Visteon Corp (VC) 2002 Q2 法說會逐字稿

Good morning and welcome to the Visteon Corporation call.

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Before we begin this morning's conference call I would like to remind you that much of the information that will be shared with you today consists of forward-looking statements.

Within the meaning of the private securities litigation reform act of 1995.

Forward-looking statements are not guarantees of future results and conditions, but rather, are subject to various risks and uncertainties.

Some of which are identified in the company's annual report Form 10-K filed with the SEC on March 29th, 2002.

Please read the entire form 10-K.

If you have not done so already.

I would now like to introduce your host for today's conference call, Mr. Derek Fiebig, Director of Investor Relations for Visteon Corporation.

Mr. Fiebig?

Thanks, Dante, and Good morning, everyone.

I'd like to view the materials on line as we cover them over the course of this call.

If you'd like to receive these materials via e-mail in the future and didn't get them today, please send a request to vcstock@visteon.com, and we'll add you to our distribution list.

Well, leading today's call will be Pete Pestillo, our Chairman and Chief Executive Officer, and Dan Coulson, our Executive Vice President and Chief Financial Officer.

Immediately after our formal comments, the operator will open up the lines and allow Pete and Dan to respond to your questions.

And with that, I will turn the call over to Pete.

Derek, thank you.

We met many of you a few weeks ago at our annal analyst meeting where we raised our forecast for the quarter.

Our results came in were where we estimated.

We're at 72 million in the second quarter, which is in line with the consensus until the second quarter of 2001.

We also had a strong operating cash flow ending the first half with 1.2 billion in cash and marketable securities.

We continue to build a new business with significant amount of non-forward wins.

We completed pricing negotiations with Ford resulting in no impact to our financial outlook.

And we believe we are well positioned for what is a difficult time for U.S. business with investors losing confidence in the auto industry, in particular.

Our cash and balance sheet is strong.

While buying companies, we are investing and restructuring our own businesses, those we know well and achieving good paybacks as a result.

With respect to pensions, we have been affected by the market downturn.

However, we are not concerned about the funding status and importantly, we will not require major funding increases as a result of recent events.

We have written off all our goodwill.

We have modestly reduced our debt and after the goodwill write-off, our debt-to-equity ratio is among the best in the sector.

It is difficult to know all the issues that have been raised in this time, we have prudent policies.

For example, we don't have off-balance sheet SPEs, we don't capitalize engineering expenses.

During the second quarter, we secured more than $650 million in net new non-Ford business wins.

On a year-to-year basis we have more than a total of $880 million. 350 million from new customers, with 30% from outside of North America.

We continue to generate strong new business especially from our cockpits, clusters, and instrument panels.

We have won significant business with General Motors, Daimler-Chrysler, Renault, [INAUDIBLE] Peugeo, and [INAUDIBLE].

Newly announced business wins are lighting fuel storage and air handling on GM's Sumeridge 2.

Premier audio on future Daimler Chrysler vehicles, lighting for the Volkswagen group, instrument panels and air-conditioning components for the new [INAUDIBLE] in Mexico, and MP 3 audio with color subpanels for Fiat.

Obviously, we are well on track to meet our target for non-Ford wins this year.

Since the spin-off from Ford two years ago, we've won more than 3.2 billion in net new non-Ford business.

In terms of new Ford business, we won almost $300 million through June 30, which was largely offset by returned or lost business.

As we discussed before, some of the business we voluntarily passed up, and some we worked with Ford to resource.

We are major producers in Ford's recently announced Chicago manufacturing campus.

We will supply front-end integrated assemblies, cockpit systems, fuel storage systems and climate systems.

On the 2004 cross-trainer in the Ford 500.

While we can't disclose the numbers, they are very significant contracts.

Among the benefits to Ford of these systems are reduction in weight, cost and product complexity, improved serviceability, more flexible packaging, better fit and finish.

We completed our pricing discussions with Ford, and will revert to more traditional illustrations in future transactions.

We are continuing to meet with Ford to come up with ideas to facilitate long-term profitability--and theirs.

These include ways to take structures and costs out of both companies.

In discussion of legacy businesses, we should invest and where to look for other opportunities.

Overall we are more than holding our own with our major customer, we won approximately 900 million in net new Ford business since our spin-off from the auto maker in June of 2000.

We have also made major progress in a number of other areas this year.

R & D spending is down without sacrificing future product, we have introduced sufficienies such as low cost engineering centers, to do more with less.

We are rebalancing in our resources to focus on growth areas, we've discontinued to work in areas where the returns don't match the investment.

We have taken a similar approach to capital spending.

We have held first half spending to 299 million, which is down 41 from the first half of 2001.

Despite the need to support record new business wins in a number of key launches.

This also includes about $25 million for the purchase of land for our new North American headquarters.

So program spending is down more than $60 million, or 20%.

We have continued our strong cross-performance which Dan will detail later.

Quality is improving.

According to JD Power, our things gone wrong have improved by 15% year-over-year.

We have significantly earned two major awards from key customers, from Toyota, Motor of Europe, on performance, quality and reliability.

From the Volkswagen group: award for quality production processes and lighting systems in our auto [INAUDIBLE] facilities [INAUDIBLE] We have maintained our turnaround in glass operations.

Glass had a profit of million -- $11 million for the first half compared with a profit of $1 million last year.

We have recently completed a sale of our public seating business and closed Visteon technologies, which provided navigation software.

And a little bit more detail on our [INAUDIBLE] we are pursuing restructuring actions in Europe and North America as they make sense.

We have just reached an agreement with our employee representatives in Europe to improve our cost base and ability to win new business.

The plan includes eight plants in the UK, Germany and France.

Each plant has a detailed plan to reach its objectives.

It relies on a number of strategies, including resourcing product, outsourcing work done in-house and other efficiencies and productivity improvements.

Ford and Visteon are supporting the sourcing commitments tied to these improvements.

We expect that by 2004, these actions will improve pre-tax profit by more than a hundred million dollars annually.

We also expect to incur a pre-tax restriction charge of 150 million by the time the plant is complete.

Dan will go into more detail [INAUDIBLE] on the balance of the year.

Other restructuring actions we expected very good payback.

We reached voluntary agreement on the plan last week, and voluntary separation which on one part of the program is already underway.

Another example of our ability to work with unions on difficult business issues.

Financial: I will give you my view of where we stand on some key performance areas.

We are still tied closely to Ford volumes and the increase in second quarter Ford North American volumes was welcomed.

This really was the first year-over-year up-tick in quarterly volume since our spin.

The unit cost reductions and non-Ford business wins are on track.

Our structure initiatives are paying off, lowering our break even point.

We announced plans for a new global headquarters in Denver and [INAUDIBLE], Michigan and new European headquarters in Kirkland, Germany.

The [INAUDIBLE] will allow us to consolidate several facilities and leverage synergies making us a much more efficient company.

We have a cohesive management team and a board of directors with a strong focus and a sharp eye on what needs to be done to improve our business.

Our challenge is to maintain a momentum on cost improvements, even the expected decline in production during the third quarter.

There is not really much more to do.

We are not satisfied with our margins or our financial performance.

We are working on the basics and look for opportunities that will help us diversify further.

There is good momentum and we will plan to build on it.

Now let me have Dan take you through the financials.

Thanks, Pete.

On page 8, we have summarized our results for the first and second quarters of 2002.

I will go through them briefly and then go through the second quarter in more detail.

Our second quarter revenue was $5 billion, generating net income of $72 million, or 56 cents per share.

These results are in line with the analyst consensus, and it reflects strong improvement versus the first quarter.

Our first quarter revenue was $4.5 billion, a loss of $338 million, or $2.63 per share was reported for the quarter.

This included an after-tax restructuring charge of $74 million, and a one-time charge of $265 million for adoption of SFAS number 142.

With the adoption of SFAS 142 we wrote off the remaining goodwill on our balance sheet and as a result we believe the balance sheet is clearer and more conservative.

For the first half, revenue totalled $9.5 billion.

We recorded a net loss of $266 million, or $2.07 per share for the period, including the first quarter of restructuring charge and accounting change.

Excluding the effect of the special charges, first half earnings were $73 million, or 57 cents per share.

I will focus now on our second quarter results.

Revenues totalled $5 billion for the quarter.

This was up $134 million, or 3% from the second quarter of 2001, reflecting primarily new business and stronger production volume in North America, offset partially by price reductions provided to the customers in the sale of our Restraint Electronics business which was completed earlier this quarter.

Or actually late last quarter.

We earned $72 million or 56 cents per share for the quarter.

This compares with a second quarter 2001 loss of $40 million, resulting in an improvement of $112 million.

Last year's second quarter included a restructuring charge of $100 million and if you exclude that charge, the improvement was $12 million.

The improvement in net income reflects primarily the impact of new business and continued cost savings offset partially by the impact of price reductions.

Glass operations also continued its solid performance with earnings of $6 million, $3 million higher than last year, excluding the effect of restructuring charges last year.

Ford production volume in North America was about 5% higher than a year ago.

And although it is not shown on the page, this was offset largely by reductions overseas.

Last quarter we looked at the trend of EBITDA to provide a better perspective on how we are doing overtime and on page 10 we've updated this information for the second quarter.

EBITDA in the second quarter was $287 million, or 5.7% of sales.

In absolute terms, this reflects improvement for the third straight quarter reflecting stronger new business, continued cost savings, and the impact of restructuring actions taken in previous quarters.

Non-Ford revenue continued to grow in the second quarter as well.

And was up 9% from a year ago.

For the first half, non-Ford revenue totalled 1 billion 734 million dollars, up $86 million or 5% compared with the same period last year.

The second quarter increase compared with last year reflects primarily organic growth.

Non-Ford revenue is running at about 18% of total revenue so far this year, consistent with full year 2001 results.

As Pete indicated, we are continuing to generate strong new business, especially for our cockpits, clusters and instrument panels.

And we on track to achieve net new business wins target for the year.

And we are pleased with the new business we are winning.

About 75% of our backlog consists of business and products that we consider as investor growth.

We continue to focus on reducing costs aggressively pursuing actions that make sense and bring us closer to our 2002 objective.

By way of example, we will save more than $10 million by consolidating office and lab facilities and reduce spending by more than $20 million by tightening the purchasing and competitive bid process and by reuse of existing facilities and tools.

Material cost savings are the biggest contributor on the first half improvements.

We have now launched the safe program that we have talked about in previous conversations to approve and accelerate savings this year and beyond.

Our target as we discussed at our last month's analyst conference is to reduce our material costs by 18% over the next three years.

In fact, the safe workshops we held in May and June identified ideas of up to $100 million.

We expect to begin savings from these ideas as soon as the fourth quarter of this year.

And this is based on 40 workshops.

We are planning to hold an additional 250 workshops before year end.

Manufacturing costs also are down reflecting primarily labor and overhead efficiencies and lower spending-related costs.

Higher economics are a partial offset to these savings.

And as Pete mentioned, our research and development costs continue to meet our expectations and our commitments.

Selling and administrative costs were up $15 million during the quarter compared with last year.

If you adjust for last year's restructuring charges.

This reflects primarily our decision to increase our focus on customers through our reorganization.

And we believe the dividends from this investment are showing up in our new business growth, our revenues and our bottom line.

We have also remained focused on liquidity.

Page 13 shows operating cash flow, excluding payments for restructuring, and cash received from the sale of receivables, and just for information, the restructuring payments were to $23 million in cash received from sale of receivables was $32 million, which we do not include in operating cash flow.

Operating cash flow for the quarter totalled $227 million positive, reflecting our profit for the period, continued achievement of spending targets and positive trade working capital.

The favorable trade working capital was achieved despite higher volume.

It reflected primarily improvements in receivables and payables metrics compared with the first quarter.

For the first half, operating cash flow was $182 million, and compared with a year ago, operating cash flow improved by $308 million, reflecting primarily improved trade working capital.

I want to mention one other item before moving on.

For some time, we have used a system with some of our suppliers where we hold the inventory they send us on consignment until we start using it.

A practice used in the industry related to just in time requirements and done to avoid suppliers building extra infrastructure structure, in an internal review conducted in the second quarter, we became aware that some of the arrangements we had were not formalized purchase orders.

And as a result, we have increased inventory levels with a corresponding equal increase in trade payables to reflect Visteon's ownership of this inventory.

This amounts to $107 million at June 30th, 2002.

We are working actively with our vendors to obtain the necessary documentation of these terms in our past practice and will reflect the impact of these arrangements when this documentation is obtained, which we expect will be later this year.

This change does not affect cash, cash flow, or net income.

As we have shown on page 14, our financial position improved during the quarter, and we intend to continue our policy of maintaining a strong and conservative balance sheet.

Total cash and marketable securities exceeded $1.2 billion at June 30th, up almost $150 million from March 31st.

We reduced debt by $107 million during the quarter as well, bringing total debt outstanding to $1.8 billion at June 30th.

Equity increased during the period to $3.1 billion.

The increase reflects improvements from foreign currency translation adjustments and net income for the period.

Combined effect of these improvements reduced debt-to-total capital ratio to 36.7%, 2.9 percentage points better than at March 31.

We also completed renewal of our bank credit lines during the quarter, syndicating the offering and reducing the our total lines of credit to $1.8 billion .

I will turn now to the outlook to the balance of 2002.

Our North American volume assumptions remained consistent with prior projections.

We expect Ford's North American production to be about 940,000 units in the third quarter, and between 4 million 50,000 units and -- 4.1 million units for the full year.

We are seeing some production releases that suggest volumes could be somewhat higher than these projections for the second half, but at this point we have chosen not to reflect this potential opportunity in our assumptions at this time.

For the full year, we project revenue will be in the range of between $18.2 billion and $18.4 billion.

This compares with full-year revenue of $17.8 billion in 2001.

The increase in the guidance that we are providing on revenue from the meeting that we had about a month ago reflects primarily the recent strengthening of the Euro.

We are estimating after-tax earnings for the year of between 50 and $80 million excluding special charges.

This is unchanged from our prior guidance.

For the third quarter,, we are projecting revenue of about $4.3 billion and a net loss ranging between 30 to $45 million, which is a solid improvement from last year's third quarter.

This projection reflects primarily lower production volume in both North America and Europe.

And the volume is down about 20% compared with the second quarter rate of production.

As well as costs to support new business coming on later this year and in the first part of 2003.

If you adjust for the volume, the third quarter outlook is consistent with our first and second quarter results.

We expect cash flow from operations to be slightly negative in the third quarter, and we are working hard to achieve break-even.

And for the full year, we have increased our guidance to a positive cash flow of between 175 and $250 million.

Page 16 provides some further detail on our outlook for the year.

As I indicated, excluding special charges, we expect full-year net income to range between 50 and $80 million.

As I noted earlier we incurred first quarter restructuring charging of $74 million after taxes.

As Pete indicated we are continuing to move forward with restructuring actions where they make good sense.

We estimate that the European plan for growth will result in pre-tax charges of up to $150 million over the next two years.

Our best estimate for the 2002 portion is between 80 and $95 million, which in after-tax terms is between 50 and $60 million.

The impact of adopting standard number 142 in the first quarter was $265 million, and this obviously will be reflected in our full-year results.

You will recall this was a non-cash charge to write off our goodwill.

Consequently, on a GAAP basis, including all special charges, we expect the full-year loss of between 310 and $350 million for the year.

To summarize, our second quarter earnings were up from last year and in line with consensus.

We are seeing good results from cost reductions and restructuring actions that are flowing through to our operating profits.

We are moving forward with additional restructuring actions later this year.

And they will concentrate primarily on European operations.

We have maintained a focus on liquidity and cash flow and it is paying off.

Our financial position has strengthened since year end 2001.

We have reduced long-term debt by more than $100 million, and we have retained a cash balance of more than $1.2 billion.

In our debt-to-capital ratio has improved from about 40% at the end of March to 37% at the end of June.

To reiterate Pete's comment we are working on the basics and we're gaining momentum.

And now Pete and I would be pleased to answer your questions.

Thank you.

If you have a question at this time please press star, then the number 1 on your telephone keypad.

If your question has been answered or you wish to remove yourself from the queue, please press star and then the number 2.

Our first question comes from John Casesa of Merrill Lynch.

Thanks, good morning, everybody.

Just three questions, two really quick.

First of all, Dan, what is the margin outlook for 03 model year business?

And does your cash flow forecast contemplate significant working capital usage in the third quarter?

Let me answer the second part of that question first.

With regard to working capital usage in the third quarter..

There will be some seasonal working capital usage in the quarter, but not significant.

In fact, we think we will be able to contain that to break even, maybe even positive from a working capital standpoint.

As -- that is our target and we think we will be able to deliver on that.

The third quarter cash flow, the fact that it is projected at this stage to be negative, reflects the combination of increased spending requirements as we head into seasonal patterns of spending as well as the projected net loss for the period.

With regard to your first question on the outlook for margins and next year, we think we are taking actions to improve our margins, both in the variable arena and in the fix the arena.

Restructuring plan in Europe, for instance, is designed specifically to address our margins and our profitability.

So we expect steady improvement.

Now, having said that, I can't really give you at this point a forecast for specific margins for next year.

We really haven't completed our budget work for next year, and we would like to withhold providing guidance on next year's outlook.

My question Dan really was, what is the pricing look like on all this business starting up in the 03 model year?

I was under the impression from the analyst meeting you could face pricing pressure on this new business.

Is that true or not?

Well, in terms of the new business that we put on, we have won it at competitive rates.

The -- so that has already been baked into our assumptions.

I can tell you that we've got a much better process in terms of getting a disciplined quote process and we are feeling good about the business that we have won.

If that's what you are --

Okay, that's great.

Just, Pete, one for you, on this European structuring, can you -- first of all, can you give us a sense of what percentage of your revenues in Europe are affected, and secondly does this plan -- is this a template that you can bring to North America?

I mean, are the fundamentals of this plan in any way agreeable to the UAW if you do something like this?

John, I can't give you a quick perspective of the ratio of total business, because it is all the plants and therefore could have more significant impact, however extensively we do it.

But yeah, it is several good things.

I won't say returns it takes us to profitability in Europe, over that period of time.

But it reflects a clear model of an attempt to work with Ford Motor Company and our European works councils.

Obviously there is separations involved with it, so I do think it represents a potential template for several reasons.

One, David Thirstfield, who was the architect of and driving force of making it work [INAUDIBLE], is now back here in a comparable position.

So he is equipped to deal with it.

I believe he [INAUDIBLE] -- we will have to ask David himself if that is the case.

It represents an opportunity to rearrange our portfolio in a way that is satisfactory to ourselves and to Ford to get us to invest in the business as we want to grow, to walk from businesses where it makes little sense but to give them a, you know, a set of clearer choices as to who they want supplying what products.

So it would be my ambition to take it back here, in a way that is acceptable both to the UAW and to Ford.

I think, John, the UAW made it clear in the way they handled glass, that they are willing to take bold steps.

I think the fact that Rod Giddlestinger has taken the presidency, and see he was the architect for glass, suggests he is willing to do difficult things if it need be to meet the interests of his people So I would -- we have been having conversations to that effect already.

Thank you, Pete.

You have been having conversations, the net effect of the European thing is you are taking out both the head count and you are getting a price, you can't make money on it, I assume, that's the idea here?

Yeah, it is again -- to Dan's earlier answer it is both, to deal with overhead as well as products included, in which we can be more competitive.

These conversations, to end this, these conversations with the preliminary ones with the UAW, I hope they have a similar ambitious scope?

They might find them too ambitious, but yet indeed, you will not find us shy in making our proposals.

I would go on to say the conversations include Ford as well.

Okay.

Thanks, Pete.

Sure, thanks.

Your next question is from Michael Ward of Salomon Smith Barney.

Good morning, everyone, thank you.

Good morning.

A couple of things, first, Pete, as it relates, to follow-up John a bit, the new management arrangements with the UAW, how does that play out or what insights do you have that relates to Visteon?

Well, I think the UAW, you know, made a series of wise choices.

Ron Gettelfinger, the first Ford employee to be president of the UAW, has a clear understanding of Visteon and what it needs to be successful.

I don't think he will lose interest in taking the presidency.

The man who succeeded him as head of the Ford department is capable.

Old Ford hand, well known to us and Visteon.

He has shown leadership already.

I am not worried about his candidacy.

Moving forward to negotiations, the head of the UAW bargaining team will be Joel Goddard, a Visteon guy out of our Rosterville plant, fully understands our needs and expectations and as a determination that Visteon be successful.

As it relates to the second half, it seems like your assumptions with Ford's production, particularly in Q4 are pretty conservative, if my calculation is right you are looking for like down 20% with volume?

Well, with respect to the third quarter, it is down 20% from the second quarter production levels.

No, no, the fourth quarter, if you back up the third quarter in the schedule that is in line with what Ford is looking at.

But if you look at the year you need down 20% to get to that full-year estimate you are looking for.

Do you see something that we don't?

What we are seeing is Ford has indicated for the year that they expect their full-year production to be $4 million -- 4 million units or greater.

So we think the full year that we are projecting is in line with that assumption.

The fourth quarter is a little bit of a fallout from that.

We think their third quarter is pretty firm at this stage, and we do acknowledge that the fourth quarter numbers be, the production level is conservative.

At the same time, we are trying to be realistic and also reflect what our customers are saying externally.

Hopefully there is opportunity, but we are not prepared yet to reflect it until we see it.

Okay.

And on the guidance with the third quarter, you get a positive impact on the currency, there is no material [INAUDIBLE] effect as relates to profitability, is that what it is?

With respect to the currency, as we said before, we do a lot of hedging to stabilize the impact on results from currency, and through the balance of this year, we have a large portion of our currency needs already [INAUDIBLE].

There will be some impact on us in the third quarter and fourth quarter, and as I look out through the rest of the year, the recent strengthening in the Euro, for instance, will help us a little bit the rest of the second half of the year.

But it is not material in either the third quarter or fourth quarter.

Okay.

And just lastly on working capital, how much room do you have to improve working capital?

Can you pull a couple hundred million dollars out of that over the next couple of years?

It depends on what happens with production and the stability of production.

As to the degree of opportunity that we have.

But we believe there is considerable opportunity of remaining in the working capital area, as we have said before, we have spent a lot of time internally to try to achieve that and it really exists in all three parts of working capital; inventory, payables, and receivables, and so I wouldn't want to commit to the specific numbers, but directionally we are certainly expecting, in our own internal plans, to get more savings in working capital.

Thank you very much.

Your next question comes from Steve Girsky of Morgan Stanley Dean Witter.

Good morning, it is Jonathan for Steve.

On the non-Ford wins standing at 850 million for the first half, any notion of taking that target up, is there something in the external environment that would prevent that?

We are not going to change the target as we go throughout the year.

The target is what well established and if we beat the target, which we think we have got a good shot to do, we will just be pleased to do that.

And at this stage, it is looking pretty good.

Thanks.

And you talked about some of the impact on the launch costs in the third quarter, do you care to quantify that at all?

I won't quantify it but I will give you some examples you know, we have been winning a lot of business for of the last few years, and there are a number of launches coming in the second half and in the first half of next year.

For instance, next year, we -- Ford has got a major launch with the P-221 program.

In some of our other customers we are working to support some products that we are providing to Nissan.

Pete mentioned the Chicago assembly plant program that is coming on stream next year.

In Europe, there is a big launch that Ford has on one of their vehicles that is launching later in the fourth quarter, so there is a lot of activity that is occurring in the second half of this year and into next year, and as we pointed out, we have to get in front of that activity, with spending, and with engineering resources.

And frankly, as the volume moves pretty significantly, quarter to quarter, like it is doing from the second quarter to the third quarter, our capability to cut those resources, cut those efforts is pretty limited, because we have to support the launch that is coming later in the year.

Thank you.

Your next question is from Mike Bruynesteyn of Prudential Securities.

Good morning.

Could you tell me how much of the year-over-year operating income is due to revenue and how much is due to cost reductions, can you split that up?

You are speaking of the third quarter?

Yes.

I can dimension it.

I will talk pre-tax for a second, Mike.

In terms of our cost performance I will focus on that.

We have said that we reduced our costs by about $225 million through the first half of the year.

In round numbers, about 125 million was achieved in the first quarter and roughly 100 million in the second quarter.

So that was on the cost performance side.

We had continued good progress in the second quarter.

With respect to revenue, we had an improvement in Ford's North American production revenue year-to-year but we also had some improvements in non-Ford business that were coming in through the year.

So that contributed to a plus on the revenue side.

And the major offset to those two pluses were pricedowns that we provided our customers.

So I can't do all the math for you, but you can kind of work those pieces together.

So what do you think of the contribution margin on the incremental revenue?

I mean, we had revenue up $134 million, operating profit up 11.

It seems like a pretty low margin there.

Well, we felt pretty good about the improvement on a year-to-year basis.

I mean, it is about all I can tell you.

We -- we -- the new business we are bringing on is definitely contributing importantly to our bottom line.

And the revenue that we are getting through higher production from Ford is contributing.

Great.

Could you tell me what the research and development was in the quarter?

Is it coming down as you planned?

Yeah, we -- we had a pretty significant improvement again in the second quarter on research and development.

It was comparable to the first quarter and we are along towards hitting our target for the full year.

And the improvements we are getting are especially large in the first half of this year compared with the a year ago, because if you recall, last year, during the second quarter is when we implemented our major restructuring action.

So on a year-to-year basis we are getting real strong comparisons.

That will start to level out as the year goes on, because we had a lot of the improvements in place in the second half of last year.

You said on the first quarter conference call that you had made a $25 million saving; is that correct?

Is this consistent with this quarter?

Let me look for a second, Mike.

Thanks.

You can roughly -- our judgment is if we roughly achieve the same performance in the second quarter as in the first quarter on a year-to-year basis, so you can roughly double that, and I am sure you are talking an after-tax number, when you mention that?

I don't know I am just taking the number you said on the call.

Yeah,I think that was an after-tax number.

So in terms of pre-tax expenses, it was a bigger savings.

Thank you very much.

Your next question comes from Gary Lapidus of Goldman Sachs.

Good morning, guys.

Just on your Q3 guidance, Dan, I want to sort of explore that a little bit relative to Q3 of 01.

You are looking for 4.3 million of -- excuse me, billion, of revenue, that is about 600 million of revenue more than last year's Q3.

If you had about a 30% contribution margin, that is like $180 million, which is about 115 million after-tax, which is about 88 cents a share, so if I added that to your negative 54 cents a share adjusted for the goodwill last year, I mean, that would be showing a significantly higher third quarter 02 earnings than what you are guiding to.

Now, I mean, so something is not right.

Maybe if you could help me understand what it is.

Is it the contribution margin is not right?

Or is costs have gone up significantly, or is there something else I am missing in Q3?

Well, I will start with last year.

We had a very strong third quarter relatively speaking last year.

Now, even though it was a loss, if you look at our PV relationships, it was a strong third quarter.

Having said that, what we have been looking at is how does the third quarter compare with the way we are running this year?

How does it compare with the second quarter and the first quarter?

And if you do the same math that you just went through, which we have done, you get pretty consistent relationships.

You can explain pretty clearly using the kind of arithmetic you just went through what we are facing in the third quarter and what it hangs together versus the first and second quarter.

I just would have expected the business to be better this year, production is better, it is more stable, and you have got some benefit from your restructuring in Q1.

Well, and we -- we agree with what you just said.

We think it is reflected in our data.

It is -- I guess that's the best way I can respond to your question.

There is -- I pointed out, just a minute ago, I mentioned the launch expense and the product development cost.

We've got more,just relatively more, new business coming on later this year and next year than we had coming on in the first half of this year and the last half of last year.

So as we get more launches coming, the effect of those fixed development costs is larger.

Okay.

Switching gears, this -- the charge, of the 150 total, and then you said what, 80 to 95 this -- in the second half.

Yes.

How much of that is cash and over what time frame do you expect the cash to go out the door?

And then how much of it is just asset write-offs?

I will speak to the full year, or excuse me, the total program number, Gary.

The $150 million, you have in round round percentages, about 60% of it is cash, and about 40% is non-cash.

So that is the 150.

The cash relates primarily to what we would characterize as separation-type programs of one sort or another.

Is the non-cash all asset or does it include pension and health care stuff?

There is -- it is all assets.

Okay.

Nothing for pension and health care to speak of, except to the extent --

Europe, I'm sorry, they all get free health care and pension in Europe.

I wouldn't go that far.

Sorry.

My mistake.

Okay.

Identify translated back to this year, this year's piece, which is an estimate at this point, because we are still -- this is being rolled out as we speak, and the termination programs, the separation programs, are voluntary, so we have to wait until we see the acceptance rate.

So there is going to be some uncertainty as to exactly the timing of this.

But our estimate of this year's piece is based upon what we know about the asset charges that will be required, or write-offs and our expectation of the employee separations.

So there is proportionally less cash this year, more like 40/60 than 60/40 because the asset charge will come up front and the termination charges will spread out.

You would expect to be done with the charging and the cash for the whole thing what, by the end of next year?

Yeah, it is quite possible a little could drift into 2004, but at this stage it would be very, very small.

Our goal is to get it all done by the end of next year.

Okay, great, thank you.

Your next question is from Wendy Needham of CS First Boston.

Good morning.

I just wanted to go back to the third quarter revenue number again.

If you -- because I am confused, if you look at revenue per unit, in the second quarter and I think you guys like to just divide it over North America, Ford's North American production, your Ford revenue per unit was about $3500, and then it just looks like it has got to take a big move up in the third quarter to get up to that 4.3 billion.

And -- so that is one part of the question.

The other is your revenue per unit is also down year-to-year.

Is that just pricing that is going on there or is there something else?

Yeah, at any particular quarter, revenue per unit of course can be affected by a lot of things, currency changes, mix and so forth.

The number you quoted for our North American revenue seems high.

It seems high.

We have been quoting a number of more like $3,000 in any quarter it could be plus or minus maybe of $100 from that.

So 35 seems high.

I'm sorry, Dan, that was just the total Ford revenue divided only by North America.

But yeah, of course --

Oh, I see.

All right.

If you just focused on North America, it is about 3,000.

Right.

We think the 4.3 is pretty consistent.

We are pretty comfortable with that being an accurate number based on the units that we are expecting Ford to produce both here and in Europe.

Yeah, Wendy, if you look if you look at Ford's production number they are down 235,000 units, if you -- that is roughly $700 million on the downside.

They going to be off somewhat in Europe on a lower content and we have some -- the mix of the products as well will get you there.

And currency's also going to help us as well in the third quarter, with the Euro at parity or better.

Do you have a lot of aftermarket stuff in there, that just stays sort of stable too?

Our aftermarket revenue is pretty stable throughout the year, so it does not change a lot.

And we do have some in each of the quarters.

Yeah, that would distort it up.

Okay, alright, I will work through that.

I guess the other question is, on the -- this inventory issue, Dan, then do I sort of move up to a new level of inventory for the rest of the year?

Is that what you are saying?

We hope not.

What we are doing here is cleaning up our documentation and we want to be sure we stated the inventories based on our existing documentation.

In fact, we already are actively working with our suppliers to have them formally agree to the terms we had been in fact in practice using.

So our expectation is by the end of the year, we will return back to where we were and we should see a -- we believe a pretty significant movement even in the third quarter.

But having said that, we just felt like we had to state -- adjust the inventory and the payables consistently.

Okay.

And so it was 170?

I'm sorry it was 107.

Okay.

Okay, thanks Dan.

Your next question is from Scott Hill of Sanford Bernstein.

Good morning.

Could you guys help again on this the third quarter number?

It really is hard to get back to your guided number given the fact that you have, you know, third quarter North American productions up like 18% for Ford, 14% globally, your revenue forecast that you actually have as you back down, really it is difficult to get back into the guided range you have, and you guys have been clear that in fact, you know, the pricing settlements both in North America and Europe have been done without materially affecting your forward guidance but it is a clever disclosure in the fact at least with the North American settlement, it was done at a time when there was no forward guidance, and so my question is, is the delta here that we are focused on and everybody is having a hard time coming to grips with, is just a function of pricing?

I don't think so, Scott.

Now, I can't tell for sure what is in your models but I don't think so.

I think maybe the missing piece that we are struggling with here is the impact of these -- this launch support product development efforts that we are working at.

Okay.

In the restructuring in Europe, could you give any idea about head count reductions, is that something you are able to disclose yet?

We have talked the about it, it may well be, it is towards 15% but it will be plant by plant, we will do that most efficiently.

It is a mix of what work we put in as well as what -- how we make the place more efficient.

Roughly 15%.

Okay.

And could you walk through how the pension expense year-over-year pension expense flows back to you?

Ford was talking about they were down about 7% through June, obviously that's going to be higher than that today, and that if everything was steady they would have about after-tax impact next year of 125 million.

How does that actually affect you guys in terms of the flow-back cost?

They just

That is a good question, Scott.

Because our pensions are tied to what happens to Ford, at least a portion of our pensions, and just sticking with that theme, we have reimbursed Ford for the assigned UAW employees that work for us with cash payments equal to our expenses.

So as their expenses go up, they bill us more and we reimburse it and vice versa, Ford has the liability as well as the assets in the fund and in fact for some of our salaried employees, those with long service, Ford also has the liability and the assets for those prior service costs that existed at the time of spin.

So clearly, a large chunk of our pension costs are driven by what happens with Ford.

In terms of our expenses, we have had -- we are projecting this year to incur about $120 million of pension expenses on a pre-tax basis.

And that is up from last year, about $30 million higher than last year, but it is very much in line with what our expectations have been all year and we communicated this previously.

We expect a similar kind of an increase next year, and again we have been expecting it for some time.

You know, it really reflects lower discount rates and the investment returns that are being observed.

On a payment or contribution side of the equation, our payments, we have been making steady payments, or steady contributions, and they are very consistent with our expenses.

In other words we don't have a big imbalance between expenses and payments.

So our payments this year are also expected to be about $120 million, and they will also be up a little bit next year as well.

If you look at investment performance of the fund that we manage, which is for our -- our hourly employees and for our salaried employees, and the service that has been incurred since spin, as well as past service for some of our salaried employees, we have actually been able to have, for our plan, a 1.6% improvement in our pension fund performance compared with our plan ending period date, which was June -- or excuse me, which was September 30th of last year.

That is our measurement date for our plan.

So we have actually improved since that point in time.

Now, if you look at that and say, what has happened since December 31st, in other words just focus on this calendar year, our performance is about 4.3% negative for the first six months of the year, which is I think in line with what many other companies have been reporting.

We are on a different plan, period.

If you lock in that performance that I just mentioned, through the balance of our plan period, in other words through September 30th, our costs would go up next year by about $8 million from what I just quoted you.

So if you stand way back from this, we are obviously very concerned about pensions, we are following it very closely, we have -- we fund and pay to Ford consistent with our expenses, but the kind of increases that we are seeing are fairly modest relative to other parts of our business and other things we are focusing on and we think are quite manageable.

At least for, you know, based on today's environment.

Just to be clear, the $30 million increase and the $8 million -- the 8 million is based on what you are looking at in terms of your own plants you are managing, the 30 million increase you that would look at would be reflective of that which Ford is currently managing for you for the employees that are assigned to you and you would reimburse?

In part.

The 30 is a mixture of what Ford is managing for us as well as what we have previously been assuming for our own plants so it is some of each.

And the 8 million is on top of that for our own plans if performance stays right about where it is at.

Okay.

I guess a fair point of risk, then, is that really here is an issue you guys are managing and quite frank lip obviously different than Ford for your own plans, your performance is different, that would reflect to the UAW costs, those workers assigned to you, you really have no capability of managing that, that is clearly in Ford's hand, whatever they have in their long-term interest in terms of much more aggressive equity stance really is nothing you guys can influence; is that correct?

Well, it is clearly in their primary control.

But as we -- as we think about the future, we can provide perspectives and input and suggestions on future actions they could consider.

So we have a vested interest in how they manage it, but they clearly have control over that process.

And just lastly could you talk about your hedging policy?

If all of a sudden the currencies moved in your favor this year, what percentage of your profits would be locked in in future years or are you going to see this reversal and actually not only have increased revenues next year but actually allow that contribution to fall to bottom line?

We hedge basically about 50% of our exposures and we estimate that those exposures on a regular basis so we are constantly ensuring that we have got the hedging updated.

And we go out for a year.

So we are rolling forward on a -- sort of a 12-month basis.

On a -- each -- as we complete a quarter we go out another quarter.

On occasion we will modify that 50% ground rule we use, if we are looking at a situation for a highly volatile currency, we might go up to 70 or 75%, for instance hedging.

So --

So the second quarter thing of next year things should start running pretty substantially in your favor?

If for instance, the Euro stays strong and [INAUDIBLE] stays weak those are our two largest currency exposures, we would begin to get a little good news this year yet, but importantly, more good news, out in 2003, starting with the first quarter.

And it gets progressively bigger as the year goes on.

Yeah, the second quarter will be good.

May is the meltdown time.

Okay, great.

Thank you very much.

Your next question is from Derek Kimball of Lehman Brothers.

Hi, good morning.

Good morning, Derek.

Can you comment on whether in the second half you expect any costs to be incurred related to some of the Ford product delays?

It looks like the aviator has been pushed back.

I am not sure what else.

Is that one of the things that might be affecting the third quarter, you have to ware-of-carry some launch costs or what?

That is a very minor impact on us, and I am not -- I am not really aware of any extensive delays that have been announced to begin with, but that is not affecting our projections.

What we are assuming is, for the programs that I mentioned a while ago, they are going to be delivered on schedule and we are working to support them.

Now, the -- on the cost performance side you said 125 and 100 in your first and second quarters, your full-year target again is what, 600 million?

Yeah, what we have said is that we are targeting to do as well as we have done in prior years which has been around 600 million.

Now, it can be 25 million in either direction, but that is what we are targeting for the year.

But if I am reading those numbers right, I guess those are year-over-year performance improvements?

Yes.

You have got to do -- you have got to achieve a significantly higher run rate in the second half; is that right?

And if so, are you -- how confident are you that the costs will come out?

Well, we are confident.

That is consistent with our past experience, if you look back at our experience over the years, we -- we generate momentum as the -- as the cost savings ideas are implemented through the year.

Typically, our fourth quarter is among our best quarters from a cost performance standpoint.

So at this stage, we believe our -- the full-year outlook is in line with delivering those kinds of numbers.

And lastly, on the cash flow, you said you had 25 million in cash outlays related to the restructuring in the second quarter; is that correct?

Yes.

Let me just confirm that, Derek, I want to be sure I didn't give you a first half number.

It was about 25 million in the second quarter, and just for reference, we had about roughly 35 million in the Q1 related to restructuring.

Okay.

And you exclude that from your operating cash flow number; correct?

Yes, we do.

Okay, so the second half cash related to Europe is not in that 175 to 250 number?

That is correct.

And very, very little of that European charge will show up in cash in the second half.

There will be some of it, but as we start to make payments, it will be late in the year, and early into next year.

Is my expectation.

Okay.

That is all I have got, thank you.

Why don't we take a final question?

I am showing 11:00.

Ladies and gentlemen, we do have time for one more question, and that question comes from Ron Tadross of Bank of America Securities.

I turn into a pumpkin in a minute there,.

On this cost performance thing, the 225, it looks to me, I am kind of fumbling through my crude notes here you guys are running on a year-to-date basis below last year by like 30 or 40 million, does that sound right?

No.

Based on our analysis, we are little ahead of last year.

Okay.

Not dramatically.

Well got off to a faster start.

So our first quarter was quite a bit better.

This quarter, because we got off to a faster start on a year-to-year basis is a little bit -- a little bit less than the second quarter, but the first half to date we are a little ahead of last year's pace.

.

And then just on the receivables, Dan, I notice those were down, you know, I think can you just help us out what is going on there?

And if they should continue to stay down, or is that temporary?

Well, we hope it is not temporary.

You can get affected by point in time, you know, conditions on receivables, but it reflects improvement in both our timing of collection of non-Ford and Ford receivables.

And we think it is going to stay pretty much at that level, at least at the year end, the quarter can get distorted because the sales are typically lower in the third quarter, so third quarter gets distorted in terms of days, but if you look through it and go to year end, well think we will be consistent.

Okay, so it is trending down and you are just collecting quicker, there were no formal changes in terms or anything?

Not that I am aware of, no.

Okay, that's all I have, thanks a lot.

Alright.

Well, Thanks for joining us on the call.

I will be around to answer questions for the rest of the day.

And we will talk to you next quarter.

Thank you.

Ladies and gentlemen, this concludes today's conference call.

Thank you for your participation.

You may disconnect at this time