Visteon Corp (VC) 2003 Q3 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Visteon Corporation conference call.

All lines have been placed on 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 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 already.

The presentation material for today's call was posted to the company's Web site this morning.

Please visit www.visteon.com\investors, to download the material if you have not already done so.

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

If you would like to ask a question during this time, simply press star then the number one on your telephone keypad.

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

Mr. Fiegig, you may begin.

Thanks, Paul, and good morning everyone.

I'd like to welcome you to Visteon's third quarter 2003 financial results conference call.

Leading today's call will be Pete Pestillo, our Chairman and Chief Executive Officer, 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 up the lines to allow Pete, Mike, and Dan to respond to your questions.

With that I'll turn it over to Pete.

Thanks, Derek.

In the third quarter we recorded a net loss of $168 million, or $1.34 a share.

This includes an after-tax charge of $41 million related to the UAW Ford labor agreement and a small net restructuring charge.

Third quarter was the lowest production level Ford has had in North America for many years.

This coupled with seasonally low production in Europe put significant pressure on other quarter results.

We did have significantly more launches, 122 in the quarter, and associated costs with them compared to last year's third quarter.

Despite these factors we had a strong cash performance during the quarter.

At September 30 our cash and marketable securities totaled $943 million, up about $90 million from June 30th.

We continue to evaluate our workforce competitiveness and ongoing needs.

The European plan for growth is progressing.

We expect to save $100 million annually starting next year, and this year we expect to recognize about a third of that savings.

We continue to see the benefits from the exit of seating.

Neither the revenue nor the loss of that operation is included in our third quarter 2003 results.

Our spending to upgrade our IT infrastructure and consolidate our southeastern Michigan facilities will help us be more cost competitive in the future.

In fact we're launching the first phase of our IT separation this month and it will continue through the first several months of 2004.

We continue to work well with the UAW and Ford.

The latest contract is an example of how this cooperative relationship will help us be a more competitive auto supplier.

The 2003 UAW contract includes several positive features from Visteons' standpoint.

We will negotiate a Visteon supplemental contract for future U.S. hires.

The acceptance of a more competitive wage structure is an important and positive development for the company and its future.

This is intended to make us competitive with other tier one suppliers.

All new Visteon UAW employees will be subjected to new terms and conditions which will allow us to change our cost structure over time.

It's a win for us and our customers and helps maintain good manufacturing jobs in our facilities.

Visteon also gained the ability to implement competitive operating agreements at the local level.

This is very important because it enables us to improve plant productivity considerably.

Our relationship with our largest customer, Ford, is the best it's been since we've spun.

We agreed to continue to make capital investments and our UAW represented plants, Ford has agreed to look to Visteon first when sourcing new products.

That's very positive to us.

There's no cap on how much business Visteon can win from Ford.

The contract includes a number of critical elements that will help improve our financial results.

We expect the competitive tier one supplier wage structure to result in significant savings over time, placing the company in a more competitive position to win incremental business.

We expect to improve productivity in our plants through implementation of local competitive operating agreements, limiting non-competitive work practices.

Ford will offer UAW represented hourly employees working at Visteon, including those hired since spin off, the opportunity to voluntarily to move into Ford operations as positions become available.

Further, there will be no longer a flow of workers from Ford to Visteon.

It's now a one-way flow from Visteon to Ford.

Finally, the $3,000 ratification bonus will cost Visteon $64 million before taxes but it's a non-recurring expense.

It's higher than we'd expected but the expense has been recognized in the third quarter results and was paid early in the fourth quarter.

In summary, we're pleased with what we've achieved in the talks but we still have much to do until we're pleased with our operating efficiencies.

Let me turn the presentation over to Mike who will update you on our operations before Dan reviews our financial performance for the quarter.

Mike?

Thanks, Pete.

In addition to the UAW contract progress on operations also continued during the quarter.

I'm very pleased with our strong new business wins in the third quarter.

This was also a quarter that contained several key launches for us, two of which I'll cover in more detail.

Our business continues to grow in the Asia Pacific region, and I'll provide a short update there.

Our net new business grew significantly in the third quarter.

We won over $380 million during the quarter, bringing our year-to-date wins to about $600 million.

On a year-to-date basis about half of our wins were outside of North America, which adds to our geographic diversification.

Most of our new business is coming in our core products such as climate and electronics, and two-thirds of our new business was with such automakers as General Motors, Nissan, and Hyundai.

About one-third of our wins were with Ford.

Before we move on I'd like to talk about the way we report new business.

After having discussions with various analysts, we feel a new approach is warranted to keep you informed of our new business growth.

Instead of providing a quarterly update on net new business wins and reporting on Ford, non-Ford basis, we'll give you more meaningful information regarding the wins and help you better calendarize how new business will impact our results in the future.

I'd like to highlight one of our major launches this year.

The Ford F-150 for which Visteon supplies more than 300 end items.

Ford selected Visteon for chassis, interiors, headlamps, audio, and electronics, truly a major showcase of our content and delivery capabilities.

Our content on the F-150 is above our average content on other Ford vehicles.

Our metrics are telling us we're strengthening our processes in program management as seen through Visteon's superb launch performance.

We're pleased, and so is our customer.

We're responsible for significant content on the F-150, and one area that sets this vehicle apart is the selection of unique interiors.

All of which were designed and developed by Visteon.

If you look at the Nissan Titan, we developed the interior, which was a different theme and unique look.

If you compare the two automakers, you can see how Visteon can differentiate the product in a terrific way.

Visteon also provides the distinct headlamps that enhance the Titan's bold stance.

The headlamps are part of the front end module, engineered and supplied by Visteon.

Nissan has been pleased with the results of these and other products we've supplied on this important launch.

Let's move to Asia Pacific.

We are well represented in the region where we have a total of 31 facilities in six countries and a number of competitive products.

Our regional footprint positions us to keep up with customers' needs.

So far this year, revenue from our consolidated Asian operations is up 12% compared with a year ago and unconsolidated revenue is up about 70% from the first nine months of last year.

Most of this increase is in China and Korea.

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

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

I'd like to provide further detail on one of our most important Asian ventures, Halla Climate Control, which is located in Korea but has operations in other parts of the world.

Visteon owns 70% of Halla.

This year we received two high honors.

The most recent was our recognition in September by Korea's CEO Association as the top company of the year for the second consecutive year.

Earlier Hyundai recognized us as the best supplier of the year and have selected us as the exclusive supplier for the important launch of their new H D model.

The honors and the new business wins solidifies how well we're positioned for growth in the Korean market.

Although we're encouraged by the labor agreement and the positive impact it will have on Visteon moving forward, the near-term continues to be challenging.

For 2003, Ford's North American and European volume has come in lower than we anticipated earlier this year.

According to Ford's most recent release, fourth quarter production is expected to be up 28% in Europe and 17% in North America from third-quarter levels but down a few percentage points from 2002 levels in both regions.

We do expect to see continued new business growth and stronger operating results in cash.

Now to give you more context on our third quarter financial performance I'd like to turn the call over to Dan.

Thanks, Mike.

We said the environment was difficult in the first half of the year, and it really remains that way.

Many of the things that affected us in the first half have continued in the third quarter and will remain challenging through the balance of the year.

Historically production is weakest in the third quarter because of new model change-over.

This year Ford's third quarter production in North America was down 17% from a year ago to 786,000 units, the lowest production level in any quarter since our spin-off.

Ford's European production was down 6%, and obviously this put pressure on our profitability.

Cost pressures also continued in the quarter.

As expected, cost to support improved IT capabilities were up about $50 million from the third quarter of 2002 and up about $10 million from the second quarter of 2003.

This increase relates primarily to our IT separation from Ford, transition costs associated with IBM outsourcing, and other strategic IT projects.

As Pete mentioned, we're launching the first phase of the IT separation from Ford this month.

Launch and project expenses total about $50 million in the quarter, and this was up about $15 million from the second quarter.

It reflected 122 new program launches during the quarter.

And as Pete mentioned, we also reflected a pre-tax charge of $64 million for the UAW settlement that Pete pointed out.

Our non-Ford revenue continued to grow in the quarter, reaching 26% of total revenue, and I'll discuss this in a little more detail in a moment.

And our European plan for growth is progressing, and we maintained a very strong cash position at quarter end.

On page 17, we've provided a summary of our results for the third quarter and the first nine months of 2003.

Revenue in the third quarter totaled almost $3.9 billion, and we incurred a loss of $168 million after taxes, or $1.34 per share.

The third quarter loss included a charge of $41 million after taxes, or 33 cents per share for the UAW settlement.

This reflected the $3,000 ratification bonus which we recognized upon contract ratification in the third quarter, and as Pete mentioned, we've paid the bonus in October.

Third quarter results also included net restructuring charges of $1 million after taxes.

Our third quarter loss is larger than incurred in the same period a year ago, which is not shown on this slide.

The decline reflected the impact of lower Ford production volumes, the UAW ratification bonus, and cost of improving our IT infrastructure.

Other cost improvements and exit from the seating business were partial offsets.

For the first nine months of 2003 revenue totaled $13.2 billion and we incurred a loss of $350 million, or $2.78 per share.

The loss included after-tax special charges of $191 million, or $1.52 per share.

Our revenue of $3.9 billion in the third quarter was down $460 million, or 11% compared with the third quarter of 2002.

Within the total, Ford revenue of $2.9 billion was down $573 million, or 17%.

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

In addition, the exit of seating earlier this year accounted for a revenue reduction of $133 million compared with last year.

These reductions were offset partially by favorable currency changes of about $55 million.

Non-Ford revenue of $1 billion was up $113 million compared with last year.

Non-Ford revenue accounts for 26% of total revenue in the third quarter of this year, up 5 percentage points from the same period a year ago.

Cash provided by operating activities was a positive $185 million in the third quarter, and this compares with a cash outflow of $40 million in the same period a year ago.

The improvement reflects primarily lower trade working capital requirements offset partially by an increase loss compared with a year ago.

I think you know historically the third quarter has been characterized by cash outflows reflecting primarily the effects of summer shutdown and new model launches.

This year's result, a significant cash inflow, reflects lower volume levels along with a continued focus throughout the organization on cash and specifically on trade working capital.

We're really pleased with the progress we made during the quarter.

Capital expenditures totaled $238 million in the quarter compared with $162 million a year ago.

The increase of $76 million includes $22 million for the consolidation of our facilities in southeast Michigan, and $19 million for IT infrastructure actions.

At September 30th, our cash and marketable securities totaled $943 million, which was up $92 million from June 30th.

Our capital position remains solid with a debt-to-capital ratio of 40%, well within the range of investment grade credits.

Compared with June 30 our debt-to-capital ratio increased by 3 percentage points.

The change reflects an increase in debt as we continue to draw on the term loan to finance construction for our facilities consolidation in southeast Michigan along with higher borrowings at several affiliates.

Equity was lower because of our loss for the period.

To summarize, 2003 continues to be a challenging year.

Ford North American production continued to decline in the third quarter, and the fourth quarter production outlook, although improved from the third quarter, is relatively weak compared with historical levels.

We're continuing to make progress on improving our operations.

We've had successful launches on many new programs, including the Ford F series and Nissan Titan that Mike described.

Our non-Ford business continues to grow and accounted for 26% of total revenue in the quarter.

The pace of new business wins also has picked up.

We're pleased that the national UAW contract has been settled and look forward to completing our Visteon-specific agreements soon.

We believe the terms will allow us to improve our competitive position moving forward.

And despite the difficult third quarter environment, we've maintained a strong cash position and solid balance sheet.

That completes our formal presentation, and now we'll be happy to open it up for questions.

Ladies and gentlemen, if you have a question at this time, please press star, then the number one on your telephone keypad.

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

Your first question is from Darren Kimball with Lehman Brothers.

Hi.

Can you talk about, you know, sort of the plan to move out the high wagers?

How fast can this be accomplished, what kind of attrition do you think you can get during the contract, and, you know, how many of those positions will you need to fill back in with tier two?

Well, they're separated, Darren.

A couple of things.

One, our attrition's run a little lower this year, it's typically run toward 5 to 6%, it's running in the low 3's now.

That's to be expected coming into a contract.

I think this contract really invites a much more rapid attrition rate in the sense that all the benefits are up-front and nothing takes place for virtually the full four years so there isn't any incentive for anybody to stay on who was thinking of retiring during the life of this contract.

I feel, if properly managed, and we'll work at it very aggressively, we can get a significant number out, with or without enhancements, and we'll back-fill as needed obviously but I think that the real value here is the new lower rate.

We'll always bid for business we've walked from and allow us in some cases to grow the place or make better utilization of our facilities.

I think, A, we don't know a number because, obviously, it's just been implemented but I think it will be positive and I think significantly better than the more recent history.

Any reason to think that flow-back activity would increase due to the contract?

Well, flow-back is a product of two things.

Obviously what growth Ford can develop, and F-150 is off to a pretty good start, but also how many they can get out quickly need how many we can get out quickly.

I would expect flow-back to improve, where both companies, Ford and Visteon, are determined to increase it.

As I indicated in my earlier comments, it is one way flow at this time and heretofore we've taken more Ford people in than they've taken Visteon people in.

I would expect it to be significant but hard to put a number on it.

Obviously we'll get as many as we can as fast as we can.

Both companies are committed to that.

Okay.

And just one more question on the contract.

You know, is there anything pending as far as, you know, troubled plant actions?

You know, that has not sort of come out in terms of the national agreement similar to the kind of announcements that we saw from Delphi the other day?

I think in fact everybody's contract is more open on that subject than heretofore.

We looked at this pretty carefully going on, because obviously that's the time to do it, and didn't feel we had a need to close anything because we do feel some opportunities for growth, so there's nothing hidden on our list.

We think we can run all of the plants we have, better utilize the people in them, and are more interested in the commitment to competitiveness to efficiency than we are in seeking some closings.

Thank you.

Your next question is from David Bradley with JP Morgan.

Good morning.

Pete, we've had announcements out of all of the big auto companies and out of Delphi of significant closings.

You're saying Visteon is not seeking any closings?

I think that with the work we've got, the facilities we have, it is more important to get the efficiencies in all of them than to seek to close one.

Could we have achieved the consolidation one or two this yeah, but they would have been small and not particularly meaningful.

We've got enough work in all the places we've got, and nothing is standing out as a white elephant.

Selling, general, administrative costs up to I think $262 million, the highest number I've seen for an awful long time.

I know some of that is IT, but is anything planned to get that back down again, or is that an anomaly there this what's the run rate?

David, just to elaborate a bit, the $262 million is up about, in round numbers, $55 million from a year ago, and IT accounts for a very, very large piece of that, probably in the range of $45 million of that increase is IT, and we also had an increase related to the change in the Euro, the European exchange rates cost us another roughly 5 or $6 million.

So it's almost entirely explained by those two factors.

I think you know that the IT costs are substantially up this year because of the work that we're doing to clone the systems that we have, that we're presently using from Ford.

That work is accelerating.

We're actually pulling some of the first systems in over this weekend, and that will continue over the next few months, so we expect to see those costs gradually come down as we complete some of that important work.

It's not going to just drop off precipitously, because it will continue on into 2004, but we do expect to see moderation in the future,

Okay.

Lastly, this F-150 is a very major product for Ford and for you.

Is your content per vehicle higher on the new F-150 than on the old?

And how much higher, and are the margins on that business any better or worse than the old ones?

I'll take that directionally, David.

The content per vehicle is higher than the previous F-150, and we've communicated that.

We won't give a specific dollar amount, but we did indicate that it was up from the model that it replaced.

I would just say that the launch went real well, and so a lot of costs related to that launch, we may have seen in the past probably weren't experienced, and I think a lot of that is to actually to the quality of the design work that went into the F-150.

So I think we've seen an improvement in the product, we've seen an improvement in the content, and we would say directionally we're happier with the business we have on the new F-150 than we were on what it replaced.

Thank you.

Your next question is from Gary Lapidus with Goldman Sachs.

Good morning.

First question, I guess, is for Pete.

Pete, could you talk a little bit about from the perspective of someone out on the shop floor, what is the incentive for flow-back for them?

I mean, is it just more fun putting cars together than putting cockpits together, or how do I think about that?

Well, Gary, I wouldn't suggest that either project represents a lot of fun, but I guess the -- well, the prospect is that more assured work for one thing, if you get on with a hot product, with four or five years to go to retirement, it would make sense to go someplace like making an F-150.

They're pretty much assured anyways, right?

I mean they can't be lot go, right?

I mean they've got guaranteed pay.

I'm just curious because, you know, in some cases that might require moving, wouldn't it?

In some cases but from our standpoint most of our facilities are here in southeast Michigan where Ford has got the assembly plant at Wayne and the assembly plant in Rouge and the like.

Big transmission plant is at La Vonia.

So we fit up against the Ford opportunities pretty well.

You provide like financial incentive for them to move?

We do.

You do.

But that's been part of the labor agreement at least four times.

What, roughly, per head, does something like that cost, or does it vary by how far they move?

Again, it's not, it's less expensive than executive moves, for example, but it involves the same thing.

We just simply call it relocation allowances.

Distance related, cost of the home and the like.

We do incentive items to some extent and I think we're willing to do that again here if we have to.

But again, also, if the moves are not sourcing, if the dislocations are not sourcing driven and they're within this zone of relocation, people can be obliged to move, so it isn't all voluntary, which gives us a further edge.

The trade working capital, normally that takes a -- normally that's a use of cash in the third quarter because of lower revenue, so I guess, Dan, if we sort of plotted this thing, and you've done that in the past, and just looked at the seasonal pattern there, was there something of an anomaly this quarter whereby we would sort of get back up to sort of the previous seasonal pattern, or should we think of this pretty significant, you know, couple hundred million dollar swing as being resetting the bar at a -- just a lower level moving forward on working capital and that the traditional seasonal pattern will take place moving forward but on this lower level?

Gary, you're right, traditionally the third quarter is weak from a working capital standpoint.

And, frankly, we expect the fourth quarter, which traditionally is strong, also to be strong, so we're not expecting to change the fourth quarter performance because of what we were able to achieve in the third quarter.

Now, having said that, I do have to say that when you're measuring a specific point in time, like a balance sheet date, that you can always have variables affecting you in both directions, and I think I pointed out in the second quarter that there were some timing effects that occurred in June 30th and there probably are some timing effects in the third quarter, September 30th, balance as well.

Best example of that is the UAW signing bonus where we took the charge in the third quarter but didn't actually pay the cash out until around October 10th, or something like that.

But if I stand way back from it, I can't identify any major significant anomalies in the third quarter performance.

We just had a full-court press on, and were able to improve our working capital.

Okay.

Thank you.

Your next question is from Mike Bruynesteyn with Prudential Equity Group.

Hi.

Could you elaborate on what this Ford looking to Visteon first means and how that might differ from past arrangements?

Well, I'll start with that, Mike.

We have a -- I'd say a really strong working relationship with Ford in terms of identifying what are the products that we provide to them that are truly world-class, and where can we grow the business with them, and what we've developed, or captured in the language, I guess, would be that there is no limit to the amount of business that Visteon can win from Ford.

And Ford sees a mutual obligation along with us to have a healthy supply base, and, of course, we're the largest supplier they have.

So our health is certainly of interest to Ford.

And I think the message that they are communicating is that in all cases where we have the capability to provide the product it's their intention to look to us, and, of course, our obligation is to provide the value and quality that they deserve.

But the intention, I guess, is verbalized that we will together develop the products that they're interested in and that we have the capability for, and I think it's a demonstration to both organizations that there's a mutual benefit at stake here, and we expect to give them that value and quality and product, and they expect to find it from us first.

Was that not the case last year and the year before, Mike?

Well, I think we've evolved into this, Mike.

Frankly we went through a lot of product portfolio work in conjunction with Ford where we did a lot of assessment on where we were world-class, where we needed to step up investment, and I think we've now got to a point where we're probably better working together than we ever have.

Pete mentioned the relationship with Ford is the best it's been since spin.

I think this is just another indication of that, looking at product development and where we're going to grow the business.

Okay.

Great.

And this tier two wage scenario, I guess the language you're using earlier talked about it will be -- sounds like it's a done deal.

Is that fair to say, or what issues might be outstanding still here?

No labor agreement is done until it's signed, so I guess I'd start with that premise, Mike.

It is less complicated than a full-bore wage benefit condition negotiation, but it will -- because there's an opportunity to be somewhat more formulaic in finding out what the rates are for typical tier one suppliers, but I think it will go smoothly but it is not yet done.

So you're saying the agreement is that they will allow you to get to a competitive wage level depending on whatever product you're looking at?

Well, it may not be single product by product, but it will certainly be we hope on a commodity basis and indeed rates equivalent to those with whom we now compete at a wage disadvantage.

Thanks very much.

Your next question is from John Casesa with Merrill Lynch.

Thanks very much.

I wasn't sure if you alluded to pursuing additional opportunities in the European plan for growth.

I don't know if -- maybe I misheard that, but are you contemplating additional restructuring either in Europe and North America beyond what you've announced?

John, I'm not sure what we alluded to.

I can tell you about the European plan for growth.

We had put a number out there that said we were going to, I think, restructure, take a charge of about $150 million overall and have an annual save of about $100 million.

And it was a delay in timing on getting that started because we had to get all of the signatures of the European Works Council, even though we had the agreement it took a little longer to get those signatures than we thought and the whole program was delayed about three months, but there was no change in the benefit or the restructure charge at that point in time.

In fact, we'd say we're probably going to -- it would look like we can maybe exceed that just a little bit.

Now what's happening is, you know, as part of a normal ongoing relationship, the two companies and the Works Council will continually look at improving that and working that on a regular basis, but there is no other major wave that would have been identified in that process where you would see, you know, restructure Phase II.

You'd have a process of continuing to improve whatever arrangements we've made in terms of plant loading and products in certain plants.

I understand.

Thank you, Mike.

Okay.

Your next question is from Brett Hoselton with McDonald Investments.

Good morning, gentlemen.

Dan, could you give us the F X impact for the quarter on revenues?

Yeah, I can.

In total, foreign exchange changes in the quarter increased our revenue by about $100 million, and that was mostly related to the Euro strengthening on a year-to-year basis.

That $100 million, by the way, is compared with the third quarter a year ago.

So year-to-year, $100 million.

Within that, I think I mentioned in my remarks that the impact on Ford revenue was about $55 million and on non-Ford revenue about $45 million, I think.

That adds up to 100, I believe.

Yep.

That is the revenue impact.

I might also mention that, while I'm on currency, from a profit perspective, there was a very small positive effect on revenue -- or on profit in the quarter.

It was quite small, a couple million dollars.

And that's because we have an ongoing hedging program, so most of the profit impact of exchange changes was offset through our hedging actions.

Then, Pete, with regards to the UAW contract, the competitive wages that we're talking about here, is that applicable to all new hires, even those that replace current UAW employees, or is that just kind of more selective?

We're moving toward a new Visteon structure, so I can't conceive of a situation where we wouldn't get the tier two for the new workers.

It's developing what we call orange work force.

My expectation is, yes, it will apply to all.

Let me make sure I'm clear here.

You know, you've got a gentleman, he's a UAW member, obviously Ford, he's decides to retire, you're going to replace him with somebody.

Can you pay him the lower wage?

Is that the concept here?

Yeah.

I think the concept is that new hires will be Visteon-only hires.

They will grow into the new structure without that right to, you know, they will be ours at the new rate.

Just so I'm clear, the flow-back provision is now just simply from Visteon to Ford?

Right.

Then some of the UAW literature has talked about looking at some enhanced retirement separation incentives, kind of implying some early buy-outs and that sort of thing but you haven't really announced any restructuring in addition.

I mean, is there an expectation or a possibility that as we go through the next year you could be announcing some additional restructuring and as part of that some early retirement programs?

Well, I think this contract really incentivizes early retirement y pulling some things ahead.

When we took 235 people out of Nashville we made very modest improvements going forward but much of that early retirement's going to come out of Ford and it's to them to initiate.

It is not impossible, but, really, it's the rough equivalent of an investment decision.

If it makes sense, I'm sure they'll do it, and you look for the yield.

Finally, Dan, as we look at 2004 earnings, I recognize you probably don't have any formal guidance at this point in time, however, my question would be, can you give us some indication of what you think would be some of the major positives to earnings and some of the major negatives to earnings?

Well, what I can say, first with respect to guidance, you're right, we're not in a position at this point to provide any outlook for 2004 but we do expect in early January, at the splinter group meeting that is scheduled to take place to provide some perspective on 2004 outlook.

At that point we will have completed our budgeting process, we'll have a lot clearer look at what 2004 is going to look like, so that's when we'll be in a position to give you a more complete discussion.

With respect to just very, very high level, I'll comment on a couple of things.

First of all, we do expect to begin working through the IT challenges that we're implementing this year.

We should see some moderation in the IT cost area.

We've already talked about that.

I think that will be on the positive side.

We're not expecting major changes in volume as we sit now looking at 2004.

We think that at least on the Ford production side, based on our reading, that volume would be pretty stable compared with this year.

On the non-Ford business side, we're expecting to see continued growth.

I think we've communicated that in the past, and we expect to see a pretty solid growth next year in our non-Ford revenue.

I'll remind you that sort of in the middle of this year we were able to exit the seating business, so we'll have a full year impact of that, helping us next year, versus a partial year this year.

Mike just talked a minute ago about the European plan for growth.

We're probably two-thirds of the way through the implementation process, so early part of next year, early to mid-next year, that should be wrapped up, so we'll have the full-year effect of that contributing on a positive side.

One of the cost pressure side, or negative side, is that we do expect continued increases in the healthcare and pension arena as we continue to absorb some of the cost effects of the higher healthcare costs that are coming through this year and the pension arena as well.

So there's a lot going on next year that we'll try to put in a lot clearer perspective when we meet with you early in the year.

Just quickly on the IT spending, up about $45 million quarter-over-quarter in the third quarter.

When you talk about it moderating, what is that?

Can you put an idea of a number on there?

Is it like a $5 million difference, or is it going to be half into next year?

What are the general thoughts there?

I don't think we can give you a specific number but I would say this, that the increase this year, year-to-year, is very sharp, because we were just literally beginning the work on the IT project at the end of last year, so on a year-to-year basis, you're seeing the full effect of the increase now.

As we look at the fourth quarter of this year, we would expect that we're going to be relatively flat in terms of IT costs, and as we look at next year, a lot of the work that we're working on right now should be done by, I'd say, the latest, by the middle of next year.

So that gives us the opportunity as we exit the year next year to be exiting at a considerably lower cost level.

And I really don't want to try to give a projection, aside from just giving you those broad trends.

Thank you very much, Dan.

Your next question is from Rod Lache with Deutsche Bank.

Good morning, guys, it's Mike Heifler for Rod.

Good morning.

Pete, in the past you've talked about some relief on the OPEB prepayment.

I was wondering if you could comment on what was achieved with the UAW on that?

Mike, that's more an issue between ourselves and Ford than with the UAW.

Was something achieved there that was positive?

Well, that negotiation didn't involve that issue.

That's not part of the labor agreement.

Okay.

But, Pete, so that you've gotten some relief there on the OPEB prepayment?

That's really part of our ongoing discussions with Ford and I'm really not in a position to comment on that just yet.

Okay.

And one for Dan.

On the UAW contract, Dan, can you quantify some of the cost pluses and minuses on labor, healthcare, and pension, what we might see in 2004 from the contract?

Sure.

I'll try to quantify it in a high level terms.

First, just a very general comment.

The contract will result in cost increases as we go forward.

The increases are more moderate than, I'd say, looking backwards the 1999 contract, but nevertheless they will result in some increases.

In terms of looking at 2004, probably the biggest effects that will be hitting us are related to the effect of the 3% performance bonus that will be paid in October of 2004.

We're beginning to -- we're treating that as something that should be accrued over the first year of the contract, so we're actually beginning to accrue for that cost starting in October of this year but it will be accrued through all of the first nine months of next year, so that's one big item that will affect us next year.

The other big item is related to pension plan amendments.

And what we're doing there is we're looking at the pension plan amendments that are taking place over the life of the contract, and some of the costs are being incurred and accrued over the contract period, such as the $800 lump-sum payment to current retirees.

We're accruing that cost over the contract period.

Then some of the pension plan amendments are just like traditional pension plan amendments that are accrued over the remaining service period of the employees, which is a longer period, something like 13 years.

So the combination of the signing bonus and the pension plan amendments will cause our costs to be higher next year than if we hadn't signed the contract, and, of course, I shouldn't forget there's the ongoing costs that are a result of prior economics and healthcare inflation and cost of living that are just sort of carry-over costs from existing contracts.

Okay.

Was there some sort of benefit from the increase in copays on your healthcare costs?

Yeah, there is.

It's pretty modest next year, and it begins to ramp up really in an important way starting in 2005, 6, and 7.

That was a very nice improvement, we think enhancement in the contract, but it takes a few years for that to have a significant effect on our costs.

Lastly, can you comment on the balance sheet implications, both to pension and healthcare, the OPEB, the increase in the underfunded status on pension?

Well, what I can do is, I can't tell you specifically the impact of the contract on the pension balance sheet position.

I just don't have that right in front of me.

But what I can say about our pension status is that you probably know, our contract, or our pension measurement date is September 30th, so we've actually completed our pension measurement date.

We're getting our actuarial valuations wrapped up as we speak, so I'm going to give you some preliminary data.

And the first thing I'll indicate is that we had a very strong year from an asset return standpoint for our last plan year.

Our return in the U.S. on our pension plan ending September 30th was about 20%.

Which was certainly a welcome return given the two preceding years.

So that helps us from a funded position.

Offsetting that, however, is that discount rates have come down, and although we haven't finalized our discount rate assumption, it looks like it's going to come down probably from 6.75 to 6.25, so that effect tends to offset the strong return we had.

So on balance, we're estimating that our funded position from a percentage standpoint probably will be slightly less than it was a year ago, but two ups and downs that get us into that position.

I should remind you also, just as a reminder, the UAW Ford employees who are assigned to us are not in our pension plans and aren't in the numbers that I've just been quoting to you.

Those employees we reimburse Ford for the pension cost on an ongoing basis based on their accounting costs that they bill to us.

So they aren't really part of our pension plans.

So when we look at the OPEB would we be thinking about a lower discount rate and maybe some benefit from the copays?

That's exactly right.

The same thing I described on pensions with respect to discount rates probably will affect us on OPEB.

The only difference is our measurement date for OPEB is December 31st, so the story is still out on where the discount rate is going to end up.

It's been pretty volatile in the last 60 days, and right at the moment is heading up again.

So I can't predict where that's going to end up.

Thanks.

Your next question is from Saul Rubin with UBS.

Good morning.

Good morning.

Hi, Saul.

You spoke about increased costs this year coming from IT and you also mentioned the launch and product costs.

I think it was $50 million Q3 to Q3 and $15 million sequentially.

But how should we think about that as we go forward?

Because you have very significant launches I think coming up with the Titan and other things coming, so how should we think about those numbers as we go into Q4 and into 2004?

Let me just clarify something, Saul.

This is Dan Coulson.

In the period we had about $50 million of launch and project expenses in absolute costs and that was up about $15 million from the second quarter and also up about $15 million year-to-year.

So the 50 I quoted was an absolute, not a year-to-year.

Okay.

Our normal running level of launch and project expense is probably in the, oh, I'd say 30 to $40 million per quarter range.

In the third quarter of this year, it was quite high because we had such a large number of major launches in the quarter.

We would expect it to come down into the normal range over the course of the next few quarters, but, of course, you know, that depends a lot on launch timing and our success in getting the launches completed.

So I'm a little reluctant to give you specific numbers.

I do want to remind you that we said this before, this year's total number of launches are about double what they were a year ago, so, for instance, the third quarter of this year, we had, I think, 122 launches.

A year ago that number was about 70.

So practically, an increase in twice.

And on a full-year basis, we're looking at about 400 launches this year, and last year the number was less than 200.

So we're able to get the launches done more efficiently on, I'll call a per-launch basis, but the number of launches, because we have so much new business coming in, is just higher, dramatically higher.

Okay.

I just wondered with those extra launches coming in whether we should just assume that the cost will be higher consistently now?

Our goal is to try to keep that cost pretty flat.

That's our challenge, is to absorb as much of that increased launch business as we possibly can, and this year, up through the first nine months we've been able to come close to that.

Okay.

Also, you talked about Asia Pacific being a nice growth area for you.

Presumably most of that growth comes through at the equity line.

Should we expect that number to start to ramp up as a result of the business there?

I'll respond to that one first.

So far, in fact, we have had an improvement in our equity line.

If you look at our equity in affiliated companies on a year-to-year basis through the first nine months, that has shown an improvement.

It also comes through in our consolidated results.

The equity line is where we have unconsolidated activities, but it also comes through in our consolidated results as well.

For instance, as Mike pointed out, our Halla operation in Korea is a consolidated activity, so that's coming through and contributing to our top-line revenue growth and it also contributes to our operating improvement.

So it comes through in various places in our financial statements.

And bottom line, as those organizations continue to grow it's helping our financial performance.

Okay.

That $42 million of equity and net income for the first nine months, is that, should we say, predominantly Asia Pacific related?

Yeah, it is, although it's not entirely Asia Pacific related, but it is definitely predominantly Asia Pacific.

Okay.

Last question.

You're saying you expect to get some of the savings from the European plan for growth in the fourth quarter.

What do you expect the -- what kind of number, and do you expect to see any impact longer term from Ford's current problems in Europe and its restructuring actions that it's looking at in the fourth quarter?

Let me talk first.

In Europe we've been pretty successful in growing our business away from Ford.

We've talked about, you know, about half of our wins are coming outside of North America.

We've had just real good success in both the German and the French OEs.

So when we look at Europe we're seeing an opportunity there to maybe mitigate whatever happens at Ford, up or down a bit, because of the new business wins and the ramp-up of work that we have there, so I would say you'll see less impact.

Of course, there's still a significant customer for us in Europe, but that's a part of the world where we're seeing good volumes from non-Ford customers.

Okay.

And the savings you expect to see in the fourth quarter?

Saul, what I would say is we said we're expecting to get about a third of the total savings, $100 million savings this year.

So that in round numbers would be 30, $35 million on a pre-tax basis.

What's been happening is the savings have been ramping up through the year.

So each quarter has been successively better than the previous quarter and we would expect that to continue in the fourth quarter.

I'm not going to try to give you a precise accurate specific forecast, but within that model I think you could come up with a pretty reasonable estimate of what the fourth quarter might be.

Okay.

Great.

Thanks very much.

Your next question is from Christopher Ceraso with CSFB.

Mike, I wasn't exactly clear on your new approach to communicating new business.

Can you explain how this new method is different from the way that you've done it in years past?

What we've done in the past, Christopher, is we've set a goal out and said we're going to win X amount of new business in the calendar year.

And then we reported on that on a quarterly basis, and we reported on it basically X amount of it was Ford, X amount of it was non-Ford.

As we look at that, you know, we spent the year, frankly, explaining why numbers were lower in the first part of the year, and there was some concern in the marketplace, were we not winning new business, when in reality we were winning at the rate that we thought we would because we knew when the awards were going to be issued during the year, but we really don't want to telegraph that to the market place and say, okay, here's the specific wins we're targeting in the third quarter or the fourth quarter of any given year.

So even though we will continue to do that, frankly, on an interim basis, we'll set the targets by customer, we know when the program awards are going to happen, we know what products we're going after, and we'll measure ourselves internally on that.

But I don't think we were doing ourselves a service in communicating that externally.

So as we did a little bit of kind of asking the customer what they wanted, so talking to some of you, the message we got was that there's more interest in understanding the health of the backlog and what the mix is going to be in future years and give you a little better vision into what that might look like going forward.

The other thing that we really don't want to do, and we were by default, was saying specific wins from a specific customer.

So as we started reporting Ford, non-Ford, in percentages, the whole world would see exactly what our wins were from a customer.

And in this industry most customers, including ours, don't want to say what they're awarding to a specific supplier.

So when you roll all that up, we said, you know, when we come into the first of next year, as Dan said, we'll give a little more traditional vision into our future than we've been able to do this year and we'll try to roll up a way to communicate maybe the health of the backlog and maybe future percentage changes, Ford, non-Ford, but not specifically announce X dollars of wins from a specific customer.

So you'll continue to provide sort of a forward look on a step up year by year, two, three years out on Ford and non-Ford like you've done in the past but you're just not going to give a bogey for the current year then update us ongoing?

That's correct.

I think we'll do a better job giving you the vision in the future but not report the specific dollars on a quarterly basis.

Last question, with respect to the two tier wage system, the way that Delphi characterized it yesterday would seem to make some sense.

In the near term they didn't expect to benefit from that to a large degree because on balance they were looking to shrink their footprint and not necessarily replace the folks that were retiring or flowing back to General Motors but then say around 2007 and beyond, attrition from that point forward, you'd be able to take advantage of the lower wage people coming in.

Should I think about it in a similar fashion for Visteon?

No, actually.

We started to work, frankly, with the UAW earlier in terms of our ability to take on incremental new volume and possibly new small facilities at a more competitive rate.

And, in fact, we've been able to do that, and we have some service centers or some just in time assembly plants that are already up and running at a more competitive rate, and that's going on right now.

And as we look at it, you know, we've won a lot of new business, a good part of that is in the United States.

So as that starts to ramp up, if our labor needs increase, we see a shorter term impact, and, in fact, would expect to see a benefit starting in '04 from our past practice as well as the new labor agreement.

Okay.

That's very helpful.

So your goal is kind of different, and you're not looking to, say, shrink the workforce, per se, but maybe keep a similar size and yet replace more of them with lower wage workers?

Is that fair?

It's a combination.

We will aggressively work with Ford on the flow-back to provide workers for them, and make ourselves more competitive on that front, and at the same time, as we're able to bring in new work, some of it Ford, some of it non-Ford into the facilities, we'll be able to take advantage of the lower wage rate starting in '04.

Okay.

Thanks a lot, Mike.

Don't forget, we've already closed Chesterfield, so the major location we had to get out from under us is done.

Right.

Thanks.

Our final question comes from Chet Loy with Barclays.

Good morning.

Can you talk about your conversations with the ratings agencies?

Both S & P and Moody's have currently have you guys on review for a downgrade.

Have you met with them recently and what are you guys doing to avert the downgrade to below investment grade?

We think we have a very good dialogue with all of the rating agencies.

S & P, Moody's, and Fitch.

We talk to them on a regular basis.

In fact, had a very complete, I guess I would say, conference call with them several weeks ago just to give them an update on our business situation.

We plan to have further discussions with them as the year proceeds.

Those are not scheduled or, you know, put on the calendar yet, but we have indicated to the rating agencies that as new developments occur we'll definitely be talking with them.

I think they understand what our situation is and what our outlook is.

I certainly can't speak for them in terms of what they're going to do but I can tell you this: There's a very open dialogue with them, so there are no surprises in terms of what's happening within our operation.

Right.

How important is it for you guys to maintain your investment grade ratings?

Well, we think it's very important thing for us to do.

We believe our financial position justifies the rating that we have now.

We're very encouraged by the strengthening in our cash position despite a difficult income statement impact in the third quarter.

We are using right now a small amount of commercial paper to help us fund ups and downs in our normal operating environment.

That level, by the way, is about $100 million, but it's very, very short-term in nature, in terms of timing and duration.

And that's almost exactly the same level we've had for four or five months.

I can tell you, though, that beyond that, we believe we have adequate liquidity, if that source of funding were to disappear.

We've looked at our operation and the combination of our cash balances and other sources of liquidity we think are adequate to ensure that we can fund our operations, so, you know, I don't want to give the impression that we're not concerned about the credit rating.

We are very much, and we want to retain it.

Believe we deserve to retain it.

But at the same time we have adequate liquidity in the event an action is taken.

Yes.

Is there a mandate from the board of directors to maintain your investment grade ratings?

They feel, I think, the same way that I've just articulate.

Which is, where all of the members of management and the board are interested in having us retain our investment grade rating and taking the actions that are necessary to do that.

Having said that, there's no specific mandate that I'm aware of that we have to do that under all costs.

Right.

Just two more, you know, quick questions.

You mentioned liquidity.

Can you talk a little bit about the details in your bank lines and what the covenants are on those bank lines, how much is drawn?

Well, we have nothing drawn on our bank lines.

In fact, I don't think we've ever drawn on our bank lines since we've been spun.

In terms of the details of our credit line agreements and the covenants, we think as a high level of comment, our covenants are very workable, we don't have any what we consider to be overly restrictive covenants.

In total we have something like $1.3 billion of facilities, $500 million of 364-day facility, and another $775 million of five-year facility, so we think our bank facilities are solid and adequate.

I'm not going to get into all of the covenant arrangements and the specifics beyond that.

We'd be happy at some other time to go into that.

But just at a high level we're very pleased with our banking relationships and credit facilities.

And your cushion on your covenants are still pretty good, as far as the ratios are concerned?

Yes.

Okay.

Now, last question.

Given that you generated about $600 million of net new business year-to-date are you guys still comfortable with your target of $1 billion for '03?

The answer to that is yes, but that's kind of why we don't want to report that way going forward.

We knew this year was very back-end loaded, and it turned out to, frankly, be that way.

There were some push-outs in program awards, different customers delayed some decisions, but even with that, our internal forecasts would show that we would expect to hit a billion dollars this year, even though there's been some program push-outs.

So we don't think it's productive to get into that discussion on a quarterly basis, and that's really why we're going to change going forward, and we'll communicate that at the beginning of the year in January.

Great.

Thank you.

All right.

Well, thank you for joining us on the call.

Pat and I will be around to answer your questions that you might have over the course of the afternoon.

Thanks.

This concludes today's Visteon conference call.

You may now disconnect.