Visteon's CEO Discusses Q4 2013 Results - Earnings Call Transcript

| About: Visteon Corporation (VC)

Visteon Corporation (NYSE:VC)

Q4 2013 Results Earnings Conference Call

February 25, 2014 9:00 a.m. ET


Timothy Leuliette - President and Chief Executive Officer

Jeff Stafeil - Executive Vice President and Chief Financial Officer

Bob Krakowiak - Investor Relations


Ryan Brinkman - JPMorgan

Matt Stover - Guggenheim Securities

Colin Langan - UBS

Bob Krakowiak

Good morning, and welcome to our review of Visteon's performance for the fourth quarter and full year of 2013. (Operator Instructions) Today we are pleased to be presenting to an audience of Investors in New York City.

Before we begin, 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.

A webcast to this earnings conference and the presentation material is posted on the Investors section of Please visit our website to download the material if you have not already done so. And 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 our performance in the fourth quarter and full year of 2013. Under the format of today's meeting, those here in the audience with us will have an opportunity to ask questions after Tim and Jeff's remarks. Again, thank you for joining us and now I will turn it over to Tim.

Timothy Leuliette

Thank you, Bob. And, again, let me extend my welcome to all of you here and on the phone. Obviously, as you have seen this is not our typical earnings call format. As we sit here in New York, we decided to combine our investor call with investor day to take you through our technology. It's a unique opportunity here because as we look out and you will basically see what we had taken to Las Vegas for our Consumer Electronics Show, as well as all the HVC technology that we have bought to you with not just ourselves but with the engineers and the technicians and the leadership of the product groups to explain them to you.

As we do this format today, we will go through the earnings, focus on '13, give some '14 guidance. Then you are going to tour these products and see and listen to the presentations and listen to the people who develop. We will also speak a bit about how legislation is impacting our portfolio. We will also talk about how the impact of the two recent announcements we have made on OpenSynergy and Autonet, those relationships, how that impacts our future. And then we will step back here after the presentations and take you through how that builds to 2017 story. I am very pleased and very happy to have you here, but also as a result of reaching out to you and coming to New York, we have the opportunity today as we look at the invitation list who has accepted to join us, is that we will have over half of the ownership of Visteon here today. And that represents a great opportunity to have that one-on-one and that interface with such a large group of the investment community. So with that let me begin.

On the first page here, recent highlights. I will summarize this by saying, it was a good year. We delivered strong full year performance. Sales of $7.4 billion. We have record EBITDA of $704 million. It would have been $710 million under the old measurement criteria as we had YFV in for the entire year but the sale at the end of the year caused some modification to the numbers, so it would have been $710 million otherwise. This is a record EBITDA for a company that’s smaller than it was, size is not everything. The focus that we are bringing to this business, focus on climate, focus on electronics and as we exit interiors, we are building a base of strong performance going forward.

Adjusted net income of $331 million. EPS of $6.48. We reported net income of attributable to Visteon of $690 million. It includes about $465 million of gains related to the sale as well as $51 million of taxes related to that. A positive adjusted free cash flow of $232 million, $130 million higher than 2012 and free cash flow of $43 million. Strong performance for the year, strong performance for the quarter. As we look at the liquidity situation, obviously now we reflect the cash that’s on our books from the sale of YFV. We have $1.7 billion in cash. This is after, by the way, of buying back some bonds, returning some bonds as well, and buying some stock back as you know. And we have $100 million of U.S. ABL which is untapped.

Debt of $730 million. And we repurchased, as we said, $300 million of shares and repaid $100 million of our debt since the beginning of Q4, 2012. With respect to guidance. We only talked to guidance here about a month ago. I am not here to go change those numbers today. $7.7 billion-$7.9 billion sales, and Jeff will take you through some of the buildup. But what I do want to focus on is the last item, and that is is we are targeting an $875 million share repurchase through the end of 2015. Have we been in the market yet outside of that shares we bought back in Q4, the answer is no. The reason is, is that we are confronted with blackout periods, restricted periods due to the end of the quarter, end of the year. Trailing through to when we have an earnings release. We also were confronted in December with having information resulting in -- information leading [ph] to LOI which led to the announcement in January on the sale of JCI.

You obviously understand that we are facing some potential transactions in the interiors side and we face those same issues of having some information that’s not yet completely ready for dissemination, and therefore we will probably be in a blackout period here until midnight. So we will not be in the market to start buying stock back most likely until midnight. From the standpoint of delivering strategic actions, you know to summarize the year up, some highlights. Contributed Climate, sold Yanfeng, agreement to acquire JCI, focused on reaching agreements to exit interiors. But let's start amplifying some of that here in a few slides in a moment.

As we do every earnings release, we talk about where are the cars built and where do we do our business. And I will give you the same story each time, Asia continues to grow. Fourth quarter was 53% of all the vehicles produced in the world came from Asia. 24% in Europe, 18% in North America and 12% in the U.S., 5% in South America. Why is that important? Why do we keep reinforcing that message? We still see our stock move more up and down based on U.S. SAAR than we do China or Asia. There is still a culture and mindset of how important the U.S. is to the industry. It is important, it's 12% important in the world global auto industry as it represents the contribution to the overall production.

As we look at where we do business, you can see climate fits the international spread of production quite well. 60% of it in Asia. Electronics, 40% in Asia, this is before the JCI and before some of the other actions that we are going to discuss. Interiors is still heavily focused on Europe. But you can see that in absence of interiors, that the remaining core businesses are levered to Asia. Will be more levered to Asia as a very good footprint as we go forward.

I will go through some of the building blocks here in the next page in more specificity here in a moment. What I think the issue is, is that when we talk to you and I first met all of you back in September of '12 at the Citi conference, many of you at the Citi conference in '12. We laid out a template of where we want to take Visteon. And at that point in time I think many of you viewed Visteon as an event company, an event stock. There were things that needed to occur, sales, supplying, cleaning up, existing etcetera, that made this an event company. And from our standpoint we said, look, 2013 into '14 will be an event period. We will be addressing the issue, this cleaning up. I call it the clean up, paint up and fix up period of the company.

But as we entered '14, a lot of that was going to start being getting behind us and we had to look at the value proposition. Today we are only -- this first presentation, we are talking about 2013 and our guidance for '14. But as we get into the presentation for the Investor Day which will go back online here afternoon, we will take you through how this builds a value story. Because now that’s the focus of Visteon is this value creation which is quite strong. But let us focus on some of the specifics here of where we started in some of these building blocks for the year.

A year ago we gave guidance of $7.3 billion to $7.5 billion in revenue and $620 million to $600 million of EBITDA. The difference between the 620 to 660 and where we ended up at the 706, was not because we sandbagged, because that’s always an excuse, but basically because if you look at flow, that incremental revenue flowed to the bottom line. And what's an important message for Visteon going forward is, is that revenue does flow to the bottom line. Right now we use IHS and other independent inputs as to gauging our volume projections but once we have those, we build our model.

I was very pleased with how the management team took every incremental dollar of revenue that came by. Europe was a little better than we anticipated. China was a little bit better than we anticipated. Hyundai was a little better than we anticipated. Ford was a little bit better than we anticipated. It flowed to the bottom line and that’s the delta from where we work. But a year ago we still had five major reporting functions. We had over 100 joint ventures. I know it was difficult for you to understand the company. I was on the board here for a few years before I took over the this role, it was difficult for me on the board to understand the complexities of this business.

We have continued to focus on cleaning it up. We have continued to focus on focus as we go forward but that’s where we were a year ago. And we had a corporate-centric culture. Now let's talk about where we have transgressed. By the way, in the background there is either a very large woodpecker or our competitors trying to borrow their way into the presentation but we will -- people are trying to address it. As we look at those building blocks, I want to spend a few moments here on HVCC.

I can't be more pleased with how this has come about. In that year we put it together, it's now the second largest climate company in the world, thermal management company. You are going to see out here some tremendous technology this afternoon, this morning into this afternoon, including the mass produced hydrogen fuel cell vehicle by Hyundai that’s now I think got many more orders than they have production capacity to build. But it shows you how we are addressing thermal management issues when you have vehicles that don’t have engines running all the time, which is going to be the future.

But it's a technical engine being driven by legislative issues, being driven by environmental issues, CO2 credits, all the stuff that seems to be minutia starts building a different business model for us and creating revenue, and Y.H. will take you through that. But up till now, the stock is up 60% since we started the formation of the company. Strong balance sheet, zero net debt, by itself. Robust backlog and 7% sales CAGR through 2017, our planning period. It's intellectual property driven and it's also a balanced company, becoming more balanced. China sales now exceed $1 billion annually. Sales even grew in up in 2013 and you see that we are right now underway and expanding in China and in Russia and in India.

As you're looking for YFV, YFVE consolidation, this story which we have talked to before but I want to explain how it builds into where we are headed. This became a very delicate negotiation for one critical factor. We wanted to exit the parts of YFV that were not core to us but we wanted to get back into and consolidate the parts of YFV such as YFVE, that were important to us. That negotiations took some months to accomplish. Again, it was closed for the most parts and we got most of the cash from sales in the fourth quarter, some cash trails. But that transaction was valued at $1.45 billion when the smoke cleared. $300 million valued for the YFVE component, our ownership of the YFVE at $300 million. Cash to Visteon of $1.50 billion. We have received over $1 billion of that cash right now in the bank accounts, in the U.S. We have about $150 million remaining. And as we outlined initially, our tax rate on that is roughly 10% to 11%, utilizing some of the NOLs and other capability we have had.

So this is a critical transformation for us. And it's now about behind us now. Just the cash and it's now building that, expanding YFVE relationship as part of our electronics business now that we consolidate that into our numbers. The JCI acquisition. I will amplify a bit on this now from what we have said in the past. Bottom line is, is that -- and Marty is going to take you through what this does for us. But it makes us the second largest -- the third largest cockpit electronic ecosystem provider in the world. Clearly a strong contributor in this business of driver information. A major base to level off of. Purchase price $265 million. We look and we quote their numbers. Their numbers were $58 million of EBITDA for their fiscal year which ended in September. That includes $11.8 million, about $12 million of corporate charges from JCI corporate to that business. We would expect significantly less corporate charges from Visteon corporate phase 2 for this asset.

And we also see this having some critical synergies. SG&A, immediately there is engineering-tech or resource synergies. What I like about this business is there is a lot of the senior people at JCI are former Visteon people. They know the culture, the know each other. There is a similar operating style. So we can start melding this thing together I think a little quicker than we normally would. Targeting this thing, late second quarter to close. Can't wait, want to get going. Got a few legislative, again a few things you got to do to get the closed, we will go through all the process. But we are happy about it and we look forward to welcoming those JCI employees as part of the Visteon family. We can't wait. As soon as this thing closes, Marty and I are going to be on the road shaking hands with these people and making them feel wanted, warm and part of our family. Looking forward to what this will do. And Marty will take you through what it will do for us as we go forward.

Exit interiors. This is the last remaining, if you will, major event I would say from an exit perspective that we need to address. We are working towards a divestiture, as I said we have at this point given you some indication of the aspirational trend, targets, objectives of the process that we are involved in right now, which is three different transactions. A standalone Asia JV which is focused to really one particular customer with a separate buyer. The European customer legacy business, we have got one there which is really focused on particular OEM. It's kind of integrated into some of the other OEMs issues, labor or facility issues such that it needs a standalone and be treated separately. And then there is the remainder of the global interiors business.

These will be combination transactions. The will be announced as they individually occur. We have always said that our job here, objective here was to get a net neutral impact from a value perspective. We will be exiting a great deal of pension liabilities, other employee liabilities, some debt. The liabilities including these pension issues and what have you, amount to about $200 million. So there will be a cash contribution to exit these liabilities. But when we do exit these liabilities, our objective here has been to have no tail. If we wanted to joint venture some of these, if we wanted to go do a different kind of path where we had some remaining exposure, we could have done this perhaps a little quicker.

Our goal here is to find the proper buyers for each one of these assets. Properly financed, properly motivated to go and build these businesses but do so not our watch. Our focus is to be out of these businesses. And that’s the path we are taking.

Lean corporate model. Again, some additional information here from what we have seen, perhaps in the past, and that is that we not only are reducing this fixed costs and SG&A burden, and if you go back to our January '13, our January 15, 2014, our August presentation last year of the stair steps, this is right in line with that plan. This is where were we are taking the fixed cost and SG&A spend down. But more importantly, that next set of bar charts underneath here on page ten, is you see how much of that is at the corporate level and how much of that is the product group level.

Now this includes the outside service aspects as some of those responsibilities have been moved to outside services and we are paying the bills for it. Which gives us some cost efficiency. But as you see, that lean corporate model says that most of the capabilities that are necessary to run these businesses on a standalone basis operationally, are now embedded there as opposed to being carried at the corporate level where it's just charged out. We want the Marty and Y.H.'s of the world to be responsible for their business. If they need a head, if they need expense, if they need a fee, if they need an advisor, if they need a license, if they need some support, they make that decision. We don’t make it corporate and charge them. I don’t like the club fee approach to corporate ahead and we continue to minimize that.

What does that mean from a corporate people perspective? There were 1283 people in corporate staff back in mid '12. We will be down towards the end of this year in the next year in the 60 to 70 range. So that we now will be a very lean corporate group and allowing these product groups to have the resources and the focus they need. Our goal here in '13, and again I will amplify this more as we talk about '15, '16, '17 here later in the day, is that we are focusing on the strategic goals. This has not been a company that’s focused on the flavor of the month. We had stuck to our 2012 goal from that September presentation. Simplifying the business so it's easier to understand. It's important for all of us. Not just you as investors or analysts, it's also important for management. We can't be everything to everybody. We are very laser focused on our electronics and climate business.

We significantly reduced our fixed cost and SG&A since 2012 and focused those resources to the more appropriate place. We have committed to create value through strategic actions. Again, we discussed Climate, the Yanfeng. Been working towards interiors divestiture, consolidating YFVE. The JCI issue. And we now we have two businesses. Very important to remember, we have two businesses that are number two, one number three by a couple tens of a point, could be number two in the world, our climate and electronics business. And they are both high growth, high margin businesses. When we look at the capital employed, when we look at the returns on capital in these business, they are strong. These are cash generating businesses.

They are large enough in their space that they can control the technology and the economic footprint. They are players in that space that can have leverage and you will see that as you walk through these presentations in bucks [ph] and vehicles here in a little while. From a strong capital return perspective, $300 million in share repurchases since Q4 of '12, which has translated $4.9 million in shares on average price of $61 a share. Been a good use of corporate cash. And $100 million in bond redemptions of Q4 '12. We will still go back and, as I said, be active and get that $875 million remaining stock buyback in placing. After pacing around all these blackout periods, it will get done. And we are committed to that.

And with that, as an overview, let me turn it over to Jeff and talk about the results in particular and specifics. Thank you.

Jeff Stafeil

I will begin my comments on slide 13 of the material. Here we present our key financial metrics for full year 2013 compared to 2012. As we had explained on previous calls, our financial results are impacted by a number of items that makes year-over-year comparisons difficult. The adjusted financial information presented on this slide excludes these items and represents how we manage the business internally. As non-GAAP financial measures, this adjusted financial information is reconciled to U.S. GAAP financials in the attached appendices on pages 30 to 32.

2013 was a strong year for Visteon as we meaningfully improved versus prior year on all our key financial metrics, driven by strong performance in our core operating businesses, climate and electronics. Note that on this page we have excluding nearly $500 million of gains related to the YFV transaction in all of these measures. On this page we also show our old and new definitions of adjusted EBITDA for your reference. Our old calculations result in $704 million of adjusted EBITDA while our new definition yields $600 million. The difference between the two is that our new definition does not include equity income or non-controlling interest.

Given the sale of our YFV business, we opted to change our definitions to be more consistent with our peers. That’s said, we will focus on our old definition of adjusted EBITDA throughout this presentation and we will begin using the new definition when we report our first quarter results. I will cover all these metrics in more detail on the following pages.

Turning to Slide 14. I will discuss the impact of the YFV transaction on our 2013 results. In November, we increased our ownership in Yanfeng Visteon Electronics, YFVE, and thus began to consolidate its results. It's impacted both our November and December financial results and add $56 million to sales. In mid-December we completed the sale of our 50% interest in Yanfeng Interiors, YFV. In total, the transactions reduced Visteon's adjusted EBITDA by $6 million for the year. If the transactions had not been completed, Visteon's 2013 full year adjusted EBITDA would have been $710 million.

Specifically, the electronics product line adjusted EBITDA was favorably impacted by $3 million related to the YFVE consolidation, the consolidation itself improved results by $6 million, but this was partially offset by $3 million of lower equity income. Adjusted EBITDA related to the interiors product line was also impacted by the transaction. In total, interiors' equity income was reduced by $9 million, based on the relating closing dates.

Moving to Slide 15. We provide an overview of quarterly consolidated sales and adjusted EBITDA versus the prior year. 2013 fourth quarter sales were the highest of any quarter during the last two year. The increase reflects new business in the climate product group and higher volumes in Asia and Europe. Q4 adjusted EBITDA was $187 million, equal to Q2 adjusted EBITDA, the highest of any other quarter for 2013. Although the trend in adjusted EBITDA showed continued strength and stability in each quarter during 2013, Q4 adjusted EBITDA was lower than in the fourth quarter last year. In addition, the $6 million negative impact from the YFV transaction discussed in the previous slide, Q4 2012 presents a difficult comparable period as we have discussed numerous times in the past.

Specifically, 2012 Q4 results were favorably benefitted from the impact of commercial agreements, higher engineering project recovery and several onetime adjusted impacting the electronics product group. That said, our full year adjusted EBITDA margin of 8.1% compares favorably to the 7.7% achieved in the previous year.

Turning to Slide 16. Turning to slide 16, we compare 2013 fourth quarter and full year sales and adjusted EBITDA to last year's results. It is important to note that both Q4 and the full year 2013 results were impacted by the YFVE consolidation. The consolidation of YFVE financials for the last two months of the year increased 2013 sales by $66 million. Adjusted EBITDA excluding equity income increase by $6 million due to the consolidation. 2013 Q4 sales were $1.96 billion or $135 million better than the fourth quarter of 2012. Other than then the consolidation of YFVE, the increase was driven by sales in climate which benefitted from higher volumes in all regions, particularly Asia and Europe.

Adjusted EBITDA for the fourth quarter of 2013 was $187 million, down $15 million compared to fourth quarter 2012. Equity income from our non-consolidated joint ventures increased but was more than offset by an increase in non-controlling interest. As discussed on the previous page Q4 2012 presents a difficult comparison as it benefitted from several timing benefits. That said, our full year results have less timing related impact and show a strong increase in both adjusted EBITDA and adjusted EBITDA margin versus 2012.

Turning to Slide 17. We show our full year sales and adjusted EBITDA for our three product group, climate, electronics and interiors. It should be noted that the adjusted EBITDA figures on this page include the benefit of equity income in affiliates and a deduct for non-controlling interest. And I will cover each of the metrics in following pages in more detail.

Moving to Slide 18. We show our fourth quarter and full year sales and adjusted EBITDA by product group. Note that the product group adjusted EBITDA on this slide excludes equity income and non-controlling interest, which are both shown separately at the bottom. We have subtotaled results for our climate and electronics businesses. You will notice that sales and adjusted EBITDA for our combined climate and electronics businesses are up 14% and 18% respectively on a full year basis versus 2012. Both of these product groups experienced strong year-over-year growth during 2013. Results for our interiors product group continued to be impacted by lower production and commercial recoveries. Sales and adjusted EBITDA for this business were down 9% and 40% respectively, on a full year basis versus 2012, primarily related to the lower production volumes in Europe and South America.

Our equity income improved year-over-year, mainly due to strength in China that benefitted the YFV affiliates. Offsetting this gain was $18 million increase in NCI, primarily related to our 70% ownership in HVCC.

On Slide 19 we provide an overview of the climate sales and adjusted EBITDA for the fourth quarter versus the prior year. Climate sales in Q4 were $1.3 billion, up $91 million or 8% compared with 2012. The increase reflects higher volume from Asia and Europe 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 $23 million, primarily driven by a stronger Korean won, euro and Chinese RMB. Adjusted EBITDA for the fourth quarter of 2013 was $112 million, down $6 million or 5% compared to the figures on the fourth quarter of 2012.

Currency lowered EBITDA by $12 million as the strengthening Korean won impacts our purchasing exposures more than the Korean won sales exposures. Non-controlling interest also lowered adjusted EBITDA by $10 million for the quarter. Increased production volume and new business were partial offsets in the year-over-year basis. Climate's adjusted EBITDA margin was 11% in the fourth quarter, reflecting a strong consistent margin throughout 2013. In fact, full year adjusted EBITDA margin increased from 10% to 10.6% year-over-year. It is important to note, the adjusted EBITDA margins on this slide and the next two slides exclude the impact of equity income and non-controlling interest.

Moving to Slide 20. Electronics sales for the fourth quarter of 2013 were $396 million and adjusted EBITDA was $40 million. Electronics sales for the quarter increased $59 million versus 2013. The increase was more than explained by the consolidation of YFVE which increased sales by $66 million for the period. As we have explained on previous calls, the electronics product group sales are also being impacted by a mix shift between vehicle electronics and cockpit electronics.

For the full year, vehicle electronics sales decreased by $56 million, while cockpit electronics sales increased $195 million. Sales related to vehicle electronics have been steadily decreasing over the last couple of years but are starting to level out. In 2013, they totaled $112 million. In 2014, we project vehicle electronics sales to be approximately $80 million. Adjusted EBITDA for the fourth quarter decreased $8 million versus 2012. As previously mentioned, Q4 2012 presents a difficult comparison point. As you can see by the spike in margin in that period, it was benefitted by several timing related items including higher engineering billings and larger customer recoveries.

Fourth quarter 2013 adjusted EBITDA margin, excluding equity income and non-controlling interest, was 9.6%, higher than all other quarters in 2013. Full year adjusted EBITDA margin was fairly consistent with 2012 despite the decline in vehicle electronics business. Note that the vehicle electronics business had margins of approximately 30% as it had virtually no engineering support given that it was being phased out of production.

Turning to Slide 21. Taking a look at our interiors business. Interior sales in the fourth quarter were $317 million and adjusted EBITDA was $60 million. Sales decreased versus the fourth quarter of 2012 by $19 million, primarily due to lower production volumes in South America. Adjusted EBITDA increased by $6 million versus the fourth quarter of 2012 reflecting a $12 million increase to equity income from our Yanfeng affiliates, partially offset by lower volumes in design recoveries. As previously described, we continue to operate and implement improvement actions in the interiors business, while supporting and investing in it. Thus, while we are continuing to target divesting it, we continue to support its growth and improvement.

Moving to Slide 22. We provide a breakdown of the key components of our 2012 and 2013 tax provision and cash tax payments. Our 2013 full year income tax provision was $107 million reflecting the following. Operating taxes in profitable countries, which included $12 million tax benefit relating to a valuation allowance released against Korean foreign tax credit attributes. An accrual of withholding taxes related to current earnings from consolidated and non-consolidated affiliates. A $48 million net tax benefit for tax contingencies relating to the release of certain reserves for uncertain tax provisions. And $52 million in transaction related taxes related to the HVCC and YFV transactions.

If you look over on the cash payment side, we had cash tax payments in 2013 of $291 million. Including in this total were $101 million in transaction related taxes and a total of $38 million of tax deposits in Korean and Brazil. We believe these tax deposits are recoverable in the future. Of the remaining $152 million of cash tax payments, $28 million related to the withholding taxes and most of this charge related to dividends from our former YFV investments.

Turning to Slide 23. We will take a look at our cash flow and our capital structure. Free cash flow was $28 million in the fourth quarter and $43 million for the full year. Free cash flow in 2013 was significantly impacted by restructuring and transaction related payments as well as the impact of the Yanfeng transaction. I will discuss more on these on the next slide. Fourth quarter free cash flow also benefitted from positive trade working capital and significant dividends from unconsolidated affiliates, partially offset by increased recoverable taxes that were paid in multiple jurisdictions that should be recoverable in the future.

Cash balances were $1.7 billion as of year-end, up $857 million since prior year. The improvement is primarily attributable to proceeds from the YFV transaction, increased debt and positive free cash flow. But partially offset by the $250 million used to repurchase Visteon's stock during the year.

Moving to Slide 24. We walk from free cash flow to adjusted free cash flow. As I mentioned, free cash flow for the fourth quarter and full year was $28 million and $3 million respectively. Those flows were impacted by restructuring and transaction related items, totaling $108 million in the fourth quarter and $189 million for the full year. Excluding those impacts, adjusted free cash flow was $136 million in the fourth quarter and $232 million for the full year. It should be noted that adjusted free cash flow was higher than our guidance of $145 million to $185 million that we provided a the Deutsche Bank conference in January. The increase was related to the Yanfeng transaction during the fourth quarter. In total, the transactions increased free cash flow by $83 million, most of it related to increased dividends net of withholding taxes. These increased dividends were not included in our guidance.

On slide 25, we provide our 2014 full year financial guidance. As mentioned earlier, beginning in 2014 we have redefined adjusted EBITDA to exclude the impacts of equity and affiliate income and non-controlling interest to better align with the definitions used by the investor community, and in consideration of the sale of our interest in YFV. For the full year, we project the midpoint of adjusted EBITDA of $680 million. Adjusted free cash flow $125 million and adjusted EPS of $2.65 per share. These figures have not changes since we presented them to you last month at the Deutsche Bank conference and do not include any contemplated M&A activity.

Specifically, they do not include any impact from our announced acquisition of JCI's electronics business, nor do they contemplate any ownership change in our interiors operation. When preparing our current 2014 midpoint of guidance to the preliminary guidance we provided last August, there are two noteworthy differences. In August, we continued to include equity earnings and non-controlling interest in our EBITDA calculation and both these forecasts have been negatively impacted since that time.

One reason for the difference in equity income is driven by divestiture accounting as we are required to change our accounting treatment relating to future dividends and equity income as we transition from the equity method to the cost method of accounting for YFV affiliates we continue to own until mid-2015. As a result of this change, we will reflect the majority of the dividends received in 2014 as balance sheet adjustments as opposed to an income statement benefit. Additionally, the equity earnings forecast has declined due to a delay in acquiring a portion of the YFVE ownership interest until mid-2014 due to various regulatory requirements.

Excluding the impact of equity income and NCI forecast, our adjusted EBITDA is slightly different from our target provided last August by about $20 million, primarily due to weaknesses in South America and South Africa. Meanwhile, our core operation at HVCC and electronics remain unchanged from that previous guidance.

Moving to slide 26. Now we provide a walk from our 2013 guidance for product sales and adjusted EBITDA to our 2014 guidance for these items. For products sales walk, the first variance relates to the consolidation of YFVE. On a pro forma basis, if we had included YFVE for 12 months, Visteon's sales would have been $7.7 billion in 2013. In 2014, we project interiors product group sales to decrease. However, this decrease will be more than offset by increased sales in our two core product groups, climate and electronics. Most of the sales increase will come from incremental new business as we expect production volumes at our key customers to be relatively flat year-over-year.

For the adjusted EBITDA walk, we first reconcile our old definition for adjusted EBITDA which included equity income from unconsolidated affiliates and non-controlling interest, to our new definition which excludes these items. 2013 adjusted EBITDA using our new definition was $600 million. We project 2014 adjusted EBITDA will increase to $680 million. The YFVE consolidation will increase adjusted EBITDA by approximately $44 million. This represents 12 months of consolidated EBITDA in 2014 versus only two months in 2013.

2014 adjusted EBITDA will be unfavorably impacted by lower sales and gross margin at our legacy interiors and climate facilities. These decreases will be more than offset though by increased profitability at our HVCC climate and our electronics product group facility.

Not let me turn it back to Bob for Q&A.

Question-and-Answer Session

Bob Krakowiak

Thank you, Tim and Jeff. We will now open up the floor for Q&A from our audience. If you have a question please raise your hand. When I call on you, please stand and a microphone will be brought to you. Please state your name, company and then your question. This will ensure everyone on the webcast can hear the questions as well. Your question, Ryan.

Ryan Brinkman - JPMorgan

Thank you. Ryan Brinkman from J.P. Morgan. On, I think it was Slide 6 of your presentation, you mentioned that HVCC has a strong balance sheet and no net debt. Can you talk about maybe what the optimal capital structure is for HVCC? And then also what opportunities, strategic or otherwise, are afforded to you by having that strong balance sheet?

Jeff Stafeil

Yes, the debt of HVCC is something that we look at quite frequently. It's a strong cash flow producer. If you look at the company, it historically pays a strong dividend. It increased its leverage a little bit with the transaction to buy our climate businesses a year ago. But it continues to pay down that debt, forecast would show it would continue to do so. Putting debt there is something that we continue to explore. Putting whether that debt comes in the form of an acquisition or increasing leverage with some sort of share buyback or other program, or things that we continue to explore. But our plans aren't definitive on that at the moment.

Timothy Leuliette

One of the things, just to expand upon that, is that as we have said before there is some opportunity to -- first of all, we don’t want to put cash on the balance sheet and let it sit there. I mean nobody wants to do that. The question is taking that cash off or chasing ownership etcetera. Right now, we have a difficult time putting cash to work and buying stock back already. What I don’t want to do is do anything to bring more cash back that puts a burden on our cost or reduction in earnings power of HVCC, while it just sits as cash on our balance sheet. So we are balancing that but I am sure overtime we all share the same objective that is, there should be leverage on HVCC and we don’t want to put a lot of cash on the balance sheet. So given those goals, let's let the year evolve and see where we lead [ph].

Ryan Brinkman - JPMorgan

Okay, thanks. And then maybe just a follow-up on HVCC. You guide to, I believe a 7% revenue CAGR through 2017 there, which is several percentage points stronger than light vehicle production. Are there any scenarios you can imagine under which revenue could grow potentially even faster, for example, if some of this European refrigerant legislation were to break your way in Europe, would that benefit you within that timeframe or is that a little bit longer term?

Timothy Leuliette

I can see scenarios where the revenue would be higher in '16, '17 based upon legislative, or like take the European issue. The R744 decision will be made some time this year. That could impact, ultimately, the R744 cadre of opportunities. Could amount somewhere between $300 million to $500 million for this company at the end of the decade. And the question is, when do we participate and if we participate at what ramp up. When we look at the marketplace and when you go through the technologies today, you will see that there are legislative pressures to bring, to add more content for us. So I am sitting here today saying I feel more upside than downside in the revenue stream, but events have to unfold. And right now, when we have put forecast of the 7% CAGR, that’s stuff we can touch. We feel comfortable with. That we have either got an order for or a pretty high confidence that that’s in the bank. These other opportunities are just that, opportunities. As they unfold, obviously, we will bring them forward. But I think the important point here is, legislation and environmental rules are going to make this a growth business for quite a while.

Ryan Brinkman - JPMorgan

Okay. Thanks. And just very last question for me. You made several recent infotainment announcements related to OpenSynergy, Autonet. Apparently an award to provide infotainment [indiscernible] for an Asian vehicle that was unnamed. Was that in your backlog, number one? And then, number two, maybe shed any light on those announcements. And is there anything you can say about Ford's movement away from Microsoft towards QNX? Does that open incremental opportunity for you?

Timothy Leuliette

So I sense four questions there. Let me take them. As far as, is the Asian based open format, our infotainment package in the numbers? The answer is yes. Regarding the Ford situation, let me just go back. The Autonet, which is more of a connectivity play, and we are going to talk about that today of how there is about $30 billion market in the connectivity side, making money of analytics. Other opportunity sets that’s not in our portfolio today, not in our forecast, not in our earnings stream or revenue stream. That this opens up the opportunity for us to participate in. And that the Autonet story which Marty will take you through in a expanded way.

And OpenSynergy is the opportunity for us to sort of interface with lots of different software formats. Whether Ford is with Microsoft or not it doesn’t matter. Using basically an Android based interface, we can interface with many different types of software, whatever software systems, the operating systems the customer wants. And still bifurcate that from critical elements of the vehicle which CAN business and separated on the CAN bus. Consider it a bifurcated operating system. That also Marty will take you through to an expanded base. Those two opportunities, Autonet and the OpenSynergy, expand our footprint to go do some additional stuff.

And it's interesting, I was talking to Marty right before the call today. I think he has already received seven emails from these announcements saying, hey, we got to talk, from customers. So it's the kind of stuff that we brought Marty on board to do. It's the kind of stuff of expanding what is more of a traditional automotive footprint to more of the connected care footprint and we are pleased with that. But we will go into greater depth when Marty steps here in a while.

Bob Krakowiak

Next question from -- we will take Matt Stover please.

Matt Stover - Guggenheim Securities

Thank you. Matt Stover with Guggenheim. A couple of questions. What do you think about the balance of the growth opportunities in the electronics business and the investment you need to make to accomplish that? It looks like there R&D increased year-over-year. And on the base Visteon business, I want to get a sense of how we should think about that into next year. And then I would like you to also comment on, as we integrate the JCI electronics business, how you can optimize investment to improve the fundamental margin and earnings performance of that business?

Timothy Leuliette

Okay. In your questions I will focus on the electronics with respect to how the progressed -- looking in 2014?

Matt Stover - Guggenheim Securities

That’s right.

Timothy Leuliette

Okay. Let me just take in pieces here, hopefully answer your questions and Jeff can chime in. We have an opportunity set -- we first of all faced in 2013 the opportunity with the growth. And we did ramp up some engineering for selected program. That engineering as you know, electronics is a capital -- it's not a capital intensive business, it's an engineering intensive business. When we ramp up engineering it's because we have a business order for something coming so therefore there is a payback and it makes some sense. We don’t just add engineering for engineering's sake.

Secondly, I think more critically as we go forward with JCI, there is duplication of some of the same fundamental platform, technical platforms, whether it be on the R&D side or development side that we will get synergies from. One of the things that we don’t do on the Visteon side and others do, is we do not capitalize the engineering. As we look at some of these events, programs, we expense them through the P&L immediately on the Visteon side. As you look at JCI, as you look at some of our competitors, they don’t do that. We will asses that as to what is the appropriate path. But we do immediately expense that through even though there are other streams and those activities go forward. So we see it improving. We see just the leverage on the platforms that we are investing in without JCI, improving the financials there. JCI is a turbocharger opportunity to strengthen that EBITDA performance and earnings performance. And don’t know, you want to amplify or...?

Jeff Stafeil

Yes. I think my big point there in addition to what you said is both these businesses are growing pretty heavily. So as Tim said, we are putting engineering ahead of it. As we bring JCI together with us, we see that that combined engineering team, not in the traditional element of having to shrink so much to basically cut cost in that way, that we can leverage that base a lot better without having to add as much incremental engineering to support the new business and to bring these businesses together. So I think your second piece of why bringing the two engineering teams together will allow us to overall increase our percentage cost and engineering overtime.

Timothy Leuliette

As we look at the JCI contribution with synergies etcetera, and you look out even a year or two and you see a contribution of say $100 million of EBITDA from the JCI piece alone and you lay that on a growing Visteon electronics piece, you see a business that’s generating a great deal of EBITDA but significantly undervalued in our share price today. So we will hope to amplify a bit of that granularity in the rest of the presentations here this morning.

Bob Krakowiak

Okay. Final question we will take from Colin Langan.

Colin Langan - UBS

One, can you just comment on the sustainability of margins, particularly on electronics and interiors, they were the highest for the year. Were there any seasonal factors helping them out in the quarter?

Jeff Stafeil

I think both should be sustainable. If you look at the margin profile of what we are projecting as we go forward, we will continue to see some opportunities for improved margin. I think with the JCI integration, we will have some more opportunities to improve margins. It's an area for us to focus on. We find that the general give and takes in this business of pricing, which we generally have to give price reductions to our customers every year. But we are able to, for the most part, find some material and other offsets in productivity to offset those things.

But then if you look forward on our new programs, there is a lot more technology content, there is a lot more R&D, there is a lot more complexity going in, which does allow for some higher margins. So that battle we expect overtime to continue to have some steadiness increased our margins. Although I am sure from quarter-to-quarter you will see some gyrations but overtime I think we would be stable to better.

Timothy Leuliette

There is always a little pressure in the fourth quarter of the people who haven't paid us. Or those kinds of things sort of make sure gets in by the end of the fiscal year, but that has been much more reduced from the dynamics in '12 into '13. So for the most part this is a sustainable footprint.

Colin Langan - UBS

And can you, just following up on the earlier question, Ryan's question, you comment that there is a $300 million to $500 million opportunity from the R744, potential change. How are you -- or what are your assumptions in that opportunity?

Timothy Leuliette

If you look at the content of the vehicles that we will need to change -- and again, if one of the big OEMs goes to R744 in Europe, then there will be rippling effect because there is a lot, and there is an R744 presentation here that we can take you there here in a little while, is to, its performance and its contribution is significant. But what it is that will trigger other OEMs and therefore the content from heat exchangers and compressors and the other elements of that, that are our forte, looking at what is a reasonable share of that business would translate to that. Why today? Because we have 0% of that market in Europe. And right now we are one of the fundamental providers of that technology. So we see a role for us to play, growing as the decade progresses.

Colin Langan - UBS

And just one last question. You mentioned going through electronics, the vehicle electronics had about $80 million in sales. But the margins were 30% from what was growing of. I mean is the remaining business a 30% margins business or was that just the incrementals are abnormally high?

Jeff Stafeil

It's generally very high. The con [ph] margin on that business is very high. Remember how engineering intensive our electronics business is. And that vehicle electronics business for the most part has be de-sourced from us a long time ago and you have seen the work done, that sales going away. But it hasn’t been things we have had to support. So the contribution of new business will improve our margin but we generally have had some headwinds as that vehicle goes away because of the high con [ph] margins from it.

Timothy Leuliette

We don’t give productivity on businesses going away and we don’t put any engineering on it. So it carries some high margins while it's still here but it will go away.

Colin Langan - UBS

And when does that fully roll off?

Jeff Stafeil

Some of it's pretty sticky and some of it will hopefully be able to hold on to for a long period of time. I will say all that stuff is reflected in the guidance that we have given you.

Timothy Leuliette

Yes. There will $30 million to $50 million that will stick out through the planning horizon. It won't go to zero but that’s in the numbers we have given.

Bob Krakowiak

All right, great. Well, thank you everyone. I would like to thank everyone for their participation. If you have any additional questions, please feel free to contact me at your convenience. I also want to encourage those of you on the phone to join us for the presentations this afternoon, focusing on our climate and electronics, products and technology. You can access the webcast from the investors section of Presenters will include Tim as well as the leaders of these core business, Y.H. Park of Halla Visteon Climate Control, and Marty Thall of Visteon Electronics. Those presentations will start at 12.15 p.m. and we will conclude with a panel Q&A that will also include Jeff Stafeil. And now I would like to turn it over to Tim for final comments. Tim?

Timothy Leuliette

I want to thank you all for joining us today. I think the excitement is before us so I won't speak too long here. We have built a business platform of growth, we have built a business platform of excitement. Out there are some of our leading technologists to take you through this so I am just going to turn over quickly to Bob and say let's kick off the next phase of this great day.

Bob Krakowiak

Thank you, Tim. That’s concludes our financial results presentation.

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