Visteon [VC] Conference call transcript for 2022 q1
2022-04-28 15:55:22
Fiscal: 2022 q1
Kristopher Doyle: Good morning. I'm Kris Doyle, Vice President of Investor Relations and Treasurer. Welcome to our earnings call for the first quarter of 2022. Please note this call is being recorded, and all lines have been placed on listen-only mode to prevent background noise. Before we begin this morning's call, I'd like to remind you this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future results and conditions, but rather are subject to various factors, risks and uncertainties that could cause our actual results to differ materially from those expressed in these statements. Please refer to the page entitled Forward-Looking Information for additional details. Presentation materials for today's call were posted on the 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 Sach Lawande, President and Chief Executive Officer; and Jerome Rouquet, Senior Vice President and Chief Financial Officer. We have scheduled the call for 1 hour, and we'll open the lines for your questions after Sachin's and Jerome's remarks. Please limit your questions to one question and one follow-up. Thank you for joining us. Now I'll turn the call over to Sachin.
Sachin Lawande: Thank you, Kris. Good morning, everyone, and thank you for joining our first quarter 2022 earnings call. As outlined on Page 2, Visteon continued to execute on our growth strategy despite the challenging environment. The product trends we highlighted on our Q4 earnings call continued in Q1 with most of our key products, significantly outperforming underlying customer vehicle production. First quarter sales were $818 million, an increase of 11% year-over-year and excluding currency and 22% growth over market as vehicle production at our customers declined approximately 11%. Sales came in better than anticipated as we benefited from automakers prioritizing higher content vehicles and on account of our proactive approach of mitigating semiconductor shortages through product redesign and purchasing chips from the open market. Adjusted EBITDA was $71 million or 8.7% of sales, an increase of $7 million when compared to last year. Our strong commercial discipline and focus on operations helped mitigate the disruptions in inflated costs in the supply chain. Adjusted free cash was a negative $37 million in the quarter as uneven supply of parts resulted in higher inventory. We launched 16 new products in the first quarter, which is an outstanding performance given the challenging supply chain situation. It sets the stage for another strong year for product launches, which are a key part of our growth strategy. New business wins were approximately $950 million, which will continue to drive our growth in the midterm and beyond. Large displays in the cockpit is an emerging trend in the industry, with industry-leading capabilities in design and manufacture of large displays, plus the unique and proprietary IP for advanced display features, we are in a great position to address the needs of carmakers for their future cockpit displays. We are excited about the industry's digital, connected and electric future and are confident that Visteon's product portfolio will continue to facilitate this key industry trends. Our focus on supporting our customers and commitment to technology innovation will continue to drive sales growth, margin expansion and cash flow generation in both the near and long term. I will provide an update on the market environment and our first quarter performance in more detail on the subsequent pages before handing it over to Jerome to discuss the financials. Turning to Page 3. The war in Ukraine and COVID-related lockdowns in China caused additional disruption to the industry, resulting in reduced vehicle production in Q1 and lowering of our estimates for production for the full year. The direct impact of Visteon from the war in Ukraine was relatively small as we do not have any operations in Ukraine. However, other suppliers, manufacturing facilities in Ukraine were affected, which resulted in our European customers' ability to produce vehicles. The outbreak of COVID-19 in China and the resulting lockdowns mainly in Shanghai and Changchun, impacted vehicle production at some of Visteon's largest customers in China. These events resulted in a lower production by Visteon customers in Q1 as compared with the rest of the industry, causing negative customer mix in the quarter. Semiconductor supply continued to be a challenge throughout the quarter with demand significantly exceeding supply. We saw a modest improvement in the supply of analog chips in the quarter compared to our initial expectation of a sequential decline from the fourth quarter level. While supply of all semiconductors is constrained, this analog chips are the most critical bottleneck. Despite these headwinds, Visteon sales grew 11% year-over-year when excluding currency. The market outperformance was driven by a combination of factors. First, OEMs continue to prioritize higher trim level vehicles, which typically have higher Visteon content. This trend combined with the high number of new products launched by Visteon in 2021, most of which were on these higher trim vehicles resulted in stronger than anticipated demand in the first quarter. Second, we are redesigning some of our high-volume products to use alternate chips wherever possible to mitigate semiconductor shortages. Combined with the modest improvement in the supply of analog chips and the proactive sourcing of chips from the open market, we were able to ship more products in Q1 than we were initially anticipating, resulting in the higher sales for the quarter. Lastly, the recoveries of incremental supply chain-related costs from our customers are recorded as revenue, further boosting our sales growth. On the next page, I would like to provide some context on how our products performed in this environment. Turning to Page 4. In the first quarter, industry production volumes decreased 4% compared to prior year. Vehicle production at our customers decreased 11% with our European customers driving most of the negative mix as discussed on the previous page. Despite the lower vehicle production, Visteon sales came in strong at $818 million, up 11% compared to prior year when excluding the impact of currency. This is also the highest level of quarterly sales since I joined the company in 2015. The transformation of our product portfolio over the past few years has put us in a great position to take advantage of the key trends impacting the industry. Cluster sales, which represent about 50% of Visteon's total sales increased 11% year-over-year, driven by the ongoing shift to digital clusters. Digital clusters were up 38% year-over-year and now represent nearly 60% of our total cluster sales. On a unit volume basis, digital clusters still represent only 40% of total cluster shipments, which provides a long runway of future growth as our customers continue to fully digitize their cockpits. In addition to new product launches, we continue to see our customers prioritizing high-content vehicles. For instance, in Europe, our sales with Ford benefited from higher take rates of digital clusters on the Kuga SUV. 3 of the 4 trims for this SUV carry our 12-inch digital cluster, all except the base trim. In the supply limited environment, the OEM prioritized the production and sale of the higher-level trims to maximize their sales and revenue. The Kuga is a competitively priced family SUV, that's one of Ford's best-selling vehicles in Europe. It's also a good example of how digital clusters are migrating into mass market vehicles. SmartCore sales now account for 10% of total Visteon sales, up from 6% in Q1 of 2021. This equates to a year-over-year sales growth of nearly 80%. SmartCore will continue to contribute to Visteon's growth for the foreseeable future given the continued ramp of these programs as well as additional launches planned over the next couple of years. Displays were up 13% year-over-year, driven by strong demand for our large displays and accounted for about 16% of our total sales in the quarter. Like in the case of digital clusters, a couple of years ago, the industry is starting to shift rapidly towards larger displays in the mid-segment of the market. I expect displays to be the next growth opportunity for Visteon in the cockpit after digital clusters and SmartCore. Infotainment continued to be the most impacted product line in the first quarter in terms of semiconductor shortages. As a result, sales of infotainment were down year-over-year, but still managed to outperform customer production volumes. The strong fit of our product portfolio to the key trends impacting the industry and the commercial and operational discipline on part of the team to maximize production and recovery of incremental costs were the main driver of our outperformance in the first quarter. Turning to Page 5. Launching new electronics products in an environment of widespread semiconductor and other part shortages is very challenging to say the least. I'm very pleased to report that Visteon launched 16 new products in the first quarter, which is a strong testament to the operational capability of the team. These 16 products were launched across 12 different OEMs and on some of their most important vehicle models and in all regions of the world. Some of these launches are highlighted on this page. We launched a digital cluster on the highly anticipated F-150 Lightning Electric Truck from Ford. This 12-inch digital cluster offers state-of-the-art functionality and high-quality graphics and is software upgradable. It's worth noting that the ICE version of the F-150 also comes with our all-digital cluster, which uses the same hardware as the cluster on the electric version of the truck. We also launched an audio system on the Ford Ranger Truck, which is the first of several additional launches of the audio system on the T6 Small Truck and SUV platform at Ford. Mazda has historically offered small displays in their vehicles, typically 8-inch or less, with the market trend shifting towards larger displays, Mazda is offering larger 10 and 12-inch displays developed by Visteon for new vehicles. In Q1, we launched a 12-inch center information display on the new flagship model for Mazda, the CX-60 plug-in hybrid SUV for the European market. There are additional vehicle launches planned with these larger displays in the coming quarters. With Honda, we launched a 10-inch digital cluster on their first EV model in China, the eNS1. Honda has been very successful in China with their ICE vehicles having a market share in high single-digits. With the growth of electric vehicles, Honda is launching new EV models in China and Europe with Visteon supply digital clusters. Other notable cluster launches include a 10-inch digital cluster on Nissan's popular 2-door sports car, the Z and a digital cluster on VW's ID electric vehicles in China. These are high-quality launches, both in terms of the product and the vehicle models thereon. We expect these products to benefit from the ongoing acceleration of the digital cockpit trends and contribute to our market outperformance in the coming quarters. Turning to Page 6. We had a strong start to the year with approximately $950 million of new business wins in the first quarter. Several new business awards were pushed out due to supply chain and other disruptions, particularly in Europe. Nevertheless, we were able to maintain our win rate consistent with our goal of achieving market share gains. From a regional perspective, sourcing activity was higher in Asia in the first quarter and we expect it to pick up in Europe and U.S. going forward. New business wins were well distributed across our products, representing the ongoing evolution of the cockpit. We had several large displays wins, multiple all-digital cluster wins, and we also added a new OEM customer for SmartCore. New business wins were also diversified across powertrain and end markets with 20% of the new business wins targeting electric vehicles, including an all-electric 2-wheeler. On the right side of the page, we highlight a few key wins in the first quarter. The first win highlighted is for a cross car platform, digital cluster with Toyota that will launch initially on the Camry in 2024. This is our first multi-vehicle and global business win with Toyota and it builds upon the cluster programs we have recently launched with that OEM in China. It adds another large global OEM to our growing portfolio of customers for digital clusters, and we hope to extend our engagement to other cockpit products in the future. The second win highlighted is for a digital cockpit system for an electric 2-wheeler with an OEM in India. We have previously highlighted the emerging trend of digital cockpits in the 2-wheeler market. This system uses a 7-inch display, which is large for 2-wheelers, will offer navigation and smartphone connectivity using WiFi and Bluetooth wireless technologies. The 2-wheeler segment has traditionally used low-end meters, but is now starting to follow passenger vehicles in offering higher-value digital cockpit systems. In China, light pickup trucks are mostly a basic utility vehicle used in rural areas with cities restricting their use to manage traffic congestion. With many cities now relaxing these restrictions, light pickup trucks are poised to grow in China as OEMs are looking to replicate the success of these trucks in U.S. and other markets. The third win highlighted is for a SmartCore system for a domestic OEM in China for a new light pickup truck. This system will offer state-of-the-art digital cockpit features, including cloud services and apps, over-the-air software updates and augmented reality, leveraging our Qualcomm Snapdragon-based SmartCore platform. The last win highlighted on this page is a multiscreen display module under one seamless cover lens for an existing Japanese customer. This program will launch in 2024 across multiple vehicles and includes 2 variants with display sizes of 24 and 28 inches for mass market and premium vehicles. It is representative of the emerging trend of multiscreen displays in the cockpit, which is an exciting area of growth for Visteon, and which I will discuss in more detail on the next page. Turning to Page 7. Multiscreen displays are an exciting growth opportunity for Visteon with the industry starting to follow a replacement cycle like what's happening with digital clusters. Consumer demand for ADAS and connected services has resulted in OEMs using larger displays in the cockpit to offer an improved experience to the traveler and passengers. Display trends driven by consumer electronics products such as smartphones and tablets have shaped some of the trends in cockpit displays, including narrow borders and high perceptual quality. In addition, requirements that are unique to automotive, such as readability in bright sunlight, low power consumption and limiting driver distraction are driving future trends in cockpit displays. Visteon was early to identify displays as a growth opportunity and launched our first large display system with BMW in 2019. This program introduced new features such as curved cover lens with optical bonding to the LCD panel to provide a nicer look and feel. With multiple display products launched and more under development, Visteon has developed strong expertise in the design and development of key elements of the display technology stack, including backlight unit, cover lens and optical bonding. We are now regarded as a technology leader in the industry for large displays. Over the 3-year period from 2021 to 2023, we expect to launch over 20 multiscreen display systems across several OEMs. In addition, Visteon has developed a unique and proprietary intellectual property such as MicroZone to enhance perceptual quality of the display, true color for dynamic image enhancement for improved readability in bright light conditions, active privacy technology and others shown on this page. These are new features that are being requested by OEMs for second generation of large displays that are scheduled to launch in 2024 and beyond. These features will launch first in premium vehicles and then migrate down to mass market vehicles. Traditionally, automotive industry lagged consumer electronics when it came to displays. This is now changing rapidly and automotive is driving its own technology road map for displays. Visteon has built a strong technology and manufacturing expertise in displays and is positioned nicely to take advantage of this fast-growing trend in the industry. After digital clusters and SmartCore, we expect large multiscreen displays to be the next growth driver for cockpit electronics for the company. Turning to Page 8. On this page, I would like to discuss our thoughts on the outlook for vehicle production and Visteon's growth over market for the full year. The recent developments in China with respect to COVID-19 and the war in Ukraine has resulted in the outlook for vehicle production to be lower than our initial expectations. The COVID-related lockdowns in Shanghai and other cities in China has reduced vehicle production and introduced additional disruption to the automotive supply chain, most of which will be felt in the second quarter. We expect authorities in China to allow critical industries to progressively restart operations within the second quarter. We anticipate that the impact of the war in Ukraine on vehicle production to moderate in Q2 and beyond as suppliers relocate production from Ukraine to facilities elsewhere. This should help reverse the negative customer mix we experienced in the first quarter. For the full year, we expect global vehicle production to grow modestly at low single-digit percentage range on a year-over-year basis. This puts our estimate in line with the latest IHS outlook, which is about 81 million units for the full year. We expect our customer mix to be neutral for the full year. While vehicle production is lower than our initial expectations, the factors that helped our market outperformance in Q1 are expected to continue to benefit us for the rest of the year. For the full year, we anticipate growth-over-market to be in the mid-teens as OEMs continue to prioritize higher content vehicles and we mitigate the impact of semiconductor shortages through redesigns and open market purchases of chips. Recoveries of higher costs from the customers and the new product launches will contribute to strong level of growth-over-market. Based on these assumptions, we are maintaining our full year guidance, which Jerome will discuss in more detail later. Turning to Page 9. In summary, the company performed very well in the first quarter. We delivered record sales, outperforming vehicle production at our customers by 22 percentage points, disciplined execution of our commercial and operational plans resulted in a solid adjusted EBITDA margin of 8.7%. The company continues to build on the foundation for future growth with the launch of 16 new products and new business wins of approximately $950 million in the quarter, we secured incremental business that expanded relationship with key customers and continue to build momentum for key growth drivers for years to come. The industry has some added challenges in the near term, but the fundamentals continue to indicate that we will be entering a multiyear up cycle in production volumes with key megatrends driving technological change. Visteon's product portfolio and the strength of our customer relationship positions the company well for continued outperformance. Now I will turn the presentation over to Jerome to review the financial results.
Jerome Rouquet: Thank you, Sachin, and good morning, everyone. Despite a challenging market, Visteon delivered robust year-over-year sales growth and improved EBITDA margins this quarter. We are pleased with the progress of our commercial negotiations in Q1, which helped us mitigate the impact of the elevated semiconductor and supply chain-related costs. The investments we've made over the last few years to optimize our cost base are paying off and supporting our results. Q1 sales were $818 million, an increase of 11% versus prior year when excluding the impact of currency. Compared to our original expectations at the beginning of the quarter, sales came in higher due to better-than-expected semiconductor supplies from our existing suppliers, added flexibility from our engineering redesigns as well as better availability of semiconductors in the open market. Higher cost recoveries, which are recorded in sales were also a positive factor. We continue to see strong customer demand, driven by recent product launches as well as our customers giving priority to higher trim models. This strong demand, improved supply and higher customer recoveries were the key contributors for our robust growth-over-market of 22%. Adjusted EBITDA was $71 million, representing a margin of 8.7% for the quarter. Adjusted EBITDA benefited from ongoing commercial and cost disciplines. We did see an increase in cost in Q1 related to the global semiconductor and supply chain shortages, which came in higher than we originally had anticipated. We were very active in Q1 addressing these increases with our customers, and we were able to partially offset this impact. In the quarter, we were able to finalize agreements with many of our customers, although we had a few customer negotiations slip into Q2. Consistent with our original full year guidance, we're still anticipating the full year net impact will be approximately negative $20 million, with Q1 representing the peak margin headwind. Adjusted free cash flow was negative $37 million, primarily driven by an increase in inventory levels. We ended the quarter with total cash of $405 million, representing a net cash position of $56 million. Our balance sheet remains very strong and our net leverage is negative 0.2x. For the full year, we are maintaining our guidance for sales, adjusted EBITDA and adjusted free cash flow. I will provide more context later in my presentation. Turning to Page 12. First quarter sales were $818 million, representing an increase of $72 million compared to last year. This increase was driven by recent product launches, OEMs prioritizing higher trim vehicles as well as by customer recoveries more than offsetting the 11% decline in our customer production volumes. Q1 represents the 12th quarter in which Visteon sales outperformed the market, driven primarily by ongoing launches of new products. As you may recall, we had a significant number of new product launches in 2021, including the launch of several new programs with GM North America, a SmartCore program with Geely and a digital cluster with VW, just to name a few. In addition, OEMs prioritized higher trim levels vehicles in the quarter, increasing the take rates of our products. Finally, sales were also positively impacted by semiconductor and supply chain cost recoveries. In a normal environment, we typically provide annual price downs to our customers. However, cost recoveries more than offset our annual pricing to customers and drove a net increase in sales of approximately 5% this quarter. Although we anticipate these recoveries to remain elevated throughout the year, the year-over-year increase to sales will moderate in the second half of this year as we started to recover costs from customers in the second half of last year. The level of customer recoveries in the coming quarters will be highly dependent on whether costs remain at these elevated levels or start to moderate. Adjusted EBITDA was $71 million, an increase of $7 million compared to prior year. Adjusted EBITDA margins were favorably impacted by higher volume and higher engineering recoveries, which were partially offset by the unfavorable impact from higher semiconductors and supply chain-related costs as well as the dilutive impact from cost recoveries. In addition, the proactive cost reset that we initiated in 2020 as well as the ongoing focus on controlling costs remains a positive contributor to EBITDA. As a result of these actions, gross engineering and adjusted SG&A continue to be significantly lower than they were in 2019 despite higher sales. These actions have helped us navigate the ongoing industry challenges, while also positioning us well to leverage our cost structure as the industry improves in the future. Turning to Page 13. The last 2 years have reinforced the importance of having a strong balance sheet in the automotive sector, and Visteon's balance sheet continues to be one of the best in the industry. We ended the quarter with total cash of $405 million, representing a net cash position of $56 million, with a net leverage ratio of negative 0.2x. Our strong balance sheet and liquidity position provides ongoing flexibility to invest in the business and delivering on our growth strategy. Adjusted free cash flow was an outflow of $37 million in the quarter. Adjusted free cash flow benefited from our continued focus on improving profitability while optimizing capital expenditures. However, Q1 cash flows were negatively impacted by an increase in inventory levels and annual incentive compensation payments. Inventory levels have increased throughout the semiconductor shortage. These elevated levels are driven by an even OEM production schedules combined with an uneven supply pattern. In addition, we have increased the level of safety stock on certain components to ensure any near-term disruption as a more muted impact on sales. The majority of the inventory increase is in semiconductors and displays and will be assembled into finished products as production schedules normalize and as we receive missing critical semiconductors. We expect to have a higher level of inventory this year than we normally would, but we do anticipate we will start to see a reduction in inventory going forward as we take actions to ensure we optimize inventory levels while balancing supply availability. Turning to Page 14. Although the headwinds facing the automotive industry have increased in the last 2 months, we are maintaining our full year guidance. We now anticipate production volumes for our customers will be up in the low single-digits for the full year compared to our original expectations of 9%. This is in line with the latest IHS forecast, although we're not factoring any positive Visteon customer mix for the full year. The production environment continues to be very volatile with the COVID-19 related lockdowns in China, creating additional near-term uncertainties, both in terms of China production volumes as well as the potential downstream impact due to logistics and supply chain disruptions. On the positive side, we anticipate we will benefit from higher customer content and elevated customer recoveries, both of which will contribute to a higher growth of the market for the full year. We now expect growth of our market will be in the mid-teens this year. Although we are not providing any formal quarterly guidance, I do want to provide some insight on how we see the second quarter playing out. Production volumes will likely be lower in Q2 compared to IHS current forecast as a result of the COVID-19 related lockdowns in China. At this stage, our assumption is that the additional units lost in Q2 will be made up in the second half of the year. Adjusted EBITDA for the second quarter will therefore be negatively impacted by the lower sales levels. We also anticipate a modest increase in net engineering. However, we do expect a slightly better run rate on cost recoveries as we finalize customer agreements in quarter 2, partially offsetting lower sales and higher net engineering costs. The automotive market remains very dynamic and we will provide updates throughout the year. Turning to Page 15. Visteon remains a compelling long-term investment opportunity. We have positioned the company for top line growth, margin expansion and free cash flow generation, while our strong balance sheet continues to provide significant flexibility. Thank you for your time today. I would like now to open the call for your questions.
Operator: . And our first question comes from the line of Mark Delaney with Goldman Sachs.
Mark Delaney: Yes. The first question is on the full year outlook, which I understand that you're keeping unchanged despite the lower auto production environment. You mentioned a couple of offsets, but could you be a bit more specific on how much the various offsets are each contributing to the added growth of the market? And related to that, should we still be thinking about the full range of guidance being appropriate? Or do you think the company is tracking towards the lower end given the reduced production levels?
Sachin Lawande: Thanks, Mark. I will take the question first and then hand it over to Jerome for more color. As I've said in my prepared remarks, demand from our customers has been very strong. It was strong in Q1, and we expect it to remain strong for the rest of the year. So we are, in some ways, a little, I would say, disconnected from the underlying vehicle production, not that it doesn't matter, but it matters less in this environment. Now we were also able to ship more products than we had initially anticipated on account of some of the proactive measures we have been taking, including redesigning some of our high runner products to use alternate semiconductor chips to broaden our -- the sourcing of -- and availability of semiconductors and also by being more proactive and purchasing the chips on the open market. So this, combined with a modest improvement in the supply of some of the critical analog chips that I mentioned are the main drivers of our higher sales and growth over market. And these dynamics, we expect to continue to remain in place throughout the rest of the year. Of course, on top of that, we have had a higher level of recoveries, which we also expect to remain in place. Jerome, anything more?
Jerome Rouquet: Yes. So we are confirming the guidance at $3,250 million. We are maintaining the range as is and not indicating whether or not we'll be at the low end or the higher end. As Sachin said, good first quarter, which really positions us very well for achieving the full year targets. And it's really on the back of very strong growth of the market, which we think will continue, probably not at the level that we've seen in Q1, given that we are assuming that maybe the mix coming from higher trim levels will moderate a little bit. We will see as well even if we keep on recovering from our customers in terms of the cost inflation, we'll see probably these costs lapping or these recoveries lapping year-over-year. So we're maintaining the guidance for the full year on the sales side as well as on the EBITDA, the -- one of the key assumptions that we have for the full year is the fact that we are capping inflation leakage at a level of $20 million exactly per our original guidance. And again, the good success that we've had in Q1 and what we're going through at the moment in terms of recovery and negotiation with suppliers -- with customers indicates that we'll still achieve that target.
Mark Delaney: That's helpful. And for my second question, it was on the new business wins and the company said during the prepared remarks that the market share relative to those wages was tracking very well. But the overall number was down from the new business wins that you reported in the first quarter over the last couple of years. You mentioned some pushouts that had occurred in the opportunity set on the fourth quarter call. It sounds like there's still some business win opportunities that pushed out again. So hoping to better understand how you see business win shaping up for this year? Do you think you can exceed the roughly $5 billion you did last year?
Sachin Lawande: Yes, that's a very good question. And yes, you're right, the new business wins have been lower in the past few quarters on account of the disruptions that we have been facing in the industry. And as you know, in the first quarter, we had the added concerns of this war in Ukraine and the lockdowns in China, which took a lot of attention. So in that environment, a performance like what we have had with $950 million in new business wins is very commendable. And I'm particularly pleased that we were able to add a new SmartCore customer as well as record our first global win with Toyota, both of which are really great additions to our customer portfolio and will contribute to future growth of our business. So given that, I'm very pleased with the performance. But in terms of the pipeline itself of new opportunities, it remains very strong. As I mentioned, displays is developing into a very good product line for us, complementing our digital clusters and SmartCore. So we do expect a fairly strong second quarter, and that should put us in a good position to target $6 billion in new business wins for the rest of the year. Let's take the next question.
Operator: Next question is from James Picariello with BNP Paribas.
James Picariello: I was wondering if you could talk about the BMS trajectory over the next few years. In terms of -- you have, I think, you have 3 customers in the pipeline. Obviously, you're currently shipping with GM on the LTM platform. Just again, curious if you could share any thoughts on the multiyear trajectory and maybe the margin profile of this business, is BMS going to be a margin-accretive product for you guys?
Sachin Lawande: Yes, yes. No, that's a great question. And as you know, there's a lot of activity around new EV platforms and models in the industry, probably the most significant transformation that's undergoing right now in the industry. And one of the first decisions an OEM has to make, after deciding the battery technology and supplier is the choice of the BMS system. And with our experience and capabilities, especially in wireless BMS, you can imagine, we are, as a result of that, engaged with several OEMs for the future BMS needs. We should be able to grow our current portfolio of 3 OEM customers that we have today based on these discussions and as they progress through the course of the rest of the year. And just to complete the picture with these 3 OEMs that we have, we have several vehicle launches planned over the next 3 years across the portfolio. And from next year onwards, BMS will start to contribute in a very meaningful manner to our annual sales. And the margin profile of BMS, I would -- the way I would describe that would be to think of it as being similar to our digital cluster margin profile. A lot of the underlying technologies are very similar. And so we are very happy with -- very excited about what this means to our future growth, both in terms of sales and profitability.
James Picariello: No, that's great color. Appreciate that. And just maybe a point of clarification. Hopefully, I didn't miss this, but the previous guidance, I believe, baked in a net $20 million supply chain benefit year-over-year. Just curious if there's an update on that or if I missed it? And how should we be thinking about the cadence in terms of the quantified impact this quarter and the rest of the year?
Jerome Rouquet: All right, James. So that guidance is unchanged. We had last year a negative $40 million, and we were -- and we are guiding to an improvement of $20 million this year, which will give you a net negative $20 million for this year. In terms of cadence, sorry, the -- we started a little bit slower than the full year recoveries. And that was expected, we had guided that Q1 would had lower levels of recoveries just because of the negotiations taking place mostly in Q1. So we are anticipating this level of recoveries to improve progressively throughout the year. It's hard to tell if Q2 will be a full recovery yet or if it will be more Q3. But for the full year, we're definitely guiding to a negative $20 million, which is, to your point, an improvement of $20 million year-over-year.
James Picariello: And is there any sizing in terms of the recovery revenue stream, what flows through the top line baked within your guidance?
Jerome Rouquet: We have not given any specific guidance on this. What I can tell you is that in Q1, our net pricing, which includes not only the recoveries, but as well the annual price downs that we give to customers was a net of 5%. So that -- and it's traditionally a negative number or it's been at least in the prior years. So this year, in Q1, we've seen a positive 5%. And the negotiations are, as you can imagine, contemplating not just the recoveries, but as well the annual price down. So it's -- in some cases, it's very separated and in some cases, it's commingled. So I think the best way to look at it is to look at the net pricing.
Operator: Our next question comes from the line of Michael Filatov with Berenberg Capital.
Michael Filatov: Just a quick one for me. I'm just looking at your 2020 sort of -- 2023 assumptions of $4 billion of revenue trying to get to that 12% target. If we look at sort of the implied disruption cost for this year of $20 million, I think in order to get to -- and so your guidance for this year, if you try to get to that $4 billion of revenue next year and 12% margins, you basically have to have no disruption costs. I think that's sort of like the baseline assumption if you assume 22% incremental margins, which I think are your normalized levels. Is that realistic that there's sort of no incremental disruption costs or no lingering disruption costs? Or should we be assuming maybe higher incremental margins relative to your normalized level next year?
Sachin Lawande: Yes. No, that's a good question. And our assumption for next year is that the supply situation is going to be a much better environment than it has been in 2022. So if there is any disruption costs, I would expect that to be a fairly minimal level that we should be able to absorb in the course of our overall business operations. So in terms of the $4 billion itself, what I would say is that in terms of demand, we see that demand even this year, as I've said before. So it's not an issue of demand. We expect demand to be fairly strong next year as well, based on the incremental 50 or so new business or new product launches, I should say, that we would have this year. And so it's going to be driven, again, largely by supply and availability. Now on that front, with respect to semiconductors, what we are seeing is somewhat of a new development through Q1 is that while demand for automotive semiconductors has remained very strong, there has been a slowdown for demand of semiconductors that come from the consumer electronics side of the market. And we believe that's on account of fading away of some of the pandemic-driven demand for laptops, TVs and smartphones, et cetera, which should provide some relief to automotive as there would be more capacity available for automotive semiconductors. So this, we expect to see continue as we go through the rest of the year. On top of that, there are incremental capacity investments that have been made for automotive that are expected to come online later this year, which will contribute to a higher availability of parts for us. And on top of that, as we have mentioned already, we are redesigning some of our higher under products to have a broader base of suppliers for critical parts. So the combination of those factors, we believe, should put us in a pretty good position next year to not only achieve a higher level of sales, but also to manage our costs from the supply chain.
Michael Filatov: Understood. And just pivoting a little bit. I just wanted to know if there was any updates around DriveCore and sort of any of your ADAS sort of commercialization opportunities since the last time we heard about it?
Sachin Lawande: Yes. I think what we are seeing, which is an acceleration of some of the trends that we have been discussing earlier, the industry is evolving quite rapidly towards the use of high-performance computing systems for the cockpit like SmartCore. And that, in combination with use of multiple external cameras typically 4 or 6 cameras means that we can now offer ADAS features that are integrated with the digital corporate system. Now these are not the same type of ADAS features that are used in, say, or offered by Level 1 and Level 2 ADAS systems such as main departure warnings or forward collision warning, these are the next level of features such as remote surveillance, augmented reality, et cetera. And so we are working on leveraging our DriveCore software and expertise that we have to develop and launch these types of next level of ADAS features for the cockpit. So it's something that we will be talking about more as we go further in the rest of the year.
Michael Filatov: So just to clarify one thing. So should we think about DriveCore is still an independent stand-alone offering? Or is it more so becoming integrated into the SmartCore product?
Sachin Lawande: It is actually becoming more integrated in the digital cockpit, which is where we see an opportunity to differentiate, because we have both sides of the technologies.
Operator: Our next question comes from the line of Emmanuel Rosner with Deutsche Bank.
Emmanuel Rosner: I was actually hoping to follow-up on your initial thoughts on going to next year. So obviously, last quarter, you explicitly confirmed being on target to $4 billion in revenues and also 12% margins at 89 million units or so. Now obviously, this year, you confirm the outlook, which is very impressive. So are you still feeling comfortable about the margin trajectory going into next year as well since you're on track with your '22 target? Or is the latest industry production, which is a little bit less than the 89 million units that you were initially contemplating for next year, would that make this more difficult?
Sachin Lawande: Yes. Yes. So Emmanuel, I think nothing fundamental has changed with respect to how we think about next year in terms of the top line as well as the profitability. So the demand remains strong. And even with the reduced outlook for next year by IHS in terms of vehicle production, that has not really made any dent in the demand that we have from customers. One of the things that we should also mention is in order to be in a better position to manage the supply chain, we have been working with our customers to provide longer term visibility to the supply chain. And that is longer term by that we mean 24 months. And based on that, we see that the demand remains quite strong. We should be in a position to achieve the $4 billion in sales as the supply as well develops and improves. So nothing to really offer as a change in terms of our outlook and perspective on '23, and that also applies to the profitability. Anything more to add Jerome?
Jerome Rouquet: Yes, the EBITDA drivers are very much unchanged, and it's really all about commercial and operational execution. So we'll continue to mitigate inflation in line with what we've been doing now for the last 2 years. And then on the operational side, we'll continue to leverage positive structure that we have, which will really will allow to benefit from the additional scale. So again, nothing has fundamentally changed.
Emmanuel Rosner: Okay. That's great to hear. And then the follow-up is coming back to your growth-over-market and in the outlook, in particular, going from what you had guided around 9% for the year and now something more like mid-teens, which is impressive. Would you be able to put a finer point on this and out of the factors you have outlined either rank them or sort of like quantify, obviously, 6 points of additional growth-over-market, seems like some of it is recoveries, some of it is stronger demand. Just trying to better understand the size of the dynamics there.
Sachin Lawande: Sure. So we had a very strong growth of the market in Q1, 22%. And I would say the first factor is the fact that we've got a very good underlying growth-over-market on the back really of all the product launches that we've had in the last couple of quarters. 2021 saw a lot of new launches. I've mentioned that in my opening remarks. And that's really the foundation for our strong growth-over-market. In Q1, on top of that, we had a very positive mix stream coming from some of our customers, and that helped our growth-over-market even further. On top of that, and you mentioned it, recoveries did help as well, growth-over-market. So that's the reason for the 22% in Q1. So with this in mind, we are confirming for the full year growth-over-market to be in the mid-teens. And again, that's on the back of a very good underlying growth-over-market. What we do assume in our guidance is the fact that mix will potentially moderate a little bit and as well the recoveries as we will start to lap recoveries year-over-year as we started to negotiate price increases last year in Q3 and Q4 with our customers. So still a very strong growth-over-market, but not obviously as strong as what we saw in Q1 for these reasons.
Operator: Our next question comes from the line of Joseph Spak with RBC Capital Markets.
Joseph Spak: Jerome, maybe you could pick up right there because, you said no change on net inflation. It was $20 million versus $40 million, so $20 million year-over-year tailwind. And when you unpack that within the context of your revenue guidance, if net inflation is unchanged, and it's kind of suggest the pricing assumption is unchanged. So the higher outgrowth seems to be really more driven by demand for Visteon product. Is that right? Or is it the case that maybe both cost and price are higher than you thought 3 months ago as well. And so it's still in that $20 million?
Jerome Rouquet: Yes, it's both. In fact, we are definitely seeing a very good momentum on what I would call our underlying growth of the market. But it's true that the recovery since we've seen, in fact, a pretty steady increase of cost in, I would say, towards the end of Q4, but as well in Q1, we had to pass on more to our customers, that as well benefits not only sales but growth-over-market. So that's what you're seeing as well in Q1 and to some extent, as a continuation into the rest of the year.
Joseph Spak: Okay. And Sachin, maybe just to build up on your comments earlier about future Visteon potential and BMS. I mean during the quarter, we saw General Motors and Honda announced what was a pretty significant expansion. I think they said millions of EVs of their partnership in OTM. I know it's early days, and they're clearly saying that product is not until 2027, but then you said BMS is one of the first decisions that has to be made. So has that conversation hit your desk yet? Or what do you see as the scope of like the longer-term Visteon opportunity there?
Sachin Lawande: Yes. We have a lot of ongoing discussions with GM on BMS related to OTM, as you can imagine. And so without going into a lot of detail, I would just say that, yes, those discussions are happening in terms of preparing for that additional volume of business. And we expect that to continue to evolve not just with GM, but also with the other 2 OEMs with whom we have just started the development of the BMS system for them.
Operator: Our next question comes from the line of Colin Langan with Wells Fargo.
Colin Langan: Just to go back to the customer pricing help. Obviously, a big help in the quarter. And you indicated fade. I mean what was the original implied outlook in guidance? I mean it sounds like it was 5% and fading, maybe 3% help as sort of the overall for the year, if that's about right? And was that kind of how you were thinking when you started the year? Or is that actually trending better and adding to some of the growth-over-market outperformance?
Jerome Rouquet: We didn't -- Colin, we didn't give any specific numbers around the recoveries as we went with our guidance. And the reason is that we are taking the cost as it comes, and we are obviously negotiating with suppliers, but we are passing that on to our customers. So it's been a very volatile market and environment, as you know, and things have changed. So we've seen higher costs than we had anticipated in Q1. And as a result, we've passed on a higher dollar amount to our customers. We've not passed on everything yet, and we're still working on this, and we hope to finalize most of our agreements in Q2. But that's essentially the dynamic that is going on at this stage.
Colin Langan: Got it. You also mentioned in your comments, customer mix would be sort of neutral for the year, but it's been several years of calling out sort of negative customer mix as a headwind. So why isn't that starting to reverse over the next year? I mentioned those customers are catching back up at some point? Or is that just upside to your outlook? How should we think about that?
Sachin Lawande: Yes. I think one of the major drivers, Colin there has been, if you go back to last year's second quarter, Ford had a pretty low production quarter, and we expect that to catch up and reverse this year. And so we haven't really made any bigger assessments or assumptions outside of that for the rest of the year, and we'll have to see how it develops. But in terms of our outlook, we do believe we had a particularly negative mix in the first quarter that will reverse on account of this dynamic with Ford, but also with the European customers recovering from some of the impact they faced in the first quarter from the war in Ukraine.
Colin Langan: Got it. And just -- we're talking earlier about the semi supply. Quite frankly, your comments sounded quite optimistic. And I think last quarter, you said there was sort of 8% to 9% help from the nonrecurrent sufficient last year. There's been a lot of, obviously, disruption with the recurring situation, but it doesn't seem like so far, there's been a big disruption on the semi side. I mean since that's the mitigating factor, I mean, do you think there's maybe upside to the IHS numbers at 4% since -- if semi production could stay on track and have that second half recovery?
Sachin Lawande: No, I think some of the recovery was already factored into the IHS outlook. And the way we expect the supply to develop just in terms of the quarterly progression, yes, we saw some improvement in Q1 as compared to our initial estimates. And we do expect that a general recovery in terms of supply as we go forward, however, that a potential dip in Q2, and this is where we probably may be a little more conservative than where IHS is at in terms of vehicle production, because of the lockdowns in China. So what has happened is there are several facilities of semiconductor suppliers in and around Shanghai whether for back-end processing or in some cases, just the distribution centers, which have had to be locked down or operate at lower capacity on account of what's happening in Shanghai that will cause an air bubble in the supply that will impact us as an industry in the second quarter, but that issue is much less severe than other disruptions we have faced for example, last year, because there has been no loss of any bip or any wafers. It's mostly a lower activity that can be picked up and resumed as soon as operations are allowed to operate at a higher level of S&P. And so we expect a little bit of a dip in Q2 and then a pickup in the second half. Now what is positive that perhaps was not fully contemplated at the beginning of the year was the slowdown in demand from consumer electronics, which should help free up some capacity for automotive. So the combination of the underlying efficiencies that we're improving, yes, there were no -- and we are not assuming anything beyond this lockdown as a macro impact on the supply. That should help drive a higher level of supply overall for the full year. That should all contribute to slightly better than maybe an earlier anticipated level of supply of semiconductors.
Operator: Our next question comes from the line of David Kelley with Jefferies.
David Kelley: Just a couple of questions on cost performance and redesign. Can you speak to if there were any outsized freight and logistics costs that factored into the quarter? And then curious how you're thinking about those progressing through the balance of the year?
Jerome Rouquet: David, yes, we continue to see very elevated transportation costs. So year-over-year, we've seen an increase compared to our base. And we are -- as we negotiate with our customers, we integrate not only the raw material cost, but as well freight increases that we see. So that's part of the inflation that we are seeing and that we are actively trying to recover.
David Kelley: Okay. Got it. And then one quick follow-up on the redesign discussion. If we're expecting the chip supply to improve in the second half, do those redesign headwinds start to abate here? Just curious how the cadence tracks and then what's baked into the guidance there?
Sachin Lawande: Yes. Yes. No, I think the redesigns are very critical for us to be able to get to the level that we would like. The improvements in supply are still pretty modest and the gap to where we stand with respect to demand is still pretty significant. So the redesigns that we are talking about are critical, not only for this year but also for next year to put us in a position where instead of being dependent on one supplier to meet all of our demand, we are now spreading the demand across multiple suppliers. And so we will continue to go down that path. We have seen really good success that contributed to our Q1 performance. And that's something we will continue to drive in more nimble by redesigning to have a broader set of suppliers rather than just inhibited by anyone.
Kristopher Doyle: Great. This concludes our earnings call for the first quarter of 2022. Thank you, everyone, for participating in today's call and your ongoing interest in Visteon. If you have any follow-up questions, please contact me directly. Thank you.
Operator: This concludes Vestion's first quarter 2022 results earnings call. You may now disconnect.
