Visteon Corp (VC) 2011 Q4 法說會逐字稿

Good morning and welcome to the Visteon fourth-quarter full-year 2011 earnings call.

All lines have been placed on a 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 Information for further information.

Presentation materials for today's call were posted on the Company's website this morning.

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

I would now like to introduce your host for today's conference call, Mr.

Chuck Mazur, Vice President, Investor Relations for Visteon Corporation.

Mr.

Mazur, you may begin.

Thank you, Christy.

Good morning and thank you for joining us for Visteon's fourth-quarter and full-year 2011 earnings call.

As Christy mentioned, our presentation materials have been posted to the Investor Relations section of our website.

Today's presenters are Don Stebbins, Chairman, CEO and President and Marty Welch, Executive Vice President and Chief Financial Officer.

Following the formal presentation, we will open up the lines to take your questions.

With that, I would like to turn it over to Don.

Thanks, Chuck and good morning, everyone.

During today's presentation, I will review Visteon's 2011 fourth-quarter and full-year performance and then I will turn the call over to Marty for the financial review.

As we take you through our 2011 financial results, we want to stress our strong operational performance and our investments in our product portfolio.

For the year, we were awarded over $1 billion in incremental new business showing growth across all of our productlines and in all regions of the world.

During 2011, we expanded our geographic footprint by opening new facilities in Morocco, Russia, China, India and Indonesia.

This continues our progress into the growth markets of the world.

We also continue to make investments in technology and innovation to support our customers.

Last year, we invested approximately $600 million in research and development and capital expenditures.

During 2011, we continue to improve quality and reduce warranty costs.

This performance was recognized by our customers through over 50 different awards.

We also received a PACE award nomination.

We also continue to focus on asset optimization.

In 2011, we completed the sale of a portion of our Duckyang joint venture while also signing a nonbinding memorandum of understanding to sell a significant majority of our Interiors business to Yanfeng Visteon.

And on February 15, we completed the closure of our Spanish Electronics facility.

In 2011, our financial performance was strong.

Adjusted EBITDA was $685 million, the highest ever achieved by Visteon.

Our full-year adjusted EBITDA margin was 8.5%, which was the third consecutive year of improvement and we are on track to achieve our goal of double-digit adjusted EBITDA margins by 2014.

Our balance sheet remains strong and we funded our 2012 and part of our 2013 pension obligations.

YFV, our large unconsolidated subsidiary in China, had another record year with sales reaching $6.3 billion.

And lastly, we are reaffirming our full-year 2012 guidance given the Deutsche Bank conference in January.

As I mentioned on November 30, we signed a nonbinding MOU to sell the majority of our Interiors business to YFV.

We continue to work with YFV to complete this complex transaction.

This transaction will strengthen our 17-year relationship SAIC and HASCO.

It also allows us to retain a 50% ownership in a truly global interiors business.

Overall, it will create the second-largest global interior supplier serving more than 30 customers from over 60 facilities in 16 countries.

On slide 5, I also want to give you an update on our Spanish Electronics facility.

Last June, we announced that we had made the very difficult decision to close our Electronics facility in Cadiz, Spain.

In early February of this year, we reached agreement with the employees, local unions, and governmental authorities regarding specific closure arrangements and on February 15, cash payments totaling $45 million were made to cover severance and other agreed-upon costs.

On slide 6, we provide our new business wins for 2011.

They totaled almost $1.1 billion, or 13.2% of 2011 revenue, which is an all-time record.

We had important wins in each of our four productlines with over 60% of the wins in 2011 from our Climate business and 24% in Electronics.

Similarly, the wins were concentrated in the Asia-Pacific and European regions, 45% and 29% respectively.

Slide 7 shows the breakdown of our full-year sales of $8 billion by productline and by customer.

The slide also shows the impact of our nonconsolidated joint venture sales of $4 billion.

Climate, our largest productline, generated 49% of total consolidated sales for the year and on a market penetration basis, Interiors was our largest productline, accounting for 42% of our sales, largely due to YFV.

Hyundai/Kia accounted for 31% of our full-year sales and Ford accounted for 27%.

If we include our nonconsolidated affiliates, Hyundai/Kia and Ford contributed 22% and 21% of our sales respectively.

Slide 8 provides our sales distribution by region.

We continue to experience strong growth in Asia with the region accounting for 42% of our total consolidated product sales.

Europe represented 36%, North America 16% and South America 6%.

Including our nonconsolidated affiliates, Asia accounted for 59% of our sales while Europe, North America and South America represented 26%, 11% and 4% respectively.

As highlighted on the right side of the slide, our Company has been positively impacted by our strength in China.

Since 2007, our total Chinese sales, including nonconsolidated revenue, are up from $1.3 billion to more than $4 billion representing a CAGR of over 30%.

IHS projects the China growth rate to slow during 2012.

Their latest estimate is that production volumes will be 7% higher than in 2011.

We expect sales related to YFV and its affiliates will grow faster than the overall Chinese market.

YFV's two largest customers, SVW and SGM, are growing faster than the market and are well-positioned to continue their growth.

I would now like to turn the call over to Marty.

Thanks, Don and good morning, everyone.

Slide 9 provides a summary of our fourth-quarter and full-year financial results.

As we have highlighted on previous calls, our 2010 and 2011 results are impacted by a number of items that make year-over-year comparisons difficult.

Our 2011 financials are impacted by the deconsolidation of our Duckyang joint venture, which was effective October 31.

2010 and 2011 gross margin, SG&A and net income were also impacted by OPEB termination, restructuring costs and reorganization and other costs.

For the rest of this presentation, I will refer to adjusted sales, adjusted gross margin, adjusted SG&A and adjusted EBITDA, which exclude these items.

Reconciliations between our reported financials and our adjusted financials are provided on pages 27 and 28 of this presentation.

Slide 10 provides a summary of our fourth-quarter year-over-year comparisons.

Fourth-quarter 2011 adjusted sales of $1.8 billion were $26 million higher than fourth quarter 2010.

The increase reflects higher volumes, primarily in Asia and North America, partially offset by the year-over-year impact of plant divestitures and closures.

Adjusted gross margin was $164 million, or 9.2% of sales.

Our adjusted gross margin is 18.8% higher than 2010, primarily driven by material cost savings and engineering efficiencies.

Adjusted SG&A was $97 million, 3% lower than last year on higher sales.

Adjusted EBITDA was $154 million for the quarter, $16 million higher than a year ago.

And lastly, we generated positive free cash flow of $47 million during the fourth quarter.

Turning to the full year 2011, adjusted sales of $7.5 billion were up 9.2% from 2010.

Year-over-year sales increased in each productline and in every region with Climate, and Asia providing the largest increases.

Adjusted gross margin was $660 million, 4.9% higher than in 2010.

D&A increased by $50 million year-over-year relating to fresh start accounting.

Excluding the increased D&A, adjusted gross margin improved by 12.9%.

Adjusted SG&A of $338 million increased $18 million versus 2010, largely explained by currency and intangibles amortization relating to fresh start accounting.

Despite these items, we have improved our SG&A as a percent of sales.

Adjusted EBITDA was $685 million, or 9.1% of Visteon's sales.

As Don highlighted earlier, our 2011 adjusted EBITDA is the highest ever achieved by Visteon.

And lastly, free cash flow was a use of $83 million for the full year 2011.

Slide 12 highlights our adjusted sales and adjusted gross margin performance for the fourth quarter and full year.

Volume and mix increased sales by $47 million in the fourth quarter and $495 million for the full year.

Fourth-quarter sales grew at a slower rate than the previous three quarters as Asia sales were impacted by Thailand floods; South America sales were impacted by select assembly plant shutdowns; and European sales were impacted by lower production volumes for certain OEMs.

Divestitures and closures lowered sales by $22 million in the fourth quarter and $166 million for the full year.

Currency had little impact on sales in the fourth quarter; although it did favorably impact sales by $383 million for the full year, principally reflecting the weakening dollar versus most major currencies, including the euro and the Korean won.

As highlighted on the right side of the slide, our fourth-quarter and full-year adjusted gross margin was $164 million and $660 million respectively.

Fourth-quarter adjusted gross margin improved year-over-year by $26 million.

The largest driver of the change was improved net cost performance.

Although negative for the full year, net cost performance improved sequentially in each quarter of 2011 and turned positive in the fourth quarter.

Slide 13 highlights our adjusted sales and adjusted gross margin performance for the fourth quarter by product segment.

The Climate and Lighting segments both increased adjusted sales and adjusted gross margin year-over-year.

Climate sales were 6% higher while its adjusted gross margin increased by $8 million, or 9%.

Electronics adjusted sales decrease slightly, but its adjusted gross margin more than doubled from $17 million to $38 million.

Electronics margins in particular benefited from strong cost performance in the fourth quarter.

Interiors adjusted sales and adjusted gross margin both decreased impacted by the Thailand floods, South American plant shutdowns and lower volumes in Europe.

Slide 14 shows the same product segment data for the full year.

In 2011, every product group increased adjusted sales and three of the four product groups also increased adjusted gross margin.

Adjusting for increased D&A related to fresh start accounting, Climate's adjusted gross margin would have been flat year-over-year.

Favorable volume was offset by unfavorable cost performance.

As we stated on previous calls, Climate's net cost performance was impacted in 2011 by increased customer pricing, but it did improve sequentially in each quarter during the year.

Full-year adjusted gross margins for Electronics, Interiors and Lighting improved year-over-year by 63%, 13% and 50% respectively.

I also want to note that Halla has released their financial results and there is a link on the Visteon Investor Relations page, which will take you to the Halla website, which shows the Halla financial results, which have been reflected there in US dollars and US GAAP.

Turning to slide 15, adjusted SG&A expense totaled $97 million in the fourth quarter, $3 million lower than the fourth quarter of 2010.

Full-year SG&A expense was $388 million, $18 million higher than 2010.

Adjusted SG&A as a percent of adjusted sales improved for both the fourth quarter and on a full-year basis.

Full-year adjusted SG&A as a percent of sales was 5.2%.

For the full year 2011, equity and net income of Visteon's nonconsolidated affiliates totaled $168 million, an increase of $22 million, or 15%.

Higher OEM production volumes, particularly in China and favorable customer positions with SAIC, SVW and SGM, drove significant growth in Yanfeng Visteon and its affiliates.

For the fourth quarter of 2011, equity and net income of Visteon's nonconsolidated affiliates was $38 million, $8 million lower than the fourth quarter last year.

YFV's financial results in the fourth quarter were impacted by certain events, including pricing adjustments, costs related to the MOU agreement and retention expenses that we do not believe will impact the long-term run rate profitability of YFV.

YFV continues to deliver strong growth at or above market levels.

Moving to slide 17, adjusted EBITDA in the fourth quarter of 2011 was $154 million compared to $138 million in the fourth quarter a year ago.

For the full year, adjusted EBITDA improved from $614 million in 2010 to $685 million in 2011.

Adjusted EBITDA as a percent of adjusted sales increased from 9.1% in 2011 from 8.9% in 2010.

And as Don noted earlier, it is an all-time record for Visteon, both in absolutes and as a percent of sales.

Free cash flow in 2011 was a use of $83 million.

Cash flow in 2011 includes outflows relating to Chapter 11 items and net restructuring of $66 million.

Cash from operating activities in 2011 was $175 million.

Capital expenditures were $258 million in 2011.

Of this amount, $168 million was in Climate, primarily in support of future customer program launches and capacity expansion.

Cash balances, including restricted cash at December 31, were $746 million, down $34 million from September 30.

This decrease reflected the impacted of currency and the consolidation of Duckyang partially offset by positive free cash flow.

The Duckyang deconsolidation reduced balance sheet cash by $52 million in the quarter.

Late in 2011, we froze our pension plan for active employees in the US and we will no longer accrue benefits under this defined benefit pension plan.

Our pension obligation at the end of 2011 was 77% funded, a 300 basis point improvement from 2010 levels.

Our unfunded pension obligation was $447 million, of which $329 million was in the US and the remainder related to plans outside of the US.

Also, as we previously disclosed, in January of this year, we contributed 1.45 million shares of Visteon valued at approximately $70 million to fund our 2012 and a portion of our 2013 US pension plan requirements.

Including the contribution made in January, we estimate that the US plans are now 83% funded.

In total, since the beginning of 2011, Visteon has contributed $150 million in cash and stock to fund our pension obligations for 2011, 2012 and a portion of 2013.

As Don said earlier, we are reaffirming our full-year 2012 guidance.

We are projecting full-year product sales of $7.1 billion to $7.5 billion, full-year adjusted EBITDA is projected at $650 million to $690 million and full-year free cash flow is projected at $25 million to $50 million.

Our 2012 free cash flow guidance includes restructuring-related payments of approximately $100 million in capital spending of approximately $250 million.

Slide 21 provides a walk from our 2011 actual results for product sales and adjusted EBITDA to our 2012 guidance for these items.

For both the product sales and adjusted EBITDA walks, the first two variance items relate to the 2011 Duckyang deconsolidation and to currency.

Currency reduces both product sales and adjusted EBITDA on a year-over-year basis whereas the Duckyang deconsolidation reduces product sales, but has minimal impact on adjusted EBITDA.

Volume and mix is expected to be a neutral factor on 2012 product sales.

Lower European volumes will reduce sales in the Interiors product group offsetting the positive impact of higher expected volumes in our other three product groups.

We expect volume and mix will have a negative impact on adjusted EBITDA due to product mix in the Climate and Electronics product groups.

Net new business wins will positively impact both our product sales and adjusted EBITDA.

These wins primarily relate to the product group -- to the Climate product group.

Pricing and other revenue changes will have a negative impact on product sales while net cost performance will improve adjusted EBITDA.

Because we don't provide quarterly guidance, we thought slide 22 would be useful to qualitatively discuss how we see the adjusted EBITDA margins trending for 2012.

For the first half of 2012, we expect adjusted EBITDA margins to be lower than the first half of 2011.

Margins in the first half of 2011 benefited from the impact of commercial agreements.

The benefit relating to these agreements in the first half of 2012 will be significantly lower.

We do expect the second half of 2012 adjusted EBITDA margins to be higher than the second half last year and be sequentially higher than the first half of 2012.

On slide 23, you can say that we expect margins to increase in the second half of 2012, as well as in the coming years.

As we have stated previously, we expect EBITDA margins as a percent of sales to be double digit by 2014.

The main drivers for this expected margin improvement are favorable volume and mix, including the impact of new business in both our consolidated and unconsolidated operations, structural cost leverage as we continue to focus on fixed costs when our top-line sales increase and thirdly, net cost performance.

We are driving material savings through procurement initiatives, supplier rationalization and global design standardization and manufacturing savings to reductions in indirect headcount and other efficiencies.

And now, at this point, I would like to turn it back to Don.

Thanks, Marty.

In summary, we believe we have the right products and technologies to capitalize on current market trends.

We have broad customer diversity with Ford and Hyundai/Kia as our anchor customers.

We have a diversified regional sales profile that is well-positioned and an extensive presence in emerging markets leveraging management, technology and innovations developed in the mature markets.

We have a low cost, highly efficient global manufacturing footprint with 75% of our hourly workforce outside of high-cost countries.

We have an attractive financial profile with a strong balance sheet, a competitive leverage position, a lean overhead cost structure and improving margins.

We would now be happy to take any questions.

(Operator Instructions).

Himanshu Patel, JPMorgan.

Hi, good morning, guys.

A couple questions.

First, you mentioned net cost performance in 2012 should be positive.

Could you put a little bit of dimension just around the magnitude?

Fourth quarter was, I think, about $25 million positive.

Is there a reason to think that that sort of rate of improvement quarterly could continue?

And the second question is, on YFV, you mentioned, I think, three items that caused the year-over-year profit decline.

You said pricing adjustments, costs related to the MOU and retention agreements.

Could you just kind of go through each one of those and explain?

I think your broad comment was most of these are nonrecurring, but just kind of talk to us a little bit about why the pricing adjustment item in particular would not be something that we should think about going forward.

Sure, hi, Himanshu.

It's Marty.

I think on your first point, we are very focused on continuing to optimize our cost structure across all of our geographies and in particular, the Climate business this year is focused on that.

And so we do feel that the net cost equation is going to be modestly positive this year and that is what is built in to our plan.

In terms of the fourth quarter for YFV, I think it is hard to tell exactly what the future will bring pricing-wise, but we do think that there were some things that built up in the fourth quarter that perhaps, at least in the order of magnitude, would not be repeating in that order of magnitude.

The other items I think are explainable.

They are incurring costs as we are in trying to understand the transaction contemplated by the MOU and of course, retention expense does come at you from time to time in China.

And just the costs related to the MOU, will there be more of that prospectively in Q1 and Q2?

Yes, yes, I think there will.

There is ongoing costs as we all work together.

Those costs actually occur on both sides.

Okay, great.

Thank you.

Kirk Ludtke, CRT Capital Group.

Good morning, everyone.

You mentioned the Yanfeng transaction and its complexity.

And I was curious if you could maybe expand on those comments and talk about some of the major events and the timing and particularly any events that public -- that the public investors would be able to put on their calendars.

Sure.

The transaction I think, as you can imagine, can cover up to -- it is multijurisdictional in terms of the number of countries that we have, probably in the neighborhood of 15 different countries that we are working through and there's thousands of employees in the Workers Council.

So it is a very complex situation to fold this in and the number of documents is quite significant.

And then on top of that, we are going to have to go through the regulatory approval process, not only in the EU and each one of those jurisdictions, but in China as well.

I think the next milestone that we would report publicly would be the signing of the documents, which again we have targeted in kind of the early second-quarter timeframe.

Okay, fantastic.

And on slide 21, and you may have mentioned this and I missed it, but could you talk a little bit about the revenues that Duckyang contributed to 2011, how much the accommodation agreements contributed to 2011 EBITDA?

And are we pretty much done with all the benefits from the accommodation agreements at this point?

This is Marty, Kirk.

The Duckyang sales are about $550 million a year and we typically don't talk about the impact of accommodation agreements specifically.

Okay.

And then the pension funding requirements for 2012, did you mention that?

Yes, they are already funded.

They are about $60 million.

We have put in $70 million of stock, so not only have we funded 2012, but we have taken a good chunk to our 2013 because, in addition, you might remember that right before year-end, we put in $15 million of cash that we had returned from the PBGC, which also goes to our 2013.

So to our 2013 already, we have got $10 million of the stock plus the $15 million of cash that we got from the PBGC.

Okay.

So is that the rate that you would expect to be funding the pension in 2013 and beyond if you add all that together?

The $60 million a year is a good run rate number right now.

I mean, obviously, there's changes with market value of the assets and so forth, but I think that would be a decent number for right now.

Okay, fantastic.

And then last question on the cash flow guidance, it looks like there is another use in there.

Is it working capital or something?

I just take the midpoint of EBITDA and subtract interest and taxes and restructuring CapEx, it looks like there is another 80 some --.

Yes, I think it is just restructuring-related, so we finished up the Cadiz and we have still got, believe it or not, some Chapter 11 cash going out.

We are still working those things down.

So I think it is really restructuring-related.

In addition to the $100 million that is already in there?

No, that is in the $100 million.

Okay, maybe I am just doing the math wrong.

I will follow up later.

I appreciate it.

Thank you.

Brian Johnson, Barclays Capital.

Good morning.

Just wonder if you could elaborate a little bit on the Lighting divestiture and then just where do you see 2012 and maybe 2013 going in terms of further portfolio restructuring and rationalization?

Sure, I guess it is unfortunate that we have speculation in the Bloomberg article, so there is not really anything I can say or comment on the article, which I think is what you are referencing to.

In terms of continued portfolio actions, one of the items that we are working on is the sale of the Grace Lake Corporate Center.

And we will continue to divest what I would look at as non-core assets to really get down to just running the business.

There is really no need for us to be property managers so to speak.

And do you have a rough range of what kind of proceeds that could be?

I would say the book value of the property is in the $75 million to $80 million range.

Okay.

And then around the Halla stake, any progress there?

I guess we continue to state what we always have, which is we believe that owning 100% makes sense for us or there is advantages to that.

However, it is not at any price that we would do that.

And if we were to do that, certainly, we would make sure that our customers are supportive of us doing that.

Okay, thanks.

Colin Langan, UBS.

(inaudible) supposed to be stronger than the first.

It seemed a little different from this year.

I mean so what makes this year different than last year?

Is it just market-driven that it is weaker in the first half or is it related to some of the divestitures that make the first half a bit more challenging?

I'm sorry, Colin.

You cut off the first half of the question, so we didn't get it here.

Oh, sorry.

I was just trying to get clarity on why -- what makes the first half a bit more challenging than the second half.

It seemed to be -- usually Q3 and Q4 tend to be weaker on a normal year.

So is it the divestiture that is starting to impact the first-half results or is it just the overall markets are a bit weaker in your key segments that make the first half a bit tougher?

Colin, I think there is, in 2010, a significant impact from commercial agreements, which -- or excuse me -- in 2011, which is not reoccurring in 2012.

So that is probably the single biggest item in terms of the --.

Okay.

And looking at Climate, it seemed like a pretty large quarter-over-quarter increase in the margin.

What is really -- what really helped from Q3 to Q4 in that segment?

For Climate, again, we had been working on let's call it the net cost performance equation back into -- started earlier in the year when we knew that it was going to be a tougher year on the pricing side and those really, in the fourth quarter, came through for us.

Okay.

And when is the normal price done?

Does that start in -- should have impacted the Q4 or is that going to be a Q1 -- the annual price [downward hit] again?

The annual -- the normal annual pricing is a January 1 type item.

What is -- what varies is the date that it gets negotiated.

We are accruing for that from January 1 based upon our estimates and then depending on what you finally settle for gets trued up along the way.

Okay.

And a similar question for the Electronics business.

It seemed to have a pretty strong margin.

It looked like almost a record margin in that segment.

Is that sustainable or -- I know that the divestiture of the -- or the closure of the facility in Spain will hit that margin.

Was that a factor in the fourth quarter or will that be more of a factor in Q1, Q2?

Yes, I think what we are looking for out of Electronics in 2012 was a little bit lower margin than we had in 2011.

Essentially currency is going to play a role for them and have a negative impact for the Electronics business, as well as increased engineering dollars.

We had a tremendously successful year in terms of winning new business in the Electronics group and so we are going to have to step up the engineering cost a little bit.

Okay.

And then just in terms of the backlog, I mean how much -- I mean it is 85% Climate.

Is that all Halla-related or is it across --?

It is across the business.

I couldn't really tell you split out between Visteon plants versus Halla plants.

Okay, all right.

Thank you very much.

Matt Stover, Guggenheim.

Thanks very much.

I had two follow-up questions.

I was looking at slide 21 and I just want to make sure I have this clear.

If I look at the impact of the pricing that is going to negatively affect sales, net cost performance, however, will be positive.

On net, should that be a favorable variable?

Yes.

Okay.

And the second question within that is what are the underlying assumptions on commodities?

Are they a headwind or a tailwind?

I think they are flat.

It is a quiet area right now.

We have not made any unusual assumptions (technical difficulty).

Okay.

And then the second question is, Marty, you made reference to the value of the commercial agreements that favorably affected the first half of last year.

Could you give us a value on that?

No, we really don't talk about the individual commercial agreements.

We have never talked about that.

I'm sorry.

Okay.

Thanks very much.

John Murphy, Bank of America-Merrill Lynch.

Hey, guys.

It is John Lovallo on for John Murphy.

How are you?

Good.

How are you, John?

Good, thanks.

First question is in terms of the Yanfeng agreement, have you guys -- have there been any regulatory concerns thus far?

No, there's not any regulatory concerns so far.

We have yet to file any paperwork with any regulatory agency though.

And again, I don't expect any, but you don't know until you do it.

Sure.

And if that transaction does in fact go through, does that have any effect on your ability to take cash dividends out of the JV?

We would need to finish the negotiation with YFV and that is not complete as of yet.

Okay.

And last question, in terms of Thailand, are you guys seeing any -- some suppliers are saying that there is a potential second wave of constraint.

Are you guys seeing any issues in the supply chain?

Not any significant issues, no.

Okay, thanks a lot, guys.

There are no further questions in queue at this time.

I turn the call back over to the presenters for any closing remarks.

That's great.

Well, thank you very much.

We appreciate you joining us for the call and have a good day.

We will be around.

Thanks.

This concludes today's conference call.

Thank you for your participation.

You may now disconnect your lines.