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Visteon Corporation (NYSE:VC)

Q2 2011 Earnings Call

August 4, 2011 11:15 am ET

Executives

Michael Lewis – VP, Treasurer and Director, IR

Don Stebbins – Chairman and CEO

Bill Quigley – EVP and CFO

Analysts

Himanshu Patel – JPMorgan

Kirk Ludtke – CRT Capital

Jason Alper – BTIG

Colin Langan – UBS

Operator

Good morning and welcome to the Visteon Second Quarter 2011 Earnings Call. All lines have been placed on listen-only mode to prevent background noise. As a reminder, this conference call is being recorded.

Before we begin this morning's conference call, I’d like to remind you that 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 forward-looking statements. Please refer to the slide entitled 'forward-looking information’ for further information.

Presentation materials for today's calls were posted on the company's website this morning. Please visit www.visteon.com/earnings to download the materials if you have not done so already.

I would now like to introduce your host for today's conference call, Mr. Michael Lewis, Vice President, Treasurer and Director of Investor Relations for Visteon Corporation. Mr. Lewis, you may begin.

Michael Lewis

Thank you, Alison, and good morning and thank you all for joining us for the Visteon’s second quarter 2011 earnings call. As Alison has stated, our review materials for today’s discussion were filed this morning with the Securities and Exchange Commission and posted on our website, visteon.com, the investor relations link.

Today’s presenters are Don Stebbins, Chairman and CEO and Bill Quigley, Executive Vice President and Chief Financial Officer.

Following the formal presentation, we will be happy to take your questions.

Now please turn to slide one, and with that, I’ll hand it over to Don.

Don Stebbins

Thank you, Michael and good morning. During today's presentation, I will review Visteon’s 2011 second quarter and then I will turn the call over to Bill Quigley for the financial review.

In the second quarter, consolidated revenues totaled almost $2.2 billion, an increase of 15%, which outpaced the growth in global vehicle production. Net income was $26 million or $0.50 per share, which included refinancing and restructuring charges of $43 million. Adjusted EBITDA was $201 million, up 21% from a year ago.

We ended the quarter with strong liquidity, $861 million in cash and debt of $596 million, translating into a net cash position of $265 million. Our $220 million asset-backed revolving credit facility also remains undrawn.

During the quarter, we were awarded over $250 million in incremental new business across all of our product lines and in all regions of the world. This continues our steady track record of new business success.

For the full-year 2011, we are increasing our product sales guidance and moving our adjusted EBITDA guidance to the high-end of our prior range.

Slide three presents our consolidated product sales by product line, region and customer. At the bottom right of the slide is our market penetration by customer which includes both consolidated and non-consolidated revenues.

In the second quarter, Visteon’s consolidated product sales totaled $2.2 billion. Adding in our second quarter un-consolidated joint venture sales of over $900 million, our market penetration increased to $3.1 billion for the quarter.

Climate, our largest product line, generated 48% of our total consolidated sales in the quarter with Interiors, Electronics and Lighting accounting for 30%, 16% and 6%, respectively.

On a market penetration basis, Interiors was our largest product line accounting for 43% of our sales, largely due to Yanfeng, our non-consolidated JV in Asia. Climate represented 36% of market penetration followed by Electronics at 16% and Lighting at 5%.

On a regional basis, Asia accounted for 41% of total consolidated product sales, up from 39% a year-ago, while Europe represented 37%; North America 15%; and South America 7%.

Including our non-consolidated affiliates, Asia increases to 57%, while Europe, North America and South America represented 27%, 11% and 5%, respectively.

Hyundai-Kia and Ford accounted for about 32% and 28% of our second quarter sales, respectively with both Renault-Nissan and PSA generating 7%.

As highlighted at the bottom right of the slide, on a market penetration basis, Ford and Hyundai-Kia each contributed 22% of our sales followed by VW at 11% and GM and Renault-Nissan which each accounted for 7% of our revenues.

Slide four provides our sales distribution on a year-to-date basis. Year to date Visteon’s consolidated product sales totaled about $4.2 billion. Adding in our unconsolidated joint venture sales of over $1.8 billion, market penetration for the first half of the year increased to about $6 billion.

Slide five highlights Visteon’s sales growth in the second quarter. The left side of the slide shows both our sales on a consolidated basis and on a market penetration basis. Visteon’s consolidated sales increased by 15% year over year, while our market penetration grew by 19%.

Our second quarter sales outpaced industry vehicle production volumes which declined 1% over the same period as highlighted on the right side of the slide.

It should be noted the overall market decrease is explained by lower Japanese production, which was down 36% versus the second quarter of 2010. If Japan production is excluded from the total, the overall market increased by 4% year over year.

After five consecutive quarters of increasing new business wins, the second quarter of this year fell about $50 million short of another increased quarter.

Our new business wins for the quarter of $259 million gave us a six-month total of $563 million, only $43 million less than the full-year of 2010. Clearly, our emergence from Chapter 11, our strong balance sheet, our technology and our global footprint are proving to be valuable in the competition to win new business.

In late June, we announced that we had taken the difficult decision to close our Electronics facility in Cadiz, Spain. While this plant had been an important facility for Visteon, the absence of new business programs to replace the current order book required this extremely difficult and unfortunate decision.

We are working diligently with the local unions and government authorities regarding specific closure arrangements and are targeting resolution during the fourth quarter of this year.

In the second quarter, we recorded a $21 million charge based upon the statutory minimum amount of severance and termination benefits. Ultimately, this amount will be determined by the final closure agreements reached with the various constituencies.

I would now like to turn the call over to Bill.

Bill Quigley

Thanks, Don and good morning, ladies and gentlemen. Slide eight provides summary of our 2011 second quarter financial results and a comparison to the second quarter 2010. Year to date results are included in the column at the right as well.

During the course of my presentation, I (inaudible) a number of these items, I would like to take the time to highlight a few items on the summary now.

Second quarter 2011 product sales were $2.18 billion, $289 million or 15% higher from the second quarter a year ago.

Sales were higher across all products and regions, with our Climate business enjoying the largest increase, and on a regional basis, Asia Pacific providing the largest contribution.

On product gross margin and SG&A, we have highlighted several items that impact our reported results versus the impact on gross margin from the termination of OPEB plans in 2010.

Second item is reorganization related and other employee cost which impacted gross margin in 2010 and then SG&A in 2011. Product gross margin was $197 million for the quarter, $93 million higher than last year.

In 2010, our reported results included a net charge of $72 million mostly with OPEB and other items.

Taking into account these items, 2011 gross margin in the quarter was higher by about $21 million. SG&A expenses in 2011 totaled $111 million, compared to $88 million in 2010, an increase of $23 million. And expenses related to our reorganization and employee severance cost in 2011 totaled $5 million, much of the remaining change is attributable to currency, the amortization of intangibles, and increased non-cash compensation expense.

Second quarter 2011 net income was $26 million, including $43 million in charges for refinancing and net restructuring actions. In 2010, our financial results included a number of charges. $75 million for OPEB, $122 million related to post-petition interest expense and a reorganization cost of $39 million.

Adjusted EBITDA which excludes the impact of OPEB, reorg and other costs was $201 million for the quarter, $35 million higher than a year ago.

Lastly, free cash flow was a slight use [ph] in the current quarter as capital expenditures, working capital changes and restructuring Chapter 11 related payments offset earnings performance.

Slide nine provides comparisons of our product sales for the second quarter and year to date, as well a distribution of sales by region.

2011 second quarter sales totaled $2.178 billion, an increase of $289 million over 2010 and on a year-to-date basis sales totaled $4.151 billion, a year-over-year increase of about $460 million.

The bottom of the slide highlights the key drivers of the year-over-year changes. Sales, as noted, volume-mix increased sales by $192 million in the second quarter and $430 million – $431 million [ph] year-to-date reflecting an improved OEM production environment, as well as strong position for Ford and Hyundai-Kia.

Divestitures and closures lowered sales by $37 in the second quarter and on a year-to-date basis a $125 million. 75% of the year-to-date decrease impacted North America as we completed the exit of a number of Interiors and Electronic facilities in the first and second quarter of 2010, the balance related to the December of 2010 divestiture of a European Interiors facility.

Currency favorably impacted sales by $155 million in the second quarter, $173 million year to date, principally reflecting the weakening dollar versus most major currencies, including euro and Korean Won.

Finally, to the right of this slide, we have highlighted the year-over-year sales increases by product line, with all product lines experiencing increases, Climate provided the largest contribution both in the quarter and year to date.

Slide 10 highlights our product gross margin performance. Second quarter 2011 product gross margin was $197 million, $93 million higher than last year. As previously noted, 2010 gross margin included $75 in net charges (inaudible) the termination of OPEB plans partially offset by $3 million in customer restructuring reimbursements.

Adjusting for these items, product gross margin improved by $21 million. On a year-to-date basis product gross margin was $346 million, a $175 million lower than a year ago. Adjusting for the impacts of OPEB terminations and reorganization and our cost, product gross margin improved by $1 million.

The bottom half of the slide outlines the key drivers of the second quarter year-over-year change in product gross margin, excluding the impact of OPEB and reorganization, and other costs which are excluded from adjusted EBITDA.

The drivers of the $21 million improvement are highlighted in the graph at the bottom right of this slide. At the very bottom of the slide, the year-to-date impacts are provided as well.

As we did during our first quarter earnings call, we’ve highlighted the impact of customer commercial agreements and the impact of higher depreciation and amortization related to fresh start [ph] accounting at the left hand slide of the lower flow chart.

Recall in the first quarter, commercial agreements had negative year-over-year impact of $15 million. In the second quarter, commercial agreements provided a $6 million year-over-year improvement, partially offsetting the higher impact of D&A.

On a combined basis, these two factors lowered margin by $16 million in the second quarter and $40 million year to date.

The right half of the waterfall details our changes in gross margin. In total, excluding the impact of increased D&A and customer agreements, second quarter gross margin improved by $37 million year over year, volume, currency were both favorable impacts increasing margin by $40 million and $80 million respectively.

Net cost performance lowered gross margin by $21 million in the quarter. Customer pricing and commodity inflation, other recoveries more than offset the impact of material and manufacturing cost efficiencies achieved in the quarter.

On a sequential basis, operating efficiencies and cost recovery actions provided more than offset the pricing and commodities impacts and we’re expecting efficiencies to continue to increase in the second half of the year.

In this quarter, we have completed the transition of our segment reporting from a product group basis to a product line basis for financial reporting purposes.

Slide 11 as mentioned illustrates the changes in the supporting structure. As shown on the left hand side of this slide, under the previous product group structure, we reported financial results for three segments, Climate, Electronics and Interiors.

And while most of the company’s facilities exclusively manufacture a single product line, we have a number of larger facilities that manufacture multiple products. Under the product group structure, these facilities were previously assigned to a single segment based on the predominant product manufactured.

The financial results for multiple product line facilities that were previously assigned exclusively to either the Climate or Electronics product group will now be separated and reported in our product line basis and we will report financial results for four segments

Climate, Electronics, Interiors and Lighting.

We have included an appendix to this presentation, a recast of historical sales and gross margin on product group to product line for your convenience.

In the next several slides, we’ll briefly summarize the financial results for each of our product lines.

Slide 12 provides the financial summary for Climate. Selected financial metrics are provided at the top left of the slide, sales distributions by region and customer are outlined at the bottom left, and sales and gross margin comparisons are highlighted on the right of the slide.

Sales in the second quarter were $1.058 billion and gross margin was $94 million, or 8.9% of sales, both sales and margin improved versus first quarter results. Over half of Climate sales are in Asia Pacific and Hyundai-Kia and Ford are the largest customers representing 46% and 26% respectively of total second quarter sales.

As noted to the right, on a year-over-year basis, sales increased by $125 million in the second quarter and $240 million year to date, both volume and currency were favorable factors.

Gross margin, excluding the impact of OPEB terminations and reorganization items, decreased by $20 million in the second quarter and $34 million year to date when compared to last year.

The key drivers of the change are outlined at the bottom right of the slide. The entire decrease can be explained by the first two drivers, the impact of the non-recurrence of benefits associated with 2010 customer agreements and increased D&A resulting from the adoption of Fresh Start Accounting.

With our key performance drivers, volume, mix, currency and net cost performance on a combined basis were slightly positive for both the quarter and year to date.

Slide 13 summarizes the financial performance of Electronics. Sales in the second quarter totaled $351 million and gross margin was $38 million, or 10.8% of sales basically in-line with first quarter results. Almost half of Electronics sales were in Europe and almost half of its sales are Ford related.

On a year-over-year basis, sales increased by $41 million in the second quarter and $72 million year to date. Favorable volume and currency were partially offset by the impact of the closure of U.S manufacturing facility in the first quarter of 2010.

Gross margin, excluding the impact of OPEB terminations and reorganization costs increased year over year by $11 million in the second quarter and $16 million year to date.

The non-recurrence of benefits associated with 2010 customer agreements and increased D&A negatively impacted margin.

The other key performance drivers, volume-mix, net of divestitures and closures, currency and net cost performance improved gross margin by $16 million in the second and by $23 million year to date.

Slide 14 summarizes the financial performance of our Interiors. Sales in the second quarter were $677 million and gross margin was $63 million, or 9.3% of sales. Second quarter sales and margins did benefit from customer agreements which were minimal in the first quarter of this year.

On a regional basis, Interior sales are fairly balanced between Europe and Asia Pacific, and the four largest customers are Hyundai-Kia, Renault-Nissan, PSA and Ford.

On a year-over-year basis, sales increased by $96 million in the second quarter, $98 million year to date. Volume and currency were both favorable factors. Divestitures and closures were partially offset reflecting the impact of divestitures in North America in the first half of 2010 and the divestiture of a European plant at the end of 2010.

Gross margin excluding the impact of OPEB and reorg costs increased year over year by $28 million in the second quarter and $20 million year to date.

In the second quarter benefits from commercial agreements with customers totaled $24 million, $9 million higher than the same period in 2010.

Other key performance drivers, volume and mix, currency and net cost performance were also positive in the second quarter.

Slide 15 provides the summary of Lightings’ financial performance. Sales in the second quarter were $136 million, gross margin was $2million. Nearly two-thirds of Lighting are in Europe, with the remainder largely in North America. The largest customer is Ford, the General Motors, PSA and Volkswagen, all account for at least 10% of total sales.

Sales increased year over by $22million in the second quarter, on a year-to-date basis, $18 million.

Gross margin excluding the impact of OPEB and reorg costs increased year over year by $2 million in the second quarter and were slightly lower on a year-to-ate basis.

Favorable factors included lower D&A and higher volume that were offset by cost performance in both the first and second quarters this year, reflecting manufacturing efficiencies, launch costs and net commodity impacts.

Slide 15 provides the summary of SG&A expense for the second quarter and first half of 2011 and 2010. SG&A expense totaled $111 million in the second quarter of 2011, $23 million higher than the second quarter of 2010. Year-to-date SG&A was $230 million, $12 million higher than the first half 2010.

Like gross margin, SG&A was impacted by the termination of OPEB, reorg and other employee costs. And as highlighted here, the impact of these items increased second quarter 2011 SG&A by about $5 million. First half 2011 cost increased by $11 million compared with $14 million of expense in the first half of 2010.

Excluding these items, SG&A increased year over year by about $18 million in second quarter and $15 million for the first half of the year. The drivers of the change in SG&A are outlined at the bottom left of the slide. The increase is largely explained on currency, intangibles amortization related to Fresh Start Accounting and increased expense related to employee equity rewards.

As a percent of sales, excluding OPEB and reorg costs, SG&A improved from 5% in 2010 to 4.9% in 2011.

In the second quarter of 2011, net income of Visteon’s non-consolidated affiliates totaled $43 million, an increase of $8 million or about 23% higher than a year ago. Higher production volumes and favorable customer positions with SAIC, SVW and SGM drove significant growth in Yanfeng Visteon, its affiliates.

Year over year while the China market grew by 7% in the second quarter of 2011, Yanfeng Visteon sales grew on U.S. GAAP basis by about 24%.

At the bottom right hand side of this slide, we have provided a summary of YFV’s financial results on U.S GAAP basis. And on U.S. GAPP basis, YFV’s net sales rose to $739 million in the second quarter of 2011, representing $144 million increased compared to a year earlier. Net income of $63 million in the current quarter increased 29% compared to 2010.

As noted at the bottom of this slide and in previous discussions, Visteon drives equity income from two sources of YFV’s operation, the first being the 50% share interest at the parent level of YFV and the second from direct share ownership in certain Electronics, Interiors subsidiaries under YFV. Of the $40 million in total equity income from YFV in the current quarter, $31 million was derived from Visteon’s 50% ownership share at the parent level of YFV, an additional 9 million was derived from Visteon’s direct ownership share in certain YFV affiliates.

Slide 18 provides adjusted EBITDA comparisons for the second quarter. As noted in my previous comments, adjusted EBITDA excludes the impact of OPEB, restructuring and reorganization-related items.

Adjusted EBITDA in the second quarter of 2011 was $201 million compared to $166 million in the second quarter a year ago.

The key year-over-year drivers of the change in adjusted EBITDA for the quarter are summarized at the top right of the slide and reflect the comments I made earlier in the presentation. Adjusted EBITDA as a percent of product sales was 9.2%, 40 basis points higher than a year ago. On a sequential basis, adjusted EBITDA as a percent of product sold improved from 7.3% in the fourth quarter of 2010 to 8.1% in the first quarter of 2011 and now to 9.2% in the latest quarter.

Second quarter adjusted EBTIDA did benefit from customer commercial agreements which totaled about $24 million for the quarter, largely in our Interiors business. We do expect the impact of these commercial agreements will be reduced in the second half of 2011.

Cash and debt metrics are highlighted in slide 19. Free cash flow in the second quarter of 2011 was use of $1 million. Year to date free cash flow was use of $106 million. Cash from operating activities in the second quarter was $70 million. Adjusted EBITDA was partially offset by seasonal trade working capital outflows, cash taxes, payment of Chapter 11 related items.

Year-to-date cash from operating activities was $20 million, reflecting adjusted EBITDA performance, trade work from capital used, cash taxes and Chapter 11 payments, as well as employee performance, incentive payments which were made in the first quarter as highlighted on our first quarter call.

Capital expenditures were $71 million in the second quarter of 2011 and of this amount $50 million was in Climate, mostly driven by Asia, and primarily in support of future customer program launches and capacity expansion.

Year to date capital expenditures totaled about $126 million, about 65% of this in Climate and about half in the Asia Pacific region.

Cash balances, including restricted cash at June 30 were $861 million, down $40 million from March 31, primarily due to settlement and reorganization related professional fees, previously escrowed and included in restricted cash balances.

As Don stated, we are increasing our full year product sales guidance, moving our full-year adjusted EBITDA guidance to the high-end of our prior range which is highlighted on slide 20.

We already are affirming all other guidance items we provided during the first quarter earnings call. We are currently projecting full-year product sales in the range of $8 billion to $8.2 billion. Full year adjusted EBITDA is projected at $660 million to $680 million. And full year free cash flow is projected at a use of $175 million.

On the next slide, we provide (inaudible) from a product sales and adjusted EBITDA guidance we gave in the first quarter to our now current outlook.

Slide 21 provides the key drivers of the change, the discounts [ph] product sales and adjusted EBITDA guidance. The top half of the slide details the drivers of the $300 million increase in product sales guidance, $7.8 billion to the mid-point of $8.1 billion. The bottom half of the slide details key changes impacting the mid-point of our adjusted EBITDA guidance of $670 million.

Product sales and adjusted EBITDA benefiting from favorable currencies versus our prior expectations, most notably a strengthening Korean Won and euro. As we have noted in the past, strengthening of the Korean Won increases our sales, yet has a negative impact in Visteon’s overall profitability.

In addition, we are forecasting increasing pass-through content sales, primarily Interiors for the rest of year, which we expect will have a nominal impact on adjusted EBITDA.

Next, we have updated our guidance for the full year impact we expected from Japan. During our first quarter earnings call, we estimated that natural disaster in Japan would negatively impact our sales and adjusted EBITDA by about $70 million and $50 million respectively. Now, through the second quarter, we expect the full year impact to be largely minimal.

Lastly, we expect margins will be impacted further by commodity cost increases, net of our recovery actions. We are working diligently to minimize this impact with both our suppliers as well as our customers.

This concludes my presentation. And Don and I are happy to take any questions you may have.

Question-and-Answer Session

Operator

Your first question is from the line of Himanshu Patel with JPMorgan.

Himanshu Patel – JPMorgan

Hi, good morning, guys.

Bill Quigley

Good morning.

Himanshu Patel – JPMorgan

A couple of questions. It looks like that the operating profit level, just excluding the restructuring charges, your incrementals sequentially from the first to second quarter, they were about $0.16 on the $1, can you just help us think about that in the third quarter sequentially, given all of the seasonality on production, particularly with Europe going down?

Bill Quigley

Himanshu, it’s Bill. As we look to the first half versus second half and my comments as well on guidance, sequentially we would look obviously to, from our net cost performance perspective, to be slightly breakeven, if not positive, in the second half. So, your point, the third quarter, always with respect to production, vacation schedules, if you will, in Europe. So, we expect, while it will be diminished, if you will, our performance to date in the third quarter will be an uptick in the fourth quarter. So, we do not expect to be net breakeven in the third quarter.

Himanshu Patel – JPMorgan

I mean, I’m sorry, what would you mean exactly by net breakeven, at what level?

Bill Quigley

If we looked at the level of our current production with respect to what we are expecting for the third quarter, the first half, first second half on our net cost performance line to the second half, we would expect to see an improvement there and the third quarter is going to be diminished by lower volumes.

Himanshu Patel – JPMorgan

Understood. Okay. Can you just so we can get all the puts and takes on the walk correctly, where there any major commercial agreements, pluses or minuses in the year ago quarter, sort of Q3 and Q4?

Bill Quigley

I mean, Q3 and Q4, as we move forward for – and there will be agreements, impacts, if you will, in 2011. For the rest of year, we expect in the current year that above $15 million in the third and fourth quarter in total, so for the second half, a year ago, there was a benefit of about $12 million in the third quarter.

Himanshu Patel – JPMorgan

So, net up $3 million favorable.

Up $3 million, correct.

Himanshu Patel – JPMorgan

Fine, okay. And then just on YFV, you’ve got this, at least, on US GAAP basis, 25% revenue growth which is – China market grew 70%, I am just curious as you guys look at the kind of backlog in that business, is that sort of outperformance relative to the market by a factor of three or four, does that continue for the next – for the foreseeable future or are we kind of a in a extraordinarily strong growth curve that sort of starts moderating and then moves more in tandem with the industry next year?

Bill Quigley

To go forward, with respect to looking at 2012, with respect to YFV obviously being a subsidiary of a public company, I do believe there has been extraordinary growth in YFV over the last several years, not only from a content per vehicle, but also just expansion of the business with the automotive goals. I think it will ultimately even out, I think which we’re seeing in the recent performance in some cockpit assembly revenue, our material line. I think, overall, I think you will see that start to pencil down in the out years.

Himanshu Patel – JPMorgan

Okay. And then just lastly a question for Bill or Don, there has been – you guys have indicated a lot of comments at your Analyst Day about cash use and why you may now want to buy the stake immediately, and I think you’ve alluded to acquisitions as part of that, I am just curious, what are you – first of all, how active are those potential opportunities on the acquisition front? And number two, could any of these big or are all of these bolt-on acquisitions?

Donald Stebbins

Himanshu, it’s Don. What we stated is that we thought that there would be activity in the M&A environment over the next two to three years and that we wanted to be in a position that we would take advantage of that and that we would participate in that in a thoughtful and disciplined way. And so, from that perspective, we are adhering to that discipline and as we look at opportunities to both acquire as well as divest.

Himanshu Patel – JPMorgan

So, basically nothing in M&A and just you want to?

Donald Stebbins

It’s important to us to maintain the flexibility that we have.

Himanshu Patel – JPMorgan

Okay. And then, I’m sorry, just one more, if I could sneak in a housekeeping, on slide in the electronics segment, I noticed, Bill, there is a $10 million currency benefit at the gross margin line on $26 million currency related revenue uptick, that’s quite a large drop through for what I would have thought is FX translations over this and hedging, is there something weird going on there?

Bill Quigley

As I said, there are some hedging gains in there, but it’s fairly diminished obviously, given its exposure to Europe. You did a pretty through with respect to currency impacts.

Himanshu Patel – JPMorgan

Okay. Great, thank you.

Operator

Your next question is from the line of Kirk Ludtke with CRT Capital.

Kirk Ludtke – CRT Capital

Good morning, everyone.

Donald Stebbins

Morning, Kirk.

Kirk Ludtke – CRT Capital

I guess following up on the contribution margin theme, given there is so much in this in Asia, would – should we apply an above average contribution margin to the backlog?

Bill Quigley

I mean – Kirk, this is Bill, I’m sorry. You are asking with respect to the business ones?

Kirk Ludtke – CRT Capital

Yes.

Bill Quigley

Yes, from a new business line perspective.

Kirk Ludtke – CRT Capital

Yes.

Donald Stebbins

Yes, I think the financial performance of the backlog will be stronger than the current programs as they come on. However, as we outlined in the Investor Day by product line, the capacity utilization in Asia is at a higher level than in other spots in the world. So, there is going to be additional investment there to co-owns a lot of that programming.

Kirk Ludtke – CRT Capital

Okay. With respect to the Spanish facility, are those products going to be transferred to other Visteon locations, or do you wind those or would you exit that – those products altogether so that whatever $150 million, $200 million in revenue, does that go away, and if so, over what period of time? Could you give us a sense what the margins are?

Donald Stebbins

By the way, I won’t give you a sense what the margins are, but it’s essentially both, a number of those programs have been transferred to other Visteon locations where they’ll run out there and then some have already – are already running out as speak. As we’ve entered the summer period here, as you know, a number of the programs, and OE programs transfer over at this time of the year/. And so that’s really the impetus for the facilities, the significant loss of programs in this time period right now.

Kirk Ludtke – CRT Capital

Okay. I guess really asking in another different way, is this a facility that’s losing money such that, it’s an addition by substration.

Donald Stebbins

No, it’s – the history of this facility is that it’s not – it has not been a money loser. We used to in the older days – had product in it that was very profitable for the company. This is clearly just a situation where we do not have product to put in as these programs wind themselves down.

Bill Quigley

So, Kirk, this is Bill. In a nutshell, what you are looking at is, a large facility obviously employees and a product line that we are obviously not necessarily high positioned it. So what is occurring here is that order book has been going down over time. There is not follow-on business to go into that facility and given the size of magnitude of that business or that facility. Any business that we have is much better suited for smaller facilities as we look to run up a business over time.

Kirk Ludtke – CRT Capital

Okay, great. Thank you. And I just had a follow-up to the earlier Himanshu’s question about the commercial agreements, was the idea there that you – the second half – the second half bridge will drag from commercial agreements of $12 million?

Bill Quigley

If you look from first to second, there will be a drag sequentially.

Kirk Ludtke – CRT Capital

(inaudible) sequential bridge and how about the year over year bridge?

Bill Quigley

Year over year will still be a drag. So from a year ago, we had about $45 million, $46 million in commercial benefits largely around, what I call, accommodation agreements pursuant to the bankruptcy and then on a full year, here we are looking at about $40 million – $39 million to $40 million.

Kirk Ludtke – CRT Capital

For the full year?

Bill Quigley

For the full year.

Kirk Ludtke – CRT Capital

And you had about $9 million in the first half?

Bill Quigley

The first half and our first half results, we had $25 million.

Kirk Ludtke – CRT Capital

Okay. Let me also revisit that. Okay, great. Thank you.

Operator

Your next question is from the line of Jason Alper with BTIG.

Jason Alper – BTIG

Hi, good afternoon. Congratulations on a great quarter.

Donald Stebbins

Hi, Jason.

Bill Quigley

Hi, Jason.

Jason Alper – BTIG

A question regarding your guidance, it looks like you revised your revenue guidance up for the year by about $300 million, but your EBITDA guidance is only up by $10 million, is there anything we should into that? Obviously, that’s a lot lower than the prevailing margins throughout your business.

Bill Quigley

Yes, this – I mean, this is Bill. I think if you take a look at our first half performance first half performance with respect to EBITDA probably at about 8.7%. If we look through our seasonality, our first to second halfs, first half has always been a stronger half for us. Second half will be somewhat diminished. And I think if you take a look at that $4.2 billion and assume our $8.1 billion. We are looking at about a $300 million reduction sequentially, first half to second half. There is going to be a contribution margin impact on that. I think also, if you look to Kirk’s question on commercial agreements, first half to second half. There is a net drag. And so, the first half ate about $25 million in commercial agreements; second half, about $15 million or $14 million is expected. So that is going to drive about 40 bps first half to second half.

And the other piece, as we look to our SG&A and R&D functions and capabilities, we are looking at a fairly stable environment first to second half. So, as we see obviously a drop-down on sales versus second half, there will be somewhat of a margin from adjusted EBITDA percentage as well.

Jason Alper – BTIG

Tell me about the revenue bump you this quarter, I believe it was $250 million of incremental new business, is that right?

Donald Stebbins

That new business wins in the quarter.

Jason Alper – BTIG

Is that $250 million, is that a net number, or is that a gross number, by the way?

Donald Stebbins

It’s a new business win, so on a gross basis, it would not include any business losses.

Jason Alper – BTIG

Okay. Is there a net number that you can provide and also, if you can comment on whether that level of win is transferrable on the quarters’ head or is it a one quarter type of event?

Donald Stebbins

Well, I mean in terms of the new business wins, we had a little over $300 million in the first quarter. So, this is a little bit shy of that. I will say that given, as I mentioned in my comments the fact that we’ve emerged, that we’ve got a strong balance sheet. We have a technology portfolio that fits where the customer is going as well. And then, we also have our global footprint. The amount of quotes that we are seeing and participating in is much, much higher than it has been in the past few years. So I would expect that we continue to win new business kind of in this level.

Now, again, certainly I caveat all that with – the awards come and the awards come, we don’t control that, it’s sourcing decisions by the OEs and I don’t know exactly how those fall in terms of per quarter as we look out. But we are very, very pleased with how we’ve done this quarter.

Jason Alper – BTIG

Okay. And the new business wins, how does that compare when you look out with regards to business and how is that match up?

Bill Quigley

If you look at – this is Bill – if you look at our revenue streams. You think about contracts in general about five years. You got to be replacing, if you will, if there are replacement programs, let’s say about %1 billion or so as you kind of move forward. So, from that perspective that’s kind of that re-win, because you’ve got programs that roll off. So, from a perspective, that’s kind of the bug you’ve got out there.

Donald Stebbins

Jason, these are new business wins. So this is business that we currently do not have in a portfolio. Actually, the portfolio, it’s currently a program that we don’t have – or we are not incumbent on.

Jason Alper – BTIG

So these are a new bit rate. What I was trying to get at is, are there any significant losses that you can anticipate coming forward that you can disclose or talk about?

Donald Stebbins

Yes, not that we have today, and so, I guess where you are driving to us, you are trying to drive towards the backlog which we’ve always stated we do once a year. And so, it’s a difficult stake that statement.

Jason Alper – BTIG

Fair enough. Thank you very much.

Operator

(Operator instructions) Your next question is from the line of Colin Langan with UBS.

Colin Langan – UBS

Good morning.

Donald Stebbins

Hey, Colin.

Colin Langan – UBS

I had a question on the – we are talking about the commercial agreements, how long do these payment wind-down business continue. I actually thought I (inaudible)

Bill Quigley

There are two sources, two sources, you’ve got two sources of these. A year ago, obviously being in Chapter 11 and in particular in North America, we were able a number of businesses, plans so and so forth. We had accommodation agreements. So those agreements were obviously with customers for which we were largely exiting a number of plants in North America. That’s was under the Chapter 11 process. Concurrently, we are always going to have some promotional agreement settlements with customers. So, first on that this year is that. But the other piece of it Colin is and we talked a bit about this in Europe, while not under US umbrella, if you will. There had been some fairly significant restructuring of the business relationship within our interiors product group and that business relationship with customers they serve.

So, there has been some ongoing business arrangements that are benefitting 2011, there was some benefit action in 2010 and probably we’ll continue to benefit in 2012 moving forward.

Colin Langan – UBS

When you are restructuring the relationships, I mean, you’ve changed the pricing terms of the contract. Are these by permanent or these are one-time type payment?

Donald Stebbins

These are more – they are chunky in terms of quarters, but they are a – are going to be from our perspective certainly ongoing in terms of that product and represent, reimbursement of expenses as well as pricing, etcetera. It runs the gamut of the commercial relationship.

Colin Langan – UBS

Okay. And I haven’t gone through the changes, but the – I mean, it looks like they actually have – what happened with the new product lineup, which become bigger and which become smaller from the recent alignments, I would say electronics (inaudible)?

Bill Quigley

Right, Colin, it’s Bill again. If you – and we know we provided a lot of information with this transition, but we think it’s a very important transition not only for the company, but for the market with respect to oppositions in various product lines, if you will. So, lighting was carved out of electronics, right. By that, to your point, that would diminish the electronics business. Concurrently, they were also carved out by the electronics business that went to climate. So, climate got larger, lighting came up, electronics got smaller, interiors (inaudible)

Colin Langan – UBS

Okay.

Bill Quigley

And you can seen that in the appendix once you have an opportunity to do that, and we bridge the product group to product line for you.

Colin Langan – UBS

So, with that carved out is now a smaller percent of your climate revenue because there is now more consolidated (inaudible) in that division?

Bill Quigley

Correct.

Colin Langan – UBS

Okay. And then – I mean, I am not sure if I missed those (inaudible), the large swing in interiors, the 9.3% gross margin, I mean, obviously it looks like the commercial agreement helps, but that’s well above your 2014 margin guidance for that segment, so how should we think of interiors going forward, I mean is this 9%, 8%, 9%, is it same for – on the near term?

Bill Quigley

Yes, I think if you take a look atto your point, $677 million in sales, $53 million in gross margin drives the 9.2% gross margin performance in the quarter. In my comments and in this discussion, there was a benefit of about $25 million – in the quarter on that $24 million. So, if you exclude that on a year-to-date basis, it is running higher above 5% or so, our gross margin from where it has been. Again, this is a business we’ve continued to spend a lot of time and effort on with respect to its run rate and to Don’s comment with respect to moving forward, it’s going to get choppy, it’s going to be chunky because we are in a process with the customers over time to better improve that business.

Colin Langan – UBS

Okay. I mean, the $24 million, because it – on the 514 [ph], instead of commercial agreements of $9 million, the $24 million is a different number.

Bill Quigley

$24 million is the absolute, the $9 million is the variance to the prior year.

Colin Langan – UBS

Okay, $9 million. Okay. Alright. And then, just lastly – well, yes, just lastly, I mean, looking at your EBITDA guidance, I mean, the first half, it looks like it’s up around $30 million or $35 million year over year. Your guidance did imply it’s up only $20 million in the second half. So, what are the major items that would sort of slow the rate of improvement for the second half?

Bill Quigley

I think I tried to highlight some of that with respect to second – with respect to the topline. Obviously, the benefits of commercial agreements will be a headwind to feel first to second. And I am still overall positive. And I think the third thing with respect to lower sales volumes, we look to see probably a stable environment from an engineering perspective, as well as SG&A first to second, just going to be a obviously a pressure on margin percentages and absolutes in the second half.

Colin Langan – UBS

And commodities, is there any change?

Bill Quigley

You see we provided an update with respect to from our prior outlook.

Colin Langan – UBS

Yes, that’s right. Yes.

Bill Quigley

We got the net $10 million amount. It’s really a – you think about it, it’s kind of (inaudible) which we are expecting customer coverage of $30 million. So, we are kind at $6 million, plus if you already expect a minus $10 million

Colin Langan – UBS

And what – year to date, how much has commodities been a headwind?

Bill Quigley

Commodity has been a headwind of about $15 million year to date.

Colin Langan – UBS

Okay. Alright. Thanks for taking my questions.

Donald Stebbins

Thanks.

Bill Quigley

Thanks.

Bill Quigley

There are no further questions at this time. Mr. Lewis, you may proceed with any further comments or closing remarks.

Michael Lewis

We just would like to thank everybody for joining us in today’s call. And Alice, we can go ahead and close the line down now. Thank you.

Operator

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

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