Visteon Corporation

Thank you for standing by. At this time, I'd like to welcome everyone to Vistion's third quarter 2024 results. After the speakers remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. Thank you. I'd now like to turn the call over to Ryan Wentling, Vice President of Investor Relations and Treasure. Please go ahead.

Good morning. I'm Ryan Wentling, Vice President of Investor Relations and Treasure. Welcome to our earnings call for the third quarter 2024. 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 Vistion's website this morning. Please visit .vistion.com to download the material if you have not already done so. Joining us today are Sachin Lawande, President and Chief Executive Officer, and Jerome Roquet, 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 will turn the call over to Sachin.

Thank you, Ryan, and good morning, everyone. Thank you for joining our third quarter 2024 earnings call. Page two provides a summary of our third quarter performance. Vistion delivered strong results for the third quarter with sales outperforming customers' vehicle production and generating solid profitability and free cash flow. Sales were just under a billion dollars, driven by strong demand for a digital cockpit and electrification products. These product lines drove mid-single digit growth over market, which was partially muted by lower sales in China, mainly due to the loss of market share of our global OEM customers in that region. Excluding China's negative impact, our growth over market would have been about 10%. I'm proud of our solid results, which continue to validate the strength of our product portfolio, even in a challenging environment. And yesterday bidder was $119 million, driven by strong operational execution and our continued focus on controlling cost. Adjusted EBITDA margin was .1% for the quarter. Adjusted free cash flow was $73 million in the quarter, and our -to-date total is a record $135 million. The global Vistion team did a great job in launching our products in 30 vehicle models across the world in the third quarter, bringing the full year total to 71 product launches. We also won $1.8 billion of new business in the quarter, mostly for digital cockpit products and taking our -to-date total to $4.9 billion. We have a solid pipeline of new business opportunities for Q4, and we should be able to meet our target of greater than $6 billion in new business for the full year. Overall, our third quarter performance demonstrates the strength of our product portfolio and the continued focus on operational excellence and cost discipline by the entire Vistion team. Turning to page three. As I mentioned, demand for our digital cockpit products and electrification was strong, particularly in America's and in rest of Asia outside of China, resulting in a growth overmarket of 6% in the third quarter. The trends of digitalization and software defined vehicle continue to be powerful drivers of growth for our digital cockpit products. Commercial vehicles and two-wheelers are also beginning to contribute meaningfully, although there's still a small percentage of total company sales. Digital clusters did very well and grew double-digit with ramp up of production of recently launched products on global vehicle platforms with Toyota and Nissan. Commercial vehicles and two-wheelers also contributed to growth of clusters with customers such as Volvo Trucks, Royal Enfield in India. Sales of large displays also grew double-digit with ramp up of launches with Ford, Stellantis and Nissan. Smart Core sales were lower year over year due to lower sales in China. However, Smart Core sales outside of China continue to do well and grow, driven by extension on vehicle models with Mahindra in India. Turning to our electrification products, sales were strong in Q3, driven by the ramp up of production of electric vehicles by GM and the start of BMS production for our second customer, Stellantis. We're optimistic that EV production volume with our BMS customers will grow with the launch of more price competitive products like the electric Chevy Equinox, which has a starting price of under 35K, which is critical for greater EV adoption. From a regional perspective, we outperformed the market in the Americas and in the rest of Asia, excluding China. In North America, the launch of digital corporate products and growth in BMS more than offset the impact of slowing EV sales, resulting in a strong market outperformance in the third quarter. In Europe, we slightly underperformed the market mainly due to slowing EV sales in that region. The high number of new product launches in Q3 that we had in Europe should help offset this trend in the coming quarters. We outperformed customer vehicle production in the rest of Asia, excluding China, mainly driven by new product launches in India. From a year over year perspective, China was the biggest headwind as the ongoing loss of market share by our global customers and the lower sales of premium vehicles by Geely resulted in a four percentage point headwind to our overall growth overmarket for the quarter. In summary, we delivered solid growth overmarket in Q3 while navigating industry challenges, most notably in China. Our efforts to diversify our product and customer portfolio have paid off with the company being much more resilient to market shifts and enabling us to continue to outperform our customer vehicle production. Turning to page four, new product launches continue to be a key driver of sales growth for Vistion. In the third quarter, we launched 30 new products, bringing our year to date total to 71. As you can see on the bottom right, our launches have been balanced across the regions this year with roughly half of the launches in Europe and Americas and remainder in Asia. Having 35% of launches in Asia, excluding China, validates our success in diversifying our customer base in this key region. Launches were balanced across the product portfolio with digital clusters representing nearly one third of our launches, highlighting the continued penetration of digital clusters in mass market vehicles. Now I would like to highlight some of our key launches during the quarter. We launched infotainment and display systems for the Tata Punch, a best-selling compact SUV in the Indian market. We have been a long-term cluster supplier to Tata Motors and this is our first infotainment system launch with them with potential to extend on additional vehicles. In North America, we launched a full digital cluster on the Ford Bronco Sport, replacing a competitor's hybrid cluster. We also launched our latest audio system in the vehicle as well. We had two Smart Core launches in Q3. We replaced a competitor's infotainment system with Smart Core on the latest Lincoln Co. plug-in hybrid vehicle model in Europe. We also launched Smart Core on the all-new Renault Grand Colleys hybrid vehicle with initial launch in Korea. Following launches are expected in Europe, Middle East and South America markets. One of our digital cluster launches was on the Nissan Qashqai, which is a popular SUV in Europe. This vehicle is offered with mild hybrid and range extender powertrain options, with our digital cluster being the default option on four of the five trim levels. Lastly, we launched our wireless battery management system with our second electrification customer, Stellantis, for the all-electric Wagonier S. We expect further launches in the coming quarters as Stellantis rolls out their electrified models in North America. Turning to page five. We delivered another strong quarter of new business wins with $1.8 billion in the quarter, bringing our -to-date total of $4.9 billion. Our quarterly win levels have increased sequentially for each of the three quarters of 2024, with strong demand for our digital cockpit products more than offsetting the weakness in electrification. With the remaining pipeline of new business opportunities, especially for our digital cockpit products, we are on track to achieve our full year target of $6 billion plus for new business wins. From a product perspective, Q3 wins were led by digital clusters with extension of recently won business with Japanese and premium European OEMs on additional vehicle models. These two car OEMs are relatively new additions to our customer portfolio, and these wins strengthen our position as key suppliers to these car makers. We also won digital cluster business with three large two-wheeler manufacturers in Asia, supporting our strategy of growing beyond the passenger car market. We did very well in winning Displaced business in the third quarter, continuing a strong first half performance. Our vertical integration strategy for Displaced makes us different and more competitive from most other suppliers, and that has translated into greater success in the market. Displaced make almost half of our total new business wins year to date, and we believe Displaced will become as large as digital clusters in our future sales. Our leadership and expertise in software for digital cockpit systems is well recognized in the industry, and in the third quarter, we won multiple new business awards for our smart core cockpit domain controller technology for vehicles launching in China, Europe, and India. On the right-hand side of the page, we highlight several wins from the third quarter. The first win is for a large curved display for multiple mass market models with a European OEM. Large displays greater than 12 inches are making inroads into the mass market, much like the trend we are experiencing with digital clusters. The second win is for our smart core product and a multi-display system for a mid-cycle refresh of a popular SUV model for an Indian OEM. Indian OEMs represent a key catalyst of future growth as demand for our products continues to increase in the region. Another smart core win to highlight is for an electric vehicle for a domestic China OEM, our third domestic customer in the region. Smart core provides an upgraded digital cockpit experience for consumers, which is highly valued by these OEMs as they look to move into the mid and upper segment of the intensely competitive market in China. Lastly, I would like to highlight our win for a digital cluster on a flagship two-wheeler model for an Indian OEM. This cluster offers Bluetooth and Wi-Fi based wireless smartphone integration and -by-turn navigation on a five-inch TFT display. These new features are only recently being introduced in the two-wheeler market, and we expect to see rapid adoption of these new advanced features in that part of the industry. Overall, I'm very pleased with our new business win performance. We have been able to offset the headwinds of China market dynamics and the slowdown in electric vehicles and still win high levels of new business while diversifying our customer portfolio. Turning to page six. As we entered the final quarter of 2024, we expect to face similar industry dynamics in Q4 that we experienced in the third quarter. We expect demand for our digital cockpit products to drive strong market outperformance in all regions, except in China, and finish the year on a solid 6% market outgrowth. In America, our sales are benefiting from the ramp-up of recent new product launches in electrification and digital clusters, and we expect double-digit market outperformance in the fourth quarter. Product launches in the third quarter with multiple OEMs in Europe are expected to ramp up in production in Q4, and more than offset lower vehicle production. We anticipate our sales to also grow double-digit overmarket in Europe. We are forecasting a solid -single-digit market outperformance in rest of Asia, excluding China, given our recent momentum in that region. In China, we are estimating a sequentially flat performance given the headwinds in that region, and underperformed vehicle production. We are in the process of expanding our business with domestic China OEMs to offset the trend, but it will take some more time to turn the tide in that region. For the full year, we expect our sales to grow 6% overmarket. This is a solid performance, given the industry headwinds that we have had to face throughout the year. Moving to page seven. I want to take a step back to both reflect on what we have accomplished, and look forward to what I view is a bright future for Vistion. Vistion has a proven track record of delivering in challenging times. In recent years, we overcame numerous industry headwinds, including the COVID pandemic, semiconductor shortages, and cost inflation, as well as headwinds in China and electric vehicles. But through this all, we have delivered exceptional results across every key financial metric. To be direct, our team has delivered regardless of the challenge. To put our performance in context, I'd like to compare our current results to what we delivered in 2019, the last year before the COVID crisis. I think it's helpful for the comparison that both 2019 and 2024 had roughly the same global light vehicle production. While the market was flat over this five year period, Vistion was not. We grew sales by over 30%, adding a billion dollars of sales. We did this by strengthening our market leadership in digital cockpit with digital clusters, displays, and infotainment products, and expanding our product portfolio in electrification. While growing sales by a billion dollars, we doubled adjusted EBITDA and expanded margin by 430 basis points. Equally as important, we efficiently converted that EBITDA to cash. Our adjusted free cash flow tripled, driven by EBITDA growth and focus on cost control in all aspects of the business. As I mentioned earlier, all key financial metrics improved substantially over this five year period. Looking to the future, we have a strategy that will drive our next phase of growth through four key pillars. First, our best in class software capabilities serve as the foundation for our partnerships with OEMs. Cars are increasingly defined by software, and we believe the automotive industry is starting on a new super cycle of innovation and software content growth with the emergence of new technologies such as artificial intelligence at the edge, which is the car in this case. Diversification of our customer base has been a key priority of mine since joining Vistion nearly a decade ago. In recent quarters, we made substantial progress on this initiative, diversifying our customer base in Asia, and there is significant runway yet to go. OEMs in Japan, India and Korea represent more than a third of global light vehicle production, but only a small share of Vistion's revenue. Diversifying our China business with more domestic OEMs is also a key priority for us going forward. Diversifying into adjacent end markets such as two-wheelers and commercial vehicles is another pillar of our growth strategy. While these markets only represent low single digits of our sales today, there is significant upside as the digitalization trend strengthens in these markets and demand for digital cockpit products increases further. Lastly, we have identified a growing need for OEMs to have a strong partner for advanced design and R&D services in addition to our existing tier one supplier status. These advanced capabilities and services also strengthen our product portfolio by bringing key insights gained from early engagement with car OEMs across several critical technology domains such as connectivity, cybersecurity and functional safety. Overall, we're optimistic about the future for Vistion and I look forward to updating you more about our midterm views in our February earnings call. Turning to page eight. In summary, the company performed very well in the first nine months of 2024. Our technology portfolio is aligned with key industry trends, including digitalization, the connected car and electrification, mega trends that will drive future growth for years to come. We continue to deliver market-out performance compared to our customers vehicle production with 6% growth over market expected for the full year. The team continued to execute on our commercial and operational plans, which resulted in a strong adjusted EBITDA margin of 12.2%. We continue to build our foundation for the future by launching 71 new products and winning $4.9 billion in new business. Now I will turn the presentation over to Jerome.

Thank you Sachin and good morning everyone. Vistion delivered solid results in the third quarter. We successfully navigated another quarter of challenging market conditions and delivered strong operational performance both on the commercial and on the cost side. Our growth of a market was in the mid single digits and in line with our expectations. We delivered an adjusted EBITDA margin slightly above 12% and generated strong cashflow. We also strengthened our future growth profile with 30 new product launches this quarter and 1.8 billion of new business wins. The end market and customer diversification initiatives that we have highlighted in recent quarters have continued to gain traction with 600 million of new business wins with rest of Asia OEMs and further successes with commercial vehicle OEMs and two wheeler customers. Overall, I am very pleased with this performance and continue to be confident in our prospects for long-term growth and margin expansion. Turning now to our third quarter financial results in more detail. Q3 sales were slightly below 1 billion. Compared to last year, sales benefited from our market outperformance of 6% driven by new product launches and strong performance of our digital cockpit and electrification product lines. This was offset by lower customer volumes and lower recoveries from our customers. In terms of performance by geography, Americas had the strongest market outperformance, rest of Asia was positive, Europe declined slightly and China underperformed by double digits. Consistent with past quarters, customer recoveries declined year over year as a result of improved semiconductor supply but were stable sequentially. Adjusted EBITDA was 119 million for the quarter or 12.1%. Our strong EBITDA performance this quarter is the result of our robust sales level and excellent operational performance, including strong cost controls and increased efficiencies. We believe our normalized EBITDA margin continues to run at approximately 12%. Adjusted FreeCastlow was 73 million in the quarter as a result of our solid adjusted EBITDA and improved working capital performance. Lastly, in the third quarter, we completed a bolt-on acquisition for 48 million net of cash acquired. As I have mentioned in recent quarters, we are prioritizing bolt-on M&As in our capital allocation framework as we believe there are meaningful opportunities to enhance our capabilities and grow our business. Our strong balance sheet with net cash of over 200 million provide us with significant flexibility to pursue our capital allocation priorities. Our team continues to operate well with strong focus on operational performance, commercial excellence, and cost discipline. We proactively adjust our cost structure to reflect business changes. And in that regard, we recognize approximately 28 million of restructuring costs outside of adjusted EBITDA in the third quarter aimed at improving our efficiency and further rationalizing our footprint. This is in line with our focus on continuous improvement and maintaining our -in-class footprint. Overall, I am proud of our solid third quarter performance. Turning to page 11. Sales were 980 million for the quarter, representing a slight decrease compared to the prior year. Our market outperformance of 6% was offset by 6% lower customer production, lower recoveries, normal price downs to customers, and a 1% headwind from FX. Our growth of our market was driven by recent product launches combined with strong demand for our digital cockpit products and the ramp-up of our electrification products. Our next-gen products continue to grow with digital clusters, displays, and electrification all showing -over-year increases. Adjusted EBITDA was 119 million in the third quarter, representing a .1% margin. Our strong performance this quarter represented a decrease from the prior year, which had approximately 100 basis points of non-recurring commercial items. Excluding those commercial items in the prior year, our adjusted EBITDA margin would have increased -over-year in the third quarter of 2024. Exchange negatively impacted -over-year adjusted EBITDA by approximately 10 million, driven mostly by the euro and the Brazilian real. Net engineering cost as a percentage of revenue was 4.8%, below our expected full-year average in the mid 5% range due to the timing of project spend, higher recoveries, and lower spending in China in response to the challenges in the region. SG&A as a percentage of revenue was .5% in line with our expected full-year target, turning to page 12. Our balance sheet remains among the strongest in the industry. We ended the quarter with 553 million in cash and a net cash position of 229 million. Our balance sheet supports our growth and provides flexibility for our capital allocation priorities. Turning to cash flow, we generated 73 million of adjusted free cash flow in the third quarter, bringing our -to-day total to a record 135 million. This is a 42 million improvement compared to the first nine months of last year, primarily due to 40 million higher adjusted EBITDA -over-year. Trade working capital was an outflow for the first nine months as we built additional working capital to support our future growth. Cash taxes were modestly lower than prior year as 2023 was impacted by the timing of some tax payments. Interest was a positive in the quarter with a net inflow as interest cost from our term loan were more than offset by interest income on our invested cash. CAPEX was 96 million in the first nine months. We expect this to increase in the fourth quarter due to timing. We remain on track for 145 million for the full year. We're investing in projects to deliver on our future growth and margin expansion, including vertical integration. With our consistent cash flow generation and solid balance sheet, we're able to execute on our capital allocation priorities. As noted on the right side of the slide, our first priority continues to be investing in organic growth. Our annual CAPEX spend of approximately .5% of sales support projects that are critical to our sustainable, profitable growth. Our second priority is Bolton acquisitions like the one we completed this quarter. We're targeting companies that not only enhance our capabilities or product offering, but are also quickly accretive to our bottom line. Although these Bolton acquisitions are likely to be individually small, we believe that in aggregate, they can be a meaningful growth and profit driver in the medium term. Our acquisition this quarter met this criteria and we will continue to be very selective and disciplined in executing on future M&A. Lastly, we intend to continue to return cash to shareholders through share repurchases. Since implementing our 300 million share repurchase program in March, 2023, we have repurchased 126 million of shares. We're committed to a balanced capital allocation between these three priorities. Turning to page 13. Based on our yesterday performance and our outlook for the fourth quarter, we are updating our 2024 full year guidance. For sales, we're tightening our guidance branch to 3.85 billion to 3.9 billion. While still within our previous guidance, we brought down the top end of the range as a result of continued weakness in the China market and some softness in Europe. Our forecast for light vehicle production are in line with SMP forecast with a reduction of 2%, while we expect our customer production to decline by approximately 3%. Our Q4 growth of market is expected to be in the mid single digits with double digit our performance in the Americas and Europe, partially offset by underperformance in China. Despite the industry challenges this year, notably in China and the slower adoption of electric vehicles, we still expect to deliver a solid food year growth of market of 6%. For Justy de Vida, we're raising our guidance branch to 465 million to 480 million, reflecting our strong year to date commercial and operational performance. We have been able to flex our net engineering and S-Generic cost, which we expect to remain within our initial forecast of approximately 10% of sales. On a margin basis, the .2% midpoint is slightly higher than our prior guidance as a result of our strong year to date performance. For adjusted free cash flow, we're increasing our guidance to 165 million to 185 million. Our full year range considers our assumption of the current adjusted Vida range, a use of working capital and CAP spending of 145 million. Our Justy de Vida conversion ratio remains within our targeted range of 35 to 40%, turning to page 14. Vistion remains a compelling long-term investment opportunity. We expect to benefit from higher demand for more digital content in the cockpit, regardless of powertrain and the growth of electric and hybrid vehicles. Vistion is uniquely positioned for multi-year top line growth, margin expansion and free cash flow generation, while our strong balance sheet provides us with significant flexibility. We appreciate your support and look forward to talking with you again in February, when we will provide our 2025 and future guidance. Thank you for your time today. I would like now to open the call for your questions.

At this time, if you'd like to ask a question, please press star and then the number one on your telephone keypad, again, that is star and the number one. We'll pause for just a moment to compile the Q&A roster. Our first question comes from the line of Luke Yunk with Baird, your line is open.

Good morning, thanks for taking the questions. To start off, hoping to just expand on cluster growth, specifically, Sachin, just hoping to impact it from both a product launch and sunset standpoint, as well as just geographic mix impacts that might be reflected right now, just the growth here pretty flat and the growth over market basis. What are some of the conditions that you would see that are needed to get that cluster business back to an overall growth posture just by continued digital growth right

now? Good morning, Luke, yes. So in terms of clusters, I would say first, that the trend of digitalization really continues to be a strong driver for growth of that product line and in Q4 as well, our digital clusters led our product sales and excluding China, they grew double digit. So what you really see here is the impact of China that on the surface makes it feel like it did not really grow everywhere, but it's really just in China. Now, if you look at our performance this year, we have continued to launch several new cluster programs. About 30% of our 71 new launches here to date were digital clusters and the percentage was about the same for new business wins this year. So, and at the same time, as we go forward, what we are seeing is that CDCs and displays are going to replace discrete digital clusters in the premium and luxury segment of the market. However, we'll continue to grow, especially digital clusters and standalone infotainment in the mass market segment, and we are very well positioned to take advantage of both trends. So in fact, what we're seeing, especially in this environment where there's a lot of pressure on prices at OEMs in many parts of the world, such as China, is that the shift is also helping us in terms of having a higher sell-through of our more mass market products. We also launched, as you know, a digital cluster with Toyota, and we are expecting a very good growth with that customer, with that product line as we go forward. So overall, I'm pretty pleased with where we stand with digital clusters. It continues to be a very strong product line for us, and as you've seen with our displays performance, that second line is starting to shape up, and I wouldn't be surprised if it becomes as big as digital clusters for us in the next couple of years.

Okay, thanks for that, Sasha. And then maybe a second question, my follow-up, would be for Jerome, just on the net R&D or net engineering, second quarter in a row that that's run a little better than expected. Can you just pull apart the two pieces here in terms of project timing? What that might mean to 2025 seems like maybe some spend is deferred and can flow back in, and then recovery is just tracking higher. Can you continue to drive a little bit higher than expected outcome on the recovery side? And then you had mentioned also in your prepared remarks, some rationalization of R&D in China, so I think you could just expand on that and the sort of balance of multis coming under pressure in China, yet they need to still drive launches with local OEMs there in terms of engineering investment. Thank you.

Yeah, thanks a lot, Luke. Good morning. So maybe let me step back a little bit on engineering. We've been running a fairly cost-effective engineering organization in the last few years, and maybe three points around that. The first one is that our platform approach has been very successful. We've also have most of our engineers located in best cost countries, and that has been helping our model tremendously. And then finally, we've been working very diligently on efficiencies within our engineering teams, ensuring that they produce quality software on time in a cost-effective manner. So as it relates to Q3, the two pieces are obviously the gross engineering piece as well as the recoveries. If you step back and look at what we've achieved on gross engineering side, our costs have been fairly flattish for the last few quarters. So therefore, it's been in line with what we've been able to achieve in the first half of the year. Recovery really is what has helped us this quarter, and we had an improvement in recoveries versus prior quarter, but as well versus prior year. And we've been running a little bit ahead this year in terms of the recovery. So timing is hard to predict on recoveries, and we think that we'll still be overall in terms of net engineering within our target of, let's say, mid single digit percentage of total sales. As we go into next year, we'll keep on looking at efficiencies, and we'll keep on as well investing in very critical area that will allow us to grow on a go-forward basis, connectivity, AI, as well as other areas. As it relates to China, we have now flexed a little bit our engineering costs, especially in Q2 and Q3, to adjust for what is going on in the region. So it is indeed a slightly reduction over there, just to adjust for the reality of the market.

Maybe just the China piece, if you could just follow up on the local OEMs, just investment in engineering, specifically with that cohort,

Jerome. Yes, we continue to be present in China, and we do want to stay very relevant. As you know, there is a lot of technology in China, and there is as well a lot of focus on cost, given the pricing that is going on, the price water that is going on. So we keep on investing over there, and we are still winning new business, but we'll obviously make sure that we are very selective in terms of the customers that we want to go along with. Maybe, Chatting, you want to

- Yeah, indeed. In fact, this topic of China may be of interest to everybody, given how significant of an impact it has been. So let me elaborate on that a little bit. So if you go back maybe last year or the year before, China represented about 15, 16% of our sales. Now that has come down to about 11 to 12% this year, and that's largely due to the loss of market share of our global OEM customers that are selling into China. Now, if you look at our revenue profile in China, about two-thirds of our revenue in China comes from global OEMs, one-third from domestic OEMs, but we're really well represented in that market. Of the top 15 OEMs that have more than 70% of the market in China, nine are Vistian customers today, and of those nines, about three are domestic OEMs. At the same time, it's a very competitive market, so there has been a lot of price-based war that is being fought by OEMs. And at the same time, the OEMs have to keep their cockpits competitive, so we continue to see opportunities, but we have been very prudent in terms of where and how we want to engage, because we want to make sure that we have a profitable business there. So our strategy has been to grow more with domestic OEMs, and also to grow share of the wallet with the OEMs that we are currently present in China, now European and American OEMs have done a little worse than, say, the Japanese, and of course, the domestic OEMs have taken a lot of market share, so we have a strategy of working with the ones that we think are going to do well, but it's going to take a little bit of time for us to recover from what has happened this year, and we expect in a couple of years to see growth return to that part of our business.

That's all great color. Thanks for jumping in there, Sachin. I'll leave it there.

Thank you. Our next question comes from the line of Joe Spack with UBS. Your line is open.

Thank you. Good morning, everyone. Sachin, maybe you could just sort of provide a little bit of color on what you're seeing out there from your customers, because it looks like you're implying customer productions down maybe mid-single digits in the fourth quarter. We just had another supplier report some pretty dire volume for the fourth quarter, like minus 9%, including significant deterioration in Europe in the fourth quarter, so we just want to better understand what you're seeing.

Yeah, absolutely. Thanks, Joe. And the first thing I would say is, at this point, our outlook for the fourth quarter is really relying more on the direct orders that we have from our customers, and as you can imagine, given all of the announcements that have been made, we have been very diligent in terms of checking for integrity of those orders, and we feel pretty good about where we stand. So having said that, we do see softness in Europe. There's no question about it. But our performance in Europe is driven more by new product launches. And if we were not to have those, I believe we would have seen a similar drop in our outlook for production as perhaps some of us might have been referring to. So as you know, we had a high number of launches, even in Q3, and many of them were actually in Europe, and that's benefiting us. From a production perspective, if I look at the various regions for Q4, we see pretty much, I would say, a reduction in all regions except our customers in Americas. And so America seems to be doing relatively well, is holding up pretty okay. All of the regions are a bit, I would say, on the negative side, including Europe. And our performance is totally driven by new product launches. So we see a market outgrowth in all regions, except China. And in China, we see more of a flattish performance relative to Q3, even though there is a seasonal uplift in production anticipated for Q4. We would probably be, I think, prudent in not assuming any benefit from that. There might be some tailwind, but we're not assuming it in our outlook for now. Hope that gives you some color.

Yeah, no, that's helpful. I guess the second question, and it's sort of a little bit bigger picture, but I just want to understand the types of conversations you're having with your customers and how this could affect future sourcing, because Qualcomm for instance had a new release of some auto product this past week, and I know you use their product a lot. And there was a big step up in performance that allows AI, et cetera. But if that product's out now, right, it's probably not getting to vehicles in 26 or so, maybe 27. But it also seems like the pace of development on the hardware side is really inflecting. So I'd venture to guess that a year from now there's another huge leap in performance. So when you go to your customers and have that conversation, how do they think about that? How does that impact your sourcing? Because things seem to be moving so quickly and accelerating, and you don't want to get caught with outdated tech, I guess.

Right, right. No, that's a great question, too. And let me try to answer this this way. So AI, as I mentioned in my prepared remarks, is really what's going to drive a cycle of content growth and increase in the cockpit in particular, but it's not going to come for free. So there is a pretty big step up when you go to the newest and the latest and latest silicon that is actually capable of supporting AI models. So therefore, that's not going to be applicable or affordable by all segments of the market. So what we're seeing here is more of a separation between, let's say, the premium luxury end of the market, which will have to compete on all of these features that we just talked about, right? AI, AI not just in the cockpit, but also in ADAS and connected features, more and more camera-based vision processing and features related to that. So that's all good, but that's really more in the upper end on account of the significant uplift in the price of these silicon in particular, which then impacts the overall system. We're talking about a two or a three X increase in price, right, not a percent. So that also is causing a need for having more competitive, more feature-rich, not necessarily having all of the bells and whistles in AI in particular in the lower part of the market. And this is going to be a big opportunity for us because we have existing solutions, existing platforms that we can bring to these OEMs. And it's not just in passenger cars. They're starting to see this interest come in commercial vehicles, very similar to what we see in cars in terms of features and content and to a lesser extent in two-wheelers. Although in two-wheelers, the volumes are higher and the time to market is shorter. So in general, I see a sort of a segmentation of tech that follows kind of the segmentation of vehicles that we have known for a long time. And the key is going to be to have solutions that are appropriate for each segment. And even for say two-wheelers and commercial vehicles that are specific and unique to those parts of the industry. And that's what we've been really trying and we've been focused on doing. Part of this is to have a vertical integration strategy, because that's what helps us drive costs lower and make the systems more affordable. We can take it to a greater extent in software and in displays to a lesser extent when it comes to silicon, but all of that helps. And I think that also helps separate and differentiate Vistion. Thank you. Thank you.

Our next question comes from the line of Mark Delaney with Goldman Sachs, your line is open.

Yes, good morning. Thanks very much for taking my questions. First, I was hoping to better understand the key puts and takes behind the updated EBITDA outlook for this year and what's allowing a slight increase to the EBITDA guidance even on slightly lower revenue. And perhaps more importantly, as you're seeing some of the progress the company is making within margins, is there anything episodic helping it that's more temporary in nature, or is this perhaps a sign of progress toward the medium term target of .5%?

Yeah, thanks. I would say generally we've been running pretty well ahead of targets on the margin side. And we saw that in Q2 and we saw that again in Q3. And that's really the fundamental reason as to why we are increasing our full year guidance on the margin dollar and but as well margin percentage standpoint. Despite a slight reduction in volume for the full year, we're able essentially to have better engineering costs. We are pretty much keeping our engineering percentage as is for the full year and obviously with lower sales that implies lower dollars. And we've been as well running well in terms of efficiencies, operational performance has been good. And that's another reason as to why we're able as well to improve our margin. So .2% is the number we are putting out there for the full year. It's essentially very much in line with what we've achieved in H1. And that's a very good run rate as we go into next year. So apart from the commercial items that I indicated impacted our financials in Q2 and it was not a very large number. It was 50 basis point of margin at the time. I don't see any major item that is a temporary as we go into next year. Obviously next year we'll have a lot of puts and takes and we'll talk about that in February. Yeah, thank you for that.

Another question was around BMS and one of your key BMS customers spoke recently about a future plan to shift some of their cell manufacturing away from pouch toward prismatic cells. We're gonna better understand if there's any implications of that for Vistion and your BMS business there, thanks.

No, great, great question. And Mark, what I would say is Vistion is one of the few suppliers if not maybe the only supplier of BMS that actually has a BMS design that is agnostic to the form factor or to the chemistry of the battery cell. Now, this is something that needs to be understood carefully because most BMS systems are designed to work with a specific cell chemistry and we took a platform approach. This is part of what we do here for all of the product lines and the platform approach meant that we had to design our BMS to be able to work with different form factors, different chemistries of the cell and therefore it requires no change on our part to support this transition or even eventually if, for example, they were to go with say solid state batteries, it would still allow them to go through that transition without needing a change with the BMS. So that's a unique and a key differentiator that we offer to our customers.

Thank

you. Thank

you.

Our next question comes from the line of Colin Langdon with Wells Fargo, your line is open.

Hey guys, this is Cosa Tosula filling in for Colin. My first question, just on the restructuring, you guys have been one of the cleanest suppliers on restructuring really this decade. I just wanted to see if you can give a little bit more Colin the actions you took and maybe you can quantify the savings you expect to see.

Yes, good morning, I'll take that question. Maybe stepping back on our footprint, we've, as I mentioned earlier on, we've got a pretty good footprint but we're always looking for further improvements. We also want to ensure, especially with the acceleration of the technology changes that we are rebalancing our resources in order to meet the need of the businesses. So the restructuring plan that we've put together during September is essentially achieving that it's as much a cost improvement that it is a rebalancing of resources. And for example, in Asia, we've mentioned earlier on some level of restructuring in China, we are then reinvesting some dollars in other area like rest of Asia as we want to grow two wheelers or some very specific customers in Japan. So it's really as much a cost play than it is a rebalancing of resources.

Great, thank you. On my second question, you guys called out some potential strengths in Q4 in North America. One of the questions, the D3 of their inventory is rather elevated. Do you guys have any downside risks to D3 production in Q4 factored into your guidance?

Yeah, we do have a good visibility at this stage for the full rest of the quarter. So I would say it is largely all factored in short of something that is dramatically different that might happen in the next few weeks, which we do not foresee. So the answer, the short answer is yes, it is factored in.

Great, and then just maybe one last one. Share repurchases, I think he's done 20 million near date versus 76 million last year at this point. Do you expect to see a rather dramatic pickup in Q4?

So we've generated a pretty strong cashflow this year. And in the last 18 months, we've been very focused on share repurchases. We have this quarter focused on M&A. What we want to achieve overall is a fairly balanced approach in our capital allocation. We've out of our 300 million of share repurchase authorization that we got last year, we've purchased so far 126 million. So we've got some room and we are very committed to continue to repurchase shares as we go forward.

Great, thank you for taking my questions.

Thank

you.

Our next question comes from the line of James Piccirillo with BMP Paribas, your line is open.

Hi everybody. Can you just provide any clarity on what this John is seeing within the competitive landscape for Smart Core? It seems there are more and more tier two and three suppliers trying to vie for the cockpit domain controller as of right now. And consolidate their vehicle architecture. How important is it for this John to win this hardware specific to the domain controller and just be a better understanding of the interplay of Smart Core and your digital instrument clusters business? They're sort of a zero sum game emerging between the two.

Yeah, so it's a good question. And again, I'll go back to what I said earlier about how we see the market segmenting with respect to technology. And we tend to normally think of these as zero sum, but the reality is that the technologies start at the upper end of the market and then they migrate down to the mass market. And it's not a very homogeneous environment out there in terms of where things stand today. So what has happened is cockpit domain controllers make a lot of sense at the mid to upper end of the market because it allows you to put more processing power and therefore drive more software defined features inside the vehicle, mostly in the cockpit. Right now, what has happened as we just talked about earlier is that AI is starting to impact that, which means that there's even further segmentation within the cockpit domain controllers where you would have a class of those systems that are AI capable versus your normal cockpit domain controller, which offers still much higher compute than a discrete digital cluster and a discrete infotainment. So if you think about this three step approach, we are seeing growth in all three segments of this product as I just described. So it's not at all a zero sum game. Number two, the complexity in terms of technology just grows exponentially because although we talk about it as just maybe hardware capabilities, it is attracting a ton of software at every stage of the step. And therefore, if you do not have the full portfolio of capabilities that are part of your platform already, integrating all these various technologies from third parties and making it all work is a nightmare. That's what is being really the reason why if you just think about all of these OEMs with all this immense investments that they've made in trying to bring that in-house, it hasn't really worked is because they haven't built that platform. So I'm not gonna comment on who are the emerging competitors and so on. All I'll say is that we do not see a lot of new competitors emerge. We still have the same set. And even within that, it's getting increasingly challenging to be able to execute as a single supplier. So we do see as we go forward, more of a collaboration between the tier one supplier, the OEM and some technology partners that bring more and more of all of these other technologies that I mentioned, mostly software. And that's gonna be the approach for the upper end of the market. For the mid and below, it's gonna be more business as normal.

That's super helpful, appreciate that. And just my follow on and apologies if I missed this, but can you provide shed any light on the German acquisition you made for roughly 50 million, which is half of I think the intended target of 100 million type of bolt-on pipeline, what the benefits are of that business and in the absence of the other 50 million or so toward M&A should be assumed buybacks, return? Thanks.

Yeah, let me address that first and then I'll also invite Jerome to talk about the buybacks in maybe a little more detail. So the way we look at how and where we're at in the industry with the various technology trends impacting it, the last five years were years of digitalization and connected car. And the next five years, we believe, are gonna be more driven by software defined and AI defined vehicles. As we just discussed right now, our strategy is to make sure that we are in the position to lead through technology and offer all of the key capabilities required to build these platforms. As I mentioned, if you do not have those capabilities, you cannot hope to catch up. And this trend is accelerating, it's not even stable or let alone slowing down. So we have been continuously looking at the make versus buy decision on various technologies. And we do a lot of make ourselves, okay? And that's gonna continue. For example, we just launched our vision-based surround, our vision-based technology for integrating multiple cameras in the CDC. We're one of the very few that can do that today at even the entry price point of the market. Now that was done in-house. Now, at the same time, we're looking at opportunities where we can acquire specific capabilities and strengthen our technology offerings. And this company that we bought, it's a small technology company based in Germany that focuses on connectivity and e-mobility technology. And today they're engaged with German OEMs supporting their technology development needs. They have deep expertise in that area. And it helps us, as I said, strengthen our capabilities and maybe plug a few holes that we may have. On top of that, it enables us to engage in services, engagements with OEMs, because they're also trying to figure out what are they gonna do in those areas beyond what they currently have defined for their next generation cockpit. So what we are starting to define or refer to as outsourced R&D services that we think is a very exciting area of potential growth opportunity for Vistion.

Maybe touching just to comment on the share repurchases versus M&A. We want to keep it very balanced overall and we'll continue to look at acquisitions. But in the short term, with the cash that we've generated, we should be able to do both, continue to look at acquisitions while doing some share repurchases.

Our next question comes from the line of Edison Yu with Deutsche Bank. Your line is open. Edison Yu with Deutsche Bank. Your line is open.

I wanna see if we can take another one.

We'll move on to the next color. Next question comes from Shreyas Patel with Wolf Research. Your line is open.

Hey, thanks so much for taking my question. Just wanted to follow up on the commentary around displays. You mentioned that in the next couple of years, you could see that grow to about the same size as your clusters business, which would be quite a significant amount of growth. And just thinking about how to frame your current market position in displays, and any color on the kind of margin profile that you have in this business, is it relatively in line with the corporate average? So more like 14, 15% margin?

Yeah, I would answer that first. Absolutely. I think the margin there looked very good. And the way I would look at displays different from maybe some other products is that it has lower software content, but it has a lot of the other value adds that is driving margins. What we're seeing, Shreyas, is that the value of displays that we are doing, especially for the premium and upper end of the market, is significantly higher than, let's say, the ASP of a digital cluster. And that's really what's gonna drive a pretty rapid growth in our displays revenue. It depends to a certain extent on how successful some of our customers are with their electric vehicle launch and production, which, as I've said before, we do believe that we are entering into this timeframe where, say, 26, 27, the state and federal mandates here in the US and also in Europe with the emissions, step up that is being required is gonna drive more sales of those vehicles, and that's gonna also pull this content more. So we have a fairly high number of new product launches around displays. The value is higher, and we are feeling pretty good about the growth profile there.

Okay, great. And then, wanted to just touch a little bit on a topic that came up earlier around the competitive landscape broadly. Maybe focusing on China in particular, we do see several cockpit electronics players in that market in areas like displays, clusters, cockpit domain controllers. They seem to be pricing their products quite competitively while still generating decent gross margins and growing volume. I'm curious what you're seeing from a competitive landscape in China, and do you see risks, or are you seeing any expansion of those players into markets outside of China?

Yeah, so let's talk first about what's happening in China, and I mentioned that we have been pretty, I would say, disciplined about how we go about the opportunities there. Because of the pace of change of technology adoption being very rapid, what we see is that very often, those OEMs are replacing those electronics faster than what would be good for returns on that business. So we do not really see, even if the margins may look good, on paper, that the frequent changes are not driving profitability with most of the suppliers. If you look at many of the suppliers there, most of them are not profitable or not sufficiently profitable. So that's the issue there. And now, at the same time, if you look at the cost structure of these, we feel we are competitive with anybody. We have never seen that we somehow are at a disadvantage when it comes to cost. Now, pricing is a different matter, but from a cost viewpoint, we are extremely competitive. So that's the other point. Now, as far as those suppliers coming to outside of China, we will naturally see some suppliers come as the China OEMs also start to export more. As you know, 20% of the vehicles produced in China are exported, but we have a very good footprint already. In fact, that's one of our value propositions to Chinese domestic OEMs, is to be a partner to them for their business outside of China. And we do not see that there would be any different in terms of being a competitor to the ones that we have today outside of China. And at the end of the day, we have to be able to live on our own competitive capabilities, which we feel good about.

This concludes our earnings call for the third quarter of 2024.

Thank

you for participating. You may now disconnect.