Lear Corp (LEA) 2008 Q4 法說會逐字稿

Good morning. My name is Lori, and I'll be your conference facilitator today. At this time I would like to welcome everyone to Lear Corporation's fourth quarter and full year 2008 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. (Operator Instructions) Thank you.

I would now like to turn the call over to Mel Stephens, Vice President, Investor Relations.

Good morning everyone and thank you for joining our earnings call. By now you should have received our press release and our financial review slide package. These materials have also been filed with the Securities and Exchange Commission and they are also posted on our website lear.com under the Investor Relations link. Today, our presenters are Bob Rossiter, Chairman, CEO, and President; and Matt Simoncini, our Chief Financial Officer. Also with me here in Southfield this morning are Daniel Ninivaggi, Executive Vice President; Ray Scott, the President of Our Electrical and Electronics Group; Terry Larkin, General Counsel; Shari Burgess, our Treasurer; and a number of other Lear financial executives.

Before we begin, I'd like to remind you that during the call we will be making forward-looking statements that are subject to risks and uncertainties. Some of the factors that could impact our future results are described in the last slide of the slide deck and also included in our SEC filings. In addition, we will be referring to certain non-GAAP financial measures. Additional information regarding these measures can be found in the slides labeled Non-GAAP financial information, also at the end of our slide presentation.

Turning now to slide two, here is the agenda for today's review. Mr. Rossiter will open with some comments on the business environment. Next, Matt Simoncini will cover our fourth quarter and full year 2008 financial results, and then provide an update on our sales backlog, and finally, Robert Rossiter will have some wrap up comments. Following the formal presentation, we will be happy to take any of your questions. So now if you'll please turn to slide number four I'll hand it over to Bob.

Thanks, Mel. I'd like to begin by putting our business and our financial results in perspective. In 2007, we achieved improved financial results in our core business for the second consecutive year following the divestiture of our interiors business, successful global restructuring efforts and ongoing cost improvements. This allowed us to enter last year with tremendous momentum. Unfortunately in 2008, the U.S. economy entered a recession and economic activity turned down globally. As a result, U.S. sales and production levels fell sharply and other major markets around the world also declined. In response, we've been very proactive in restructuring our operations and reducing our costs. In the fourth quarter, we accelerated our restructuring and cost reduction efforts; however, we are also mindful that the present pace of sales is not where the longer term run rate will be. In this regard, we are continuing to make progress on our operations, operating priorities to position the Company for success when economic conditions improve and industry sales and production levels recover.

If you'll please move to slide five. Our immediate attention is on managing our way through the downturn. We are focused on a lean operating structure to minimize our cash burn. This means investing our capital in the most efficient manner possible, prioritizing all of our spending on those projects with the best returns, minimizing inventories, and continuing to manage the business as efficiently as possible. We also are in the process of negotiating an amendment to our current credit facility to maintain our financial flexibility during the downturn.

As I mentioned earlier, we have made substantial progress on the restructuring of our business so we can operate more effectively and efficiently at lower volumes, and these efforts are continuing and accelerating. We also are paying close attention to the fundamentals of our business, quality, cost, service, and innovation, so that we can provide our customers with superior value. Lastly, we are working closely with our supply base, selectively insourcing certain components where it makes economic sense and we are following a disciplined pricing model.

If you'll move to slide six please. This slide provides some examples of the comprehensive actions we have taken to improve our operating efficiency and lower our operating cost. Specific actions range from facility closures to census reductions to reductions in compensation and fringe benefits to overall thrifting of our discretionary spending. We also have reduced non-program related spending, slowed up certain expenditures in new markets and we are implementing a number of actions to further reduce our plant and administrative costs including extended holiday shut-downs, additional consolidations, reductions in overhead cost, and the reduction of planned capacity expansion in emerging markets.

If you'll move to slide seven. We also are continuing to make progress in further diversifying our sales mix. Last year, 64% of our sales were outside of North America compared with 55% in 2007. We also continue to diversify our customer mix, with increasing sales coming from Europe and Asian manufacturers.

If you'll move to slide eight. As we work our way through the downturn, it is important to keep in mind that Lear is well positioned to be successful when industry volumes recover. We have strong global capabilities and critical automotive systems, seating and power distribution. We've made substantial progress on restructuring our global operations and reducing our ongoing cost structure. This includes significant low cost footprint. We continue to make progress on further diversifying our sales and we have maintained our leadership position in quality and customer service. Lastly, we are continuing to invest in key technologies such as lightweight materials in our seating business and high power and hybrid electrical components and systems. Now I'll turn it over to Matt for a review of our financials.

Okay, thanks, Bob. I'd like to begin the review of our 2008 financials with a look at the global production environment for the fourth quarter and full year. In the fourth quarter, industry production was down sharply in all of our major markets. Global industry production was down 21% from year ago. In North America, industry production was down 26% and the domestic three were down 30%. In Europe, industry production was down 29% from the fourth quarter of 2007. In South America, industry production was down 27% and India and China were down 11% and 13% respectively. For the full year, global industry production was down 4% led by a 16% decline in North America and a 6% decline in Europe with industry sales and production levels down sharply in the second half of the year.

Please turn to slide 11. The sharply lower industry production, our financial results have been adversely impacted despite our aggressive restructuring and cost reduction efforts. In the fourth quarter, our net sales were $2.6 billion and our core operating earnings were a positive $22 million. We continue to achieve increased benefits from our restructuring initiative as well as other ongoing cost reductions; however, these favorable factors were not enough to offset the steep declines we experienced in the industry production. Free cash flow in the quarter was a negative $38 million. For the full year, we reported net sales of $13.6 billion. Our core operating earnings were $418 million. Free cash flow was negative $71 million. Our three year sales backlog covering the 2009 through 2011 period now stands at $1.1 billion. On the next few slides I'll cover our fourth quarter and full year 2008 results, as well as our sales and backlog in more detail.

Slide 12 provides our financial scorecard for the fourth quarter. Starting with the top line, we posted net sales of $2.6 billion down $1.3 billion from last year. The decline reflects sharply lower production globally. Our reported pre-tax loss was $692 million and a loss of $688 million after-taxes or $8.91 per share. These reported results included a non-cash goodwill impairment charge of $530 million and restructuring costs of $66 million. On the next slide, I'll show our results excluding these special items to highlight our underlying operating performance.

SG&A as a percentage of net sales was 3.7% compared with 3.8% a year ago. Interest expense was about $51 million, up $2 million from last year primarily due to higher borrowing levels. Depreciation and amortization at $72 million was down $4 million from a year ago. Other expense was $73 million compared with income of $10 million a year ago. The increase reflects primarily an impairment charge related to our investment in IAC North America, increased losses at our IAC joint ventures and unfavorable foreign exchange.

Slide 13 summarizes the impact of restructuring actions and other special items on our reported fourth quarter results. Our reported loss before interest, other expense, and income taxes was $568 million. Excluding goodwill impairment charges of $530 million and restructuring cost of $60 million, our core operating earnings were $22 million compared with $178 million a year ago. The decline in core operating earnings primarily reflects lower industry production globally, offset in part by favorable cost performance including increased savings from restructuring actions. To help clarify how these special items impacted our financial statement we've indicated the amount by income statement category on the right hand side of the chart.

Slide 14 summarizes the impact of major performance items on our fourth quarter sales and margin compared with a year ago. The major adverse factor for the change in sales was lower production in North America and Europe. Margins were adversely impacted by the lower industry production and mature markets, favorable operating performance including restructuring savings was a partial offset.

Turning now to our performance by product line. Sales and margin for our CD business declined last year reflecting primarily sharper lower production levels in our mature markets. Our adjusted seating margins declined from 7% to 4.8%. This is below our target range reflecting sharply lower industry production and adverse platform mix in North America and Europe, net selling price reductions as well as higher commodity costs. Longer term, we expect our seating margins to improve as we realign capacity to match demand, take a disciplined approach to pricing, implement further cost reduction actions, including restructuring actions, realize the benefit from selective vertical integration, continued growth in emerging markets and overall industry recovery.

In our electrical and electronic business, full year adjusted margins declined from 3.6% to 2.7%. This reflects the impact of lower production offset in part by favorable operating performance. We have been targeting an improvement in our electrical and electronic margins in a 4% range this year; however sharply lower production levels caused us to fall short of this interim target. Longer term, we see our electrical and electronic margins improving as we continue to implement our global improvement plan for this business and industry production levels recover.

Please turn to page 17. Free cash flow was a negative $38 million in the quarter and negative 71 for the year, compared with a year ago, free cash flow was adversely impacted by the lower earnings and higher cash cost for restructuring.

Turning to slide 18, I'd like to discuss our liquidity position. During the fourth quarter, we fully borrowed $1.2 billion under our primary credit facility to protect against potential disruptions in the capital markets and uncertainty in the auto industry. We ended the year with cash and equivalents of about $1.6 billion providing us with ample resources to satisfy our ordinary course business obligations. As a result of the decision not to repay the amounts borrowed at year-end, the Company is no longer in compliance with the leverage ratio contained in its primary credit facility. We have initiated discussions with our co-agent under our primary credit facility to seek a long term amendment. These discussions have been constructive and are continuing. Because the amendment will require the support from lenders holding a majority of our outstanding commitments and borrowings under the credit facility, the Company intends to pursue discussions with a broader lender group before launching the formal amendment process.

Slide 19 provides an update on our sales backlog. As a reminder, we define backlog as net new business awarded or new business that has been awarded, less programs rolling off the lost business. We do not include pursued or high confidence in new business. Since our last formal update a year ago, we have been very successful in signing new business. Over the past 12 months, we've been awarded approximately $1 billion in net new business. This has more than offset the adverse impact of several major lost programs primarily in North America. The present status of our base three year backlog covering the 2009 through 2011 period now is $1.1 billion.

In considering our future growth potential, it is important to note that we have made significant investment in strategic joint ventures primarily in Asia and elsewhere supplying Asian manufactures globally. If you include our non-consolidated backlog over the next three years, our total backlog increases by about $300 million to $1.4 billion. I would like to point out that a number of significant sourcing decisions for the backlog period are still open, so we have an opportunity to add new business to our backlog shown here once these programs are awarded.

Slide 20 highlights some of the new electrical and electronic wins we have achieved recently. During the fourth quarter, we opened a new Global Center of Excellence for high powered and hybrid electrical components and systems on our Southfield campus. We are encouraged by the early success of this new initiative. Our most significant win is key electrical and electronic content on the new Chevy Bolt. Here, we have been awarded both the high and low voltage wire harnesses, several customized terminals and connectors and other proprietary electronics. In addition, we have recently been awarded new electrical and electronic content on several other high, new hybrid models including high voltage wiring for the next generation of BMW hybrids, significant electrical content on the new Fisker Karma, a voltage module on the Land Rover hybrids and battery charges on the upcoming Renault and Saturn hybrids.

Please turn to slide 21. Given the very rapid decline in industry sales and production levels and the fact that economic conditions globally are very volatile and uncertain, there is a wide range of industry assumptions for 2009. As a result, we are not providing financial guidance at this time. While there continues to be a number of significant negatives there are also some key positive factors including low interest rates, government stimulus actions in a number of major countries, U.S. government support for domestic automakers and their finance subsidiaries and declining energy and raw material prices globally. In this very challenging environment we intend to keep our focus on reducing cost, proactively managing our liquidity position, maintaining financial flexibility, and positioning the Company for the eventual industry recovery. I'd like to turn it back to Bob for some wrap up comments.

Thanks, Matt. If you'll turn it now to slide 23. In summary and before we take questions, I would like to sincerely thank the Lear team for their dedication, hard work and perseverance in the face of unprecedented challenges. Business conditions are very tough and I'm very confident in our ability to manage our way through this downturn. We've faced many challenges in the past and we've always met them head on and emerged an even stronger Company and I'm confident that we will prevail once again. We have great relationships with our customers, strong global capabilities and the hardest working people in the industry. We made exceptional progress in reducing our costs and repositioning our Company for long term success. We also have been having very good discussions with our customers regarding the state of the industry, productivity, pricing and all of the tough issues that we face. These discussions have been constructive and our employees continue to be fully supportive of doing whatever it takes and we have many sacrifices in meeting the difficult business conditions before us. I truly appreciate the extraordinary effort being put forth. We are well positioned to withstand the downturn and emerge ready to take full advantage of the recovery in the industry both in sales and production. Now I'll be happy to take your questions.

Thank you very much. (Operator Instructions) Our first question today comes from Chris Ceraso with Credit Suisse.

Oh, thanks, good morning.

Good morning, Chris.

A couple of things. So most of the other expense you talked about that has to do with IAC, I was surprised at the drop in SG&A. On a percent of sales, it makes sense, but I wouldn't have thought that on a dollar basis you could change it that quickly. Can you talk about some of the expense buckets in there and how that came down so fast with sales?

Right. If you go back to the third quarter call we talked about the $150 million improvement plan and included in there were probably split evenly a third, a third, a third, Chris was near term actions which were about $50 million we thought over 12 months and it included things like eliminating non-essential spending, suspending certain compensation programs such as the 401(K) match, some of the things that you would expect. We talked about it and Bob spoke about the holiday break and vacations and a lot of things that you are hearing other people do, so there is a portion of that that is not sustainable. We do believe on a go forward basis that on a year-over-year basis we can continue to bring that number down. The number you see in the fourth quarter is not the run rate but we would see going into next year a spending level that's a fair bit lower than what we saw for the full year of 2008. Obviously with the sales come back on an absolute dollar basis the amount may be down but the percentage will probably creep up.

So to summarize that what's kind of a normal rate as a percent of sales?

Well, we spoke about in the past about 4% but that was based on a revenue number that was probably in the $14 billion range and you extend that out you'd get a number that would be higher than what we're expecting for next year but we're really trying to stay away from providing guidance. It's going to depend a lot on what the customers do and how they manage their programs and what they do as far as the backlog and the timing of the backlog.

Okay. Next question and this may be up for discussion with the banks right now, but as you calculate your leverage ratio, do you include that other expense line so if we anticipate losses at IAC to continue, is that going to impair your EBITDA from a covenant standpoint?

No. It's excluded.

Okay. The segment margins, if we've done the math right, it looks like seating was actually better from Q3 to Q4 and electronics was a pretty meaningful loss. First, is that right and then can you just give us some color as to how that happened in both of those segments?

Yes. Seating was better from the third to fourth quarter and it really is because of the mix of business that they have in the fourth quarter in North America to Europe. Electrical business is a little bit disproportionately Europe and Europe took a significant production reduction in the fourth quarter that really came in the last eight weeks of the quarter and so we were caught with the inability to adjust our cost structure when the production came out that quickly, so yes, leads did take a hair cut and seating did step up.

Okay, thanks. I'll get back in the queue. Appreciate it.

Thanks.

We'll take our next question from Brian Johnson with Barclays.

Hi, good morning, Bob. And team. A couple questions. On that $75 million, we had thought that with the equity method accounting we wouldn't see any bad news or negative impact from IAC flowing up. We thought you already had that down to zero. Could you maybe flush that out a bit?

No. We actually do have an amount that, we still have investment balances in both IAC North America and IAC Europe, so on the equity method we would still take a portion of their losses and what happened in the quarter in that line item Brian was a couple things. One, we did actually write down the equity investment in IAC North America based on their projections and lower volumes that we're seeing in North America. They also incurred, the IAC joint ventures incurred a level of restructuring cost and we took our 20% share of that in North America and a 33% share of whatever they did in Europe and the ventures themselves lost money in the quarter. That was probably singly the biggest driver of the increase.

Okay, and what's the remaining book value in IAC in the various geographies left for us to worry about loss?

Yes, it's about 130 in total and it's roughly 17 to 20 in North America and the rest of it is in Europe.

Okay. And second, what's your thinking on if you can't get the covenants done to your satisfaction and sort of what are you looking for and what's the thinking vis-a-vis would a strategic filing make sense given the potential unavailability of DIF financing?

Well, first, one, we think it's in the bank's best interest to work with us and we've had a constructive dialogue today on that. Obviously what we're looking for is financial flexibility to get through what's going to be a very difficult next 18 months by any stretch of the imagination, so both from a covenant standpoint and a liquidity standpoint. We've been working with them. We've been in dialogue with them and that's been our singular focus. I'll turn it over to Dan if he wants to add any additional comments.

We're reaching out to the broader bank group. We have exchanged proposals with our lead banks and as Matt said it's been very constructive. We'll get a sense of the broader bank group over the next couple weeks and then we intend to launch at that point.

Okay, great.

We'll take our next question from Rich Kwas with Wachovia.

Good morning.

Good morning Rich.

Matt, on the restructuring, with European volumes coming down so much and the outlook certainly for the next year and maybe couple years being meaningfully lower than where we were just two or three quarters ago, how do you feel about your cost structure in Europe right now and how much of a lag do you expect for the foreseeable future?

Well, one, I don't think first and foremost, I don't think we could ever really size the business nor would we want to size the business at the production levels that we're seeing in North America. As far as Europe, you're right. The volumes have come down and the projections are that they recover gradually. We need to continue to reduce our cost in Europe and we started doing that well before we saw the production pullback. We've talked in the past about the low cost initiative that we've had in our component facilities, metals, trims, and electrical distribution. We're continuing that. We stepped up our efforts in our infrastructure. We need to do more in the near term to get there, so when we talked about restructuring on a go forward basis the last time we gave an update, we talked about 2009 in the $100 million range. In light of the production pullback, that number needs to increase. We would see restructuring overall for Lear Corporation someplace between that $100 million and the $190 million that we've reported this year.

Okay. For North America, how are you thinking about sizing the business if you aren't going to bring it down to these levels then I completely understand that, given that we're at such low levels but how are you thinking about sizing the business out the next three years or so for North America?

Well, a couple things. One, a good portion of our business is just in time manufacturing and it really is dependent upon what the customer does with our assembly facilities. If they continue to run their assembly facilities then it's hard for us to take manufacturing capacity out of the jet assembly. From a component standpoint, we would have to reduce our capacity and consolidate our manufacturing. If you look at it from a broader sense though, replacement values and scrap values by any stretch of the imagination are at least 10 million units if not higher, as high as 12 million units, so we continue to look for opportunities to reduce capacity, to consolidate manufacturing where it makes sense. We've been very aggressive with our administrative centers, infrastructure, salary staff, compensation programs, but there comes a point where you just can't size to 10 or 9 million units because quite frankly we don't think that's sustainable.

So it sounds like the implication is you're sizing for something north of 12 million.

It's hard to really get capacity utilization. I'd be a little bit hesitant to give you an exact number because quite frankly that's not how we run. That's not how the business really runs but we're looking for opportunities to bring it down but we don't think the 10 million unit level is sustainable.

Okay, thanks. And then when you look, the Chrysler announcement from yesterday in terms of supplier price reductions, how much of that have you factored into your cost savings aside from the restructuring and how much have you contemplated overall for that type of stuff occurring?

Actually, Chrysler talked about it at the last meetings what their targets were in terms of supplier and dealer price reductions and consolidations and we continued to work with them. We always work with our customers when they have pricing requests. I feel comfortable with where we're at and I don't think there's going to be any significant down in pricing from what we've already projected.

Okay. Thanks so much.

Thanks.

Our next question comes from Himanshu Patel with JPMorgan.

There was a lot of talk at the Detroit auto show about distress in the Tier 2 supply base. Did you incur a lot of those costs in the fourth quarter and could you give us an outlook for what you expect on that front in the first half?

Yes. What we saw, we did see a little bit of a pickup in activity in the fourth quarter, Himanshu. It wasn't meaningful. It was higher from a run rate standpoint than what we saw I think for the full year. We saw a number of between OI and some cash costs that approached $10 million and it was probably back end loaded. For 2009, we think that amount is going to increase. We factor a level of that into our thinking and we have it in pretty much pro rata now over the year. Now, put a frame of reference on it, going back to the 2005 time frame when we had the interiors business we talked about a number of about $50 million cut in half in '06 and basically nil in '07. We see the numbers starting to get back to the 06/05 amounts.

And then back to the sort of $25 million to $50 million range?

Something in that range, correct.

Okay. And then I know you don't want to give earnings guidance but could you help us a little bit, Matt, with '09 CapEx and working capital thoughts?

Yes. I think when Bob talked about we need to have a cash focus, capital spending, running lean from a cash perspective, in the past we talked about a capital number that would be about 1.7% of sales. I think that metric needs to go out the window a little bit. CapEx is going to be driven by our focus on reducing cost but also on our backlog and you can see in '09 right now, we have a basically a nil backlog. We believe the amount for CapEx going into next year will be lower than what we reported this year at 167. From a working capital standpoint, Ray Scott, our President of Electrical and Electronics, Lou Salvatore, the Head of our seating operations globally, have aggressively attacked the inventory chain all the way through from supplier on up and looking at ways to reduce. We believe we can continue to take inventory levels down.

Okay, and then last question, the backlog number I forgot what it was I think $700 million for 2010. What's your industry production assumptions?

We are pretty, when we do our backlog, we pretty much tie it into what CSM is seeing for that year.

Okay.

If you use CSM, you won't be far off, Himanshu.

Okay, thank you, guys.

Our final question comes from Brett Hoselton with KeyBanc.

Good morning, gentlemen.

Good morning, Brett.

Let's see. As far as your negotiations with the bank group, do you have a sense as to the possible timing for resolution? Is this a couple of weeks or is this a couple of months? How long do you think this might take?

This is Dan. As I mentioned, we have exchanged proposals with lead banks and now we're reaching out to the broader bank group, I would say over the next couple weeks and then we'll make a decision to launch at that point.

Okay, and then secondly, from a restructuring standpoint, obviously you're somewhat cash constrained at this point in time. If you were to get an agreement with the bank group, do you think you might get more aggressive in terms of your cash restructuring?

One, I'd like to push back a little bit on the cash constrain. Obviously we have a checkbook that we like to maintain and keep an eye on it but we exited the year with a pretty healthy liquidity position, Brett. It comes down, the cash restructuring comes down to a couple things. One is the ability to action it, to actually move the product or do the type of things that we need to do from an employment level and a manufacturing standpoint. Two, we're probably shortening up the investment horizon meaning that we would like to see quicker and faster paybacks and we're putting our focus into that. From a bank stand point, we would anticipate that that's part of the discussions that we're having with them is the need to be able to continue to restructure our business in light of industry production assumptions globally, they are going to be significantly lower in the near term than what we were sized for initially. We had a basket of, in the original bank facility of about 285 and we filled that basket up. We would like to see something back into the bank agreement about that size to give us relief.

Fair enough. Thank you very much, gentlemen.

Thanks, Brett.

I guess that pretty much wraps it up. I want to thank everybody for participating in the call and I want to thank you, Matt, for an outstanding job and the team that supports him. Thank you all very much and thank the great team of Lear that continues to work hard and stay dedicated to what our goals are and we will get through this. Adios.

Thank you very much, ladies and gentlemen. This concludes your conference. You may now disconnect.