Visteon Corporation

Good morning. I'm Chris Doyle, Vice President of Investor Relations and Treasurer. Welcome to our earnings call for the second 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.visteon.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 McKay, Senior Vice President and Chief Financial Officer. We have scheduled the call for one hour, and we'll open the lines for your questions after Sachin's and Jerome's remarks. Please limit your questions to one question and one follow-up. Thank you for joining us. Now I'll turn the call over to Sachin.

Thank you, Chris. Good morning, everyone, and thank you for joining our second quarter 2022 earnings call. Page two summarizes our results for the second quarter. The company did very well in navigating semiconductor shortages and the COVID-19 related lockdowns in Shanghai that impacted the global automotive industry in the quarter. Our second quarter sales were $848 million, an increase of 42% year over year when excluding the impact of currency. This is the highest quarterly sales achieved by the company since 2015. Adjusted EBITDA was $79 million, or 9.3% of sales, an increase of $49 million compared to prior year due to higher production volumes and a strong commercial and operational discipline. Adjusted free cash flow for the second quarter was the use of $62 million as disruptions in semiconductor supply drove an increase of working capital. The company delivered another quarter of higher-than-market growth for sales, continuing our performance from the past quarters. We launched 11 new products in the quarter and 27 in the first half across multiple OEMs and on high-profile vehicle models. These new product launches put us in a good position to continue our sales or performance in the coming quarters. We won over $2 billion of new business in the second quarter bringing our year to date total to approximately $3.1 billion. This performance puts us on track for achieving our full year target of approximately $6 billion. We continue to lead the transformation of the industry to integrated cockpit domain controllers and added two new customer logos in the second quarter. We're excited for the transformation underway in the industry. And a smart core technology is one of the many innovations that Visteon is providing to enable the transformation. I will provide more details on our second quarter performance as well as our second half outlook on the subsequent pages before handing it over to Jerome to discuss the financials. Turning to page three. COVID-related shutdown followed by a sharp recovery of automotive and other industries in 2020 deserted in shortage of semiconductors at the start of 2021. Automotive industry production was impacted sharply in Q2 of 2021 as semiconductor buffer stock was exhausted by the end of the first quarter. Supply of semiconductors has remained critical ever since and for longer than anyone had anticipated. Visiting on sales were expected to outperform vehicle production by double digit percentages in 2021 based on the ramp up of new products launched with OEMs. We started to see this double digit growth over market in Q1 as the impact of semiconductor shortages was minimal in the quarter. The growth over market slowed in Q2 and Q3 to mid to high single digit level when semiconductor shortages were at their worst. However, we were very active during this time, taking several proactive measures to mitigate the impact of chip shortages. We ramped up the sourcing of parts from brokers, finding alternate drop-in components, and kicking off fast redesign of products to replace highly constrained chips. These proactive actions started to pay dividend beginning in Q4 of last year and have continued into 2022. When excluding pricing, our growth over market has recovered to high teen levels in the first two quarters of this year. Pricing is normally a headwind in our business. However, pricing has been a positive contributor to our sales and growth over market since Q3 of last year when we started to recover the incremental costs from customers. These costs spiked sharply in Q2 of this year due to the lockdown in Shanghai resulting in the unusually high positive pricing in the quarter. We expect the need for spot buys to reduce in the second half as semiconductor supply recovers from the impact of the lockdown in China. The fundamental driver of a market outperformance remains the high number of new product launches and their volume ramp up, which is more challenging in this environment than otherwise due to the semiconductor shortages. As this slide illustrates the wisdom team has been very nimble and diligent in addressing the industry headwinds and enable the company to return to double digit and mid teens growth over market for sales. I would like to acknowledge and thank the entire wisdom team for that outstanding effort in this regard. Turning to page for The ongoing semiconductor shortages and the added challenges due to the lockdown of Shanghai resulted in global vehicle production registering a sequential decline in Q2 compared to Q1 and flat compared to prior year. Fistion sales were $848 million, outperforming the market with an increase of 42% year-over-year when excluding the impact of currency. The underlying industry trends impacting the cockpit resulted in strong demand from customers for digital products such as clusters, infotainment, and cockpit domain controllers. Like the first quarter, customer demand was very strong and Q2 sales would have been closer to a billion dollars if supply was not constrained. Our growth was strongest in the Americas due to the ramp up of recently launched digital cluster and infotainment systems with our customers. Vehicle production at our customers also performed better this year as compared to the same period last year. In Europe, our sales grew in the high teens and well above vehicle production at our customers. We were also more active in launching product redesigns in this region, which helped in mitigating the chip shortages. Vehicle production at our customers in Asia was down 11% as compared to prior year. Vestion sales, however, were up 2% based on the ramp-up of new cockpit domain controllers and multi-display systems. Our sales in China were impacted in the first half of the quarter due to the lockdown in Shanghai, but managed to make a strong recovery in June. Overall, clusters, infotainment, and smart core performed very well in the quarter, with strong double-digit growth year-over-year driven by the ramp-up of new product launches. Growth of displays was muted in the quarter due to reduced supply of LCD panels, resulting from the COVID-related lockdown in Shanghai, which is expected to recover in the second half. I'm really pleased to see the continuing growth of our digital products, despite the challenging environment. We're also performing well in all regions, or performing vehicle production by a good margin. Turning to page five. We launched 11 new products in the second quarter, bringing the total year-to-date count to 27. Launching a high number of new products is hard even in normal times. It's incredibly challenging in a supply-constrained environment. It says a lot about the operational discipline and execution focus of the Visteon team. These 11 new products are launching on vehicles for eight different OEMs and on some of their most important vehicle models. We have highlighted a few of these products and the respective vehicles on the left hand side of this page. We launched a 12 inch digital cluster on the Everest SUV and the Ranger Raptor truck, which are based on the T6 platform at Ford. This high resolution digital cluster is fully reconfigurable and supports over the air software updates. Digital clusters which large displays have done well in this market and expected to be the same with these products. We launched a smart core based digital cockpit system on the new electric SUV for the smart brand that's developed jointly by Mercedes and Geely. The smart core system in this vehicle drives a nine inch digital cluster and a 12 inch center information display. The smart one is the first model to launch and will sell in China and Europe with more models to follow. Additionally, we launched a 10.25 inch infotainment system with Apple CarPlay and Android Auto on the new Citroen C3 for the South American market. The Citroen C3 is a subcompact crossover vehicle that's targeted for India and South America and will carry this infotainment system as standard equipment. Additional models are expected to follow the launch of this initial vehicle. Lastly, I would like to highlight the launch of a curved multi-display module on the Maserati Grakele, the all-new flagship crossover SUV for the luxury brand, which we spotlight on the right-hand side of the page. This display has launched on the IS version of the Grakele and will also feature in the electric version of the vehicle in the future. This curve multi display module is a complex assembly of optically bonded displays under a single glass cover lens and demonstrates this day on strong expertise in display technology and manufacturing that we highlighted on the last call. This display is a good example of the transformation of the user experience within the cockpit that we believe will accelerate in the years to come. Our launches in the second quarter and the year to date demonstrate our expanding capabilities across the digital cockpit, as well as the team's strong operational capabilities. Turning to page six. The company won a significant amount of new business in the second quarter, putting us on track to achieve our target of $6 billion for the year and bringing us back to pre-pandemic levels. Sourcing activity remains strained given the supply chain disruptions. However, we were able to win over $2 billion of awards in the quarter led by two large smart core cockpit domain controller wins with two new customer logos. These smart core wins are for new electric vehicle platforms. More than 50% of our year-to-date new business wins are for electric vehicles. On the right side of the page, we highlight a few key wins in the quarter. The first win highlighted is for a 12-inch center information display for a German luxury OEM with launch on their high-volume platform starting in 2026. This is our first display win with this luxury car maker with the potential to extend the product on other platforms with the OEM. The second win highlighted is an all-digital cluster for a Japanese OEM. This 12-inch all-digital cluster will launch on the OEM's B-segment compact SUV which is a good example of the industry trend of featuring all digital clusters in the high volume mass market segment. The third been highlighted on the page is for our latest generation smart core cockpit domain controller for a European OEM. The system will launch initially on the OEM's new electric vehicle platform before migrating to hybrid and ICE vehicles and will offer advanced features such as augmented reality for navigation, high-performance multi-channel audio processing, and cloud services with an integrated app store and OTA software updates. It will also drive up to five high-resolution displays in the cockpit. This is our largest smart core business win to date. Vestion has led the industry in developing state-of-the-art technology for integrated systems for the cockpit since the early days of this trend. I will discuss our latest generation of smart core technology on the next page, which we believe will continue to position Visteon as a leader in this technology domain. Turning to page 7. Visteon was the first supplier in the industry to launch an integrated cockpit system with the launch of smart core with Daimler in 2018. The system integrated a digital cluster and Linux-based infotainment system into a single chip and ECU, which was a significant accomplishment at that time, considering the limited computing power available to the industry. This product was the start of what has since become a significant line of business for Visteon, with SmartCore now accounting for more than 10% of our total revenue. We have launched SmartCore-based integrated digital cockpit systems with six car manufacturers in different regions of the world, with more under development. The shift to electric vehicles is accelerating the development of new vehicle platforms based on a more advanced electrical and electronics architecture. This new architecture is based on high-performance centralized computing systems that reduce the number of ECUs in the vehicle and enable the industry's transition to software-defined vehicles. The cockpit of these future vehicles will have multiple large displays and offer advanced features including informational ADAS, voice smart assistance, augmented reality for navigation, 360-degree surround view, and cloud-based media and other services. Vestion is in a unique position to meet these new industry demands. With over 10 million lines of code, a smart code platform already offers many of the features required for these future vehicles. We have been actively advancing the capabilities of smart code to include augmented reality and camera-based informational ADAS features in anticipation of the industry's requirements for these technologies. While the first smart core system offered computing performance of about 20k DMIPS, these new features require much higher compute performance, about 10 times greater, due to use of machine learning and other advanced software technologies. We are working with silicon suppliers like Qualcomm and Samsung to run our latest smart core software on the latest high performance chips. The new Smart Core win mentioned on the previous page includes many of these new capabilities. As the industry transitions to a software-oriented architecture, our Smart Core technology is well positioned to address the need for a high-performance computing platform for the cockpit. Turning to page 8. Customer demand continues to remain very strong as car makers offer greater digital content across the vehicle lineup. The ramp up of new products launched in the first half and the historically low levels of dealer inventory that will need to be restocked will mean that demand from OEMs for Visteon products will remain elevated throughout the rest of the year. We expect semiconductor supply to modestly improve in the second half as compared to the first half. In Q2, semiconductor supply was negatively impacted due to the lockdowns in Shanghai, as Shanghai is the logistics hub for many semiconductor suppliers. This bottleneck created additional shipment delays while also causing a spike in prices for semiconductors purchased in the open market. The reopening of Shanghai will help alleviate this bottleneck. In addition, Visteon continues to benefit from our ability to redesign products quickly to use alternative semiconductors, which will help mitigate some of the shortages. Despite these initiatives, there are still several analog and power chips that remain in critically short supply. Although this number has come down as compared to last year, it will still impact our ability to fully meet customers' demand. We expect costs related to semiconductor shortages will remain high for the second half. We have made progress in negotiations for this cost recovery with several of our customers, And the need for sourcing parts on the open market at elevated prices should reduce in the second half with the improvement in supply. While we're on track to achieve our full year objective for cost recovery, we expect that will remain a significant challenge through the rest of the year. In summary, based on our performance thus far, we're pleased to report that we are on track to achieve our full year targets for sales adjusted EBITDA and adjusted free cash flow. Turning to page 9. In summary, the company performed very well despite the ongoing semiconductor shortages and the added challenges caused by the lockdown in Shanghai. We delivered strong sales with growth outpacing vehicle production at our customers, continuing the trend of the past several quarters. Discipline execution of our commercial and operational plans resulted in a solid adjusted EBITDA margin of 9.3%, With the launch of 27 new products and 3.1 billion in new business fans and a product portfolio that addresses the emerging needs of the industry, our business is on a strong foundation to continue to outperform the market. Now, I will turn the presentation over to Jerome to review the financial results.

Thank you, Sachin, and good morning, everyone. The Visteon team has continued to navigate the near-term industry challenges with resiliency highlighting the agility of our supply chain while continuing to focus on commercial and cost discipline. Q2 sales were 848 million, coming in higher than our original expectations at the beginning of the quarter and representing an increase both year-over-year and sequentially. Our strong sales performance was driven by a combination of new product launches, higher customer demand, and proactive actions Visteon took to mitigate the impact of semiconductor shortages. Compared to our initial expectations, sales benefited from higher semiconductor open market purchases, as well as quicker than expected rebound in China in the month of June. Adjacent EBITDA was 79 million, representing a margin of 9.3% for the quarter. Adjacent EBITDA benefited from higher sales volumes, as well as ongoing commercial and cost discipline. We're still seeing elevated costs related to the global semiconductor and supply chain shortages and continue to partner with our customers to minimize these disruptions while also ensuring these costs are passed through the supply chain. Adjusted free cash flow for the quarter was negative 62 million or negative 99 million through the first half of the year, driven by an outflow in working capital due to higher inventory and the timing of customer recoveries. We ended the quarter with total cash of 325 million, representing a modest net debt position of 24 million. Our net leverage remained very low at 0.1 times. Turning to page 12. Second quarter sales of 848 million represented an increase of 238 million compared to last year. This increase was primarily from higher customer production volumes, recent product launches, and favorable pricing, partially offset by the impact of the COVID-19 lockdowns in Shanghai. Q2 was the 13th consecutive quarter of market outperformance, driven by a strong launch cadence and robust product portfolio. Total growth of a market was 36%. When excluding the positive impact from pricing, growth of a market was 16%. Pricing, which is typically a modest headwind, increased sales by 20% compared to prior year as a result of customer recoveries, which includes a combination of lower annual price downs, higher average selling prices, and one-time recoveries. The largest contributor to favorable pricing in Q2 were recoveries from open market purchases. We remain very active in procuring semiconductors from brokers and distributors to support our customers, and those costs continue to increase. In Q2 alone, we incurred an incremental 75 million of additional costs for open market purchases, nearly as much as what we incurred cumulatively since the shortages started in early 2021. The remaining pricing benefit relates primarily to Tier 2 supplier surcharge recoveries, including some level of catch-up from Q1 as we progress in our negotiations with customers in the second quarter. Adjusted EBITDA was 79 million, representing an increase of 49 million compared to prior year. Adjusted EBITDA increased due to higher sales and the favorable year-over-year impact from recovery of semiconductor costs. Gross engineering and adjusted SG&A remained fairly flat year-over-year as we continue to benefit from the restructuring actions we took in 2020 as well as our ongoing cost discipline. Partially offsetting these benefits were higher freight and logistics costs in the quarter. Overall, margins were negatively impacted due to the dilution from higher semiconductor costs and the associated recoveries. For the first half of the year, adjusted EBITDA margins were 9%. For modeling purposes, the first half of the year is an appropriate starting point as it mitigates some of the quarterly volatility related to the timing of customer recoveries. Turning to page 13. We ended the quarter with a total cash position of $325 million, resulting in a net debt position of $24 million and a net leverage ratio of 0.1 times. Despite the temporary reduction in cash due to the outflow in working capital, we continue to have one of the strongest balance sheets in the industry. In July, we took the opportunity to extend our debt maturity profile out to 2027. As a result, we now have 400 million undrawn revolving credit facility that matures in 2027 and issued a new five-year term loan A facility of 350 million maturing in 2027 as well. The proceeds from the term loan were used to repay our existing term loan which was maturing in early 2024 with the transaction having no impact on our leverage. The credit agreement as a sustainability linked KPI aligning our capital structure where our commitment to reduce our overall and environmental impact. Adjusted free cash flow was an outflow of 62 million in the quarter, resulting in an outflow of 99 million through the first half of the year. Consistent with prior quarters adjusted free cash flow benefited from improved profitability and optimize capitals expenditure. However, The largest outflow throughout the first half of the year has been working capital. Inventory levels increased throughout the quarter, peaking in May before we started to see an unwind in the month of June to 306 million. We anticipate inventory levels to continue to decline as the semiconductor shortages improve in the second half of the year. In addition to inventory, the timing of costs and customer recoveries related to semiconductors also drove a net outflow in the first half of the year. We have been incurring and paying for elevated semiconductor costs throughout the year, but only finalized several customer negotiations late in the second quarter, with incoming cash anticipated in the third quarter. Adjusted free cash flow was also negatively impacted due to an outflow in other changes, primarily related to the annual incentive compensation payment in Q1, unfavorable timing of tax refunds, and reduction in deferred income, as well as pension-related items. Turning to page 14. Based on our strong performance through the first half of the year and our expectations for the second half of the year, we're maintaining our guidance for the full year. For sales, we're maintaining our guidance of 3.15 to 3.35 billion and are tracking towards the higher end of the range. Since we initially provided guidance back in February, our strong growth of the market has been offsetting the decline in industry production volume assumptions, as well as the depreciation of the euro and Japanese yen. The main difference since our last call are the higher open market purchases and customer recoveries for such costs. These recoveries increase sales while having a neutral impact on adjusted EBITDA as we're offsetting higher costs. As such, we're maintaining our adjusted EBITDA range of 295 to 335 million and are tracking towards the midpoint of guidance. Fully-adjusted EBITDA margins are now anticipated to be towards the low end of the range, reflecting the dilutive nature of the higher semiconductor-related costs and associated customer recoveries. When compared to the first half of the year, we expect sales to be up in the second half, driven by higher customer production volumes, partially offset by lower semiconductor open market purchases and the associated recoveries. At the midpoint of our guidance, we anticipate adjusted EBITDA will be higher than the first half of the year due to higher sales volumes and lower net semiconductor costs, partially offset by an increase in engineering spend. For the full year, we still anticipate the net negative impact from semiconductors to be approximately 20 million. We are also maintaining our adjusted free cash flow range of 85 to 115 million Reflecting our expectation of a working capital unwind related to both inventory and the timing of customer recoveries. In addition, we continue to benefit from ongoing CapEx optimization initiatives and now expect CapEx to be approximately 100 million. Turning to page 15. Vistion remains a compelling long-term investment opportunity. We have positioned the company well 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.