Lear Corporation

Good morning and welcome to the LIRA Corporation third quarter 2020 earnings conference call. All participants will be in a 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. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Alicia Davis, Senior Vice President of Corporate Development and Investor Relations. Please go ahead.

Thanks, Andrea. Good morning, everyone, and thanks for joining us for LEAR's third 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 Seating Division, 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.leer.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 LEER's expectations for the future. As detailed in our safe harbor statement on slide two, 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 third quarter financial results and provide a full year 2020 outlook. Finally, Ray will offer some concluding remarks. Following the formal presentation, we will be happy to take your questions. Now, I'd like to invite Ray to begin.

Salisha, good morning, everyone. Please turn to slide five. I'm going to provide some business highlights. We posted strong financial results in the third quarter, with both of our business segments recording margins in the high 7% range. Our sales grew faster than industry production, with especially strong growth over market in these systems of 12 percentage points. In March, in an abundance of caution, we drew $1 billion on our revolving credit facilities. In the third quarter, based on our strong cash flow generation and our confidence in the business, we repaid all amounts outstanding on our revolver. We're also recognized by Daily Power for the quality of our seats. We won two first place awards this year and received more top three rankings than any other seat supplier. And earlier this month, we were proud to announce our pledge to continue our efforts to help create a cleaner environment. By 2030, we are targeting to use 100% renewable energy and cut carbon emissions in our manufacturing plants by 50%. And by 2050, we aspire to be carbon neutral with net zero emissions. Looking at our performance this quarter, I couldn't be more proud of the team and their accomplishments during these very challenging times. Please turn to slide six. I'm going to provide a brief update of our industry-leading seeding business. In seeding, which is our largest business with 75% of our total sales, we have a demonstrated record of delivering strong margins and significant free cash flow. The investments we have made to increase vertical integration and develop new technologies have driven profitable growth and increased market share. As the chart shows, our financial performance in seeding has been very consistent. even with lower volumes in recent years and during program changeover cycles. Looking forward, we are very well positioned to benefit from the secular trends of being a market leader in luxury seating and with a strong position in the European EV market and in higher content CUVs and SUVs globally. We have the most complete capabilities of any seat supplier and a long history of operational excellence. Our customers continue to choose Lear as evidenced by our $700 million in net conquest awards this year. And as discussed in our second quarter earnings call, we are continuing to invest in new technologies to expand our competitive advantages within the segment. Two examples of our advanced product technologies that continue to gain traction with customers are Intune Seating and Configure+. INTO is an intelligent seating system that provides advanced solutions for wellness, comfort, sound, and safety. Interest is continuing to grow from our customers, and we have been awarded an advanced technology production contract. And engineering development programs are underway with multiple global OEMs. In Configure Plus, our tetherless electrified rail system will launch in 2021 and 2023 with two global automakers. Our seating team has done a remarkable job separating rear from the competition and extending our clear leadership position in this segment. Okay, slide seven shows our eSystems portfolio simplified into three focused product areas, electrical distribution and connection systems, electronic systems, and software and connected services. Today, about 75% of our business is in electrical distribution and connection systems. With the balance in electronic systems, we expect the relative mix of our business in electronic systems to increase over the next several years as the industry shifts to electric vehicles and connected cars. I will talk more about this in a few minutes. We have a long history in electrical distribution and connection systems. with capabilities to produce products both in low-voltage and high-voltage applications. We also have many years of experience producing and innovating in electric systems. We were the first to bring printed circuit board junction box technology to market in 1989. And in 2012, we received a Pace Award for our development of the first solid-state junction box. Today, we're the only Tier 1 supplier with a full range of capabilities and expertise to be a full architecture solution provider for both electrical distribution systems and power electronics. Building upon our rich heritage in body electronics, we are concentrating our efforts in electronic systems on power distribution, battery management, and onboard charging systems for electric vehicles, as well as a high-performance computing gateway and 5G communication modules. In addition to embedded software that enables our electronic systems hardware, we have enhanced our positions in software-only offerings through the acquisitions of Xebo and Xo. Software within the vehicle is rapidly growing as a key element of technology innovation, as well as a cost-effective way to provide new features and functions. Our global team of software engineers is working to expand capabilities in vehicle networking, control algorithms, cybersecurity and connectivity platforms and protocols. Slide 8 depicts the key components required for high-voltage electrical architecture. As described in our last earnings column, we have narrowed our eSystems electrification portfolio based on a detailed analysis of the market. We have targeted specific areas where we have the right to win. and which have a strong growth potential in order to leverage our capital and our engineering investments. For Leo, this includes high-voltage wiring and connection systems, power distribution boxes, onboard chargers, DC-DC converters, and battery management systems. Similar to the approach we have followed in our body electronics business, we are concentrating on providing our customers with tailor-made solutions for difficult problems. Our strategy is to focus on niche areas where we have deep expertise such as network architecture, power distribution, and power management. We also are investing in areas to move up the value chain from component specialists to broader systems and domain experts. Over time, we expect the vehicle electrical architecture will evolve as more content is integrated into multi-purpose boxes and as software replaces some of the functionality in today's architectures. As these trends develop, we will continue to be laser-focused on customizing product solutions to help our customers achieve faster charging times and longer vehicle ranges. Turning to slide nine, I want to highlight the significant growth rates expected in the electric vehicle market. Today, full hybrid and electric vehicles account for 9% of all vehicles produced globally. Over the next five years, the market for these vehicles is expected to more than triple. While many auto suppliers have legacy products that will shrink with the decline of the internal combustion engine, Lear's product portfolio in both seating and E-systems is powertrain agnostic. The story gets even better for Lear. As the shift to electric vehicle provides a unique content growth opportunity, We see an opportunity for our eSystems content to increase over three times. Our low-voltage wiring and connection system content will remain largely intact with the shift to electric vehicles. The engine harness will no longer be needed, but electric vehicles still require low-voltage wiring and connection systems for many other applications. There stands the benefit from growth in the EV market, regardless of the propulsion system involved. Slide 10 shows what these positive trends could mean for LEER. This year, our electrification-related sales are forecasted to be about $250 million. By 2025, we expect our sales will grow to approximately $1 billion. Sales growth in our electrification business through 2025 is expected to add 300 basis points to our growth rate in our overall eSystems business. We've already booked approximately 70% of the $1 billion in sales expected in 2025. And based on our quote pipeline and our average win rate, we are very confident we will meet this target. We are experiencing increasing levels of quoting activity for electric vehicles. We're also seeing opportunities to expand our customer base, both with traditional customers and some of the newer EV companies. Electrification is a platform that we expect will continue to improve our customer diversification. As architectures are being redefined, this opens the door for Lear to both broaden its customer base and accelerate growth in eSystems. In a short period of time, we have been very successful growing our electrification business, which is driving significant eSystems growth over market. Looking at our 2025 estimated sales mix in electrification, We expect that about 60% of our business will be in electronics, with the remaining 40% in high voltage wiring and connection systems. This is largely consistent with our product mix today. We are at the beginning of the curve on EV adoption. We believe this drives a significant opportunity for Lear as the automakers need supplier partners that have expertise to help them participate in the growing EV market. Laird has a long history of close collaboration with his customers as a full-service supplier with significant resources. We have design, engineering, and manufacturing capabilities, as well as the ability to source and supply parts across the globe. As the EV market continues to mature, both established OEMs and new EV companies will need partners like Laird to be successful. Now I would like to invite Jason to review our third quarter financial results.