Visteon Corporation

Good morning. I'm Chris Doyle, Vice President, Investor Relations and Treasurer. Welcome to our earnings call for the fourth quarter and full year 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 Awande, 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. Page 1 summarizes our fourth quarter results and our full year highlights. Visteon finished the year strong with sales of $787 million, up 5% year-over-year when excluding currency. Our strong performance was largely driven by the ramp-up of new products launched during 2020. Adjusted EBITDA was $75 million, or 9.5% of sales, and in line with our expectations. We also generated adjusted free cash flow of $59 million in the quarter. Adjusted free cash flow for the full year was $96 million despite the unprecedented industry shutdown in the second quarter followed by its V-shaped recovery in the second half. On the operational front, we continued to strengthen Visteon's future growth in the fourth quarter by securing 22 new business awards from customers worth $1.4 billion in lifetime value. This brings our full year new business total to $4.6 billion with $3 billion won in the second half. This is an outstanding achievement considering the industry environment and confirms that our strong technology portfolio aligns well with key trends in the industry. We also launched 11 new products in the fourth quarter, bringing the total for the full year to 55. This makes 2020 one of our best years ever for new product launches despite the pandemic. Our products were launched on some high-profile vehicles that appropriately received significant attention and scrutiny. The team deserves great credit for delivering on our customer commitments despite the COVID challenges. The stringent cost control measures and restructuring actions we took early in the year resulted in significant structural cost savings. All functions, including engineering, manufacturing, and SG&A reduced their cost base. Capital expenditures also decreased in line with our expectations for the year. In addition to improving our adjusted EBITDA margin and adjusted free cash flow, These actions allowed the company to finish the year with strong liquidity and a net cash position higher than our pre-COVID level. I will discuss our fourth quarter performance in more detail in the subsequent pages, followed by our outlook for 2021 before transitioning to Jerome to discuss the financials. Turning to page 2. The global automotive industry continued its recovery in the fourth quarter driven by robust consumer demand and the restocking of dealer inventories. From a year-over-year perspective, while overall global vehicle production was up, customers that represent almost 90% of our revenue saw a drop in vehicle production by approximately 2 percentage points, led by double-digit declines at Ford and JLR. While vehicle production at our top customers declined, our sales increased 5% year-over-year on a constant currency basis. Our performance was mainly driven by the high number of product launches over the prior four quarters. In the Americas, our sales were up 2%, driven by higher take rates on large displays and new product launches with VW and Ford for infotainment and digital clusters. In Europe, our sales were up 15% year-over-year on the strength of our new product launches with PSA and Daimler and the ongoing ramp-up of production of recently launched products. In Asia, we continue to offset the decline of infotainment revenue at Mazda with new product launches with other OEMs closing the gap in vehicle production to 2 percentage points. The transition of the industry to digital clusters continues to be a key driver of our better than market performance. In the fourth quarter, for example, our shipments of all digital clusters almost doubled from prior year. Display audio and large display systems also grew well as we continue to benefit from industry demand for these products. The growth of these digital products more than offset the decline in older products as well as lower customer production volumes. Turning to page three, as I said previously, Vestion launched 11 new products during the fourth quarter, bringing the full year number to 55. The left side of the page shows some of our fourth quarter highlights. Digital clusters have been steadily migrating into the lower end of the market in A and B class vehicles, and we launched two clusters for this section of the market in the fourth quarter. The first entry-level digital cluster is on the Renault KZE, an electric city car priced below $10,000. The car will be introduced first in China, followed by upcoming launches in Europe. The second cluster is for competitively priced vehicles on the VW MQB platform, which includes vehicle models such as the Golf and the Polo. As a cross-platform product, this cluster has very high volume and provides us the scale to drive costs down further and bring digital clusters to mass-market vehicles with other OEMs. We also launched high-end digital clusters in the fourth quarter, including 12-inch clusters on the Cadillac CT4 and for Mercedes-Benz AMG GT vehicles. The cluster for the Cadillac CT4 is a mid-cycle upgrade. The vehicle previously offered an 8-inch cluster from a competitor. We developed and launched the new 12-inch cluster for GM within 18 months for this vehicle. leveraging our digital cluster platform. The cluster for the Mercedes-AMG GT car line offers high-end features such as super sport mode with high-quality graphics and OTA software update capability. As part of the continued digitization of the cockpit, the industry is moving toward replacing traditional hard buttons, knobs and switches with modern control panels that use touch and haptics combined with displays for a more refined experience. We launched a new control panel system with JLR based on touch input and haptic feedback with embedded color displays. The JLR system will be launched in eight different vehicle models across the Jaguar and Land Rover brands. On our last earnings call, I had mentioned that the two-wheeler market is transitioning to the all-digital cockpit, similar to passenger cars. We launched an innovative digital cockpit system for Honda Premium motorcycles in the fourth quarter with a 5-inch TFT display, Bluetooth Low Energy, and support for turn-by-turn navigation, music, and phone calls via an app on the phone. We expect this trend to continue to grow in the two-wheeler market which has high volume potential for our products in the future. For the full year, we launched 55 new products with 22 OEMs globally, worth more than $5 billion in lifetime value. Our launches included some of the most advanced cockpit systems in the industry on a number of very high-profile vehicles. They included some key new technologies that will serve us well in the future such as our Android-based infotainment platform, smart code system based on new Qualcomm processor, and digital cluster for the low end of the market. Turning to page four, we won $1.4 billion in new business in the fourth quarter, bringing the second half 2020 new business total to $3 billion this year. which is in line with our performance in prior years despite the COVID-19 related industry slowdown. Some of the Q4 new business win highlights include a second customer for our industry-first wireless battery management solution. This win is with a global OEM, we are not allowed to make their name public, and will launch initially in 2023. Similar to our first win with GM, there will be additional follow-on launches as the OEM adds more vehicle models to their electric platform. We are very excited about this win and look forward to expanding our engagement with this OEM on their electric vehicle models as well as presenting the solution to other OEMs. The second win highlighted on the page is for a digital cockpit solution for a leading motorcycle manufacturer. The win leverages our smart core technology with Android-based infotainment and digital cluster features. This is a new customer for Visteon and we're pleased to expand our customer base in the two-wheeler market. As I have mentioned before, the two-wheeler market is undergoing a digital cockpit transformation similar to passenger vehicles. The system will launch in 2024 and uses a 12-inch display that offers connected apps and over-the-air software download capabilities. Similar to the earlier example, the work we did with the first Android infotainment system for VW was critical for us to win this business. Large displays bigger than the traditional 10 and 12 inch displays are increasingly becoming a point of differentiation for vehicle manufacturers. Beyond size, there is increasing interest in making the display match the premium look and feel of consumer products such as tablets with narrow borders and high optical performance. The third win highlighted on this page is for a dual display system for a Japanese OEM that uses two 14-inch displays under a single glass cover lens to create a seamless 28-inch display viewing area. This display will have the thinnest border in the industry and deliver the premium tablet-like experience our customers seek in their vehicles. Despite the industry challenges in 2020, our product and technology portfolio is enabling us to continue to win significant business. We expanded our customer base with three additional OEMs, one each in the commercial vehicle, passenger car, and two-wheeler markets. Our battery management business received a boost with the addition of a second customer, and we added a new commercial vehicle manufacturer to our list of customers for an Android-based digital cockpit, a third in this vehicle category. Turning to page five, this page shows our progress in transforming our product and technology portfolio despite the pandemic. Our recently launched digital clusters are doing very well in the market and in the fourth quarter represented half of our total cluster sales up from about a third a year ago. We expect this growth to continue as digital clusters migrate into mass market vehicles from the more higher end vehicles today. We launched our first Android based infotainment system and one business with three additional OEMs in 2020. Although Android is quickly becoming the operating system of choice for the digital cockpit, stock Android is not sufficient. Visteon has the necessary experience in extending Android with our software to meet automotive requirements. Our investment in display technologies is beginning to show results with multiple wins at OEMs for advanced displays. Our capabilities in design and manufacture of large, complex displays is state-of-the-art especially in the design and manufacture of curved lens and optical bonding of the different components. We upgraded a smart core technology to support new and high performance processors from Qualcomm and launched the first system for an electric vehicle with a manufacturer in China. We have multiple programs under development with other OEMs based on this technology. As mentioned, we added a second customer for our wireless battery management business, adding to our momentum in this emerging area of business for Visteon. Lastly, with Drivecore, our ADAS technology for integrated level 2 plus systems, We made progress in evolving our vision algorithms to achieve the levels of lane, car, and pedestrian detection required for highway driving. We also integrated our driver monitoring system into our platform to meet new regulatory requirements. In summary, we made good progress in evolving our products to address the three main trends in automotive electronics, the growing demand for digital cockpits, the electrification of the powertrain, and the evolution of ADAS for more automated driving. As the industry returns back to normal operation, we are confident that we can win business at the level of $6 billion or more with this product portfolio. Turning to page six. As we look ahead, I would like to discuss some of the key considerations that influence our 2021 guidance. First, we anticipate the underlying market demand to remain strong in 2021. The demand signals from OEMs at the end of last year indicated a continuation of production from the levels in Q3 and Q4 into 2021. In addition, we will continue to launch on average more than one product a week in 2021. Coupled with the new products we launched in 2020, we are well positioned to continue to outperform underlying vehicle production growth this year. However, 2021 will not be without challenges. I am sure you are well aware that the industry is experiencing a significant shortage of semiconductors. The shortage is expected to impact vehicle production and limit growth, particularly in the first half of the year. Based on our discussions with suppliers, we anticipate the supply of semiconductors will improve in the second half. Based on this assumption and on industry data for production, we believe production growth for the full year will likely only reach high single-digit levels versus the double-digit growth the industry expected prior to the shortage. The semiconductor shortage will also constrain Visteon's growth over market as our new digital products have higher use of silicon than the older products they are replacing. We also recognize that COVID-19 will continue to impact our industry. Although Visteon successfully navigated through the COVID-19 pandemic in 2020, we expect the pandemic will continue to create challenges and uncertainties throughout 2021 until a sufficient number of people have been vaccinated across the globe. Finally, as Jerome will detail in his section, we anticipate margin expansion in 2021 compared to 2020, despite the added costs due to semiconductor shortages. This is primarily driven by the structural changes we implemented in 2020 to reset our cost base, which will help offset the non-recurrence of the austerity measures we implemented early in the pandemic. In addition, we expect sales flow through and fixed cost leverage to more than offset the increase in activity-based costs. Turning to page seven. As I mentioned on the previous page, with the consumer demand remaining strong, the industry was forecasting 2021 production to reach 85 million units, a growth of about 14% over 2020. However, the semiconductor suppliers that supply various types of chips that go into automotive electronics components, such as brake controllers, engine controllers, body controllers, and cockpit electronics, cannot meet the higher industry demand. The semiconductor shortage has been well publicized and several factors appear to have created this situation. For example, semiconductor suppliers underestimated the pace of recovery from the lows of second quarter of last year. At the same time, demand for chips from the consumer electronics sector has gone up due to working from home and the increased use of semiconductors in newer consumer devices such as 5G phones. These and other factors contributed to a tightening of the supply chain for semiconductors that is affecting all industries, including automotives. Based on conversations we're having with our customers and our suppliers, we anticipate a 10 to 15% gap between OEM demand and semiconductor supply in the first half of 2021. The supply situation is expected to improve during the second half of the year as new capacity is being added with a lead time of about 26 weeks. As a result, we're expecting that vehicle production will be impacted in the first half by about 10 to 15%, particularly in the second quarter before improving in the third and fourth quarters. In total, we anticipate that industry production volumes will increase approximately 8% in 2021 to 80 million units versus the initial expectation of 14% growth. Nevertheless, it will be the first time since 2017 that the industry will see a year-over-year growth in vehicle production. I would like to emphasize that the situation is very dynamic and is still evolving. Therefore, we may need to update our assumptions as the year progresses depending on how vehicle production and semiconductor supplies evolve. Turning to page 8, despite the muted growth of vehicle production in 2021 due to semiconductor shortages, We have another year of high new product launches that will continue our market outperformance in 2021 and beyond. We have more than 50 products with over $7 billion in lifetime revenue that are scheduled to launch with over 20 different OEMs in 2021. These launches are for a broad set of products, including the first launch of our battery management system, multi-display systems, Android-based infotainment, and digital clusters. With the launch of 55 new products in 2020 and an additional 50-plus this year, we will be setting the stage for faster-than-market sales growth not only for this year but also for the next, which will greatly help in achieving the 2023 targets that I will discuss next. Moving to page 9. Our three-year business plan is based on the updated perspective of vehicle production over this period and the continued outperformance due to a high number of new product launches. After three straight years of industry production declines, including an unprecedented and dramatic production low of about 75 million units in 2020, we're assuming a continuous increase in production levels to about 89 million units in 2023, representing a CAGR of about 6%. In 2021, we anticipate sales will be between $2.875 and $3.025 billion, the midpoint of $2.95 billion, representing approximately 16% year-over-year growth driven by the rebound in industry production volumes and our continued growth over market. In 2021, we currently forecast growth of our market in the mid to high single-digit range. We anticipate this will accelerate over the next two years as we continue launching new programs. We anticipate 2023 sales to be approximately $4 billion, of which more than 90% has already been sourced. We expect to close the remaining gap through a combination of new business wins in 2021 as well as the typical program expansion and extensions that we have experienced in previous years. However, even at 89 million units in 2023, the industry will still be about 7% below the peak it achieved in 2017 with 95 million units. Despite this decline, we are anticipating Visteon's 2023 sales will be about 25% higher than 2017 sales. As we progress through 2021, we are excited about our growth trajectory, which we expect will include absolute sales growth, sustained growth over market, and adjusted EBITDA expansion. Moving to page 10. In summary, the company executed well in 2020, particularly during the second half of the year. I would like to thank our customers, suppliers, employees, and investors for their support in a challenging year. We expect to carry this positive momentum into 2021 and hope to recover from the headwinds in the first half created by the semiconductor shortage during the second half of the year. The company built a strong foundation for future growth by launching 55 new products and booking $4.6 billion in new business during the year. We expanded our product portfolio to address the emerging shift towards electric vehicles and gained early momentum with OEMs for our battery management systems. The recovery we experienced last year and the new business pipeline we have created has set the stage for continued market outperformance. It positions the company to achieve our 2023 targets, where we expect to surpass our 2017 sales and profitability performance. Now, I will turn the presentation over to Jerome to review the financial results.

Thank you, Sachin, and good morning, everyone. At this time last year, we could have never envisioned the challenges the automotive industry was about to face. With industry production coming to a stop, at most locations at some point throughout the first half of 2020. We are very proud of how the Visteon team tackled the challenges and continued to deliver on our commitments while resetting our cost base and improving cash generation. These actions will ensure we are well positioned for the future. Visteon has continued to outperform industry production at our top customers, driven by a high number of new products launched in 2020, 55 for the full year. In 2020, Visteon sales were 2 billion, 548 million, representing a decrease of 13% when excluding the impact of currency. In comparison, overall industry production volumes decreased 16%, while production volumes at Visteon's top customers declined approximately 20%. Cluster sales, which represent approximately half of our total sales, increased compared to prior year despite the industry production decline this performance was driven by the growth in all digital clusters which increased approximately 60 percent compared to 2019. cost performance was another highlight for the year with a major reset of our cost base Decremental margins for the full year were approximately 15% on a normalized basis, reflecting the significant cost initiatives undertaken very early in 2020. Compared to 2019, net engineering was down approximately 30%, and adjusted SG&A was down 15%. Costs were reduced as a result of lower activity levels, strong cost controls, as well as short-term austerity measures, which primarily impacted Q2 and Q3. However, we did not rely on short-term actions alone and also undertook a major structural reset of our cost base, including various restructuring programs. For the full year, adjusted free cash flow was 96 million and reflects the disciplined and prudent approach we took during the entire year. Capital expenditures were reduced by approximately 25% due to structural changes we implemented to our capital expenditure process during Q1, while benefiting as well from lower activity levels during the year. Adjusted free cash flow was also positively impacted by temporary negotiated payment terms extensions with some of our suppliers, as well as from favorable timing from some customers' collections. With a strong balance sheet at the end of December 2019, we entered the pandemic with significant flexibility. Despite a challenging year and with our focus on cost and cash generation, our position is even stronger than at the end of December 2020, with half a billion dollars on cash on the balance sheet and a net cash position of 151 million. We are entering 2021 with ample flexibility, and our goal is to continue to maintain a strong balance sheet. Moving to page 13. 2020 is a tale of two halves, with the first half impacted by the outbreak of the COVID-19 pandemic and planned closures, while the second half experienced a significant rebound in retail sales and industry production volumes. Our results in the second half benefited from the industry rebound and the cost savings that we implemented in the first half of the year. Sales in the second half of the year were 1,534,000,000, representing an increase of 520,000,000 from the first half of the year. Adjusted EBITDA was 162,000,000, representing an adjusted EBITDA margin of 10.6%. Compared to the first half, Incremental margins were in the mid-20 percentage range as EBITDA benefited from structural cost savings, increased fixed cost leverage, and higher engineering recoveries while being negatively impacted by higher incentive compensation, freight, and logistics expenses. Short-term austerity measures increased EBITDA by approximately 15 million in both halves of the year. In the second half of the year, this represents approximately 100 basis points of margin. In total, adjusted EBITDA margins were robust in both Q3 and Q4 as the result of the industry rebound, our growth of a market, as well as our cost discipline. Q4 sales were $787 million. And Q4 adjusted EBITDA was 75 million, or 9.5%, broadly in line with Q3 EBITDA margin percentage adjusted for austerity measures. For the full year, adjusted EBITDA margin were 7.5%, 40 basis points lower than 2019, despite a significant reduction in sales. Page 14 provides an overview of our cash and net cash position at the end of the year, as well as our adjusted free cash flow for the full year. Our balance sheet continues to be one of the best in the industry, with a net cash position of $151 million and a net debt to last 12 months EBITDA ratio of negative 0.8 times with no debt maturities until 2024. Adjusted free cash flow for the year was 96 million, an improvement of 40 million versus 2019. Adjusted free cash flow benefited from our disciplined approach during the year, including a 25% decline in capital expenditures. Beyond the reduction in activity levels, this reduction was driven by the structural capital expenditure process changes we implemented in Q1 2020, focusing on optimizing reuse, cost, and payment terms. As previously discussed, Visteon also negotiated temporary payment terms extensions with some suppliers early in the pandemic, as the depth and the duration of the crisis was still unknown. These temporary payment terms extensions improved adjusted free cash flow for the year by 20 million, which will reverse in early 2021. Lastly, we benefited in Q4 2020 from higher than anticipated collections from some of our customers, which were anticipated to be received in early 2021. This increased adjusted free cash flow by more than 40 million for the full year. In the fourth quarter, Visteon contributed approximately $16 million to its legacy U.S. pension plan. The plan is closed and the last contribution was made in 2012 when Visteon pre-funded obligations through 2019. Restructuring payments, which are not included in our adjusted free cash flow, were $32 million in 2020. Turning to slide 50. On page 15, we present our full year guidance for 2021. Our guidance for sales is between $2,875,000,000 and $3,025,000,000, which at the midpoint $2,950,000,000 represents a 16% increase compared to prior. This assumes an increase in global industry production volumes of approximately 8%, while growth of a market is expected to be in the mid to high single digit range. Given the uncertainty around the 2021 semiconductor shortages and its impact on industry production volumes for the year, we have elected to broaden our sales range this year. we anticipate the semiconductor shortage will lead to additional OEM plant closures in the first half of the year before the situation stabilizes in the second half of the year. Adjusted EBITDA is forecasted to be between 230 and 270 million representing an adjusted EBITDA of 250 million, or 8.5% at the midpoint, an expansion of 100 basis points versus prior, despite higher costs due to semiconductor shortages. Adjusted free cash flow is anticipated to be between 35 and 65 million. Adjusted free cash flow will favorably be impacted by higher adjusted EBITDA, while also benefiting from our continued focus on optimizing capital expenditure. For the full year, we anticipate capital expenditure will be approximately $115 million, representing a 20% decrease from 2019 levels. Working capital is expected to be a use of cash in 2021, partially driven by the favorable timing of working capital in 2020. In addition, Visteon expects to make contributions to its U.S.-defined benefit pension plans at levels similar to the 2020 levels. Excluded from adjusted free cash flow are restructuring payments, which we anticipate will be approximately 40 million and are related to previously announced restructuring programs. As the environment continues to evolve due to the semiconductor shortage, creating some near-term uncertainty, we may need to revise our assumptions. Turning to page 16, we provide an adjusted EBITDA bridge from our 2020 results to the midpoint of our 2021 guidance. We're expecting adjusted EBITDA to increase in 2021 to a range of 230 to 270 million, representing an adjusted EBITDA margin of approximately 8.5%. As we believe the semiconductor shortage costs related to higher purchase prices, logistics, and some product redesigns are transitory in nature, we have attempted to isolate the impact of these specific items and currently believe they will be in the range of 100 basis points in 2021. Excluding the semiconductor impact, we would anticipate EBITDA margins to increase approximately 200 basis points at the midpoints. This is primarily driven by scale and efficiencies, which more than offset the return of some costs related to the increase in activity levels. Additionally, the restructuring programs announced in 2020 are anticipated to improve adjusted EBITDA by approximately 60 million on an absolute basis, or approximately 100 basis points on a year-over-year basis, as our 2020 results included restructuring savings of just over 30 million. This incremental structural savings helps offset the non-recurrence of the short-term austerity measures we implemented in 2020. Although we're not providing targets for individual line items, I do want to highlight that starting in 2021, the cost of our program management function will be moved from adjusted SG&A to gross engineering. This move is driven by our restructuring programs which streamlined our organizational structure. Program management is now fully integrated within the engineering function. For your reference, program management expense in 2020 was approximately 15 million. Given that we believe the negative volume impact and higher costs for the semiconductor shortage are temporary, we are reinstating our 2023 adjusted EBITDA margin target of approximately 12%. Our confidence level in achieving this target is increasing based on the strong order book we have combined with the structural savings we implemented in 2020, which has reset our cost base. Although we anticipate a challenging start to 2021, we plan to execute on our strategy regardless of the market backdrop, just like we did in 2020. Turning to page 16. Visteon continues to be a compelling long-term investment opportunity. We have positioned the company for top-line growth, margin expansion, and continued free cash flow generation, while our strong balance sheet provides significant flexibility. Thank you for your time today. I would like now to open the call for your questions.