Lear Corp (LEA) 2002 Q1 法說會逐字稿

Good morning. My name is Anissa and I will be your conference facilitator today. Welcome to the Lear Corporation's first quarter conference call. At the end of the conference, there will be a question and answer period. Questions will be taken in the order they are received. If you would like to withdraw your question, please press the pound key. I will now turn the call over to Mr. Mel Stephens.

Thank you for joining us.And these are also available on our website at lear.Com. This morning, we'll review the first quarter financial results and updating our full guidance. Joining me are Robert Rossiter, James Vandenberghe, and David Wajsgras. I direct your attention to the disclaimer we have at the back of the release. If you'll please now turn to slide number 2, I'll begin the agenda. We'll begin with Bob. He will cover highlights of the quarter. Jim will cover business conditions, and Dave will give a financial review. Then Bob will sum up and we'll take your questions. With that, let's turn to slide 3 and I'll turn it over to Bob Rossiter.

Thanks, Mel. Taking a look at the slide, the highlights for the first quarter. I believe the company began to strengthen the customer relations. And we are continuing to do a good job with that. I believe changes in the industry are going to enhance Lear's capability to grow. Even though there are changes to that, we still maintain it. Fortunate results are improving.And we're doing a great job of that. With that, I'll turn it over to Jim.

Thanks, Bob. Our customer base remains the strength, however. The outlook for our three largest companies, General Motors, Ford, Daimler Chrysler, is improving. All three are increasing production. And all are implementing long-term restructuring plans. We expect to increase our presence with them. Overall was up 6% and big three were up 3%.Also, importantly, industry stock levels remain relatively low at a 60-day supply. Incentives have remained moderate period. Present units are up compared with the beginning of the year. We now see vehicle production up about 1%, compared to a year ago. And most were in the mid to high 15 million range. We remain cautiously optimistic. In the first quarter, industry vehicle production was down 8%. We see production being down about 3% in the second quarter and continued weakness in the second half. Nearly all of the major vehicle manufacturers are experiencing low volume. Currency also was a negative in the first quarter as the Euro was down about 5% compared to the U.S. Dollar in first quarter. In this, we continue to drive the fundamental, strengthening our relationship and effectively managing our cost structure. I'll now turn it over to Dave to cover our financial aspect.

Thanks, Jim. I'd like to spend a few minutes covering the first quarter 2002 financial results and also provide guidance for the second quarter and update the previously stated full-year guidance. Let me start with the first quarter. If you'd move to the next slide, please. Let me provide some color for each of these changes.Key Lear platform that experienced volume improvement in the quarter include the GMT 800, as well as GM's full-sized cars, the Jeep Liberty and the Ford Explorer. Some of the more important Lear platforms that experienced the volume decline include the Peugeot 206 Fiat, Ford, and the BMW 3 series. Currency impact reflect primarily a weaker Euro, South African dollar. Noncore assets disposed of last year. If you'd move to the next slide. That would be slide 9. Adverse currency changes and the impact of prior year divestitures were essentially absorbed by the profit contribution from new business. And our production was down year over year. Specifically, production for the Ford group was down 19%, GM group declined 15% and Fiat fell by 14%. If you'd move to the next slide, please.

Inventories were about flat during the period, with inventory efficiency actions being offset by planned inventory bills to support the restructuring action. If you'd move to the next slide. That should be slide 11. We announce a significant restructuring of our operations in the fourth quarter of last year. The major elements of the plan are summarized on the left panel. It began last summer and most will be completed this year. The right panel shows us the status of the actions we've completed to date. So far, we have completed three of the 21 facilities included in the plan. We have also completed about 40% of the census reduction, many of which were not related to the closure of a facility. To accomplish our overall objective, we will invest about $90 million. During the first quarter, satisfactory savings were more than offset by period or implementation costs. As we mentioned previously, savings for the full year 2002 will not be significant, again for the same reasons. However, we are on track to receive annual savings of $50 million, beginning 2003. We will continue to provide regular updates on our progress and implementing the restructuring plan, most likely during the quarterly conference calls. If you'd now move to slide 12. On a macro level, production looks to be down 4 to 7%, but where Lear's business is concentrated, that is with our key customers, production levels could continue to be disproportionately down, similar to the first quarter. If you'd now move to slide 13. Increases in the second quarter are primarily driven by the timing of planned expenditures. For reference purposes, depreciation will be about 150 million for the first half of 2002 and 300 million for the full year, in line with our spending plan and consistent with the prior year's. We see capital bringing to half of the 125 million. If you'd now move to slide 14. Since assuming the role of CFO earlier this year, a number of people from both inside and outside the company have asked me what I believe are are the key areas of focus for our finance group. That is, how can our shareholders maximize value. This summarizes Lear's financial priority. As for the roles at Lear, we want to make sure that the company meets its commitment, partnering with operations, continuously improving our financial controls and infrastructure, developing a world-class finance team and always maintaining transparency and open dialogue with respect to the company's performance. Now I'll turn it back to Bob for final comments.

Thanks. Just to sum it up, I think the first slide here number 15 shows that there is no stress for the strategic call of our portfolio. So we're not looking at anything to fill out our capabilities. We're well-positioned. And if you compare that to the potential content of total interior, you can see a potential upside are if Lear in this market. Some ask me, how is Lear representing? Let me show you what I accident advancing relentlessly means to Lear. Number one, customer focus. What does that mean to Lear? Quality. It is our focus and the true measure to a company is quality. Three, service, the best in the business, always. I'll add to that a reasonable and responsible approach to the cost-price equation. The only way to increase lower price is through productivity and more efficient design. The only way to achieve that is partnership. Partnership between a customer and supplier, a commitment by both to achieve real cost reduction. And the last point is profitability. We are in business to make a profit. That is the only true measure of success. And we will grow and we will improve profitability. Number two, growth. That is a key point for Lear. We have the platform for growth and there is great opportunity in the industry because of the changes taking place. And number three, continue to be humble and run our business like an LBO. We are excellent asset managers and we stress asset management every day in our business. And how do we measure performance?So what is our success formula at Lear?That's how we'll grow.Now, I'd like to open it up for questions.

Thank you. At this time, in order to ask a question, please press star and the number one on your keypad. First question comes from Stephen Girsky from Morgan Stanley.

Good morning, everybody. When you guys measure potential content with interior, do you include electrical distributions systems with that or is that straight separate?

A portion of that is included, I would say, Steve.

But there are others beyond the interior, right?

That typically includes a built-up instrument panel, and a lot of the wires funnel through there.

The other question I have deals with the whole idea of partnership and generation. Your customers are now using you as an example of how your ideas contribute to their lowering costs. And I think Ford cites the example of the Volvo leather seats versus the Ford leather seats. How do you make money on that? How does that benefit Lear, if, for example, Ford switches from Volvo -- Ford leather to Volvo leather?

I think the key for us is we make a commitment to our customers to reduce costs. And anything we can do typically in partnership with our customers they will give us credit for. So if we can reduce costs, it benefits our commercial settlement on that year-over-year productivity.

So just because you're charging them more for a Ford leather seat and the Volvo leather is less, that doesn't mean that you make less money on that?

It's not that we're charging them more. The cost of leather is higher. But if we bring the cost reduction, we have an application out there that's in use, in automotive standard. It's in their own company, we get to keep a portion that was because we negotiated this 50/50 deal. They get 50% and we do. And it goes away over time. We have an opportunity to improve in both areas. And it's a win for both and a long-term win for us.

I think in over the last couple of years, you've seen a dramatic change in all the customers. And Chrysler's change of how they're reducing costs longer term, they've really stepped up in reviewing our engineering ideas. Ford last year approved some $110 million worth of ideas. They see our ideas as the same.

Okay. All right. Thanks a lot.

Thank you, steve.

You're next question comes from Michael Ward of Salomon Smith Barney.

Good morning, everyone.

Hi, Mike.

That's right.

Okay. Barely profitable?

Okay. Where did the convertible notes show up on your balance sheet?

That's right.

Okay.Is it -- what -- is the maturity level of it?

Well, yeah, basically it's red going over the next three years. Actually, the way it terms out is pretty favorable for Lear.

No restrictions at all as far as paying it down or those sorts of things?

No, not really.

Lastly, do you have your security balance?

It was up about $12 million to 273.

Mike, it's unlikely that we would pay down those bonds prior to maturity because it's uneconomic to do so. But we'll always have short-term floating.

But that's just the short term and their portions. The rest of it is pretty fixed out going out.

The bond term portion is definitely fixed.

Thank you.

Good morning.Should it stay around this level for the rest of the year?

Yeah. It will stay about 3 1/2% for this year. And it's really where the income is earned in 2002 versus 2001.

This level or maybe a little lower?

240, 245.

Okay. And I'm sorry, Dave. Could you just go through that again?

In the second half of 2002, actually, the second half of this year, assuming things continue to play out the way they did in the first quarter, we do see some margin improvement year over year in the second half of 2002 and then further expanding in 2003.

Okay.

Primarily in SG & A. That's right.And again, really, the costs are offsetting savings, but it was a net negative on the quarter.

And one final one. I think Bob alluded to some 3 1/2 billion backlog. I think the last time you guys gave us a breakout it was 800 million of new business this year and 900 in next year. Any shifts in those numbers?

No. There's no shifts. It's April, it's early in the year. But the way we're seeing it, there's no significant changes this year or the next.

Next question comes from Gary Lapidus of Goldman Sachs.

Good morning, everyone.

Good morning.

You guys are relentless.

We're advancing relentless here.

I'll have one maybe for Bob and company and then one other one.

Bob and company? You mean puppet Bob? I'll sit on his lap and he'll answer for you.

I'm glad you brought that up. Jim worked on me with the strategy. People are expecting it next month. I don't know exactly when twitch billion is going to happen. I do know this, Gary, I know that there is that growth partial in this business, if we continue to do the things I said in my of our wrap-up comments, which is, focus on our customers. I state that we have no major acquisitions planned. That doesn't mean that we will not make acquisitions. We find something that makes sense to us longer term that may enhance our electronics capabilities. We may go ahead and do something. But it wouldn't be a major acquisition. I honestly believe that to get to 25 billion today, we have everything we need. We have the team in place to do it. I believe the customers are changing quick enough to quarterbacking total interiors that I think that that kind of growth potential is there for the company.

Okay. Bob, maybe you can handle this one, too.

I don't know, Gary. Some of these are tough.

Could you talk about your accounting for this convertible.

I love that.

Let me sit on Jim's knee. Go ahead, David. Answer that.

Is that how it works?

That's right. It's noncash.

Thanks, Bob.

Next question comes from Steven Haggerty of Merrill Lynch.

Good morning, everyone. Let me just follow-up. What was your net change in the fourth quarter of '01 to first quarter?

We diagonal add a little in equity as a result of operation exercises. Those are as a result of that.

Your key is your customers. Despite that, you can see margin improvement?

Yeah. We'll start to see some in the back half because of restructuring. And I caution that there is no further weakening with our customers.

Is this proportionate amount?

Is it a disproportionate amount?From a spending standpoint, roughly 50/50.

You clearly identified Ford and Opal and Fiat.Or is it just a function television weakness where they're strong?

I think it's probably a combination with Ford and GM, Volvo and Saab, they are in a changing cycle. Obviously Fiat has lost market share. I think that's a longer-lasting thing.

Thanks, guys.

Next question comes from David Bradley of J.P. Morgan.

Okay. Couple of other things. With respect to a -- from a customer standpoint, a good portion of the backlog over the next five years is with General Motors. I'm sorry. What was the other part to your question?

I was just trying to get a sense for the geographic and breakdown for the customer backlog in comparison to your current, which I think you've answered.

Okay.

Secondly, the last page of the press release shows around 2%. But you talk about your organic growth being 5. I assume the difference is currency loss?

The difference is the currency and divestiture. That's right.

Would you expect that to rise in the next year?

Yes, we do expect it to rise over the course of the year.

Okay.Is that something you see as a phenomenon for the year? And then you'll be back with us?

Dave, it's pretty difficult. It's a little bit of a crystal ball. We feel that we're working on all the right things, but the industry is really something we can't control.

Okay. And you'll address it with these plant closures and such?

We're addressing it from a cost structure. Let me say this, Lear is doing everything it can to maintain profitability. But again, there are just some things out of our control.

Next question comes from David Leiker of Robert W. Baird & Company.

First up.

No. No.

I'm sorry. Say again.

O.I. is about 10 million.

Okay. Great. And just follow-up on the guidance. On the high end of the range, you took down the numbers.

I'm sorry. Can you repeat the question one more time?

You raised your guidance -- the high end of your guidance for production, [INAUDIBLE].

Yeah. That's primarily the way we're seeing.

There aren't others?

And also the currency thing.

The currency, too. We see the Euro being down a little year over year. But we'll see as time goes on.

All right. Thank you much.

Good morning, guys. On the SG & A sides. We're switching to kind of a flat percentage regime? Is that what we're looking for?

Again, I would say from a guidance standpoint, kind of the 3.6 to 3.8%. We -- again, it's seasonal, and it's probably -- seasonal primarily with respect to the engineering component, which is geared along with the launches in the following quarter. But overall, I would say it would be from an absolute dollar standpoint on an annual basis in the same neighborhood as we were last year. But there will be some seasonality effects.

Okay, great. And you may have said this.

No, I didn't.

Can you?

Yeah, I mean, for the second quarter, at the high end of the range, we're seeing, you know, somewhere in the 3.6 to 3.7 billion dollars. At the low end, we're seeing, you know, kind of in the high 3.4 to mid 3.5 billion unit range.

And what about for the year?

For the full year on the high end, we're seeing in the sort of north of 13.7 billion. And on the low end, 13.4 to 13.5.

Okay, great. Thanks.

All righty.

Good morning. You guys talked about a 50/50 split in the savings. I'm familiar with the 65/35 they've announced, but I'm not as familiar with the 50/50. Is this a special deal?

I misspoke myself. It actually, it was 50/50 in the past, not 65/35 announcement in the restructuring. Which is a restructuring Ford has in the production. Excuse me.

That's not a problem.

Don't hold it against me.

No, not at all.Is that primarily transplant?

Combination of both. We've said it openly.We're working on a couple of things. We can't announce things. Obviously we're far enough to work close with everybody.

Absolutely.

When we think of the backlog in the 20 percent that you mentioned before, could we see a significant impact moving up to 25 or 30%?

I believe so, yes. I don't know if you heard me say in that speech, but we choose to go to the moon.

I'll have to look for the transcript on that one.

Okay.

Next question comes from Darren Kimball of Lehman Brothers.

Good morning, everybody. Can you just help me with the benefits of restructuring actions. I'm just trying to understand how much will be incremental of '03. How much sort of net benefit shines through in '02 of the 50 million you expect to get by '03.

In '02, it's not going to be like I said before, it's going to be basically unfavorable in the first half of the year, favorable in the back half of the year. There is a slight savings. As we move into 2003, we're looking to about $50 million.

Okay. So $50 million, 50 cents roughly looks like it's the incremental into '03.

That's the incremental of 03.

Okay. Secondly are there any other divestitures at this point that you're still contemplating making? Is there anything in that bucket?

I think there are smaller things that we're thinking, but for the year, we wouldn't expect it to be much higher than the 100 million that we've done in the last couple of years.

Okay.Pretty profitable stuff.

Okay.

Needed with those divestitures. That's why I was -- I said it during the slide. But you may or may not have picked up on it.

Okay. Now I understand what you meant by commercial. But I mean, is there something noteworthy about the timing in terms of, you know, this being something that you're stressing today? I mean, is this a hint or an indication that, you know, we should watch this and there could be some interesting developments here? Or is this just a general emphasis on your long-term strategy?

I mean, actually producing out there. It is no announcement. It is no tickler.And in fact, we've got a number of things that we're looking at and talking to Asians about. So there is nothing to announce today. It's only a desire, and it's part of our strategy going forward.

Gotcha. Thank you.

It's called the undenial denial, right?

Thank you.

Your next question comes from Mike Pender of Salomon Smith Barney.

Yes. I had a number of questions.

Yeah.There are things there will be playing out, but it will be in same neighborhood.

And the 90 million, you had 16 million so far. How much of that 90 million should hit for the rest of the year?

It will be 70 million for the rest of the year. And you brought up another point I wanted to bring up.

Okay.

Particularly on this, we don't disclose that on a dollar basis, but down significantly from prior quarters.

Okay. And then the last question I had was on raw materials. Are you seeing anything inching upwards with the economy picking up?

I don't think we've seen it so much with the raw materials. Obviously we've seen some with the fuel costs, with the diesel costs and fuel costs, and typically that's the start of, you know, potential expansion and raw material costs as well. But I can't say we have seen much or have to deal with much today.

Okay. Thank you.

Next question comes from Andrew Knutsen of Dresdner.

The capital expenditure guidance, I think, jumped up 25 million. Last guidance. Is there any specific reason for that?

And it's really, again, we feel that we'll be able to absorb a little more this year versus as we go into 2003. So there's nothing really -- no specific thing driving that.

Okay. Thank you.

We'll take one more question.

Gentlemen, at this time there are no further questions.

That's the last question we'll have to take then. We always want to stay on the line as long as anyone wants to ask questions, but we know that we have to get back to work. I am pleased with the quarter. And extremely proud of the Lear team for the focus that they had and hard work that they're putting in.So thank you all for being on today.