Visteon Corporation (VC) Earnings Call Transcript & Summary

Good morning, everybody, and thank you for joining us for this session with Visteon as part of Deutsche Bank's Global Automotive Conference. My name is Emmanuel Rosner, and I'm the senior U.S. autos analyst at Deutsche Bank. Visteon has undergone a dramatic transformation over the past several years, turning the company essentially into a pure-play in vehicle cockpit solutions with products in instrument clusters, infotainment, displays and increasingly, compute platforms. The company is now aiming to bring software-defined architecture and content in vehicle. We are very pleased to host Visteon's CEO, Sachin Lawande; and CFO, Jerome Rouquet; and Head of Investor Relations, Kris Doyle, for a discussion with us this morning. The format for this session will be a short presentation from the Visteon team with some slides that should be available in your webcast window. Then we will turn to some Q&A around some of my prepared questions as well as mainly, questions from all of you on the call. To submit a question, please type in, in the box on the left side of the webcast window. I highly encourage you to do so and to get involved in this discussion. Only I will see your questions, and I will ask them on this call without mentioning your name or affiliation. So with that, Sachin, Jerome, Kris, thanks a lot for being with us. And Sachin, over to you.

Thank you, Emmanuel, and good morning and thank you for hosting us today. As you mentioned, I have a few slides that will provide the latest update on Visteon before we get into the Q&A. So moving to the next page. This is our safe harbor slide. Today's call will include forward-looking statements, which are subject to various risks and uncertainties. So participants are cautioned not to place undue reliance on these statements, which reflects management's opinion only as of today and subject to change. Next page. So Visteon is a Tier 1 supplier to automakers of cockpit electronic systems, and we are also developing new solutions for Level 2+ safety. The modern car has 4 main technology domains: the cockpit, powertrain, ADAS and body and chassis domains. And of these 4 domains, the cockpit and the ADAS domains are evolving rapidly, with user experience driving the evolution of the cockpit domain and increased safety predominantly driving the ADAS domain. Now last year, in 2019, Visteon had $2.9 billion in sales, and we operate in 18 countries with 11,000 people and with 20 manufacturing locations and 18 technical centers. Moving to the next page. So the global cockpit electronics market is about $35 billion in size, with infotainment, instrument clusters and displays making up most of it. Now these products require expertise across a broad set of technologies and only a small handful of suppliers have the breadth of product and technology portfolio and expertise like Visteon. We offer the full range of cockpit electronics products with particular focus on instrument clusters, infotainment and displays as these 3 product -- products make up more than 80% of the market. And besides these products, as I mentioned earlier, we are also developing an advanced Level 2+ safety technology that we hope to bring to the market soon. On the right of the page, you see some of the customers that we work with. We are in a strong position with respect to our customer portfolio, and we do business with almost all of the top 15 car OEMs that make up about 75% of the total vehicle production. Moving to the next page. Now even before COVID-19, the auto industry was slowing down globally and most notably in China, and COVID-19 has dealt a significant blow, pushing the industry to levels that have not been seen in a long time. Our expectation for this year is that production volume is going to be down between 20% to 25% for the full year. It will probably take a couple of years before production volumes return to 2019 levels. Now our goal in the near term is to withstand the severe market drop this year while maintaining our long-term growth through launch of new products and winning new business. Now automotive is a cyclical industry, and we have always strived to maintain a recession-proof balance sheet, which is coming very useful in this crisis. Our fortress balance sheet, with no near-term debt maturities, is one of the strongest in the industry. We have proactively taken several actions to reduce cost and preserve cash with strict controls on all expenditures, and these actions will continue to remain in place beyond this year as we come out of this crisis. Now Visteon has been launching a high number of new products for the last 2 years, which has been the main driver of our better-than-market performance in the past 4 quarters. And despite the challenging environment we are facing currently, we are on track to launch a high number of new products yet again this year. As we look forward to the next 2 to 3 years, as the industry starts to return to pre-COVID levels, our objectives are: number one, to reduce our structural costs to align with the new realities of the market; number two, solidify our position as market share leaders in digital clusters; number three, grow market share in infotainment, leveraging our android-based platform; and number four is to lead the industry in its transition to multi-display modules. I'll discuss the specific product strategies in the next couple of slides. Moving to the next page. Now instrument clusters market is about $8.5 billion in size, at least that was the status as of 2019, and consists of 2 product types, mainly hybrid clusters with analog gauges and small digital displays and all digital clusters. Now all digital clusters are growing rapidly as shown on the graph on top left, and Visteon is the global leader in this product category. In the past, the instrument cluster was limited to providing information about the vehicle health and driving dynamics, such as speed and RPM. Now with the introduction of active safety features and connected infotainment, the instrument cluster is also the second display in the cockpit in addition to the center information display. Now Visteon has the most advanced digital cluster platform in the industry, that's in use at about 12 out of the top 15 OEMs in the industry. This platform contains many digital cluster-specific technologies that are developed in-house by Visteon that enables us to deliver product innovation at competitive cost. In combination with our strong displays expertise, we are able to meet the evolving demands of the industry better than the competition. Next page, please. Infotainment is the largest product segment in cockpit electronics with a market size of about $18 billion. The infotainment system has been evolving to keep up with consumer electronics trends, such as connected apps and streaming media. Consumers are increasingly uses -- are using voice to interact with their devices, and the voice smart assistant is also coming into the vehicle cockpit. Smartphone projection technologies, such as CarPlay and Android Auto, are already very popular with consumers. And from a technology perspective, the Android operating system offers better app ecosystem as compared to the proprietary infotainment systems based on Linux or QNX. Visteon was one of the first to offer an Android-based infotainment system, which offers downloadable apps, integrated voice smart assistant developed by Visteon, and CarPlay and Android Auto support. We have recently added several OEMs as customers for our Android-based infotainment solution, and we are very optimistic about the potential for growth in this segment, similar to instrument clusters. Moving to the next page. Now for displays, after infotainment clusters, center information displays, or CID, are the third largest product segment in cockpit electronics, with a market size of approximately $5 billion. Displays continue to grow in size, and together with digital cluster displays, the cockpit is evolving into a multi-display environment. Increasingly, these multiple displays in the cockpit are being integrated into a single module with a glass cover lens for improved look and feel and with sensors for touch, proximity and gestures. This multi-display module is the latest trend in the cockpit in the industry. Our strategy is to lead the transition of the industry towards multi-display modules, and we are currently the leaders in key related technologies such as optical bonding and the design and manufacture of curved glass cover lens, but also introducing automotive-specific display innovations, such as microZone or OLED replacement, and energy-efficient displays for electric vehicles that use significantly less power than the traditional displays. Next slide, please. This is the last slide. And in summary, what I would say is that Visteon is a pure-play in cockpit electronics, which is one of the fastest-growing segments of the auto industry. We have a broad portfolio of innovative products and a competitive cost structure, and our balance sheet is strong and more than sufficient to withstand the shock of COVID-19. With that, I would now like to, Emmanuel, open it up to questions.

Thank you very much, Sachin, for this great company and technology overview. We already have some great questions from the investors on the line. So keep it coming. I'm going to try to get through as many as possible. So maybe just starting with like current conditions. Can you give us an update on the progress of your restarting production around the world? What sort of capacity utilization are you seeing? How is the supply chain holding up?

Yes. No, I think that is top of mind for many of us. So I think it's very appropriate. So as we discussed also on our earnings call a few weeks ago, China has rebounded pretty well. And we are pretty much at pre-COVID levels of production in China. I think this has been probably mentioned by some others as well. So it should not come as any new information. And we had, at the time, talked about expecting Europe to reopen a little earlier than North America. And what I would say here is that towards the end of April, beginning of May, Europe did start to open on schedule. However, we have experienced, as an industry, a delay in restart in North America. There has been some false starts, I should say, in Mexico with respect to the government's mandates regarding the reopening of plants. However, thankfully, that's all behind us. We are now in a position where we are producing and supplying to the industry. Our expectation is that we would be at about a 75% level in Europe and about 60% by the end of June, which would be more or less where we said we would be at the -- on the last call -- our earnings call. So overall, we see still production levels in the same range, about 50% to 60%, somewhere in that range, below prior year, with Europe doing a little bit better than what we had expected, whereas North America, a little bit worse. And China is as we thought it would be, back at pre-COVID levels. So I would say, Emmanuel, more or less, it's going as we thought it would with the usual adjustments that you would expect. We -- all of our plants are up and running, with the exception of one plant in South America. From our customers' viewpoint, all their plants are also up where we ship product to. So I expect that we would be coming out of Q2 with the restart kind of behind us, and we would be then, at that point, looking at the demand side of the equation, and we will need to understand how that shapes up to be really able to talk to how Q3 and Q4 might look like.

Great. That's good color. Shifting to new program launches and growth above market. I think as of first quarter results, you haven't seen much in terms of new program delays or cancellation. Is that still the case?

Yes. So we have, as we mentioned also on that call, seen some in-year movement of the new product launches, some delays, but still contained within the year. We have not seen significant cancellations. As I mentioned on that call as well that when you are this close to launching the product, it really does not pay for the OEM to cancel altogether. There may be some adjustments made and COVID, for sure, has impacted just in terms of our ability to work together to launch the vehicles. And what's interesting is, as I mentioned in my prepared remarks here, this year, we had the highest number of launches as compared to the last 3 years. And majority of those launches are going to occur this year on track. And that's really, I think, testament to the pull of these products from a consumer viewpoint, the cockpit electronics products, larger displays, infotainment, digital clusters, and that should help us continue our track record of growing better than market, which we have seen in the last few quarters.

That's actually my next question. But before that, there was a question from an investor on the clarification, something you said before, was the Mexico commentary around false starts but now behind us, was this a Visteon-specific issue or that was an industry-wide comment?

Yes. No, good question. No, it was an industry-wide issue because the government of Mexico had initially announced that they would allow the industry in Mexico to reopen a week before the North American OEM plants would open. That was the initial statement. So we were all prepared to reopen our plants as per that mandate. Later on, as the number of COVID cases started to grow and the country went into a more, I would say, forceful reaction to the COVID situation, they introduced additional measures. So we had to, as an industry, not just Visteon, get approval, specific to each of our plants, in the regions of Mexico that we operate from both the federal government but also the state government. And as a result of that, that delayed the starting time lines by a couple of weeks. Now that impacted everybody. And, in fact, we are one of the still more fortunate ones because we know some of the other suppliers have plants that have still not opened because of these -- some of the new requirements. Now we were able to bring some of our experience from China, where we had gone through exactly a similar situation in terms of being able to follow the safety procedures to reopen the plants. We applied the same procedures globally. And I have to tell you that, that was a very good thing on our part because not only did they require -- the Mexican authorities require more stringent safety standards and procedures in place, but they also are conducting spot checks, and both of our plants have gone through that and have passed their audits, which is a very good thing for us to be able to say.

And so first quarter growth above market was strong at 11 points, but I think you also indicated at the time that second quarter revenue could be down more in line with global auto production. But with all these launches generally on time, do you feel comfortable about your continued ability to outgrow production by high single digit? And could that be as soon as in the second half of this year?

Yes. So I would say, first of all, that the second quarter is going to be really a unique quarter because of the depth of the production volume drop. So I think we shouldn't really look too much into the second quarter numbers. But the better-than-market performance that we've had in the 4 quarters leading up to Q1 should continue because of the fact that those same launches should continue to benefit us going forward. And on top of that, we have the launches that are happening this year. So the short answer is yes. Now we will have to see within that how the mix shapes up to be able to really -- not only mix in terms of the product, but mix in terms of the customers, in terms of how they come out of this COVID situation. But overall, the expectation is yes, we should continue to show that same better-than-market performance.

A question from an investor: what type of mid-cycle refresh opportunities are you're seeing from OEMs looking to give current models cosmetic or technology facelift maybe next year or the year after as opposed to full redesign?

Yes. That's a great question. And we expect to see more of that given what has happened, but we are seeing, across the board, interest in upgrading the displays, upgrading infotainments in particular, because a lot of the vehicles have infotainment systems that are quickly becoming out of date because lack of connectivity, connected apps, et cetera. The launch of infotainment system that we had earlier this -- the last few weeks that we talked about with VW, it's going on new vehicles, but it's also being introduced as a mid-cycle update on some other vehicles. So my expectation is that as we go forward with the OEMS, perhaps pulling back a little bit on new vehicle development, essentially for reasons of cost, we would see more opportunities to have these types of mid-cycle updates. And that actually plays to our strengths. In fact, we believe we can do that much more cost effectively on account of our platform strategy. In many cases, we have the product ready to go with minimal changes, fairly cosmetic-level changes. And we think that could be a very interesting value proposition for OEMs in this environment.

That's very interesting. Maybe one last one on the growth side. You reported just $800 million in new business wins in the first quarter, which was obviously a pretty unusual type of circumstances. You indicated there was a function of industry business awards being delayed and that your win rates continued at 35%, 40%. What can you tell us now about your latest, I guess, win rates on new business win activity? Can you still achieve the initial full year goal of $6 billion in the new business win?

Yes. No. So this year, we will clearly see an impact simply because of the fact that some of these decisions are being delayed by OEMs. As you might imagine, many car manufacturers are sort of regrouping to think about what their cycle plan should look like in light of what has happened, and that is delaying some of the decisions. And that delay, we will certainly see this year. So I'm not expecting to be able to be at the $6-plus billion level this year. That would not be a reasonable expectation given slowdown in activities that we have observed. But we are not seeing any fundamental lack of interest in the products or the fact that the cockpit is where the attention is. That is absolutely still the case. So the way I would characterize what has happened is we have a lost quarter, if you will. And we will be impacted by around that much in terms of the new business potential for the year. So it's a quarter that we had very little activity due to the fact that almost all of the attention was, first, on the ramp down, the safety procedures and then the ramp-up. And so imagine like as if the world really didn't experience much in that quarter from our viewpoint and everything is delayed by at least that much. I do expect on top of that, because life is not necessarily just want to come back to normal as in the sense of pre-COVID, there will be some changes. There will be cycle plan updates. But what we lose in terms of new model investment by OEMS, we gain on the mid-cycle updates. So I'm very comfortable with where we stand. And in fact, the extension of our business through mid-cycle updates or the prolongation of some of our awards is actually helpful from a margin viewpoint. Now I'm not going to guess in terms of what that might mean. But overall, I believe this puts us in a strong position because one of the things that I look at is if you think about our product freshness and the revenue that we currently get from the product that we have launched over the last 2 years, most of the products that we have in production now are the ones that you would want in this environment in terms of them being digital, connected and in line with the trends. So any prolongation, any delays are going to help us. Now if this was to happen a couple of years earlier, that may not have been the same. But where we are at with our product freshness and the new technology that we've launched, this is not necessarily a bad thing for us.

And your comment on the quarter that had very little activity, that was a Q1 or a Q2 comment?

Q2.

Okay. Understood. That makes sense. Maybe a couple of questions on margins, and then I really want to go through the line of questions from investors because there's quite a few. But you had impressive decremental margins of just 20% in the first quarter, benefiting from some of the cost action. But you said second quarter could be high 20s percent because of the steeper volume decline. How should we think about the rest of the year and then more generally for Visteon longer term as the industry volumes rebound?

Yes. I would first start, and then I'll ask Jerome to step in here. But let me share with you how we are looking at this crisis and what we're doing with it in terms of positioning Visteon for the future. Now we have been looking at our structural costs across all aspects of the business. When you have a situation like this and a crisis like this, it gives you an opportunity to reassess how you are doing what you're doing. And so we have been looking at it across all of our functions globally, and we are finding opportunities to be more efficient, and we're using this time when the operational activity is experiencing some slowdown to restructure our organizations and our processes, it's very important to do both, so that we can fundamentally lower the cost [indiscernible]. Now we started that, to be honest, even before we were impacted by COVID. This was one of the things that, as Jerome joined the company, we looked at very closely, and we were driving that. The crisis just give us that increased push or momentum to accelerate some of those decisions, which we have made. We have already seen the impacts of that in Q1. We are continuing to see the impact of that in Q2. And we'll see that going forward. As I mentioned, many of the changes that we are making will remain in place long after COVID is behind us, and that should help us, both on the decremental side, but hopefully, more importantly, on the incremental side, once this is behind us. Jerome, anything to add?

Yes. So exactly as you said, Sachin, a lot of actions, short term, but as well, structural actions. Q1 was close to 20% in decrementals. We've announced for Q2 that we would be in the high 20s, largely because volumes are going to be much more down than what we've experienced in Q1. Going forward, we are -- because the volumes will be a little bit better, less severe decline, we think we'll be in the mid to high 20% range. We'll be benefiting from the restructuring actions that we've implemented in Q1, Q2, and some of that will continue in Q3 as well. At the same time, we'll have as well some of the short-term actions, for example, like the 20% salary decreases that is only temporary. That will go away. But it will be replaced by the structural actions that we've got in place. So mid to high 20% is kind of the number we're looking at for the H2 at this point.

And this would be the sort of range that's applicable for -- on the way up as well? I mean I think H2 production is probably still down. But as things recover, can you also increase margins at this kind of incrementals?

On -- what I've said before is that the incrementals, the way you should think of it is between the range of 20% to 25% and will be on the lower side in the initial years and more towards the 25% range as we go forward as the new business wins become a smaller proportion of our total revenue. Now having said that, whatever we have done is going to help that and should improve that. But we'll see how exactly in what shape and form and how much it's going to impact us positively, but I do expect it to help and improve our incrementals beyond what we have said in the past.

That's encouraging. And then the 12% margin target, is that still on the table? I assume probably not on the same time line. Or does it require, I guess, recent peak industry volumes?

Yes. So a big portion of the margin expansion, as just said, is volume dependent, right? So we would expect that the 12% would be a target that is still on the table as long as the volumes are around where we were expecting them to be, right? When we -- I think if I remember right, when we talked about it, it was about $4 billion roughly at revenue level, $4.1 billion, where we talked about the $12 billion target. And I would be quite comfortable that if we come close to that, that we would be at that level.

But with the restructuring, do you have an opportunity to do that at lower revenues?

There might be some, but we will have to be talking about that a little bit later as we see the throughput of the benefits coming through. And so the expectation is yes, but I wouldn't be able to quantify that -- beyond that at this point.

Great. If that's okay with you, I would like to try and go through several of the investor questions that I haven't gone through yet. So maybe we could do it as sort of like a rapid fire format because there's quite a few interesting topics. So a few questions around capital allocation. Does the company see any M&A opportunities in the near future? What type of supplier or technology partnership or incremental capabilities could augment Visteon's growth profile and improve positioning to win in the cockpit of the future?

Yes. No, we look at them constantly, but at this point in time, there's nothing that necessarily looks interesting in the near term. But we are constantly looking. One thing I do want to add to this question, we have shown, we have demonstrated the capability to build technology ourselves internally. And this industry gives us that time so we have a very disciplined approach. If we find something, like AllGo, that can help us very quickly gain some momentum, we certainly will look at it. But the opportunities are not that many.

And what type of technology would help you?

I think anything in the ADAS and safety area would be of interest. Also, anything that could help us gain traction in the displays business as we start to really gain our momentum there, would also be helpful.

Right. Jerome, how are you thinking about repaying your $400 million revolver? Can you do it with cash on hand or future free cash flow? Or could you go as far as to consider a common equity refinancing similar to what [ Aston ] did?

Yes. So yes, we drew $400 million early Q2. At this stage, we will keep it like it is. We don't have any plans. We're waiting and making sure that the industry is going to recover. So at this stage, no plan to pay it back, at least in the short term, but that's something we are monitoring constantly.

Okay. Does the company see any additional opportunities for consolidation within the vehicle display segment?

We see that the display segment will quickly evolve and separate the many traditional suppliers from the field that can actually deliver, at least, multi-display modules. So more than consolidation, I see a separation occur. And so we think that there will be a set of suppliers that are playing more in the commodity display space, the smaller displays, poke-through displays. And there will be a handful that will be in the multi-display segment, and we hope to be one of those.

Understood. A few more. Just to conclude, can you speak to the restructuring opportunity that you see? And I guess, you've addressed that. Can you maybe just put a final point on the dollar size of the opportunity on the restructuring side and the time line over which the savings might be there?

Yes. So we've embarked on restructuring already. At the end of January, we had a first plan. We have announced a second plan at the end of March, early April. And it's essentially covering engineering and SG&A, I would say, high level, 2/3 is engineering-related, 1/3 is SG&A-related. The cost of the restructuring, the range we gave was -- between the 2 plans was between $29 million and $39 million. And we estimate that the payback is close to 1 year. We are very well -- we're progressing very well towards that restructuring plan. So we are confident that we'll achieve the savings.

Great. And then maybe finally, can you discuss how pricing for displays and infotainment centers is determined, how prices have trended and where you see it going?

Yes. So that's a very good question. So because the technology is fairly new and these larger multi-display systems are initially being introduced in the more premium segment of the market, the prices are very high. So we are looking at, when I say high, 2 displays, roughly 12 inches together, upwards of over $500. Now in comparison, the same displays separated, more conventional approach, would be somewhere in the range of probably about $300. So there's a significant uplift today on account of these new technologies that are getting integrated into a multi-display module. We expect -- as the volumes go up and these displays start to come into the mid-segment of the market, we expect the prices to come down a little bit. But fundamentally, it gives us an opportunity for an ASP increase and that's really why we think it's a interesting market for us to be in.

Great. I think we're -- went a little over by a couple of minutes. But I really want to thank you, Sachin, Jerome and Kris, for being with us today at the Deutsche Bank Global Autos Conference, for your time, for your insights. I want to thank all the investors on the line for your participation and for your very interesting questions. So Visteon team, thank you so much again.

Thank you.

Thank you, Emmanuel.