Visteon Corp (VC) 2002 Q3 法說會逐字稿

Good morning and welcome to the Visteon Corporation conference call.

All lines have been placed mute to prevent any background noise.

As a reminder, this conference call is being recorded.

Before we begin this morning's conference call, I'd like 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 a subject to various risks and uncertainties.

Some of which are identified in the company's annual report on form 10K filed with the SEC in March of 2002.

Please read the entire 10K form if you have not done so already.

After the speakers' remarks, there will be a question and answer period.

To ask a question during this time, simply press star, then the number 1 on your telephone keypad.

To withdraw your question, press star, then the number 2 on your telephone keypad.

I would now like introduce your host for today's conference, Mr. Derek Fiebig, Assistant Treasurer for Visteon Corporation.

You may begin.

Thanks, David and good morning, everyone.

I'd like to welcome you to Visteon's third quarter 2002financial results conference call.

We posted this on our website under news and events this morning.

I hope you had time to pull the materials down and review them.

In the event that you haven't, you can go to www.Visteon.com and review them over the course of the call.

Leading today's call will be Mike Johnston, our President and Chief Operating Officer and Dan Coulson, our Executive Vice President and Chief Financial Officer.

Mike and Dan will respond to your questions.

With that, I turn it over to Mike.

Thanks, Derek.

Our 3rd Quarter results were in line with the guidance we provided back in July.

We achieved year-over-year improvements in revenue, EBITDA, earnings, and cash flow and reduced capital spending to below 2001 levels in spite of the investment required to support the new business.

For the first time since our spin-off, more than 20% of our revenue for a quarter came from non-forward customers.

We continue to make progress on restructuring.

Our European plan for growth is well under way and that will help us grow our business in that region.

And since the spin-off, we have eliminated more than 6,000 positions worldwide.

We're on track to exceed our goal for the year of securing more than $1 billion in net new business wins.

Through September, we booked more than $900 million in net new business, broadening our customer and geographic base.

Virtually all of our new business is non-forward.

We've won new business from Ford, but it was offset with losses and give backs.

More than a third of the new business is outside of North America.

Now, some of the recent announceable wins include some future Daimler Chrysler vehicles with durable lightweight compresses, we have our in-vehicle entertainment system on the VW [SHERON], on the Ford Fusion, which is the new SUV for the European market, we supply interior, electrical, chassis and climate systems.

And in a partnership and supply agreement with BMW for our wireless interface module, based on bluetooth technology for in-car mobile phone integration.

Next, we want to talk about one of our highest volume non-Ford wins.

We recently won a contract to supply integrated cockpit systems for future Nissan platforms in the U.S. and Europe.

These include the minivan, pickup truck and sport utility vehicles Nissan will assemble at its new plant near Canton, Mississippi, as well as the frontier pick up, Xtera sport utility vehicle and Altima sedan assembled in Smynra,Tennessee.

The cockpit system includes the cross-car bar beam, instrument cluster, instrument panel with integrated air bag, wiring harness, console, climate system and steering column.

This new business win expands on the new Nissan business we had previously announced.

To deliver it, we will assemble on site with just-in-time in-line vehicle sequencing processes.

These orders are a good illustration of Visteon's global strength there.

They were a result of our coordination of our customer business groups in France, our engineering in Japan, and our manufacturing organization in the United States.

Going forward, based predominantly on booked business, we expect our non-Ford sales to grow 25% in 2004 and 30% by 2005.

As a point of reference, by 2005 our non-Ford revenue alone would make us about the 10th largest automotive supplier based on Automotive's News 2002 ranking.

Over the next three years, there will be a major ramp-up, we have $2.5 million in non-Ford business coming on-line.

Next, if we turn to Ford, we've won approximately $900 million in net new Ford business since our spin-off in June of 2000.

This net growth is despite letting go of some legacy business we don't consider core to our portfolio or that have weak margins.

So far this year, North American volumes have been stable.

There are a few areas of concern, however, including some selected European products and then also in South America.

We're working together with Ford, developing strategies that facilitate our long-term profitability and theirs.

These include ways to take structure and cost out of both companies.

The end result will be a better bottom line for both of us.

We continue to make progress on the European plan for growth, which I mentioned in our second quarter call.

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

The plan includes eight plants in the high-cost countries of the U.K., Germany and France and obviously each plant has a detailed set of plans to reach its objectives.

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

Both Ford and Visteon are supporting with sourcing commitments tied to the improvements and we'd expect to see some similar actions in North America.

We expect that by 2004 the European actions alone will improve pre-tax profit by more than $100 million annually.

We also expect to incur a pre-tax restructuring charge of up to $150 million by the time the plan is complete.

Dan will have more detail when he covers our outlook for the balance of the year.

As with our other restructuring actions, we expect a very good payback.

And the voluntary separations, which are already part of the program, are already under way.

We've also made progress in a number of other areas this year.

R&D spending will be down more than $100 million from last year.

We've introduced efficiencies such as things like low-cost engineering centers, to do more with less.

We've rebalanced the engineering reresources to focus on growth areas and discontinued work in areas where the returns didn't match the investment.

We've taken a similar approach on capital spending, which is down $55 million through the first nine months.

We'd also want to point out our quality is improving.

Our J.D.

Powers scores have improved 15% year-over-year and we have won two major awards from key customers.

From Toyota motor of Europe, we won one on performance, quality and reliability.

And from the Volkswagen group, for quality production processes.

We are continuing to pursue restructuring actions with solid payback.

Before we get to the financials, let me give you a summary of where we stand in some key performance areas.

We continue to identify ways to streamline our structure and so far we've eliminated the 6,000 positions worldwide since spin.

Our customer focus is paying off in new customer orders and in building stronger relationships.

Our commercialization process is improving rapidly and we've implemented a robust engineering change process and are accelerating our time to market.

Also, our purchasing initiatives are gaining traction.

We've talked about our save program and received more than 1500 ideas from our supplier partners and believe we're on track with that program.

We have confidence that these initiatives will flow through to our financial performance in 2003.

We expect improved operating earnings and margins next year with a major ramp-up in new non-Ford business.

This should allow us to exceed analysis consensus estimates and this is despite expected increases in pension and OPEC costs and the support for the new business.

Now Dan will take you through the financials.

Thanks, Mike.

We've summarized our financial results for the third quarter and first nine months of 2002 on page 10 of the material that was posted on our website.

Revenue in the third quarter totaled $4.3 billion and we incurred a loss of $52 million or 40 cents a share.

The loss included restructuring charges of $17 million after taxes for the European plan for growth we announced last quarter.

Excluding these restructuring charges, our loss for the quarter was $35 million or 27 cents per share.

This is in line with the guidance range of $30 to $45 million that we had provided.

For the first nine months of 2002, revenue totaled almost $13.9 billion.

We recorded a net loss of $318 million or $2.48 per share for the period, including the goodwill accounting change we made in the 1st Quarter and all restructuring charges.

Excluding the effect of these special charges, operating earnings for the first nine months totaled $38 million or 30 cents per share.

I'll focus next on our third quarter results, excluding the effect of special charges.

Year-over-year, we're posting improvements for all of the line items shown, which is positive news we're pleased to report.

Revenue of $4.3 billion was up $622 million or 17% from third quarter of 2001.

Ford revenue increased substantially.

This reflected stronger North American production volume and new business as well as favorable currency changes and were offset partially by the effect of price downs and the sale of our restrain electronic business completed earlier this year.

Non-Ford revenue increased by $181 million or 25% to $898 million and I will talk more about that in a moment.

Third quarter EBITDA was $109 million, up $42 million year-over-year and equal to 2.5% of sales.

Consistent prior years, we experienced shutdown periods in North America and Europe, varying by country between one and two weeks during the quarter.

This adversely impacts our third quarter results.

As a result, excluding restructuring charges, we recorded a third quarter loss of $35 million.

This is an improvement of $39 million over the third quarter of 2001, reflecting higher volume, the impact of new business coming on stream and continued cost savings.

Price reductions, lower margins on some replacement business, and unexpected weakness in South America were partial offsets.

Our non-Ford revenue continued grow in the third quarter, reaching 21% of total revenue.

As I mentioned, non-Ford revenue for the quarter was up 25% compared with the same period a year ago.

This increase compared with last year reflects primarily higher production volume, organic business growth and favorable currency changes.

For the first nine months of 2002, non-Ford revenue is equal to 19% of total revenue.

This is consistent with our expectations and prior projections.

As Mike indicated, we're also on track to achieve our net new business wins target of $1 billion in 2002.

We're very please we this trend and the momentum that it reflects.

It took us several years for the new business we had won to come into production, but we're now seeing the effects.

Today, our non-Ford revenue comprises 21% of our total and we're project it will reach 25% by 2004 and 30% by 2005.

This reflects a substantial improvement off our relatively low base and it provides tangible evidence that the diversification that we're seeking.

I'll turn to cash flow, which is shown on page 13.

As I indicated, this page shows operating cash flow for the first nine months of 2002, excluding payments from resturcturing charges, which were $70 million, in cash received from the sale of some receivables, which amounted to $15 million.

Our operating cash flow in the third quarter totaled $174 million negative.

This reflected negative trade working capital and our loss for the period.

Historically, third quarter cash flow is weak because of the seasonal decline in production in both North America and Europe.

You compare our results with a year ago, our third quarter cash flow improved by $84 million.

For the first nine months, operating cash flow was $8 million positive compared with a year ago, cash flow improved by $392 million reflecting improvements in all cash flow components.

Earnings, capital spending, working capital and net accruals.

We're pleased with the improvement in our operating cash flow.

It reflects the added focus we've placed upon and the results of actions taken throughout the year, which we've discussed previously in these conference calls.

Fourth quarter cash flow typically is strong.

We also expect to continue to improve compared with a year ago.

Our forecast is to achieve positive operating cash flow in the range of $175 million to $250 million for the quarter.

Our financial position remains strong.

We ended the third quarter with $1 billion in cash and marketable securities.

As we stressed in the past, insuring adequate cash and liquidity is a high priority for us.

Our profits improve cash and liquidity include implementation of restructuring actions with quick paybacks, tight requirements for capital spending and an intense focus on working capital.

We consider our balance sheet a strength in these difficult times.

We eliminated goodwill earlier this year and we don't have any off-balance sheet special purpose entities.

At September 30th, our capital totaled $4.9 billion and our debt to capital ratio was 37.5%.

Which is substantially lower than most of our competitors.

Like many other companies, we've also reviewed the accounting method we use for stock options and decided to make a change here, as well.

Beginning in January 2003 we will expense the fair market value of stock options granted to employees pursuant to SFAS 123.

Our best estimates indicate that expensing options reduce 2003 net income by about $5 million with the response increasing to $15 million over the next three years.

The next page provides a summary of some points relating to pensions and OPEB liabilities, which two topics that have been in the news lately for many companies.

On the following page, we go into pensions in greater detail.

Our situation differs from most of the other companies in our industry.

Regarding pensions, for example, Visteon is not responsible for pension benefits for pre-spend retirees, expect in those instances where we had stand-alone plans that existed prior to our spin-off in June of 2000.

We are responsible only for retirees that take place after the spin.

As a result, our active to retirees ratio 8 to 1 in our major operations in the U.S. and western Europe.

And further, if you just focus on UAW master agreement employees that are assigned to us by Ford, the ratio is significantly higher, almost 17 to 1.

Also, Visteon's funded position is determined only by obligations for Visteon plan employees.

And excludes Ford-assigned UAW employees.

Consequently, we have a relatively low under funded amount in today's depressed market conditions.

For OPEB, like pensions, we're not responsible for benefits, for prespend retirees except where we had existing stand-alone plans.

We're only responsible for employees that retire after spin.

Unlike pensions, however, our current cash payments at about $19 million in 2001 are substantially lower than our OPEB expense accruals that we make.

This cash difference helps provide cash to fund near term business initiatives.

We're reflecting an increase in OPEB accrual during 2002 in a range of $30 million for the full year and have been accruing that throughout the year.

And we're aggressively taking actions wherever possible to contain these cost increases.

And finally, as we've covered in the past, our spin-off agreements require us to begin a pre-funding a portion of our OPEB liability over 15 years beginning in 2006.

Focusing specifically in pensions in more detail, our funded position is determined only by obligations for Visteon employees.

Consequently, we had a relatively low underfunded amount at $327 million at the end of our measurement date period in 2001.

Although the amount will increase this year for lower asset values and most likely a lower discount rate, our September 30th, 2001 measurement date already had reflected a substantial market decline.

Consequently, we estimate that our fund assets are down only an additional 4% as of our measurement data as of September 30th of this year, that includes the contributions we made net of about a 5% reduction in market values.

So, it is a net number.

For our U.S. plans, this market decline, plus lowering our discount rate to about 7% would increase our underfunded liability by about $170 million from what it was a year ago and we're still reviewing the situation for our non-U.S. plans because we're collecting data and still going through our actualarily analysis, but the underfunded amount for the non-U.S. plans also would be up but not as much as the U.S. plans.

For assigned UAW employees, Ford retains the assets and liabilities, and Visteon reimburses Ford in cash [INAUDIBLE] on a lagged basis through changes in expense over time.

As we've mentioned in prior conference calls, we are expecting this year's pension expense to be up in the range of $40 million before taxes and that's been reflected in our accrual assumptions.

For 2003, we're projecting a further increase, probably in the range of 40 to $50 million, as well.

But we do not anticipate the need to make any unusual contributions beyond our normal level of funding.

I will turn now to our outlook for the balance of the year.

We're projecting fourth quarter revenue of about $4.6 billion which would result in full-year revenue of $18.5 billion.

This compares with the fourth quarter 2001 revenue of $4.5 billion.

So, revenue should be up a little bit year-to-year.

We've tightened the range of our guidance for fourth quarter earnings to between $15 and $35 million after taxes.

This excludes potential restructuring charges.

Last year, as a point of reference, on a comparable basis, we had a loss of $14 million in the period.

We anticipate additional restructuring charges in the fourth quarter related to European plan for growth.

In addition, we continue to consider other actions, because these studies are in progress, we're not at a point at this time that we can project the impact that they may have on us during the fourth quarter.

As I mentioned, we expect cash flow from operations to be positive in the fourth quarter, ranging between $175 and $250 million.

This reflects normal seasonality and our continued focus on improving cash flow.

We've included as a memo our North American volume assumption, which is up slightly from our prior projections.

Fourth quarter North American production volume is expected to be 965,000 vehicles which is equal to the external guidance Ford has provided.

By the way, this results in a full-year production level of a little over 4.1 million vehicles for Ford for the year.

Compared with the fourth quarter of 2001, we're seeing considerable improvements in earnings and cash flow at slightly lower production volumes.

To summarize, our third quarter results were in line with our guidance and the restructuring actions being implemented are providing good results and we intend to continue to take actions in Europe and in North America as it makes sense.

Our focus on liquidity and cash flow continues to pay off, our operating cash flow for the nine months reflects a substantial improvement over 2001.

Our cash balance remains above a billion dollars and our debt to capital ratio remains strong at 37.5%.

And we anticipate positive operating results in the 4th Quarter that will continue to build on the momentum we have gained. 2003 is a key ramp-up year of non-Ford business and we anticipate further improvement from cost savings and restructuring actions that have been taken.

And as Mike indicated, we anticipate these continued improvements will result in an improvement in operating earnings next year.

And I should point out that we will provide additional texture and details on this on the 2003 outlook at the splinter group meetings that are scheduled to take place in January.

And with that, Mike and I would now be pleased to answer your questions.

If you have a question, press star 1.

If your question has been answered or you wish to remove yourself from the queue, press star 2 on your telephone keypad.

Our first question is from John Casesa of Merrill Lynch.

Thanks very much.

I have three quick ones.

First of all, Mike, what's the possibility of an announcement on a North American plan for growth?

Is this something that could be months away or is it years away.

John, I think it is something we're working on almost on a product line by product line basis and frankly in cooperation with the efforts that Ford has talked about.

So, we go through a process of assessing the various products and systems and look at ways to take the cost out of the total system.

And we're making progress on that and I think you will see that through that process we will end up moving some product around and coming up with a similar plan that we have in Europe and I would expect that, you know, you're not talking years away, but it is a living process right now.

So, I would expect sometime throughout the 2003 period it will come in increments throughout the year.

As opposed to a single comprehensive announcement that you made in Europe.

That's correct.

And secondly, you have a lot of business starting up in '03, a lot of non-Ford business.

Do we have to worry about start-up costs or are there any particular new product launches that are particularly high risk because of technology, volumes, customer timings, things like that?

At this point in time, we don't see anything that's high risk.

As you know, in this industry, those launches are reviewed over a three-year period prior to job one.

And in all cases the new business launches, we're getting pretty good feedback from the customers that we're in good shape on those launches.

Any issues have been identified early.

We feel pretty confident about it.

And a lot of those costs we talked about in the past were incurring today and absorbing tied support that new business.

So, I don't see any surprises on launch costs or anything unusual in supporting that new business wins beyond what we're already incurring year-over-year.

Thanks, Mike.

Our next question is from Darren Kimball of Lehman Brothers.

Good morning, guys.

Good morning.

Could you just go over in a little bit more detail the third to fourth quarter issues?

What I mean is that the North American volumes at Ford are pretty comparable, they're up a little bit, yet your earnings guidance is substantially up.

What are the key seasonal factors from the third to the fourth?

I will be happy to respond to that, Darren.

You're right, Ford North American production is up only a little bit.

We're seeing a pretty substantial increase in Europe, however.

Which contributes to part of the reason for the increase as well as continued improvements in non-Ford business, new business coming on in addition.

So revenue and growth is clearly part of the story.

We are expecting our revenue to be up $200 to $300 million quarter-to-quarter.

In addition, we're continuing to get traction from our cross reduction efforts and really throughout the organization.

In the material arena, focusing on our safe program and manufacturing costs we're better-managing the overtime and launch costs and in our engineering arena.

And just as a reminder, during the third quarter, we had the seasonal shut down that is very disruptive from an operating standpoint and you don't get your best levels of efficiency in the plants at that time and we're past that now.

So, for a variety of reasons we would expect to see a pretty substantial pick up.

And looking at last year as a point of reference, we had a similar improvement in operating results, third to fourth quarter, as well.

Okay.

And I'm just curious on the materials savings plan.

You guys have commented I guess in the end of the second quarter that you were behind plan, but you expected to make it up maybe in the fourth quarter.

Can you update us on where you think you will be, you know, for the full year is there going to be a positive in the fourth quarter?

I will start with that, and Mike can add to it.

I don't recall saying we were behind plan, actually.

There is always seasonality up and down quarter by quarter, but I think we felt like we were running on track.

Now, there is as well, there is, by virtue, the way we handled the negotiations throughout the year, some of the negotiations don't get resolved until later in the year, as the year proceeds.

And when that occurs, we will reflect the full effect of the negotiations retroactive back to whatever point, you know, the starting agreement refers to.

So, there is some of that that occurs, as well.

But I don't recall, you know, a comment saying we were running behind.

I would just add to that you know, I think there was an update communication out of our purchasing organization and where we were at specifically at a point in time and I think they were lagging the execution of some of the ideas that had been generated through the save program and through the emphasis.

This was some months ago now, you know, getting the engineering groups to implement the changes that had come out of the projection process or collaborative process with the suppliers.

We now feel that we're on target.

That also helps explains some of the difference between the third and fourth quarter.

You said what, 18% material savings over three years, are you roughly on target for a third of that?

Yes.

Okay.

And can you just clarify the 40 to $50 million increase in pension OPEB; that pre-tax or after tax?

That is a pre-tax amount.

Okay.

And when you guys talk about the pension liability, what you're saying is that the pension liability in the assets are on Ford's balance sheet?

But you guys are on the hook for, you know, the cost associate we did that.

Is that what you're saying?

Yeah, in terms of the assigned UAW employees, if I can narrow it to that specific thing, that liability and the assets that go with it is on Ford's balance sheet.

We do have the responsibility to pay the ongoing cost of the pensions that relate to those employees, who retire after the spin-off had occurred.

So, anybody who retired prior to the spin-off is not our responsibility.

Anybody who retires after the spin-off, that is assigned to us, we have to pay the cost of that, but we don't have the liability.

Does that answer your question?

Yeah, I can follow up.

Just lastly, it looks like you're saying you saw a 10% contribution in terms of that, you know, EBITDA increase versus the increase in the Ford volumes that one slide.

Where do you think you will be in the next couple of quarters?

Or is there anomaly in that?

In terms of variable contribution?

Well, I think that's it's a pretty tough comparison to make, Darrel, because of the seasonality in the fourth quarter.

There is a lot that goes on, there is launches and plant shutdowns and start-ups.

That's a global situation, not just a North American one.

So when you compare fourth quarter to third quarter you really have to dig deep.

I wouldn't look at it at that high a level.

I would expect that the third quarter is consistently is one of our tougher quarters.

Okay.

Thanks very much.

The next question is from Steve Girsky of Morgan Stanley.

Good morning, everybody.

Hi, Steve.

Just a follow-up on Darren's question.

What was your cost performance in the quarter?

On a pre-tax basis, the way we've been disclosing our cost numbers, we saved about $70 to $75 million of net cost savings.

Now, that's net of launch costs, any economics, we try to come up a net total bottom line number.

About $70 to $75 million.

And what was your prices down in the quarter?

We've typically not disclosed that, Steve, but it was bigger than that.

Prices were down more than costs went down?

In the quarter.

Okay.

A big piece of the improvement was glass year-to-year.

Can you just tell me what's the status of some of these theoretically non-core businesses?

Well, we will start with glass and, you know, as we've communicated before, we had a very good working relationship with the UAW to introduce some work practice changes and move some product around and so on and that resulted in a good improvement year-over-year on glass.

And some of the other businesses, we are working with the UAW and with the dmor find solutions for and, you know, it's a slow process on those non core businesses as you know, Steve.

We feel we are making some progress in that arena.

We can't give you a solution date or tell you we are "X" percentage of a way to a solution, but I'd say the intensity to get them resolved is very high in all parties involved.

Okay.

Let me ask you one, the backlog, you said that 900 last quarter was 850.

You sure you're going get to a billion?

Actually, we looked at the fourth quarter status, obviously across all of our business groups and look at the seasonality of when the orders are issued.

And we're confident that we will hit or beat the billion dollars after looking at even business received this month.

That number is through the end of September.

And we've already made progress to beaten that goal.

Uh-huh.

And just getting back to the cost performance, when is your cost going to start going down faster than you prices going down?

[ Laughter ] Well, I think we're making, you know, a lot of fundmental progress here.

I would expect we'd see that going forward, Steve.

I know you said on employment numbers since you spend, but what's the employment year-to-year?

Okay, we will get that, the exact numbers for you, Steve and maybe we will just comment it while we're answering another question.

Okay.

I can respond to that, I do have the numbers on a year-to-year basis.

And if you look at the end of the third quarter of this year versus the end of the third quarter of last year, and I will focus just around on rough numbers 4% in the U.S., a little bit higher outside the U.S.

So, that's net employment is down 4%?

In the U.S., so it's not -- this is not just the number of people that retired, net of adds and all that stuff?

Yes, yes.

And that's compared with the same period a year ago.

In other words, September 30th a year ago versus September 30th of now.

Right.

Right.

And the pension, the plan assets are down 5%?

Or 4%.

Yeah, they are.

Did you put money in there?

We're always making contributions in two ways.

To Ford as to satisfy our expense obligations, we essentially pay Ford a cash amount equal to our expense accrual and for the plans that we have, we also are making contributions to those plans on a continued basis.

They're not -- what I would characterize as special contributions, they are normal contributions and if you add those two together, the Ford and non-Ford piece, we had a pension cash outflow for the first nine months of this year, in round numbers, of about $100 million.

And that's very, very close to the expense level that we accrued through the first nine months of this year, as well.

So, our cash and our expense is very similar for pensions.

And some of that went into our own pension plans.

Okay.

Thanks a lot, everybody.

Our next question is from Gary Lapidus of Goldman Sachs.

Morning.

Good morning, Gary.

Good morning.

Dan, when you say the cost increase is expected of -- you said what, $40 million for the -- you have it here as expense and cash payments on the pension?

Yes.

So, I will take it to mean that's the increase of your book expense of your plans as well as the expense for Visteon-assigned Ford UAW employees, right?

It is the sum of both?

Yes, it is the sum of both.

So, in other words, you had $140 million last year and say it will be up to about 180 this year for the sum of those two pieces.

Let me give you the specific numbers.

Last year -- and you can find --

Yeah, 139.

There you go.

And then you're just saying it is up 40 this year and you expect the sum of those two items to be up another 40 to 50 in '03?

Yes, that's correct.

If you were to get your plans for now and just look at the expense for Visteon and assigned Ford employees, if you sort of modeled this thing out, what would you estimate the present value of that number would be?

In other words, if this was a traditional pension accounting as opposed to -- I mean if it was a capital lease as opposed to an operating lease, which is kind of how it is set up now, what would the number look like?

I know you have to make a lot of assumptions, but I'm curious if you have a sense of what that number would be?

I don't.

I mean we certainly could analytically come up with such a number, but I don't have it.

And you're right, this has some characteristics of a lease.

But we do think it is different some respects, too.

And the obligation is not a fixed amount.

It keeps changing based on deputigraphics of employees and the levels and the marketplace and so forth.

Right.

But ultimately, say Ford's returns were minus 15 and then 6 for the next five years that, ultimately flows through to your operating lease expense, pardon the analogy.

Yes, it does.

Ultimately, the performance -- but to the extent they're making contributions, whether they do or do not choose to make contributions, which is a different question, yes it ultimately comes back to you, but the in fact they're making a big contribution in any year has no bearing on what you're paying.

That's correct.

Okay.

Tolly switching gears, the non-Ford revenue numbers are very impressive and I, you know, particularly as you out to '04, '05, I'm just curious as to what kinds of margins should we be expecting on those revenues?

Relative to the margins that you have on the existing business, you know, particularly in the out years since that's business that you booked, you know, after you came separate from Ford and so, you know, may have somewhat better characteristics?

Okay, Gary, we would expect that we had the disciplines in place over the last say year and a half or so that we're pretty confident that the margins on the business in the out years that you're talking about would be similar to what you would expect a good performing tier 1 supplier to earn.

Obviously there are ups and downs in there, but as a whole, we feel pretty good about those margins.

And all you have to do is look at our net margin today, you can come to the conclusion that the margins will be better than what you're seeing today.

Who would you define as a good-performing tier 1 supplier?

[ Laughter ]

Can we be a little more specific than that?

I wouldn't give you the benchmark companies, but we would say that in the past we've said 4 to 5% range would be what we would expect.

That a pre-tax number?

No, after.

Sorry?

No, after.

After.

Wow, okay, that's a good-performing tier 1.

Just one other, you mentioned on a $15 million receivable sale.

In the quarter.

What's the total amount of that program?

It's 15.

In fact, this is a sale that we did in Europe several months ago when we were really trying to ensure we had adequate liquidity all over the world.

We wanted to implement a receivable sale just to run through the process and make sure that our systems were all set up to handle them.

That's winding its way down at this stage and we have not counted that as cash flow.

We just really didn't feel like that was an operating action.

It was more of a financing action.

We just wanted to mention it.

Okay, thank you.

Our next question is from David Bradley of J.P. Morgan.

Good morning.

Good morning.

Good morning.

You've got this -- you know, good relationship going with Ford now, where you're cooperating actively on VAPE cost reduction and I think David Thirstfield has either done you a favor or a disfavor I don't know, talking about the radio and the huge saving there.

Assuming that radio example can cut across other product lines as well, and there are some big cost saving opportunities for both sides.

As you weed out inefficiencies, it strikes me it's going to free up a lot of extra people.

Obviously with big efficiency improvements you've needed less workers, how do you plan to cope with that going forward?

Actually, if you consider the in fact we have a ramp-up of a significant amount of new non-Ford business, some of the workers are obviously required for that.

And, you know, the process we have going on with Ford, you know, this is not new.

We have been working together to find ways to improve it and frankly some of the benefits that's come out of the process that we're reading about here are the elimination of complexities.

So, if you look at taking the number of SKU's on a component or a system from I think numbers I read were, you know, 140 or 50 down to something in maybe a 10 or 20-30 range and think about what that does in improved quality and logistics and inventory and all of that, there is a tremendous savings there without impacting margins.

I've read recently in the same papers, you know, there are plans to take this across the entire supply base and a lot of other commodities.

I assume similar opportunities will benefit everybody.

It has been a good process and, you know, we will continue to do it.

Okay.

And then just lastly, a lot of questions on the pension payment to Ford, I want to get a final clarity on that.

So, the amount you owe to Ford is based what basically Ford's discount rate times the liability amount plus ongoing service costs or how?

It is equal to the accounting accruals, so, we go through the normal analysis of what you would accrue for accounting purposes and this is the calculation as done by Ford, we audit and review it to make sure we are all in agreement.

But it's driven by the accounting, and once that number is determined, then we book it in our expense and we also pay it to Ford on an ongoing basis.

So, for the year, for that portion of our pension expense, the cash payment is essentially identical.

Okay, but the accrual -- this is for workers who retired prior to the separation or for workers --

No, for workers who exist, who are working today or who have retired since separation.

Okay, but Ford is showing that the future payment stream has a liability their balance sheet.

Do they have an offsetting asset, which is the receivables from you?

No, their assets is the assets in the pension fund that existed and still exist.

So you get credit for their assets, the return on those assets?

Yes, we, if you will, have a portion of their assets and a portion of their liabilities relate to our assigned employees.

Now, they're all co-mingled within the Ford accounts, but a portion of them that relates to our people who are working for us.

Okay and that $140 million last year, and I guess $180 million this year expense, what portion of that expense of your pension expense equaled the payments to Ford and what's equal to your own payments?

I can give you a rough approximation and I think it is about and this is for this year, I want to say 40 to 50%.

It is roughly half and half, I guess I would say, as related to Ford assigned employees and the other half is related to our employees.

It's -- in directional numbers.

I don't want to be too much more precise than that because it moves around every year, but directionally it is in that ballpark.

So, going back to Gary's question earlier, if you were to reflect that to the balance sheet the typical way you would take your current pension liability number and double it, that's what that would be.

Say that again, please, David.

Since it is roughly half of the pension payments you are making if we simply took your current pensions, assets and liabilities on your balance sheet and doubled that number would that give us an approximation of what that present value [INAUDIBLE] would be if we capitalized it?

No, as I said in response to Gary's questions we don't look at it that way, assets and liabilities are in Ford's balance sheet, we have the responsibility to pay these ongoing costs, so I couldn't even give you a judgmental estimate.

One thing I can tell you is to refer you to the financial statement that actually the numbers we have been kind of guessing at are published in the financial statements are note 7.

It shows the expenses for Visteon assigned Ford UAW employees right related to our total expenses so you can do the exact math.

Okay, so that minus 4% on your pensions assets, is that the change from the end of the second to the end of the third quarter?

No.

What that represents is our last official measurement date which was September 30, 2001 to September 30, 2002 so it's a one year change and it is our estimate at this point in time of the global change in our asset levels for all of our plans.

This takes into account whatever contributions we've made and whatever has happened to the market value of our investments.

Okay, thank you very much.

Next question comes from Michael Burnastein from Prudential Securities.

Could you quantify the revenue drivers with Ford that you listed off the new business, the FX, the volumes, the price downs, and the [INAUDIBLE] business?

You are referring to the comments we have made for this years?

Or since then of?

This quarter's revenue drivers in terms of the total revenue impact at Ford, you said was impacted positively by new business, section volume, and negatively by price downs and exiting business.

I was wondering if you could give us some numbers related to those?

I can give you some of the numbers, yes, just to repeat.

Our revenue with Ford was up substantially, about $440 million.

And there were lots of ups and downs, but if you just focus on the North American production volume increase of 138,000 units, most of that $440 million could be ascribed to that.

Now, in addition, we also had some other important changes.

We did get some additional net new Ford business coming on-stream and that was quite significant and we did have currency effects which were relatively modest and the sales of our restrain electronics business was also relatively modest, as well.

So, those are directionally the factors, but if you cut all through it, the production change accounts for practically the whole change.

Okay.

And then on the backlog, I think in Paris you guys said $933 million, now you're saying just over 900, have you actually lost some, like maybe some Ford business since then?

There was a small amount of giveback and the net effect actually wound up slightly down.

Now, that's been offset in the current month already.

But it was exactly that.

It was exactly a giveback.

Okay, and then just maybe a little minor, but the equity income line took a big jump in the quarter.

Is there anything you can call out there?

Well, yeah, two things.

And by big jump I'm looking at --

Well, $11 million in the context of your net result that's not insignificant.

Oh, I'm sorry.

Equity and the unconsolidated subs.

Yeah that, really reflected very continued good results on some of our investments that we've got around the world and our subsidiaries, particularly in Asia, where they continue to operate very, very strong.

That's where most of the improvement occurred.

Okay, thank you.

Thanks, Mike.

Ladies and gentlemen, we have time for one more question and our last question comes from Michael Ward of Salomon Smith Barney.

Good morning, everyone.

Good morning, Michael.

Over in Paris, you mentioned that you had five key product areas of focus, I assume; that where most of the new business, the outside, the non-core business is coming in?

That's correct, Michael, that is virtually all of it.

What percentage do those five product areas currently represent of your revenue stream?

I don't think we've split that out, but you could indicate it is a real round ballpark on that would be about 2/3.

2/3.

Okay, we should expect that portion to be growing in the next couple of years as the new business comes on?

We're planning it.

Okay.

And lastly, one last question on the pension thing; there any provision in the appointment agreement with Ford that Visteon will absorb the legacy cost onto their balance sheet at any point in the future?

No.

No.

Okay.

Okay.

Thank you very much.

Ladies and gentlemen, there is some more time available.

We have one last question from Rod Lash of Deutsche Banc.

Got a few questions.

Good morning, everybody.

Good morning, Rod.

The service cost component of that $139 million pension is about $45 million.

What is the growth rate or is there a growth rate for that service cost component?

No, I think that's a pretty stable number.

That reflects current service and it does change year by year with the demographics of our workforce, but it is a pretty stable number.

So, it shouldn't change by much.

Okay.

And then the $58 million cost, this is the cost assigned to Visteon for the Ford UAW employees?

Yes.

That's going to be flat, you're talking about, right?

No that, number will change.

That is one of the things that will change as Ford's investment performance changes, as discount rate assumptions change.

That number will change.

And I would expect this year -- well, this year it will be higher than it was last year and next year it will be again higher.

So, it will change.

And on a separate topic, did you say that you're assuming only a slight reduction in Ford production next year?

I don't think we said anything about next year's production.

We'll get into that in January once we have a better fix on just what the outlooks like.

And lastly, can you elaborate a little bit on this comment you made about walking away from unprofitable Ford business, do you still think Ford content per vehicle would be flat next year versus this year?

And is there a significant amount of non-Ford business that would also fall under that category of being unprofitable and something you'd want to reduce?

No, the bulk of the business where we have issues would be with Ford and we understood that and we're working to alleviate that, I think on both sides.

So, if we walk away from something, there is always a solution.

It's not like we walk out the door.

There is a coordinated movement to bring on another supplier or find another technology.

So, it's with no disruption.

We come together and say there is a better solution for our customer.

Let's find a way to execute that and we do.

So, there's been a little bit of that here in the last quarter or so.

But it's virtually all with Ford.

How big a factor is that as you look out to next year?

Well, I think as you go through the process we're going through with them, you know, we want to make sure that we provide the technology that they need and that they have an opportunity to get the technology from somebody else if in fact there is a better option for them.

So, I think it is an ongoing process for us, I don't think it's an event and it is one that is planned and coordinated.

Okay.

Thanks.

All right.

Well, thanks for joining the call.

I know you have another one here at 11:00 and we will be around to answer your questions if you have any follow-ups.

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

Thank you for your participation.

You may disconnect at this time.

Have a great day!