Lear Corporation (LEA)

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Lear (LEA)

Q3 2011 Earnings Call

October 28, 2011 9:00 am ET

Executives

Ed Lowenfeld -

Terrence B. Larkin - Senior Vice President of Business Development and General Counsel

Matthew J. Simoncini - Chief Executive Officer, President and Director

Jason M. Cardew - Interim Chief Financial officer

Analysts

Colin Langan - UBS Investment Bank, Research Division

Amy L. Carroll - JP Morgan Chase & Co, Research Division

Rod Lache - Deutsche Bank AG, Research Division

Itay Michaeli - Citigroup Inc, Research Division

Aditya Oberoi - Goldman Sachs Group Inc., Research Division

John Murphy - BofA Merrill Lynch, Research Division

Brian Arthur Johnson - Barclays Capital, Research Division

H. Peter Nesvold - Jefferies & Company, Inc., Research Division

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Presentation

Operator

Good morning. My name is Sara, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lear Corporation Third Quarter Earnings Call. [Operator Instructions] I would now like to turn the call over to Mr. Ed Lowenfeld, Vice President of Investor Relations. Mr. Ed Lowenfeld, you may begin.

Ed Lowenfeld

Thank you, Sara. Good morning, and thank you for joining us for our Third Quarter 2011 Earnings Call. The materials for our earnings call were filed this morning with the Securities and Exchange Commission and posted on our website, lear.com, through the Investor Relations link. Today's presenters are, Matt Simoncini, President and CEO; and Jason Cardew, Interim Chief Financial Officer. Also participating on the call are several other 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 last slide of the presentation materials and also 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 slide labeled Non-GAAP Financial Information, also at the end of the presentation materials.

Slide #2 shows the agenda for today's review. First, Matt will review highlights from the third quarter. Next, Jason will review our third quarter financial results and our full year 2011 outlook, and then Matt will have some wrap-up comments. Following the formal presentation, we will be happy to take your questions.

Now please turn to Slide #3, and I'll hand it over to Matt.

Matthew J. Simoncini

Thanks, Ed, and good morning. Our trend of positive momentum continued in the third quarter. Sales and earnings increased at a faster pace in the industry production, and we achieved our ninth consecutive quarter of year-over-year improvement in core operating earnings. We generated $64 million of free cash flow in the third quarter. In addition to reinvesting in the business, we also have been returning cash to shareholders through a combination of share repurchases and dividends. During the quarter, share repurchases and dividends totaled $107 million.

In August, J.D. Power released its annual C-quality study, and Lear was recognized as the highest quality major seat manufacture for the 10th time in 11 years. We are increasing our full year guidance, and Jason will provide details a little bit later in the presentation.

Please turn to Slide #4. There's no change in the strategic direction of our company from what we've been talking about for the last several years. We believe we are well-positioned in both our business segments with global product capability and financial flexibility to grow and further diversify our business. Our primary focus remains on serving our customers to ensure we are a supplier of choice. We plan to continue to expand our component capabilities in emerging markets to further improve as well as create long-term shareholder value. We continue to evaluate niche acquisitions that will expand our capabilities in the emerging markets, increase our sales and add scale to our electrical segment. No major acquisitions are needed or planned. We are committed to maintaining a strong balance sheet with investment-grade metrics.

Finally, I would like to discuss some recent management changes. Lear has a very deep bench with outstanding management talent. At the end of September, Lou Salvatore, who ran our seating business left the company. This week, I asked Ray Scart, our most experienced operating executive to return to seating to lead that team. Most recently, Ray has done a great job leading the turnaround of our EPMS business. We have also announced that Frank Orsini, who worked closely with Ray and running our EPMS business to go back to running EPMS as the Interim President. I am confident that both of these leaders will do an outstanding job in their new roles.

Slide #5 highlights our geographic sales diversification of recent growth in emerging markets. We continue to diversify our sales with almost 2/3 of total sales outside of North America. The Asia Pacific region continues to grow and is expected to account for approximately 16% of our consolidated worldwide sales in 2011. Furthermore, our sales in the BRIC markets have grown significantly in the past 5 years from about $800 million in 2006 to approximately $2.4 billion this year. This represents an annual growth rate of 24% versus industry growth of 17%. Over half of our BRIC sales or approximately $1.3 billion are in China. This does not include, however, our sales at our unconsolidated joint ventures in China, which total approximately $700 million.

Slide #6 shows our recent and planned investment in low-cost component capacity. For the period 2010 through 2012, we anticipate spending approximately $300 million on new component capacity in low costs regions. In seating, we are adding capacity in seat trim, structures, metals and mechanisms and seat foam. In electrical, we're adding wire harness capacity as well as capacities in connectors and electronics.

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