Visteon Corp (VC) 2007 Q1 法說會逐字稿

Good morning, and welcome to the Visteon first quarter 2007 earnings conference call.

All lines have been placed on listen only mode to prevent background noise.

As a reminder, this conference call is being recorded.

Before we begin this morning's conference call, I'd like to remind you this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are not guarantees of future results and conditions, but rather are subject to various factors, risks, and uncertainties that could cause our actual results to differ materially from those expressed in these statements.

Please refer to the slide entitled Forward-Looking Statements for further information.

Presentation materials for today's call were posted to the company's website this morning.

Please visit www.visteon.com/earnings to download the material if you have not already done so.

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

(OPERATOR INSTRUCTIONS)

I'd 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, sir.

Thanks, LuAnn, and good morning, everyone.

Joining me on today's call are Mike Johnston, our Chairman and Chief Executive Officer; Don Stebbins, our President and Chief Operating Officer; and Bill Quigley, our Chief Financial Officer.

Following our formal remarks, we'll be happy to take your questions.

Now, I'll turn the call over to Mike.

Thanks, Derek, and good morning, everyone.

This slide is one you're likely familiar with.

It shows our plan as communicated over a year ago with its three pillars -- restructuring, improving our base operation, and growing our business -- all of which we are executing concurrently in order to make Visteon a more successful supplier, which we believe will lead to increased shareholder value.

As we have highlighted in our quarterly calls, our restructuring activities are underway, and we made solid progress in 2006 and are continuing to do so in 2007.

We are also improving the business by working on our base operations, and Don will provide you with our progress there.

We are also profitably growing our business and our core products in order to ensure a long-term success.

And 2007 has gotten out to a solid start following up on an outstanding 2006.

Our broad base of customers recognized the value proposition we provide them through our product lineup and are rewarding us with significant levels of new purchase orders.

Slide 3 provides our first quarter highlights.

Although we do not provide quarterly guidance as a matter of practice, our financial results were in line with our internal expectations.

We announced the divestiture of three chassis plants in Europe as well as some chassis assets from Brazil and closed on the European facilities this Monday.

We added liquidity as we completed the term debt financing with an incremental $500 million.

Our business wins remain very solid as we were awarded a significant amount of new business.

Visteon received customer and industry recognition including a PACE Award, and we continue to advance the restructuring plan and are moving forward as we planned.

In late March, we announced the divestiture of a large portion of our remaining chassis operations.

The divestiture includes two plants in Germany, one in Poland, as well as some assets in Brazil, and the effective businesses employ about 2,400 people.

Our sales from these facilities in 2006 were about $600 million of revenue, most of which went to Ford.

Under the terms of the agreement, we will receive about $90 million of cash and transfer certain liabilities including pensions to the buyer, which represent about $40 million of liabilities.

As I mentioned, we closed the European facilities this week, and that represent most of the sales, assets, employees and proceeds.

The South American assets are expected to be transferred in the fourth quarter of this year.

These are non-core operations which we have been able to exit without disruption of our customers and without spending money from the escrow account.

This preserves the escrow account for other restructuring actions.

As stated in our release, we're adjusting our 2007 outlook to reflect this transaction.

Recall that our guidance provided earlier this year specifically did not address any divestitures.

This is a very significant step in addressing our non-core operations, allowing us to hone our focus on the remaining non-core and underperforming facilities and the performance of our core operations.

Visteon recently received some very gratifying industry recognition.

Over the past several years, Visteon has been a frequent finalist and winner of the PACE Award, which is sponsored by Automotive News and considered a premier industry award.

We continued the trend at this year's PACE Award ceremony April 16th, and our affiliate Halla Climate Control won a PACE Award in the product category for its Wave Blade cooling fan design, which is in production on the Hyundai Sonata.

This Halla innovation was one of just 12 PACE winners from the global auto industry.

In addition, Visteon won a PACE recognition for our mock DSP receiver for HD radio.

This is a first in production innovation on several BMW models.

We also received some notable customer recognition.

Hyundai Kia awarded its 5-star certification to Visteon's VASI Chennai, India and Beijing, China climate plants.

This honor is given to only a handful of Hyundai suppliers worldwide.

Earlier this year, Yanfang Visteon, our 50/50 joint venture with Shanghai Automotive Industry Corporation, received a Best Supplier of the Year Award from Shanghai General Motors.

Yanfang Visteon is one of only 7 companies to receive the award from among SGM's nearly 1,500 suppliers.

Other awards received but not shown include our Port Elizabeth plant in South Africa, which was named to Ford's Top 20 Suppliers List for the third consecutive year, and in South America at the GM Mercasol Supplier Dinner, Visteon was named the best supplier of audio.

So as you can see, Visteon continues to be recognized for its quality and technology.

Now I'll turn the call over to Don.

Thanks, Mike.

As we've stated before, the restructuring of our business is difficult, yet a vital step in making Visteon a successful supplier.

In 2006, we had planned to address 11 non-core or underperforming facilities, and we accomplished our goal by fixing 3 operations, closing 6 facilities, and selling 2 businesses.

For 2007, we are planning on closing 2 operations and selling 5 businesses.

And so far this year, we're making substantial progress.

In April, we completed our previously announced closure of our Chicago facility.

And on Monday, we completed the sale of the 3 chassis operations that Mike mentioned, leaving 3 facilities to be addressed to achieve our objective of 7.

One of the remaining 3 facilities is our Connersville plant, which has already been announced and will close in the back half of this year.

We are confident that we'll achieve our 2007 objective of addressing 7 non-core or nonperforming operations.

And while not a facility-related action, we have also completed our salary census reduction, in which we separated about 900 salaried employees.

Charges related to this action were $23 million, and savings are expected to be in excess of $65 million.

At the end of the first quarter, our escrow account balance was $268 million.

Chart 8 provides a review of our restructuring actions.

As you know, we had a total of 30 operations which are underperforming or non-core.

And 16 months into the plan, we've addressed 15 of the 30 facilities.

And our expectation is that by the end of 2007, we will have addressed 18 of the 30.

In addition to the facility actions, we are also improving Visteon's operations through selective outsourcing.

During the first quarter, we reached an agreement with a recognized leader in the electronic circuit board industry.

Under the agreement, a large portion of our printed circuit boards currently produced in-house will be outsourced to this company.

They'll also take on responsibility for some of the purchasing of the electronic components.

The migration of the production and purchasing will take place over the next year to 18 months.

This agreement will allow us to focus on more value-added electronics and allow our partner to increase its scale, providing value to both parties.

The second pillar in our plan is improving the base operations.

We've focused on quality, safety, investments, and efficiencies in last year, and we continue this year to make solid progress.

And although our first quarter performance exceeded our expectations, we have been negatively impacted by lower production volume and mix and some unexpected premium costs.

Additionally, the first quarter results include $10 million of non-reimbursed expenses related to restructuring due to accelerated depreciation.

Most importantly, our business equation remains on track.

Slide 10 shows some of our key metrics.

Our quality as measured by defective parts per million improved 65% in 2006 and has improved another 18% in the first quarter of 2007.

Equally impressive is our safety performance, which has improved 23% in 2007 after 45% improvement in 2006.

We remain highly focused on capital expenditures, as our first quarter 2007 spend was $21 million less than it was one year ago.

Our premium cost compared to both last year's first quarter and our plan were negatively impacted by costs associated with our European non-core operations as well as a couple of difficult launches.

As I mentioned, chart 11 shows the year-over-year change in volumes for the first quarter.

As you can see, we had substantial volume declines by some of our largest customers.

In North America, we faced production declines at Ford, Nissan, General Motors, and DaimlerChrysler.

In Europe, Ford production was higher while PSA was slightly lower.

Globally, Hyundai Kia was flat.

For the back half of the year, we expect year-over-year comparisons to be flat to slightly up.

The third pillar of our plan is to grow our business.

And the momentum of our $1 billion in wins in 2006 is continuing in 2007.

For the first quarter, we had approximately $200 million in new business wins with approximately two-thirds coming in the climate product line and one-third coming in the electronics product line.

By region, the new business wins are 25% in Asia, 55% in Europe, and 20% in North America and are increasing the breadth of our customer base.

So now, before I turn it over to Bill for the financial review, I'd just like to summarize.

We had a good first quarter, as we've continued to deliver on each of the aspect of our multi-year improvement plan.

By addressing non-core and underperforming facilities, we're strengthening our focus and our footprint.

Our innovation is leading to diverse and significant new business wins as well as industry recognition.

And financially we're on or ahead of plan despite a number of headwinds and poor performance by our non-core operations.

So although there remains much to be done in 2007, we are on the right track.

Bill?

Thanks, Don.

Good morning, ladies and gentlemen.

This slide provides a summary of our financial results for the first quarter.

Product sales of $2.8 billion were essentially even from a year ago, yet there was a significant shift in our customer and regional sales.

For the quarter, we had a net loss of $153 million or $1.19 per share.

Over half of the net loss for the quarter was attributal to three items.

$50 million of non-cash asset impairments, $10 million of accelerated depreciation expense as a result of a restructuring actions and a $17 million Canadian pension settlement.

EBIT-R for the quarter was negative $46 million, which excludes the asset impairments, as compared to $72 million a year ago.

As we previously disclosed, our 2006 EBIT-R results benefited from certain non-recurring items of $39 million.

Free cash flow in the quarter was a use of $195 million and included a $41 million reduction in the level of receivables sold under our securitization facility.

These financial results were in line with our expectations, and we are only changing our 2007 outlook to reflect the rest of year impact of the divestiture of certain non-core chassis facilities.

Slide 14 shows our product sales for the first quarter of this year and last.

Total product sales in 2007 of $2.8 billion were $19 million lower than a year ago.

Sales to non-Ford customers of $1.6 billion increased $138 million as compared to the prior year and represented 58% of total sales.

Ford sales of $1.2 billion decreased $157 million and represented 42% of total sales.

On a regional basis, North American sales were lower by $219 million, reflecting a decline in Ford vehicle production of 136,000 units, as well as a 40,000 unit decline in Nissan vehicle production.

New business and favorable currency of $187 million largely offset these and other customer production declines.

The next slide provides further details of the year-over-year changes in our regional sales.

The left box provides a year-over-year change in sales to Ford on a regional basis.

The right box provides the same information for non-Ford sales.

Ford sales in North America were more than $250 million lower on a year-over-year basis driven by lower vehicle production and lower content per vehicle.

Ford Europe production was higher than a year ago, up 32,000 units, and favorable currency increased sales by $83 million.

On the non-Ford side, North American sales were $39 million lower, primarily reflecting lower Nissan production volumes, while Europe, Asia, and currency increased sales by $177 million.

Overall, adjusting for the impact of currency, sales volumes declined by about $200 million in the quarter.

These changes in the composition of our customer and regional sales were largely anticipated in our 2007 outlook.

On slide 16, this shows our 2007 and 2006 first quarter product sales by group and region.

As you can see, we remain well balanced in the distribution of our sales by product group and there was little change year-over-year.

As discussed, on a regional basis, we did experience a significant shift in our sales.

North American sales represented 31% of total sales in 2007, decreasing by 8 percentage points from a year ago.

Europe and South America represented 46% of total sales, increasing by 5 percentage points from a year ago.

And Asia represented 23% of total sales, increasing by 3 percentage points from a year ago.

Slide 17 provides gross margin comparisons on both a year-over-year and a sequential basis.

As we had a number of unusual and nonrecurring items in all periods, I will take a few moments to highlight some of these items to clarify our results.

Starting with the first quarter of this year, we had three items that lowered our margins.

They were the $17 million pension settlement and $10 million of accelerated depreciation I mentioned earlier, and $10 million of curtailment expense that was included in cost of sales, but did qualify for reimbursement from the escrow account.

In total, these items reduced our gross margin by more than 130 basis points to 3.9% of sales.

As previously disclosed, our fourth quarter of 2006 included non-income tax based benefits of $19 million, which increased margins by 70 basis points to 4.8%.

If you were to adjust for these items, our first quarter gross margin would be higher than the fourth quarter of last year.

Also, as we previously disclosed, the first quarter of 2006 included $39 million of pension and OPEB relief associated with the transfer of Visteon salary employees to Ford as well as favorable customer settlements.

These items increased gross margin by about 140 basis points to 8.6%.

On a year-over-year basis, gross margin was adversely impacted by product volume, and mix, sourcing actions on some higher margin products, and the performance issues of certain of our non-core operations that Don mentioned in his comments.

However, net cost efficiencies at most of our facilities were solid in the quarter and we realized savings from our restructuring actions.

Our SG&A performance for the quarter is highlighted on the next slide.

SG&A expenses for the first quarter totalled $170 million or 6.1% of total product sales.

First quarter expense is $7 million lower than the previous quarter, although up slightly from the first quarter of last year.

On a year-over-year basis, net cost efficiencies including the impact of our salaried reduction program were more than offset by currency of $6 million as well as costs associated with our securitization facility of about $6 million.

For the remainder of 2007, we expect SG&A to be lower than the previous year as we realize the flowthrough benefit of salaried actions and other spending efficiencies.

Slide 19 summarizes our restructuring actions in the quarter as well as activity in the escrow account.

During the first quarter, we had $41 million of restructuring charges and qualifying costs principally related to the future exit of certain of our manufacturing operations as well as a lesser amount related to the previously announced salary reduction program.

All of this $41 million is reimbursable from the escrow account.

We also had $50 million of non-cash asset impairments in the quarter, primarily related to the valuation of our chassis operations.

The bottom of this chart provides an update of where the escrow account stands at the end of the first quarter.

As Don mentioned, the cash balance in the escrow account was $268 million.

As a reminder, under the terms of the agreement, the escrow account funds first dollar for the initial $250 million of costs incurred and we share the costs evenly thereafter up to the original $400 million.

$53 million remains available until we hit the cost sharing threshold, and we expect to have a small amount of sharing in 2007.

Slide 20 reconciles our net income or loss to EBIT-R for first quarter 2007 and 2006.

Although net income decreased by $156 million, EBIT-R was $118 million lower as it excludes the $50 million asset impairment partially offset by lower taxes, which, as in the fourth quarter of last year, benefited from the weaker US dollar.

EBIT-R of negative $46 million was lower in the first quarter of last year due to the items I explained earlier.

And D & A was up about $19 million, of which $10 million was an accelerated depreciation related to our restructuring actions.

Turning to free cash flow, cash used by operations of $131 million was higher than the first quarter a year ago, primarily driven by lower earnings.

Trade working capital was a use of $65 million in the quarter driven by normal seasonality and a change in payment terms from Ford North America moving from 22 to 26 days.

After $64 million of capital expenditures, free cash flow was a use of $195 million in the quarter.

We ended the quarter with $872 million of cash, about flat with last year, and about $180 million lower than at year end.

Our debt levels are higher due to the financings we completed last year, and net debt of about $1.4 billion is up from a year ago.

Not reflected in our cash and debt balances is the additional $500 million in term debt that closed in early April.

Slide 22 shows Visteon's long-term debt profile, reflecting the additional $500 million in term debt that we completed in April.

As you can see, we have no significant debt maturities until the 8.25 notes mature in August 2010.

With the $500 million addition to the term loan, we have provided ourselves with additional runway as we continue to implement our improvement plan.

Moving to our 2007 outlook, as Mike mentioned, we are only adjusting our 2007 full-year outlook to reflect the divestiture of the chassis facilities.

We now expect our product sales to be about $10.7 billion for the year.

Our EBIT-R is expected to be negative $35 million to $135 million, free cash flow is expected to be $55 million lower and a use of $180 million to $280 million.

And in summary, our improvement plan remains on track.

We are addressing our non-core and nonperforming operations, and we remain focused on the efficient use of our cash resources.

Now, I'll turn the call back to Mike, who will wrap things up.

Okay.

Thanks, Bill.

In 2006, Visteon moved a long way ahead on the path to profitability, and our progress continues in 2007.

We are and will continue to address our non-core and underperforming operations, and we made significant process with the chassis divestitures in the closing of Chicago.

Our customer mix continues to gain better balance.

We will make a good deal of investment for innovation in our core products and we expect our Asian growth to continue.

Following 2008, the business will have the full impact of new program wins and the majority of our restructuring will be behind us.

And in 2009, we forecast we will be cash flow positive, allowing us to bring down our debt levels.

In summary, we are executing, we are on track, and we intend to keep moving ahead with our plan.

With that, we'd be happy to take your questions.

LuAnn, if you could please prompt the listeners how to get into the queue?

Thank you.

[OPERATOR INSTRUCTIONS] And our first question comes from John Murphy with Merrill Lynch.

Good morning, guys.

I just wanted to dig into the chassis sale a little bit here.

If you look at this, sales of $400 million are going to be lost through the remainder of the year, $35 million of EBIT.

Looks like the EBIT margin or the operating margin is 8.8%.

Is that about right?

Yeah, it's about right, the math works.

So then if I look at it and you guys are getting $90 million in cash and pushing off $40 million in liabilities, looks like the EBIT -- EBITDA's less than 2 times on the sale.

Sounds like it went incredibly inexpensively for something that's making a lot of money.

Am I looking at this correctly?

I think that picture looks at it today.

A couple of points.

One, that this is a non-core operation for us, predominantly high-cost country located.

2,400 employees -- about 1,600 of those in Germany.

Substantially declining revenue and profitability as you look out in 2008, 2009, 2010.

So when you start to look at the total picture from our standpoint, financially it's a good transaction for us.

Okay.

I would imagine you're expecting that to be a third of the size or something in a couple of years is why you pushed out of it?

Well, again, the revenues for us -- we had not been awarded a number of follow-on programs.

And so it was going to substantially decline.

And then we were going to have to address those operations.

Okay.

And then, if we think about that in the context of Visteon in a broader sense.

It sounds like there's sort of this bifurcation of some great assets having great margins, and there's some stuff that's really underperforming like Connersville.

What is sort of the general split maybe on a revenue basis of business if you can talk about this that's really outperforming?

And what's really underperforming that you maybe can be parsed off over time or even separated in a transaction?

Well, I think what I'd say on that, John, is that we've got four facilities that are targeted for sales remaining.

And those four represent approximately $300 million in revenue of annual revenue and are not profitable in total.

So that'll give you some dimension.

We've also talked historically about a handful of plants that lose a substantial amount of money.

And that's about as far as we've dimensioned it so far.

So as far as transactions going, we're looking at further workdowns or sales of those facilities?

Is that how we should think about it?

Or would there be any other transactions to isolate those underperforming assets?

Again, we've broken out -- there's 4 left to sell.

There are essentially 11 or 10 left to close and 1 to fix out of the remaining 15.

Okay.

And would you consider selling any other businesses that are performing well to raise cash going forward if need be similar to this chassis business?

Well, I don't think -- as we look at our liquidity position right now, I think we're very, very comfortable where we sit liquidity wise.

Okay.

Thank you very much.

Our next question comes from Ron Tadross with Banc of America.

Good morning, guys.

Just on that last point on -- of the $870 million of cash, is most of that in the U.S.?

No, I think most of it is not in the U.S.

I think the number is 70% of the cash is in the U.S.

and Europe.

Yes, if you look at the US and Europe in total it's about 65, 70% of our total cash balance.

So how much is in U.S.?

Is it half?

It's about 15-20%.

And that ebbs and flows, obviously, depending on our quarters.

Okay.

And just on the COGS year-over-year, even if I took out, I think you gave us about $37 million of items -- even if I called those out, your cost of goods sold were up about $60 million year-over-year on pretty flat sales.

So why would it be that the cost of goods would be up so much?

If you take a look, you're really referring to our page 17.

As we kind of walk through the ins and outs on the nonrecurring and the unusual items, there's about a 200 basis point difference between quarter one of 2007 versus quarter one of 2006.

Obviously as you look at our sales shift, we had a significant reduction in our North American sales.

That obviously most of it coming from Ford North America, although Nissan North America contributed, as well.

We're seeing a significant shift there.

One of the reasons, obviously, 3 months ago we're looking to rationalize additional facilities, including Connersville from the fixed cost structure.

So we obviously have a margin impact as our sales shift, most notably in North America.

That really makes up the remainder of that 200 basis points.

I should note, though, as Don mentioned, we continue on the restructuring actions, our manufacturing efficiencies, our material efficiencies.

And in the first quarter, those largely offset any customer pricing that we had.

It sounds like you're adding overhead -- are you adding overhead for the new business?

Is that why the COGS would be up?

I understand the sales shift in North America, but if you think about your cost of goods sold as material labor and overhead.

You're not adding labor, right?

Your materials should go down with the sales shift.

So -- or with the North American sales shift, are you adding overhead?

No.

So why are the cost of goods up?

You've got two point -- one is obviously the fixed cost associated with a number of our facilities.

And the second piece is with respect to -- we have taken and we notice sourcing actions with respect to certain of our product lines, most notably in the electronics business.

And that's really a mix shift as we look year-over-year from more premium products to more market based products.

And lastly, as we do have -- most notably in our interiors business -- there are some directed source flowthrough, so we don't necessarily get a normal manufacturing margin on that.

We get more of a logistics and assembly margin.

Okay.

All right.

Thanks a lot.

Our next question comes from Chris Ceraso with Credit Suisse.

Hey, thanks, good morning.

Morning, Chris.

Don, of the handful of plants -- I thought you said in the past, it was about $100 million of losses.

Maybe that's not right.

Where are we today?

Were any of these European ones among those?

Those are just non-core and not underperforming?

How many are left if we assume Connersville and Chicago were among that handful?

I guess we still have a handful of facilities left to be addressed is how I would answer that.

So even after stripping out Connersville and Chicago there's still a handful left?

Yes.

And is that $100 million the right number?

I think it's a little bit less than that after you address those two operations.

Okay.

What's the new expectation for D&A with some of the accelerated depreciation you've got here in the quarter?

Chris, it's Bill.

As you look at -- obviously $120 million in the first quarter -- $121 million.

As we look to the full year, we're looking at about $460 million.

So you've got kind of some ins and outs.

We've obviously got accelerated appreciation for our number of facilities that are under restructuring.

But as we note from a free cash flow perspective, Panorama is going to offset some of that as those businesses we exit effectively May 1st.

So a run rate is probably more like $430 million or so.

We're reflecting about $30 million of additional depreciation expense in that $460 million for the year related to facilities under restructuring.

Okay.

And then, Mike, just one last one on the new business, the $200 million -- or Don.

Is any of that replacement?

Or is that truly net new business?

It's truly net new business.

Net new.

Okay.

Thanks, guys.

Our next question comes from Jon Rogers with CitiGroup.

Yes, thank you very much.

I guess maybe a bigger picture question as you move forward.

Don, is there any material difference between the divestiture environment over the last 6 months or so?

No, I don't think so.

I think you guys are well aware of the private equity monies out there.

I think -- but that's been there for the last 6 months.

I would say that the environment has not changed.

Okay.

And then I guess as we move forward, are you seeing anything specific that would lead you to believe that production comps will be better in the second half of the year?

I think there's some pressures on the macro side that might forestall a second half recovery.

Is that based on just forecasts?

Are you actually seeing something from customers that suggest that we will have a bit of a recovery?

We're not seeing anything from the customer base at this point that would indicate that it's going to be a better back half, no.

Okay.

All right.

Thank you very much.

Our next question comes from Rod Lache with Deutsche Bank.

Good morning.

Hi, Rod.

Couple things.

Are you going to disclose segment performance this quarter -- the climate and interior in electronics?

That's a normal and I'll declare disclosures in our SEC filings, and that will be disclosed.

Okay.

Can you give us any color on how -- you report gross profit.

Can you talk a little bit about how those did in each of the segments?

I think from a -- we'll obviously in filing in a week or so those filings with the SEC.

At that point in time the information will be available.

Although it's important to note as we've talked in our comments, we have had sourcing actions that have compressed margins, and in particular that being our electronics product group.

On a year-over-year basis, we're going to see some deterioration of that business from a quarter of year ago to this quarter.

And again, that's just kind of the normal sourcing actions that have undergone here in predominantly the North American market.

Okay.

Is the climate business less affected because that has some of that Korean exposure?

Yes, as well as the climate business will have obviously some of these restructuring related costs.

If you talk about Connersville, Connersville is a contributor to this accelerated depreciation, and that will be reflected in those financial results, which of course, didn't exist a year ago.

Okay.

And I know you've gone through this.

Maybe if you could more slowly walk through this cost of goods sold increase of $115 million year-over-year.

You mentioned $10 million accelerated depreciation impact.

What was the pension impact on the year-over-year basis?

The pension impact is about $17 million.

And that was a settlement of previous liabilities.

In Canada we have spoken about this in early January.

This is our Markham pension plans.

And that was $17 million.

So as a one-time pension settlement as we annuitize those liabilities.

Right.

And you had a $39 million relief last year?

So that would have been reducing your cost of goods sold?

Exactly.

And predominantly being the relief of OPEB and pension liabilities associated with the salaried employees that we transferred back to Ford associated with certain ACH facilities.

Okay.

But these three items collectively don't fully account for the increase in the cost of goods sold.

And that is what -- a function of currency?

What is driving the those numbers higher?

As we explained -- to Jon, I think it was -- we've got obviously mix from a year ago as well as lower volumes in North American.

Pure volume.

Okay.

What was your original Ford production assumption for this year?

Has that changed?

2.95 was the original assumption.

And we've moved that down to 2.85.

Okay.

Thank you.

Your next question comes from Eric Selle with J.P.

Morgan.

Good morning, guys.

Looking at -- you guys gave some guidance last year and looking at your 45,000 employees at year-end, roughly about 29,000 are hourly.

What portion of those are now operating in low-cost countries?

I know you guys were looking to get three-quarters of those to low-cost countries by the end of '08.

Yes, the status of that is that right now we're about 52% of our employees or manufacturing employees are in low-cost areas.

The target there is 75%.

And then if you look at on an engineering perspective about 30% of our employees are in low-cost areas.

And again, the target there is at 50%.

Are some of the actions these guys are doing right now -- when are we going to get the bulk of the savings?

That's a lot of savings.

That's really the hockey stick of profit growth here.

We can talk about sales coming and going, but these employee savings are really the bulk of the profit growth I would imagine.

Certainly it's important.

And it ties on a manufacturing front directly to the restructuring plan.

So as a Connersville or a Chicago closes, obviously those employees move from high-cost and are either replaced or just the product is moved into low-cost areas.

So that's the manufacturing piece is more of what I'll call a lumpy type of progression, where the engineering is a more straight-lined approach where we're hiring employees in low cost countries.

So if you take a look at 2006, for example, on the engineering front -- we increased our low-cost engineering personnel by some 38% while reducing our high cost by 12.

So that will continue.

And we have a trajectory that we can follow there.

And then, again on the manufacturing side, that will come and go as we either set up new facilities in low-cost areas -- be it at China, be it a Turkey, be it a Slovakia -- as we build new plants, and then it directly ties as well to the restructuring actions.

On the manufacturing front, I would imagine some of the union contracts as well as some of the severance issues delay that a little bit.

Is that a true statement?

Certainly our restructuring plan is linked to some of the expiration of the labor contracts, correct.

What are the next major milestones for your labor contracts?

Is there one coming up I'm missing right now?

No, we have not disclosed that.

Okay.

And just finally, the use of excess liquidity -- you guys are bringing in another $500 million this quarter.

Where do you see that being spent over the next several years?

I'm sorry, we missed that.

I'm sorry, you have $500 million coming in through the new term facility.

And was just wondering what areas do you guys expect to spend that money?

Right now what we'd say is that we're comfortable with the liquidity position.

It's there to absorb any significant disruption that -- let's say the next few months might or might not provide.

If anything doesn't occur and things flow smoothly, then certainly we're going to look at the 2010s as a potential to take out.

I think it's important to note that part of that $500 million was used to create availability under some of the receivable programs.

It's not as if the full amount is sitting in cash waiting to be used.

We have opened up some liquidity on our facilities.

Okay.

Thanks a lot, guys.

Our next question comes from Jeff Skoglund of UBS.

Morning.

Morning, Jeff.

Wanted to see if you could help me understand the quarterly progression that we're likely to see for the balance of the year.

You had an EBIT-R loss of $46 million in the first quarter.

You're guiding to a difficult second quarter.

I know Ford's pulled forward 40,000 units from Q3 to Q2.

And while the year-over-year comparisons for Ford may improve, the volumes are still going be significantly down year-over-year.

It would suggest to me that a lot obviously has to come from restructuring savings.

Number one, is that correct?

And number two, what is your total restructuring savings target for the year and what did you achieve in Q1?

Yes, Jeff.

It's Bill Quigley.

As you reference, we don't provide quarterly guidance obviously, we provide annual guidance and we're affirming that other than an adjustment to reflect the chassis divestitures.

If you look at our EBIT-R for $46 million for the first quarter, it does have $17 million of pension settlements in it.

And as we go forward with our restructuring plans and actions, we're going to likely continue to have some adjustments for either OPEB or settlements.

That's $17 million we believe over the entire year will actually be probably a net positive in the range of $15 million to $25 million.

So that's a component of our improvement in the rest of the year.

As well as just our manufacturing efficiencies, material adjustments, as well as the restructuring plans that we're launching and executing throughout the course of the year.

But you won't give a targeted restructuring savings number?

We had those on the charts in our January presentation.

Okay.

Those are still valid?

Yes.

We had an incremental impact of about 120 year-over-year, which would include facility actions as well as what we've done on the salary side.

And what's the plan for AR securitization for the full-year?

From the AR -- we've got now the European facility.

We had a French facility that we've rolled into that.

So we've got our fully capacitized (inaudible) European facility.

We transferred receivables into the SPE, and then we draw on, obviously, or sell those receivables when it's required.

As part of our original guidance, we set that at about $100 million or so.

We expect it to be basically flat if you look period to period or year-to-year.

So the guidance for $230 million of free cash flow burn -- that includes the benefit of $100 million of additional AR securitization?

It's not a benefit, it's flat to what we had --

It's neutral to cash flow.

Right.

So obviously the securitization for that facility, utilization is going to ebb and flow.

But as we provided free cash flow guidance, it was appropriate for us to set a base and say we're going to keep it flat from a free cash flow perspective.

Because you can move it, obviously a lot with changes in assets sold or receivables sold.

Thank you.

Our next question comes from Adam Plissner with Credit Suisse.

Morning.

Wondering if you could help me understand a little bit better.

The $60 million of unreimbursable, let's call it restructuring start-up costs.

How does it specifically relate to the process of moving to the low-cost locations?

Is there a separate bucket that you look at that will just be inefficiencies to either getting facilities up and running or building out facilities?

Yes, certainly, and Bill will help me with the numbers a little bit.

But the concept of the non-reimbursable restructuring -- for example, environmental cleanup at a location is an expense, obviously, that we would have to incur as we move out of facility A to facility B.

That's not reimbursable under the escrow arrangement.

So all we're doing there is we're calling out some of these expenses that are due to the restructuring activities so that we can understand how the core operations of the business are working and are performing.

Similarly are the launch costs, say in facility B where we're moving to to get those products up and running again.

There's substantial expense associated with preparing those facilities to have the product come, in in terms of not only testing, but in pre-production runs.

So again, what we're trying, at least from my perspective, what we're trying to do is to make sure we understand where the core operations are, how they're performing, and then bucket the restructuring activities -- be it reimbursed or unreimbursed -- bucket those expenses.

Okay.

-- go ahead.

It's Bill, and a significant piece of that as we even call out in the first quarter is accelerated depreciation expense.

So it's non-cash.

And that item is specifically non-reimbursable under the escrow account.

It doesn't account for either underabsorption during the process of shutting and transferring, and it does not include the potential for inefficiencies as you -- because you talked about some start-up costs.

But just whether it's going out trying to hire employees, issues of lining up supply chains, vendors, anything in just getting the low-cost locations up and running?

You're exactly correct.

Those are effectively normal operating costs, quote unquote.

So they're not reimbursable from the escrow account.

Any way to gauge either what that impact is currently running through your P&L and sort of when you get through that period?

And I guess it also has to do with the new business wins because almost, I think you quoted before 80% of your new business wins will end up in the low-cost location.

Is this a process that takes a long time through transition?

How can we separate out that cost?

It's Mike, I don't know that you can separate it out.

I would just look to the fact that we've been winning new business now for a number of years from a variety of customers.

And we're really getting pretty good at starting up new operations in various parts of the world.

Even though you're looking at in this case maybe a transfer of business, it's not unique for us.

We build plants around the world, lately only in low-cost countries, and we've gotten pretty good at starting those up.

So we don't see anything really unusual that we would recognize.

It's more a matter of normal business for us today.

That's helpful.

And then, maybe just a follow-up on the recent asset sale in western Europe.

You've talked about inefficiencies in western Europe and the difficulty during the sale process, whether it's excess freight or just general manufacturing inefficiencies.

Once this asset sale is behind you, can you describe the environment of your existing facilities in western Europe and what else has to be accomplished there?

Certainly that this transaction with the chassis plants, the three chassis plants in western Europe goes a long way.

as Mike said in his opening remarks, in terms of solving some of those issues.

But it does not fully address the total issues that we've got to go through in western Europe.

And so I would expect that premium freight or premium costs associated with the non-core facilities will come down as we go as we move through the year.

But it will not go down to zero.

We still do have some other facilities that we're working with our customers with labor to address.

And our plan to be addressed this year.

But again, does not fully get us out of the situation there.

Okay.

Would you describe the rest of the challenges over there more difficult to accomplish?

Was this -- by no means didn't sound easy to take care of.

But was this the easier part of addressing those challenges?

I think they're all difficult to do.

We're trying to be sensitive to all of the stakeholders involved.

So I wouldn't rank one more difficult than the other.

Just a lot of hard work to do to get these things done.

Okay.

Thanks, gentlemen.

Our next question comes from Robert Barry with Goldman Sachs.

Hi, guys, good morning.

Good morning.

When do you think the business is going to be EBITDAR break even?

As we stated in January, '07 through '08, we're obviously in our restructuring plan, we're moving forward with that.

As we move out in '09 and we're looking to be positive from a free cash flow perspective, I think if you start to do the math back there, you get to that -- you must be EBITDAR, if you will, positive to enable the free cash flow because we're going to continue to have a CapEx spend in the business.

So by the time you enter '09 you expect to be EBITDAR break even?

Correct.

And the free cash flow guidance positive for '09 -- is that on a full-year basis, or is that a run rate as you exit '09?

Full-year.

And just finally, the $60 million in expense that you called out that's non-reimbursable -- that is part of the negative $85 million EBIT-R guidance for this year that's in there?

Correct.

Okay.

Thank you.

Thank you.

Great, thanks, guys.

Of the 4 facilities that you have left, they represent about $300 million in revenues that are relatively non-profitable.

How do we think about proceeds from those sales?

Given the three facilities you sold at about $400 million in revenue, one for about $90 million -- if we think of that as a break even sale, we're going to move those out of the business with little to no proceeds?

The way I'd answer that is that we don't know at this stage.

We're marketing the properties.

And we'll have to see how the process goes.

Okay.

And the other plants that are 10 left to close.

Would you just kind of go over the timing on that?

Are you still on the same timetable for that?

Yes, we're still on the same timetable.

We haven't changed that.

2008, we've got 8 facilities to address -- 6 of those are close, 1 fix, and 1 sell.

And then 4 in 2009.

So the timetable has not changed.

And then just to the cash flow real quick.

It looks like restructuring and other reimbursable costs for the full year are $117 million and reimbursable from the escrow account $105 million.

That starts going 1-to-1 pay after about another $50 million?

$53 million.

$53 million.

So that number's kind of close to $117 million.

Is that because you've got receivables coming from that escrow account still to follow?

No, I think that $117 million versus the $105 million.

And when we made in our comments, we're going to have some cost sharing as we go through our restructuring actions.

This year, obviously, we've had $41 million in the first quarter and you can do the math, obviously, to get out to the $117 million.

And if there's $53 million available as we restructure the business, we're going to work through that first $250 million traunch of the $400 million escrow account.

Okay.

Thanks, guys.

That's all that $12 million is.

Okay.

Great.

Our next question comes from Frank Jarman with Goldman Sachs.

Thanks, guys.

Just a couple questions.

One -- on CapEx, you guys spent about $64 million in the first quarter.

You're expecting $370 million for the full year.

Can you just give me a sense for how that's going to lay out over the next few quarters?

Probably more heavily weighted in the back half of the year than the first half.

And predominantly related to a number of the new business wins here in North America for the program for the Dodge Ram interior program.

Okay.

In terms of more of a maintenance type level, what would you guys think you could take that down to?

We've looked at ranges anywhere from $320 million to $340 million depending.

But it's going to ebb and flow based on new businesses, new business launches.

And depending on obviously the movement in our revenue, that can move forward.

But if you look at kind of a run rate, I think we've mentioned prior anywhere from $320 million, $340 million, $350 million range.

Thanks, and then second question -- just in terms of the volume hits from Ford and Nissan.

Are there any competitive issues driving the volumes or content per vehicle lower?

Or is it purely a function of lower volumes at both companies?

Are you guys losing any business with either of those guys?

No, this is Mike.

In this case, it was mostly the build.

And any sourcing decisions would have been made that we're currently shipping product would have been made several years ago.

There really aren't any surprises there.

And I think, as Don mentioned, our re-wins are continuing strong.

So we've seen -- I would say most of the de-sourcing actions have already occurred and there's nothing that's affecting in particular the first quarter of this year.

So you guys haven't seen Ford shift any throughput over to the ACH facilities recently?

First of all, we wouldn't see that.

The ACH facilities operate on their own at this point.

And a lot of the ACH facilities are in businesses that are not core to us.

We wouldn't have even seen anything that they're doing with that.

The answer to your question is at this point in time, no.

We're not seeing it.

Great.

Thanks very much.

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

That question comes from Chet Luy with Barclays.

Hi, good morning.

Just a few questions.

Most of my questions have been answered.

But just to be clear -- the free cash flow guidance of negative $230 million, plus/minus $50 million for '07.

That does not include the $90 million in proceeds from the chassis business sale, right?

That is correct.

And then, earlier in this conference call, management mentioned that the predetermined multi-year price downs were no longer the norm in the businesses they compete in and OEMs are more willing to consider as far as costs when negotiating annual prices.

Are you witnessing the same trend?

We're working with our customers individually on year-over-year productivity.

And certainly part of that negotiation is based upon our cost structure and what we're seeing in costs and commodities, et cetera.

Housekeeping question.

Can you give us a sense as to whether or not working capital will be a source of cash this year?

Yes, it will be.

Would it be slight source of cash?

It'll be a slight source of cash if you obviously take a look at our financials, we're managing our receivables payables quite well from a matching perspective.

But it'll be a slight source of cash.

We do have some headwind as we've spoken in our comments about Ford North America -- the change in payment terms.

But it'll be slightly positive.

And finally, are you experiencing higher than expected higher distress costs?

Yeah, I think that is a factor for us.

That's probably -- our forecast is probably going to be double what it was last year.

Okay.

Thank you.

Okay.

Okay, well, thank you for participating on the call today.

I'll be around for the rest of the day to answer your questions.

Thank you.

Thank you.

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

Thank you for your participation.

You may disconnect at this time.

Good day.