Visteon Corp (VC) 2006 Q2 法說會逐字稿

Good morning and welcome to the Visteon second quarter 2006 earnings release conference call. [OPERATOR INSTRUCTIONS] 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 like to now introduce your host for today's conference call Mr. Derek Fiebig, Director of Investor Relations for Visteon Corporation.

Mr. Fiebig, you may begin.

Thanks, Dennis, and good morning, everyone.

We had a little bit of a glitch there.

This is Derek Fiebig, joining me on the call today 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 Dennis said after we get done with our formal remarks we will turn it over for Q&A.

With that I will kick the call over to Mike, who will make a few brief remarks before Don and Jim take you through their specifics on the second quarter.

Thanks, Derek.

Today I will just make a few brief remarks before Don and Jim take you through the details.

As you can see from our release we had improved results in the second quarter and are increasing our guidance for this year.

We continue to make going progress on the implementation of our three year plan.

We are enhancing our global footprint by adding facilities in low cost countries and we are improving our base operations and our quality.

Our customers recognize our capabilities and our progress and are awarding us with significant new business.

We are only two quarters into a three-year plan.

There's a lot more work ahead of us, but I'm really pleased with the progress we have made and that we will continue to make.

Now I will turn the call over to Don to take you through the results.

Thanks, Mike, and good morning.

For the second quarter we posted another quarter of improved financial performance with second quarter results better than both second quarter of '05 and the first quarter this year.

We also completed our seven-year, $800 million secured term loan, which lengthen our maturities and decreased our borrowing rate.

And based upon our second quarter performance we have once again raised our EBITDA guidance for this year.

We continue to make progress on our three-year plan and our restructuring plans remain on target.

During the quarter our competitive global footprint was further enhanced as we started production at facilities in Turkey, Slovakia, China and a newly acquired lighting facility in Mexico.

Our customers continue to recognize the value we provide as we were awarded new business with diverse customers across all of our major product lines.

For the second quarter we reported net income of $50 million or $0.39 per share.

Net income improved $47 million, or $0.37 per share from the first quarter of this year and our EBITDA for the quarter was $119 million, which is $47 million higher than the first quarter and $152 million better than the second quarter of 2005.

Free cash flow was a source of $10 million.

This is an improvement of $127 million from our seasonally low first quarter use of $117 million.

So as you can see our financial results for the quarter provided both sequential and year-over-year improvement and we remain on track to deliver our commitments in our three-year plan.

Slide five.

As we've discussed, over the next three years the key to our success lies in our ability to effectively restructure our business, improve our operations and to continue to profitably grow.

As you know, our restructuring activities are well underway.

We are addressing our underperforming and nonstrategic assets.

We are taking actions to achieve competitive cost sourcing and an improved footprint for manufacturing, engineering and SG&A.

We've made some tough decisions that are showing results in our financials.

And we are also improving the business by working on our base operations.

This is pretty much just roll up your sleeves and find a better way to get things done and drive year-over-year improvement.

We are also aware that we need to grow our business.

Cost cutting and restructuring will bring to us to a certain level of success but in order to ensure long-term success we need to grow the business profitably in our core products.

Our customers realize the potential of Visteon, both now and over the long-term, and recognize the value we provide them through our product lineup.

And are backing up their belief with purchase orders.

Slide six provides a high level overview of the 23 plants that we have identified internally and are focused on restructuring.

From a timing perspective about half of the 23 locations are expected to be addressed in 2006 with another seven in 2007.

So far this year we have either completed or announced plant closure for seven of the 11 targeted locations in 2006.

Activities on those announced actions are progressing with no significant negative change in cost, schedule or savings.

The remaining four items for 2006 are plants where we have focused efforts on selling these nonstrategic locations.

For our largest sale activity we have narrowed the field of potential interested parties and are in the second round of discussions.

We have also engaged in discussions with labor.

And given acceptable resolution of their concerns, we would expect to reach a definitive agreement in the late third or early fourth quarter of this year.

Detailed plans for transitioning engineering and SG&A activities to low cost countries are also being implemented.

Slide seven shows the moves we made to enhance our global footprint.

We have opened a manufacturing plant in Dalian in China, which will produce air conditioning components for a variety of auto manufacturers in China and elsewhere in the Asia/Pacific region.

The 90,000 square meter facility is a greenfield plant capable of producing advanced and environmentally friendly compressors.

The plant will have more than 300 employees and a planned production capacity of 1 million units annually.

This is the second climate control plant in China and we now have more than 30 manufacturing facilities in the Asia/Pacific region located throughout China, Japan, Korea, Thailand, the Philippines, and India from which we serve global and regional auto makers.

We started production at our climate control facility in Turkey, which manufactures and assembles HVAC units and cooling modules for Hyundai.

The facility currently employees approximately 150 people and is expected to run at full capacity by October of 2006.

We also started production at our Nitra facility in Slovakia.

This facility manufactures interior and climate control products and gives us a manufacturing base to serve the rapidly expanding automotive market in Slovakia and Eastern Europe.

The Nitra plant supplies door panels for PSA’s new 207.

Later this year the facility is scheduled to begin producing climate control products for Kia.

We expect to employee up to 400 people in Slovakia when the facilities reach full capacity in 2007.

Additionally, as we mentioned last quarter, we've acquired a lighting facility in Monterey, Mexico, which has now been successfully integrated into our global lighting platform.

All of these steps help improve our manufacturing footprint and allow us to provide support for our global customers from competitive cost facilities.

There were a number of drivers in our year-over-year profit improvement.

The 23 facilities and the 18,000 master agreement UAW workers are no longer included in our results, which has led to lower overall labor costs.

But in addition to the ACH transaction, we have also taken our own steps to reduce our labor and salaried costs.

Depreciation and amortization are lower reflecting the ACH transaction and asset impairments taken in 2005.

And our OPEB and pension expense has been reduced through our changes to our plans.

And we also recognized a benefit in the quarter related to the post employment benefits for Visteon salaried employees associated with Rawsonville and Sterling.

During the quarter we also benefited from both material and manufacturing efficiencies.

And our SG&A was lower year-over-year.

Our team is focused on continuing to improve the operations and all levels of the organization are becoming more engaged.

Performance has improved and we are making solid progress but we are still not where we need to be and must continue to work on margin expansion.

Slide nine.

There's a lot of discussion regarding production volumes here in North America, but our results are no longer as dependent upon Ford's North American production as they used to be.

Some important points are in Europe, where our average content per vehicle with Ford is higher than our North American average, production was up versus the first half of 2005 and expected to be higher in the third quarter as well.

And although we've seen a decrease in Nissan's production here in North America so far this year, we anticipate that the worst is behind us in year-over-year declines.

Hyundai is on the upswing in terms of production with the Santa Fe and Sonata here in the U.S.

And with respect to Ford North America production was lower in the first half and they have announced further reductions in the third quarter.

However, we remain comfortable with our full year estimate for their production.

We also had several major launches in the quarter, we launched our air induction system and our premiere branded Boston Acoustics audio system on the Jeep Compass, DaimlerChrysler's first compact SUV.

We launched a new instrument panel and console on Nissan's redesigned Quest minivan.

And as I mentioned, for the Peugeot 207 we have a launch underway in Slovakia where we supply the door panels and lighting.

Our USB audio interface module launched on a wide variety of Volkswagen vehicles, including the Golf, the Jetta, the Touran and the Passat.

And we had climate electronics and interiors content on Ford's new generation Galaxy and the new S-Max vehicle, both of which launched at the Geneva Motor Show.

Also importantly we had some important new business wins.

As the slide on 11 shows, we are winning new business from a wide variety of customers across all of our product groups in every region of the world.

As a result of the successful launches with the Chrysler group for both air induction and AC lines, we have been rewarded with increased business in these areas.

We've also won a North American front and rear lighting program for the Chrysler group in the second quarter.

Our front HVAC module will be on an upcoming Ford model as part of Ford's global shared technologies platform and we have won significant business to supply a full thermal system for a future Hyundai Kia vehicle in the Asia/Pacific.

In addition we will supply a radar base side object awareness system for a North American OEM.

This is the first time we have sold this innovative product and there is a good deal of interest in our technology.

Overall our first half new business wins are up 11% versus the first half of 2005, with almost 75% being non-Ford business.

Slide 12.

We continue our focus on operating excellence.

We have a very competitive global manufacturing and engineering footprint that will continue to improve throughout the implementation of our three-year plan.

We are driving to improve all areas of our operations and we are increasing speed by using resources wisely to make decisions faster.

We have also implemented new performance based increases that tie employee compensation to performance, increasing accountability throughout our organization.

We have also had substantial quality and safety improvements this year and it will continue to be a major focus.

We continue to focus on cash flow and our capital allocation.

And through our actions we are now taking our CapEx estimate down to $400 million for 2006.

And finally, we've improved our visibility further down in the organization.

Part of this is benefit to our new organizational structure as well as some spending that we've done on information technologies.

Before turning things over to Jim, I will conclude by covering our outlook.

As Mike mentioned, we now have two quarters down in our three-year plan and we are looking for every opportunity to accelerate our actions.

As we presented in our release, we are raising our guidance for the full year EBIT-R from the range of 120 to 150 million, to our new range of 170 million to 200 million.

And we are affirming our free cash flow guidance of $50 million for the full year.

We expect continued improvement throughout the planned period.

We made substantial progress and are pleased with the improvement in the first half of 2006.

But there remains a large task ahead of us and a lot of work to do to turn Visteon into the Company it can be.

I will now turn it over to Jim.

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

Given the substantial change in our business since a year ago, driven largely by the ACH transaction, I'm generally going to be discussing our results on a running quarter over quarter basis rather than a year-over-year basis.

That impact of the ACH transaction is most apparent on this slide where product sales totaled 2.86 billion for the second quarter, which is a year-over-year decrease of about $2.1 billion.

The decrease is explained by the elimination of $2.1 billion of sales attributable to the ACH plants, of which 1.9 billion were Ford North America sales and roughly 200 million were non-Ford.

The elimination of the sales attributable to the ACH plants also explains why Ford North America revenue declined to 24% of total revenue from 51% of total revenue last year.

Excluding ACH plant sales non-Ford sales were down slightly on a year-over-year basis.

Lower production on some key Nissan products in North America and about $25 million of sales formerly to Collins & Aikman in Europe that became Ford sales after CNA filed for bankruptcy in June of last year account for all of the reduction in year-over-year sales.

Product sales were up about $47 million from the first quarter of 2006.

Non-Ford sales rose $19 million as decreases in North America were offset by increases in Europe and Asia.

Ford sales rose $28 million from the first quarter driven by higher sales in Europe and South America.

Turning to the cost of sales on the next slide, second quarter 2006 gross margins were 10.8%, an improvement of about 220 basis points from the first quarter.

As I mentioned on our first quarter call, the first quarter benefited by about 150 basis points from commercial negotiations and OPEB relief for workers returning to Ford.

The second quarter also benefited by about 260 basis points from OPEB and pension relief for workers returning to Ford and some commercial items with customers.

Adjusting both quarters for these items yields a 110 basis point improvement in gross margin from the first quarter to the second quarter, driven by improved operating performance principally in materials and lower warranty costs reflecting our current experience, offset somewhat by higher incentive costs in the second quarter.

We had previously disclosed a $40 million estimate for the second quarter OPEB and pension cost reduction, when the actual reduction was about $49 million.

Through the first half, benefits from OPEB and commercial items improved gross margins by about 260 basis points.

At this point we do not expect to recognize an additional benefit for employees returning to Ford in the second half of the year.

However, we do expect to incur a pension settlement cost of about $20 million for the Markham, Ontario, facility that we exited a number of years ago.

We expect to recognize this expense in the fourth quarter of this year as we wind down those pension plans.

Although we expect to continue to drive gross margin improvement through operating efficiency and restructuring actions, 2006 full year gross margins will be less than the first half due to the third quarter seasonal effects of production shutdowns and the absence of similar OPEB and pension benefits in the second half.

At this point we would expect full year gross margins to approximate 8%.

Turning to SG&A comparisons on the next slide, G&A for the quarter was $194 million, up from first quarter's $168 million.

In the second quarter there were a number of factors that led to higher expense on a quarter over quarter basis.

Incentive compensation was up about $10 million in the G&A line, reflecting stock price appreciation, which affects our long-term incentive plans, and higher annual incentive compensation accruals, reflecting our performance during the year.

Currency translation, facility related expenses, increased spending on IT infrastructure and expenses associated with the divestiture of some of our facilities, as well as higher expenses for some of our growing Asian entities, accounted for more than $10 million of additional G&A cost.

Although not shown, SG&A was down $80 million from the second quarter of last year, reflecting lower bad debt expense for the Collins & Aikman bankruptcy and the ACH transaction which affected G&A by about $57 million.

We do expect SG&A expense in the third and fourth quarters to be lower than the dollar amount in the second quarter, with full year SG&A at about the same percentage of sales as in the first half, although stock price appreciation could lead or would lead to additional expenses.

Our long-term goal is to further reduce SG&A cost, but in the near-term we are willing to spend in the current range to support and grow our business with our global customers.

On the next slide net income for the quarter was $50 million, which included an $8 million extraordinary gain related to the acquisition of the lighting facility that Don talked about in Mexico.

The results also include $22 million of non-cash asset impairments related to restructuring activities and a $14 million benefit from restoration of the deferred tax assets in Brazil.

Quarter over quarter improvements in operating income are driven by the second quarter operational improvements that I talked about in the earlier slide on cost of sales, partially offset by the higher SG&A expenses.

Tax expense was $17 million in the second quarter versus $30 million in the first quarter, with the $13 million decrease in tax expense primarily attributable to the $14 million benefit recognized to reverse the valuation allowances against the deferred tax assets in Brazil, offset by higher profit for tax in certain profitable jurisdictions.

We expect tax expense to be about $110 million for the full year of 2006.

As you know, in addition to the traditional GAAP measures we are looking at ourselves or measuring ourselves using a non-GAAP measure of EBIT-R due to the significant amount of restructuring that we anticipate incurring over the next three-year periods.

EBIT-R for the second quarter was $119 million compared to $72 million in the first quarter, improving $47 million sequentially.

EBIT-R for the second quarter improved by $152 million versus the second quarter of 2005 when it was negative $33 million.

The improvement was driven by a number of factors including operational improvements, the benefits of the ACH transaction, lower post employment benefits, depreciation and amortization, and the absence of the bad debt from Collins & Aikman bankruptcy last year.

As I mentioned earlier, the ACH transactions obviously substantially changed the face of Visteon and we think it's beneficial to look at the trend of our results post the ACH transaction and I do that on the next page.

EBIT-R has shown substantial improvement since the fourth quarter of last year when the ACH transaction was completed on October 1st.

In the fourth quarter of last year it was a negative $102 million.

It improved by $174 million in the first quarter of this year and then an additional 47 million in the second quarter.

Depreciation and amortization are included in this chart, as well, to allow you to look at the EBITDA results, which show a substantial improvement over the past three quarters.

As you know EBITDA is used in a calculation of our bank financial covenants and has improved significantly versus a year ago.

The calculation of financial covenants provide for a number of adjustments but clearly these results provide for significant head room under the existing covenant.

The covenant is still meaningful until we complete the second stage of our financings later this year.

Let's turn to free cash flow on the next slide.

Free cash flow for the second quarter was positive $10 million, improving by 127 million from the first quarter.

CapEx was 98 million for the second quarter, up slightly from the first quarter and now totals $183 million for the first half.

There remains additional room for improvement in the area of trade working capital, which was negative again in the second quarter, with quarterly performance negative in both DSOs and inventory turns.

Slight improvements in DSOs on a year-to-date basis have been more than offset by declines in DPOs and inventory turns.

The third quarter has historically been a difficult quarter for us in working capital performance due to the summer shutdowns around the globe.

However, the fourth quarter has historically been the strongest quarter for working capital reduction.

We have looked at the amount of working capital reduction that would be needed to meet our free cash flow target for this year.

And based on our historical results, we believe the target is achievable.

Simply getting back to the 2005 levels of DSOs and DPOs and inventory turns goes a long way in getting us to our year-end objective.

We also know that our 2005 year-end metrics are not as competitive as a number of our competitors, so we clearly believe we have opportunities to improve further.

Our leadership team is committed to driving improvements in working capital management and free cash flow, as you know, is half of our annual incentive, so we do expect to see significant improvements in the fourth quarter.

Before turning to our updated guidance, I wanted to provide an update on our debt related activities during the second quarter and I do that on slide 21.

In June we closed on our seven-year, $800 million secured term loan.

The borrowing cost under that transaction is LIBOR plus 300.

With the proceeds we repaid the 350 million and the $241 million of term loans which had June, '07 maturity dates and were priced at LIBOR plus 450.

We also retired $150 million of our 8.25 2010 notes and reduced our 2007 revolver from 772 million to 500 million.

We expect to replace the revolver in the next few weeks with asset backed facilities in Europe and in the U.S. totally about $700 million.

When these financings are completed, we will have extended all of our June, '07 maturities into '11 and '13 allowing us to focus all of our time and attention on operations and the implementation of our three-year plan.

As Don said we have increased our full year EBIT-R guidance to 170 to 200 from our previous guidance of 120 to 150, reflecting our current expectations for 2006 results and are maintaining our free cash flow guidance of $50 million.

We have also adjusted our expected product sales for 2006 downward about $200 million from our initial estimate of $11.2 billion.

We expect Ford revenue to make up 44% of total product revenue.

This is somewhat higher than our original estimate, primarily due to higher than expected Ford production volumes in Europe and lower than expected Nissan volumes in North America in the first half of this year.

As usual, the third quarter is expected to be a difficult quarter for us due to low production volumes, although we are in a better position than we have been in past years and we have increased our flexibility with the exit of the ACH plants.

In setting our guidance we have tried to be mindful of a number of factors affecting our industry.

As you know, the automotive sector is working to address a number of issues that could have an impact on production levels.

Oil prices remain high affecting both consumer demand on a worldwide basis for vehicles and a price of resins used in our products.

Domestically the major OEs are working on restructuring their operations to reduce costs.

All of these factors contribute to a somewhat uncertain environment for production levels, product mix and, to some extent, raw material costs.

We are off to a really good start on our restructuring activities.

As Don said, there is a lot of hard work to be accomplished, including completing the activities that we have already announced.

We are diligently working to pursue those activities.

But ultimately timing of those activities, and thus the savings in some cases, are dependent upon negotiations with third parties.

But most importantly we are working very hard to ensure that the culture of Visteon is financially driven as well as customer and product driven and where exceeding expectations is supported and expected.

So before we turn it over Derek for questions, I just want to conclude with the Why Visteon chart.

We recognize that we have a lot of hard work to do.

There is absolutely no question about that.

We are off to a tremendously good start.

But we also recognize that there are parts of our Company that are still not performing at or near the level that is necessary for those operations to sustain themselves.

So there is still a lot of work yet to be accomplished.

And as we've said, we are two quarters into a multi-quarter plan.

But make no mistake, we are not shying away from the work that needs to be done.

In a nutshell, we got a clearly focused restructuring plan, funds in an escrow account to achieve it, leading market positions in core products, and a global manufacturing and engineering footprint that we believe is second to none.

In addition, we have an increasingly diverse customer base, a truly focused team that's driving change throughout the entire Company, and we are really focused on free cash flow.

Our annual incentives are completely aligned to achieving our goals.

So with that, Derek, I will turn it over to you for questions.

Dennis, if you could please prompt the audience on how they would get in the queue.

[OPERATOR INSTRUCTIONS] Our first question comes from Joe Amaturo of Calyon.

Two quick questions.

First, the 20 million expense related to the [pension] settlement that you are expecting to hit in the fourth quarter, I’m assuming – (multiple speakers).

Hello.

Hello, can you hear me?

Mr. Amaturo, please hold one moment.

Dennis, are you there, please?

Yes, I am.

Can you hear me?

Mr. Fiebig, your first question is from Joe Amaturo from Calyon.

Hello, can you hear me?

We can hear you.

Can you hear us okay, Joe.

Yes.

Sorry about that.

We had a little glitch on our end.

I don't know what happened there.

My first question relates to the $20 million expense you are expecting from the pension settlement in the fourth quarter.

I am assuming that's part of your EBIT-R guidance for the full year.

It is.

And the second one, could you just touch on what your assumptions are for second half production as it relates to the percentage change for Ford, Nissan and Hyundai?

Joe, we've retained our estimate for Ford North America production volumes that we've had essentially since the beginning of the year.

We have, as we've gone through the year, updated our mix assumptions and as we look at production volumes and mix, not only for Ford North America but Ford Europe and Nissan, we remain comfortable with our EBITDA guidance that results from all of that, the 170 to $200 million number.

Just lastly you've mentioned that during the second quarter new business was up 11%.

Could you just touch on the absolute dollar amount of new business awards during the second quarter?

Joe, as you know, we update the backlog once a year.

I just wanted to -- and so we won't give the number for the new business wins so far this year but I just wanted to give you some indication that we are running faster than we did last year.

All right, good quarter, guys.

Thank you.

Our next question comes from Himanshu Patel of JP Morgan.

Good morning, guys.

Good morning.

Could we talk a little bit on the free cash flow slide?

When you think of for the full year, how should we think about working capital?

Should it -- the first half obviously was a drain.

You mentioned third quarter would be tough.

Q4 would be a recovery.

What sort of range would you expect for working capital for the full year?

Essentially when I look at working capital, as I said in my comments, getting back to the 2005 levels for DSO, DPOs and inventory turns drives a significant reduction from where we are today, which essentially is affected to a certain extent by the seasonality.

That in and of itself, working capital reduction I believe we can get $200 million round number from where we are essentially today and probably even more than that.

Jim, would you think you could get most of that back by year-end or is it sort of a two-year target?

No, I really look at getting it back by year-end.

Again when I've looked back over the last four years, the fourth quarter has historically been a significant quarter or has achieved significant reduction in trade working capital in the quarter; ranging anywhere from a couple hundred million dollars to, of course, in the prior years including ACH plants, 4 or $500 million.

The trends are very positive.

And as I said, just getting back to the 2005 levels, which frankly are not nearly as good as a number of our competitors, closes much of that reduction in trade working capital that we need to achieve to be able to hit our free cash flow guidance for this year.

Remember, also, that I've told all of you in the past that whether we are looking at a day of DSO or a day of DPO, or a one time inventory turn, all three of those metrics, one time improvement in DSOs or DPOs or one time improvement in turns, all equate individually to about $30 million of working capital reduction or cash flow.

So going after receivables and improving inventory turns, managing payables is an important part of our business and we believe we really have opportunities here.

Just to be clear on that, $200 million you would recoup in the second half, so essentially for the full year you would be basically flat on working capital?

I'm looking at $200 million improvement in the fourth quarter, which essentially is about a $400 million reduction from where we are today.

Right.

Okay.

And then secondly, we are getting into the back half of the year where a lot of suppliers are going to see some commodity contracts that were long-term in nature potentially being repriced.

Anything sort of on the horizon for you guys, whether it's steel or resins that you're thinking about, that could cause concern as we go into the 2007 outlook discussions next quarter?

We've been following commodity prices fairly closely as you might imagine.

And at the same time working with all of our customers around commodity price changes, moving to index approaches in some cases, and just negotiations with customers.

And so we are monitoring both the potential cost increases as well as working with our customers on recovery techniques to isolate the impact of those changes.

But are there any annual steel contracts or something that are rolling off at the end of this year where there is the scope for potential step-change increase in your raw materials cost bill for next year?

Most of the commodity contracts at this point in time are price based on essentially what the market is doing.

Steel, in our case, is about the third or fourth commodity in terms of importance in terms of exposure.

Other than our chassis Powertrain business in western Europe, we really have little steel exposure at this point in time.

And then lastly, you raised your EBIT-R forecast but not your cash flow forecast.

What was the disconnect there?

I don't know that there's a disconnect but we've spent a lot of time on both EBIT-R and free cash flow and as I think about it we have, as you said, raised the guidance.

Some of it is non-cash.

We recognize that.

And at the same time we have reduced our CapEx by about $50 million from the beginning of the year.

So that is, at least theoretically, a benefit to free cash flow.

But on the other hand, as many of you know, last year we substantially beat in the fourth quarter our forecast for free cash flow over $200 million.

And when we did that we really didn't change our expectation for 2006 simply because we thought it was really important that we emphasize to the organization that we have to be free cash flow positive in each year.

And as I said, when I look at where we are today on our DSOs and DPOs and inventory turns, simply getting back to 2005 year-end levels goes a long way towards getting to the working capital reduction we need to achieve to get to our free cash flow guidance.

So I'm pretty comfortable with where we are.

In fact there could be an upside.

Okay.

I mean if you look at slide 29, where you give your breakdown of free cash flow between operating cash and CapEx, you are at 450 for operating cash for the full year and 400 on CapEx.

It looks like both of those figures were tweaked down by about 50 million versus last quarter's full year guidance.

Are we to read from that that the $50 million reduction in cash flow from operations guidance is that mainly working capital?

Essentially we've worked to the free cash flow number.

We are managing to -- that our objectives are all around free cash flow.

We knew that we took down capital expenditures and essentially what that means is we have to only -- our free cash flow reduction, our reduction from working capital, really is $50 million less than what we previously had to achieve to get to our target for 2006.

As I said, that's why I believe we have a little bit of upside at this point in time.

Okay, great.

Great.

Thank you.

Our next question comes from John Murphy of Merrill Lynch.

Good morning, guys.

Good morning.

A quick question on the CapEx.

What was the rationale for the reduction in CapEx from 450 to 400?

It really just reflects our expectation for the year.

We are at a run rate through the first half of 183.

So far off a 225 run rate if you will for the 450 for the year.

So based on what we see in the pipeline, we believe the $400 million number is the best estimate of what we need to spend.

John, I think this is a reflection of two things.

One, tighter controls over the CapEx process.

And then secondly, I think we are seeing some of the benefits of global product group organization, where we are using capacity across the world and we are working with each of the product group leaders to squeeze the capital down.

This is something that you can keep going maybe in '07 and '08?

It does sound like it's a function of your restructuring efforts, also, here.

I mean it sounds like it's more ongoing than product delays or anything like that.

Is that correct?

Well, absolutely.

This is running the business tighter and better, no question about it.

And absolutely as we go into the planning process for '07 and '08, yes, I would expect to see benefits as well.

Okay.

Then on pension and OPEB reductions into the expense.

What is the ongoing reduction that we are seeing in the quarters here or for the full year as opposed to the curtailments and the one time benefit in the fourth quarter?

I think if you simply take out the $49 million number, the benefit in the second quarter from the second quarter results you get back to what the ongoing run rates are.

And as you know that is prior to the remeasurement date for our pension and OPEB costs which is September 30th.

So we will remeasure, as we always do, as every Company does on an annual basis, we use September 30 as that measurement date and we all know that interest rates are higher today than they were last September.

So my expectation would be that there would be some further reduction in pension costs in 2007 simply because the discount rate used to measure pension costs on a go forward basis will be less, as well as the pension plan changes that we announced in the fourth quarter of 2005, last year, will be reflected in the new measurement at September 30, 2006, which will also result in a benefit in pension costs in 2007 and forward.

So for the first two quarters of this year you had -- the curtailments were the big benefit, the ongoing pension and OPEB expense really wasn't that big a deal to gross margin.

Is that a fair characterization.

Correct.

One last question on rationalizing your footprint, Don.

You have 16 plants left to go out of the 23 you have deemed to be rationalized originally.

Are any of those potentially going to go back to Ford still?

And second, is there any potential for acquisitions, maybe small or large in the near-term as you rework your footprint?

No, there is no option or plan or desire to give any more plants back to Ford.

That's not going to happen.

Secondly, in terms of acquisitions, clearly we are always looking to strengthen the portfolio of product that we have.

But we wouldn't comment on anything specific today.

And I think the acquisition of the lighting facility down in Mexico is a great example of strengthening our product portfolio through a small acquisition.

We are looking for those opportunities all the time.

Great.

Thanks a lot, guys.

Our next question comes from Chris Ceraso of Credit Suisse.

Thanks, good morning.

A few items.

First most of the companies that have been reporting so far have been complaining that material costs are getting worse but you've referenced that material costs were a benefit in the second quarter.

Can you explain where that came from?

Was it a commercial settlement like you had in Q1 or was it a particular material, was it the result of a contract change?

Can you just give us some more color on that?

Chris, we are having a hard time hearing you but I think you asked about material cost reductions in the second quarter.

Those comments were about savings that we have achieved in negotiations with our suppliers.

At the same time, you are correct that we have seen material cost increases, what we would call material surcharges, and we've also, then, worked with our customers on techniques to either reduce those surcharges that we would have experienced or to recover them in terms of pricing.

So both negotiations savings, some increase in raw material surcharges, and then better recovery of those through the quarter compared to previously.

So some part of that 49 million that you referenced was that a recovery from customers?

The 49 million was OPEB.

Or was that all OPEB?

That was all OPEB and pension and again we had previously estimated that that would be about 40 million.

So basically consistent with the prior estimate.

How much was the warranty cost benefit?

Was that a reduction in your ongoing accrual or a reversal from your existing allowance?

I'm not going to get into specific dollar amounts but essentially it was a reduction in our expense for the quarter, essentially looking at our experience to date.

Now I think earlier in the year, Jim, you had outlined that part of the year-to-year walk was maybe a $20 million improvement from warranty.

Is that still the right number?

I would have to ask Derek about the walk.

So I'll let him.

Yes, you will see the warranty number.

We will publish that in our Q next week when we file.

I think if you look at the metrics in terms of quality and what we are doing, we are doing a really good job on that.

So we would imagine that would be reflected in what we are doing in terms of warranty.

So you will see an improvement.

Okay.

Again in terms of a year to year walk, I think in the first quarter or maybe the fourth quarter you gave an outline of a number of factors that got us from the '05 pro forma EBIT-R to something in the 150 range for '06.

Now you are in the 170 to 200 range.

What changed from the previous walk to the new walk?

Is it all operational or some of the other items were the OPEB, DNA reduction, German labor savings, product warranty recall.

What is the big – (multiple speakers).

I would have to go back through it in detail, but the OPEB, the second quarter OPEB was included in the prior walk to the 120 to 150.

So, without going through it in detail it is essentially operational, better operational or stronger operational performance.

Okay.

One more if I can, you talked a lot on the call earlier about the working capital improvement coming in the back half.

I think you've been talking all along about trying to bring down the DSOs and the DPOs.

Yet in the first half it looks like those metrics actually deteriorated a bit.

What's behind the deterioration there?

Why does that get better in the second half?

Part of it is just the seasonal nature of the business.

And frankly closing on the lighting facility in Mexico added inventory that wasn't there at the beginning of the year.

We only had that facility for part of the quarter.

So that in and of itself just affected the calculation of inventory turns.

And then the DPOs, which was the other negative for the quarter, I wish I really had a good answer for that.

And essentially we need to do somewhat of a better job in managing those activities, which again gives me confidence that we can do that.

Clearly there is some impact from distressed suppliers where we are paying more quickly than we thought we would have had to.

So that's part of the issue.

But I agree with Jim as well, it's just something that we need to improve on.

Okay.

Thank you very much.

Our next question comes from Ronald Tadross with Banc of America Securities.

A couple quick things here.

On that 220 basis points sequential improvement, slide 15, you break that down into operating performance versus, I guess, the other bucket would be nonoperating.

Is it pretty much 50/50 or can you give us a rough idea of at least the 220, how much is operating versus nonoperating?

The way I look at it, Ron, is as I said both quarters, the first and the second, had those items that you are calling nonoperating.

I don't know that I would necessarily call them nonoperating.

If we take both of them out of the first quarter and the second quarter, the improvement quarter over quarter is 110 basis points, which is all in your words, all operating.

The material improvements, the lower warranty cost, offset, as I said, by somewhat higher incentive compensation cost.

Then it seemed like we had a benefit, if I remember correct, from the fourth quarter to the first quarter from commercial discussions and it looked like you've actual built on that in the second quarter.

I'm wondering if that's true and if so do we see a kind of big fall off here in the third quarter, is that kind of the big thing that explains the margin decline?

Ron, this is Don.

As you know, as part of our normal operations, we work with the customer every day to find solutions to issues that we have with them and try to help them out and they are trying to help us out as well.

And literally there are hundreds of things that get decided in each quarter and some of them fall our way and some of them don't.

And so we would expect that to continue throughout the following quarters and throughout the life of Visteon.

It's part of the process.

But, Don, it seems like at least for two quarters here it's gone your way, which is good and probably why they brought you on board, you are good at that.

I'm just wondering is that -- should we expect -- ?

Remember in the fourth quarter it didn't go our way.

Right.

So whenever, as Don said, part of every day life and -- .

I guess I'm wondering if we should just be braced a little bit for maybe -- it's not going to go your way all the time.

Should we be braced for a quarter where it might not go your way?

So the way that I would answer your question is the margin, my expectation for gross margins for the year, around 8%, reflect our assumptions about any of those kinds of activities that we know about at this point.

Just one last thing on the restructuring.

I have my notes, you are going to spend about 180 million this year.

I'm not sure if that's my estimate or yours, but can you just give us an idea of how much you are going to spend this year on restructuring and if you could just clarify what kind of payback you are looking for?

The payback varies by type of activities, but if it’s employee type activities we expect to get a payback within a year.

The 180 million, I think, is high.

I believe at the beginning of the year our estimate was around 160.

At this point I don't think we are going to spend that much this year.

Not because activities are not being accomplished but simply because we've made some changes to some of our programs, for example, our separation programs, which should result in a reduction in some of the costs.

And I don't think we are going to spend as much as we thought at the beginning of the year.

And, remember, Ron we did pull some [ahead] to last year.

There was 51 last year.

Okay.

So then in '07 do you have any thoughts on what you think you might spend in '07?

I think the amounts in '07 are pretty well consistent with our prior thoughts.

Okay.

Thanks, guys.

Our next question comes from Rod Lache with Deutsche Bank.

Good morning, everybody.

Good morning.

A couple of questions.

Can you give us some color on how you are doing in your segment, the climate, electronics, interior and other?

The margins in climate are going to be stronger in the second quarter than in the first, same in electronics and same in interiors.

On a year-over-year basis are they all up?

The last quarter there was a pretty significant improvement in the other segment.

The other segment is essentially flat.

It is really the three core product areas that are driving the operational improvements.

The $33 million EBIT-R loss that you mentioned in the second quarter of '05, that's not the pro forma number.

Is that correct?

That's not the pro forma number, that's correct.

Last quarter you gave us sort of a pro forma adjustment?

I think you mentioned what it was for the SG&A but do you have a pro forma adjustment for the EBIT for last year?

As you all might remember when we published our pro forma adjustments with the 8(K) in November of last year, the total for the nine months was $224 million and at the first quarter we said about 50% of that occurred or related to the first quarter, about 15% of it relates to the second quarter.

And it's down first quarter to second quarter simply because remember last year in late first quarter, we implemented the Ford funding agreement which provided for not only an acceleration of receivable payment terms but also a reduction in the reimbursement for labor costs that we were reimbursing Ford for the UAW employees.

So it's like roughly 33 million or so of adjustment here for Q2, which means that last year pro forma you were pretty close to breakeven on an EBIT basis?

Correct.

Was it $30 million of bad debt expense that you had?

There was about -- yes, $30 million of bad debt expense.

So on a clean basis you would have had like a $30 million profit in that quarter?

Is that how you would think?

That's right.

Okay.

All right.

So going from there to the -- you did 119 this year but 49 million was that OPEB adjustments.

So you are going from 30 to 70.

Can you just give us some color on that $40 million improvement, how much of that was sort of non-cash items?

Your revenue was flat on a year-over-year basis, it looks like on an adjusted basis.

On a pro forma basis?

Yes.

Yes, that's about true.

I would have to go through all of these numbers to be able to give you that answer.

I think Derek will be able to do that with you.

Okay.

The assets that are held for sale, can you give us an update on how that process is going and how much of a drag on operations is that right now.

The facilities that we are working to market with, actually with Deutsche Bank, as Don mentioned we have -- we are essentially into the second round with a number of potential interested parties.

We are working with them to drive to a hopeful conclusion here in the late third quarter, fourth quarter.

We are also working with labor in those affected facilities so that we understand what their issues or concerns are and trying to bring all the parties together so that, as I said, we can get a deal completed here in the late third or early fourth quarter.

Are those facilities a drag currently on the reported EBIT-R or are you guys putting that into a discontinued op line.

We are not putting it into a discontinued ops line.

At this point in time we will continue to work to see whether or not we can get to a resolution or a satisfactory selling price.

And we will take it from there.

If we don't, clearly those businesses are generating some positive EBITDA at this point in time and ultimately this will come down to a selling price versus the value of the business if it just continues.

Are they close to breakeven on an EBIT basis?

They have some small earnings, yes.

Okay.

Then lastly, the change in the debt, doing some capital raising in Europe, is that going to have an effect on your tax rate going forward?

It is.

Part of the reason for putting some of the debt in the European jurisdictions is help us to work on some of that tax drag.

We've, frankly, factored that into our thinking about tax expense on a go forward basis as we look at our forecast into '07 and '08.

I'd also point out that the interest costs or the LIBOR plus 225 is again going to be favorable to the current revolver which is LIBOR plus 450.

Okay.

That was in your original guidance for taxes?

Yes.

Great.

Okay, thank you.

Our next question comes from Jon Rogers of Citigroup.

Most of my questions have been answered, but I'm just wondering if -- have you guys had any issues with some of the work stoppages at Hyundai that would affect the third quarter's earnings?

So far we've lost about approximately $50 million in revenue from the work stoppages there.

We would expect to, if like in prior years, if history will repeat itself, we'll make up a majority of that in the late third and fourth quarters.

Although we won't know definitively until we get the new production schedules which come out in late August.

And then, Don, I know one of your focuses has been just plant quality in North America and elsewhere.

Can you give us an update on some of the quality metrics and the improvement there?

Sure.

Where we set today, both -- I think you're right, quality and safety have been important points for us.

We've improved our safety metrics by 50% so far this year and quality is up 66% from last year.

Where does that put you sort of relative to your competition?

I mean are you starting at a much higher base, so 66% means there's still more work to be done or are you below -- ?

There is still room for improvement.

I would say in terms of safety we are probably one of the, if we are not the leader in the industry, we certainly are one of the leaders in the industry.

In terms of quality, we still have a ways to go to be considered world class.

Okay.

Thank you.

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

The next question is from Robert Barry of Goldman Sachs.

Hi, good morning.

Good morning.

Just a few things.

Is it possible to quantify what the impact has been on the year-to-date restructuring actions you've taken so far?

I know it's still early in the process, but.

I think the way I'd answer your question is, and Don made the comment as we were going through the presentation, what we've seen in terms of the activities we've undertaken both in terms of cost and benefits, all of them were at or better than our original assumptions.

Okay.

And just a followup from a couple of questions prior regarding the facilities that you are planning to divest this year.

Given there were so many facilities on the block and other suppliers have had some challenges selling facilities, what is the backup plan if the six facilities you've slotted for sell can't be sold?

As I said in response to the earlier question, a number of those facilities or businesses are generating positive EBIT and EBITDA and so there's value in the businesses in just continuing to produce the product.

So ultimately our decision will be around selling prices that we can achieve in a sale process, essentially allowing us to focus our full time and attention on our core businesses, versus retaining the businesses and continuing to manage and run those businesses.

Lastly not to beat a dead horse on the cash flow, but it sounds like the third quarter will be a big perhaps negative on cash flow but then a significant improvement in 4Q?

None of that is new.

That's always been the case.

Not only this year in terms of our expectations and forecasts but ever year as we look back.

I just wanted to make sure I got the cadence right.

And based on what you were saying earlier, it sounds like the ability to deliver on the working capital piece of that, which is significant, is more tied to Visteon's execution ability as opposed to negotiations with customers.

Is that correct?

Yes.

Absolutely.

Absolutely.

The improvement in the working capital has nothing to do with customer negotiations.

This is our ability to execute.

Okay.

Great.

Well, thank you.

Okay.

Well, thank you for participating in today's call.

I'll be around the rest of the day to answer your questions and we will talk to you later.

Thank you.

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

Thank you for your participation.

You may disconnect at this time.

Good day.