Visteon Corporation

Good morning. I'm Chris Doyle, Vice President of Investor Relations and Treasurer. Welcome to our earnings call for the first quarter of 2022. 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.vistion.com to download the material if you have not already done so. Joining us today are Satchin Lawande, President and Chief Executive Officer, and Jerome Riquet, Senior Vice President and Chief Financial Officer. We have scheduled the call for one hour, and we'll open the lines for your questions after Satchin'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 Satchin.

Thank you, Chris. Good morning, everyone, and thank you for joining our first quarter 2022 earnings call. As outlined on page two, Vestion continued to execute on our growth strategy despite the challenging environment. The product trends we highlighted on our Q4 earnings call continued in Q1, with most of our key products significantly outperforming underlying customer vehicle production. First quarter sales were $818 million, an increase of 11% year-over-year when excluding currency and 22% growth over market as vehicle production at our customers declined approximately 11%. Sales came in better than anticipated as we benefited from automakers prioritizing higher content vehicles and on account of our proactive approach of mitigating semiconductor shortages through product redesign and purchasing chips from the open market. Adjusted EBITDA was $71 million, or 8.7% of sales, an increase of $7 million when compared to last year. A strong commercial discipline and focus on operations helped mitigate the disruptions in inflated costs in the supply chain. Adjusted free cash was a negative $37 million in the quarter as uneven supply of parts resulted in higher inventory. We launched 16 new products in the first quarter, which is an outstanding performance given the challenging supply chain situation. It sets the stage for another strong year for product launches, which are a key part of our growth strategy. New business wins were approximately $950 million, which will continue to drive our growth in the midterm and beyond. Large displays in the cockpit is an emerging trend in the industry. With industry-leading capabilities in design and manufacture of large displays, plus the unique and proprietary IP for advanced display features, we are in a great position to address the needs of carmakers for their future cockpit displays. We are excited about the industry's digital, connected, and electric future, and are confident that Visteon's product portfolio will continue to facilitate these key industry trends. Our focus on supporting our customers and commitment to technology innovation will continue to drive sales growth, margin expansion, and cash flow generation in both the near and long term. I will provide an update on the market environment and our first quarter performance in more detail on the subsequent pages before handing it over to Jerome to discuss the financials. Turning to page 3. The war in Ukraine and COVID-related lockdowns in China caused additional disruption to the industry, resulting in reduced vehicle production in Q1 and lowering of our estimates for production for the full year. The direct impact of Visteon from the war in Ukraine was relatively small, as we do not have any operations in Ukraine. However, other suppliers' manufacturing facilities in Ukraine were affected, which resulted in our European customers' ability to produce vehicles. The outbreak of COVID-19 in China and the resulting lockdowns, mainly in Shanghai and Changchun, impacted vehicle production at some of Visteon's largest customers in China. These events resulted in a lower production by Visteon customers in Q1 as compared with the rest of the industry, causing negative customer mix in the quarter. Semiconductor supply continued to be a challenge throughout the quarter, with demand significantly exceeding supply. We saw a modest improvement in the supply of analog chips in the quarter compared to our initial expectation of a sequential decline from the fourth quarter level. While supply of all semiconductors is constrained, these analog chips are the most critical bottleneck. Despite these headwinds, Visteon's sales grew 11% year-over-year when excluding currency. The market outperformance was driven by a combination of factors. First, OEMs continued to prioritize higher trim-level vehicles, which typically have higher Visteon content. This trend, combined with the high number of new products launched by Visteon in 2021, most of which go on these higher trim vehicles, resulted in stronger than anticipated demand in the first quarter. Second, we are redesigning some of our high-volume products to use alternate chips wherever possible to mitigate semiconductor shortages. Combined with the modest improvement in the supply of analog chips and the proactive sourcing of chips from the open market, We were able to ship more products in Q1 than we were initially anticipating, resulting in the higher sales for the quarter. Lastly, the recoveries of incremental supply chain related costs from our customers are recorded as revenue, further boosting our sales growth. On the next page, I would like to provide some context on how our products performed in this environment. Turning to page four. In the first quarter, industry production volumes decreased 4% compared to prior year. Vehicle production at our customers decreased 11%, with our European customers driving most of the negative mix, as discussed on the previous page. Despite the lower vehicle production, Visteon's sales came in strong at $818 million, up 11% compared to prior year when excluding the impact of currency. This is also the highest level of quarterly sales since I joined the company in 2015. The transformation of our product portfolio over the past few years has put us in a great position to take advantage of the key trends impacting the industry. Cluster sales, which represent about 50% of Vestion's total sales, increased 11% year-over-year, driven by the ongoing shift to digital clusters. Digital clusters were up 38% year over year and now represent nearly 60% of our total cluster sales. On a unit volume basis, digital clusters still represent only 40% of total cluster shipments, which provides a long runway of future growth as our customers continue to fully digitize their cockpits. In addition to new product launches, we continue to see our customers prioritizing high content vehicles. For instance, in Europe, Our sales with Ford benefited from higher take rates of digital clusters on the Kuga SUV. Three of the four trims for this SUV carry a 12-inch digital cluster, all except the base trim. In the supply-limited environment, the OEM prioritized the production and sale of the higher-level trims to maximize their sales and revenue. The Kuga is a competitively priced family SUV that's one of Ford's best-selling vehicles in Europe, It's also a good example of how digital clusters are migrating into mass market vehicles. Smart Core sales now account for 10% of total Visteon sales, up from 6% in Q1 of 2021. This equates to a year-over-year sales growth of nearly 80%. Smart Core will continue to contribute to Visteon's growth for the foreseeable future, given the continued ramp of these programs, as well as additional launches planned over the next couple of years. Displays were up 13% year-over-year, driven by strong demand for our large displays and accounted for about 16% of our total sales in the quarter. Like in the case of digital clusters a couple of years ago, the industry is starting to shift rapidly towards larger displays in the mid-segment of the market. I expect displays to be the next growth opportunity for Visteon in the cockpit after digital clusters and smart core. Infotainment continued to be the most impacted product line in the first quarter in terms of semiconductor shortages. As a result, sales of infotainment were down year over year, but still managed to outperform customer production volumes. The strong fit of our product portfolio to the key trends impacting the industry in the commercial and operational discipline on part of the team to maximize production and recovery of incremental costs but the main driver of our outperformance in the first quarter. Turning to page five. Launching new electronics products in an environment of widespread semiconductor and other power shortages is very challenging to say the least. I'm very pleased to report that Visteon launched 16 new products in the first quarter, which is a strong testament to the operational capability of the team. These 16 products were launched across 12 different OEMs and on some of their most important vehicle models and in all regions of the world. Some of these launches are highlighted on this page. We launched a digital cluster on the highly anticipated F-150 Lightning electric truck from Ford. This 12-inch digital cluster offers state-of-the-art functionality and high-quality graphics and is software upgradable. It's worth noting that the ICE version of the F-150 also comes with our all-digital cluster, which uses the same hardware as the cluster on the electric version of the truck. We also launched an audio system on the Ford Ranger truck, which is the first of several additional launches of the audio system on the T6 small truck and SUV platform at Ford. Mazda has historically offered small displays in their vehicles, typically 8-inch or less. With the market trend shifting towards larger displays, Mazda is offering larger 10- and 12-inch displays developed by Visteon for new vehicles. In Q1, we launched a 12-inch center information display on the new flagship model for Mazda, the CX-60 plug-in hybrid SUV for the European market. There are additional vehicle launches planned with these larger displays in the coming quarters. With Honda, we launched a 10-inch digital cluster on their first EV model in China, the ENS1. Honda has been very successful in China with their ICE vehicles, having a market share in high single digits. With the growth of electric vehicles, Honda is launching new EV models in China and Europe with Visteon-supplied digital clusters. Other notable cluster launches include a 10-inch digital cluster on Nissan's popular two-door sports car, the Z, and a digital cluster on VW's ID electric vehicles in China. These are high-quality launches, both in terms of the product and the vehicle models they are on. We expect these products to benefit from the ongoing acceleration of the digital cockpit trends and contribute to our market outperformance in the coming quarters. Turning to page six, We had a strong start to the year with approximately $950 million of new business wins in the first quarter. Several new business awards were pushed out due to supply chain and other disruptions, particularly in Europe. Nevertheless, we were able to maintain our win rate consistent with our goal of achieving market share gains. From a regional perspective, sourcing activity was higher in Asia in the first quarter, and we expected to pick up in Europe and US going forward. New business wins were well distributed across our products, representing the ongoing evolution of the cockpit. We had several large displays wins, multiple all-digital cluster wins, and we also added a new OEM customer for Smart Core. New business wins were also diversified across powertrain and end markets, with 20% of the new business wins targeting electric vehicles, including an all-electric two-wheeler. On the right side of the page, we highlight a few key wins in the first quarter. The first win highlighted is for a cross-car platform digital cluster with Toyota that will launch initially on the Camry in 2024. This is our first multi-vehicle and global business win with Toyota and it builds upon the cluster programs we have recently launched with that OEM in China. It adds another large global OEM to our growing portfolio of customers for digital clusters and we hope to extend our engagement to other cockpit products in the future. The second win highlighted is for a digital cockpit system for an electric two-wheeler with an OEM in India. We have previously highlighted the emerging trend of digital cockpits in the two-wheeler market. This system uses a 7-inch display which is large for two-wheelers and will offer navigation and smartphone connectivity using Wi-Fi and Bluetooth wireless technologies. The two-wheeler segment has traditionally used low-end meters but is now starting to follow passenger vehicles in offering higher-value digital cockpit systems. In China, light pickup trucks are mostly a basic utility vehicle used in rural areas, with cities restricting their use to manage traffic congestion. With many cities now relaxing these restrictions, light pickup trucks are poised to grow in China as OEMs are looking to replicate the success of these trucks in U.S. and other markets. The third win highlighted is for a smart core system for a domestic OEM in China for a new light pickup truck. This system will offer state-of-the-art digital cockpit features including cloud services and apps, over-the-air software updates and augmented reality, leveraging our Qualcomm Snapdragon-based smart core platform. The last one highlighted on this page is a multi-screen display module under one seamless cover lens for an existing Japanese customer. This program will launch in 2024 across multiple vehicles and includes two variants with display sizes of 24 and 28 inches for mass market and premium vehicles, It is representative of the emerging trend of multi-screen displays in the cockpit, which is an exciting area of growth for Visteon, and which I will discuss in more detail on the next page. Turning to page 7. Multi-screen displays are an exciting growth opportunity for Visteon, with the industry starting to follow a replacement cycle like what's happening with digital clusters. Consumer demand for ADAS and connected services has resulted in OEMs using larger displays in the cockpit to offer an improved experience to the driver and passengers. Display trends, driven by consumer electronics products such as smartphones and tablets, have shaped some of the trends in cockpit displays, including narrow borders and high perceptual quality. In addition, requirements that are unique to automotive, such as readability in bright sunlight, low power consumption, and limiting driver distraction are driving future trends in cockpit displays. Visteon was early to identify displays as a growth opportunity and launched our first large display system with BMW in 2019. This program introduced new features such as curved cover lens with optical bonding to the LCD panel to provide a nicer look and feel. With multiple display products launched and more under development, Visteon has developed strong expertise in the design and development of key elements of the display technology stack, including backlight unit, cover lens, and optical bonding. We are now regarded as a technology leader in the industry for large displays. Over the three-year period from 2021 to 2023, we expect to launch over 20 multi-screen display systems across several OEMs. In addition, Vestion has developed unique and proprietary intellectual property such as microzone to enhance perceptual quality of the display, true color for dynamic image enhancement for improved readability in bright light conditions, active privacy technology and others shown on this page. These are new features that are being requested by OEMs for second generation of large displays that are scheduled to launch in 2024 and beyond. These features will launch first in premium vehicles and then migrate down to mass market vehicles. Traditionally, automotive industry lagged consumer electronics when it came to displays. This is now changing rapidly and automotive is driving its own technology roadmap for displays. Vestion has built a strong technology and manufacturing expertise in displays and is positioned nicely to take advantage of this fast growing trend in the industry. After digital clusters and smart core, we expect large multi-screen displays to be the next growth driver for cockpit electronics for the company. Turning to page eight. On this page, I would like to discuss our thoughts on the outlook for vehicle production and Visteon's growth over market for the full year. The recent developments in China with respect to COVID-19 and the war in Ukraine has resulted in the outlook for vehicle production to be lower than our initial expectations. The COVID-related lockdowns in Shanghai and other cities in China has reduced vehicle production and introduced additional disruption to the automotive supply chain, most of which will be felt in the second quarter. We expect authorities in China to allow critical industries to progressively restart operations within the second quarter. We anticipate that the impact of the war in Ukraine on vehicle production to moderate in Q2 and beyond as suppliers relocate production from Ukraine to facilities elsewhere. This should help reverse the negative customer mix we experienced in the first quarter. For the full year, we expect global vehicle production to grow modestly at low single-digit percentage range on a year-over-year basis. This puts our estimate in line with the latest IHS outlook, which is about 81 million units for the full year. We expect our customer mix to be neutral for the full year. While vehicle production is lower than our initial expectations, the factors that helped our market outperformance in Q1 are expected to continue to benefit us for the rest of the year. For the full year, we anticipate growth over market to be in the mid-teens as OEMs continue to prioritize higher content vehicles and we mitigate the impact of semiconductor shortages through redesigns and open market purchases of chips. Recoveries of higher costs from the customers and the new product launches will contribute to strong level of growth over market. Based on these assumptions, we are maintaining our full year guidance, which Jerome will discuss in more detail later. Turning to page nine. In summary, the company performed very well in the first quarter. We delivered record sales, outperforming vehicle production at our customers by 22 percentage points. Disciplined execution of our commercial and operational plans resulted in a solid adjusted EBITDA margin of 8.7%. The company continues to build on the foundation for future growth with the launch of 16 new products and new business wins of approximately $950 million in the quarter, we secured incremental business that expanded relationship with key customers and continued to build momentum for key growth drivers for years to come. The industry has some added challenges in the near term, but the fundamentals continue to indicate that we will be entering a multi-year upcycle in production volumes with key megatrends driving technological change. Vistion's product portfolio and the strength of our customer relationship positions the company well for continued outperformance. Now, I will turn the presentation over to Jerome to review the financial results.

Thank you, Sachin, and good morning, everyone. Despite a challenging market, Vistion delivered robust year-over-year sales growth and improved EBITDA margins this quarter. We are pleased with the progress of our commercial negotiations in Q1, which helped us mitigate the impact of the elevated semiconductor and supply chain related costs. The investments we've made over the last few years to optimize our cost base are paying off and supporting our results. Q1 sales were $818 million, an increase of 11% versus prior year when excluding the impact of currency. Compared to our original expectations at the beginning of the quarter, sales came in higher due to better than expected semiconductor supplies from our existing suppliers, added flexibility from our engineering redesigns, as well as better availability of semiconductors in the open market. Higher cost recoveries, which are recorded in sales, were also a positive factor. We continue to see strong customer demand driven by recent product launches, as well as our customers giving priority to higher trim models. This strong demand, improved supply, and higher customer recoveries were the key contributors for our robust growth of a market of 22%. Adjusted EBITDA was 71 million, representing a margin of 8.7% for the quarter. Audacity BDAP benefited from ongoing commercial and cost disciplines. We did see an increase in cost in Q1 related to the global semiconductor and supply chain shortages, which came in higher than we originally had anticipated. We were very active in Q1 addressing these increases with our customers, and we were able to partially offset this impact. In the quarter, we were able to finalize agreements with many of our customers, although we had a few customer negotiations slip into Q2. Consistent with our original full-year guidance, we're still anticipating the full-year net impact will be approximately negative 20 million, with Q1 representing the peak margin headwind. Adjusted free cash flow was negative 37 million, primarily driven by an increase in inventory levels. We ended the quarter with total cash of $405 million, representing a net cash position of $56 million. Our balance sheet remains very strong, and our net leverage is negative 0.2 times. For the full year, we are maintaining our guidance for sales, adjusted EBITDA, and adjusted free cash flow. I will provide more context later in my presentation. Turning to page 12. First quarter sales were 818 million, representing an increase of 72 million compared to last year. This increase was driven by recent product launches, OEMs prioritizing higher trim vehicles, as well as by customer recoveries, more than offsetting the 11% decline in our customer production volumes. Q1 represents the 12th quarter in which Visteon sales outperformed the market, driven primarily by ongoing launches of new products. As you may recall, we had a significant number of new product launches in 2021, including the launch of several new programs with GM North America, a smart core program with Geely, and a digital cluster with VW, just to name a few. In addition, OEMs prioritized higher trim levels vehicles in the quarter, increasing the take rates of our products. Finally, sales were also positively impacted by semiconductor and supply chain cost recoveries. In a normal environment, we typically provide annual price downs to our customers. However, cost recoveries more than offset our annual pricing to customers and drove a net increase in sales of approximately 5% this quarter. Although we anticipate these recoveries to remain elevated throughout the year, the year-over-year increase to sales will moderate in the second half of this year, as we started to recover costs from customers in the second half of last year. The level of customer recoveries in the coming quarters will be highly dependent on whether costs remain at these elevated levels or start to moderate. Adjusted EBITDA was 71 million, an increase of 7 million compared to prior year. Adjusted EBITDA margins were favorably impacted by higher volume and higher engineering recoveries, which were partially offset by the unfavorable impact from higher semiconductors and supply chain related costs, as well as the dilutive impact from cost recoveries. In addition, the proactive cost reset that we initiated in 2020, as well as the ongoing focus on controlling cost, remains a positive contributor to EBITDA. As a result of these actions, gross engineering and adjusted SG&A continue to be significantly lower than they were in 2019, despite higher sales. These actions have helped us navigate the ongoing industry challenges while also positioning us well to leverage our cost structure as the industry improves in the future. Turning to page 13. The last two years have reinforced the importance of having a strong balance sheet in the automotive sector, and Visteon's balance sheet continues to be one of the best in the industry. We ended the quarter with total cash of $405 million, representing a net cash position of $56 million with a net leverage ratio of negative 0.2 times. Our strong balance sheet and liquidity position provides ongoing flexibility to invest in the business and delivering on our growth strategy. Adjusted free cash flow was an outflow of $37 million in the quarter. Adjusted free cash flow benefited from our continued focus on improving profitability while optimizing capital expenditures. However, Q1 cash flows were negatively impacted by an increase in inventory levels and annual incentive compensation payments. Inventory levels have increased throughout the semiconductor shortage. These elevated levels are driven by uneven OEM production schedules combined with an uneven supply pattern. In addition, we have increased the level of safety stock on certain components to ensure any near-term disruption has a more muted impact on sales. The majority of the inventory increase is in semiconductors and displays and will be assembled into finished products as production schedules normalize and as we receive missing critical semiconductors. We expect to have a higher level of inventory this year than we normally would, but we do anticipate we will start to see a reduction in inventory going forward as we take actions to ensure we optimize inventory levels while balancing supply availability. Turning to page 14. Although the headwinds facing the automotive industry have increased in the last two months, we are maintaining our full year guidance. We now anticipate production volumes for our customers will be up in the low single digits for the full year compared to our original expectations of 9%. This is in line with latest IHS forecast, although we're not factoring any positive Visteon customer mix for the full year. The production environment continues to be very volatile with the COVID-19 related lockdowns in China, creating additional near-term uncertainties, both in terms of China production volumes, as well as the potential downstream impact due to logistics and supply chain disruptions. On the positive side, we anticipate we will benefit from higher customer content and elevated customer recoveries, both of which will contribute to a higher growth of a market for the full year. We now expect growth of a market will be in the mid-teens this year. Although we are not providing any formal quarterly guidance, I do want to provide some insight on how we see the second quarter playing out. Production volumes will likely be lower in Q2 compared to IHS current forecast as a result of the COVID-19 related lockdowns in China. At this stage, our assumption is that the additional units lost in Q2 will be made up in the second half of the year. Adjusted EBITDA for the second quarter will therefore be negatively impacted by the lower sales levels. We also anticipate a modest increase in net engineering. However, we do expect a slightly better run rate on cost recoveries as we finalize customer agreements in quarter two, partially offsetting lower sales and a higher net engineering costs. The automotive market remains very dynamic and we will provide updates throughout the year. Turning to page 15. Vistion remains a compelling long-term investment opportunity. We have positioned the company for top-line growth, margin expansion, and 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.