Lear Corporation (LEA)

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Lear (LEA)

Q3 2012 Earnings Call

October 26, 2012 9:00 am ET

Executives

Ed Lowenfeld

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

Jeffrey H. Vanneste - Chief Financial Officer and Senior Vice President

Bill McLaughlin

Analysts

John Murphy - BofA Merrill Lynch, Research Division

Patrick Nolan - Deutsche Bank AG, Research Division

Itay Michaeli - Citigroup Inc, Research Division

Joseph Spak - RBC Capital Markets, LLC, Research Division

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

Colin Langan - UBS Investment Bank, Research Division

Brian Arthur Johnson - Barclays Capital, Research Division

Aditya Oberoi - Goldman Sachs Group Inc., Research Division

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Adam Brooks - Sidoti & Company, LLC

Emmanuel Rosner - Credit Agricole Securities (USA) Inc., Research Division

Presentation

Operator

Good morning, my name is Tracy, and I will be your conference operator today. At this time, I would like to welcome everyone to Lear's Third Quarter Earnings Conference Call. [Operator Instructions] Thank you. And I'll now introduce and turn the call over to Mr. Ed Lowenfeld, Vice President, Investor Relations. You may begin your conference, sir.

Ed Lowenfeld

Thank you, Tracy. Good morning, everyone, and thank you for joining us for our third quarter 2012 earnings call. Our earnings press release was filed this morning with the Securities and Exchange Commission, and materials for our earnings call are posted on our website, lear.com, through the Investor Relations link.

Today's presenters are Matt Simoncini, President and CEO; and Jeff Vanneste, Chief Financial Officer. Also participating on the call are several other members of Lear's leadership.

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 Investor Information at the beginning 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 slides labeled Non-GAAP Financial Information, also at the end of the presentation materials.

Slide #3 shows the agenda for today's review. First, Matt will provide a company overview, and Jeff will cover our third quarter financial results and 2012 outlook. Then Matt will have some wrap-up comments. Following the formal presentation, we'll be happy to take your questions.

Please turn to Slide #4, and I'll hand it over to Matt.

Matthew J. Simoncini

Thanks, Ed, and good morning. Despite a challenging industry environment in Europe, Lear had another solid quarter of operating performance with year-over-year improvements in sales, earnings and free cash flow. Sales in the third quarter were $3.5 billion, up 2% from 1 year ago, reflecting the benefit of new business, the Guilford acquisition and higher production in North America and China, partially offset by the adverse impact of foreign exchange and lower production in Europe.

Adjusted earnings per share was $1.29 per share, up 19% from a year ago. Free cash flow was $88 million, up 37%. In addition to improved financial results, our earnings per share also benefited from our share repurchase program. Over the last 12 months, we reduced our shares outstanding by 6.9 million shares or approximately 7% of the total shares outstanding.

Our Electrical business continues its rapid growth and achieved a quarterly record with sales of $877 million in the third quarter. Adjusted margins improved to 7.5% from 5.4% last year as the business continues to benefit from greater scale and previous restructuring actions.

We continue to return cash to shareholders through dividends and share repurchases. This year, we will return $214 million to shareholders, bringing the total to $544 million since these programs were initiated in the first quarter of 2011. We are increasing our 2012 guidance for net income by $15 million. Jeff will review the outlook in more detail a little later in the presentation.

Also, during the quarter, we were recognized again by J.D. Power and Associates as the highest quality major independent seat manufacturer for the 11th time in 12 years in their annual study.

Slide #5 provides your regional overview of Lear's business results in the third quarter. In North America and Asia, our business continues to perform well. And in Europe, both product groups are profitable despite lower auto production in the region. South America was slightly unprofitable in the third quarter, reflecting higher facility and product launch costs as well as increased infrastructure spending to support new business growth. On a consistent foreign exchange basis, our sales in South America are expected to increase by about 15% in 2012. For the next 18 to 24 months, we expect sales to increase by an additional 40%.

We're also expanding component capabilities and seat structures, covers and foams as well as wire harnesses. We are confident that the investments we are making today in this emerging market will provide sales and earnings growth opportunities going forward. However, we expect that margins in the region will remain under pressure into next year during this ramp-up phase. At present margins, both Seating and EPMS businesses, are generating returns on invested capital in excess of Lear's cost of capital.

Now I'll turn it over to Jeff, who will take you through our financial results and outlook.

Jeffrey H. Vanneste

Thanks, Matt. Slide 7 shows vehicle production in our key markets for the third quarter. In the quarter, global vehicle production was 18.7 million units, up 2% from 2011. As Matt mentioned, business conditions in Europe remained challenging in the third quarter, as industry production was down 7% and the euro weakened by 12%.

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