Q1 2020 Earnings Call
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Thanks, Karen good morning, everyone and thanks for joining us for many years first quarter 2020 earnings call.
Today's call with prepared remarks from Ray Scott Your President and CEO and do some cardiac senior Vice President and CFO.
I can find a copy of the presentation that accompanies these remark and I are Dartmoor dotcom. Following the presentation, we will open the call for acuity.
Before we begin I'd like to take this opportunity to remind you that as we conducted coal we will be making forward looking statements to assist you in understanding what your expectations for the future as detailed in our safe Harbor statement on fly to our actual results could differ materially from these forward looking statements due to many factors discussed in our latest 10.
And other periodic reports I also want to remind you that you're in today's presentation. We will refer to non-GAAP financial metrics were directly to the slide in the appendix of my presentation, but a reconciliation of non-GAAP items to the most directly comparable GAAP measures.
The agenda for todays call is on slide three.
We will begin with some introductory comments and provide an overview of the quarter.
Great and then we'll review our first quarter financial result, then outline the theory the steps we've taken to preserve cash and maximize financial flexibility in the current environment. Finally, Ray will provide a business update and discuss our efforts related to employee health and safety strategy and the community.
In the formal presentation, we would be happy to take your questions now I'd like to look like rate to begin.
Thanks, Felicia good morning, everyone.
Before I begin the formal presentation I would like to say a few words about the current crisis. The cobot 19 pandemic has taken a tremendous told people around the globe.
I don't want to thank our employees for their efforts and commitment during these unprecedented times.
Okay now if we could Doug please turn to slide five.
It has done a very challenging start to the year industry disruptions related to cope with 19 pandemic have impacted our operations all our major markets.
We expect additional challenges in the coming months.
We have remained focused on controlling what we can and moving the business Ford.
We have a very talented and skilled senior management team each of us with decades of industry experience most of us where here Leer during the 2008 2009 financial crisis.
We learned valuable lessons from that time.
Well, we also understand that what we're facing today is much more complex.
We have a strong balance sheet ample liquidity solid foundation and operational excellence.
The highly experienced management team.
Yeah, well pick up position for the challenges.
And the team we have developed three near term business priorities.
Ensuring the health and safety of our employees preserving liquidity.
In aligning our operations with industry changes, while remaining focused on the long term strategic opportunities.
We believe by executing on these priorities, we will successfully navigate the current crisis and emerge as an even stronger industry leader close call with 19.
[laughter] for Jason begins I'd like to provide a brief overview of the quarter.
Earlier. This morning, we released our first quarter 2020 financial results, a summary of which is shown on slide six.
Sales of 4.5 billing in the quarter, we had growth over market up 11%, excluding the impact of Cobot 19 operating margins in both our seating any system segment would have exceeded 8%.
A solid performance by both divisions.
We recently were recognized by automotive news with a 2020 pace award receivable market.
This is Lear second consecutive pace Award a testament to our continued industry leadership as a pace award is recognized around the world as a benchmark for automotive supplier innovation.
Now I'd like to invite Jason to provide a review of our financial results.
Thanks Ray.
Why they chose vehicle production volumes and key exchange rates for the first quarter.
Or global vehicle production was down 5.1 million units or 23% compared to 2019 as the industry was significantly impacted by cobot 19 related shutdowns.
In China <unk> production was down 47% as plants were generally shut down for the month of February and a portion of March and mid to late March other markets, including Europe, and North America also experienced similar shutdowns.
Production in Europe, and North America was down, 19% and 10% year over year, respectively for the quarter.
From a currency standpoint major currencies continue to weaken against the U.S. dollar.
Slide nine highlights our financial results for the first quarter.
For the quarter sales were 4.5 billion down 702 million or 14% from last year driven by production declines in all our major markets and the negative impact of foreign exchange, partially offset by girls from our backlog.
Excluding the impact of foreign exchange and acquisitions sales were down, 12%, which reflects 11% growth about markup.
We're operating earnings for $205 million Dot 173 million, primarily due to the decrease in sales somewhat offset by positive overall operating performance adjusted operating margins were 4.6% in the quarter.
We estimate that the negative impact of covert 19 out our sales and core operating earnings in the first quarter was approximately 900 million and 200 million respectively.
First quarter free cash flow was positive $113 million compared to negative 71 million in 2019.
Improving free cash flow was primarily the result from favorable working capital, including increased cash collections due to a later quarter close date in 2020, partially offset by lower earnings.
Slide 10 explains the first quarter year over year variance in sales and adjusted operating margins in seating segment.
Sales in the quarter were $3.4 billion down 14% from the first quarter 2019, excluding the impact of foreign exchange sales were down 12%, reflecting growth over market of 11%.
In the first quarter CD margins were 6% compared to 7.6% last year, reflecting lower volumes, partially offset by margin accretive backlog and positive operational performance.
During the impact of Cold at night, James segment margins would've been above 8%.
Slide 11 provides a first quarter year over year sales and adjusted operating margin walk for our east system segment.
Sales in the first quarter $1.1 billion down 12% from the first quarter 2019, excluding the impact of foreign exchange and acquisition sales were also down 12%, reflecting crossover market of 11%.
You systems margins were 4.8%.
The margins were primarily impacted by lower volumes negative net performance and the zibo acquisition, excluding the impact of colder 19 segment margins would've been up over 8%.
On March 26, we work through our 2020 guidance due to the significant uncertainty caused by the colder 19 pandemic. However, we thought it was important to provide an update on our liquidity position and described the steps were taken to reduce cost and preserve cash and that's environments.
Now please turn to slide 12.
Over the past decade, whereas maintaining a conservative capital structure to ensure we have ample liquidity to manage and invest in our business throughout the entire automotive cycle.
Slide highlights that our strong balance sheet, which positions us well to navigate through these unprecedented times in mid February before the severity of the cold attaching crisis was apparent.
We are actively entered the credit markets to refinance $650 million and bonds due on 2025.
The bond refinancing resulted in extending our weighted average bond maturity to over 14 years and reducing the weighted average interest rate on our outstanding debt to under 3.5%.
In February in addition to the bond refinancing we also extended the maturity on our $1.75 billion revolver to August 2024, and with our first bond maturity in 2027, we're confident in our ability to manage our debt requirements and interest obligations.
As CFO, what are my top priorities as aggressively managing our cash and liquidity position and we're continuing to take proactive steps to minimize cash usage well industry production is severely depressed.
We've done extensive scenario modeling and even under the most extreme scenarios, we will continue to have sufficient liquidity.
Well, we paid a cash dividend and repurchase shares in the first quarter in March the board made it difficult, but we believe prudent decision to suspend both share repurchases and dividend payments. This is not a decision taken lightly but one that became necessary as the urgency of the situation and the impact on the economy from called at night.
Got it became clear.
With our strong balance sheet ample liquidity and no significant near term debt maturities are comfortable we can not only weathered the storm, but also continue making targeted investments that sport the long term growth potential of both our business segments.
On slide 13, I wanted to take a moment to share our philosophy on managing costs and preserving cash in this environment.
Cost reduction programs were designed to carefully balance the need for preserving cash well also protecting our world class operating performance and the longer term value creation potential the company.
Hi, retaining our salaried workforce, we were able to use the downtime to prepare the new safe workplace protocols and to relaunch our factories in the most efficient manner.
Other team members have been working closely with our supply chain to ensure all suppliers can safely and efficiently relaunch production and finally, we have established a team to evaluate long term strategic priorities in light of the disruptive forces cobot nitrogen.
With respect to other cost reduction actions, while we have moved aggressively to reduce R&D and other discretionary costs. We are positioning our projects to be quickly resumed when industry conditions warrant.
We are investing in strategic areas and thoughtfully deferring lower priority projects.
We're closely monitoring economic conditions and overall new vehicle demand if we determine that production cuts are likely to become more permanent will take decisive action to further reduce capacity through additional investments and restructuring.
Slide 14 highlights specific actions, we identified and began implementing quickly as a devastating impact of covert 19 on the global economy to became apparent we created several models to estimate the financial impact on our business and these scenarios continue to evolve as we carefully monitor both our customers production schedules and overall glow.
Little economic conditions.
We've taken a layered approach to identify and executing actions to reduce cost and increased cash flow all the items shown in phase one and most of the items in phase two has already been implemented.
And as you can see all stakeholders, including our employees board members and stockholders have been impacted by these cost saving actions as noted earlier, our liquidity position is strong, allowing us to act in a measured way as we gain a better sense for how prolong the impact of coven 19 will be out our industry.
We have more levers to pull and the items shown in phase three are increasingly aggressive actions. We have identified that we can take if needed.
During the great recession in 2008 in 2009, we took out significant cost by reducing capacity consolidating our global footprint and Rightsizing, Our program engineering capital spending and ask DNA and we're prepared to take similar steps again as appropriate we did a lot of things right during the financial crisis, but we also learn some valuable.
Since our experience tells us that it is prudent to take highly targeted cost reduction actions to ensure that we are not damaging our market position or hindering growth during the recovery.
As Ray will discuss later in the presentation, we believe significant new business opportunities will rise as a result at the industry shifts post cobot 19.
Lots to be shared at our cost reduction actions are not so drastic that they affect our ability to innovate today, keeping us from fully executing our strategic plan the future.
Before I leave this slide I'd like to discuss decremental margins are decremental margin in the first quarter compared to 2019 was 25%.
This is higher than our usual variable margin, partially due to the abrupt nature of the shutdown of production as result of Culver 19 in certain locations. We are required to pay our hourly employees for a period of time upon layoff.
When production resumes it is important to note that the decremental margins will be impacted by other costs as we adapt to the new operating environment, We anticipate increased cost for personal protective equipment for our employees and temporary inefficiencies, resulting from restarting the entire global automotive value chain.
We would expect that process to be somewhat similar to the inefficiencies typically associated with a new production facility ramping wrapping up the cost savings measures out wind in slide 14 are intended to help us achieve decremental margins for the remainder of the year of approximately 20% to 22%.
Once we have a clearer view of future industry production levels will take actions as necessary to rightsize production capacity with the goal of further improving decremental margins.
Now I'd like to turn it over to Ray to provide a business update thanks, Jason Michelle.
Turning now to slide 16, as I said earlier on the call. We have three near term business priorities and there we have no higher priorities and protecting the health and safety of our employees.
Numbers Alere team around the world had been working hard to develop and implement leading edge safety protocols and all of our facilities globally.
As a leadership team we understand that we have to manage the current challenges due to colder 19, while positioning the company for long term success.
We are prepared to act strategically and Opportunistically when it is appropriate.
Slide 17.
On slide 17, I will provide some back ground on the safe work playbook that we published on their website on April six.
After Colbert 19 surfaced in China is starting to spread globally, we realize that our plant processes would have to adapt quickly to this new environment.
With no off the shelf solution, we took best practices recommendations from the CDC and the World Health organization, along with lessons learned from our plants in China and elsewhere elsewhere and develop the safe work playbook.
The playbook was designed to standardize best practices for our global operations and give our local management teams the tools that they needed.
It is a plan to protect our people and minimize the chance to spreading the virus in our plant in office locations.
Yes, we have seen this players is very unpredictable.
The best practices and protocols, we had in place today will change as we continue to learn from the medical community and our experiences at our own facilities in locations around the world.
[noise] playbook has been downloaded over 23000 times from our website and the response from around the World has been overwhelming we will continue to share our best ideas and we'll seek input from others as well we understand that this playbook isn't a failsafe.
And we have no eagle if we find a better practice out there we will update the playbook for use within our own facilities globally.
Turning to slide 18.
However in the history of the auto industry have we seen an extended global shutdown followed by a nearly simultaneous relaunch of our plants around the world.
Restarting production on this scale is a monumental tasks made even more challenging but they need to add safety protocols to minimize the potential spread to the virus.
It's more important than ever to have significant operational expertise during these unprecedented times.
There has a long history of operational excellence with a highly detailed procedures and consistent consistency applied across our global manufacturing locations.
This experience was invaluable to us as we developed a sophisticated plan for how to execute the playbook.
The playbook alone is useful but without established framework and protocols and the disciplines in the tools to execute the plan success will be limited I'm very impressed with the team did to design a plan that allows us to restart and run our manufacturing facilities safely and ensure the well being of our employees.
The early feedback from employees in the plants that have reopened has been overwhelmingly positive.
We will face challenges along the way, but with the right disciplines in place I'm confident the playbook will help us operate our plants more safely and optimize efficiency as we transition to the new work environment.
Turning to slide 19, the 2008 2008 find that 2008 2009 financial crisis taught us the importance of staying focused not only on what is immediately in front of us such as the day to day operational challenges in liquidity management, but also on innovation technology and long term.
Strategy.
The cobot 19 pandemic will have far reaching a long last lasting impacts on our global economy in society and broad implications for layers business.
I was just too soon to know precisely how we know the industry will chains or as a result of the upheaval.
So I have created a senior level team that is evaluating potential changes in the industry landscape shifts in technology Mega trends and new business opportunities for both seeding new systems in a post pandemic world.
This team is working closely with our business unit leaders to ensure that leer strategy evolves with potential market and industry shift due to Covance 18.
All right now managing our business day to day requires our immediate attention. We're also committed to positioning lear to capitalize on future strategic growth opportunities.
No you scaled back some near term R&D, we've continued to support investments that will be important for executing our long term strategic plan.
Given our financial strength flexibility and market position, we are well equipped to drive change and adapt as the industry evolves.
Slide 20 describes initiatives taken by layer to support the battle against Cold 19, including donating masks and other personal protective equipment to hospitals first responders and communities a need.
In February we identified a need for mask to protect our employees and families in China as a testament to our ability to innovate and adapt the Lear team worked across the globe quickly to design engineer and ramp up the production of mass.
I'm amazed at the way the linear team came together to develop this in how solution.
Which put us in a position to help our employees and their families as well as those on the front line of this crisis.
We're on pace to produce over 1 million mass per week.
Building on Lear strong culture of supporting the communities, where we live and work our employees acting on their own also have found ways to use their resources and skill to help their local areas I'm. So proud of the team and what they have accomplished during this time.
Now turning to slide 21 in summary, the first quarter was marked by significant industry disruptions. Unlike anything we've ever experience.
The what the team accomplished from an operational standpoint, especially with nearly everyone working remotely was truly remarkable.
I believe this was the best performance, we've ever had collectively as a team.
Of challenges remain I continue to be impressed by the dedication resolve our employees worldwide.
I remain confident in our ability to successfully navigate this crisis and position the company for longterm success.
Now we would be happy to take your questions.
Yeah.
[noise] as reminders asked that question you don't need to parse it star one on your telephone.
Question, Okay pound key.
And your first question comes from delight.
Joe six pack from I.D.C. kept down like that you're not even that open.
Thanks, Good morning, everyone. The morning, Joe.
Jason Yeah, maybe to to start a appreciate it sorta. Your your comments on the detrimental margins I was wondering if you could just sort of.
Spend another second on it because I I know, there's some maybe some rounding and you're just using sort of estimates but.
Mental margin on the covert information you provided was like 22%, which is actually better than the 25% pet you experience in a quarter. So can you just talk a little bit about about what what sort of going on there and and I guess more importantly, how you see that detrimental margin performing as you move into second quarter.
And then when the regional exchanges.
Sure. So in the first quarter, Joe you know in addition to the impact of of covert 19, you had the the usual volume and mix fluctuations that happened prior to that you had a layer of of customer pricing in performance on our on our side and and so you had all those other factors that impact.
The results, but if you look at it by segment in Suiting, you know, obviously, a better better conversion year over year than any systems, where you know we continue to see the same effect that we saw and the third quarter and fourth quarter last year.
Changeover of new of of programs from the old miles to the new model ruling out at slightly lower margins. So that's really the main thing sort of diluting the year over year conversion that you see in the first quarter. So that at 25% is not necessarily attributed to just colder 19. It's also all the other fundamentals that are happy.
And with the business as we look forward.
The balance of the year, you know our our normal variable margin is about 22 or 23% in in both businesses combine.
And we expect to see you know about three point impact on that for the combined effect of sort of the one time cost of P.P. and other and other costs were going to encouraged to prepare our facilities to relaunch and this this posts pandemic environment and.
We expect to see about a two point impact as a result of the inefficiencies associated with running production yeah less than full capacity for an extended period of time and that's why we describe it's similar to what you see in a new facility ramp up you're gonna have you know what we've seen for example in in Europe many of our.
Plants restarted production last week on one shift, but ran at 20 or 30% of the normal volume level. So you have your full complement of of labor and overhead in the plan, but you're you're only seen 20 or 30% of your normal production output and so overtime that will diminish, but we believe you know that could be in the neighborhood of a 100 million.
Silver.
You know the remainder of the year. So that's that's the other factor. So that takes your detrimental margin from 23 up to 26% now working the other and the other direction, we have our cost reduction program, which we're expecting to see savings of about 250 million for the full year it's resolved.
Oh, those plans and we design that plan to to operate in an environment, where volumes were down 25% to 30%. So if you do the math on that if if volume is down 25%.
About a 5 billion dollar reduction in revenue.
That works out to about 50 basis points improvement in or five point improvement in in bars, and say can you from 26 down to 21, if you assume a 30% reduction and volume for the full year or 6 billion in revenue than that cost reduction program would be worth about four points. So that's hence the range of.
20% to 22% those are sort of the big puts and takes Joe.
Really really appreciate the color Ray maybe maybe just bigger picture you know you mentioned some of the action said well your talk during the financial crisis, you know if I look at your slide 14 to date you know there's been some tactical restructuring. It seems like you could still do more especially if you sort of need to move on to to phase.
<unk> same with S.G.N.A. savings is that really you know that stuff is is in the additional lovers bucket just because things happened. So fast and you have another chance to to plan and implement or is it really only truly needed.
Things get much worse and if it's if it's the ladder like why wouldn't you still try to take the opportunity to to to get some more savings here as you as you sort of reevaluated everything.
Yeah. That's a good question then.
Yeah, I think I look at this way in in.
You know nine is nothing like what we're experiencing today.
You know nine was really a financial crisis that cut the man immediately and.
Obviously, we could you know really cut our cost based on our customers cutting their programs and they really getting it or overall cost. This is obviously more of in in in no way. You know name was really North America Europe did you know come down and volume, but China in South America, we're doing well.
And so yeah, we could do things a little bit differently, given that we knew their customers were very aggressively cutting their programs.
Today. This is supply issue you know right now and we know it will lead to a demand issue, but that isn't really clear today and what is going to and how demand is going to be impacted so you know Jason I work through this and really put a plan in place that we looked at it from different phases, and we had different models that we had.
Built up on different scenarios based on what the demand will look like what we don't want to do in this scenario, there's something that we learn from innovate no nine we did get very aggressive with our cost cutting and when volumes did come back we were not in a position to take advantage of those and what we want to do is be mindful that.
We we do believe there's there's more cutting in cost cutting that though we're gonna have to do I think we have to be much more selective in tactical about that I think a demand will come back in particular programs, but I think everyone. In the question is is this a V.U.L. shaped type of scenario and as we start to get more visibility on.
We can be much more aggressive or if it's steps back quicker we want to be you know a very good position to strong position to again those benefits and so yeah. I think we're gonna we're going to know more we know a little bit more what seems to be every single week, but we did take a very technical approach in in strategic approach on how this is it.
Acting our business in in what the potential demand is go look like in in the next several quarters.
<unk>.
Thanks, Yeah.
Mm.
And your next question.
Right.
Slash some wolf you take your line isn't that okay.
Good good morning, everybody just <unk> wanted to follow up on Joe's question, just I I understanding that you and and I think a lot of suppliers are kind of in a holding pattern because you have to be ready. If production does have a cover I I was just hoping you can maybe just clarify for us if.
If you did determine that revenue where to stay at you know maybe like the Q1 run rate for awhile. So you were annual I think it just 18 billion.
Can you just clarify what how we should be thinking about the the margin recovery from here.
<unk> from what we were observing and in in the quarter should we be <unk>. He is is there a incremental like 250 million annual lies savings versus what we were observing in.
In a quarter it and you should we be you know mitigating that by some of that the P.P.E. costs and other inefficiencies that you.
Not sure if those are are viewed as permanent.
Yeah, I would say first of all just in terms of adjusting the business to a lower volume environment. Yeah. We have cued up a number of restructuring plans that are ready to go once we have a little better sense of of what the Runrate looks like.
Coming out of the of the crisis and and so.
Those are geared towards you know taking structural costs out or more permanent basis to improve that detrimental margin you know into into the first half second half in 2021. So we can take those actions in the in the meantime, they'll what we've done is we have cut capital spending and we put <unk>, we're putting less capacity and.
Place, particularly in the component plants anticipating that there will be some near term weakness and dime at least into 2021, so that that will be a factor that will further improve the detrimental margins. If you look out to the next year in terms of the permanent see the cost reduction actions most of what we've done.
Here with our cost reduction program is temporary in nature, and so I wouldn't look at that yeah, something that will repeat itself next year a lot of the cost we've taken out we won't put back in until volumes come back. So some of that will carry end of next year, calling for main week.
But but much of that will come back again as as volumes recover we would target enough of that to cover any ongoing costs that we see from operating our facilities differently because of the results of the pandemic. So I would say that the goal would be for that to be sort of push rod. If you just look at the incremental.
Cost or a permanent basis on due to cold at 19, and then the permanent impact of some of the cost reduction efforts that we've put in place this year sort of balancing out.
Oh, Okay, I I guess I'm I'm, just trying to ask the question a little bit differently, you you're talking about margins.
For the segments that could've been north of 8% had it not been for this this impact of <unk>.
Are you <unk> are you are you able to at this lower revenue base given enough time.
Restructure to those kinds of margins.
They percent or or or better against is ultimately <unk> ultimately my question.
Yeah, I wouldn't say that that's something we can do in a one or two quarter time, very but over a a 12 to 18, Bob time period that would absolutely be the objective than in a lot of the restructuring programs that we have a cued up as I as I mentioned, a moment ago are designed to do just that allow us to earn.
Similar operating margins in a lower volume environment I don't think it'll be precisely the same you know the eight eight per cent plots that we saw in the first quarter, excluding the impact of covert 19, probably be a little bit lower than that but that's that's the the overall objective of of what we're doing with restructuring so I.
Yeah, I I would I would probably costing you from you know trying to put a precise number on operating margins by segment next year I think there's just too many moving parts right now, but the longer term goal would be to do just that okay. Just lastly, ray we would you mind just giving us.
Some perspective on what you're hearing from your customers on the production trajectory from here and any thoughts on on Mexico for you, which has been an issue for thing for a number of suppliers.
Yeah from our customers.
Needs. It a lot of our conversations that I've had with the customers have been around readiness getting getting up and running and I'll say generally across the board, they're very optimistic and and obviously talking about the demand. They believe there's demand there. So we've done you know.
It had number of conversations with our customers in respect to getting our plants up and running to the volumes that they're requesting and I'll tell ya. The early indication coming out to Europe is very positive, albeit not at the levels. They would like to see I'm, a very optimistic given we've been up for two weeks now and we've been able.
To run our facilities to supply chain has been able to run a somewhat efficiently and they seem to be doing a nice jello producing vehicles will start running production here on the 18th in some of our other customers I was just down in Tuscaloosa last week with what's going on with dine learn in they were actually trying to push ball.
And get volume up and so they seem to be running very well. So I think generally optimistic in in working with our customers closely understated volume that they'd like to see but they do actually believe that the volume and the demands there.
In respect to Mexico, Mexico has been.
Challenging for US you know we have 170000 employees.
Around the world and we've have over 240 facilities.
And unfortunately in in the war as a region, we've been hit pretty hard by this virus.
Been down we haven't been running our production production been shut down for over six weeks and I think this viruses spread obviously spread throughout the world. It different timetables, you know starting with China than to Korea than to Italy than through Europe here in North America now I believe next school is probably.
Three weeks four weeks behind North America, So I still think they're going to have a some challenges you know we're we're.
Behaving, obviously very aggressively with our protocols and making sure we have a safe work environment, we're bringing our workers into shown to step. So we're taking but obviously, we can't do anything as far as a manufacturing because the orders are we can't affect your components are material, but I do believe that Mexico is behind.
The curve in respect to this virus and we're starting to see some of that particular regions with hot spots.
Okay. Thank you.
<unk> next question.
Yeah.
That.
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Yeah.
<unk>.
[noise] Hi, good morning, <unk>. Thank you you might want to just yeah, yeah, <unk> well want us to just.
<unk> with a question on the the outgrowth I mean this the outgrowth you had in the first quarter with a lot higher than the typical quarterly pace, we'd seen in the past skews provide a little more color on on the driver's of the outbreak, especially in China in North America works for customers doing any.
Stocking up pre downturn and if there was a one time benefit should we expect any pay back and change course, it just the broad color on <unk> the the opera in corner.
Yeah. So in in China. The main driver is particularly with the premium customers have held up better than.
Everyone else in that market and we have a really strong business with Saddam learn B.M.W. in particular and they had they had a very strong first quarter. That's the biggest a driver or what we saw it in terms of outgrowth in.
In China in North America, and we talked a lot about this last year that this.
Into the change over of our our major platforms and that we would eventually get through that and in fact, we did and you saw a really strong performance from G.M.'s full size trucks for explore was up significantly year over here at the big platform for us as well and we had strong backlog and bowl CD an anti systems.
In the first quarter that was predominantly in North America. So those are the big drivers Dan.
Oh, no no one time benefits in there.
No no.
<unk>, Okay, and then just one small follow up on that it can we extrapolate this type of outgrowth to future quarters. It was this just you got really lucky with an excess corner.
Well I think there's there's so much uncertainty as to when customers will watch that you have that added complexity or around who's going to be able to ramp up and and whether they're going to.
See any yes setbacks with their production because of the pandemic, but I would say in China were seen into the second quarter, a similar phenomena, where the premium customers seemed to be producing at a higher rate then the rest of the market and so we would expect to see some continue.
Benefit.
In our seeding business in China as a result of that I think also in North America to the extent everyone can ramp back up there's tremendous pent up demand for the G.M. full size truck platform, which is our largest platform. So that could lead to some further outgrowth in North America as well.
Okay, Great and then just a second question on the text spend which it sounds like you've.
Temporarily pulled back which makes sense in this environment to the longer term focus is still intact well one could make the argument that given you know that the predominant exposure for the company's seating, which is much less capital intensive you probably have some leeway to more aggressively.
Cutback on spend in if you want so what is the ability to cut back on spend or is it just it's still the view that the future opportunities and use it didn't electrification and kind of activity just shouldn't be compromised and so you're still it's only going to be very modest cuts to tax Bender r. and d. spend I really just on the margin.
Mmm yeah.
I think again like we said, we're we're being.
Very strategic in our approach to were spending in technology innovation and we do believe that we will continue to bend them and looking at the Mega trends. We don't you know we don't see significant shifts you know China for example, as well on their way Europe is in a good position so.
See the Mega trends still being in place now would that said I I think every customer is different and they have different liquidity needs in in in they're going to look at their capital differently post. This virus in so what we're doing is is really looking at how we place our technology, where we play Sir.
Technology, and who will place our technology, whereas in so we believe the market trends are still going to be in tech and that investment that we're talking about supports those mega trends, we believe kind of activity.
It's still going to be important in the future and if you step back now you're going to lose your your position. It was you know very similar to what we're talking about with no wait no nine where if you backed up too much you lost real good busy business growth opportunities above market didn't so we are being very selective we we do believe in the mega trends.
The positioning ourselves in particular regions in with particular customers because they're not all equal, but we do believe that we can continue and we have we're fortunate to have the luxury in the flexibility to to look at it that way a lot of suppliers. Unfortunately don't have them. We do believe that when we do emerge will be in a good position.
To continue our growth trajectory.
Great. Thank you.
Yeah. Thanks.
Hmm.
And during next question some deadline.
<unk>.
Your question.
[noise] Hi, good morning morning, I was intrigued.
Hi, I'm always intrigued by your comments in prepared to remark, where you say you think there will be some new business support G.P.S. who's <unk> as the industry shifts can you just elaborate a little bit more I knew you just have it megatrends I'm not changing any sort of shift street you look for anything that that may change and go for.
Susan and hide those that actually provides you'd use unfortunately.
Yeah, Yeah. That's it's a good question and let's say, it's it's somewhat speculative on my part, but I do believe you know if we focus on the customer in and add value to work in our customers. We believe we can put ourselves with position to to win business and let me give you. A couple examples you know there there was some shifts in in some changes with.
Some of our customers in full service design responsibility for seating no right. Now you know seat consists of 60, maybe 70% directed components in components that are directed outside of our capabilities. We were seeing shifts that were leading us to in some cases being awarded full service.
<unk>, you'll being of the most vertical he integrated C. company in the world. It puts us in a really good position to go in and help our customers that they start to rethink through their spend and their engineering dollars. A that we can help them I think another. Great example is you know we talked about engineering components in the wiring business in the team.
With Carl Esposito, and and might ballsy, we're doing a great job of winning engineered components, which increases our content and also are margin profile and they were doing a nice job prior to <unk> I would think that that's an opportunity for us to talk to our customer to accelerate those opportunities because they can benefit from.
Value proposition and then I think you know just generally the world's changing you know just from a hygiene standpoint, you know is their opportunities that we're talking to our customers right now on an infection or resistant materials anti bacterial relative to the interiors <unk> consumers.
Behavior change.
So that's why we set up a very specific team that's aligned with their overall strategy to help develop plans that we can accelerate our grilled. So I think sitting here in in thinking that the world is going to stay the same way is is not the right approach being much more aggressive in a proactive approach to help our customers because I do believe I think about.
Product cycle in terms of one to five years that I think over the short term, there's some really good needs, where we can help them.
You know in you know give another example, we we have $100 million of what we call it costs technology optimization in front of our customers.
You know I'm hopeful and we saw it back in <unk> Oh nine they were much more flexible on implementing ideas.
Oh, you added value engineering, so we work hard on building a cue like I said of $100 million worth of ideas that we can help our customers at the same time help lear benefit with growth additional content in March and opportunities and so you know and then we have a a number of different opportunities that we're working on his thinking through that the team.
Done excellent job of being very focused and you know making sure. We're we're we're watching all the different behavioral issues that might occur and then capitalizing on those.
Okay. That's interesting and then on the <unk> Oscars in terms of this new business launches and okay. So the year are you seeing seeing progressing pretty much on time, and you don't need delays or cancellation and one shape and obviously the back like you said you reported was but.
Hundreds 30 million and a quarter I think your initial <unk> yeah. It was in a union 25 million <unk> I I understand when you just for your volume in new reality, but direction speaking use the business you're anticipating this you're still watching this year.
Yeah, Let me I'll hit the first presentation will follow up with some details like you know a lot of the discussions like I said, a manual would've been around just restart quality, you know P.B. equipment, and making sure supply chain and everything's in place and and what we have gotten from our customers now you know in respect to delays are cancellations is.
You know the the time that we were all.
No sheltered in place in in down to those timeline to kind of shifted by the same time that we've been down and so a lot of the programs have moved in respect to the time that were down as far as cancellations. We've seen some derivatives. Some smaller programs those type of things that have been cancelled nothing significant I think.
This way you of of of five year window, you're wanting to pretty much contact with you know just the delays I talked about because of the time that we've been down no significant cancellations I do think our customers are you know reprioritizing their capital needs are looking at years, three four and five but.
We we don't we don't have a that inside at this time, but I do think and believe they are reconsidering some of their product planning and respect to this crisis in in his right as far as some of the details you. So yeah. There hasn't been any significant program delays upon programs in the backlog per se, but I would expect that.
Over time, we would see some shifting programs that were plan to launch later in this year, maybe slip it into the beginning of next year and the bigger issue certainly going to be the level of overall production volumes you know looking at the second quarter alone.
We're anticipating somewhere in the neighborhood of 60% to 70% of reduction and volume from what we had previously expected that we'll have a meaningful impact on on the backlog and then and then it's just a matter of you know seeing how the ramp up progressive into the third and fourth quarter and and ultimately how the manhole.
But we would expect that there'd be further volume reductions in the second half of the you're certainly as well and we're building our plans based on that.
That makes sense. Thank you.
Thank you thanks.
And during next question comes from Tonight.
The county.
City, you're like isn't that what I'm, saying.
Oh, great. Thank you all get good morning.
Just.
Just a couple a couple of questions first for Jason I'm going back to the the decremental margin for the rest of the year that the 20% to 22%.
Freaked out by by the two segments and then also if you could share any kind of directional color around how should think about kept extra working capital in in Q2, and then maybe be on that as well.
Okay, I'll, maybe I'll start with the second part of the question first and come back to the Sacramento margins.
In the first quarter as I mentioned on the in the prepared remarks, we did see a bad after from working capital in Q1 as a result of the late quarter run into our quarter ended on April 4th and so some of our customer collections that ordinarily would happen in the second quarter happened in the first quarter, we see about 50 million dollar.
I had when in the second quarter due to working capital as a result of that that by itself, there's going to be an additional headwind on working capital in the second quarter do the restarted production as we're bringing material in anticipation of our customers ramping up and so there's a high like likelihoods will incur.
Some of those cast aspersions in the second quarter and not see the full benefit receivable questions until the third quarter. So I plan on another 50 to 100 million for that so I would see of working capital headwind into hundred 150 million dollar range in the second quarter are we taking steps to try and offset that we've.
Capital spending.
And we believe we can take 20 per cent out of that number without damaging any of our our operating plants, mainly because again the lower overall volumes that we're seeing in the industry and some delays on programs that were slated to life later this year and even in the beginning of next year, allowing us to push that.
That capital spending out so that that will help a little bit we're gonna we're trying to realize the majority of that benefit as much as possible in the second quarter to help a offset.
The cash cash Byrne, that's when it happened in the second quarter due to working capital and anticipated losses in the corridor due to the very low production volumes. So those mostly the main factors I talk about for the second quarter terms of detrimental margins between the two segments.
Overall, we've talked about this in the in the past that she didn't runs between 15 and 20 per cent any assistance between 25% to 30%. So the spread we would see for this year will be very similar to that between the two segments that you systems is going to convert maybe five points above that target and.
<unk> going to be five points below that target roughly speaking.
That that hopefully just to follow for re maybe it an update on just your new business discussion any improvement in the level of activity and wouldn't reach an awards cutovers Q1 in in how to how you directly thinking about you know that the 2022 backlog and the ability to kind of.
Build that up this year.
Well [laughter] <unk>, we we had a great quarter. This first quarter and we had a a tremendous amount of new business a window, primarily conquest wins and so we were on pace and really having a good start to the year until obviously the the the the pandemic hit and so we're looking forward to kind of make.
Some announcements here and Jason you want to add any color was enough emphasis or yeah. So we had a as race that a great first quarter before this this recent slowdown so we had over 900 million of new business awards and seating in the first quarter, including almost 500 million of conquest of work. So we've been talking about this for.
A number of quarters waiting for for this to happen. We saw it again last year. When we got 300 million of conquest of work that we have 500 million in the first core so we're pretty excited about that and these systems. We saw similar pace to send your business awards in the first before we had more than 250 million and told me business.
Warts, we we have seen a slow down and the the sourcing process. Just by you know as a result of stuff people working remotely and and so we would expect to see that the total awards for the year, maybe down a little bit as a result of that certainly for you know for the second and maybe even.
The third quarter, but overall you know our pipeline is strong and bowl segments of the the the underlying fundamentals of of growth or certainly still in place and bowl segments, and I'd say, even add to that that even in the downtime in working remotely.
Some really good conversations with some key customers on some.
Business that were quoted and a big programs and so yeah I'm optimistic I think in general like Jason mentioned, just because everyone was working remotely and you know some efficiencies as far as some of the quote unquote process things did slow up but in in respect to some of the bigger programs. We're.
We were quoting and working on those were pretty much intact, and we were working aggressively on getting the customers what they need as far as a a technical specs and and quote related material. So it was moving despite the fact that we're moving we're in working remotely in having good conversations.
With our customers.
Great that that's all very helpful things so much.
And your next question.
Brian Johnson from from like me, you know like isn't that okay.
I think it.
You you sort of touched on that but just trying to get some for their color. Your balance sheet is in a quite different place then what you had in.
Oh, 920, 10, plus you're standing with customers just kind of a blue chips supplier with balance sheets quite different so given that you kinda hinted at perhaps using it for M.N.A.
You know kind of thinking about that where would you see the opportunities between.
Further vertical integration exceeding versus.
E. systems, and we'd you'd be looking more at kind of bike size things using cash on hand, or perhaps larger using a combination of stock in cash.
Yeah. It's a good question that I think at this time, it's it's it's too early you know right now it's the here now focusing on getting these plants up and running but we are keeping an eye on you know different types of opportunities that might present themselves, but obviously, it's too early in that process to start.
You can get any type of m. in a but but we are mindful that and making sure. We're looking at the different opportunities that might present themselves in respect to where you know it'd be it'd be it would be more of what we've been doing it I think we've done a nice job of these the string approach Ah getting done very good.
<unk> complimentary type companies that can help us grow you know we've we've talked about the areas. You know we were doing nice job of building up our software capabilities were doing a nice job we've talked about the vertical integration the need to become more vertical in D.E. systems area of electronics power.
Solutions. So we think there might be some opportunities there, but that's you know we're really strong and seating we think that we have a a very strong position, but the most vertically integrated company. We think opportunities will present themselves. We were looking back at this and seeding, but still very much in tact with the strategy we had prior to Kobe.
Just being very mindful of what's going on in the industry and how the landscapes changing and if in the event like I said when the opportunity is right. We want to make sure that we can take advantage of it.
Okay, and just as a quick follow up you you talk about being vertically integrated which I agree with yet your biggest competitor is also very quickly integrated up into the seat structures are medals a business that they got by their own admission and plain numbers have struggled with.
Would you be looking at taking over any of those plants or Alternatively did you have any desire to deep in your kind of metal bending.
<unk> Oh no no no. We we I think we've I won't be very clear <unk>, we have good competencies in a good business and instructions we have no intent to strategically grow that business, we <unk> well positioned for what we need to have the design capabilities to allow us the ability to grow.
But no I know, we we have other ears, when we think about the things that we're doing in seeding with configure plus which is a great feature that allows the consumer too move throughout the vehicle gives you flexibility that's a great area for US we continue to look at <unk> metrics and smart.
Seats in adding content, where we can create value and give our customers technology and innovation. So we see more of the integration of software and embedded technology to help our <unk> our customers differentiate their products, that's really where our value proposition.
As a net if we're to focus on in there's very <unk> a number of similarities with what we're doing these systems. That's why we're into such a great position to to really create that intelligent seat system, which you know, we're we're really doing a nice job of getting design contracts in in contracts with our customers on those applications.
That's where our focus is that we believe there's a value creation through the content in features that our customers can differentiate their products and not within the <unk> the component area of structures.
Okay. Thank you.
Yep. Thanks.
And your next question <unk>, something like <unk> keep that kept them why can't you may ask your question.
Hey, good morning, guys.
Morning, just on just on Zibo, you know how should we think about break even timing. There you know that the original expectation I I believe was for you know some kind of an in a creative impact beginning and 2021 so.
Yep curious what that timeline might look like from here get you know given the unique situation.
Yeah, I think you know that businesses impacted by volume as well certainly this year just due to the the licensing revenue impacts to the the reduction and our expectation for volumes for the full year. So we will we will like we lose body on that business for.
This you're looking out for next year, we do see a glide path to profitability and and and beyond that into 2022, we would expect it to be a creative I think it will be a little bit take a little bit longer to get there, but not that much different than what we initially I had anticipated.
Got it that's helpful and then just thinking about E. systems.
In the quarter Sacramento's.
How how much of the of the impact attributed to you know you're you're higher margin legacy China business and that you know the obvious industry pressures in the corridor.
And you know maybe just sent in updated sizing a what.
What that mix.
<unk> comprises in term you know for the segment.
Yeah. So that's the biggest.
The biggest issue in the first quarter in terms of the margin compression. There are many systems is it's a continuation of what we saw throughout last year. So Q1 of last year. We were at you know, 11% operating margins any system. So that was sort of that last quarter that has a legacy impact.
Higher margin programs and so as those programs watched throughout the year last year, we saw that number come down in the second quarter and then it's it's stabilized at that rate. So if you look a sequential basis. It's it's very much in line with what we saw in the fourth quarter. So there's we're not seeing.
Any more sequential margin erosion due to your business watching it's watching consistent with our existing margins in the segment, but it's more just the the the fact of the first quarter of last year at about 11% was sort of that last high water mark quarter that we had.
These systems, it's not China, it's more in North America in Europe, where we had a change over from an old old platform to new platform or the the new bargains are very good but there there are a little bit lower than the outgoing program. We would expect again over time to to see those margins come back.
Two or in line with what what they were previously but you know we're we're six to 12 months into most of those programs that changed over and and so we'll we do need some time before you'll see that margin come all the way back.
<unk>, that's really helpful and just cook fall onto that when thinking about 2021, and the base business free systems, excluding new business backlog, how should we think about the incremental.
Into next year on that based businesses given you know the the dynamic changes that that have you know.
Been experience over the last you know 18 plus months.
Yeah.
Yeah, the businesses launching into the backlog generally is in line with the segments overall averages we see that expanding overtime as the share of electrification are all electronic and connectivity products start to pick up a bigger proportion of the backlog.
So if you look out towards the second half next year and a 22, you'll start to see I I think some margin accretion through the backlog as a result of that but I'd. Our core wire business. You know, it's sort of rolling on consistent with our historical margin that we've seen over the last 12 months.
Thank you.
Thanks.
Hmm.
Mmm.
Okay. Okay.
That's it operator.
Lost her operator.
Maybe that's yeah, there's four more yeah.
Okay, well I think something happened or operator, so oh judge for getting cut off but.
This time I just like to.
Okay. Thank you for the whole Lear team I mean, it was a it was an incredible quarter.
Working remotely I know the hours that everyone put in it was a truly incredible remarkable I know, we built an incredible team in it shows in the execution and what we delivered in so we have the right priorities. There's no question about it I, absolutely and passionate about the things that we're doing the.
The way we're handling this in in the passion in the attitude within the organization. So I just wanted to say say thank you the whole team and thank you for everything you've done.
Oh <unk> conference call. Thank you for participating disconnect.
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