Visteon Corp (VC) 2014 Q2 法說會逐字稿

Good morning and welcome to Visteon's second-quarter 2014 earnings call. (Operator Instructions) As a reminder, this conference is being recorded.

Before we begin this morning's conference call, I would like to remind you: this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future results and conditions but rather are subject to various factors, risks, and uncertainties that could cause our actual result 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 Visteon'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. Bob Krakowiak, Visteon's Vice President, Treasurer, and Investor Relations. Mr. Krakowiak, you may begin.

Thank you, Jennifer. Good morning, everyone. With us today are Tim Leuliette, Visteon's President and Chief Executive Officer; and Jeff Stafeil, Visteon's Executive Vice President and Chief Financial Officer. We appreciate your interest in our Company and taking the time to join us for our review of the second quarter of 2014. We have scheduled a meeting for one hour and will open the lines for your questions after Tim and Jeff's remarks.

As previously mentioned, a presentation deck associated with today's call is posted on Visteon.com within the Investors section. Also note that our Form 10-Q was filed earlier this morning with the news release.

Again, thank you for joining us. And now I will turn it over to Tim.

Thank you, Bob, and good morning, everyone. And thank you for joining us.

As usual, we have a lot to talk about today, so let's start. I will be on page 2, which is entitled recent highlights. As you see here -- and first of all, as you go through all our financials, you will see that as per GAAP requirements, we have taken the Interiors operation and put that into discontinued operations. And how that impacts financials is highlighted where appropriately throughout the presentation.

Our sales were $2 billion for the quarter, $1.8 billion excluding discontinued ops. That is 11% up versus the prior quarter, the prior year. Adjusted EBITDA of $193 million -- that is the highest quarterly adjusted EBITDA in our history. $175 million excluding the discontinued operations. Net income of $81 million, and adjusted EPS of $1.71.

We did obviously report a net loss due to a lot of actions in the quarter. The asset impairment, the restructuring, the debt extinguishment -- there is a lot of activity in the quarter that we booked through to impact net income. On an adjusted free cash flow basis, we had a slight negative for the quarter due to the calendarization of payments to suppliers. In some quarters there is four payments; in some of them there is two.

Year to date, however, we have got a positive cash flow of $46 million. The balance sheet remains strong: cash of $1.4 billion; that is up $417 million. Debt of $960 million, $161 million higher.

Our EBITDA -- debt to trailing EBITDA is about 1.5 turns, a little under 1.5 turns. Very conservative capital structure at this point.

As you go to the lower left-hand corner, I think it is important to focus on some of the actions that we had this quarter. We closed the acquisition of JCI on July 1. It has post the quarter, but all that activity occurred, obviously, during the quarter to prepare for that. I will talk more about JCI and our vision and our purpose for that a little later.

We reached an agreement to sell the majority of our Interiors operations to Cerberus, and we have one facility remaining that -- we are working on that per our discussions, and everything is, again, in line with expectations on value for the entire Interior package.

We closed the acquisition of thermal and emissions division of Cooper Standard. That may be small now and small during the immediate future, but I'm going to spend some time a little later on why that is important for us and for HVCC.

And then we agreed to purchase a group annuity contract transferring a third of our US pension liability. I think under Bob's leadership in this activity, we have done a tremendous, significant work in the area of pension, reducing not just the PBO but our unfunded position. I will take you through that in a moment.

Looking at our 2014 guidance, Jeff will take you through that increase in guidance, remembering that we will take Interiors out for the entire year. We will bring in JCI and the thermal business that we bought from Cooper for six months. There is a lot of pushes and pulls there, but we will take you through that.

But we thought what was most important here is to start giving you some glimpse of 2015 in a full-year environment, where we have got Interiors gone for the year completely. We have electronics in the Cooper Standard business in completely for the year to give you a look at what we see next year.

And what we see next year I think is quite good. We see revenue up about 13%; EBITDA up 16% year over year. And again, all of this is in line with our commitment back in January of a $10 billion Visteon with a $1 billion EBITDA performance by 2017. And we are still stepping in line with that.

Let's move on to page 3. This is a chart we show you every quarter. It is important to understand where our vehicles are built and where we do business.

For the quarter, 21.9 million vehicles were built around the world. 52% in Asia. It is not shown here, but 26% of those were built in China, meaning that China produces over one out of every four vehicles on earth. If you are going to grow, if you're going to be part of this global vehicle environment and went to succeed, you have got to be heavily invested in Asia and China.

And as you can see on the bar chart on the right side of the page, that with our reported numbers in Q2, that we mimic the world quite closely. 51% of our business in Asia, 27% in Europe, 19% in the Americas and North America, and 3% in South America. What we have shown here is a sort of insight of what happens when we add JCI to the mix.

It would have slightly moved us down in Asia, slightly up in Europe. That is a content-driven issue of vehicle content in Europe JCI brings. Interestingly to note, though, that the major growth that JCI is bringing as well as Asia -- so we see quite quickly, we'll be back to the 50%, 51% Asian mix of our revenue as the decade progresses.

So, again, we are well positioned as a company to take advantage of the Asian-centric growth going forward. And this, again, just reinforces that, as you see on page 3.

Moving to page 4, let's update the JCI Electronics acquisition. That was completed on July 1. It is 5,000 people in 20 countries, including 1,400 engineers and specialist designers around the world. It focuses on advanced driver information, infotainment. It fits quite well with our strategic direction.

It has got some market-leading innovative technologies. I'm going to spend a moment here in a few moments on the technology that we saw embedded and excited us about JCI. It diversifies our regional and customer footprint, which was critical; gives us global scale. And as I said, it moves us up into the top two or three in the world in the cockpit ecosystem.

The business is bringing about $1.3 billion in revenue, $58 million in EBITDA for the year ending September 30, 2013. That is the last full year of audited financials that is publicly available for everyone to see. We'll use that as a standard at this point. But to say that on a stand-alone basis, the EBITDA margin was 4.5%.

JCI was investing very heavily in engineering, and I will show you what some of those products were that are being -- ready to be launched. But we also see some significant synergies as a result, which I also will share with you in a moment.

During the period of 2014 to 2017, JCI's growth is going to be lower than Visteon Electronics's growth. And the reason for that is quite simply that when you put a business up for sale, when you are -- have an unclear future, the customer reaction is one of holding back, not giving you business or delaying awards.

We saw the same thing that occurred with Visteon back when Visteon was in bankruptcy and coming out of bankruptcy. There was a purgatory period, if you will, where business not awarded, but then it expanded quite quickly post-clarity.

I will tell you, I've been on the road for the last 30 days with Marty and the team, meeting with customers, talking about the electronics business. And we see that growth coming back and coming back quite strongly. But it will impact post the 2017 period, just because of the lead times our industry has.

And as I said, we have got $1 billion of EBITDA targeted for 2017. And that doesn't yet even include what we will call the excitement and the power that JCI will bring later in the decade.

Moving on to page 5. Sales growth, as I said, will expand. We are very pleased with the reaction we have seen from customers. But margin expansion is also on the docket. We have said to you in the past that we see a minimum of $40 million of synergies out by 2017. We are now are creating a range here of $40 million to $70 million for those synergies. And it is going to cost us about a dollar for dollar, roughly, for those synergies.

And we will be taking charges as appropriate beginning this quarter and going throughout next year as we restructure and take advantage of the opportunity to achieve those synergies. Additionally, we will incur about $20 million of additional IT transformation and other integration costs related to JCI.

$7 million of those have already occurred in the first half of 2014. And these amounts are excluded, obviously, from adjusted EBITDA. We are moving as quickly as we can on these synergies. Meetings have been held -- all-hands meeting here two weeks ago. Organization charts are out; structures are being put in place.

So, quickly, within the first 30 days, everyone knows where they stand; what the structure is going to be; and what the organization needs to be to achieve these goals. We will continue to provide update on these, but we are very pleased with, A, the reaction of the customer; B, the economics of this transaction; and, C, the opportunity that it brings in technology.

Let's move on to page 6. I want to talk a bit about the acquisition of the T&E, the thermal/emission division of Cooper Standard. Small at this point, yes. $46 million transaction, bringing in EGR, recirculated modules, coolant pumps, valves. And the whole thing allows us to bring another module to the engine.

Let me go back a bit from an historical perspective: if we go back 10 years or so ago, 8 years ago, the only thing that we would bring to an engine would be a cooling module. But over the years, you have started to see more turbochargers. Turbochargers require inner cooling to cool that air, to bring air in in a very controlled way to help improve the combustion process and allow engines to be smaller.

We used to have 2.5-liter naturally aspirated engines; now we have 1.6-liter turbocharged engines. So as engines are smaller, we bring in more air. The air that came through those turbochargers needed to be cooled. If we cool it precisely and have an electronic process that interfaced with the combustion process, we can make the engines more efficient, and we could meet emission numbers.

Air is important. This may kind of surprise you a bit, but for every gram of fuel, we burned 14.7 grams of air. For every pound of fuel, you burn 14.7 pounds of air, meaning when you fill your gas tank, you will burn a ton of air to burn that fuel in your tank.

So how that air comes into the engine, how it is monitored, is very critical. Part of the process now is on the EGR, which helps control the combustion process, provides a whole new module for us of thermal management.

The emission regulations and fuel economy regulations are so tight going forward that the precise combustion process must be kept to a very narrow bandwidth of what is called the adiabatic combustion process. Has to be very closely held.

The way to do that is through these additional thermal control modules that we bring to the party. So in dish engine cooling, then we added turbocharger inner cooling; now we are adding EGR cooling.

So a few years ago, when we had one module on an engine -- later in the decade we will have three modules on an engine. And that is not just a US phenomenon or a European phenomenon; it is a global phenomenon of really bringing technology to the engine.

And that is what the acquisition of Cooper Standard meant. It is only $100 million of revenue by 2017, but we are expanding quite quickly after that period.

Moving on to page 7, pension update. We were able to buy an annuity for approximately one-third of our US pension liability for $1 million over the PBO. This was done with Prudential Insurance. This puts a large piece of our pension into -- obligation into their hands. But it is obviously a very safe and very appropriate location for the assurance of this forward for those Visteon hourly employees that were impacted by this.

This is part of an overall initiative -- and I will have you move on to page 8, if you will -- to see how this plays through. If you look back, on the chart on the left is our overall PBO. The chart on the right is the unfunded position. These are both global numbers. We've referenced the US at the bottom of the chart.

You will see that over time -- and this includes a couple of steps: the annuity purchase as well as the impact of the entire Interior sale. As you know, we have one facility remaining that is in process of transaction this year. That, as we have said to you in the past, reflected a lot of liability being moved off of our balance sheet.

We are reflecting the projection of those numbers here to sort of just give you a guess of what we'll be by year-end. And you can see that on an overall global basis, we're going to reduce our global PBO from about $1.9 billion to $1.2 billion, in the US from $1.245 billion to $775 million.

And on the unfunded position, from $528 million to around $250 million, cutting it in half; but in the US, considerably better performance -- $279 million, cutting our unfunded position down to $115 million. And, again, to do that in this interest rate environment, I think, is quite strong. It makes a strong statement of performance.

We are pleased with how we can continue to work our way out of all of the elements that affect our balance sheet and perfect our performance. The pension is one where -- we are pleased with that particular situation.

Moving on to page 9, I want to take a moment here to go back to the vision that we outlined in September of 2012. At that point we listed some actions and activities that we wanted to accomplish. One was to contribute Climate to Halla and create HVCC and to improve the value of that business. And I think as we go back and look over time, that has not only been accomplished but has achieved many of those goals.

We have become now the second largest in the world. The growth curve there is quite strong. At the time that we were starting this discussion, the HVCC stock was at $17,401. It is now trading in excess of $50,001. And the future is quite bright for that Company and for that stock.

We said at that time we would sell the Interiors business. And that is now in process; the sale's announced.

We said we would address the electronics strategy. We have done that. I will talk more about that in a moment.

We said we would monetize YFV. We have done that. We said we would rightsize the corporate activities in line with where we're -- the proper balance for the businesses. We are in line with that. Continuing -- that is ongoing process. You are never done on that area.

And we said we would start doing some more aggressive stock buybacks. And over the last two years, we've contributed $800 million towards share repurchases, and we still have $375 million of additional authorization remaining.

We said we would strengthen the balance sheet. And I think of two areas there. Pension activity we have done, as well as the debt refinancing from the bonds to the term debt at a much lower cost we have announced also and accomplished this quarter.

As we look at the actions we took recently, and we look now to where we are leading, on the right side of the page, you see that the new Visteon has got these two world-class, high-growth businesses. They are growing for two reasons.

One, they are growing because they are technology focused, and they are industry-leading technologies. So they are technology-driven growth.

But they also growing because they are positioned properly regionally. We have a strong Asian presence. The combination of technology-driven growth with an Asian presence helps fuel, we think, value creation. And we have kept a strong balance sheet with a net cash position.

And, again, we are focused always on shareholder value of every action we take. The two businesses, as you see -- one number two, one number three -- both with growth above in the short term and in long-term above the vehicle build in GDP, and good, strong EBITDA margin improvements. And we will share some of that with you, obviously, of what our performance was in Q2 and how we see that going forward.

Let's move on now to page 11. And I want to focus a bit on the electronics transaction, as it is now completed, and what our vision is there. Right now we are the number three provider in the world of cockpit electronics. It is an area of significant growth. Number two in driver information.

We are now better balanced -- Asian, American, and European -- than we were before. Broad customer profile, from entry-level vehicles to the high end of the German luxury brands.

We are a full service provider in the cockpit. We are not just in infotainment; we're not just in driver information; we are not just in heads-up display or the interface of those systems with the rest of the vehicle, but in all of those activities. Our R&D footprint is global and low cost. And we have market-leading scale because of size of our business and our engineering resources. We now have, as a $3 billion company, the power to play in this business very effectively.

Moving onto page 12, you can see again, pre the JCI acquisition and post the JCI acquisition, of where we stand in the space. Conti number one, Denso and we tied roughly for a 10% share. Then Harmon, then Alpine, Panasonic, Delphi, Bosch, etc.

We have the critical mass of this space to compete. And that is what it allowed us to do.

Moving onto page 13, you can see some of the pie charts here with respect to product, region, and customer. As you can see on page 13, we are very dominant in this instrument cluster and display area but obviously play very strongly in the remainder.

A balanced regional footprint. Again, Asia growing faster than the rest of the world. And you can see Ford is a large customer, but the Nissan/Renault, BMW, Honda, PSA -- a very global portfolio of businesses, all with different growth curves because of vehicle launches that are set over the next few years.

But again, we anticipate again a very balanced customer profile as we expand this business.

I would like to move onto page 14. This is kind of the array of products now that we have within our electronics group. OpenAir, which is our software for infotainment; LightScape for our cluster driver information. We do infotainment head units, head-up displays, rear-seat body control modules, in-vehicle wireless charging, etc.

You can read the chart. It is a broad portfolio of capabilities to step in to the customer and address all their needs of the space. We have the capability, very strong.

But the question is always: what did you see inside JCI that made you wanted to buy that business? What were the technologies that got your attention? And I like to address that on page 15.

These are just three examples of the technologies that we were excited about as we looked at JCI. The first one, Visteon Fusion, used be called JCI Fusion. It is a fusion product line, and the takeaways from this are not so much what the technology does; we are talking about new microprocessors that JCI and their engineering people worked on for years with the semiconductor industry that are now just coming in beta form to us for testing.

But this product will change the way you interface with the vehicle, the vehicle interfaces with you, and the vehicle interfaces with the cloud in a way similar to what the iPhone did for phones. This is a significant change and a significant technological leap forward that we are very excited about. And it has consumed a lot of my last 30 days with customers in getting this launched and getting this into their hands to look at.

This is a gateway to the cloud. It will allow for the customer to have graphics on a class cockpit that rival any tablet, any iPhone, any smartphone in your hands today. This will change significantly the graphics and the interface between infotainment, driver information, and HUD, and being allowed to move whatever is appropriate to your line of sight and to no longer have this demarcation between the center stack and a instrument cluster and defined information. This will now allow it to merge into an appropriate priority and appropriate access for the driver.

It also, because of the design of this system, which is now allowing up to 16 CPUs on common silicon to allow us to run various domains, separate domains, and different cores of the microprocessor so that you can run QNX for one system, Linux for another, Android for a third -- and do it in separate cores, so that you can change the infotainment deck without affecting anything else in the system.

If we tried to connect this all with software, we would have 25 million to 40 million lines of code. This is a much simpler system for the customer and the OEM to be able to update significant parts of the system without affecting others. It will allow us to download new clusters, new infotainment packages of the customer.

It will allow the OEM to download warranty repairs, to download software upgrades -- not just for the infotainment package, not just for the cluster, but as a gateway to all of the other ECUs in the vehicle, if that OEM so desires. This is a significant leap forward.

And obviously, when we're out there with OEMs, we haven't seen anything competitive with this. And we are very high on this. This technology alone could pay for the acquisition of JCI.

Let's move to the next one, advanced infotainment system. This is affordable interoperability. This allows a low-cost, very affordable system to be put in. This happens to be the Mazda 3, which has met with rave reviews -- to great reviews -- to be able to have all the systems and capability of a high-end system, but by grabbing apps off the phone and making it simple and low-cost, making the interface something that people are comfortable with, because it is what they do on their iPhone or their smartphone.

This system, which was launched to the Mazda 3 to, as I said, great reviews, is now able to be expanded to other OEMs. It is a turnkey, complete system that allows for streaming services such as Pandora and others, and really allowing the interface of the vehicle to become that mobile device that we have talked about.

The technology is done; engineering is complete. It has been launched with Mazda. It could be launched with others.

Let's move up to the third item here on the page, digital light processing, DLP, for windshield heads-up display. The term here I want you to think about is augmented reality. What does that mean?

Today, with heads-up display, you look out; you see a few numbers that they float out about 2 meters in front of you visually, and it gives you a modicum of information. But now think about Monday Night Football. And think about the 10-yard line, the 10 yards that the team has to achieve to get its first down.

There is a line on the field as you see it. It is not really painted on that field, but it is painted in your mind; it is painted on your screen, because it is augmented reality. We have been able to digitize information and lay it on your reality.

This heads-up display will be able to go out 150 meters and grab information with respect to your destination. For example, we will overlay on the road the path you need to take for your nav system. We will highlight the building that you plugged in the address. We will highlight the Starbucks, the gas station, or the ATM location, if that is what you want.

It will be overlaid on the reality, as Monday Night Football overlays that line on the field. This will change the heads-up display and make it an integral part of the vehicle interface. And this technology, where it is part of Fusion or on a stand-alone basis, has had tremendous reaction from customers. These are just three reasons why we liked to buy JCI.

Moving on to page 16, remembering that the vehicle is the fourth screen -- the computer, the mobile phone, the tablet; now the automobile. These technologies and turning this vehicle, as we said, into the largest mobile device a customer will ever buy is changing and growing this segment.

The impact is going to be later in the decade and early in the next as the technologies become available, but this is a future of significant growth.

Moving on to page 17: our role here, looking at connected opportunities, is an area that we will spend more time with you, as the investment community, on where we are headed on connected services. If you look at the page, there is -- I will just pick one item, the digital wallet.

One of the cores in that fusion microprocessor that we will have would allow you to book your charge card. And you can automatically pay for your tolls, your fees, pull into your Starbucks and pay for Starbucks. Do what you need from the vehicle with just the pressing of a button on the steering wheel, because it will have a dedicated, stand-alone banking element embedded in that connected service.

So a lot of areas here of opportunity. That will expand our footprint beyond what we have shown you to date. And we'll talk more about that as the 2015 rolls along.

The future of the next five years, page 18. A lot of technology is coming to this space. They will flow in to the automobile, including curved screens, flexible displays. The connected head-up display, as I talked to you about; the DLP that I mentioned here a couple pages later will change forever the interface of the heads-up display in the vehicle.

Vehicle-to-vehicle and the wireless gateway -- whether it be 4G or Wi-Fi -- again, the Fusion product will allow downloads, warranty activities as the vehicle sits in your driveway or sits in the garage at home. Significant activity here fueling the growth.

Moving on to page 19, again, why we did this and summarizing up the commitment to electronics. If we go back to where we were in 2012, 2013, with $1.5 billion of electronics, we now have $3.8 billion of revenue in this business in 2017, with a majority and excitement of growth post that period to take this number even higher.

Number three in the world. A very diversified player, very capable in this space. So, again, now that the electronics transaction is done, now you get to see a bit of why we are interested in this business and what role it will play.

Before I turn it over to Jeff, a summation here of this. And that is basically that our view is that we have two businesses here, driven by technology, driven growth, Asian-centric. But the key to all of that is you have to execute. You have got to be able to deliver the bottom line.

And with respect to delivering to the bottom line, and what we did this quarter, and what our plans are for the next year or so, let me turn it over to Jeff. Jeff?

Great. Thanks, Tim. Thanks, everyone.

Turning to page 21 of the slide deck -- and before we get into our financial results for the second quarter of 2014 and our revised guidance, I want to highlight some key items that will impact the numbers. We definitely had a lot of activity in the quarter.

As Tim mentioned, beginning in the second quarter we have reclassified the majority of our Interiors business as discontinued operations in the financial statements. Our income statement has been adjusted to exclude Interior-specific income and expense, and Interior net profit has been reflected on one item as discontinued operations.

Second-quarter 2014 results have been recast to conform to this presentation, as have results for prior periods. This treatment reduces Visteon's second-quarter and year-to-date sales by $258 million and $522 million, respectively. In addition, certain Interior legacy operations still subject to divestiture or wind-down are reflected as the other product group in our segment reporting.

We have also adjusted our full-year 2014 guidance for a number of items. In addition to the discontinued operation treatment for the majority of Interiors, we have updated our guidance to reflect the acquisition of JCI Electronics beginning on July 1 the acquisition of Cooper Standard's thermal and emissions division during the third quarter and for the pension annuitization agreement Tim referenced in his presentation. I will provide more details on our updated guidance later in my presentation, after I review our second-quarter and year-to-date 2014 financials.

Turning to slide 22, I provide a brief update on our transactions to dispose of our Interior operations. As we previously announced, the sale would encompass three transactions. We have completed the sale of our interest in Duckyang and have announced an agreement to sell the majority of the remaining business to an affiliate of Cerberus.

We are still working to finalize an agreement to sell the last remaining piece of this business and are targeting an announcement by year-end. Overall, the transactions are in line with our previous guidance of an approximately neutral value impact.

Regarding the Cerberus transaction, we are anticipating a closing before year-end. We recognized a charge of $173 million in Q2 upon announcement and anticipate an additional charge of roughly the same amount in the second half of 2014. The vast majority of this anticipated charge is non-cash in nature.

Turning to slide 23, we addressed the financial impact for the Interior operation being sold to an affiliate of Cerberus. The adjusted EBITDA of this business was $18 million in 2013 and is $27 million through the second quarter. 2014 adjusted EBITDA includes approximately $7 million of non-cash items and approximately $12 million of cash related commercial agreements.

We anticipate the business will have approximately breakeven EBITDA in the back half of the year. The free cash flow for Visteon would be $18 million and $50 million higher in the first half of 2014 and for the full year of 2013, respectively, if this business was excluded.

Further, we anticipate this business would have a negative $65 million cash flow impact for the full year of 2014. At the January 2014 Deutsche Bank Conference, we gave adjusted EPS guidance of $2.65 and stated that our Interior operation in total had a 45% negative impact.

Our prior EPS guidance excluding Interiors would have been $3.10 per share. We have now increased our guidance, excluding discontinued operations, to $3.30 per share. This reflects improved performance and the acquisition of JCI, partially offset by the elimination of the non-cash pension gain discussed earlier and a higher average Visteon share count, driven by a delay in launching our accelerated buyback program from the first quarter to the second quarter.

Moving to slide 24, we present our key financial results for second quarter 2014 compared to the second quarter of 2013. The top half of the slide highlights results for our continuing operations, excluding our Interiors business that has been reclassified to discontinued operations. On the bottom half of the slide, we provide key financials including discontinued operations.

As we have explained on prior calls, our financial results are impacted by a number of items that make year-over-year comparisons difficult. The adjusted financial information presented on this slide excludes these items and represents how we manage the business internally.

As non-GAAP financial measures, this adjusted financial information is reconciled to US GAAP financials in the attached appendix on pages 38 through 40. Additionally, year-over-year comparisons are impacted by the consolidation of our Yanfeng Visteon Electronics operation. A consolidation of YFVE explains a portion of the year-over-year growth in sales, adjusted gross margin, adjusted SG&A, and adjusted EBITDA.

Adjusted EBITDA, excluding discontinued operations, was $175 million in the quarter or $26 million better than last year. The year-over-year increase reflects improved climates and electronics performance, despite unfavorable currency impacts and the consolidation of YVFE.

Adjusted EBITDA, including discontinued operations, was $193 million in the quarter -- which, as Tim mentioned, was a record for Visteon. Adjusted free cash flow with an outflow of $18 million, $20 million lower than last year. The negative free cash flow in the second quarter of 2014 is more than explained by lower working capital related to the calendar-driven payment delays, which benefited first quarter of 2014 but reversed in the second quarter.

I will cover more of the metrics on the following pages. Turning to slide 25, we compare 2014 second-quarter sales and adjusted EBITDA to last year's results.

Q2 2014 sales were $1.782 billion or $172 million better than the second quarter of 2013. The increase was driven by the consolidation of YFVE and higher year-over-year sales in climate, which benefited from net new business wins in Asia, North America, and Europe. Total sales, including sales related to our discontinued Interiors operations, were $2.039 billion in the second quarter.

Adjusted EBITDA for the second quarter was $193 million including discontinued operations or $175 million excluding discontinued operations. Adjusted EBITDA increased versus 2013, reflecting the consolidation of YFVE and increased profitability in both the climates and electronics product groups. A partial offset to increased product group profits were corporate costs, which increased $5 million year over year, reflecting unfavorable currency and the loss of a billing arrangement with our former lighting business that ended in mid-2013.

Turning to slide 26, we show our second-quarter sales and adjusted EBITDA for our two main product groups, climate and electronics. We will cover the financials for each of these product groups on the following pages.

On page 27 we provide an overview of our 2014 year-to-date results versus the same period last year. Sales increased 10%, driven by the consolidation of YFVE and higher year-over-year volumes and new business wins in Asia and Europe related to our climate business. Adjusted EBITDA, including discontinued operations, was $363 million, an increase of $59 million versus last year.

On page 28 we provide an overview of climate sales and adjusted EBITDA for the second quarter and for the year to date 2014 versus the prior year. Climate sales in Q2 were $1.332 billion, up $85 million or 7% compared with 2013. For the first six months of the year, sales increased $125 million versus last year. The year-over-year increase for both periods largely reflects Hyundai-Kia; net new business wins in Asia, North America, and Europe; as well as higher Ford and Hyundai-Kia volumes in Asia.

Currency positively impacted both periods as well, largely related to a stronger Korean won and euro, which more than offset the negative impacts of a weaker Thai baht and Indian rupee. Customer agreements include a $12 million commercial claim recognized in the second quarter.

Adjusted EBITDA was $147 million and $264 million for the second quarter and year to date, respectively. For both periods, adjusted EBITDA increased versus 2013. The increase reflects higher volumes, net new business wins, the $12 million commercial claim, and positive business equations in both periods.

Partially offsetting these impacts was unfavorable currency, largely related to the negative impact that a strengthening Korean won has on our profits, as well as currency transaction losses on balance sheet amounts denominated in currencies other than functional currencies.

Climate adjusted EBITDA margin was 11% in the second quarter, 10 basis points higher than the same period last year. On a constant currency basis, climate adjusted EBITDA margin would have been 12.0% or 110 basis points higher than second quarter 2013.

As mentioned last quarter, we have initiated a substantial effort to reduce our exposure to the Korean won by localizing more of our supply and production globally. These efforts will begin to have meaningful impact in 2015, but we will continue to remain significantly exposed to the Korean won for several years in the future.

Turning to slide 29, our electronics sales for the second quarter of 2014 were $443 million, and adjusted EBITDA was $50 million. On a year-to-date basis sales were $882 million, and adjusted EBITDA was $107 million.

Sales increased versus 2013 for both the quarter and on a year-to-date basis, largely driven by the consolidation of YFVE and net new business wins in Asia, South America, and Europe. Adjusted EBITDA increased $20 million in the second quarter versus 2013 and $51 million on a year-to-date basis. For both periods, the increase was primarily driven by the consolidation of YVFE. Net new business, positive business equation, and favorable currency -- largely related to a stronger euro -- also benefited both periods.

Second-quarter 2014 adjusted EBITDA margin was 11.3%, higher than any quarter of 2013, but slightly lower than the first-quarter 2014 margin. As we mentioned on our last earnings call, first-quarter of 2014 electronics adjusted EBITDA included approximately $10 million of favorable impacts relating to the timing of commercial settlements and prototype recoveries. The timing of these items can be uneven throughout the year, and in 2014 we recognized a disproportionate amount in the first quarter.

On slide 30 we take a look at our cash flow and our capital structure. Free cash flow was negative $44 million in the second quarter and zero in the first half of 2014. Adjusted free cash flow, which excludes restructuring- and transaction-related payments, was negative $18 million in the quarter and positive $46 million year to date.

Adjusted free cash flow for the second quarter was $64 million, lower than the first quarter of 2014. The variance is more than explained by calendar-driven, trade working capital payment delays, which benefited the first quarter but reversed in the second quarter.

Cash balances, including cash held for sale, were $1.425 billion as of June 30, 2014. And Visteon closed the quarter in a net cash position of $465 million.

In the second quarter Visteon refinanced its existing 6.75% bonds with a new $600 million seven-year term loan B and also replaced its existing $130 million asset based revolver with a $200 million, five-year cash flow revolver that remains undrawn. The term loan interest rate is LIBOR plus 275 basis points with a 75 basis point LIBOR floor. As mentioned on our first-quarter call, we also initiated a $500 million accelerated buyback during Q2.

Turning to slide 31, we provide our 2014 full-year financial guidance. As Tim stated, we are updating our full-year guidance to reflect better business performance and for the impact of the transaction-related items I discussed a few slides back.

Our updated guidance reflects higher adjusted EBITDA, adjusted free cash flow, adjusted earnings per share, then our prior guidance. For the full year we project the midpoint of sales of $7.6 billion; adjusted EBITDA of $715 million including discontinued operations and $690 million excluding discontinued operations; adjusted free cash flow of $145 million; and adjusted EPS of $3.25 per share, excluding discontinued operations.

As Tim mentioned, we anticipate annual synergies from the JCI transaction of between $40 million and $70 million by 2017. To achieve these synergies, we need to invest in integration and restructuring efforts that are currently underway.

We have lowered our 2014 free cash flow guidance to reflect an approximate $40 million to $50 million investment into these activities. And we anticipate that we will complete these investments in 2015 and spend an additional $25 million to $50 million. And just correcting a comment, we have -- excluding discontinued operations, our EPS guidance midpoint is $3.30.

Moving to slide 32, we provide a reconciliation from our prior 2014 full-year sales and adjusted EBITDA guidance to our updated guidance. Our updated full-year sales guidance is now $7.6 billion compared to $7.8 billion previously. The decrease reflects lost Interior sales of approximately $950 million, partially offset by approximately $700 million of incremental sales related to the JCI Electronics and Cooper Standard's thermal business.

Our updated full-year adjusted EBITDA guidance is now for $715 million including discontinued operations or $690 million excluding discontinued operations. The increase versus our prior guidance midpoint of $680 million reflects $25 million in additional profits related to the transactions, partly offset by the removal of an amortization gain related to certain pension assets. Additionally, the increase versus our prior guidance reflects $10 million of favorable performance that we expect to achieve by year-end.

On slide 33 we provide our full-year 2015 preliminary sales and adjusted EBITDA guidance. As you recall, we provided 2017 guidance at the Deutsche Bank Conference shortly after we announced the JCI Electronics acquisition. Specifically, we estimated 2017 sales and adjusted EBITDA to be approximately $10 billion and $1 billion, respectively. We are still on track to achieve these results.

For the full year 2013, we project sales to be between $8.5 billion and $8.7 billion and adjusted EBITDA to be between $780 million and $820 million. Our 2015 guidance assumes we complete the sale of all Interior operations by the year-end 2014.

Moving to slide 34, we provide a reconciliation from our 2014 full-year sales and adjusted EBITDA guidance to our 2015 guidance. Our 2015 sales guidance is $8.6 billion or $1 billion higher than full-year 2014 guidance. The increase primarily reflects an additional half-year of sales for JCI Electronics and Cooper Standard's thermal business, as well as the benefit of net new business wins and higher volumes during 2015.

Our midpoint 2015 full-year adjusted EBITDA guidance is $800 million or $110 million higher than our updated 2014 full-year guidance, excluding discontinued operations. The increase reflects an additional half-year of profits related to the acquisitions as well as positive net new business wins and positive cost performance, partially offset by the loss of approximately $5 million of adjusted EBITDA related to other legacy Interior operations that were not included in discontinued operations, but we expect to sell by the end of the year.

Now let me turn the presentation back to Bob for Q&A.

Thank you, Tim and Jeff. Jennifer, please open the line for questions.

Colin Langan, UBS.

Any color -- when we look at the 2015 guidance, sales looks quite strong. But the EBITDA margin seems fairly flat year over year. Any factors going on into 2015 that are mitigating that upside, particularly given that there should be some synergies coming through for JCI?

Yes, we definitely see these synergies coming to come through, Colin. But remember that JCI -- the historical business of JCI had lower margins than are combined business. That will have a little bit of a drag.

These synergies we talked about, we have pacing their way into our operations over a couple years, as well, too. So they certainly will not all hit next year. So I think both those two will have a little bit of a weighing factor on our margin, but it should continue to increase as we approach 2017.

Okay. And looking at slide 5, I mean, it says you have $40 million to $70 million in JCI synergies. That's above your prior estimate. I think you previously had said $40 million, isn't that right?

We said minimum of $40 million in the past, Colin. So we have given you a range with -- obviously, starting at $40 million, but we think we could probably do a little bit better than that.

And when does that start phasing in through 2017? And where were the -- any color on what those major items within the synergies are?

The numbers here are to be accomplished by 2017. So they start phasing in next year. As we have said, we will layer them in, and as Jeff said, phase in through the next couple of years.

The activities are basically in three buckets, as far as synergies go. One, there was embedded inside the performance of JCI some corporate overhead charges from JCI. Ours probably are going to be a little different than that. So there is an element there. Those are probably easier to achieve more quickly, obviously.

And then the other ones are in the SG&A and engineering side, where there is now obviously additional engineers in the system, additional SG&A people. But we are going to make prioritization of programs between the two. And to that degree there will be some synergies come out, some efficiencies that we can book.

And then the last and the slower piece of this is there is probably a facility or two, I think as we have said in the past, that is manufacturing and purchasing. And those will take -- purchasing is a little quicker; manufacturing takes a little longer, because there are some facility-related actions there.

So those three buckets of corporate SG&A, product group SG&A and engineering, and manufacturing and purchasing -- those three buckets are the focus area of the savings potential. Each has its own timeline.

And we think about -- and these are just cost synergies, so the revenue synergies probably are going to take over three years, since you would have to start winning the business today. Is that the right way to think about it?

Yes, right today. As I was sitting out -- you know, again, as I said, we have been out on the road here around the world the last 30 days. And primarily we are talking 2018 programs. I mean, it's just the lead time of the business.

So they may have a tail of launch into 2017, some of them; but for the most part, these are 2018 calendar events. And as I think we have said in the past, the reason we still feel comfortable with our 2017 target of $10 billion and $1 billion is because, for the most part in our industry, we know what business we want. The confidence level of the business revenue base by then is fairly good.

The technology revolution and the real impact of JCI will extend -- is really going to impact on the revenue basis 2018 and beyond. And that is just the nature of the lead time in the industry.

Okay. That makes sense. And then is there any tax impact on your tax rate on a GAAP basis? It seems pretty high -- particularly there is that discrepancy between your operating taxes and your GAAP taxes. Does the Interiors divestiture and JCI deal help improve your tax situation at all?

The Interiors divestiture should start to improve our effective tax. It won't improve our actual dollars paid. For the most part those operations were not paying much tax at all. And we're (technical difficulty) losses that we couldn't take the income tax benefit for.

So you will see -- should start to see some improvement in rate there. I think for JCI, eventually we will start to get some positive elements there, too. Over time, as I have kind of said in the past, our goal is to make our effective tax rate much clearer. I think with all the noise in 2014, it's harder to see.

We will give you a better view of what the tax situation looks like when we get to next year or we get to the Deutsche Bank Conference and give you a more detailed view of what 2015 looks like. We will give you an update on what -- that tax picture. But it should get better as we go year to year to year.

Okay, that makes sense. Thank you very much.

Brian Johnson, Barclays.

It is actually Steven Hempel on for Brian Johnson. I just wanted to drill down on the integration of HVCC and Visteon's core client business. I believe that has been progressing now for roughly six quarters now.

How much more should we expect from a synergy perspective in terms of combining those businesses? I believe you enclosed that business in January of last year.

And also, if you could just -- related to housekeeping question: how much of a revenue headwind should we be expecting moving forward from the wind-down of the legacy client business that wasn't transferred to HVCC? I believe on our estimates roughly a 300, 350 basis point headwind in this quarter.

Let me answer some of these questions, and the guys will dig into some of the others as I'm talking. First of all, we have for the most part taken advantage of the engineering SG&A and other people-related synergies of the combining of the businesses as of yet, up till now.

But the remaining issues have been sort of the manufacturing side, and it was read to the fact that -- let's take compressors, for example. We had eight different families of compressors between the two companies. We are now launching a consolidated line. That launch is in -- later this year for the first phase of that.

So the manufacturing synergies, which are another -- and I will say probably in the neighborhood of 50 to 100 basis points remaining of synergy impact will occur from both the purchasing, consolidated purchasing as well as the manufacturing consolidation, specifically in compressors and other areas. So you still have remaining some synergistic activities, but they're the longer-lead items.

Also, as result of the companies coming together, we are seeing some growth leverage that we didn't -- you know, that was not available to either one of them in the past. And so, again, we have talked about a 7% CAGR of growth net-net-net after productivity, impacted by exchange, etc. We are still very comfortable with that as a threshold of growth for the business going forward in the foreseeable future.

Let me address the last part of your question relating to some of the legacy climate business that didn't go with the initial deal. That business, as you mentioned, did decline a bit year over year in 2013 to 2014 from a sales standpoint. You see that in our guidance, and you see that in our numbers.

There is -- I would say, roughly, you still have about $100 million of that business, maybe a little bit more. Some of that business will continue to eke away. It doesn't have a lot of margin today. Some of that business will remain a very long time.

So I would say that's certainly a slower growth part of our climate portfolio, but it is certainly also built into all the numbers. It has a little bit of a margin drag compared to if you looked at just the HVCC financials. But at this point, it is fairly neutral. It is going to probably get a little bit better starting now, probably going forward.

Okay. And then could you provide any additional color or clarity around the strategic direction you want to take with the 70% stake in HVCC, you know, whether that be monetizing some of the stake to take it down to 51% or acquiring a larger position for tax purposes?

I think what we have said in the past is that long-term we see that a 70% ownership is probably an inappropriate holding. But we also are cognizant of the contribution that HVCC makes to us with its current performance, and its growth may pertain. So I think at this point we won't speculate publicly about where it going to head on that, other than to reinforce the statement that I think we have made numerous times in the past, which is basically: we are here to optimize shareholder value. And we will look continuously at what is the best utilization of the capital structure we have today.

Okay. And then just one last one on the 2015 guidance here, including JCI Electronics. Does that include the backlog from JCI's electronics business? Because it looks like you're only expecting a roughly 3% CAGR for JCI Electronics through 2017. And for the combined electronics business.

Overall, you're looking for around 8% CAGR. I believe you discussed in the past a cockpit electronics industry CAGR of around 12%. Is there some headwinds within JCI's electronics business that we should be aware of moving forward?

As I stated, and that is a good question, as to be clear -- is that JCI, when the company was delegated to be non-core, it was put up for sale. It impacted its ability to attract new business. And that was occurring over the last few years of JCI.

We saw the same phenomenon here at Visteon when we were challenged during the bankruptcy period. Long-term, as I said, the immediate reaction, once the business was closed and we have met with customers, is that the order book is now starting to again approach the figures of where we were with Visteon.

It will take some time for those businesses to be launched. So you go through a period of purgatory, which JCI is going through now. The decisions on businesses being launched in 2015 and 2016 were decisions made with customers, you know, 2012 and 2013.

The other core issue is that there are some segments in the business that are non-core to us, so that we will not be prioritizing. It is a small piece, but that affects it by a couple of basis points.

Also, over time we see this industry still growing at a 10% to 12% CAGR. We do see, however, year to year, you're going to get dynamics depending upon vehicle launches. 2015 is a year of decent growth; 2016 is a better growth year for Visteon Electronics, just because of the order book.

So you get some cyclicality just because of vehicle launches. So JCI will be less than Visteon over the short term, but we do not see any dichotomy as we start hitting 2018 and beyond just with customer reaction.

Okay. And then it looks like JCI is contributing roughly $23 million, based on our calculations, of 2014 EBITDA, which implies about a 3.5% margin. Is that largely related to purchase accounting adjustments? And then if so, how much of that impact will it have on 2015 EBITDA margins?

Yes, it will start to blend away such that we won't really be able to segregate what portion of our EBITDA relates to the old JCI Electronics business; it will start to morph. One of the synergies we are going to have to -- as we pursue all the synergies, but as we pursue in particular the admin synergies, we are going to be combining our functions in this operation. And the quicker we combine them, the quicker we will have benefits on the margin.

Initially, it is a little bit difficult. Because even a lot of the services that were previously part of JCI corporate, we are paying in a TSA our services agreement to them for several months, as we transition those operations onto our own platforms, and our own systems, and our own capabilities, and our own people.

So all those things -- and, for instance, we had always talked about there is $12 million of corporate costs we paid -- or they paid to the JCI corporate. Those costs take some integration and some time for us to sort of completely work off of. All those things will continually bring a better margin story for our combined electronics business, probably over the course of the next 12 months as we work through those.

Okay. Great. Thanks, guys.

Jennifer, we have got time for one more question.

Itay Michaeli, Citi.

Just to continue on the electronics conversation, the revenue synergies beyond 2017: what is the best way for us to model that? If JCI is growing at 3%, should we think that maybe you can get that up to 5%, 6%, 7% as we think about the opportunity to accelerate that growth beyond 2017? I know it is just early, but just want to try to get a sense of what you think that target would be.

You know, it is a little early; and again, we are actively in the marketplace now. I would say that in 2018, you will start to see over a year or two the growth of what we call at that a point JCI electronics to try to track it approaching that of Visteon historically. It becomes difficult to track independently, because you start to morph.

Some of these agreements, some of these contracts have significant value to them. If we look at the Fusion contracts, those contracts are by themselves $100 million to $150 million, sometimes $200 million a year. So they have significant impact once achieved. And so winning one of those or two of those has a significant impact on the numbers.

But we see that there is no reason why the new Visteon Electronics, which includes the JCI elements, cannot approach the prior Visteon growth curve within a couple of years post the 2017 time frame.

That is very helpful, Tim. And then just on the margins for 2017, it seems like with the synergies for JCI and the very strong performance in the last few quarters for electronics, that maybe you are tracking a little bit ahead of 10%. Is that true? Is there an upward bias of that 10% margin in 2017, using a couple of things like additional R&D and other investments that you have to make to achieve the growth beyond 2017?

Well, I think there are a couple points. One, as Jeff highlighted, obviously Visteon Electronics came in strong and above the 10% EBITDA level. But we are going to integrate JCI, which will take that number down. So we have got to recoup that back to the 10% level.

I think from our perspective, 2017 is -- with a $1 billion target, and there is probably an upside of that number over time, is that we are comfortable with $1 billion and the implied 10% or so that that represents, at least from a planning number today. I am sure as we get closer, we'll be able to enhance that number more.

But I think as you look at us marching through the next couple of years, that on a EBITDA CAGR basis, this is quite a strong growth curve for any company in our sector, any company in our industry. And we are comfortable with that. And as I said, our job here is always to meet or exceed those numbers the best we can as we go forward.

Yes, that is helpful. And then just two quick last follow-ups on cash flow. Any kind of guidance or direction to think about the big buckets for 2015? And then, also, any change at all to the 2017 free cash flow -- I have around, maybe, $250 million, if I recall correctly?

Yes, I guess the last part of your question on 2017 -- we haven't changed our outlook on that. We will obviously do as many things as we can to continue to find ways to outperform that number, but that number hasn't changed.

As it relates to next-year cash flow guidance, we will come with a much better view of that when we get to the end of the year. I don't think there is going to be massive surprises. I gave you a little bit of a view of some of the tail over, probably, integration expense we will have on the JCI acquisition, a little bit of restructuring to achieve some of the synergies.

Overall, we should have less noise than we did this last year, certainly. Excluding -- we gave you some guidance, too, on what the Interiors business -- how that impacts not only our first half of the year, but a bit of on how it impacts our entire year of 2014. Obviously, we expect that to not be in the numbers. All those things will be some tailwind a bit on some of those cash flow numbers.

Very good. That is very helpful. Thanks, everyone.

And that was our last question. And I would like turn the conference back to Mr. Bob Krakowiak.

Thank you, Jennifer. I would like to thank everyone for their participation in today's call. If you have any additional questions, please feel free to contact me at your convenience. Now I would like to turn it over Tim for his final comments. Tim?

Thank you, Bob. For those of you who have been following us for a few years, you know that we have established 2014 as the ending of the cleanup, paint-up, and fix-up era of Visteon; and that we would transition as a pure focus of two strong high-growth businesses, well financed, with a good Asian footprint to grow and expand upon.

I think you can see that in these numbers. This was a quarter, from the standpoint of a press release and a presentation, that was more complicated with a lot more details associated with a lot of the goes-ins and goes-outs of the Interiors, discontinued operations, etc. But all of these are the positive elements of achieving the goal of getting this Company focused on those two strong businesses.

I have been very pleased with performance of the team this quarter. We see the rest of year as being bright despite the challenges -- macroeconomic around the world, etc. Our growth is not predicated on more vehicle builds as much as it is predicated on the content of the vehicle builds that are there.

So we are comfortable with our future. And we very much appreciate your support through the years, and we look forward to talking to many of you. I know that there are some calls lined up, and we will be hitting some conferences here in the next month or two. Look forward to seeing you there.

So thank you so much for your support. And again, we'll talk to you next quarter. Thank you.

Thank you.

Thank you. This does conclude today's conference call, and you may now disconnect.