Visteon Corp (VC) 2005 Q2 法說會逐字稿

Good morning and welcome to the Visteon second quarter 2005 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 this presentation contains 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 statements.

Please refer to the slide entitled forward-looking statements for further information.

Presentation material for today's conference 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 key pad.

If you would like to withdraw your question press star and then the number 2 on your telephone key pad.

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

Mr. Fiebig, you may begin your conference.

Thanks, Tanya, and welcome to Visteon's second quarter 2005 call.

Joining me on today's call are Mike Johnston, our Chairman and CEO; and Jim Palmer our CFO.

As a reminder, the preliminary information in today's presentation is un -- unaudited and remains subject to change.

The information presented reflects the Company's current estimates of adjustments for errors identified based on preliminary conclusions of the ongoing independent review by our audit committee.

However, the review is not complete and we are not yet able to determine whether further adjustments may be required to the preliminary financial information presented or in any other period resulting from completion of the independent review, the Company's or its independent registered public accounting firms review process or any subsequent events.

Because the review remains open we are presenting limited financial information for the second quarter of '05.

We have not presented prior year or year-over-year -- or year-to-date results.

Preliminary information presented should allow you to have an understanding of the current financial performance of Visteon.

Additionally, as you are aware, we have yet to finish the definitive agreements with Ford relating to the MOU we announced in May.

At a later date we intend to provide additional details on the transaction with Ford, our restructuring actions and our financial outlook for Visteon post the transaction.

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

Thanks, Derek.

On today's call I'll provide you with a business update and turn things over to Jim who will take you through the financial information.

After our formal remarks we'll open up the lines to take your questions.

I thought it'd be helpful to provide an overview of where Visteon is going.

Over the years we've made significant progress on a number of initiatives but our financial performance has been hampered by declining revenue from our largest customer and an inflexible cost structure.

Visteon is focused on the growth of our core products: electronics, climate and interiors.

These are the areas in which we've been winning and continue to win a significant portion of our new business.

We have done a solid job of diversifying our sales base.

The agreement with Ford will accelerate the process but we need to continue to grow with our non-Ford customers.

We spent a good deal of time walking you through manufacturing and engineering footprint in May.

I will put Visteon's new footprint up there with just about any supplier in the industry.

We're well positioned with our operations to support our global customers and will continue to make improvements going forward.

Through the Ford transaction we will address many of our non-core operations here in North America.

However, we'll still have some facilities that do not support our core products in North America as well as in Europe.

There also remains a need to improve operating and overhead efficiencies and Don Stebbins will be a driving force in getting this done.

Visteon will become a leaner organization as we continue to support our global customers.

We will continue to sharpen our focus on cash flow generation and through improved financial results we'll be able to reduce our debt levels.

Our goal for Visteon is value creation for our customers and for our shareholders leading to sustainable growth.

We had some significant developments during the second quarter.

At the end of May we announced the MOU with Ford.

The agreement was very positive and I believe worth the wait.

We've made significant progress on the definitive agreements with most of details worked out.

The definitive agreements remain consistent with the MOU that we presented in May.

We also restructured or credit facilities which we announced in late June and put in place a $300 million short-term credit facility.

On the management side we brought in Don Stebbins as our President and COO.

And most of you know Don from his days at Lear and we're happy to have him on board as we seek to improve our operations and become a leaner and more profitable organization.

We also brought John Donofrio on board as general counsel.

John was most recently at Honeywell and is a great addition to our team.

During the second quarter we had another all time high for non-Ford sales, nearly 1.8 billion.

Non-Ford sales represented 36 percent of total sales and were 4$00 million higher than the second quarter of last year.

This growth will continue in the future as we continue to win new business in our core products of electronics, climate and interiors.

The transaction with Ford will transform our operations here in North America.

This slide looks at our 2005 projected revenue in what Visteon's revenue from Ford looks like on a pro forma basis.

Roughly $6 billion of business will be transferred to the Ford managed entity, which we're calling NewCo for now until a formal name is announced by Ford.

This will reduce our content per vehicle on Ford to less than $1,000 per vehicle, or one third of its current level.

Ford will remain our largest customer representing about 50 percent of our total revenue and we will still be Ford's biggest supplier.

But we will be less dependent on Ford and they will have the opportunity to diversify their supply base allowing for improvements from suppliers who specialize in products that are not core to Visteon.

With the Ford transaction, Visteon's customer portfolio will be better balanced across the North American, European and Asian regions.

Visteon will move from having nearly two-thirds of our revenue in North America to a more balanced position with about 40 percent in North America, 40 percent in Europe and 20 percent in Asia Pacific.

Including unconsolidated joint ventures our revenue is even more balanced across regions at about a third, a third, a third.

This next slide looks at our estimated pro forma revenue by region excluding unconsolidated JVs.

As you can see, the opportunity remains in terms of Visteon's regional sales diversification and focus on core products.

In North America, 90 percent of our business will be in our core products, 33 percent of our revenue will be from Ford.

While the portion of Ford -- revenue from Ford is greatly reduced from current levels we'll seek to improve diversification by growing business with General Motors, DaimlerChrysler and the trans plants.

Europe and South America will become our largest region after the transaction.

Although our sales are only about 50 percent in the region -- or our Ford sales, we look to continue our growth with other customers.

Our core products will represent about 73 percent of sales in the region and over time we'll work on increasing this percentage through growth in core products and the exit of non-core operations.

In Asia our $2 billion of revenue is well diversified and focused on our core products.

In this region we intend to continue to profitably grow our revenue base.

This diversification growth will continued to be fueled in the future by our new business wins.

Our non-Ford business wins continue.

Through the first half of this year our wins are running at a healthy level and are higher than 2004 levels for the same period. 90 percent of these wins are in core products of electronics, climate and interiors and more than 85 percent of these wins will represent sales outside of the North American market.

The wins come from a balanced customer mix.

We continue to win new business with our second and third largest customers, Nissan and Hyundai and we have had some significant wins at Volkswagen, Peugeot and General Motors.

We know that there's a great deal of interest in the growth prospects of our non-Ford sales.

We plan to provide additional information later this year in the form of a metric for you to better understand what to expect in this area in the years to come.

We remain focused on growing globally and we have a solid footprint in place to support our global customers.

This slide looks at the next steps for Visteon.

In the near term we need to define how Visteon will support NewCo, reach the definitive agreements and close the transaction with Ford.

We also need to ensure that the appropriate infrastructure is in place to support NewCo.

There is a lot that needs to be done and people are working hard.

It's not an easy task as NewCo will become one of the largest suppliers in the world.

The number of Visteon employees directly servicing the operation will represent a significant portion of our salary headcount here in North America.

And we've been examining what the requirements for the new Visteon will be in terms of staffing levels.

We plan on restructuring our global overhead to more affordable and competitive levels.

We're taking a deep look at engineering, manufacturing and administration.

After we determine how many people will be directly supporting NewCo we'll be in a better position to determine the actions we have to take to make Visteon truly competitive going forward.

On an ongoing basis we'll continue to work on under-porming facilities while supporting our global customers to allow for profitable growth.

Longer term, we'll restructure manufacturing plants which could include some plant closures and we will look to exit some of our remaining non-core businesses.

As part of the transaction with Ford, we'll have an anticipated $550 million fund from Ford to fund the restructuring.

We know we must take additional action here at Visteon to get the results to where they need to be.

We're in the process of identifying these actions and will have the funds available to make it happen.

Now I'll turn the all over to Jim.

Thanks, Mike, and good morning, ladies and gentlemen.

I thought I would start with a reminder of the recent update we gave on the status of our internal accounting review.

In May 2005 the audit committee commenced an independent review of accounting for transactions originating in North American purchasing activities.

Last Monday, August 1st, several preliminary conclusions were announced as follows: approximately $44 million of additional freight expenses should have been recorded in periods prior to December 31, 2004, including $13 million initially identified by the Company.

Secondly, additionally, 27 million of additional expenses for material surcharges should have been recorded in periods prior to December 31, 2004, including $18 million identified by the Company.

And then finally, $6 million of other supplier expenses were recorded in the first quarter of 2005 that should have been included in periods prior to the first quarter of 2005.

As Derek said in his opening comments, the review is not complete, further adjustments maybe identified.

Pending the completion of the review we have not concluded on possible restatements of past financial statements but we do know that we will not be able to file our second quarter 10Q on time.

Because of this review we are not publishing complete financials but rather selected fina -- preliminary financial information.

This financial information is subject to change pending the completion of the independent review.

On the following slide, I will take a look at those preliminary results.

For the second quarter sales were just over $5 billion as higher non-Ford sales more than offset decreased Ford sales.

Cost of sales were 5.891 billion.

Included in cost of sales were previously announced asset impairment charges of 1.132 billion or $9.01 per share.

The charge was the same both before and after tax and I will just discuss those impairments in a moment.

Selling administration and other expenses were 274 million for the quarter but included in SG&A were about $40 million of bad debt expense primarily related to tier 1 customer bankruptcies.

Net interest expense was $31 million from the quarter resulting from higher interest rates and higher borrowing levels.

All of that results in a second quarter loss before tax and minority interest of $1.185 billion.

For the quarter we added net tax benefit of $2 million as normal tax expense was more than offset by benefits related to prior year audits and return true-up adjustments.

And finally the net loss for the quarter was 1.193 billion or $9.49 per share.

Let's turn to special charges on the next slide.

During the quarter we recorded 1.132 billion non-cash charge related to asset impairments in North America and Europe.

Of the $1.1 billion charge, 881 million was related to the Ford transaction.

This was lower than our earlier estimate of up to $1.3 billion announced with the MOU in May as higher fair value for the assets were greater than our earlier estimates.

In addition to the impairment related to the Ford transaction we also recorded an asset impairment for non-core operations, primarily in Europe, for $251 million related to driveline and air fuel system products.

These assets support about $550 million of sales in 2004 primarily to Ford.

Although we're still finalizing some of the details of the agreements with Ford, we still expect to record a substantial gain upon closure of the Ford transaction well in excess of these second quarter charges.

Let's turn to sales on the following slide.

Non-Ford sales were at an all time high and totaled nearly $1.8 billion for the quarter, up 400 million or 29 percent from Q2 2004.

For the quarter they represented 36 percent of total sales increasing 8 percentage points year-over-year.

Foreign currency increased non-Ford sales by 71 million due to the strength of the Korean wan and the Euro.

Ford sales on the other hand were down 268 million as favorable currency of 49 million was more than offset by 4 percent unit reduction in Ford's second quarter North America production as well as a 5 percent decline in its European production.

Pricing and mix were also negatives on a year-over-year basis.

In total sales increased by $133 million or nearly 3 percent.

On the next slide we'll take a look at EBITDA.

As in the past we have included a slide on EBITDA because we know that it is a useful, albeit non-GAAP financial measure, that many of you calculate.

EBITDA for the second quarter was negative $984 million including the billion -- 1.1 billion of special charges.

Income taxes were a benefit of 2 million and depreciation was $154 million for the quarter while amortization was $26 million.

Under our revised credit agreement we have a net debt to trailing four quarter EBITDA covenant and the ratio for the second quarter was 3.75 to 1.

We are well within the limit of the covenant for the quarter.

And under the cov -- covenant we can exclude special charges and add back interest income to the calculation and we are also able to adjust for losses related to a specific tier 1 customer bankruptcy.

So, on the next slide I'll take a -- I'll provide an update on pensions and OPEB.

For pensions, the Ford transaction will have little impact on our funded status.

This is because Ford has held both the assets and liabilities of the master agreement UAW employees leased to Visteon and we reimburse Ford currently for this pension expe -- expense.

The big changes from the Ford transaction to the balance sheet in the income statement will be related to OPEB.

Most of the $2.2 billion of post retirement benefit payable to Ford as of December 31, 2004, will be forgiven.

Other OPEB benefit obligations of 1.1 billion. as of December 31, 2004, will not be affected by the Ford transaction.

However, as Mike mentioned, in late June we announced changes to our U.S. salary OPEB program for employees not covered by the Ford OPEB plans.

Under the new program employees borned after July 1, 1960, will no longer be eligible for OPEB coverage.

Benefits for current retirees and employees retiring on or before July 1st of 2007 will not be changed nor will benefits change for workers covered under Ford plans.

Other employees, however, will receive a partial OPEB benefit upon retire -- upon retirement.

Based on the status of the plans, as of the most recent measurement date, these actions are expected to result in annual savings of about $40 million in 2006 and beyond.

And additionally, the OPEB obligation as of December 31, 2004, will be reduced by about $300 million.

For the second quarter, OPEB expense continues to be much higher than our cash payments with expense of about $90 million and cash payments of about $20 million or about $70 million less than expense.

Our measurement date for both pensions and OPEB is September 30th.

Recently, interest rates have started to move in a more favorable direction but are still lower than what they were at last year's measurement date.

The next slide we'll look at cash and debt levels.

With our abbreviated financial information this is a little more difficult to get a cash flow for the quarter so I wanted to give you some information to help you understand cash flow.

At June 30 cash was $823 million and debt was a 1.921 billion.

This resulted in a net debt of a 1.098 billion, which is $128 million lower -- or better than it was at March 31st.

Positive factors construin -- contributing to the lower debt in the quarter included trade and working capital improvement, primarily related to the changes in the Ford funding agreement, OPEB and pension accruals in excess of cash payments and as well as a favorable balance between depreciation and amortization and capital spending.

Negative factors on the other hand included our operating loss, reduced receivable sales and securitizations of nearly $80 million and cash restructuring payments of about 35 million and tax payments of $26 million.

At quarter end about 25 percent of our cash balances were in the United States.

On a next slide I'll ta -- I'll take you through our bank finance that we completed in June.

In June we replaced our previous 360 day facility with a new $300 million short term revolver which will expire on December 15th of this year.

This facility is intentionally smaller than the previous line in anticipation of the Ford transaction completion.

We also amended our $775 million revolver and the $250 million delayed draw term loan for Visteon Village both of which expiring in June 2007.

As of June 30th, we were undrawn on both of the revolvers and had drawn about $240 million on the Village term loan facility.

The interest rate all facilities -- all three facilities is Libor at plus 450.

We also revised the covenants to bridge to completing the Ford transaction and obtained similar changes for existing $100 million non-Ford U.S. receivable securitization program.

As of June 30, no funds were outstanding against this securitization facility down about $65 million from March 31st.

And finally, we provided a collateral package and more restrictive covenants to all three bank agreements.

Let's look at some of those covenants on the next slide.

As part of the amendments, we extended the financial statement filing deadlines until December 10, 2005.

If you recall we had announced on May 20th that we had extended those deadlines until July 29th of this year.

We also revised the net debt to EBITDA financial ratio covenant through the end of 2005 from the previous level of 3.5 times.

For the second quarter the ratio is 3.75.

It increases to 4.2 times in both the third and fourth quarter of 2005.

In 2006 the ratio begins in the first quarter at 3.5 and declines over time through each quarter to 2.5 by the end of 2006.

Also, new restricted covenants have been added.

Among other matters these covenants limit Visteon's ability to incur new debt, make capital investments, acquisitions or equity contributions or inner company loans, sell assets or pay dividends.

All of these are pretty much standard conditions for non-investment grade companies.

And on the next slide I'll provide some perspective on the third quarter.

Sales are expected to be lower in the third quarter due to the seasonal shut down.

Ford's announced third quarter production for both North America of 733,000 units and in Europe of 370,000 units are both down about 2 percent from the third quarter of 2004.

However, when compared to this year's second quarter both are down about 20 percent sequentially.

As you -- as we have said we are committed to fini -- finishing the definitive agreements and is closing on the Ford transactions by the end of the quarter.

And as I said we expect to recognize a significant gain well in excess of the second quarter charges.

The cost of reduction environment continues to be challenged particularly here in North America.

Although we have seen some moderation in the prices of steel, resins and chemicals remain high as oil continues to remain at its historical high levels.

These commodity price levels as well as lower OE production levels is putting a great deal of pressure on the sector making it more difficult to attain previous levels of cost reductions from suppliers.

And finally, we do expect to have working capital usage in the quarter as is the norm due to the impact of the summer shut downs.

As we disclosed last week we drew down $450 million in our bank lines to fund retirement of our 7 and 7.95 percent notes that were due on August 1st and to support working capital needs.

Once the definitive agreements are completed with Ford we plan to draw down the $250 million short-term loan from Ford and expect to reduce the borrowings on our bank lines from where they are currently.

Although we've accomplished quite a bit during the second quarter there is still much to be accomplished.

Our attention is obviously focused on completing the Ford agreements as well as getting the right infrastructure in place for the new Visteon on our go forward basis.

These are our truly difficult times for the industry.

But, we encouraged by the prospects for the new Visteon as we go forward.

Mike, with that, I think we'll open up the line for questions.

Thank you. (OPERATOR INSTRUCTIONS) Our first question is from John Casesa of Merrill Lynch.

Thank you very much.

I have just two quick questions.

One on -- one financial, one strategic.

First, Jim, on the customer bankruptcies can you say how much they cost you in the quarter and what the outlook is for your -- for you receivables?

The -- the -- the -- the customer bankruptcies cost us about -- round numbers about $35 million in the quarter, one large customer in particular.

And as I said, the -- the environment is -- is difficult for the supply base given commodity pricing pressures and -- and lower OE production levels.

These -- these are supplier bankruptcies, not customers, right.

Supplier bankruptcies?

Supplier bankruptcies, correct.

So, I mean, would you anticipate that --

John, let -- let me correct that.

In one -- one case it was a customer bankruptcy.

Customer is a -- is a another tier 1 supp -- supplier to the OE's where we were especially a tier 2 to them.

Okay.

And then what --

There are -- there are pressures on the supply base and so -- again, some of those suppliers are lower suppliers to us in some cases we're suppliers to them.

Okay.

So you -- I mean this -- this -- this could repeat itself in presumably 6 months, 9 months, three months.

I mean, do you -- is is -- is -- is it getting worse here?

I -- I don't know that it's getting worse.

But, I -- I think we've -- we've just seen the pressure on the bla -- on the base.

Okay.

And, Mike, I wanted to ask you about the -- the near term restructuring activities you talked about particularly restructuring global overhead and then addressing under performing facilities.

From the remarks you made today and the remarks you made at the time that you signed the MOU, my impression was that once this Ford deal is done you would get to work in earnest on some of these other issues, global overhead and under performing facilities.

Am I incorrect, is that happening now, it's not sequential?

And then secondly, what is the nature of these activities?

Are they -- they going to be large restructurings?

Is it a long pay back, short pay back?

What -- what should we look for that would potentially impact the '06 res --

Yes, okay, John.

The -- I -- I would say that the work is simultaneous with the Ford transaction.

So at -- at the same time we're identifying all of the services and people that we need to support the -- the NewCo.

We're also identifying what's the right size for the businesses we remain in and the $11.5 billion or so revenue corporation that we've become.

So that's going on in parallel.

Until we know exactly what the service levels that'll be required by the -- by Ford's NewCo it's pretty hard for us to -- to take some other actions, but I would expect it would -- it would all happen pretty much at the same time.

And than as you look at -- it's say manufacturing, we do have a number of operations spread around the world that -- that are underperforming, and in some cases we would look at moving that production to a -- a more competitive part of the world or in some cases we may in fact be closing some facilities and sometimes, John that -- the timing on that isn't necessarily instantaneous because we may be investing in capacity in another part of the world and -- and we have to make sure that -- that we have a good supply for our customers and there's no interruption.

So some of that would be staggered over maybe two or three years even.

But I think you'll start to see some activity pretty soon and it should be consistent over a two to three year period.

And this is, Mike, North America and Europe?

Yes, correct.

Okay.

Thanks very much.

Your next question comes from Chris Ceraso of CSFB.

Thanks.

Good morning, everyone.

Good morning.

Good morning.

One thing I'm a little confused on, may you can help me.

You -- you said, Jim, that you expected to book a much larger gain when the deal closes than the writedown that you've taken presumably on the same assets.

Is Ford valuing these assets much higher than you value them?

Can you give me some -- some context on that?

Well, Chris, as -- as we said when we announced the MOU, the -- the transaction essentially was a two-step process where we would recognize an impairment, or assets held for sale, write those assets down to a value in the second quarter and then when we close the transaction at the end of the third quarter recognize a gain for the -- essentially for the forgiveness of OPEB -- UAW OPEB and -- and the other items.

We still expect that to cu -- to occur.

I -- I -- I don't know what -- what Ford is using per se to value these assets.

It is just that when we had come up with our preliminary estimates of the charge to be taken in the second quarter we hadn't gone through the valuation process.

We now have.

It came up with a little bit higher values at -- at this point.

We will recognize the remaining write off of those assets when we complete the transaction and we're still confident in the overall gain estimate that we gave you all at -- at May when we announced the MOU which at that point we thought that the net transaction would generate a gain in 450 to 650 range.

Okay.

I think the forgiveness of the OPEB is the big piece I was missing there.

Okay.

Next question on your -- your remaining businesses, interior is one of the core businesses.

The -- the question has to do with some of the interior trim pieces, maybe you can give us a feel for how much of your interior business you would call interior trim.

The reason I ask, you've seen the troubles that Collins & Aikman has had, Leer is putting its interior trim business up for sale because it's having a tough time making money given the -- the commoditized nature of the product and the fact that resin costs are so high and -- et cetera.

How much of your business would you consider similar to -- to -- to that part of Leer and to Collins & Aikman that -- that you may need to work on to get more profitable?

Actually very little of our business it remains is in trim.

The -- the core business for us remains cockpits and instrument panels.

And, in fact, part of the business that went back to Ford was -- was really about the only trim operation that we had in -- in North America, so I -- I would say very, very little of our interior business would fall under the definition of trim.

Okay.

And then lastly, I'm not sure how much more you can add on this, Mike, but trying to identify the number of people to service the new company, what don't you know yet or how much?

What -- what do you need to figure out before you can identify how many people you'll have to -- you'll have to -- to carve off to support that business?

Yes, I -- I'm going to sort ask Jim to -- to -- to jump in because he's been involved, really as the point person on a lot of these discussions, and just picture that this service business is huge.

I mean you're -- you're talking about one of the largest automotive suppliers in the world in NewCo and we -- we will be providing all of the management services for that -- for that entity.

It's extremely complex, so I -- I would ask Jim to throw some color on that.

Yes, Chris, I -- I -- what I would add is -- is that although we've had a great deal of conversations around the -- the employment -- employee needs for -- for NewCo and essentially both companies have numbers we've been working on that -- they're not final at this point and so -- but I -- I think it's really fair to say we're talking about a substantial number of our people being leased -- or providing services to NewCo.

I hope that we're only a few weeks away from trying to get all of that finalized where we can really give you exact numbers on what that -- those numbers of people are going to be.

But again, as Mike alluded to, this is going to be a major part of their operations on a go-forward basis.

It's a -- it is a great deal of number of people.

Now you'll get reimbursed for those folks right, but it -- it may hamper your ability to -- to shrink your -- your SG&A base, right?

We will get reimbursed for those people and so the cost associated with those people will be paid for by the NewCo organization.

What we then are looking to do is what remains at Visteon and to essentially right size the inf -- the remaining infrastructure for what we need in the -- in the new Visteon on a go forward basis.

That's what we've been essentially alluding to all along when -- when Mike or I have said that we are working feverishly to get the right infrastructure in place for the new Visteon on a go forward basis.

Okay.

Thanks very much.

Your next question comes from Darren Kimball of Lehman Brothers.

Good morning.

Morning.

On slide 9 you talked about your new business wins running ahead of 2004 levels and I was just wondering if you could remind us what your -- what your key financial hurdles are for the new business that you're securing?

Well, it -- it varies by -- by product, Darren.

So there's different hurdle rates and different products and I would just say that we feel very good about the processes we put in place in the -- in the quote process and the business reviews and gateway reviews that we have as we start to assemble a bid or go after a major part -- portion of business.

So, I don't think we've ever published a number on a hurdle rate but -- but we feel good about the process and new business that we -- we are winning.

Okay.

And just wondering on the -- on your slide about what's core and non-core, could you speak to the -- what -- what what businesses you'll be in in Europe that -- that you consider to be non-core pro forma for the deal?

Yes, I can give you a little bit on that.

We do just under a $1 billion of chassis business in Europe, so think about 800 million or so of -- of chassis there.

And that was not part of the agreement with -- with Ford and so it's a -- it's a business that we're exiting here in North America, we'll continue to provide support for European customers and actually the chassis business was part of the European plan for growth that we talked about over the last couple of years and so the performance of that business has -- has improved pretty significantly but we would still view that as non-core.

And then there's also about half a billion dollars of I would say fuel delivery systems, fuel tanks and -- and senders and so on that we will not be in here in -- in North America but will continue to provide support for our customers in Europe.

So that -- that's the bulk of non-core in Europe.

Okay.

And it sounds like there's a pretty slim chance that that develops into a core business if you guys?

I -- I -- yes, I wouldn't expect -- I mean, as soon as you say something it'll come back the other way.

But it's not our intention right now that -- that those product lines would become core for us on a global basis.

Okay.

Thanks, Mike.

Your next question come from Ron Tadross of Banc of America Securities.

Thanks a lot.

Good morning, everyone.

Morning.

Morning.

Your gross profit dollars were up about $130 million from the first quarter excluding the -- the charge.

Can you just walk through what were the major components there?

I think one was the Ford assistance which was at least another $50 million.

But maybe you could talk to the other ones?

Yes -- that -- you're right, Ron, that -- that -- that is part of it.

A couple other items.

G&A and engineering were somewhat lower quarter-over-quarter excluding the -- the -- tier 1 customer bankruptcy.

There were some improvements in material and manufacturing efficiencies and then as I said we had the-- the tier 1 bankruptcy.

So. it -- it's essentially those four items that account for the -- the improvement quarter-over-quarter.

So, the funding agreements, lower G&A in engineering, improved material and manufacturing performance and efficiencies offset by additional tier 1 - or -- or not additional, tier 1 customer bankruptcies.

The -- the tier 1 bankruptcies were in the SG&A line, the 35 million or is there more than that?

Yes, sir.

Yes, sir.

Is it just on the gross profit dollar line though, was it -- was it just -- is lower engineering and the material manufacturing?

It's -- it's -- it's essentially the funding agreement and material and manufacturing efficiencies.

Does that mean that steel costs were lower sequentially?

Steel costs were lower sequentially although resin costs were up sequentially and essentially offset one another in -- at least in broad terms.

If you look at the -- the spot prices quarter to quarter, you'll essentially see that steel is down second quarter versus first, but on the other hand oil and resin based -- or res -- oil based products principally resin were up quarter over quarter.

So -- so the G&A in the engineering sound like it was the big item.

I mean, is that just due to the new business launches, fewer launches?

No, it's -- it's really the other two, the funding agreement and manufacturing and material efficiencies that are in the gross profit line, the G&A is engineering -- some engineering is in gross profit.

So should I read that as -- as just cost reductions?

I mean were your -- your cost reductions accelerated from the first quarter?

I would read it as a combination of efficiencies as well as cost reductions.

Okay.

Cause you alluded to -- you said in the opening remarks that it was it was dif -- it's difficult to achieve cost reductions due to the supplier issues.

Right.

Are -- are you saying you're still improving them, you're just not as much as you would like?

Yes, I -- I think what I said is it's difficult to get the historical levels of cost efficiencies given the condition of the supply base.

All right.

And then just on the SG&A, the -- the -- I guess the 35 million was all bad debt expense in the SG&A?

Correct.

And is that related to NewCo now, is like is the customer or supplier issue related to NewCo or if NewCo went away, would those -- that 35 million still be around?

If NewCo went away, the 35 million would have still been here.

Would -- would still be there?

Yes.

That's related to the basically a core Visteon customer or -- or supplier?

Well, I -- I wou -- it -- it was in Europe and the big piece was in Europe and most of the transaction with -- with Ford or NewCo is around North America.

Okay.

And is that just a one-time item?

I mean is this just one-time --

Yes.

Yes?

Yes, one-time item.

Okay.

And just finally on Vi -- on SG&A, when you guys spin off NewCo, I mean is it fair to say that Vi -- SG -- it looks like SG&A could be upwards of 7 percent of sales even -- even net of the recovery of some of the leased employees?

I mean is -- is that kind of outline the opportunity here to get cost down?

We believe to be a competitive tier 1 supplier we need to have our G&A level consistent with our past levels of -- of G&A.

Right.

So --

That -- that -- that puts us in 5, mid-5 range.

Okay.

And is it fair to say that there's got to be at least -- it seems like there's at least 2 points of opportunity there, to get to mid-5?

Well, opportunity either through employees being leased [cough] excuse me, employees being leased to NewCo or cost reduction activities that may need to be taken.

Okay.

All right.

Thanks a lot.

Okay.

Your next question comes from Joseph Amaturo of Calyon Securities.

Good morning.

Good morning.

Good morning.

With respect to the OPEB you suggested that it's 1.1 billion post deal and then you said the changes in the OPEB would bring that down, am I reading this correctly, by another $300 million.

So all else constant will we be at like an $800 million run rate?

For that -- the total OPEB obligation as determined based on our -- our past measurement date and -- and the -- the message there, Joe, is that we have a new measurement date at September 30th and as we all know, today's interest rates are somewhat lower than what they were a year ago and so if you had to discount that lower obligation at a lower interest rate you pro -- you -- you end up with a somewhat higher balance sheet amount than -- than what you would have had using last year's interest rates.

Right.

But it -- the 1.1 will still be reduced by 300 from the changes?

Is that --

The -- the -- the changes reduce the obligation by about $300 million.

And then whatever impact from interest rates will increase that amount?

That -- that change of $300 million is amortized over the remaining work force lifetime.

Okay.

And then secondly, non-Ford revenue, was the FX impact there roughly $70 million?

You got it.

And then lastly, with -- with this SG&A reimbursement with some of the leased employees to NewCo, when you -- when you receive the reimbursement I'm assuming you're going to net that against the SG&A expense that you report?

Actually, Joe, I'm not sure how we're going to re -- whether we're going to pull all this leased operations off to the side and report it as a one-line item gross -- gross and then net reimbursement or whether we leave all the numbers scattered through the financial statements and then show reimbursement.

We -- we still need to resolve the -- the exact reporting of that.

Okay.

Thank you.

Okay.

Your next question comes from Rod Lache of Deutsche Bank.

Good morning, everybody, can you hear me?

Good morning.

Yes.

Yes.

Just a couple things.

Can you give us any color at this point on what the profitability of the core business was EBITDA pre-tax operating income, any -- anything along those lines?

Rod, we haven't broken any of that out in the past and until we get through the -- the completion of the definitive agreements and get back into this -- the mode of being able to present forecast information I don't think we should go there.

Okay.

I guess what you had said previously was you expected the business to be around break even pro forma for the transfer of -- of these -- these operations, is that still the case?

I think what we said is around break even on a TBT basis.

Okay.

And that would exclude the additional restructuring and the move of salary people and the change in the OPEB or -- or not?

Is that all in?

That does -- it did include an assumption about leased employees being reimbursed at a certain level.

The restructuring costs that we may incur in the future was -- was not included in that, so.

What -- what about -- what about the 550 of the -- this -- this escrowed restructuring that Ford is -- is paying for, is that included?

The benefit of that?

Again, the exact accounting for the 550 reimbursement when it's -- when it's to be recognized, whether it's on an incurred basis or -- or otherwise is -- will be determined upon the completion of the definitive agreements.

Okay.

And just from an order of magnitude perspective, a lot of people asking questions about the -- the -- the employees that'll be leased to the NewCo, is it fair to say that we're talking something like 2,000 people or can we put any parameters around that?

I -- I -- I think it would be higher than that.

Okay.

Great.

Thank you very much.

Your next question comes from Michael Bruynesteyn of Prudential.

Good morning, gentlemen.

Good morning.

Morning.

Could you talk about the degree of independence of Halla, it's operations and -- and maybe how you can further leverage that and -- and what reasons maybe you don't continue owning 70 percent or why don't you own 100 percent?

First of all, Michael, I -- I would say that we don't have any plans to change the percentage ownership so I'll just say that we're happy with it where it is for now and -- and there's no plans or contemplated to -- to move that up or down.

Halla operates within our Asian region of course out of -- out of Korea.

They're a very, very well run company.

They tend to receive top quality awards from their customers, very lean in their management and in their manufacturing operations, and in fact, we've been able to integrate that thinking and -- and that management into some of the Visteon operations and -- and especially some of the new facilities that we're building in support of -- of our customers.

We have a situation in -- in Beijing where we have a -- a Visteon entity that's managed by Halla management and is performing very well and in fact they were Hyundai's top supplier last year and again this year.

So I think we're doing a pretty good job of integrating the Halla processes across our climate business on a -- on a global basis.

They do run then still fairly independently is what you're saying?

Is that correct?

Yes, I -- I mean they operate -- we -- we -- it's like we're not going to change their -- their management process at this point.

They perform very well and they operate independently, but, again, we integrate their -- their climate designs and their -- we use their tooling, we integrate their management processes and yet they're still a -- a separate public company in -- in Korea.

So, I think we've got a -- a good blend of them being able to operate independently as they need to and yet us gaining the benefit from integrating them into our -- into our operation.

Great.

And then can we get an R&D number for the quarter?

We'll -- we'll get back to you on that.

I don't have anything at my finger tips, Mike, so I'll ask Derek to get back to you with that.

All right.

Thanks very much.

Okay.

Your next question comes from Brett Hoselton of Keybanc Capital Markets.

Good morning, gentlemen.

Good morning.

A couple of quick questions here.

First of all, Mike, you have talked a little bit about -- well you've talked about completing the agreement with Ford by the end of September.

What do you think the probability is that you're going to have that done -- would you say that is a high probability or would you say that it's kind of 50/50?

No, we would say we're working to get that done.

So we would -- we would put it as a high probability.

Okay.

And can you remind me what -- where were you at as far as new non-Ford business wins this time last year and -- and can you give us an idea of where you are this year?

We stopped disclosing that number last year so I ca -- what I can tell you is that we're running ahead of last year this year and if you look at our non-Ford revenue growth, I -- I think it remains pretty strong.

What we said we were winning a few years ago shows up in revenue now and -- and I will just say our wins are running ahead of what they were a year ago and continue to -- to be strong.

Now we are going to take a look at when we can start disclosing more information.

Coming up with some metrics that we can put out there that we haven't done before to give you a better look into our -- into the prospects on -- on revenue growth in the coming years.

But we just have -- we'll - we just have to take that on and in -- at a time we can communicate more information we will in fact do so in this area.

What -- what do you think happens post -- post the agreement with your -- with your Ford business?

Do you think it treads water, continues to grow, goes down?

Well, I think it depends on -- on what part of the world.

If you look at our Ford business about half of it is in Europe and half of it is -- is here in North America.

We've done I think a really good job servicing Ford with our -- with our products in Europe and I think in the core products that we continue to supply to Ford we have a very good manufacturing footprint so I feel -- I feel good with that.

And we have an opportunity in Asia where frankly we have very little Ford business today.

We've reported in the past that it's only about 5 percent of our revenue and I think we have an opportunity to grow with them in -- in Asia.

So I would -- it's a -- we have to compete and earn it and I -- I think that's good for us and them.

So -- so it'd be much more of an arms length transaction than let's say the business that -- that you've transferred back to Ford where -- where they really have a -- a tacit obligation to -- to provide you with business to support their own employees?

Is that a fair statement?

I would look at it this way, that the -- the remaining business we have with Ford is business that we have won and they haven't necessarily felt an obligation the way you're describing and most of that business comes out of very competitive footprints and it's good technology and I would expect that we would continue to fight to win that business going forward.

What do you make of Leer's reconsidering their interiors business and -- and does that present any opportunities in your opinion for Visteon?

Well, I wouldn't -- I wouldn't comment on -- on any other suppliers strategies.

We would try to win business in -- in interiors where we we have fully integrated cockpit capability, in electrics and those would be the two areas we would compete with -- with them in particular.

But, I wouldn't -- I wouldn't comment on their strategy at all.

And then when I look at -- I think it's what page number 6 and then page number 7, page number 6 that includes unconsolidated joint ventures as well?

I didn't catch that.

That's the Ford revenue by region, the 2005 Ford revenue by region?

No, that would not.

No?

No?

Okay.

And then when we say including unconsolidated joint ventures on the next page, about one third in each region, is that simply saying that about one third of the revenue in each region is say unconsolidated joint ventures?

No.

No.

What I'm saying is that in Asia if you included our unconsolidated revenue from our joint ventures and added that revenue to the totals, then our balance would be a third of our revenue in Asia or a third in Europe and a third in North America.

Perfect.

And the -- okay.

That answers all of my questions.

Thank you very much.

Okay.

[Operator Instructions] Your next question comes from Jonathan Steinmetz of Morgan Stanley.

Thanks.

Good morning, everyone.

Good morning.

Good morning.

A few questions.

When you mentioned the European businesses, the chassis and fuel systems that you'll support your customers but they're not necessarily core, are those businesses profitable on an accounting basis or are they generating rating cash flow after sort of required CapEx?

Again, we --we really haven't broken that information out and -- and it's not something that we could do right now anyway.

Okay.

Well let me ask it a different way.

If you were able to divest any of those types of businesses, which of your core businesses do you think you'd be most likely to redeploy proceeds into?

Well, I would just say that we would be -- part of this assessment is we look at our -- our right sizing on the go forward Visteon, part of that assessment is to make sure that we have the engineering and -- and technical capabilities that we need to -- to support our growth.

And so in -- in some cases we've in -- invested pretty heavily in -- in some of the core business and in some cases I think we have an opportunity to invest more.

I wouldn't want to break out that investment by in -- by product category at all, not at this point in time, and if we ever change the way we report, then you would see it that way, but I wouldn't expect that we would -- we would break those numbers out.

Okay.

And I just want to clarify from an earlier question, the $550 million that -- the escrowed money, not so much from accounting perspective but your break even PBT number, just to be clear, does that include some sort of -- of benefit and -- and pay back from that money being spent or does it exclude any benefit from that?

The -- what I tried to say, Jonathan, is that when someone had asked about break even PBT, I said that that amount did not include any restructuring activities nor any reimbursement that may come from the escrowed or the reimbursement agreement amounts.

Okay.

And last one, on the OPEB you talked about the reduction.

Do you have a number for NewCo for both the -- the book expense and also your forecast for the initial or at least like an '06 type number on the cash contribution?

No, I don't.

Okay.

Thank you very much.

Okay.

Ladies and gentlemen we have time for one more question.

Your next question comes from Paul Lloyd of Schneider Capital.

Good morning, guys.

I was just wondering if --

Morning.

if you could give us any idea where you're going to stand with tax loss carry forwards and I know that accounting is out into the future until you prove profitability, but could you give us an idea where you stand?

The -- the trans -- Paul, if you're asking does the transaction affect our tax loss carry forwards in the states, the answer is it does not.

What -- what we have in terms of NOLs going forward we still have after the transaction.

And how does that -- I -- I assume that their increase to the second quarter charge and reduced to the third quarter credit perhaps?

I mean net net we're going to be roughly in the same position when we come out is what I am saying?

I'd have to really go ask my tax guys to -- to give you a definitive answer there, but -- so rather than make a guess, I'll -- I'll ask them.

I'll ask Derek to get back to you with an answer there.

Okay.

Thanks.

Well that concludes our call.

Thank you for joining us.

I'll be around all day to answer your questions.

Thanks.

Ladies and gentlemen this concludes today's conference call.

Thank you for your participation.

You may disconnect at this time.

Good day.