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Executives

Robert R. Krakowiak - Vice President and Treasurer

Timothy D. Leuliette - Chief Executive Officer, President and Director

Jeffrey M. Stafeil - Chief Financial Officer and Executive Vice President

Analysts

Colin Langan - UBS Investment Bank, Research Division

Ryan J. Brinkman - JP Morgan Chase & Co, Research Division

Steven Hempel - Barclays Capital, Research Division

Matthew T. Stover - Guggenheim Securities, LLC, Research Division

Kirk Ludtke - CRT Capital Group LLC, Research Division

Visteon (VC) Q3 2013 Earnings Call November 7, 2013 8:00 AM ET

Operator

Good morning, and welcome to Visteon's Third Quarter 2013 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

Before we begin this morning's conference call, I would like to remind you this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future results and conditions, but rather are subject to various factors, risks and uncertainties that could cause our actual 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 Visteon's website this morning. Please visit www.visteon.com/earnings to download the material if you have not already done so.

I would now like to introduce your host for today's conference call, Mr. Bob Krakowiak, Visteon's Vice President, Treasurer and Investor Relations. Mr. Krakowiak, you may begin.

Robert R. Krakowiak

Thank you, Brent. Good morning, everyone. With us today are Tim Leuliette, Visteon's President and Chief Executive Officer; and Jeff Stafeil, Visteon's Executive Vice President and Chief Financial Officer.

We appreciate your interest in our company and for taking the time to join us to review the third 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 previously mentioned, a presentation deck associated with today's call is posted on visteon.com within the Investor 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. Let's move right on into the presentation materials on Page 2. We had a strong third quarter. I think for all of you who are familiar with the automotive industry, you realize that third quarter typically is affected by downtime for model changeover and holidays in many of our key markets. But overall, we had a good performance in the quarter with Climate sales up 10%, Electronics sales up 12%, including 19% increase year-over-year in cockpit electronics. So a strong revenue base which got us to $1.7 billion for the quarter.

Adjusted EBITDA of $160 million versus $34 million in third quarter of '12. I would ask you to look at the, obviously, the PV of how the EBITDA performance was versus that the revenue increase was quite strong. Adjusted net income of $59 million versus -- and EPS of $1.17 on an adjusted basis.

Again as I said, Climate, Electronics strong in the quarter. A net 10% increase in the Climate revenue, their EBITDA was up 21%. Electronics was up 60% of EBITDA.

We ended up the quarter with approximately $1 billion of liquidity, including our undrawn ABL which, obviously, we don't touch with the cash we have on hand. But I think what it's important about that is we did proceed in the quarter with $125 million ASB or accelerated share buyback program. I think many of you wondered as we announced in August what our plans were to start addressing that $1 billion share buyback. And we began immediately with this ASB piece of $125 million, which we executed within days. We still have $875 million remaining on that repurchase authorization.

Lest we not forget, a few days after our Q2 announcement, we did announce the Yanfeng transaction, which was a combination of selling Interiors and other assets and then acquiring a majority piece of our Electronics JV. That still remains on track. That transaction valued at $1.5 billion in total, $1.2 billion of proceeds to us. Approximately 90% of those at close and approximately 10% net tax position on those proceeds. That's still in place. Jeff will update you more in a few moments.

As a result also, we are updating our 2013 guidance. It does not reflect the impact of the YFV transaction. As we've said, that transaction will close either late Q4, early Q1, and that'll impact some numbers, obviously, as it does occur. But independent of that transaction, we're raising our guidance for EBITDA, adjusted EBITDA, adjusted free cash flow and adjusted EPS and maintaining our sales, focusing our sales at the midpoint of our prior guidance.

Adjusted EBITDA is being raised from $680 million to $700 million from the $660 million to $690 million. Adjusted free cash flow raised from $145 million to $185 million from the previous $135 million to $170 million, and adjusted EPS, $4.83 to $6.11, now it's $5 to $6.26. So again, we're comfortable with the remaining quarter of '13, and we see that as giving us good momentum as we go into the next year.

Moving on to next page, Page 3. This is a slide we always show as to where vehicle production occurred during the quarter. Again, remembering that, primarily, Asia now is the primary, over half of the vehicle production on Earth. Of the 20 million units produced, they produced half; Europe, 23%; North America, 20%, U.S., 14% of that; South America, 6%. As you look at our particular businesses, I ask you to look at Climate, Electronics. In particular, you see the large Asian presence that we have. The Electronics number is reflective of the consolidation of the YFV position as it would be on a pro forma basis, but we're strong in Asia. North America and Europe follow.

If you look at Interiors, you see Interiors is more of a European business. And so as we exit that business per our plans, you'll see that we continue to be focused more and more as an Asian business.

Looking to the next page, Page 4. You've asked many times as to what is our footprint of manufacturing. This is, in essence, our factory production, or sales x factory of where we produce our goods around the world. Year-to-date through 2013, year-to-date, 23% of our business comes out of Korea, 13.7% out of China, and then it tails down a couple of points here. We have a very diversified production profile. You can see it's a very low cost production profile, strong Asian presence with 37% of our production in Korea and China. We're expanding our low cost footprint. I think you've seen recently our announcements of expansions in Indonesia. We're expanding in China. We also announced 2 facilities in Russia over the last about 45 days or so where our production will probably double over the next few years. So Russia is becoming also a growing market for us.

Let me proceed now to the next page. And remember -- let's talk a bit about the transition of this company. Back in September 2012, as you see on Page 5, we were a collection of many businesses. As we go forward here, we announced, after the YFV transaction, basically a cleanup that got us down to basic Climate, Electronics, still with our Interiors business. Our Interiors business remains our plan to exit that. And as I said in the past, when there's something to announce, we will announce it.

And then as we look forward to the future of Visteon, we see a very lean corporate center with 2 primary businesses: Climate and Electronics. One growing at 7% CAGR, one at 12%. That provides us a very lean, very focused corporation with 2 businesses that are growing above the industry with strong growth and strong technology.

So what we thought we'd do at this quarterly review is to review a bit of our technology story. And I ask you all to move on to Page 7. Page 7 is an interesting slide. Most of it I can't talk about, but I think that's the important statement here. And that is -- this is the Halla-Visteon technology roadmap. We, like other technology companies, lay out a 4- or 5-year plan of technical innovation and launches.

In Halla Visteon, we focus on 3 areas: the eco-friendly area, the fuel efficiency area and the comfort area. And each one of those 3 areas has an array of product programs that have launch dates. Those are a function of our interface with our customers, interface with legislative issues, opportunities we see and technical innovations that are coming to the point where we can commercialize them.

You can see here, over the short term -- and in each one of these, we've basically taken 2016 and beyond and we can't discuss these, but they do represent product programs that we are interfacing with customers and prepared to launch. But you see in the short term here things like the small electric compressor, the battery cooling system that we have launched with the BMW on the i3 and i8, the vitamin filter fragrance CO2 sensors that we're putting in on the comfort side and on and on.

These product programs represent technical changes in how business is done. We talk about, for example, in the eco-friendly side, alternative refrigerant systems. I will tell you that the impact of alternative refrigerant systems will change significantly the content cost, the technology base and the -- and probably market shares of the participants in the segment. So this roadmap is something we share with our customers, and is in a very aggressive element of our portfolio.

If we turn to Page 8, I'll hit on some selected areas of technology that we have made public and we do discuss. For fuel cell vehicles, and this is hydrogen fuel cell vehicles, we have -- the board has recently driven one of our customer's fuel-cell vehicle with this technology. This is going to go into a limited production as we start to push the technology footprint forward on different powertrain propulsion systems in the industry. But that includes things like brushless DC cooling modules; high-voltage positive temperature coefficient; heaters which -- another way of dealing with heating issue of the consumer and the customer; cathode oxygen depletion heaters; turbo blowers. All of these technologies are necessary because when we start replacing the internal combustion engine, either partially or completely in a vehicle, it changes significantly how we heat and cool the human and how we'd address the heat generation of these other forms of propulsion.

For the hybrid and electric vehicle technologies, we've seen battery chillers and contact heat exchangers, electric compressors. If you do not have an engine that's running all the time, how do you keep the passengers cool? You need a compressor. It needs, therefore, to not be run by a fan belt, it needs to be run electrically. And while that may sound easy, the last thing you really want to be doing is putting big electric motor drains on the battery pack, so technology there. High-efficiency blower scrolls, which are quieter, and have higher efficiency flow. And the integrated climate system module, which allows us to remove the climate module from behind the instrument panel, and increasing space in the vehicle. All of these technologies continue to move Halla Visteon at a segment growth -- at a growth higher than the segment.

And if I go on to Page 9, again, you can see, I think, on the right side I'll focus on, is our continual focus on intellectual property as far as patent applications, et cetera. Also here, by the way, we've had historical PACE Awards. I want to say that Halla Visteon has been sort of designated as a finalist for 2 awards this year in the PACE Award finalists, and our Electronics group 1. So Visteon, again, will have 3 -- be represented in 3 opportunities for PACE Awards this year, which we're quite proud of. Heat pumps for vehicles in 2012, thin film coolant heaters and battery contact coolers, again, the technology base here is quite impressive.

Let's move on now to the Electronics side as we talk about technology, Page 10. We are going to review -- I think you will see this term more and more, but basically the automobile is being referred to in the -- in Silicon Valley and in our world as the fourth screen. First screen was the computer; second, the mobile phone; third, the tablet; now the automobile. As far as connectivity and interfacing with the web, with the vehicle-to-vehicle, with social media, with all the elements that connectivity includes, the automobile is the fourth screen. However, the automobile's a different screen than the others because it lives for a different purpose. The automobile has other functions, very critical functions.

If you go on to the next page, Page 11, you see that Visteon is at the intersection here of what our 2 different philosophies and 2 different technical requirements. In the automobile section, in the automobile itself and the requirements of an automobile, that's a safety critical world. That is something where robustness and reliability and security are paramount. It is not acceptable for functions of the automobile to work almost all the time. Brakes must work every time. Airbags must work when they're needed. The engine must run through a variety of thermal and environmental issues. So there's a different set of expectations in an automobile. But on the other side, we need to bring that driving experience to include the entertainment, data, navigation, all the cloud elements, location apps, media, social elements, all the services that connectivity bring, we have to merge those and merge these 2 cultures. And Visteon remains and is really at a very unique position of being at the intersection of those 2 cultures.

As we go to Page 12, what the strength is within the Visteon organization and the technical base is because of our user experience -- and I'll talk a bit about -- more about that in a moment, but our ability to understand the human-machine interface, which is an area we've been in for many, many years; the combination of our innovation portfolio, where we have many patents, know-how and expertise; our automotive intellect, we speak this language. Around the world with all manufacturers, we have a presence and an understanding, and I'll give some examples of that in a moment. And we've got a superior global reach. If anybody wants to launch anything around the world, we're there. It doesn't matter which OEM, which market, our presence is global, as you saw earlier on in our description of our footprint.

And we take our user experience, connecting it to the user interfaces, in connectivity, and using open architectural models, which I will spend a moment on here in a few seconds to talk about how we bridge and keep these 2 cultures now connected and have the opportunity for growth in technology and business over time.

Moving to the next page, I'll give you some examples of that, Page 13. First of all, as we blend these cultures, you can see on the top of the page, the high-definition reconfigurable instrument cluster. This is going to go into a German premium OEM vehicle launch in 2016. What's dramatic about this is where did it come from? It came from a bunch of our software engineers whose experience was in the gaming -- videogaming industry. The video graphics, the dynamics, the visuals of this cluster move this part of the vehicle so far forward that it dates everything that came before.

When you get inside the vehicle, this is now a different experience. It's not just from an automotive perspective we brought this to the table, but because of the interface of hiring and bringing into our team people from the videogaming industry.

The horizon cockpit concept. We recently took 4 different vehicle concepts to a clinic. We did this in conjunction with and support of a Japanese OEM to review different approaches to how we deal with distraction, how we deal with the interface, what we do with 3D elements, gesture controls, multilayer displays, some of the tacticals, how do we interface and how does the driver interface with the vehicle given different concepts and different options of technology.

It was a very interesting clinic. It was a very -- great to get feedback from the consumer as it now will tend to give us a different direction of, perhaps, than others as we go forward with different generations of technology. I think both we and the Japanese OEM were very surprised at how the openness and the desire of the consumer to continue to push the envelope here and how we can do that for them.

On the HMeye cockpit concept, this is one where we use eye gaze, image attribute tracking and steering wheel controls so that the consumer, the driver, never has to have his eyes -- their hands leave the wheel. This is where we continue to push forward the connectivity elements of the vehicle and keep moving that intersection between the consumer electronic world and the automotive world, but also do it in a way that we maintain the -- and minimize driver distraction and keep the safety element there. So different technologies moving forward there.

On the global connectivity solution, I will say this, and I mentioned this, I think, to you in the past, we are launching a number of programs which, basically, are connected via the smartphone. There's no reason anymore to bury high-cost software or app capability inside the vehicle itself, but we can capture it off the phone in your pocket. Whether there's 1 or 2 of you in the vehicle or 4 of you in the vehicle, we can reach out and take those apps that are applicable here and make that part of the vehicle infrastructure.

Why is that important? As we continue to reach out and use the apps that are on the phones, we now can lower the cost of the system. What's important, as we connect the vehicle going forward, is that we democratize this technology. It's not just for the high end. It's got to be for the first car buyer, the second car. It's got to be cost-effective so that we can expand this footprint. This is going to change a bit the model. This is going to give young people the opportunity and the desire to buy a car, a new car, as opposed to being in the used car market.

We're also using, on a connected basis, a cloud-based personalized infotainment concept with another mainline Silicon Valley company that will allow people to cloud-base their personalized information, infotainment profiles, et cetera, so they can move from vehicle to vehicle and keep that profile and then there'll be expansion of that capability going forward. We're also working with another firm with respect to securing all the software capability because, again, I go back to the concept that a vehicle is different than a phone. Our expectations on safety and reliability dictate a different footprint and expectations.

All in all, we have over 30 different activities with partners, developers, OEM advance programs and others that continue to push our technology forward.

As we go to the next page here, Page 15, and we look at our near-term events and deliverables, I will say this, that we will finish 2013 with a strong financial performance. We will continue to return excess capital to shareholders as part of our share repurchase program. We will complete the majority of the YFVE transaction, as I've said, either late this quarter or early next, and we're talking about a matter of plus or minus days there. We will also exhibit our advanced electronics technologies at the Consumer Electronics Show in January in Las Vegas in 2014.

The Consumer Electronics Show today is now our largest technical interface with customers in the world. And we will present our 2014 outlook and our full year 2000 new business wins at the Deutsche conference in January 15. This is typically our, as you know, our approach as we announced the business wins once a year, and it will be -- I think, you will see a very robust year for us.

And with that, let me turn it over to Jeff, and he can talk about the financial details for the quarter.

Jeffrey M. Stafeil

Great. Thanks, Tim. I'll begin my comments on Slide 17 of the deck. And before I get to the third quarter results, I want to provide a quick update on the status of the Yanfeng transaction. Regarding our expectations for timing and proceeds of the transaction, nothing has changed. We are still on track to close the predominant portion of the transaction in late 2013 or early 2014 and expect net pretax cash proceeds will be approximately $1.2 billion, with approximately $1.1 billion of the proceeds received at or near close, and the remainder received in June 2014 and June 2015.

The right side of the page shows the impact of the transaction on Visteon's financials and has not changed from the data we've shown you in the past. At the top of the page, we provide a summary of historical dividends we received from Yanfeng, excluding YFVE, the Electronics venture. On the bottom of the slide, we show the net impact on Visteon's reported adjusted EBITDA relating to the transaction. In summary, nothing's changed from what we talked to you about before on this transaction.

Turning to Slide 18. On this slide, we present our key financial results for the third quarter of 2013 compared to the third quarter of 2012. 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 appendix on Pages 33 through 35.

We had another very good quarter as we meaningfully improved versus prior year on topline sales and our profitability metrics. We will cover the metrics more in the following pages, but let me cover the bottom 2 metrics on this slide related to cash flow now. The decrease in year-over-year cash flow was in line with our expectations and reflects 3 key items. The first relates to the delay of planned dividends from Yanfeng. These dividends would normally be paid during the third quarter, but were postponed to the fourth quarter as part of the announced Yanfeng transaction. The second item stems from timing impacts of scheduled supplier payments that benefited Q1 and Q2 but reversed in Q3. As we previously stated, we expected the benefits enjoyed in the first half of the year to reverse in the second half of the year simply due to how the calendar fell.

Finally, our tax payments increased year-over-year. On a year-to-date basis, higher profitability increased tax payments by $7 million. However, the majority increase in taxes was related to several onetime items, including $12 million incurred in the first quarter related to the HVCC transaction buying our Climate business and $38 million related to tax disputes in Korea and Brazil. We anticipate that we will recover the money related to the tax disputes in the future.

If we exclude these items, third quarter adjusted free cash flow would have improved consistent with our improvements in underlying earnings. It is important to note that these items are largely timing-related and that we are increasing our full year free cash flow and adjusted free cash flow guidance. I will discuss these metrics more in the following pages.

Turning to Slide 19. Here, we compare 2013 third quarter sales and adjusted EBITDA to last year. Sales were $1.7 billion or $109 million better than the third quarter of 2012. The increase was driven by higher year-over-year sales in Climate and Electronics, which benefited from higher volumes in all regions, particularly, Asia and North America.

Meanwhile, our adjusted EBITDA was $160 million, up $26 million versus the third quarter of 2012 and reflects higher adjusted EBITDA in Climate and Electronics and higher equity income from our nonconsolidated joint ventures, primarily Yanfeng.

The Interiors base business, excluding nonconsolidated JVs, was down $9 million and primarily due to year-over-year engineering-related design recoveries.

Moving to Slide 20. Here, we show our third quarter sales and adjusted EBITDA for our 3 product groups: Climate, Electronics and Interiors. It should be noted that the adjusted EBITDA figures on this page include the benefit of equity and affiliates and a deduct for noncontrolling interests. We will cover the financials for each product group in the following pages.

So turning to Slide 21. We show our third quarter and year-to-date sales and adjusted EBITDA by product group. Note that the product group adjusted EBITDA on this page excludes equity income and noncontrolling interests, which are shown separately at the bottom of the slide. We have subtotaled the results for our Climate and Electronics businesses. You'll note that sales and adjusted EBITDA for our combined Climate and Electronics business are up 15% and 27%, respectively, on a year-to-date basis, versus 2012. Both of these product groups experienced strong year-over-year growth in Q3 and on a year-to-date basis.

Results for our Interior product group continue to be impacted by lower European volumes and the timing of product development recoveries, although the impact of sales in Q3 was less than what we saw in the first half of the year. Sales and adjusted EBITDA for the business were down 10% and 58%, respectively, on a year-to-date basis, versus 2012. And I will cover the explanations here in detail in a moment.

Our equity income improved year-over-year mainly due to the strength in China, but benefited our YFV investment. Offsetting this gain was a $7 million increase in NCI, primarily related to our 70% ownership in HVCC.

Moving to Slide 22. Here, we provide an overview of Climate sales and adjusted EBITDA for the third quarter versus the prior year. Climate sales were $1.1 billion, up $107 million or 10% compared with 2012. The increase reflects higher volumes in Asia, Europe and North America, as well as the launch of new Hyundai business in Asia and Ford business in North America and Europe. Currency also positively impacted sales by $25 million primarily driven by a stronger won, euro and Chinese RMB.

Adjusted EBITDA for the third quarter of 2013 was $99 million, up $17 million or 21% compared with the third quarter of 2012. Increased volumes were the biggest driver, contributing $16 million of the $17 million increase.

Climate's adjusted EBITDA margin was 10.1% in the third quarter, up 30 basis points versus the third quarter of 2012. It is important to note that the adjusted EBITDA margins on this slide and the next 2 slides exclude the impact of equity income and noncontrolling interests.

The last thing I would like to point out on this slide is related to the strength and stability of our margins during each quarter of 2013. Adjusted EBITDA as a percent of sales has been over 10% in each quarter this year, and each quarter has improved versus the same period in 2012. It should be noted that the margin in the fourth quarter of 2012, last year, did benefit from several onetime items, which we do not expect to repeat. However, we do expect margins in the fourth quarter will continue to show the strength underlying the base business.

Moving to Slide 23. Electronics sales for the third quarter of 2013 were $340 million, and adjusted EBITDA was $32 million. Electronics sales for the quarter increased $36 million versus 2012. The increase primarily reflects a $56 million increase in our Cockpit Electronics business, partially offset by a lower vehicle electronics sales, which decreased by $14 million year-over-year to $28 million in the quarter. The sales increase was primarily in our North America and European regions.

Adjusted EBITDA for the quarter increased $12 million versus 2012, primarily reflecting higher cockpit electronics volumes, partially offset by $4 million in lower profits related to lower volumes in our vehicle electronics product line.

Third quarter 2013 adjusted EBITDA margin, excluding equity income and noncontrolling interests, was 7.9%, 260 basis points above the third quarter of 2012. Similar to the Climate product group, adjusted EBITDA margins have been strong and stable in each quarter of 2013. Year-to-date adjusted EBITDA as a percent of sales has increased from 7.2% in the first 9 months of 2012 to 7.8% in 2013. Similar to our expectations for the Climate product group, we expect margins to remain strong in the fourth quarter but not at the 2012 fourth quarter level, which also benefited from several onetime items that will not repeat.

Turning to Slide 24, our Interiors business. You'll see here that Interiors sales in the third quarter were $293 million and adjusted EBITDA was $43 million. Sales decreased versus the third quarter of 2012 by $14 million, primarily due to lower production volumes in Europe. Adjusted EBITDA decreased by $1 million versus the third quarter of 2012, reflecting an $8 million increase in equity income, which was more than offset by a $9 million year-over-year decrease in our base Interiors business. The primary driver of the decrease in our Q3 base Interiors performance was due to lower product development recoveries versus prior year.

Our year-to-date performance was lower, primarily driven by $108 million decline in sales largely related to decreases in orders from our European customers. Equity and affiliates, related to the Interiors product group, totaled $42 million in the third quarter of 2013, up $8 million from the prior year. The increase reflects higher profits from Yanfeng affiliates, partially offset by the elimination of profits related to our R-TEK joint venture, which we sold in August 2012.

As we have already mentioned, we view our Interiors business as non-core and have targeted to divest the business. With that said, we continue to operate and implement improvement actions in the business while supporting investing in it.

Turning to Slide 25. We provide an update on the status of our fixed costs and SG&A reduction plan. Earlier this year, we announced a plan to reduce fixed cost in 2013 and beyond. This plan targeted both SG&A and certain components of our cost of goods sold, such as information technology costs, dedicated to our manufacturing facilities and engineering staffs.

Our target for 2013 was to reduce these costs -- these fixed costs, year-over-year by $27 million. Through the first 9 months of the year, we are on pace to reach, or slightly exceed, our target.

I should note that when measuring our fixed cost reductions, we exclude the impact of incentive compensation. Because of this, you will note that although a significant portion of the cost-reduction efforts impact SG&A, absolute SG&A costs are not significantly lower year-over-year as these cost efficiencies are being offset by higher compensation costs -- or higher incentive competition cost in the first 9 months, driven by the performance of the business.

Another important aspect of the fixed cost reduction plan is increased decentralization as we migrate activities from our corporate center to our product groups. Previously, a large amount of centralized service costs were allocated to the product groups but, going forward, the product groups will function more autonomously and the remaining corporate cost will better represent the true stewardship cost of the organization.

Turning to Slide 26. We provide an update on the restructuring program, which we originally announced during the fourth quarter of 2012. At that time, we announced that we expected to incur approximately $100 million of restructuring and related costs to allow Visteon to further reduce SG&A and other fixed costs in 2013.

Since that announcement, Visteon has incurred $41 million in restructuring cash outflows and nearly $70 million in restructuring charges. We still expect cash outflows will total approximately $100 million, but some of the outflows are now expected to occur in 2014, as you can see the chart. It's important to note that this $100 million program does not include any positive or negative flows -- cash flows -- related to the divestiture or potential divestiture of our Interiors business.

Moving to Slide 27. We provide a breakdown of the key components of our 2013 actual and full year estimated tax provision and cash tax payments. In the first 9 months of the year, our income tax provision was $41 million, reflecting operating taxes in profitable countries, which include the $12 million tax benefit related to a valuation allowance released against Korean foreign tax credit attributes and accrual of withholding taxes related to current earnings from consolidated and nonconsolidated affiliates and a $15 million noncash tax benefit related to a decrease in reserves for uncertain tax positions, mainly in the first quarter.

For the full year, we expect our tax provision to be between $55 million and $100 million. The broad range is a result of the impact of ongoing tax proceedings outside the U.S. that could impact our judgments regarding uncertain tax positions in the fourth quarter or later periods. Cash tax payments in the first 9 months of 2013 were $122 million, excluding deposits in Korea of $23 million earlier this year and a deposit in Brazil for $15 million in Q3, both of which we anticipate to recover in the future.

For the full year, we have updated our guidance for cash tax payments to be between $155 million and $180 million, primarily driven by higher earnings in jurisdictions where we pay current tax.

I'd like to provide a quick update on our U.S. NOL balance. We estimate our post-emergence U.S. NOL balance to be in the range of $400 million to $500 million at the end of the third quarter. We expect to utilize most of this NOL to offset the U.S. gain generated from the YFV transaction.

We will update the company's estimated remaining U.S. NOL balance after the YFV transaction is closed. I would also like to remind everyone that we have $1.1 billion of preemergence NOLs that are generally subject to an annual limitation of approximately $120 million. Additional limitations exist on our use of these pre-existing NOLs until late 2015.

Turning to Slide 28, we'll take a look at our cash flow and our capital structure. Our free cash flow was negative $29 million in the quarter and included a $72 million timing difference related to trade working capital. As I already mentioned, this outflow was expected and discussed during our Q2 conference call and simply reflects how the quarter-end calendar dates compare to the timing of some of our larger vendor payments. Our third quarter free cash flow also included $28 million in restructuring- and transaction-related payments.

Our adjusted free cash flow, which excludes these items, was negative $1 million from the quarter. Year-to-date free cash flow was $15 million and adjusted free cash flow was $96 million. Cash balances were $862 million as of September 30, up $17 million since year-end 2012. The improvement is primarily attributable to proceeds from debt raised at Halla and positive free cash flow, partially offset by $250 million of cash used to repurchase Visteon stock this year. Total debt at the end of the year was $807 million.

On Slide 29, we provide our 2013 full year financial guidance. I would like to point out that our guidance assumes that YFV transaction closes subsequent to year-end 2013. If the transaction closes before year-end, we will provide a reconciliation during our fourth quarter 2013 earnings call as to how that impacted our numbers.

As Jim previously mentioned, we are increasing guidance for adjusted EBITDA, free cash flow, adjusted free cash flow and adjusted EPS. We are narrowing our sales guidance. For the full year, we now project adjusted EBITDA of $680 million to $700 million, adjusted free cash flow of $145 million to $185 million, and adjusted earnings per share of $5 to $6.26 per share. Our revised guidance primarily reflects an improved outlook for our Climate, Electronics business driven by higher volumes in all regions and improved performance.

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

Robert R. Krakowiak

Thank you, Tim and Jeff. Brent, please open the phone lines for questions.

Question-and-Answer Session

Operator

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

Colin Langan - UBS Investment Bank, Research Division

You mentioned already that in Q4, there's some tough comps. Can you just remind us of what are the major items? I believe there's some pretty large commercial recoveries last year that won't reoccur. Any color around what are the year-over-year headwinds?

Timothy D. Leuliette

Jeff, you want to...

Jeffrey M. Stafeil

Yes. The -- in the fourth quarter of last year, you'll see that the number of our margins were spiked. And when we were on the conference call talking about our fourth quarter performance last year, Colin, you had remembered, we talked about a large amount of commercial agreements and we also had, I'd say, just a number of true-up items across the year that we had pledged that we were going to focus, really, throughout the year in 2013. And I think we've done that. We've -- so the amounts are fairly significant as a portion to the Electronics business but, again, we see the margin improvements we made this year continuing in just without that spike in the fourth quarter that we had last year.

Colin Langan - UBS Investment Bank, Research Division

Okay. And I noticed in Climate, your sales are up around 19% in the first half and they moderated a little bit this quarter. Is anything, from an end market perspective, that caused it to come down to 10% or is this just sort of normal year-over-year winds from last year?

Timothy D. Leuliette

The -- you saw in the first half -- I think, we saw a better delta in China, in particular, year-over-year than we were seeing in the Q3. Q4 still growth, still good, up versus prior year but not at the same rate. I think there's just some difference in deltas between markets. There's no falloff in anything there. It's just the comparisons year-over-year of market strengths in selected markets.

Colin Langan - UBS Investment Bank, Research Division

And then China is where the [indiscernible].

Jeffrey M. Stafeil

Yes, I think if you look at the Hyundai-Kia volumes in China, you'd see a huge growth in the first half of 2013 versus the first half of 2012. But they had already -- they had a nice growth in the back half of 2012. So the year-over-year comparisons are a little lighter.

Colin Langan - UBS Investment Bank, Research Division

And on the accelerated share repurchase program, did you say that was completed or is that still ongoing?

Jeffrey M. Stafeil

We -- the way that works is we -- the $125 million, it's fully out of our treasury and fully out of our balance sheet. The process of those shares being delivered to us and the purchasing process from the agent executing that for us is not quite done. It'll be done in the fourth quarter.

Colin Langan - UBS Investment Bank, Research Division

Okay. I wasn't sure [indiscernible] That.

Jeffrey M. Stafeil

But the cash is fully out of our balance sheet.

Colin Langan - UBS Investment Bank, Research Division

Okay. And any -- what is you're -- sort of can you just give us your latest view of M&A, particularly within Electronics? I mean, what kind of targets would you be looking for? And how do you think of the opportunities that are available out there today?

Timothy D. Leuliette

Well, I think, we've said in the past, we don't comment on M&A activities other than to say that if there are accretive opportunities that bring technology or market presence to us in either of our core businesses, that we would be actively evaluating those opportunities. And I think I'll leave it at that.

Operator

Your next question comes from the line of Ryan Brinkman with JP Morgan.

Ryan J. Brinkman - JP Morgan Chase & Co, Research Division

So on Page 18, Jeff walked us through some of the items which might have impacted comparability year-over-year. I didn't hear you discuss work stoppages in Korea, which have sometimes been mentioned on these calls and sometimes not, but I think that there were some during the quarter. So curious if you were impacted at all by that.

Jeffrey M. Stafeil

Yes, Ryan. There was a brief strike in Korea. I would say that it's somewhat comparable to the brief strike they did in the previous year. So we didn't really call it out in our variances. But yes, there was a bit of a few days where they were out of work over there at one point.

Timothy D. Leuliette

We typically -- and we saw the same thing last year, as they lose 5, 6, 7 days perhaps, and then we pick up and recover that production in the Q4. And we see that occurring again this year.

Ryan J. Brinkman - JP Morgan Chase & Co, Research Division

Okay, got it. Can you talk about the scale of your Electronics business currently and if you think that the business could gain from getting some greater scale? I know what you do in Electronics has really nothing to do at all with what Lear does in the electrical space. But in that company, we've just noted that the margins just really took off once they started gaining some scale closer to that of their major competitors.

Timothy D. Leuliette

Yes. Well, I think the -- again, and I think I heard the whole question, the Electronics business at this point is going through commitments in new platforms, whether they're platforms on the cluster side or platforms on the infotainment side. And yes, you do get leverage when you expand the volumes and you do get revenue leverage on the investment in those platforms. What we typically see right now, if you look at where we see margin improvement, margin enhancement capability, as you know, we will be consolidating in the YFV component once we close the transaction in China, that'll give us that opportunity to consolidate that piece and more leverage those assets in China. We see some -- still some factory floor operating opportunities there. We will probably, over the short term, continue to see RD&E expenditures of about 12% gross and 9% net. There may be some improvement over time, 0.5 points here or there. But in absence of significant volume increases, that's the model. The margin improvement opportunities there, absent significant volume improvements, are still factory floor. And those are being worked. Does that answer your question?

Ryan J. Brinkman - JP Morgan Chase & Co, Research Division

No, I think that does help. Then just the last real aimed [ph] Question. Just on the customer recoveries, your increased -- your stronger EBITDA guidance state implies, obviously, a sequential increase in 3Q to 4Q and you talked in your opening remarks -- well, first, you [indiscernible], you're talking about how 3Q is typically softer, so I'm just curious what you penciled in from a customer recoveries perspective in 4Q? Because last year, and we should clearly not model what happened last year. It was amazing. But last year was better than you expected going in the quarter. So is there a potential to -- how will customer recoveries track differently as you have those conversations with automakers? Could there be potential upside to your numbers?

Timothy D. Leuliette

Okay, let me -- I'll start this and I'll throw it to Jeff. I think the key part of last year, as we said, was as we went through the accounts here and, again, as the management teams came on board, we reviewed where we stood with key customers. And there were some monies owed to us, not only through activities for '12, but also for activities in '11, that had yet to be paid. So the first thing we did is we went back and looked at trying to get current. Typically, there's a variety of different types of reimbursements here, from engineering, particularly. And those activities, some of them have different milestones. Sometimes our agreements cover our performance or operating targets and in all cases, it's now going back and vetting paperwork. And so we did recover activities in '11 that were due to us in December. But more importantly, there were milestones throughout the year of '12 that had yet to be recovered that we now -- and we made the commitment, I think, as we went into this year saying, "Look, we will try to do these now on a more of a quarter-by-quarter basis and not let these things bow wave in the Q4." And so the combination of recoveries from '11 and the combinations of events that should have occurred earlier in '12 added up to a bit of a bulge in Q4 of '12. And I don't think we have gone in and quantified the size of that bulge. But just to sit back and say that if you want to go back and look where we stand today, as we've given you guidance for the year and we've gone through 3 quarters, so you get a sense of where we believe our fourth quarter's going to be, and we're comfortable with that guidance.

Jeffrey M. Stafeil

Yes. I guess maybe a couple of other words, Ryan. If you go back, and I don't have the numbers sitting in front of me, but I believe our fourth quarter was something like $203 million of adjusted EBITDA in 2012. When we sat on our February call, we mentioned that there were some recoveries from 2011, and there was a lot of things in 2012 that had been sort of finally done in the fourth quarter, which we emphasized as being reflective or adding to maybe unnaturally to that quarter. As we look here, I'd say the margins and the stability of our margins have been better in 2013 relative to 2012 versus the first 3 quarters. As we look at Q4, I think we look at the core operating strength to be improved for especially the Climate and the Electronics business. But probably the relative piece of what you can look at from our year-to-date performance through Q3 versus the updated guidance we just gave you, that relative difference is going to be less than the $203 million we did last year, but still should reflect stronger operating performance sans those onetime items. And I'd model it consistent with the guidance we provided you.

Ryan J. Brinkman - JP Morgan Chase & Co, Research Division

That's really helpful. Just a housekeeping item then on the ASR, are you able -- or would you expect to be making open market purchases the same time as the bankers is wrapping that up...

Jeffrey M. Stafeil

I mean, I think it's a good question, Ryan. I'd say from our -- as a general response to that, we said we would put out $1 billion share buyback right after we announced the YFV deal. We said the relative size of that buyback relative to our market cap was so significant that we gave ourselves a fairly long time. And we said we'd do a number of different vehicles, and open market purchases could be one, accelerated stock buyback, potentially tender offers, to be one. The challenge on the open market buyback in particular, but on any buyback that we engage in, we do need to have a clear day from a public information standpoint. So I'd say with the element of limiting factor of if it being a clear day, we certainly could go out and buy. But the mere fact we were out doing an ASB probably would have prevented us at that point.

Operator

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

Steven Hempel - Barclays Capital, Research Division

This is Steven Hempel, on for Brian Johnson. Just had follow-up questions on the Electronics business. And obviously, according to our estimates, the market is implying a little value to Electronics roughly around 1x FY to EBITDA post the YFV consolidation. I'm just wondering, moving forward here, you're making some efforts with the YFV consolidation along with increasing your stake in the Russian JV, Electronics JV. I understand your continuing to explore opportunities to optimize the size and scale of that business, but should we really think about that business as being grown organically or potentially through M&A? Or are you guys thinking about potentially, I mean, still divesting the businesses, is that still an option? Or will electronics become core moving forward? And a follow-up on that, which areas would you focus on? I understand cockpit electronics, definitely core right now, divesting some powertrain business. But competitors out there with the divestiture's remaining Electronics business, and any interest in that at all? So...

Timothy D. Leuliette

Okay, let me just summarize up by saying Electronics for us is very core. We've made that statement, I think, very clearly. And we're committed to this business for a number of reasons. One, we have significant organic growth. We have a significant intellectual property portfolio. We've got a strong customer support for continued growth, and we like our low cost footprint. So as we look at the business, the first thing we assess is a, are we making money at it? And two, is it something that has a long-term opportunity set for us? The answer is, clearly, it does. As we then look at M&A opportunities in this space, as I've said, we have a balance sheet and we have the capability to go and do the kinds of things that makes sense. I think that we will -- since it is a core business, we'll always keep an eye out for those things that make either technical or market sense for us -- technology or market sense for us to expand. But this is not a business for sale at all. This is a business that we're going to grow. And we are as puzzled as you as why a business with that kind of growth, with that kind of margin and that kind of CapEx, I mean it's a real value driver, is valued as it is. But we think -- I go back to where we were 18 months ago when we said, "Look, we're going to spend the first year or so here, the new management team, addressing some of the cleanup issues." We still have one left to do of significance -- of partial significance, anyway, the Interiors side. But now we are migrating to focus in on these 2 strong core businesses, both of which have a portfolio capability and leverage capability that is above industry growth patterns. And we have a very strong position in Electronics that we will do everything we can do to lever. And so we're quite, quite bullish on that business. And I'm sure you will see -- and if you can join us or anyone that can join us at the Consumer Electronics Show, we'll see how that's expanding. We have a very unique position here. In the HMeye world, you can do all you want to do on the electronic front, but it still has to come back and do that interface with the driver, interface with the passenger, interface with the consumer in an automotive context. And it's -- OEM after OEM are coming to us for that experience. So this was something that we see as quite a robust opportunity for us. I know that it's not the size of Climate, but you can see just with the 12% growth this quarter and the 19% growth in cockpit electronics year-over-year, this is an engine of growth. And yes, we think it should be valued higher than it is, and that's part of our message.

Steven Hempel - Barclays Capital, Research Division

Great. And just one quick follow-up then on that. On an organic basis and moving forward with the Electronics business, post the YFVE consolidation, how should we think about the margin profile of that business? We've seen a lot of new products here in some of the slides, interesting products. One of the products was the one with a German premium OEM, that's definitely a positive. Just wondering where -- when should we start thinking about the benefit rolling into them, from the backlog, if at all? And how we should think about margins moving forward? Also if you could just update us on the capacity utilization in Electronics, specifically North America.

Timothy D. Leuliette

Yes. We have stated -- a good couple of questions. We have stated that we are targeting 100 to 150 basis points of gross margin improvement in that business over the next 3 years, and we still see that as a possible, clearly, and a necessary and probable act, because we still believe that we are not operating on the factory floor as we should. And so we still see some margin improvement there going forward. And we will see that into '14. From a standpoint of capacity issues, we do not have a capacity site, a manufacturing site in the United States. We do have in Mexico. We do utilize our primary electronics footprint globally, which is China, Mexico, Brazil and Portugal with some new facilities. You saw we announced one in Thailand. We announced the expansion in Russia as being adjuncts to what is our core manufacturing footprint. We do export from those sites on a global basis. From the standpoint of overall capacity, we are -- we have the capacity to expand in some areas, but I think the important element of electronics, which comes back to the value equation, is that you see that we spend around 2.25%, 2.5% of CapEx -- of sales on CapEx in that business. It's not a capital-intensive business, it's a software-intensive business. Our engineering focus -- and we are software-driven and our assembly capability is not a capital-intensive business because we -- again, we buy displays and screens. We buy things, we do the assembly, we do the work, we input our software. So we can expand that business without significant capital requirements. That's just the nature of our business model, and it's worked quite well.

Operator

Your next question comes from the line of Matt Stover with Guggenheim.

Matthew T. Stover - Guggenheim Securities, LLC, Research Division

Just a quick follow-up on that, Tim. If we think about sort of the outlook for growth in the Electronics business, how would you encourage us to think about a growth rate over the next several years in that business? Obviously, post integration of the YFV asset.

Timothy D. Leuliette

Well, we've stated that we have a 12% CAGR model in the forecast, so that we update our -- every January, our, if you will, our 3-year guidance and outlook for that business. But we have shown this year of being at 12% CAGR over the next 3 years. We think we're comfortable with that. I would say that in this business in particular, and I think this is kind of a unique segment in the auto industry, and that is this will grow as fast as we can commercialize next-generation technology. The kind of thing you'll see in the cluster, the kind you'll see that we're launching in Europe, I think will change dramatically how people look at the information flow to the driver. I think when you see the infotainment packages that are utilizing open-source designs, that's going to significantly lower the cost and, as I say, democratize the capability of taking this technology to a broader array of consumers. And the key to this is as soon as we can get it done, as soon as we can launch these products, as soon as they're ready for production, there's demand. And I -- we meet with a number of OEMs, and we're probing that element. The consumer Electronics industry moves at a much faster pace than the auto industry and launches. But the key is we've got to launch it with automotive reliability and quality and robustness, and that's that balance that we look at. So this is a business that's going to grow considerably higher than vehicle build for the rest of this decade and then the next. This is going to be the one of the major dynamic and exciting areas in the automobile.

Matthew T. Stover - Guggenheim Securities, LLC, Research Division

Actually, I had a follow-on to that. I -- within the context of the commentary here, there had been a reference to the sale of the Interiors. I noticed that there was no sense of timing on that. And I'm wondering if you could kind of update us on that? And I know the original timing had been set towards the end of the year. Has that been pushed out or changed?

Timothy D. Leuliette

As I think we have said, we don't comment specifically on timing. I'll just give you 2 inputs. One, it took us 8 months to negotiate a YFV transaction, and we weren't public about that until it was done. To not -- for us, not to be making comments or saying anything publicly about it, that's not to infer that we're not doing something on this moving it forward. We will -- we do not have a gun to our head as we've said, but it is something that we are comfortable with that we will deal with in a timely manner. So I'm going to give you no greater insight than that.

Operator

Your final question comes from the line of Kirk Ludtke with CRT Capital Group.

Kirk Ludtke - CRT Capital Group LLC, Research Division

Just a couple of follow-ups, one on electronics and one on restructuring. I just -- my sense has been that whatever you do on Electronics M&A-wise is opportunistic rather than need-based, and I just want to confirm that. And if it is need-based, maybe I've got some follow-ups on that.

Timothy D. Leuliette

No. I think you're spot on. There's no technology we have to have to execute our game plan. If there's ways that we can get economies of scale, if there's ways that open customers up to us, if there's some opportunities as you said, we'll pursue it, but it's not a have to. I'd like greater scale in that segment. I think we've made that clear, but it's not something where we've got to go do that. I think you're seeing with the growth, 19% year-over-year in cockpit electronics, it's good business model. When you can grow at that rate with these kind of EBITDA margins, with a business that has 2.5% CapEx as a percent of sales, you can create a lot of value.

Kirk Ludtke - CRT Capital Group LLC, Research Division

Great. I appreciate that. And then on restructuring, I guess you've got $59 million of the $100 million left to spend. Is that all in 2014? And then secondly, if and when you're able to exit some Interior plants, will that be incremental to the $59 million?

Jeffrey M. Stafeil

So to your first question, the $59 million at this point, we do expect to spend in 2014. As it relates to a question of would there be additional cash outflows as it relates to an Interiors business, I think that's too speculative right now to address. And we'll come to you as things become more definitive on Interiors.

Operator

We've now reached the allotted time for Q&A. I'd like to turn the call back over to Mr. Krakowiak.

Robert R. Krakowiak

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

Timothy D. Leuliette

Thank you, Bob. I think, as we've said before and we'll say it now again, we're very comfortable with the path we're on. We've now transitioned from, what I call, the paint up, clean up and fix up era of this business, now focusing on the 2 core businesses of Climate and Electronics. They have indigenous growth opportunities. We see margin improvement. We see good customer reaction. We still have issues on Interiors and what have you to deal with that we are dealing with, and we'll deal with on a timely basis as we move this company forward. Visteon, at this point, we see as an engine of value creation, an engine of growth with a very good Asian and global footprint. So we appreciate your support. We look forward to a good Q4 and a good 2014. And we'll talk to you again in 90 days with the performance of the last quarter. So thank you, all.

Jeffrey M. Stafeil

Thank you.

Robert R. Krakowiak

Thank you.

Operator

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

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