Good morning and welcome to the Lear Corporation Second Quarter 2021 Earnings Conference Call. All participants will be in a listen only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. And please note today's event is being recorded. At this time, I'd like to turn the floor over to Ed Lowenfeld, Vice President of Investor Relations. Please go ahead.

Thanks, Jamie. Good morning, everyone. And thanks for joining us for Lear's second quarter 2021 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 have also joined us on the call. Following prepared remarks, we will open up the call for Q&A. You can find a copy of the presentation that accompanies these remarks at ir.lear.com. Before Ray begins, I'd like to take this opportunity to remind you that as we conducted the call, we will be making forward-looking statements to assist you and understanding Lear's expectations for the future. As detailed in our Safe Harbor statement on Slide 2, our actual results could differ materially from these forward-looking statements due to many factors discussed in our latest 10-Q and other periodic reports. I also want to remind you that during today's presentation, we will refer to non-GAAP financial metrics. You are directed to the slides in the appendix of our presentation for the reconciliation of non-GAAP items to the most directly comparable GAAP measures. The agenda for today's call is on Slide 3. First, Ray will review highlights from the quarter and provide a business update. Jason will then review our second quarter financial results and our full year 2021 outlook. Finally, Ray will offer some concluding comments. Following the formal presentation, we'll be happy to take your questions. Now I'd like to invite Ray to begin.

Thanks Ed and good morning everyone. If you can please turn on Slide 5. I'm going to provide a brief overview of our second quarter financial results. In a very challenging environment marked by components shortages, and significant production disruptions, Lear team delivered solid results in the second quarter, with sales of $4.8 billion in core operating earnings of $233 million. Our financial performance improved significantly versus last year, when the global pandemic led to extended production shutdowns in North America and Europe. Adjusted operating margin in the second quarter was 4.9% and earnings per share was $2.45. Slide 6 provides some business highlights from the quarter. I'm very proud of what the team accomplished. For the second quarter in a row, we successfully navigated supply chain shortages and related customer production shutdowns. Lear's sales growth outpaced the industry by 11 percentage points in the second quarter. We continue to focus on executing our strategic plan, which includes developing innovative products and technologies across both business segments and investing in our manufacturing operations to extend our competitive advantage in operational excellence. Our backlog is growing, driven by new business wins in both seating and E-systems. I will comment further on some of these product wins on the next few slides. We're honored that Lear was named as General Motors Supplier of the Year for the fourth consecutive year and for the 20th time overall. In addition, we received an overdrive award from General Motors for developing innovative second row seating functionalities in the GM full size trucks and creating the Lear Safe Work hit handbook and sharing it with the industry. In May, we released our updated sustainability report highlighting our growing portfolio of green technologies, the achievements and diversity, human rights and governance in our ambitious climate change goals.…

Thanks Ray. Slide 10 shows vehicle production and e-exchange rates for the second quarter. During the second quarter of 2020, industry production in North America and Europe was negatively impacted by extended COVID pandemic related shutdowns. While the second quarter of 2021 industry production volumes rebounded from 2020, total production in the quarter was negatively impacted by component shortages, particularly those related semiconductors. Global vehicle production in the second quarter increased by 51% compared to 2020. On the Lear sales weighted basis, global production increased by 72%. From a currency standpoint, the U.S. Dollar weakened against our major currencies compared to last year. Slide 11 highlights Lear's growth over market in the second quarter. Total company growth over market was a strong 11 percentage points, driven primarily by favorable platform mix and new business. While our seating business benefited from customers prioritizing production of full-size truck and SUV platforms, E-system's business mix was disproportionately impacted by supply chain disruptions, particularly with some of the segments largest customers and in China. New business and E-systems in the quarter partially offset the impact of the supply chain disruptions. Growth over market in North America of 24 percentage points reflected the benefit of new business in both segments and strong production on GM's full size pickup trucks and SUVs, as well as Audi, Mercedes and Hyundai SUVs. In Europe, growth over market of 10 percentage points is driven primarily by new business, as well as strong performance in the luxury segment. Our China business lags the market by 5 percentage points due to lower volumes on our key platforms. Slide 12 highlights our financial results for the second quarter of 2021 compared to 2020. Our sales increased 95% year over year to $4.8 billion. Excluding the impact of foreign exchange, commodities and acquisitions,…

Thanks, Jason. Nice job. Turning to Slide 23. I'm so proud of the team's performance this quarter and for executing our plan in the face of the component shortages, and significant production downtime. While continued supply chain volatility is driving uncertainty in the near term, I remain confident that Lear is well positioned to benefit from the industry recovery we expect over the next several years. Our financial position is strong, and we will continue to make investments to strengthen both business segments while returning excess cash to shareholders. We are laser focused on executing our strategy to drive profitable growth and deliver superior returns to our shareholders. But before - I do want to pause for a moment before we move on to questions, and I do want to take the time to recognize our team in Mexico that arranged for 1000s of COVID-19 vaccines to be provided to Lear employees, family members, residents and employees and other suppliers a few weeks ago. The team transformed our plant parking lots in open warehouse spaces into vaccination centers, and coordinated the inoculation of over 25,000 people over the course of a week. I think this is just another example of the great work our teams are doing around the world to support the communities where we live and work. And I do want to say thank you for all your hard work and the great work that you've been doing. And now we'd be happy to take your questions.

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question today comes from Colin Langan from Wells Fargo. Please go ahead with your question.

Great. Thanks for taking my question.

Hey Colin. Good morning.

Good morning. Maybe we can talk about commodity costs. I think you said it's $175 million. That's the cumulative of year over year hit in your guidance. How much is it year-to-date? I think I'm coming out with something closer to 50. So, that means quite a bit in the second half. But maybe my numbers are wrong. And can you just remind us, what is sort of the hedging offsets that might be coming sort of how much of your business is hedged? And any thoughts on how this might run into 2022 from a commodity side?

Sure, starting with the cadence of the commodity impact, so it's $135 million for the full year, about $40 million of that was in the first half and $95 million of that is in the second half, largely driven by the run up in steel and the fact that we had locked in much of our buy in the first half of the year. In terms of hedging, we don't do much in terms of hedging either of steel or copper. Our best hedge really is our commercial agreements with our customers. So, on the copper side about 90% of our copper buy is on an index in our pass-through agreement with our customers. Some cases, there's a three or six month lag, but most of it is pass-through quite quickly. And the steel side, about 85% of our buy is insulated either by customer agreements or where the supplier owns that buy and about 15% of that is our exposure. In terms of what we see going into next year, it's a bit early to talk about guidance for next year. But certainly, we're exiting the second half of the year at a higher rate for steel than at start of the year. So, I would expect there to be a cost headwind for that. On the recovery side, because of the lag in some of the recovery on steel, we'll see a benefit next year that will partially offset that. In terms of copper, we see the low point, or the most significant impact in the third quarter. And that improves in the fourth quarter again, as the pass-through mechanisms take effect. And I wouldn't expect a meaningful impact next year for copper. Copper has come down off of its all-time highs, which I think were reached in April or May of this year. And so, we would expect if anything, maybe a little bit of a tailwind on copper.

Got it. And when I look at the guidance reduction, I mean, the decremental at the midpoint seemed to be like over a little over 30%, which seems a bit high. But other than I guess it looks like you said a $95 million increase in commodity that would make that decremental under 20. Any other factors to be thinking about that would impact how we think first half to second half decremental?

From the first half to the second half, yeah, there's two things going on. One is lower volumes. So, if I look at our change in sales, first half actuals to the second half midpoints reduction sales were $130 million, is actually an increase in sales for the commodity pass-through about $55 million and then volume next and everything else is negative $185 million. So, convert that, it's about $40 million of operating income, commodities are $95 million higher at least about $10 million of favorable incremental operating performance sequentially from the first half to second half.

Okay. All right. Thanks for taking my question.

Thanks Colin.

Our next question comes from John Murphy from Bank of America. Please go ahead with your question.

Good morning, everyone. This is Danely Smith [ph] on for John. I wanted to the first question - good morning. First question around the semiconductor shortage. Obviously, we heard from one of your major customers earlier this week, and they're really bearing the brunt of downtime in the second half, particularly on the truck side where you have a lot of content, which is partially a function of them pulling forward some chips, but then also COVID outbreaks that are forcing incremental downtime. Given there are some pretty wide indications on the production outlook in the second half of the year, how much of your outlook revision would you say is more attributable to that one major customer of yours versus what's a function of broader industry dynamics and all automakers getting hit to some extent?

Yeah, so certainly, the announcement earlier in the week with one of our largest customers was a factor. But we're seeing something a little bit more pervasive. And so, it's impacting all of our customers' production in the second half of the year. And really, what we see is sort of a continuation of the impact that we experienced in the second quarter. And the second quarter, we saw an impact of about $1 billion in revenue. At the midpoint of our guidance, we're expecting a similar impact in the third quarter. So, the second and third quarter sort of becomes the trough before it recovers in the fourth quarter, so it's not any one customer. It's really a pervasive issue across the whole supply chain.

And just to add to that and again, I think this is an industry issue. And I think Lear has a perspective through E-systems that's somewhat unique. Obviously, we're on calls daily with a microchip suppliers and our customers. And so, we have unique intelligence and insight to kind of generally gauge what's going on across the industry and around the world. And what started was as a wafer capacity constraint has quickly moved into the back-end processing of microchips. And the big issue today is the amount of downtime that's being taken with COVID related cases and increases with shutdowns in the clean rooms, in areas like Malaysia and Thailand. If you think about the microchip manufacturers, the majority of them do the back-end processing out of Asia. And so, as they go down, and I believe there's a multiplier effect because there is no inventory in the pipeline and vehicles are built up today that are requiring replacement parts, it impacts on a multiple level. And so, we're still seeing that. We're still seeing a number of key microprocessors and chip manufacturers that are having to go down for a number of different reasons. And so, taking that into consideration, that really helped us understand what and how we look at the second half of the year, and it isn't one particular customer. And our customers are much more sophisticated. I will say that the communication and dialogue we've had, they're much more sophisticated in respect to chips, the chip needs. It's now become the back-end processing of the microchip. And we don't see that dissipating. I mean, Jason did a nice job of showing what's occurred over the last 11 weeks, last 11 weeks, 10 weeks, we've received notices of continued downtime. And so, to me, it's three key points. One, the answer around real supply and demand with all the different releases are in the system. Two, when will the COVID related items with shutdowns in the back end of the processing be alleviated? And then three, the times to require to get back to more of a traditional inventory level. And so, even though we're in a much better position to we probably were and believe it or not, several months ago, wafer production seems to be more stable. The sophistication level of how we're looking at chips, the 1000s of chips are required, is much, much better. And if we can get through some of these, like I said, COVID related issues that are causing the back-end processing behind us, we should be in a better position. And that's why we're looking at this getting worse in the third quarter and then some improvement in the fourth quarter.

Okay, great. That's very helpful color. And then I wanted to ask a bigger picture question, particularly as we think about the government push on EVs, at the Biden ministration, and Europe and China all heating up. I remember an important chart from the E-systems say a couple months ago, specifically referencing Lear's broad product capabilities across electrification with high voltage wiring, connection systems, battery units, battery management systems and others. And how it stacked up versus some of your competitors that only offer one or a few of these products to customers? As the focus on EVs from automakers is ramping up in a pretty significant way, are you finding that your broad product portfolio is a key competitive advantage in the bidding process? And are you finding traction for winning multiple products that customers where you can offer a more holistic solution?

Yeah, that's a great question. And I have Frank Orsini here and Carl Esposito. I'm going to let them kind of they're on the ground working every day, get some insight. I will say this just before we get into this, we've won as much business today in electrification than we did all last year. And so, we absolutely couldn't be more excited about the acceleration electrification in our position, and how we're differentiating ourselves in crossing over the seating. I think it's outstanding, because there's some really cool things, we have that we've patented in our very unique for electric vehicles. So, I'm going to go ahead and let Frank and Carl take that one.

Sure. So, from an electrification perspective, we really do see that broad portfolio as an advantage, not only in all the different types of products that we offer, but from a technology evolution, we also see a greater integration of those products. And so, where a few years ago, there might be a separate onboard charger and a separate DC to DC converter, for example, two separate boxes. We're seeing those types of products integrate more deeply as the electronics, the power systems get more efficient and we can package those into smaller packages and more efficient products for our customers. So, we definitely see that broad portfolio integrating and integrating in the ways of the products that we have for our customers. We also get to take a whole system view of the electrification and the vehicles looking at the low voltage wiring, which is critically important in electric vehicle, the high voltage wiring, the connection systems and all the electronics that go into those vehicles and how can we package those more efficiently and more effectively, not only from the electronics, from the packaging, the connection systems. And also, even as Ray mentioned, the aerodynamics now with some of the things we're doing from integrating antennas on the vehicle and making the vehicle more efficient. All that leads to greater range, faster charging times and more performance for the vehicles and that's what our customers are looking for.

Yeah, from a seating perspective, as Ray mentioned, we're really focused on innovation. We mentioned in the past, we're laser focused on a couple of key areas, priceable features and contents will remain a priority for us. And as you mentioned in your question, the [ph] HD platforms are of great importance to our growth strategy. So, we have a technology called ConfigurE+, that's a Pace Award winning technology fully developed in house and we're little background on that. It's a powered reconfigurable, fully patented rail and cassette system. And the highlight of the technology is our seats do not have to be hardwired or tethered to the vehicle. The cassette itself, which is patented, allows us to connect to the power to the vehicle. And the reason that's important is it gives us ultimate flexibility. And when you think about the HD platforms and the solutions required for EV platforms were flat load floor solutions become more important with battery packaging constraints. And as customers redesigned, those floor strategies, our ConfigurE+ package is perfectly within those tight environment constraints. So, it really is an ideal solution for the EV market. And we've been very successful with it so far. We've been awarded over $100 million of business with two global OEMs. We're actually launching the platform right now with VW on the fully multiband platform with VW. And over the next five to six years, we think it has a potential to grow in excess of half a billion dollars. But we do have a number of active customer engagements going on right now. We have multiple RFIs with OEMs on a global basis. We're actually in one expert development phase on a North American EV platform with this technology. We're going to be shipping prototypes to some of our European customers early next year. And we have one really interesting work stream that we're on right now with an OEM where they're looking at a daytime nighttime application for vehicle where during the day, we could provide our configure plus system with our seats for passenger movement, our ride sharing things of that nature. And at the nighttime, we're working on a wired cargo management solution that would adapt to the rails and concepts where we would serve to service them in a last mile delivery scenario. So, the vehicle can be 24 hours. So that's a pretty interesting technology. For us again, those would ideally be EV platforms as well. So as Ray mentioned, it's going to provide a lot of opportunity for us. And we're very excited about what that looks like in the future.

Wish you could see the room right now because we all have smiles. We love what's going on with our technology, innovation, our growth strategy. It's amazing. On the E-systems side what what's coming at us and I mentioned how excited we are on electrification and this ConfigurE+ just has so many different applications. It's exciting to build deliver that in electric vehicle in a very unique way that I believe will change the way you look at seating and cargo management. So really exciting stuff. Thanks for the question.

Great, thanks for taking the questions.

Our next question comes from David Kelly from Jefferies. Please go ahead with your question.

Hi. Good morning, everyone. Thanks for taking my questions. Maybe - morning, just maybe to start a follow up on the earlier decremental second half margin discussion. I guess schedule is clearly still touching go. I think planning visibility seems to be low for everyone. So, can you talk about the labor and plant in efficiencies specifically and realizing you have your margin enhancement plans as well. But is there much opportunity to drive some efficiencies in the back half of the year given the ongoing choppy macro?

Yeah, certainly that makes it more challenging, David, but I'll point out and it doesn't really come through in the material we provided. But the operating performance in both segments this year is remarkable. And it's the most significant net positive operating performance I think we've ever achieved. And that's a testament to Frank and Carl's teams, what they're doing day to day in the facilities. Now in terms of managing the short notice shutdown, certainly that does add labor costs to our operations. But we've taken measures to try and offset that. We're using attrition to lower our headcount in our higher labor of content facilities particularly, think about seat covers and wire harnesses that are very labor intensive. That's the most significant step we can take is really just lowering the headcount and trying to rebalance to lower production rates in the meantime, and still being prepared for volumes to recover, which are coming back in the fourth quarter. So, there's some cost sticky labor, trap labor costs that we are incurring that make it more challenging. But despite that, both segments are generating significant operating improvements.

Okay, great. Thanks, Jason. And maybe one more follow-up and appreciate Slide 18 and kind of an initial look at the Q3 midpoint. I wanted to ask about the E-systems margin trajectory, and clearly, we have rising input costs. But from a mix standpoint, should we start to see some improvements from the second quarter, given your customer weightings specifically in North America?

Yes, we do anticipate some improvement in the mix of where the downtime is showing up in the E-systems business. And perhaps it's going a bit in the other direction on the CD inside, given the importance of General Motors to our seating business. But those volumes, for example, on a full-size truck and SUV are still going to be quite strong. But you heard the announcement that they made recently is the downtime that's been taken thus far here in the third quarter. So that's going to put a little bit of pressure on the mix in seating. But generally, on the E-systems side, there's a modest improvement and mix as we look at North America, second quarter to third quarter and Europe a little bit as well.

Okay, great. That's helpful. Thanks for taking my questions.

No problem David.

Our next question comes from Brian Johnson from Barclays. Please go ahead with your question.

Yes, thank you. I was struck by the strong seat margins relative to your largest competitor. Can you maybe go into some of the things and, I know, it's our job to analyze the competitor? But that led to better than feared after yesterday's results from your competitor, performance and seating. Is it just that you have platforms that were less up and down? Is it that you're less exposed to metals? Do you have better recovery mechanisms or what was it?

Yeah, I think take this one, I think it's years of the work and the investment we've put in seating. And we've been investing in that business well over 10 years, with the improvements we've made with capital, with our layouts with our plants. The investments that we've made and getting very granular in the details of return on invested capital by product and having those tough discussions with the customers to fix the business going forward. And that took place over 10 years. And I do think that's really a credit to the seat business today and the hard work that they're doing. It is incredible how they're performing, given all the difference on expected downtime and the downtime that they are being hit with. And I also think a big part of it, we've talked about this. We find structures and metals to be importantly core competency, but we didn't grow it at all cost. We maintained a relatively good size of structures business, because of these types of situations. And so, I do think that that helps us. Significantly, we do have very good customer relationships. So, we're planning on going in and having some discussions with our customers. And I think the performance that we've elevated over the past years will help us there. But I think it's a combination there everything you mentioned. And it has continued to be very resilient. And so, it's a lot of different efforts. And I'm sure our competitors are listening. So, I don't want to get in all the details. But we've put a tremendous amount of effort in that business, to put it in the position that it is. Now just say that the outstanding hard work that the team is doing. And we talked about war work, we have more opportunities to continue to get cost out. There's a significant amount of more work we can do. But the work that they've done, and how quickly they respond is absolutely amazing to me. And so, part of it is just the incredible team that we have and the knowledge that we have. So, that's going on into it. But we are very proud of the resiliency and their ability to produce during uncertainty.

Okay, and just a quick follow on, and a walkthrough of the Chicago Auto Show, which we're thankful to get in between all these COVID waves. I was struck by the touchscreen control seats on some upper end SUV models, particularly their grand Wagoneer not sure if that's your platform or not. But the broader question is, does that kind of touchscreen control of seats kind of reinforce your position with your E-systems? Or is it really no different than having the complicated touch knobs and dials and kind of mech levers that you see on most cars?

No, I think it's actually it's kind of, it's aligned with our intuitive seat, the work that we're doing. We believe that there's a number of feature contents if you're hear where focus is on features and content sitting in the seat and I think we talked about embedding technology, it's exactly that we think there's a number of opportunities we're presenting our customers that will help the consumer in respect to comfort features, thermal comfort, other content that we believe is right in line with what we're doing with intuitive seating. And so, now we've looked at applications like that we're looking at applications like that. But we do think there's a number of additional opportunities. I don't know if you guys want to comment a little bit?

That I think it also shows a level of integration, and that drives in the vehicle higher speed connections from a warren perspective, more technology into the data communications, data networks and computer networks in the vehicle. That's one of the reasons why we're investing in and working with things like the IMS connection systems for high-speed Ethernet connections. Because those types of touchscreen controls more integrated features in the vehicle drives more data flow throughout the vehicle, more data routing and thinking computer communications. And those drive both the wiring the connection systems, and also the low voltage electronics for us.

Yeah, and I can highlight Brian to raise point. I highlighted ConfigurE+ a minute ago, but into is a great product for us Ray mentioned. Thermal comfort that we're working on a proactive comfort is exactly what you described, we have applications that work off touchscreens, we have applications that work off your cell phone. And part of the drive is to put sensors and technology and software into our intelligent seating, so that it is more intuitive and adjusts automatically to our consumers for the preferences. So, that's very similar to what we're doing in the market today. Yeah, it works with touchscreen. And it can work with the hardwired systems that are in place today, as well.

And we've discussed this too. We think that's a unique competitive advantage for Lear Corporation. The interconnectedness between E-systems and seating have already proven that we cannot just - we're not just commercialize it, but extend our ways of differentiating our seat products, because they are interconnected. We do believe that the intuitive seat is the future of seating and that the combination of the E-systems, so we have teams that are working on the technology. We talked about embedding this innovation in the seats of the future. So, we're excited, like I said, to continue to differentiate ourselves, and we have a unique position in that space to continue to do that.

Thank you.

Our next question comes from Joseph Spak from RBC Capital Markets. Please go ahead with your question.

Thanks. Good morning, everyone. If we could just go back, and holistically listen to everything you said about the issues in the back half with commodities and mix, and then we sort of look at the midpoint of your third quarter guidance $150 million in core operating earnings. Back of the envelope for us, like that seems to suggest maybe like, maybe 5% or 6% margins in seating, which would have to mean that E-systems is a breakeven, is that correct? And if so, what's driving the breakeven in E-systems?

Yeah, it's actually a little bit better than that Joe. We would say seating will be between 5% and 6%. And the E-systems will be between, let's say, 2.5% and 3.5% in the third quarter. The biggest factor in the E-systems in addition to the volume reduction, as that's a low point on commodity. So, the full effect of the higher copper price is for the first time being realized and actual material costs in our plants in the third quarter this year, because we had bought ahead earlier in the year and lessened some of the impact of higher copper prices earlier in the year. And then in the fourth quarter, you get the pass-through benefit of that. And so, you have two things happening with the third quarter, the fourth quarter, we have volumes recovering, and the benefit of the commodity pass-through agreements taking effect, and that leads to a pretty significant step back up from the third quarter, the fourth quarter. And you'd expect both segments at this guidance or this volume level, to be right around 7% in the fourth quarter, maybe a little bit less than that, but close to 7%.

All right, Jason, that's very helpful. I appreciate that. And then you're just on I know you're not really talking about '22 on the commodities but I think I just want to make sure I got this right, you said $175 million commodity hit for the year, $95 million of which in the back half. So, I mean, is as simple as if we wanted to assume that commodities just did not move from here, which is obviously an oversimplified assumption that there would be an incremental $15 million commodity headwind into the first half of '22. Or can we not do that math?

I think the way we were looking at the math, did you just said that the second half commodity costs were to hold for all of next year. That would be about $100 million impact, and offsetting that you have the benefit of some of the delayed recovery mechanisms. In some cases, some of our commercial agreements have a three, six or even 12 month lag, you'll see a benefit that will partially offset that. And I also think that it's hard to see steel remaining at the level of that. And so there should be, you know, some moderation from these all-time highs that we're experiencing here in the back half of the year. But if it does remain at that level, that's sort of the math there. Now, we are taking steps commercially to try and improve upon that 15% exposure we have with steel, we have negotiations with several customers Ray briefly alluded to that earlier. And we're optimistic that we're going to improve upon that exposure. And, in this business, I think more of that, that steel responsibility belongs with the customers and we've been working on that for cash, 10, 12 years. And we have, I think put ourselves in a pretty good position relative to the competition. But I think we can even do more there. And then outside of your sort of indexing and pass-through agreements. At the beginning of next year, we'll be starting our annual price reduction discussions with our customers. And so it still remains at this level, we'll have another opportunity to try and negotiate some offsets to that. Now, we've got to balance the backlog and growth and other aspects of the relationship. But I think we will have a chance to deal with this if that cost remains that elevated level.

Thanks for that color as well. Appreciate it.

Our next question comes from Dan Levy from Credit Suisse. Please go with your question.

Hi, good morning. Thanks for taking the question. Sorry to beat a dead horse on the commodity side. But I just want to understand the sensitivity on that $95 million comment. Is that just purely based on where prices are today? What is that embedding in terms of recovery? And just to be clear, like, what's your visibility on the $95 million? Meaning, let's say prices happen. And no one knows what's going to happen with prices. But let's say prices do come down, how much do you get immediate relief? Or is that relief on a lag? So, what's your visibility on that $95 million hit in the back half?

Yeah, so it's a bit of a mixed bag. So, in Europe, for example, we've locked in the steel cost for the remainder of the year. So, we have a 100% line of sight on that. In North America, we've locked in the third quarter, and we have some exposure, good and bad to the fourth quarter. So, we've made an assumption on what the markets going to do there embedded in the outlook. So, I'd say the vast majority of the $95 million, we have a clear line of sight, Dan.

Okay, so getting to the prior comments you gave on quarterly margin 5 to 6, receiving the 2 to 3 for E-systems. It sounds like barring some large uptick in volume or search for a lot of performance, we're probably not going to see a lot of upside to those figures for the third quarter. Is that a fair assessment?

Yeah, I think the biggest opportunity in the third quarter, would be a production stabilized at the current - what's been currently announced. So, the high end of our guidance range effectively embeds everything that we we're aware of. And so, I think that may be a bit optimistic, but there's certainly a chance that conditions improve and production stabilizes. And that could be upside. I think the prudent assumption is that more in line with the midpoint that we will see continued disruption. And July is probably the worst month we've seen of the year and I think June and August are probably similar. So, that really comes down to September and whether things stabilized or not. And as Ray mentioned, the difficult part is, and semiconductor parts where there's no buffer in the system. There's no inventory and so any new shutdowns to take place, where the backend processing is happening in Southeast Asia, we do an immediate disruption of production. And so that's what gives us the hesitation around being a little bit more optimistic for the third quarter at this point.

Great. And then thank you. And then my follow up is on E-systems. We know that in the past quarter, one of your large customers was highlighting at one of their investor days, their overhauled electrical architecture, and this seems to be like an industry trend is just more central compute much less wiring. So maybe you can just remind us because you've obviously, given us a good sense on what your opportunity is with electrification? But in parallel, as we have this trend of overhauled architectures, that was more central compute how does the E-systems content change, especially as there's less wiring content?

Yeah, that's a good question. We've spent a significant amount of time understand this, and knowing where we can position ourselves for continued growth. And Carl's here, I'm going to let Carl kind of give you a little insight and how we're looking at it, to continue to grow our business.

Yeah. From an architecture perspective, we see that architecture change over happening over the next kind of 15 plus years. There'll be some early adopters, and there'll be a lot of folks that will continue to use legacy architectures or do a lot of hybrid things. And so, we see that move to zonal control or central computing will improve the optimization of the electrical architecture. But at the same time, what we're seeing is a growth in circuit counts, actually, where we're adding more content to the vehicle with more safety sensors, active safety sensors, and even autonomy, a lot more high-speed signals in the vehicle. And that's offsetting some of the integration of the data networks. We're well positioned, I think, on the electronic side with our body domain controller and software expertise to participate in these new architectures. And we're responding right now to a number of customer proposals for some of these new architectures. So, we're definitely in the mix and talking with our customers about these changes in permit architecture perspective. We also see that most of the high-volume customers will select an element of these architectures independently, not everything from one supplier. And that includes both software and hardware sourcing very kind of federated procurement approaches they have historically done. We're excited about the change from a technology perspective. In the electronics, we're excited about that, what that change drives from the wiring and the connection system parts of the portfolio. And as Ray mentioned, some of these autonomous programs that we're working on, we're really getting early insight into the technologies required and the architectures required. And even the unique manufacturing requirements and capabilities we're developing as we're working on these programs with our customers. Some of these wiring harnesses are the largest and most complex harnesses we've ever built. And we're maturing and developing both the manufacturing as well as the sub component technologies. So, really excited about the change in the architectures where we're there right along with our customers in helping them to find those new architectures on the electronic side, on the power side, and looking at the whole system optimization.

Now, what's nice is, like Carl mentioned, and I mentioned earlier, is that we do have with two major OEs development contracts and autonomous vehicles. And so, a lot of new architecture, technology and capabilities are in some respects being applied. And we can - you can look at what we're doing with IMS, our partnership there to get high speed data, knowledge capabilities we can grow within the connectors, part of that business. Our continued acceleration of components within layering on both high power and low voltage. And so, even we see this transition occurring. We do believe that we have incredible capabilities that will fit with the new architectures, and we're continuing to develop our capabilities as we move along.

Great, thank you.

And ladies and gentlemen, our last question for today comes from Emmanuel Rosner from Deutsche Bank. Please go ahead with your question.

Yeah. Good morning.

Hey Emmanuel.

Hi. I was hoping to just hone in a little bit more on I guess how much of your cautious second half volume view is dependent on industry wide factors versus sort of your own customer and vehicle mix? Can you maybe frame it in terms of crossover markets? You have outperformed on that metric, pretty materially in the first half of the year. How do you think about it maybe in the back half of the year?

Yeah, so Emmanuel, in the first half of the year, our growth over market was about 9 percentage points total company and as I look at the second half, it does moderate, it's right around 5%. And so, the full year is about 7 percentage points of growth over market, which is consistent with what we talked about back in May. So, that is part of part of what's going on, if you look at the second half of the year. And, in particular, if you look at our revenue in North America, relative to what's happened in the market, it's down a little bit. And so that's probably a big factor. But I still believe that the assumption we've made at 6%, for total industry goals for the full year. That's a pretty balanced view of the current circumstances that we're seeing as Ray outline, just because of the tremendous uncertainty around semiconductor parts and the back end processing and unexpected shutdowns that very well might occur over the coming weeks and months.

Thanks for the color. Would you have the second half breakdown between seating and E-systems for the 5 points of growth of the market?

Yeah, so seating will be a little bit higher than that. And E-systems will be a little bit lower than that. E-systems growth of the market will be better in the second half than the first half.

Okay, that's great to hear. And then my follow up question is on your Slide 20, which I really appreciate you including in it as investors are only very focused on what some of the current factors mean for next year, and then the out years. I was hoping could walk through some of those, but some of the factors on the slide. But I guess just overall, is the plus versus the plus is that is the sense overall that 2020 to some of these headwinds will still be there, but sequentially better than 2021 and then the full normalization happens in 2023? Or, I guess, how should I understand this slide?

Yeah, that's kind of how we were looking at it Emmanuel. Certainly, we expect 2022 to grow relative to 2021. The supply chain challenges should be alleviated somewhat, but I don't think you're going to see an industry that has the ability to fully meet consumer demand because of ongoing supply chain charges until you get to 2023. And maybe the back half of 2022, you get closer to that. And so, that is the kind of thought process and how we laid that out.

Understood, thank you so much.

You're welcome.

Okay. Just to wrap things up, one, it's probably just layer employees on the call at this time, I just want to say thank you, I couldn't be more proud of the team. We're going to continue to focus on what we can control. And we do an outstanding job. The performance in the operations are just absolutely incredible. And I know there's things outside of our control, but the things we do control, we do a remarkable job. And I want to thank the team around the world for your performance operation. The work that purchasing is doing in both business segments, I tell you, I just can't believe what you've been doing to protect our customers and it's being recognized our customers. If there's a silver lining, we have an incredibly tight relationship with our customers because of the work that you're doing and the teams are doing. It will be recognized it at some point, I believe it. I believe if you do the right things, that there will be a time when you're recognized. And I believe that will be a recognition through growth. And we'll continue to grow this business. The special thank you to Mexico, you guys just continue to impress me, the team down there. Thank you so much for the inoculations, the vaccinations, the shots, the initiative to do the right thing. That's what we're about. It's outstanding, and I appreciate all the work around the world. We're growing this business. We're staying focused on our strategy and good things are bound for Lear Corporation. So, thank you for all your effort.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending today's presentation. You may not disconnect your lines.