Lear Corp (LEA) 2018 Q2 法說會逐字稿

(Operator Instructions) Mr. Joel, you may begin your conference.

Thanks, [Ceressa]. Good morning, and thank you for joining us for our Second Quarter 2018 Earnings call.

Our press release was filed this morning with the Securities and Exchange Commission, and today's presentation is posted on our website, ir.lear.com. Today's presenters are Jeff Vanneste, Chief Financial Officer; and Ray Scott, President and CEO. Also participating on the call are other key members of Lear's leadership team.

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 slide titled "safe harbor statement" at the beginning of the presentation and also in our SEC filings. We will also refer to certain non-GAAP financial measures. Reconciliations to the corresponding GAAP financial measures can be found in the slides at the end of the presentation.

Slide 3 shows the agenda for today's review. Following the presentations, we will be pleased to take your questions.

Now please turn to Slide 5 and I'll turn it over to Jeff.

Thanks, Joel. Slide 5 shows the financial highlights for the second quarter. We had another great quarter delivering record sales, core operating earnings and adjusted earnings per share. Sales grew 9% in the quarter driven by our strong sales backlog, the benefits of foreign exchange and our acquisition of Grupo Antolin Seating business, partially offset by lower production volumes on key Lear platforms. Core operating earnings increased 7% to $471 million, primarily driven by the increase in sales. Adjusted earnings per share was up 13% driven by the record earnings, a lower tax rate and a reduced share count.

Slide 6 shows the second quarter results for our 2 product segments. Both of our segments delivered record second quarter sales with E-Systems growing 19% compared to last year. Excluding the impact of foreign exchange, E-Systems sales grew 13% and seating sales grew 2% compared with 4% growth in industry production. Sales in both segments were negatively impacted by lower production on key Lear platforms, primarily in North America and China. Both segments also delivered record second quarter earnings with E-Systems earnings up 11% versus 2017.

Consistent with our previous guidance, margins were down in both segments compared to last year. The decline reflects the impact of key program changeovers, higher commodity costs, primarily related to steel, increased investments to support our backlog and accelerated new business quoting activity.

Slide 7 shows the key assumptions behind our full year 2018 guidance. Our vehicle production outlook is based on the July 2018 IHS forecast. Global industry production is now expected to be 95.4 million units, which is up from 2017 but down approximately 300,000 units compared to our previous outlook.

Slide 8 provides a summary of our full year financial outlook, which despite more challenging industry conditions, is unchanged from our prior outlook. Second half revenue is expected to be lower sequentially as a result of a number of factors. Most global currencies have weakened against the U.S. dollar, led by the Euro and Chinese RMB. Our outlook assumes an FX rate of $1.18 per euro in the second half of the year. Although global vehicle production is up sequentially in the second half, vehicle production in our 2 largest markets, North America and Europe, is down, reflecting normal seasonality. The second half of the year includes some historical programs building out, primarily in Q3; the impact of major program changeovers on replacement business; and the launch of incremental new business, primarily in Q4. Given our record first half results and our forecasted strong second half operating performance, we feel very comfortable with our full year guidance.

Now I'll turn it over to Ray to provide an overall update on the business.

Thanks, Jeff. The company continues to perform at a very high level. We delivered record second quarter results and maintained our full year outlook, while continuing to invest in the business to support our current launch in our drive to continue profitable growth.

Our new Chief Technology Officer, John Absmeier, will enhance our focus on product technology and innovation. We provided our long-term outlook for the business at our Investor Day in late June. I'm sure those who were in attendance can see why we are so excited about our future growth potential with our 2 high-performing products segment that are perfectly aligned with industry market trends.

Slide 11 highlights some our key 2018 launches. We're excited to be bringing to market several major new programs in key vehicle segments with a significant amount of this activity occurring in the second half. Many of our most important programs are transitioning to new models, including GM's full size pickups in North America and the Ford Focus in Europe and China. Additionally, we are launching significant backlog this year, including several premium vehicles like the Mercedes GLE, BMW X3 and various Audi and Jag Land Rover models. As Jeff indicated, production will be coming to an end on the BMW X5 in the third quarter, a program we elected not to pursue because the return profile did not meet our internal threshold. We will utilize this capacity to launch the all-new Volvo S60 in the fourth quarter. Also late this year, we will launch 2 new vehicles in North America market, the Ford Ranger and the Chevy Blazer.

Slide 12 provides a recap of the longer-term outlook that we presented at our recent Investor Day. Our 2023 sales are projected to be over $30 billion, reflecting a compounded annual growth rate of 7%. Over that same time period, we forecast operating earnings to grow faster than sales and company margins to improve. We will continue to convert a high percentage of our earnings to cash with free cash flow expected to double for that period from 2018 to 2023.

Slide 13 provides a summary of our capital allocation priorities. First and foremost, we will continue to invest in the business to drive profitable growth. Consistent with our recent transactions, we will continue to pursue niche acquisitions that enhance our capabilities, diversify our sales and increase regional market share. Our strong balance sheet is a competitive advantage, and we plan to maintain investment-grade credit metrics. Finally, we have a consistent track record of returning excess cash to our shareholders.

Slide 14 summarizes our history of returning cash to our shareholders. Since 2011, we have returned over $4.4 billion to our shareholders in the form of share repurchases and dividends. Over that time, we have repurchased 43% of our shares outstanding while increasing the dividend each year. That trend has continued to the first half of 2018, and we have invested nearly $300 million in share repurchases and increased our dividend by 40%. We have $1.2 billion remaining in our share repurchase authorization, which extends to the end of 2020.

Slide 15 shows our current valuation relative to our peer group. Despite our track record of performance, positive growth outlook and a history of shareholder friendly actions, we continue to trade a discount to our peers. We believe that this provides shareholders with a valuation opportunity as we continue to deliver strong sales growth, superior performance and significant free cash flow. I've said this before, I firmly believe we're in the strongest competitive position in our 100-year history and our best days are ahead of us.

Now we will take your questions.

(Operator Instructions) Our first question comes from the line of Itay Michaeli with Citi.

Maybe just first on the quarter itself, Jeff, I think at the Investor Day, you highlighted a few headwinds that you experienced in the second quarter. I was hoping if you could just quantify the impact of those particularly on margin as well as just the impact for raw materials in the quarter as well as the full year?

Yes. I think, what we alluded to in the Investor Day was there were a couple of items in -- that really appeared in the June time frame that did have an impact on second quarter results. One was the very sudden change in Ford pass car volumes primarily in China. If you look at the Q2 pass car volumes there, they were down significantly, but that reduction accelerated near the end of the quarter. That hit us by about $50 million in the quarter from a top line perspective. Then there were couple other ones, Ford mentioned this on their earnings call last evening, the Meridian fire. It affected not only Ford assembly plants but also other assembly plants that we provide parts to. So that OEM downtime impacted us as well. And then in Brazil, they had a nationwide trucker strike, which basically shutdown the automotive industry there for a week or so. So all told, those 3 items impacted us by about $75 million in sales in the quarter and from a margin perspective 10 basis points or so. Now I think what we've seen is the -- with respect to the Brazil trucker strike, some of that volume has come back and I think the OEMs are trying to make up some of the volume that's been lost by the Meridian fire, but specifically in the quarter that was kind of the damage. And then with respect to commodities in the quarter, primarily in Seating, on a year-over-year basis and I think we're going to see this consistently throughout 2018 in each quarter, because effectively the -- our contractual buy for steel for all of 2018 was done at the end of '17. So we have a contractual price for all of '18. So we had a -- about a 20 basis point impact year-over-year in the second quarter. And on a copper standpoint, the impact in the quarter was relatively marginal.

Great, that's helpful. And then maybe one for Ray. Hoping you can update us on the quoting activity, I think, the $1 billion that we talked about last quarter in electrification and connectivity. How are those going in terms of the RFQs as well as just -- is that $1 billion dollar still more or less the level of quoting activity that you're seeing?

Yes, that's a good question. Couple of things. One, obviously, we come out with our backlog traditionally in the January time frame. But to give you some insight into what's going on. If you look last year at this time, we're relatively on track to exactly the same number we were -- as far as wins that we had with new business. In respect to the new technology, the $1 billion, it still remains about the same number. A lot of those programs are still in process, meaning we're still quoting them. Those programs, because of the specifications and the technology and innovation, there's a lot more vetting that goes on, but we're in a really good position. We're just as confident as we were several months ago when we talked about the $1 billion to capture a good portion of those quotes. So a lot of them haven't been awarded yet, but we're vetting them and having technical reviews with our customers right now.

Our next question comes from the line of Chris McNally with Evercore.

Can we -- for the BMW X5, can you put a annual figure just so we sort of think about the drag maybe in Q4 and the beginning of '19, all things considered?

On an annual basis, about $250 million.

$250 million. That's great. And then, I mean guess just -- sorry.

Just to add some color to that. The -- that was a decision that we made years ago to basically walk away from that business, because the margin profile was getting run into the gutter, and we didn't want to chase unprofitable business. So we made a conscious decision not to take that next-gen business up. What we've been able to do since then, and Ray alluded to this as well in his presentation, is we want some Volvo business, specifically the X -- S60, which is going to be put in that plan that loss -- the X5 business to offset some of that X5 loss.

All right. In addition to that, what was -- around the same time, we won that GOE program that's going to launch in October of this year, which is -- we're really excited about that launch down in Alabama, our Tuscaloosa facility. Same time, we won the Ranger business that's going to be here in Detroit building alongside with our Mustang and then we won the GM blazer business. And so those programs really start to take effect as far as launches in late third quarter, early fourth quarter. So along with this Volvo business, we're really optimistic about where we're headed in the future with the CUV, SUV in particular with those exciting new brands that are coming out on customers.

That's great. And I know you guys have been consistent on the BMW commentary. I actually think even the supplier who picked it up has, sort of, indicated that it's lower-margin business, so very clear. Just maybe broadly on the second half, just topics like WLTP and then maybe even just China growth outside of Ford, where we can clearly see the numbers are weak, how are you guys thinking about? It's clearly an uncertain environment. Many suppliers have talked about Q3, there's significant downtime at a couple of players as a result of the testing, and we're unsure how much is coming back in Q4 and then we're seeing weak numbers in China now as a result of the tariff. Can you just give maybe a little qualitative or any numbers about how you're, sort of, trying to range some of these issues, particularly as Q4 kind of seems pretty uncertain right now for production?

Yes. I'll give a little bit insight and then Jeff can, kind of, clarify with some numbers. But with our guidance, I mean, keeping consistent with our guidance, we took into consideration what is going on in Europe. Obviously WLP, we believe some of that volume erosion in the second half is due to that issue. And we've been working with our customers in respect to what they're doing with their vehicles. I'll tell you one thing that I think about -- a little bit more optimistic about it, with the exception of the volume that's going down, is the increased request we're getting for electrification, because of a lot of these different issues. And so I'm optimistic that it's going to generate some opportunities for us to quote some business. In respect to China, I think China, there's a lot of moving parts, especially in the second, third quarter for us, I think, with one of our major customers in China, but we are really gaining some momentum with our domestic customers in China. So again, we're really optimistic despite some of the headwinds we've seen in the second and third quarter with some of the volume down.

And I think if you size up the back half, I'd size it up this way that the third quarter is historically our weakest quarter, seasonal downtime being the unusual part of the back half. I would add to that, that some of the things that we talked about, the build-out of the focus in North America, the X5 going away in -- really at the end of the second quarter would suggest that the third quarter may have some additional challenges even beyond normal seasonality. So as you ramp through the remainder of the -- end of the third quarter and into the fourth quarter, we're launching some new incremental business, the Ranger, the Blazer, the GLE, I'm missing one.

Audi Q3.

Audi Q3. So there is a number of new incremental programs that get launched late third, early fourth. So we would expect to see the margin profile in the fourth quarter return back to -- with target ranges.

Okay. That's really clear. So small issues in Q3 and then we start to -- basically on the outgrowth and the margin get better in Q4.

Our next question comes from the line of John Murphy.

And I apologize, I just got on late here, so if -- I hope I'm not that repetitive in my questions. But when we look at the second half, I think you kind of just went through this. I mean, it sounds like there's a little bit of risk just based on the X5 going away and then things picking up in the fourth quarter. But if we think about some of the products that are rolling off and then the backlog gets rolling on, is there any reason to believe over time that the margins might be a bit lower on what's rolling on versus what's rolling off, because business was booked at really good times and, sort of, there's this expectation that things will remain pretty good and there might not be as much operating leverage to the upside as there, kind of, has been over the last 5 years?

No, just the opposite. We -- even during the good times, we were very, very diligent on our thresholds and what we had to get as far as returns. Now -- and there are some issues relative to the launch cost, yes. But as far as the margin profile, no. We stayed focus on that. We talked internally, we've built this company to perform in good times and if there's any headwinds, we can still perform. And so we stay diligent with our financial metrics and what we're focused on as far as returns.

So we're confident in the margin profile going forward.

Okay. So the quoting right -- that's going on right now as far as what you're dealing with the automakers and as well as your financial discipline is basically almost exactly the same now as it was 5 years, or exactly the same, I should say, not almost?

It's exactly the same.

Okay. And then just a second question as we think about the GM truck launch, I mean, the pickups are helpful to some degree, but it's really the SUVs, which are really kind of juicy in content for you, and it sounds like those are not really next year but they're more of a 2020. So is there a way to, kind of, sort of, illustrate to us the benefit of that truck launch through pickups and SUVs? And really what's the difference between your content in the two different trucks?

Yes, yes. Frank, why don't you -- Frank Orsini is here, President of our Global Seat business. So...

Yes, what we've traditionally said, John, is the difference between the pickups and the SUVs for us primarily ends up being a third row application in the vehicle. On average, we place the average cars -- and this is on our global business with all of our product mix around the $700 range and then climbing to about $750 over the next few years. If you compare that to CUV or an SUV product, that starts back in the $1,000 range and can go up from there, depending on the content that makes it's way into each row and, of course, that third row addition is a big piece of that. So like you said, the pickups are launching right now, the launch cadence on that program spans all of next year as well. Silao, the plant in Mexico, goes off in December and then the Flint facility will launch in June of '19. So we're in launch mode on the pickups and then the SUV comes out in the first quarter roughly of 2020. So we're having a very successful launch right now with the program. And yes, we do look forward to the SUV launch in 2020, that's a great product.

And if I could add one other comment. We're not so dependent on one particular model or customer. We've really done a really nice job of diversification across all of our different customers and products. If you look at our backlog, we've mentioned this before, 90% of the vehicles we're launching are CUV or SUV programs. And we're just as excited, I mean, the launch is going well with the T1. However, the GLE, the Mercedes, that's coming out and the proliferation of different vehicles that will be coming out over the next year with the GLE, the Blazer that we're launching for General Motors here in North America, the Ranger that we're launching, all has incremental content than what would be over a traditional [passed] vehicle. So yes, the T1 is a big launch for us, but if you look at what we're launching right now, we're really excited about how those programs are going to take -- shape heading into next year because of the content and because of mix and because of the premium that's on those type of vehicles. And so those are really what we're transitioning into over the -- like I said, the third -- end of the third and fourth quarter.

Got you. And when we think about the 90% that are crossovers and SUVs, I mean, the content on those is essentially 50% higher than the $700 average you guys were talking about on a corporate basis roughly?

Yes. Roughly, yes.

And then just lastly. As we think about raws and your ability to pass those on to your customers being the OEMs and push them down to Tier 2 and 3 suppliers, what sort of the propensity or your ability to, sort of, insulate yourselves from rising raws?

Well, just -- and I've said this before on the steel side, we buy roughly 3 billion pounds of steel. Right now, we've got about 10% of that buy that is a direct exposure to us. And we're working with one customer in particular to get on their steel resale program. So we would anticipate going forward that our risk would be even lower with respect to our steel buy. And then copper, the 178-ish million pounds of copper we buy each year, 90% of that is on some indexing agreement. And I don't anticipate that changing any dramatic degree. So we're pretty insulated and becoming more insulated on steel.

I think another point, and we've seen these type of headwinds in the past too, but the leverage that we can pull on in addition to the steel indexing contracts we're on with our customers is -- right now, we proactively set in place CTO and [VAVE] ideas that our customers seem to be very open to alternative solutions. And so, bringing them ideas with alternative materials with EPP or different types of steels or even different types of designs, we're very aggressive with what options and ideas that we can deliver to our customer, which they also are in -- it's in their best interest. So we have that going. And then we obviously have the ongoing productivity negotiations that we have with our customers and then the ability to leverage across our purchasing buy. So there's a number of different actions we're taking today to be prepared even in the event that we had further headwinds.

And then just one last quick one. I mean, the backlog that rolls on in 2018 versus what you've projected going on in 2019, what were those numbers roughly? Just trying to understand how much is going to accelerate next year?

I think the backlog for this year is $1.2 billion. Next year's backlog is $1.4 billion.

That was our final question. Now I'll turn it back over to Ray Scott for closing remarks.

Yes, thank you. So just closing remarks, a couple of things I want to mention. One, I want to thank the Lear team for all their efforts, a great quarter. Obviously, we have some headwinds going in the third and fourth quarter, but I know we're built to make sure that we'll achieve the results and do great things. On a personal note, I want to thank Mel Stephens, I think everyone read the announcement now. You've been a great asset to the team. You've built this company to where it's at today and everything you've done for us. And John Absmeier, welcome to the team. It's great to having you already. You've already opened our eyes in driving innovation and technology. We appreciate all your efforts. And again, that's all. I want to thank the team for everything they're doing. So that's it.