Although Visteon passed its fourth birthday as an independent supplier back in June 2004, it is clear that many big challenges lay ahead for the company. Legacy issues and Visteon’s relationship with Ford remain dominant issues, in spite of loosening ties between the two and Visteon’s continuing efforts to diversify its customer base. It’s looking like there’s more restructuring ahead. Colin Whitbread reports.
Unloved and poorly valued –
When the stock market values a supplier that has annual sales of almost US$18bn at just over US$1.1bn, then an important warning light is flashing. Visteon, the supplier in question, is clearly unloved by investors and ranked, in market capitalisation* terms at least, alongside such peers as Modine Manufacturing, which had 2003 sales of just US$1.2bn. Looked at another way, fellow suppliers with turnover levels in the US$15bn-20bn range typically have market values in the US$4bn-8bn range.
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– reflecting continuing challenges
Despite having passed its fourth birthday as an independent supplier back in June 2004, it is clear that many challenges remain. Although the company secured a Q1 2004 net profit of US$30m, the company’s first since the second quarter of 2002, this proved to be a false dawn. The short-term outlook from management has become progressively more cautious as 2004 has unfolded, and it is now clear that a new round of strategic and structural measures aimed at its US business is required. These measures inevitably involve Ford and Visteon’s legacy businesses with its former parent, but remained cloaked in secrecy at the present time.
For Michael Johnston, Visteon’s recently installed president and CEO, the stakes are high. Visteon has already invested huge resources into changing its structure, operating footprint and culture, in fairness with some success, but the results have fallen short. Johnston’s team has to get it right this time.
Legacy issues still dominate –
Visteon’s difficulties are not hard to analyse. Despite having been floated from its parent with a relatively healthy balance sheet, it remains clear that Visteon’s former status as an in-house parts supplier to Ford handicapped it from birth. In the lee of its parent, Visteon was protected from the full force of competition for many years and was allowed, even encouraged, to support a diverse product range that included a number of inadequately performing businesses with flimsy margins. Attempts to rid the company of these, most notably the glass operations, were hampered by the company’s legacy cost problems. These arose from agreements concluded as part of the split with Ford in 2000. The company’s internal structure was also sub-optimal and confusing, resulting in duplicate points of contact to the same customers, and the management team appeared to lack depth.
– and need further attention
These, and other problems necessitated a heavy program of restructuring, both in North America and Europe. Visteon has booked over US$1bn in special charges in the last three years in order to overcome these legacy challenges and to position itself for improved profitability in future years. Around 75% of this was booked in 2003, a large proportion of which was related to a substantial asset write-down in six product areas where Visteon perceives itself to be weak. A rolling programme of facility downsizing and closing, both in Europe and in North America have now been in place for some time. This has been in tandem with a strategic withdrawal from a number of poorly performing businesses. Sadly, as 2004 has progressed and operating conditions tied to Ford’s North American production schedules and rising commodity prices have deteriorated, evidence has grown that new measures will be required.
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By GlobalDataRelationship with Ford still the dominant concern –
Visteon’s relationship with Ford remains the dominant issue, despite the loosening ties between the two. The affiliation remains crucial to Visteon’s current and future prospects, especially in North America. The commercial agreements that were signed with Ford at the end of 2003, that provide for specific average productivity price reductions to the OEM for North American sales through 2007, will inevitably have a significant impact on Visteon’s short- and medium-term performance.
These new agreements have replaced the original purchase and supply agreement that was put in place when Visteon was born in 2000. The agreements govern general commercial matters relating to the supply of components in North America by Visteon to Ford, principally with regard to sourcing and pricing obligations. Key clauses in the new agreement included the payment by Visteon of US$150m in lieu of additional productivity price reductions on components supplied to Ford in North America in 2003 and the provision of specified (but not publicly revealed) productivity price reductions for all components supplied to Ford beginning 1 January 2004 and on each 1 January thereafter through 2007. In return, Ford has agreed to pay to Visteon an amount based on the cost differential between wages paid to Ford-UAW workers, at efficient manning levels, and workers at tier 1 suppliers, with respect to new business sourced to Visteon at plants covered by the Ford-UAW master collective bargaining agreement. In addition, Ford has agreed to reimburse Visteon for up to 50% of any capital investment spending on production facilities and equipment made by Visteon during the 2004-07 period to the extent related to the production of certain uncompetitive commodities for Ford.
On balance, and despite the US$150m short-term hit, which has now been paid, these and other clauses in the new agreement, especially those relating to the funding of post-retirement health care and life insurance benefits (OPEB) for Visteon-assigned UAW-Ford employees, should have a significant positive impact on Visteon’s future variable costs. Visteon has undoubtedly been saddled with additional costs, particularly in the labour area since its spin-off. These have resulted in a competitive disadvantage via-a-vis other peer suppliers. In other words, the consensus appears to be that the terms of Visteon’s relationship with Ford, in North America at least, have moved in favour of the supplier in the last 12 months, with a gradual improvement in the high legacy cost position expected. Current discussions with Ford must have a high chance of tilting the playing field even more in Visteon’s favour, although this has to be seen in the context of Ford’s current overall sourcing strategy. This is undoubtedly more confrontational than that of its peers, and placed it among the least favoured customers for many tier 1 suppliers. Visteon was clearly in the firing line when the infamous new global purchasing terms and conditions were imposed by Ford on its supply base from 1 January 2004.
– but customer and market diversification is underway
The good news, especially for the longer term, is that Visteon is making the promised progress in diversifying its customer base. Non-Ford sales are targeted to reach around US$5.5bn in 2004, up from just US$2.3bn in 1999. This should lift the percentage of non-Ford sales in Visteon’s total revenues to approaching 30% in 2004, six percentage points higher than in 2003 and up from 12% in 1999. In the third quarter of 2004 alone, non-Ford revenue rose 37% to US$1.38bn and these sales accounted for 33% of total revenue, up from 26% in the same period in 2003. This was a record level, and higher than expected, although this partly reflected weakness in sales to Ford in North America in the quarter and exit of the seating business. Visteon launches with non-Ford customers are focused on cockpits, electronics and climate products. A further US$1bn of non-Ford business is expected in 2005.
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*Includes sales to tier 1 suppliers to Ford. Source: Visteon |
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Europe and Asia will remain the key to market and customer diversification and the reliance on Ford in these regions is already substantially less than in North America. Visteon’s management in Europe predicts that in 2005 the company will already have 50% non-Ford business in the region. This is counting PAG as Ford. Visteon’s sales in Europe in 2003 were US$3.2bn, a figure than could rise above US$4bn in 2005. This would imply non-Ford business of around US$2bn in Europe by 2005.
Restructuring has lowered costs –
Also positive is the fact that recent restructuring should deliver increasing savings going forward and that these could be enhanced by any further measures yet to be announced. In 2002 the emphasis shifted to restructuring of manufacturing operations in the UK, Germany and France, the first steps in the program dubbed European Plan for Growth. Visteon believes that when completed shortly, this initiative in Europe will result in annual pre-tax savings of US$100m, combined savings in 2002 and 2003 having already exceeded US$50m. Management is confident that the US$100m run-rate will have been achieved in 2004 and that this could rise a little further in 2005. Although the European Plan for Growth program has now been largely completed, a rolling schedule of further cost-saving measures is likely to continue.
– but more is needed judging by financial results
It is no overstatement to say that Visteon’s financial performance since the spin-off from Ford has been a major disappointment. Operating losses were incurred through 2000-03, with a huge US$1.13bn loss being experienced in 2003 alone. These losses were magnified at the net level. Total sales also declined around 1% in the three-year period, with around US$1bn less sales to Ford being offset by a matching gain from revenues from other customers. However, Visteon’s Q1 2004 results appeared to show the first glimmer of hope for a brighter financial performance placing the company on course to produce its first full-year profit since its spin-off. The Q1 2004 net profit of US$30m was Visteon’s first since the second quarter of 2002 and was driven by a US$79m turnaround at the operating level. Cash provided by operating activities also reached US$105m, a US$240 swing positive. These results far exceeded analysts’ expectations and earlier company guidance, leading to raised forecasts and expectations. Unfortunately they also proved sustainable.
Although Q3 2004 sales rose 7% to US$4.15bn, an operating loss of US$435m was suffered, US$178m more than in the same period of 2003. The pre-tax loss was US$449m, US$185m greater than in 2003 and the net loss was a thumping US$1.36bn. These results took the nine-months net loss to US$1.3bn, a headline-grabbing number, but one that has to be treated with caution. Special charges contributed US$1.17bn to this nine-month loss, of which US$834m resulted from deferred tax assets and US$314m to fixed asset write-downs. The latter related to charges taken against Visteon’s steering systems business, one of the company’s portfolio of underperforming businesses. Of more concern to investors was the company’s statement that: “because of the uncertainty surrounding future market and economic conditions, combined with Visteon’s on-going discussions with Ford, Visteon is not providing specific guidance [regarding full-year earnings] at this time.
Summary and outlook
Visteon has undoubtedly made significant progress in a number of areas since its birth. The supplier’s customer and market base continues to diversify, the cost base has been lowered through restructuring and some poor-performing businesses have been spun off. But this progress has also been accompanied by disappointment. To be fair, most of the inflated expectations of the company in the early months originated from outside the company and management, whatever its subsequent shortcomings, always appeared to have a clear perspective of the challenges that needed to be addressed. Legacy issues relating to Visteon’s former ownership by Ford remain and these, plus the impact of unexpected headwinds in recent quarters emanating from rising commodity prices and weakening North American production schedules, continue to dominate investor sentiment. Little respite from these headwinds appears to be on the horizon and it is clear that financial performance will only be improved by further management efforts to pull the company away from its past. The outcome of the current discussions/negotiations with Ford and other internal deliberations is keenly awaited. There is a clear opportunity and need for management to initiate further actions to reinvigorate growth and to restore the faith of investors. Failure to deliver a credible package could be costly. Until it happens, Visteon will remain unloved by an unforgiving stock market.
* Market capitalisation, a measure of company value as determined by investors in public companies, is derived by multiplying the company share price by the number of shares outstanding. When compared with total company sales, a good indication of corporate size versus value emerges.
