Visteon Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

There are 12 speakers on the call.

Operator

Good morning. I'm Ryan Wendling, Vice President of Investor Relations and Treasurer. Welcome to our earnings call for the Q2 of 2023. Please note that this call is being recorded and all lines have been placed on listen only mode to prevent background noise. Before we begin this morning's 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.

Operator

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 page entitled Forward Looking Information for additional details. Presentation materials for today's call were posted on the Investors of Visteon's website this morning. Please visit investors. Visteon.com to download the material if you have not already done so.

Operator

Joining us today are Sachin Lalande, President and Chief Executive Officer and Jerome Roque, Senior Vice President and Chief Financial Officer. We have scheduled the call for 1 hour, and we'll open the lines for questions after Sachin's and Jerome's remarks. Please limit your questions to one question and one follow-up. Thank you for joining us. Now I will turn the call over to Sachin.

Speaker 1

Thank you, Ryan, and good morning, everyone. Thank you for joining our Q2 2023 earnings call. Page 2 provides a summary of our results for the Q2. The company continued to deliver strong results and execute on our growth strategy. 2nd quarter sales were $983,000,000 an increase of 18% year over year excluding currency.

Speaker 1

Our underlying product sales outperformed industry vehicle production as a result of the strong demand for our digital cockpit products and the emergence of our electrification business. Our sales now have outperformed industry vehicle production for 17 consecutive quarters and demonstrate that the digital transformation is in full effect in our industry. Adjusted EBITDA was $19,000,000 or 9.2 percent of sales, an increase of $11,000,000 when compared to last year. Our EBITDA grew year over year despite the $15,000,000 exceptional recall charge resulting in a 150 basis point impact to our margin For a product recall with one of our customers, the issue is related to soldering of a memory chip on the printer circuit board used in 2 newly launched clusters with the customer. The combination of the packaging material used for the chip And the surface finish used by the printed circuit board resulted in solder joint failures in a small number of units.

Speaker 1

This issue was detected after a few months of production in Q1 of this year and was quickly fixed in early Q2. It's important to note that the combination of the particular chip with the finish of the circuit board surface was only used in these two products that are subject to the recall. Excluding the charge for this isolated issue, Visteon was able to It's adjusted EBITDA margin in the Q2. The team continues to demonstrate excellent operational and commercial discipline In dealing with the evolving semiconductor supply chain environment, which has improved from prior quarters, but remains challenging nonetheless. Adjusted free cash flow was a positive cash inflow of $32,000,000 bringing our first half total cash outflow to $5,000,000 This is a $94,000,000 improvement versus the same period last year.

Speaker 1

Our operations and engineering teams Launched our products on 35 new vehicle models in the Q2, which will help support our sales growth for the rest of the year and beyond. The Q2 marked an important milestone for our electrification business as we secured our first win for an EV powered electronics product with a luxury European OEM. The smart battery junction box system integrates A battery management system controller with high voltage battery junction box in the compact and lightweight package. We were proud to showcase this product at CES earlier this year and this win validates our go to market strategy for EV Power Electronics. We also won a record level of $2,500,000,000 in new business for the 2nd quarter, bringing our first half total to a record $4,000,000,000 The pipeline of new business opportunities for the second half also looks robust and we expect to exceed our original target of $6,000,000,000 for the full year.

Speaker 1

In the second quarter, we delivered On our capital allocation commitment that we announced during our Investor Day in March of this year and repurchased $30,000,000 of shares. In summary, the company performed very well in the Q2 while building a solid foundation for further growth in the years ahead. Turning to Page 3. The Q2 continued to demonstrate the robust demand for our digital cockpit products When excluding the unfavorable impact from net pricing and foreign exchange, Visteon sales in the Q2 grew 27% year over year. Semiconductor supply in Q2 was an improvement over prior quarters with fewer chips negatively impacting our production.

Speaker 1

As a result, we were able to come closer to meeting the full demand from our customers in the Q2. Q2 was similar to the Q1 in terms of product sales. Digital clusters led product sales driven by the ramp up of recently launched programs with General Motors, Volkswagen and Nissan. The company has managed the industry transition from analog to digital very well, starting the digital clusters, which now represent 70% of our total cluster sales. This compares with less than 20% in 2019 when the transition to digital first started to accelerate.

Speaker 1

Our SmartCore sales grew at a robust 45% year over year driven by vehicle launches at Geely, Mahindra and Mercedes. SmartCore is now our 2nd largest product after digital clusters and continues to grow rapidly. As the industry transitions to software defined vehicles, our SmartCore business puts us in an excellent position to take advantage of that trend. As previously mentioned, 2023 is a transition year for our displays business with ramp up of recently launched large Multi Display Systems mostly offsetting the ramp down of our displays business with BMW. We expect our displays business to start to grow again in 2024 as the recently launched products start to ramp up in volume.

Speaker 1

Our infotainment business saw double digit growth in Q2 due to strong demand for our Android based system with Volkswagen and the ramp up of new launches with Stellantis. Lastly, our electrification business started to ramp up in Q2, Although at a slower pace than we had anticipated earlier, as our customers' electric vehicle production has ramped more slowly than they predicted. We expect our BMS business to grow steadily in the second half of this year as our customers ramp up their EV production to achieve their targets. In summary, Q2 turned out to be very much in line with our expectations with strong demand for our digital cockpit products, reflecting the ongoing digital transformation of the industry. We expect to continue to outperform the market as the underlying demand for our product Semiconductor supply continued to show improvements in the Q2 with supply improving modestly compared to the Q1.

Speaker 1

The combination of increased capacity in semiconductor supply chain and lower demand from other industries, most notably consumer electronics, Has resulted in supply for automotive to increase for 2 consecutive quarters. There are still a few analog and power chips that are in short supply And while chip supply is expected to continuously improve going forward, there will still be lingering shortages for the foreseeable future. Nevertheless, the increased semiconductor supply combined with product redesigns to use alternate chips Resulted in Visteon having to depend less on open market purchases in Q2 to meet demand from carmakers. On the right side of the slide, you can see the effect of the chip shortages and the need for open market purchases, which peaked in the second half of last year. Since then, the number of semiconductor parts in critical shortage have significantly decreased And the supply challenges have become more manageable, resulting in a major reduction in open market purchases thus far in 2023.

Speaker 1

In addition to the lingering shortages of some analog and power chips, in Q2 there was a disruption in supply of a microcontroller that is widely used in digital clusters at Visteon. While the cause of the disruption has been fixed by the supplier, The resulting supply outages constrained our digital cluster production in Q2, which will also likely linger into the second half. We have started work on redesigning some clusters to mitigate the anticipated supply constraints for this microcontroller, which we expect to launch by the end of Q3. We expect semiconductor supply to continue to improve modestly throughout the year. Together with product redesigns, I'm confident that we can achieve the growth we are expecting in the second half.

Speaker 1

I'm proud of how the Visteon team has navigated the semiconductor shortages over the past 2 years. The work is not over, however, As we are actively engaging with our suppliers to support our growth for the remainder of the year and into 2024. I'm optimistic in our ability to secure the supply needed based on the improvements in the supply chain and the actions we have taken. Turning to Page 5. At our Investor Day earlier this year, We discussed our plans for extending our electrification business beyond battery management systems.

Speaker 1

The need for faster charging, higher power conversion efficiency And greater safety of electric vehicles offer interesting opportunities for Visteon for the midterm. I'm very pleased to report that we have secured our first EV powered electronics win with a European luxury OEM For an integrated battery management and high voltage junction box, what we refer to as our spark junction box. This system will be used for all vehicles based on the next generation luxury EV platform with this OEM And the first launch is in 2026. The Smart Junction Box integrates battery management functionality with high voltage junction box features in a more compact and lightweight package. This integration enables the implementation of more sophisticated diagnostic and safety features that are not possible with the traditional discrete approach.

Speaker 1

In addition, the reduced size and weight of the combined system contributes to weight reduction for this next generation electric vehicles. In addition to the Smart Junction box, we also won the Cell monitoring controller portion of the battery management system for this platform. There's 1 cell monitoring controller per battery module with multiple modules making a battery pack. This win is a significant milestone for the company and gets us started with our power electronics strategy. As we highlighted during our Investor Day, power electronics provides An incremental content per vehicle opportunity for Visteon.

Speaker 1

This program will give us over $700 per vehicle of electrification content between the Smart Junction box and battery management system and will ramp up in volume throughout the rest of the decade after initial launch in 2026. This win is also a great example of the dynamic nature of electric vehicle powertrain technology, which continues to evolve rapidly. We expect further integration of other functions that would offer similar opportunities for Visteon to grow in this domain. Turning to Page 6. New business wins in the 2nd quarter were very strong at $2,500,000,000 which is a record for the company and brings our first half total to $4,000,000,000 The strong first half and the robust pipeline of opportunities The remainder of the year gives us confidence that we will surpass a $6,000,000,000 full year target.

Speaker 1

We continued our momentum in electrification with an additional $1,000,000,000 in new business bookings in the 2nd quarter. The electrification bookings for the quarter included a follow on extension win for an existing battery management system program in addition The new Smart Junction box and integrated BMS discussed on the prior slide. New business wins on electric vehicles Has steadily increased over the past few years and in the first half about a third of our Digital Cockpit new business wins were for electric vehicles. While the share of EV business is expected to grow going forward, we also see strong demand for new cockpit electronic systems for ICE vehicles. The challenges faced by most OEMs in transitioning to electric vehicles are public knowledge And these OEMs will continue to rely on their high volume and profitable ICE business for several more years.

Speaker 1

Visteon's powertrain agnostic digital cockpit products are well positioned to support these OEMs across all their vehicles. And we have highlighted some Q2 wins on the right of this slide. The first win highlighted is an extension of a high volume, high content, All digital cluster currently in production for trucks and SUV platform for North American OEM. Extension of the program secures revenue contribution through our midterm targets and demonstrates the ongoing commitments Our OEM customers are making with a highly profitable ICE vehicle lines. The second win highlighted demonstrates Ongoing momentum we are building in the 2 wheeler segment.

Speaker 1

This win is for an 8 inches display based digital cockpit system with the European OEM for the Sport 2 wheeler line. The display is touch capable and uses Visteon's proprietary local dimming technology to provide enhanced display visibility in varying level of sunlight and weather conditions. The 3rd win highlighted This is the 1st multi display win with this OEM following the recent conquest wins for single displays. This large display will be featured on the higher trim of the OEMs B segment vehicle, which is indicative of the multi display trend Starting to move downstream into mass market vehicles. The last program been highlighted is a 12.3 inches digital cluster display for a large Japanese OEM.

Speaker 1

This cluster will be equipped on a global vehicle for the OEM's premium brand and is expected to go into production in 2025. This program represents the 3rd cluster win with this customer in the last 2 years And we believe there's a good runway for further growth opportunities with this OEM. Turning to Page 7, The company launched its products in 35 new vehicle models across the globe in the Q2, demonstrating exceptional operational execution. Every new launch requires customization of the product to fit unique requirements of each vehicle and market in addition to ensuring We had several follow on product launches across all regions. In Europe, we launched a digital cluster program on several high volume SUV nameplates for Mercedes, including the GLE, GLC and the GLA.

Speaker 1

In the Americas, we launched a 10.25 inches display audio infotainment system on the Citroen C4 Cactus for Stellantis in Brazil. This existing program supports smartphone projection and was initially launched on the Peugeot 208. In China, we launched a 12.1 inches center infotainment display with JMC for their flagship electric pickup We have an active commercial relationship with this domestic Chinese OEM having launched several display programs now and supporting the automaker with several other products that we will be introducing to the China market in the future. Lastly, I would like to highlight the launch of our SmartCore cockpit domain controller with Harley Davidson on their Touring Cruiser 2 wheelers. This SmartCore system uses a 12 inches display to offer a rich set of digital cluster and connected infotainment features that are comparable to that offered by any passenger vehicle.

Speaker 1

This program is introduced 1st in North America and will be followed by launches in other regions around the world. While this system is the most advanced of its kind in the 2 wheeler market and probably appropriate only for the top end of the 2 wheeler market, This product and the 8 inches digital cockpit win with the European 2 wheeler OEM discussed on the previous page highlight the fact The 2 wheeler industry are starting on their own digital and connected transformation similar to passenger vehicles. The transition to electric powertrain for 2 wheelers is also adding more fuel to this trend. We believe that this emerging 2 wheeler trend Presents an interesting opportunity for Visteon to extend our digital cockpit products into an adjacent market. I will discuss this opportunity further on the next page.

Speaker 1

Turning to Page 8, 2 wheeler OEMs have traditionally offered very basic equipment for driver information that has lagged The passenger vehicle side of the automotive industry, the relatively higher cost of advanced electronics as a share of the total vehicle cost And the perceived lack of compelling features for their customer demographic resulted in the industry making slow progress on this front. However, the connected and digital lifestyle made possible by consumer electronics is changing consumers' expectations for all forms of mobility when it comes to technology. Diodes and gauges are just not acceptable anymore to the emerging consumer all around the world and 2 wheelers are not immune to this global trend. Visteon's digital cluster, Android based infotainment, displays and SmartCore technologies are very well suited for the needs of both 4 wheeled and 2 wheeled vehicles. Our platform based technology development approach enables us to build products for 2 wheelers quickly, leveraging the extensive work we have done for passenger cars.

Speaker 1

Additionally, we can also bring the benefit of scale produces nearly 40,000,000 vehicles each year excluding the very low end of the market. We believe about 10% of this market It's currently addressable by Visteon and we expect the segment of the market to grow rapidly through the rest of the decade. Much like with passenger cars, the trend of digital cockpit and 2 wheelers is starting at the high end of the market with cruiser and touring bikes. Our SmartCore launch with Harley Davidson is a good example, which features a 12 inches display that offers a rich set of cluster Connected infotainment features that is comparable to that offered in premium passenger vehicles. Sport bikes form the bulk of the higher value 2 wheelers We are starting to see more digital content in the cockpits of these bikes.

Speaker 1

Premium sport bikes are now being equipped With larger displays and embedded digital cluster and infotainment, while the rest of the sport bikes are using smaller 5 inches displays And smartphone projection for apps. The recent 8 inches display based digital cockpit win in Q2 with a European OEM It's a good example of the trend in premium sport 2 wheelers. Also similar to passenger vehicles, We expect high content systems to migrate quickly from the upper to middle and lower segments of the 2 wheeler market. Prices for cockpit domain controllers and digital clusters for 2 wheelers are similar to the prices offered in passenger vehicles as the content is also similar And ranges from greater than $3.50 for cockpit domain controllers with large displays to about $200 for digital clusters And about $100 for displays with smartphone projection. While the current market size is relatively small at just over $500,000,000 We expect it to grow rapidly with greater penetration of digital content across all segments.

Speaker 1

The launch with Harley Davidson and the recent win with the European OEM puts Visteon in a great position to move quickly and take leading share of this fast growing market. Turning to Page 9. Industry vehicle production in the first half of the Has been strong due to the pent up demand from consumers and the need for inventory restocking. As a result, Demand from our customers has remained strong and the acceleration in sales growth over the last few quarters is due to the easing supply constraints that have enabled us to deliver on a higher portion of the demand. As we look towards the second half, We expect consumer demand to remain fairly resilient, but against a backdrop of decreasing order backlog for OEMs.

Speaker 1

In China, passenger vehicle production has improved gradually following COVID lockdowns last year. However, the slowing growth in the region Has resulted in a slower recovery in vehicle production. Further, Visteon's customer production has been impacted As the domestic Chinese OEMs have taken share from global OEMs, we believe this will continue to be the case in the second half and likely remain a headwind to our customer production in the near term. Within North America and Europe, Inventory restocking and order backlog fulfillment supported production growth to start the year. With inventory levels Beginning to normalize in North America and with orders slowing in Europe, we expect pent up demand to be less of a contributor to vehicle production going forward.

Speaker 1

For Visteon, we expect our sales to continue to outperform the market and grow in the second half. Our product launches to date And planned launches over the next few months will accelerate growth in the back half of the year. Additionally, our battery management sales have been slowly increasing And we'll continue to ramp up as our OEM customers introduce more electric vehicles to the market. With the product ramp up as well as lower headwinds From the display program roll offs mentioned on the prior slide, we expect our growth of our market to remain strong in the second half. Our new business wins to date reflects the high demand for our digital cockpit and electrification products and the increasing size of capabilities are paying off as we have seen an uplift in our win rate this year.

Speaker 1

Our commercial traction reflects Our technological leadership and OEM recognition of the value we provide in the next generation of vehicle architectures. As a result of the new business wins so far this year and the robust pipeline for the remainder of the year, we expect our full year bookings to exceed $7,000,000,000 positioning us well for future growth. Turning to Page 10. In summary, the company performed well and delivered another quarter of growth that outperformed our customers' vehicle production. Our disciplined execution of our growth strategy plans resulted in strong sales growth of 18% excluding currency, While our commercial discipline generated an adjusted EBITDA margin of 9.2% or 10.7% when excluding exceptional recall charge.

Speaker 1

We have continued to build a strong foundation for further growth through new product launches and $4,000,000,000 in new business wins. Our ability to deliver on challenging production cycles and a product portfolio that is well aligned with the industry trends Positions us to continue to outperform the market going forward. With our performance in the first half of the year, we are on track to achieve our full year guidance that we issued at the start of the year and our new business wins support our targets that we provided at our Investor Day. Now, I will turn the presentation over to Jerome to review the financial results.

Speaker 2

Thank you, Sachin, and good morning, everyone. Visteon's 2nd quarter financial results were solid and demonstrated our ongoing focus on commercial and operational Despite an exceptional charge that we took in the quarter for a product recall with 1 of our customers, We are executing per plan and we are on track to achieve our full year objectives. Q2 sales were $983,000,000 and grew 18% compared to prior year when excluding foreign exchange. Sales benefited from higher customer volumes as well as from recently launched programs supported by an overall improvement in semiconductor supplies. Growth of the market, net of pricing, was 15% and represents our 17th consecutive quarter of growth of the market.

Speaker 2

Semiconductor supplies has continued to improve and our reliance on open market purchases has reduced significantly compared to the end of last year. The associated pass through recoveries have therefore followed the same trends. However, we continue to see elevated prices from our traditional Tier 2 suppliers and we're continuing to share the higher costs with our customers. While I am pleased with the progress made in securing agreements with customers in the first half of the year, there are several agreements that still need to be finalized in the second half. Adjusted EBITDA was $90,000,000 for the quarter and included the exceptional record related charge of $15,000,000 and negative impact of 150 basis points to EBITDA margin as Sachin discussed earlier.

Speaker 2

Excluding this charge, our EBITDA improved by $26,000,000 or 140 basis points versus prior year. Our run rate EBITDA margin therefore remains above the 10% mark. Adjusted EBITDA benefited from higher base sales and improved operational efficiencies. This was partially offset by unfavorable exchange impacts as well as increases in net engineering and SG and A expenses as we continue to strategically invest to support our growth. In the quarter, we secured additional recovery agreements with customers that were retroactive to the beginning of the year.

Speaker 2

As a result, the net impact in the Q2 from semiconductor and other material cost leakage was relatively neutral and in line with prior year. Adjusted free cash flow was $32,000,000 in the quarter, resulting from a strong operational performance. As Sachin highlighted, We began to execute on our share repurchase authorization announced in March with $30,000,000 in share repurchases at an average price of just under $142,000,000 We ended the 2nd quarter with a net cash position of $111,000,000 in line with our targeted net cash number. Overall, our results in the first half provide a strong foundation for the second half of the year. We remain on track to achieve our targets for sales growth, margin expansion and cash flow generation this year.

Speaker 2

Turning to Page 13. Sales were $983,000,000 for the quarter. When excluding customer recoveries, Base sales were slightly above $900,000,000 representing growth of $195,000,000 or 27% compared to the prior year. This increase in base sales was primarily driven by higher customer production volumes and our continued market outperformance fueled by recent product launches. Visteon customer vehicle production volumes increased 12% from the prior year driven by improved semiconductor supply, supporting strong customer demand in both North America and Europe.

Speaker 2

This year on customer production in China also improved year over year, but this was primarily due to the lower production levels that we experienced in Q2 last year as a result of the COVID lockdowns. We delivered another quarter of double digit market outperformance, Thanks to the ongoing demand for our digital cockpit products and recent launch activities. Large cluster programs across all regions as well as various SmartCourt programs in Europe and Asia continue to drive sales growth and outperformance. Customer recoveries, which are illustrated in the dotted boxes, declined year over year by 40% to approximately $75,000,000 driven mostly by a decrease in recoveries of open market purchases. We expect open market purchases and therefore customer recoveries of these specific purchases to remain low for the remainder of the year.

Speaker 2

This is a welcome development for both Visteon and our customers and it reduces the total input costs for semiconductor parts and reinforces a return to a more stable semiconductor environment. Recoveries related to higher costs from our traditional Tier 2 suppliers are expected to remain stable over the rest of the year. As a reminder, recoveries, although bucketed as pricing, are pass through in nature, increasing Sales and neutral for adjusted EBITDA, but dilute margin percentages. Adjusted EBITDA was $90,000,000 for the quarter and included the $15,000,000 exceptional recall charge. Excluding this charge, adjusted EBITDA increased by $26,000,000 versus prior year or 140 basis points, primarily driven by higher base sales, operational efficiencies and a few $1,000,000 of net positive one timers.

Speaker 2

This was partially offset by negative foreign exchange impacts, higher net engineering and increased SG and A. Net engineering was higher compared to the prior year due to the timing of engineering recoveries and the investments we're making in innovative technology around the software defined vehicle and electrification. Adjusted SG and A was higher mostly due to personal costs. We continue to invest in our team to support our strong growth, but equally we will leverage our cost structure as we scale up. Our net engineering and SG and A costs as a percentage of sales for the first half of the year were 6% and 4.5% respectively.

Speaker 2

Despite the exceptional charge we took in the Q2, we delivered solid financial results that were in line with our expectations. We continue to demonstrate our ability to overcome lingering supply chain challenges, while delivering on a high number of program launches, which support our future growth. Turning to Page 14. We continue to maintain one of the strongest balance sheets in the industry. Our balance sheet supports our growth and provides the flexibility needed to pursue our capital allocation priorities.

Speaker 2

We ended the quarter with total cash of $459,000,000 and a net cash position of 111,000,000 At our recent Investor Day, we announced a $300,000,000 share repurchase program that runs to the end of 2026. In Q2, we repurchased $30,000,000 at an average price of just under $142 per share. We intend to continue utilizing the share repurchase program authorization and will remain opportunistic in our execution. We generated $32,000,000 of adjusted free cash flow in the quarter. In the first half, adjusted free cash flow was an outflow of $5,000,000 In line with our expectations and normal seasonality, trade and other working capital items were an outflow in the first half, which we anticipated and which we expect will partially unwind throughout the remainder of the year.

Speaker 2

Cash taxes were higher than prior year Due to the cash payments related to increasing profitability in some jurisdictions also in line with our expectations and contemplated in our guidance. Interest payments remained low and primarily relate to our $350,000,000 term loan that matures in 2027. We had our first amortization payment of $4,000,000 in the Q2 of 2023. These modest amortization payments will continue on a quarterly basis through the maturity of the facility. CapEx was $51,000,000 in the first half.

Speaker 2

We expect CapEx to increase in the back half of the year, reflecting our ongoing investment in manufacturing and electrification to support our growth. We continue to expect CapEx of $130,000,000 for the full year. Turning to Page 15. Based on our performance in the first half of the year and our expectations for the second half, we are maintaining our full year 2023 guidance. For sales, we are maintaining our guidance range of $3,950,000,000 to 4,150,000,000 Since we initially provided guidance back in February, the industry produced more vehicles in the first half than anticipated As improved semiconductor supply supported pent up demand, particularly from strong European order books and inventory restocking in North America.

Speaker 2

Aggregate industry production growth in the first half needs to be viewed at a more granular level As much of the total increase is related to BYD in China and native EV OEMs that are not currently in our customer base. We expect these OEMs to increase productions further in the second half. Based on the strong first half production in Europe and North America, As well as the ongoing customer mix headwinds in China, we anticipate Visteon customer production will be lower in the second half relative to the first half of the year. Lower Visteon customer production will be more than offset by our growth of our market expected to be in the mid teens in the second half. This will be driven by product launches that are contributing to our sales growth as well as an increase of our electrification programs as compared to the first half, though at a slower rate than our OEM customers initially anticipated.

Speaker 2

We're maintaining our adjusted EBITDA range of $405,000,000 to $445,000,000 to continue to track towards the midpoint of the range. We expect the flow through of higher sales to be the most significant contributor to our EBITDA growth versus the first half of the year with SG and A and net engineering remaining flat compared to H1. Additionally, we continue to expect to meet our semiconductor and other raw material cost leakage target of negative $20,000,000 for the full year. Our adjusted free cash flow range of $115,000,000 to $165,000,000 confirms our assumptions for the second half, including Our adjusted EBITDA range, a moderate working capital unwind and higher CapEx spending. On the right side of the slide, you can see the 20 26 targets we set earlier this year at our Investor Day.

Speaker 2

With $4,000,000,000 of new business wins and continued strong customer demand across our product lines, we made a step in the right direction in the first half. Turning to Page 16. Visteon remains a compelling long term investment opportunity. We have positioned the company for top line growth, margin expansion and free cash flow generation. We will continue to return cash to shareholders while maintaining a strong balance sheet, which provides significant flexibility.

Speaker 2

As Sachin mentioned, our solid start of the year Gives us confidence in our 2023 guidance and we are on track to achieve these targets as well as our 2026 targets. Thank you for your time today. I would like now to open the call for your questions.

Speaker 3

Thank We will take our first question from Tom Narayan with RBC Capital Markets. Your line is open.

Speaker 4

Hi, thanks guys. One point of clarification, just understanding the 2023 guidance. So Yes, I mean industry wide production is coming in better than expected, but I guess the points you made were That maybe you guys specifically aren't seeing it. A lot of it's coming from China or OEMs not near customer bases. Is that the primary reason you would say why Despite improved production volumes, you're not raising your guidance or were there other factors that contribute as well?

Speaker 1

Good morning, Tom. This is Sachin. Let me first take that question and then I'll invite Jerome to also provide some more color. But first of all, what I would like to say is that we are very pleased with how our revenues have developed in Q1 and Q2. If you look at it on a half basis and year over year, our base sales excluding recoveries Grew a very robust 20 plus percent year over year.

Speaker 1

Now when you look at the Rest of the year, the outlook in terms of global vehicle production, second half of this year It's more or less flat in terms of global vehicle production to first half. Now within that, the Visteon customer mix is slightly negative. Despite that, our sales at the midpoint of our guidance would imply at least a 7.5% or 8% Half over half growth. So that's a pretty robust performance. And when you factor into it that our BMS Ramp up has been slightly lower than our initial expectations.

Speaker 1

It still results in a Very robust double digit growth of market for the full year of 2023. From a revenue viewpoint, therefore, we don't really see this As a somehow missing the benefits of the vehicle production, I think we You are doing very well. And similarly on our EBITDA performance, driven by Our operational execution, but I'll let Jerome speak more to that.

Speaker 2

Yes. No, thanks, Achin. Yes, indeed, First half versus second half, a lot of growth in terms of sales, and that will allow us, in fact, to be at the midpoint of that guidance in EBITDA terms. In terms of how we executed in Q2, As we've said in our prepared remarks, very strong quarter sales wise, but as well EBITDA wise. In fact, we are slightly better Than what we had anticipated when you exclude the one time charge that we took.

Speaker 2

And that does two things for us. It gives us a good run rate as we go into the 3rd Q4. And it will allow us as well to absorb that one time charge that we had in Q2. So overall, a good sales performance in the first half, but as well a good Improvement in the second half will allow us to be essentially at the midpoint of the EBITDA guidance that we had, Despite the one time recall that we had.

Speaker 4

Thanks. Yes, that's a good point on the one timer, I forgot about that. The second question I had was the win you guys got, the European luxury OEM, integrated battery management system. Just curious how these work and apologies if this is a naive question, but are these typically like exclusive to Visteon? And I know competition in this category is high, we're an EV component.

Speaker 4

Just curious like what the main factors are to winning these Types of businesses are there? Is it mostly just pricing or is it something else? Just curious. Thanks.

Speaker 5

Yes.

Speaker 1

Yes. That's a very good question. And so the first thing I would say is to answer your question directly, it is an exclusive win. So it's going to be Only Christian just won't be providing this integrated submission. And we had previously stated on our Investor Day that our strategy for EV Power Electronics is based on technology driven differentiation, We are really interested in those opportunities where using our technology capabilities, we can solve specific challenges and this win What we refer to as a smart junction box is a great example of this type of a product.

Speaker 1

It's a combination of BMS as well as a battery junction box. And it supports some of the most advanced features required for this next generation vehicles, including us being able to switch from 400 volt batteries to an 800 volt operation, plus advanced diagnostics and safety, Plus in a very compact and lightweight package. Now the first two features really come from the BMS side of pathology. And the reason we won this business is on account of our capabilities and proven expertise in BMS. So again, we are very pleased that this is a quick sort of a turnaround from when we first talked about The junction box and the smart junction box to landing this business with a very credible and capable OEM.

Speaker 1

And this, I'm sure, will lead to further opportunities in these types of more and more integrated solutions. Now just to be also clear, this business is on a new platform that the OEMs developing for their luxury vehicles, But it also gives us the potential to then take it into the other platforms, their performance and the value brands that they have within their portfolio. So it's a very significant opportunity and an opportunity that's going to have a very long tail, plus Brings us into this power electronics business that we had not been present in previously. So very excited about it.

Speaker 4

That's great. Thanks a lot. It sounds like a big win for you guys. Thank you.

Speaker 6

Thank you. Thank you.

Speaker 3

We'll take our next question from James Picariello with BNP Paribas. Your line is open.

Speaker 7

Hi, guys. I just want to hit on the retail charge again. So this is not something that's going to get recovered You know, buy you from a related supplier, right? So this is an additional $15,000,000 charge For the year that wasn't previously contemplated in your guidance. So I suppose my question is without that impact, Your ability to maintain your guidance here, right, I mean, there's a 40 basis point hit to your margins.

Speaker 7

So you're in effect raising, right? You're in effect raising by about 40 basis points your margin trajectory for this year. Is that a fair way to think about this recall Charge in the implied improvement in your underlying business from a profitability standpoint?

Speaker 2

Absolutely, James. It's absolutely the right way to look at it. Without this Charge, we would have increased our EBITDA guidance, not our sales guidance, but our EBITDA guidance. And it's largely because Our run rate is slightly better already at the end of H1 going into the second half. So in terms of EBITDA, we are slightly above 10% of EBITDA margin when you exclude the charge.

Speaker 2

And we are contemplating being close to 11% in the second half, and that allows us to be at the $425,000,000 Of EBITDA for the full year. So you're absolutely right, we would have raised guidance on the EBITDA side if we hadn't had the charge.

Speaker 7

Understood. And then can we just revisit the semi supply A situation that might have some persisting problems that need to be addressed. I just want to Make sure I fully understand what's happening on the semi sourcing, the chipset comment that was made. Thank you.

Speaker 1

Sure, sure. So in general, I would characterize semi supplies as continuously improving And the number of parts that are in critical short supply situation is reducing with every quarter, But we should not necessarily think that that issue is going to get to a point yet this year where We will have no shortages, so we need to be clear about that. So our redesign activity that we have talked about on previous Earnings calls is really helping us bridge the gap between supply and the customer demand. So in this quarter in Q2, We came closer to meeting 100 percent of the customer demand in any other quarter. So that's an improvement.

Speaker 1

One thing that we did highlight This issue with a microcontroller that is used in a few digital clusters at Visteon that I had a disruption in supply. I want to also be clear in communicating that disruption was And that issue was addressed by the supplier and so production is back up, but it created an air bubble that We felt in Q2 and we may have some lingering effects of that in Q3 and Q4. So what we have decided to do to be prudent Is to undertake some redesigns not to put ourselves at any risk, especially because we see continued growth of our digital clusters business even extending into next year. So, our approach at being proactive and quick about redesigns, I think is Pretty unique in our ability to then capture more of the customer demand and this is the same thing we are doing in this particular case. So my expectation is for second half supply will improve modestly.

Speaker 1

We can expect that the industries From a semiconductor supply chain perspective, improved 10% to 15% year over year and that's going to be The case this year as well. And our demand is a little bit higher than that. So the redesigns are also very key in terms of us being able to address The gaps. So we feel pretty good. We are on track with what we have stated earlier.

Speaker 2

And I would add as well that all these improvements translate into much less Open market purchases. We've seen a fairly sizable decline from Q4 levels into Q1 of this year and even Q2 this quarter, we had less than $10,000,000 of open market purchases and recovery. So It's a good indicator of the improvement that we're seeing in the supply. Thanks.

Speaker 3

And we'll take our next question from Ron Yefickel with Guggenheim Securities. Your line is open.

Speaker 6

Great job on the name. Good morning and thanks for taking my questions, Sachin and Jerome. Appreciate the color on the power electronics business and the ability to move beyond the luxury designation of that OEM over time. Just remind us on the junction box and maybe other power electronics. Does that have a similar CPD shift Like we see with BMS, with based on the size of the battery packer, is that a bit more agnostic?

Speaker 1

Yes. I would say the junction box CPV is determined more by the 4 hundredeight 100 watt capability, unlike in the case of the BMS, which is driven More by the size of the battery, right? The size determines the number of cells that need to be monitored and that's what drives CPV on the PMS, in the case of the junction box, the 400 to 800 volt transition and being able to switch Drives the higher CTV.

Speaker 6

Okay. That's helpful color. And With GM announcing the extension of life on the Chevy Bolt, is there a benefit to Visteon there? Or I guess conversely, If the Bolt takes a larger share of the overall GM electrification pie going forward, would that be a headwind to your BMS assumptions?

Speaker 1

Yes. So the way to think about our business with GM is really driven by the Production and uptake of the Ultium batteries. So in the near term, right, our Battery management systems with them is directly dependent on how they do with respect to the Ultium battery usage. So it's hard for us to say exactly what that old battery configuration might look like if it is Altium and part of what we supply, clearly that will be a benefit to us. Having said that, All of our discussions with the customer indicate a steady ramp up of the battery management product from us to them That will continue for this year and into next year.

Speaker 1

So it has been delayed a little bit in terms of the timing as we discussed in our prepared remarks. By no means we think that this is something that is coming lower than our initial expectations. We do fully expect it to kick up in terms of demand and production as we go forward.

Speaker 6

Thank you. And maybe just sneak one quick Question on BMS, your second customer launch, can you update on the timeline when that's expected and the markets that will be offered in?

Speaker 1

Yes. So we will start to ramp our production later this year and I believe the customer production of the vehicle starts in the Q1 of next year. So pretty close in terms of when we will go into production. I should also mention that there are several vehicles that will be launched fairly quickly after the initial launch. So pretty excited about that ramp up next year.

Speaker 6

Thanks. I'll hop back in the queue. Appreciate it. Thank you.

Speaker 3

We will take our next question from Mark Delaney with Goldman Sachs. Your line is open.

Speaker 5

Yes. Good morning and thank you very much for taking my questions. First, relative to the China domestic OEMs, you mentioned And your exposure there and having less sales into some of these China domestic OEMs, what steps, if any, is Visteon taking to better address those And how long may it take to have traction?

Speaker 1

Yes. And you might recollect, we have previously said that we have already Done a lot of work in terms of achieving a better balance between domestic and global OEMs in China. A few years ago, That distribution was eighty-twenty global OEMs to domestic. I believe last year it was more sixty-forty, so coming closer to our ideal fifty-fifty share that we would like to see. So what actions have we taken?

Speaker 1

We have really increased our engagements with OEMs in China domestic OEMs that we believe will have a good performance. This includes Customers like Geely that we have talked about before, but also JMC and we continue to ramp So we are very optimistic about especially our cockpit domain controller Our product line in China also looking at displays as a differentiated product from our side. So lot more to come based on some of the engagements that we are currently having.

Speaker 5

That's helpful. And then thinking about some of the technology development trends underway in the industry, some of the OEMs have discussed Using gesture and voice controls as an added part of some of these future platforms, Visteon is at the intersection of a lot of these key tech trends. And so just to better understand what Visteon may be seen and to the extent interactions with the vehicles moves beyond touch. Is that an opportunity for Visteon? Thanks.

Speaker 1

Yes. So we do see a lot of these things that have been already part of many of these technology initiatives at different customers. And to be honest, The success has been somewhat mixed in terms of the customer feedback, especially with gestures. Voice on the side has had a greater level of success, especially with the introduction of So, smarter systems like Alexa and its type in the industry. So, we remain very close to the key partners there, Whether it is Google or Alexa or Nuance in terms of voice technology And with gestures and other technologies, we are participating and working very closely with OEMs with their partners there.

Speaker 1

So The main thing though is that all these technologies are driving a higher need for computing Resources within the vehicle and that's what is contributing to the content increase that we see Not just at the luxury hands of the market, but also coming into more of the mass market vehicle. So we think all of these types of initiatives are good for Business for Visteon.

Speaker 8

Thank you. I'll pass it on.

Speaker 6

Thank you.

Speaker 3

We will take our next question from Shreyas Patel with Wolfe Research. Your line is open.

Speaker 9

Hey, thanks so much for taking my question. Just thinking about it as we look out the next few years, you previously talked about your BMS business growing About $600,000,000 of revenue by 2026. I'm curious as you've mapped that out, Have you taken into account any conservatism around some of the volume expectations That that underpins that kind of revenue. And similarly with this award that you just won on Power Electronics, Obviously, there's a lot of concern in the market regarding legacy automakers and some of the volume aspirations that they have with regards to EVs.

Speaker 1

Yes. Very good question, Faiza. So what I would start with is At the $600,000,000 for 2026 that we have talked about previously, I would like to reiterate that we We have already lowered that number from

Speaker 8

what

Speaker 1

our customers are telling us in terms of their demand. So it's already a number that we have taken down factoring all these concerns that we have about The ramp up and the speed of the ramp up. I do believe that over time that we will see higher levels of sales, But I think it is prudent for now to be a little more conservative than we would normally be, especially this is considering that it's a new Product for our customers and the industry at large. So we are comfortable with the 2026 Target of $600,000,000 is there an upside to it if some of these customers do better than what we think they would, Especially if they come anywhere close to their own stated objectives, yes, there is an upside to that. Now the specific PMS win that we talked about, it actually launches in the second half of twenty twenty six.

Speaker 1

So it's not going to be material to the 2026 targets, but it's hugely important going forward to continue Our growth in this category, however, the other BMS extensions that we have reported also this First half, I would say about a third of our BMS or electrification wins in the first half Counted by this junction box and BMS product, the 2 thirds of it is extensions of our existing BMS business that will help in terms of Our midterm targets and us either achieving or hopefully exceeding our midterm target.

Speaker 9

Okay, understood. And maybe, Jerome, just a quick question on how to think about engineering and SG and A For the second half, I apologize if you commented on this already, but just trying to think about that both In dollars and as a percent of revenue.

Speaker 2

Yes. No, good point. So we've at a very high level, H2 2 will look very similar to H1 for net engineering as well as for SG and A. So In percentage of sales, we were 6% for H1 for net engineering and 4.5% for SG and A. The dollar amount will stay stable in the second half, but obviously as volume ramps, we'll have an improvement in the percentage for both net engineering as well as SG and A.

Speaker 2

And we are essentially tracking in line with what we had in mind when we first issued guidance back earlier

Speaker 9

Okay, great. Thank you.

Speaker 6

Thank you.

Speaker 3

And we will take our next question from Dan Levy with Barclays. Your line is open.

Speaker 8

Hi, good morning. Thank you for taking the questions. I know you've noted, you've talked to maybe one of the Slow ramp on the EV front. Just wondering as far as BMS goes, If the ramp is slower, how should we think about the impact on margins, meaning How much upfront R and D has there been? And if it's a slower ramp of revenue, what is the impact on margins from that?

Speaker 1

Yes. So I would not say that there would be anything material. A lot of the Engineering that is related to the specific products that are part of this ramp up As already offered in the past and so the engineering related to electrification that's ongoing is for future business and also at a company level. These numbers I still credit a reminder and I do not expect that to have any significant impact.

Speaker 8

Great. Thank you. And then as a follow-up, a question on semiconductor and your sourcing. I know you've talked about redesigns of some of your architectures, at least in some of the sourcing, helping to mitigate some of the pressures. And I think you've had sort of the very unique circumstances.

Speaker 8

You actually have seen very limited leakage On semiconductor, which is a bit of a contrast versus what we've seen from suppliers broadly on materials. So Maybe give us some context of what we've seen that over the last couple of years, the leakage has been Generally minimal, what has driven that? And to what extent have the redesign played into that? How expensive are those?

Speaker 2

Yes. How

Speaker 8

much effort is it? What's the and how much more opportunity is it for that?

Speaker 1

Yes. So, no, good question. And so let me try to It's right that the bigger picture of semiconductors and how the last couple of years have played out. So One factor that I think we need to also keep in mind is when supply was very constrained and the industry Was really working hard to produce vehicles. Our parts, what we supply to the OEMs For one of the more desired set of components that the OEMs wanted to equip their vehicles with To lift the content, right.

Speaker 1

If they had only a few cars to build, they were going to build it with as much content as they possibly could. And so that helped us work with our customers to ensure that we were able to get the supply that we needed, whether it was from open market, Whether it was from suppliers themselves paying the surcharges, which also helped us recover Those are charges from our customers. So point number 1 is the nature of the products that we Our offer are very much what the industry needs to be competitive and for our customers to drive their margins. So that's something that should not be probably lost in the shuffle here. The second was Our redesign activity.

Speaker 1

By doing more redesigns, we were able to reduce the spend on These open market purchases faster than the competition. And I can tell you more anecdotally, some of our customers have told us that our execution in terms of managing This risk and the proactive sort of approach that we took was Highly appreciated by them as they had many other challenges to deal with. We were one of the ones that were able to get that under control earlier than many of our competitors. So that is in general that operational focus, execution focus And then the engagement with semiconductor suppliers that we made proactively was all All of those contributed to us being able to recover quicker and have lower leakage as a result.

Speaker 8

Thank you. That's helpful color.

Speaker 10

Thank you.

Speaker 3

And we'll take our next Question from Luke Young with Baird. Your line is open.

Speaker 11

Good morning. Thanks for taking the questions. First question I have is just on the Growth in the back half of the year, I think you'd been expecting the second half to be launch heavy and I'm just wondering if there's any metrics you can provide to help Animate that in terms of the expected 15% outgrowth and then specifically I'm wondering just your assumption around the ramp of wireless BMS, just if you could Maybe just put a finer point on how much you've derisked that for a potential slow ramp? Thank you.

Speaker 2

Yes.

Speaker 1

So Few points to address there. So first of all, we've talked about our new Model launches, meaning our products previously launched, being launched in new vehicle models. Obviously, these new vehicle models Generate incremental revenue for Visteon, so we are providing that information. And you saw that in the first half, It was about, I would say, 70 vehicle model launches that we had, which was a terrific performance in terms of just the execution. However, we've also previously indicated that more of our new program launches and the way we differentiate program versus new models, new program launches are Launches that have not occurred before, very new products and those new program launches were mostly second uploaded compared to say other years.

Speaker 1

And so about 2 thirds of this new program launches are yet to happen and will happen in the second half. So we will have a continuation of new vehicle model launches And on top of that, we will have some very meaningful new program launches, which is what It is the reason why we are seeing this year half over half improvement in revenues despite the Underlying vehicle production of our customers not growing. So that's the dynamic there. Now in terms of the BMS expectations and what we have done to derisk it is we have Reduced our expectation in our outlook quite significantly in terms of what the customers have provided as The signal, the demand signal. Obviously, we hope that we are perhaps More on the conservative side and the demand stays higher than what we have assumed.

Speaker 1

So Our assumption has been built on more or less the same flat line performance at the exit rate at the end of Q2. So each week there has been or each month there has been an increase in demand. And to be clear, our expectation for the rest The year has been at the same level as the exit rate of Q2. We are hoping that it improves further from that, in which case there might be some We're clearly prepared to supply at high levels, but we want to not necessarily have an expectation of I thought that what we think would be at least a high confidence number for us in terms of PMS sales. Hopefully, that addresses your question, Luke.

Speaker 11

It does. That's very helpful. Thank you, Sachin. For my follow-up, maybe a question for Jerome, if I look at the guidance and you exclude the recall charge this quarter, it's implying that there's some lift to the EBITDA in the back half of the year. And I'm just wondering what's driving that.

Speaker 11

You're looking at leakage being consistent with prior guidance. OpEx seems pretty Consistent as well in terms of net engineering spend and SG and A, is the business just gearing a little better than you expected this year?

Speaker 2

So a few things. Indeed, first, sales. We are increasing our sales between the first half and the second half by about $150,000,000 So you get quite a lot of flow through EBITDA, especially when our costs SG and A and engineering, net engineering stay Flat, H2 versus H1. So that's really what's happening. It's largely volume driven on a fairly flattish cost

Speaker 8

base.

Speaker 4

Understood. Thank you.

Speaker 8

Thank you.

Speaker 3

And we will take our final question from Emmanuel Rosner with Deutsche Bank. Your line is open.

Speaker 10

Hi, good morning. Thanks for squeezing me in here. I was hoping to put a final point again on the Industry production environment and I guess to what extent it does or doesn't help you this year or your outlook. I think In the Q2 specifically, if my notes are correct, I think at some point you were looking for probably like $1,000,000,000 in revenue Or better, obviously, it's coming a little bit short of that, but you've also said, obviously, production industry production is coming in somewhat Better than expected. So what I'm thinking about is in terms of both impact on Q2 and on the unchanged full year revenue guidance, is there like a Gaining factor

Speaker 2

in terms

Speaker 10

of the supply? I guess, where is the why is this not

Speaker 1

Very good. Yes, let me try to address that. So in Q2, we were expecting to come closer to achieving Full customer demand in terms of supply and we were short in terms of that objective By about $20,000,000 So that's the backlog, order backlog that we ended up with at the end of Q2. And that was driven by the semiconductor shortages that I mentioned earlier. And on top of that, In Q2, our BMS sales also came in a little lower than we expected.

Speaker 1

So that's really the Q2 dynamic.

Speaker 6

Now I want

Speaker 1

to be clear that in second half, the expectation of underlying vehicle production versus first half, There has been a lot of perhaps expectations that it's somehow going up. But in reality, if you look at all of the Our forecast for vehicle production second half is coming in flat with

Speaker 8

first half.

Speaker 1

And then when you look at Specific customer mix for Visteon is a slight negative. So in that environment, Our sales growth continues to be driven by this ramp up of products that have been recently launched and the new program launches that I just mentioned. And that's what's driving that our performance. Now, PMS and some of the other programs, if The ramp up occurs at a level that is perhaps higher than what we might have assumed. There may be some upside there, but we are pretty pleased with even at the midpoint of Hotpeo's guidance, let's say, 8% sequential growth 2nd half over first half and we think that's a pretty strong performance.

Speaker 1

And for the full year, we will be On track with our growth over market, especially looking at our midterm guidance and what we need To be able to achieve our midterm guidance, this year's performance will put us very much on track to achieve a dead goal.

Speaker 10

Great. That's super helpful color. And then just as a quick follow-up then on the full year basis, the Unchanged revenue guidance, are you still seeing it being negated by semi shortages In the back half or is this sort of like largely behind? And is it fair to say like the overall On a full year basis again versus previous expectation production is looking better than previously anticipated, but you also derisk the MS, At least I'm looking at the presentation here.

Speaker 1

Yes. So I would say from a semiconductor viewpoint, our expectation for second half is a gradual Improvement as compared to the first half. So we do expect that we would be able to Deliver to more of the customer demand as compared to the first half. And in terms of our expectation, Look, if you look at the first half, I would say that our actual performances come Very close to our initial expectation at the beginning of the year. So it is something that We take a lot of pride in looking at our outlook and try to not just be Only optimistic, but very realistic and thoughtful about what we think is likely to happen.

Speaker 1

And we feel the same about the second half. So I would say that it would come very much in line with what and how we thought It would initially play out despite some of the puts and takes that invariably happen. So yes, PMS is going to be a little lower, but We have seen pickup in other areas. So I think it nets out to where we thought we would be at the end of the year.

Speaker 2

I would say in Summary that we are really on track for our 2023 guidance, sales and EBITDA. We got a good run rate, And that gives us a lot of confidence achieving our 26 targets, especially when we had A lot of new business wins in the Q2. So I think that's kind of how I would summarize it.

Speaker 10

Great. Thanks again.

Speaker 6

Thank you.

Operator

This concludes our earnings call for the Q2 of 2023.

Speaker 3

And ladies and gentlemen, this concludes Visteon's Q2 2023 earnings results call. You may now disconnect.

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Visteon Q2 2023
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