Visteon Corporation (VC) Earnings Call Transcript & Summary

All right. Great. I think we are ready to go and live. Good morning, everybody, and welcome to our session with Visteon. I'm Itay Michaeli, Citi's U.S. Auto Analyst, and I'm very excited to have the Visteon team back with us for a presentation and Q&A. From Visteon, we're very pleased to have back with us Sachin Lawande, the company's President and CEO; and as well as Jerome Rouquet, Senior Vice President and CFO. And of course, Kris Doyle from Investor Relations is also on the line. The company did publish a presentation on its website. If you'd like to look at it there, I think we'll also screen share and go through it as well, and we'll go off from there into a Q&A session. [Operator Instructions] So with that, I want to welcome Visteon back to the Citi Tech Conference, and I will turn it over to Sachin.

Thank you, Itay, and good morning, everyone. As Itay mentioned, we've prepared a few slides that provide the latest update on the company, its products. And towards the end of the presentation, I'll also remark on our outlook for the second half of the year, and then we can open it up for questions. I'm joined here by our CFO, Jerome Rouquet, and we will participate together in the Q&A session. Moving to the next page here. This is our safe harbor statement, which you should take some time to read through carefully. I won't spend the time on the presentation here. I'll skip to the next slide. So this page is just for those who may not be as familiar with our story. Visteon is a Tier 1 supplier to the automotive industry. And we are different than most of the Tier 1 suppliers in the sense that we are exclusively focused on cockpit electronics and now higher levels of advanced safety systems or ADAS. Last year, 2019, our revenues was about $2.9 billion. We have about 10,000 employees globally. We have our facilities everywhere where we design and build cars. Next page shows our product portfolio on the left and some of the customers on the right. We, as I mentioned, are focused on cockpit electronics and safety. But within that, we're also unique in the sense that we have the full range of products for the cockpit. That includes instrument clusters, infotainment, displays, telematics, cockpit domain controllers, et cetera. Now these different products require an expertise across a broad set of technologies that not all of our competitors possess. In that sense, we are quite unique. As I mentioned earlier, we are also a pure-play in the sense, we are exclusively focused on this space, which enables us to be really nimble and responsive to the industry's trends, which are quite significant and the industry within the cockpit electronics world is evolving very quickly, and we will talk about there in the later slides on what are the key trends and how we are responding to them. On the right, we see our customer portfolio. It's a very diversified portfolio of customers, and our revenue is at this point, almost evenly distributed across Europe, Americas and in Asia. And our top 10 customers that make up about 90% of our revenue represent about half of the total production globally. So we have opportunity to not only expand our customer base, but even within our customer base, we have opportunities to further grow our share of the wallet. Moving to the next page, Page 5. This page shows the size of the cockpit electronics market on the left and some commentary on our market share in that on the right. The global cockpit electronics market is about $36 billion in size. This was 2019 numbers now, and it's made up of primarily 3 segments. Infotainment is about half of the market. Clusters is about 1/4. Displays make up about 15%, and all of the other products make up the rest. So 90% of the market is made up of these 3 products, and that's where our product and technologies are focused. Now prior to COVID, this industry was growing about a 7% CAGR and infotainment being the most significant within this is what is driving the growth. But within digital clusters, I should say, the transformation of the clusters into all digital is driving the growth. Now -- hang on one second. [Technical Difficulty] All right. Hopefully, you can now see the screen share. So I'm on Slide 5 that discusses the cockpit electronics market. Now on -- in terms of our market share, clusters represents the bulk of our revenue today. 50% of Visteon's revenue comes from the cluster segment. And here, we are a global leader with 15% of the total market. But more importantly, as this industry is -- as this product line is shifting towards all digital, our share of all-digital clusters is the largest in the industry today. And this industry is also growing very rapidly. Now with infotainment, which is the biggest segment, Visteon has not traditionally been a strong player in infotainment. We were one of the largest suppliers of the audio products, but as infotainment has largely replaced audio, we've had to focus on infotainment. Today, we have about a 4% market share, which puts us in the middle of the pack of the list of about 15 suppliers that make up most of the market. However, we have recently launched a new Android-based infotainment system, which has been received very well in the market. We will talk more about it in the later slides. We believe with this new product, we are really well positioned to grow our market share in this very important segment for us. Now when it comes to displays, we have always had a very good business in this place. We have a healthy market share of about 10%. And over the last 2 years, we have invested and built in-house capabilities, both in design and manufacturing of the larger displays, the larger nonflat, nonrectangular displays, which is where we see the industry go forward. So overall, when you look at the market, we are a top 5 supplier within that, with about an 8% share, with a business, especially in the backlog that is at a level where we are now poised as we convert that into revenue to grow our share further. Moving to the next page. So with respect to clusters, as I mentioned earlier, clusters is our strongest product line, making up about 50% of the revenue. Some of the key trends that we are seeing has to do with the evolution of the cluster, which was traditionally a portal to vehicle health and driving dynamics in to now also showing information that is brought in by the ADAS systems as well as the need that we now have with infotainment systems to show media metadata, phone information and navigation direction when the main infotainment system is busy with other features. Infotainment integration is now coming into even in mass market vehicles. And moreover, with the digital clusters, we can further customize the experience with different skins and different driving modes. Now these 3 trends are what is driving the growth of all-digital clusters. Clusters in the past used to be a mixed-mode device, with analog meters or with gauges as well as smaller displays. This is rapidly evolving into an all-digital product. Now our strategy in clusters has been to build a software platform with in-house technologies, replacing what we have traditionally bought from third parties. Now this has enabled us to lower our cost of operations. It has also enabled us to control the innovation by bringing these capabilities in-house, and through this platform approach, leverage reuse to drive further cost reduction and grow our business as you can see on the image on the right. With the same platform, we can address multiple OEMs with an all-digital cluster product line that from an HMI and look and feel is very different, but underneath, the software platform is identical to a large extent. Certain parts of it have to be different for different OEMS. But that drives reuse. That drives improved quality. And it also reduces our development time. We believe we have a unique position in the industry as a result because the industry traditionally has built this bespoke custom products all the way from the hardware design and up to the software applications. We've taken a very different approach, and we believe, as a result of this, we are able to win a larger share of the business, like we have demonstrated for the last 3 years. And we expect to have that performance continue as we go forward. Moving to the next page, this slide talks about the trends with infotainment and our strategy in response to that. As I mentioned earlier, infotainment offers an opportunity for Visteon, whereas with clusters where we have a dominant market share, here, we have a lot of room to grow. If you look at what's happening with infotainment, the main trend has been connectivity and apps and that coming not only into premium vehicles but also into mass market vehicles. And the connectivity and apps are being brought into the infotainment system, either through an integration with the smartphones, through Apple CarPlay and Android Auto, but also through native apps. Now in response to these trends, Visteon has developed and launched a brand-new infotainment platform. And this is based on Android. It launched with VW earlier this year. And this system offers some first-to-market features. It's the first entry infotainment system to offer apps, and it offers apps with a difference. Unlike other systems that have tried to build some apps, which are custom-built by the OEM through a supplier, in this particular case, with this platform, we are able to bring standard Android apps that were designed and offered for the phone market into the infotainment system. Okay. We have to solve some really deep challenges in terms of being able to address the requirements that are very specific to automotive in order for the system to be able to run these standard native Android apps. I'm talking about apps like Waze, Spotify and many others. And we're able to offer those at a cost point of the system that is very different and has really taken the market by surprise. And we are seeing as a result of that, a lot of good interactions with many other OEMs that we are in different stages of discussions. And hopefully, we will be able to announce some more relationships for this particular product here in the near future. So imagine in a mass market vehicle, you have now with this system, the ability to deploy a 10-plus inch display, an Android-based infotainment system that offers wireless CarPlay, Android Auto capabilities. It also offers these apps that you can download from an app store. And on top of that, as we are looking into the future here, we are bringing our own voice smart assistant technology. Imagine something similar to Alexa, but running embedded within the device and offers a very free-form interaction through voice with the system. So we are very, very happy with where we stand today. I think we have made a big step forward here with the launch of the system, and we are really optimistic about our future prospects here. Moving on to displays. I will summarize displays very quickly by saying that the biggest trends here are just in terms of the screens getting ever larger. But as the screens keep getting larger, flat rectangular displays don't work very well, either from a viewing perspective by the driver or from its fit within the interior designs of the cockpits. So the trend has been to move towards more curved displays. They are getting larger. We are seeing both form factors, portrayed as well as more landscape designs. And so in response to this trend, we have over the last 2 years, as I mentioned earlier, invested in building our capabilities, in terms of being able to design and manufacture these displays in-house. Now unlike the smaller flat rectangular displays that the industry has used in the past, we, in this particular case, cannot rely on other industries that need systems because there are no other industries that need this type of product. So we have had to innovate ourselves, including the development and building of the equipment that we need to manufacture these displays. In addition to our in-house vertical integration of these capabilities, we also continue to innovate here. Now one of the newer technologies to impact the display industry after LCD has been OLED. OLED has very successful phones, with smartphones, in particular. And so it was a very natural next step for the industry to think about bringing OLED into automotive. However, it has now been, kind of, proven that OLED is not as good a solution. It has a couple of disadvantages. The life span of OLED technology does not meet the requirement for automotive life spans of about 10 years. Average age of cars today in the U.S. is much more than that. The second issue we see with OLED is that the brightness is also compromised, also partly because of the first limitation. The more bright you run with OLED displays, the shorter is the life. So in trying to find that balance, the brightness is reduced in the ambient lighting conditions that we have to operate within the cockpit, you do not get a good experience. In response to that, Visteon has launched a new technology we call microZone. MicroZone approaches this from a very different perspective. Just for some comparison's sake, whereas you can run OLED at about 500 candela, which is the brightness measure, we can run microZone at about 1,000 candela, twice as bright, which makes a big difference within automotive, while consuming less than 10 watts of power, which is also one of the requirements that we have to serve within automotive. So it's very new technology from Visteon. We had this launched at CES earlier this year. We have since been talking to many OEMs about it. And we, again, here feel very optimistic that we'll be able to make a breakthrough here as well. What microZone demonstrates more than anything, is that in each of our product categories, we are approaching the industry, not just from the viewpoint of being able to meet what our customers are asking us to build, but we are bringing value-added innovation with a lot of cost focus in mind. And microZone is a great example of that. Moving on to cockpit domain controllers. Cockpit domain controllers are an integrated version of the products that we discussed earlier in instrument clusters, infotainment, telematics, et cetera. This has been a trend that has been in the making for several years now. And as the industry has matured in its understanding of the pros and cons of going towards an integrated solution, overall, the momentum has only been picking up. Now Visteon has been a leader in this space. It has been -- in fact, a pioneer. We developed and launched the first integrated digital cockpit with Mercedes in 2018, and we have since then continued to win more business and launch more systems. We have gained tremendous amount of experience in understanding both the challenges and also how to deliver a superior experience. What is new since the last time we talked about our approach with cockpit domain controllers is we entered the market from the premium segment. Many of these technologies typically find their entry point into the market with premium vehicles. But now we're addressing the opportunities in the entry segment. We now have silicon solutions that are approaching the cost and feature and performance requirements that are necessary to be able to offer a good system at the entry price points. We have been demonstrating that to customers now, and we are getting a lot of good traction here as well. And so you can imagine on a single chip that we are able to drive both infotainment, Android-based, as well as instrument cluster requirements in its own separate domain on 1 chip and reduce the cost. And at the same time, deliver a better functionality with the ability to over the air, update the software much more easily as an example as compared to discrete systems. So that's the strategy for Visteon in cockpit domain controllers. We are the leaders today, and we are focused on maintaining our leadership through technology here. The last product that I would like to talk about with respect to trends and our strategy is our solution for ADAS or safety systems. Now ADAS has not been traditionally our business here at Visteon. And we've been looking for an appropriate entry point into this -- into the market. Now ADAS is typically described in terms of the levels of automation. And today, what you see in the marketplace are what are termed as Level 1 and Level 2 ADAS features. Level 1 systems typically make use of a single sensor, Level 2 systems often use 2 or more sensors. But one of the defining things with both is that both are essentially warning systems. They provide warnings to drivers, but expect the driver to monitor the environment and take the control of the vehicle. Now as we move forward here with Level 2 and higher, so -- so-called Level 2+. This is where we believe Visteon can leverage our strengths. And this is where we have targeted our solution. Our DriveCore system is, we believe, the first system from a supplier to integrate all of the vision processing, all of the camera processing, all of the radar processing into 1 chip and 1 ECU to deliver a higher level of driving -- self-driving capability. Now the other new development in the space, which is very impactful to our future here is that for the first time, UNECE, which is the regulatory body that's responsible for harmonizing vehicle regulations for many countries, it covers about 60 countries, mostly Western European countries and a few others. They recently released regulation that will come into effect beginning of next year, which will allow automatic lane keep system, so-called ALKS and this will, for the first time, make it legal to have hands-free driving on road. Now what is ALKS, the auto lane keep system is essentially a system that enables the drivers under certain conditions on well-marked roads to let the system drive the vehicle. So some of the conditions require that the speeds be below 60 kilometers an hour. So this is essentially a solution for slow-moving traffic, traffic jam situations on highways that have no pedestrians or bicycle traffic. And the system can detect the condition and offer the driver to let the car be driven by itself. However, it also adds the requirement of the driver being monitored to ensure that there is a safe handover between the driver and the system. So in response to that, our system, our DriveCore system, and this is one of the newer, sort of, developments with the DriveCore is not only are we implementing the camera and radar processing required for the ADAS portion of it, but we are also implementing in-house driver monitoring so that we can further reduce the total cost of the system. We are in advanced stage of testing this technology in the vehicles on the road, and I believe this is going to be one of the, sort of, plus 1 sort of features within our strategy. None of our financial guidance and outlook that we have previously provided incorporates any benefit from ADAS. To me, this is a pure optionality from an investor viewpoint, where we are taking a very calculated cost-oriented approach, that if this can work for us, which we expect to, given the fact that regulations now are in place, we do not see a lot of other competitors with this kind of capability. We've spent the last 3 years developing this technology where we have a viable alternative now to, let's say, a Mobileye-based solution, which means that we can offer a cost saving to the OEM and the fact that it's an open technology that enables the OEM and their other partners to collaborate on this very important area of technology for them. All of these things mean that we have a very good prospect of breaking through into this fast-growing segment of the industry that up till now, we have not addressed. If you look at where the ADAS market is expected to go in the next 5 years, we expect ADAS to be as big as cockpit electronics is today. And so what this gives us is a sort of an entry point into that important market that we cannot ignore, and we believe we have all of the right capabilities to be able to make a breakthrough here. So with that, I will very quickly now just talk a little bit about what's happening in the market. How are we seeing some of the other dynamics here. And how we should think about the second half. And then from here, we can open it up for questions. So the chart on the left shows the recovery that has happened in global vehicle production since the impact of COVID, which, kind of, peaked in April. And the recovery has been pretty good. It's almost a v-shaped recovery as you look at it. It's still below prior year levels. But we exited the second quarter with June coming just at around 17% year-over-year; July, the improvement continued; and as we look forward here, we've been paying a lot of attention to the retail demand to understand how much of this is sustainable or what are the other dynamics there. When you look at the U.S., the market does seem to be, at this point in time, quite strong, despite the fact that consumer confidence isn't very high despite the fact that there's still a high level of unemployment, we still see retail sales being fairly strong. And especially when you look at dealer inventory of new models, 2021, it's really thin. So we expect demand in U.S. to remain strong for the remainder of the quarter for sure. We'll have to look at how it shapes up for the fourth quarter, whether most of the demand here is pent-up based on the lower activity in the prior months or if this is more normal. The SAAR now stands at just over 15 million, which in -- given what has happened here, if that's the level we finished the year, I think everybody will think of that as a good outcome. With Europe, sales -- retail sales improved in July, coming off of the lows of this second quarter. And the demand was also fairly good, but it's not sure whether this is driven more by pent-up demand or whether there is an underlying strength in the economy that's driving this behavior. There are also a lot of incentives being offered, especially for EVs and also for scrapping of older vehicles, which we need to understand what that would do to demand later in the year and going into next year because some of the sales might be pulled ahead on account of that. China continues to be a good story. We now believe we are onto the fourth consecutive month of year-over-year sales growth in retail. So that's good news. And then when you look at our performance within that, we have -- we are continuing to benefit from the trends that are now favorable to our product lines. So we expect that to continue. Our high number of new product launches that we have been launching, even this year, it's going to be a high number of launches, about 60 in total, that's going to continue to help us. So we expect our performance relative to market to continue in the third quarter and also in the fourth quarter, and we'll have to see in terms of the underlying production. But our expectation is the growth in terms of the relative to market performance that we have demonstrated over the last 4 quarters, mid-to-high single digits should continue going forward. So with that, I would -- I will not go through this last slide, Slide 12. But instead, Itay, maybe this is a good time to open it for questions.

Great. Sachin, that was a great overview as always, learned a lot and definitely a lot of questions. I thought we can kick things off. Maybe on Slide 11, a couple of quick ones on the second half outlook. First, perhaps just -- so Q3 down 10%, are you able to provide an update on how you look at H2 overall? I think on the Q2 call, you were looking at key customers down about 15%. And then second, on the expectation to continue to outperform industry production, maybe just talk about what you're seeing on take rates and whether the degree of outperformance -- you don't have to quantify it, of course, but is the degree of outperformance you expect now better, worse, same as what you expected back in the Q2 call?

Yes. No. So if you think about where we were at the -- I would say, when we talked about it on the earnings call, second quarter with respect to performance in the second half, we were expecting a 15% production decline. Now for the third quarter, that is clearly coming a little better than we expected. We now expect our third quarter key customer production to be more around the 10% year-over-year lower mark, which is an improvement over our earlier expectation. And we are seeing strength, I would say, generally across all regions with perhaps the one exception, and that exception is in South America, which is still reeling from the effects of COVID and certain parts of Southeast Asia. So Asia, excluding Japan, China are still not at a level where the rest of the world is at. Now as we look forward to the fourth quarter. We are a bit hesitant to provide a whole lot of clarity because there's still uncertainty with respect to what is driving this demand in the third quarter. As I mentioned earlier, incentives, government incentives in Europe have been a big factor. July was a good month with retail sales, but August, we saw a little bit of a dip in Europe. So we still are trying to understand some of the dynamics there. I'm actually quite positive on U.S. and the underlying demand here. All of the signs point to a continuation of the story here. China seems to be also doing well. So if there is any adjustment for the fourth quarter relative to the third, I expect that will be fairly modest. And more than likely, I expect it to be flattish with respect to the third quarter in terms of production. Now our outperformance is driven by new product launches predominantly. And so in the near term, third quarter and the fourth quarter, we expect it to be very similar in terms of its flavor. We expect it to be in the high single-digit levels, which is what we were expecting this year to be like pre COVID and largely driven by new product launches. We are also benefiting from most of our legacy products to kind of have been flushed out of the system. So the roll-offs that we had a couple of years to endure, the impact of that is diminishing. And so going forward, that's the level that I expect to continue to see as we continue to launch. The biggest factor for us is going to be the new product launches. As long as we continue to execute on that front, we should be performing at this level.

Excellent. That's super helpful. So then maybe going back to the business itself. And I guess maybe it touches back on Slide 5. Sachin, you -- obviously, a lot has changed this year in so many ways. And in the last few months, we've seen, obviously, a lot of activity on the emerging EV OEM side. Obviously, things like Tesla's valuation. And curious whether you're seeing an acceleration in industry and OEM interest in some of your technology, a lot of new vehicles, of course, feature large displays and digital clusters and new electrical architectures. So just curious maybe on kind of what you're seeing in the last few months on customer interest. I was hoping maybe an update at a high level of how H2 kind of booking activity is progressing thus far?

Yes. Yes. So definitely, in terms of a broader macro trend, I can confidently say that the cockpit electronics trends, meaning the clusters becoming all digital and larger displays, infotainment becoming connected and also the displays in general becoming larger, those trends have not at all been impacted by COVID. If anything, those trends are now accelerating as the market is becoming that much more competitive, the end market. So we are seeing interest not only for new models, but we're also seeing interest for introduction of some of these technologies as a mid-cycle update. Okay, so that's something that we are paying even more attention to as a result of this environment. Now at a higher level, what we're also seeing is that OEMs are putting most of the investment in EVs. There are many, many EV launches scheduled over the next couple of years. There's a lot of attention that's being given to them and investment, and which means that investment on the other side is seeing a little bit of a rethink. So with respect to the conventional vehicles, what we expect OEMs to do is to prune some of that portfolio and focus on the high runners and even extend the life of some of those platforms through mid-cycle updates, but then divert more of the investment into EVs. Now when it comes to EVs, they are by definition, digital systems, digital devices, these cars. And as such, it goes without saying that the clusters and the rest of the products are all digital largely -- large display based, and that's a very good thing for us. What's also new of some interest in the sense that we have not discussed it up to this point that much is that our battery management BMS business is also getting a lot of attention. We have, over the last couple of quarters, talked about some of the wins that we have had in BMS. And we are there pioneering a new technology. So if you think about battery management systems, these systems are essentially connecting to many battery cells. And a battery pack is an integrated product made up of many cells, each one of which has to be monitored independently. Now traditional BMS systems have wires going out to them. We are in the process of working on technology that's going to replace the wires with wireless technology. Now you can imagine the benefit that, that brings. So flexibility in terms of configuring the system, you also have a lot of mechanical issues, the wires getting disconnected, et cetera, crimping issues with the wires that you do not have when you go wireless. As a new technology, especially wireless, it has to go through a lot of validation and testing before OEMs will feel comfortable with it. But we believe that it's the right technology. That is what has been getting us a lot of interest now. So that's something that is relatively new that adds to our existing product portfolio.

That's very helpful, Sachin. So a couple of kind of follow-ups to kind of the progression of Visteon's growth. So first -- for maybe for investors who are newer to the Visteon story, on clusters here on Slide 5, maybe kind of update us on where -- what the penetration is for all-digital clusters today, where you expect that to be, let's say, the next several years? Whether you can hold your 15% market share? And we'll start there and then a couple of follow-ups.

Right. Absolutely. So if you look at the market today, about 15% of all new cars shipped come with digital clusters, right? Still a long way to go before it reaches saturation. However, if you look at what we ship, a full 1/4, 25% of what we ship are all digital. And if you project this next year and maybe a year after that, we'll be at about 50% of all shipment, being all digital, right? So we are much, much more oriented towards all digital. And therefore, you can assume from that, that we have a bigger share of that globally than the others. And so that is where we are at. So still a long way to go before we hit any sense of saturation. If you look at the customers that we have today, that's still addressing only about 50% of the vehicles produced. So we have a lot of room to continue to add to our portfolio for growth. And this segment will remain our most important segment in the near term.

Excellent. We think, a question on microZone and -- and kind of if you can now articulate the hardware versus software content there as well as -- like are there other competitors who can kind of match on those capabilities, particularly on the manufacturing side, I know the company has worked very hard on. And then also a question on DriveCore on whether -- what the application is for the DriveCore development, which still seems like -- more like you're moving forward pretty aggressively with is on R&D and potential even M&A along the DriveCore side?