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Visteon Corp. (NYSE:VC)

Q2 2008 Earnings Call

July 30, 2008 9:00 am ET

Executives

Derek Fiebig - Director of IR

Don Stebbins - President and CEO

Bill Quigley - EVP and CFO

Mike Johnston - Executive Chairman

Analysts

Joe Amaturo - Buckingham Research

Chris Ceraso - Credit Suisse

John Murphy - Merrill Lynch

Patrick Archibault - Goldman Sachs

Jeff Skoglund - UBS

Mark Warnsman - Calyon

Kirk Ludtke - CRT Capital

Operator

Good morning and welcome to the Visteon second quarter 2008 earnings conference 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 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 statements' for further information. Presentation materials for today's call were posted to the company's website this morning. Please visit www.visteon.com/earnings to download the material if you have not already done so. After the speaker's remarks there will be a question-and-answer period.

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

Derek Fiebig

Thanks, Regina and good morning, everyone. On today's call Don Stebbins, our President and Chief Executive Officer will provide a business overview. Then our CFO, Bill Quigley will review the financials. And after that we will take your questions. Also joining us in the room today is our Chairman, Mike Johnston. With that I will turn things over to Don.

Don Stebbins

Thanks, Derek and good morning everyone. During today's presentation I will provide a brief look at the global market and an overview of our second quarter and first half performance.

As you'll see throughout today's presentation our geographically diverse sales base, our restructuring activities, and our focus on improving our cost structure are enabling us to show improvement in our financial results despite a very challenging market.

Additionally our recently completed debt transactions were both excellently timed and now provide a debt structure with minimal maturities through June of 2013, and combined with our current cash balance of $1.5 billion provides us with sufficient cash and liquidity to run our business and implement our plan.

As we look at the remainder of 2008, there are significant challenges ahead. However, based upon our first half performance and our outlook for the next six months, we are maintaining our full year EBIT-R and free cash flow guidance.

Turning to slide 2, as you know global production levels vary greatly on a regional basis. In North America, the market is going through a significant volume downturn as well as a significant shift in product mix. Europe remains fairly stable with pockets of weakness in some Western European countries offset by growth in Eastern Europe, while Asia continues to grow.

Commodity cost pressures are high and volatile and are not expected to abate in the near future. Our most significant exposures are in aluminum and resin. Aluminum market prices have been fairly stable this year, while resin costs have increased significantly and we continue to work with our customers and our suppliers to reduce the impact of these increases.

Despite this difficult environment, our first half results significantly improved over last year. During the quarter we improved our margin substantially and excluding onetime items, each of our product groups improved their performance. Our steady progress on our restructuring plan, our focus on reducing overhead costs, and our drive to improve our operational efficiency are paying off.

Additionally, as we will detail later, our restructuring efforts are slightly ahead of plan and we have taken additional actions to offset some of the macroeconomic issues.

Turning to our second quarter highlights on slide 3. Product sales were down about $50 million to $2.8 billion, as divestitures in North American production declines were offset by favorable currency and sales growth in Asia.

Gross margin for the second quarter 2008 increased 49% from a year ago to $231 million as we hit solid performance in the quarter, while our operating income increased nearly five-fold to $53 million. Despite higher restructuring costs and significantly higher book taxes, we narrowed our net loss by $25 million to $42 million.

EBIT-R was $78 million for the quarter, an improvement of $63 million from second quarter 2007, and for the quarter we generated $53 million of free cash flow. As of the quarter end, we had $1.5 billion of cash, as well as additional untapped liquidity under our existing facilities of approximately $280 million.

The second quarter was a quarter in which Visteon continued to show solid performance and although the markets have become more difficult, we continue to progress toward our goal of becoming free cash flow positive and profitable.

Slide 4 presents our consolidated product sales by customers for the first half of 2007 and 2008. Overall, sales were down about $70 million from last year despite a large decrease associated with divestures and closures of facilities which totaled $222 million. New business in Asia and favorable currency were offsets, and as been our trend, we continue to have a fairly significant shift in the composition of our sales.

Global sales to Ford declined by nearly $300 million and represented 34% of our total. Our sales to Ford North America declined 5 percentage points to 11% of total, and we expect this to continue to decline in the second half of the year.

Our Hyundai/Kia related sales increased significantly growing from 19% of our total last year to 21% of our total this year. This increase was driven by higher production volumes in Korea, as well as global expansion in China and Turkey.

Regionally sales in Europe were up for the first half of the year as volume and currency more than offset the impact of divestures. North America declined by 5 percentage points on lower Ford and Nissan volumes, and North America now accounts for only 25% of the company's total sales.

Our Asian sales increased 6 percentage points and now represents 29% of total consolidated sales as they grew by $227 million to nearly $1.7 billion.

In the bottom of this slide is the regional split of our non-consolidated sales. Total joint venture sales were $970 million for the first half, up $776 million from a year ago. Our Asia joint ventures had significant growth increasing 24% or nearly $200 million to more than $800 million for the first half and our joint ventures are profitable.

Gross margin was $165 million for the first half and net income was $60 million, $30 million of which was our share. This represents a 30% increase over last year. As you can see, we are much more diversified and we expect to continue to capitalize on our strong position in Asia, and to continue our growth of business in this region.

Slide 6 presents our product group sales on a consolidated and non-consolidated basis. For our consolidated sales, the most significant year-over-year changes were the reduction in our non-core segment which declined from 17% of the total in 2007 to 7% of total so far this year. This decline reflects our divestiture activities and will further decline in the second half due to the sale of Swansea. All of our core product groups have increased sales year-over-year.

Slide 7 shows our new business so far this year. Wins for the first half of 2008 were $265 million. Climate made up 38% of the wins, Electronics were about one-third of the total with the balance in Interiors. From a geographic standpoint, 40% of the wins were from Asia, including $50 million of wins in India. Europe was 27%, South America was 9% with the balance in North America.

Total wins through the first half are slightly below last year and below our own expectations, as many of our customers are taking an additional look at their future product plans which has shifted their decision making into the back half of this year. Despite this delay, and the cancellation of some programs, we remain confident that we will achieve our internal incremental new and re-win targets.

Slide 8 provides an update on our operations. For quality, we continue to improve as we lowered our year-to-date PPMs by 40% from full year 2007. For safety, we used lost time case rate was one of our performance metrics. For the full year 2007, our lost time case rate was 0.17 which was, if not best in class, certainly close. So far this year we're at 0.23 due to a number of slip and falls, and we fully expect to be under 0.2 by year end.

Premium costs are down significantly from what we experienced in 2007. For the first half premium costs were $10 million, down from about $29 million a year ago. Last year we had a number of labor, launch and supplier issues that contributed to higher premium costs and we are realizing a year-over-year improvements that I highlighted in January.

Finally, CapEx spending of $154 million was slightly higher than last year, largely reflecting spending on new business. However, we still expect full year capital expenditures in 2008 to be about $310 million as compared to $376 million in 2007.

Slide 9 provides an update on our overhead cost reduction initiative which we announced in January. Over the next three years, we expect this initiative to provide $250 million of gross cumulative savings, as we further address our SG&A and engineering expenses.

We expect about $80 million of net savings this year from this initiative. We have reduced our cost in the first half from 2007 levels by more than $55 million which represents a 10% reduction despite currency translation challenges.

The weaker U.S. dollar does make it more difficult. However, we are still on track to deliver these savings. This initiative is a significant priority for us, and we will continue to take the actions required to make Visteon a leaner and more efficient supplier.

On the restructuring front, we completed the closure of two fuel tank facilities in Germany, and we cease production at our Indiana facility in the second quarter. Our Missouri facility ceased production in July. Taken into account actions taken to address the UK, we have completed 27 of the 30 restructuring actions we had originally identified and are already ahead of the 26 we have planned on completing by the end of 2008.

By year end, I expect to have 29 of the 30 facilities addressed. We are also taking actions in addition to the three-year plan, including the divestiture of our North American after-market business and the announcement last month that we will be closing our Durant, Mississippi interiors facility and consolidating that work into other plants.

Turning to the sale of Swansea on slide 11. The sale of the Linamar was completed on July 7 and represents a significant milestone in our restructuring of our U.K. business. In 2007, our Swansea plant had sales of about $80 million and a negative gross margin of about $40 million. Our second quarter results reflect $32 million of losses related to this sale, with the remaining balance to be recognized in the third quarter.

Additionally, customer agreements are now in place to mitigate the manufacturing losses at three of the remaining U.K. manufacturing facilities. Last fall, we highlighted the significant losses in our U.K. operations and indicated it was our top priority to address these operations during 2008. With the sale of Swansea, and the agreements with our customers, we are delivering on this commitment.

Slide 12 provides an overview of our sales by region, market trends, and what we expect for the second half of the year. We expect sales to be about $4.5 billion in the second half, which is $1 billion lower than the first half for the year and will result in full year sales, $100 million less than we had projected on our first quarter call.

Europe is expected to make up 42% of second half revenues as production in total is projected to be flat year-over-year, Western Europe should be stable to slightly down with Eastern Europe increasing.

In Asia, production is expected to continue to increase and the region should represent one-third of our total sales in the second half. In North America, we anticipate additional declines in production with recovery not expected in the near-term and sales are expected to be about one-fifth of the total in the second half. Finally, for South America, we expect stable production levels for the second half.

So in summary, despite the substantial challenges in the North American market, the significant volatility in commodity prices and the stress that these facts have caused in the Tier 2 and Tier 3 supply base, we've had substantial improvement in our first half results due to our geographically diverse sales base, the success of our restructuring efforts, and the cost and efficiency improvements in each of our product groups.

The back half of the year will provide significant challenges but by continuing to aggressively address our costs, engaging with our customers and our suppliers, and progressing our restructuring plan, we are maintaining our full year EBIT-R and free cash flow guidance.

I'll now turn over the call to Bill.

Bill Quigley

Thanks, Don and good morning, ladies and gentlemen. Slide 14 provides a summary of our second quarter financial results. Product sales of $2.78 billion were essentially even to the prior year, yet as Don just reviewed, we continue to experience a shift in the composition of our sales across customer, product group and region.

Our product group gross margin for the quarter was $230 million compared to $154 million a year ago, a $76 million improvement. EBIT-R was positive $78 million for the quarter as compared to $15 million a year ago, an improvement of $63 million. Cost improvements on our product groups, including restructuring savings, as well as other actions we are taking to address our cost profile, drove much of the improvement in EBIT-R.

The second quarter also reflects a curtailment gain from employee post-retirement benefits related to the closure of the Bedford facility, which we've discussed in the past.

Our net loss for the quarter was $42 million, and improved by $25 million compared to 2007 despite the $18 million of net on a reimbursed restructuring costs and an increase in income tax expense of $21 million. Free cash flow in the quarter was positive $53 million, compared with $66 million in the prior year.

Turning to first half 2008 financial results on the following slide, for the first half of 2008 our product sales are $5.52 billion, were lower by $71 million from a year ago. However, on lower sales our product gross margin increased by $155 million to $424 million. And EBIT-R of $129 million, compared to a loss of $31 million in 2007 represented an improvement of $160 million.

Despite an increase in tax expense of $55 million and $41 million of restructuring expenses that were not funded by the Escrow Account, our net loss narrowed by $73 million to $147 million. Free cash flow was a use of $147 million for the first half, compared with $129 million a year ago.

Echoing Don's comments, our first half financial results reflect a solid improvement over the prior year and are indicative that our restructuring and cost reduction efforts are taking hold despite a weakening in production environment in North America. I will address each of these items in further detail in the following slides.

Slide 16 outlines the production volume performance of our key customers for the second quarter and first half as compared to the prior year. These production volumes reflect vehicle platforms for which Visteon derived significant sales. Two customers, Ford Europe and Hyundai/Kia represented approximately 40% of Visteon sales in the first half of 2008, and both enjoyed increased production year-over-year.

Ford Europe production volumes were up 11% for the second quarter and 7% for the first half. Hyundai/Kia production increased by 17% in the second quarter and 22% year-to-date. The remaining five customers experienced production declines for both the second quarter and year-to-date. In total, these customers accounted for about 25% of our first half sales.

Ford North America sales were $616 million, and production was lower 15% in the second quarter and 11% in the first half. PSA was down 6% to-date and Nissan Truck production was lower by 21% with each of these customers representing about $300 million of sales in the first half of the year. And then, finally, GM/Chrysler platforms for which we have content were lower by 6% and combined for about $175 million of sales.

Slide 17 looks at our product sales for the second quarter by region. Although sales were essentially flat, there was a significant shift between regions. Sales in Europe, Asia increased by 5 and 3 percentage points respectively, while sales in North America declined by about 7 percentage points.

As you've become accustomed to, the bottom of the slide provides the drivers of the change in sales on a year-over-year basis. Currency and the impact of our restructuring activity significantly impacted sales. Variable currency increased sales by $163 million reflecting the weak U.S. dollar, while divestitures and plant closures decreased sales by $222 million.

Divestitures include the sale of the European chassis business and the starters and alternators business in India which we completed in 2007, as well as the North American after-market business which was completed in January of this year. These three divestitures account for $125 million of the change. The remaining change relates to plant closures including those completed such as Chicago, Chesapeake and Connersville, as well as plants expected to be addressed into our restructuring plan.

Excluding currency divestitures and plant closures, sales in North America were lower than a year ago, principally reflecting lower Ford and Nissan North America production. Sales in Europe and South America were slightly ahead of last year, and our Asia sales increased by $97 million. As you can see, this slide further highlights the fact that the geographic distribution of our sales has been a mitigating factor against the mounting challenges of the North American market.

Slide 18 provides gross margin comparisons for the second quarter. Product gross margin in the second quarter of $230 million was $76 million higher than a year ago, and as a percent of sales increased $290 bases points from 5.4% a year ago to 8.3% this year. In the quarter, gross margin was impacted by a number of factors that were largely restructuring related.

Divestitures and plant closures reduced margins by about $21 million, while restructuring related items increased margin in the quarter by $23 million. The most significant item included in this category in the current period is a curtailment gain related to the closure of our Bedford facility of about $25 million. As we have highlighted in previous updates, we also include in this category the impact of items such as accelerated depreciation expense as well as asset dispositions.

In total, volume and mix for the quarter were slight positives as the performance in Europe and Asia helped to offset the sales decline in North America. Currency was favorable $43 million and net cost performance, which includes a benefit from restructuring actions, was a solid $41 million for the quarter.

Slide 19 presents our product segment results for the second quarter of this year. Year-over-year, gross margin improved in both absolute dollars and as a percent of sales for our climate and electronics product groups.

Margins in our interiors product group were slightly lower year-over-year but did increase as compared to the first quarter of this year. Climate sales in the quarter were $879 million and gross margin was $78 million, about 8.9% of sales. Gross margin as a percent of sales increased 293 basis points when compared with a year ago. The change is largely due to volume, mix and currency.

Favorable volume was driven primarily by increased Hyundai/Kia sales. Special items primarily lower accelerated depreciation related to Connersville also had a favorable impact. Our net cost performance also includes a restructuring savings related to the closure of our Connersville facility.

Electronic sales in the quarter were just over $1 billion and gross margin was $115 million or 11.5% of sales, an improvement of 418 basis points from the prior year. Special items primarily increased accelerated depreciation for certain North American production assets had a negative impact. Favorable volume and currency was driven predominantly from new lighting programs launched during last y and the impact of a stronger euro. Net cost performance improved gross margin by 340 basis points in the period.

Interior sales were $844 million for the second quarter and gross margin was $25 million or 3% of sales. Gross margin as a percent of sales increased from 1.7% of sales in the first quarter this year but was below last year's second quarter by 67 basis points.

Volume and mix was unfavorable in the quarter, primarily related to North American production declines. Special items also contributed to the decrease reflecting favorable commercial settlements reached a year ago. Net cost performance was positive for the quarter despite costs related to two new facilities in North America for the launch of Chrysler business in the second half of this year.

Slide 20 provides an overview of SG&A expenses for the second quarter as well as year-to-date. SG&A expenses for the second quarter totaled $156 million or 5.6% of sales. This is higher than second quarter last year but in line with our first quarter results this year. SG&A expense for the first half of 2008 totaled $304 million or 5.5% of sales. There were a number of items that impacted SG&A spending that are highlighted on this slide.

As discussed earlier this year, we did expect non-recurring implementation costs associated with our overhead cost reduction efforts. These were about $10 million in the quarter and $14 million year-to-date, and we do anticipate these costs to total approximately $30 million for the full year.

Incentive comp increased SG&A by about $7 million in the quarter and $2 million year-to-date and currency was a $6 million drag for the quarter and $12 million for the first half. All others comprised primarily of the non-recurrence of lower accounts receivable reserves that provided a benefit last year.

On a year-to-date basis, SG&A costs were lower than last year by $10 million as we continue to drive our cost efficiencies. Cost efficiencies totaled $19 million for the quarter and $36 million for the first half of the year.

Moving to restructuring. Slide 21 provides an overview of the charges for the second quarter as well as the net impact on cash flow of these actions for both the quarter and year-to-date. In the quarter, we recognized $29 million of restructuring charges while $7 million of other qualifying costs which are included in cost of sales. Of the total $36 million, half is reimbursable from the escrow account. $25 million of charges and costs were result of the sale of our Swansea plant as Don highlighted in his comments.

At the end of the quarter, we had $97 million remaining in the escrow account and outstanding receivables due from the account of about $16 million. As we outlined again earlier this year, the timing of our restructuring actions do have a significant impact on our 2008 free cash flow and is detailed at the bottom of this slide. The net impact in restructuring on our second quarter cash flow is an outflow of $2 million, representing cash payments of $28 million, partially offset by $26 million of cash received form the escrow account.

Recall that in the first quarter restructuring cash payments to complete actions taken were higher than we seized from the escrow account by $28 million, so a net impact on cash flow to date is an outflow of $30 million. This compares to a cash inflow of approximately $65 million in the first half of 2007.

Slide 22 provides our income tax provision and cash taxes. Income tax expense in the second quarter of 2008, a $49 million was $21 million higher than a year ago. In the quarter, both the mix and overall increase in profits in countries where we pay tax contributed to a $20 million increase in the provision compared to a year ago. However, we have made strides in addressing cash taxes paid in certain countries and for book purposes we have established reserves for tax positions taken of about $10 million in the quarter.

We continue to carry deferred tax valuation allowances in various countries, which generally prevent us from tax benefiting losses and accordingly our affected tax rate will remain volatile for the foreseeable future. As we discussed in the past in certain situations however, we can benefit these losses if there is adequate pre-tax income from other categories of earnings such as increases in our other comprehensive income account, those increases largely driven by currency translation and pension and OPEB re-measurements.

Despite the volatility in our tax provision, we do continue to expect our cash taxes for 2008 to be about $100 million even as profits increase in taxable jurisdictions.

Slide 23 provides a reconciliation of net loss to EBIT-R for the second quarter of 2008 and 2007. EBIT-R was $78 million in the second quarter of 2008, $63 million higher than a year ago. The top of the slide provides a reconciliation for net loss to EBIT-R and the year-over-year drivers of the change are outlined in the bottom of the slide, which reflects a cumulative impact of all the items I had previously discussed.

Slide 24 provides the same net loss to EBIT-R reconciliation for the first half of 2008 and 2007. EBIT-R was positive $129 million this year compared with negative $31 million last year, an improvement of $160 million. The first half of 2008 benefited from strong cost performance, restructuring related items and currency, excluding the impact of divestitures and plant closures volumes also were slight positive in the first half of the year. I will provide some additional color on our expectations for the second half of 2008 in a moment.

Slide 25 provides our free cash flow performance for the second quarter and year-to-date, and is compared to a year ago. Free cash flow in the second quarter was positive $53 million, slightly lower than our performance last year. The year-over-year decrease in second quarter free cash flow was impacted by net restructuring cash outlays, lower dividends from certain affiliates and higher interest payments principally associated with the completion of the bond transactions in the quarter. These were partially offset by the improvement in our trade-off or our net loss, improved trade working capital and the change in receivables sold under our Europe securitization facility.

For the first half of 2008, free cash flow was a use of $147 million, slightly lower than last year by about $18 million. Factors impacting free cash flow year-over-year were net restructuring cash outflows, which included both higher cash payments for restructuring and lower escrow receipts, lower dividends from non-consolidated affiliates and the net impact of OPEB and pension expense which includes higher non-cash curtailment gains as compared to cash contributions.

Favorable factors include the reduction in our net loss, again improved trade working capital and the non-recurrence of the 2007 reduction receivables sold under our Europe securitization facility.

As you know, on June 18, we completed two bond transactions, both reduced and extended our 2010 notes. We used approximately $150 million of cash and issued 216 notes of $206 million at par to reduce the 2010 notes by $344 million. This transaction provides the flexibility as the options we can use to address the remaining 2010 maturity.

Slide 27 summarizes our cash balances at the end of the second quarter. Cash balances totaled $1.5 billion, a decrease of about $107 million from the first quarter. The change reflects positive free cash flow of $53 million in the quarter, offset by about $150 million used to reduce and extend the 2010 notes just reviewed. We continue to exhibit strong liquidity in both cash as well as availability under our credit facilities.

Slide 28 provides a summary of our full-year outlook for 2008. We are adjusting our full-year outlook for product sales to be about $10 billion. This is $100 million lower than our last guidance, primarily reflecting our revised expectations for North America production.

Despite the reduction in our full-year sales guidance, we are affirming our full-year EBIT-R and free cash flow guidance. We still expect full-year EBIT-R to improve year-over-year to breakeven with a range of plus or minus $25 million. We expect our performance in the first half of the year; continue restructuring savings in the second half of the year and our customer and geographic distribution will help to offset lower volumes in North America.

We also project our full-year cash flow at a use of $300 million, plus or minus $50 million. We are very pleased with our positive free cash flow in the second quarter and our focus on continuing to drive operational cash flow improvements for the rest of the year.

The next slide provides our production estimates for the second half of 2008 for our key customers. Our projections for Ford Europe and Ford North America production are in line with Ford's estimates outlined during its second quarter call last week.

Ford Europe is expected to be down slightly year-over-year, while Ford North America is expected to decline about 26%. We do expect Hyundai/Kia volumes to remain strong in the second half of the year albeit not as strong as the first half. PSA, GM and Chrysler production for our key platforms are expected to increase, largely reflecting the launch of new business on select PSA vehicle lines and the Chrysler Dodge ram.

We project the most significant declines for Nissan North America truck production. First half, Nissan truck production was down 21% and we are projecting a further decline in the second half of over 70%. We've already announced the closure and consolidation of the Durant, Mississippi facility in response to this expectation.

In addition the production projections, the impact of our restructuring actions will further reduce our second half sales and in total we project our second half sales to be $650 million lower than a year ago.

Slide 30 highlights the first and second half year-over-year changes in our product sales and the key drivers of these changes. The top of the slide highlights the change in sales for the first half of 2008 as compared to 2007. As we discussed, the impact of divestures and plant closures were largely offset by favorable currency and regional performance. The bottom of the slide provides the same information for the second half of 2008.

Second half sales are projected to be lower on a year-over-year basis by about $650 million. In the second half, currency will continue to be positive, yet the impact will not be as significant as the impact of the weaker U.S. dollar diminished during the last half of 2007 in comparison to 2008 levels. Divestitures and plant closures with reduced sales by over $600 million in the first half of the year will reduce sales by another $400 million in the second half.

Excluding currency, divestitures and plant closures, we project sales in North America will be lower in the second half of the year, reflecting our estimate of production for our key customers as outlined earlier.

Sales in Europe and South America will be down slightly year-over-year in the second half, while sales in Asia will be up slightly, although the growth will not be as much as experienced in the first half of 2008.

Slide 31 provides the same presentation for EBIT-R. Our full-year guidance for EBIT-R is breakeven plus or minus $25 million and this represents an improvement over 2007 of approximately $50 million. EBIT-R in the first half of 2008 improved year-over-year by $160 million, yet we expect our second half EBIT-R to be lower in the prior year by $111 million.

We expect our strong net cost performance in the first half of the year to continue to the second half of the year. The restructuring related savings and the overhead cost improvements are being actioned and will improve our year-over-year results. However, a number of restructuring related items improved our EBIT-R in the second half of last year, including a significant curtailment gain associated with Connersville of about $48 million.

The non-recurrence of these items will result in a negative year-over-year comparison this year. In addition, volume and currency, which combine at a positive impact in the first half, while a significant negative impact in the second half of the year, driven largely by lower production volumes.

As Don highlighted in his comments, the second half of 2008 will provide significant challenges, yet our first half performance was solid and provides us a foundation to deliver our second half and full-year commitments, despite a much different environment expected at the start of this year.

Thank you and now we will open the call for questions. Derek?

Derek Fiebig

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

Question-and-Answer Session

Operator

(Operator Instructions). Our first question is from Joe Amaturo of Buckingham Research.

Joe Amaturo - Buckingham Research

Good morning.

Don Stebbins

Good morning, Joe.

Joe Amaturo - Buckingham Research

Couple of questions. You highlighted in the press release that you have these three commercial agreements now with the U.K. facilities. Could you give us some color on that? Are they similar to the Swansea commercial agreement you had? And if you could, could you quantity the expected cost savings?

Bill Quigley

Hi Joe, this is Bill Quigley. The agreements are very similar to the Swansea agreement which we discussed in the first quarter. You recall in the first quarter, we said we received a $6 million benefit for Swansea specifically in the quarter. Now with the remaining commercial agreements in place, that benefit increased by about $25 million in the second quarter, so that was a catch-up obviously of first quarter results that was reflected in the second quarter.

Joe Amaturo - Buckingham Research

So about $12 million, the quarter going forward?

Bill Quigley

I think that the… talking about Swansea, obviously with the disposition of Swansea, we won't have a reimbursement for that. But going forward, that would probably be about accurate.

Joe Amaturo - Buckingham Research

Okay. And then, given that the Dodge Ram heavy duties is delayed and there's all these start-up issues, because of the volumes, obviously capacity utilization for those facilities probably lower than what you thought in January. How should we think about interior margins in the second half of the year? Should they erode from where we saw them in the second quarter or--?

Bill Quigley

A couple things, Joe. One, I'm not sure the ram has been delayed. I think it's a slightly slower ram than probably we would have anticipated. So we'll still be producing vehicles. In terms of the margin, that will have somewhat of a negative effect on the margin because of the capacity utilization. But again, like many programs we've had to deal with overtime, we've got to find a way to deliver the profitability overtime. But in the back half of this year, it will impact us.

Joe Amaturo - Buckingham Research

Okay. And then as it relates to Ford Europe production schedules, there is a modest decline expected. Are you seeing anything different there in the marketplace that would suggest that those production volumes could actually be materially lower than what you are projecting currently and what would be the risk to that forecast?

Don Stebbins

We have not seen anything that would indicate that there is a substantial decline coming. There are pockets in some of the Western European countries, the U.K. and Spain, that are down on a sales basis but they are also that's more than offset actually by what we see in Eastern Europe and Russia specifically and the vehicles that are being exported to those countries.

Joe Amaturo - Buckingham Research

Then just a last question for Bill. The premium cost reduction, is that part of the $41 million year-over-year cost improvement?

Bill Quigley

Exactly Joe. Those types of cost improvements would be included in our net cost performance.

Joe Amaturo - Buckingham Research

Okay, thank you and good quarter.

Bill Quigley

Thanks, Joe.

Don Stebbins

Thank you, Joe.

Operator

Your next question comes from Chris Ceraso of Credit Suisse.

Chris Ceraso - Credit Suisse

Thanks. Good morning.

Don Stebbins

Good morning, Chris.

Bill Quigley

Hi Chris.

Chris Ceraso - Credit Suisse

A couple of items here. I appreciate the year-to-year profit walks. I find that really helpful. The one thing that seems to be missing and maybe it's varied somewhere in cost performance is any comment on materials. You mentioned it briefly in your remarks but can you give us a feel for what kind of an impact plus or minus materials had in the first half, what you think it will be in the second half and then how we should think about it for '09?

Bill Quigley

Yes Chris. Chris, this is Bill. You are correct. We include really all elements of our manufacturing costs as well as SG&A for example and EBIT-R role and net cost performance. So that's going to include our assumption and expectations for material costs. I think as Don indicated, our primary exposures are largely aluminum in the climate business or our resins in the interiors business. I think to date we've been working well with the customers as well as the suppliers to kind of manage those costs albeit resins have significantly increased.

So again, we include those types of costs in our net cost performance and we are going to continue to work with the customers as well as the suppliers for the remainder of the year. But obviously, we don't see in the near term, at least resin prices significantly abating from current levels. So we're going to manage through it as we've been managing through it.

Chris Ceraso - Credit Suisse

And you've got, I'm looking at slide 31. You've got second half net cost performance about the same as what you did in the first half. Within that, is there a worsening of the raw material situation or is it going to be about the same in the second half relative to the first half?

Bill Quigley

There is a slight worsening, Chris, reflected in that second half net cost performance.

Chris Ceraso - Credit Suisse

Do you think it will be notably more difficult in '09 because of the timing of any contracts or anything like that?

Don Stebbins

No, we don't think so. In fact, some of the contracts that we've had on the aluminum front expired this year. And so we are feeling that change or that catch-up this year. And again, we've been able to offset a lot of that as Bill mentioned in the net cost performance line.

Chris Ceraso - Credit Suisse

Okay. On slide 25, the cash flow reconciliation, on the first half 2008 versus the first half of '07, can you just tell us what's within that other changes bucket? I'm sorry if I missed that. It was $113 million negative in first half '08 but $55 million favorable in the first half of '07.

Bill Quigley

Yes, Chris. On the free cash flow slide, if you take a look at what we tried to do at the bottom is highlight at the bottom of the slide; I didn't speak to it specifically. But you'll note at the bottom, trying to highlight significant year-over-year free cash flow drivers which are included in many of the line items at the above. So if you kind of think about it, as we talked about our net restructuring actions this year, we are on the 50% match under the escrow account as well as the inflows and outflows of restructuring are not linked. I mean they are not always linked together with respect to the timing.

So you note, in our free cash flow for the second quarter, we've got negatives of about $30 million related to net restructuring as a cash outflow. And then year-over-year for the first half it's about a $95 million drag on free cash flow. So again, we tried to highlight really the significant drivers that you probably try to model at the bottom of that slide on page 25.

You also note from dividends. We talked about dividends at the fourth quarter of 2007 that we had some pull ahead in dividends into that quarter. So obviously, dividends would have gotten in the second quarter of 2008, actually were experienced in the fourth quarter of 2007. So again, we're trying to highlight kind of the key drivers there.

Chris Ceraso - Credit Suisse

That makes sense. Last question, more of a curiosity. I noticed, clearly the performance in the interior business and your consolidated results is under a lot of pressure from materials. Your non-consolidated business consist of a lot of Interior business. What's the profitability like in the non-consolidated interior business? Is it as bad as the consolidated stuff?

Bill Quigley

Chris, if you're looking, you'll see in our 10-Q that we always publish. One of the biggest contributor is obviously from our equity income is our Yanfeng, distant joint vent. It does have a sizable interiors position. In those margins, and you can see the results in total of Yanfeng included in our 10-Qs. But again as Don indicated, we continue to see an expansion with that joint venture and bolted sales and its profitability. And if you think about it, obviously our profitability would include a fairly significant composition of interiors business, so little different margin profile.

Chris Ceraso - Credit Suisse

Okay. Great. Thanks a lot guys.

Operator

Your next question comes from John Murphy of Merrill Lynch.

John Murphy - Merrill Lynch

Good morning, guys. I think about your guidance here and the fact that it's unchanged and despite the fact that the macro environment is getting much tougher, I've got to assume that your restructuring efforts are bearing a lot more fruit particularly in the second half than you were originally expecting. I mean, is that a correct characterization? And secondly, do you believe that maybe you can get a lot more than this $215 million in savings that you are targeting right now?

Don Stebbins

I think a couple of points. One, certainly the restructuring activities are a little bit ahead of schedule and are providing benefit both in the first half and the second half. We continue… the $420 million is the number that we use for the restructuring savings, cumulative and so we expect to be beyond that number. What I'd also say is that there has been a significant improvement in the cost structure of the business in terms of SG&A as well as the efficiency of some of our operations. So it's not only the restructuring portion of the business, but also the improving the base operations that is contributing to our confidence in terms of holding the guidance in a difficult situation here in North America.

John Murphy - Merrill Lynch

Okay. And then when we think about capacity actions and changes that are going on, not just at Detroit 3 but also some of your other customers, particularly Nissan, and the closure of Durant, I mean what is your flexibility in the near term and how quickly can you respond to changes like that?

Don Stebbins

Well, it depends really on what products that we are producing for, whatever the OE and where the OE is and those types of things. So, I mean clearly you saw, I think a fairly quick reaction with Durant in terms of consolidating that into other facilities. I mean it will take about a year in terms of the transition, but we made the decision and are moving on that today.

Mexico is a big part of our foot footprint going forward. So that will help us in terms of speed of any actions that need to be taken. And again, as you look around the world where our footprint is, clearly in places like the U.S. and Western Europe that's a more timely effort, takes more time than some of the other areas that we are located in.

John Murphy - Merrill Lynch

Okay. And then lastly, I just wondered if you could give us an update on the aggregate backlog you talked about, $265 million in new wins in the first half. I was just wondering if you could give us an update on the backlog in aggregate.

Don Stebbins

Yes. We have not updated the backlog. We do that once a year. Clearly there are a number of significant changes that are taking place both from a currency perspective as well as some of the new volume numbers that have come out. So, that will come out later on in the year.

John Murphy - Merrill Lynch

But the 265, we should assume is purely incremental?

Don Stebbins

265 is purely incremental, absolutely.

John Murphy - Merrill Lynch

Great. Thank you very much.

Operator

Your next question comes from Patrick Archibault of Goldman Sachs.

Patrick Archibault - Goldman Sachs

Hi, Good morning.

Don Stebbins

Hi Patrick

Bill Quigley

Good morning, Patrick.

Patrick Archibault - Goldman Sachs

First just on the cash front, I don't know if you mentioned, can you just give us the U.S. cash balance at the end of the quarter?

Bill Quigley

Cash in the U.S. was almost $1 billion.

Patrick Archibault - Goldman Sachs

Okay, great. And also, if you have it handy, can you give us the amount of available liquidity on your credit facilities as well?

Bill Quigley

Patrick, the credit facilities that's between the U.S., ABL and the Europe securization facility is about $280 million as of the end of the quarter.

Patrick Archibault - Goldman Sachs

Okay, both taken together in terms of available liquidity?

Bill Quigley

In total, correct. We also have unused lines across the globe with respect to some of our affiliates. But we're really focused on those two facilities and that's about $280 million.

Patrick Archibault - Goldman Sachs

Okay. And, I guess in terms of… wanted to just go back to your cash flow slide, I believe it was slide 25. I might have missed this, but did you give the amount of sold accounts receivable that was actually in the cash flow numbers this year versus same quarter last year?

Bill Quigley

Yes, if you take a look, if you look on slide 25, you'll see the change in receivables sold. So for example in the second quarter of '07 we actually had brought the facility down by $24 million and year-to-date we brought it down to $65 million. Current balance is about $98 million or so, $99 million.

Patrick Archibault - Goldman Sachs

Okay. Great. And on the walk you present in slide 18, I had a question just on the currency impact on the gross margin. I mean, it looks like if I'm comparing this correctly, from a revenue point of view currency was $163 million favorable but, $43 million favorable on a gross margin basis, which is probably like close to a 30% margin. Wanted to just get there, was there any sort of unusual transactional related things that might have made that translation a lot higher than your standard operating margin?

Bill Quigley

Yeah, I think Patrick that column, all of that variance includes both translation and transactional exchange, and a lot of that obviously is flowing through as we talked about our products results through our electronics group which has a very sizable European platform.

So, quite frankly we were picking up some fairly good mix there, if you will. There are currency pairings. Concurrently, we had in the first half of the year we kind of let the currency flow a bit and we have now placed in additional hedges to basically lock in that gain.

So, if you look at the second half, we are not going to get as much currency benefit on the margin line flowing through the bottom because we have effectively not locked in that gain that we had in life-to-date or year-to-date.

Patrick Archibault - Goldman Sachs

What kind of margin, number one, is it possible to sort of strip out what might have been transactional and what might have been translation for that piece? And then secondly, what do you think we should model going forward just as a margin on FX in the back half?

Bill Quigley

I think on the back half we kind of lay it out. On the EBIT-R watch for the second half, I would use that for your modeling purposes and above that you will see that the currency impact on sales and then there's a currency impact on EBIT-R. I would use that for modeling purposes. I don't have the split between transactional and translation with me, its something we can call off of you on post our call.

Patrick Archibault - Goldman Sachs

Okay. I will follow up with Derek on that. I guess lastly, just following up on some of the questions on raw materials. I know you haven't really broken it out specific headwinds for us. But I don't know, could you give us just a little bit more color on how you expect the cadence of those headwinds to roll out and maybe it might be helpful to break out resins from some of the ferrous and non-ferrous metal pressures that you also expect.

Bill Quigley

If you think about ferrous, we have very limited exposure to steel. And quite frankly that exposure largely was eliminated with the sale of Swansea. As we go forward, I think again we include those types of pressures if we will or changes in commodities of our net cost perform.

Again to date, we are not calling it out specifically, which I think would suggest to you that we continue to manage that and we haven't called that out for the second half and again I think Don's comments with respect to the work with the supplier and customers, today we don't see that as a significant headwind to us that we would call us separately. We include our net cost performance, but obviously commodity prices continue to change on a daily basis and we work very closely with the customers and the supply base to try to manage that.

Patrick Archibault - Goldman Sachs

I guess when you say that you are able to manage it, that would be largely from customer recoveries meaning the net headwind at the end of the day it tends to be very small or is it just that you're finding other ways in terms of ongoing restructuring to manage that down?

Don Stebbins

It's a combination of everything. It really does come through if you look at the interiors break-out in terms of their net cost performance in terms of being the smallest of the other product groups that clearly reflect some of the resin impact that we have.

So managing it, again, as Bill mentioned, has to do with recoveries from the customer working with our suppliers, consolidation of trucking routes, whatever it may be in terms of fuel costs or resin pricing. It is working through the chain. The way we look at it is it is part of doing business and we have got to offset it.

Patrick Archibault - Goldman Sachs

I guess it has been said by other suppliers that some of these customer talks are easier to have outside of North America. And clearly you have a lot of revenue outside of North America. Is that something you would tend to agree with, that might be playing to the advantage of having a lower headwind, I guess?

Don Stebbins

I'd say it is very specific to customer-supplier relationships. I couldn't comment on how other suppliers have dealt with it or what they feel.

Patrick Archibault - Goldman Sachs

Okay. Well that's all I had. Thanks a lot, and congratulations on the quarter.

Don Stebbins

Thank you.

Bill Quigley

Thank you.

Operator

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

Jeff Skoglund - UBS

Hey, good morning.

Don Stebbins

Hi Jeff.

Bill Quigley

Good morning Jeff

Jeff Skoglund - UBS

Can you talk a little bit about the Nissan truck volumes which you expect to be off dramatically in the second half. I think Don you mentioned that you are taking out some capacity, but I'm trying to figure out when you have you a business that has operated at such low levels of profitability, what kind of contribution margins are you looking at?

Bill Quigley

Sorry, Jeff. This is Bill. With respect to the contribution margins, obviously, if you look at the Interiors profile, even with the comments Don just made pursuant to the last question, it has got a markedly different profile than for example Climate. So again, that contribution margin is going to be lower if there is a significant piece that's material. So, if you think about Nissan, our significant cockpit supplier. So a significant portion of that is going to be material which we can basically stop buying, obviously, given demand. So, I would suggest probably a 15% variable margin, and then obviously, the actions that were taken, like a Durant action, and being able to flex the largely non-union workforce. Our other actions that we are taking to mitigate that contribution mark.

Jeff Skoglund - UBS

Okay. And as that platform merges with the Nissan truck down the line, does that help that business or is that not a factor?

Don Stebbins

Sorry, I didn't understand the question.

Jeff Skoglund - UBS

Isn't the plan to merge the Ram with the Nissan?

Don Stebbins

Down in Mexico, that's right.

Jeff Skoglund - UBS

Does that result in incremental content for you at some point that would help profitability there?

Don Stebbins

Sourcing has not yet been determined. I mean, certainly we would see ourselves as being in a prime position to get that business, but the sourcing has not been determined yet.

Jeff Skoglund - UBS

Okay. And then, you've got your business growing with Chrysler as you look at the pie chart migration. Is that updated for all of the platform reductions? I guess you are taking out a number of vehicle models. Is that adjusted for those actions?

Don Stebbins

Yes, it is, Jeff.

Jeff Skoglund - UBS

Okay. And last question is just kind of housekeeping, the dividend, I assume it's for Yanfeng, it is page 25 I'm referring to.

Don Stebbins

Right.

Jeff Skoglund - UBS

What's the dividend that's expected in the second half? Is there any sort of timing issues that you're anticipating?

Don Stebbins

We talked about the last quarter of '07 that we did have a distribution, early distribution, if you will, for Yanfeng. To your point, that dividend normally would have occurred in the second quarter. Obviously, it didn't occur because we pulled it ahead in 2007 because of some tax efficiencies that made it sensible to do that. We obviously will continue to look with our partner at the investment required in Yanfeng. We don't really disclose when and/or if we would get a dividend and what period. So, again, that JV continues to grow, and it is always obviously looking at additional investment opportunities with respect to the cash and whether you make a dividend or not.

Jeff Skoglund - UBS

Overtime, what is the expected dividend payout ratio there?

Don Stebbins

Overtime, I think in the past, it's been largely to distribute a fair majority of the earnings of the affiliate in the current year. So, it is always kind of a second quarter lag from the year. I think with the growth of that joint venture and the growth that we expect in the near term the next couple of years, that's not a policy that we are strictly going to adhere to with our partner. And I continue to invest in the business and grow that business.

Jeff Skoglund - UBS

Okay. Thank you.

Operator

Your next question comes from Mark Warnsman of Calyon.

Mark Warnsman - Calyon

Good morning.

Don Stebbins

Hi, Mark.

Mark Warnsman - Calyon

Hi. There were a number of bankruptcies in the Interior space in the first half; Plastech and Progressive up in Canada, I'm curious as to what you see as the end game for the interior sector within the North American industry and your role within it?

Don Stebbins

Okay. I think we are a significant player in the interiors business, not only in North America but globally. I think that our global scope, I mean we talked a little bit about Yanfeng Visteon already, provides us with an advantage as a number of these platforms are globally based or look to be globally based. In terms of the bankruptcies of some of the suppliers, that has impacted us. We do see a slightly greater Tier 2, Tier 3 distress factor.

However, it hasn't significantly impacted us financially anymore, but we do see that going on. And we are managing the business appropriately in both, in terms of dealing with our supply base and we expect to be a player in the Interiors market in North America, as well as around the world.

Mark Warnsman - Calyon

To the extent that the increase in resin costs is contributing to distress in the sector, are you seeing OEMs react to that as a means to maintain the stability of their supply?

Don Stebbins

Again, I think that's an individual customer-supplier discussion, and it really depends upon the relationship and what's going on with each OE and each supplier. We certainly have relationships that are very helpful in terms of that discussion, and we also have relationships that aren't. So, it really is independent discussions with each customer.

Mark Warnsman - Calyon

Okay. Thank you.

Don Stebbins

I think we have time for one more question. If we could take the final question, please?

Operator

Your last question will be from Kirk Ludtke of CRT Capital.

Kirk Ludtke - CRT Capital

Good morning, guys.

Don Stebbins

Hi Kirk

Bill Quigley

Good morning

Kirk Ludtke - CRT Capital

A follow-up on one of the earlier questions, is it too early to be thinking about you picking up a share from some of these failed Interiors competitors? I think Plastech failed quite a while ago.

Don Stebbins

Never too early to think about a new business.

Kirk Ludtke - CRT Capital

But is it something that's being resourced or is it too early to be actually seeing some awards?

Don Stebbins

In terms of the Plastech business, Johnson controls essentially acquired that business. So, how they are managing it and what they will do with it really would be a question probably directed to them.

Kirk Ludtke - CRT Capital

Okay. And then I guess maybe this is a little bit longer term as well, but with Ford's announcement that they are going to be bringing a number of passenger car models in from Europe, just looking at those models, would you think that that's going to be a positive or a negative for your business?

Don Stebbins

I think it's a substantial positive. We have substantial content on programs such as the Fiesta, the Focus, the new Cougar, the Mondeo, the Transit, again across all product groups. So, I think as those platforms migrate to North America, that is a positive for Visteon.

Kirk Ludtke - CRT Capital

Do you think they will be imported or do you think they will actually be manufactured over here?

Don Stebbins

I think Ford is making substantial changes to try to manufacturer those here.

Kirk Ludtke - CRT Capital

I mean, it would make sense that they would stay with the suppliers that are making the components over there, right?

Don Stebbins

It certainly makes sense to me.

Kirk Ludtke - CRT Capital

I hear you. Okay. So do you have a sense for when that might start impacting your new business wins?

Don Stebbins

I think if you look at the Ford announcement on what they were doing. I think, really, what their announcement has been around, is the Focus and the Fiesta, the timeframe is kind of late 2010, 2011.

Kirk Ludtke - CRT Capital

To go into production or to ramp up?

Don Stebbins

Go into production.

Kirk Ludtke - CRT Capital

So you might start seeing some awards here in the next few quarters, do you think, as they firm those plans up?

Don Stebbins

I would think early '09 is probably late '08, early '09 is the timeframe to source that business.

Kirk Ludtke - CRT Capital

You generated over, what, 40% of your first half sales in Europe. And it seems like some parts of Europe are doing very well and others are not, and I was curious if you could maybe force rank in you're European exposure by country?

Don Stebbins

No, I could not actually. The situation, what you're asking is the sales line in some of those countries are down, not necessarily the production. So, you might take an example of our plants in Spain, although Spain vehicle sales may be down 10%, 11%, our plants in Spain are running full out that are serving Ford for export into other vehicle assembly operations, a country-by-country discussion.

Kirk Ludtke - CRT Capital

Okay. I might have missed it but are you still providing '09 guidance?

Don Stebbins

No, what the comment was at this point, our goal remains the same. Clearly, there have been a number of macro-changes since we gave that guidance, some of which are certainly to our benefit and some of which aren't. Our performance is substantially ahead of where we thought it was going to be. So that needs to be taken into account, and so as we go through the planning process for the '09 season we will address the '09 guidance.

Kirk Ludtke - CRT Capital

Okay. And then, last question. Have you disclosed how big your North American aftermarket business is?

Don Stebbins

We sold it. It was sold at the middle of the first quarter.

Bill Quigley

It was $133 million in sales a year ago.

Kirk Ludtke - CRT Capital

Okay.

Bill Quigley

And if you look back at the first quarter presentation, there is a slide actually on it.

Kirk Ludtke - CRT Capital

Okay. Sorry about that.

Bill Quigley

Okay. No problem

Kirk Ludtke - CRT Capital

Great slides. Best in class.

Don Stebbins

Okay.

Bill Quigley

Alright, well. Thanks for joining us on the call. I will be around the rest of the day to answer your questions. Bye now.

Don Stebbins

Thank you.

Operator

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

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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Source: Visteon Corp. Q2 2008 Earnings Call Transcript
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