Visteon Corporation

Good morning. I'm Chris Doyle, Vice President, Investor Relations, and Treasurer. Welcome to our earnings call for the second 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 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 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.

Thank you, Chris. Good morning, everyone, and thank you for joining our second quarter earnings call. Page 2 summarizes our results for the second quarter. Our sales were $610 million, up 59% year-over-year, excluding currency, while the global vehicle production grew 49% in the same period. While demand from automakers was strong in the second quarter, semiconductor supply was impacted by multiple factors, including the Texas winter storm, the fire in a supplier's facility in Japan, and the outbreak of COVID-19 in Taiwan and Malaysia. Despite these challenges, the Visteon team did a great job in mitigating the impact to our customers while keeping costs in check. I'm pleased that the company continued to outperform the market in a challenging environment due to supply chain disruptions and the COVID-19 pandemic. I will discuss our sales performance more on the next page. Adjusted EBITDA was $30 million or 4.9% of sales, an increase of $33 million compared to prior year. Compared to the COVID-19 impacted second quarter of 2020, adjusted EBITDA improved due to a combination of higher volume, cost efficiency measures introduced in 2020, and engineering recoveries. While our profitability improved significantly versus last year, it was below our initial estimates for the quarter. This was due to the lower than expected sales driven by supply constraints and the slightly higher costs incurred due to open market purchases of critical semiconductor parts. The company's liquidity remains strong and we ended the second quarter with $470 million of cash and debt of $355 million representing a net cash position of $115 million. Our product portfolio for digital cockpit and electrification continues to do well in winning new business. I'm pleased to report that we achieved $3.2 billion in new business wins in the first half, returning to pre-pandemic levels of performance. We also launched seven new products in the second quarter and remain on track to deliver products for the full year. We believe that long-term business success and the creation of shareholder value are integrally dependent on building a more sustainable business. Recently, ISS rated Visteon in the top quartile in our peer group for our ESG performance. While we are pleased with the progress we have made, we have set more aggressive sustainability targets for the company to achieve by 2025. Turning to page 3. This page shows Visteon's Q2 sales performance relative to global and Visteon customer vehicle production volumes. On a year-over-year basis, global vehicle production increased 49% as compared to the COVID-19 impacted second quarter of 2020, which was lower than many had expected at the beginning of the quarter. Automakers were forced to shut down plants or reduce shifts in response to widespread shortages of components caused by semiconductor supply shortages. On a year-over-year basis, Viztion's customers grew 55%, a positive customer mix of 6% this quarter compared to a negative mix of 11% in the first quarter. On a first-half basis, customer mix was a negative headwind to our results. Our sales grew 59% year-over-year on a constant currency basis, outperforming the market by 10 percentage points and our customers' production by 4 percentage points. Our expectation for sales at the beginning of the quarter based on semiconductor supply outlook was a little higher at about $650 million, even though demand from OEMs was in excess of $800 million. Semiconductor supply was particularly constrained early in the second quarter due to the effects of the winter storm in Texas and the fire at a supplier's facility in Japan in Q1. We had to source some components on the open market to maintain supply continuity to our customers. Despite these constraints, our core digital cockpit products performed very well with cluster sales growing 57% year-over-year. Infotainment sales grew 80% and displays grew more than 75% as these products were less impacted by the semiconductor shortages as compared to clusters. The good news is that demand for our digital cockpit products remains strong and as semiconductor supply recovers from the lows of the second quarter, I expect our market outperformance to continue and return to mid to high single digit or better. Turning to page four, the company launched seven new products in the second quarter, three of which are highlighted on this page. We launched our latest 3D cluster technology on the completely redesigned third generation Peugeot 308. This cluster uses an innovative dual display technology to generate depth perception for 3D graphics for improved user experience and to bring high priority information such as speed alerts and warnings to the driver's attention. This business represents approximately $175 million in lifetime program revenue. Our Android-based infotainment system was launched on a new Skoda SUV, which is part of VW Group's ambitious India 2.0 project. The system offers a 10-inch touchscreen with localized connected infotainment content through an embedded app store, Bluetooth 5.0, wireless CarPlay, Android Auto, and other state-of-the-art infotainment features. This program is worth about $135 million in lifetime revenue. The third product highlighted on this page is for Zhili in China. Geely is introducing our Android-based infotainment system in its newest high-end flagship SUV. This system uses latest Qualcomm Snapdragon chip to deliver infotainment content on two displays, on the center console and the passenger side, and also renders content on an augmented reality head-up display, providing drivers with access to road and navigation information without having to ever degaze. The total lifetime program revenue is approximately $115 million. These products leverage the latest advances in hardware and software technologies to deliver an enhanced user experience that is key to the automakers' brands. It also illustrates very well Visteon's technology expertise and global product development capability. Turning to page 5, New business activity was strong in the second quarter, despite the distraction caused by semiconductor shortages. We ended the first half with $3.2 billion in new business wins, which puts us on track to achieve a full-year target of $6 billion. With $2.9 billion in the second half of 2020 and $3.2 billion in the first half of this year, our new business bookings are back at pre-pandemic run rate. In the second quarter, from a product perspective, digital clusters did very well followed by displays. We also made progress on opportunities that will be awarded in the second half of this year. Our digital cockpit and electrification products are addressing the growth areas of the industry and the pipeline of opportunities for new business is robust. For the first half, Digital clusters represents almost half of the 3.2 billion of booked business. Android-based infotainment accounts for over a third, and displays make up the rest. Interest in our integrated cockpit controller technologies, SmartCore, continues to remain strong, with 30% of the bookings for the first half powered by this technology. The timing of new business decisions tend to be lumpy, and the semiconductor supply situation may extend some of the upcoming decision timelines. Nonetheless, I feel confident that we'll be able to achieve our goal of $6 billion in new business wins for the full year. Turning to page 6, this page highlights a couple of significant new business wins in the second quarter. The company was able to extend its digital cluster business with a large European OEM for an 8-inch digital cluster on multiple vehicle models. With this extension, the total business for this program is now worth $1.5 billion. With the product launching on 25 different vehicle models across three brands and in all regions of the world, this is probably the biggest digital cluster program in the industry. Beyond the revenue associated with this program, it also gives us the benefits of scale that we can bring to other customers for similar products. The second win highlighted on this page is for the two-wheeler market, where we were successful in making a breakthrough with a large OEM for a circular pod digital cluster. This is our first win with this OEM. and the system will offer turn-by-turn navigation and phone integration via Bluetooth in addition to traditional cluster features. Our business in the two-wheeler market has been steadily growing over the past two years, and with this win, we now have business with four OEMs and have our products in 35 different current and future models. Turning to page 7, Creating long-term shareholder value requires that our business operations are sustainable. As part of our drive for greater sustainability, we are committed to improving our emissions, social and governance performance and practices across the company. Starting with our products and technologies, we are enabling our customers to achieve their environmental goals with solutions that not only enable electrification of the powertrain, but also reduce the weight and energy consumption of the electronic systems. We have already reduced Scope 1 and 2 greenhouse gas emissions in our operations by over 10% over the past 5 years and have set aggressive goal of reducing them further by 25% by 2025. Although our operations are not water intensive, we will further reduce water consumption by 6% as well as reduce waste and energy usage. Moreover, 50% of our energy used by 2025 will come from renewable sources. The company participates in the Carbon Disclosure Project to provide transparent reporting of its emissions data and carbon emissions reduction strategies. The company employs approximately 10,000 people from different backgrounds and experience across 18 countries. Diversity, equity and inclusion are a key focus for the company. Gender diversity is an important part of this effort and this year we have launched a leadership development program to elevate more female leaders in the company. It's also important that we contribute to the societies in which we operate I'm proud of our employees for responding to the many challenges the world is encountering, especially COVID-19, with various social outreach programs. I'm pleased to report that our efforts in building a sustainable business are being recognized. ISS recently upgraded our rating in their latest report that puts us in the top quartile of our industry peers in ESG performance. Turning to page 8. On this page, I would like to discuss our outlook for global vehicle production for the rest of the year and the key drivers of Visteon sales. Unlike any time in recent years, the outlook for vehicle production for the rest of the year will depend almost entirely on semiconductor supply. Demand remains strong as vehicle inventories globally have been depleted in the face of robust consumer demand. The first half global vehicle production was 39 million units, representing a year-over-year increase of 29%. Our customers' production growth was lower, representing a negative customer mix of 6% for the first half, mainly driven by Ford. Viztion sales were up 34% in the first half, which, after excluding the positive effect of currency, represents an outperformance of 7 percentage points versus our customers' production growth. As we have noted earlier, our outperformance would have been higher if the supply of semiconductors was greater, especially for clusters. Based on our discussions with automakers and semiconductor suppliers, our estimate for global vehicle production for the second half of the year is 41 million units, a decrease of 7% year-over-year. Our estimate for full year remains at the same level as before at approximately 80 million units representing a year-over-year increase of 8%. We expect our customer mix to improve in the second half but remain a headwind for the full year based on the negative mix experienced in the first half. Semiconductor supply is also expected to improve gradually starting midway in the third quarter and continuing into the fourth quarter. There is some indication that demand for semiconductors from other sectors of the industry is starting to slow down, which should help secure more supply for automotive. Also, a growth over market in the second half is expected to be in the mid to high single digit percent range, driven by both the level of semiconductor supply and the new product launches. Most of our new product launches this year are happening in the second half. Based on these considerations, we expect sales to come within our guidance range, but below the midpoint. Turning to page 9. In summary, the company performed well in a challenging environment that was impacted not only by COVID-19, but also semiconductor supply constraints. Our sales in second quarter grew 59% year-over-year, outperforming our customers by 4 percentage points and the general market by 10 percentage points. Our digital cockpit 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 well with the key industry trends of connectivity, digitalization, and electrification. The pipeline of new business opportunities is strong and we won $3.2 billion in new business for the first half that will continue to drive better than market performance going forward. Demand from automakers remains strong and semiconductor supply is expected to improve as we progress through the rest of the year. Our sales for the full year are expected to come within the guidance range. I will now hand it over to Jerome to review the financials.

Thank you, Sachin, and good morning, everyone. As the industry rebounded from Q2 of last year, which represented the low point of industry production output during the COVID-19 pandemic, Visteon increased sales, expanded margins, and improved adjusted free cash flow compared to prior year. Visteon grew sales 59% year-over-year when excluding the favorable impact of currency, outperforming customer production volumes. Adjusted EBITDA improved to 30 million, representing a margin of 4.9%. Through the first half of the year, adjusted free cash flow was negative 7 million. However, Q2 of 2021 had its own set of challenges, driven by a constrained supply chain with semiconductor shortages impacting the overall industry, and Visteon was no exception. In Q2, we experienced a significant reduction in parts from key suppliers, including NXP, as a result of damages incurred to their facility from the Texas winter storm and Renesas following a planned fire at their Naka factory in Japan. As previously discussed, we established a cross-functional global task force early in the year, which has been working around the clock to optimize supply, and minimize the ongoing impact to our customer production schedules as well as to our operations. The task force is in daily communication with our customers and suppliers to align on part availability and was able to provide additional products to our customers through open market semiconductor purchases. This team has done an excellent job minimizing customer disruption while at the same time reducing the impact of fluctuating schedules on our own operational performance. This constrained environment, driven by supply, muted sales growth in the quarter. However, overall demand for vehicles, as well as for Visteon's products, remained robust, with initial OEM orders representing an increase from Q1 sales levels. We anticipate that the second quarter represents the low point in supply availability and that supply will steadily increase throughout the remainder of the year. Adjusted EBITDA margins were negatively impacted by lower scale and higher incremental costs associated with semiconductors and premium freight, while benefiting from higher engineering recoveries from our customers and savings from previous restructuring programs. Adjusted free cash flow was a slight outflow in the first half of the year, primarily driven by use of cash from working capital. This was partially offset by the continued discipline on capital expenditures. We continue to have one of the best balance sheets in the industry with a total cash balance of $470 million, a net cash position after debt of $115 million, and a negative net debt leverage ratio. For the full year, Our outlook remains within our guidance range, but below the midpoint as sales continue to be impacted by supply chain disruptions and the incremental costs associated with the semiconductor shortages slightly exceeding our initial estimates. Turning to page 12. Sales in the second quarter of 2021 were 610 million, an increase of 239 million compared to prior year. In comparison, industry production volumes were up 49%, while production at our top customers was up 55%, representing a favorable customer mix on a year-over-year basis, primarily due to the uneven nature of OEM plant closures last year, early in the COVID-19 pandemic. Compared to our top customers, Visteon sales outperformed by approximately 4%. Adjusted EBITDA was $30 million, representing a margin of 4.9%, an increase compared to prior year of $33 million, or 570 basis points. Compared to last year, adjusted EBITDA margins benefited from higher volumes, higher engineering recoveries from our customers, as well as from our cost reset in 2020. This was partially offset by supply chain cost impacts and the non-recurrence of temporary austerity measures that were implemented in 2020 and have since ended. Net incremental costs associated with the semiconductor shortages were approximately 17 million in the quarter. The majority of these costs resulted from higher purchase prices of semiconductors on the open market through brokers and distributors. In the second quarter, open market purchases represented two-thirds of our total incremental costs related to supply shortages. The decision to utilize brokers and distributors was a proactive approach Visteon took to ensure we optimized deliveries to our customers. Compared to the first quarter, the quantity of semiconductors purchased through brokers and distributors decreased as supply reduced. However, driven by high demand, incremental unit costs increased, resulting in higher costs for the company in Q2 versus Q1. Some of the incremental costs also included temporary surcharges from our Tier 2 suppliers, as well as higher freight and logistics costs. We are actively negotiating with our customers to pass along incremental costs and our recovery rate has increased as the quarter progressed, while many OEMs are passing along price increases to customers. In total, incremental semiconductor costs impacted margins by approximately 280 basis points, while lower sales compared to our recent run rate of approximately 750 million per quarter reduced margins by a little more than 300 basis points. When normalizing for these two items and for the higher engineering recoveries, we estimate that margins would have been closer to 9.5% to 10%, which is consistent with our normalized margins over the last few quarters. Turning to page 13. Page 13 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 half of 2021. Our balance sheet continues to be one of the best in the industry, with a net cash position of 115 million and a net debt to last 12 month EBITDA ratio of negative 0.5 times, with no material debt maturities until 2024. Adjusted free cash flow for the first half was negative 7 million, an improvement of 59 million versus prior year. Adjusted free cash flow benefited from higher adjusted EBITDA, as well as from our continued discipline in capital expenditures. Capital expenditures were down approximately 50% year over year, as the actions we implemented early last year continue to drive optimized levels of CapEx going forward. Working capital was an outflow for the first half, primarily driven by an increase in inventory levels. we have been building inventory to manage the variability of OEM production schedules, which will allow us to ramp up output as semiconductor supply increases. Turning to page 14. Based on the conversations with our suppliers and customers, we currently anticipate that sales, adjusted EBITDA, and adjusted free cash flow will all be within our guidance range, but below the midpoint. As a reminder, Our full-year guidance is sales of 2,875,000,000 to 3,025,000,000, adjusted EBITDA of 230,000,000 to 270,000,000, and adjusted free cash flow of 35,000,000 to 65,000,000. In this supply-constrained environment, we expect production volumes to be down approximately 7% in the second half of 2021 compared to prior year. As Sachin mentioned, the industry got off a slow start in July, with multiple customers reducing production schedules to adjust to the ongoing supply chain shortages exacerbated by the more recent COVID-19 outbreaks in Taiwan and Malaysia. We currently anticipate activity will peak up in the second half of the third quarter and continue to increase throughout the fourth quarter. In addition, Visteon is scheduled to launch a significant amount of new programs in the second half of the year. Based on these factors, we expect Q3 sales to be higher than Q2 sales, in the mid-teens percent range. This would represent a reduction in sales for the third quarter compared to prior year, when supply was not constrained. we expect further improvement in Q4 sales, which we forecast to be slightly higher than sales in Q4 2020. However, visibility continues to be limited with additional risk stemming from the ongoing COVID-19 pandemic, which is creating additional disruptions around the world. On the cost side, We are currently expecting 2021 net incremental supply chain costs will be between 35 and 40 million for the full year, which compares to 3 to 4 million we incurred in 2020. This is up slightly from our original expectations. Cost pressures have increased as the shortages have lasted longer than many had anticipated. To mitigate these cost increases, we have been actively negotiating with both our suppliers and customers. As already stated, we began to see increased success in the negotiation with our customers towards the end of the second quarter and anticipate that we'll have more success as we progress throughout the year. Despite these near-term challenges, we remain optimistic about the long-term growth prospects for the business. We continue to win a significant amount of new business and launch a high number of new programs, with 2021 representing another year of approximately 50 program launches. In addition, we believe that there is a significant amount of pent-up demand that will help accelerate industry production growth for years to come, including the continued demand from retail customers, the return of fleet demand, and historically low inventory levels in the US and Europe. In summary, the situation continues to be fluid with forecasts from both our suppliers and our customers, changing on a weekly basis. We believe that the near-term challenges are transitory, and we remain optimistic about the future growth trajectory for Visteon. Turning to page 15. Visteon's compelling investment thesis remains intact. We continue to see the acceleration in key industry trends, including digitalization, connectivity, and electrification. Visteon's product portfolio is well positioned to support these key trends. Thank you for your time today and your interest in Visteon. I would like now to open the call for your questions.