Visteon Corp. (NYSE:VC)
Q4 2008 Earnings Call
February 25, 2009 09:00 AM ET
Steven Ward - Director of Investor Relations
Donald J. Stebbins - Chairman and Chief Executive Officer
Bill Quigley - Executive Vice President and Chief Financial Officer
Good morning and welcome to the Visteon Fourth 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 would like to remind you this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future results and 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 calls were posted to the company's website this morning. Please visit www.visteon.com/earnings to download the materials if you have not already done so.
I would now like to introduce your host for today's conference call, Mr. Steve Ward, Director of Investor Relations for Visteon Corporation. Mr. Ward, you may begin.
Thanks, Carrie, and good morning, everyone. Joining me on the call today to review our fourth quarter and full year 2008 results are Don Stebbins, our Chairman and Chief Executive Officer and Bill Quigley, our Executive Vice President and Chief Financial Officer.
As mentioned in our press release issued earlier this morning in view of the volatile macro environment and industry conditions, Visteon has decided not to provide guidance for future periods. Accordingly following today's presentation of financial results we will not be conducting a question-and-answer session.
I'd now like to turn the call over to Don.
Donald J. Stebbins
Thank you, Steve, and good morning. During today's presentation I'll review the company's overall performance and then turn it over to Bill for the financial review.
On our third quarter call we said, we anticipated continued production weakness in the fourth quarter. However, the speed, the severity, and the breadth of the change greatly exceeded our expectations. Nearly every OEM in every region experienced significant sales and production declines during the last three months of 2008. And as a result the collapse of the global automotive market in the fourth quarter had a significant impact on Visteon's financial results.
Although volume reductions dominated the news in the fourth quarter, the end of 2008 also marked the successful completion of Visteon's three year improvement plan. As you may recall we set out in early 2006 to restructure our business and fundamentally change our company. I am very pleased to report that we completed the plan ahead of schedule and with greater savings and at a lower cost than initially planned. I give credit to the entire Visteon team for the work that they have done to achieve this difficult task.
For the fourth quarter 2008 product sales were $1.5 billion down 43% or about $1.2 billion from a year ago. This decline was primarily driven by the significant reduction in vehicle production, unfavorable movements in currency, and plant divestitures and closures.
We have accelerated our cost reduction efforts in light of the current production environment. We are ahead of where we had planned to be on our salary census reduction announced in October and we continue to take action on all elements of our cost structure. These actions will allow us to be more competitive at lower volume levels and to leverage the savings associated with our three year plan. Finally we ended the year with a cash balance of $1.18 billion.
Turning now to slide three, where we mentioned the fall-off in the global vehicle production in the fourth quarter. As you can see the production disruptions were significant, quick, and broad based. Most automakers were hit by the economic conditions that swept quickly across all markets. Visteon like virtually every other supplier was adversely impacted by these swift and sustained production cuts.
Slide four, presents our consolidated product sales by customer for the full year 2008 and 2007. Overall for 2008, sales were down $1.6 billion from last year with the vast majority of declines coming during the fourth quarter. About $1 billion of the total revenue decrease was expected and as explained by plant divestiture and closure actions taken as part of the plan. Bill will provide more detail of the revenue changes in his financial review.
As you can see our customer base continues to diversify. Sales to Ford in 2008 were $3.1 billion and account for 34% of our sales, down from 38% of our sales in 2007. Hyundia/Kia sales were $2 billion and account for 22% of our revenue, a slight percentage improvement from 2007. Sales to Nissan in North America declined to less than $400 million during 2008, a 42% drop from 2007. Total sales to Renault/Nissan account for 9% of our revenue. Sales to PSA are just over $500 million and account for 6% of our revenue, a slight percentage improvement from 2007. Combined sales to General Motors and Chrysler were about $450 million, and together account for about 5% of our revenue.
Slide five shows our product sales by region. Sales in all three regions in 2008 were lower than 2007 owing to reduced volumes along with plant closure and divestiture activity. European sales now constitute 41% of our revenue up from 38% in 2007. North America declined by 6 percentage points and now accounts for 24% of the Company's total sales. More of our divestiture and closure activity was in North America in 2008.
Our Asian share of revenue increased 3 percentage points and now represents 30% of total consolidated sales and account for about $2.6 billion. On the bottom of this slide is the regional split of our non-consolidated sales which increased 12% to just over $1.8 billion.
At Visteon we have never lost sight of being an innovative company focused on helping customers distinguish their vehicles. This is evidenced by the content we have on some of the newest and hottest vehicles on the road today. Many of these vehicles were showcased at the recent North American International Auto Show here in Detroit.
On the truck side, we have content on the Ford Escape Hybrid that ranges from Climate to Electronics products and we continue to provide enabling technologies and products that assist our OEM partners in their green initiatives. We also have complete Climate and Powertrain Cooling System on award winning Hyundai Genesis and additionally we provide the instrument panel on this vehicle. There are many other examples of innovative Visteon products and technologies that enable our customers to offer the best vehicles in today's very competitive environment. We are presently working with several customers to showcase products ranging from improved CO2 climate systems to in vehicle systems that integrate the best new ideas in consumer electronics.
Slide seven shows several recent quality and innovation awards that the Visteon team has won. As you can see, customers and industry groups around the world, recognize Visteon for the superior products we design, engineer and manufacture. The breadth of these awards across all of our product groups and all of our regions are a testament to our global technical ability.
In addition they confirm our position as a relevant partner in the global automotive industry. During these very difficult times we remain committed to our customers and value these awards as recognition of our astounding teamwork and automotive intellect.
Slide eight shows our new business wins for 2008. Our wins were $680 million and reflects strong balance across product lines and regions. The events that unfolded during 2008 caused our customers to reassess their future vehicle cycle plants, in doing so they have deferred or cancelled many programs that had been set to be awarded in 2008 and consequently our wins of $680 million were lower than the past couple of years.
On a product line breakup, Climate made up 47% of the wins, with Electronics at 32% and Interiors at 21%. Our regional split of the wins continues to show good balance with the major regions about evenly split at roughly one third each. Our re-win business, that is re-winning the product sourcing arrangement where we are the incumbent totaled a record $1.3 billion, whereas new business is conquest business and important to our strategy of growth and diversification. The re-win of existing business demonstrates our customer satisfaction with our product, service, and manufacturing capabilities.
As shown on slide nine, we continue to perform strongly in several key operating metrics. Despite the turbulent production environment, we were able to improve or maintain all key operational metrics. We've improved quality as measured by customer reported effective parts per million by 36% at the same time our safety performance was maintained at our best-in-class levels.
Premium costs down significantly year-over-year reflecting improved launch performance. For 2008 premium cost were $18 million, down about $32 million or 64% from 2007. Finally, CapEx spending of $294 million was significantly lower than prior year levels. The reduced spending of about $80 million reflects timing of new program launches and increased diligence to reduce our expenditures during this difficult environment.
Slide 10, loss will be familiar to many of you, as we shared an earlier version of this in January of 2008, in relation to our three year plan. While the top half of the slide appears similar there are few important points.
First, we are previously anticipating completing the four planned actions in 2009. The 12 facilities that we addressed in 2008 reflect the 8 that we're originally planned plus the pull ahead of the 4 actions that were planned for 2009.
The second item that I would like to point out is the cumulative growth savings in the upper right hand corner at $500 million. Our plan had projected savings of $420 million, so we have exceeded these by over $80 million. And then finally the tables at the bottom show the timing and the amount of savings from the plan. We have been able to accelerate and increase the amount of savings compared with our original plan.
Slide 11, provides details on our manufacturing workforce. As of December 31, we had just over 25,000 manufacturing employees globally, which represents a decrease of 15% since the end of the third quarter and a 27% decrease since the end of 2007. We have been very proactive in flexing our workforce requirements during a period of rapid and unpredictable change in the vehicle production environment. As shown on the table our workforce efficiencies result from both the divestiture and closure actions in our three year plan along with efficiencies only in reduction of production schedules.
As we have discussed in the past we've shifted our manufacturing footprint to match our customer base globally. We continue to align our headcount to match lower production levels and to consolidate facilities when practical. Both speed and flexibility are crucial in today's environment and our current manufacturing workforce and footprint reflect this.
Turning now to slide 12, we've also been reducing our salary headcount while also moving certain positions to lower cost countries where appropriate. In October we had announced the plan to reduce our salary census levels by 800 persons around the world in response to lower production volumes. In light of the sharper downturn, we now expect that the actual separations will be over 1000 individuals.
Our salary staffing level at the year-end was 5900 and reflects a 6% reduction from third quarter levels and a 14% reduction since 2007. As indicated in our third quarter presentation, 150 of the original 800 separations occurred in the third quarter and additional 475 separations took place in the fourth quarter bringing the total to 625. We anticipate that we will complete this program by the end of March. The total savings from this program are now estimated at $90 million with implementation cost of about $75 million.
Just to ensure that there is no confusion, the census reductions described here and the amounts reflected on the slide are not incremental to the program we announced in the third quarter but rather an expansion of that program. We've been very aggressive in reducing cost and will continue to do so.
Slide 13 provides an update to our overhead cost reduction initiative which we announced in January of 2008. And at that time we had targeted $215 million of gross cumulative savings by 2010, as we further addressed our administrative and engineering expenses. About $80 million of these savings were expected during 2008. Our 2008 overhead cost finished the year down over a $160 million or 14% from last year. Over the past two years, we have been successful in reducing these costs by $270 million or 22%. We remain committed to taking the necessary actions to reduce costs.
Now turning to slide 15, in addition to the salary census reductions, we are taking additional cost reduction actions across all aspects of our business. We have initiated measures across all Visteon facilities globally, that include workforce reductions and a hiring freeze, elimination of certain compensation adjustments, and reductions in other selective benefits. In the United States we have reduced salaries for our South Eastern Michigan employees and suspended our 401(k) match. Additional benefit programs like our tuition assistance program have also been eliminated.
In Europe actions include moving to four day work weeks, voluntary separations and unpaid time off. These reductions are taken... are not taken without serious deliberation by the Visteon Management Team. We understand the hardships that can be caused by these actions. However in today's economic environment we are proactively examining the best way to flex our cost structure and preserve our core strengths and capabilities.
And I'd now like to turn it over to Bill.
Thanks Don. This slide provides a summary of our fourth quarter and full year financial results as well as the comparison to the prior year on a full year basis.
As Don pointed out earlier in his comments, full year 2008 product sales were just over 9 billion or 1.6 billion lower than the prior year with the vast majority of the decline occurring in the fourth quarter.
While, we did expect sales to be lower taking into account the impact of business divestitures and plant closures completed in consort with our restructuring plan, much of the decline was a result of a severe downturn in the production volumes of our key customers.
2008 full year product gross margin was $456 million, and although we worked to pull ahead our restructuring efforts and implemented additional cost actions to reduce spending levels, these efforts were offset by the sales declines experienced during last several months of 2008, as OEMs around the world quickly reduced output. This resulted in a negative gross margin of 10 million for the fourth quarter of 2008.
In the fourth quarter we also recognized non-cash asset impairment charges for our Interiors' product line of about $200 million. Net loss for the year was $663 million which includes asset impairment charges, tax expense of $94 million, and $63 million of net restructuring and related expenses not funded by the Escrow account.
EBITDA was a negative $62 million in 2008, $13 million lower than the prior year. The decline again largely reflected the sales impact on gross margin partially offset by SG&A cost reduction efforts. Free cash flow was the use of $410 million for the full year. I will address each of these items in further detail in the following slides.
Slide 16 outlines the production volume performance of our key customers for the fourth quarter and full year of 2008. These key customers which comprised approximately two-thirds of Visteon's product sales all experienced production declines in the fourth quarter except for Hyundai/Kia each of our customers experienced double digit declines. Hyundai/Kia and Ford of Europe represented approximately 40% of Visteon's full year 2008 sales.
Hyundai/Kia production volumes were down slightly in the fourth quarter, yet still higher on a full year basis. Ford of Europe production volumes were 25% lower in the fourth quarter, more than offsetting an increase in production through the third quarter of 2008. Ford North America production was lower by 21% in 2008, PSA down about 11%, and Nissan truck production was lower by 47%. Nissan alone was down over 80% in the fourth quarter.
Finally, GM and Chrysler platforms for which we have significant content were lower by about 4% during the year and combined for about 360 million of sales.
Slide 17 provides comparisons of our product sales for both the fourth quarter and full year as well as the distribution by region. 2008 full year sales were 9.1 billion, a decrease of 1.6 billion compared to 2007. Sales were lower in every region with the most significant decline in North America, where sales declined by over 1.1 billion. North America represented 24% of total sales versus 30% a year ago, while Europe and Asia account for 41% and 30% respectively of total 2008 sales.
The bottom of this slide provides the key drivers of the change in sales on a year-over-year basis. Favorable currency increased full year sales by 172 million, but the impact was negative in the fourth quarter reflecting the strengthening of the U.S. dollar against major currencies. As expected, divestitures and plant closures decreased full year sales by just over 1 billion. Significant plant closures include Bedford, Chesapeake, Concordia and Connersville and two facilities in Germany.
Divestitures include the sale of the North American aftermarket business and the Swansea and Halewood plants in UK in 2008 as well as the starters and alternators business in India, which was completed in the later part of 2007. After taking these items into account, sales were lower in all regions reflecting the impact of significant reductions in customer schedules. The most significant decrease was in North America where full year sales decreased 543 million, with more than half the decrease occurring in the fourth quarter.
Full year sales in Europe and South America were lower by 388 million, almost all of the decrease occurring in the fourth quarter. While full year sales in Asia, did increase 127 million fourth quarter sales were lower by 70 million. The severe reduction in sales experienced in the fourth quarter of 2008, had a significantly adverse impact on our gross margin performance as outlined in the next slide.
Product gross margin in the fourth quarter was negative 10 million and positive 201 million for the full year. Through the third quarter of 2008 gross margin had improved from the prior year by a 100 million, yet fourth quarter gross margin was lower by 211 million, resulting in a full year reduction of a 111 million. Again volume and mix was a dominant driver impacting year-over-year gross margin comparisons as highlighted at the bottom of this slide.
In the fourth quarter, the entire 211 million decrease in margin is a result of lower customer production volume. For the full year volume and mix reduced margin by about 299 million.
Gross margin was also impacted by a number of factors that were restructuring related. Divestitures and plant closures reduced full year margins by 135 million, 42 million in the fourth quarter. Restructuring related items, which includes curtailment gains, accelerated depreciation expense, and asset dispositions improved full year margin by 60 million, including 23 million in the fourth quarter.
Currency was favorable on a full year basis, yet reduced gross margin by 24 million in the fourth quarter. Favorable net cost performance of 232 million, 65 million in the fourth quarter was an offset to the volume impacts. As indicated earlier this performance includes the impact from our restructuring and cost reduction efforts.
Slide 19 summarizes our product group segment results for the fourth quarter. Climate sales in the quarter were 587 million, lower by 275 million compared to 2007, and gross margin was 16 million or about 2.7% of sales. Gross margin as a percent of sales was 7.5 points lower than a year ago; unfavorable volume was driven primarily by lower Hyundai/Kia and Ford North American production.
Special items, primarily the non-recurrence of the 2007 curtailment gain related to Connersville also had an unfavorable impact. Net cost performance, including restructuring savings related to the closure of Connersville as well as significant manning reductions in our Mexican operations, did provide an offset to the impact of lower volumes.
Electronics sales in the quarter were 526 million, lower by 425 million compared to 2007 and gross margin was negative 24 million. Volume includes the impact of lower production in the quarter as well as customer sourcing actions in North America for which we have highlighted in previous updates.
Special items included a curtailment gain of 20 million related to workforce reductions completed in our North Penn manufacturing facility. Interior sales were 454 million lower by 409 million compared to 2007, and gross margin was negative 12 million.
Special items include the non-recurrence, of favorable commercial claims received in 2007. Net cost performance including lower engineering, program launch cost and restructuring savings did improve Interiors' margins in the quarter.
Slide 20, summarizes our product group offering results on a full year basis, and while net cost performance was positive in each of our product groups on a full year basis, the impact of buying a mix, most notably the significant reduction experienced in the fourth quarter of 2008 more than offset these improvements.
Slide 21 summarizes SG&A for the fourth quarter and the full year. SG&A expense totaled $111 million in the fourth quarter and $553 million for the full year or about 6.1% of product sales. Full year expense was $83 million lower than the prior year and the key drivers of the changes are highlighted at the bottom of the slide.
Net cost efficiencies have reduced SG&A spending throughout the course of the year, totaling a $102 million for the full year and $39 million in the fourth quarter largely reflecting salary headcount reductions completed during the course of the quarter as well as other cost savings measures we implemented including early shutdown of our U.S. headquarters' operations in December.
Earlier this year we also discussed the need to incur one time implementation costs associated with our overhead cost reduction efforts principally around rightsizing our information technology cost structure. These costs totaled about $25 million for the year.
Incentive compensation, decreased SG&A by 20 million for the full year, 31 in the fourth quarter alone. This decline included the impact of stock based expense reflecting the change in our stock price. Currency did increase SG&A by 9 million for the full year yet was favorable in the fourth quarter and all other principally reflects the one time benefit of the receivable recovery from a former customer in 2007 that had previously been reserved for offset by a 9 million curtailment gain.
Slide 22 provides an overview of restructuring charges for the fourth quarter as well as the net impact on cash flow of such actions for the quarter as well as the full year. In the fourth quarter, we recognized 51 million of restructuring and other reimbursable charges related to salaries and manufacturing staffing reductions, of which 32 million were eligible for reimbursement from the Escrow account.
At the end of the year, the remaining balance in Escrow account was 68 million and there was an outstanding receivables due of about 7 million for charges yet to be funded from the account. As we discussed throughout the year the timing of our restructuring actions and Escrow account reimbursement has a significant impact on our cash flow and is highlighted in detail at the bottom of the slide.
The net impact of restructuring on our fourth quarter cash flow was a positive 26 million, representing cash received from the Escrow account of 50 million partially offset by cash payments to fund actions of 24 million. The net impact on cash flow for the full year was an outflow of 17 million. This compares to a cash inflow of approximately 10 million in the fourth quarter of 2007 and 99 million for the full year 2007. So, in summary the timing of Escrow account reimbursements and cash outflows to settle restructuring actions resulted in a year-over-year cash flow use of 116 million.
This slide summarizes our income tax provision and cash taxes for the fourth quarter and full year. Full year taxes were 74 million higher than the prior year. As the chart illustrates, a significantly reduced OCI benefit contributed $91 million to the year-over-year increase. This reduction in benefit is principally attributable to significantly less pre-tax income from changes in OCI compared to a year ago, which limited our ability to tax benefit current year losses.
The mix and source of income, and loss in jurisdictions where we continue to accrue and pay tax also contributed to the overall increase in tax expense. These increases were offset by reductions and reserves for tax positions related to certain of our transfer pricing initiatives. Cash taxes in 2008, were about 86 million slightly less from the prior year.
Slide 24 provides EBIT-R comparisons for the fourth quarter and full year. EBIT-R in the fourth quarter was negative 94 million, was negative 62 million for the full year. The year-over-year drivers of the change in EBIT-R are also highlighted in the bottom half of this slide. Fourth quarter EBIT-R was 109 million lower than a year ago while full year EBIT-R was lower by 13 million. This comparisons reflect the impact of the items I previously discussed and are highlighted at the bottom of the slide.
Slide 25, summarizes our free cash flow performance for the fourth quarter and full year 2008 with comparisons to the prior year. Free cash flow in the fourth quarter was the use of 27 million, 214 million lower than last year. And although our operating results were negatively impacted by the rapid decline in our fourth quarter sales, trade working capital provided a benefit. The year-over-year decrease in free cash flows was significantly impacted by increased net loss in 2008. The decrease also reflects the non-recurrence of certain tax items and commercial terms that favorably impacted 2007 cash flow, partially offset by lower capital spending in 2008.
For the full year 2008 free cash flow was the use of 410 million compared to use of 83 million during 2007. On a full year basis the changing cash flow is again explained by the increased loss as well as the change in cash flow related to our restructuring actions.
Slide 26 summarizes our cash balances at the end of the third and fourth quarters. Cash balances totaled 1.1 billion at year end, an increase of about 47 million from the third quarter of 2008. Change reflects a 75 million draw under the U.S. ABL partially offset by a free cash flow use of 27 million and the strengthening of the U.S. dollar which lowered cash by 17 million.
At the end of fourth quarter we had about 56 million in availability under our U.S. ABL in European securitization facilities. Since then we drew 30 million under the U.S. ABL in January 2009, which was substantially all that was available at that time. Debt balances increased at year end in the third quarter by about 173 million reflecting the 75 million draw under the U.S. ABL as well as the change in the fourth quarter accounting for amounts drawn under Europe securitization facility of 92 million which we discussed in our third quarter call.
Now we will turn the call over to Don, for closing comments.
Donald J. Stebbins
Thanks Bill. As you're all aware we are in the middle of an extraordinary time in our industry. At this time we're fortunate to have successfully completed our three year restructuring plan and have a group of talented employees who are focused on moving us through these very difficult times. We expect the Global Automotive production levels will remain extremely challenged and uncertain throughout 2009, and as a result we continue to work to address the significant operational and liquidity challenges presented by this environment.
As a result of this uncertainly and our ongoing work and as Steve mentioned in his opening comments we have decided not to take questions today. We appreciate you joining us today on the call.
Thank you, everyone for attending our presentation today. This concludes our conference call and Kerry you may now close the call.
Once again, thank you for your participation. This concludes today's conference. You may now disconnect.
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