Visteon Corporation
Q3 2012 Earnings Call Transcript

Published: 1 Nov 2012

[Operator:]

Good morning, and welcome to the Visteon Third Quarter 2012 Earnings Call. [Operator Instructions] 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. Scott Deitz, representing Investor Relations for Visteon Corporation. Mr. Deitz, you may begin.

[Scott Deitz:]

Thank you, Gina. Good morning, everyone, and a special thank you to those of you affected by Hurricane Sandy who are joining us from the East Coast. I know that, for many of you, you've had a challenging few days and some of you probably have some stories to tell about how you've gotten on these calls this week. So that's thanks for joining us for what we estimate will be about a one-hour call. We appreciate your interest in our view toward our third quarter and what we see going forward. Today, we'll provide you with a recap of our results for the quarter and insights associated with our overall performance. And as you'd expect, we'll address guidance for the remainder of the year. As Gina mentioned, the presentation deck associated with today's call is posted on our website within the IR section and just a reminder that our website is simply visteon.com. And I can confirm, and as many of you know, the Q was also filed this morning with the news release. We are joined today by Tim Leuliette, President and CEO; and Mike Widgren, Interim CFO and Corporate Controller. After Tim and Mike's prepared remarks, we'll open the call to your questions and then Tim will close with a brief summary. Again, thanks for joining us. With that, I'd turn it over to Tim.

[Timothy D. Leuliette:]

Thank you, Scott, and welcome, everyone. We have a lot to talk about today but what I want to do first is I do want to welcome Jeff Stafeil, who will be announced as our CFO -- is announced as our CFO effective on November 2. For those of you who know, both Jeff and I, we've worked together for about 12 years around Asia, Europe and North America, and it's good to have Jeff as part of the team. In addition to that, I would like to also thank Mike Widgren who's filled in and taken the role of interim CFO in the interim period here and has led the group through, as you know, a number of actions and scenarios and activities as we prepare to improve shareholder value. With that, let me start and focus, first of all, on the first slide, Page 2, of the deck and talk about our third quarter performance. I think, first of all, the key here is that it was in line with our expectations. I think what's underlying here, an important point for shareholders, is that the company was fairly conservative with respect to its forecast of Europe in the beginning of the year and Europe has played out as anticipated. Adjusted sales of $1.6 billion were down year-over-year by about $107 million, of which more than that was -- represents the impact of currency over the year. Adjusted EBITDA of $131 million, down $37 million. Year-over-year currency impact of that by $15 million will go through some -- Mike will go through some explanations of the product groups, but climate was up $5 million, electronics down $18 million because of the timing of some inputs and outputs to that particular business, interiors down $1 million and the discontinued ops at $8 million explain that delta. Net income was down $26 million to a $15 million level driven obviously by the EBITDA, also driven by the fact that we had run through expenses through -- for the quarter for the unsuccessful Halla tender offer that's about $10 million. We had some higher taxes of about $8 million, and that was partially offset by lower D&A and a gain on sale of the R-TEK and some restructuring and other expenses net of about $12 million. We ended the quarter with $920 million of cash. That's an increase of $174 million from year-end 2011, again, driven by both operational cash contribution but it had significant proceeds, obviously, from the sale of Grace Lake, the headquarters facility in lighting and R-TEK. We also ended the quarter with debt of $595 million. Mike will take you through the details of that, but those are the top line drivers of those specific elements. As we look at our guidance for the year, we will confirm the $6.8 billion revenue target for the year, and we are maintaining the midpoint of the adjusted EBITDA range, narrowing it down between $590 million and $610 million. We have referenced here. I think it's important to see what is that number less lighting for the year. As you know, the revenue number of $6.8 billion is also less lighting, so you see the impact of taking lighting out for the 12-month period and it provides some sort of basis, as you know, going forward. Our free cash flow, we said plus or minus 0. Historically, I think now we're saying at least a $25 million positive free cash flow from operations. We've also added earnings per share as a guidance item here on the upfront portion of the presentation. A couple of reasons for that. I've watched, in both my role on the board now and as CEO, sort of a disconnect between, I think, the ability for you out there, from an analyst perspective, to go bridge from EBITDA to earnings per share and what I'm going to ask and have asked Jeff Stafeil to do as we get into the first quarter is to help you bridge our cash flow and our earnings per share. Right now, we're going to bring that up as a formal guidance item for you to track. The other item here, as we talk about guidance, is we do not give quarterly guidance, but obviously as we've now finished 3 quarters and there's only one left, by default, we are giving a Q4 guidance. And let me talk a bit about that. If you look at our EBITDA, we have generated approximately $150 million in the first quarter, $150 million in the second and approximately $130 million in the third, which is obviously the weaker quarter of the year. To get to this range of numbers for our outlook for the forecast for the year would imply $160 million to $180 million for the fourth quarter, which would be our strongest quarter of the year. It also would impact -- reflect the fact that there's no lighting in Q4. And it also would reflect the fact that -- of all the announcements we've seen in Europe. The important part here is I think the company has stated for some time that during the Chapter 11 process and the emergence of that process, you go through what I'll call a purgatory period where your order book and business awards are somewhat soft until the company exits. The company has now been out for 2 years, and you're starting to see the impact of the business awards, as well as cost reduction actions, that the company had -- has announced and has been discussing for the last year or so. I think you should look at the fourth quarter as sort of a baseline for what we will be building on going forward and so that's sort of the indication there. And we do look at the fourth quarter as being fairly good from a revenue perspective. I will also say that we will spend the rest of my time on this call discussing some of the value-creating actions and items that we have discussed in the past. And with that, I'd like to turn to the next slide on Page 3, which is entitled the Visteon

[Michael J. Widgren:]

Thanks, Tim. Good morning, ladies and gentlemen. Our financial results for the third quarter were heavily impacted by unfavorable volumes in currency. This slide provides a summary of automotive production volumes by region and average exchange rates for key currencies compared with 2011. Global volumes increased by 2% as favorable production volumes in North America and Asia more than offset declines in Europe where economic weakness continued to weigh on consumer confidence. European customers, Ford and Renault-Nissan, were down 9% and 13%, respectively, compared with the third quarter of last year, while PSA was up 1%. Despite overall volume increases in Asia, Visteon's largest customer, Hyundai Motor Group, was down 7% year-over-year on labor disruptions in Korea. Currency negatively impacted our results in the quarter as the U.S. dollar continued to strengthen against most major currencies. Because of the regional distribution of our sales, changes in the euro and Korean won have a significant impact on Visteon. Average exchange rates for the euro and the Korean won declined by 13% and 7% on a year-over-year basis for the quarter. On Slide 14, we provide an overview of our third quarter and year-to-date 2012 sales by region and customer. These figures reflect our consolidated sales only and exclude sales from our nonconsolidated joint ventures. As you can see, on the top half of the slide, approximately 30% of our sales are related to the European region. Lower volumes and a weaker euro, as discussed in the previous slide, both negatively impacted our European sales and led to a significant decrease in our year-over-year performance. On the customer side, Hyundai Motor Group continues to be our largest customer, representing 32% of our consolidated sales. Year-over-year, Hyundai sales were lower in Korea due to the labor disruption previously mentioned but were higher in North America, China and Europe. Turning to Slide 15, our financial results have been impacted by a number of items that make year-over-year comparisons difficult. The adjusted financial information presented on this slide excludes these items. As non-GAAP financial measures, this adjusted financial information is reconciled to U.S. GAAP financials in the attached appendix on Pages 31 through 34. On an adjusted basis, our third quarter 2012 sales were $1.6 billion, $107 million lower than last year. The decrease was more than explained by unfavorable currency. Adjusted gross margin was $129 million or 7.9% of sales, $15 million lower than 2011, driven by unfavorable currency and product mix, partially offset by positive net cost performance. Adjusted SG&A was $85 million, representing an improvement of $7 million or 10 basis points compared with 2011. Adjusted EBITDA was $131 million for the quarter, down from an average of $150 million per quarter during the first half of 2012. Approximately $10 million of the decrease is related to the sale of the company's lighting business, which closed on August 1. The remaining decrease is attributable to seasonal plant shutdowns in the third quarter when compared with earlier quarters in the year. As Tim mentioned, we are introducing an adjusted EPS metric, which, for the third quarter of 2012, was $0.37, $0.63 lower than 2011. The decrease is explained by the per share impact of lower adjusted EBITDA, higher interest expense associated with the Korean bridge loan and higher income tax expense due to the non-recurrence of benefits recorded in the third quarter of 2011, partially offset by depreciation and amortization. The calculation of adjusted EPS can be found in the appendix of this presentation on Page 34. Our free cash flow during the quarter was $112 million, an improvement of $136 million, reflecting favorable trade working capital performance, lower pension cash payments, increased dividends from unconsolidated affiliates and lower capital expenditures. Slide 16 provides a year-over-year view of adjusted sales and adjusted EBITDA for the third quarter and year-to-date period of 2012. Adjusted sales were $1.6 billion during the third quarter and $5 billion on a year-to-date basis, representing decreases of $107 million and $292 million compared with 2011. Volume and mix increased sales in the third quarter and year-to-date period of 2012, as growth in North America and Asia more than offset weakness in Europe. On a product group basis, climate volumes more than offset declines in Interiors and Electronics, which were heavily impacted by conditions in Europe. Currency had an unfavorable impact on sales from both the third quarter and year-to-date period of 2012, reflecting the strengthening U.S. dollar compared with most major currencies, with the euro and won having a significant impact on Visteon. Customer pricing, design actions and commercial agreements represent other changes affecting sales. Third quarter and year-to-date adjusted EBITDA were both down compared with 2011, reflecting unfavorable product mix and currency, primarily associated with conditions in Europe and most significantly impacting the company's Interiors and Electronics Product Groups. Equity in affiliates were lower for the quarter and on a year-to-date basis. The decrease reflects price productivity and product development costs to support new program launches planned during the rest of 2012 and into 2013. The business equation represents cost efficiencies net of price reductions to our customers. As you can see, our business equation was positive for the quarter and on a year-to-date basis. We expect our business equation to remain positive for the rest of the year, as we implement additional material, manufacturing and fixed cost efficiencies. Turning to Slide 17. On a segment basis, third quarter sales increased slightly for the climate product group, primarily driven by higher Hyundai volumes in North America and Europe and new business in Asia. Electronics and Interior sales were lower for the third quarter, reflecting soft European volumes and the impact of a weakened euro. Adjusted EBITDA, including equity in affiliates and noncontrolling interests, was up slightly for climate but lower for Electronics and Interiors, as currency and lower volumes negatively impacted both groups. Significant decline in the Electronics adjusted EBITDA reflects lower European volumes, a weaker euro and unfavorable product mix. Similar to prior quarters in 2012, we continued to see margin contraction in Electronics during third quarter, resulting from unfavorable product mix. It should be noted that there were some engineering recoveries that favorably impacted the third quarter of 2011 and a pricing item that had an unfavorable impact in the third quarter of 2012, which, when combined, contributed to the decline. The next 3 slides provide a bit more detail on our financial performance by product group. Slide 18 provides an overview of climate sales and adjusted EBITDA for the third quarter and year-to-date periods of 2012. Climate sales in the quarter were $1 billion, up $21 million compared with 2011. Higher volumes, including net new business, increased sales by $92 million despite lower volumes in South Korea attributable to the labor disruption. Currency of $68 million was a partial offset and was primarily related to the euro and the Korean won. Adjusted EBITDA margin for the third quarter of 2012 was 8.6% of sales, up 20 basis points when compared with 8.4% in 2011. It's important to note that the adjusted EBITDA margin shown on this slide and the following 2 slides exclude the impact of equity income and noncontrolling interests. On a year-to-date basis, climate sales were $3 billion and adjusted EBITDA margin was 8.3%. This adjusted EBITDA margin is lower than 2011, reflecting unfavorable currency, product mix and cost performance, partially offset by favorable volumes. We expect climate-adjusted EBITDA margins to improve in the fourth quarter of 2012, driven by higher volumes in all regions, particularly in South Korea as production volumes recover from the third quarter work stoppage. Climate-adjusted EBITDA margin is also expected to be favorably impacted by new business and improved cost performance. On Slide 19, Electronics sales for the third quarter of 2012 were $298 million and adjusted EBITDA margin was 3% of sales. On a year-to-date basis, Electronics sales were $919 million and adjusted EBITDA margin was 5.2% of sales. As previously discussed, Electronics sales for the third quarter and year-to-date 2012 were lower than 2011 due to the European production volumes and weakened euro. Adjusted EBITDA margins were also lower due to unfavorable product mix, lower engineering cost recoveries and unfavorable pricing items in 2012. Turning to Slide 20. Interior sales in the third quarter were $313 million and adjusted EBITDA margin was 3.5% of sales. On a year-to-date basis, Interior sales were $1 billion and adjusted EBITDA margin was 2.3% of sales. Interior sales and adjusted EBITDA margins both decreased compared with 2011, driven by lower European vehicle production volumes and a weakened euro. Similar to Electronics Product Groups -- Product Group, Interiors had a significant European presence and has been particularly impacted by softness in the region. Compared with the first and second quarters of the year, adjusted EBITDA margins have increased, primarily driven by customer cost recoveries and material cost efficiencies. Slide 21 shows adjusted SG&A for the third quarter and year-to-date periods of 2012. Adjusted SG&A totaled $85 million in the third quarter of 2012, which was $7 million better than the third quarter of 2011. For the first 9 months of 2012, adjusted SG&A was $262 million, $20 million better than 2011. About half of the improvement in adjusted SG&A for both the third quarter and year-to-date periods of 2012 reflect net cost efficiencies, while the remainder is attributable to currency. In both periods, adjusted SG&A, as a percent of adjusted sales, improved on a year-over-year basis. And as Tim mentioned previously, we're taking cost reduction actions which will result in additional year-over-year savings in both 2013 and 2014. Turning to Slide 22. Free cash flow was $112 million for the third quarter of 2012 and $17 million for the first 9 months of 2012. Our year-to-date cash from operating activities of $163 million includes positive adjusted EBITDA of $432 million, partially offset by $68 million of restructuring and transaction-related payments attributable to the closure of our Cadiz, Spain electronics facility and professional fees. Seasonal trade working capital outflows of $71 million also served as a partial offset. Capital expenditures were $146 million for the first 9 months of 2012. More than 65% of our capital spending was related to climate in support of future customer program launches and capacity expansion. Cash balances were $920 million at September 30 of this year, up over $170 million from the end of last year. The increase in cash is attributable to positive free cash flow and proceeds from asset sales, including the lighting business, the R-TEK joint venture and the Grace Lake headquarters facility. Total debt at the end of the quarter was $595 million, resulting in net cash position of $325 million. Before I take you through our financial guidance for 2012, I would like to briefly discuss our fourth quarter 2012 volume assumptions. Slide 23 provides IHS fourth quarter volume projections, and for the most part, our volume forecast is in line with IHS. Compared to the third quarter of 2012, global volumes are forecasted to increase by 5% in the fourth quarter, reflecting higher volumes in all regions except North America. Visteon's key customers in each region are forecasted to grow at faster rates than the overall region. Ford in North America is expected to grow at 13%, compared with the slight decrease for the region overall. In Europe, Ford and Renault-Nissan are forecasted to grow at 9% and 15%, respectively, compared with 5% for the region overall. In Asia, our largest customer, Hyundai, is expected to increase by 29% compared with the third quarter of this year, as volumes recover in the fourth quarter from the previously mentioned work stoppage. In summary, we expect the increased volumes for our key customers to be significant drivers of our financial results in the fourth quarter of this year. On Slide 24, we provide our current expectations for 2012 results. As Tim previously mentioned, we are moving our full year 2012 sales guidance to the upper end of the previously announced range, primarily reflecting a strengthened euro. We are narrowing the range for our adjusted EBITDA guidance, and we are increasing our free cash flow guidance. We are also introducing adjusted EPS guidance. We now expect full year 2012 sales to be approximately $6.8 billion and adjusted EBITDA to be in the range of $590 million to $610 million. Excluding the impact of lighting discontinued operations, we are forecasting adjusted EBITDA of $563 million to $583 million. We are increasing our guidance for free cash flow, which we expect to be in excess of $25 million for the year. Lastly, we expect adjusted EPS to range from $2.77 a share to $3.14 a share, or $2.39 a share to $2.77 a share, excluding lighting discontinued operations. That concludes the financial review. Tim, back to you.

[Timothy D. Leuliette:]

Thank you, Mike. Moving to the last page here, Success Milestones, Page 25. As we've said, we're going to contribute climate business to Halla, creating Halla-Visteon climate company a very global -- a very capable global climate powerhouse. We're going to provide Visteon shareholders optionality in that investment. We are monetizing our Interiors business on a time frame and a time line that make sense, and we're going to address our Electronics strategy and our global position. With that business, it's got a good order book. I'd like to see some more critical mass that needs to be part of a greater critical mass. And we need to uncover the Yanfeng value to Visteon shareholders as a critical success milestone and we understand that. As I said, we'll give a greater insight and clarity on Yanfeng in our January meetings. And we need to rightsize our corporate functions in response to the actions above. So I think, with that, I'll turn it over to Scott for questions. Scott?

[Scott Deitz:]

Okay. Gina, let's turn it over to you to work the queue and let's take questions as time allows.

[Operator:]

[Operator Instructions] Your first question comes from the line of Kirk Ludtke with CRT Capital.

[Kirk Ludtke:]

Well, I had the -- one, I wanted to welcome Jeff and also, with respect to the restructuring, does $100 million cover everything on Slide 8? The rightsizing of SG&A, Europe, Philippines? Or is it the first installment?

[Timothy D. Leuliette:]

I think $100 million is clearly the bulk of that. We said approximately $100 million. If there is charges that are necessary in addition to that, Kirk, it'll be noncash-related and it's just going to be a function of how we set up some of the write-downs or exposure going forward. But it's the best estimate today.

[Kirk Ludtke:]

Okay, that's helpful. And Tim, you mentioned that you're starting to see the benefits of some new business. And I was wondering if you could maybe talk about the pace at which the company is winning the business over the last few quarters and whether or not you see any trends.

[Timothy D. Leuliette:]

We'll probably amplify that a bit more in January, obviously, but I would say that, in particular, both the climate and Electronics business have been -- or had some good year and had good year this -- good award base this year. And as I said, I think earlier in my comments, that the business awards over the last 18 months or so have been in excess of industry growth. We'll detail and outline those positions going forward, but we're comfortable and pleased with the response from the customers.

[Kirk Ludtke:]

Okay, great. And I noticed that in the EBITDA reconciliation last quarter, there was -- you backed out a $14 million gain from the sale of R-TEK and I didn't see it in the reconciliation this year. I'm wondering if it's just buried in one of those other line items.

[Timothy D. Leuliette:]

Mike?

[Michael J. Widgren:]

Yes, that number, Kirk, is buried in the restructuring and other items line.

[Kirk Ludtke:]

Okay. So you're still backing it out?

[Michael J. Widgren:]

That's correct.

[Kirk Ludtke:]

I appreciate it. And then lastly, from time to time, we've heard that Visteon would be providing more full financial statements for Yanfeng in this upcoming 10-K? Is that the case?

[Michael J. Widgren:]

Yes, Kirk, that's the plan. We have a requirement from the SEC to provide those separate financial statements in 2013.

[Kirk Ludtke:]

For the fiscal year 2012?

[Michael J. Widgren:]

Correct.

[Operator:]

[Operator Instructions] Your next question comes from the line of Jimmy Baker with B. Riley & Co.

[Jimmy Baker:]

I was first hoping that you could just elaborate on the impact of mix in your Electronics business and then maybe how we should think about that, the impact of mix there, in 2013?

[Timothy D. Leuliette:]

There are a couple of points that I'm going to -- I'll pass it also over to Mike. Thanks for the question. The driver on Electronics in the third quarter were a couple of aspects. We had the typical Q3 softness due to production reductions in Europe in particular, and we've also had some out-of-cycle timing between some expenditures and some recoveries from customers. But I would say, as I look at Electronics, that we're going to see obviously better than this EBITDA margin but substandard EBITDA margins through '13. As I look at the business mix and the impact of some of the new business awards, they have a bigger impact as we get into '14. But in '13, I would think that the historical performance levels we've seen in Electronics are going to be the norm outside of the actions we're taking on the SG&A front. And so I don't expect, given the current situation, that we'll again get more definitive on this in January. There's a significant increase beyond the trailing norm of electronic performance until we start getting into '14, '15 outside of, as I said, the SG&A and other structural changes that were occurring. The mix shift between infotainment and clusters is such that that's an endemic kind of systemic baseline that we'll have for about another 12 to 18 months.

[Michael J. Widgren:]

That's correct, Tim. I just would add that what we're seeing in the mix has been impacted by the Cadiz plant closure.

[Timothy D. Leuliette:]

Right, also which did have some margin -- attractive margins to it and some product lines but, clearly, it was an overall challenging facility.

[Jimmy Baker:]

Okay. And just more of a housekeeping item. Did you quantify the impact of the engineering benefit in '11 and then the pricing item here in '12?

[Michael J. Widgren:]

Yes. Year-over-year base -- I mean, on a year-over-year basis, it's minimal. But having said that, on a small number, a small number results in a large percentage change.

[Operator:]

[Operator Instructions] Your next question comes from the line of Colin Langan with UBS.

[Colin Langan:]

Color on the multiple that you're -- that Halla is paying for the non-Halla climate business. I mean, it seems like a pretty good price. I mean, where did you come -- how did you come up with that range?

[Timothy D. Leuliette:]

We have -- we've obviously looked at this from an independent third-party perspective of valuation, looked at industry trading multiples. We also have looked at the asset base, cash flows, all the standard football field of valuation metrics. We have expectations, in essence, looking at the buyer side, which is also our responsibility as part of the Halla management and board. We do not want to pay over market for that, and the valuation metric for the sell side was determined to be a multiple that is less than what Halla is trading at currently, which allows us to have the accretion that we believe is appropriate for the transaction. We will detail the financial -- again, we're in the process of, again, the final days here of finalizing the sale price, but we will detail that -- those metrics and those multiples in January at the January 15 conference.

[Colin Langan:]

And are those like an EBITDA multiple? Is that like the main multiple...

[Timothy D. Leuliette:]

Were looking -- we're using an EBITDA multiple.

[Colin Langan:]

Okay, okay. So the -- and the Halla climate business does have at least some sizable positive EBITDA?

[Timothy D. Leuliette:]

Yes, I think -- and again, embedded in the historical climate product group, again, which was -- I think we go back, the company started reporting climate as a stand-alone product group a quarter ago from an EBITDA perspective, so you have that clarity. There was a significant amount of SG&A associated with that, that was assigned to that climate group, which again is part of our restructuring and streamlining operation, so that A, it's no longer there, and B, not transferred with the transaction.

[Colin Langan:]

Okay, it makes sense. And there are a lot of media reports about Mando's interest in Halla that seems to have died down quite a bit. I mean, do you have a dialogue with the company or -- and any interest in continuing that dialogue? Any update regarding that?

[Timothy D. Leuliette:]

We don't -- I don't publicly discuss M&A activities. But I will say, and I will reinforce what I said on September 19 and again, I've been in Korea now twice over the last 3 weeks, I've had no dialogue nor had any contact from M.W. Chung or Mando.

[Colin Langan:]

Okay, okay. And looking at your Q4 outlook, it seems like you're expecting things to get a bit better than in Q3 though it seems like a lot of suppliers are actually getting more cautious into the fourth quarter. So what gives you that confidence? Is it driven by Hyundai kind of recovering after the strike in Q3? What other sort of factors are making you confident that EBITDA actually can get better in Q4?

[Timothy D. Leuliette:]

I think a couple of points. First of all, I think I'll go back to one of my earlier comments, and that is the company was very conservative with Europe from the very -- from the get-go. So what we're seeing from the standpoint of announcements and production schedules, et cetera, et cetera, for Q4 are basically in line with expectations since the beginning of the year. I think the company, from the board on down to the management team back a year ago, was very, very, very cautious on Europe, and I think that has manifested itself into actually happening. So therefore, there was no downside from some of the actions that were announced or were seen. Secondly, we're seeing a stronger euro going into Q4, which is bolstering both the revenue side and obviously some of the underlying building blocks. And as I said, the company had announced that it was starting to see, and would see, the impact of some business awards and the impact of some cost reductions and margin improvement actions. So I think all of those together give us the confidence of what we've got in that forecast.

[Colin Langan:]

Okay. And just one last question. Any color on -- you're looking to sell interiors possibly at some point in the future, YFV. I mean, does -- and particularly in Interiors, does the slowdown in Europe, has that made that process much more challenging? Any color on maybe the timeline on how those are progressing?

[Timothy D. Leuliette:]

Well, I'll tell you it didn't make it any easier. A couple of things. One, we, as a company, are not sitting here with a gun to our head to go do anything from the standpoint of needing to go pay bills. We've got a good balance sheet. You can see what we're doing from the standpoint of cash. We will do the right things with that business and we're not going to do anything to compromise it. And as a matter of fact, we recently took over some business from another competitor who was struggling in South America. We like the margins we saw there. We're going to do some activity in Europe as part of that restructuring to help streamline and make that business more attractive. And we're probably going to expand into Russia in '13. And so we are still managing and actively pursuing and supporting that business and working with others to make sure that footprint is as strong as possible. I don't feel, and I don't think, anyone here around the table or at the board level feels the necessity to go sell at the bottom or to do anything that's irrational or to do anything that would compromise a customer's position. So we're working actively with customers and actively with others and I suspect that -- again, I don't want to get in M&A discussions here overtly on the phone, but at the right time, we'll have something strategic to announce and we'll announce it at that point.

[Colin Langan:]

And is that similar for YFV? I mean, China has been falling a bit. Does that make it a tougher time to look to sell that asset?

[Timothy D. Leuliette:]

Because the weakness in -- excuse me, China itself?

[Colin Langan:]

Yes. It seems like growth rates there seem to be slowing.

[Timothy D. Leuliette:]

Well, I mean, again, growth rates are slowing in China, but again there's cyclicality. I think when President Xi comes in, of course, the party has announced its new leadership changes and they take over their government roles here in the spring. We would expect some, as is traditional in China, some stimulus associated with the new leadership. Independent of that leadership, I think, and I mentioned earlier, that when I put my YFV head on, again, we own half that business, we have $1 billion plus of growth next year in YFV, which is a significant statement to make. YFV will become larger than Visteon next year with its size. And as a result of that, there's a lot of focus, a lot of activity. We had the management team over here earlier in the week, had a board meeting. A lot's going on with YFV, and I think the issue of its ability to pay for anything, its ability to go do anything, is not impaired at all. The question is, is that the metrics and the parameters were not right for the transaction at that moment in time last spring. I will tell you, from sitting here as a businessman, that the combination of Interiors and YFV is still, from an industrial logic perspective, the right thing to do. I don't, right now, see the mechanics to get that done. But that doesn't say that the mechanics can't, at some point in the future, line up to do something there. But the bottom line is, is that, right now, we've got actions and clean up to do in Europe, which we're going to do and YFV has got a lot on its plate. Now by the way, since I'm mentioning YFV, and I'm sure, before the questions are over, one will ask and that is what's the cash position of YFV. And let me just add that since I got the phone here, is that YFV ended the quarter with a little over $1 billion in cash. As we've said in the past, and I was very clear on the 19th, is that when you got a company that's growing at $1 billion a year and you've got the number of JVs and subsidiaries, et cetera, that work its way through that organization, 5 major product groupings and then a number of supporting affiliates, there is a lot of need for cash. Do we still believe there's an opportunity for us to extract some dividend out of there, and the answer is yes, but it's more modest and that's something that's still on the table but I have nothing to report at this time.

[Operator:]

[Operator Instructions] Your next question comes from the line of Matt Stover from Guggenheim.

[Matthew T. Stover:]

I'd just like to ask some clarifying questions. On the tails to your last comment, Tim, you folks have talked about working on the payout ratio in terms of relative to equity income at YFV and I'm wondering if you expect to see your ability to increase cash dividend relative to the income there continue to climb or because of the growth of cash payout as a percent of income needs to stay the same.

[Timothy D. Leuliette:]

Okay. There's a couple of elements there. One, I think, as we look at the trend line, YFV going forward, we're going to continue to see it again. There's going to be ups and downs and it's going to be like any company, some cyclicality here, but we see the long-term trend as being very positive in the growth of net income. And to that degree, we have, as you know, a 70% payout on the dividend. We'd like to increase that and are working on that. But from time to time, there'll be opportunities because of the cash generation. Again, it's going to be cyclical right now. We got a number of plants under construction, a lot of engineering work going on in China that there will be times to extract cash and times not to. We still believe there's an opportunity to pull out it on a periodic basis, sometimes a special dividend. At this point, we'd also like to see the baseline dividend increase and, we're active on that front. But the overall trend over time should be a positive one, without question. The growth that I've talked about for YFV next year will be duplicated the year after, given the business awards the company has had. So there's a clear trend. And the degree that cash is appropriate to be extracted, I can assure you that that's on the front of our discussions.

[Matthew T. Stover:]

Okay. On the restructuring, a couple of things. One, the plants that are excluded from the Visteon Climate contribution, have they been included in that restructuring charge? And if you could just kind of sort of roughly apportion the charge by sort of business sector, that would be helpful.

[Timothy D. Leuliette:]

Yes, the answer, Matt, to your first question is yes. They've been included in the restructuring charge. And as far as being -- providing clarity there, just because of ongoing negotiations and discussions, I would -- I'll refrain from giving any more clarity there until January.

[Matthew T. Stover:]

Okay, okay. And when we think about that, if I look at the returns in the Interiors business, they're obviously the most challenged. And so I guess, sort of as a dumb outsider, I'd say that that's business that needs the most activity. Does -- would it be fair to associate most of the charge with Interiors? Or would that be an incorrect assumption?

[Timothy D. Leuliette:]

Matt, God love you, you're still doing it. I'm going to say is that -- is it's clearly is represented -- well represented in that number, but I'm not going to give you any greater clarity until January.

[Matthew T. Stover:]

Okay. And then one last one. If I look at the margin performance in Climate and Interiors, we had somewhat of an atypical trend from Q2 to Q3. And I thought I heard mention of pricing recovery in Interiors. I'm wondering if you could give us a sense of what that might have been. And then two, if you could put some more meat on the bones of what happened in the Climate business, that would be really helpful.

[Timothy D. Leuliette:]

I'm going to turn it over to Mike on the first point. I'll just say on the second point, embedded in climate, there's some additional revenue coming in. We had some less than acceptable manufacturing performance in Q3 which may bleed a bit into Q4, which did not contribute positively in climate and that's being addressed. And then as far as the remainder of this, let me -- Mike, let me turn that over to you.

[Michael J. Widgren:]

Yes. And what we saw in Interiors, we did see a benefit to our cost of sales during the period as a result of an engineering recovery from costs that were passed through, kind of approved by the customer in the quarter.

[Matthew T. Stover:]

Okay. What I was thinking of actually in the Climate business, is actually the margin, if I have it correctly, the EBITDA margin in Q2 was 7.8% and the EBITDA margin in Q3 was mid-8s. And as we both know historically, third quarter, because of changeovers and production days, usually is a lower margin quarter versus Q2. And I'm wondering if we need to look back to 2Q to say there was something in there that was a problem. Or was there a good guy in Q3 that perhaps there's something we can extrapolate forward?

[Timothy D. Leuliette:]

One point is that climate is less susceptible to the Q3, Q2 dynamic than some of the other businesses because of its dependence on Asia.

[Michael J. Widgren:]

Yes, and we've also seen continued efficiencies and new business coming onstream with growth of Hyundai.

[Scott Deitz:]

Gina, I think, at this point, we'll end the queue and I'll turn the it over to Tim for closing comments apart from saying again thank you, everyone, for joining us. We'll be taking calls for the next couple of days.

[Timothy D. Leuliette:]

Thank you, Scott. And I guess the bottom line here for -- from the company's perspective is that we did perform to expectations, but we are elevating those expectations as we go forward. The underlying growth and a combination of both tactical and strategic actions, I think, will better position this company and its assets in the future for which we see -- for which we are confident we'll deliver the shareholder value equation that is expected. The implied Q4, which is the strongest quarter of the year now, the Halla-Visteon combination and the resulting cash generation back to the parent, the restructuring actions announced, are all part of that process. I look forward to seeing you, and I'm going to be in New York here, in Boston the next few days and next -- early next week, we'll see you at some of the conferences coming up, and we look forward to seeing you. And again, we appreciate your interest in the company. Thank you.

[Operator:]

This concludes today's conference call. You may now disconnect.