Visteon Corp (VC) 2003 Q2 法說會逐字稿

Good morning.

Welcome to the Visteon Corporation conference call.

All lines have been placed on a listen-only mode to prevent background noise.

As a reminder this conference call is being recorded.

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 periodic filings with the SEC.

Please read such filings if you have not done so also.

Presentation material for today's call was posted to the company's website this morning.

Go to www.Visteon.com/investors to download the material if you have not done so.

After the speaker's remarks there will be a question and answer period.

If you would like to ask a question during this time press star followed by the number one.

If you want to withdraw your question press star followed by the number 2 on your key pad.

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

You may begin.

Thanks, Thomas and Good afternoon, everyone.

I would like to welcome to you Visteon's second quarter 2003 financial results 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.

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

With that I will turn it over to Mike.

Thanks, Derek.

In the second quarter we recorded a net loss of $167 million or $1.33 per share.

This includes an after tax charge of $170 million for our exit of the seating business and continuing actions related to our European plan for growth.

We completed the exit of seating in late June.

This is a major step toward aligning our product portfolio to be more competitive.

We are also moving ahead with the European plan for growth that we expect to provide savings of about $100 million before taxes when implementation is complete in 2004.

Progress on operations also continued during the quarter.

Excluding the affect of special charges, the operating results were slightly above analyst expectations.

We also have successfully launched several new programs for our customers including the Ford F-150 pick up, the Ford Free Star minivan and the Nissan Quest and maintained a solid financial position.

Next our cooperative work with Ford and the UAW continues.

Glass operations remain profitable recording net income of $5 million, down slightly from $6 million a year ago, but at substantially lower volume.

We signed a definitive agreement with Ford, as I mentioned a complete de-exit of our seating business.

We incurred pre-tax costs of $217 million in the second quarter.

Dan will provide more detail later, but we expect about a 2 year pay back.

Just under 1500 Visteon assigned Ford UAW hourly employees at Chesterfield will flow back to Ford under this agreement.

The action will reduce Visteon's revenue by about $500 million annually, but it will eliminate substantial on going losses.

Our European plan for growth is on track.

We eliminated 570 hourly positions at three locations in Germany by a social plan negotiated with the works council.

About 200 of these are off the roles as of June 30th.

We also expect to eliminate over 200 jobs by year-end in the U.K. as agreed with the unions.

Our initial estimates assumed we would eliminate a total of 1100 positions through the plan.

Projections are now closer to 1300.

To realize shorter efficiencies, the product portfolio also is being stream lined.

For example, we are moving a portion of our electronics business from the U.K. to Spain.

These are evidence of the progress we can make working jointly with Ford and the unions.

We kicked off labor negotiations with the UAW this morning so we'll now remain silent on all Ford and UAW discussions until those negotiations are complete.

Just a brief update on launches.

We communicated we had 400 launches this year and we are about halfway through them.

We are part of some really great products and proud to be supplying the vehicles that we have.

The Ford F-150 had its job one at Norfolk assembly on June 9th.

Kansas City assembly will start wramp up on July 21st.

This truck is getting glowing reviews from the automotive press.

As I discussed in the past this is is a strong program for Visteon.

We have more content on the new vehicle than we did on the previous f series.

The Nissan Quest minivan went into production on May 5th.

The Pathfinder [AMEDA] which is Nissan's full size SUV is scheduled to begin production in early August.

The third Nissan vehicle we're watching with significant Visteon content will be the Titan, a full sized pickup truck scheduled to begin production in October.

These are three strong programs for Visteon.

In launches we are benefiting from a growing network of focus factories.

These facilities that you call Visteon regional assembly plants provide several advantages over our large legacy plants.

They are focused on a limited set of products.

There are lean structure and operating practices they are close to the customer and enable us to invest more efficiently.

Now new business wins so far this year we won $220 million in non-Ford new business.

As we communicated earlier, a majority of this year's targeted new business awards are rated heavily toward the second half of the year.

We have a large number of outstanding bids in which we have high confidence of success.

Although we have seen a couple significant programs pushed into 2004, we are still targeting awards in excess of $1 billion for the year.

With these delays, however, it will be tougher for us to hit our objective.

We continue to win the majority of our new business in our core products such as climate and electronics and about 45% of our wins are outside of North America, particularly in the Asia Pacific operations.

Which leads us to the next slide where we provide an update on our growth in that region.

We're well represented in the Asia Pacific region.

We have a total of about 31 factories in 6 countries and a number of competitive products.

Our regional footprint positions is to keep up with customer needs.

We believe we have the right partners and right products and this is reflected by the strong growth we are experiencing in the region.

The foundation we are building is solid.

In 2002 revenue from our consolidated operations totaled $1.3 billion unconsolidated ventures had an additional $700 million of revenue.

So far this year revenue from our consolidated Asian operations is up 25% compared with a year ago and unconsolidated revenue has nearly doubled.

Most of this increase is in China and Korea.

We're pleased with the progress we are making in Asia and we believe it will help us substantially as we go forward.

Now, these are the objectives we set earlier in the year.

In the first quarter we identified a number of challenges that emerged and we indicated we focused on things within our control and we are.

We are concentrating on getting costs down, winning new business at solid margins and improving margins on the legacy business.

Our exit from seating and progress of our plant for growth, evidences our effort to improve the structure of our business.

We continue to grow a non-Ford business and as communicated before the timing of awards is later in 2003 than in previous years, plus our wins trail last year on a year to date basis, but are close to our plan.

We are also on track with the launches that were scheduled for 2003 and we are seeing good execution across multiple customers.

We'll maintain a strong cash focus.

The environment, however, poses a greater challenge in meeting the final objective to improve profitability.

The size of the production cuts that have occurred in our forecast to occur will make it difficult for us to attain this goal.

We will, however, continue to drive improvements that will provide benefits this year and into the future.

Now I will turn it over to Dan who will go through the financials.

Thanks, Mike.

Last quarter we said the environment was difficult and it remains that way.

Many of the things that affected us in the first quarter have continued in the second and will remain challenges throughout the year.

I summarized some on this slide.

Historically production is strongest in the second quarter.

This year, however, Ford's second quarter production in North America was down 14% from a year ago and Ford's European production was down 5%.

Non-Ford business, however, continues to grow and was up 12% in the quarter.

We took further actions to restructure the business during the quarter.

As Mike indicated, we exited seating at Chesterfield and made good progress on the European plan for growth.

Cost pressures continued in the quarter as well.

As expected, IT costs to support infrastructure improvements were up about 39 million dollars from the second quarter of 2002 and we continue to experience increases in pension and health care costs.

Finally cash and marketable securities declined about 10% during the quarter reflecting our investments to support new business growth, to restructure our business and to achieve infrastructure efficiencies.

The next slide provides a summary of our result for the quarter for the first half of 2003.

Revenue in the second quarter totaled $4.6 billion.

We incurred a loss of $167 million after taxes or $1.33 a share.

The second quarter loss included after tax special charges of $170 million or $1.35 per share associated with the exit of seating and continued implementation of the European plan for growth.

I'll provide details on those charges in just a minute.

Although not shown, second quarter 2003 results are down compared with a year ago.

The decline reflects the impact of this year's special charges, lower Ford production and increased economics and IT costs.

New business that has come into production, improvements in Asia Pacific and other savings are partial offsets.

For the first half of the year, revenue totaled $9.3 billion and we had a loss of $182 million or $1.45 a share.

The first half loss includes the affect of special charges totaling $190 million after taxes or $1.51 per share.

Revenue of $4.6 billion in the second quarter was $426 million or 8% lower than the same period in 2002.

Within the total, Ford revenue of almost $3.6 billion was down $536 million or 13%.

The decrease was more than lower production volume in North America and Europe compared with last year.

Favorable currency changes were a partial offset.

The 2003 results include seating revenue of $118 million through June 23rd which was the date of our definitive agreement with Ford.

Non-Ford revenue of 1 billion 21 million dollars was up $110 million or 12% compared with the second quarter of 2002.

The improvement reflects primarily organic growth and higher volume.

None Ford revenue accounted for 22% of total revenue in the quarter.

The next slide provides details of the special charges in the quarter.

Costs of $217 million before taxes or $139 million after taxes were associated with the seating exit.

Costs of $217 million before taxes or $139 million after taxes were associated with the seating exit. 25 million dollars of non-cash impairment losses with fixed assets to be disposed of and $18 million for operating losses that were incurred between the effective date of the agreement and the date the agreement was finalized.

We expect an average pay back of a little more than two years for the exit of seating as Mike indicated.

In addition, pre-tax charges of $45 million or $29 million after taxes were recorded for the European plan for growth in the quarter and several other minor actions were completed.

Cash payments which will be spread over a number of years related to these charges, represent about 85% of the total.

The balance reflects a net write down and equipment operating losses are already incurred.

With these actions we will eliminate 2200 positions.

Incidentally, including the effect of these actions will have eliminated 10,000 positions since our spin off from Ford several years ago.

Our next slide summarizes second quarter 2003 cash from operating activities as they are reported in our financial statements for the second quarter cash from operating activities was positive $67 million an improvement of $200 million compared with the first quarter out flow.

During the second quarter our net loss and modest increase in trade working capital were offset by non-cash items of depreciation and amortization along with changes and accruals.

Trade capital was worse than normal and it reflected a few selected one time items including inventory stock piling that will be turned around in the third quarter.

As we demonstrated in the past our trade working capital requirements are seasonal and we expect a cash inflow in the fourth quarter.

Finally, our capital spending of $222 million reflects investments made to support our business growth initiatives and to overhaul our IT infrastructure.

We believe these investment decisions are the right actions for us to be taking even though cash balances were reduced somewhat during the quarter.

At June 30th our cash and marketable securities balance of $851 million was $96 million lower than at March 31st.

Our capital position remains solid with our debt to capital ratio at 37%.

Well within the range of investment grade credits.

Compared with March 31st our debt to capital ratio increased from 36 to 37% reflecting an increase in debt caused by the initial draw down on the company's term loan to finance its construction of the facilities consolidation in southeast Michigan.

Equity was lower because of the special charges we took in the second quarter.

And just as a point of reference, although it is not shown, our debt to capital ratio at June 30th 2002, in other words, a year ago, was 37%.

Our liquidity position is strong and we continue to take actions to ensure it stays that way.

In June we renewed our 364 day credit facility in the amount of $530 million.

When combined with our existing 5 year credit facility of $775 million we now have 1.3 billion dollars of available credit and this excludes the $250 million delayed draw term loan for our headquarters project.

Despite our split, short-term credit rating of 83 p 2 we have been able to maintain a market for commercial paper.

We had $101 million outstanding at June 30th, which is down from about $150 million at March 31st.

We expect to continue to access this market to provide short-term cost-efficient funding to handle normal variability in our cash requirements.

We established additional liquidity through working capital facilities for foreign affiliates.

The issuance of industrial development bonds to fund selected ventures and through selected leasing opportunities.

And we'll also continue to develop additional sources of liquidity through establishment of an asset back commercial paper program or other receivables based structures.

These should be in place by year-end.

Given our existing cash balance and available liquidity, we are confident we have sufficient liquidity to support our operational needs and our restructuring efforts.

We also wanted to provide a brief update on our pension status.

A return on our U.S. pension portfolio has been strong this year, consistent with market trends.

For a plan year through June, our portfolio return has averaged 15%.

U.S. discount rates are lower, however which increases our projected obligation.

If it were established today the discount rate would be a bit above 6%.

If present conditions hold until our measurement date of September 30th, we estimate our funded status for U.S. plans would be about equal to last year.

As we stated before, we do not have any unusual, major contribution requirements this year, nor do we anticipate any during 2004.

I also should mention that our second quarter provision for special charges includes pension related costs of approximately $95 million before taxes and this is related primarily to the Chesterfield action.

So in summary, pension conditions have improved from earlier in the year.

I'll summarize how we view our second quarter performance, excluding special charges, the result were slightly above analyst expectations and we're far from satisfied and no further improvement still is needed.

As Mike indicated, we remain focused on delivery of our 2003 objectives concentrating on cost reductions and margin improvement.

The restructuring is toward the transformation of our business.

It will allow us to better focus on our portfolio of core products.

We are also investing in our future.

Strengthening our IT infrastructure and consolidating facilities, gaining efficiencies in the process.

We are delivering on our commitments to our customers both well established and new, emphasizing the delivery of flawless launches.

And we are working hard to offset lower production volume we have experienced in the first half and those projected for the third quarter.

Finally we have not lost sight of the need to maintain a solid financial position.

That concludes our remarks.

Thomas, if you could open the lineup for questions.

Thank you.

If you have a question at this time please press star followed by the number 1 on your telephone key pad.

If your question has been answered or you wish to remove yourself from the queue please press star followed by the number 2 on your telephone key pad.

Our first question is from John Casesa with Merrill Lynch.

Thanks very much.

Good afternoon, everyone.

Good afternoon.

Mike, my first question is, -- it relates to the profit objective.

I am not sure I exactly understood.

You said it would be more difficult to achieve the objective of an improving profit.

Did you mean in the second half of the year?

No, John, those are our objectives that we laid out at the beginning of the year and we didn't give guidance on 2003, but we made this statement in our objectives that said we wanted to improve the profitability over what it was in 2002.

So I am only referring to that comment as it relates to 2002, not second half to first half.

I mean, are you comparing excluding charges.

Yes, that's correct.

And then the second question relates to the separation cost.

I think you said $114 million Dan for 650 people.

That 175,000 dollars a person.

Also, what happened the other -- have you a total of 220 people.

Can you explain how that works for me.

Just on the separation cost, it does include a number of things.

It includes not only the separation of the people, but also some outer zone relocations for a number of people as well.

And what I would characterize as acceleration of pension and OPEC costs that occur when you separate employees earlier than they normally would be separated through normal retirement.

So there are a variety of things incurred in that cost.

In terms of the remaining people, some of those remaining employees will flow back to Ford.

In fact, they already have flown back to Ford and will be reassigned within Ford operations.

Others of them will be separated as we discussed and some of them will be transferred to operations outside of the region.

650 just refers to people who are immediate separation.

Yes, that will be separated, if not immediately, during the course of the next two or three quarters.

Okay.

Thank you.

One last question, what is the spending ramp, and I guess therefore the borrowing ramp on the new headquarters construction loan?

Well, the loan itself is a 5-year facility that we have in place.

We began spending last year in a modest way.

We required some land and began the initial spending last year.

This is, as you know a facility consolidation where we are consolidated employees from 15 different facilities in southeast Michigan into one operation to get reduced lease costs in operating efficiencies.

As this year has occurred, particularly starting with the second quarter as weather conditions have improved, the pace of construction has picked up.

So we are expecting that this year we will be spending and looking for an estimate here, in the range of probably about 100 to 130 million dollars this year.

Okay.

Thank you, Dan.

I appreciate it.

Our next question is from Gary Lapidus from Goldman Sachs.

Good afternoon.

Good afternoon.

Hi, Gary.

Note 4 where you talk about the restructuring and specifically seating, it talks about Visteon agreeing to reimburse Ford for net costs of transferring seat production through June '04 which sounds like some kind of subsidy that maybe was part of this agreement between the three parties here, J.C.I., Ford and Visteon.

Could you explain that a little bit what that is and is that expense or some present value of that expense included in the $217 million?

Yes, it is.

What it represents is the -- what I would characterize as the cost of stewardship during the period between the effective date of the transfer which is April first to the time that the operations are moved out of that facility and exited which we expect around the middle of next year.

It reflects the net cost penalties associated with continued operation during that time period.

And it is included in the 217 and there are some net numbers, ins and outs, but it is part of the $60 million.

So it is in the 60 and it is some sort of subsidy that is part of just getting it all done.

Is that the way to think about it?

I characterize it as, -- yes, we call it the cost of stewardship for the exit period.

Okay, thanks.

The next thing, could you just help us with the currency impact on total and specifically non-Ford revenue?

Sure.

Currency -- actually let me answer a different question first and then I will come back to it.

In total from a profit standpoint, currency affects were fairly minor.

Relatively small slightly negative but not even enough to mention.

However it did have a bigger affect from a revenue standpoint.

In total, currency increased our revenue on a year to year basis by about in round numbers by about $200 million and a little over 80% of that was on Ford business.

So Ford revenue was increased by about -- in round numbers $160, $165 million because of currency changes.

Okay.

So 80% was Ford.

Yes.

Boy, I'm batting 2 for 2 here.

This is great.

This is Visteon not Ford, sorry.

The cash flow and cap backs, specifically the Cap X number looks pretty healthy and I heard the explanation.

I seem to recall at one point although it was quite awhile ago, you had thought that Cap X for the full year might be up $100 million year over year?

Would you think that maybe full year Cap X would now be higher than that?

Year over year?

Or do you still think it would be about in that range?

If you are just focusing on what I characterize as base Cap X, base spending to support our programs and products, we think it is going to be pretty flat year to year.

However, we do have a distortion this year because of the spending on the new construction of our consolidated facility operation and the I.T. spending that we are doing that is coming through as capitalized software.

That will cause our total capital spending to be higher.

I think we mentioned just a minute ago that the facility's consolidation will be about $100 to $130 million dollars this year.

And I.T.

I think would add -- I'm not sure I can give you specifically a number, but in the range of $75 to a million dollars or so, maybe less than that. 50 to 75 this year for the full year.

So the combination of those two might be $150 to $175 million up.

Yeah, okay great.

And just lastly --

By the way we are talking full year estimates when I was giving those numbers.

Okay.

The fact that there is no comment on here -- in here on third quarters, could we just assume that that means your -- well, no comment means no comment and that means have you nothing to say about it, so it must be okay, and then, you know, it exists out there and then -- if you could update us on the status of the [OPED] prefunding talks?

Well maybe I -- before talking about [OPED] I will just clarify third quarter, no comment means no comment.

We are not providing any guidance we are not affirming one way or another what is out there.

And then, Gary, on the comments on talks, like I mention earlier this morning we kicked off labor negotiations this morning, literally, we really feel we are in a quiet period and any talks we are having or not having with Ford or the UAW and any of these subjects, we are just not able to comment on them until after they are completed.

Okay.

Fair enough guys.

Thanks.

Our next question comes from Steve Girsky with Morgan Stanley.

Hi, guys.

Hi.

What does Cap X do next year?

Do we just move this 150 to 175 out and go back to base or what do we do?

Well, let's talk about base spending.

We think our base spending will remain pretty flat next year as well.

We are hoping to bring it down a touch if we could but assume kind of flat.

The spending to consolidate our facility spending next year, we should be winding it down the latter part of next year, but we still have 2 to 3 quarters to complete that project of next year.

So I am thinking it will be relatively flat as well.

I.T. spending should begin to stabilize and come down.

We got this extra 150 to 175 for two years then.

Ballpark, yes.

We can't call it quite that precisely, but ballpark, yes.

Can I ask you about the new business, this 220, if the old slides are correct, that is versus 850 in new business for the first half of last year?

Yeah, okay, Steve, I'll comment on that.

The new business wins this year are bucketed in different quarters than they were last year.

And in fact, if you look back through what we disclosed by quarter last year you would see that in the second quarter a year ago we realized only 2/3 of our non-Ford business wins came in that quarter.

This year, as we looked at when the program sourcing decisions were being made, they were heavily skewed into the third and fourth quarter.

So even though our numbers certainly significantly less than a year ago we're pretty much on target here.

I will say there have been a couple of major programs in late 2003 that the customers -- two different customers have pushed into the first quarter of '04.

So we are still considering that when we say we are still targeting a billion dollars even though there has been a couple significant push ups.

If there were additional significant push ups, then we would have to tell you those awards will probably show up more next year than this year.

If those awards go next year, next year's number theoretically would be north of a billion?

As long as we are on the billion target.

But again we are getting more precise, Steve, and we really do a good job of targeting the new customers and doing it by timing of when the kinds of products we are trying to market to the customers we are marketing to are going to be awarded.

So we can be a lot more precise in terms of saying by quarter when we expect to see those awards given in 2004.

And in fact we are a lot more accurate in 2003 than we were in 2002.

And what's the assumption the 220?

Is it constant currency?

And is it consolidated revenue or unconsolidated?

That's all consolidated.

And that's a net number.

So the new business borders we received are higher than that and we have given back, locked away and in some cases have lost something I have set a larger gross number.

I may have missed this, but where are we on the pricing of Ford for the year?

Well, I'll tell you what we have been -- where we have been saying all along.

We were early in the tv in process and it is our expectation key can deliver enough savings for Ford through that process that it will exceed their expectations frankly.

And 95% of our product has gone through that process.

And I can tell you that the opportunities identified are north of what they would normally experience I think and that's why we support the process and why it should be successful for them.

Both companies now are working hard at how do we accelerate or pull forward the savings into the current year.

Right.

So that's where we are at with the process.

You got to get some of the savings also, right?

That's correct.

The process does yield savings to us as well.

So we are incentivized to do it as fast as we can.

And if we for some reason get down graded to below investment grade, how does that change things here?

Well, obviously if that occurred we would be disappointed.

But in terms of affecting our day-to-day operations, we believe we have adequate liquidity to manage our business and complete our business plan.

So we would expect it would not have an affect on us.

Okay.

Thank you.

Our next question comes from Darren Kimball with Lehman Brothers.

Hi.

Hi, Darren.

Any sense of what D&A could be in '04 to match that Cap X number?

Our D&A doesn't change that much period to period.

I don't have the number handy, but I would guess if you just did an extrapolation you would get close.

And you would probably take it over 30 years on the building, Darren, so it is -- for the facility, so.

Okay.

And on the cash payouts from all the restructuring actions, I'm just -- I was hoping you could provide some more clarity there.

I see have you noted that there is $98 million that goes out to Ford by the end of the second quarter next year.

Is that sort of split evenly among the four quarters?

And what -- if you added everything else that is going what would you expect, you know, the cash out flow is related to be over the next couple quarters?

In terms of just the restructuring cash, it is relatively even over the next four quarters.

That $98 million that you are referring to, it is relatively even.

It is not enough variability to have a big affect on us.

I guess that what I --that is how I would answer the question.

So $98 million is going to Ford and it is still about $30 million a quarter related to the other actions you have taken?

Yeah, if we look backwards I think we have -- we may have given this number previously.

In the first quarter I think it was about $40 million for restructuring cash payments.

This quarter it was around -- a little closer to 35, 40.

So in that ballpark.

So given the other nonseating actions that we have taken or in the past or in the second quarter, probably would be just a little higher now that we have Chesterfield done.

So some of those other actions, you know, are getting behind us so that the running rate will come down, but then it will be increased by the Chesterfield action.

Okay.

So if I'm not mistaken, other than Chesterfield, that would sort of run out through the end of this year and there wouldn't be much in the way of a cash out flow in '04 and then you just have in the first half of '04 half of the out flow related to Chesterfield left.

Yeah, we have some of the European plan for growth payments and cash effects that will come later this year and early into next year.

You recall that being implemented on a plant by plant basis gradually.

So there will still be some of that yet to go.

But beyond that most everything else is pretty much wrapped up.

Okay.

That's helpful.

Thank you.

Our next question comes from Chris Cerasso with CSFB.

Good afternoon, everybody.

Good afternoon.

Hi.

Yesterday [LEER] gave us a chart that showed how much new business they brought on in the quarter in terms of revenue and profits which gave as you feel for the margin of the new business versus the old business.

Do you have those numbers you could share with us?

Well, I guess I'll take a shot at it.

We're not really planning to disclose those numbers.

What we have said and what I can reaffirm, the new business we are winning is at better margins than what it is replacing.

And we continue to update you in that manner that we are happy with the disciplines we have.

And in the process of improving margins from time awarded to time of shipment.

So I will just tell you that it is better than what we have in the legacy business.

Okay.

And then to clarify on the business awards that are being pushed into '04, is that just the decisions or are these companies pushing back the programs and then the next question would be then, does that yield some kind of a gap in new business in the '05 '06 time frame.

It is not the latter.

I think they are just pushing back the decision on the program.

We're talking maybe about a 2 month push back and it maybe swings it one year to the next and I think as Steve asked, we would add, you know, our expectations of winning that business to what we expected to win in '04.

So I don't see a gap emerging in out years.

I think it is just a short-term movement of when we recognize the award.

Okay.

Then the last question, maybe I'm just not clear. 1470 Ford UAW employees flow back to Ford.

You are reimbursing Ford for a total of about 890 of those.

What happens to the other 580?

They are filling jobs at Ford.

So you don't have to pay for those people?

No.

Okay.

Thank you very much.

Our next question comes from Mike Bruynesteyn from Prudential.

Hi, guys.

Good afternoon.

Can I go back to the profit target question.

I mean, the target is you will improve profit for the year.

Clearly consensus is not tieing with that.

What is this missing here?

Is it a question of your target maybe is not achievable?

What we -- Mike, at the start of the year we set out a target without giving specific guidance.

And last year we earned like $125 million.

So our target was that we would improve our profitability to something higher than that number.

So what we wanted to do and what we do internally is keep those objectives in front of everybody.

The objective didn't change.

We said it the end of last year and communicated to you and the objective was to beat 2002 earnings.

So that does not change for the organization.

What we are saying is given the magnitude of the productions in the second quarter and those that are forecast for the balance of the year, they are such a magnitude that it would be pretty difficult for us to beat that 2002 number.

And so that's what we are holding up there.

You are right.

Your consensus would be significantly below 2002 performance for us.

All we are saying is that it is really not feasible that we would be able to achieve that objective we said internally and communicated to you at the start of the year.

So at this point you have half the year behind you.

Some pretty solid outlook for third quarter production schedules, and as you just mentioned through the end of the year, what's holding you back from putting out some guidance or even ranges at this point?

Well, there still is a lot of uncertainties for the balance of the year, besides the production schedules.

We think the third quarter production schedule probably is solid and it is down dramatically, as you know, from last year.

But the fourth quarter there is still uncertainties, quite a bit of uncertainties about the fourth quarter.

On top of that, the UAW contract negotiations always are uncertain, as to how that could turn out.

We have made assumptions as to how it might, but our assumptions could be dramatically incorrect.

And as we have indicated a couple times before which we really can't get into, we also have discussions with Ford on some other matters.

We really can't get into how all those things could affect our outlook.

And that's why we think it just is not prudent to provide guidance.

Okay.

Could you talk about your acquisition strategy..

There was something in the European press about that.

Could you elaborate on that?

Sure.

I'll take that first I guess.

We've always indicated that if the right opportunity came along in a technology that was core to us and in a geography or with a customer base that was customer base that was attractive to us, that we would entertain that.

We saw no game changing kinds of acquisitions or mergers.

We thought that if anything came up it would be fairly small in nature.

And that is what Dr. [Fawnschmit] was referring to.

There are a couple of pretty small opportunities we were looking at specifically in the European arena.

But frankly we have -- we have issues in front of us over the next three to six months that we want to feel comfortable before we have addressed before we embark on any ambitious growth.

We said organic growth is not going to be sufficient enough for us to diversify away from Ford to the degree that we want.

There will be acquisitions at some point and that's what [Dr.

Fawnschmit] was referring to.

So they won't be enough to move the needle necessarily?

That's correct.

The ones he's looking at more to fill the technology void we have or specific opportunity that is being directed to us at the request of a customer.

Okay.

And finally, how long do you expect Cap X to be out stripping D&A like it has for the last few quarters and looks like it will I guess for the rest of the year.

But is that going to keep going beyond '04?

Touching on what Darren said earlier?

Some of it will depend on the magnitude of the new business wins.

Frankly as we ramp up, most new business wins require either new tooling or equipment or facilities.

So to the degree that we're still in a ramp up mode on organic growth, it is conceivable that we will see Cap X in any given year that may out strip the D&A.

But it will depend on specifically orders received and the magnitude of them.

All right.

Thanks very much.

Our next question comes from Saul Rubin with UBS.

Good afternoon.

Good afternoon.

On the -- Gary earlier asked the question about the negotiations for Ford on the payments on the health care.

And I understand you don't want to talk about the UAW negotiations, but isn't it fare to say that that is -- fair to say that is actually an agreement with Ford that is independent of the UAW, or is that incorrect to say that?

Saul, you know, we have to stand firm on the quiet period, and if you think about it, any item that impacts any form of labor, benefit, any kind of reimbursement, it certainly has ties to any discussions that would be going on in this period of time with the UAW.

So we just have to stand firm and we will let you know when the negotiations are completed.

We are only talking a matter of several months here.

Okay.

But the agreement itself is between yourself and Ford.

Is that -- is it true to say that?

That particular point you are referencing is an agreement between us and Ford.

But you are saying if there is a resolution it will come along with the UAW talks?

No not necessarily along with -- if things are going on simultaneously we don't want to be discussing them in a public forum.

Your SG&A levels went up by 10% and revenue going down.

What is contributing to that?

That is really more than explained before by the increase in I.T. cost as we improve our I.T. infrastructure.

I think I mentioned I.T. costs were up $39 million year to year.

That's more than a total increase in SG&A.

Okay.

Okay.

So you are capitalizing these new things, but then they are being amortized quickly.

They are being amortized quickly, but not that quickly.

When I was -- what I was quoting was the actual expense, the IT cost that comes through expense.

In addition, there is some of the it spending that we are doing that qualifies for capitalization.

That gets capitalized and amortized over a fairly short authority period.

But not immediately.

What is that period roughly?

Five years is what we would typically amortize, capitalize software over.

Okay.

The 39 million I quoted was expense.

That's expense, right.

Okay.

And then -- okay fine.

So that's normal course of I.T. spending.

No, it is not normal.

It is a ramped up rate of spending which we have been talking about for some time that we ramped up very late last year and the first quarter and it is really the work we are doing to transfer all our systems from Ford as well as set up a new arrangement with IBM to manage our systems infrastructure around the world.

It is a very major initiative we have under way this year that is beyond normal.

Okay.

In terms of cash flow, your net debt has increased almost $500 million through the first half of the year, and most of that seems to be working capital related.

Although the movement might be seasonal it seems he working capital deterioration through the first half of this year is far worse than through the first half of last year.

So is there something different going on this time?

In the discrepancy of almost $400 million or so.

It is seasonal.

The reason this year's affect is much more noticeable than last year, our first quarter affect was larger than it was a year ago.

The starting point was that we have a stronger fourth quarter in 2002 which made our start point for the year lower than it normally would be.

The first quarter we had some pay back from that.

In addition in the second quarter we would normally expect a modest decline in working capital in the second quarter.

This year we had a modest increase in working capital.

And there were three or four unusual reasons that contributed to that.

We had some stock piling that occurred in a couple of activities outside North America.

There were one or two other things, just give me a second here.

We had ramp up of work for non-Ford new customers and some tooling, receivables that again as we ramping up to support new business work we often times will have to spend the money in advance before we can actually bill it to the customers.

So the combination of those things occurring created a little bit of a distortion this year in our second quarter.

So the combination of all of that got to us on a year to year basis.

Having said that, as we look to the fourth quarter of the year, that typically is our strongest working capital quarter and last year for instance and the year before we had a very strong improvement in working capital in the fourth quarter which we expect to occur again this year.

Do you think that if we look ahead to the working capital at the end of the year will it be-- would it be a source or a drain from cash?

Do you expect--

I am not going to try to project an element of the outlook for the balance of the year.

I can just tell that you working capital is seasonal and the fourth quarter is always strong.

We expect it to be strong again this year.

Okay.

Fine.

And finally, you have quite a lot of new business coming on towards the end of the year with Nissan, can we expect that to be right from the get go, will that contribute to be a positive thing for your earnings level, or at the beginning are there other costs associated with that that might actually hurt earnings?

When does that become a real contributor to your earnings?

I think it will be -- if you look at 2004 we're up one in production launches are over.

That's where you get a good read on the performance of the new business.

Typically we incur launch costs with every customer.

So we are heavy launches with Nissan.

This year I expect 2004 would represent the more normal return on the business.

Okay.

Thank you.

Our next question comes from Rod Lache with Deutsche Banc.

Hello.

Good afternoon.

Hi, Rod.

Good afternoon, sorry about that.

You reclassified $148 million in post retirement health as a liability.

Could you tell us about the payment terms for that and does that have any affect on the prefunding of the [VIBA]?

It does in an indirect way, yes.

This is a liability that already was on our books as a liability.

It was just included in the [OPED] liability line.

When we got the agreement with Ford on the Chesterfield exit, we also agreed as part of that arrangement that we would reimburse Ford for that liability over time.

And the way it is reimbursed is we will pay them $10 million in the first year and $5 million a year thereafter until that obligation is repaid.

That stretches it out over a long period of time and as a matter of fact, quite indirectly it reduces the amount of the prefunding issue substantially because it takes that whole population of $148 million out of the prefunding pool and puts it into another payment pool which has a much longer duration.

Right.

I don't know if I was clear but it changes substantially our payment pattern.

Great.

That helps a lot.

Also, I know you mentioned the fourth quarter production is not solid, but could you just share with us the assumptions you guys are running with for Q4?

We are expecting that Ford's fourth quarter production will be about the same as a year ago.

Okay.

Whereas in the second and third quarter, their production is substantially down about 15% down in North America.

Okay.

And then another housekeeping item, the $150 to $175 million in I.T. spends, that is an expense, right?

The Cap X portion of this is separate, am I correct?

No.

When we have given previous disclosures about IT we talk about spending in total.

In other words expense and Cap X. A portion of that will be expense and a portion is in Cap X. By far the largest portion is expense.

It just comes right through normal everyday expense.

And we have quoted instead of $150 to $175 I think we said $150 to $200 million.

But there is a piece that will be capitalized.

It is a smaller, much smaller piece of that increase.

Like 25%, something like that?

Is that a fare assumption?

It's reasonable, yeah.

Probably.

Maybe a touch higher than that.

But it is much smaller percentage.

Okay.

And last question, I guess if you exclude currency based on the numbers you just gave us before, Ford revenue would have declined about 17% and if we look at the European and North American production for Ford, it was down about 11%.

The mix was actually quite good for them.

I assume that part of the difference here is price.

Is part of the difference here also the contribution from Chesterfield last year versus this year?

There is a very little affect of the Chesterfield action because we had the revenue from Chesterfield in our numbers this year through June 22nd.

Okay.

So there is very little revenue that came out of the numbers for Chesterfield.

But there were a lot of other things that went on in terms of the revenue numbers.

Mix is a factor you mentioned pricing and design changes are factors.

You have to take into account business size, their core business, [INAUDIBLE] business for instance.

So there were a lot of things that occurred.

Okay.

But is that a greater differential than in the past?

It seems like it is.

So is there anything changing with respect to pricing or content?

No, there is one more item.

I just found my back up schedule, so I have identified one other item and that is precious metals revenue was also lower this year than a year ago by about $75 million on Ford business.

And you recall that that is largely just a pass through when the Ford revenue goes up or down our costs go up or down by virtually the same number.

And so that did contribute to, that probably the main factor explaining the gap.

Is that something changed from last quarter?

No, that's from last year.

Right.

But if I look at the differential in prior quarters it wasn't as big a gap I would imagine this precious metals issue.

There are a couple other things going on by sides precious metal.

We communicated previously we gave back some business to Ford as well.

We are netting out against those new business wins in some cases that business has moved out and then also you have a full affect of a year.

There is probably some pricing affect that wept on and came through the tv in process.

We have been able to move some of that forward.

So you have to add all those pieces up.

None of which is a single large contributor.

Okay could that -- you know, the give backs, I guess you are not quantifying that.

Could that be a 2 or 3% affect on sales?

No.

No, not that big.

Okay.

Thanks.

Your next question comes from Brett Hoselton with McDonald Investments.

Good afternoon, gentlemen.

Hi, Brett.

Annualized seating revenues is $500 million a good number?

It is more like 550.

Between 500 and 550.

Okay SG&A, is this a good run rate for the next couple years, or do you expect I.T. spending to drop like from a year from now?

We expect I.T. spending to drop next year.

Whether we can predict how much I'm not sure we can say.

But it will moderate.

I would expect that '04 may track '03, '05 for sure you would see a decline in the I.T. spend.

Okay.

And finally I know this is a -- probably not likely at this point in time given your rating, but with the share price so low you have a pretty decent balance sheet.

What would it take -- maybe an improvement in the rating a year from now or something.

What would it take to cause to you consider a share repurchase?

Well, just to remind you, we have had a moderate share repurchase program for about a year and a half, two years where we purchased back shares to support our employee compensation program.

It's been very modest, but nevertheless it has been out there.

I assume you are talking about a major program?

Yes.

I'll take a crack at that.

I think the first thing would be to get some of these matters that Mike was talking about, resolved.

We have a lot of items on our plate in front of us that we've talked about and several occasions, I think getting those resolved and sorted out would be very, very important.

And then looking at the uses of our funds.

In terms of our situation of what's the best use and return for our stockholders of our capital?

That's good enough.

Thank you gentlemen.

Your final question comes from David Leiker with Robert W. Baird.

What a way to end.

A few small items.

You are talking about working capital and are there stock piles there.

Can you quantify that at all?

Yeah, directionally.

Hang on for just a second.

Yeah, the inventory stock piling is in the range of $15 million.

The temporary tooling ramp up I described was more in the range of $20 million or so.

We have some other temporary ramp ups to support customers in the range of $15 million.

So you add all those together and you have $45, $50 million dollars worth of what we consider temporary build ups in working capital that shouldn't be there for any length of time.

You don't have -- you don't use any securitized types of receivables, right?

Or do you?

Well, we do -- we factor some receivables in a small way in Europe, and I think in France is specifically where we do it.

The amount of the receivables we factor is $20 to $25 million and that is a level we don't exceed.

It goes up $5 to $10 million quarter and it was put in place 6 to 9 months ago as an added liquidity action in the event we needed it.

And making the adjustment under a receivable number for what we talked about it looked like the receivables still look on the high side.

Basically flat versus your revenues down 8%.

Okay.

Anything in particular going on there?

Well, yeah, there is at least a couple things.

At any point in time when you look at receivables, there can be distortions.

And in particular, as you look at our receivables with Ford, I think we have mentioned in the past we have a very automated automatic process where based on previous agreements with Ford we routinely net out receivables and payables between each other and we get paid on a weekly basis.

As it turned out at the end of June of this past -- June 30th of 2003, the payment pattern was such that our normal payment occurred after the quarter close instead of before the quarter close as compared with the first quarter and a year ago.

We had a bit of a distortion just by the timing of the calendar.

That type of thing can occur at any point in time and it tended to make our receivables higher than normal.

I didn't mention it earlier because it goes in both directions and it is the kind of thing that it is up and down and it is not an underling change in our operations.

Okay.

If I look at page 9,.

Yes.

It looks like sequentially your profits are flat with revenues being down $100 million?

Does that sound about right?

Yes.

Is that -- what are all the factors behind that or is it just a culmination of everything we have been talking about here in the call?

Well, it is.

If you think about it, as new businesses come on, that is contributed to improvements in our results.

It reflects continued improvement in our operation from a cost standpoint.

Our results in the second quarter don't include Chesterfield and we had a loss in the first quarter.

So, our underling profitability in the second versus the first was better.

If that's the point you're raising, David.

That is, actually.

And then one last question.

I mean, we talked about the cash flows and the numbers coming in and out and the new headquarters and payments to Ford and all those things, is there a way we can jump out two or three years and what kind of numbers do you think you will be sitting at a net debt number and debt to capital number or something along those lines?

You know, we're reluctant to provide guidance for the balance of this year it would be premature for us to be speculating out two or three years.

But you are probably not in a position that you are reducing debt on a year to year basis for several years?

We think we have gotten our debt levels to about the right level.

We have brought them down over the last 18 months and we think we have gotten them to about the right level.

Okay.

Great.

Thank you.

All right.

That concludes our call.

Pat and I will be around to answer your questions the rest of the day.

Thanks for your participation.

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

Thank you for your participation.

You may disconnect at this time.

Good day.