Visteon Corporation (VC) Earnings Call Transcript & Summary

Great. Good morning, everyone. My name is Edison Yu. I lead the U.S. auto equity research here. We have the pleasure of welcoming Visteon, Jerome Rouquet, CFO, to the conference. Just to provide a little bit of context, Visteon is a global leading Tier 1 supplier of vehicle cockpit solutions, ranging from instrument clusters, to displays, to main controllers. For those of you who are not as familiar, Visteon generated nearly $3.9 billion in sales last year and secured over $6 billion in new business, in particular, making a lot of traction with the Japanese OEMs. Perhaps most impressively, the company delivered record profit and free cash flow last year despite a very, very challenging backdrop in China, $474 million, $300 million adjusted free cash flow. And of course, now we have one of the people making all this happen, one of the cooks behind all this, Jerome.

So to begin, I'd like to start off on the vehicle cockpit. It seems it's getting a lot more attention, a lot more focus than ever before. China arguably has been at the front -- forefront of this trend, but naturally, this is expanding in the U.S. and Europe. How do you think about the different layers of value capture?

No. Thanks, Edison. Thank you very much for having me here. Maybe before I even dive into the topic, let me maybe give a quick intro on Visteon and who we are and what we're doing, and then I'll answer maybe more directly your question. So maybe just in general, Visteon is a pure cockpit electronic player, and we offer a very large range of products from digital clusters to infotainment, including as well cockpit domain controllers, displays. And we've gone as well into electrification with our BMS. Our core capabilities are around software as well as around displays, and that's what allows us to offer a full suite of products. Our sales, as you said, are about $4 billion. We are very global. We're pretty well balanced as well by region, I would say, 1/3 in every large region. And we've got -- we are employing about 10,000 people, out of which about 4,000 are engineers. And that shows the focus that we have as a company -- as a technology company. So very good profit in 2024. We were at 12.3% EBITDA margin out of less than $4 billion in sales. And we've generated last year about $300 million in free cash flow. So just a quick backdrop on the sales. So maybe to answer your question, so given that we are in the cockpit. And given that the cockpit is becoming a key differentiator when you sell a car, Visteon is very well positioned. So we've seen significant trends, not just in China, but just generally and more and more technologies going into the car. So that means more digital clusters, more connectivity with your phone, better infotainment systems, better rendering as well of the information with larger curve displays and better quality as well for the rendering of this information. So we've seen these trends going into the industry. And it's true that China has probably gone pretty aggressively on the technology side. But we do see this as well, and we've seen that and benefited from this pretty much everywhere in the world. I would say that's where our skill set applies very well. You see more and more complexity in the cockpit from a technology standpoint. So it's not only the software domains that need to be mastered, but as well the integration of other areas within the cockpit that have got to be very well mastered. And again, because of our large range of products, we're able to grow, and we've been growing quite significantly in the last few years. I think maybe as you were mentioning China, I'll point to a win that we had last year. with Geely, and we were able to get on to their Zeekr brand and got the -- what we call a high-performance compute system with Geely. And it shows -- it demonstrates that especially in China, we can be very technology competitive as well as cost competitive given that we were competing with many, many competitors.

Can you share with us some observations or learnings in respect to consumers developing different kind of past behavior, especially in the cockpit entertainment, I imagine a lot has maybe changed in the last couple of years. And how has this influenced your product?

Yes. No, absolutely. So it's been a very fast-moving world, I would say. As I said, the cockpit is the key differentiator when you buy a car, there's not that much differentiation on everything else. The powertrain is less differentiated. So it's really the cockpit that makes the different consumers have been asking for more and more technology in the car. They want to have their phone going in. They want to be able to interact in the same way they interact at home with their phone or computer. And that's where AI as well will have probably a strong place to play in the near future. So if you look back a few years ago, whenever cars were sold, you had generally one trim that was a digital cluster. Very often now, you have 3, 4 trims that are digital clusters. So in the course of just 3, 4 years, we've seen a tremendous content increase generally in the car on the digital cluster side. But we've seen the same as well with infotainment. It's very rare now to -- in the Western world to sell a car without CarPlay, without a phone connection. So -- and what we've seen as well on the display side are larger, more sophisticated displays, which again plays very well into what we're doing given the sizable investments we've done on both software, but as well on display.

Competitively, I'm curious, what do you think the product offerings that you're most strong in? And which areas do you think are most competitive and they might be very [indiscernible].

Given that we've always positioned ourselves as a pure cockpit electronics, I'd say that we are -- most of our products, if not all of them, are very strong. But what's maybe as impressive is the fact that we have a very large breadth of products from, again, digital clusters to infotainment systems to cockpit domain controllers, the basic one, but as well the high compute ones, the high-performance compute one, as I was mentioning, all the way as well to electrification and we're benefiting as well for the electrification growth that we've seen over the last few years, even though the levels are probably lower than what we had anticipated. So I would say a strong product line overall. What is important for us is to keep on innovating. And that's one of the characteristics as well of Visteon. We've been extremely focused on innovation, not innovating too early, not too late as well at the same time. So trying to be on the right -- at the right time with the trends. And in some cases, as well setting the trends. We were the first ones who developed and sold a CDC system, a cockpit domain controller system back in 2018 to Mercedes. So that innovation has been at the core front of everything we do. And to have a strong product portfolio, you and to be able to sell it, you need as well to be cost competitive. So we do have a pretty strong, pretty well best-in-class, I would say, cost structure, and we pride ourselves with as well very good product cost.

The tech companies, whether it's the big ones in here or even Huawei in China, they're trying to get much more involved in the cockpit. Sometimes maybe on a chip, sometimes interface. How do you manage that relationship? It seems the collaboration, doesn't become...

Yes, yes, it is. We've -- from, let's say, from many years ago, we've partnered very well with Qualcomm. And given, again, the complexity of the cockpit these days, you need a lot of high compute power in the car. And we've got, I would say, almost a preferential relationship with Qualcomm, which has been developed over the years. We use their Snapdragon chip in our CDC system. At the same time, I would say that we are agnostic to what chip we're using in the car. So we've been using Samsung as well in the past.

Thinking about the next generation of cockpit, is this you're thinking that almost all cars at maybe above a certain price will have digital cluster, will they have big screen? Is this kind of where the industry is heading? If you do think that, how much extra content do you think...

Yes. I think you can -- I would think indeed that most of the cars will have digital clusters for sure and as well some displays because of the volumes that we're able to produce some of the standardizations that we've been working on. I do think as well that a lot of cars will have displays. And you can turn up or down the level of displays you're putting in the car. You can have on a mass market car a pretty simple display, whereas what we've seen recently as well is the OEs differentiating the car with what people see first when they come into the car, and that's display. So we've got pretty interesting shapes that are sometimes very difficult to produce, but that's been a great way as well for us to compete and be able to offer this technology, which is not easy to produce. I think there's sometimes a misunderstanding about displays. A lot of people think these are commodities, and they are probably commodities for your phone. They are pretty simple. They are -- they don't have to last 10 years. They don't have to be exposed to extreme conditions. And the curvature -- the curvature of the display on the phone is nonexistent. So all this technology, all these investments that we've done on displays have been absolutely fantastic and help us differentiate and offer not only in mass market displays, but as well in more premium brands, pretty differentiated display.

Give any rough numbers around the content and something very basic versus where you think we might be headed?

Yes. So if you step back a few years ago, most of the cars had hybrid clusters. So essentially a cluster that had an analog gauge as well as a little bit of digitalization with a small screen. These clusters were worth about $75. A digital cluster today is worth $150, $200. So that's just for the cluster. Displays can range literally from $100, $150 to over $1,000 when you go to, for example, pillar-to-pillar display. So the range is very large. But what we've seen -- and the CDC, which is -- if you think about a CDC, it's essentially the combination of a cluster as well as infotainment system. These as well products are between $350 and can go, again, all the way to over $1,000, especially if you're putting AI in there. So I would say the content in the car has been absolutely increasing over the years. And our success has been the fact that we've been able to win new business with new customers and therefore, increase our market shares as well as we benefited from that content increase.

What's been the response to the -- I think you got the pillar of the pillar that really almost like the...

The big ones, yes.

It seems just from the reviews, we've seen that you have a lot of hate. I don't know if that is accurate...

Yes, I think there are personal preferences. I think the luxury cars are trying to make a statement. And in fact, we see that when we go and bid for these kind of businesses, you have a lot of focus on the competition because it's a statement for sure. And as well, some of these are quite complex to produce. So it shows as well your capability, your leading-edge technology in this space, if you're able to win this kind of business and execute and produce according to the plan, which is not always easy.

You mentioned AI. I have to ask a little bit about that given the relevance of gaining in the cockpit, where does AI fit into all this?

Yes. So AI is, I would say, everywhere going into your phone. It will as well come into the car. And I think a lot of people have talked about AI in the car, but it's more essentially a replication of what you have on your phone. What we've showcased at CES was AI in the car that integrates the real live data that you have in the car and essentially combine this with the cloud. So it allows you to interact with your car, but using the data that is in the car. So it's a much -- the way we're thinking about it is not only obviously a reactive where you're asking a question to your car and the car answers, but it's as well a very predictive type relationship with the driver or the passenger. But again, using real-life data that is in the car. That's the big differentiator. And we've showcased our platform, which is called Cognitive AI. And we've -- since CES, in fact, we've had a lot of inbound from customers on this. I think they are still trying to see how they want to use this. China is probably a little bit more advanced in this area and again, pushing the envelope on the technology side. But we had very good inbounds from some of our customers already on this topic. So I would say more to come on the AI side.

Strategically, we noticed you've been in-sourcing some components recently. How much do you think in this next-gen infotainment cockpit world you need to control to cultivate them?

Yes. That's a great question. And we've started this, in fact, I would say, 3 years ago, when we had our Analyst Day back, I think, in 2023, we already were talking about in-sourcing a lot of the display manufacturing. And we think about it as a competitive advantage from a -- definitely from a cost standpoint, obviously, but as well from a technology standpoint. If you are manufacturing yourself, the certain products, some of the components that you're assembling, you are at the leading edge of technology, you're more likely to stay relevant. So that's kind of the philosophy. So displays has been a great success story. We are in-sourcing now a large portion of our displays and invested in our major plants to have that capability. There are other streams as well as in-sourcing that have already been almost completed. We do, for example, magnesium injection molding, which is pretty technical as well. So we tend to go for the more technology savvy areas that tend to be expensive when you buy them from the outside, and that can give us as well this competitive edge.

Does it make sense to have any front for voice recognition?

When you say voice recognition...

In the car, yes.

Yes, it's absolutely. That can be -- I think there will be many, many forms of AI and many use cases. So yes, absolutely.

Okay. I guess in relation to that, you -- on the in-sourcing side, I think a couple of years ago or the last couple of years, there's been rumbling about the OEMs kind of wanting to take more control over the cockpit because of the number you mentioned [indiscernible] is the in-source of helping to defend the position, so they may make that...

It's kind of independent from what they're trying to do, but it's true that if we are cost competitive, if we are technology focused, we'll be very competitive with our customers. And in some case, in fact, in many cases, prove that it's -- there's no point for them to in-source. I think the challenge the OEs have got these days, they've got so many things to worry about. If you think about the -- and I'm not even thinking about the powertrain, but just even in the cockpit, the amount of domains you have to master being cybersecurity, connectivity, functional safety, these domains are pretty complicated, and they get more and more technical every day. So it's hard for OEs to be able to master all these. And therefore, we do have a pretty big role to play in my mind. We are also -- and that's a good indicator that they are realizing that it's hard to master everything. We have expanded in a more intentional way into engineering services in the last year, and we acquired a small company that is doing that largely because we've realized a lot of OEs are using a lot of engineering services firm to be able to get advice. So these are more like consulting type activities, supporting, recommending, advising OEs on certain matters. And that just showcase the fact that it's complicated. So we're not pretending to know everything. But over time, if you think about the number of platforms that we've been launching over the last 10 years, we're launching about 100 platforms per year. So I would say, 1,000 platforms. It gives us a very broad range of experience. It's a little bit like Tesla that has been about what they're doing for many years. It's very similar for us. So for the OEs to come in and recruit 2,000 people, we've seen that in a few cases. It's not that easy to become expert on a certain topic, even recruiting 2,000 people.

I hear on that. You've got a lot of traction, speaking of the new launches and [indiscernible], you've got a lot of traction with a very tough crowd Chinese OEMs, in particular, Toyota. Do you see opportunity to replicate this with other companies?

So Toyota has been a fantastic success story for us. And if you even step back in 2019, Toyota was not a customer. Today, a few years later, we've already won more than $2 billion of new business with this customer. And we've already won more than 10 platforms out of our top 20 platforms. So it's a great success in a very short amount of time. By '28, we think this customer with what we won today will be close to 10% and will be in our top 3, top 5 customers. So it's been a very rapid success story. And what has happened with Toyota, we were able to obviously showcase cost technology and quality as well, but as well speed. They wanted some quick refresh of their cockpits, and we were able to do that. So they tested us along the way and slowly but surely given us quite a lot of business. So what we are -- what we've been focusing recently is trying to tap into other customers that are in the index for us in the index. And there are 4 customers that we are targeting, Toyota, Maruti Suzuki, Hyundai Kia and Honda. And these 4 customers represent 5% of our sales today, so pretty small, but they represent about 25% of the market. So we've done a fantastic job with Toyota with what we call landed Hyundai Kia as well as Maruti Suzuki with a first win with Maruti Suzuki last year. And the objective is now to expand. And we generally do that pretty well. We are very customer-focused as an organization, and we hope to be able to increase our market share with these customers. We are also going into adjacent markets like CVs and 2-wheelers, which are as well seeing an increase in content on the digital side. So a lot of the bikes now have digital clusters, the large Class 8 trucks as well, obviously, with full infotainment systems. So there's a lot of migration of what we've seen in the car as well into other areas of like CVs or 2-wheelers. So we do have a lot of opportunity to grow, not only with our product lines, but as well with very specific customers or as well very specific segments.

One area that's been tough, China, and I think you've acknowledged this in several quarters. But I get the impression that maybe the worst could be over. Would you agree with that?

Yes. And that's what we've guided to when we announced our guidance at the beginning of the year. So we do think that '25 will be the low revenue -- the low point for revenue for China. China represents a little bit less than 10% of our sales overall now these days, 40% of our customers are local domestic OEs and 60% are international OEs. What we see going forward is really -- a resuming of the growth in '26, but as well in '27 as we won already some businesses with Geely, with local OEs, but as well with some of the international OEs and only -- we're only focusing or mostly focusing on Germans and Japanese who we think will keep some level of share in China. So with this, we think that the share between local and the international OEs for us will be about 50-50 in 2027. And I think maybe if I can add, again, the Zeekr win that we got recently shows that we can be very competitive. We are focusing in China on the more technology critical items as opposed to try to fight in mass market where you have outrageous price war.

I want to move a little more to the financial side. Obviously, the execution recently has been excellent, both on margin and free cash flow. What's the next priority for you?

It will remain margin and cash flow. So yes, we've done quite a good job in the last 5 years. So if you look at where we were in '19 and where we are today, we've doubled EBITDA and added more than 100 basis points of EBITDA. And our free cash flow has been -- in terms of generation, we've been at close to 40% on average over the last 5 years, 40% of EBITDA in terms of free cash flow generation. So it's been a great story. We still have got, in my mind, a lot of opportunity to continue expanding. Obviously, growth will keep on helping. And we've done a good job at growing without adding the level of fixed cost that is needed to run the business. So scaling has been a great way to improve the margins. But we do have further vertical integration initiatives that we are working on. As an auto supplier, we're always working on manufacturing productivity. But what we do as well, given that we have 4,000 engineers, we are also working on engineering productivity, which I think is a little new in the industry. I don't hear a lot of people talking about engineering productivity. And that productivity can be people just being more efficient, having better tools using AI, for example, and if you are able to be 5%, 10% more productive out of 4,000 people, that's quite a large number. So that's an area we are working on. I would say we still have got as well some inroads to make on material cost, and we're working on that, getting deeper in the supply chain, trying to understand better what true cost should be. And then finally, some of the businesses that we're pursuing as well can be quite accretive from a margin standpoint, CV 2-wheelers, engineering services or high-performance cockpit compute system as well.

A little bit on the near term perhaps. It seems the macro fingers crossed a bit stable now, tell you why -- are you seeing better visibility in the production schedules in particular in North America and how the other regions kind of looking?

It's been remarkably stable, in fact. We were a little surprised to see so much stability in our orders from customers. So our visibility is always the same. We have very good visibility for the next quarter, and then we are using planning from customers on the longer run for Q3, Q4. And these can be obviously subject to changes quite rapidly. But we are cautiously optimistic that the volume will hold. The SARS level is pretty strong in the U.S. these days. Inventories are low, which is a good sign. I think in Europe, we've been benefiting recently, in fact, from the EV growth of the non-Tesla producers, and we are on quite a few platform over there. So that's been a pretty nice upside for us. And then China has been holding reasonably well for us as well. So overall, we see a lot of stability in the volume so far.

On the tariffs, at least one question, unfortunately, on the tariffs. I know the plan is to obviously pass on. Has the timing, has the magnitude kind of been in line with the expectations that you laid out?

Yes. Nothing has changed since we last reported, in fact, during our earnings call in Q1. For us, the key is U.S. MCA compliance. We have -- out of all the products that we ship from Mexico to the U.S., 97% of our products are U.S. MCA compliant. So today, we barely pay any tariffs. And for the few percentages where we do pay tariffs, we are working with our customers to try to see what are the alternatives. So it's been a good position to be in. And if things can stay like that, that would be a big win.

Just one thing on the comment you made about China. Do you think on the JVs -- the foreign JV, do you think the -- they've been obviously still in decline, but decline for a while. But sequentially, is that sort of -- do you think they're sort of bottoming out in terms of their performance?

I think there's still room for them to go even further down. We are more optimistic about the Germans and the Japanese generally. I think the other ones have been struggling quite significantly.

Okay. And then just on the free cash flow, as we mentioned earlier, it's been very strong. And there's some M&A for insourcing going on. What's your framework on the capital -- the return to shareholders and buybacks?

Yes. So we've been generating quite a lot of cash. We've -- I would say we have obviously a very strong balance sheet. We have a net cash position. We've been generating quite a substantial amount of cash flow. So our priority remains to invest in the business. And it translates, obviously, through engineering spend or CapEx. But I'm putting a lot of effort as well on the vertical integration. So if we need a little bit more CapEx to vertically integrate some activities, we'll do so. So it's always a key priority. We've been as well doing quite a lot of share repurchases. You may know that we have an authorization of $300 million out there. We've used about 60% so far. Most recently, we've been refocusing our effort on M&A. And we've done a first acquisition, what we call a bolt-on, small acquisition in Q3 of last year, about $50 million of purchase price. And we are pretty active in looking at other type of acquisitions that would resemble this one where we are essentially trying to acquire a very technology-focused company that offers engineering services, not only because they are accretive day 1 with very good margin generally, but as well, they allow us to strengthen our engineering core teams and platform that we have developed. So M&A will remain for the next future at the forefront and then we'll return cash to shareholders with the excess. So generally, I would say we're trying to have a pretty balanced approach from a capital allocation standpoint.

Last question. And if you want to raise your hand, we can also bring someone else in. If you think about -- we talked a little bit about the competitive dynamics. Do you think there's consolidation that needs have in, in some of the suppliers, I guess, depending on which of those...

In China or just generally?

Just generally...

In China, for sure, yes. I think the -- outside of China, we've got a lot of our peers that are looking for strategic alternatives. I won't give the names. I think everybody knows there was a bankruptcy announced yesterday before. So there's a lot of turmoil, I would say. So yes, I do think that there's going to be some level of consolidation or at least there will be less suppliers on a go-forward basis, at least out of the Western world. There is definitely a lot of Chinese suppliers that are emerging in China, and some of them have ventured as well outside of China. So the deck will be reshuffled. We are, again, putting priorities on technology and cost so that we can compete with the newcomer.

Just we've heard a lot about the geopolitical tensions creating some kind of more of a desire for companies, especially in China to buy from China and to source from China. Just curious, especially given the kind of leading technological advantages in a lot of these things, what makes your product more competitive and allows you to be competitive with some of those Chinese...

I think it's the -- as I said, we've been at the forefront of technology for a long time. We have as well great partnerships with Qualcomm on the chipset side. And then I think these are 2 critical elements. There's maybe a third one, which is a little bit tangible and is the fact that we are able to work pretty fast. We are pretty nimble as a $4 billion company. We are not part of a larger big company. And therefore, we work pretty well with the Chinese. We can meet some of the very fast demand that they have. And that has been a big differentiator as well as much as it's quite intangible.

So with that thank you, Jerome.

Thank you very much.