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.