Visteon Corporation

Good morning. I'm Chris Doyle, Vice President, Investor Relations and Treasurer. Welcome to our earnings call for the third 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 Lewande, President and Chief Executive Officer, and Jerome Riquet, Senior Vice President and Chief Financial Officer. We have scheduled a 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 third quarter earnings call. Page 2 summarizes our results for the third quarter. Our sales were $631 million, down 17% year-over-year, excluding currency. Global automotive production was down significantly as a result of the semiconductor shortages, which have persisted beyond initial expectations. Adjusted EBITDA was $42 million. or 6.7% of sales, a decrease of $45 million compared to prior year, mainly due to lower production volume. Adjusted free cash flow for the first three quarters was a use of $37 million, as disruptions in semiconductor supply resulted in an increase of working capital. Despite the challenging semiconductor supply environment, Our core digital products did very well with year-over-year growth in sales of digital clusters, smart core domain controllers, and Android-based infotainment. We launched 13 products in the third quarter and are on track to launch approximately 50 products for the full year. These new product launches and the $3.8 billion in new business wins year-to-date positions the company well for continued growth in the future. On the ESG front, we are pleased with the progress we have made on our previously announced environmental targets. Going forward, we have committed to the use of science-based target initiative for the setting and reporting of emissions reduction targets for the company. The company's liquidity remains strong and we ended the third quarter with 401 million of cash and debt of 354 million representing a net cash position of $47 million with no material debt maturities until 2024. Turning to page 3, supply of semiconductors was significantly constrained throughout the third quarter, going against earlier expectations of recovery from the second quarter. Most of the recent investment in the semiconductor supply chain has been going into 300 mm wafer fabs, for high performance chips used in smartphones, PCs, servers, and base stations. Automotive industry uses chips that are built on 200 millimeter wafers using mature process technologies. Consumer electronics also uses these 200 millimeter wafers for chips, for digital cameras, Wi-Fi, Bluetooth, television, and variable devices. However, unlike 300 millimeter wafer fabs, There has been little investment going into 200 mm wafer fabs as these wafers are not used for the newer high-performance chips. Demand for semiconductors changed significantly during 2020 as a result of the pandemic. Automotive demand dropped sharply in the first half of 2020 due to COVID-related shutdown. At the same time, demand for consumer electronics increased due to work from home and the proliferation of connected devices. In the second half, automotive production recovered faster than expected, resulting in demand for 200 mm wafers to exceed supply and setting the stage for a challenging 2021. In the first quarter of 2021, automotive industry lost approximately 1.5 million vehicles due to semiconductor shortages. The winter storm in Texas towards the end of the first quarter and the fire at the facilities of a semiconductor supplier in Japan early in the second further impacted semiconductor supply. The industry lost an additional 2.5 million vehicles in the second quarter. The impacted suppliers were back in operation by the end of the quarter, but not at full capacity, and wafer supply remained a significant constraint. In late second quarter, COVID outbreaks in Southeast Asia forced several backend processing facilities that perform assembly and test of chips to be negatively impacted. The impact lasted longer than the industry had anticipated and caused widespread interruption to supply throughout the third quarter. Virtually all semiconductor suppliers were impacted as the industry is heavily concentrated in Asia for assembly and test facilities. Another 3.5 million vehicles were lost in the third quarter as a result. Most of the COVID-impacted facilities in Asia are now back in operation, but not all are operating at pre-COVID levels. Supply of chips will remain uneven across the different suppliers, limiting the industry's ability to build complete products. Therefore, we expect automotive production in the fourth quarter to be impacted similarly like in the third quarter and will likely be lower than the current IHS forecast. Turning to page four. This page shows Visteon's Q3 sales performance relative to global and Visteon customer vehicle production volumes. As I mentioned on the previous page, the industry was impacted more in the third quarter by semiconductor shortages than in the first half of the year, an outcome not anticipated by the industry at the beginning of Q3. Unlike in the first half, where two or three semiconductor suppliers were the main problem, in the third quarter, virtually all semiconductor suppliers were short on supply. The outbreak of COVID in Asia made backend processing the critical bottleneck for supply of chips in the quarter, in addition to wafer shortages. In Q3, global vehicle production was down about 20% compared to prior year and was also down sequentially compared to the second quarter. Visteon's customers were impacted more than the market. and were down 25% year-over-year, with customers in Europe and Japan experiencing greater reduction in vehicle production. Visteon sales were down 17% from prior year when excluding the impact of currency, but was up sequentially from the second quarter. The Visteon team did a great job in recovering most of the extraordinary semiconductor costs from customers in the third quarter. As a result, pricing, which is usually a headwind, was a net positive for the quarter. Jerome will provide more details on this part of our performance later in this section. Our sales outperformed our customers' vehicle production by 8 percentage points, driven by strong sales of new digital products. Digital clusters, smart core, and Android-based infotainment experienced double-digit growth despite the general shortage of chips. On the other hand, hybrid clusters and infotainment displays, which together represent about 40% of our revenues, were down significantly as these products were particularly affected by the chip shortages in the quarter. In summary, the third quarter was impacted more than anticipated by semiconductor shortages that rippled across all chip suppliers. Despite the challenging environment, I'm pleased to report that Visteon was able to support our customers' vehicle production and grow over market and recover most of the extraordinary semiconductor-related costs. Our outperformance relative to customer vehicle production is a testament to the strength of our product portfolio, especially our new digital cockpit products. Turning to page 5. The company launched 13 new products in the third quarter, four of which are highlighted on the left of this page. We launched an 8-inch infotainment display on the all-new Ford Maverick compact pickup truck. This vehicle is offered in three trim lines, and our display is standard on all three. This is our first 8-inch display with Ford, and there are additional launches planned in the future. The second product highlighted on this page is a 10-inch digital cluster launched on the K9 platform at Stellantis. The K9 platform is the foundation for the compact minivans that are sold under the Citroën, Peugeot, and Opel brands. For 2021, Stellantis is offering battery electric versions of these vehicles in addition to gasoline and diesel models, and these new models all come with our 10-inch digital cluster as standard. We also launched our first infotainment system for Stellantis on a new compact SUV for Brazil. This system offers a 10-inch display and supports CarPlay, Android Auto, USB multimedia, and Bluetooth connectivity features. There are two more vehicle models that will follow this first launch and these vehicles will also be offered in India in addition to South America. Our infotainment system will be offered as standard on all these vehicles. The final product highlighted is the launch of our 12-inch digital cluster with Dongfeng Motors in China for an all-new vehicle that comes in gasoline and electric versions. China domestic OEMs continue to perform very well in the market and we are building our business with customers such as Dongfeng and Geely. Year-to-date, we have launched 26 new products, including 14 digital clusters and two smart core cockpit domain controllers. The company continues to perform very well in transitioning our business to these new digital products that have high take rates as seen in the past few quarters. We have a busy fourth quarter with more than 20 new products slated for launch. We are expecting 2021 to be another strong year with approximately 50 new products launched, which will position Visteon very well when vehicle production rebounds from the current low levels. Turning to page six. We won over 600 million in new business in the third quarter, lower than our normal run rate, as the disruption caused by semiconductor shortages delayed sourcing decisions at carmakers. Nonetheless, new business wins queue three year-to-date, total $3.8 billion, compared to $3.2 billion at the same time last year. Some of the key new business wins in the quarter include a 15-inch OLED display for infotainment, there is increasing interest in the industry for large, high-quality displays for premium luxury vehicles. This is our first win for an OLED display, which together with Microzone positions us well to address the needs of luxury car makers. The need for high compute power as well as over-the-air software updates to deliver smartphone-like experience in the cockpit is accelerating the shift towards integrated domain controllers. Visteon's smart code technology is evolving to meet these new demands by leveraging the latest silicon and software technologies. The next win highlighted on this page is for a smart code system that drives up to six displays in the cockpit and integrates infotainment and digital cluster features. In addition, it processes data from several cameras around the vehicle for rendering 360-degree view on the center information display. It uses two high-power silicon system-on-chips or SoCs to process all this information with the latest version of Android operating system. The last win highlighted on this page is for a 10-inch digital cluster as a mid-cycle upgrade for an OEM in China. Visteon is the current provider of a hybrid analog digital cluster for this customer. This upgrade will extend the life of the vehicle model and keep it competitive in the marketplace. The outlook for the fourth quarter looks promising with a strong pipeline of new business opportunities. We should be able to reach our target of six billion for the full year, assuming most of the business gets sourced as planned. Turning to page seven, This page shows the latest outlook for vehicle production from IHS and compares it with Visteon's forecast presented at the beginning of this year. IHS has gradually reduced its forecast throughout the year in response to the semiconductor shortages, and its 2021 forecast is now at 74.8 million units. Our internal outlook is lower, as we believe that Q4 will look more like Q3 in terms of semiconductor supply. Looking ahead to 2022 and beyond, the forecast from IHS has 2022 vehicle production recovering to 82.7 million units and then continuing to 91.9 million units in 2023. Our forecast that was created before the impact of semiconductors was fully appreciated has 2023 production at 89 million units, still lower than IHS's latest forecast. We are yet to conclude our discussions with customers and suppliers regarding 2022. Nevertheless, I would like to share our thoughts regarding the imbalance in semiconductor demand and supply and its impact on vehicle production. On one hand, the industry is entering a strong demand cycle based on underlying demand from consumers, the low levels of inventory in the sales pipeline, and emissions regulations driving the need to build more EV models. On the other hand, vehicle production will remain constrained in 2022 as the imbalance between supply and demand for semiconductors will take longer to be mitigated. The investments in capacity increase for automotive chips made by semiconductor suppliers and foundries will yield higher supply of chips only towards the end of 2022. Until sufficient capacity comes online, the industry more effectively. Car makers have traditionally provided low visibility into their demand outlook, often not extending beyond a couple of months. On the other hand, semiconductor manufacturing lead times are six months or even longer. In 2021, this resulted in inefficient planning of manufacture and supply of the different chips required by the industry. Semiconductor suppliers have excess inventory of some parts while they are critically short on others. All it takes is one missing chip to impact production of the entire vehicle. We are working with our customers to get 12 months visibility for all parts that we supply, which in turn will help semiconductor suppliers to plan their production more effectively. 2021 was an unusual year. with natural disasters and COVID-19 impacting semiconductor supply. The combination of better long-term planning, reduction of COVID-related impact, and the non-recurrence of the natural disasters should result in better utilization of the existing semiconductor capacity in 2022 before additional capacity comes online later in the year. Moving to page eight. At Visteon, we have always been focused on reducing use of natural resources and reducing the emission of greenhouse gases. Our previously announced goals include the reduction of energy and water by 6%, waste by 5%, and greenhouse gas emission by 25%. These 2025 goals are set against 2019 levels, and we are making good progress in achieving them. In addition, we have joined the science-based target initiative to set new emissions reduction targets to meet the requirement of the Paris Agreement on Climate Change. SBTI will assist Visteon in setting targets in line with the strict criteria and will also assess our performance. SBTI is considered to be the most scientific and reliable framework for setting and reporting of emissions reduction and is widely recognized in the industry. We will continue to reduce our emissions and are pleased to join the roughly 1,000 or so companies that are working with SPTI to achieve the goals of the Paris Agreement. Turning to page 9. In summary, the company delivered 8% growth over market relative to our customers in a challenging semiconductor supply environment. We were also able to recover most of the incremental costs for chips from customers. We expect semiconductor supply to remain challenging in the fourth quarter, and as a result, industry vehicle production will be similar to the third quarter level. Despite shortages of semiconductors, our digital products such as digital clusters, smart core, and Android-based infotainment experience strong year-over-year growth. Our technology portfolio is well aligned with the key industry trends of connectivity, digitalization, and electrification. With 3.8 billion in new business wins by the end of the third quarter, the company is positioned well for continued growth. I will now hand it over to Jerome to review the financials.

Thank you, Sachin, and good morning, everyone. Visteon continued to focus on execution throughout the third quarter, while industry production volumes were negatively impacted by the ongoing supply chain disruptions and the worldwide semiconductor shortages. Our focus continues to be on controlling the variables we can influence, including proactively negotiating cost recoveries from our customers and ensuring we are well positioned for the industry's future rebound. Third quarter sales were 631 million, representing a slight increase compared to prior quarter. customer mix improved sequentially, and we were successful in recovering a large portion of the increased semiconductor costs from our customers. As a result, annual pricing, which is typically negative, was a positive for the quarter. Adjusted EBITDA was 42 million, representing a margin of 6.7%. Through the first three quarters of the year, adjusted free cash flow was negative 37 million. Industry production volumes were down 20% year-over-year, while our customers' production was down 25% in the quarter, as some of our European and Japanese customers were more impacted than the overall industry. Excluding the favorable impact from currency, Visteon's sales declined 17%, representing a positive performance versus both the industry and our customers' production volumes. This solid performance was driven by the robust number of launches in recent quarters, combined with customer recoveries. Semiconductor cost recoveries have been a major focus in the quarter. We were able to recover 75% of incremental semiconductor costs incurred in the quarter, despite an increase in the ongoing cost run rates. We discussed on our last call that recoveries had improved late in the second quarter, a trend that continued into Q3. As a result, the net impact of incremental supply chain costs related to semiconductor for Q3 was 6 million, an improvement of 11 million compared to the second quarter. We ended the quarter with $401 million in cash, representing a net cash position after debt of $47 million and a negative net debt leverage ratio. Adjusted free cash flow through the first three quarters of the year was a use of cash of $37 million, negatively impacted by an increase in inventory levels, mostly driven by the supply chain disruptions and the constant changes in OEM schedules. We continue to focus on capital expenditure discipline and the optimization activities we put in place last year continue to work well. Full year guidance is being adjusted to reflect the continuation of the supply chain shortages, which impacted industry production volumes more significantly than anticipated in Q3 and which we anticipate will have a larger impact on Q4 than previously discussed. I will provide more information on subsequent slides. Turning to page 12. Sales in the third quarter of 2021 were $631 million, representing an increase of $21 million compared to Q2. Adjusted EBITDA was $42 million, an improvement of $12 million compared to the second quarter, while adjusted EBITDA margin improved 180 basis points to 6.7%. The margin increase versus prior quarter is primarily due to the reduced net impact of semiconductor costs, which were achieved with higher customer recoveries combined with slightly higher sales and partially offset by higher net engineering. Q3 financial results continue to be impacted by the ongoing supply chain disruptions. Within the quarter, monthly industry production peaked in July at 5.8 million units, while exiting the quarter at 5.6 million units in the month of September. This is in contrast with our previous expectations, as we had anticipated production would steadily improve throughout the quarter. Visibility continues to be limited, making forecasting in this environment challenging, as illustrated by the recent Q3 industry forecast revisions. The supply chain disruptions also continues to negatively impact margins in the quarter margins decreased approximately 100 basis points due to the net impact of higher supply chain costs related to the semiconductor shortage. Why lower scale due to production disruptions reduce margin by several percentage points. When compared to prior year, sales for the quarter were lowered by $116 million, while adjusted EBITDA was reduced by $45 million. As you may recall, 2020 results benefited from temporary austerity measures, while this quarter, adjusted EBITDA was impacted by lower scale and higher net semiconductor costs. In total, Visteon's Q3 sales and adjusted EBITDA were negatively impacted by the supply chain disruptions and ongoing semiconductor shortages. However, the fundamentals of the business remain intact. We continue to benefit from the actions we implemented last year, which significantly reduced our fixed cost structure. Our continued focus on fixed cost management will allow us to expand margins as volume eventually increase. Turning to page 13. As previously highlighted, the supply chain disruptions and the worldwide semiconductor shortages continued in the third quarter. However, we were able to significantly reduce the net impact to our financial results through ongoing negotiations with customers. For the first three quarters of the year, adjusted EBITDA has been negatively impacted by 37 million related to the semiconductor supply chain shortages. The majority of our incremental costs relate to open market purchases as we continue to actively utilize brokers and distributors to increase parts availability and ensure we can optimize deliveries to our customers. In the third quarter, we also experienced an increase in semiconductor costs directly from our Tier 2 suppliers while continuing to experience elevated freight and logistics costs. Our approach to proactively addressing the semiconductor shortage has evolved as the supply chain disruption extends beyond initial estimates. While we continue to work around the clock to support our customers, we have also increased our negotiations with them to pass along the elevated costs. During the first half of the year, we recovered approximately 17% of the higher cost while we recovered approximately 75% in the third quarter. This situation is unprecedented in the industry, but we have been successful in our negotiations and we expect to maintain this momentum into the fourth quarter and beyond. For the full year, we now anticipate the net impact to adjusted EBITDA will be around 40 million. For Q4, we expect costs to remain elevated while we negotiate cost recoveries from our customers. Turning to page 14. Page 14 provides an overview of our cash and net cash position at the end of the quarter, as well as our adjusted free cash flow for the first three quarters of 20 and 21. Our balance sheet continues to provide flexibility as we navigate the ongoing supply chain disruptions. With total cash of 401 million, a net cash position of 47, and net negative leverage, we have one of the strongest balance sheets in the industry. Adjusted free cash flow for the first three quarters of 2021 was a use of cash of $37 million compared to a source of cash of $37 million in 2020. Adjusted free cash flow benefited in 2020 from a working capital unwind as sales decreased during the pandemic, as well as from lower cash taxes, while interest payments were elevated due to the revolving credit facility drawdown. CapEx, which was elevated in Q1 of 2020, began to benefit last year from the optimization activities we implemented to drive better capital utilization and costs. Moving to 2021, working capital was an outflow of $100 million, primarily driven by an increase of $82 million in inventory since the beginning of the year. Inventory has been building mostly as a result of the supply chain disruptions and the constant changes in OEM schedules. Equally, the increase in inventory will allow us to quickly ramp up output when the supply chain disruptions dissipate. Cash tax payments resumed in 2021, while cash flow benefited from a dividend from an unconsolidated JV. CapEx in 21 continues to benefit from our optimization focus, and we now expect full-year CapEx to be close to 85 million. Turning to page 15. We are adjusting our full-year outlook to align with our current expectations of industry production for the year. We now anticipate that sales will be between 2.6 to 2.65 billion, adjusted EBITDA will be between 165 and 175 million, representing a margin of approximately 6.5% at the midpoint, and we are targeting break-even adjusted free cash flow. At the midpoint of our guidance, Q4 sales will look fairly similar to Q3 levels, while adjusted EBITDA will be modestly impacted by higher net engineering costs in the fourth quarter compared to Q3. Q4 adjusted free cash flow is expected to be an inflow of cash driven by a partial unwind of working capital. Turning to page 16. This year is turning out to be more challenging than anyone could have anticipated. with disruptions occurring throughout the supply chain at varying times. However, we remain focused on controlling what we can influence while ensuring our long-term investment thesis remains intact. Despite the supply chain disruptions, we see an acceleration in secular trends, with cars becoming more digital, connected and electric. Visteon's product portfolio is well positioned to support these key trends. We anticipate our performance will accelerate as the industry recovers from the near-term supply disruptions and begins to embark on a multi-year upcycle driven by increased content, inventory restocking, and the shift to electric vehicles. Thank you for your time today and your interest in Visteon. I would now like to open the call for your questions.