Visteon Corp (VC) 2005 Q4 法說會逐字稿

Good morning.

Welcome to the Visteon fourth quarter 2005 earnings release conference call. [OPERATOR INSTRUCTIONS].

This conference call is being recorded.

Before we begin this morning's conference call I would 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 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. [OPERATOR INSTRUCTIONS].

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

Mr. Fiebig, you may begin.

Thanks, Judy, and good morning, everyone.

Joining me are Mike Johnston, our Chairman and Chief Executive Officer, Don Stebbins, our President and Chief Operating Officer, as well as Jim Palmer, our Chief Financial Officer.

As Judy said, after we get done with our formal remarks we'll turn it over to Q and A. I with that I'll kick the call over to Mike.

Last month we laid out our three-year plan during the auto show in Detroit and shared with you what we call our road map to success.

The plan addresses the ongoing need to improve our operations and we are taking a number of necessary steps to create a sustainable success story.

This includes executing a sustainable business model with our focused strategy on our three core product areas where we already have global leadership positions.

While we believe the plan we've laid out is both aggressive and realistic we are looking at every opportunity to accelerate it.

As we know this will lead to a more rapid improvement in our operations.

In addition to restructuring, we expect to improve our operations through continued diversification of our customer base, we have a large and growing position with the Asian OEMs, Hyundai, Kia, and Nissan combined for more than $2 billion of our 2005 revenue, and we are well positioned to grow our business with these key customers in the coming years.

We are also strengthening our core business through a focused and disciplined allocation of both capital and human resources.

At the same time we are enhancing our global footprint, improving it from already competitive position it's in today to even better positions in cost-competitive countries.

All of this will lead to value creation, which I believe in time will be recognized in the marketplace.

We will create value for our customers, our shareholders, our bond holders, and our talented and committed workforce.

We'll do it by reducing our cost base through restructuring and other operational improvements and by improving our cash flow.

Turning to the highlights of 2005, our net loss narrowed year-over-year.

This was driven by the gain on the Ford transaction.

Cash flow did improve nicely over last year and Jim will take you through in that detail.

Our outlook for 2006 continues to show significant year-over-year improvements.

We're looking for positive EBIT-R, which has now been raised to reflect the lower depreciation and amortization resulting from our asset impairment.

And we are affirming our guidance of $50 million of free cash flow.

We have a solid multiyear plan that we fully expect will lead to year-over-year improvement in both EBIT-R in 2006, 2007, 2008 and beyond.

And our customer diversification continues as we are growing our business with a number of strategic customers, particularly with the Asian OEMs and DaimlerChrysler.

Don will take you through the specifics, but I wanted to highlight some of the actions we have taken recently as part of our three-year plan.

We have reduced hourly employment levels through buyouts.

For the fourth quarter, we improved our working capital performance.

We continue to win important new business as evidenced by the recent Chrysler announcement and we are adopting more cost competitive programs while still providing a level of benefits we feel is appropriate for an $11 billion tier 1 supplier.

We have made revisions to US salaried benefits, including to OPEB and pensions while also addressing active salary healthcare and implementing other benefit changes.

We are also moving toward more competitive European pay and benefits which includes the German labor agreement covering both hourly and salaried personnel.

We expect improvement in our 2006 results.

Our new business backlog for the next three years totals $1.5 billion.

Contained in the backlog is solid growth with the Asian and European OEs, partially offset by declines in our North American sales to Ford.

We expect sales with the Asian OEs to increase about $1.5 billion over the next three years.

European OEs are expected to grow by about $500 million.

Sales to Ford North America are expected to decline by about $900 million, decreasing to 14% of total sales by 2008.

For Ford North American production, we've used an estimate of 3.15 million units, and we expect our content per vehicle to decrease for Ford here in North America as well, reflecting programs that have been sourced to other suppliers.

This production level is below Ford's recently announced targeted production capacity for North America.

The backlog includes only a small portion of the Chrysler 2009 model year light truck program that has received a good deal of press coverage.

While we can't provide extensive details at this point we're very excited about the program.

It's an extremely significant program for us and for DaimlerChrysler.

We expect our backlog will increase in the future as the dampening from the overall decrease in Ford North America business, resulting from our recent transaction diminishes over time and our new business wins with other customers continue.

Turning to the financial results for the fourth quarter and the full year, we posted net income of $1.35 billion for the fourth quarter, and a $258 million loss for the full year.

These results include the $1.8 billion gain on the Ford transaction and $1.5 billion of asset impairment.

For the fourth quarter, as expected, Ford product sales were less than half of our total and Ford North American sales were 24% of the total.

EBIT-R for the full year came in a little lighter than our previous projection, primarily due to some end of the year commercial agreements and some selected European plant performance.

Free cash flow was more than $30 million better than expected, and our recent actions have begun to improve our recent results.

Now let me give you a little insight on our outlook.

As I noted earlier, we are looking at every opportunity to accelerate our multiyear action plan.

Our entire team is engaged in making sure that we are taking the right actions, we're executing quickly and efficiently, but without impacting our customer needs or commitment to quality.

We are affirming our outlook for earnings and cash flow.

We are raising our EBIT-R to reflect the lower D&A in holding free cash flow guidance to $50 million for the full year.

We continue to project year-over-year improvements again in 2007 and in 2008.

Our three year Road map is driving value and sustainable performance, and I will turn the call over to Don who will provide additional details on our operations.

Thanks, Mike.

In January, we provided our outlook for significant improvement from 2005 pro forma results to full year 2006 projected EBIT-R and positive free cash flow.

Following that presentation there were a number of questions surrounding the outlook versus the fourth quarter run rate.

While simply multiplying our fourth quarter 2005 results by four can be done, there are a number of issues with using such an approach.

First, there is the normal seasonality factor.

Second, as Mike mentioned, and Jim will discuss in additional detail, our fourth quarter 2005 results did contain some expenses that are not likely to repeat themselves at the same levels in 2006.

Third, given our guidance for 2006 revenue, and percentage of sales from customers other than Ford, we expect about $0.750 billion of additional non-Ford sales from the implied run rate in the fourth quarter of 2005.

Additionally, a number of actions that we've taken will have a bigger impact going forward than they did in the fourth quarter.

These include our benefit changes and our announced restructuring items.

And finally, we plan on, and are implementing, additional restructuring actions to improve our operations in 2006.

This slide highlights the five broad areas of focus that will bridge the gap from our 2005 fourth quarter pro forma results to our '06 guidance.

These five areas of focus include improving our normal base operations by eliminating unnecessary costs in each of our factories, and across the entire value chain from our suppliers through to our customers.

Right-sizing our engineering and SG&A staff to better align with our business.

Improvements in these areas include increasing the leverage of low-cost locations, revising contracts on purchased services, reducing staff personnel levels in line with our priorities, and achieving savings from the benefit and compensation changes that Mike reviewed.

Another major focus is on the 23 plants that we identified in January that require fixing, selling, or developing other plans to improve our financial equation.

Finally we have a heightened focus on all factors that impact our free cash flow.

We had a strong finish from a cash perspective in 2005.

Jim will show why we believe there is significant further opportunity in working capital by focusing on our DSOs, our DPOs, as well as our inventory turns.

Increasing EBIT-R, improving our working capital, and reducing capital spending will continue to drive improvements in free cash flow in the years to come.

As slide 9 shows, many actions have already been implemented and or are being implemented.

In the fourth quarter of last year we reduced headcount by over 1,000 employees in the United States, Europe, and Mexico.

We exited our loss making joint venture in Europe.

As Mike mentioned, we announced changes to our U.S. salaried benefits, making us more competitive in the industry.

Additionally, we engaged some institutions to assist in the disposal of several non-strategic assets.

In the first six weeks of 2006, two large plants transferred to Ford Motor Company resulting in over 800 Visteon employees becoming Ford employees.

We also reached agreement with our German labor unions to reduce both salary and hourly labor costs approximately 13% effective January 1st.

A couple weeks ago we creased production -- ceased production in a couple of plants.

As part of our agreement with Ford in Europe we transferred 88 employees to Ford and expect to easily hit our original plan of 100 by the end of June 2006.

Slide 10 provides a high-level overview of the 23 facilities we have identified to focus on during our restructuring.

While we won't specifically identify these plants, as I just mentioned, through the closure of the two North American plants, the announcement of the third and the exit of the European joint venture that we exited, we've completed four of the 11 actions identified and four of the six that we expect to close in 2006.

As discussed in January, of the 23 facilities, we were focused on fixing five underperforming yet strategically important plants through the application of Lean production methods, Six Sigma problem solving, better material purchasing, and better utilization of make versus buy alternatives.

Additionally, there are six facilities that are not strategic and will be sold or partnered.

We'll not discuss any details until agreements have been reached.

Then there are the dozen or so facilities where fixing or selling does not appear viable, and as a result, we're currently working with all of the necessary stakeholders to implement our plans.

Of these, about half are currently manufacturing strategic products and will transfer production to other more competitive Visteon locations.

It is important to note that as a part of last year's transaction with Ford, an escrow account was established with the intention to fund these actions.

Our global manufacturing and engineering footprints are extremely competitive today with a strong mix of locations and competitive cost regions as well as others that remain close to our customers in order to ensure excellent service levels.

We continue to improve our footprint by launching new facilities around the world with new sites in China, Slovakia, Mexico, and the southern United States.

In the fourth quarter of last year, we also opened our new Shanghai engineering and technical center.

As we work to reduce our engineering and SG&A costs we continue to review the cost drivers of program rationalization, which is eliminating spending on low return programs or low value-added processes, and people productivity, which is ensuring that we have the optimal mix of people, skills, and tools and ensuring that we're performing the right functions in the right locations.

And by following this process and expanding our already solid footprint, I'm confident we'll achieve the necessary savings.

In addition to our restructuring savings and our engineering and SG&A right-sizing, there are a number of operational areas that are targeted for improvement.

First we need to continue to grow the top line and grow it profitably.

We have a solid backlog of new business coming on stream over the next three years.

The margins for most of those programs are solid, and we're focused on fixing a few programs where the returns are not appropriate.

As you may know, both Jim and I review every new program quote to ensure that we have a disciplined approach towards new business pursuit.

We're also intentionally focused on inefficiencies.

In 2005, premium freight, material obsolescence, scrap, and premium launch costs cost Visteon approximately $100 million, so there's clearly room for substantial improvement in 2006 and beyond.

We're also continuing to work with our labor partners around the world to ensure that our plants are the most competitive so that we can continue to win new business.

A great example of this recent agreement is our agreement in Germany which will save us approximately $20 million in 2006.

And as we talked before, we continue to implement benefit changes to ensure that we will remain competitive.

On slide 13, while cost is important, and significantly improving our financial performance is our first priority, we do continue to focus on servicing our customers and developing and delivering innovative products to help them succeed in the marketplace.

On this slide we pictured a few.

Our advanced lighting system for the Corvette, our family entertainment system where we have an exclusive relationship with Nintendo, our next-generation environmentally friendly compressor, and our broad array of manufacturing technology like seamless air bags and two-color one-shot molding surfaces.

I'll now turn it over to Jim.

Thanks, Don.

Before I go through the results for the fourth quarter I thought it would be really helpful spend a few moments and talk about a few of the notable items that occurred in the quarter.

As expected, we realized a gain on the Ford transaction of a $1.832 billion, when combined with the asset impairments taken in the second quarter this year that results in a net gain on the overall Ford transaction of $912 million.

Also during the fourth quarter, we took a noncash asset impairment charge of $335 million to impair assets on a number of product lines, produced principally in the United States and in the United Kingdom.

At that time reason we took these impairments is not related to our future anticipated restructuring plans, many of these operations are addressed in those multiyear restructuring plans.

During the quarter we also recognized $28 million of restructuring expense for severance and other restructuring related costs.

Conversely, we also recognized $51 million of reimbursements from the Ford escrow account.

This amount includes those costs incurred in the fourth quarter as well as other costs from prior periods as the final agreement allowed us to reach back for eligible activity since the MOU date.

Of this amount, $24 million was actually received and cashed during the quarter.

Finally the fourth quarter had the impact of the unwind of receivables and payables associated with the businesses transferred to ACH.

As we said before, the approximate -- or estimated impact of this drag on working capital was $300 million in the quarter.

So, many of you will likely note that our actual cash performance was much better than it looks like on its face.

The next slide looks at product sales for the fourth quarter.

It does exclude any of our service-related revenues related to the ACH transaction.

And non-Ford sales totaled $1.4 billion for the quarter, and although down on an absolute basis versus the fourth quarter of 2004, it is actually up on a pro forma basis on a year-over-year basis.

The fourth quarter of 2004 also included about $38 million of sales to another tier 1 supplier who filed for bankruptcy in Europe during during the second quarter of 2005.

After that bankruptcy filing, the purchase order was converted to a Ford PO, essentially reducing our non-Ford sales.

So when you adjust the 2004 pro forma non-Ford sales for this change, you end up with about $1.3 billion as non-Ford revenues on a pro forma basis for 2004, resulting in a 6% pro forma year-over-year increase in non-Ford sales.

We do expect our full-year 2006 revenues for non-Ford customers to increase by about $0.750 billion over the fourth quarter 2005 run rate.

Let's look at cost of sales on the next slide, which are decreased about $1.83 billion on sales decrease of slightly under 2 billion year-over-year.

Gross margin decreased year-over-year by about 100 basis points, and that can be explained by a number of factors.

We have been growing our interiors and integration content business.

And as we have discussed before, the margins associated with this type of revenue is lower than the margins we have on products we manufacture, although the capital required is less, and the asset and inventory turnovers are both better.

We estimate that this affected our fourth quarter margins by about 20 basis points.

Warranty and recall costs and lump-sum commercial settlements depressed margins as well on a year-over-year basis.

And then finally, European operating performance also declined.

This has been somewhat of an issue throughout the year, but now that the Ford transaction is complete, it becomes more evident in our consolidated results.

On the next slide we take a look at G&A costs on a year-over-year basis.

They have declined by $69 million, reflecting in part the employees and services provided to ACH.

IT spending was lower year-over-year, and we had savings related to lower OPEB and pension costs as well.

Offsetting that were some transition costs associated with the Ford transaction that we do not expect to repeat on a go forward basis.

For the full year of 2006, we expect to see about a 50 basis point reduction from our fourth quarter SG&A rate, reflecting additional cost reduction actions, employee benefit changes and right-sizing activities.

So with that, let's take a look at after-tax results on the next slide.

For the quarter, net income was $1.338 billion, including the after-tax gain on the Ford transaction and the asset impairments.

After adjusting both years for the special charges and gains included in them, fourth quarter '05 operations were about $35 million worse than that in '04.

This negative performance is largely explained by the unanticipated lump sum commercial settlements in European performance with volume declines and normal pricing give-backs being largely offset by cost improvements.

Interest expense was up $10 million year-over-year reflecting higher borrowing costs.

We also saw a decline in equity from affiliates due to increased industry pressures and losses on start-ups of a couple of new joint ventures.

The big change in income taxes is that we retained -- or returned, rather, to a more normal level of tax expense, $23 million for the quarter, compared to a benefit last year.

Turning it to the full year, our net loss of $270 million was significantly lower than the $1.5 billion loss in 2004.

Both years did have significant special charges and gains.

Although we could spend a whole lot of time talking about the comparison of the historical 2005 and 2004 results, they are, as would you expect, significantly affected by the ACH plants.

Some of the big drivers in those changes year-over-year would be lower Ford North American production, and other one-time actions such as the second quarter buyer bad debt that we referred to earlier, the pricing actions that incurred in the fourth quarter, but rather than do that I thought what made more sense was to spend time on our 2005 pro forma results on the next page.

This slide does show those both reported results, which, as you know, includes the ACH transactions and essentially, therefore, the plants, those related plants for the nine months that we owned them, compared to pro forma results as if the ACH transaction occurred at the very beginning of the year.

It does result in a significant change in the business.

Ford concentration, both on a global and North American basis declined significantly while the basic business represented by EBIT-R and free cash flow is improved.

As you know, we have a multiyear plan to restructure the business.

These activities will reflect bottom line reported results, so in addition to reported bottom line results we have also included a metric which we're using as EBIT-R to measure the basic health or the performance of the business.

And, of course, the obligatory reconciliation of net income to non-GAAP measures such as EBIT-R and free cash flow are included in the appendix and press release.

During the Detroit auto show we presented our estimates for EBIT-R and free cash flow for 2005.

As compared to those estimates, EBIT-R is about $39 million worse while free cash flow is about $32 million better.

Essentially reflecting the concentration or focus on working capital management that we've talked about already.

Contributing to the miss on EBIT-R for the fourth quarter are essentially the commercial lump-sum settlements that I referred to European performance, and some warranty recall costs.

Let's turn to free cash flow for the year.

It was negative $168 million, which was a $240 million improvement over last year, reflecting lower capital expenditures year-over-year with essentially flat cash flow from operations.

As I mentioned before, cash flow from operations does include the unwind of receivables and payables we retained on the businesses that we sold to ACH as of October 1st.

That contributed a $300 million drag to cash flow from operations.

I should also point out that the unwind of the retained receivables and payables, although included in operating cash flow, the sale of inventory associated with the ACH transaction is not included in operating cash flow.

It is treated as a sale and is reported as an investing activity rather than an operating activity.

And finally, cash and debt are both improved over -- or cash and net debt are both improved over 2004.

The next slide summarizes our estimates for 2006 compared to the 2005 pro forma results that we just reviewed, and to our prior 2006 estimate that we shared in January during the Detroit auto show.

The 2006 estimates are essentially unchanged, although we have increased the EBIT R estimate to reflect the lower depreciation resulting from the 2005 asset impairment.

We expect product sales to increase about 4% year-over-year, so to about $11.2 billion, and sales to Ford as a percent of total product sales are expected to decline by about 400 basis points, resulting in a $400 million decline Ford sales off the fourth quarter run rate.

Conversely, non-Ford sales are expected to increase by more than $700 million off the fourth quarter run rate.

On the next couple of slides, I will go into a little bit more greater detail for our walk on 2006 EBIT-R and free cash flow.

I know there's been some questions on how we're going to achieve the improvements in EBIT-R that we have in our outlook.

This chart is a simple walk from the pro form na 2005 EBIT-R that I just reviewed with you, to the outlook for 2006.

As we shared with many of you at the Detroit auto show, we expect our restructuring plan to generate $60 million of savings in2006.

Pension and OPEB are expected to decline by about $40 million.

We have already implemented these changes.

We don't expect the 2005 bad debt resulting from that tier 1 bankruptcy to be repeated in 2006.

D&A is going to be lower by about $25 million, resulting from the asset impairments, and finally, both Mike and Don talked about the labor agreements that we have executed in Germany which would reduce our costs by about $20 million.

And then we do expect some reduction in product recall and warranty costs which were abnormally high in 2005.

And then finally, that leaves only about 14 million to $44 million of operational improvements to be achieved from all of those different activities that Don talked about, as well as growth in the new business volume.

So, with that, let me turn to 2006 free cash flow.

And as we have said, we expect it to be positive $50 million for the full year of 2006.

Again, another topic of discussion, so just to be clear, and set expectations, we define free cash flow as cash flow from operations less capital expenditures, and again obviously we have the reconciliation from GAAP to non-GAAP measures in the appendix.

Having said that, we expect EBIT-R, as I just shared with you on the prior slide, to be in the range of 45 to $75 million, D&A should be about $480 million, and capital expenditures about $450 million.

Cash, taxes, and interest are about $10 million less than actual expense, and having said that, I do think there's also an opportunity to further reduce cash taxes.

But we haven't reflected that in the forecast at this point.

We expect accruals to be a positive factor for the year.

Escrow reimbursement, employee-related accruals and pension and OPEB and ACH reimbursements also contribute to the positive accrual factor for the year.

And then finally, trade working capital We expect it to e contribute.

We have bench marked our competition as shown in the charts above, and looking at the total global sales outstanding, on one hand we look relatively competitive.

However, there are significant differences as we look across our customers and regions.

Notably, our non-Ford DSOs are north of 70 days and above any of our competitors.

Europe and Asia are the regions with the greatest disparity between us and our peers and represent one of the biggest opportunities.

On DPOs, we're about in the middle of the pack, but again, regional disparity exists, and we believe this represents an opportunity for to us more effectively match receivables and payables.

The best of our peers have a spread of at least five days between DPOs and -- positive spread between DPOs and DSO.

We're not there.

So that essentially is the basic opportunity.

As the chart illustrates, a day of both DPO and DSOs are worth about $30 million.

A day of inventory turns is worth a -- a one-time turn, rather, of inventory, is worth $20 million.

So, again, we see a significant opportunity in a couple of days improvement in DSO and DPO in our forecast.

So why Visteon?

We believe we have a very solid position globally with a diverse customer base and expanding presence with growing OEs.

We expect to have substantially more sales with the Asian OEs than we had.

We have a strong product portfolio, and we're enhancing it on a go forward basis.

Our leadership team is committed to delivering operational improvements, and most importantly, our annual incentives are tied to achieving those results effectively both EBIT-R and free cash flow.

We have clear restructuring plans to improve our manufacturing and engineering footprint as well as our operating results.

As we have reiterated today we do expect significant year-over-year improvements in EBIT-R and positive free cash flow in each of the next three years with opportunities to further improve trade working capital.

Our goal is to drive value and sustainable performance, and with that, Derek, I'll turn it back over to you for questions.

Judy, if you can please remind people how they get in the queue for the question and answer, please.

Yes, sir. [OPERATOR INSTRUCTIONS].

Your first question comes from the line of Chris Ceraso with Credit Suisse.

Thanks.

Good morning.

Good morning, Chris.

A few items.

One that seems pretty important is this fourth quarter commercial settlement.

Can you give us any more clarity on that?

That's a pretty big chunk of what your expected EBIT-R was going to be so how should we think of that as it relates to expectation for improved profitability in '06, '07, '08?

Chris this is Mike.

I would categorize it as a look backwards on a kind of normal end of the year commercial settlement and not reflective of a go-forward agreement.

Is this something having to do with the agreement with Ford, or is this kind of normal course of business year-end price changes?

I wouldn't call out which customer, frankly, but I would say it's fairly normal, and in a negotiation like that, the effect in the fourth quarter was a little harder than what we expected, but then there's always trade-offs as you make that negotiation.

I would just again reiterate that it was a retroactive, or a go-backward adjustment and not reflective of '06 and beyond.

Okay.

I guess that brings me to the next question, which is on the walk to 2006 on the EBIT-R.

I didn't see anything there for price, those kinds of changes.

Maybe that's baked into your net operational.

I also don't see anything on the volume and mix.

Can you tell us what you're expecting or assuming in terms of volume and mix and pricing in this walk?

On the commercial side, Chris, this is Don, that's in that net operational bucket down at the bottom.

It's all wrapped into there.

As well as, as Jim mentioned, the new volume and the mix impact.

Okay.

So all that stuff you expect to net out to the positive.

Yes, that's correct.

Okay.

And then I guess maybe this is part of the same thing, Don.

You sort of quickly ran through some items that added up to about 100 million of inefficiencies.

I'm guessing you expect to realize some of that to recover these other items and get to that net positive operational.

Can you take us through again what some of those items were that added up to 100 million of operational inefficiencies?

Sure.

Premium freight, I'd call them premium launch costs, scrap and obsolescence totaled over $100 million in 2005.

Was that associated with a particular launch that didn't go well that you had to have premium freight or was that across the board?

Across the board.

And then I guess the last thing on the cash flow, you highlighted that it came out better than you were expecting in Detroit.

You thought it was going to be $200 million negative.

It came out $168 million negative.

And you were saying that it would improve by 250, which got you to the 50 million positive.

You're still looking for the 50 million positive.

Was part of that improvement just timing on the working capital?

So, in other words, you picked it up in the fourth quarter where as you thought you were going to get it in the first quarter, or is it just conservative and really we might see better cash flow?

Chris, you might argue that but frankly $32 million of improvement in cash flow, I do know it came from a really concentrated effort to improve working capital or cash flow.

Frankly, I expect similar efforts in '06 that will lead to those -- that $50 million of free cash flow improvement.

Free cash flow for 2006.

So I don't expect that $32 million to come out of '06 results.

Okay.

But you're still -- you had been expecting an improvement of 250 from '05 to '06.

If you still were baking in that improvement of $250 you'd be at 80 million of cash flow for '06.

Yes, but -- again, a lot of puts and takes.

We're holding with our $50 million of free cash flow.

You could argue that EBIT-R came in less and it also is going to affect 2006 from a starting point.

We don't think that's the case.

When we look at all the pluses and minuses, we feel very good about our $50 million forecast for free cash flow for 2006.

Okay.

Terrific.

Thank you.

Your next question comes from the line of Michael Bruynesteyn with Prudential.

Could you clarify this EBIT-R definition in the 102?

Is that a clean number?

Is that adjusted for the 28 million restructuring and the 51 million of payments, or is that subsequent to that, or separate?

I would characterize it as a clean number.

It takes out the restructuring costs, it takes out the $51 million of reimbursements on a full-year basis.

All of that stuff nets out to 0.

Okay.

And then in terms of some of these drivers going into '06, warranty and recall, if that was an unexpected head wind in the fourth quarter, is that just reversing in '06, or could that continue to be an issue?

Why should that necessarily turn around?

We don't expect it to continue in '06.

We think they were isolated incidences that occurred during 2005.

Actually, product recall and warranty costs were up greater than that for the full year, and so even though we are expecting a return to more normal, we're only looking at the unusual one-time items that we could really associate with those isolated incidences.

Okay.

Great.

Finally, is there any change in terms of how you're going to spend your planned restructuring funds and in terms of the timing of that and the timing of the SG&A and engineering right sizing, or is that still what you've been thinking of since --

The basic plan is still the same.

The 23 plants are still the same.

The activities that we had associated with the 23 plants, as well as any engineering and G&A activities, they're all the same.

As Mike mentioned, we're looking for every opportunity we can to pull things forward.

All right.

Thank you.

Your next question comes from the line of Rod Lache with Deutsche Bank.

Good morning, everybody.

Good morning.

Couple things.

Just wanted to just confirm, did you say that you were making a positive volume and mix assumption for Ford in your '06 expectations?

Just seems a bit kind of out of --

what we said is that our forecast for Ford North American production was at 3.15 million units, which is down from their actuals for '04, and I believe down from their targeted forecast for -- I'm sorry, I said '04.

For '05.

And their targeted forecast for '06.

We are, however, projecting increased non-Ford revenues.

Okay.

And on the 500 million European growth that you have, 1.5 billion Asia, offset by the 900 million Ford decline, can you just talk a little bit about where the non-Ford -- or what businesses are experiencing the growth from the non-Ford and what types of businesses -- climate, electronics, interiors, are experiencing the declines from the Ford?

Okay.

In terms of the backlog, about 45% of the backlog is interior business, about 45% is electronics, and about 10% is climate.

As you look at the interior business, some of the big wins in there clearly is the DaimlerChrysler win.

We also have wins, large wins with Renault and Hyundai.

In terms of electronics, that is spread across a number of customers.

BMW in Europe, General Motors here, Tata Motors in India, so it's across all of our electronics products as well as across all customers around the world.

is it weighted that way in '06, or is it somewhat disproportionate over time?

I don't know the answer to that.

We could check it it out for you.

Rod, I'll just tell you that it's probably proportionate.

Over the last few years, 85, 90% of all of our wins were in those three product categories.

And over that period of time, they were spread out pretty evenly.

I think we reported that previously.

So in any one year you may have electronics higher than climate or something like that but over the three-year period, it's been pretty evenly spaced across the three product lines.

Okay.

And on the cost savings, could you refresh us on how much you expect to spend and how much drawn from the escrow in '06 to achieve the 60 million restructuring and the 14 to 44 operating performance, how does that compare with historical trends, efficiency gains and that sort of thing?

Rod, what we had in our plan, restructuring plan that we shared at the Detroit auto show, was about $180 million of cash costs in '06 for restructuring, all reimbursed from the escrow account.

Frankly, some of those items occurred in '05, so I do at this point, would expect that cash to be a little bit less, unless we're really successful inbeing able to move things forward.

We also, in what we shared with you in Detroit, had an $80 million noncash restructuring cost estimate for '06.

Essentially that will be now reduced because of the asset impairments that we incurred in the fourth quarter here of '05.

Our estimate now for those noncash restructuring costs in '06 are about $30 million.

I'm sorry, I forgot the other part of your question.

In terms of the last question, that kind of net bucket at the end of the walk there, essentially that covers material cost savings, plant efficiencies, commercial resolution items or productivity agreements with our customers, cost increases, then we've got the volume/mix story in there as well.

So if you looked at it based on history, we're very comfortable that we'd be able to beat that, but you do have that volume/mix piece in there as well, so that is going to play a role, and we're just going to have to see how that plays out over the year.

Okay.

Thank you.

The next question comes from the line of Darren Kimball with Lehman Brothers.

I had a question on the EBIT-R walk from net income to EBIT-R.

You're adjusting for interest, taxes, then the impairment and then the gain, and I'm just -- which line item is the adjustment for the restructuring cost and the favorable reimbursement in, to get f from the 1.338 to the 1.02?

What page?

This is page 4 of the press release.

The net income to EBIT-R walk.

It's just a follow-up basically to Mike Bruynesteyn's question.

Well, if you're talking about the quarter, it's just not in there.

If you're talking about the year it nets out to 0.

So the 102 does not have the benefit of greater reimbursements than costs.

Okay.

Because your income statement, you know, walks to 1.338.

I'll follow up on that one.

Let me ask a different question.

Maybe I missed it, but the European performance issue that you referenced, did you explain that?

Other than to say it was unexpected performance problems in Europe, we didn't go into any more detail than that.

Okay.

But it's just a reference to operating issues?

Right.

Darren, we did say in selected operations.

It's not across the continent.

There are a few operations that performance was less than what we expected in the fourth quarter.

Okay.

Question on cash flow.

If you look at the fourth quarter, and you exclude the ACH effects, you really had, you know, phenomenal working capital performance, and I was just wondering if you could talk a little bit more about what accounts for that.

And I know that you said that the 2006 will not suffer from it, but will the first quarter -- and really the question is, since we don't have a lot of experience with the new company, I mean, is this suggestive of what the new seasonality is going to be, sort of working capital performance in 2006 is going to be heavily loaded in the fourth quarter?

No Darren, I think basically what's affecting positively, as you said, the working capital performance, or cash flow performance, is really the increased focus that we have on better management of working capital.

That better management of working capital is reflected in those DSOs and DPOs that we see on the chart that's in the presentation.

And even with that better performance, we're in the, at best, middle of the pack.

So there is still a tremendous opportunity to improve our performance in both DSOs and DPOs.

We've recognized the importance of free cash flow to our future, we've incentivized our people by changing the annual incentive with essential 50% of the annual incentive being tied to achieving that $50 million of free cash flow for 2006.

So I think with incentives aligned, performance will improve.

Darren this is something that we started kind of middle of 2005, and is just starting to take hold in terms of getting the information out to the customer groups and to those guys responsible, and I think we're all very pleased with how it's going.

At the end of the year, we had Senior Vice Presidents calling around, trying to collect money from our customers in the $500,000 to $1 million levels.

And it is starting to change, and so I think that, yeah, there is opportunity out there to continue to improve this.

I think most of the improvement that we saw at that time year-end here, or in the fourth quarter, was a -- was a North American-based number.

And as we get that message out to Europe and work with tier peen guys and make sure that they have the right information, we'll see improvement there as well.

Okay.

And lastly, I just wanted to ask about the commercial performance issue.

I mean, I just really want to understand what that -- what that fourth quarter surprise says about 2006.

In January, you know, you were still, you know, negotiating with your customers about price, and obviously, you know, didn't turn out well, and what would prevent similar surprises in 2006, I guess is my question.

Darren, Mike.

The commercial agreements -- it's not unusual for the negotiations to go on right at the end of the year.

In fact, depending on the customer, it can be actually the standard that some folks work to.

In this particular case, we settle something in'05, and it does not have an effect on '06.

And I don't want to go into the impact or the details of the commercial agreement, but the adjustment was won, and it was a negotiation -- it was one where we elected to make a decision that would impact '05.

And we got something for that decision going forward.

Beyond that, I don't want to -- I can't discuss the terms of any commercial agreement with any customer, but there was a trade-off in that settlement.

So we were surprised in '05, and we made a decision that affected '05, and we get a benefit somewhere else.

And so I would look at it as not reflective of anything in '06.

I got it.

Thanks for the color.

The next question comes from the line of Jon Rogers with Citigroup.

Good morning.

Most of my questions have been answered.

I just wanted to get, on slide 30, just a little more information.

It looks like on the walk, interest expenses is going up, as well as the provision for taxes.

Why is that specifically, even though -- I guess the GAAP net income is essentially the same.

Why is the interest expense going up?

Well, Jon,, we've been downgraded throughout '05.

Our current financing agreements have us at LIBOR plus 450, which is a substantial cost increase from where we started in '05.

So it essentially is recognizing the current interest cost in our borrowing agreements versus what we had for a weighted average during '05.

Okay.

Then the provision for taxes, that's not necessarily -- is that a jurisdictional thing, or is that just the losses is lower, so taxes go up?

No, it really is a jurisdictional thing, and as we said, the fourth quarter tax expense of 23 was more of a normal run rate type tax expense than what we've had in some of the other quarters this year, which had some resolutions of our tax settlements with the various tax authorities, and or benefits.

Therefore, recorded.

So essentially the fourth quarter is kind of a more normal run rate that we would expect to see in '06.

Okay.

Then just on the working capital efforts, is it fair to say that DSO -- it would seem to me that would be the hardest place to make improvement, just because of the terms with your customers, and most of the improvement that we'll see will be in the payables and especially on the inventory line.

Is that a fair assumption?

-- no, I don't think so.

I think there's improvements that can be made in DSOs.

Obviously our customers establish the terms.

They are essentially the same for all the suppliers that serve those individual customers, and again, our data shows that we're not as good as our competitors who have, again, the same terms from the OEs that we have, largely.

So we do need to do a better job of making sure that we follow up on any disputed items or uncollected items, get them resolved as quickly as possible.

Not to discount that I think there are improvement opportunities in DPOs and inventory turns as well but I don't want to leave with you the impression that it's all coming from inventory turns or DPOs.

I really think there's an opportunity in DSO.

Your next question comes from the line of John Murphy with Merrill Lynch.

Hey, guys.

Hello, John.

if we take a step back and think about the Company three years, and forget about all the noise that we have in the short run and all these numbers that are bouncing around, and we get into a land that's not EBIT-R, maybe it's a land that is regular EBIT, what do you think the operating margin or the EBIT margin of this company could be that far, three years out?

Interesting to talk about the land of EBIT-R, but we believe that all the steps we're taking, in terms of being a global leader in the three product categories, and being, frankly, one of the leaders in the industry in those, as well as the movement into the cost-competitive footprint in manufacturing and engineering capability, we think that we deserve to be at the leading edge of the returns of our peers.

We're clearly not there at this point in time.

But when you get out of the noise of all the restructuring activities that we have to take, and we all though we have to do that, and there is going to be noise around that and it will depend on how fast we can accelerate certain is actions.

When you look at the footprint, the business wins we're getting, the geographic of our business, a third of our revenue in each product category in the world I think we have a terrific balance as a corporation, and I believe that balance, that competitive footprint, new business wins we're get willing position us to be at the leading edge of the returns of the automotive tier 1 suppliers in the world.

Step back and maybe getting into stuff that's happened in the fourth quarter and looking at slides 15 and 16, it looks like the no-Ford business increased pretty significantly as percent of the total but the gross margin was down over 100 basis points.

Is that swing -- just get a little bit nervous there that that non-Ford business isn't carrying very good margins like the Ford business.

Can you comment on the margins between the non Ford and the Ford and what you expect going forward?

Yes.

Some of the explanation is the fact that there's quite a bit of systems integration work that came on in the non-Ford part of the business.

And as Jim explained earlier, the margins on that are typically less.

The inventory turns and investments are better, and so actually the business is good but the margin number could be less.

And I think when you look at the types of wins we've gotten, and as Don pointed out, the interiors backlog and interiors business growth that would explain that level of change in the margin line.

So as this non-Ford business ramps up it should become more profitable in the future?

Is that what you are saying?

I think the discipline that Don and Jim bring to the review process alone is already having an impact on the margins and the backlog and the new business wins.

And there's also, I would say, a heightened emphasis on margin improvement on product in launch, so post-win, pre shipment, and there's a lot of activity in the margins on that product as well or on those orders as well so I feel real confident about the ability to move the margins up.

and just thinking about the restructuring, your new cost structure, as we move forward, do you think that's going to allow to you bid more competitively on certain businesses maybe in the interiors or the electronics area, and accelerate growth?

I think -- I think we bid competitively today.

I think there's an opportunity to enhance the margin of the business because of our footprint.

Okay.

Then just one last question.

Ford's restructuring announcement, you have that baked into everything here I would assume.

Any other downsizing baked into your thoughts going forward?

Well, as we communicated, we're using lower build numbers for Ford than Ford is using internally for themselves.

So I think we're preparing for, certainly realistic positions or volumes on a global basis.

So I think we've adjusted our outlook for all of our customers based on what we believe will be the reality.

We have some customers, frankly, who have consistently exceeded their projections on the projected volumes.

And so we have to take that into account as well.

I think we've adjusted for everything that we can possibly predict with some degree of realism.

I think we've taken it into account when we laid out the three-year plan.

Thank you very much, guys.

Ladies and gentlemen, we have time for one more question.

And that question will come from Scott Merlis with Thomas Weisel Partners.

When we look at Visteon, you approach your normal EBIT margins or returns probably towards the end of the three-year plan.

Should we think of like 2009 or 2008 as approximating normalized earnings and returns?

Is that the theme here, the underlying theme?

By the '08-'09 time frame, much of the restructuring activities are behind us.

As we have said, we are projecting year-over-year EBIT-R improvements of kind of the 150 to 175-type range. '06, '07, '08.

With the restructuring activities being largely completed by '08, as planned.

Now, we're working to try to accelerate that.

Again, we would expect '09 improvements as well.

So as you said, when you get out into that '08, '09 time frame, the margins are essentially where the peers are, if not trending towards the upper end.

Will it be -- before, you mentioned the returns being towards the peers, maybe that is the better measure than EBIT.

Because I guess if you look at like an integrated cockpit solution that could have like great -- I'm guessing that could have great returns, but maybe lower than peer EBIT margins.

that's very true.

So like the seat business.

Right.

so when you look at all your growth products, is it fair that -- could it be that cash flow and returns could be at peers or better, but maybe EBIT and more exemplary than EBIT margins?

Yes, could be.

Again, the total volume mix, or product mix at that point in time will have an impact.

As we have said that interiors business or integration business has lower margins but less -- much less capital investment as well.

In terms of the mix, could you just review the mix of the 700 million, the non-Ford business, the electronics piece and -- percent?

Of the backlog, I'm not specifically speaking -- of the backlog, 45% is interiors, 45% is electronics, and 10% is climate.

Great.

Okay.

Thanks.

That's how we answered the question earlier.

Thank you very much.

Have a good day.

Thanks for participating in our call.

I'll be around the rest of the day to answer any questions you might have.

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

Thank you for your participation.

You may disconnect at this time.

Good day.