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Lear exits bankruptcy with a new manufacturing, product footprint

In a third-quarter earnings call just days after emerging from a voluntary Chapter 11 bankruptcy reorganization, Tier One automotive supplier Lear (Southfield, MI) showed investors how a shift in its production footprint to lower-cost countries and a realignment in its sales mix to favor electrical/electronic (e/e) over seating will make it stronger going forward. Addressing investors in a Nov. 11 conference call, two days after exiting bankruptcy on Nov. 9, Bob Rossiter, Lear's chairman, CEO, and president, and Matthew J.

(Southfield, MI) showed investors how a shift in its production footprint to lower-cost countries and a realignment in its sales mix to favor electrical/electronic (e/e) over seating will make it stronger going forward. Addressing investors in a Nov. 11 conference call, two days after exiting bankruptcy on Nov. 9, Bob Rossiter, Lear's chairman, CEO, and president, and Matthew J. Simoncini, chief financial officer, laid out a still-grim automotive industry outlook and how they plan to succeed in spite of the broader market's difficulties.

Simoncini noted that in the first half of 2009, Lear's sales were down more than 40%, reflecting in part North American production, which was off by 50%, as well as European weakness, where production fell by 32%. In the third quarter, net sales were down 19%, but the company still posted core operating earnings of $11 million.

Global production of vehicles in the third quarter totaled 14.8 million, down 6% from year-ago figures. The largest contraction was in North America (down 21%), with lower production in Europe (-8%), and Brazil (-7%). In India and China, however, the third quarter showed strong growth in production, with China's activity up 66% to 2.8 million vehicles (eclipsing 2.3 million in North America), and India rising 18% to 600,000 vehicles. Year-to-date, Chinese production of 7.5 million vehicles marks an increase of 34% over the same time period in 2008, with India's 1.7 million vehicles up 7%. North American production of 5.8 million is off 42%, with Europe's 11.3 million vehicles down 25%.

In mid-2005, Lear began restructuring its global production footprint and geographic sales mix, emphasizing manufacturing and sales outside mature markets. In the presentation, the company said it has invested $580 million in the effort since that time, including $180 million in 2009. The result has been the closure of 35 manufacturing and 10 administrative facilities. After the reconfiguration, more than half of Lear's facilities and fully 75% of its employees are in lower-cost regions. The result has been annual savings of $125 million. "Cost savings are kind of like a snowball coming down a hill," Simoncini said. "They gain size as they goes along."

In addition to savings, the shift in sales meant that weaker business in North America and Europe was partially off set by stronger "rest of world" sales. Those revenues were up from $560 million in the third quarter of 2008, to $586.7 million in 2009's third quarter. In contrast, year-over-year third-quarter sales in Europe fell from $1.493 billion to $1.143 billion, with North America's drop more dramatic, as sales plummeted from $1.079 billion to $817.8 million.

For the full year, the company is anticipating $9.5 billion in sales and core operating earnings of $80 million. Due to charges, however, the company anticipates a pretax loss of $140 million. Given this forecast, Lear believes vehicle production in North America will total 8.5 million, with European production of 15.7 million units.

Through 2012, the company has a sales backlog of $1.4 billion, which in one year's time, has seen its product mix swing from a 40:60 e/e:seating split to 60:40 e/e:seating. In addition, although the biggest chunk-$650 million-is coming from North America, fully $600 million is in Asian business, with $150 million in Europe.

Simoncini said that while Lear is "starting to see some recovery in production volume" the stronger first half of 2009 does not a full recovery make. "Two quarters do not make a runway," Simoncini told analysts. Asked whether the company would consider acquisitions at this time, Bob Rossiter, Lear's chairman, CEO, and president said his personal preference is to grow the company organically, adding that he doesn't want to see Lear become over leveraged. He did say the company would continue to look at joint ventures as a means to growth, particularly in Asia, where he continues to see long-term growth as being important.

Part of the growth in the e/e business at Lear is linked to its push into the growing hybrid vehicle market, for which it supplies wire harnesses, smart junction boxes, terminals, connectors, and fuses. The company said last year that it expected hybrid vehicle demand to more than quadruple in North America from an estimated 700,000 vehicles in 2008, to more than 3 million by 2013. - [email protected]

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