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spk02: 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.
spk01: 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.
spk03: 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.
spk00: At this time, if you would like to ask an audio question, please press star, then the number one on your telephone keypad. Again, that is star and the number one. We will pause just a moment to compile the Q&A roster. Your first question comes from the line of Joseph Speck with RBC.
spk07: Two questions. One sort of more near-term than one strategic. But just on the incremental semi-cost, you're saying $40 million for the year, so that's like $3 million for the fourth quarter. Are you expecting that 75% recovery rate still in 2020? in the fourth quarter? And then, you know, how should we think about semi-inflation, you know, moving into 2022?
spk03: Good morning, Joe. It's Jerome. Yes, generally speaking, we are anticipating that our negotiations in Q4 will lead to similar results to what we've been able to achieve in Q3. So, roughly 40 million for the full year, That means 75 to 80 percent cost recoveries for Q4. Talking about next year, it's still pretty early. In fact, we want first to finalize our negotiations for Q4, and we are right in the middle of that. But what we are today embarking on is our larger discussions with our customers, not only to include cost recoveries, but to make sure as well that we integrate in these discussions more strategic elements, including supply, including visibility, and as well the cost side of things. So we're still going through that, and we'll definitely update you in our Q4 calls later on next year. The one thing I can say is that we are definitely targeting for at least 75%, if not 80% recovery going into next year.
spk07: Okay, thank you. That's helpful. And then Just, you know, Sachin, on sort of the longer term here, you know, in the past, you sort of talked about new business wins needed to be about $6 billion a year to hit your targets. And it sounds like, you know, you're planning for a big fourth quarter to hit that this year. And then you showed this chart, which showed, you know, IHS is actually, you know, above 23 now versus what you had for volume versus what you had considered in it doesn't sound like you're really sort of changing your view. So is the message here you still think those mid-term targets are achievable even if the path there is a little bit different given by everything that's been going on over the past year?
spk01: That's exactly it, Joe. So if you think about when we talked about the mid-term target at the beginning of the year, that was on an assumption of vehicle production of 89 million units And if you look at where we are at today, although our base has been lowered with what has happened this year, we do believe that the path to 89 is, or even higher, is definitely achievable based on the recovery that we expect to see in terms of supply next year and then continuing And so nothing changes structurally from our other elements of the growth story. So the new business wins that we expect to be on target or close to it this year. There has been some delays in Q3 on account of all of the distraction that we have all faced. And I would say that has made Q4 even stronger than earlier. So let's see how much of that is actually converted into decisions and awards. But these delays are still relatively within, I would say, very normal levels and will not change the trajectory of the revenue of those programs. And when you look at the midterm targets, virtually all of that revenue is already booked and it's more about converting that through new product launches. So we are maintaining a pretty good cadence of new product launches. We'll be at about 50 this year. We have another strong year next year as well. And so the way to think about the next couple of years for us is it's not an issue of demand. It's really... one of a supply-driven environment for us, and the growth of our market is starting to shape up in the direction that we have always been talking about. So all of the other factors are aligned. So as long as we get the supply that we expect, and I feel good about it as we go forward here, we should be in a pretty good position to hit our midterm targets. Thank you very much.
spk00: Your next question comes from the line of Luke Junk with Baird.
spk04: Good morning. Thanks for taking the question. First question that I wanted to ask is, having made this progress to the 75% cost recovery on the higher semi-cost, just wondering if we could talk a little bit more about what the next layer of those discussions with customers look like going into next year. Jerome, you mentioned some of the more strategic elements in terms of better visibility into your customers. supply chains and whatnot, is there an evolution in terms of terms, be it lower price downs, better terms on new business, or other similar things that could enter into those discussions as well?
spk01: Yeah, hi, Luke. I'll take it first, and then we'll have Jerome also comment on it. The first thing I would say is that if you look at part of the reason why we are in the situation we are in with supply is on account of the fact that demand visibility in this industry has not been very good in the past. Most of the OEMs have provided visibility that is much shorter than the lead times, typical lead times for semiconductors, which, by the way, have only increased so that the difference between what we provide as visibility to our suppliers and what the lead times are has actually grown And that has caused a lot of inefficiency in the planning of certain semiconductor parts. So we have a situation where now we have more of some of the parts that we don't need and are critically short on some parts that is holding up vehicle production. And as I mentioned in my prepared remarks, all it takes is one chip to stop the production of the entire vehicle. So just getting that planning in a better shape so that we provide our suppliers with clear 52-week at least visibility part by part that allows them to plan their production better itself will solve quite a bit of the challenges that we have encountered this year. So that's the first discussion, the next level that we are having with our customers and with suppliers. And by the way, this isn't something that the industry is set up very well to do. So we are bringing some best practices. Some of our customers are doing the job better than others. We are bringing our own insights into the whole semiconductor supply chain to help make that discussion more efficient and effective with all of our customers. And as part of that, pricing and cost increases is also an integral part of those discussions and we will all have to come to that realization that the industry will have to contribute more as the costs have gone up on account of the various inflationary pressures that the semiconductor supply chain is experiencing. So I would say the discussions are fairly advanced, and we hope to conclude the majority of it by the end of this year. You can imagine it takes a huge amount of effort to go end item by end item across all of the various OEMs and then map it out for the full year. So that's exactly what's going on. And it's going as well as you can imagine it would in the circumstances. Anything more to add?
spk03: The only thing, maybe just to come back on Q3, we were pretty successful in achieving 75%. It's really because we started pretty early. So I think that's... That's a great point to add, the fact that given the challenges that we were seeing very early in the year, we embarked on these discussions with our customers and were able to achieve 75%. So kudos to the team with this achievement.
spk04: Thank you for that. Yeah, those are some great things to think about going forward. Second, I wanted to ask a question. bigger question. Now that it's been a year since you formally announced that first wireless BMS contract with GM on the LTM platform, I'm wondering what you've learned about the sales cycle for this product. You know, GM, clearly someone on the front foot in terms of their EV strategy, you know, some other OEMs clearly may be playing a little bit of catch up on that front. How does that dynamic play into what we might expect in terms of next bookings for wireless BMS be on the first two that you've already announced?
spk01: Right. Look, before I speak specifically about the ones we are discussing with now, I just want to remind everybody that besides GM, we had also announced another large global OEM that we are working on a solution for them for BMS. In addition to these two, we are engaged with multiple OEMs, and those discussions are, I would say, at various stages of progress. Our focus is on the larger OEMs that have ambitious EV plans with different models because we believe the solution that we have really scales very effectively. And we have developed a hardware and software solution that can work for almost all of the OEMs. It's a platform approach, if you will, in trying to take our learning from the engagements that we have had so far and developing a solution that addresses most of the different OEMs' needs. Now, where I would say we are at is that the industry is going through a tremendous amount of learning new learning on account of the catch-up that some of the OEMs are faced with. And at the same time, there is also a lot of evolution occurring with the underlying technologies, whether the battery chemistry or the semiconductor technology that is also evolving at the same time in terms of being able to perform better with respect to the accuracy of the measurements or the speed and also safety. So these are all starting to come in, and as you can imagine, for the next maybe a couple of years, given how relatively new this industry is, we will see a huge amount of activity, probably not as structured as some of the more mature products are in terms of the cadence and productivity. planning, but we do expect that 2022 would be a fairly busy year for us as everyone is trying to get going with it. But more importantly, in terms of announcing that third customer, I hope that we'll be in a position to do so yet this fourth quarter.
spk04: Thank you for that. I'll go ahead and leave it there.
spk00: Your next question comes from the line of Ryan Brinkman with JP Morgan.
spk09: Hi, thanks for taking my question. I think typically suppliers enjoy counter-cyclical working capital as production declines given the nature of customer payables and receivables, and that can provide a nice offset to the impact of lower FCF when production is softer. But on the other hand, we've heard from a few suppliers that the suddenness of customer call-offs has led to in inventory build of finished goods or even that they're at times pursuing a conscious strategy to invest in raw materials or purchased components to ensure a continuity of supply amidst supply chain uncertainty. So I saw a bit softer FCF in the quarter and I wanted to ask what maybe the bigger drivers of that were and how you're thinking about managing working capital in the current environment and how we might expect cash flows to track going forward.
spk03: Yeah, thanks, Ryan. It is true that working capital and specifically inventory has been challenging this year. The main reason for the negative adjusted free cash flow in Q3 is the inventory build. And a few things on that point. The first one is that we started the year with a fairly low level of inventory. We had close to 25 days going in this year, and therefore, due to the good management coming from our teams, we were maybe a little bit more exposed. So we've looked at this during the year, and given the critical situations, we've increased safety levels. At the same time, exactly as Sachin was highlighting and as you were highlighting as well, we've been suffering from uneven supply schedules, and as well from the fact that customers were changing their production schedules on a regular basis. So most of the inventory builds we've seen has been around raw materials. And that's as well, as I said earlier, where we've been trying to be a little bit more safe and have increased our safety levels. So going into Q4, we are not planning to have any major reductions. We want to be on the safe side, especially when we think that production will be ramping up into 2022. So we'll probably be coming a little bit down, going into the end of 22. But at this stage, until there's a better supply, we want to be careful and we'll hold a little bit higher inventory levels.
spk09: Okay, that's very helpful. Thank you. And then I know obviously the current run rate of margin is not representative of the potential of the business. And of course, you're going to earn a decremental on lower revenue for as long as the situation persists. But I just wanted to check in on what your latest thoughts were on ordinary EBITDA margin, just given the high value add nature of the product that you produce doesn't seem totally congruous with you know, where you stack up in margin relative to some of your peers. So, you know, when you do get the higher revenue, when industry conditions do normalize, you know, what type of a margin do you think is reasonable to be able to target even a couple years out?
spk03: Yeah, no, thanks. Definitely Q3, similar to Q2, has been impacted by, I would say by scale to a very large extent and to some extent by semiconductor costs. We think that scale has impacted us by about 300 basis points when we normalize our sales level at a level of $750 million. The best way to look at it, in fact, is to look at Q3 and Q4 of last year, where we were running at these kind of levels, and we were able to achieve in a normalized way. We had austerity measures last year, but we were able to run at a 9.5, 10%. So in the current environment with $750 million in sales per quarter. That's kind of the run rate we have in mind, 9.5% and 10%. And every quarter has kind of demonstrated that level. So the way we are thinking about it, this year nothing has fundamentally changed. We are impacted by scale. We will be focusing, as we alluded earlier on, on inflation recovery, and that's the key going into next year, making sure that we are minimizing inflation going into 22.
spk09: Great. Very helpful. Thank you.
spk00: Your next question comes from the line of Brian Johnson with Barclays.
spk05: Good morning. You know, just want to talk a little bit about the booking environment and the take rate environment. So maybe starting with the second take rates, as you look at your outgrowth versus your customers' production schedules. You know, to what extent can you contribute if you're trying to tease out the factors between launch of new models with digital cockpits versus existing models where take rate has run ahead of maybe initial when the program was set up expectations? And kind of related to that, you know, we've heard sort of a channel check for things that some of the electronic features that automakers know the customers want and customers really want actually had to be throttled back to the chip shortage, which actually could be then depressing the take rates on some of those features. So could you just maybe talk about the digital cockpit in that environment?
spk01: Sure, sure, Brian. And that's a great question, actually. And I will try to put some light on it. but there is a bit of a nuance to it as you alluded to it. So the first thing that we see is that the increase in take rates is quite, I would say, dramatic in the case of digital clusters. And that's largely driven by two factors. One is the popularity of ADAS. When you have ADAS features like blind spot detection, lane change assist, et cetera, you need to render that information on the cluster, and the cluster has to be digital for that. So anecdotally, I can tell you, for example, OEM in Europe had initially given us an indication of about 40% take rates for a digital cluster on their vehicles. they are running at 80% take rates. And so it's a significant shift as all of these factors are coming together. Plus, on top of that, the EV models are also driving the take rates higher because EVs have digital clusters, digital content, and many of the vehicles are having different power trains, but they are offering EV versions as well as your ICE, and they are going with the same cluster just to make it easier for them. So that's a positive tailwind in terms of improvement and increase in the take rates for us. The challenge, of course, on the other side is obviously availability of semiconductors to meet that demand. But if you look at our performance even in the third quarter, in spite of all of the shortages that we have gone through, our sales, unit sales of digital clusters actually increased both year-over-year and sequentially. And we would have done far better if we had more semiconductors. So that hopefully gives you a perspective on what is happening with respect to the take rates and the puts and takes there. But as we go forward, where we start to see more semiconductor come available to us, more parts, I expect that this trend will continue. We are not going to go backwards. So I think we are going to see acceleration in the take rates of our digital products. We are seeing not just for clusters. We are also seeing the same for smart core. and we're seeing the same for larger displays.
spk05: Okay, and in terms of the quoting pipeline, even though, as you pointed out, the bookings were below typical rates due to OEMs just scrambling on securing chip supplies, how does the pipeline look of quoting opportunities going into 2022? And second, is there anything to give investors comfort that, even with a little bit softer pace of bookings, that your win rate, and more particularly win rate on attractively priced business, is one that bodes well for the future.
spk01: Yeah. So on the pipeline first, we see, if you were to look at the pipeline at the beginning of this year even, it's come back to the pre-pandemic levels. And as I look at the pipeline for next year, it's actually... even a bit stronger than this year. So the pipeline seems to be pretty strong. The product mix is evolving, as we've talked about it before. We are seeing more smart core opportunities. We're seeing more opportunities for larger displays. And what's interesting is that as a general observation, the ASPs are also increasing because of the increase in content. So I think that's all bodes well for the future. In terms of win rates, we see nothing change. Our win rates are roughly around the 30% or so that we have had historically for the last few years. We don't expect that to change fundamentally. And the last point I would say is anything we are talking about next year obviously is beyond the horizon of the midterm guidance that we have given. So it's going to continue the growth of the business going forward even beyond where we currently have provided this outlook. Okay, thank you.
spk00: Your next question comes from the line of David Kelly with Jefferies.
spk08: Hey, good morning and thanks for taking my question. Maybe just starting with the Q4 question. revenue guide, similar to Q3 levels. Can you walk us through, you know, how you're thinking about Q4 auto production? It sounds like more cautious than IHS, but just want a little bit more color there. And then specifically, you know, mix your customers' exposure has been a little bit of a headwind as well. So curious as to how you're thinking about mix impact also.
spk01: Yeah, that's a great question. And let me try to share with you how we're thinking about it. So one thing to note is that the impact of semiconductor shortages kind of changed their nature in Q3 versus in the first half, and I mentioned that in my prepared remarks. And so what we saw in the third quarter was that there were many more semiconductor suppliers that were impacted by the shortages, and the shortages were also less predictable in the sense that many of the suppliers had late changes to the supply plan, not able to provide visibility beyond a couple of weeks. And so we ended up in a situation, as I mentioned, where we had more parts of some semiconductors and less of some critical parts. As we look at Q4, that situation seems to largely continue, although In aggregate, we may say that we will probably get more semiconductors, more parts in Q4 than in Q3. There will still be what I call as this unevenness in supply, and that's what is really causing us to be a bit cautious in terms of how we provide our outlook for Q4. So that's really the thinking behind what we have laid out here. We are certainly hoping that it improves more than what we currently have as visibility with some of these suppliers that have been kind of the new problem suppliers. And I'm also certain that as we go further out, a lot of what has happened has been on account of COVID. And as those facilities come back online and get to full capacity, things will improve. But that's really where we are at in terms of our outlook for Q4.
spk08: Okay, got it. That's helpful. Thank you. And then maybe a follow-up on kind of the pricing discussion. You noted it was a net positive in the third quarter and certainly not assuming that sustainable longer term, but it seemed to be in strange times. But, you know, I think you also noted you're targeting another 75 to 80 percent recovery rate with the elevated semi-cost into next year. So I realize you're not guiding 2022, but any thoughts on kind of the pricing there? into next year, just given some of the pass-throughs and pass-along opportunities that are out there?
spk03: Sure, David. So you're right. These are exceptional times, so the positive pricing may not be something that is going to carry on. There are a few buckets. The first one is the pricing that we traditionally give to our customers, and that's generally offset, I would say, by pricing that we get from our suppliers. That's how we think about it. That's our business equation. So that's got to be neutral in the grand scheme of things for 2022. And then the other element is essentially making sure that any inflation that is either temporary or will last longer gets as well recovered. So these are two different buckets, but we are negotiating going into 2022 the overall equation with our customers. So a little bit early to say where we'll land, but that's how we're looking at it.
spk08: Okay, perfect. Thank you.
spk03: Thank you.
spk00: Your next question comes from the line of Itay Makali with Citi.
spk06: Great, thank you. Good morning, everyone. Just back on the fourth quarter, and I do apologize if I missed it, maybe Jerome, but did you quantify the engineering impact in the fourth quarter? I think you mentioned it should be going higher versus Q3.
spk03: We have not, but it's probably $5 to $6 million incremental versus what we've seen in Q3, and that's a net engineering number.
spk06: Got it. And then maybe a couple questions on the bookings. I think, Sachin, you mentioned you're still confident in $6 billion for the year. If you look at kind of what you're hoping to win in the fourth quarter, is it a few kind of large programs in there, or is it just a bunch of kind of smaller or medium-sized programs that have been kind of delayed into the fourth quarter?
spk01: Yeah, so on account of the delays in the third quarter, I would say it is now a mix of everything. So there's a lot of higher value as well as your usual smaller programs that Our average typically is somewhere around $100 million program lifetime value, and I don't expect that to change in Q4. Got it.
spk06: Maybe just one last thing on kind of growth over market, kind of longer term. I think you mentioned, Sachin, earlier that the coding environment may actually improve next year. Obviously, you're winning a lot of programs on EVs. Is there any kind of high-level thoughts around how to think about growth over market for the company even beyond 2023 in terms of the pace of, I think, 8% to 12% you previously highlighted?
spk01: Right. Yeah, I don't want to give you a specific number just yet, and we'll talk more about it early next. But let me just share with you some of how we would be thinking about it. If you look at the near term, About 50% of our revenue comes from what we would call here as our new digital products. That would be digital clusters, smart core, and larger displays. And as I've mentioned on the call earlier, these products are doing very well with take rates actually improving. And we expect that to continue. So if you look at even Q3, one of the reasons why we had a good growth over market despite general shortages of semiconductors is that we were able to source more of the chips that go into these digital products. Now, as we start to get more chips, we would expect that we would be able to drive this growth over market into double-digit territory. And I expect that to be our growth over market story for the next a couple of years, as long as we get the tips that we need for those products. And I fully see, as I talk to the suppliers, that that situation is going to continue to improve, barring any more natural disasters like what we have gone through this year.
spk06: That's all very, very helpful. Thank you.
spk02: Great. This concludes our earnings call for the third 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.
spk00: This concludes Visteon's third quarter 2021 earnings call. You may now disconnect.
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