Visteon [VC] Conference call transcript for 2023 q1
2023-04-27 16:40:27
Fiscal: 2023 q1
Operator: Ladies and gentlemen thank you for standing by. My name is Brent and I will be your conference operator today. At this time, I would like to welcome everyone to Visteon's First Quarter 2023 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. It is now my pleasure to turn today's call over to Mr. Ryan Wentling, Vice President of Investor Relations and Treasurer. Sir please go ahead.
Ryan Wentling: Good morning. I'm Ryan Wentling, Vice President of Investor Relations and Treasurer. Welcome to our earnings call for the first quarter 2023. Please note that this call is being recorded and all lines have been placed on a 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 Sachin Lawande, President and Chief Executive Officer; and Jerome Rouquet, Senior Vice President and Chief Financial Officer. We have scheduled the call for one hour and we'll open the lines for your questions after Sachin'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.
Sachin Lawande: Thank you, Ryan and welcome to the Visteon team. Good morning everyone and thank you for joining our first quarter 2023 earnings call. H2 provides a summary of our results for the first quarter. The company continued to execute its growth strategy well starting the year on a strong note. First quarter sales were $967 million, an increase of 22% year-over-year excluding currency compared to a 6% increase in global vehicle production. The outperformance in sales was mainly driven by the strength of our product portfolio, which continues to benefit from the industry shift to digital and connected cockpit experiences. Our sales have now outperformed industry vehicle production for 16 consecutive quarters. Adjusted EBITDA was $99 million or 10.2% of sales an increase of $28 million when compared to last year. Our global team continues to demonstrate excellent operational and commercial discipline and deliver exceptional results despite the challenging industry environment. Proactive engagement with customers and suppliers helped us mitigate the impact of semiconductor shortages and was a critical factor in driving our overall performance in the quarter. Adjusted free cash flow followed historical patterns and as anticipated was a negative $37 million in the quarter. On the operational front the company had a busy quarter with our products launching in 34 new vehicle models which will help us to continue our sales growth in the near term. The company also had a strong start to the year with $1.5 billion in new business wins for the first quarter. This puts us on track to achieve our full year goal of $6 billion in new business wins. We continue to make good progress in our electrification business in the quarter with the extension of our existing BMS business to support additional electric vehicle models with existing customers and signing strategic joint development agreements for new technology with key car manufacturers. In summary, the company had a strong start to the year and it puts us in a good position to achieve the full year guidance targets that we have provided earlier this year. Turning to page three. Q1 industry vehicle production volume was up in all regions of the world, except in China which was down due to a mix of demand pull ahead in Q4 of last year, due to expiring incentives and weaker consumer sentiment. Visteon customers fared better than the general industry in Q1, with vehicle production at our top customers growing 9% year-over-year compared to 6% for the industry. Europe led the growth, on account of a strong order backlog, coupled with improved supply of semiconductors. Consumer demand in the US was also robust, driving double-digit vehicle production growth compared to prior year. And while vehicle production was down in China, it was offset by production increases in the rest of Asia. Semiconductor supply, which has been the primary supply constraint in recent years continues to improve gradually. In Q1, the number of chips that were in critically short supply and impacting production, was less as compared to prior quarters. However, even with the improved supply there are still a number of key semiconductors that are below current demand, causing growth to be muted. Nonetheless, the improved supply enabled the industry to build more cars in Q1, than was initially anticipated. Semiconductor pricing however, remained at elevated levels in Q1, despite the improvement in supply. Visteon sales benefited from higher customer vehicle production as well as the ramp-up of recently launched products. In addition, to the improved chip supply, our recent product redesigns to use alternate chips, mitigated supply shortages of critical components. Our sales also benefited from the recovery of higher supply chain-related costs, that we had to share with our customers. Overall, the first quarter was positive in terms of consumer demand and vehicle production, that was helped by improved semiconductor supply. The actions we have taken to mitigate impact of semiconductor supply have enabled us to ramp up production of new products quickly and drive faster than market sales growth in the first quarter. Turning to Page 4. Our digital cockpit products did well in Q1, continuing the strong performance from prior quarters. When excluding the favorable year-over-year impact from net pricing and the unfavorable impact from foreign exchange, Visteon sales in Q1 grew 20% year-over-year. Our cluster sales growth was driven by the ramp-up of recent digital cluster launches with GM, Volkswagen and Nissan on some of their high-volume vehicle lines. Despite the high growth. it was still muted due to the constraint in supply of a key microcontroller used in several digital cluster products. We are working on a redesign that will help mitigate the impact going forward. Our cluster business continues to shift more towards all digital systems. And in Q1, shipment of digital clusters exceeded that of hybrid clusters for the first time. Overall, industry penetration of digital clusters is much lower at about 25%, which provides substantial runway for future growth. Our SmartCore products also did well in Q1, with sales growing at all customers and particularly with Geely and Mahindra, due to ramp-up of recent launches on new vehicle models. The success of SmartCore in India with Mahindra, is a good indication of the growing interest in high-performance cockpit systems for mid-segment vehicles. While we have launched several new displays recently with multiple car manufacturers, in the near term our displays business is impacted by the roll-off of our business with BMW, which was first launched in 2018. As a result, we expect our display business revenue to be down this year, before starting to grow again from 2024 onwards, all of which was factored into our full year guidance. Lastly, sales of our infotainment and audio systems also did well in Q1, on account of improved semiconductor supply that helped us in our business with VW and Stellantis. Overall, demand for our digital cockpit products was strong in the first quarter. The improved semiconductor supply and the recent product redesigns, helped in narrowing the supply gap resulting in a strong quarter of product sales for the company. Turning to Page 5. We started the year on a strong note with $1.5 billion in new business wins in the first quarter. The combination of the strong start, and a robust pipeline of opportunities across all core products, positions us well to achieve our full year target of $6 billion in total wins. The composition of the first quarter new business wins, reflects the current focus of the industry, on the electrification of the power train and connected in digital experience in the cockpit. We have highlighted a few wins on the right of the page. We added two more vehicle models to our SmartCore business with a Chinese OEM. High-performance computing in the cockpit is becoming increasingly important for market competitiveness and especially for electric vehicles. These systems were launched within 12 months, which is very ambitious for systems of this level of complexity. We also added a new customer for our stand-alone Android-based infotainment business in India. With the addition of App Store and OTA capabilities, we are very competitive in the discrete infotainment product segment for mass market vehicles, especially in emerging markets. Lastly, we added more electric vehicle models, to our wireless BMS product line with an existing global customer's North American brands for launch in 2024. This win extends the program on several new vehicles, including electric versions of the OEM's flagship full-sized SUVs and trucks. These additional vehicles are scheduled to go into production later in 2024 and in 2025, and across multiple brands in North America. The wins we have highlighted are a good example of the platform approach to sourcing that OEMs are increasingly taking for their electronic systems. The increased complexity in the shorter product introduction time lines, make it more attractive to develop systems that can work across multiple vehicle models. On the following slide, I would like to spend a few minutes discussing the progress we have made in our electrification business and the momentum we are building in this area. Turning to page six. The automotive industry has seen a rapid growth in sales of electric vehicles in the past three years and in the first quarter of this year, battery electric cars made up about 10% of all passenger vehicle sales for the first time. Car manufacturers are responding to this trend by rapidly launching new electric vehicle models. Visteon's strategy in electrification is to help carmakers build battery electric vehicles that offer superior range in charging performance, through innovation in BMS and power electronics. This slide summarizes the progress we have made in building momentum in our electrification business over the past couple of years. We introduced the first wireless BMS system in the industry in 2020, and have continued to develop advanced features to improve measurement accuracy and safety, while supporting the latest battery chemistries and cell configurations. In total, we have added three car makers to our customer portfolio for this first generation of wireless BMS system, and have won over $5 billion in business across 24 new vehicle models that are just starting to launch. These wins will keep our team busy with upcoming launches and will generate significant revenue for the company for the rest of the decade. While the first-generation electric vehicles are using 400 volt battery systems, the past two years has seen an increased interest in the use of higher voltage battery systems to reduce charge time and for other benefits. In addition to upgrading our BMS technology to support 800 volt batteries, we have also added power electronics products to our portfolio, focusing on bidirectional grid to cell charging and power conversion for high-voltage systems. Our goal is to facilitate the shift of the industry to 800 volt and higher battery systems, which we believe will help accelerate the shift to electric vehicles with a broader set of consumers. Earlier this year, at the Consumer Electronics Show in Las Vegas, we showcased our latest BMS system and new power electronics technologies with support for both 400 and 800 volt configurations. Since then, we have signed a joint development agreement with a high-volume car maker in Asia to co-develop their next-generation BMS solution that's targeted for launch in 2025. We have also signed an agreement with a luxury car maker in Europe to develop a prototype of a highly integrated on-board charger and multiple DC-to-DC converters to power their next generation of electric vehicles. These joint development programs validate Visteon's technology capabilities and electrification and positions the company well to win future business. In addition to these advanced technology development initiatives, we are in discussions with multiple car makers to develop 800 volt version of BMS systems for market introduction in the 2025-'26 time frame. I expect the company to announce additional customers in business for electrification, through the rest of the year. I'm very pleased by what the team has been able to accomplish in electrification, and I'm excited for what is to come. Turning to Page 7. The first quarter was busy for Visteon from an operational viewpoint. The company launched its products in 34 new vehicle models across the world in the first quarter which is an incredible achievement for the team. Every new launch requires customization of the product to fit the unique requirements of each vehicle end market in addition to ensuring sufficient supply of critical components like semiconductors to support customers' dynamic production plans. As more of our business is becoming platform-based and across multiple vehicle models we have decided to highlight the number of product launches across all vehicle models instead of just the initial launch which provides a more complete correlation to revenue contribution from the program and demonstrates our operational execution in the delivery of the products. We have highlighted a few key product launches to demonstrate the extension of programs that contribute to the growth of our sales. We launched our 12-inch digital clusters in heavy-duty versions of Chevy Silverado and GMC Sierra trucks with GM. These vehicles follow the other SUVs and trucks that we have already launched our 12-inch cluster in previously. Our digital cluster business has grown rapidly over the past two years with GM and these launches will continue this performance in 2023. We launched our digital cluster and audio system for the 2023 Ford Ranger for Latin America which is a mid-size truck that's popular in the region. In China, we launched a SmartCore cockpit domain controller on the Zeekr electric vehicle from Geely in partnership with ECARX and a digital cluster on the Honda eNP1 also in electric vehicle. About 20% of our new launches were on electric vehicles reflecting the increased focus on EV model launches at car makers. Turning to Page 8. Our outlook for full year vehicle production at our customers remains unchanged with production volumes growing at low single-digit level. We expect semiconductor supply will continue to improve although some chips will remain tight throughout the year. As mentioned previously, our goal is to redesign and use alternate chips where necessary and our objective is to not be limited by chip supply in the second half of the year. Consumer demand in U.S. and Europe has been encouraging thus far and we expect that this demand will remain strong in the near term. With the economy improving in China we expect consumer demand to also improve in the region. At the same time the potential risk to consumer demand arising from high financing rates coupled with higher vehicle prices that we incorporated in our 2023 guidance remains. Our solid Q1 results and the robust near-term demand we are seeing from customers gives us confidence in our outlook for the rest of the year and we are reaffirming our full year 2023 guidance. Turning to Page 9. In summary, the company executed well in the first quarter to deliver our 16th consecutive quarter of sales growing faster than vehicle production. Our disciplined execution of the company's operational and commercial plans resulted in strong sales growth of 22% excluding currency and adjusted EBITDA margin of 10.2%. New product launches and new business wins in the first quarter were in line with our expectations and puts us on track to achieve our goals for the full year. And lastly, we made good progress in our electrification business in the first quarter by adding more vehicle models to existing programs and engaging with new customers for future business. Now, I will turn the presentation over to Jerome, to review the financial results.
Jerome Rouquet: Thank you, Sachin and good morning, everyone. Visteon's first quarter financial results came in strong, with our focus on commercial and operational discipline continuing to drive results. Excluding exchange, Q1 sales grew 22% versus prior year benefiting from an increase in customer volumes, a double-digit market outperformance and higher customer recoveries. Compared to customer vehicle production volumes, growth of a market net of pricing was 11% representing our 16th consecutive quarter of growth of our markets. Semiconductor supply continued to improve in the quarter, with a number of parts in critical shortage decreasing significantly from the fourth quarter of last year. As a result, the amount of semiconductors purchased through the broker and distributor sport market channels decreased. However, we continue to see elevated prices from our Tier 2 suppliers which we are sharing with our customers. Compared to prior year, we were able to finalize more customer negotiations in Q1 this year, which increased sales while reducing the impact to adjusted EBITDA. Although, this was a large year-over-year improvement, the net leakage in the quarter still negatively impacted adjusted EBITDA by a few million dollars. Adjusted EBITDA was $99 million, representing a 10.2% margin. Compared to prior year, EBITDA benefited from higher sales and the favorable timing of customer recoveries secured in Q1, partially offset by increases in net engineering and SG&A expenses supporting our growth. Adjusted free cash flow was negative $37 million, in line with the cash outflow we've experienced in Q1 of last year, partially driven by the increased 2022 incentive compensation paid out in Q1, as well as the cash timing of customer recoveries negotiations that settled late in the quarter. We ended Q1, with total cash of $487 million, representing a net cash position of $135 million and a net leverage ratio of negative 0.4 tmes. In total, our Q1 results provide a strong foundation for the rest of the year, and keep us on track to achieve our full year guidance of sales growth, margin expansion and cash flow generation. Turning to Page 12. Page 12 provides more detail on our sales increase and margin expansion for the quarter. Q1 sales were $967 million. When excluding the impact from customer recoveries, base sales came just under $900 million, representing an increase of $126 million year-over-year. Compared to prior year customer vehicle production volumes increased 9%, driven by improved semiconductor supply as well as strong customer demand in both North America and Europe, which more than offset the slow start of the year in China. Foreign exchange was a modest headwind to sales of 4%. The remainder of the growth in base sales, was driven by high demand for our digital cockpit products. Our strong new business wins in the past few years, continue to convert into product launches, which will continue to drive increased sales. These programs are typically launched on OEM platforms, across multiple vehicle lines and continue to grow our sales, as follow-on model launches are brought into production on new vehicles and in additional markets. Customer recoveries, which are illustrated by the dotted boxes increased on a year-over-year basis. Despite the improving supply dynamic, we're still confronted with increased costs from our Tier 2 suppliers, impacting semiconductor and non-semiconductor purchases. We continue to actively work with our customers to share these higher costs, which are leading to higher recoveries on a year-over-year basis. In addition, we also benefited this year from favorable timing, as we were able to close out more customer negotiations earlier in the year. Finally, spot purchase recoveries were essentially flat year-over-year at $25 million, but decreased approximately 75% on a sequential basis due to the improving supply from our Q2 suppliers. Adjusted EBITDA increased $28 million, driven by the flow-through on higher base sales and the favorable timing of customer recoveries in 2023, which decreased the net cost impact from elevated semiconductor and other inflationary costs. Net engineering was higher by $8 million, compared to prior year primarily driven by the timing of engineering recoveries. As a percentage of sales, net engineering was 5.8% in the quarter and tracking in line with our full year expectations. Adjusted SG&A was up $7 million, primarily due to personnel costs, investment in IT and bad debt partially offset by foreign exchange. As a percentage of sales, Q1 adjusted SG&A came in at 4.6% flat compared to prior year. Our cost discipline and increasing scale continue to allow us to leverage our fixed cost, while investing in the business. Compared to our expectations, Q1 came in slightly better than anticipated, primarily due to higher production volumes and the favorable timing of when we were able to finalize customer negotiations. In Q2, we currently anticipate that industry production volumes will be flat to modestly up compared to Q1, and therefore, we expect Q2 financial results to look fairly similar to Q1. Turning to page 13. We maintained one of the strongest balance sheets in the industry, which positions us well to grow the business and provide flexibility on our capital allocation opportunities. We ended the quarter with total cash of $487 million, representing a net cash position of $135 million with a net leverage ratio of negative 0.4 times. At our recent Investor Day, we announced a $300 million share repurchase program that runs to the end of 2026. The amount of repurchases will depend on several factors including cash flow generation, as well as other industry dynamics. In Q1, adjusted free cash flow was an outflow of $37 million similar to the outflow we had in Q1 of last year and in line with our expectations for the quarter. Working capital was an outflow, primarily driven by the timing of customer recovery negotiations. Since many of the negotiations were finalized late in the quarter, we saw an imbalance between AR and AP balances, which we anticipate will normalize throughout the remainder of the year. Inventory was a slight outflow of $5 million. Cash taxes were elevated in the quarter versus prior year due to the cash payments related to increasing profitability in some countries, which was contemplated in our original cash flow guidance. Interest payments remained low and primarily relate to our $350 million Term Loan A that matures in 2027. The outflow in other changes was primarily driven by the company's annual incentive payout, which occurred in March. This was partially offset by the favorable timing in VAT taxes and other changes in assets and liabilities. CapEx was $21 million in the quarter. We expect this number to increase throughout the year in line with our full year guidance, which reflects our ongoing investments in manufacturing and electrification. Turning to page 14. 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. As Sachin mentioned, our solid start of the year gives us confidence in our 2023 guidance and we are on track to achieve those targets. Thank you for your time today. I would like now to open the call for your questions.
Operator: [Operator Instructions] Your first question is from the line of Tom Narayan with RBC. Your line is open.
Operator: Your next question comes from the line of Mark Delaney with Goldman Sachs. Your line is open.
Operator: Your next question is from the line of Dan Levy with Barclays. Your line is open.
Operator: Your next question comes from the line of James Picariello with BNP Paribas. Your line is open.
Operator: Your next question is from the line of Luke Junk with Baird. Your line is open.
Operator: Your next question is from the line of Emmanuel Rosner with Deutsche Bank. Your line is open.
Ryan Wentling: Thank you. This concludes our earnings call for the first quarter 2023 results. 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 Visteon's First Quarter 2023 Results Earnings Call. You may now disconnect.
