Visteon Corporation

Good morning. I'm Chris Doyle, Vice President, Investor Relations, and Treasurer. Welcome to our earnings call for the third quarter of 2020. Please note 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. 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 Investor section of Vistion's website this morning. Please visit investors.vistion.com to download the material if you have not already done so. Joining us today are Sachin Alwande, President and Chief Executive Officer, and Jerome Rouquet, Senior Vice President and Chief Financial Officer. We have scheduled the call for one hour, and we'll open the lines for your questions after Sachin's and Jerome's remarks. Please limit your questions to one question and one follow-up. Again, thank you for joining us. Now I'll turn the call over to Sachin.

Thank you, Chris. Good morning, everyone. Vistion's third quarter performance reflects the proactive actions we took to align our business operations with the sudden impact to the industry caused by the coronavirus crisis. Our employees have proven to be resilient and resourceful in delivering to our customer commitments while simultaneously reducing costs. Our sales grew 3% year over year on a constant currency basis to $747 million in the third quarter, despite vehicle production being down 3% globally. Adjusted EBITDA was $87 million or 11.6% of sales, which is a record for the third quarter. This represents a 310 basis point improvement over last year, mainly due to cost reduction actions and our disciplined execution across all areas of our business. As a result, adjusted free cash flow was $103 million for the third quarter and $37 million for the first nine months. This is higher than prior year and the Q3 cash flow offset the negative adjusted free cash flow in the first half of the year. While sourcing activities at automakers has not returned to pre-COVID levels, Our new business wins exceeded $1.5 billion in the third quarter. This performance underscores the strength of our product and technology portfolio, which is very well aligned with the key trends impacting the industry. We also launched 23 new products, a record for the company, bringing the total year-to-date number to 44. The company has been undergoing a transformation of its footprint and business processes over the past several quarters, including the move toward a platform-based approach of product development. We initiated the third and critical phase of this transformation in the quarter that will result in increased operational efficiency and reduce structural costs across our business. With the improvement in business environment, And in our cash position, I'm pleased to report that the company repaid the revolving credit facility it accessed at the end of Q1 and ended the quarter with a net cash position of $87 million. With that, we are now back to pre-COVID levels in terms of net cash. I'm also pleased to report that the Visteon board and I have agreed to extend my contract for a period of five years. From a technology perspective, these are exciting times for the industry and I look forward to leading the company in its next phase of evolution. Turning to page three. Vehicle production improved in the third quarter with global production recovering to within 3% of prior year level. Retail demand was higher than expected, partly due to pent-up demand coming out of the Q2 lockdown as well as government incentives in some European countries. In addition, the restocking of depleted vehicle inventories at retail dealerships provided an added boost to the industry. While the overall market was down 3%, Visteon's top customers were down more at 6% decline year-over-year. Visteon's sales, however, were up 3% year-over-year on a constant currency basis, due to strong demand for digital cockpit products as well as new product launches that more than offset the impact of volume and product roll-offs. Sales of digital clusters more than doubled from the prior year's level and now represent almost half of our total instrument cluster sales. Digital cluster sales were particularly strong in Europe with customers such as Daimler, Renault, and PSA. In audio and infotainment, we continued the ramp up of recently launched programs with Ford and VW, which partly offset the non-recurrence of last year's sales promotion at SGM in China and the ongoing phase out of infotainment business with Mazda. Sales of digital displays also grew double digit year over year, due to launches of central information displays and multi-module displays with Mazda and SGM, respectively. Sales of displays to BMW also increased in the third quarter, driven by the increased attach rates in China. In summary, strong market demand for digital cockpit systems and the high number of new product launches continued Visteon's better-than-market performance in the third quarter. Turning to page four, I am very pleased to report that despite the restrictions caused by COVID-19, the company launched a record number of new products during the third quarter. We launched 23 new products in Q3, including products on flagship vehicles such as the new Ford F-150 and the Mercedes-Benz S-Class. The combined projected lifetime revenue of these 23 launches is more than $2.5 billion, which is the highest we have achieved for a single quarter, and will help us continue our market outperformance in the coming quarters. These new product launches were also well distributed across the different regions, with seven in China, five in North America, four in Europe, and the remaining in other parts of Asia. Two-thirds of the launches were for instrument clusters, of which half were all digital. In North America, we launched a 12-inch digital cluster plus audio and telematics on the all-new Ford F-150, which is the best-selling pickup in the region. We also launched a 12-inch digital cluster for the Cadillac CT5 as a mid-cycle upgrade, which replaces an analog digital cluster from a competitor. In Europe, we launched a feature-rich 12-inch digital cluster with the new Mercedes-Benz S-Class. This cluster offers 4K graphics, over-the-air software updates, and integration with augmented reality HUD. We also launched a 10-inch digital cluster for the all-new third-generation Peugeot 308 vehicle. It's a good example of how digital clusters are migrating to mass-market vehicles to support new functionality, especially integration with infotainment and ADAS. In China, we launched an 8-inch hybrid cluster on the new Buick Envision compact crossover and an 8-inch all-digital cluster for multiple models with VW. And in Japan, we launched a 10-inch center information display as a mid-cycle upgrade for the Mazda CX-5 compact SUV. The two-wheeler segment has historically used analog or LED gauges for reasons of cost, but is now looking to introduce digital solutions as well. In the third quarter, we launched an innovative digital cockpit system for Royal Enfield motorcycles with support for turn-by-turn navigation, phone integration, and software updates. The 23 new products launched in the third quarter bring our year-to-date total to 44 and continue our cadence of a high number of new launches. They showed that the company can execute and launch complex systems, even in this challenging environment, while keeping costs in check. Turning to page five. After the second quarter shutdown, sourcing activity at OEMs outside of China restarted in the third quarter, but did not quite reach pre-COVID-19 levels. Nonetheless, I'm pleased to report that our new business bookings improved to $1.5 billion in the third quarter, bringing the year-to-date total to $3.2 billion. Cockpit Electronics represented about $1 billion of the total. Of that, clusters led with about 50% of the share, audio infotainment at 20%, displays at 15% and the rest coming from other products, which is consistent with our recent performance. And unlike the first two quarters where most of the bookings came from Asia, China in particular, third quarter bookings were more evenly spread across all regions. Some key wins included a 12-inch cluster for a North American OEM's new pickup that will launch in 2023, and a 12-inch cluster for Japanese OEM as a mid-cycle upgrade for the sports car that launches towards the end of 2021. We also won a 12-inch cluster with the North American OEM for the vehicles in Europe and North America as a mid-cycle upgrade, which will also launch in about 18 months. Besides digital clusters, other key wins included a large 12-inch center information display for an OEM in Japan, which will replace the current smaller display as a mid-cycle update and an infotainment system in South America that's based on our new Android-based infotainment platform. In addition to cockpit electronics, we also booked a significant amount of additional business for our wireless battery management system with GM as the OEM and its partner added vehicle models to the EV platform. We had won the initial business with GM early last year and the first launch will be mid 2021. I will discuss our wireless battery management system in more detail on the next page. The pipeline for the fourth quarter is similar to the third quarter, but with a stronger mix of infotainment and displays. As the industry continues to recover, we expect sourcing activity to also increase in return to more normal level. and our product and technology portfolio has never been stronger with the progress we have made in infotainment and now in BMS solution. Turning to page six. Electric vehicles need enormous amount of power to operate and batteries for EVs are made from hundreds or even thousands of battery cells to deliver the required power. These battery cells need to be constantly monitored for their state of health and to maintain them within allowed operating ranges. This monitoring and management of the cells is done by a system of electronic devices and software that is collectively referred to as the Battery Management System or BMS. Today's battery management systems use wired connections between the different electronics components of the BMS. A wired system has several limitations, First, the wiring harness itself adds extra cost, weight, and space to the battery and requires additional work in manufacturing of the battery pack. Second, the limit design flexibility of the battery pack that limits its reuse across vehicle models. And third, the connectors and wires of the harness are prone to mechanical failures that are expensive to fix. The wireless BMS technology from Visteon replaces the wired connections with a highly secure and reliable wireless communication technology that eliminates these limitations with wired BMS solutions. We are developing the three electronics components of this solution, the wireless cell monitoring units, the wireless network control unit, and the battery control and vehicle interface unit to enable the assembly of battery packs without the need for low voltage wiring harness. The software algorithms that act on the information provided by the cell monitoring units are typically developed by the OEM in collaboration with the battery cell supplier. We integrate these algorithms in our system as part of the design and manufacture of the BMS solution. We are working with GM to introduce this solution on all planned EV models powered by their Ultium batteries. The wireless BMS system will help ensure the scalability of Ultium batteries across GM's future lineup, covering all brands and vehicle segments from heavy duty trucks to performance vehicles. And we are in discussions with other OEMs for this technology as well. Turning to page seven, Electric vehicles sold very well in the third quarter, especially in Europe, due to government incentives and tightening emissions requirements, and also in China, where sales of EVs have started to pick up again. The number of available models are also growing, giving consumers a greater choice than before. The growth in the market share of EVs is expected to continue, and by 2030, EVs are expected to represent about a fourth of the total market. Vestion is in a good position to leverage this trend. Our cockpit electronics products, such as digital cluster, infotainment, and smart core, are powertrain agnostic and can seamlessly work for EVs as well as traditional vehicles. Our new microzone display technology is ideal for high-quality automotive displays, but without paying a price in higher power consumption. And the wireless BMS provides a scalable solution for modular and reusable battery packs for OEMs. Our products are already on some of the best-selling EVs, such as the Zoe from Renault, which was the best-selling EV in Europe so far this year. Starting next year, our products will launch on multiple models based on new electric vehicle platforms, such as the BEV3 from GM, the PMA platform from Geely, and the new EV platform from Nissan. Turning to page eight. While retail demand in the third quarter was stronger than initially expected, Vehicle production volume was also helped by pent-up consumer demand and the replenishing of dealer inventories depleted by shutdowns in the second quarter. Government incentives, particularly in Europe, also helped spur production volume. Retail demand is expected to remain strong in the fourth quarter, particularly in the US and in China, but much uncertainty remains in the market. First, there is the risk associated with the recent increase in COVID-19 cases, the so-called second wave, and several countries are already considering stricter restrictions to control the spread. Second, government incentives in several countries in Europe that were put in place toward the end of the second quarter are slowly being phased out and will expire by the end of this year. Also, the next level of European vehicle emissions requirements go into effect early next year, which may have an impact on the volume and mix of vehicles produced in the fourth quarter. The third quarter's quick demand recovery has caused some market watchers to increase expectations for the fourth quarter, with some forecasts indicating a double-digit sequential growth in vehicle production. We believe these estimates are too optimistic and may not reflect underlying market conditions. Given the above risks and based on our discussions with OEMs, we believe the sequential growth will be more muted in terms of demand and production. On the other hand, while it is difficult to forecast vehicle production in this environment, we expect our outperformance to continue in the fourth quarter based on the same reasons that drove our results in the third quarter. Cockpit electronics trends and our new product launches will continue to be important factors that should drive our market outperformance to similar levels experienced in the third quarter. Turning to page nine. In summary, the company executed very well in the face of a challenging business environment, delivering another quarter of sales growth over market and at a robust 11.6 adjusted EBITDA margin. The 44 new programs we launched and the 3.2 billion in new business we've won year to date build a solid foundation for continued growth in the future. Our product and technology portfolio for the digital cockpit is stronger than ever before. And together with the wireless BMS solution is very well positioned to leverage the growing interest in electric vehicles. The proactive actions that we took to streamline our operations and restructure the organization have resulted in improved operational performance and optimized cost structure while maintaining a strong balance sheet that's helping us emerge stronger from the crisis. Now I would like to turn the call over to Jerome.

Thank you, Sachin, and good morning, everyone. In addition to the increase in activity levels compared to Q2, the financial results in the third quarter also benefited from the proactive actions that we initiated very early on this year, some of which were implemented before the COVID-19 pandemic. These actions were focused on actively generating and preserving cash and aggressively adjusting our cost base. Net sales were 747 million in the quarter, representing a 3% year-over-year growth rate when excluding the impact of currency. Adjusted EBITDA for the quarter was 87 million, representing an adjusted EBITDA margin of 11.6%. Adjusted free cash flow was 37 million for the first nine months of the year. Our focus on cost control is evident by the significant reductions in both engineering and adjusted SG&A that we are reporting. Gross engineering in the quarter is down 25% and adjusted SG&A is down 19% compared to last year. Both areas benefited from a combination of short-term and longer-term structural cost initiatives, which will allow Visteon to support a growing business with an optimized structure. Our focus on cash continued in Q3, allowing us to maintain a strong balance sheet. To address the numerous supply chain challenges throughout the last few quarters, we created a global sales and supply chain task force early in the pandemic, which continues today to optimize our inventory levels while ensuring we service our customers timely. We ended the quarter with 164 million in inventory, a 15% reduction year over year, representing a cash-in flow of 10 million from Q2 2020, and this despite a significant increase in sales on a quarter-over-quarter basis. CapEx was down 24% on a year-to-date basis, and we continue to target a 20% reduction for the full year versus 2019. In aggregate, adjusted free cash flow for the quarter was 103 million and 37 million for the full year. Q3 adjusted free cash flow also benefited from approximately 40 million of temporary supplier term extensions that we negotiated in the midst of the crisis in Q2, half of which will reverse in Q4 of this year and the remainder early next year. With cash generation coming in strong in Q3, combined with a strong balance sheet and improving activity levels, we repaid at the end of September the entire 400 million revolver credit facility that we had access as a precaution at the end of Q1. We also repaid our short-term debt. As a result, our total debt was reduced to 348 million at the end of the quarter. combined with a total cash position of $435 million, our net cash position after debt stands at $87 million. To put this in context, it is essentially the net cash position that we had at the end of 2019, which was $84 million. Turning to page 11. On page 11, we provide a summary of our sales and adjusted EBITDA for Q3 2020 versus 2019. Sales of 747 million in the third quarter increased 16 million euro a year, representing a 3% improvement when excluding the impact of currency. In comparison, industry production volumes declined 3% in the same period, while production volumes at Visteon's top customers declined by approximately 6%. Pricing represented 2.3% of prior year sales and continues to be within our historical ranges. The combination of ongoing new business wins and the robust launch schedule has enabled Visteon to continue to outperform the market. Adjusted EBITDA was 87 million, or 11.6%, representing an increase of 25 million versus prior year. Strong cost performance in manufacturing, engineering, and SG&A more than offset the negative impacts from mixed and annual pricing. We estimate that short-term measures implemented earlier this year, including temporary salary reductions and curtailed spending, benefited margins in Q3 by approximately 1.5 to 2%. These measures will not carry into Q4. Adjusted EBITDA benefited from permanent savings related to the restructuring programs announced earlier in the year and which are coming to completion. The most recently announced restructuring program will not have a material impact in the fourth quarter. Before moving to cash flow, I would like to provide some context on our continued decision to not provide guidance for the remainder of the year. Although we are optimistic coming out of the third quarter, the rate of change in production forecast has not stabilized. For instance, IHS forecast for Q3 improved nearly eight percentage points in the last three months, with a two percentage point improvement in just the last month. In addition, the fourth quarter has the typical uncertainty related to holiday shutdowns and year-end OEM inventory managements with the added complexity of COVID-19 this year. However, we do expect that. We will continue to outgrow the market in the mid to high single digits. Adjusted EBITDA will continue to benefit from the structural savings that we benefited from in the third quarter, while we do expect cost increase due to the expiration of short-term salary reductions and a gradual increase in discretionary spending. Engineering recoveries will not have the same seasonality in the fourth quarter as they had in prior year. We expect full-year net engineering to be down in the mid-20% range compared to prior year. In total, we are now anticipating that decremental margins will be in the mid teens for the full year. Moving to cash flow. Page 12 provides an overview of our cash and net cash position at the end of the quarter, as well as our adjusted free cash flow for the first three quarters of the year. Our balance sheet continues to be one of the best in the industry with a net cash position of $87 million and a net debt to last 12 months EBITDA ratio of negative 0.4 times with no near term debt maturity before 2024. Adjusted free cash flow year to date was $37 million and Q3 adjusted free cash flow was $103 million. Working capital was a source of cash, benefiting from our focus on optimizing inventory levels and negotiating temporary extended payment terms with our suppliers. Capital expenditures decreased by more than 20% on the year-to-date basis, putting us on track to reduce capex by 20% and spend $115 million for the full year. In the fourth quarter, we anticipate approximately a $20 million reversal from temporary supplier payment term expansions and will plan to contribute approximately $17 million to the Visteon U.S. pension plan. Despite these expected cash-out flows in the fourth quarter, we are anticipating adjusted free cash flow for the full year to be slightly above break-even levels. Turning to page 13. Visteon continues to be a compelling long-term investment opportunity. We have positioned the company for top-line growth, margin expansion, and increased free cash flow generation, while our strong balance sheet provides maximum flexibility. Thank you for your time today. I would now like to open the call for your questions.