Visteon Corp (VC) 2004 Q2 法說會逐字稿

Good morning and welcome to the Visteon Corporation conference call.

All lines have been placed on 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'd like to remind you 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 factors, risks, and uncertainties that could cause our actual results to differ materially from those expressed in these forward-looking statements, including the automotive vehicle production volumes and schedules of our customers, the effect of pension and other post-employment benefit obligations, our ability to recover our remaining net-deferred tax asset, the need to recognize restructuring and other special items, as well as those factors identified in our filings with the SEC, including our annual report on Form 10K for the year ended December 31, 2003.

We assume no obligation to update these forward-looking statements.

Presentation materials for today's call was posted to the Company's website this morning.

Please visit www.visteon.com/earnings 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 1 on your telephone keypad.

If you would like to withdraw your question, press star, then the number 2 on your telephone keypad.

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

Mr. Fiebig, you may begin.

Thanks, Judy, and good morning, everyone.

I'd like to add my welcome to today's conference call.

Leading the call today will be Mike Johnston, our Chief Executive Officer and President, and Jim Palmer, our Executive Vice President and Chief Financial Officer.

Immediately after our formal comments the operator will open up all lines for questioning to allow Mike and Jim to respond to your questions.

And with that, I'll turn the call over to Mike.

Okay.

Thanks, Derek, and good morning.

I'm pleased to be here this morning, not only because of our results, but also because I have our new CFO, Jim Palmer, here with me.

Jim's dug right in and we're pleased to have him on the Visteon leadership team.

So welcome, Jim.

In the second quarter we recorded net income of $31 million, generating earnings of 24 cents per share, slightly higher than our earlier guidance of 10 to 20 cents per share and a $198 million improvement over the second quarter of 2003.

Revenue for the quarter was 4.9 billion, which is up 257 million from last year.

We're realizing the benefits of our previous restructuring actions, namely the European plan for growth, and the exit of our seating operations.

Cash from operations was 247 million for the second quarter and 352 million for the first half of the year.

In addition to our financial results, I'm pleased to report we had several key business wins with strategic customers in all major regions.

Now, not on the screen, but we also want to report that in April we successfully completed the second phase of the IT Clone Project, and that's the one that included all of the operating systems that run all of our plants around the world.

Next, our non-Ford sales for the second quarter were 1.4 billion, up 35% compared to the second quarter of '03.

For the quarter, non-Ford revenue comprised 28% of our total sales.

First half non-Ford revenue for 2004 is 2.7 billion, a $700 million improvement over last year's first half.

We're on track this year to report non-Ford revenue of approximately 5.4 billion, which is an increase of over $1 billion from 2003.

We're winning new business at a healthy pace.

Year-to-date we're ahead of last year's pace.

And these wins will continue to help our sales diversification in future years.

Now just to hit on a few key business wins, in the second quarter we continued to win new business in the area of cockpits, electronics, and climate.

Now, as you know, most customers don't want us to attribute the product wins to them.

One exception is Hyundai, who I will mention by name, but the others will remain unnamed.

For Hyundai, we won the climate control systems business for a future sport utility vehicle that will be sold on three continents -- North America, Asia, and Europe.

For the second year in a row, we've been named Hyundai's #1 supplier.

This is a great tribute to our relationship Hyundai has with our Korean subsidiary, Halla Climate Control, who themselves have been voted one of the most respected companies in all of Korea.

For one Asian OEM, Visteon has been selected to provide the integrated control panel for three future models.

This business win covers one model of BM (ph) production in '05 and two models in '06.

In South America we were awarded an audio contract for a German-based automaker, and in North America we won a significant contract for satellite radio and MACH Voice Link for a Japanese transplant.

Now I'd like to take you through some of the growth we're experiencing with regards to our technical centers and technology capabilities.

To strengthen our service to customers, we have made a concerted effort to improve our global technology foot print.

Our goal was to have a seamless flow of information and technological expertise among Visteon's technical centers all over the world.

Looking at China, we've begun construction on a new technical center in Shanghai that will serve as the hub of Visteon's Asia-Pacific product development efforts.

The YanFeng Visteon Technical Center is slated for completion in the fall of 2005.

The facility will house about 200 Visteon engineers and support staff along with 400 engineers from YanFeng Visteon, the 50/50 joint venture we have with Shanghai Automotive Industrial Corp.

The new Tech Center will house prototyping and lab facilities to support interiors and electronics products that could be applied to both global and regional use.

The Tech Center will be comprised of two buildings -- a main building that will house engineering and support personnel, and a testing and development building that will house a styling studio and testing facilities.

In the United Kingdom, we recently moved into a new customer and technology center in Basildon, England.

The Tech Center was designed to align our people with our key business processes, Innovation and Commercialization, Award To Launch, and Delivery and Service.

A number of lab facilities will soon be moved into this location.

We have about 800 people working in Basildon in an open environment.

For example, there's (sic) only three private offices.

This environment really enhances collaboration, gives us customer flexibility and speed, and it will be the pattern for all of our future facilities.

In India, we're expanding our technical center at our Chennai facility to strengthen our software operations.

It's become vital to integrate software and hardware as the electronics content in vehicles continues to increase.

Our expansion in Chennai will allow us to do that in a robust manner.

Over the years, we've grown and strengthened our software capabilities.

In India, we're now developing software for global programs.

We have about 250 employees in Chennai, and this will grow as the operation expands.

Moving over to Eastern Europe, we've just opened a new technical center in the Czech Republic to provide engineering solutions for climate control and engine cooling components and systems.

This new facility is located at Visteon's Autopal subsidiary in Novy Jicin.

The Technical Center represents a major investment for that area and is located adjacent to our climate control production facility.

It will house climate control product planning, core development, product design, process engineering, and simultaneous engineering, as well as a prototype shop.

Over 100 engineers and technicians are located at that center.

This new Tech Center supports our increasing role as a supplier of climate control systems to car manufacturers across Europe.

And this week we're moving over 80 engineers into our newly-constructed technical center in Chihuahua, Mexico.

The new Tech Center significantly expands our lab here (ph) and testing capabilities, and the grand opening celebration is scheduled for August 24th.

The Tech Center is divided into two main areas of design: electronics and chassis product development.

The majority of the resources will be focused on electronic products, which includes climate, audio, and driver information.

Now, on the labor affairs front in the United States, we've had about 450 employees under the UAW Master Agreement population flowback to Ford in the first half of '04.

Second half flowback and retirements are projected to reduce the Master Agreement population by an additional 1300 people.

These employees are being replaced with Visteon employees hired under the recently-negotiated UAW supplemental agreement.

In 2003 Visteon and UAW agreement sets a new tiered wage and benefit level, which significantly improves our competitive position and strengthens our ability to secure new business in certain U.S. facilities.

In summary, Visteon experienced a good second quarter and delivered a solid first half performance.

We're winning significant new business in cockpits, electronics, and climate product areas.

The diversification of our customer base continues.

Report cards from customers signal future growth opportunities.

And we're very focused on our performance metrics so that we can take these opportunities and turn them into business wins.

We're very pleased that our new business wins are not only diverse from a customer perspective, but also by region.

Throughout the world we've had several key launches this year.

And we're using those successes as building blocks for the future.

We had a solid first half, and we're using this as a foundation as we go into the second half, knowing we're facing some challenges.

I'm very pleased to have Jim Palmer on board as our CFO.

Again, he's a great addition to the Visteon leadership team.

And I'll now turn the call over to Jim to take us through the details of the financials.

Jim?

Thanks, Mike.

And thanks for your kind comments.

Ladies and gentlemen, this morning I'll take you through the second quarter financial results, which reflect a year-over-year improvement, including a reduction in special charges, operating improvements, and growth in both revenue and income despite lower Ford North American production volumes.

Year-to-date cash flow from operations was 352 million, an increase of 463 million from the comparable period last year, reflecting reductions in special charges and operating improvements.

After issuing a $450 million 10-year note at 7% in the first quarter, we completed three additional transactions in the second quarter, which I will discuss in greater detail later.

In the aggregate though, these four transactions enhanced our liquidity and extended our maturity profile.

So, on the next slide, we'll start by looking at revenues compared to last year.

Second quarter 2004 revenue totaled 4.87 billion, up 257 million or 6% from the second quarter of 2003.

Ford revenue totaled 3.5 billion for the quarter and was down about 100 million or 3% from the same period last year.

However, last year's revenue included about 120 million from the seating operations, which we exited at the end of the second quarter of 2003.

Changes in currency increased Ford revenue by about 80 million, higher Ford European volume added another 80 million, and we had some new business as well.

A 58,000 unit decline in Ford North American production volumes and Ford price reductions were partial offsets.

Lower Ford North American production volume reduced our revenues by about 175 million in the quarter.

Non-Ford revenue increased 358 million year-over-year, growing 35% to nearly 1.4 billion.

Year-to-date, non-Ford revenues were up 710 million.

Non-Ford revenue now totals 28% of total revenue, up 600 basis points since the second quarter of 2003.

The increase in non-Ford revenue is primarily from the impact of about $0.25 billion of new business, while currency changes had an impact of about 90 million for the quarter.

The majority of the new business growth is in our core product lines -- climate, interiors, and electronics.

And customers include Nissan, Renault, GM, and Hyundai.

Now, let's turn to second quarter income on the next slide.

Our income before taxes and minority interest was 55 million for the quarter.

This included pre-tax special charges of 5 million and 11 million of debt retirement cost.

These results are $311 million better than last year's comparable second quarter pre-tax loss of 256 million, which did include 266 million of pre-tax special charges that hit cost of sales.

With these numbers, you should be able to calculate the operational improvement in cost of sales as a percent of revenue.

SG&A up 236 -- decreased nominally from the second quarter 2003 level but was lower as a percent of revenue.

It was also $27 million lower than first quarter levels.

Total interest expense was 10 million, higher for the quarter, mostly due to the debt retirement.

And our effective tax rate for the quarter was 32%.

I'll discuss quarterly fluctuations in our effective tax rate a little bit later.

Second quarter net income of 31 million is essentially flat with the first quarter of this year, but $198 million better than last year's second quarter loss of 167 million, which included after-tax special charges of 170 million.

In addition to lower special charges, our results benefited from continued increases in new business, operating and material efficiencies, and decreased OPEB costs.

These benefits were offset partially by customer price reductions, lower Ford North America production volumes, material surcharges, fuel cost increases, and debt retirement costs incurred during the quarter.

Wage and benefit economics were also slightly negative for the quarter, despite our reduced OPEB costs.

On the following slide, you'll see a summary of our financial results for the first half of 2004.

First half revenue totaled 9.9 billion with second quarter revenue down about 100 million quarter-over-quarter, reflecting the lower Ford production.

But income taxes -- but income before taxes and minority interest was about the same in each quarter and totaled 111 million for the first half, a nice increase from last year's results.

Total cost from special charges and debt retirement were roughly a push quarter-over-quarter, so essentially flat second quarter results were achieved despite $100 million decline in the top line.

Quarter-over-quarter SG&A reductions at 27 million, largely related to IT spending, favorably affected second quarter performance.

Now, let's turn to cash flow on the next slide.

For the six months ended June 30, cash flow from operating activities totaled 352 million, including 247 million of cash flow from operations in the second quarter.

The improvement from a year ago reflects higher net income resulting from the improvement in our operations, as well as a reduction in the special charges from last year.

Trade working capital flows, although negative for six months, reflect the traditional build-up from the low year-end level resulting from the year-end shutdown and are improved from last year.

Our non-Ford days sales outstanding improved 18 days from a year ago to a more reasonable 76 days.

Ford days sales outstanding, inventory turns and trade payables also improved.

We've made solid progress on our trade working capital management, but believe we still have further room for improvement.

Capital spending, including increased expenditures for our facilities consolidation, has been reduced from last year's level, primarily from a reduction in IT spending.

For the six months, CapEx spending was slightly more than cash flow generated from operations.

And, as we have previously said, our target is for cash from operations to exceed capital spending for the full year, and we expect to meet that target.

The next slide summarizes our financial position.

At June 30, consolidated cash and marketable securities totaled 1.010 billion, up from 956 million at December 31, 2003.

Debt also increased to 1.93 billion, up from 1.818 billion at year end.

The increase in cash and debt was mainly due to our March debt issuance of 450 million, offset largely by the subsequent tender offer for 250 million of term debt maturing in 2005 and other short-term debt reductions of about 100 million, including an $81 million reduction in commercial paper outstanding.

Debt to capital ratio was 51% at quarter end, up slightly from year-end, but down from the 55% level at March 31.

In June, we renewed our 364-day credit facility in the amount of 565 million.

When combined with our existing 5-year credit facilities of 775 million, we continue to have 1.3 billion of available committed credit lines.

This is in addition to committed loans of 250 million for our facilities consolidation project.

And during the second quarter, we also began to use the asset securitization program we established for U.S. receivables late in the first quarter.

The program was established as an additional source of liquidity.

At the end of the second quarter, we had sold a $45 million undivided interest in a pool of $265 million of receivables.

This sale generated $45 million of cash flow from operations in the second quarter.

On the next slide, I'll discuss deferred income taxes.

As you know, at the end of 2003 we recorded non-cash evaluation allowances against deferred tax assets in a few European countries and a partial evaluation allowance in the U.S.

As we stated at that time, the realization of the remaining net deferred assets of 870 million, principally for the U.S., is dependent on achievement of our current year forecast and our U.S. profit outlook for future years.

Based on our reviews, we've concluded that the estimates and assumptions about the realization of our remaining net-deferred tax assets are appropriate at this time.

However, our ability to achieve our 2004 forecast for earnings in the U.S. and our outlook for future years could be affected by a number of factors, including lower than expected Ford North American volumes.

If there's a change in our forecast for 2004 or our forward-year outlook, we'll reassess our deferred tax assets and a further write down may result.

Because of these valuation allowances, we're not tax-effecting losses in the current year in certain foreign jurisdictions.

This does cause a fluctuation in our quarterly effective tax rate.

On the following slide, I'll summarize factors affecting the outlook for the balance of 2004.

We expect our overall performance in the second half of the year to continue to improve on a year-over-year basis.

However, as you will see in the next couple slides, Ford volumes will drop significantly in the third quarter from those in the second quarter, negatively affecting our results for that quarter.

But in the fourth quarter, we'll see improvement in our operating results as volumes return to seasonably higher levels.

In addition to volume, we also continue to be challenged with pricing pressures related to steel and other commodities.

We are negotiating with our suppliers to mitigate these risks and with our customers to recover these costs.

Finally, in an effort to stimulate flowback of UAW employees to Ford, we expect to have additional cost in the third quarter associated with retirement incentives provided to certain UAW employees.

Present-year savings are dependent upon the timing of that action and a smooth transition process.

We expect these challenges to be offset by new business growth, continued improvement in operating performance, fourth quarter savings from the flowback of UAW employees to Ford, and reductions in SG&A cost.

Now, let's look at a summary of the first six months of 2004 to the second six months on the next slide.

Comparing the first and second half, we are expecting Ford North American volume to decrease about 265,000 units, with decreased production in Europe of about 100,000 units as well.

This should reduce our Ford revenues substantially.

We also expect non-Ford sales to be more robust period-to-period due to incremental new business.

Our full-year guidance implies net income of 14 to 49 million in the second half of the year, down from our first half results on lower revenue as well.

Our results in the third quarter, which I will discuss on the next slide, reflect seasonably low volumes with recovery to more normal levels expected in the fourth quarter.

Pre-tax charges and debt retirement costs combined are expected to be slightly higher in the second half with most of those charges being recognized in the third quarter.

We expect to generate additional savings from flowback to workers to Ford in the fourth quarter, as well as additional material cost savings throughout the back half of the year.

While these items are expected to provide a benefit in both the third and fourth quarters, the savings will be much more apparent in our fourth quarter results as they will not include the strong headwinds associated with the summer shutdowns.

Now, let's go onto third quarter guidance.

For the third quarter of 2004, we expect total revenue to come in between 4 and 4.1 billion, up slightly, 4% from the third quarter of 2003.

This represents an $800 million decrease in revenue from the second quarter, driven principally by the lower production at Ford.

Our guidance is based on Ford North American production volume of 755,000 units.

This volume level is about 30,000 units lower than in the third quarter of 2003 and almost 200,000 units lower than second quarter of 2004 production.

We expect to see continuing operating efficiencies in the third quarter.

However, they will be masked by this large volume decline.

As a result, we're forecasting third quarter net loss in the range of 90 to 105 million or 70 to 80 cents per share.

This is based on an effective tax rate of 27%.

This lower tax benefit associated with the rate adversely impacts net income on a year-over-year basis and takes third quarter EPS down about a dime.

The next slide looks at our guidance for the overall year of 2004.

Our guidance, which I should mention is on a GAAP basis, for the full year has declined slightly based on a range of updated assumptions and is still significantly above 2003 levels.

We're facing commodity pressures this year, principally from fuel and steel, but we're taking actions to try to offset these higher costs.

And we're working to recover these increases from our customers.

The costs of the UAW flowbacks to Ford have long-term benefits and lower wages for new employees.

We're also impacted adversely by a decline in Ford North American production volume.

Our guidance now includes a Ford North American vehicle production forecast of 3.65 million units, down from our prior guidance of 3.7 million units.

Obviously, we will continue to monitor Ford volumes very closely.

Even with the lower Ford North American volume, we still expect revenue to be between 18.6 and 18.8 billion, with Ford North American volume declines offset by increases in non-Ford business.

We expect net income to total between 75 and 110 million for the full year or 60 to 90 cents per share.

This is based on a full-year effective tax rate of 38% with a 27% rate in the third quarter, as I previously mentioned, and a rate of about 31% in the fourth quarter.

With that, let me move to the last slide, which summarizes our presentation.

In summary, our second quarter results were well above guidance and well ahead of 2003 results.

We continue to benefit from operational improvements.

There are challenges ahead.

We are working to offset lower production volumes and other headwinds.

We continue to deliver on our commitments to our customers and continue to win new business.

Our goal remains to continue to improve our operations on a year-over-year basis, and we remain focused on cash flow and the balance sheet.

Well, Derek, I guess with those comments, we're ready to turn it over for questions.

Judy, if you could please remind people how to get in the queue for questions and then open it up.

[OPERATOR INSTRUCTIONS]

Your first question comes from Steve Girsky of Morgan Stanley.

Good morning.

Good morning.

I'm just trying to sort through some things here, so I apologize.

Bear with me.

Chesterfield was in last year's numbers, but is not in this year's numbers, is that true?

That's true.

Correct.

So that was a couple hundred million in revenue.

So adjusting for Chesterfield, the revenue at Ford was sort of even up, or maybe even up a little bit?

That's correct.

Okay.

Chesterfield was a loser, right?

That's correct.

Okay.

So now I'm trying to think, um, I'm looking at pension, and OPEB was 130 million favorable pre-tax, Chesterfield was a big favorable pre-tax.

It seems like those two favorables more than offset the improvements in operating income here.

Am I looking at this wrong or is it -- I'm trying to put my arms around the operational improvements we've been getting from some of these restructuring charges we've been taking.

Well, first of all, Steve, the impact on profits at Chesterfield was really only -- because of the timing of when we phased out of it, it was really only about an $18 million swing year-to-year.

18 favorable?

It would be 18 favorable this year.

Okay.

And pension and OPEB, if I'm looking at the footnote right, looks like it was 130 million favorable.

Is that -- am I looking at that right?

It's about 90 million favorable.

Yeah.

For both of them?

Steve, this is Derek.

Some of those charges from Chesterfield were -- hit the pension and OPEB line.

And if you look at the notes, there was 85 million of pension expense and about 17 of OPEB.

All right, so there was some double counting or something then?

Yeah, because it had cost us sales, but it goes there as well.

Okay, fine.

So that gets us to 108.

And operating income -- so where were the -- how much of these efficiencies were there?

We -- you know, what we've said in the past, Steve, is that this year we're comfortable that our operating cost-downs and material cost-downs are greater than our price-downs.

There is some timing that goes on throughout the year that allows that to happen.

As you know, some of the savings come later in the year and our retroactive back.

So you have some of that.

We also have the headwinds of the material surcharges that we're experiencing this year that weren't in there last year.

So there's (sic) a few other items that are going on, and you know, in the background.

Net-net, Mike, are material costs up or down when you get through your purchasing savings, offsetting the surcharges?

At this point, they're down.

Okay.

So again, it still seems like there's something missing here, that the numbers should be better than they are.

You know, Steve, another factor, frankly, is, we, because of the Ford settlement last year, we are recognizing price-downs on a current basis, rather than having this big negotiation all at the end of the year.

Yeah, that should make it better, shouldn't it?

No, it's reflected in current operations.

So you're saying then that would explain why the fourth quarter is such a large -- 'cause the implied fourth quarter shows a pretty big improvement, no?

I agree.

When I looked at the guidance and thought about it and challenged it, to come to grips with it, it really helped me to think about the fourth quarter versus the second quarter of this year, the results that we just reported, because as you, I think, can appreciate, we are really getting whipsawed when we go from second to third with the large volume declines and then back up in the fourth to basically a volume level that is pretty consistent with where we were in the second quarter.

So, if I try to do a comparison of why is the fourth quarter better than the results that we just reported, there's (sic) a handful of reasons that account for much of those changes.

First, it is continued benefit from new business growth.

As Mike mentioned, we expect to have additional cost savings, and as I think you can appreciate, many times those negotiations are completed late in the year and can be retroactive to sometime during the year.

So we expect to get those kind of material savings in the fourth quarter as well.

We do expect to get benefits from the flowback of UAW employees.

Most of that's going to be realized in the fourth quarter.

It wasn't in the second quarter.

We expect to see some continued operating efficiencies as well.

Could you just explain the benefits of that?

We're paying money, and then what's happening here?

What's the -- can you just explain the economics of that stuff?

We're basically replacing them with the -- under the supplemental agreement, the tier 2 or the second tier wage structure.

Yeah, Steve, if you remember in earlier conversations when we looked at our outlook for the year, we said we had budgeted for some flowback to occur late in the year.

And as I reported on the U.S. labor update, we've had about 450 people go back to Ford already.

But the mix of incentivized flowback is greater than what we expected at the start of the year.

So, we we've entered into this program to offer incentives for folks to flow back, flow out of the area in some cases, some retirements in some cases to accelerate the number of heads that we would end up being able to replace with the tier 1 wage folks.

But is -- are you replacing these 450?

You're not getting any attrition on your own?

No, we do get attrition on our own as well, Steve.

But there is a number that does get replaced, and it takes time.

It doesn't happen the day the person leaves.

He's not replaced immediately that day with somebody else.

So what's it cost you to get a guy out then?

Well, it varies on whether it's out of area, out of zone flowback or not.

So it's in the $30 to $45,000 range per person.

And as Jim was saying, the timing of this is a little different than what we had expected also.

So, you have most of the expense of the flowback occurring now in the third quarter with the benefit occurring in the fourth quarter.

And is that the special charges, those flowback things, you call those special charges or no?

That is correct.

The other item, as you were asking on the second quarter, is we had $11 million with that bond offering in the second quarter this year.

Mmm hmm.

So I'm just -- let me just, and I'll stop after this -- 450 people attrited in the quarter?

In the first half.

In the first half.

Right.

Those -- is it -- that's all that attrited, or that's what attrited and you replaced?

No, that's what flowed back to Ford.

So how many people actually -- what's your head count end of June versus end of December?

Okay, on the Master Agreement, UAW folks at the end of June, it's 19,070.

And at the end of the year it was 19,784.

So you've had some natural attrition in there and you've had some flowback.

Okay.

All right, thanks a lot.

Okay.

Your next question comes from Ron Tadross with Banc of America Securities.

Good morning, guys.

Good morning.

Good morning.

So, just to clarify on that last question.

You were talking about the 90 million on the pension and health care and the $18 million on Chesterfield.

Was that second quarter or first half you were talking about?

That's first half.

Right, okay.

All right, so on the second quarter did you guys see a benefit from the European plan for savings?

You know, I think you said we thought about something like maybe 20 million or so?

Yeah, that's correct, Ron.

And that, you know, that plan essentially is complete.

The actions are done, the restructuring charges are over, and the benefits are flowing through, and it is on schedule to deliver the savings that we had projected.

Okay.

And then on the third quarter guidance, just on Ford volume, it looks like they're down about -- well, you said, 32,000 units it looks like in the -- in North America.

And if I said you have like $3,000 of revenue per unit, that's about 96 million in sales.

Are we using like a variable margin of let’s say like 30, 35%, in that range?

Steve, they're down 30,000 from last year, almost 200,000 from second quarter this year.

Right.

I mean, I'm just looking at it on a year-over-year basis.

I guess I'm just trying to get to the variable margin.

Yeah, we know you're trying to get there.

We haven't disclosed that number for Ford or any other -- any other customer, but surely there's a -- there is a operating margin number.

It's not an ROS number that impacts us on those volume declines.

And you can plug in probably a reasonable number and get, you know, get within our guidance when you do that.

All right.

So, is there -- there's nothing going wrong there on -- I'm just thinking on volume, where the margins, the variable margins are much higher than you thought they were?

No.

Or should be.

No.

Okay, and then Ford -- I see, I mean, at least on Ford's production schedule, it looks like they're up or flat, at least, in the third quarter.

Is that right for Ford Europe?

No.

Ford Europe is down.

3Q.

Third quarter from second quarter.

All right, I'll check that.

Oh, third quarter to second quarter, but year-over-year you're still flat.

That's correct, year-over-year is relatively flat.

And the thing, Ron, we want to point out is these projections on volumes are purely Visteon projections.

They are not based on any information from Ford.

They'll release their numbers early in September, I believe.

Okay.

Is there a reason, Mike, you're looking at this on a sequential basis versus year-over-year?

Is there anything that you'll miss on a year-over-year basis?

No, I don't think so.

You know, we're looking at -- we do do the year-over-year as well.

But as you know, last year had a fair amount of turmoil in it.

And for us to go back and compare, we end up doing a lot of re-statement of adjustments that were going on.

Okay.

And you know, we're real comfortable going -- we had the Ford agreement, you know, which significantly changed things coming into '04 from '03.

So we're just, we're more comfortable building the bridges in '04.

Okay, and then just moving on here, still in the third quarter.

Your -- the Europe plan then should still give you -- help you out, similar idea as the second quarter in the third quarter?

Is that still going to be a benefit?

Yeah, still be a benefit, but remember, the -- some of the benefit was realized back in '03, because we started this back in '02.

Okay, so you're starting to --

Yeah, so you're starting now to bump up against quarters we already recognized some improvement in the prior year.

So it's probably a little lower than the second quarter benefit?

Correct.

Okay.

All right.

And then just on this flowback issue, do these people have to be replaced, the 1700 or so you think will flow back by the end of this year?

Well, we also, at the same time we have this going on, Ron, we have the implementation of the competitive operating agreements in the plants.

Yeah.

And I really don't want to get into, you know, what the ratios are in different plants and so on.

But there is a timing lag and we do have agreements with the UAW on this.

So in some cases they are and some cases it's a different number.

I would point out we already have started hiring folks at the tier 1 wage.

We have hired 160 replacement workers at this point in time, and if you look at it, we've hired 160.

We flowed back 450.

So there's a bit of a lag, and we're going through the process now of integrating the folks at the lower wage into the factories where they have master agreement workers.

And that's happening virtually across all of our plants.

Okay, all right.

And then just finally on capital spending, did you guys update your guidance for the year?

Or is it going be the same still?

It's the same.

Same?

Okay.

All right, thank you very much.

Your next question comes from Darren Kimball with Lehman Brothers.

Hey, guys, how are you doing?

Good morning.

Your guidance implies that you need, you know, based on the third quarter, and what you now did in the second quarter, that you need to make minimum 90 cents in the fourth quarter, maybe as much as $1.20, versus the 85 cents -- 85-cent loss last year.

It -- is my math correct there?

Yeah.

And so I guess my first question is how much of the change in the pricing treatment -- how much of a change is there?

How much of the swing is explained by that?

I was under the impression that even though you're paying, you know, sort of quarterly instead of maybe negotiating it at year-end, that it wouldn't affect the quarter-to-quarter accruals very much.

You're suggesting that your price concessions were sort of fourth quarter loaded and now they won't be?

No.

No, they're the same.

It's a -- it was an annual agreement, and there's no differences between the quarters.

So--

Maybe I misunderstood what you and Steve were talking about earlier.

I thought you were explaining a difference between the second and the fourth quarter that pricing's no longer lumpy.

Well, last year--

In the last year.

Last year's was more lumpy, and as you might expect, we made estimates of what those price-downs would be.

And then we had a true-up at the end of the year when we negotiated the agreement with Ford.

It did provide some lumpiness and it was greater in the fourth quarter last year.

We don't expect that lumpiness to occur this year, obviously, since we have the current agreement.

So, my question is how much of that very large swing in the fourth quarter relates to pricing?

What other major issues are there?

And can you speak specifically to volume, because your full-year Ford North American volume estimate implies like a 32,000 unit increase year-over-year in the fourth quarter.

And you know, are you really counting on that as part of the swing, because I think most people, at this point, suspect that, you know, Ford's not going to be up in the fourth quarter, probably going to be down and could be down by a good amount.

Yeah, Darren, when I look at the fourth quarter, our implied fourth quarter '04 to '03, again, there's about a handful, or four or five items, that account for the big swingers.

It is first that one-time Ford settlement last year that's not going to repeat this year.

Secondly, it's the continued benefit from the growth in the non-Ford business.

That's a benefit this year over and above what it was last year.

We do have material cost efficiencies or reductions and manufacturing efficiencies and G&A savings that are also a benefit this year versus last, all of which, to a certain extent, are partly offset by price-downs and material surcharges this year, rather than last.

So, you know, in a nutshell, those four or five items are the big changes year-over-year.

Also, I'd just point out the non-Ford revenue, you know, at the last quarter, as we discussed it, I think we had a number out there for the year that just said 5-plus billion.

And you were questioning you know, are we being too conservative.

And when we look at where we're at right now, we're saying it's 5.4 billion.

So there's a pretty significant continuation of shipment of non-Ford revenue that continues you know, the third and fourth quarter, especially in the fourth quarter.

And we have additional launches of non-Ford projects and programs coming up in the third quarter this year.

And Darren, again, I'd like to bring you back to thinking about the fourth quarter '04 versus the second quarter '04, and when you do that, continued benefit from new business, the back end realization of material savings, benefits from the flowback, and material, or material and manufacturing efficiencies, are the big drivers.

So, if you look at the material cost savings in the first half versus the first half of last year, that sort of run rate, how much higher do you expect the run rate to be in the second half?

I know that's always been sort of part of the explanation for why the year-over-year improvement would be bigger in the second half than in the first half.

And how much of that is being undermined by the commodity cost increases that you're talking about?

Yeah, I was going to point out that the cost-downs this year are running ahead of last year.

But we do have the material surcharges this year, and some fuel surcharges as well, which we didn't have last year.

So, I'm not really ready to say what the net effect of those two items are, but if you think of the fundamental savings processes we have along working with our supply base, we're running ahead of last year.

Okay.

And then just get back on the Ford volume issue.

I mean, you know, it's -- maybe it's just analyst speculation.

But you know, maybe some people speculate that you've built in a nice cushion against the 3.7 million unit Ford estimate.

And I guess there's quite a bit of debate there.

You know, if they miss that number, you know, if we have to calibrate our number quite directly to that, but the change in your full-year guidance, you know, based on just the 50,000 unit increase in the volume, suggests that maybe there isn't much of a cushion there.

Is that -- if their fourth quarter volumes aren't plus-32, they're minus-32.

Would you suggest that we simply calibrate that effect versus your 60 to 90-cent full-year guidance?

No.

That's why we pointed out there's a number of factors that go around that affect that guidance.

We're seeing, you know, upside in Asia, we're running ahead of our plan there.

The European volumes have some upside possibly in them.

We talked about the material surcharges.

I'll tell you, the flowback, you know, we're looking at what's the effectiveness in our plants as people bump through after somebody flows back.

And there's just a lot of variables that are going on.

And as we look at it, we said this is the first year that we've given guidance in a while.

We gave a range at the beginning of the year, as you know, and we've given pretty wide ranges each quarter, and we said we haven't established a pattern here yet.

We've had two quarters that we were able to beat the guidance we had out there.

And we committed that we would put credible guidance out in front of you and constantly monitor as we go forward.

We feel comfortable putting the guidance out that we've put out there.

And understand, there's (sic) a lot of variables going on that we have to manage.

And we're confident we're going to manage them to be within the guidance that we put out.

Thank you.

Sorry for taking up so much time.

Okay.

Your next question comes from Gary Lapidus with Goldman Sachs.

Hi, good morning.

I am going to follow on the line of Darren's questioning, although hopefully I won't take as much time.

Just -- I apologize to do math with you, but if we can try to stick -- if you could try to follow this.

If I look at the fourth quarter, the production that you're using for Ford versus the quarterly production that you had in the first half of '04, the difference is about 50,000 vehicles, okay, per quarter.

And at your $3,000 per Ford vehicle, approximately -- and I'm talking North America, of course -- that's a lost variable contribution of approximately $50 million, okay?

I'm not asking you to bless the contribution margin, but you know, roughly $50 million pre-tax.

If I look at your implied operating income, or EBIT, in the fourth quarter, and I'm using the low end of your guidance, it's about 140 million of EBIT.

And again, I'm not asking you to bless that, but if I just take the EPS and gross it up et cetera, it's about 140 million.,so -- in the quarter.

So I've got 140 million, you know, fourth quarter EBIT, and then I add to that the 50 million lost contribution from the lower volume in the fourth quarter versus what you were doing per quarter in the first half, and we've got about $190 million.

And then I compare that to the quarterly EBIT in the first half, which was $60 million.

So I've got about $130 million per quarter improvement in operating profit on an apples to apples basis as it relates to Ford North American production.

So, you know, that's a staggering number, particularly given that the sort of, you know, the re-set of your relationship with Ford presumably was already reflected in first half numbers.

So, you know, regardless of what -- we can all debate about what Ford's production is going to be or not be.

I guess if you could maybe help us understand you know, what's driving such a dramatic improvement in operating profit, you know, fourth quarter versus the kind of run rate you were hitting in the first half.

Again, it's about $130 million a quarter.

Gary, I hate to be a broken record, but it does come back to the material savings that are backend loaded, flowback benefits, continued growth in new business, non-Ford new business.

Yeah, okay.

I -- I'm just concerned that if I sat down with a spread sheet and made assumptions about flowback and new business and a variable contribution on that new business, et cetera, et cetera, I'm just -- it will be interesting to see what we come up with.

On the flowback, maybe -- is there, you know, given that some folks out here have concerns about where Ford's production's really going to end up, and, you know, maybe it's going to end up less in the fourth quarter, you know, than we might have liked and maybe, certainly for '05, because the inventory level's probably still going to end this year too high, perhaps too high.

Is there some risk that we're sort of double counting upsides here that are going to sort of compound each other?

I guess what I mean is, is there some risk that as Ford's production starts coming down, more than everybody had been anticipating, that then the flowbacks to Ford start falling short of expectations since, you know, Ford doesn't want people flowing back if there's nothing for them to do?

Well, I don't see a risk at this point in time on that item, Gary.

We've identified the folks.

They're actually going through the sign-up period right now, so the numbers are estimated numbers.

But you know, there's also retirement incentives at Ford for folks to go out and that will also open up some positions.

So we feel pretty good about the numbers we're forecasting for the balance of this year for flowback, and then I think we'll adjust as we go into next year as well.

And if there's (sic) opportunities to incentivize flowback, we'll access them at that point and do it.

I don't see a risk to these numbers.

So it doesn't affect flowback for, perhaps, if for, whatever reason, Ford's production ended up being short for '05 and even beyond.

I mean, if industry volumes fell, whatever.

You could affect flowbacks in '05, but probably not '04, is that what you're saying?

Yeah.

And also, remember, both Ford and Visteon work really closely together with the UAW on this to manage the head counts and the flowbacks.

And we assess together what's the right opportunity and what's the right incentives, and where do they need to hire workers out of region.

And there's a lot of collaboration that goes on in this.

So I'm sure we'll be assessing it throughout the year this year, as in fact we manage together the flowback as it's occurring this year.

Yeah.

Okay.

Appreciate it.

Thank you.

Okay.

Your next question comes from John Casesa with Merrill Lynch.

Thanks.

Just two quick ones.

Can you reiterate your CapEx guidance for the year?

And just explain what the key drivers are, the change year over year.

And secondly, on the Hyundai business, Mike, that you mentioned at the beginning of the call, is that direct business or is that through a joint venture?

What are the economics of that program?

I'll start with the Hyundai question, John.

Some of it's through the joint venture, and some of it is direct.

What we've found we've been able to do with, frankly with a good performance at Halla Climate Control, we've won a lot of business in climate.

But because of that performance, we've been able to leverage that into other products and commodities for Hyundai around the world.

And as you know, they're building a plant in Slovakia.

We're also going to build a plant in Slovakia that will make product that's Visteon product, not Halla Climate Control product, and supply them there.

So I'd say it's a mix of new business wins at Hyundai.

We have a real solid business with them in China as well, as they ramp up their production in Beijing.

Part of that business is through Halla, but part of it is also through a joint venture with Visteon and YanFeng.

So there's a number of ways that we go into Hyundai.

It's producing some direct Visteon business?

That is correct.

And on -- what's -- in CapEx?

It's about $900 million.

Okay.

And I mean, how much of all this technical center expansion are you paying for in this year's number?

Is that a big chunk of it?

Um, no, no.

The bulk of that is still, I'd say the normal CapEx for programs, product development, and there's some IT CapEx that's in there as well.

Right.

And is that IT CapEx, did you say that was peaking?

Yeah, yes.

Yes.

Yeah, we're almost, as I mentioned, through all of the cloning from Ford.

We've had all of the financials -- and all of the operating systems are already done, and now we're into the support functions like HR.

So it's a much smaller clone that we have yet ahead of us.

And I think as Jim mentioned, our IT spend, even, is down in the second quarter of this year.

That's tailed off.

Thanks, Mike.

Your next question comes from Chris Ceraso with CSFB.

Oh, thanks.

Good morning.

Good morning.

Maybe if I can just get back to the fourth quarter question about trying to get to something in the neighborhood of $1.00 of earnings.

If we can focus for a minute on the flowback and the potential economic impact of those flowbacks, just to maybe check my math here.

Is the cost savings to go from, you know, one of your Ford legacy workers to a new tier 2 person about a 50,000 a year savings all in, in terms of salary and benefits?

Is that the right ballpark?

Yeah, we've used very round numbers, because we frankly didn't want to give the precise ones, but we said think about $50 an hour to $25 an hour.

Okay.

So it's about half, right?

Right.

So then -- are you baking into your guidance for the fourth quarter the expectation that you get all of these people back to Ford, and then how many of them do you think you'll replace?

How many -- for how long will you be running just without those people?

I'm trying to get to -- because I mean, it would seem that you would have to get all these people out as quickly as possible and then not replace them for as long as possible to try to get close to that number.

Is that -- ?

Well, that would probably be an admirable goal.

I think the thing we want to point out here is that this is a terrific benefit for Visteon going into 2005 and beyond.

And as we look at the benefit and the cost of the flowback, you have to consider -- in our guidance we're estimating what is the delay, what's the replacement, what's the training of replacement workers going to cost us?

What's the bumping that goes on, because there's a whole bumping process when somebody moves, as you can imagine out of one position.

It's not that that's the position you fill with a replacement worker.

You can have 1 bump, no bumps, or 7 bumps.

And so you have to estimate what's the -- when is the full run rate of the savings going to occur?

And we've done our best guess at what that might be, and frankly that's what's in our guidance.

And then Mike, how much of an offset do you get from all of these engineers that you're hiring around the world?

Is that sort of eating into your savings from the large number of flowbacks?

No.

Gee, on the engineering centers, are all in low-cost countries, with the exception of Basildon.

But the efficiency gains we've gotten out of what we had in the U.K. prior to the move to Basildon has (sic) been terrific.

That open environment has proven to be phenomenal for us.

So in every case, whether it's in the Czech Republic, China, India, Mexico, or Basildon, we're becoming more effective in our spend on engineering.

So that's not eating into anything.

That's helping to contribute our effectiveness going forward.

So while you're building these technical centers around the world, you're also staffing them with what you would consider lower-wage engineers?

You're not sticking, you know, North American, European engineers in these remote locations?

Oh, there would be a few, you know, for training purposes.

But don't forget, all of this is supporting incremental business.

We have a lot of business in the backlog, and that's what's fueling our non-Ford growth.

And we also have a lot of business in the countries that we're putting the technical centers.

So we do a good business in India.

We have a great lighting business in the Czech Republic.

Obviously, we have solid business in Mexico, and China's a huge growth area for us.

So it's putting, you know, people in positions to support the growth, both in the region, and to support our global technology strategy.

So we do that 24/7 on different projects.

All right.

And then lastly, if I could, [Lear] mentioned earlier today that the headwind from higher material costs that they're seeing is about double, or worse than double, in the second half than it was in the first half.

Is that the magnitude that you've baked into your numbers?

You've mentioned a number of times that material cost saves are a big deal for you in Q4.

Yeah, there's more headwind.

I wouldn't compare -- they have a little different material content in their product than we do in ours, and it's not -- you can't go apples to apples there.

But there's more headwind in the second half than there was in the first.

Okay, thanks a lot.

Okay.

Okay, seems as though we've ran out of the allotted time for today.

Chris and I will be around all day to answer your questions.

We thank you for participating in the call.

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Once again, ladies and gentlemen, this concludes today's conference call.

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