Visteon Corporation (VC) Earnings Call Transcript & Summary

Hello. This is Brian Johnson. I want to welcome everyone to our second presentation of our 11th Annual Global Automotive Conference. We're very pleased to have with us Sachin Lawande, CEO of Visteon; Jerome Rouquet, CFO of Visteon. We have an overweight on Visteon and had always talked about it being a beneficiary of a move to digital cockpit. Some of it moved -- spurred by leading EV companies like Tesla redoing cockpits to all-digital. But most recently, a kind of interesting win in battery management, which we have not been aware of. So very glad Visteon could join us, at least, for this fireside chat.

I want to start with before we get to kind of some of the strategic stuff around just what are you seeing vis-à-vis the -- both the sales and sales environment and the production environment versus where you thought the quarter could be, in particular, risks to any of the regions, particularly Europe but also in North America from the second wave of the COVID virus?

Sure. Thank you, Brian, and good morning, everyone. Thank you for hosting us today as well. Yes. So we are paying a lot of attention to some of the dynamics with respect to the market and the underlying production environment. The first thing I would say is that the production environment, especially in the beginning of the quarter, continued from the fairly strong performance we saw in the third quarter. And our expectation is that we will continue to see some growth in Q4 sequentially compared to Q3 as the underlying retail demand still was pretty robust, the inventory levels with dealers were still at a very healthy level and so we are expecting to see some growth. Now the 2 clouds that are definitely causing us a lot of, I would say, we're spending a lot of time trying to understand them. One is the shutdowns that Europe has announced that has impacted our retail sales already in certain parts of Europe and are going to continue from what we understand, extend by a week. And we need to understand what would be the impact of that on production, especially when it comes to the month of December. And the other issue that is also causing certain impact on production is the supply constraints we are now seeing on account of COVID, coming largely out of Mexico. We have, on our part, been able to avoid any impact. Our operating procedures that we have put in place seem to be sufficient to allow us to continue to operate at levels that we were also operating at in Q3. But I'm referring to some other suppliers having some challenges, which is impacting ultimately, the cars being manufactured, which will have an impact on the demand for our products as well. Still trying to figure out how much of an impact that would be. But with every passing week, clearly, we feel the risk is more limited. And therefore, I would say that, for us, yes, it might be a little bit lower in terms of what we were expecting at the end of Q3, but it should still be a pretty decent quarter.

Great. And you haven't received notice of any production shutdowns in Germany or U.S. yet?

No. We haven't. And we are seeing some fluctuation in the demand, but not a production shutdown of any sort.

Okay. So let's go on to what we thought the big news from the third quarter results were and the Battery Management Award you have with GM. Can you help us understand several things, why GM -- what your product line actually is, what you're providing, what's coming from the rest of the supply chain? Why wireless versus wired battery systems, will wireless be niche or will it actually become the de facto industry standard? Why GM picked you, and then what conversations are you having with other EV customers?

No, that's a great topic to discuss. And I would like to provide a broader context to the questions that you asked so that you understand our position in that product line, clearly because this is new, and we had not talked about this previously, at least, not to this extent. Now the first thing I would say is that we are not necessarily new to BMS. We have been supplying BMS to GM for their earlier generation electric vehicles, starting with the word -- the board, where we were their supplier for the wired version of the BMS product. So we've been engaged with GM for a number of years. And 3 years ago, when we started to talk to them about the next-generation of BMS solution and with their ambitious plans for EVs based on the new battery electric architecture that they have, there were a lot of discussions about what would be some of the pain points that we should try to address with the new architecture. And if you look at the BMS product, you really need to think about how that is constructed. So a battery pack is fundamentally made up of battery cells. And in the earlier generation battery packs, the number of cells were much higher. The cells have become a little more capable to have fewer cells per battery pack, but the battery cells are packaged in modules and the modules then are put together to form the pack. Now each and every cell in the battery pack has to be monitored very closely to ensure that it operates the right way. And so there is a piece of electronics, call it, the cell monitoring unit that is attached to every cell. Now you do not need one cell monitoring unit per cell, you can actually have one cell monitoring unit to monitor 8 or 12 cells. And then these cell monitoring units communicate with a central master controller that really implement all of the algorithms that control the operation of the cells and also interface to the rest of the vehicle electronics to deliver ultimately the power to the motor. And so if you can imagine a ECU for the vehicle interface and the control solution, which is the ECU that has more of the software content in it, and then multiple cell monitoring units, electronic units that are actually packaged together with the battery pack. So what we provide are all of these components. The cell monitoring units and there may be any number of them depending upon how many modules are in that pack, typically 9 or 12. And then you have a cell -- not a cell monitoring, but the other end of it, which is the vehicle interface and the control module, which is a classic ECU. And when we were designing this next-generation product together with GM, it became clear that the wiring harness that typically connects this master controller to each and every cell monitoring unit is a severe limiting factor in the flexibility of this battery pack, especially for an OEM that has an ambitious line of models that they want to launch all the way from SUVs, trucks, fast sports vehicles off of the same architecture. The battery pack composition and physical design, it's going to be very different. And to avoid having to redesign the BMS solution, dividing harness, the connectors, et cetera, that are required that then would be a severe limitation in the flexibility of this architecture. So moving to wireless made a lot of sense. Now wireless is very new to that application. This is a deep embedded vehicle application, as you can imagine. And so there wasn't any ready technology available that we could use just off the market to implement this. So GM and us worked together with ADI, Analog Devices, to develop a solution based on some technology that they already had in their labs. And this known solution has an optimally designed wireless solution that addresses the bandwidth requirements, the security and reliability requirements and, as a result, offers a very flexible approach for GM to be able to assemble these battery packs in whatever configuration and physical design that they need. Now we are their partner for all of the Ultium battery-based products that they want to build. They have a very ambitious plan that they have made public. So I don't need to repeat what they have said already. And we would be in all of those vehicles as they launch over time. So we are really, really happy to see this engagement come about in this manner because if you think about the industry, outside of Tesla, we believe GM is probably in the most advanced stage in terms of being prepared for the EV market. They're very ambitious plans, very, very good technologies from what we can tell. And so they are an ideal partner for us to make a very strong move in this area. We are not limiting our offerings to just the BMS in their EVs. We also have the clusters also going on to the same EV vehicles that they are planning. It's a platform approach. So anything that we do gets the benefit of the additional models that they plan for that particular platform. And we believe that this wireless BMS approach will be a very attractive approach for any OEM that has a platform approach to developing EVs. Most OEMs have some EV models today. Most of them -- all of them use a wired BMS. When you go from wireless to -- I should say, from wired to wireless, there is a direct material cost savings because of the lack of wiring harness, connectors, fuses, which are required in a wired approach. And over and on top of that, you have the flexibility, the design flexibility that I talk about, which, in terms of the total cost, can be a significant savings. Now we are discussing this technology, the solution with other OEMs after the introduction that we made on the third quarter call. And we will -- I'm hopeful that we will have more OEMs that we will be discussing as customers going forward. But this is still relatively new in terms of the business development activity. We were under a certain embargo to go more public until both sides are ready. And so we are now really, at this point, starting the business discussions with other OEMs. So hopefully, this gives you an idea.

Yes. Of course, we have Mary on tomorrow Midday to talk about the GM EV strategy. In terms of thinking about this as an opportunity, can you give us a sense, you don't have to give price tags exactly, obviously, but where the per vehicle content -- content per vehicle be on this versus what you would traditionally or not traditionally, but recently do around infotainment or digital clusters?

Yes. So depending upon the size of the battery pack, the content could be anywhere between $350 to $500. So it's pretty high value.

Shocking.

Absolutely. So very meaningful for us. And we believe that EVs are going to be a greater and greater portion of our business going forward, even perhaps a little bit ahead of what the market penetration rates might indicate. So this should be a meaningful incremental revenue for the company, a product line, if you will, that we can continue to develop. What's actually more interesting to me is that much like the cockpit, we believe that there is opportunity to integrate more features into this platform beyond just the BMS. If you look at the electronics around the battery, today, they are also designed largely as discrete solutions, much like how we do today for the cockpit with discrete clusters and infotainment, which, by the way, are quickly moving towards more integrated solutions. The same dynamic is also going to happen here on the battery electronics front, and that's the real potential, the real exciting development here that we can also participate in as we go forward based on the win that we have with GM.

And in terms of -- what is the unique Visteon value-add here? Because a skeptic could ask, was this a build-to-print with GM working directly with Analog Devices and the Tier 1s just being brought in to kind of put chips in a hard plastic case and ship it?

Yes. So let me help you understand the system at a lower level so that you can understand what are the different elements of it. So what the ADI, the Analog Devices' chip does is provide the communication between the master controller and the cell monitoring units. That's it. The algorithms, the control that is then executed is implemented via software on the master controller. That software content looks a lot like the content in a cluster because it is a safety-relevant product. In automotive, depending upon the criticality of the system in terms of safety, you classify these systems based on 4 levels of safety integrity. At the highest level, ASIL, so Automotive Safety Integrity Level, which is the nomenclature used to define the safety relevance. So any system that, if that were to fail, could cause a catastrophic event at the highest level is rated at Level D. After that, at Level C and Level B. So these are the 3 safety relevant devices. And then everything else, such as infotainment, is not rated and can follow a different architecture. But in order to engineer and build a safety-relevant product, you have to follow certain guidelines that really are based on an analysis of the system's various faults and if it was to fail, what actions the system would take. That requires a lot of skills and capability that even OEMs necessarily don't have. This is not something that they do. They rely on the suppliers. Now why were we the right partner for them? That's because we were -- as you know, we are one of the largest cluster providers to the industry. We have a lot of experience and expertise when it comes to software that is safety-relevant, and at the same time, has to do complex algorithms. Now with the complexity increasing in terms of what's being done in the battery management system, it's effectively a software product. As I said, it looks a lot like the cluster. And that should also give you a sense of how we think of the margin opportunity there similar to the cluster product line from that viewpoint because of the content. Now none of that comes from GM. Of course, they tell us the requirements of what they want this thing to do. The device on one side, as I mentioned earlier, interfaces to the rest of the electronics components that make up the system. The cell monitoring algorithms themselves are implemented within the software as well as the communication, and it has to be done in a safety-relevant manner. Now what we really bring here is the know-how and experience. It's not that we have a special chip or a proprietary component, but there's a lot of know-how that is built over a number of years doing products like the clusters. If you were an infotainment-only supplier, this would be a very difficult product for you to imagine, to develop without all of these capabilities that have to be built over time. And so we have the cluster business, and therefore, I think this makes us and a few others, of course, we will not be the only ones that are capable of building a product like this.

And how much -- is there any way to quantify how much of the software is coming from you versus the OEM, versus other parties?

Virtually all of the software comes from us. They provide the requirements. We do the implementation of the software. We do the validation and, of course, the manufacturing and everything else. So nothing comes from third parties. We get requirements and then we implement it in software.