Lear Corporation (LEA) Earnings Call Transcript & Summary

Good morning, and welcome to the Wolfe Research Autos Corporate Week. This is the Lear fireside chat, hosted by Wolfe's Managing Director covering autos, Rod Lache. [Operator Instructions] And now, I hand the call over to Rod.

Thanks, Satyana, and thanks, everybody, for joining us on the Wolfe Autos Corporate Access Week. The feedback we've gotten from many of you is that these types of corporate access events are very valuable, and we're glad to be doing that. And we're very gratified by the response that we've had by some of the leading companies in the industry, including Lear, which is our focus company today. Representing Lear, we've got the senior leadership team, the CEO of the company, Ray Scott; Chief Financial Officer, Jason Cardew. Ray and Jason, thank you very much for joining us today.

Yes, it's great to be here, Rod. Thanks.

Great. And so I have a list of questions that I'd like to ask. But before I begin, I just wanted to mention that these webinars that we've been hosting, they're always the most -- more interesting when we get good audience participation. [Operator Instructions] So just to kick things off, Ray, I was hoping maybe you could just start us off by giving us an update on the general state of the business.

Yes. Thanks, Rod. Jason and I were just talking this morning, it's hard to believe it was just a little bit over, what, 3 months ago, Rod, we were in New York at your conference. And world's obviously changed quite a bit. But based on what we're seeing, I will say this, we are much more optimistic than I've been in quite some time now. I think I remain very confident that we have the right plan for these challenging -- this challenging time. And I think without question, we'll be a better and stronger company. Now as I mentioned on our first quarter call, we spent a lot of time in the planning phase. And really the guiding principles were around safety and ensuring the health and safety of our employees and prioritizing our production and our manufacturing plants as we started to restart the plants. And so a tremendous amount of time, the team did an incredible job of putting together plans to restart our plants. Second, and just equally as important, was liquidity and reducing our costs and preserving our liquidity. And Jason and the financial team, along with the operations team, did a great job. And I believe the methodology and how we really rolled that out was outstanding and really put us in a good position as we start to emerge from the planning part of this steps. But the other one was strategy, aligning our operations with the industry challenges. And so -- now as we've discussed, we developed a Safe Work Playbook, standardizing all the best practices. I consider it a living document, something that we continue to remain focused on and it continues to change and improve with best practices as we reopen our plants. But now we're heading into what I consider to be the execution phase and safely and efficiently restarting our operations, managing our decremental margins, which we'll talk a little bit about, and really getting after our cost structure. And I think it's equally as important, position the company to take advantage of some of the growth opportunities, specifically with Conquest wins. We had a really nice first quarter with Conquest wins. And we're getting a number of requests from our customers today to continue with opportunities that we believe will build our backlog longer term. And just, I guess, before we get into your questions, Rod, just kind of give you a quick overview. Virtually all of our plants outside of South America are up and running at some level. In China, production isn't at 100%, but closer to 95% of pre-COVID levels. In Europe, we're around 50% pre-COVID levels. And in North America, we're just starting back up, but right now, around 35%. So in a very good position overall with our facilities around the world. And Jason will go through the numbers in a little bit more detail. But like I said, we're much more optimistic about where we're at for the second quarter and for the remainder of the year.

Great. And that's really helpful. Can you just talk a little bit on this ramp? You've been super active in laying out plans and actually guided a lot of other companies on how to do it. Just operationally, can you talk a little bit about how the ramp has been going? Have you had any surprises? And what are the biggest challenges that you see right now as you continue to ramp up?

Yes. I've had the opportunity to actually visit our plants and kind of see what's going on in our plants and have gone through the whole process from how our employees enter the plant and taking the questionnaires, to the videos and instructions as far as education and training, gone through the facilities in respect to how we're protecting our employees with PP equipment, how we're getting our efficiencies and driving efficiencies within the plants given the requirements and the challenges that we have to protect our employees. And it's going reasonably well. I was a little concerned about absenteeism. But overall, our absenteeism level in some cases is lower than pre-COVID. There's other regional issues that we're struggling with. That -- it's slightly higher, but nothing significant. And in terms to anything I'm seeing, there are some things that we continue to improve with contact tracing, what we're doing with some technology in respect to thermal cameras, how we're monitoring individuals as they enter our facilities. So I see -- like I said, this is a living document for us that we continue to evolve and ensure that we have all the best technologies and techniques in our plants to protect our employees. Obviously, the supply chain is very complex. I'd say one of the biggest challenges that we have is Mexico. We have 56,000 employees in Mexico. And I mentioned it on the first quarter call that Mexico is 4 to 6 weeks, I believe, behind the United States. And with that, they obviously have a tremendous amount of infrastructure and issues within the medical community that needs help. And so as we continue to relaunch, I would look at Mexico as an area of -- even though we're optimistic, cautiously optimistic as we monitor Mexico. And within the states of Mexico, there's different levels or degrees and different requirements. And so we're obviously monitoring any orders, any specifications in regards to what the government, both at a federal level and state level, are required. We shut our facilities down, and they've been shut down for over 2 months. We shut down prior to the government even ordering the facilities to go down. And so we're monitoring any changes within the states. But I'd say Mexico, given where they're at in respect to COVID-19, I think it's just something that we're continuing to monitor closely and make sure we're doing everything we can to protect our people.

So just to clarify, Ray, are your Mexico plants starting to get back up and running? I presume that they're kind of needed, right, to have the North American complex going.

Yes. So it depends on -- by state, Rod, and so -- some of them are at 100% capacity. And there's 2 different states, Puebla and Chihuahua, that are -- Puebla's down completely and then is Chihuahua limited. And right now, they're down to 30% capacity. And those will change depending on -- they actually have different colors for where they're at within the -- that particular state.

And just the nature of this start up, it sounds like you're -- your tone is very optimistic, and it's great to hear that. We actually spoke to another supplier yesterday, who was telling us that they're -- they're not in the same sector as you within auto, but they were saying that the -- it's tricky for them when you have starts and stops of production and they're dealing with a lot of challenges in optimizing and that their decremental margins are actually larger than they -- much larger than they typically would be. On your earnings call, you suggested that, for the year, the decrementals should only be down in the 20% to 22% range, which I think people found very encouraging. Can you maybe just give us some insight into what you expect in the second quarter and the balance of the year? And whether that still looks like it's realistic given what you're seeing in terms of production?

Sure, Rod. And since we did not provide formal financial guidance on the earnings call, I thought I'd take this opportunity today to provide a little more insight, specifically what we're seeing in our second quarter as it unfolds here. And so when we talked about the second quarter on our earnings call, we talked about revenue being down 60% to 70%. Given the current state of the ramp-up by region that Ray just described a moment ago, we think we're now closer to being down about 60% and perhaps a little bit better than that. Now that assumes no significant setbacks and that's certainly still a possibility. But if the customer ramp-up plans remain on track, we will be down around 60% in terms of revenue year-over-year in the second quarter. Our sales in April and May were down more than 80% and more than 60%, respectively. So we need June to be down about 40% for the math to work out in the second quarter. In terms of the decremental margins, in the first quarter, we were at 25%. Q2 is going to be better than that, but it's going to be a little bit higher than that 20% to 22% range I talked about on the earnings call. Second half, we would expect to be around 20%. So I think overall, Q2 through Q4 will be pretty close to the high end of that 20% to 22% range that I described. All that again depends largely on a somewhat uniform ramp up. We do -- we have had some fits and starts at certain plants and that's factored in. So -- and our cost reduction programs are on track. The labor and overhead inefficiencies that we're seeing during the ramp-up are generally in line with what we had anticipated. Our PPE cost may be a little bit higher than what we had initially estimated, but not enough really to change our view on decremental margins for the year, Rod.

Interesting. And that's very encouraging. So if -- I've gotten a couple of questions about just cash flow and what this means. And I think if you come through with this low 20% decrementals, and it sounded like you were cutting CapEx a bit, the -- some of the discretionary CapEx. There was a slide in your Q1 deck where you talked about that. It doesn't look like, based on that, your 2020 cash burn would be all that meaningful. So is that a reasonable conclusion, do you think, just mathematically? And I mean and related to that, you're sitting on a lot of liquidity, but you did suspend the buybacks and the dividend for the rest of the year. How should we think about your -- what you need to see to start reducing -- start resuming that in the future?

Yes. I think we've got to take this 1 quarter at a time. There will be a significant cash burn in the second quarter. I talked about the working capital headwind and then you have the losses in the quarter. And that will be a meaningful number. And then ultimately, the third and fourth quarter will just depend on, first, you'll have some inventory replenishment, which should benefit the third quarter, but the fourth quarter will be more dependent on demand. And I think that's an open question, given all the economic uncertainty around COVID. In terms of our plans and timing for resuming some of our programs to return cash to shareholders, first of all, I'd say that our capital allocation priorities haven't changed. Our general philosophy hasn't changed. Our first priority is to invest in our business through CapEx and really ensure the competitiveness of both our business segments and protect the backlog that we'll be rolling out over the next 3 years. The second priority is tuck-in acquisitions to further strengthen our competitive position in both of those business segments and drive growth. And then thirdly, we will return excess cash to shareholders. At the same time, we're committed to maintaining our investment-grade balance sheet. I think that really served us well during this crisis. And so that's important as well as we look out to the remainder of this year and into next year. In terms of the time table to really to resume dividends and share repurchases, ultimately, that depends on having more clarity around both the economic outlook generally and auto demand very specifically. And as a reminder, we did implement a number of temporary cash conservation measures, so we have to unwind those as well. So that will be another factor as we look out at next year and the time table for restarting those cash programs to return cash to shareholders. We're fully committed to doing that, but the time table is still a little bit uncertain at this stage.

And I've got -- just related to that question, it sounds like a lot of it is dependent on what happens to demand ultimately. Right now, obviously, things are going to be pretty intense with companies trying to catch up in terms of the inventory that they burn through at dealerships. When you speak to executives and some of your customers, do they give you some views on just regionally how they think further out things are going to look? Or are they sounding more optimistic about demand? Or do they not really give you much longer-term color?

Well, I think immediately, Rod, it's been more short-term focused. And it has been overwhelmingly positive in the short term, meaning I think the inventory levels -- we all know that the inventory levels are relatively low. The digital orders seem to be there in respect to orders. And so across the board, I'd tell you that the customers seem very optimistic about the volume for the remainder of this year in a lot of respects, and how fast we can even get up and run even quicker than what we're projecting today. And so we're talking to every customer. And thinking through this, I don't look at China as the barometer, because I think China had some other issues going on or even restrictions that were going on that helped them accelerate quicker than probably what we'll see in Europe and North America. But Europe has been going extremely well for us. And like we mentioned, I think what we're seeing in the U.S. is very similar. I mean it's about how quickly can we get up and run. And so I think now the focus will be more on what and how different things are going to impact demand longer term, unemployment, obviously, stimulus packages that we're seeing today and how that will take hold. And so we're paying close attention to it, Rod, obviously, talking to our customers about it, but they seem to be very optimistic about the volume and how real it is.

Yes. Yes. Anything regionally different that you're hearing between North -- obviously, China has been very good, but between North America and Europe, is North America a little bit more upbeat than Europe is? Or is it too early to tell?

Yes. No, I think North America seems to be much more upbeat. And I wouldn't to say much more upbeat, but they're upbeat more than Europe. So yes. It's good. It's -- like I said, we talked about it early on that given what we're seeing and the success that we've had in the supply chain and the requests from our customers to ramp up quicker, all seem to be very positive signs, not just for this quarter but for the remainder of this year.

Great. I wanted to maybe just ask a couple questions about the divisions a little bit more specifically. So just starting with the Seating business. What we're hearing from automakers is that they're prioritizing their most profitable vehicles for the rest of this year. GM talked to us about that just vis-à-vis their trucks in North America. I think that many, if not all, of their pick-up truck plants are going to be going back to 3 shifts here very soon. And in Europe and China, we'd expect the luxury vehicles to be prioritized. So how should we be thinking about that for you guys in terms of the mix, if that's a meaningful tailwind? Can you weave into that, just for people that may be a little bit less familiar with how the content per vehicle is different? What is the differential when you're looking at large SUVs and large pick-ups and luxury vehicles versus an average vehicle?

Sure. Yes. So our global CPV estimate is about $735 a vehicle. So that's the average across the entire global industry. In North America, that number is closer to about $1,150 a vehicle. So North America tends to run a richer content on seating, primarily because of the penetration of CUVs and SUVs, particularly those that have 3 rows. And in terms of the differential within that North America market, a CUV, SUV with 3 rows, with leather, with some luxury features can run twice the segment average for the North American region at the extreme. So I think that, that trend towards more CUV, SUVs, trucks, luxury vehicles, generally speaking, will be supportive to CPV growth in our seat business. For us, in terms of the margin side of that, though, the bigger factor is going to be the level of vertical integration on the platforms that are growing disproportionately. And so if GM is able to ramp up production on the T1 pick-ups and SUVs, that will be beneficial to us as well because that's our most vertically integrated platform. So you need a higher margin just to earn that same return on the program overall because we have structures, we have seat covers, we have leather, we have foam, in addition to JIT. So that's the bigger factor that's really going to impact margins. In terms of the other regions, we do see luxury in China, for example, doing better than the rest of the market. And our margins are a little bit better on those platforms than they are on the overall segment average in that market. So that's helpful for us. In Europe, it's a little bit less profitable region for us because there's less vertical integration again. So even if you have a luxury vehicle, it may drive higher revenue. It doesn't necessarily drive higher margins if it's just a just-in-time seat program and it doesn't have structures or leather or other componentry with it.

And is there a way to maybe just frame the margin benefit that you're seeing from this? Can -- is this playing a role already in that better-than-expected decremental margins near term? And do you think that this could be a tailwind kind of longer term into 2021 and 2022? Or is this just sort of an aberrational period where we're just seeing unusual -- unusually rich mix?

Yes. I think it's more of a temporary phenomenon that will be helpful this year. And we did anticipate that when we talked about that decremental margin range. So there isn't anything that surprised us that's happening as the ramp-up starts back up. So I wouldn't point to any meaningful change there in terms of the long-term margin profile of Seating. We still see it as a 7.5% to 8.5% business. That's what it's run, really. If you go back to the middle of 2015 and absent the General Motors strike and the COVID impact this year, we've pretty consistently run in that range for about 5 years. And that -- and it's not by accident. We've targeted programs that allow us to earn a return and a margin in that range. And we probably could have grown the business faster if we had lowered our return threshold. We're not really prepared to do that. We've been able to grow the business and maintain those margins because of the overall operational excellence performance of that segment. And we're starting to see some additional Conquest wins this year and sticking to our return expectations at the same time. So I guess, that's what I'd say to that, Rod.

Yes. And I've gotten 3 inbound questions already about those Conquest wins, Ray. I know that you already talked a little bit about that. You talked about, I think, in the Q1 call that you had had $500 million of Conquest awards at that point, and that was up from something like $300 million for all of last year. It was interesting to hear because the Seating business is typically very sticky, as you know. Can you talk a little bit about any update on what's happening there? What's driving it? Is there anything that is happening here that is just noteworthy in terms of the regions, the segments or the types of business that you're winning?

Yes. One, we've done a great job of growing the seat business overall, if you look back historically, just the market share -- the increase in market share for Lear corporation. And we've always talked about growing profitably and not chasing business. And we've said that, listen, this story still needs some time to play out. But by focusing on having the right team, operational excellence, driving value for our customers, allowing them to increase content through technology and innovation, those type of things will pay off. And right now, we're seeing that. We had an incredibly, I think, great quarter in respect to Conquest wins. There's a number of customers we're talking to today. I think I'm going to save a little bit for, hopefully, the second quarter, where we're going to come out with another great story in respect to Conquest wins that we're close to wrapping up that I feel we're going to see probably one of the biggest years we've seen in respect to Conquest wins. And so that continues to play itself out. I think if you're asking, is there anything significantly different, I think what I've always said is that it takes some time. There's a model year changeover that has to occur. Our customers do prefer to avoid risk. Changing mid-cycle becomes a problem. And if we have competitors who are out there that are going in demanding price increases or taking advantage of a crisis in a way that temporarily fixes the part of their business, we know that if we're patient that will pay off in a win. If you put yourself in a good position where you can create value for your customer, you're at the front of line. And so I think that's exactly what we're seeing. I'm very confident. The team has done a remarkable job. And I don't think the end of that story is, by any stretch, done. And so I'll save a little bit for the second quarter.

Just if you -- just from a high level, is there anything distinctive in terms of the pattern? Is it regional? Is it more JIT? Or is it something -- is there anything that's -- it's noteworthy where Lear is gaining a little bit more in one area or another?

Yes. It's more JIT right now, and it's somewhat spread out. I'd say that the wins and the cadence of wins have kind of moved across from Europe to Asia to North America. But I think overall, when we do tally up the amount of Conquest wins, it will be pretty well balanced through the different regions. And it is, at this time, more focused on the JIT business.

You mentioned on the Q1 call that you're getting more complete seat contracts. And that was also, I think, a little bit of a change versus the past couple of years, Ray, where I think that the industry trend was kind of towards directed by, there was this notion that maybe the automakers can extract a little bit of pricing by doing that. It sounds like maybe that's not happening. Is that a reasonable observation? And are you noticing that as well?

Well, we saw some trends before the crisis where our customers were actually sourcing full-service contracts, which allows us the ability to source the components, which gives us the ability to vertically integrate, which hits on the point that Jason mentioned earlier, which gives us the ability to increase our margin. And so there's a lot of benefits. I think as we look now, and I think I'm even getting more feedback from our customers in respect to sourcing patterns and sourcing decisions in respect to regions. And when we think about the amount of cost that is required to have complete seat engineering within a customer, there's a lot of duplication there. And even though it's very important that branding, image, craftsmanship, those things are maintained within the style of the OE; those are differentiators for our customers. The sourcing decisions and where you create value with trim covers, foam and how that stacks up within the hardware are where you really can drive opportunities in respect to creating value. And those are the trends that we're seeing is the sourcing decisions for integration in respect to a well-crafted seat system with a sourcing of foam and trim. I think -- and what we're focused on and what we've talked about, this particular crisis we know is going to change the landscape. And some of the feedback we're getting is sourcing decisions in respect to how our customers source particular designs globally. And you can -- and we heard it before the crisis is the Chinese customers were focused on global-type applications, global-type designs. They've been changed. And a lot of the decisions that were -- we are hearing from our customers in China were much more regionally focused. We want a seat that's designed for our particular customers in China for their Chinese customer. The same thing we're hearing now in respect to regional sourcing decisions. You can see some of the complications in how complicated the supply chain is when you have a global system that is trying to hit all different levels of specification is very inefficient. So I do believe, and again, it's just through conversations I've had with the customers, that we'll see more of those type of decisions that will be focused on, I believe, less directed components. Because think about our customers, they have to manage the engineering, they have to do the sourcing, they have to manage the quality, the manufacturing, any commercial negotiations that go along with it, et cetera, where you can get a significant amount of value on selective components within the seat. And then also, as you look at scaling on a regional level and from specification, there's a tremendous amount of opportunities. And so I've been around a long time, Rod, 30 years in the seat business. I've seen it to go back and forth. It's been called shadow engineering, a lot of different things. But I think a lot of things that are coming to light now are going to allow us the ability to help our customers create value and drive a much more efficient system. And that's -- I think some of the changes we saw before, but I do think this crisis will help us accelerate those things and drive value for our customers.

Great. And do you think that -- we've gotten a number of questions about the Seating margins over time. And you did say, look, this business has been a 7.5% to 8.5% margin business for a while. Is this phenomenon something that could allow you to improve the margins even beyond that range? And also within that business, there had been sort of underperformance for a long time within the structures business, which I think is about 13% of your Seating revenue. Is this something that you suggest we should sort of think about as a very long-term opportunity for improvement? Or is this just basically just -- it's a 7.5% to 8.5% margin business?

I think, again, it's going to depend on how much vertical integration you take on. So to the extent we -- through control of the sourcing and some of the design, we're able to manufacture more of the components, and we believe we can do that competitively, that will push the margin to the higher end of that range. And to the extent you decide to just do the JIT portion of a contract and then outsource the componentry, you're going to be more at the lower end of that range. So that's going to be the biggest factor. But it gives us a little bit more control of our destiny and would lead to, longer term, the potential to increase the margin profile of that business, I think if you look at it over a longer time horizon.

Yes. I think, Rod, too, one thing that we focused on, we've touched on it, obviously, continuing to improve the margins within our structures business, but we're in no hurry to grow that business or even accelerate that business. We think that having some type of level of competencies allows us to grow our business. But where our focus has been, and we're going to stay focused on it, is technology and innovation. We believe that embedding technology that allows our customers to differentiate their vehicles and allows customers better features and content allows us to increase our margin profile, too. And so there's a lot of different ways we're going at this. We don't have limitations. We think there's a balanced approach to grow the business and still get a fair return on invested capital. But one of the things that we think we continue to differentiate ourselves in the area is technology and innovation. And having these systems and a lot of the different synergies with these systems has allowed us to really create a uniqueness in Intelligent Seating, which we believe is continuing to work well and work on different development contracts with our customers for future applications.

Yes. So what I'm hearing from you just at a high level is in the recovery, margins in Seating will likely be at least what we've seen in the past, and there are opportunities to improve from that. I'm just kind of paraphrasing a bunch of things that you've said before. I'd like to switch to the E-Systems business for a bit. So before COVID, it seemed like you're starting to stabilize the E-Systems margins. And you actually gave us an illustration in Q1 where you kind of mathematically backed out the COVID impact and showed that -- actually, margins, if you back that out even in E-Systems were better than expected. Can you just give us a little bit of an update on how we should be thinking about the time line now to get that segment back up to 10% margins, which was, I think, a 3-year objective for you?

If I can real quick, Jason, why don't you -- you can go through some of the details, but just -- Rod, like you said, I just want to -- the team did an incredible job. They were so excited with the work that they had done, and we talked about it. We said -- and Jason and I were part of the team that put together the seat plan when we had dropped down in margins and then had to really accelerate margins going forward. And a lot of the actions that the team was taking in E-Systems were very similar to the steps we took in Seating. And so we had a good knowledge and history of being able to turn businesses around, particularly with some of the issues that we're dealing with. So the team was doing a great job. That first quarter was really coming in line with the exception of the crisis. So they're getting some incredible traction, and I think in a very quick manner. And so if we think about some of the opportunities that they were focused on was we talked about wiring and the ability to source engineered components. And one thing that I'm seeing, which is exciting, I think, not just for me but for the team, is that as we're continuing to work through some of the issues with our customers, an opportunity where we can help them is in the engineered components. And they're asking us to accelerate opportunities within the wiring business. And so that was part of the plan was to vertically integrate. And even some of the programs we're talking about in respect to Conquest with some of our customers, they're asking us to also help them accelerate the engineered components. So kind of twofold there. One, Conquest, but just as importantly, getting at our own business that we can control working with our customers. The ability to continue to work with our customers, we've talked about being able to diversify our customer base, we did a nice job. We're protecting our customers, putting in the right R&D, engineering investment, those type of things. And negotiating fair and reasonable contracts in settlements with our customers in particular regions is moving along well. The team that we've put in place globally has built great relationships and those are working out well for us. So we continue to see improvement there, and then we talked about it. Last year was a great year when we talk about electrification and connectivity. We are a $1.2 billion electrification and connectivity business, and we won 40%. That is an extremely good level of business wins for us in what we consider to be higher profile margin business in exciting areas as far as trends and growth areas. So everything seems to be coming in line. Obviously, we've lost a little bit of time in respect to time just because of the crisis. But that's just because shelter-in-place and some of the things that we're doing here to just maintain and focus on short-term safety protocols, those type of things. But overall, the team has done a remarkable job. And I don't know, Jason, if you want to add a little bit in respect to that.

Yes. Just one comment. As Ray said, everything that we laid out last year -- the end of last year and the beginning of this year in terms of that 3-year trajectory remains on track. The only hesitation we have is around what the volume environment is going to be. So in a higher margin -- higher variable margin business, like E-Systems, a volume reduction of, say, 10% will have a much more meaningful impact on operating margins, and it takes longer to restructure your way through that to get back to the starting point we were at. But in terms of the building blocks to go from 7.5% to 10%, they're all in place and on track as we look out over this next 3-year time period. But as I think I said at your conference in February, this isn't going to be linear. As we identified some of these new opportunities on the vertical integration side, in some cases, there'll be near-term investments to support that. So there may be a modest step back as we invest in that, but with a clear payback and accretion to margins over time.

There's a lot in that you just said. So you're saying that the 3-year plan to get to 10% margins is still there. I think you had originally said that half of that was going to come from mix, and I think that, correct me if I'm wrong, half of it was improving existing business. Maybe if you can fill us in on the color on that. But what I'd like to get at is the trajectory here and how we should be thinking about how overall volume levels really affect these targets. So could you get to those targets if you're 10% or 15% below pre-COVID levels? And is there a way for us to kind of calibrate what a partial recovery would look like?

Yes. I think just if you do the math on -- E-Systems has variable margins of 30%. So if you say the starting point is 8% operating margins and there's a 10% reduction in volume, just doing the math on that, that's a 250 basis point reduction in the operating margin of the business. So before your offsets, before restructuring, et cetera, you're going to be down 250 basis points just on that simple math. So now how quickly can we make that up? Well, I think it's probably a 2-year process just to restructure your way and realign your capacity to operate at that same level of profitability in a global volume environment that is 10% lower, maybe slightly quicker than that, maybe a little bit longer than that, depending on where that volume comes out. And so that -- if volumes are down 10%, Rod, that will have a negative impact in the near term on the E-Systems margins more so than Seating. Seating is a 20% variable margin business. So it's easier to offset the impact of that through restructuring than it is in E-Systems just truly because of the math.

Yes. I was more thinking not 10% down, like, this year or in the near term. But maybe a different way to ask this is, you were at 8%. You were targeting 200 basis points of improvement originally over that 3-year period. If we are now 200 basis points below that, we're closer to 6% is the base. Do you still have that 200 basis points of improvement, then you just simply get back to 8%, if you're, like, let's say, an 85 million to 90 million unit market instead of 90 million to 95 million unit global production? Or do you think that over a 3-year period, you have enough opportunity to restructure that business to actually claw back some of what you've lost from volume?

Yes. We started to model that. And I think that we can claw back 1/3 of that margin impact due to the lower volumes in the first 6 to 12 months through our restructuring program and taking capacity out. I think to get the other 2/3 of that, you're looking at, at least another 12 months or so. So I think it would delay that march towards 10% by 12 to 18 months, something like that, if you're operating in a global volume environment that's permanently 10% lower than where you were previously. That's probably as precise as I can get at this stage.

That is really helpful. And can you talk a little bit -- because we are running low on time, but I've gotten a number of questions about the growth over market here. Actually, I've gotten questions about growth over market for both businesses. But in E-Systems, how do you see kind of Lear fitting in within the competitive landscape? What are the biggest technologies here that are going to drive growth over market? And what do you think that kind of looks like? And similarly, in the Seating business, I guess, when you have these Conquest wins, what do you see as the trajectory of growth over market as we get beyond this year?

Well, in terms of just the overall targeted growth rates, we've talked about 4 to 5 points above market in Seating and 6 to 8 in E-Systems. And I think if you look out over a 5- to 7-year time horizon, that's -- we're still tracking towards that. And in Seating, we've talked about trying to grow our market share from 23% to 28%. And with the recent level of Conquest wins, I think we have an opportunity certainly to meet that -- those targets. In terms of E-Systems, our growth in electrification and connectivity will be the biggest catalysts for meeting those growth targets. And as Ray mentioned, we had a great year last year in terms of wins in that space. And if we look at our backlog, 2/3 of our backlog rolling out over the next 3 years is really in that electrification connectivity space. So that's really going to be the primary growth driver. In terms of specific products on the E-Systems side, it's a combination of high-voltage wiring and connection systems, onboard chargers and then maybe to a lesser extent, battery disconnect unit and battery management systems. Those are the catalysts for the growth. That's what we're seeing the most commercial success. And on the connectivity side, it's telecommunication units and gateways that are driving that. And then supplementing that longer term is the potential for growth with Xevo.

Great. I think we are -- we've got maybe just 1 minute left, and I'm just going to ask you one last. We've gotten way more questions here from investors than we've been able to get to. So apologies to those that I didn't get to your questions. But there was a question, maybe you can handle very quickly, about what you're seeing in China right now. Obviously, it was a challenging business for a bit. Q1 obviously was really challenging there. How are you -- how are things kind of looking now with regard to China as you're looking into Q2? And presumably, the market is starting to flatten out.

Yes. I mean, we're seeing 95% of pre-COVID production levels in China, just on average, if you look at our whole business there. That's where we were last week. So I think it's largely back on track in terms of the production volumes that we're seeing there. And in terms of our performance in that market, in Seating, it remained strong, and in E-Systems, that's one of the catalysts for the margin expansion that we laid out previously as we diversified the customer base there that brought with it some lower margins on certain customers. And we've made some progress, and we see further progress for the remainder of the year and into next year as we continue to build relationships there with those newer customers, FAW and SAIC and those -- and others in that market we lead in.

Yes. Great. Well, we are out of time, and we do have a number of additional questions, several on Xevo, that hopefully we can probe that in a future event or on your earnings call. But I want to thank you both for taking the time. I know how busy all you guys are and with everything that's going on in the industry right now and the restarts. But it is really valuable to all of us to get this transparency, and -- so that's much appreciated. And to the investors that gave us all these great questions, I want to thank you guys as well, and let us know if there's anything we could do to help you as well to follow up.

Thanks, Rod, and thanks for everyone on the phone.

Thanks, Rod.

Great. Thanks, guys.

See you, Rod.