Visteon Corporation
Q2 2013 Earnings Call Transcript

Published: 8 Aug 2013

[Operator:]

Good morning. My name is Jennifer, and I will be your conference operator today. Welcome to Visteon's Second Quarter 2013 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. Bob Krakowiak, Vice President, Treasurer and Investor Relations for Visteon Corporation. Mr. Krakowiak, you may begin.

[Robert R. Krakowiak:]

Thank you, Jennifer. Good morning, everyone. With us today are Tim Leuliette, Visteon's President and Chief Executive Officer; and Jeff Stafeil, Visteon's Chief Financial Officer. We appreciate your interest in our company and taking the time to join us to review the second quarter of 2013. We have scheduled the meeting for an hour, and we'll open the lines for your questions after Tim and Jeff's remarks. As 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.

[Timothy D. Leuliette:]

Thank you, Bob, and good morning, everyone. And thank you for joining us this is morning. We have a lot to go through this morning, so let's jump right to it. Page 2 of the deck, entitled Recent Highlights. We had a good quarter. We have a lot to do here. We have a long journey in front of us, but we feel very comfortable with the steps that we're taking in the second quarter, specifically focused on fundamentals. Sales were up approximately $200 million to $1.9 billion and adjusted EBITDA of $187 million versus $147 million a year ago. Adjusted net income of $71 million, earnings per share of $1.41. Underlying that was the strength in our Climate and Electronics product groups. Year-over-year adjusted EBITDA, up 38% and 17%, respectively. And as I've said in our press release, we saw the company from a sales gross margin and EBITDA perspective, up in all major regions of the world. We have over $1 billion of liquidity as of June 30. And if you go back and look at what we have done over the last months, the last 12 months, we have bought back $175 million worth of stock and $50 million worth of bonds, have been repurchased. So again, strong liquidity performance against the grain of also improving the balance sheet. We have a little over $1 billion, as I said, of cash, which is up $306 million from a year ago, and that we also have $114 million on our ABL availability. Debt of slightly under $800 million at $799 million, 1.2x, so again, we remain very -- leverage is quite light and our balance sheet remains very strong. As we looked at the market, as we looked at the performance and I think as we talked to you at the last earnings announcement in Q1, we said we wanted to get a gauge of where this market was going before we went back and then looked at adjusting guidance. And after the second quarter, we said we'd look at that, and we are. At this point, we're not going to revise sales upward. We think that our sales forecast is pretty strong. And again, there's some pluses and minuses with currency and weaknesses, and Interiors strengthened, offset by some of the other product groups, but we're comfortable with our sales guidance. But we are going to increase our EBITDA, adjusted EBITDA guidance from $620 million to $660 million range to the $660 million to $690 million. And the free cash flow, we're going increase up to the $135 million to $170 million range. And adjusted EPS, to $4.83 to $6.11 versus the $4.04 to $5.52 we had previously. We believe that the performance in the first half of the year and what we see in the second half of the year gives us -- gains us comfort to proceed with that kind of guidance increase. And we're pleased with the performance of the team to achieve that. Moving to the next page. Again, we talk about this every quarter. I would like to, again, highlight where the vehicles are built and where we sell our products. In the second quarter of 2013, half of the vehicles on earth were built in Asia; 24% in Europe; 20% in North America, with 14% in the United States. This, again, sort of sets the tone for where one should produce their products and where our customers are. On a consolidated basis, as you see, that we are 43% Asia, 31% Europe, 20% North America, 6% South America. Slightly -- just a slight variance from where the vehicle platforms are built around the world. On a nonconsolidated basis, when we include the YFV JV, you see that we remain very heavily focused as an Asian company. Moving to the next page, Page 4. I want to, again, look here at where we have accomplished, what we've accomplished, what we believe some of the items we have remaining to do. And I'll, on the next few pages, focus on that. From an operational status perspective, I think as we look back over the first 6 months, we see that sales are up 10%, gross margin is up 130 basis points and adjusted EBITDA is up 23%. These reflect fundamentals. These reflect the team working on factory floor issues, engineering recovery issues, launch issues and addressing that order book that we have before us and will continue. The net income is up -- is $134 million for the first half versus $88 million in the similar period last year. But I must remember -- you must remember, as you look at our Q2, in particular, that last year we had a $63 million equity gain in that quarter. So on a quarter-by-quarter basis, on a pure performance basis, this quarter has been much stronger than a year ago. On adjusted free cash flow, we've generated almost $100 million in the first half of 2013 versus using $25 million a year ago. We're increasing the guidance because, again, as I said earlier, of the strong first half financials and the projected performance we see in the second half. This has given us comfort to increase that guidance. We expect a strong Q4 supported, primarily, by that order book we've discussed in the past and the launches that occur towards the end of every year, and the expansion of our business base. However, Q3 will be impacted by the traditional cyclicality that we always see. And again, I think it's good to remember that the first half of the year, from a vehicle production perspective, is always stronger than the second half of the year. The full-year guidance reflects, in our minds, some softening of the worldwide vehicle production versus the first half. Year-over-year, China was up 12% in the first half, and we're projecting they'll only be up 8% in the second half, if you look specifically at the largest customers in China we have, which are

[Jeffrey M. Stafeil:]

Yes, thanks, Tim. I have a fair amount to cover today, as Tim mentioned, and I'll try to move through these slides fairly quickly. Starting on Slide 9, we'll talk about detail on our YFV investment, our 50% nonconsolidated joint venture in China. The SEC, under Rule 3-09, requires separate financial statements to be filed for significant subsidiaries that meet certain conditions. YFV now meets these conditions, and as such, Visteon filed separate historical financial statements this past June on a Form 10-K/A. These statements are required on an annual basis going forward. As we recently filed these statements, we thought we'd take a few minutes to walk through the YFV financials and how they tie into Visteon's profits. Turning to Slide 10, we show a very simplified structure for YFV. We own 50% of the parent company, as well as several direct stakes, shown on the red lines in the diagram, in various subsidiary entities. YFV is made up of essentially 5 businesses. Interiors, these are shown at the bottom of the page. And generally speaking, we hold a 50% economic interest in this group. Electronics, we own 40% directly and have 70% of the economic interest. This business is integral to our global electronics business outside of YFV. The Seating business, we have 25% of the economic interest of this business. And finally, Safety and Exterior businesses. YFV does not consolidate these 2 operations, and Visteon has a 25% economic interest in each. Moving to Slide 11. We show consolidated YFV financials for 2011 and 2012 in RMB and U.S. dollars. These numbers include all of YFV and not just our 50% economic interest. Under IFRS, YFV generated RMB 39.8 billion in revenue and RMB 1.6 billion in profit in 2012. On Slide 12, we provide a walk between IFRS financials and the amounts we recognized in U.S. GAAP. The primary difference between IFRS and U.S. GAAP was a 2012 noncash gain of $126 million recognized only in U.S. GAAP. Please note that we excluded this noncash gain in all of our adjusted EBITDA and adjusted net income calculations. Moving to Slide 13. We show how the $369 million from the previous page reconciles to our equity income line. The major bridge items include our direct ownership interest in YFV subsidiaries, plus equity investments and other entities outside of YFV, such as our 50% holding of Duckyang. Moving to Slide 14, final one in this section. We provide a buildup of YFV 2012 EBITDA. YFV generated RMB 2.6 billion in EBITDA during 2012, or USD 419 million in EBITDA. Visteon's 50% share of YFV's total EBITDA translates into $210 million. It is important to note 2 things. First, the figures on this page represent results for consolidated YFV only. Visteon's direct stakes in Yanfeng affiliates are not considered on the page, but contribute approximately $45 million of additional EBITDA. Second, the EBITDA amounts are positively impacted by YFV's equity from nonconsolidated affiliates and reflect a deduction for YFV's noncontrolling interests from other partners. I'll now move to an overview of our second quarter 2013 financial results. Moving to Slide 16, we present our key financial results for the second quarter of 2013 compared to the second quarter of 2012. We had another very good quarter, as Tim mentioned, as we meaningfully improved versus prior year on all our key metrics. 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 U.S. GAAP financials in the attached appendices -- appendix pages on Pages 30 through 32. I will discuss these metrics in more detail on the following pages. Turning to Slide 17. We compare 2013 second quarter sales and adjusted EBITDA to last year. Sales were $1.9 billion, or $199 million better than the second quarter of 2012. The increase was primarily -- was driven by higher year-over-year volumes in all regions, particularly Asia and North America. Meanwhile, our adjusted EBITDA was $187 million, up $40 million versus the second quarter of 2012, and primarily reflected higher volumes and higher equity income, partially offset by a $12 million increase in noncontrolling interest. Our business equation, which was slightly positive on a year-over-year basis, included an $11 million year-over-year benefit related to certain design recoveries that were recognized in our Interiors product line. Turning to Slide 18. We show our second quarter sales and adjusted EBITDA for our 3 products group segments

[Robert R. Krakowiak:]

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

[Operator:]

[Operator Instructions] And our first question comes from the line of Colin Langan with UBS.

[Colin Langan:]

Any color on the Interiors sale, how that's progressing? Do you think that could be completed by the end of this year?

[Timothy D. Leuliette:]

Again, thank you, Colin, for the comments. As you know, we don't comment on M&A actions. As I said here, I think, in the past, when we do comment, it will be because the transaction has been completed, not because we have an LOI, MOU or in discussions. So I think it's best to say that the sale of Interiors remains a priority, and when there is a transaction at the right price and at the right time, we'll communicate that to you. And that's just the way we're going to operate on that.

[Colin Langan:]

Okay. Then, there's no time line targeted to get it completed by?

[Timothy D. Leuliette:]

It was clearly a priority for us this year to work through that, and we are working through that. As you saw on our list here of priorities to get on the M&A side, divesting Interiors is one of the key priorities. So I'll just leave it at that.

[Colin Langan:]

Okay. And then, we saw JCI is selling its electronics business. Can you explain how your Electronics as similar or different, as we kind of look at what prices they get for that business, and whether we should think about it as a readthrough for your -- the value of your business?

[Timothy D. Leuliette:]

Yes. The JCI electronics business, as you saw, I think they have obviously announced a sale of one of their big components of that business, which -- it was in an area that's not an area where we compete in. They do compete in some areas we do, such as the clusters and a little bit in the infotainment side. And -- but fundamentally, I think we have a different footprint. I think that our focus at this stage remains upon what I'll call the expansion of the vehicle into the mobile device world. I think their electronic capability has got some areas that are consistent with that. But like many of us, if you look at that -- and I think we've shown back on the, I guess it was February when we did the deep dive on Electronics, we showed in our space where we were and where JCI was on the like components. And again, I think the smaller piece of their Electronics business is in this what we call clusters and infotainment side. And you can see where we stand and where they stand in that area.

[Colin Langan:]

Okay. So the biggest overlap is in the clusters part?

[Timothy D. Leuliette:]

There is some overlap in a part of their business, that's correct.

[Colin Langan:]

And in the past, you've mentioned that you needed better scale in Electronics, but you're not interested in M&A. So how do you -- how can you achieve that and so would you -- how would you achieve that going forward?

[Timothy D. Leuliette:]

Well, I think that, first of all, we've got a pretty good indigenous growth plan when you look at the order book. Secondly, we've said that we would not leverage the Visteon balance sheet to achieve an M&A transaction. But there are other relationship, partnerships, working relationships that could occur to expand our effective footprint. I also ask you to look at, for example, what we're doing on HVCC, where we're utilizing the balance sheet of a subsidiary. So there are many paths one could use to expand that business if a proper opportunity presented itself. But I think the focus at this point is, #1 on our list is to get the YFV component integrated in this in a more effective way and that, we've mentioned, is a priority. We, today -- basically, when you look at that, it's about 1/3 of the size of our current business, but it's really outside of our footprint. We're looking at ways to sort of work closer with that and prioritize that. But again, a lot of opportunities in the Electronics side.

[Colin Langan:]

Okay. And just one last question. Any update on the restructuring, sort of, how far -- I guess, it's $100 million in spend, that looks like it came down a little bit. But how far are you through the restructuring, and how much is reflected in our current results? Or is that really going to be something we see more in the second half?

[Timothy D. Leuliette:]

Jeff, do you want to go through the specifics there?

[Jeffrey M. Stafeil:]

Yes. Colin, there's a, I'd say, a number of actions that are in process. You saw us take a charge in the fourth quarter of last year relating to a facility in France, and another one in the first quarter of this year relating to a different facility in France. Those actions are under way. A lot of the benefit will start to come to us a little bit later. And some of those actions were done because of some product movements from the customer standpoint. So the benefit is more of just mitigating against a future loss. A lot of the corporate actions continue to go through, I would say, a lot of the corporate SG&A and fixed cost reductions we have targeted. We're still on plan to the presentation I think we put out at the Deutsche Bank conference back in January, if you'd reference that document. We're looking -- but a lot of the actions we have will pay more dividends in 2014, as it takes a while to set up some of these. So I'd say, we're still on path. Some of these things just move, as far as the cash and the timing of the expense, a little further out in the calendar as we pace them appropriately from a business and operating perspective.

[Timothy D. Leuliette:]

I would add to that, that in addition, we've seen some pretty darn good revenue growth in the first half of the year, which has also created some headwind there. And I've been pleased with the fact that we still have kept to plan despite that. Secondly, we've also done the spinoff, if you will, of the Climate business into the HVCC activity. And as you get -- go through that transaction, little things -- it's interesting, I was over there a few months back and now every water tower, every piece of stationery, every sign, every door, every bus for employees has got the Halla-Visteon Climate Corporation. So this whole infrastructural change in the cost of transferring and creating that new business get embedded in your SG&A, and has been done and completed. Again, we don't -- we haven't kind of missed our task on it. So a lot of good work going on in that. And I do say that we are on path, confirming what Jeff said.

[Operator:]

Your next question from the line of Brian Johnson with Barclays.

[Brian Arthur Johnson:]

A couple of things. You've got cash building up on the balance sheet. Any thoughts on when to move on the share buybacks, and any reason not to have done it in the past quarter?

[Timothy D. Leuliette:]

Regarding what we're going to do in the future, you'll be the second to know as we execute our plan. But I would say, first of all, we outlined a 2-year business -- or a 2-year plan, stock buyback plan. We were aggressive in the first quarter. We intend to maintain that plan and look at opportunities. If there are opportunities to expand that, we will. I think, again, just like we were in the first quarter, of sitting back and looking at the year and getting comfortable with the year, we now have got 6 months behind us. Let's assess where we head for the rest of the year and take a look at the marketplace, a lot of dynamics. But again, we I think have been very clear that the businesses themselves generate sufficient cash to reinvest. They're cash-generating businesses and they invest in themselves. If we have excess cash over time, it'll work its way back to the shareholder.

[Brian Arthur Johnson:]

Okay. And secondly, Halla's had a nice run up in stock. You've always talked about its -- 51% makes more sense than 70%. Any thoughts on potential timing of monetizing some of that Halla position?

[Timothy D. Leuliette:]

Well, I think, today is the first time that the investment community has had a real good shot at looking at Halla-Visteon as a combined entity. I ask you to look at Page, I think it's 20 in our deck, which is the Climate footprint, the Climate financials. And as you see, we got some pretty good momentum there. So the question is, timing is -- let us execute there a bit. We have no gun to our head. There is a tremendous growth there. There's a tremendous order book there. There's margin improvement there. So let us get a few quarters of that under our belt, let the market respond to that and then we'll come back and ask that question. I don't feel, at this point in time, that, that stock has achieved a value for which it's attractive for us to start monetizing.

[Brian Arthur Johnson:]

Okay. And then, a final question around Interiors. Can you quantify, if you haven't, the recovery that helped in this quarter? And then just secondly, there wasn't a lot of growth in this, which I think is good because it's the least profitable business. Is that by design? Is their business a trading off here that might make it more digestible to a buyer and as it trades off, can you reduce the cost base proportionally?

[Timothy D. Leuliette:]

That's about $7 million or $8 million, Jeff, of the onetime?

[Jeffrey M. Stafeil:]

$11 million year-over-year difference.

[Timothy D. Leuliette:]

$11 million year-over-year difference, the onetime event.

[Brian Arthur Johnson:]

And that's a small business equation?

[Timothy D. Leuliette:]

Yes.

[Jeffrey M. Stafeil:]

It was really, just to be clear on that, it's engineering recoveries, which are just episodic. And in this business, we tend to -- we bill out our engineering time, but before we can recognize it in revenue, certain milestones need to be met. So it does not -- it's not necessarily a onetime event. It just comes in episodically with the launch of new programs.

[Brian Arthur Johnson:]

Right, lumpy. But it's also nice to see the customers actually pay?

[Timothy D. Leuliette:]

Also a good thing. But I would say this, the order book for Interiors has not dried up. There are certain pieces of business that roll off because of the very nature of where we're taking the company. But we are sustaining that business. We are interfacing with the customers. We are investing in the business. We're not bleeding it for cash. We are creating a sustainable business that we feel will be better properly placed in the hands of the Interior consolidator. This is a business for which you need a good global footprint. As you know, we don't have an Interiors presence in North America. So there are people that are in this business that we believe are more appropriate stewards of these assets. But the way to optimize the value of that business to those people is not to bleed it and to not go out and be aggressive where we can, where appropriate, in achieving new business. So you'll see, and I think we've discussed in the past in our cash flows that we are investing in the business. We're putting engineering money there. We're also putting capital in place for new programs. So that business will continue to be optimized. But optimized does not mean to be milked, it means to be put in a position such that it's attractive and can transition to a new owner as seamlessly as possible.

[Brian Arthur Johnson:]

Yes. And final question on Electronics. We heard Delphi noting a bit of softness in high-end electronic systems. Harman noted its major growth was in mid-market, and that's in the branded audio. It was down a bit. I mean, a, what are you seeing in terms of mix within mid-range versus upper electronics infotainment uptake? And b, kind of, where is Visteon's business positioned in that sort of scalable mid-range versus higher-end systems?

[Timothy D. Leuliette:]

It's a good question. We compete, primarily, in that space in the low- to mid-range, that's our sweet spot. And what we're seeing is that we can effectively add content in the low- and mid-range and continue to move up. So part of the pressure that's being felt at the upper end is because of platforms we have, the Eagle platform being one of the electronic platforms we have, of achieving some of the customers' needs. As you look, especially globally, the world is not all upscale C- and D-size cars, it's mostly an A and B world. It's a world of a very cost-effective, lower-priced product. And that has been our historical footprint. If you look at the Volkswagen business that we've discussed in the past, and the Renault-Nissan business we've discussed in the past, large vehicle platforms, right focus in that area, the Ford platforms. Again, not in the upper end but in the low- to mid-range globally. And that's been a good vehicle growth for us. And we don't see that changing. As a matter fact, that's really one of the engines of growth for us in the future.

[Brian Arthur Johnson:]

And if you could had to flag a publicly disclosed platform clients could look at to say, "Okay, I get it. That's a leading-edge mid-range system," where -- we certainly know the e-Bee, and we've seen that out in Las Vegas, but something that's in the market now and selling well?

[Timothy D. Leuliette:]

Well, I think, most of the Ford products globally, the Renault-Nissan B platforms, the Volkswagen A-B platform products, I think, is probably an area to look at, as far as vehicle for us that we can discuss, I guess, yes.

[Operator:]

[Operator Instructions] And we do have a question from the line of Kirk Ludtke with CRT Capital.

[Kirk Ludtke:]

A couple of follow-ups. With respect to -- you mentioned that you'd like to get the tax rate down, and one strategy for doing that might be to move some debt into areas where you have taxable income. And of -- the 6.75% are callable next year. Can you talk a little bit about how you might reposition the debt? And I guess, more specifically, what your target leverage is for the business on a consolidated basis?

[Jeffrey M. Stafeil:]

Kirk, I'll answer that in a few different ways. But I'd say, one of the focus points for us is looking at our earnings line and looking at tax. And I don't recall the exact page number in the appendix of our February 28 conference call, but we gave a page in the back that showed our taxable income in profitable locations, or our PBT in profitable locations around the world, and our effective rate there was in the low 20% range. But then, we summarized the amount of losses we made in areas around the world, obviously, where we weren't enjoying any tax benefit. And the U.S. is one of those. We don't have much operations in the U.S., as you know. Having our debt here is something that we've looked at. It certainly doesn't give us a tax benefit as it would in some other jurisdictions around the world. But that whole equation of how we look at it is much more, I'd say, there's many more things in the equation than just our debt location as we look at -- as we talk about our service organizations and central service environment, where those are located, and making sure that we have those things, as much as we can, matching up against profitable locations that they're serving so we can enjoy tax deductions for those types of expenses. And as we looked through, I'd say, all of those things, we're seeing opportunity. It's going to take a little time and energy to manifest itself. But with target -- I'd say our target leverage is probably peer-group average. I don't think we want to get away from ourselves there. I would probably say we're a bit under-levered today. We still have, certainly, opportunities to increase our cash balances going forward. But trying to put that in locations around the world then, I'd say, there's a lot of opportunities for putting it in different regions where we could enjoy the tax benefit.

[Timothy D. Leuliette:]

I think, Kirk, your comment, though, that this is becoming a more financially attractive debt to address is true. And we're obviously cognizant and aware of that.

[Kirk Ludtke:]

Yes, I'm sure. I just -- you mentioned that you wouldn't lever up to buy something, but I guess, is it conceivable that you'd lever up to pay a special dividend?

[Timothy D. Leuliette:]

Special dividends have not been a focus of the business and a priority given, especially some of the tax nature of some of our shareholders. I think the first issue here is migrating debt from the parent to the subsidiaries -- to subsidiaries, where appropriate -- is appropriate. As I said I think in the past a number of times that probably at Visteon Corp. perspective, that long term should probably be not an entity where you carry a lot of debt. But in the interim period, the next couple of years as we transition through this, probably, replacement of that debt into the more efficient areas and more tax-efficient areas is clearly a priority. But again, I will come back and look at the migration of the debt away from the parent to subsidiaries, where appropriate, will be explored. And I think the issue is that's a more efficient use and a more appropriate use of that capital.

[Operator:]

Thank you. And we have no further questions at this time.

[Robert R. Krakowiak:]

Very good, Jennifer. With that, I'd like to thank -- first of all, thank everyone for your questions and your participation in today's call. And I'd like to turn it over to Tim for his final comments.

[Timothy D. Leuliette:]

Thanks, Bob. And thanks, all of you, for your interest in Visteon and your support of the company. We know we have a path here that we still have a lot to execute on. I go back to that September 19 presentation back in Boston at the Citi Conference and the update we did at the Deutsche Conference in January, as far as setting guideposts and setting good targets and setting the objectives, not only tactically but strategically in where we want to head. We have further work to do. We have further execution to achieve. But I do sit back and say, I've been pleased, very pleased with the team this quarter as far as just looking at the fundamentals side of this. And again, I'm sure we'll see some of you next week at the JPMorgan Conference, where we can go into greater depth in some of these questions. But we feel comfortable with where the direction of the company is, we are generating value, we like the order book. I would say, the order book has got some good momentum this year. We'll discuss that, obviously, later. But I feel that we are positioning Visteon for growth and for margin improvement. And the story will continue to unfold quarter-after-quarter. So again, thank you for your support, and we look forward to seeing you next week. Thank you.

[Jeffrey M. Stafeil:]

Thank you.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect at this time. Good day.