Good morning, and welcome to Visteon Second Quarter 2014 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. Before we begin this morning's conference call, I would like to remind you this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future results and conditions, but rather are subject to various factors, risks and uncertainties that could cause our actual results to differ materially from those expressed in these statements. Please refer to the slide entitled Forward-Looking Information for further information. Presentation materials for today's call were posted on Visteon's website this morning. Please visit www.visteon.com/earnings to download the material if you have not already done so. I would now like to introduce your host for today's conference call, Mr. Bob Krakowiak, Visteon's Vice President, Treasurer and Investor Relations Mr. Krakowiak, you may begin.

Thank you, Jennifer. Good morning, everyone. With us today are Tim Leuliette, Visteon's President and Chief Executive Officer; and Jeff Stafeil, Visteon's Executive Vice President and Chief Financial Officer. We appreciate your interest in our company and taking the time to join us for our review of the second quarter of 2014. We have scheduled the meeting for an hour, and will open the lines for your questions after Tim and Jeff's remarks. As previously mentioned, a presentation deck associated with today's call is posted on visteon.com within the Investors section. Also note that our Form 10-Q was filed earlier this morning with the news release. Again, thank you for joining us. And now I will turn it over to Tim.

Thank you, Bob, and good morning, everyone, and thank you for joining us. As usual, we have a lot to talk about today, so let's start. I'll be on Page 2, which is entitled Recent Highlights. As you see here, and first of all, as you go through all our financials, you'll see that as per GAAP requirements, we have taken the Interiors' operations and put that into discontinued operations, and how that impacts financials is highlighted where appropriately throughout the presentation. Our sales were $2 billion for the quarter, $1.8 billion excluding discontinued ops. That's 11% up versus the prior quarter -- the prior year. Adjusted EBITDA of $193 million, that's the highest quarterly adjusted EBITDA in our history, $175 million excluding the discontinued operations. Net income of $81 million and adjusted EPS of $1.71. We did, obviously, report a net loss due to a lot of actions in the quarter. The asset impairment, the restructuring, the debt extinguishment, there's a lot of activity in the quarter that we booked through to impact net income. On adjusted free cash flow basis, we had a slight negative for the quarter due to the calendarization of payments to suppliers. In some quarters there's 4 payments, in some there's 2. Year-to-date, however, we've got a positive cash flow of $46 million. The balance sheet remains strong. Cash of $1.4 billion, that's up $417 million; debt of $960 million, $161 million higher; our EBITDA debt to -- trailing EBITDA is about 1.5 turns or under 1.5 turns. A very, very conservative capital structure at this point. As you go to the lower left-hand corner, I think it's important to focus on some of the actions that we had this quarter. We closed the acquisition of JCI in July 1, that's post the quarter,…

Great. Thanks, Tim. Thanks, everyone. Turning to Page 21 of the slide deck. And before we get into our financial results for the second quarter of 2014 and our revised guidance, I want to highlight some key items that will impact the numbers. We definitely had a lot of activity in the quarter. As Tim mentioned, beginning in the second quarter, we have reclassified the majority of our Interiors business as discontinued operations in the financial statements. Our income statement has been adjusted to exclude Interior-specific income and expense, and Interior net profit has been reflected on one line item as discontinued operations. Second quarter 2014 results have been recast to conform to this presentation as that results for prior periods. This treatment reduces Visteon's second quarter and year-to-date sales by $258 million and $522 million, respectively. In addition, certain Interior legacy operations still subject to divestiture or wind-down are reflected as the Other product group in our segment reporting. We've also adjusted our full year 2014 guidance for a number of items. In addition to the discontinued operation treatment for the majority of Interiors, we have updated our guidance to reflect the acquisition of JCI Electronics beginning on July 1, the acquisition of Cooper-Standard's Thermal & Emissions division during the third quarter, and for the pension annuitization agreement Tim referenced in his presentation. I will provide more details in our updated guidance later in my presentation after I review our second quarter and year-to-date 2014 financials. Turning to Slide 22, I provide a brief update on our transactions to dispense -- dispose of our Interior operations. As we previously announced, the sale would encompass 3 transactions. We have completed the sale of our interest in Duckyang and have announced an agreement to sell the majority of the remaining business…

Thank you, Tim and Jeff. Jennifer, please open the line for questions.

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

Any color when we look at the '15 guidance, sales looked quite strong, but the EBITDA margin seems fairly flat year-over-year. Any factors going on into '15 that are mitigating that upside, particularly given that there should be some synergies coming through for JCI?

Yes. We definitely see the synergies starting to come through, Colin, but remember that JCI -- the historical business of JCI, had lower margins than our combined business. That will have a little bit of a drag. The synergies we talked about, we have pacing their way into our operations over a couple of years as well, too. So they certainly will not all hit next year. So I think both the 2 will have a little bit of a weighting factor on our margin, but it should continue to increase as we approach 2017.

Okay, and looking at Slide 5, I mean, it says $40 million to $70 million in JCI synergies. That's above your prior estimates that you previously had said $40 million, is not right?

We said minimum of $40 million in the past, Colin. So we've given you a range with, obviously, starting at $40 million. But we think we could probably do a little bit better than that.

And when does that starts phasing in through '17? And what were the -- any color on what those major items within the synergies are?

The numbers here are to be accomplished by 2017. So they start phasing in next year. As we've said, we'll layer them in, and as Jeff said, phase in through the next couple of years. The activities are basically in 3 buckets as far as synergies go. One, there was embedded inside the performance of JCI, some corporate overhead charges from JCI. Ours are probably going to be a little different than that. So there's an element there, and those are probably easier to achieve more quickly, obviously. And then the other ones are in the SG&A and engineering side where there is now, obviously, additional engineers in the system, additional SG&A people. But we are going to make prioritization of programs between the 2. And to that degree, there will be some synergies to come out, some efficiencies that we can book. And then the last and the slower piece of this is probably a facility or 2. I think, as we said in the past, that is manufacturing and purchasing, and those will take -- purchasing takes a little -- is a little quicker, manufacturing takes a little longer because there are some facility-related actions there. So those 3 buckets of corporate SG&A, product group SG&A and engineering and manufacturing and purchasing, those 3 buckets are the focal area -- focus area of the savings potential. Each has its own timeline.

And when we think about -- and these are just cost synergies. So the revenue synergies probably are going to took over 3 years since you adopt to start winning the business today.

Yes. I mean -- yes. Right, today, as I was sitting out, as we have said we have been out in the road here around the world in the last 30 days, and primarily we're talking 2018 programs. I mean, it's just the lead time of the business. So they may have a tail of launch into 2017 some of them, but for the most part, these are 2018 calendar events. And I think we've said in the past, the reason we still feel comfortable with our 2017 target of $10 billion and $1 billion is because, for the most part in our industry, we know what business we've won. The confidence level in the business revenue base by then is really good. The technology revolution and the real impact of JCI will extend -- is really going to impact on a revenue basis 2018 and beyond. And that's just the nature of the lead time in the industry.

Okay. That makes sense. And then is there any tax impact? I mean, your tax rate, on a GAAP basis seems pretty high, particularly there's that discrepancy between your operating taxes and your GAAP taxes. Does the Interiors divestiture and JCI deal help improve your tax situation at all?

The Interiors divestiture should start to improve our effective tax. It won't approve -- improve our actual dollars paid. For the most part those operations weren't paying much tax at all, and were for losses that we couldn't take the income tax benefit for. So you'll see -- should start to see some improvement in rate there. I think for JCI, eventually, we will start to get some positive elements there, too. Over time, as I've kind of said in the past, our goal is to make our effective tax rate much clearer. I think with all the noise in 2014, it's harder to see. We'll give you a better view of what the tax situation looks like when we get to next year or when we get to the Deutsche Bank conference, and give a more detailed view of what 2015 looks like. We'll give you an update on what tax picture. But it should get better as we go year to year to year.

And your next question is from the line of Brian Johnson with Barclays.

It's actually Steven Hempel on for Brian Johnson. I just wanted to drill down on the integration of HVCC and Visteon's core Climate business. I believe that's been progressing now for roughly 6 quarters now. I guess how much more should we expect from a synergy perspective in terms of combining those businesses. I believe you closed that business in January of last year. And also, if you could just -- related to a housekeeping question, how much of a revenue headwind should we be expecting moving forward from the wind-down of the legacy Climate business that wasn't transferred to HVCC? I believe on our estimates, roughly a 300, 350 basis point headwind this quarter.

Well, let me answer some of these questions and the guys will dig into some of the others as I'm talking. First of all, we have, for the most part, taken advantage of the engineering SG&A and other people-related synergies of the combining of the businesses as of yet -- up until now. But the remaining issue is sort of the manufacturing side, and it was related to the fact that compressors -- let's take compressors, for example. We had 8 different families of compressors between the 2 companies, and we're now launching a consolidated line. That launch is in later this year for the first phase of that. So the manufacturing synergies, which are another -- and I will say probably in the neighborhood of 50 to 100 basis points remaining of synergy impact, will occur from both the purchasing -- consolidated purchasing, as well as the manufacturing consolidations, specifically in compressors and other areas. So you still have remaining some synergistic activities within the longer lead items. Also, we -- as result of the companies coming together, we're seeing some growth leverage that we didn't -- that was not available to either one of them in the past. And so, again, we've talked about a 7% CAGR of growth net, net, net after productivity impacted by exchange, et cetera. We're still very comfortable of that as a threshold of growth for that business going forward in the foreseeable future.

Yes. Let me address the last part of your question, relating to some of the legacy Climate business that didn't go with the initial deal. That business, as you mentioned, did decline a bit year-over-year in 2013 to 2014 from a sales standpoint. You see that in our guidance, you see that in our numbers. There is -- I would say, roughly, you still have about $100 million of that business, maybe a little bit more. Some of that business will continue to eke away. It doesn't have a lot of margin today. Some of that business will remain a very long time. So I would say, that's certainly a slower growth part of our Climate portfolio, but it's certainly also built into all of the numbers. It has a bit of a margin drag compared to -- if you looked at just the HVCC financials. But at this point, it's fairly neutral. It's going to probably get a little bit better, starting now probably going forward.

Okay. And then could you provide any additional color or clarity around the strategic direction you want to take with this 70% stake in HVCC, whether that would be monetizing some of the stake, take it down to 51% or acquiring a larger position for tax purposes?

I think what we've said in the past is that, long term, we see that a 70% ownership is probably an inappropriate holding. But we also are cognizant of the contribution that HVCC makes to us with its current performance and what its growth may pertain. So I think, at this point, we won't speculate probably about where we're going to head on that other than to reinforce the statement I think we've made numerous times in the past, which is, basically, we are here to optimize shareholder value. And we will look at, continuously, at what is the best utilization of the capital structure we have today.

Okay. And then just one last one on the '15 guidance here, including JCI Electronics. Does that include the backlog from JCI's Electronics business? And -- because it looks like you're only expecting roughly a 3% CAGR for JCI Electronics through 2017. And for the combined Electronics business, overall, you're looking for around 8% CAGR. I believe you discussed in the past cockpit electronics industry CAGR of around 12%. Is there some headwinds within JCI Electronics business that we should be aware of moving forward?

As I stated, and this is, I guess, a good question is to be clear, is that JCI, when the company was delegated to be non-core, it was put up for sale. It impacts its ability to attract new business. And that was occurring over the last few years of JCI. We saw the same phenomena here at Visteon when we were challenged during the bankruptcy period. Long term, as I said, the immediate reaction once the business was closed and we've met with customers, is the order book is now starting to, again, approach the figures of where we were at Visteon. It will take some time for those businesses to be launched. So you go through a period of purgatory, which JCI is going through now. The decisions on businesses being launched in '15 and '16, were decisions made with customers in '12 and '13. The other core issue is that there is some segments in that business that are non-core to us, that we will not be prioritizing, it's a small piece, but that affects us by a couple of basis points. Also, over time, we see this industry still growing at 10% and 12% CAGR. We do see, however, year-to-year, you’re going to get dynamics depending upon vehicle launches. '15 is a year of decent growth, '16 is a better growth year for Visteon Electronics because of the order book. So you get some cyclicality just because of vehicle launches. So JCI will be less than Visteon over the short term, but we don't see any dichotomy as we start hitting 2018 and beyond just with customer reaction.

Okay. And then it looks like JCI's contributing roughly $23 million based on our calculation for 2014 EBITDA, which implies about 3.5% margin. Is that related, largely related to purchase accounting adjustments? And then, if so, how much of that impact will it have on 2015 EBITDA margin?

Yes. The -- It will start to blend away, such that we won't really be able to segregate what portion of our EBITDA relates to the old JCI Electronics business. It will start to morph -- one of the synergies we're going to have as we pursue all the synergies, but as we pursue in particular the admin synergies, the -- we're going to be combining our functions in this operation. And the quicker we combine them, the quicker we'll have benefits on the margin. Initially, it's a little bit difficult because even a lot of the services that were previously part of JCI corporate we're paying in a TSA, our services agreement, to them for several months as we transitioned those operations onto our own platforms and our own systems and our own capabilities and our own people. So all those things -- for instance, we talked about there's $12 million of corporate cost we paid or they paid to the JCI corporate, those costs take some integration and some time for us to sort of completely work off of. All those things will continually bring a better margin story for our combined Electronics business, probably over the course of the next 12 months as we work through those.

And our final question comes from the line of Itay Michaeli from Citi.

Just to continue on the Electronics conversation, the revenue synergies beyond 2017. What's still the best way for us to model that if JCI is growing at 3%? Do you think that -- maybe you can get that up to 5%, 6%, 7% as we think about the opportunity to accelerate that growth beyond 2017? I know it's just early, but I just want to try and get a sense of what you think that target should be?

It is a little early. And again, we're actively in the marketplace now. I would say that in 2018, you'll start to see, over 1 year or 2, the growth of what we call, at that point, JCI Electronics, and try to track it, approaching that of Visteon historically. It becomes difficult to track independently because you start to morph. Some of these agreements, some of these contracts have significant value to them. If we look at the Fusion contracts, those contracts are, by themselves, $100 million to $150 million, sometimes $200 million a year. So they have significant impact once achieved. And so winning 1 of those or 2 of those has a significant impact on the numbers. But we see that there's no reason why the new Visteon Electronics, which includes the JCI elements, cannot approach the prior-Visteon growth curve within a couple of years post the 2017 time frame.

That's very helpful, Tim. And then just on the margins for 2017. It seems like with the synergies for JCI, and the very strong performance in the last few quarters for Electronics, I mean, maybe you're tracking a little bit ahead of 10%. Is that true? Maybe is there an upward bias of that 10% margin in 2017 and you're using a couple of things like additional R&D and other investments that you have to make to achieve the growth beyond 2017.

Well, I think a couple of points. One, and as Jeff highlighted, obviously, Visteon Electronics came in strong at above the 10% EBITDA level. But we're going to hit a great JCI, which will take that number down, so we got to recoup that back to the 10% level. I think from our perspective, 2017 is -- with $1 billion target, and there's probably upside to that number over time, is that we're comfortable with $1 billion and the implied 10% or so that, that represents, at least from a planning number today. I'm sure as we get closer, we'll be able to enhance that number more. But I think as you look at us marching through the next couple of years of that, on an EBITDA CAGR basis, it's quite a strong growth curve for any company in our sector, any company in our industry. And we're comfortable with that. And as I said, our job here is always to meet or exceed those numbers the best we can as we go forward.

That's helpful. And then just 2 quick last follow-ups on cash flow. Any kind of guidance or direction to think about the big buckets to 2015? And then also any change at all to the 2017 free cash flow of around maybe $250 million, if I recall correctly.

Yes. I guess the last part of your question, on 2017, we haven't changed our outlook on that. We'll obviously do as many things as we can take to continue to find ways to outperform that number. But that number hasn't changed. As it relate to next year cash flow guidance, we'll come with a much better view on that when we get to the end of the year. I don't think there's going to be massive surprises. I gave you a little bit of a view of some of the tail over, probably integration expense we'll have on the JCI acquisition, a little bit of restructuring to achieve some of the synergies. Overall, we should have less noise than we did this year, certainly, excluding -- we gave you some guidance, too, on what the Interiors business, how that impacts not only our first half of the year but a bit of how it impacts our entire year of 2014. Obviously, we expect that to not be in the numbers. All those things will be some tailwind a bit on some of those cash flow numbers.

Thank you.

And that was our last question. And I would like to turn the conference back to Mr. Krakowiak.

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

Thank you, Bob. For those of you who have been following us for a few years, you know that we've established 2014 as the ending of the cleanup, paint up and fix up era of Visteon. And that we would transition in the pure focus of 2 strong high-growth businesses, well financed with a good Asian footprint to grow and expand upon. I think you can see that in these numbers. This was a quarter from a standpoint of a press release and a presentation that was more complicated, with a lot more details associated, with a lot of the goes ins and goes outs of the Interiors' discontinued operations, et cetera. But all of these are the positive elements of achieving the goal of getting this company to focus on this 2 strong businesses. I've been very pleased with the performance of the team this quarter. We see the rest of the year as being bright despite the challenges, macroeconomic around the world, et cetera. Our growth is not predicated on more vehicle builds as much as it's predicated on the content of the vehicle builds that are there. So we're comfortable with our future, and we very much appreciate your support through the years. And we look forward to talking to many of you. I know that there are some calls lined up and we'll be hitting some conferences here in next month or 2. We look forward to seeing you there. So thank you so much for your support. And again, we'll talk to you next quarter. Thank you.

Thank you.