Visteon Corporation

Welcome to our earnings call for the fourth quarter and full year 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 Investors section of Vistion's website this morning. Please visit investors.vistion.com to download the material if you have not already done so. Joining us today are Sachin Lawande, President and Chief Executive Officer, and Jerome Roque, 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 fourth quarter and full year 2024 earnings call. Visteon delivered a strong performance in 2024 with robust sales of $3.87 billion, record adjusted EBITDA of $474 million, and record adjusted free cash flow of $300 million, all of which are outstanding numbers for our company. Our product portfolio is well aligned with key industry trends of digitalization, software-defined vehicle, and electrification. Demand for Visteon products that enable these trends, such as smart core, large displays, digital clusters, and BMS, was strong and resulted in our sales are performing underlying customer vehicle production by 4 percentage points. In the Americas, Visteon outperformed the market by double digits driven by ramp up of digital cluster and electrification products. In Europe, Visteon outperformed the market by mid single digits with the launch of digital clusters and large displays in mass market passenger vehicles as well as on heavy commercial vehicles. In Asia, Robust demand for large displays and smart core drove mid-single-digit market outperformance in Japan and India. And while market headwinds faced by our customers in China muted our performance, Viztion delivered 9% growth over market outside of China. We secured $6.1 billion of new business wins in 2024 with strong demand for our large displays, smart core, and digital cluster products. We achieved important milestones in new product introduction with first wins for our high-performance smart core and onboard charger and DC to DC converter, which further expands our product portfolio into fast-growing parts of the market. While our customers had lower than average code activity in 2024, I'm pleased that the breadth and strength of our product portfolio enabled us to exceed our new business win target for the full year. Adjusted EBITDA was a record $474 million driven by strong operational execution and our continued focus on cost control. Adjusted EBITDA margin was a record 12.3% for the year, 130 basis point improvement compared to last year. Adjusted free cash flow was also a record at $300 million for the year. We delivered on our commitment to balanced capital allocation with more than $100 million deployed to M&A and share repurchases. Overall, our 2024 performance is proof of the strength of our product portfolio, a continued focus on operational excellence, and our best-in-class cost structure. Turning to page three, key industry trends of digitalization software-defined vehicle, and electrification continue to drive increased digital content in the vehicle. Viztion's product portfolio is aligned with these trends, which was also reflected in our new product launches in 2024. Software-driven features and functions are growing rapidly in the mid and upper part of the market, which is driving demand for our industry-leading smart core and large display products. Nearly 30% of our 2024 launches were for these products, which are a key driver of our market outperformance. The trends of digitalization and connected car are now impacting mass market vehicles. Digital clusters and Android-based infotainment systems are becoming mandatory features of affordable vehicles in all regions of the world. We're also seeing commercial vehicle and two-wheeler OEMs start to offer digital cockpit systems. About 40% of our launches in the year were for products targeting this section of the market. As shown on this page, in the fourth quarter, we launched digital clusters on the popular Citroen C4 and on a scooter for TVS and Asian two-wheeler OEM. Our wireless BMS offers OEMs the flexibility to offer a range of electric vehicles with different battery configurations without re-engineering the system which reduces time to market and cost. In Q4, we launched our wireless BMS system on the Jeep Recon, our second launch with Stellantis. We launched a total of 95 new products in 2024 with 21 different OEMs globally and on ICE, hybrid, and fully electric vehicles. This is a testament to the strong execution capability of the Visteon team and to the powertrain agnostic nature of the business. Turning to page four, we delivered $6.1 billion of new business wins in 2024, making it our third straight year at or above the $6 billion level. We made significant progress on our strategic initiatives to diversify our customer base and expand into adjacent end markets. The breadth of our product portfolio and success in new customer acquisitions enabled us to win a high level of new business despite lower than usual customer quoting activity. OEMs from Japan, Korea, and India accounted for about 40% of the total wins, with Toyota emerging as the top customer for bookings for Visteon in 2024. We also won our first cockpit business with Maruti Suzuki, the market share leader in India with significant runway for further expansion. Customer interest for large displays was strong across all regions, and we won substantial displays business with multiple OEMs, including Lexus, Mahindra, Stellantis, Volvo, and Audi. Our display's design and manufacturing capabilities are a competitive advantage for the company, and most of these are conquest wins for Visteon. In China, we expanded our base of domestic OEM customers by winning a smart core program with FAW and a large display program with Dongfeng. Both these wins are for new affordable electric vehicles that are expected to launch at the beginning of 2026. In the fourth quarter, we won our first high-performance smart core program with Zeker, the premium EV brand of Geely, the leading domestic OEM in China. Smart Core HPC is designed to run large language models for AI in the cockpit, which requires significantly higher processing power than the usual cockpit domain controllers. The system will launch in mid-2026 in China and will be offered in the higher trims of ZQIRS vehicle models. While China is leading the industry in bringing AI in the cockpit, we expect OEMs globally to follow quickly and bring the exciting potential of LLMs to their customers. Lastly, we won our first business for onboard charger and DC to DC converter with Mercedes-Benz. These power electronics components offer best-in-class power conversion efficiency in a small package which is critical for improving battery range and reducing charging time for electric vehicles. Overall, 2024 was a very successful year for Viztion in terms of new business bookings. These wins highlight the breadth of our technology portfolio and our ability to stay in sync with emerging technology trends and launch new products. Moving to page five, Before turning to our forward-looking outlook, I wanted to take a moment to reflect on the highly successful year we had and the significant progress we made on our strategic initiatives. Our strategy is focused on addressing fast-growing automotive technology domains with products that are aligned with the key industry trends coupled with the best-in-class cost structure. We added new customers and expanded our business with leading OEMs in Asia, particularly in Japan and India, which was a key priority for the company. We achieved significant bookings for our digital products that support key industry trends, such as large displays and cockpit domain controllers, laying a solid foundation for our continued growth. We are also constantly innovating and enhancing our product portfolio. We displayed our onboard charger and DC to DC converter for the first time at CES in 2022, and delivered our first win for these products within two years in 2024. Expertise in emerging technologies is critical for continued success. We strengthened our technology capabilities through bolt-on acquisitions that complement our in-house R&D and bring critical expertise in-house. AI and large language models will drive the next cycle of innovation and content growth in the cockpit and require new hardware and software solutions. We introduced a high-performance version of Smart Core called Smart Core HPC that can run AI models in the car and secured our first win with Zeker as discussed on the previous page. And at CES earlier this year, we introduced an industry-first software solution for AI-based user interface called Cognito AI that enables car makers to implement smart assistant features in their cockpits. Our technology platforms are a key competitive advantage for Viztion, and we are continuously enhancing these platforms and integrating more functionality in them. We integrated new software technologies such as surround view and software-defined radio that eliminates the need for third-party solutions, reducing the total system cost to car makers. We're also driving vertical integration of hardware, bringing tier two content in-house to drive innovation and increase our competitiveness while removing layers from the supply chain. In 2024, we started manufacturing of automotive cameras in-house, as well as designing backlight unit for displays and injection molding various metal and plastic components used in our products. Our cost structure is already very competitive with most of our manufacturing and engineering footprint located in best cost regions. However, we continue to look for opportunities to further align our footprint to the evolving market needs for software developers that are specialized in key automotive technologies. This is truly a competitive advantage as it's very challenging to find such expertise in the market. We remain committed to a balanced capital allocation approach. We are laying the foundation for future growth with the organic growth initiatives I mentioned earlier while layering in M&A to expand our product and technology offerings. We deployed $55 million to M&A in 2024 and have a pipeline of additional Turkey acquisitions. We also returned capital to shareholders and fixed $3 million of share repurchases in the year. Overall, 2024 was an impressive year for Viztion As we expanded our product and customer base, delivered strong financial results, and set ourselves up for future growth with strong bookings. Turning to page six. On this page, I would like to share our sales outlook for 2025 and through 2027. For 2025, our customer vehicle production forecasts are based on S&P Global's January forecast. and include company estimates where our production expectations differ from S&P. Global light vehicle production is expected to decline slightly, with a mid-single-digit decline in Visteon's customers' vehicle production. Several of our largest customers, including Ford and GM, are expected to adjust production to work down elevated vehicle inventories. Our growth over market is expected to be mid to high single digit in 2025, with another year of outgrowth in every region outside of China. Our strong performance is driven by new product launches with several customers, including Ford, Renault, Stellantis, and Toyota, as well as commercial vehicle and two-wheeler OEMs. Despite a strong performance in 2024, we expect electric vehicle sales in the U.S. to stay flat in 2025 due to tariff and incentive uncertainty. We are forecasting our BMS sales to be slightly lower in 2025, accounting for the elevated levels of electric vehicle inventory in the market. In China, where we have experienced sales headwinds in 2024 from the loss of market share by global OEMs, We expect our sales drop to moderate in 2025 and represent the low point for our sales in that market before recovering in 2026. Overall, we're guiding to sales of $3.75 billion at the midpoint for 2025. This represents a flat base sales year over year despite the headwinds from lower customer vehicle production and recoveries as well as defects. The very solid performance as a strong product portfolio and business win momentum offset the near-term market headwinds. Now turning to our outlook for 2026 and 2027. We're assuming that light vehicle production increases in line with S&P global forecasts for both years, with customer mix improving from 2025. Growth over market is expected to be in mid to high single digit in 2026 and 2027. We have some large smart core and display programs that are launching with customers in Asia and Europe. that will drive our market outperformance in those regions. In China in particular, we have several new launches with domestic Chinese OEMs, as well as German and Japanese OEMs that are expected to do relatively better and hold their market share in their region. Our BMS sales are expected to grow more closely in line with electric vehicle sales growth at GM and Celantis. and helped by the launch of BMS, the third customer based in Europe. Overall, we're targeting $4.15 billion in sales in 2027, which is a mid-single-digit sales growth trigger relative to our 2025 sales guidance. This represents an attractive multi-year growth profile as the strategic initiatives continue to gain traction. Now, I will turn the presentation over to Jerome.

Thank you, Sachin, and good morning, everyone. I want to while innovations in displays and electrification generated growth later in the period. We grew despite a substantial sales headwind from the changes in the China market since 2022. We doubled EBITDA over the same five-year period. EBITDA margin reached a record of more than 12% in 2024, an improvement of 440 basis points compared to 2019. Our ability to grow revenue and significantly improve margins at the same time is a testament to our strong product portfolio and operational efficiency. Improvements in margins have been the result of scale from additional sales, our laser-focused cost approach, and our drive for a best cost footprint, as well as an engineering platform approach, which allowed us to optimize cost while continuing to invest in the business. Our EBITDA to cash conversion was 38% on average over the five-year period. This is the direct result of our increased profitability, our success in managing working capital, as well as turning Visteon into an efficient business with light capital requirements, all supported by a strong balance sheet. Overall, Visteon has delivered impressive improvements in sales, margins, and cash flow over the last five years. With an innovative, technology-based product portfolio and a team focused on execution, Visteon has a strong foundation for continued profitable growth. Turning to page 9. We had a very strong finish to the year with Q4 sales of $939 million. Compared to last year, sales benefited from our market outperformance driven by new product launches and robust performance of our digital cockpit and electrification product lines, offset by lower customer production, lower recoveries as a result of improved semiconductor supply, and annual pricing. In terms of performance by geography, Europe had double-digit market outperformance, America's high single-digit outperformance, while China underperformed. The weaker Euro video performance in China is consistent with a trend from recent quarters and is due to the ongoing market share shifts towards domestic OEMs. While we remain underexposed to domestic OEMs relative to the market, we continue to make inroads with these customers, including a significant Q4 new business win for HPC with Zeker, as mentioned by Sachin. Adjusted EBITDA was $117 million for the quarter. Our EBITDA performance was driven by continued cost discipline and strong operational performance. Net engineering, while including the recent acquisition we made in Q3 2024, was lower due to the favorable timing of engineering recoveries, offset by higher SG&A. Margins improved to 12.5%, a 70 basis point expansion compared to the prior year. When adjusting for more normalized engineering and SG&A, our run rate margin exiting the year was around 12%. Adjusted free cash flow was a record 165 million in the quarter, a result of our strong adjusted EBITDA and a significant inflow from working capital. This level of cash flow was above our expectations as we had several one-time working capital benefits. Lastly, We remain committed to our balanced capital allocation framework with allocations to organic growth, M&A, and capital returns to shareholders. Overall, we delivered a strong... Our next-gen products, including digital clusters, displays, smart core, and electrification, drove our 4% market outperformance. This market of performance was offset by lower customer production, lower recoveries, price downs to customers, and a headwind from FX. China was also a 5% headwind to growth of market as a result of our global OEMs losing shares in the market. Adjusted EBITDA for the full year was a record $474 million, a $40 million improvement compared to the prior year. Our EBITDA performance was driven by solid incrementals on our growth of market and another year of significant operational improvements as we continue to optimize our manufacturing costs and increase vertical integration, which more than offsets the impact of annual pricing to customers. Net engineering costs were lower, mostly due to the favorable timing of engineering recoveries, which can be lumpy in nature, as well as lower spending in China in response to the challenges in the region. This decrease was despite additional engineering spending in 2024 associated with our acquisition of an outsourced R&D firm. Net engineering cost as a percentage of revenue was 4.9%, which is below our normal run rate. SG&A as a percentage of revenue was 4.6% and in line with our expectations. Finally, we benefited from the non-recurrence of the 15 million recall charge incurred in 2023, but were also negatively impacted year-over-year by approximately 12 million of foreign exchange, driven mostly by the Brazilian real and the Japanese yen, partially offset by the peso. EBITDA margin was 12.3% in 2024, an expansion of 130 basis points year-over-year. Turning to page 11. Visteon generated a record 300 million of adjusted free cash flow in 2024. The improvement compared to the prior year was primarily due to higher adjusted EBITDA and an inflow from trade working capital. This trade working capital inflow was above our expectations as we benefited not only from the unwide from lower sales, but as well from several one-time benefits in the fourth quarter of 2024, some of which will reverse in 2025. Adjusting for these items, trade working capital would have been a modest outflow for the year and our conversion would have been between 45 and 50% of EBITDA in 2024, closer to our targeted level of 40% conversion. Cash taxes were modestly higher than the prior period as we paid higher taxes in line with our increased profitability. Interest was positive for the year as interest income CAPEX was 137 million for the year, an increase of 12 million compared to last year. The increase was primarily focused on investing for the future, including setting up our new plant in Tunisia, as well as several vertical integration initiatives, including investing in our display product line. Our consistent cash flow generation and solid balance sheet enable significant allocations of capital to both invest in our future and return capital to shareholders. In 2024, we deployed $55 million to M&A and $63 million to share repurchases. We expect to continue executing on these important strategic initiatives. Turning to page 12. Before moving to our financial guidance, I would like to address the topic of tariffs. The tariff situation continues to evolve with the tariffs against Mexico and Canada currently postponed until early March and global reciprocal tariffs proposed last week. If implemented, these tariffs would have a meaningful impact across the entire automotive industry and especially the supply base. We're working closely with our customers to identify mitigation actions and minimize any potential impact on these films should these tariffs be enacted. Our guidance does not include any impact from these or any other potential tariffs. Now let's turn to our 2025 guidance. Our guidance range for sales is 3.65%. the impact of supply chain recoveries, our base sales are expected to be roughly flat year-over-year. We have assumed this year on customer production declines mid-single digits, with customer production down the most in the Americas as OEMs right-size their inventory, and in Europe due to the ongoing macroeconomic weakness. Our growth of our market is anticipated to be mid- to high-single digits, driven by strong expected performance for large displays, digital clusters, and infotainment products. Regionally, we expect the strongest performance in the rest of Asia and Europe, offset by continued double-digit underperformance in China. Recoveries and effects are expected to be a 3.5% headwind in 2025. adjusted EBITDA is expected to be between 450 and 480 million, representing a margin of 12.4% at the midpoint. This is a margin improvement year over year, as continued strong commercial performance and further operating efficiencies partially offset the impact of the more normalized net engineering spend. As a percentage of 2025 sales, We anticipate net engineering to be in the high 5% range and SG&A to be in the high 4% range as we continue to invest in our teams to support future growth. We also expect FX to be a modest headwind to EBITDA in 2025. Adjusted free cash flow is expected to be between 175 to 205 million, which at the midpoint is a conversion of 40% of adjusted EBITDA into adjusted free cash flow. We expect working capital to be a modest outflow for the year to come, as the one-time benefits from 2024 unwind next year. CAPEX is forecasted at $150 million as we invest for future growth and margin expansion, with several notable vertical integration initiatives planned for 2025. And finally, while we do not provide quarterly guidance, we expect a slight decline sequentially in both revenue and EBITDA in the first quarter of 2025. Turning to page 13. Looking now to the medium term, we are providing 2027 targets for sales, adjusted EBITDA, and adjusted free cash flow. For sales, our target for 2027 is $4.15 billion. This represents a 5% growth CAGR and an increase of $400 million in sales between 2025 and 2027. Our forecast assumes a modest LDP growth for our customers over the period. We're expecting growth of a market of mid to high single digits in both 2026 and 2027, driven by the progress on our strategic initiatives. We expect our growth to be largely driven by launches of next generation products that align with our strategy of growing our business with wide space customers in rest of Asia, in SDV enabling products with OEMs in Europe, and in adjacent markets, including commercial vehicles and two-wheelers. including a few key programs, such as a display with Toyota, a cluster with Maruti Suzuki, a large CDC program with a luxury German OEM, or multiple products on two-wheelers with Honda, KVS, BMW, and Royal Enfield, and a high-performance compute cockpit domain controller with Zeker in China. As a result, our product portfolio mix will continue to evolve with growth driven by displays, electrification, and cockpit domain controllers, while at the same time expanding our market share with wide-space OEMs and in-adjustment markets. In addition, we anticipate we will return to growth in China starting in 2026. For adjusted EBITDA, margins are expected to expand to 13.3% in 2027. This represents a 90 basis point increase from 2025. Roughly half of the increase in margin is from leveraging scale as we grow the business, and the other half relates to further improvements in operational performance and manufacturing costs, including vertical integration. Our continued focus on cost controls drives incrementals in the low 20% range. With regard to cash flow, we expect to convert more than 40% of adjusted EBITDA to adjusted free cash flow in 2027, which represents $230 million of adjusted free cash flow, or 10% CAGR, from 2025 levels. As a result of our capital business model, nearly 50% of the increase in EBITDA from 2025 to 2027 flows through adjusted free cash flow. A strong level of cash flow will allow for significant capital to be deployed to M&A and shareholder returns. Overall, I am excited to deliver on this plan and the substantial growth in sales, EBITDA, and free cash flow we are showing here. I am confident that the foundation we have put in over the past few years positions us very well for strong financial results through 2027. Turning to page 14. Visteum remains a compelling long-term investment opportunity.