Visteon Corporation

Good morning. I'm Ryan Gazzeri, Director of Capital Markets and Strategic Planning. Welcome to our earnings call for the fourth quarter and full year 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 that 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 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 Rouquet, 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 and Jerome's remarks. Please limit your questions to one question and one follow-up. Thank you for joining us. Now we'll turn over the call to Sachin.

Thank you, Ryan, and thanks everyone for joining us this morning. 2022 was an exceptional year for Visteon. Our industry-leading digital cockpit electronics products performed very well, resulting in full-year sales of $3,756,000,000, an increase of 35% over last year, compared with our customers' vehicle production growth of approximately 5%. We ended the year with the 15th consecutive quarter in which our sales outperformed our customers' vehicle production. Adjusted EBITDA was $348 million, or 9.3% of sales, an increase of $120 million over last year. The company's cost-efficient footprint combined with the shift to platform-based product development and operational and commercial discipline resulted in higher sales and drove margin expansion of 110 basis points. Adjusted free cash flow for the year was $101 million in line with the midpoint of the original guidance range that we provided at this time last year. Our liquidity remains strong with over $500 million in cash. Risteon has and remains focused on sustainability and I'm pleased to report that we have committed to reduce our Scope 1 and 2 greenhouse gas emissions by at least 45% by 2030 compared to 2019 and Scope 3 emissions by at least 25% compared to 2021. These targets were formally submitted for validation to SBTI in late December, and they aligned well with our mission to make driving safer, cleaner, and more convenient. We launched 45 new customer programs in 2022 and extended several existing programs on new vehicle models. The company also achieved its goal of winning $6 billion in new business for the year, reinforcing the strength of our product and technology portfolio. We introduced several new products and services that extend our product offering to address emerging trends in the industry. These include a new cloud service for OTA that complements our App Store service, and several products for electrification, including onboard charger, DC to DC converter, and smart junction box that were showcased to customers at CES earlier this year. We also announced a collaboration with Qualcomm for our next generation smart core system that's targeted at software defined vehicles of the future. Our high number of launches and new business wins and strong product portfolio position as well for market our performance in 2023 and beyond. I would like to thank the entire Visteon team for the hard work and dedication in what has been a difficult year for the industry. Our performance this year is the result of the team's resiliency and dedication to each other and to our customers. Turning to page three. We saw robust demand for all core products throughout the year that exceeded the supply of semiconductor and other critical components. While our customers' vehicle production grew by 5% year over year, our sales grew by a robust 21% when excluding impact of customer recoveries of supply chain related costs. Our market outperformance was driven by the recent launches of products that ramped up production in 2022. The growth of our market was higher than anticipated due in part to the rapid ramp up of a digital cluster program with the North American OEM. We also benefited from the product mix shifting to higher content products like digital clusters, and from smaller legacy displays to larger displays. The automotive industry's transition to digital clusters continued in 2022 with one out of four new cars being equipped with a digital cluster. This trend benefited Visteon and our digital cluster sales increased by 40% year over year. Digital clusters now represent about half of all clusters shipped by Visteon and was a significant driver of our sales growth in 2022. Smart core sales grew approximately 75% year over year, driven by recent launches with car makers in Asia. The industry is shifting to high-performance cockpit domain controllers to deliver user experiences that rival mobile devices, which is helping drive higher smart core sales. 2022 was a continued period of transition for Visteon from small legacy displays to larger displays, both in terms of new launches as well as business wins. Recently launched multi-display systems with Maserati in Europe and Nissan and Ford in Asia contributed to the growth of our displays business in 2022, offsetting the decline of smaller legacy displays. We also experienced higher sales of audio infotainment products with the ramp-up of Android-based systems in South America and Asia and new launches of audio systems with an OEM in North America. Overall, we benefited from strong demand of our digital corporate products and the momentum from recent launch activity. Turning to page 4. 2022 was a busy year for new product launches for the company. We successfully launched 45 new programs across 18 different OEMs globally. Digital clusters topped the list with 17 launches, continuing the trend of the past few quarters. followed by displays with 11 launches, including multi-display systems with Maserati and Kia. Displays are an expanding and exciting area of growth for Visteon, and these launches will help drive higher sales for this product in the coming quarters. Our digital cockpit products are powertrain agnostic, and about 25% of our new program launches in 2022 are for vehicle platforms that have both electric and ICE models. We finished the year strong with 13 new program launches in the fourth quarter and have highlighted a few on the bottom half of the slide. With Ford, we launched a new audio system for several vehicle lines supporting Ford's latest sync infotainment system. The program was launched in North America and Europe on super duty trucks, the transit commercial vehicle, and SUVs for Ford and Lincoln brands. In addition, we launched multiple digital cluster programs on the same vehicles. In China, we launched our latest generation of a smart core cockpit domain controller and center infotainment displays on the Lotus Lambda all-electric SUV in partnership with eCarX. The launch of the first model will be followed by additional models in China as well as in other regions. Additionally, we launched a digital cluster for Stellantis that we won in Q1 of 2021, less than two years from award to production. The cluster comes in 10 and 7-inch variants and will launch on multiple brands, including Jeep, Fiat, and Alfa Romeo. Our new program launches in 2022 and ongoing vehicle model extensions of programs launched in prior years demonstrate the continued momentum we have been building for our near and mid-term sales growth. We are launching programs across all core product lines that will drive further growth in 2023 and beyond. Turning to page 5, We won $6 billion in new business in 2022, achieving the target we had set out at the beginning of the year. This is particularly significant considering the disruption caused by supply chain shortages. All our core products did well, including over $1.5 billion in display awards, the first time this product category has crossed the billion-dollar mark in a single year. Smartcore also did very well, adding two new OEMs in Europe, representing three car brands, and winning over a billion dollars for the year. We won over a billion dollars of digital clusters business in 2022, including our first global win with Toyota. Asia represented more than half of all digital cluster wins in the year, as more OEMs start to transition to digital cockpit in that region. We anticipate that growth of electric vehicles will be a tailwind for Visteon in the future, and in 2022, about 45% of our total digital cockpit wins were for electric vehicles. We also had several future vehicle models added to our awarded BMS business as customers updated their plans for EV model launches in the coming years. The first Q4 win highlighted on the right is a center infotainment display for a North American OEM. The 12-inch center display uses a slim tablet-like design with an integrated driver-facing camera and will be featured on an electric version of a popular SUV vehicle line for the OEM. We extended a SmartCore program that's currently in production with a customer in India to two new compact SUV models that will launch in 2024. Our first launch of SmartCore with this OEM has been very successful, and these follow-on launches will feature our updated SmartCore technology with additional features and functions. Lastly, the third win highlighted on the slide is a follow-on win for an existing multi-display system with a Japanese OEM. This follow-on win is on a high-volume mass-market vehicle, but the lead vehicle was for the luxury brand. It's a perfect example of how the multi-display trend is starting to come to the mass-market vehicle segment. Our product portfolio is well-aligned with the major trends in the automotive industry, and 2022 was a great example of how we expect our sales mix will transform in the coming years. Turning to page 6... The automotive industry lost about 4.5 million vehicles to semiconductor shortages in 2022, and while semiconductor supply is improving, the outlook for 2023 is a loss of about 3 million vehicles. However, the nature of the semiconductor shortages will be different in 2023. In 2022, power and analog chips were more constrained than microcontrollers. In 2023, we expect gradual improvements in analog and power chips with investments made in production capacity by integrated device manufacturers like Texas Instruments and OnSemi. However, semiconductor suppliers that rely on foundries for the front-end capacity will continue to be constrained in wafer supply as these foundries have not invested in capacity for legacy nodes of 40 nanometer and higher that are used extensively in automotive. Weaker macroeconomic environment and geopolitical concerns are also causing us to believe that the strong consumer demand the industry experienced in 2022 may start to soften, especially if these macro issues persist throughout the year. As a result, we are forecasting global vehicle production in 2023 to be up modestly to 84 million units, with Visteon customers up 1% over last year. Furthermore, we expect production to be lower in the first half due to tighter semiconductor supply before improving in the second half of the year. From a regional perspective, we expect our customers in North America to have modest production growth at mid-single-digit levels driven by recent model launches and the low level of dealer inventories. In Europe, our customers remain optimistic due to strong order books But the ongoing economic and geopolitical uncertainties cause us to temper our outlook for the full year. China has started slowly in January after COVID-19 impacted production in the fourth quarter of last year. While we anticipate vehicle production to slowly increase throughout the year as the country transitions from zero COVID to zero lockdowns, we expect vehicle production at our customers to be down in low single digits year over year. and especially pronounced with our global customers operating in China. In summary, we are cautious about vehicle production growth in 2023 on account of the demand and supply dynamics that I just mentioned. However, we also believe that the momentum we have built with our product portfolio combined with the operational capabilities of our team will support better than market growth in 2023 and beyond. Turning to page seven, In 2023, we are anticipating sales to be $4 billion and $50 million at the midpoint of our guidance, with a range from $3.95 to $4.15 billion. On the right-hand side of the page, we provide a waterfall chart bridging 2022 base sales of $3.26 billion, which excludes the positive impact from customer recoveries, to 2023 base sales, which at the midpoint of guidance is approximately $3.75 billion. As stated on the previous slide, we are expecting only a modest improvement of 1% in our customers vehicle production in 2023. However, we expect that a strong new product launch performance in the past two years, plus additional launches in 2023 will continue to drive market our performance with base sales, excluding customer recoveries growing in mid teens. The combination of annual customer pricing and the impact of foreign exchange is expected to be a slight net headwind. Like in 2022, we will need to mitigate the impact of semiconductor shortages to deliver another year of double-digit base sales growth. With the expectation of improving chip supply, we anticipate fewer open market purchases of semiconductors as compared to last year. As a result, we expect customer recoveries in 2023 to be lower than 2022, as shown in the dotted boxes on the waterfall chart. Overall, I'm pleased with the mid-teens growth forecasted in base sales, which reflects our multi-year product transformation, continued operational excellence, and supply chain capability. Turning to page eight, In summary, the company executed very well in 2022, which helped drive record sales in what continued to be a challenging environment. I would like to thank our customers, suppliers, employees, and investors for their support in a challenging year. We launched a high number of digital cockpit programs that will drive our market art performance in the near to mid-term and continue to build a strong foundation for future growth by booking $6 billion in new business during the year. As we look towards 2023 and beyond, we anticipate further sales growth and market our performance as we benefit from the alignment of our product portfolio with key automotive trends that's driving high demand for our digital cockpit and electrification products. We'll be sharing more information on our vision for the future and strategy for capitalizing on key automotive trends in a couple of weeks at our Investor Day on March 7th in New York City. I look forward to seeing all that are able to attend. Now I will turn the presentation over to Jerome to review the financial results.

Thank you Sachin and good morning everyone. Visteon's fourth quarter financial results came in strong reflecting another quarter of robust commercial and operational execution. Q4 sales were 1 billion and 64 million, a record quarter for Visteon. We were able to outperform industry production volumes thanks to the unprecedented cadence and size of our recent product launches in the last few quarters, combined with a very proactive supply chain management. Although semiconductor supply has improved since the first half of the year, we are still seeing a disconnect between supply and demand. In a quarter, we benefited from our proactive product redesigns, while also securing an important amount of components through brokers and distributors. In partnership with our customers, we shared the elevated costs and recovered cost increases through customer recoveries in the quarter. Compared to prior year, sales were up 35%, including the negative impact from foreign exchange, which reduced sales by approximately 8%. While Visteon's customer production volumes were up 3%, our growth of a market excluding net pricing was 26%. Incremental customer recoveries, partially offset by annual price downs, also increased sales by 14% for the quarter. Finally, excluding customer recoveries, our base sales were approximately 900 million, a good indicator of how our underlying business is performing. On a comparable basis, this is also a record level for Visteon. Adjusted EBITDA was $103 million, up $11 million versus prior year and representing a margin of 9.7%. Compared to prior year, Adjusted EBITDA benefited from higher base sales and year-over-year operational improvements. The quarter also benefited from approximately $5 million of catch-up in customer recoveries related to costs incurred earlier in the year. Partially offsetting these benefits were the impact of currency headwinds, the non-recurrence of the one-time customer claim last year, as well as an increase in both gross engineering and SG&A. While we continue to invest in various strategic areas of engineering, as mentioned by Sachin, gross engineering costs were also impacted by one-time program expense this quarter, while higher SG&A primarily related to incentive compensation increases. Adjusted free cash flow for the quarter was an inflow of $141 million, driven primarily by higher EBITDA and favorable working capital, generated by an increased customer recovery collections. We ended the quarter with total cash of $523 million and $349 million of debt, resulting in a net cash position of $174 million. Turning to page 11. For the full year, sales came in at 3.75 billion, eclipsing our previous record of 3.15 billion, which was achieved in 2017 when industry production volumes were at 95 million units. Since 2020, industry production volumes have increased modestly as growth continued to be constrained by semiconductor availability. Despite this challenging environment, This term's compounded annual sales growth was 21%, benefiting from a robust set of product launches, proactive supply chain management, and customer recoveries. Compared to prior year, sales in 2022 grew 35%. Growth of a market, excluding pricing, was 21%, while customer recoveries, offset by annual price downs, was a positive contributor of 14%. Customer production volumes provided an increase of 5%, while foreign exchange was a 5% headwind. Excluding customer recoveries, base sales were approximately $3.26 billion in 2022, an increase of 28% compared to 2020, while production volumes increased 10% in the same period. Our adjusted EBITDA margin of 9.3% in 2022 was nearly two full percentage points higher than 2020. With programs launched on higher volume platforms, relentless operational and efficiency improvements, combined with an improved best cost footprint, as well as an engineering platform approach, our incremental margins have been approximately 22% when excluding the dilutive nature of customer cost recoveries. Cash flow conversions averaged approximately 30% over the last three years, turning to page 12. We ended the year with a total cash position of $523 million and maintained a debt balance of $349 million, resulting in a net cash position of $174 million. This represents our highest net cash position in five years and demonstrates our commitment to maintaining a strong balance sheet. In addition, we were proactive and refinanced our debt earlier last year, extending our debt maturities to 2027 and locked in a low cost of debt with a current interest rate of approximately 3.5% when including our cross-currency swaps. In short, we have ample flexibility to invest in strategic actions and drive shareholder value. Adjusted free cash flow was an inflow of $141 million in the quarter. The inflow of cash in the quarter was driven by continued improvements in profitability and our focus on optimizing capital expenditures. In addition, working capital was an inflow for the quarter as we were able to better align the timing impact related to semiconductor spot purchases and the corresponding recoveries. For the full year, we generated $101 million of adjusted free cash flow in line with our original guidance issued in February of last year. The increase in adjusted free cash flow compared to prior year was primarily driven by the expansion of our adjusted EBITDA. Trade working capital was an outflow for the year with supply disruption negatively impacting inventory levels. Capital expenditures came in at 81 million as we continue to focus on best cost industrialization practices as well as equipment reuse. CapEx was also lower than we originally anticipated for the year, as we benefited from favorable timing on some program spending. Our cash flow for the year demonstrates the team's ongoing commitment to drive actions that are critical to generate cash for the company. With nearly 30% of cash conversion for 2022, we continue to remain diligent about cash conversion improvements. Turning to page 13. On page 13, we present our full year guidance for 2023. Our guidance for sales is 3.95 to 4.15 billion, which at the midpoint of 4.05 billion represents an increase of 8% year-over-year. Focusing on the midpoint, this assumes our customer production is up 1% compared to prior year, while growth of a market is anticipated to be in the low to mid-teens. On the pricing side, we are currently assuming that customer recoveries for 2023 are lower than 2022, primarily due to the lower spot purchases and associated recoveries. This will translate into negative pricing of approximately 200 million, or 5%, plus our normal annual price downs to customers. Excluding customer recoveries, we anticipate base sales will be approximately 3.75 billion in 2023. On a comparable basis, this equates to a 15% year-over-year increase in base sales. Adjusted EBITDA is expected to be between 405 and 445 million, representing a 10.5% adjusted EBITDA margin at the midpoint, with a range of 10.3 to 10.7%. Compared to prior year, BAD margin is expected to increase 120 basis points as a result of higher volumes and operating efficiencies, partially offset by an increase in net engineering spend. We currently anticipate net engineering as a percentage of sales will be in the mid to high 5% range as we continue to invest in various strategic areas. Compared to 2022, we also expect the net impact of supply chain disruptions cost net of recoveries will be similar. Finally, we anticipate that margins will be diluted by approximately 80 basis points due to customer recoveries. Adjusted free cash flow is expected to be between 115 and 165 million, which at the midpoint of 140 million equates to a conversion of approximately one-third of adjusted EBITDA into adjusted free cash flow. We expect working capital will be an outflow for the year as a result of higher sales and the ongoing supply chain challenges. CAPEX is forecasted at approximately 130 million as we invest for future growth, expanding our manufacturing plant capacity in the Americas, EMEA, and in India. We are also investing in critical capability and capacity for our industry-leading battery management systems, as well as optical bonding, preparing for our electrification and display growth. Despite these investments and some unfavorable timing of spend, CapEx as a percentage of sales will remain in the low 3% range. And finally, even though we're not providing quarterly guidance, which is consistent with our existing practices, we do want to highlight some negative calendarization in Q1 with industry production volumes forecasted to be down sequentially and the unfavorable timing of customer negotiations related to supply chain costs and recoveries. As a result, we expect our earnings profile to follow a similar cadence to the one we've had in 2022. Turning to page 14. 2023 represents another year in which we anticipate sales growth, margin expansion, and cash flow generation. This outlook has been years in the making as we embarked on numerous key initiatives starting as early as 2015. These initiatives have enabled us to benefit from the cockpit's regular trends while outperforming in a challenging environment. Since 2015, we have transitioned our product portfolio from primarily analog clusters and AM-FM radios to industry-leading digital clusters, centralized domain controllers, advanced displays, and smart battery management systems. We now have a product portfolio that aligns very well with the key circular trends in the industry and has led to a robust level of new business wins every year. In addition, we have been optimizing our cost base with our best-in-class engineering footprint, the introduction of product platforms that increase reuse, and the implementation of a cost-focused organization. From 2020, industry production volumes are forecasted to grow modestly by 4% annually, as growth has been constrained by the COVID-19 pandemic and associated supply chain challenges. In this environment, we are forecasting self-growth with an annual rate of 17%, margin expansion of 300 basis points, and an increase in cash flow generation, representing strong financial performance as a result of the actions we have taken. 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, and our strong balance sheet provides ongoing flexibility. I would like to close by, again, thanking the entire Vistion organization for their hard work in 2022 to drive record performance and pave the way for future growth. As Sachin mentioned, we are hosting our Invest Day in March, and we look forward to sharing our ongoing growth story and capital allocation thoughts with you in a few weeks. Thank you for your time today. I would like now to open the call for your questions.

Thank you. As a reminder, if you would like to ask a question, please press star then one on your telephone keypad. Our first question is from Emmanuel Rosner with Deutsche Bank. Your line is open.

Oh, thank you so much. First question is, I was hoping you could maybe put the 2023 margin guidance or outlook, I guess, in the broader context of your sort of like, you know, existing midterm margin outlook. Obviously, you know, as reported, you know, the margins are sort of like mid-10s, but even I think if you add sort of like recoveries, which probably be sort of like in the sort of like low to maybe 11% maybe. I think, you know, the environment has sort of like presented some challenges, but I guess what would it take, or I guess what sort of inputs are needed, you know, for you to sort of like go towards the 12% that you saw, you know, in the past you'd be getting to?

Yeah, sure. It's Jerome. I'll take that. Emmanuel, good morning. So we are, our guidance for 2030 shows sales at 4 billion 05 million and it is in fact with recoveries and we've in our deck we've showed that the recoveries in 2023 will go down from what we had in 2022 but we'll still have about 300 million of recoveries in 2023 with no margin so the right way to look at it is really to look at base sales which are total sales minus recoveries and they are at 3 billion and 75 for 2023. So essentially we're shy of the 4 billion target in sales by 250 million. And if you essentially add these 250 million in sales at a mid 20% incremental margin, you would get essentially to the 12%. And that's not even including any of the leakage that we are still factoring in in our guidance for 23. So bottom line, we are very much on track towards our 12%. Volumes are lower because industry volumes are not at 89 as we had originally anticipated when we first gave the 4 billion target. And it is just a question of a few quarters before we get to the 12%.

Okay, that's very helpful. And then the second one, I guess on the free cash flow and specifically on CapEx, I guess this is a pretty meaningful step up which seems to be driven by investment in growth. I guess I should be thinking about it specifically in terms of the needed investments for this year and then what that means in terms of your capital allocation going forward.

Yes, so we had guided, so we're going in fact from 81 million this year or in 22 to 130 million in 23. And it is to your point, a fairly significant step up. I must say first that 81 was a little bit on the low end of what we were expecting. There's a little bit of timing between 22 and 23. So we'll see some of that drifting into Q1 of this year. In terms of the step-up, it's really very much aligned with the growth profile that we have, investing in BMS, essentially electrification capacity and capability, as well as on the display side. We do have a little bit of plant expansions going on, nothing major, but it's adding up as well to the CAPEX for 2023. And then beyond manufacturing, I would say we are investing as well a little bit in IT. So that's part of the step up in investment. And I guess generally we are staying at close to the 3% range that we've been used to in the past. Okay. Thank you very much.

The next question is from Luke Junk with Baird. Your line is open.

good morning thanks for taking the questions uh first jerome a question on the operating expense items just hoping you could expand on the investments in engineering and sgna that you said in the prepared remarks and specifically i'm just trying to square it with the one-time items and incentive comp impacts that we saw in the fourth quarter here just in terms of run rate levels going forward for those items thank you yes so

Overall, I'll start with engineering and I'll let Sachin as well give some color in terms of the investments. But just in terms of numbers, we ended the year with engineering being fairly low. In fact, we were close to $200 million in terms of engineering. A little bit of a higher gross engineering because of the one time that we incurred, but essentially offset by higher recoveries as well. So overall, we were, I think, at 5.2% for the full year in terms of engineering, which is slightly lower than what we had guided to originally. So a little bit like similar to CapEx, we're starting with a low base. In terms of investments for next year, it's very much aligned with what we've been talking about, electrification. Sachin talked as well in his prepared remarks about online services.

Yeah, maybe I can jump in here. Yes. Thanks. So yes, Luke, so we are anticipating that the technology trends in automotive are going to accelerate both on the cockpit as well as in EV powertrain electronics. And the trend towards a software-defined vehicle for the industry are going to go through these two domains initially and we are anticipating and preparing for that. We have really good assets today in those areas, such as smart core and our BMS technology, but we are looking at opportunities to extend these assets and address even beyond the passenger vehicle market, two-wheelers, commercial vehicles, et cetera. And as Jerome mentioned, add new features and functions, especially in the areas of cloud services, And for BMS and for power electronics, add new features and capabilities. There's a push towards faster charging and higher levels of safety for EV, power-tuned electronics. And we are really driving the cutting edge of that technology.

And this is going to require some investments from our side as we go forward.

So in terms of engineering percentage for next year, we are anticipating a slight increase versus where we were. So as I said, 5.2% this year on 22 and will be probably between 5.5 and 6% engineering cost as a presenter of sales for 2023. In terms of SG&A, modest investment there, inflation as well and investments in IT, we will essentially keep our percentage flat year-over-year versus what we had in 2022. Okay, great.

All very helpful detail. Thank you both for that. And then, Sascha, for my follow-up, I'm going to ask about the launch that you mentioned with Lotus in partnership with eCarX. Just hoping to better understand the mechanics of that relationship and how the two companies are working together. Thank you.

Yeah, great. So when you talk about China,

The market is, as you know, different from the rest of the world in terms of the level of cloud service integration that's expected in vehicles in China for the cockpit. So we provide a smart code platform. So that's all of the hardware, middleware, OS, and all of these features and functions that smart code brings. And eCarX has their services on top of it. as well as the HMI and the cloud services. So this is something that we don't expect Visteon in China to be able to offer to the extent that our partners can and so this collaboration brings the best of breed of both sides. Our proven smart core technology that we have now launched on more customers than virtually any other supplier and this is really have been well accepted in the marketplace. And eCarX with their capabilities and assets that they bring, especially on the cloud services, smart voice using AI and other applications, and also ADAS, by the way, that's getting more and more integrated with the cockpit in China. So that's the nature of our collaboration. We've had several vehicles launched

already and so pretty excited about, you know, what that means for our future growth for smart core in China.

That's very helpful. Thank you for that, Sasha, and I'll leave it there. Great. Thanks, Luke.

The next question is from David Kelly with Jefferies. Your line is open.

Hi. Good morning, guys.

Thanks for taking my questions as well. I wanted to start with recoveries and appreciate the color on the expected impact on 2023 sales. I guess, how should we think about the visibility to those recoveries? How much has been negotiated in today versus ongoing discussions with your customers?

Yeah, that's a good question. Good morning, David. Very pleased first with the level of recoveries we had in 2022. Net leakage was close to $20 million, slightly better, in fact, versus our original target. As we go into 2023, mechanically, I would say that most of the surcharge or recoveries are kind of a reset. But at the same time, we have had discussions with our customer for the last few months indicating that these cost increases would continue into 2023. So we are still in the middle of negotiations as far as recoveries are concerned. And there is definitely an expectation that 2022 cost increases will roll into 2023 and will add obviously some level of true ups for the 2023 cost increases or decreases that we'll have. So right in the middle of that, We've indicated as well, I think like a lot of other suppliers, that our earnings profile will be a little bit distorted again this year by the level of success we'll have in Q1 versus the other quarters. And you'll see probably a ramp up in terms of earnings profile throughout the year as we are more and more successful to close negotiations on recoveries.

Okay, got it. That's helpful. Thank you.

And then maybe just a follow-up question on the mixed impact from the ongoing supply chain disruptions. I guess, A, were you held back on let's call it like higher dollar content shipments due to the supply shortages in 2022. And does the change in the type of those shortages moving, as you acknowledged, microcontrollers and away from some of the analog and digital issues of last year, does that at all have an impact on mix in 2023?

Yeah, no, that's a good question. And let me try to explain how that mix has

impacted us in 22 and the shift that we expect in 23. So as I mentioned, primarily in 2022, the shortages were in the area of power and analog chips. And as such, they cut across all products. One of the things to kind of keep in mind is every product that we build requires these power chips to drive the rest of the circuitry. And if there are displays involved, there are some analog chips that also come into the picture. So virtually all of our products were impacted to some level in 2022. Towards the end of 2022, we started to see the supply of these power and analog chips start to improve. And also on account of the work that we have done that I think is ahead of most in our industry in terms of working with the specific suppliers. So as we start here in 2023, We see our situation with respect to power and analog chips improve. We are already seeing those improvements, and we expect that to continue to improve. But there are emerging shortages in the areas of microcontrollers that is more driven by the lack of wafer supply from foundries to semiconductor suppliers that The visibility of that was not very great towards the end of last year, and as we started to come to the end of the year, it became more apparent that we will start with a shortage situation in these microcontrollers. Those microcontrollers in particular effect our digital clusters product line more than, say, Smart Core or others. So we anticipate some impact there, and we expect that to improve in the second half of the year, as I've also mentioned before. At the same time, we are continuing to redesign some of our products to give us more flexibility so that we would be in a position to address more demand as we anticipate as we go forward, especially on the clusters with the launches that we've had that we would be then in a position with the redesigns to work around some of the shortages. And that's what is factored in our forecast, especially the growth over market forecast that we have forecasted for 2023.

Got it. That's really, really helpful. Thank you.

The next question is from James Piccariello with BNP Paribas. Your line is open.

Hi, good morning. Good morning.

Back to the supply chain, you're still making some choppiness from a semi-supply standpoint through the first half, then assuming some demand weakness in the back half to get to your full-year LVP assumption of up just 1%. But again, from a chip supply perspective, if demand were to prove more resilient in the second half, to what extent do you think the industry can handle better production growth? Relative to your up 1%, what's the supply chain limiting max growth for production this year as you see it?

First of all, I would like to clarify that demand, as we see it even today, is stronger than what we believe the supply chain, even with the improvements, can address. But having said that, If the demand holds up, especially in the second half, then I expect that the vehicle production to improve beyond the 84 million units that we have outlined. Now, how far up from 84 it might go, that's hard for me to say. And so my expectation would be that if you think about 2021, 1 to 2022, whereas the industry added about 5 million units of production, that would be the kind of range that I would expect that the industry would be able to do again if the supply constraints were to be somehow lifted.

Got it.

And if we do add, again, hypothetically, if we were to add 5 million units of production growth, would that Would that force Vistion to likely have to reenter the spot buy, the broker market for chips? Or at this point, your best assessment would be possibly that your contracted supply could support that? How should we be thinking about that?

Right.

In general, we expect that it would be less, even in the case that the demand is higher because of all the redesigns that we have done. So there are two dynamics that will help us in 23. One, we do expect the supply levels themselves to go up on account of the work that has been done by our suppliers. And that specific area that we are now highlighting as a bigger problem, which is the microcontrollers, with the redesigns that we are doing, I expect that we would be able to work around it in the second half. So overall, I expect that our spot-by demand to be lower, even in the event where we see our

supply increase in keeping up with the demand.

Okay, super helpful. Just one quick one. Any chance to get a finer point on the cadence for the year? I know it's a sequential ramp similar to last year. Just maybe a marker on 1Q relative to 4Q or on a year-to-year basis just to get a better feel for how the year starts off.

We won't give any guidance for Q1, but it's really impacted by two things. First, the recoveries and the cadence of the negotiation. And then the second point is production. I think IHS is already showing 5% down for Q1. So that's essentially what we drive the quarters throughout the year. production levels as well as the level of recoveries.

Thanks. Thank you. The next question is from Colin Langan with Wells Fargo.

Your line is open.

Oh, great. Thanks for taking my questions. Just wanted to ask about the new business wins. When I look at the mix of this year versus last year, Clusters is just 17%. I think it was like 41% last year. That would be about a billion-dollar swing, obviously offset by other areas. Is there a reclassification that's impacting that? Is there something going on in that segment or timing this year that would cause the big swing? Just kind of wondering if there's any color there.

No, no. So, Colin, this is Sachin. So I don't think there's anything structural there. It's... just a timing issue. Last year we had a pretty good year for clusters, but some of the other sectors were not as strong, and this seems to be reversed in 2022.

So I wouldn't say that we are expecting anything different with respect to our go-forward views on cluster wins.

Okay, got it. And if I look at the guidance, it looks like something like a 16% incremental on the sales, excluding the impact of recoveries. I think you've mentioned just on this call, low 20s is normal. You want to make sure I get all the offsets. R&D is a headwind. And then input costs and any color on the size of these input costs that we're expecting? And is there anything else?

Yeah. Sure, sure, Colin. So you're right. So face value, I think we are 26% incremental, but removing the recoveries, we are at 16%. So volumes are converting at the normal levels in the mid-20% range. The offsets are, as we said, engineering, and it's not just the increases or the absolute levels that we are seeing in 23. It's as well the comp, which is a little bit harder given that engineering came in low in 2022, largely because of recoveries. We have as well a modest increase in SG&A, and then all VCs offset by operational improvements. In terms of, I would say what I would call the leakage in terms of the supply chain disruptions, we're essentially assuming that the net leakage of 20 million that we had in 2022 will carry forward into 2023. So same amount of leakage. The geography may be a little bit different, but the same amount is forecasted for 2023.

And that's related to, and this year is it the same as last year? Because I thought last year was more semiconductor costs in the timing and getting those recoveries. Or is this labor related? Because a lot of other suppliers have called that out.

it's more, for us, it's definitely more semi-related. Absolutely, yes.

Okay. All right. Thanks for taking my questions. Thank you.

The next question is from Atei McAuley with Citi. Your line is open.

Great. Thanks. Good morning, everyone. Just maybe a bigger picture question on the GOM sustainability, you know, mid-teens. This year, obviously, is strong. How sustainable do you think that is beyond 2023? And what kind of bookings should we or are you targeting this year that can kind of support that sustainability in future years?

Yeah, so let's talk about this here and we'll see how, you know, what happens in terms of the market going into the future.

But we will be, again, targeting $6 billion of wins this year as we have done last year. And with that level of win, we should be able to continue our GOM meetings at least in the near term.

Now, as we go forward, as our base sales increases, it's going to be having some effect on the GOM percentages simply because of the increase of the base.

But we will talk more about the future on our investor day here that's coming up on the 7th of March. But we will provide more color on how we see the outer years develop.

Terrific. That's helpful, Sachin. And maybe just a quick follow-up. Back to the cadence of the settlements this year, make sure I have it clear. So is that just a timing issue from kind of normal course price downs or are some of these recoveries just proving to be more challenging early on here in the year?

It's very similar to what we had in 2022. So it takes some time to negotiate with OE the recovery. So the cadence we are anticipating in 2023 will be similar to the cadence of negotiation and successful closing of the negotiation that we had in 2022. So no major differences between the two. Perfect.

That's very helpful. Thank you.

Thank you. Thanks, Yitai. This does conclude our earnings call for the fourth quarter and full year of 2022. Thank you, everyone, for participating in today's call and your ongoing interest in Vistion. If you have any follow-up questions, please contact me, Chris Doyle, or Ryan Gazzari directly. Thank you.

This concludes Vistion's fourth quarter and full year 2022 results earnings call. You may now disconnect.