Visteon Corporation

Good morning. I'm Chris Doyle, Vice President of Investor Relations and Treasurer. Welcome to our earnings call for the fourth quarter and full year 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 Investors 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 Ruque, 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. 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 fourth quarter and full year 2021 earnings call. I would like to start with a summary of our full-year performance as outlined on page 2. As we have communicated on prior calls, semiconductor shortages affected the industry throughout the year, presenting many operational and commercial challenges. However, the company responded effectively and consistently to deliver against the high demand from customers for our cockpit products. The result was a strong financial performance in both the fourth quarter and the full year despite the difficult environment. Full-year sales were $2,773,000,000, an increase of 7% year-over-year when excluding currency, and 9 percentage points growth over market as vehicle production at our customers declined approximately 2%. Adjusted EBITDA was $228,000,000, or 8.2% of sales, an increase of $36,000,000 compared to prior year. Strong operational and commercial discipline by the Visteon team helped mitigate the impact of frequent interruptions to supply and the higher incremental costs of semiconductors. Adjusted free cash flow for the year was $22 million. The company's track record of launching a high number of new products remained intact, and in 2021, we launched 43 new products. In addition to digital cockpit products, we launched the industry's first wireless battery management system on GM's new electric Hummer. These launches and the $5.1 billion in new business wins continue to position us well for market our performance in 2022 and beyond. I'm also pleased to inform you that we added a third customer to our growing DMS business. I would like to thank the entire Visteon team for their hard work and dedication throughout the year. I'm proud of the way the team has rallied around the challenges to ensure we continue to deliver for our customers and in turn drive shareholder value. We are excited about the secular changes underway in the industry as it continues to transition towards a more digital, connected and electric future. Visteon's product portfolio is well positioned and aligned with these key industry trends creating the right backdrop for continued sales growth, margin expansion, and cash flow generation. I will discuss our performance in more detail on the subsequent pages, followed by our outlook for 2022, before handing it over to Jerome to discuss the financials. Turning to page 3. Automotive production recovered from Q3 levels, but was still significantly lower than the same quarter last year due to semiconductor shortages. Visteon's customers were impacted more than the overall market, with vehicle production at our customers down 15% in Q4 year-over-year versus 10% for the total market. The negative customer mix was highest in China, where international OEMs underperformed domestic China OEMs. Nonetheless, our sales came in strong at $786 million, essentially flat compared to prior year, and representing an outperformance of 15 percentage points compared with our customers' vehicle production. Our team did a great job in working collaboratively with customers and semiconductor suppliers to optimize production for the quarter and by sourcing chips on the open market to reduce shortages. We also benefited from redesign of some products to use alternate semiconductors which will be a bigger factor for us going forward in reducing the impact of these critical chips on our sales in 2022. Net pricing was positive in the quarter as recoveries of extraordinary costs related to semiconductors more than offset annual price reduction, increasing our market outperformance. Digital clusters did very well in Q4 and were up by more than 20% year-over-year. Industry transition from analog to digital continues to pick up pace even in this challenging environment. Digital clusters now represent more than half of our total cluster sales, and we expect this to continue to grow. Smart core cockpit domain controllers grew even faster at 57% year over year, although from a lower base compared to digital clusters driven by new product launches at multiple customers. Infotainment was impacted more by semiconductor shortages than our other products in the fourth quarter and was down year over year. Display sales were also down year over year, but in line with customer vehicle production. Sales for all products would have been higher if we had more supply of chips, as demand from customers remained consistently strong throughout the quarter. On a regional basis, our sales performance was balanced and delivered double digit our performance in all regions. Most of our legacy business is now phased out and replaced with new digital products that are experiencing strong demand. Turning to page 4. Global vehicle production in 2021 came in lower than initially anticipated on account of persistent semiconductor shortages throughout the year. Full year industry production came in just over 2020 level, a year in which the industry was shut down for almost a full quarter. Vehicle production at Visteon's customers was lower than the overall market, with a drop of 2% year-over-year. Against this weak vehicle production backdrop, Visteon's sales of 2,773,000,000 grew 7% compared to prior year when excluding the impact of currency, representing an outperformance of 9 percentage points versus our customers' vehicle production. Customer demand remains strong throughout the year and our sales outperform vehicle production in each quarter. At quarterly global production of 20 million units or greater, which was the case in Q1 and Q4, our sales outperformance was at high single-digit level or better. The main driver of this outperformance is the strong sales of our digital clusters, which are doing very well even in this supply-constrained environment. On a full year basis, our total clusters business grew 13% over prior year driven by new product launches of digital clusters across multiple customers. Making up about half of our total sales, the growth of clusters is also the main driver of our overall sales outperformance. Smart core cockpit domain controllers grew even faster at 45% with multiple customer launches starting to ramp up in volume. As mentioned on the previous page, infotainment was more adversely affected than other products due to chip shortages, especially in the second half of the year. Nonetheless, for the full year, our infotainment sales performed in line with customer production volumes, with the growth of our Android-based infotainment products offsetting the roll-off of legacy business with Mazda that we have mentioned in previous quarters. The same is true for our displays business, with the growth of larger displays helping to offset the decline in smaller legacy displays. Our performance in 2021 confirms our belief that the combination of a high number of product launches and the alignment of the product portfolio to current industry trends provides a solid foundation for continued outperformance in the coming quarters. Turning to page 5. 2021 was another busy year of launches with 43 programs launched successfully across 15 different OEMs around the world. The industry continued its transition to digital and connected systems for the cockpit in 2021. In addition to a high number of digital cluster launches, we also launched multiple infotainment systems and large displays on some of the most exciting and important vehicle platforms and models for OEMs globally. Our digital cockpit products are powertrain agnostic and are used on both IS and EVs. About 20% of all our launches in 2021 were on electric vehicles. We also launched the industry's first wireless battery management system on the GMC Hummer. It's a significant innovation that not only reduces total system cost, but also improves flexibility and reliability of battery packs for electric vehicles. We finished a year strong with 17 new product launches in the fourth quarter, some of which are highlighted on this page. We launched three new products with GM that will contribute meaningfully to the growth of our business with this OEM. These include a digital cluster that will be featured in full-size trucks and large SUVs, such as the Chevy Silverado and the Suburban and Tahoe SUVs, as well as GMC Yukon and Sierra SUVs. We also launched the wireless BMS system and a digital cluster on the electric Hummer, which is the first model to launch on the Altium platform at GM. We also launched an S-shaped display on Nissan's brand new electric SUV, the Ariya. This multi-display system uses two 12-inch displays that are integrated behind a single large glass cover lens, creating an aesthetically pleasing cockpit design. We believe that such multi-display systems will become a standard feature in future mid- and higher-class vehicles. We are already seeing interest from multiple OEMs for such displays. Visteon is one of the few suppliers that have the engineering and manufacturing capabilities and experience in launching such displays in the automotive industry. Lastly, I would like to highlight the launch of our Smart Core system with Mahindra in India on the all-new XUV700 midsize SUV. It features dual 10-inch displays and a rich set of connected features including integrated App Store, over-the-air software updates, Alexa, and smartphone integration with Android Auto and CarPlay, besides other conventional infotainment features. This is the first cockpit domain controller to launch in the Indian market and the most advanced digital cockpit by far in the region. The XUV700 vehicle has been very successful with over 100,000 in bookings since its launch in October, in large part because of the advanced cockpit system. I believe it has set the benchmark for future cockpit systems in that market. Turning to page 6. We won over $5 billion of new business for the full year, representing nearly two times the level of sales booked in 2021. This is slightly lower than we had anticipated due to push-outs of some business awards by OEMs as they worked through the supply chain challenges. Lower vehicle production outlook also depressed the lifetime value of new business wins as compared to prior years. Our product mix reflects the key trends in automotive, with digital clusters leading with more than $2 billion in wins, followed by smart code with over a billion dollars, followed by displays, electrification, and infotainment. Many of these wins are on high-profile vehicle platforms and are likely to be extended as more models get added to the platform. We added two new customer logos in 2021, one in the two-wheeler and one in the passenger car segment, further diversifying our customer portfolio. About a third of our total wins are for electric vehicles, reflecting the industry's focus on electrification. On the right side of the page, we highlight a few key wins in the fourth quarter. The first win highlighted is a panoramic multi-screen display module under one seamless curved cover lens for 25 inches of total display area. This is our first win with this European luxury automotive brand and our product will be featured across the platform for two premium brands launching in 2024. The second win highlighted is a smart core award in China with a leading domestic OEM and our second win with them. This is the first cockpit domain controller in the industry that uses dual high-performance silicon chips to deliver the high processing power required to support new features such as augmented reality head-up display, occupant monitoring, and the replacement of outside rearview mirrors with cameras and displays. This is in addition to the more conventional applications such as digital cluster, front and rear seat connected infotainment, and over-the-air software updates. This system will exclusively be featured on electric vehicle models and is expected to launch in 2024. The third win highlighted on this page is for a 10-inch center stack display with a European OEM for their new electric vehicle platform for compact vehicles. This win complements our previously announced 10-inch digital cluster for the same platform. These two products combine to form a dual display cockpit and will launch on two EV models starting in 2024. In addition, we won a third customer for electrification business with the win of a next generation battery cell controller with the German OEM. This is a conquest win for an upgrade to the OEM's EV platform for premium vehicles and the initial award is for four vehicle models on two brands with the first launch in 2024. This OEM has an ambitious EV launch plan and additional vehicle models will follow, creating more opportunities for Visteon. Unlike the two other VINs, this battery management system uses wired connections between the cell controllers and the master controller. It's also the first system that will support 800V charging and requires highly accurate measurements of battery cell state. We also believe that this OEM will look at wireless solutions for future BMS systems leveraging our experience in their technology. Turning to page 7. Growth of electric vehicle sales in 2021 was a silver lining in an otherwise challenging year for the automotive industry. With over 6.5 million electric cars sold in 2021, EVs were 9% of total vehicles sold globally and doubled the level from prior year. Electric vehicles are digital natives and are good for our digital cockpit business. Our digital cockpit solutions are already on several battery electric and hybrid cars today, such as the Renault Zoe, Ford Mach-E and the Nissan Ariya. This page highlights the progress we have made with our electrification business, which is quickly growing into a significant incremental revenue opportunity for the company. With the third customer win, we have crossed $3 billion in bookings for our electrification business. Starting with the electric Hummer, we have a busy launch cadence with these OEMs leading all the way up to 2024. We anticipate electrification will represent 5% of our business by 2023 with a larger contribution in 2024 and beyond. Our BMS technology offers best-in-class performance with respect to cell measurement, accuracy, reliability and safety. The wireless capability eliminates the need for complex and costly wiring harnesses, which also improves safety as there are no connections for high current flow. In addition, it makes assembly of the battery packs easier with fewer connectors to attach, also improving reliability and reducing cost. For these reasons, we believe that over time, most OEMs will make the switch to wireless PMS. In the case of our third customer, they are upgrading an existing wired battery management system to meet new requirements of extended range and fast charging. The switch to wireless would have introduced timing risk to their already tight development schedule. We are looking forward to work with this customer for the future BMS requirements post this win. Our goal in electrification is to build a broad base of customers with BMS and then extend into power electronic solutions like we demonstrated at CES earlier in January. I am pleased to report that we are making good progress on both fronts. We are currently actively engaged with multiple OEMs for their BMS needs and are simultaneously working on developing our solutions for junction box, onboard charging, and other key products that will extend our offering in this space. Turning to page 8. From an industry perspective, automotive demand and supply dynamics in 2022 will look a lot like 2021. Strong consumer demand and depleted dealer inventories will keep demand higher than supply throughout the year. Supply in turn will depend on the availability of semiconductors, which will remain constrained as capacity increases will likely take another year before taking effect. We expect semiconductor supply in 2022 to improve as compared to 2021 due to non-recurrence of natural disasters that disrupted supply in 2021 and due to the supply chain operating at higher efficiency with the currently installed capacity. Semiconductor suppliers and fabs are allocating more wafers to automotive especially for chips that were critical bottlenecks in 2021 which will alleviate the shortages to some extent. On the other side, semiconductor content in vehicles continues to increase due to the digitization of the cockpit, greater ADAS penetration, and an increase in share of electric vehicles. While this is good for Visteon in general, it will impact the number of vehicles that can be built. The continued risk we face is from COVID outbreaks like the ones that impacted back-end processing facilities for semiconductors in Southeast Asia last year. The net of all these, we believe, is an increase in industry production volumes of approximately 9% over last year. This puts our forecast in line with IHS outlook for the industry. However, the quarterly cadence is different. We expect a slower start to the year as compared to IHS with lower production in the first quarter and steady improvement through the rest of the year. We expect supply and demand will continue to improve throughout the year but will remain imbalanced, putting a cap on industry vehicle production volumes. On the demand side, we are seeing strong demand from our OEM customers, driven by pent-up demand from consumers as well as the need to restock depleted inventory levels at dealerships. Although customer orders are likely overstated due to overordering, full year orders coming directly from our customers are in excess of $4 billion in 2022. Turning to page 9. In 2022, we anticipate sales will be between 3.15 and 3.35 billion, representing a growth over market of approximately 9% for the full year at the midpoint of guidance. The strength of our product portfolio has positioned us to grow sales faster than underlying vehicle production volumes at our customers. Since 2016, we have consistently won new business at levels much higher than current sales. These awards have converted into new product launches over the last several years and are now starting to ramp up production, providing a sustainable growth model for the years to come. We anticipate robust growth over market throughout 2022, ranging from the high single digits to low double digits on a quarterly basis, driven by our recently launched products and a less constrained environment in which 20 million vehicles or more are produced in most quarters. Looking beyond 2022, the ongoing transformation of our product portfolio will continue to drive robust growth over market despite higher comparables. The industry is still in its early years of digital cockpit transformation and growth of digital clusters, Android based infotainment and large displays will continue for several years. Our electrification product line will start to contribute meaningfully to our sales starting in 2023 and production will ramp up further in 2024 and beyond. We anticipate we'll be able to achieve our $4 billion sales target in 2023, assuming industry vehicle production reaches 89 million units or better. Moving to slide 10. In summary, the company performed very well despite the challenging environment with COVID and semiconductor shortages. We delivered solid sales, outperforming vehicle production at our customers by 9 percentage points, Disciplined execution of our operational and commercial goals resulted in a robust adjusted EBITDA margin of 8.2%. The company built a strong foundation for future growth by launching 43 new products and booking $5.1 billion in new business during the year. We launched a new product line, the industry's first wireless PMS product, and secured a third customer to drive growth in electrification. The industry fundamentals appear to indicate we will be entering a multi-year upcycle in production volumes. The strength of Visteon's product portfolio is perfectly positioned in this environment. Now I will turn the presentation over to Jerome to review the financial results.

Thank you Sachin and good morning everyone. The last two years have been challenging for the auto industry. In this environment, the Visteon team has navigated both the pandemic and the global semiconductor shortages with resiliency, highlighting the agility of our supply chain while demonstrating strict commercial discipline. For the full year, sales were 2,773,000,000, an increase of 7% versus prior year, when excluding the positive impact of currency. Production at Visteon's top customers was down 2%, underperforming the overall industry by approximately 5 percentage points. Compared to production at our customers, Visteon's growth over market was 9% for the full year, driven by the ongoing transformation of Visteon's product portfolio. This outperformance was supported by our proactive supply chain initiatives, as well as positive pricing for the year. Adjusted EBITDA was $228 million, or 8.2% of sales, essentially at the low end of our original guidance, despite volumes being much lower than anticipated. Compared to prior year, adjusted EBITDA increased by 36 million, or 70 basis points of margin, due to higher sales, lower engineering, continued cost discipline, and a one-time customer recovery in Q4. Incremental costs related to the global semiconductor shortages were a partial offset. For the full year, adjusted EBITDA was negatively impacted by 40 million of net cost as a result of open market semiconductor purchases, supplier price increases, higher freight and logistics costs, as well as product redesigns. These costs have continued to increase throughout the year, but our recovery success rate also improved quarter after quarter, including full year settlements in Q4. Combined with a strong pricing discipline, these recoveries more than offset our annual price reductions. Adjusted free cash flow was positive 22 million in 2021. Adjusted free cash flow benefited from higher adjusted EBITDA and continued capital discipline, partially offset by built-in inventory levels due to the uneven supply chain environment throughout the year. Compared to our most recent guidance, Q4 results came in better than we were expecting, which I will provide more information on shortly. We continue to have one of the strongest balance sheets in the industry and ended the year with cash of $455 million and net cash after debt of $102 million. This provides a strong foundation for growth and tremendous flexibility as we move into 2022. As Sachin mentioned, we expect the first half of the year to still be constrained, with the supply of semiconductors improving throughout the year. Combining our expectation for industry growth through better supply and a strong demand of Visteon's products, we are anticipating strong top-line growth, margin expansion, and increased adjusted free cash flow in 2022. Turning to slide 13. On slide 13, we highlight sales and adjusted EBITDA for the fourth quarter. Coming out of Q3, we had anticipated a very challenging market environment with production schedules in Q4 being very similar to what we had seen in Q3. Fortunately, production schedules improved throughout the quarter as semiconductor supply began to improve in late October. Visteon sales for the quarter were 786 million in line with prior year, despite a 15% reduction in our customer production volumes. This represents a 15 percentage point growth of a market, driven by the acceleration of our product transformation and higher pricing. This performance would not have been possible without the proactive measures we took to optimize supply throughout the quarter, including constant dialogue with our suppliers and customers, a sizable level of purchases of semiconductors on the open market, as well as some product redesigns. We also worked with our customers to recover the higher costs that we were incurring to support their operations in the fourth quarter. Adjusted EBITDA was 92 million, representing a margin of 11.7% and a 220 basis point improvement from Q4 2020. This strong margin percentage performance, especially in a challenging environment, was driven by volume levels, higher engineering recoveries, and a one-time customer recovery of 9 million related to a customer's decision to exit a particular geography. Partially offsetting these benefits were the net costs incurred from the ongoing global semiconductor shortages, related inflation, as well as higher freight costs. In the quarter, net costs related to the semiconductor shortages were approximately 3 million, whereas the impact to margin was 120 basis points due to the dilutive nature of cost recoveries. At a sales level of approximately 750 million, we continue to see adjusted EBITDA margins around 9.5% when normalized for unusual items and timing. In this quarter, Adjusted EBITDA would have also been in this range, once adjusted for the favorable impact from lower engineering and the one-time customer recovery, as well as the dilutive impact from semiconductor cost increases and higher rates. Turning to page 14. Page 14 provides an overview of our cash and net cash position at the end of the year, as well as our adjusted free cash flow for the full year. Our balance sheet continues to be very strong, with a net cash position of 102 million and a net debt to the last 12 month EBITDA ratio of negative 0.4 times. Adjusted free cash flow was 22 million for the full year. Adjusted free cash flow benefited from a strong EBITDA performance in this challenging environment. Trade working capital was the largest headwind in 2021. As you may recall, the timing of some working capital items benefited 2020 results by approximately 60 million due to some temporary supplier payment term extensions and early customer payments. This benefit helped our 2020 adjusted free cash flow, but was a headwind in 2021. In addition, inventory was an outflow of about 90 million in 2021. Inventory has been building mostly as a result of the supply chain disruptions and the constant changes in OEM schedules. Although this has been a negative on our cash flow performance, these levels of inventory will allow us to ramp up production easily as supply chain disruptions improve. Cash taxes were flat in 2021 versus 2020, but included certain favorable discrete items. Other one-time items in 2021 included an increase in deferred income, a dividend received from a non-consolidated JV, and lower working capital with unconsolidated JVs. CAPEX was reduced by approximately 30% compared to prior year as we continue to benefit from our ongoing CAPEX optimization initiatives, including the increase in equipment reuse. In the last two years, Most investments we have made were towards upgrading capability as opposed to capacity. As volumes ramp up again in 2022, we will be increasing our CapEx capacity spending. Turning to page 15. On page 15, we present our full year guidance for 2022. Our guidance for sales is between 3 billion, 150 million, and 3 billion, 350 million, which at the midpoint, 3 billion, 250 million, represents a 17% increase versus prior. This assumes that production at our top customers will grow approximately 9%, in line with the global industry production volumes. Excluding a slight headwind from currency, we anticipate growth of our market will be in the high single digits to low double digits for the second straight year. Given the uncertainties around semiconductor availability, we have elected to broaden our sales range this year. We anticipate the semiconductor shortages will be more impactful in the first half of the year, impacting both industry production volumes and creating some unevenness in growth of a market on a quarterly basis. Adjusted EBITDA is forecasted to be between 295 million and 335 million, representing an adjusted EBITDA of 315 million or 9.7% at the midpoint. an expansion of 150 basis points versus prior year, despite the non-recurrence of a one-time customer recovery of 9 million, and an increase in net engineering expense to account for higher new business wins and ongoing investments to support the industry trends, including further investments in electrification. The inflationary costs related to the ongoing semiconductor shortages are expected to continue in 2022, and we are in the midst of ongoing commercial negotiations with suppliers and customers. As we have done in 2021, we are focusing on reducing the net impact to Visteon through a combination of product redesigns and commercial actions, including price increases, lower annual price downs, and discrete cost recoveries. Although we still anticipate a negative net cost in 2022 due to the semiconductor shortages and related inflation, we anticipate about a $20 million improvement in adjusted EBITDA on a year-over-year basis as we continue to reduce the ongoing impact to the bottom line. Due to the ongoing negotiations with our customers and suppliers, we are not disclosing the rate of recoveries we are anticipating in our guidance. However, we do intend to vigorously pass along the vast majority of these costs to our customers while working to preserve margins. Adjusted free cash flow is anticipated to be between $85 million and $115 million, representing about a 30% free cash flow conversion ratio to EBITDA at the midpoint of our guidance, or $100 million. Adjusted free cash flow will be positively impacted by higher adjusted EBITDA, a partial unwind of inventory, and the ongoing focus on optimizing capital expenditures. We anticipate capital expenditures will be approximately $110 million, representing a 23% decrease from 2019, despite an increase in 10% in revenue. Working capital is expected to be a use of cash in 2022, driven by an increase in sales partially offset by lower inventory levels. Although we do not plan on providing quarterly guidance, I do want to reiterate that we expect the first half of the year to be more challenging than the second half. In particular, we expect Q1 to represent a peak headwind on margins as we absorb higher costs from suppliers while we are still in the process of negotiating 2022 cost recoveries with our customers. Turning to page 16. This trend continues to be a compelling long-term investment opportunity. We have positioned the company for top-line growth, margin expansion, and continued free cash flow generation. while our strong balance sheet continues to provide significant flexibility. Thank you for your time today. I would like now to open the call for your questions.