Visteon Corporation (VC) Earnings Call Transcript & Summary

Hi, good afternoon. I'm Ryan Brinkman, the automotive equity research analyst here at JPMorgan. Thanks for joining us for the 2020 JPMorgan Automotive Conference, being held virtually this year, we were just discussing. And before we get going with the next presentation which is with Visteon, I just want to remind the investors that you can ask a question by submitting it via the conference website, and I'd be happy to ask it for you without identifying your name or firm. I encourage you to do so. So with that, let's -- I want to turn it over to Sachin Lawande, Visteon's, President and CEO; and Jerome Rouquet, Chief Financial Officer. I don't know if you guys have any opening remarks and be happy to lob a bunch of questions your way.

Sure. Thank you. Thank you, Ryan, and good morning, everyone. Ryan, we do have a few slides that we had prepared that provide the latest update on Visteon that I would like to go through, and then we can take questions. And I will be joined by Jerome in this presentation as well, as he'll cover the second quarter results as well as the outlook for the rest of the year. So if you don't mind, if we go to our second slide very quickly. It's our safe harbor statement. This presentation will include some forward-looking statements, which, as you well know, are subject to various risks and uncertainties, especially in this time. So you are cautioned not to place undue reliance on these statements as they reflect our position and our opinion only as of today. Anyway, moving on to Slide #3. For those that are new to the company, Visteon is a Tier 1 supplier to global automakers of cockpit electronic systems. We're also developing a new solution for Level 2+ safety and automation. Last year, 2019, we had $2.9 billion in annual sales. We have approximately 10,000 employees operating in 18 countries, 20 manufacturing locations, 18 technical centers. We are pretty much everywhere where automakers design and manufacture cars. Next page. Our products and customers. So Visteon is unique because we are one of the few Tier 1 suppliers that actually have the complete range of products for the cockpit. And that includes instrument clusters, infotainment, displays, telematics, et cetera. Now these products require a very broad set of expertise and capabilities and technologies. And only a small number of competitors have the breadth and depth of product and technology portfolio like we do. We're also one of the very few pure players in this industry. Most of our competitors, are part of traditional Tier 1 suppliers. And our focus really enables us to be more nimble, more responsive to the technology trends that are driving the industry, and I'll talk more about the trends later in the presentation. On the right of the page, you see some of our customers. We have a very diversified customer portfolio that we have broadened over the last few years. And the revenue is distributed almost evenly across Europe, Americas and Asia. Our top 10 customers that make up about 90% of our revenues represent about half of the total market. So we still have opportunities to grow our customer portfolio and, for sure, grow our share of the wallet with the existing customers. Moving to the next page, Page 5. So this is where I would like to hand it over to Jerome quickly for a discussion on our second quarter results. Jerome?

Thank you very much, Sachin, and good morning to everyone. Despite a challenging environment in the second quarter, we were able to grow faster than industry production at our customer. Our sales for Q2 were $371 million, down 48% year-over-year, if you exclude currency impact. We outperformed vehicle production at our customers by 5 percentage points. What we did very early in the crisis was to set a comprehensive action plan with a focus on 5 key areas: first, we were focusing on managing cash and liquidity; second, reducing operational costs; third, strengthening commercial discipline; fourth, aligning supply chain and manufacturing to lower demand; and finally, positioning the company for the future. We have entered the crisis with a fairly strong balance sheet, and we are pleased to report at the end of Q2, a total cash balance of $759 million. We do not have any significant near-term debt maturities, and we have almost as much cash as debt on the balance sheet. Adjusted EBITDA decremental margins were down to 15% for the quarter, and we're expecting to have close to 20% for the full year. All this really highlights the significant actions and the cost reductions that we took pretty early in the crisis, and we took short-term actions, but as well longer-term actions, including in restructuring, and that will impact structurally our cost base. With respect to commercial items, we were able to have price-downs with customers close to 2%, which is at the low end of our historical range. Managing efficiently our supply chain as well as manufacturing during the crisis was very challenging. And despite very variable movements from customers in terms of volumes, we were able to reduce our inventory balances by $10 million in Q2 versus Q1. So we were pretty happy with the results. In summary, we continue to be very excited for the future of Visteon. We have won $1.7 billion in new business year-to-date. We have close to 40 new program launches that are in the pipeline for the second half of the year, and we have been resetting our cost base. I'll move to Page 6. So the industry exited the quarter with production volumes down about 21%, and we are seeing positive trends as we speak, and we remain essentially cautiously optimistic about the second half of the year. We recognize that there's still an amount of uncertainty as it relates to the second half. And it's specific to the pandemic and its long-term impacts on the global economy or on the automotive industry. So as such, we expect the industry to be lower year-over-year by about 15% for the second half of the year, that is better than our exit rate at the end of June, but it is more conservative than what IHS has been highlighting recently for the second half of the year. I think the key point for Visteon is that regardless of the industry volumes, we see our sales performing better than the underlying industry volumes for the second half of the year. And that is essentially due to the strong trends that we are seeing in cockpit electronics as well as the strong pipeline that we have for the second half of the year in terms of launches. With this, I'll turn it over, back to Sachin for Page 7.

Thank you, Jerome. So we will move to Page 7. In this page and the next, I would like to talk about the cockpit electronics market, our current share within that and some of the key trends that Jerome mentioned are driving opportunities here for Visteon in the near and midterm. So the cockpit electronics market is about $36 billion in total, and it's made up primarily of 3 product categories: infotainment, clusters and displays. Infotainment is the most significant portion of the market, making it almost half of the total. Instrument clusters is next, makes about 1/4. And then displays is about 15% of the total. Now we have a very strong position in instrument clusters, with about 15% of the market, the global market, and in particular, in all digital clusters, which are growing very rapidly. Infotainment represents an area of opportunity for us. Traditionally, that has not been Visteon's strength. And infotainment was also a very fragmented market, it almost takes about 15 suppliers to make up 70% of that market. And today, we are positioned somewhere in the middle of the pack. However, we have just launched a new solution based on Android that we believe is about to change our position in that segment of the industry. In displays, today, we have a healthy 10% market share. And with strong in-house capabilities in design and manufacturing of displays, we believe that we are well positioned to continue to grow in this segment as well. In total, we have about 8% share of the cockpit electronics market, which makes us a top 5 supplier in the industry. In the past 3 years, we have worked very hard to streamline our product portfolio. And today, with our focus on these 3 segments, we have a very synergistic product offering. One of the common themes in all the 3 products is their reliance on displays, and we believe we have one of the better capabilities in the industry. And so success in digital clusters helps us with displays, and it helps us become more competitive in infotainment. Moving to the next page, Page #8. I'll talk about some of the key trends that are impacting the industry. The 4 main trends are: digitization, conversion of the cockpit into an all-digital environment; the connected car trend, with software updates and apps; the third trend is the conversion of the cockpit into a multi-display environment; and then the final trend is the impact of electrification of the powertrain on cockpit electronics. Now Visteon is well positioned to gain from all of these trends. As I mentioned earlier, we are already the leader today in all digital clusters. And this trend is expected to continue to grow, as today, only about 15% of new cars come with digital clusters. There's a whole shift that's occurring in digital clusters, which are now moving from the premium C-plus or D segment and above into lower-C and B segment of the vehicle market. I mentioned earlier that we launched the first Android-based infotainment system with downloadable apps for entry vehicles, and we launched that with VW earlier this year. We have another 5 OEMs that we are working with that we will launch products with here shortly. With displays, we are leading the industry in the development of large and multi-display systems, like the one that we recently saw in the electric crossover vehicle by Nissan called the Ariya. And the shift towards electric vehicles is also a positive development for Visteon as EVs are what we call as digital native vehicles. In fact, the best-selling EV in Europe for the first half of this year was the ZOE from Renault, which comes with a 10-inch digital cluster from Visteon. And EVs have done particularly well in Europe this year as they have a -- as Europe has really backed EVs with policy changes that are very helpful for growth of EVs in that industry. The cockpit today is where the battleground is for OEMs. And all of these trends continue to accelerate even in this COVID environment, and this puts us in a great position to continue to [indiscernible] the performance that we have demonstrated now for the last several quarters. And with that, moving on to next and last slide, Page 9. So this is really our investment thesis. We are a pure-play in cockpit electronics, which is there, the growth is occurring in the auto industry. We have a broad portfolio of innovative products and a very competitive cost structure. And thus our balance sheet remains very strong and more than sufficient to withstand the [indiscernible] like COVID. So this was a very quick introduction to the company. Ryan, I think at this point, I would like to just open it up for questions.

Yes, great. Thanks. I'll start with a few on coronavirus. They were trying to ask to each of the suppliers at the conference. The first question is what you think the ultimate impact will be on margin for your company. Heading into the global financial crisis in '08, '09, supplier margins were severely compressed, but then eventually rebounded to higher than they were beforehand. I'm just curious in the current situation, as you think about extra costs coming on, supply chain depression, I'm not sure, PPE, et cetera, but then also learning to be leaner, taking SG&A out. How do you think margin ultimately shakes out for you?

Absolutely. And I'll start, and I'll let Jerome add to it. This is a question that I think is on everyone's minds. But I think we have to look at how the virus has impacted our cost structure. Clearly, there are certain costs that we have to take in terms of being able to respond to the crisis, working around the restrictions, the PPE, the distancing, et cetera, that's adding to some cost. But at the same time, we're also able to avoid some of the costs. Okay, so net-net, I believe we will come out of those much stronger in terms of being able to reduce our fixed cost. Now before I turn it over to Jerome, I want to mention a couple of things. We at Visteon were looking at taking cost out even before the crisis impacted us. And the crisis really gave us that additional impetus to carry out some of these actions earlier than we might have done otherwise. So the way we look at cost is our bulk of our cost today is in the engineering of the products that we build. And so we have been on a dual-track strategy to reduce cost. One is to adjust our footprint to more cost-efficient or lower-cost locations. And the second is to drive a higher use of our platform strategy, which would then enable us to increase views and lower the engineering cost as a result. Now both we could accelerate because COVID gave us this -- the crisis. And as you know there's a saying about not wasting a crisis, and I think we have done a good job of fully taking advantage of that and pushing hard on both these fronts. Jerome?

Yes. No, thanks, Sachin. I think on balance, we are seeing a better result. If you see our Q2 results and look at the decrementals that we're able to achieve just in a quarter, I think that speaks to the fact that we're able to take out quite a lot of cost. Some of it is very short term, obviously, but some of it will stick for the longer term. And it's largely around restructuring actions that we took very early in the year as well as our constant cost focus. I must say, we are moving from high-cost to low-cost countries. We were already very well under way at the beginning of the year, but we've accelerated that. We are as well fully taking advantage of the engineering platforms that Sachin has been talking about earlier on this year. So with this, we are seeing a permanent improved cost base, and that will help us going forward.

Great. So maybe a similar question, too, about how coronavirus impacts the way that you think about capital allocation long term. I mean, obviously, you're one of the better capitalized suppliers, but does it change in any way how you think about how much capital cushion you should run with or the right amount or timing of return of capital to shareholders?

Yes. We have always had a very conservative approach. And as you saw, even prior to coronavirus, we were very well capitalized. And I think all along, we were of the opinion that this is a cyclical industry. The cycle was starting to slow down, and that we needed enough capital to take care of our business and not be exposed. So this has come of great help. At the same time, I think we have been very prudent about how we use the cash. Our best investments remain in ourselves. Our return on investment continues to be very attractive. And so that is our first option. We're extremely responsible in terms of looking at any acquisitions. This industry more than any, gives you pretty long look ahead into the future. Things don't happen overnight. And so if -- especially, if we have the ability to develop technology in house, it's not easy, it is not for everybody. But if you have that capability, there's always an easier option to build, to make versus to buy. And we have done that now multiple times. So I think we have a pretty good track record of doing that. Anything you would like to add?

Not much. I would say the COVID crisis did not change our view on capital allocation. We'll remain prudent and -- but at the same time we'll [ wait and see ].

Right. And then lastly, on coronavirus. I just wanted to ask what impact you think it may have on the type or pace of technological change in the industry? Does it speed up or slow down or have no effect on pre-existing trends such as electrification and autonomous driving?

I think the technological changes kind of occur in parallel, somewhat independent of COVID. What it will do is that it will hasten the use of certain technologies that can actually reduce cost. So the way we think of COVID and the biggest impact it's going to have in the near term on the industry is that COVID will favor cost-efficient solutions over certain other solutions that might not deliver the same from a cost viewpoint. So we have been always believers in innovation, but with a focus on cost. So our approach, if you look at the products and technologies that we are investing in, is to hit the sweet spot of mass market vehicles. We are not targeting the premium segment and then the flow-down effect, but rather to address the innovations to the more mass market segments, and that's true of everything that we have done. I believe those innovations will actually have a good pickup even in these COVID times because the pull is coming from consumers. You take the example of technology like infotainment. If you still see what's being sold today in mass market vehicles, these products are static. They're closed systems. You cannot update them. There's no over-the-air capabilities. There are no apps. And people are just not accepting the solutions anymore. They completely misrepresent what the needs are. So we believe there's opportunities. And as long as they're cost-efficient solutions, we will see those opportunities at the same pace as before.

Okay. And I thought I'd ask too around the Android-based infotainment system with VW in Brazil. You talked about there being 5 additional awards or awards with 5 additional automakers. But also looking beyond that, how about discussions that haven't yet resulted in awards, including after maybe the system has garnered some attention in the marketplace? And on the slide, you referenced about a 4% market share in infotainment overall. But given that you're first to market here, do you think there's the potential for the market share in Android-based systems to be higher? And if that's the case, where could the market share for Visteon and overall infotainment ultimately go?

Yes. So I would say that at this point in time, it appears that we have a lead on the competition in terms of offering an entry-level infotainment system with all these capabilities. So the 3 things that are really unique about our solution as compared to anything else in the industry today is that, number one, it has Android and the ability to bring apps. The system that we launched with VW comes with 15 apps and there are more that will be launched as we go further here. And we have already started to see, by the way, the early customers of that vehicle start to download these apps, and that's really great to see. So we are the first to introduce an entry-level system that does that. So that's great. The second thing that's unique about this solution is that, it brings a large display, a 10-inch display into an entry-level vehicle. None of the competitor systems offer anything greater than 8 inches. Most of them are down to 7 inches. So it's a big step-up in terms of the size and quality of the display. And the third thing is really the wireless Android auto and car play. So you don't even have to bring your phone out of your pocket or your bag, leave it in there, and you are able to use it. Now all of these features in entry-level segments, in fact, many of the features are not available even in the premium infotainment solutions. So to your point, we are in discussions with multiple other OEMs as a result of this launch. In fact, the launch has brought a few opportunities to us that we simply would not have been in a position to entertain because we are not their current infotainment supplier. We do not have the relationships, but these things are now starting to open up. So we are very optimistic. We're very -- I would not yet go so far as to say that we can see a significant market share gain, but I'm hoping that we are -- we will be able to convert some of these opportunities beyond the 5 into wins, and that should have a positive impact on our market share.

Okay. And your decremental margin in the second quarter was a low 15%, significantly better than the guidance for high 20s. Can you talk about some of the drivers of that better performance in the quarter and the sustainability of those drivers? It seems like the full year guide for 20% would squeeze to something higher in the back half. Just curious if that is because of the nonrepeat of some of the austerity measures in 2Q or whether there might be potential for back-half incrementals to also attract better as similar to in 1Q if execution is on point.

Jerome, do you want to take that?

Yes, I'll take that one. So decremental margins are essentially comparison year-over-year. And one of the key drivers for us is the fact that last year, our engineering recoveries were pretty uneven. They were very back-end loaded. And therefore, the comparisons are pretty tough year-over-year for the second half. If you normalize that and look at an even recovery from last year, you would have essentially decremental margin in H1, close to 20%, and close to 20% as well in H2. So we were helped a little bit by that year-over-year effect in H1, and we'll lose some of that. But fundamentally, nothing will change. We have taken, permanently, costs out. We'll have a little bit more costs coming back, obviously, in the second half of the year as volumes are ramping up again. But the structural changes that we've made in Q2 will stick.

Okay. That's fair. And then is there an update you can provide on DriveCore, including what the development has been like with GAC? And then are there other automakers that you've been engaging with around those products?

Yes. So I do have some updates there. So let's go back to the value proposition of DriveCore and where we see the industry go. But I do want to mention also one thing. EU, just last month, announced a new policy that will enable from 2022 onwards, cars on the road with what we would call as Level 2+ technology. They call it Level 3, but it's really Level 2+, which means you will be able to get on the highways with this technology at highway speeds and be able to drive with your hands off the steering wheel with the integration of ADAS, but also the requirement that the driver be monitored at all times. So what this is doing is a couple of things. It's increasing interest in more integrated solutions, solutions that can bring in the ADAS functionality, but also driver monitoring. And so the third component that is starting to also gain a lot of interest is in a park assist functionality. So our strategy is we have been evolving and maturing our DriveCore solution. We now have it today where we believe it is in terms of its capabilities on par with an earlier-generation Mobileye solution, the EyeQ3, Mobileye since has released EyeQ4. Also, we are in a pretty good shape, we are catching up with the camera-based technology, which was one of the first requirements. We are also -- because of the nature of our system, which is more integrated, are able to bring in driver monitoring and parking technologies integrated. So it's 1 ECU that does all of these things. And so we believe we have a good technology that could be a bit of a game-changer in the same manner that now the Android-based infotainment system has been, where it brings new opportunities to Visteon. We are in advanced discussions with GAC. We're trying to work with them on the first vehicle to target this technology onto that has not been finalized yet, just to be clear, but we are in discussions with them. We have other OEMs that are interested. We have vehicles from them that we are equipping our solution and trying to evaluate and demonstrate what we have. I expect the interest to continue to grow on account of this UN regulation. By the way, the UN regulation covers something like 60-plus countries that will adopt it as they normally do. It does not include U.S., does not include Japan. So we are still awaiting regulations here, but it will drive interest in these type of technologies. And we think we have the makings of a good technology offering that has, again, the same value proposition. It has technologies that will deliver what is required, but it will also do that at a more cost-effective way than the current approaches, which is discrete components, Mobileye, plus others ECUs that are required to achieve the same solution today.

Okay. And just in the minute we've got left here, I thought I'd get an update on curved glass displays, including execution and upcoming launches. And then also, yes, I guess when you first launched it, you had 100% market share. Are other people trying to replicate it? What are you seeing in the marketplace?

We are definitely seeing competition, but we are doing pretty well. If you go back to when we talked about this a year ago now, we were one of the early ones, and we have made the right investments, meaning we have now the capabilities to design and manufacture these large displays in all of our factories in the different places. So we can produce and manufacture in Asia, Americas and Europe. And we have a strong pipeline of products that we are developing that are going to launch, but also a lot of interest in -- from OEMs to continue to go forward in that path. The capabilities that we have, I believe, are still leading in the industry. We have invested in an office and resources in Taiwan. We have brought in some of the people from the display industry to vertically integrate more of the display design and manufacturing internally. And I remain very optimistic that this is going to be a good area of growth for us going forward.

Okay. That's great. It looks like we're out of time. So thanks, Sachin and Jerome, really appreciate the time here today. Thanks a lot.

Thank you.

Thanks, everyone. Thanks, Ryan.