Visteon Corporation

Good morning. I'm Chris Doyle, Vice President, Investor Relations and Treasurer. Welcome to our earnings call for the first quarter of 2021. 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 Visteon's website this morning. Please visit investors.visteon.com to download the material if you have not already done so. Joining us today are Sachin Lawande, 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.

Sachin Patel- Thank you, Chris. Good morning, everyone. Page one summarizes our first quarter results. Visteon's strong performance in the second half of 2020 continued in the first quarter of 2021. Industry demand remained strong although supply shortages muted vehicle production growth at our customers. Visteon's first quarter sales of $746 million represents a 14% year-over-year increase when excluding currency. Adjusted EBITDA was $64 million or 8.6% of sales. Incremental supply chain costs related to semiconductor shortages reduced adjusted EBITDA margin by about 190 basis points. Adjusted free cash flow for the quarter was positive $9 million. We ended the quarter with $486 million of total cash on our balance sheet. Visteon's new business booking in the first quarter was strong with $1.8 billion. New business bookings included our first win for Microzone display technology. Microzone is a recent market introduction and offers automakers an attractive alternative to OLED displays for their premium vehicles. We also won significant smart core business in the quarter, accounting for nearly 50% of our total wins with approximately $850 million in lifetime value. I will discuss our Microzone and Smart Core wins in more detail later in my presentation. Q1 incremental margins were approximately 30%, benefiting from the structural cost reductions we started to implement near the end of Q1 2020 and our continued spending discipline. Our balance sheet remained strong with $137 million in net cash at the end of the quarter. Overall, the company performed well across all areas of the business and delivered a solid first quarter. I will discuss our operational performance in more detail on the following pages before handing it over to Jerome to discuss the financials. Turning to page 2. This page shows Visteon's Q1 sales performance relative to global and Visteon customer vehicle production volumes. Global industry production increased 12% in the first quarter of 2021, despite semiconductor and other supply chain constraints that impacted vehicle production in all regions. Most of the growth occurred in China. As you may recall, production volumes in China during the first quarter of 2020 were significantly reduced, with production facilities being shut down for the majority of February and March of last year due to the pandemic. Vehicle production in China in the first quarter of this year was robust and just under pre-pandemic levels, resulting in a 75% year-over-year growth. In the rest of the world, Vehicle production was down in the Americas and Europe and modestly up in the rest of Asia, excluding China. If not for parts supply shortages, first quarter vehicle production growth would have been positive for all regions, continuing the strong performance seen during the second half of last year. As a result, first quarter industry production growth was heavily weighted towards China which represents about 25% of the global market. While Visteon has been growing its business in the China domestic market, it still represents only about 16% of Visteon sales, creating a negative regional mix for the first quarter. We anticipate this scenario will reverse itself in the second quarter and for the remainder of the year. On a sales-weighted basis, our customers' vehicle production was flat year-over-year, primarily driven by this negative regional mix. In contrast, Visteon sales grew 14% on a year-over-year basis, excluding the impact of currency. Most of this outperformance, about two-thirds, was due to the contribution from new product launches over the prior four quarters. The rest was due to the positive mix resulting from the higher sales in China with some of our customers. We estimate about one week of vehicle production was lost globally in the first quarter due to power shortages, equaling about 1.5 million vehicles and impacting Visteon sales by approximately 6%. Turning to page 3, We had a strong start to the year with $1.8 billion in new business in the quarter. As noted previously, about half of our first quarter new business wins were for smart core cockpit domain controllers with two OEMs, one in North America and the other in Asia. The transition to cockpit domain controllers with integrated Android-based infotainment and digital clusters is accelerating across the industry. With these wins, Visteon is in production with or will soon deliver our smart core technology to 10 OEM customers globally, strengthening our position as the industry leaders in this emerging trend. Similar to the wins in 2020, about 20% of the total new business wins are for mid-cycle updates and about half of the total wins will launch within two years. which underscores the accelerating pace of digitalization in the industry. Furthermore, one-third of our total new business wins are for electric vehicles, reflecting the prioritization of investment in new electric vehicle platforms by OEMs. On the right side of the page are some key first quarter wins. As mentioned earlier, we secured our first win for Microzone Display Technology, Microzone is a new display solution for premium automotive cockpit displays that's designed to meet the demanding requirements of large, high-quality displays for premium and luxury vehicles. I will discuss Microzone in more detail in a later page. The second win highlighted here is for a smart core cockpit domain controller with a North American OEM. This system offers integrated Android-based infotainment and an all-digital cluster with over-the-air software updates and connected applications. This cockpit domain controller win extends our current business with this OEM beyond clusters and into Android-based infotainment. The system launches on multiple vehicle models starting in 2023. The third win on this page is for a 10-inch digital cluster with a global OEM for two new vehicle models that are planned to launch in mid-2022. This win extends our digital cluster business with this OEM in two additional vehicle brands where we do not currently have business today and are replacing their incumbent supplier. Turning to page four. The auto industry is quickly adopting larger displays with touch capability similar to consumer electronics. Dials, knobs and buttons are fading into history. As mass market vehicles start to offer 12-inch or larger displays, premium and luxury OEMs are looking to differentiate their cockpits with more advanced display solutions. Visteon developed Microzone to address the industry demand for a high-quality display that delivers a premium experience while meeting stringent automotive-specific requirements. Automotive displays larger than 12 inches require a wider color gamut to render images without a bending effect. Displays also require higher brightness and contrast ratios to work well in bright ambient lighting conditions. Unlike consumer devices, cockpit displays are mounted at a fixed viewing position and angle. Displays must also be very energy efficient so that heat dissipation can be managed effectively. Finally, displays must have a lifespan of 10 years or more to match vehicle lifespans. OLED is today's state-of-the-art technology for high-end displays in consumer electronics However, it has two significant drawbacks when it comes to automotive applications. First, as it is based on organic light emitting material, OLED's lifespan is not long enough for automotive applications. Moreover, the brighter the display, the quicker it deteriorates. The second drawback is cost. OLED is significantly more expensive to manufacture, especially for large size displays. Visteon's Microzone display technology offers vehicle manufacturers a very good alternative to OLED. It uses proprietary and patent-pending technology to deliver exceptional optical performance while meeting challenging automotive requirements at a cost that is less than OLED. We introduced Microzone at the Consumer Electronics Show in 2019 and have since continued to evolve its capabilities. Today, we are pleased to announce our first Microzone win. The award is with the North American OEM for a multi-display system that will be featured in multiple premium and performance vehicle models. At about $250 million, this business win is very significant and will launch in 2024. Microzone is an innovation developed entirely in-house at Visteon to address specific automotive challenges. As a high-end solution that delivers a premium experience, Microzone carries a price premium over standard displays that use LCD technology. Visteon will continue to offer display solutions based on LCD technology. However, with Microzone, we can now address a broader section of the market and differentiate ourselves from the competition. Turning to page 5. Along with the shift to larger displays, car manufacturers are quickly adopting over-the-air software updates and Android-based infotainment for their next-generation cockpits. Offering consumers a choice of connected services along with over-the-air software updates has become a critical requirement for new vehicles. Visteon's SmartCore solution uses advanced silicon and software technologies to enable OEMs to offer these kinds of advanced user experiences in the cockpit. Our first quarter smart core win with the North American OEM is a second cockpit domain controller win in this region and reinforces Visteon's industry leadership in this technology. The system will launch in 2023 and will support multiple ICE and electric vehicle models. It offers digital cluster and Android-based infotainment, a first for this OEM, with multiple connected services and applications. The panel on the right of this page shows the evolution of our smart core business over the past few years. Our customer portfolio has grown from passenger car OEMs initially to now include commercial and two-wheeler manufacturers as over-the-air updates and connected services have become equally important for these vehicle categories. We launched our first-generation Linux-based smart core system in Europe with Daimler in 2018. The emergence of Android as the operating system for infotainment led to the development of our second-generation system, which we launched with GAC in China. With the increasing acceptance of Android globally, we are seeing an acceleration in the adoption of smart core technology by OEMs in all regions. Today, we have smart core business with 10 OEM customers, eight of which are shown on this page. Smart core is and will continue to be a key driver of Viztion's growth in the coming years as we launch the systems currently under development. Turning to page six, I would like to discuss our outlook for the rest of the year and several key drivers of our growth. Retail demand remains strong in all regions and dealer inventories are lower than normal. US retail sales in March was strong with the SAR being close to 18 million units. New vehicle registrations in Europe were also strong in March. This has led to historically low inventory levels, particularly in the US, as OEMs cannot restock dealer lots quickly enough. As a result, we are seeing high order levels from our OEM customers, and initial first quarter orders represented a sequential increase compared to the last quarter. We are planning for another year of over 50 new product introductions. First quarter launch highlights include a 12-inch digital cluster for Nissan, a multi-display digital cluster for Jiangling Motors in China, and a 10-inch digital display for Hyundai. We anticipate our 2021 launch schedule will enable Visteon to continue to outpace industry production volumes for the near future. Although demand remains strong, we anticipate industry growth will continue to be muted in the second quarter primarily due to supply chain shortages and especially semiconductors. The already tight semiconductor supply was further negatively impacted by the winter storm in Texas in February and a fire at a silicon supplier's facility in Japan in March. As a result, we believe semiconductor shortages will be more significant in the second quarter as compared to the first quarter before recovering in the second half of the year. We expect OEMs to shut down or reduced production amounting to about two to three weeks of production loss for the second quarter, representing a decrease in production levels compared to the first quarter. We anticipate that the supply situation will improve sufficiently in the second half of the year to allow for partial recovery of the lost production from the first half. For these reasons, we feel confident in maintaining our full year guidance which incorporates a view that industry production volumes will increase approximately 8%. In addition, we anticipate that the negative regional and customer mix experienced in the first quarter will reverse itself by the end of the year. In fact, current third-party forecasts estimate a slight tailwind from customer mix although we are not ready to factor this into our guidance until we see it materialize throughout the year. We remain optimistic about the fundamentals of the industry and our position in it. Visteon has the broadest portfolio of cockpit electronics and continues to benefit from the shift to digital clusters, Android-based infotainment systems, cockpit domain controllers, and large displays. We also expect the industry's accelerated shift to electric vehicles will continue as OEMs fully commit to EVs. This shift will also drive increased digitalization of the cockpit and provide more opportunities for our wireless battery management system. Finally, as we discussed on our last call, we expect the trend of digitalization in commercial and two-wheeler cockpits to grow and lead to increased content opportunity for Visteon in those important vehicle categories. These secular growth drivers continue to give us confidence in being able to outperform the market in the coming years and achieving our 2023 targets. Turning to page 7. In summary, Visteon performed very well in the first quarter in a challenging environment. We delivered solid results with 14% growth over market for sales and 8.6% adjusted EBITDA margin, including the impact of incremental supply chain costs. The fundamentals of the industry and our place within it remain strong. Our core products, such as digital clusters, infotainment, and large displays performed very well despite the challenging supply chain environment. Our technology portfolio is strong and aligns very well with the key industry trends of connectivity, digitalization, and electrification. The $1.8 billion of new business booked during the quarter enables Visteon to continue a faster than market growth. We expect the supply chain constraints impacting vehicle production to dissipate in the second half of the year, allowing for a recovery that sets the stage for robust long-term growth in 2022 and beyond. And we are maintaining our 2021 guidance as previously indicated. Now, I will turn the presentation over to Jerome to review the financial results.

Thank you, Sachin, and good morning, everyone. Visayon started the year in a similar way in which it finished 2020, posting strong financial results despite the challenging industry dynamics. Visteon grew sales 14% year-over-year when excluding the positive impact from currency. Adjusted EBITDA improved to 64 million, representing a margin of 8.6%, and the company generated 9 million of adjusted free cash flow for the quarter. Production at Visteon's top customers was flat year-over-year, while Visteon sales improved 14% when excluding currency. This performance is a result of our recent launch activities in 2020, the ramp up of key programs, as well as some favorable mix resulting from the higher sales in China with some of our customers. Adjusted EBITDA for the quarter was 64 million, representing an 8.6% margin, which is essentially in line with the midpoint of our full year guidance. The impact of supply chain constraints lowered adjusted EBITDA by about 190 basis points. On a year-over-year basis, incremental margins were 30% or approximately 45% when excluding the incremental supply chain costs, as we benefited from the structural cost measures we implemented throughout last year. These savings will continue to benefit our results going forward. However, as most of these actions were initiated in the first half of 2020, we will start lapping these cost savings as early as the second quarter. Adjusted free cash flow was positive 9 million in quarter one, the first time we are generating positive adjusted free cash flow in the first quarter since 2018. Compared to last year, cash flows benefited from higher adjusted EBITDA, continued optimization of CAPEX, partially offset by year-over-year working capital outflow. We continue to have one of the best balance sheets in the industry, with a total cash of $486 million and a net cash position after debt of $137 million, which drives a net leverage ratio that is less than zero. As we look ahead, we still anticipate to be within the guidance range that we provided in mid-February. Although our Q1 sales came in slightly better than anticipated, we expect the supply chain to further tighten in Q2 before beginning to improve in the second half of the year. As a result, we anticipate Q2 sales and adjusted EBITDA will be lower than Q1 due to OEM shutdowns in the second quarter, while adjusted free cash flow for Q2 is expected to be an outflow. Turning to page 10. Sales in the first quarter of 2021 were $746 million, an increase of $103 million compared to prior year. OEM demand remained strong in quarter one, with initial orders at the beginning of the quarter indicating a modest increase from Q4 2020 levels, fueled by retail demand and lower dealer inventory levels. However, as the quarter progressed, OEMs adjusted and reduced order levels as the global supply chain shortages intensified, in which various inputs, such as rubber, foam, resins, and semiconductors, were in short supply throughout the industry. Ultimately, compared to prior year, Visteon's organic sales grew 14% driven by a combination of recent launch activity, ramp up of key programs, and favorable mix. To mitigate the semiconductor shortages coming from our tier two suppliers, Visteon set up a cross-functional task force. The team took numerous actions during the quarter that increased our ability to ship products to our customers. These actions included the purchase of parts through brokers and distributors, expedited logistics, some engineering redesign, as well as the drawdown of inventory levels, while our suppliers were also able to improve some of their deliveries. Our daily engagement with suppliers and customers increased as well. However, these actions did come at a price which is reflected in the 190 basis point of EBITDA margin lost in the quarter, due and categorized as supply chain costs. Some of these actions will be harder to implement in the second quarter as the supply chain becomes more constrained. Adjusted EBITDA was 64 million, representing a margin of 8.6%, an increase compared to prior year of 31 million or 350 basis points. Adjusted EBITDA margins benefited from higher volumes, as well as from our cost reset in 2020, partially offset by supply chain cost impacts. We also benefited from lower launch costs and continued decreases in certain discretionary spend, such as travel. Overall, gross engineering reduced in Q1 by approximately 20% year over year and adjusted SG&A by approximately 15%. Costs related to the supply chain constraints, which impacted margins by approximately 190 basis points, were primarily driven by higher input costs as we purchased a higher number of semiconductors from brokers and distributors as opposed to our normal Tier 2 suppliers, combined with higher freight and logistics costs. Overall, although we anticipate these costs to be transitory in nature, we are starting to see increased pricing pressures from our Tier 2 suppliers, which we are pushing back against, as we want to limit the amount of price increases that we will have to pass along to our customers. We continue to forecast a year-over-year semiconductor shortage impact of approximately $30 million, which will primarily be incurred in the first half of the year. This impact includes higher purchase prices, net of recoveries, higher logistics costs, and some engineering redesign. Moving to slide 11. Page 11 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 quarter. Our balance sheet continues to be one of the best in the industry, with a net cash position of $137 million and a net debt to last 12-month EBITDA ratio of negative 0.6 times, with no material debt maturities until 2024. Adjusted free cash flow for the quarter was positive $9 million, an improvement of $23 million versus prior. Adjusted free cash flow benefited from higher adjusted EBITDA and our continued discipline in capital expenditures. Capital expenditures were down more than 50% as the action we implemented early last year will continue to drive optimized level of CapEx going forward. Working capital was an outflow in the first quarter. As you may recall, we benefited from favorable working capital at the end of 2020, which we anticipated would negatively impact the beginning of 2021. Partially offsetting this negative impact was the unwind of working capital at the end of the quarter, as activity levels in the industry were lower than at the end of Q4 2020. Throughout the quarter, inventory levels did increase approximately 17 million when excluding currency as a result of supply chain constraints. The cash outflow related to this build will primarily be in the second quarter. Turning to page 12. In summary, we continue to execute on our growth strategy while focusing on margin expansion and adjusted free cash flow in Q1. And although we anticipate that the supply chain will continue to tighten in the second quarter and continue to impact the automotive production levels, we remain optimistic about the future due to strong underlying dynamics on the demand side, as well as the continued shift to digital, connected, and electric vehicles. Visteon's product portfolio is well positioned to accelerate these industry changes, leading to continued growth for the company. Thank you for your time today. I would now like to open the call for your questions.

At this time, if you would like to ask a question, please press star, then the number one on your telephone keypad. Again, that's star and the number one. We will pause for just a moment to compile the Q&A roster. Your first question is from the line of David Kelly with Jefferies.

Hi, good morning, guys, and thanks for taking my questions. I really appreciate the commentary on the Q2 supply chain headlands and the second half as well. Just curious as to how you're thinking about the growth over market ramp throughout the year in light of your 8% to 12% targets, everything you mentioned on the regional mix shift, and then hopefully at least more normalized production levels in the back half of the year.

Yeah, David, this is Sachin. I'll take that first, and then I'll pass it on to Jerome for more commentary. First of all, as you saw our Q1 performance, we had a very good new business win contribution to our revenues in Q1, driven by the high cadence of new product launches we have had in the prior four quarters. And that's going to continue. If you look at the rest of the year, in total, we have scheduled more than 50 new products that are going to launch this year. And that has been the biggest driver of our better than market performance, not just in Q1, but also in the previous quarters, and that's expected to continue. Now, on top of that, we've had some benefit from the OEMs in this environment prioritizing higher content, higher mix vehicles. And as our digital products typically go on the higher trim models, that's going to benefit us. And that's partly also the reason why our Q1 performance came in as strong as it did in terms of growth over market. Jerome, anything you would like to add to that?

Yeah, very pleased with how Q1 developed. I think from an EBITDA standpoint, the way maybe to think about it is the fact it's very consistent to what we've seen in Q3 and Q4 of last year, excluding supply chain cost impacts. We're at 9.5%, 10% EBITDA margin. So it's very well in line, if not on the high end of our guidance, and it's a good start of the year indeed.

Okay, great. That's helpful. And then maybe one last follow-up on that last point, Jerome, via the 190 basis points. Supply chain cost impact in Q1, it sounds like from your commentary, the pressures will mount a bit more in Q2 before normalizing the back half of the year. But maybe if you could provide a bit more color on kind of how you're thinking about the sequential trajectory of that headwind go forward.

Yeah, sure. Let me maybe step back first. So we had always talked about supply chain costs impacting our full year numbers. When we provided guidance in Q4, we talked about an incremental $30 million of cost. And that's exactly what we're seeing. And we highlighted at the time that it would be more Q1 and Q2. So in terms of what we've got in this bucket, there are two very large items. The first one is the smallest item. relates to expedited cost and logistics costs. We've seen some of that in Q4, as you may remember, and we at the time talked about a 50 basis point impact to our numbers. This is continuing, and that's what we've seen in Q1, again, because of the COVID impacts and the various supply chain tensions that we've got, including the semiconductor. So that's the smallest bucket, about 50 basis points related to expedited freight. The second category, which is now the largest, and again we had highlighted this in our guidance back in Q4, relates to what we call spot buys. The fact that we had to buy beyond our normal suppliers, we had to buy components, semiconductor components from brokers and distributors. And that is largely because the demand was so high in Q1, and obviously the supply chain was constrained, we had to go the extra mile and buy quite a lot of items. We put a specific task force to be able to provide these and find these parts, and I think we were pretty successful. So the cost was pretty large, and overall, between freight and these extra spot buys, that represented 190 basis points. So that's the bulk of what we've seen in Q1. As we think about Q2, these costs will probably continue, and although we think that the, given that the sales level will be a little bit lower, we may see a little bit of a decrease in terms of absolute dollars. And then we are expecting most of these costs to disappear or to ease quite substantially in Q3 and Q4 as the supply chain tensions are getting resolved. At the same time, and I think you alluded to that point, we're seeing material cost increases from suppliers. We are getting pressure. to accept cost increases from suppliers. And you don't see much of that in our Q1 results. In fact, we've pushed back quite strongly on this side. And we'll continue to do so. But if it continues and if we're not able, we'll definitely pass that on to our customers. We'll try to keep that as neutral as possible on an ongoing basis.

Okay, got it. Really helpful. Thank you.

Your next question is from the line of Michael Filatov with Birnberg.

All right. Thanks for taking my question. I just wanted to ask about new business wins. Clearly looks like a really strong quarter for you guys and particularly in infotainment, probably in the back of that smart core, the smart core wins. And then of course the displays looks pretty, pretty strong as well. But clusters maybe it looks a little slower than average historically. So I'm just kind of curious the, you know, how you think about new business wins going forward for the year, if you think you can sort of maintain the cadence you picked up here in the first quarter.

Sure, sure. And the first thing I would say there is that the new business win activity this year has certainly strengthened quite a bit as compared to last year. And this is despite some of the supply chain and other I should say distractions that are taking up a lot of time and energy of people in the industry. Q1 was very good in terms of activity as well as bookings. Most of the bookings came from our North America region. But we also saw good activity in other regions, which are going to develop into opportunities for the remainder of the year. As you noted, Q1 was more weighted towards cockpit domain controllers or smart core and less in terms of clusters. But as you look at the pipeline for the rest of the year, which is, I would say, quite robust, it balances out quite a bit. We see a little more of clusters, less of smart core and displays, and also some BMS opportunities in the pipeline. And given where we are at with the first quarter at $1.8 billion, I think we are on a pretty good track to achieve our $6 billion target for the full year. One thing I should mention just to make that point clear, when we talk about smart core, smart core does integrate what is the traditional cluster functionality within it. So, yeah, it may appear that the cluster business wins are lesser than perhaps in the prior quarters, and that's only because what we represent here on the slide is clusters, is just a standalone cluster business. There is more to it with the smart corvins as well, and so as we go forward, I do expect to see more and more, even beyond 2021, more and more cockpit domain controller business as the key trends of digitalization over the air software updates connected services are really pushing OEMs to deliver those types of experiences to their customers. And Smart Core with our Android-based infotainment is a really good platform for that. Understood.

Thank you. And just one follow-up. I was wondering if you could provide a little bit more color on your comments that, you know, the Microzone Award and Microzone in general sort of open up a broader, you know, market opportunity for you guys.

Right. So if you look at the displays technologies today, you have the standard display technology, which is the LCD display. And most of the vehicles that you see on the roads are using some level of LCD technology. The capability of LCD are pretty well known. It's a good display for automotive. But since now we see more and more what I would term as mass market vehicles offering larger displays, 12-inch displays, which used to be in the past just available in the premium and luxury vehicles, that's pushing OEMs of those vehicles to look for alternatives. Now, OLED has been the display technology of choice for consumer electronics for higher optical quality. But it has its challenges when it comes to automotive electronics. And so now with Microzone, which solves many of these challenges that OLED has, lifespan, cost, it really gives us the ability to address this opportunity at the luxury segment, the premium segment as well. And as you know, that's typically the segment that's going to introduce the new larger displays first before they come down into the mass market segment. So for us, what Microzone truly represents is a demonstration of Visteon's display capabilities. It's an innovative product. It's unique in the industry. And it's really opening up all these engagements and discussions with OEMs for larger displays, which we were frankly not part of in the past. So I'm very excited about what that represents. Great. Thank you very much.

Your next question is from the line of Mark Delaney with the Goldman Sachs.

Yes, thanks very much for taking the call and my questions. The company was able to maintain its four-year guidance despite the incremental semiconductor shortages. And I know you made some comments on this, but I was hoping to better understand this. And perhaps there was some conservatism in the original guide, or maybe the company is able to maintain its four-year guidance because of that higher mix to more premium vehicles. But from any more context to help us reconcile Visteon being able to maintain its four-year outlook despite the – the incremental challenges with automotive production would be helpful.

Yeah, let me try to explain how we had come up with our guidance. First of all, our guidance had assumed a vehicle production growth, as you noted, 8% for 2021, not 13% or 16% as some of the market analysts had indicated. And that was because we had anticipated lower semiconductor supply especially for the first half of 2021, and then followed by a recovery in the second half. Now, perhaps that aspect of the supply being limited was not fully appreciated by the rest of the industry at that time. Now, as we stand here today with the first quarter behind us, how does that look like? So Q1 has come in better, than we had expected, certainly impacted by supply by about 6% or so as we noted. But on account of buffer stock in the whole supply chain, we were largely able to meet OEM's demand for product. Now that's not just Visteon alone, I'm talking about the whole industry. Now that buffer stock is completely exhausted and we are effectively using as an industry, every chip we can get our hands on to build parts and deliver to the customers. Now, what we had not anticipated that happened in February and March was the impact to the supply chain of the Texas winter storm and then the fire that occurred in one of the production facilities of a large supplier to the industry, Renesas, which took out production for a few weeks, I should say, and impacting Q2 the most. Now, the suppliers that have been impacted by these things have largely recovered the production, but that will still mean that when it comes to Q2 production as compared to Q1, we will see anywhere between two to three weeks of additional production volume loss on account of the impact. Now, having said that, we are also seeing from our suppliers better visibility into the second half than we did at the beginning of the year. And the second half supply seems to be coming in better than we had anticipated. So overall, when you look at all of these dynamics, we still believe that 80 million units roughly for the full year or 8% growth is the right number and the industry will likely come very close to that level and that's how we see between the first half and the second half the production outlook and on top of that we have our market our performance that we have indicated we have seen that play out in Q1 as well and we expect that to continue into the rest of the year so given all of that we are quite comfortable with our guidance range that we have provided, and we expect to come within that.

That's really helpful context. Thank you for the additional details there. For my second question, I was hoping we could talk more on the BMS product, which has been going very well for the company. I remember last Journey's call, you were able to announce a win on BMS with the second customer. Could you provide an update on how that's going, both with the two customers you have so far, and how is that progressing in terms of any sort of timeline of when we may be able to potentially get a third OEM? Thank you. Yeah, yeah, yeah.

No, first of all, there's a lot of activity happening at the company with respect to BMS. One, just executing the current business that we have on hand, which is quite substantial. There are a few very significant businesses launches happening this year, the very first launches on that technology. So you can imagine that it's taking a lot of our attention and energy at this point in time. But on top of that, we are also busy engaging with other OEMs, especially more so in Europe, as this announcement that we had previously and the interest in EVs in general is creating a lot of opportunities for us to showcase our technology to these OEMs. As it is the case with any new technology in this space, that it does take some amount of time for them to get comfortable, especially the wireless nature of our solution. And so we believe that in the course of the remainder of the year, we will be able to work with some of these and convert those into wins for us So I would say it's going very well, especially in terms of getting in front of new OEMs. Given everything else that's going on, all the restrictions that we have with travel, et cetera, I would say that we are in a very strong position and clearly emerging as one of the leaders in this space. Thank you. Thank you.

Your next question is from the line of Eileen Smith with Bank of America.

Good morning, everyone. I'm probably going to be dead. But I wanted to drill down a bit on the maintained 2021 outlook. I think investors are a little fearful after one of your major customers that reported last night had a pretty big beat similarly in the first quarter, but guided to a much weaker back half of the year. As you think about your outlook now versus your outlook that was provided in February, as the implied weaker outlook for the remainder of the year off of a 1Q beat, Is that isolated to the second quarter, or would you expect some lingering pressure in the third and fourth quarter as well? And is there anything beyond the semiconductor shortage impact, like commodity costs or otherwise, that you're now incrementally more cautious on than perhaps you were earlier in the year?

Yeah, in terms of demand, Eileen, I would say that it is indeed exactly that, which is we see a specific Q2 challenge, and that's driven largely by the two incidents that had a significant impact impacting the second quarter. We feel pretty good about the plans of the semiconductor suppliers to resume production at those facilities that were impacted. In fact, the plans have already come back online, and by the time we finish Q2, they should be at or above the levels of production that they were at before the impact. Now, investments that were made by the semiconductor suppliers that go back towards the tail end of last year will also start to contribute more supply, which will appear here in Q3 and Q4. So when we look at the supply levels for the second half versus the first half, we feel that even though there will still be higher demand then supply, it is still enough for us to make the levels that we need to make to be within our guidance. So I do not feel that that is at risk. This is still very much a supply-driven environment for us for the remainder of the year. The customer demand, the retail demand seems to be exceptionally strong, so we see no challenges with respect to that. And as long as we can produce enough vehicles, not just our parts, but ultimately at the OEMs, we should be in a pretty good shape. So that's how we see it.

Jerome, on the... Yes, thanks, Sachin. I was about to add as well, we were always a little bit more cautious in the second half of the year about the ability of the OEMs to recover. So whereas I think some publications were anticipating a full recovery, we were far from that. So I think that helps us indeed. with what's going on at the moment. From an EBITDA standpoint, it really follows what Sachin was doing on the sales side. We did a little bit better in Q1. We'll have Q2, which will be definitely more challenging because of lower sales and therefore lower EBITDA. And then the rest of the year will resume to a more normal run rate for us in terms of at least EBITDA. And we'll get back to the 9.5% range that we've been talking about. So we are We still feel pretty good about our full year guidance sales-wise and EBITDA-wise.

Great. That is very helpful commentary. And second question, I wanted to follow up around the growth above market, specifically the 14% in the first quarter versus 8% to 12% for the full year. As you think about regional mix normalizing and automakers continuing to prioritize higher mix vehicles within those regions, Why wouldn't growth above market remain at similar levels from the first quarter? And is there something regional in product launches that leads you to believe that it would decelerate as North America and Europe come online in the back half of the year? Or could we perhaps assume that you may be somewhat conservative or prudent in assuming that what had been very favorable price and mix for the value chain, certainly in the first quarter, doesn't persist as we get into the back half of this year?

Yeah, that's a great question, and I think there is some detail here that needs to be probably discussed in terms of the 14%, which will put more light on how that might look like for the rest of the year. So if you look at how that 14% is made up, about two-thirds of that, as I mentioned, comes from our new product launches. And so that's somewhere between, let's say, 9% to 10%. And we expect that to continue for the remainder of the year because of the strong cadence of new product launches. The remainder actually came through some of a regional mix within our large customers. Q1 growth was all about China. And so we had some customers that had a stronger performance in China relative to the rest of the world, especially for vehicles that carried our product. Now, Mind you, most of our product is the higher-end digital content in the cockpits of these vehicles. And China, for many of our customers, does represent more of a higher-end, more premium vehicle opportunity than the rest of the world. Now, as we go forward here, that will reverse a little bit. Now, China was a special case on account of the shutdowns that they went through last year that did not occur this year. So as we go forward, we'll see some of that benefit in the rest of the world. But then for the second half, that should not necessarily be a tailwind in terms of growth of our market. So it's going to normalize down to our, what I would say is our organic growth of our market, driven largely by new product launches.

Okay, fantastic. That's very, very helpful commentary. Thanks for taking the question.

You're welcome. Thank you.

Your next question is from the line of Emmanuel Rosner with Deutsche Bank.

Hi, good morning. Thanks for taking my question. I was hoping to put one additional final point on the potential impact to industry production from some of this chip disruption, but focusing specifically on the second quarter, because I understand your point around how you were more conservative around the second half recovery. I guess what was surprising from Ford's communication yesterday was this idea of their production globally being down 50%, 5-0 year-over-year in the second quarter, which is considerably worse than obviously IHS or which probably most people would have expected. And so as far as you being overall more conservative on the year, specifically for second quarter, is this the sort of magnitude that you would have had already contemplated or that is being contemplated in your restated guidance And what kind of risk is there that other automakers besides Ford would have to would incur this kind of disruption, losing almost half of production in the second quarter?

So let me take that first. So as you might imagine, where we stand at this point in the quarter, we have fairly good visibility for the remainder of the quarter from the demand side from the OEMs. but also very importantly in this environment from the supply constraint perspective and what we will be able to deliver as a result of that. So it's hard for me to comment on what Ford or any other OEM might be saying with respect to their planned production because we are not necessarily privy to all of their initial plans. But having said that, from our perspective, because mind you, we also, within a OEM like Ford provide content that is typically the higher end content within their vehicles. It's not that we have 100% content on 100% vehicles that Ford produces. So there is some level of mix that is helping us. That we had seen also in the first quarter that we expect to see continue in the second quarter. And so based on the knowledge of where we saw the supply come in and knowing that demand was much, much higher than what we could deliver from a supply perspective, we feel quite comfortable with how we see Q2 and the rest of the year play out.

Okay, that's a very helpful perspective. And I guess switching you to the financials, So you had quite a sizable decline in engineering growth span and then in SG&A. How sustainable are these levels when sales recover further?

Yeah, thanks. Good morning, Emmanuel. So I would say that our run rate, if you look at engineering levels as a percentage of sales for Q1, as well as our SG&A levels are in terms of percentages, sustainable. That's really, we're talking about 8% net engineering. We're talking about a little bit more than 5% on the SG&A side. That's kind of the ballpark numbers we've got in mind for the full year. So if sales go up a little bit, we'll have a little bit of increase as well on these categories. But generally, I would say what we're able to demonstrate, I think, is the fact that all the restructuring actions, all the cost discipline that we put in place last year is sticking. And it shows, it's been showing in Q3, Q4, and it shows in Q1 as well. So we continue to monitor that very carefully, but these are kind of the levels we are thinking about as we go forward.

Okay, that's great to hear. Thank you. Thank you.

Your next question is from the line of James Piccarello with KeyBank Capital Markets.

Hey, good morning, guys. Good morning. Just on your reiterated four-year guide, you obviously noted the second quarter is set up to be sequentially lower, which makes complete sense given the industry production backdrop. But can you maybe just mention maybe a first half versus second half for the year within the midpoint of your full year framework?

Yeah, so if you think about, I'll talk about it in the context of vehicle production. That's a good way to look at it. So when you look at the initial estimate or the guidance that we had given, that was based on the second half being kind of higher than the first half simply because of the impact of the supply that we had anticipated to be lower. Now, where we stand with that is that we expect our supply to be lower than our estimate by about two to three weeks in the second quarter compared to the first, right? More probably closer to three weeks than two. And we have already seen an impact of about a week in the first quarter of this year. So that kind of gives you a sense of the calendarization of the impact. So clearly we will be more weighted on the second half in terms of our revenue. But having said that, as I mentioned earlier, we do see a stronger supply in the second half coming to us as compared to our initial estimate. Hopefully, that comes through. We'll have to see how well the suppliers execute on that plan. If so, there is some potential for, I would say, some modest upside. But at this point, it feels like we will be well within our range that we have guided towards.

Got it. Now, that's really helpful on that. Clearly, incrementals were strong this quarter. Can you confirm maybe what was captured in restructuring savings during the quarter relative to the full-year guide for $30 million? And should those incremental savings for this year run on a pretty routable basis?

Yeah, so maybe two things. First one, the incremental that we saw in Q1, they are, in fact, they are 30%. If you exclude supply chain costs, they are, in fact, even at 45%. And it's essentially because of, exactly as you said, the restructuring actions and the cost controls that we've had. You saw, and Emmanuel was pointing that earlier, we've reduced net engineering by 20% year-over-year and SG&A by 15%. So that's really what's showing. in the incremental margins. What we've got to be careful is that this is not the new run rate. As we are going into the year, the comps year over year are going to get tougher as we implemented these cost savings pretty early last year, in fact, starting in Q2 of 2020. In terms of restructuring, we are very much in line with what we had announced. We talked about an absolute restructuring number of savings of $60 million for 21, which is incremental to 2020 by $30 million. And what we see in Q1 is, coming through, there's about a $10 million restructuring saving year over year. The rest are cost savings and cost discipline. Thank you.

Your final question is from the line of Etai McCauley with Citi.

Great. Thanks. Good morning, everybody. Just to continue, one more margin question on Q1, because the sequential margin expansion was pretty robust, excluding the engineering and, of course, the semiconductor cost issues. And I was curious if you can comment on what you're seeing in terms of product mix in margin, and specifically just the margins you're seeing in on new digital clusters as well as new launches, and just how that compares to the historical average margin for the company.

Yeah, so hi, Tai. We are definitely benefiting a little bit in terms of the mix kind of leaning more towards the higher end of the product, and that we expect to see continue in the constrained environment. But having said that, we do believe that as we go forward, that is the general trend that the business is going to be based on. And this has also been, by the way, true in the fourth quarter of last year. So too early to say whether that is the new norm. So let us see how it develops. We are expecting to see some benefit of that in the constrained environment as OEMs have to prioritize what vehicles they build. And they will orient more towards the higher end, as we all know by now. And so that should help. But we'll see. We'll wait and see how exactly and in what way it has as an impact to our bottom line.

That's very helpful. Thank you. Just two quick follow-ups on the bookings. We saw one-third of the Q1 wins were for EVs. Hoping you can maybe talk about roughly the mix of EVs and what you're seeing in the future pipeline. And also, I think last quarter, Sachin, you mentioned I think 25% of your bookings were for mid-cycle refreshes for clusters. I was hoping to maybe get an update in terms of what you're seeing for cluster demand from your customers that could be done on mid-cycle refreshes as opposed to vehicle redesigns.

Yeah, so I think it's very similar to what we saw in the second half of last year. So we seem to be tracking somewhere around 20% of our new business wins for the full year now for mid-cycle updates, and that we are expecting to see for the rest of the year as well. With respect to EVs, as you would imagine, there's a lot of interest in EVs across the board with all OEMs. And so we will see for those EVs, Products that are for new vehicle models, I expect to see that we would be somewhere around 25% to 30% of our content going on EVs. What's really beneficial here for us is that many of the products, smart code is a great example that we want. It's the same product that cuts across ICE and EVs. Same thing for our displays. The display microzone wind that we talked about is going to launch on ICE vehicles as well as EVs. And so we are largely platform agnostic or powertrain agnostic, I should say, in terms of our products, and that's going to continue to be the case, which helps in making some of these wins significantly larger for us because now it's covering a higher number of models. So that's beneficial. The engineering content on those and the cost will certainly be amortized better. which should translate into better margins going forward.

That's all very helpful. Thank you.

Thank you. And this concludes our earnings call for the first quarter of 2021. Thank you, everyone, for participating in today's call and your ongoing interest in Visteon. If you have any follow-up questions, please contact me directly. Thank you.

This concludes Visteon's first quarter 2021 earnings call. You may now disconnect.