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.