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 Global Automotive Conference. My name is Emmanuel Rosner and I'm the senior U.S. autos and technology analyst at Deutsche Bank. Visteon is a leading auto supplier of vehicle cockpit solutions with products in instrument clusters, infotainment, displays and increasingly compute platforms. The company is also having some good traction with its wireless battery management system going into electric vehicles. And this is certainly something that we would love to bring and explore further in the discussion. So representing Visteon today, we're very pleased to have Sachin Lawande, who's President and CEO; and Jerome Rouquet, who's SVP and CFO. The format for today's session will be a short presentation by the Visteon team using some slides, followed by a Q&A session. I'll have some questions. If investors on the line, if you'd like to ask some questions, just enter them in the box at the bottom left of your screen, and I will try and weave them into the conversation. So with that, Sachin, thanks a lot for being with us, and over to you.

Thank you, Emmanuel, and good morning, everyone. And again, thanks, Emmanuel, for hosting us today. As you mentioned, we have a few slides that we have prepared, and I would like to go through before taking questions. Let's go to the next page. Today's presentation may include a few forward-looking statements, which are subject to [ greatest ] risks and uncertainties. So you are cautioned not to place undue reliance on the statements. I would encourage you to read through our safe harbor statement as shown on the slide. Next page. For those that are new to Visteon, we are a Tier 1 supplier of cockpit electronics and now electrification electronics to the global automotive industry. In the past 3 years, we have made a lot of progress in aligning our product portfolio with the emerging trends in the industry. As you may be aware, automotive is going through a significant transformation on multiple fronts, and that requires the product portfolio of suppliers like us needs to be really tuned to meet the needs of these emerging trends. We now have as a result of the work that we have done over the past few years, one of the broadest product portfolio for digital cockpit, which is one of the big trends that is impacting the industry, including products such as all-digital clusters, infotainment, cockpit domain controllers, displays and so on. And as Emmanuel mentioned, we now also offer a very innovative battery management system that wireless that enables OEMs to build different electric vehicle models with different configurations of the battery pack. Our customer portfolio has also grown very well over the past few years, as shown on the slide on the right. And with our new battery management solution, we are now in a great position to gain a larger share of the wallet of these OEMs as they race to build competitive electric vehicles. Next page, please. Clusters are one of our most significant products here at the company, and our cluster product sales has grown despite the decline in vehicle production, mainly due to the growth of all digital clusters. Clusters in the past used to be analog devices. You might remember analog meters with gauges in the past. And then they walk into some sort of a hybrid with a small display, but still with gauges. What we now see is that the industry has been rapidly upgrading the cockpit to an all-digital cluster. We were one of the first in the industry to detect this trend back in 2016. At the time, we had digital cluster business with 2 OEMs. Today, we have digital clusters now virtually with almost all major OEMs in the world. And even as the vehicle production volume has declined almost 20% from 2017 to now, our clusters business has grown, as shown on this slide, with digital clusters growing at a CAGR of over 50%. And as the industry returns back to growth. We expect our digital clusters business to accelerate further. Next page, please. Now on digital clusters are the first wave of growth for Visteon. Cockpit domain controllers are poised to be the next growth product for the company and I'll explain what cockpit domain controllers are on the slide. For cockpit electronics to be really competitive and more importantly, be acceptable to consumers. They have to support features and functions that have been made popular by smartphones, such as over-the-air updates, downloadable apps, et cetera. The base of fixed devices that do not offer apps and over-the-air upgrade are no longer feasible or viable. Now these features require a different approach to building cockpit electronics, where a single powerful computer, a cockpit computer is used to implement all the features and functions that traditionally might have been implemented as discrete products such as clusters and infotainment. Visteon was one of the first in the industry to launch a cockpit domain controller back in 2018 with Mercedes. Since then, we have continued to update the technology to bring the best of the smartphone world while supporting key automotive requirements. Our latest SmartCore technology uses 3 operating systems, as shown on this slide in the center. It uses an operating system called [ AutoSAR ], which is an automotive standard operating system used to implement features and functions that have to do more with the vehicle. We also use the QNX operating system to implement features that are required to have a high degree of reliability, such as clusters. And then we use Android for infotainment features to bring all of the smartphone type of user experiences to the cockpit. And all these 3 operating systems are coexisting on a single powerful system on a chip. This system can drive multiple displays in the cockpit, including the cluster display or the center infotainment display and increasingly now a third display on the passenger side of the dashboard. The SmartCore system has over 10 million lines of code developed by Visteon. On top of many more also that come from third parties such as Android itself and is incredibly complex as it has to coordinate the operation of these 3 different operating systems very seamlessly to deliver a good user experience. As I mentioned earlier, it offers over-the-air updates, downloadable apps through an integrated app store, it offers Alexa for voice assistant, as well as integrated apps for GPS navigation, media player, all of the things that you would expect in an in-car infotainment system. And we have designed the software for the system such that there's high reuse when you take this platform across different OEMs. It's not possible to develop systems that require 10 million lines of code each time for a new customer. Smartphone is able to use high-performance silicon solutions as they become available from suppliers such as Qualcomm, Samsung and others, keeping intact the investment that the OEMs would have made in this technology. And it truly offers them a future proof technology for implementing next-generation cockpits that deliver the kind of experiences that consumers now expect. Next page, please. This slide shows our recent performance in terms of new business wins and launches with SmartCore and the revenue expectations as we look forward. We have by now 10 OEM card manufacturers or SmartCore today with multiple launches since the first launch in 2018. The first version of SmartCore did not support Android because Android was not a viable infotainment operating system at the time. Our first Android operating system-based SmartCore was launched in 2020, and all subsequent SmartCore solutions use infotainment or, I should say, Android as the infotainment operating system of choice for all the subsequent launches. Also since 2019, after the initial launch, we have won over $3 billion in SmartCore business. And as shown on the chart on the right, we expect fast revenue growth for SmartCore similar to what we have experienced with digital clusters. So as I mentioned earlier, our digital clusters are the driver of Visteon's growth now. And we are really now setting ourselves up for a similar second wave of growth with our SmartCore digital cockpit solution. Let's go to the next slide. That brings me to the final slide here, and then we can open it up for questions. Our investment thesis is that we are a global leader in cockpit electronics, which continues to grow quickly even in a challenging market environment. We have a broad portfolio of innovative products and a very competitive cost structure. The products that we have are products that are required for cars to be competitive in the marketplace. And our balance sheet is strong and more than sufficient to withstand shocks like COVID-19. The industry is also poised at a very interesting phase. We have seen really strong demand coming out of the COVID-induced shutdowns last year. There have been some challenges with respect to semiconductor supply. But as we look forward, as more supply comes on board with all of the demand that we see for these types of more digital content and systems that are capable of doing a lot more for the consumers, we believe Visteon is positioned extremely well to take advantage of the growth that we expect to see in digital pocket area and also with the electrification that's happening in the industry. So Emmanuel, at this point, I would suggest that we get into the Q&A.

[indiscernible] this overview and a good detail on SmartCore. Just reminding everyone if you'd like to ask a question, just enter it in the box at the bottom left. I see some of -- some questions already coming in. Let me just -- before diving into technology and EVs in particular, let me just ask a couple of quick questions on the environment you're operating in. How has the impact from the semiconductor shortage progress so far through the quarter? I think you were sort of anticipating 2 to 3 weeks of incremental downtime this quarter versus last. Is that still the right way to think about it? And what do you think about the back half of the year from that point of view?

Very good question, Emmanuel. As you can imagine, we are spending an enormous amount of time trying to understand where we stand with the supply situation. But let me walk you through how the industry has progressed so far. And you go back to the beginning of the year, when we first started to see the impact of the shortages. In the first quarter, with all of the inventory that we had across the industry, we were able to minimize the impact of the semiconductor shortage to a part of [ the weeks ] for the production for the industry. And back then, as we were looking ahead, especially with some of the events that occurred, first, the winter storm in Texas that impacted several semiconductor suppliers, facilities in that region. And then later on, a fire in the facilities plant of -- that belong to Renesas, which is a fairly large supplier to the industry. We knew that the second quarter was going to be impacted more than the first quarter. And at the time, we had anticipated that the impact would be an incremental 2 to 3 weeks of production impact for the industry. Now as we stand fairly close to finishing the quarter, we believe that it is expect with all of the shutdowns that have been announced by OEMs that the impact for the second quarter to be in the range of an incremental 2 to 3 weeks over and on top of the impact in Q1. Now as we look forward into the second half, I would like to make clear that there are a couple of dynamics at play. One is that the demand continues to be incredibly robust. We are seeing higher demand than we had anticipated in Q3, also extending into Q4 from the OEMs. And on top of that, from a supply perspective, we have fairly limited visibility. We do not have visibility yet from silicon suppliers for supply for the fourth quarter. But for the third quarter, they have provided initial estimates that indicate that our suppliers would be higher than what we have experienced in the second quarter. But as I mentioned earlier, the demand continues to be even higher than the supply that's available. So in the first half, the constraints were not only in our front-end process, which is the foundries, but also the back-end process of semiconductor manufacturing, which is all of the packaging, assembly and test, et cetera. The back-end constraints seem to be getting a little better with the investments that have been made. The front end, the wafer capacity from the foundries is still a challenge. And that's on account of the continuing high demand for semiconductors, not just from automotive, but from other industries as well. So for the rest of the year, we expect that it's going to continue to be a struggle to get more wafers that the industry that automotive needs. And although we will see a higher allocation of wafers to automotive, it will still not be sufficient to meet all of the demand.

That's a great overview. What -- are you worried about some lingering issues of these shortages even moving into next year, not just necessarily from the volume impact, but in terms of either availability to support the strong industry production or even in terms of cost inflation?

Very good question, and we are spending a lot of time trying to analyze how this is likely to play out. But if you put the bigger demand situation in appropriate context. Semiconductor demand historically has grown at a 5% CAGR. Now what has happened in 2021 coming off of a COVID-induced lower demand in the first half of 2020. And then snapping right back in the second half of 2020 as automotive came back, but also some other things happened that kind of made it a perfect confluence of various factors. We have 5G coming on board in the second half of last year. We had work-from-home demand. So the demand that we see in 2021 is on account of a multitude of factors. Now the question is how much of that demand is going to continue to extend into 2022? We believe that some of the demand, especially the work from home related demand is going to subside in 2022. And even with respect to, say, 5G, at least we expect that to plateau. Now with automotive, in terms of the underlying vehicle production itself, because of some of the pent-up demand that we expect to see in 2022 coming from a lower than ideal situation in 2021, we expect that automotive demand organically to be in high single digits. Now it all depends on what the market then would do with respect to the buffers has said that the industry has seen to be completely depleted and the buildup of that, that may play some extra demand in 2022. So we are watching it closely. We believe that some of the demand from other sectors of the industries that are using semiconductor for subside. Automotive demand is going to remain robust. On top of the underlying production volume that's going to recover, we also expect content to continue to grow and which is good for Visteon, as you can see from the product portfolio, a lot of the content increases in automotive are coming into the cockpit. And that's a good secular theme in terms of growth for the company. I expect -- you asked the other question about cost, we do see cost to be an issue in terms of just the inflation in some of the prices that are a result of the shortages. And we are working diligently, one, to minimize the impact of that coming from the supply base, but also on the other side, to try to recover as much as we can from the customers to offset the impact that, that would have on us.

If I can -- good morning, everyone. It's Jerome. Good morning, Emmanuel, and thank you for having us today. Just to elaborate a little bit on cost. We've seen in Q1, as you may remember, fairly large cost on our side coming from spot buys that we've made to supplement purchases with essentially purchases from brokers and distributors at higher cost. These costs will continue and are continuing in Q2, in fact, have increased even slightly not necessarily from a number of parts purchased but from a dollar standpoint. And we've had successes in recovering these from customers. Ultimately, this is going to ease up as we go into the year. And what is potentially going to replace this is going to be what we call today surcharges from suppliers, which we are, as Sachin said, definitely pushing back on. But we are, at the same time, as I said, having successes in recovering some of that. And if they continue into '22, we'll be -- if these costs continue into 2022, we'll be pushing on for the recoveries with our customers. So that's kind of the dynamic we are on at the moment, looking at both sides, pushing back on suppliers but as well if the costs come through pushing back on our customers to recover some of its costs.

Yes. Thanks a lot for all this detail. I was going to move to your EV technology, but I'm going to jump first to a question that I had prepared that also a lot of investors are submitting through the box, which is essentially the competitive landscape and whether there's any change in there with the recent announcement from Stellantis working with Foxconn towards some of the -- seemingly some of the technologies that Visteon supply. So can you maybe talk to us both in terms of direct impact, if that -- you view this as an impactful or negative impact on Visteon. But I guess also more holistically, if you see a change in what automakers want to focus on and what they want to do themselves.

Again, a very good question, Emmanuel. And I've been in this industry now actively for about 15 years. And at every point along the way, there has been this discussion about OEMs wanting to in-source some portion or all of the various components in the cockpit. I remember going back to the days when they wanted to do some of that for infotainment. Now it is about the whole cockpit systems. But the reality is that there is no OEM that really has the capabilities outside of maybe 1 or 2 that you can talk about, and that would include Tesla that have the capabilities to build a system like this. There's a reason why Visteon and people like us in Tier 1 space exist, we used to be part of OEMs before. And so the main reason is that the complexity has grown to a point where you need to really have this as the main focus of your business. You cannot do this as one of the activities along many others, it's a very fast-moving landscape in terms of technologies. And if you do not have these capabilities in place today, it's very hard to play catch up. There's just a tremendous amount of technologies that are already in play and they're evolving at a rapid pace. And you don't get the time necessarily to take a way, work on things and then come back 3, 4 years later and launch, your products, your vehicles are not going to be competitive in that [ meantime ]. So we'll talk about the Stellantis announcement in a minute, but people forget that there's been just 1 success in the industry that has shown that this can be done in [ and there's ] Tesla, but people forget that Tesla started on that path many, many years ago. Now if other OEMs did not start back then, the chances that today that they can come and launch a very competitive product is very low. Now the specific announcement that you referred to, that was a little bit of a head scratcher for us. One, if you think about what the biggest challenge is in the development of such systems today, it's related to the complexity of software and how to build those complex software systems that are required for delivering the user experiences. Neither of the 2 partners have any software capabilities that at least we are aware of. The capabilities that both possess are secondary to the delivery of competitive systems. So we do not understand it. We have been trying to also make sense of it to our own connections with these companies. So again, I'm not [indiscernible] to dismiss any competitor, but this is not something that I see at the moment as the strongest competition to Visteon. Our competition is still mainly the traditional Tier 1 suppliers that have been competitive in the product areas that we offer. But even more importantly, we need to be able to transform and innovate our own processes capabilities to meet the requirements of this next-generation systems. I talked about 10 million lines of code that the systems take. A few years ago, a system of a significant complexity may have had between 5,000 to 10,000 software requirements. Today, we are seeing systems that require 25,000 distinct features to be implemented. These are the requirements that I'm talking about massively complex. And so this space is not expected to slow down, and we need to be able to retool ourselves to be able to deliver at scale this type of systems. And we believe today, when you look at the industry, we are one of those that are leading this transformation within to be able to deliver this type of products in the industry.

That's very helpful. So let me then shift to EVs in interest of time. So I definitely want to talk on wireless BMS next. But first, focusing on your core technology portfolio of SmartCore clusters, displays, you highlighted in the first quarter that 1/3 of the business wins were for EVs. So what's Visteon's opportunity within EVs? How successful have you been so far with it? And are there any goals that you could share for how much EV should represent for your revenue down the line?

So EVs -- we refer to them as digital natives, EVs, by definition, are all-digital systems. And therefore, it fits very nicely to Visteon's broader product and technology strategy. In almost all cases, when we talk about our EV business, we are talking about not only our BMS product, which has a great opportunity there. But also not to forget our digital content products. And when you look at the recent win that we talked about, which was I think last quarter when we talked about our microZone display, great example of a product that cuts across both conventional vehicles, but also EVs. Most of our cockpit electronics products are powertrain agnostic. The differences between the EV and the non-EV version of that are relatively minor that allows us to have a single product offering that covers a broad spectrum of the vehicle manufacturers of models. That is the first point. Now when you talk about how much should we see as a portion of our business going towards EVs, we believe that on account of various factors, mainly policy but eventually, also the cost basis that is quickly approaching and hopefully, if predictions are right, would be because for EVs in the industry would be predominantly in the more developed world swing towards EVs versus Eye's. Most of the investments are going into EVs. So we expect that the share of our new business wins will continue to grow. In terms of revenue, we will start to see EVs become more meaningful as they become a bigger share of the vehicles sold. Today, the industry is still in somewhat, I would say, mid-single-digit territory globally. It's changing quite rapidly, as you know, Europe is picking up momentum based on policies. And if you look at their emissions requirements, we expect that to continue through the rest of the decade, similarly in China. And I believe that, that's going to drive EV to that double-digit our share of our revenue fairly quickly. So we expect in terms of revenue to track at a rate that's better than the industry given the dynamic that I talked about with our products being powertrain agnostic. And at the same time, in terms of new business wins, we expect it to be a little bit higher than that simply because most of the investments are for now going into new EV models.

And on the wireless BMS side, how are customer conversations going? Can you please remind us what part of the system you have developed and manufacture and where you see Visteon's largest end?

Yes. That's a good question. So it's really important to understand what the BMS product is and why wireless matters. BMS is effectively the brains of the electric powertrain. So it sits between the motor and the battery pack that manages all of the interaction between the two. If you want to accelerate or break, it's the BMS that comes into the picture and really manages and coordinates all of the things that need to happen. Now a battery pack as you know, is made up of multiple battery modules, which in turn, are made up of many cells. So it's not uncommon to see hundreds of cells in the battery. Every cell needs to be monitored. Temperature of the cell is critical in its performance. It has to be monitored for state of charge, state of health and temperature, and that is on a cell-by-cell basis. You also have to do cell balancing, not all the cells over time behave the same way. So that coordination has to be done by the BMS system. Now why wireless? So the traditional way to build a BMS is to connect to each and every cell wired to the BMS system. Imagine now if we have hundreds or thousands of cells, there's a lot of wires. But more importantly, that also means a lot of connectors. Going wireless enables us and our partners to fully automate the battery pack manufacturing, which is a significant cost advantage. Number two, because there are no wires in what is essentially a high-voltage environment, it's 400 volts today going towards 800 volts, high-voltage, high-current environment inherently makes the system more resistant to malfunction and a serious consequences out of that. On top of that, we are introducing significant innovations, for example, inventory management. When they build a battery pack and the battery pack is stored for later manufacturing, the state of the charge of [ various ] cells is much easily recorded with a wireless system and allows the manufacturing teams to be much more, I would say, follow the guidelines on quality than with a wired product. There are many advantages to it. Now when we first launched this with GM and clearly on account of GM's position in the industry and particularly with EVs, we've got a lot of exposure. We are having a lot of discussions. We have mentioned about our second win outside of GM, the very significant OEM. So we are very happy with the position we are in and the attention we are getting. And we intend to continue to push on the innovation front on the BMS going forward. We expect this to be a significant revenue contributor to the company going forward.

And it's great. Let me just sneak one last one because I think we're fresh out of time, but this is when I meant to ask as well. So I think you had $1.8 billion in new business wins in the first quarter. Can you just remind us what is your order intake target for the year? How on track you feel you're on this? And any sort of cadence or seasonality within that?

Right. I should mention first that on account of this silicon shortages and other shortages as well that the whole industry is spending an enormous amount of time and energy trying to get parts and improve parts in the vehicles. So there is the natural impact of that on sourcing activity. However, having said that, our goal is to still be on track to hit $6 billion in new business wins for this year coming out of 2020, that's going to be a terrific accomplishment if we can achieve it. And also demonstrates what I'd said earlier about our product portfolio. And so that's where we stand. We still believe that we are on track to achieve $6 billion of new business wins.

That's great to hear. Sachin and Jerome, we really appreciate you participating in our conference, providing us with this update. Thank you very much, everyone, on the line for participating, joining us and for submitting great questions. Thank you so much again. And next up, we have Adient. Thanks again.

Thanks, everyone.

Thank you.