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Visteon Corporation (NYSE:VC)

Q3 2008 Earnings Call Transcript

October 30, 2008, 10:00 am ET

Executives

Derek Fiebig – Director, IR

Don Stebbins – President and CEO

Bill Quigley – EVP and CFO

Analysts

Christopher Ceraso – Credit Suisse

John Murphy – Merrill Lynch

Jeff Skoglund – UBS

Patrick Nolan – Deutsche Bank

Brett Hoselton – KeyBanc Capital Markets

Kirk Ludtke – CRT Capital Group

Patrick Archambault – Goldman Sachs

Operator

Good morning and welcome to the Visteon third quarter 2008 earnings conference call. All lines have been placed on a listen-only mode to prevent background noise. As a reminder, this conference call is being recorded.

Before we begin this morning's conference call I'd like to remind you this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future results and condition, but rather are subject to various factors, risks, and uncertainties that could cause our actual results to differ materially from those expressed in these statements.

Please refer to the slide entitled 'forward-looking statements' for further information. Presentation materials for today's call were posted on the company's website this morning. Please visit www.visteon.com/earnings to download the materials if you have not already done so. After the speakers’ remarks there will be a question-and-answer period. (Operator instructions)

I would now like to introduce our host for today's conference call, Mr. Derek Fiebig, Director of Investor Relations for Visteon Corporation. Mr. Fiebig, you may begin your conference.

Derek Fiebig

Thanks, Christie, and good morning, everyone. Joining me on the call today are Don Stebbins, our President and Chief Executive Officer and Bill Quigley, our Chief Financial Officer. After the call, we’ll open up the lines for your questions.

With that, I will turn the call over to Don.

Don Stebbins

Thank you, Derek, and good morning. During today's presentation I will review the company’s overall performance and then turn it over to bill for the financial review.

On our second quarter call we discussed the fact that we anticipate a weaker back half of the year versus the front half. However though we may have called the direction correctly, the speed and severity of the change greatly exceeded our expectations and as a result we expect a very challenging fourth quarter and a full year 2009.

For the third quarter 2008, product sales were $2 billion, down about $400 million from a year ago. This decline was primarily driven by plant divestitures, plant closures, and volume decreases, partially offset by favorable currency.

In North America, we experienced significantly lower production volumes for both Ford and Nissan while European volumes, which were favorable in the first half of the year began to evidence some weakness. In Korea, Hyundai/Kia production was down significantly due to labor disruptions. And production in China was negatively impacted due to the Beijing Olympic Games.

Gross margin for the third quarter was $43 million as our positive net cost performance, including the benefits of our restructuring actions, were offset by the lower production volumes.

As you know, three years ago we set out to address 30 underperforming facilities. Through the third quarter we have addressed 28 of the 30 facilities, and expect to finish the remaining two by the end of 2008. The restructuring program will have been accomplished ahead of schedule, under budget, and with greater savings.

However, in response to the collapse in production volume and current market conditions, we are implementing additional headcount reductions to better align our resource with market conditions.

At the end of the quarter we had combined cash and availability of $1.3 billion with no substantial near-term maturities and no financial maintenance covenants.

Slide three presents our consolidated product sales by customer for the nine months of 2008 compared to 2007. Overall, for the nine months sales were down about $470 million from last year with the vast majority of the declines coming during the third quarter.

Year-to-date, our global sales to Ford were down $540 million to $2.6 billion, and account for 35% of our sales. This decline was primarily driven by Ford North America. For the first nine months, rest of the world sales were aided by a weaker U.S. dollar and strong production levels.

Hyundai/Kia sales, which had been growing, were unchanged as a percentage of sales and declined by about $165 million from the third quarter last year. The major contributing factors to this decline were the approximately 140,000 units that were lost due to the Korean labor disruptions as well as the weakening of the Korean won against the U.S. dollar. Given the state of the global economy we do not expect many of these units will be recovered in the fourth quarter and the won continues to lose ground to the dollar.

Sales to Nissan in North America declined about 65% to less than $60 million during the third quarter and down 28% for the first nine months. Sales to GM and Chrysler were slightly higher primarily reflecting increased car production at GM and the launch of the Dodge Ram.

Slide four shows our product sales by region. Sales in Europe were up for the first three quarters of the year as volume and currency more than offset the impact of divestitures. North America declined by seven percentage points on lower volumes, plant closures, and divestitures, and now accounts for only 24% of the company’s total sales. Our Asian revenue increased three percentage points and now represent 29% of total consolidated sales and account for about 2$.2 billion.

On the bottom of this is the regional split of our non-consolidated sales, which increased more than 9% to over $1.3 billion.

Slide five presents our product group sales on a consolidated and non-consolidated basis. For our consolidated sales, the most significant year-over-year change was the reduction in our non-core segment, which declined from 12% in 2007 to 6% so far this year. As we discussed in the past, this decline reflects our divestiture activities and plant closures. As you can see, we remain balanced across all of our reporting segments with 34% of sales from electronics, 31% from climate, and 29% from interiors.

As shown at the bottom of the slide, our unconsolidated activities also contribute to product diversification. The majority of the sales are with our Yan Feng operations, which are primarily interior related, but climate and electronics each comprised 20% of total non-consolidated sales.

Slide six presents new business wins. Our new business wins in the third quarter totaled $200 million, an improvement from the relatively low levels we experienced in the first half of the year. The third quarter wins were concentrated with climate and electronics product lines accounting for nearly the full amount.

By region, North America accounted for just over half of the wins while Europe accounted for one-fourth. The balance was fairly evenly split between Asia Pacific and South America. Through September, we’ve been awarded $465 million of new business. We continue to see delay in awards due to the significant industry changes. Although we expect to have significant wins in the fourth quarter given the uncertainty we do anticipate that some of the business that we expected our customers to award us during 2008 will get pushed into 2009.

On Slide seven, operationally we continue to show significant progress. Our quality for the third consecutive year is showing over a 35% improvement while our safety performance despite being up 6% remains a leader in the industry. Premium costs are down significantly from the difficulty experienced in 2007. And through September, premium costs were $14 million, down from about $42 million a year ago.

Finally, CapEx spending of $230 million was about flat compared to last year. For the full year, capital spending will be about $300 million as compared to $376 million in 2007.

Slide eight provides an update on our overhead cost reduction initiative, which we announced in January. At that time we had targeted $250 million of gross cumulative savings by 2010 as we further addressed our administrative cost and engineering expenses with $80 million of savings expected during 2008. Through September, costs are down nearly $90 million from last year. As mentioned in January, this initiative is a significant priority and the actions that we are announcing today will provide for additional savings.

On the restructuring front, we now have addressed 28 of the 30 facilities in our three-year plan. As I mentioned earlier, this program is ahead of schedule, costing less than expected and exceeding the savings we projected. For the third quarter, we closed our fuel tank facility in Missouri and we finalized customer agreements for our U.K. facilities. We also modified and extended the union contract at our electronics facility in Pennsylvania to provide further cost flexibility.

Although not part of the original 30 facilities, in August we completed the sale of our interiors facility in Halewood, England.

Additionally, given the current market conditions, we have already embarked upon manufacturing headcount alignment actions, implementing a salaried census reduction and the elimination of certain OPEB benefits for two of our recently closed U.S. facilities. During the third quarter, we had charges of $42 million as a result of these actions.

Slide 10 summarize the actions completed in the U.K. over the past few months. These actions are a significant milestone for Visteon and greatly improve our U.K. operations, which lost more than $100 million during 2007 on sales of about $500 million.

We finalized the sale of our Swansea operation to Linamar Corporation in July. This action eliminates an annual operating loss of about $40 million and our third quarter results include a $16 million charge associated with this transaction. Also, in July, we executed agreements with our customers for the balance of our U.K. plants that eliminate their ongoing losses.

We also received proceeds of $4 million for the sale of Halewood and recognized a loss of about $2 million. We previously discussed that addressing our U.K. operations would be one of the most difficult actions of our restructuring plan. And I am proud of the results that our team working with our customers has accomplished.

Slide 11 provides a summary of the North Penn contact extension. The restructured contract covers 250 employees and was extended for two year and now expires in 2001. Under the extended contract, there will be no minimum manning levels. Additionally, the extension eliminated OPEB eligibility for certain employees. This will result in the reduction of liabilities by more than $20 million and result in a curtailment gain of $15 million during the fourth quarter of this year.

Turning to the next slide, on October 14th, we announced that effective in 2009 Visteon will eliminate company-sponsored prescription drug benefits of Medicare eligible retirees from our Connersville and Bedford facilities. We will provide a supplement to retirees’ pensions to help mitigate this cost.

From a financial perspective, this will reduce our OPEB liability by more than $70 million. It will also reduce expenses by $9 million and cash requirements by $3 million annually.

Slide 13 provides details on our manufacturing workforce. As of September 30th, we had just under 26,000 hourly workers globally, which represents a decrease of 12% since the end of last year and a 23% decline since the end of 2006. On a regional basis, 7% of our workforce is in the U.S. and Canada; nearly half is in Europe, split fairly even between East and West; 20% of the workforce is in Asia; 15% Mexico; and 10% in South America. We have taken a number of actions to reduce our hourly headcount and is also been reduced as a result of our completed divestitures.

As we have discussed in the past, we have shifted our manufacturing footprint to match our customer base globally. We are aligning our headcount to match lower production levels and consolidating facilities, when practical. As an example, in response to lower North American production volumes and aided by improved operating efficiencies, we have reduced our Mexican workforce by nearly 1000 employees; the majority of this was completed during the third quarter. We understand that both speed and flexibility are crucial to our success.

We also have been reducing our salaried headcount as well as moving many positions to lower cost countries. However, in response to our lower production levels, we have accelerated our efforts to reduce our salaried personnel. These actions will reduce our salaried ranks by more than 800, which would represent more than 12% reduction. These separations provide a minimal cost savings during the third quarter as only about 150 people were separated from the company during the quarter. We expect per annum savings of more than $60 million. The cost to execute the program are expected to be approximately $60 million with $25 million in the third quarter. These costs are eligible for reimbursement from the Escrow Account.

I will now turn the call over to Bill.

Bill Quigley

Thanks, Don, and good morning, ladies and gentlemen. This slide provides a summary of our third quarter financial results. Product sales of just over $2 billion were $400 million lower than the prior year. And as Don discussed, divestitures and plant closures had a significant impact as did lower production volumes.

Our product gross margin for the quarter was $42 million compared to $97 million a year ago. The reduction in margins is more than explained by lower production volumes in the quarter although we did realize significant positive net cost performance in the quarter.

EBIT-R was negative $97 million for the quarter as compared to negative $33 million a year ago. Our net loss for the quarter was $188 million, which included $3 million of net un-reimbursed restructuring costs, and income tax expense of $31 million compared with $20 million in 2007.

Free cash flow was a use in the quarter of $236 million compared with $141 million in the prior year largely driven by lower EBIT-R, trade working capital, and restructuring cash flows, which I will discuss in further detail later.

The following slide summarizes our year-to-date financial results. On a year-to-date basis product sales of $7.5 billion were lower by $471 million compared to a year ago. During the first half of 2008, sales were relatively even to a year ago with most of the decline occurring in the third quarter of this year.

Despite lower sales year-to-date product gross margin increased by $100 million to $466 million. Gross margin in the first half of 2008 improved significantly reflecting our restructuring and cost reduction efforts. The third quarter benefited from those efforts as well but these improvements were more than offset by the impact of lower sales.

Year-to-date EBIT-R of $32 million in 2008 has improved by $96 million, largely reflecting the improvement in gross margin.

Our net loss widened by $6 million to $335 million. Year-to-date results include an increase in taxes of about $66 million and $44 million of restructuring and related expenses that were not funded by the Escrow Account.

Free Cash Flow was the use of $383 million for the first nine months compared with $270 million a year ago.

I will address each of these items in further detail in the following slides.

Slide 17 aligns the production volume performance of our key customers for the third quarter and year-to-date as compared with the prior year. Two customers, Hyundai/Kia and Ford of Europe represent, approximately 40% of Visteon’s year-to-date sales. Production volume for each increased in the first half of 2008 compared with the prior year, yet third quarter comparison turned negative.

Hyundai/Kia production volumes decreased by 13% in the third quarter largely reflecting the impact of intermittent labor disruptions that Don mentioned, yet are higher 8% year-to-date. Ford Europe production volumes were 11% lower in the third quarter, yet still higher on a year-to-date basis.

The remaining five customer experienced production declines on a year-to-date basis. In total, these customers accounted for about 25% of our sales through September. Ford North America sales were $815 million and production was lower by 30% in the third quarter and 17% in the first nine months.

PSA-Citroen was down 3% year-to-date and Nissan truck production was lower by 35%. Nissan was down over 60% in the third quarter alone.

Finally, GM and Chrysler platforms, for which we have significant content were lower by about 5% and combined for about $265 million of sales.

Slide 18 provides our product sales for the third quarter by region. Sales decreased $400 million versus prior year and were lower in every region with the most significant decline in North America of over $300 million. As Don stated, North America now represents about 22% of our total sales versus 30% a year ago. Europe represents 42% of the total and Asia accounts for 29%.

The bottom of this slide provides the drivers of the change to sales on a year-over-year basis. Favorable currency did increase sales by $75 million while divestitures and plant closures decreased sales by $205 million. Plant closures include Bedford, Chesapeake, and Connersville, and our divestitures include the sale of the North American aftermarket business, which was completed in January this year, the Swansea and Halewood plants in the U.K., and the starters and alternators business in India in 2007.

After taking these items into account sales were still lower in all regions reflecting lower production volumes. The most significant decrease was in North America where sales decreased $165 million.

Slide 19 provides the same information on a year-to-date basis. Year-to-date, sales decreased $471 million versus prior year, again with most of that decrease occurring in the third quarter. Favorable currency increased sales by $419 million year-to-date while divestitures and plant closures decreased sales by an additional $806 million.

On a regional basis, excluding these factors, North America declined $261 million through September principally reflecting lower Ford and Nissan North America truck production. Europe and South America were basically flat and Asia increased nearly $200 million reflecting stronger volumes during the first half of this year.

Slide 20 provides gross margin comparisons for the third quarter. Product gross margin in the third quarter was $42 million. As you know, gross margin is normally the lowest in the third quarter due to seasonal plant shutdown, yet our results were significantly pressured by production volume lower than we have seen previous years.

In the quarter, gross margins was impacted by a number of factors that were restructuring related, divestitures and plant closures reduced margin by about $45 million while restructuring related items decreased margin by $9 million. As we’ve discussed in the past, we include in this category items such as accelerated depreciation expense and asset disposition.

Volume and mix for the quarter reduced margins by $96 million. Unfavorable volumes impacted every market we participate in and every product group, which I will review in a moment. This was largely offset by favorable net cost performance across our product groups of $91 million.

Currency had a minimal impact on the quarter’s results. We had anticipated a modest benefit for the back half of this year, but the benefit obviously was less than expected as the U.S. dollar significantly strengthened during the latter half of the quarter.

Slide 21 provides year-to-date gross margin comparisons. Gross margin increased by $100 million to $466 million, or 6.2% of sales versus 4.6% a year ago. Similar to the previous slide, the bottom of this slide provides the key drivers of the year-to-date change in gross margin.

Favorable net cost performance and currency of $237 million more than offset the negative impact of volume mix as well as our restructuring actions. I do want to highlight that included in restructuring related items are curtailment gains of about $32 million associated with the closure of the Bedford facility earlier this year.

The next slide summarizes our product group segment results for the third quarter. Year-over-year, net cost performance favorably impacted gross margin for each product group, yet this impact was more than offset by unfavorable volume and mix.

Climate sales in the quarter were $674 million and gross margin was $30 million or 4.5% of sales. Gross margin as percent of sales was 209 basis points lower than a year ago. The change is largely due to volume mix and currency, unfavorable volumes driven primarily by lower Hyundai/Kia and Ford North American production volumes. Special items, primarily the non-recurrence of a 2007 curtailment gain related to Connersville also had an unfavorable impact. Net cost performance improved margins by over 200 basis points. This included restructuring savings related to the closure of our Connersville facility as well as certain actions taken in our Mexican operations.

Electronics sales in the quarter were just over $750 million, gross margin was $9 million, or 1.2% of sales, 386 basis points lower than the prior year, favorable volume and currency including the impact of lower production volumes and Ford desourcing actions in North America, which we have highlighted in previous quarters. Special items include a curtailment gain related to workforce declines at our North Penn facility. And net cost performance did improve gross margin by 93 basis points.

Interiors sales were $609 million, and gross margin was breakeven for the quarter. Again, volume and mix was unfavorable in the quarter primarily related to continued declines in Nissan truck production in North America. Net cost performance was positive for the quarter.

Slide 23 summarizes our product group operating results on a year-to-date basis. Gross margin improved in both absolute dollars and as a percent of sales in Climate and Electronics while margin in Interiors were slightly lower than a year ago largely reflecting cost associated with new program launches principally in North America.

Slide 24 summarizes SG&A expenses for the third quarter and year-to-date. In the third quarter SG&A totaled $138 million or 6.9% of sales. This is higher than the third quarter of a year ago, but lower than the run rate in the first half of this year. SG&A expense for the first nine months of 2008 totaled $442 million or about 5.9% of sales.

The principal drivers of this change are highlighted at the bottom of this slide. As discussed earlier this year, we expected non-recurring implementation cost associated with our overhead cost reduction efforts. These costs were about $6 million in the quarter and year-to-date basis about $20 million. We anticipate these costs to total approximately $30 million for the full year 2008.

Incentive compensation increased SG&A by about $9 million in the quarter, $11 million year-to-date. This was largely driven by the impact of stock-based expense, which decline in the third quarter last year, reflecting the change in our stock price. Currency increased cost $4 million for the quarter and $16 million for the first nine months. All others comprised primarily of the non-recurrence of a significant recovery receivables from a former customer a year ago.

Cost efficiencies net of economics totaled $27 million for the quarter and $63 million on a year-to-date basis.

Turning to Slide 25, as you know, during the third quarter several of the ACH agreements were amended between Visteon, ACH, and Ford as highlighted on this slide. In connection with these amendments, we did extend the Salaried Lease and Master Services Agreements with ACH.

Ford also assumed responsibility for the severance and termination benefits for the Visteon employees leased to ACH. Under the original agreement, Ford’s portion of these costs had been capped at $150 million and any funds remaining at the end of 2009 were to have been transferred to the Escrow Account with Visteon maintaining a liability for separations. In lieu of the transfer funds at the end of next year, Ford contributed $50 million into the Escrow Account in August of this year. These funds were available for first dollar coverage for qualified restructuring actions under the terms of the Escrow Agreement starting in August of this year. I will further discuss this in the following slide.

Slide 26 provides an overview of restructuring charges for the third quarter as well as a net impact on cash flow from such actions for both the quarter as well as year-to-date. In the quarter, as Don indicated, we recognized $42 million of restructuring charges related to staffing and manufacturing actions. Only half the charges incurred in July were reimbursed from the Escrow Account, but the Escrow Agreement was amended to add $50 million of additional funding of full coverage, as I just discussed. As a result, $39 million of the third quarter charges were eligible for reimbursement from the Escrow Account. At the end of the quarter, we had about $117 million remain in the Escrow Account and an outstanding receivable due of $23 million. As we discussed throughout the year, the timing of our restructuring actions has a significant impact on our 2008 free cash flow and we provide on this at the bottom of the slide.

The net impact of restructuring on our third quarter cash flow was an outflow of $13 million representing cash payments of $44 million, partially offset by $31 million of cash received from the Escrow Account. The net impact on cash flow year-to-date is an outflow of about $43 million. This does compare to a cash inflow of approximately $24 million in the third quarter of ’07, and $89 million in the first nine months of last year.

So, for the first nine months of the year, the timing of Escrow Account reimbursements and related outflows to complete the actions has resulted in a year-over-year cash flow use of $132 million.

Slide 27 provides our income tax provision and cash taxes. Income tax expense in the third quarter of ’08 of $31 million was $11 million higher than a year ago. As the chart illustrates in both the quarter and on a year-to-date basis, a significantly reduced OCI benefit contributed $26 million and $52 million, respectively, to the year-over-year increases in tax expense.

Also contributing to the increase in tax expense was the improvement in profits where we pay tax, resulting about $5 million and $27 million increases in tax expense for the third quarter and year-to-date respectively. We did establish reserves for tax positions taken in the quarter of about $15 million, which was about $15 million less than the reserves established a year ago.

Despite the volatility in our tax provision as we’ve discussed in past calls, we do expect our cash taxes for 2008 to be about $95 million, which is fairly constant to the prior year even as profits increased in certain taxable jurisdictions.

Slide 28 provides a reconciliation of net loss to EBIT-R for the third quarter of 2008 and 2007. EBIT-R was a negative $97 million in the third quarter of 2008, $64 million lower than the year ago. The year-over-year drivers of the change are outlined in the bottom half of the slide and reflect a cumulative impact of the items I’ve previously discussed.

Slide 29 provides the same reconciliation on a year-to-date base. EBIT-R positive $32 million in 2008, an improvement of $96 million from a year ago.

Slide 30 provides our free cash flow performance for the third quarter and year-to-date with comparisons to the prior year. Free cash flow in the third quarter was a use of $236 million, $95 million lower than last year. The year-over-year decrease in free cash flow was impacted by an increased net loss and net restructuring cash outlays.

Trade working capital in the third quarter include higher spending for tooling, which will be reimbursed in the fourth quarter. The timing of restructuring payments was a negative swing of $37 million compared to the third quarter of 2007. And these items were partially offset by lower capital expenditures in the quarter.

For the first nine months of 2008, free cash flow was a use of $383 million, a change of $113 million compared to a use of $270 million during ’07. On a year-to-date basis that we just discussed the change in cash flows is more than explained by the $132 million swing associated with the timing of the cash inflows and related outflows for our restructuring actions.

Slide 31 summarizes our cash balance as of the end of the second and third quarters. Cash balances totaled $1.1 billion, a decrease of $373 million from the second quarter. The change reflects the free cash flow use of $236 million in the quarter, reductions in debt, including $37 million in industrial revenue bonds in the U.S., which did provide a corresponding reduction in letters of credit, and the strengthening of the U.S. dollar.

At the end of the third quarter, we had about $190 million availability under our U.S. ABL and Europe securitization facilities. It’s important, I do want to take a moment and highlight that today we closed on an amendment to our European securitization facility that does provide additional availability. In conjunction with this amendment, any amounts outstanding on this facility will be on balance sheet on a prospective basis. But as you know, our free cash flow guidance excludes the impact of changes to the securitization levels.

As we look to the rest of the year, Slide 32 outlines estimated production volume performance of our key customers for the fourth quarter and full year as compared to the prior year. These production volumes reflect vehicle platforms from which Visteon derives obviously significant sales.

Ford of Europe and Hyundai/Kia are the only two customers with increased productions at the end of the third quarter. While we expect Hyundai/Kia’s fourth quarter production to remain strong with an increase of 5% year-over-year, we do expect Ford of Europe’s fourth quarter production to decline about 14%.

The remaining five customers have reduced year-to-date production in 2008 and we expect the trend will likely continue into the fourth quarter. We estimate Ford North America fourth quarter sales at $150 million and production lower by 30%. PSA-Citroen volumes are projected to decline 21% while Nissan truck production is projected to be lower by 78%. Finally, GM and Chrysler platform for which we have content should decrease by about 6%. This does include the favorable impact of Dodge Ram production, which is a new program and was not included in our production for ’07.

Slide 33 provides a summary of our full year outlook for 2008. As we exited the second quarter, our financial results for 2008 were tracking to the expectations we shared with all of you in January of this year, yet obviously the macroeconomic environment has dramatically deteriorated over the past two months.

We are adjusting our full year outlook for product sales for 2008 to be about $9.4 billion. This is $600 million lower than our guidance last quarter, primarily reflecting our revised expectations for both currency and production levels. Along with our reduction in our full year sales guidance, we are reducing our full year EBIT-R and free cash flow guidance. We now expect a full year EBIT-R to be negative $25 million and we project full year free cash flow to be a use of between $375 million to $425 million.

Finally, given the continued uncertainty in the marketplace and future production volumes at all the markets that we participate in, we are continuing to evaluate our operating plans and accordingly are not in a position to provide 2009 financial guidance as this time. We will address 2009 guidance at the Detroit (inaudible) Conference this coming January.

It should be noted, we will continue to take the necessary action as we move through this difficult environment.

Now, Don will make a few closing remarks before we take your questions.

Don Stebbins

Thanks, Bill. This is an incredible time in our industry and as we head into what will be an extremely challenging 2009 we at Visteon are fortunate to have both an extremely talented group of employees and substantial liquidity. We continue to aggressively restructure our company by reducing overhead, minimizing cost and maximizing the utilization of each of our facilities. We also remain focused on working capital and capital expenditures. Cash flow will continue to be the highest the priority for our company.

We’ll now open it up to questions.

Derek Fiebig

Christie, if you could please remind the callers how to get in queue.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Your first question comes from the line of Chris Ceraso of Credit Suisse.

Don Stebbins

Hello, Chris.

Christopher Ceraso – Credit Suisse

Well, thanks. Good morning. Just a couple of things. First, the U.K. actions, this was a business that you mentioned was losing $100 million on $500 million of sales. Are you at the full run rate benefit yet from those closures or when will you get there?

Bill Quigley

Yes, Chris, this is Bill Quigley. We’ve got a couple of things, one is obviously the Swansea transaction was completed early July, so if you think about it we still had the first half although we were under an agreement with our customers on reimbursement for training losses. So, Swansea effectively had a full run rate. If you think about the other agreements that we have in place, they were sporadic throughout the course of first half. We now have them locked in. I think we comments on the last call that our second quarter will probably be the first full run rate – or I am sorry, our third quarter is about $12 million per quarter.

And Halewood, again it was a nominal business from a manufacturing profit perspective. So, again it shouldn’t really be on a year-over-year basis a big driver.

Christopher Ceraso – Credit Suisse

So, short answer, by Q3, yes, you were basically–

Bill Quigley

Q3, we should be in.

Christopher Ceraso – Credit Suisse

Yes, okay. China, if China slows down, let’s say GDP in China gets cut in half and we run at 4% or 5% instead of 9% or 10%, can you talk about the impact on the Yanfeng business versus where it’s running right now and would it require any restructuring actions on your part?

Don Stebbins

Yes, I think in terms of the impact of that, we are starting to see a slowdown in China and probably for the first time we are seeing a situation where we have manufacturing employees being let go in that region. So we are – in terms of massive restructuring or larger restructuring, no we don’t see that happening, but certainly there is headcount that probably will come out in part not only due to the macro environment, but we are also driving a lot of change through those facilities and gaining significant efficiencies. So, no, in terms of an infusion of capital, I don’t see that as a need.

Christopher Ceraso – Credit Suisse

Okay. Thanks guys.

Operator

Your next question comes from the line of John Murphy of Merrill Lynch.

John Murphy – Merrill Lynch

Good morning guys.

Don Stebbins

Hi, John.

Bill Quigley

Good morning, John.

John Murphy – Merrill Lynch

If you look at your Hyundai/Kia sales, I was just wondering if you could sort of break down how much of your product is going into vehicles that are made in Korea and then end up back in the U.S. and how many sort of are – stay domestic in Korea? So, I am just trying to understand with the strengthening of the won if there is a big hope–

Bill Quigley

Right, Chris, I don’t have that right – or John, have that right in front of me. I can follow up on that, but if I think about Korean business, you’ve got obviously Halla, which is going to be servicing the local markets there. We’ve got operation in here Alabama, which is a smaller operation, quite frankly. So, I think the bulk of it would be actually within their own market, with limited exports outside of the market.

John Murphy – Merrill Lynch

Okay.

Bill Quigley

We’ve got – obviously got localization here. So, it’s really going to be more on the Korean market.

Don Stebbins

Yes, and as you look forward, I mean, that’s one of the opportunities – the customer’s directives is to try to localize as much as you can. So – but from Bill’s point, yes, there is still a fairly significant amount of exports out of Korea. So, we’ll have to get that for you.

John Murphy – Merrill Lynch

Okay. Then on the free cash flow guidance on Slide 33, the $400 million plus or minus $25 million, that – does that include the restructuring cash from this year, which is $132 million year-to-date, I am just trying to understand that number.

Bill Quigley

Yes, it does.

John Murphy – Merrill Lynch

Okay. So, if we were to assume whatever cash restructuring we get, the – would execute next year, do you expect that sort of the operating portion of that to get significantly better assuming the volumes are going to be down but you are getting the benefit of your cost saves next year. I mean in I know that’s sort of – I mean it’s sort of – it’s sort of looking into next year, but could it get significantly better even with the tough environment we are looking at?

Bill Quigley

I think if you look what we’ve accomplished (inaudible) what we expect to have accomplished through the end of the year, the cumulative savings are approaching the $400 million plus for that three-year program. So we are going to get to spill over, if you will, from actions this year into next year, which would be obviously a tailwind, obviously from a profit perspective. The uncertainty is around production volumes, quite frankly. And we continue to work through at those production volume at least the assumptions will be operating under – but obviously just from a restructuring itself, we won't have that type of a cash outflow. And it should provide, obviously, some upside again to a very jagged environment right now in production volumes.

John Murphy – Merrill Lynch

Okay. And then on the F-150 launch, I was just—if you could remind us what kind of content on the F-150 and if there is – and if that launch is going according to plan after the initial delay.

Bill Quigley

In terms of content, we have both climate and electronics content on it. In terms of the launch, once it’s – from our perspective it’s gone – it’s going as post the initial delay, yes, there is no issue there.

John Murphy – Merrill Lynch

Okay, great. Thank you very much.

Operator

Your next question comes from the line of Jeff Skoglund of UBS.

Bill Quigley

Hi, Jeff.

Don Stebbins

Hello, Jeff.

Jeff Skoglund – UBS

Hi, Don. Hey, just a follow-on on John’s question. The $400 million of saving, could you confirm how much you’ve achieved to-date and is it safe to assume the balance is going to be achieved in 2009?

Bill Quigley

Yes, this is Bill again. By year-end, we would expect to have about $400 million cumulative posted, if you will, through the third quarter it’s about $360 million.

Jeff Skoglund – UBS

Is that on a run rate basis or is that what you’ve actually achieved?

Bill Quigley

Cumulative. Achieved.

Jeff Skoglund – UBS

So, when you talk about amounts spilling over into next year incremental to what was achieved in – to-date–?

Bill Quigley

Right. So, you are going to have actions this year that we’ve taken and not all of the actions occurred January 1st of this year. So you are going to get your rest of your benefit, if you will, your full year benefit into 2009. So, if you look at the outline I think of the restructuring actions over the last nine months, if you will, we are going to get some benefit of those actions into 2009.

Jeff Skoglund – UBS

Can you quantify what’s incremental in 2009 versus what you achieved in 2008 or expect to achieve in 2008?

Bill Quigley

That’s going to be – this year it’s going to be $40 million. Yes, $40 million. That’s not – but you have to remember that the salaried incremental, the salary headcount actions that we are taking now are not included in that $400 million. So, you are also going to get the benefit of that next year.

Jeff Skoglund – UBS

Okay, thanks. And then on the cash, what you guys consider to be the minimum amount of cash that you actually need to run the business day to day, assume the intra-quarter needs are higher than the quarter-end needs.

Bill Quigley

Actually, as we’ve restructured the business over time, we obviously monitor the intra-quarter needs. The intra-quarter needs actually are becoming plus [ph] volatile, quite frankly. Given as we’ve sold businesses off, we are basically pulling the platform in more, if you will. We’ve stated publicly I think in the last couple of quarters that – at least I would be comfortable at a $700 million or so, but I don’t believe that really is what’s needed to run the business. If you set aside probably our Asian business, you got to look at North America and Europe together and our look at those two regions probably a comfort rate of about $550 million.

Jeff Skoglund – UBS

And–

Bill Quigley

That’s cash and liquidity.

Jeff Skoglund – UBS

Okay. And if you look at the cash balances at the end of Q3, obviously ForEx impacted in Q3, but is there anyway that you can mark-to-market kind of the ForEx net cash, may be I guess in other way what will be the – same way you can discus or quantify what the impact if you were to mark that to foreign exchange rates?

Bill Quigley

Jeff, did you say to market, we are having trouble hearing–

Jeff Skoglund – UBS

No, I mean obviously the dollar is appreciating considerably, right, versus most currencies particularly in Europe. So, that would impact the cash (inaudible) negatively right?

Bill Quigley

Right. If you think about our cash balance, let me just give you some distribution a little bit. If you think about how we’ve got it allocated, well there is about $670 million in North America, $180 million in Europe, South America, we’ve got Asia Pac at $300 million.

Jeff Skoglund – UBS

And last one the – on the pension. I might have missed it, but did you guys comment on what the year-to-date return has been on plan assets and I was wondering if you can maybe provide an update on what the asset mix there is.

Bill Quigley

Yes, we actually, not in our formal comments, but we can kind of give you an overview of what we are at with respect to at least the U.S. plan. As we look through, obviously year-to-date asset returns have not been favorable if you will. At the same time, our discount rates or the current discount rate has helped quite a lot, quite frankly from a funding perspective. If we look at our U.S. plan funding level, recall, we ended 12/31/07 about 89% funded. If we look at kind of a 09/30 to even kind of mid-October it’s ranging in the order from 85% to 88% funded. So, it’s reflecting both obviously lower asset performance but at the same time, a lot it’s going to be dependant on the discount rate. So, as the rates have moved, it is lowering the PBO. So, on a funded level it’s actually held in fairly well in the U.S. side.

Jeff Skoglund – UBS

Okay. Can you provide any clarity on the asset mix within the plan?

Derek Fiebig

Yes, it’s – I haven’t seen or really disclosed that, probably, Jeff. This is Derek. We do have fixed income in there as well as equity. There is – we’ve got some LDI in there and a little bit of hedge funds as we’ve been migrating that plan over time.

Jeff Skoglund – UBS

Okay. And Bill or Derek, if you look at the funding percentage, that 85% to 88%, is it safe to assume we shouldn’t see a significant increase in funding performance over the next year or two?

Bill Quigley

I think presuming that level, yes, I don’t think will significantly change the funding requirements for ’09. And in fact your funding requirement is almost a year later, actually. So, it would really be more of an ’10 impact.

Jeff Skoglund – UBS

Got it. Okay, thank you.

Bill Quigley

Thanks.

Operator

Your next question comes from the line of Patrick Nolan of Deutsche Bank.

Patrick Nolan – Deutsche Bank

Hi, most of my question have been answered, but can you just – just a follow-up, you said the salary deduction is incremental to your previous savings. Is the Mexican restructuring also incremental?

Bill Quigley

Yes, the Mexican in and of itself yes the Mexican restructuring is incremental to the three-year plan, if you will. But again in response two things. One was obviously identify efficiencies that our Climate group has been working on. At the same time just from response to the production requirement.

Patrick Nolan – Deutsche Bank

And could you just comment on that a little bit particularly in Europe your appetite for taking more hourly heads out and whether – based on the (inaudible) next year is going to be temporary and you want to be in condition for any temporary recovery in 2010 or would you be more aggressive as far taking those heads out?

Bill Quigley

We’ll be more aggressive. We’ll have to work with the labor unions over there with the workers’ councils, but we will tend to shade on the aggressive side of any discussion.

Patrick Nolan – Deutsche Bank

Got it. And just lastly, the working capital assumption for the fourth quarter, is it going to still a pretty big positive like last year?

Bill Quigley

Yes, it will be still be – it won't be the size of last year. Last year was $180 million plus. Obviously with the production environment it will still be positive, but it’s not going to near the $180 million.

Patrick Nolan – Deutsche Bank

Got it. Okay, great. Thank you.

Operator

Your next question comes from the line of Brett Hoselton of KeyBanc.

Brett Hoselton – KeyBanc Capital Markets

Good morning, gentlemen.

Don Stebbins

Good morning, Brett.

Bill Quigley

Hi.

Brett Hoselton – KeyBanc Capital Markets

Let’s see, I will start with this one, commodities, can you give us a sense of the commodities impact? What I am really wondering is the impact of commodities you move into 2009, but can you give a sense of kind of the impact in the third quarter and year-to-date 2008 and then it’s probably going to be a headwind in 2009 or is that a mistaken assumption on my part?

Bill Quigley

Hi Brett, it’s Bill. I think as we’ve talked about over the last several calls, we’ve done I think a pretty good job working through the commodity environment. We are not a – the user, obviously of steel. It’s aluminum, it’s going to be copper in certain of our businesses and obviously resins in the interiors business. I think we work with the customers on various methods and alternatives given that commodity environment. So, again, we haven’t called out a whole lot of pressure, if you will, or upside on the commodity front. I think if you look at what’s going on in the commodity markets now, obviously they have been trending downward very quickly, quite frankly. But again, that’s going to be part of the discussions that we have as customers into 2009 as we realign agreements and other methods that we have to work through the commodity environment. I don’t see it necessarily as a – necessarily as a big benefit to Visteon.

Brett Hoselton – KeyBanc Capital Markets

As you think about the free cash flow and as we move from 2008 into 2009, can you just give us a sense of what you consider to be the major pluses and minuses affecting that free cash flow as you change or mover from 2008 to 2009?

Bill Quigley

Well, without providing an ’09 number, I think–

Brett Hoselton – KeyBanc Capital Markets

I don’t know like if you can quantify, I am just looking direct—

Bill Quigley

Yes, still working through it obviously. You are going to have – you’ve got a – that’s a lot of traditional things, Brett, right. It’s going to be – what happens on the working capital environment which is going to be driven, quite frankly, by the production as well as the supply base and our customer base. We’ve been basically I think done a great job in trade working capital. There is – I don’t think there is a whole lot, yet we can still wean out of that. Capital spending obviously is a focus. Don mentioned in his comments that we will be focused on in 2009. Our spend this year is estimated about $300 million. And obviously in ’09 we’ll be realigning capital plans, given the operating environment. What else is interesting, given the – we don’t seem – we don’t see the large inflow of – for the fourth quarter of ’08 in trade working capital compared to ’07. The flip side of that, production side is that we wouldn’t expect to see a real big use of cash and trade working capital in the first quarter. So, as productions come down, and continues to come down, we are not going to see the benefit, if you will, in the fourth quarter, but it shouldn’t be a huge headwind in the fourth quarter of ’08. Probably the last two items are going to be our OPEB and pension, cash contributions. Obviously to Jeff’s question previously, pension probably moves more into 2010 once you finalize the year-ends at least for the U.S. The U.K. obviously is a negotiated pension contribution of the trustees, and so we expect those actually to be lower compared to this year, 2008.

As you will recall, we had some larger pension contributions scheduled for 2008 in our call, I am discussing in January that said we do not expect that to occur in 2009.

Brett Hoselton – KeyBanc Capital Markets

Perfect. Thank you, Bill, that’s exactly what I was looking for.

Bill Quigley

Yes.

Operator

Your next question comes from the line of Kirk Ludtke of CRT Capital Group

Kirk Ludtke – CRT Capital Group

Good morning, guys.

Don Stebbins

Good morning, Kirk.

Bill Quigley

Good morning, Kirk.

Kirk Ludtke – CRT Capital Group

I want a follow-up to Jeff’s question quickly, you mentioned that you thought your minimum liquidity was I guess I got a little bit confused – it was 550 or 700?

Don Stebbins

Yes, as we – we had stated in the past it was about 700, but as we’ve restructured the business, and as we look to the regions, I think the minimums – you always have to set Asia aside somewhat with respect to the free cash flow there. If you look at North America and Europe and what we’ve been able to accomplish there, we will look at a 500 plus liquidity position being an appropriate size for those two regions. It doesn’t say you are going to have cash in Asia. It just says that Asia necessary isn’t our focus. It’s more on the North American and Europe regions.

Kirk Ludtke – CRT Capital Group

Okay. So, but that is a consolidated number, 550 million?

Don Stebbins

Yes.

Kirk Ludtke – CRT Capital Group

Okay. And is that – that’s the quarter-end number or is that the mid-quarter number? I mean I – it sounds like you’ve got a pretty sizable–

Don Stebbins

(inaudible) intra-quarter volatility.

Kirk Ludtke – CRT Capital Group

That also – that’s a quarter-end number.

Bill Quigley

No, that includes –

Don Stebbins

No, it’s the intra-quarter volatility for the business, the peak to trough, so to speak.

Kirk Ludtke – CRT Capital Group

Okay. With respect to Slide 31, I just had a couple of questions on – you paid down the $37 million of debt and reduced a letter of credit by a like amount. Did that also increase the availability, the borrowing availability by a like amount?

Bill Quigley

Yes, it would have, correctly, under the US ABL.

Kirk Ludtke – CRT Capital Group

Okay. And was that debt that you couldn’t refinance or you just felt that it was the – it was positive net present value to do it this way or—

Bill Quigley

Yes, I think – if you think about it, I think the net drag to it was the negative carry as well as the cost of a duplicate (inaudible) LOC, so savings probably about $900,000 on an annual basis. And if you think about via the debt as well as a full LOC against it. So we took advantage of it. It really was pursuant to one of the restructuring actions that we announced earlier in the year with the Durant consolidation, our Nissan business.

Kirk Ludtke – CRT Capital Group

Right. The cash went down, but your availability went up–

Bill Quigley

Correct.

Kirk Ludtke – CRT Capital Group

What would be the – I mean how much of this should we expect going forward in terms of these kind of little miscellaneous debt repayments that you need to make or you –?

Bill Quigley

There is some rolling debt. If you take a look at – if you could even take a look at our second quarter but those are basically our affiliate working capital line. Our next obviously is – significant maturity is the August 2010 stub of $206 million.

Kirk Ludtke – CRT Capital Group

So, really nothing – no miscellaneous debt. You are not going to have to use cash to pay down any kind of miscellaneous–?

Bill Quigley

No – yes, nothing of significance.

Kirk Ludtke – CRT Capital Group

It looks like your fourth quarter EBIT-R guidance is a negative $57 million, does that sound right?

Bill Quigley

Yes. Correct.

Kirk Ludtke – CRT Capital Group

Yes. And that includes a curtailment gain of $15 million?

Bill Quigley

Yes sir.

Kirk Ludtke – CRT Capital Group

Alright. Is there anything in the comparable quarter in the – if you think about year-over-year comparisons, was there anything in the fourth quarter of ’07 – I remember there was–

Bill Quigley

Yes, we had a fairly significant curtailment gain, I think it was about $37 million or so related to our Connersville facility–

Kirk Ludtke – CRT Capital Group

And that was also a gain?

Bill Quigley

Yes sir.

Kirk Ludtke – CRT Capital Group

Okay. And then lastly, we are hearing companies increase their budgets for distressed supplier, cost, and trade support, and I am just curious if you are seeing any of that and if you can quantify it that would be great.

Bill Quigley

In terms of the trade suppliers, it’s been fairly constant throughout the year, but as we look to ’09, we certainly do expect that to be a drag. And again, we’ll go through all of those assumptions at the (inaudible) conference in January.

Kirk Ludtke – CRT Capital Group

Okay. And then lastly, given that everything has changed and the magnitude or the volume declines and – offset by your restructuring activities, what are the decremental margins in North America versus Europe for—

Bill Quigley

For Visteon, is it–

Kirk Ludtke – CRT Capital Group

Are they pretty much the same or would you–?

Bill Quigley

I think if you think about our North American business, largely really an interiors and climate business. If you take a look at kind of our product groups’ segment results, the interiors business is not as – does not have the same profile as the other businesses. So, again that’s kind of the concentration we have in North America, is in the truck side of the business. So, we’ve seen a lot of it come through already, if you will, into 2008. So, obviously Western Europe is – at least in our opinion has got a higher profile or higher margin profile.

Kirk Ludtke – CRT Capital Group

So, the – so the contribution margins would be higher–

Bill Quigley

Yes, higher.

Kirk Ludtke – CRT Capital Group

– in Europe than they are in North America?

Bill Quigley

Yes.

Kirk Ludtke – CRT Capital Group

Okay. Thank you.

Operator

Your next question comes from the line of Patrick Archambault of Goldman Sachs.

Patrick Archambault – Goldman Sachs

Hi, yes, good morning.

Don Stebbins

Good morning.

Patrick Archambault – Goldman Sachs

Yes, I guess first on I guess on slide 29, the year-to-date EBIT-R look, can you just remind us of what the – I guess you had a $54 million tailwind year-to-date from currency. Can you just remind us how to think about the margin on that going forward and is there any reason – what is that – what does that translate into for a margin year-to-date and how do we think about going – of that in – going into ’09 obviously when currency might go against us?

Bill Quigley

Let me try to—I think on Slide 29 obviously you’ve got your year-to-date EBIT-R, so you get the positive currency of $54 million. I think if you look at the third quarter at minus $7 million that’s kind of at a rate as we close out the third quarter what – 38 buck 39 on a euro basis where you’ve called the forecast $1.32 at least on a USD to euro. So, again I don’t think you can look at it year-to-date. It’s probably more of a run rat on the third quarter.

Patrick Archambault – Goldman Sachs

Fair enough. And can you just–

Bill Quigley

And we ended the second quarter $1.55 I think the USD to euro was.

Patrick Archambault – Goldman Sachs

Okay. And can you just remind us – and it’s probably here somewhere, but what currency added to sales then year-to-date or excuse me year-over-year for the third quarter?

Bill Quigley

Year-over-year? Yes, if you take a look at the slides previous product sales of 419 I believe. If you look at Page 19 year-to-date was $419 million.

Patrick Archambault – Goldman Sachs

Okay. So, relatively small impact from a margin perspective I mean is there a reason we shouldn’t expect that to hold on a go-forward basis?

Bill Quigley

No, I think that’s a reasonable assumption, actually.

Patrick Archambault – Goldman Sachs

Okay. And I guess I mean just on why year-to-date was it such a positive impact and all of a sudden I guess in the third quarter it seems that the impact was kind of de minimis.

Derek Fiebig

Yes, this is Derek. As we explained on the second quarter call, Patrick, we did have some things that were not hedged. We put some hedges in place at the end of the second quarter. So that’s really what you saw in the first half of the year in terms of currency.

Patrick Archambault – Goldman Sachs

Okay. And I take it these hedges last into 2009, which is why you think that you are going to be relatively protected from any sort of EBIT – big EBIT swings from that.

Bill Quigley

Yes.

Patrick Archambault – Goldman Sachs

Okay. I guess just on 26 – one quick housekeeping item, the $23 million Escrow receivable, so is that the restructuring that you paid out of Visteon’s cash balance and that you are going to get a refund from the Escrow Account, so–

Bill Quigley

No, that would be – that is – those are charges taken in the latter half of third quarter largely related to the census actions that we are taking. So those outflows and again the receivable is on our books at 09/30. It’s been submitted obviously to the Escrow Account for reimbursement. We will receive reimbursement in the fourth quarter and obviously with the separation actions that we are taking, we would expect to have outsource [ph] as well in the fourth quarter. So, again we haven’t had the inflow nor the outflow largely for that charge.

Patrick Archambault – Goldman Sachs

Okay. Great, thank you. That’s all I had.

Don Stebbins

Okay, normally at this time we generally ask for one last question. Instead, today, I’d like to take these final few minutes to acknowledge someone who has been a staple on these calls – for many, many years and in our interaction with you for the past seven and a half years.

Derek Fiebig, our Head of Investor Relations, has informed us that he has accepted a position with another organization, which is a great opportunity for Derek and his family. Derek has been with Visteon since 2001 and those of you who have worked with him over that time know, as we do, that he is a consummate professional who has worked tirelessly to support this company and to make sure you have all the information you need. We appreciate every thing Derek has done for Visteon and I know that you all join me in wishing him the best of luck as he moves on to this new opportunity.

I am also pleased that Steve Ward will take over from Derek as Director of Investor Relations. Steve has been with Ford and Visteon since 1989 in a variety of financial roles, including controllership and treasury responsibilities, and I am sure that you will enjoy working with him.

Derek will remain with us a while longer as we wrap up the activities related to the quarter-end. And now, I will turn the call over to Derek.

Derek Fiebig

Thank you, Don, for your kind words. I’d like to express my appreciation to you, to Bill Quigley and to Mike Johnston for all your guidance and support over the years. Visteon is a rather complicated company to present to the financial community, but all of your understanding of the business, financial acumen, and willingness to enhance disclosures has made the Visteon story much easier for me to communicate to the Street. The progress Visteon has made in diversifying its customer base, restructuring the Company, addressing its capital structure, and reducing cost, has been a tremendous effort, which I am certain will continue in the future.

I am and always will be proud of the seven plus years that I have had as a Visteon employee. It’s been a tremendous experience for me and I’ve greatly enjoyed working with the talented group of people on the Visteon team. In addition, I’d like to thank Terry Gohl, Brian Casey, and Bill Robertson, and the other members of the team that has supported Visteon’s Investor Relations activities over the past 30 quarters.

Don, I want to thank you for giving me the opportunity back in ’99 to lead the Investor Relations efforts at Lear and I regret that I am quitting on you for a second time.

As Don mentioned, the team and I will be New York next week to meet with a number of you and I am certain that you’ll enjoy working with Steve. It was a difficult decision for me to depart Visteon, but I was presented with an excellent opportunity for both me and my family.

That concludes our call for today. Steve and I will be around for the rest of the day to answer your questions. Thank you.

Operator

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

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