically integrated approximately $50 million of previously external purchases, with 80% of these products launching by the year 2021. This success is helping drive margin improvement in each system segment. Now please turn to slide nine. On our second quarter 2019 earnings call, we laid out a detailed plan to improve eSystems performance and position it for profitable growth. We intended to provide a comprehensive review of eSystems business and strategy at our investor day, which was scheduled for June 9th. We unfortunately had to postpone investor day because of the COVID-19, so we thought it was important to provide a brief update on the improvement plan and describe the system's strategic direction on today's earnings call. Over the past year, we have successfully executed on our improvement plan. We have built a strong management team, stabilized the business, restructured operations to better align capacity with production volumes, and improved visibility and the profitability by customer, project, and region. We have improved margins on existing businesses through customer negotiations and cost optimization. We continue to make strategic and highly targeted investments in fast-growing industry segments where we can earn returns that exceed our cost of capital. And we are aligning our product portfolio to industry megatrends by accelerating expansions of our terminal connections business and increasing vertical integration. and expanding our footprint in high-growth businesses with a focus on electric vehicles, 5G connectivity, and software. We have conducted an extensive study of the markets in which we participate. We examined the competitive dynamics, growth prospects, and the future architecture of the products we supply. As slide nine demonstrates, we have expertise in the complete vehicle architectures. We are narrowing our electronic product portfolio to those areas where we can leverage our expertise in electrical distribution systems, body electronics, and vehicle architecture, thus allowing us to make selective value-creating investments. We are focusing our product segments where we believe we can be most competitive, such as battery and charging power management with electrification, where we have demonstrated that we can be successful, and in areas like software that enable us to move beyond being a component specialist to having systems and domain expertise. We believe pursuing these very targeted areas of business will allow us to leverage synergies and drive further margin improvement. And now I'd like to invite Jason to review our second quarter financial results.

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. Lear's 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's sales. Global production declines on a Lear sales-weighted basis were approximately 55%. Industry production in China recovered in the second quarter, 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 anti-systems. Slide 13 highlights our financial results for the second quarter, which were 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 our major markets, except for China. We did see a meaningful ramp up in sales in the last few weeks of June, and as a result, our financial performance in the quarter was better than expected. Adjusted operating losses were $248 million compared to core operating earnings of $352 million in 2019. The decline in core operating earnings from a year ago reflects the significant decrease in sales, as well as incremental costs associated with the restart of production and operating our plants in the current environment. I will provide more detail on both these incremental costs as well as actions that we have taken to offset their impact later in the presentation. Second quarter, free cash flow was negative $611 million compared to $268 million in 2019. Negative free cash flow reflects lower earnings and higher working capital related to the restart of production, partially offset by lower capital expenditures. We expect that working capital will decline in the second half of the year and be a source of cash flows. Slide 14 explains the second quarter, year over year, variance in sales and adjusted earnings in the seeding segment. Sales in the quarter were $1.8 billion, down 54% from the second quarter of 2019. Seeding adjusted operating losses were $102 million compared to adjusted earnings of $315 million last year. reflecting lower volumes and net COVID-related costs. Slide 15 provides the second quarter year-over-year sales and adjusted earnings walk for our eSystems segment. Sales in the second quarter were $690 million, down 41% from the second quarter of 2019. eSystems adjusted operating losses were $91 million. Adjusted earnings declined from last year due to lower industry volumes and net COVID-related costs. Please turn to slide 16, where I will describe in more detail how COVID-19 has increased our operating costs, as well as the actions we took to mitigate the impact on our financial results. In the second quarter, we faced significant non-recurring costs related to setting up our plants for safe production. The biggest cost headwind we faced in the quarter was semi-fixed labor costs. In certain locations, we were obligated to continue to pay some of our employees while they weren't working. This occurred in the first quarter in China as well. While a portion of these costs were offset by local government incentives, the net impact was significant. Inefficiencies at our plants as they restarted operations also drove higher costs during the quarter. There are other costs that impacted us in the second quarter that we expect to continue for the foreseeable future. These costs include personal protective equipment and other costs associated with lower plant efficiencies due to social distancing protocols we have put in place. Consistent with our expectations, we incurred incremental costs related to COVID-19 in the first half of the year for approximately $150 million. Net of customer reimbursements for certain of these costs. Now that production is running closer to pre-COVID levels, we expect the net cost going forward to be considerably lower in the second half of the year. As we noted on our last earnings call, we took aggressive actions to offset these additional costs with programs that were designed to carefully balance the need to reduce costs while also protecting our world-class operating performance and the longer-term value creation potential of both our business segments. Our cost reduction plans, which were split into three distinct phases to provide flexibility, were designed to operate in an environment where revenue was down 25% to 30%. As industry conditions continue to improve, we will reverse some of the non-returning spending reductions that we put in place. Likewise, if industry conditions worsen, we will implement additional cost reduction actions to preserve our liquidity and protect the enterprise. Slide 17 highlights assumptions that are driving our expectations for the second half of the year. While our visibility is somewhat limited under the current circumstances, we wanted to provide some insight into how we are thinking about the rest of the year. The situation is still very fluid. The number of increasing COVID infections and the potential for additional shutdowns could have a significant impact on our financial results. Other factors that could impact the second half include the underlying mix of production, changes in foreign exchange rates, and ongoing customer demand. IHF is projecting global industry production to decline by 11% in the second half compared to 2019. Given the uncertainty surrounding the COVID-19 pandemic and the possibility for government-mandated shutdowns, our internal projections are based on a range of 10% to 15% for production declines. Our production estimate also reflects uncertainty with respect to consumer demand, given the challenging economic environment. Despite the significant drop in revenue in the second quarter, decremental margins improved somewhat on a sequential basis to 23% from 25% in the first quarter. Looking ahead to the second half of the year, we expect decrementals to improve further to about 20%, with the fourth quarter anticipated to be better than the third quarter. Factors driving the improvement in decamentals include one-time production ramp-up costs that will not reoccur, higher production volumes, and the continued benefit from cost reduction programs. Decamental margins in the fourth quarter will also benefit from the non-recurrence of the GM strike. For the full year, we expect decamental margins to come in at approximately 23%, consistent with our prior public comments. Looking at our margin performance on a sequential basis, we expect incremental margins to be above 20% for the third quarter. Restructuring costs for the remainder of the year are expected to be relatively consistent with our first half run rate as we continue to realign our manufacturing capacity with industry demand. We expect free cash flow to turn positive in the third quarter and expect additional sequential improvements in the fourth quarter, reflecting lower working capital. Capital expenditures are expected to increase in the back half of the year to support new programs coming online in the second half of 2020 and throughout 2021. Please turn to slide 18, where I will discuss our financial position. There entered the pandemic with a strong balance sheet and ample liquidity. As a result, we didn't need to raise additional funding or seek covenant relief when the auto industry shut down for two months earlier this year. In today's uncertain economic environment, it is critical to have ample liquidity in case production is impacted again or if industry conditions worsen. At the same time, it's equally important to have the wherewithal to continue to invest in the business to further improve our competitive position and create long-term value for all stakeholders. While the second quarter was among the most challenging we have ever faced, we ended the quarter with $2.5 billion in total liquidity, a low-cost flexible debt structure, and no significant near-term debt maturities. We have investment-grade credit ratings from all three rating agencies. Fitch recently initiated Lear with a BBB rating in July, and Moody's affirmed Lear's investment-grade rating in June. Our capital allocation plans remain unchanged. Our first priority remains investing in our core businesses through capital expenditures. We'll consider both on acquisitions, but believe Our businesses are well positioned and are not looking for any transformational M&A. And we remain fully committed to maintaining investment-grade credit metrics. We have been consistent in our commitment to returning excess cash to shareholders and look forward to continuing discussions with the board about restarting these programs once we have greater certainty regarding the sustainability of our cash flows. And I'll turn it back to Ray for some closing thoughts.

Thanks, Jason. Now turn to slide 20. In summary, the second quarter was among the most challenging in our history. Our solid performance in the quarter demonstrated resilience and our financial strength in the face of a previously unimaginable scenario, involving a global shutdown leading to 50% decline in revenue in the midst of a pandemic with many of our employees working remotely. And never in the history of the automotive industry have we seen nearly simultaneously relaunch of 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 to the 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 could not ask for a more talented, committed, or loyal team. 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 phase 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 come 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, and 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. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then 2. And our first question today will come from Joseph Speck with RBC Capital Markets. Please go ahead.

Thanks. Thanks very much. First question is maybe you could talk a little bit more about the 8% margin commentary, you know, 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 cost that we talked about impacting both segments as well as just adjusting for volume. And the way we measured that, we looked at what we were anticipating in terms of revenue in the quarter prior to COVID. So, when we set guidance at the beginning of the year and relative to where it came out, and that's the way we've measured that.

Okay. And then as we think about each of the segments headed to the back half of the year, I mean, in seeding, is that the right level, that 8% level to think about, especially since you're, you know, lapping the GM strike in the fourth quarter? And then the eSystems, you know, you talked about showing improvement going back, you know, to the back half of last year. And, you know, you mentioned some of the eSystems 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 stabilize. So we have seen an improvement in production rates, you know, heading into the third quarter in July. We're, you know, around 90% now. But that's still a 10% difference from our historical run rate. So, you know, if you just look at the math on that, the variable margin in seeing that 20% in these systems at 30%, that trims, you know, about 135%. 135 basis points off the seat margins and about 200 to 250 basis points off the systems margin, so at a 10% lower volume overall. So I think that's probably sort of the right starting point as we look at the third quarter. Now, if the volume improvement improves and it's down less than 10%, then I would see upside to those numbers. If volumes were flat, year over year, then I think you've got the right idea of where we would end up. But I think we're a little ways away from that. And, you know, there's still a great deal of strain in the whole supply chain right now. And, you know, particularly 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, you know, it's uncertain as to whether they're going to be able to continue running at the rates they want to, you know, throughout the quarter. If all that worked out, then, you know, certainly we would be back on track in terms of the operating margin for the business, but I think the bonds will be a little bit lower than what you're suggesting there, Joe.

Thanks. Maybe I could just take one last one, and 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 any 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, no, I'm not really seeing any buildup of inventory at all. Thank you.

And our next question will come from Rod Lash with Wolf Research. Please go ahead.

Good morning, everybody. Good morning. 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 over 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?

Yeah, why don't you go ahead, Chris.

So in terms of growth of the market, Rod, you know, we're still expecting six points plus in these systems, and that really is underpinned by the growth potential and electrification and connectivity. You know, we had 450 million customers. new business awards in those categories last year. 600 million of the 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 COVID, we still had 170 million of awards in that space. And so we see just a tremendous growth opportunity You know, 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 sort of the, you know, if you had to split the portfolio, it would be 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, you know, great potential with both those. sub-segments, say, of electrification heading out to the next several years.

Yeah, I think just to complete a little bit of that, too, just, Rod, why I think we're so optimistic and positive about the future growth prospects within these systems is we talk a lot about being customer-centric with maybe one or two major customers and the need to really differentiate our customer base into And through this COVID, obviously one benefit is we talk to our customers quite a bit. I talk 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've 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 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 area.

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

Yeah, I would say on the low voltage side, it's more like $700 would be the kind of average vehicle 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 that we're participating, we've got $1,500 to $2,000 of content opportunity per vehicle.

Okay. And just lastly, could you just clarify, I believe it's slide 16, when you put $130 million on the right, that includes both non-recurring and ongoing, 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 longer-term margin targets at lower levels of revenue?

Yeah, so I would say 75% of that $130 million is in the non-recurring category, the salary deferrals and pay cuts, the lower incentive count, 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, you know, that investment was in two areas. One, lowering our SG&A costs. You know, we've done a lot of work in that area over the years, but we did find an opportunity to lower costs in some of the administrative functions, centralizing some functions in lower cost regions, taking some headcount out on the program management and sales side on 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 these 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 improve the cost structure and the capacity utilization. And then on the seeding 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, that's about a quarter of that, you know, cost reduction program we see sort of continuing and helping offset both the ongoing cost of operating in this post-COVID environment and ultimately helping offset a little bit of the impact of the lower volumes as well. Great. Thank you. Yep. Thanks, Greg.

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

Good morning, guys. Good morning, Ray. Just a 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. Just curious if you could parse out sort of Mix as well as new business wings that are supporting that. And as we get into the second half of the year, as the anniversary that the GM strikes in the fourth quarter, plus the launch of the SUVs at GM, I got to imagine there could be some upside 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 even beyond that, how sustainable this number is.

Yeah, well, starting with the second quarter, really was driven by the strong mix in the region. That was the biggest factor. But also kind of unique to Lear is you may recall last year, Ford was going through a changeover on 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 did. And so we had talked a lot about that last year sort of weighing on our growth. in seeding in 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 market just generally speaking to continue, not maybe at the sort of 6% sales weight adjusted basis that we enjoyed in the first half, but maybe a little bit less than that. And again, underpinned by the same things you described there, John, in terms of the 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 I'll 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 is sort of outperforming the broader market there. And in both our business segments, we're overweight luxury. maybe more so in seeding than these systems, but both segments do benefit from that as well.

Okay, that's incredibly helpful. And then just a second question around these conquest wins in seeding. I think you said they were $500 million in the first quarter and $200 million in the second quarter. I'm just curious, you know, how fast those roll on? Are they faster than sort of your typical, you know, 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 then just lastly, you know, you sort of talked a lot about M&A opportunity on the eSystems side. But is there anything that you're seeing on the seeding side that would either be sort of, you know, a tech, you know, acquisition or vertical integration or anything that you might do on the seeding side on M&A?

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

And our next question will come from David Kelly with Jeffrey. Please go ahead.

Hey, good morning, guys. Appreciate you taking my questions. And appreciate the breakout of segment level net COVID costs. And just curious to how you see the moderation cadence there impacting the second half or are you expecting more steady PPE-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?

Yeah, so the costs were disproportionately in the second quarter. The biggest piece of that was that semi-fixed labor costs, you know, due to contractual or statutory requirements to pay employees that weren't working, plus the ramp-up. So it's sort of like having to go through a new program or new plant launch across all of our manufacturing plants globally. We're largely through that unless, of course, you know, there's another wave of shutdown. So that was the vast majority of the costs. About 80% of the costs were non-recurring and in that category. The other 20%, which you're referring to, is the PPE costs and 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 at a $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 where appropriate, include that in the cost models going forward. I think it's reasonable to assume that we can offset or pass through about half of that. But that will be a cost that we see continuing with the business, not just in the second half of the year, but likely in the next year as well.

Okay, great. That's helpful. And then maybe switching gears, you 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.

Most of that we saw, you know, in advance of the first quarter earnings call, and we talked about, you know, sort of a shifting of a month or two, but there's been nothing new since then.

Okay, perfect. Thank you.

And the next question will come from James Piccariello with E-Bank Capital Markets. Please go ahead.

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

Yeah, we are. So what we talked about in the first quarter earnings call is we sort of reprioritized our original $100 million investment in restructuring to try and yield more savings in the 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 referred to a moment ago.

Right. But would those savings be – in addition to your normalized incremental margin, or would this help offset, you know, an uptick in engineering spend and, you know, spillover from PPE costs and the like?

Yeah, you know, that's difficult to sort of bucket that. You know, it's an incremental savings that we will enjoy next year. You know, we haven't done our 2021 plan, and it's obviously a bit early to try and, you know, guide to next year. We're still trying to work our way through the 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 know, you've got some pluses and minuses heading into next year that are sort of unique, you know, outside of what we've described in the past in terms of, you know, just sort of our goal to have a net performance that's positive where we're funding our customer pricing each year and then the incremental investments that we may have for engineering to, you know, fund the backlog that's rolling on. Those would be independent of the more recent developments.

Yep, understood. And just on the eSystems vertical integration, so the $50 million that you brought in, was this achieved on legacy programs since, you know, 80% is already shipping next year? And, you know, just to provide some color maybe on the product mix, is it mainly terminals and connectors? And just what's the runway potential for this initiative and, you know, over what timeframe?

Yeah, that's one, like I said, we're really excited on. 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 Qs and Cs. And they're on legacy programs or programs that are in production today. And so, you know, 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, increase 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 in how successful we were so quickly was surprising. And so those are current programs. 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 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 will take place when 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 the early feedback from our customers have been overwhelmingly positive. There's some programs we're discussing right now that are in development that we can replace components that were either directed components from our customer or engineered components outside of leaders' engineered portfolio. And so I think two things going on. One, the ability to quickly get at what is a legacy program or current program surprisingly quick. And, boy, are we getting great traction right now. And, two, the amazing feedback we've gotten from our customers today. when you have a full service type capability where you can source yourselves and the flexibility that we're allowing our customers, one, 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 to improve our margin within our eSystems business.

That's great, Colin. Thank you.

Yep. And the next question will come from Brian Johnson with Barclays. Go ahead.

Hi, team.

This is Jason Stuhl right around for Brian. I appreciate all the help today, the new initiatives, the initiatives in eSystems. I was hoping to maybe drill in a little bit on electrification. You know, I guess one question, as we think about your win rate in 2019, which I think you mentioned was around 40%, you know, how does that compare to your win rate in the first half of this year? And I guess, You know, as we go out to the 2022 and 2023 timeframe, you know, as that business approaches, you know, near a billion dollars, you know, given your win rates, you know, how would – what I'm kind of trying to understand is if we think about your positioning in traditional wire harnesses, which may be your, you know, number four player or something, are the ambitions to be perhaps like a number – three or even a number two player in high voltage electrification? Because it seems like the win rates, if those continue, might imply that.

Yeah, well, first of all, yeah, 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. You know, 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, yeah, we have set internal targets where we want to be in a position to be a 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, and we've been very successful in that area. I think what's important, too, and I mentioned it earlier, is that eSystems 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, you know, 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 at the 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 siege 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 them.

Understood. Very, very helpful. And then maybe just following along a similar theme, maybe in seeding, I know there's been a lot of discussion around conquest wins in the first half of this year, which has been very constructive for certainly shareholders of Lear. As we think about the seeding business, 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, you know, the win rate here exceeding your current market share? And maybe there's some upside to preceding growth in the three- to five-year timeframe.

Well, yeah. I mean, one, we said net new business reward. So there is business that we obviously will selectively in some cases, you know, choose to – not necessarily aggressively go after or for other reasons, logistically or just competitively, it doesn't make sense for us. And so, yeah, we consider everything when we talk about conquest wins. And the way we look at our backlog is net new business awards. And we have been very successful within the conquest wins. But there are other businesses that, you know, for financial reasons, we don't think necessarily fit with our strategy long term. But our And we are absolutely comfortable with our growth over market in that area. And we've done a nice job of market share gains from 18 to 23 percent 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. You know, 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, you know, we have made very specific, you know, targeted investments within that business that I do believe 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 talk about embedding technology into our seat systems, and that's exactly what we're doing. We have capabilities with 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 landscape has been relatively the same I've been in this business for 32 years, the same forever. There's always an irrational player or somebody that's a Tier 2 that wants to be a Tier 1 and all kinds of things. But you're just focusing on the things that you can control. We have put ourselves in a position where operational excellence is a light switch. You have to invest over 10-plus years to put yourself in that position and create processes and operational excellence that differentiate you. And two, equally as important now is technology. You know, we're in these development programs. Why we talk about them is we're in the studio with our customers at such an early stage. And to be able to take that Configure Plus, which was, you know, unique to itself where you power a rail system with a cassette that's patented by Lear to move a seat with reconfigurability, electronic, you know, with a rail that can be powered now with the seat, the airbag. I mean, it's just a totally different setup. And then So we're in there in a different way, and it's, I think, what really creates that reputation of Lear to differentiate ourselves. And I do believe that that's why we've been successful. Thanks.

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

Hi. Good morning, everyone. Thank you. Morning. Hi. Hi. First, just housekeeping. Could you, Jason, maybe you could provide us with a framework for when you might expect to pay down the billion-dollar revolver draw, and what do you need to achieve before you think you can reinstate the dividend?

Yeah, so in terms of the revolver repayments, you know, that's something that we'll likely end up doing at least partially in the third quarter, and if not, then 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 $1.25 billion, Dan. 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 return a portion of that revolver. And so provided there aren't any surprises for the rest of the third quarter and into the fourth quarter or any new shutdowns, we should be in a position to largely pay that back. And then in regards to the longer-term discussion around dividends and shared 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, you know, put it in prematurely and then have a setback. 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's down 10% from 2019. But ultimately, that's a decision by the board and a dialogue that we're in with the board constantly.

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

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

Did you just? Sorry, go ahead. No, go ahead.

What was 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 have a different composition of vertical integration. But, you know, mostly trim or seat covers and foam. But there is some seat structures on one of the three programs, but not the other two.

Thank you.

Yep.

And our next question will come from Emmanuel Rosser with Deutsche Bank.

Please go ahead. Hi, good morning, everybody.

Good morning.

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

Yeah, 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, you know, to the extent of 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, you know, down the road, 30, 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, you know, what we target is, you know, 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, you know, the better end of that range of down 10% to 15% would align with revenue that's down, you know, roughly 20% year over year and give us a reasonable chance of getting back to that free cash flow neutral position. The other factor, though, I just want to highlight is, you know, 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, you know, for lower level salary employees, we may want to do that earlier. The sooner 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 great, Fowler. And I guess, secondly, focusing on the outlook for your second half, gross above market, I understand the elements of positive mix, you know, both in North American trucks and in China luxury. I was hoping to focus maybe on the backlog outlook for the second half. Obviously, you had great growth above market this quarter despite a negative backlog. How should we think about what does the backlog look like in the second half?

Yeah, so the backlog was, you know, 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 in programs rolling on and rolling on at lower volumes. So the second half backlog is considerably stronger overall. You know, we're expecting somewhere between 500 and 600 million of four-year backlog, and so, you know, the vast majority of that's going to hit in the second half of the year. And that will be, you know, a significant factor in the growth over market, whereas the first half was, you know, more driven by mix than anything else.

That's incredibly helpful. And any breakdown by segment that you could provide?

I'm looking at the second half of the year. It's, you know, in terms of the relative breakdown of it, it's more weighted to eSystems in terms of their relative size of the company today. In terms of absolute dollars, you know, seeding is going to be a bigger piece of it. But we do see stronger growth from the backlog on a relative basis in eSystems 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 rolling on in the second half of the year that are driving that. Great. Thanks for all the information.

You're welcome. And the next question will come from Chris McNally with EverCorp. Go ahead.

Thanks so much, guys, for taking my call. If we just put together the couple of different points you've made on margin over the course of the conference call, and if we look at the underlying that you're calling out for bulk seeding 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, whether that's one or two years, but the underlying, even if costs come back, once we hit that revenue level, that 8% underlying would be a good starting point.

Yeah, I think in seeding that's definitely the case. In these systems, the other factor we have to think about is The mix of, you know, whether that revenue comes back by production volumes going up or whether it's backlogged. You know, so typically you've got this decremental margin or variable margin on the lower volumes at 30%, and then you're rolling on backlog, say, at the segment margin of, say, 8% to 12%. And so you could see a little bit of dilution as a result of that. It depends on how the mix of revenue shakes out looking out into future years. But generally speaking, if volumes get back to 2019 levels, then, you know, what we've said is in seeding, we're very comfortable with a long-term margin range of 7.5% to 8.5%. That's what we've run this business at for the most part of the last five years. And in these systems, we still see a longer-term trajectory towards 10%. You know, it sort of troughed in the middle of last year at 7.6%. And we've been working our way up absent this COVID setback. And we still are well 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 the incremental margins from Q2 to Q3. And I think you've mentioned in the 20% plus range, You know, that's very helpful because obviously maybe we're in this COVID environment with extra costs for longer than we realize. Is that sort of low to mid-20s, all things being equal as production gets better? Can we use that as a sort of a sequential incremental margin or at least, you know, a rule of thumb or just, you know, a checkmark to kind of keep the quarterly numbers, you know, as we think about maybe the next four to six quarters?

Yeah, to the extent that revenue increase is driven by volume recovering, yes, that's a good number to use. You know, the other factor to 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 at, you know, our European, you know, segment margins overall. So call it 5% or so in today's volume environment. So that would be a little bit diluted to that sequential incremental margin. You know, and the other factor as well is whether that revenue comes back by volume or, again, by backlog. You know, and so there's the sequential incremental margin will vary depending on the mix of volume versus backlog as well.

Great. And if I could speak in one quick secular one on eSystems. You've had great success with some of the big customers in Europe. without even giving any names. Can you talk about, have you made any progress with some of these, you know, super early stage startups that may not even be huge volumes, but, you know, predominantly in North America, you know, we're seeing a lot of activity in launches. Has that business been awarded on for, you know, for their electrical?

You know, we've had some, I'll leave it at this, 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, you know, we're obviously remaining somewhat optimistic, but a lot more work to be done there. But good conversations.

Great. Thanks so much, Dean, for the detail.

Yeah, thanks.

And the next question will come from Itai Mikelli with Citi. Please go ahead.

Great. Thank you. Good morning, everyone.

Good morning.

Good morning. I just want to go back to the new business win discussion. I was hoping if you can share on a total company basis what Lear's net new business wins looked 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. How are you thinking about that and some of the conquest wins as well?

Yeah, you know, I think it's a little bit early to provide the full backlog update at this point each day. But as Ray described a moment ago, when we're reporting conquest wins, they're net of any losses. So you can use that as a proxy for backlog. And, you know, what's just a bit unusual about the last 12 months is the extent of backlog we're seeing come through conquest wins where historically it's been more you know, customers introducing a new program and winning your share of that. So I think it points to some market share opportunities in seeding maybe beyond what we anticipated. We did have, you know, 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, you know, that helps us get to the four to five points above market targeted growth opportunity that we've talked about in seeding. And eSystems, you know, more of the new business wins are coming in electrification connectivity, so it's not 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 eSystems.

Yeah, so to Jason's point, we're very comfortable. 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.

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

Yeah, I think, you know, 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 low. And I think, you know, sort of 3% of sales on a normalized basis is still a pretty good figure to use for the combined business going forward.

Great. That's all very helpful. Thank you.

You're welcome.

Thanks. And our final question today will come from Armisa Sinkovic with Morgan Stanley. Please go ahead.

Great. Thank you. Appreciate you taking the question. Mike, you know, I'm just trying to think through, you know, 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, you know, how things have gone since reopening in mid-May and how they look like today. Okay.

That's a good question. And I think to kind of quickly say we're pleasantly surprised overall with the performance and how we look at our business within our manufacturing facilities. It's gone extremely well. You know, we do a nice job of being able to contact trace, minimize any type of exposure, stop any spread. And the number of issues that we have had have been external to our facilities. And so We haven't gone through what I thought we'd see is a lot of start-stops, start-stops, and so it's been relatively smooth from that perspective. Now, on the supply side, and we study both, obviously, our own facilities, and we have detailed reviews of how each plant's doing internally at Lear, but on the supply side, even though it's gone extremely well, better than I would have expected, it's 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 and a weekly basis from an audit standpoint, we also keep a very close eye on our suppliers. I would say that Mexico, and I think I said it at the last call, Mexico unfortunately doesn't in some respect 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. 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. You know, 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 margins. You know, once we get through COVID, and, you know, you mentioned some other detail around, you know, what the volume situation does to your margins, but, you know, once we get through this, Should we be looking at the 20%, 30% variable margins for seeding in e-systems, or do the 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.

Yeah, 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, I'll just caution you on the split of whether that revenue is coming back through additional volume on existing platforms or if that revenue is coming on through backlog. Backlog is going to roll on closer to segment margin and to the extent it's 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. dollar, which was pretty significant, you know, over the last couple of weeks. And so that, you know, incremental revenue will come on at a lower margin as well.

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

The volume piece of it, no.

Great. Thank you for taking the questions.

Yep, thanks. Okay, that should be it. I think the only ones left on the line at this time are the 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 is now concluded. Thank you for attending today's presentation. You may now disconnect your lines this time.