Good morning. I'm Kris Doyle, Director of Investor Relations for Visteon. Welcome to our earnings call for the Second Quarter of 2019. Please note, this call is being recorded and all lines have been placed on listen-only mode to prevent background noise. Before we begin this morning's call, I'd like to remind you this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future results and conditions, but rather are subject to various factors, risks and uncertainties that could cause our actual results to differ materially from those expressed in these statements. Please refer to the page entitled Forward-Looking Information for further details. Presentation materials for today's call were posted on the Investors section of the Visteon’s website this morning. Please visit investors.visteon.com to download the material if you have not already done so. Joining us today are Sachin Lawande, President and Chief Executive Officer; and Christian Garcia, Executive Vice President and Chief Financial Officer. We have scheduled the call for 1 hour and we'll open the lines for your questions after Sachin's and Christian's remarks. [Operator Instructions] Again, thank you for joining us. Now I'll turn the call over to Sachin.

Thank you, Kris, and good morning, everyone. I will start by providing an overview of our second quarter results on Page 2. On subsequent pages, I will discuss highlights from the quarter and provide our perspective on the outlook for vehicle production for the remainder of 2019. Christian will then review our financial results in more detail. Vehicle production at top Visteon customers was down significantly in the quarter across all regions with China leading the decline at high-teen levels. North America was weaker than expected and the product mix also affected us negatively in this region, and while Europe was also lower than prior year, it was in line with our expectations. Overall, production volume at our top customers was down about 8% for the quarter. Visteon recorded sales of $733 million in the quarter. Adjusted EBITDA was $46 million or 6.3% of sales and adjusted free cash flow was $28 million for the quarter. Our profitability was impacted by lower OEM volumes and unfavorable mix as well as the pricing and currency. Despite the severe weakness in the automotive market in China, in the second quarter, Visteon sales performed very well growing 30% year-over-year. We also won approximately $1 billion in new business wins in China year-to-date and have launched 27 new products in the past 12 months. We will talk more about China on the later page. On the operations front, we are on track to resolve the specific items that impacted us in the first quarter. The ramp up of production of the center information display module is going as for planned. We are steadily improving the yield and the glass supplier is also improving the quality and throughput. The transfer of our plant in Reynosa, Mexico to a new facility nearby is also complete. We…

Thank you, Sachin, and good morning, everyone. On Page 12, we present our key financial results for the second quarter of 2019 versus the comparable period in 2018. Sales of $733 million in the second quarter decreased $25 million or 3% compared to last year as new product launches partially offset the impact of lower production volumes, currency and pricing. This year-over-year rate of decline is the lowest that we have registered since the start of the industry downturn in the third quarter of 2018. Adjusted EBITDA was $46 million, representing a $35 million decrease from 2018. Besides the impact of lower revenues, we had unfavorable mix, higher engineering expense and cost associated with launch challenges discussed earlier. Adjusted free cash flow was positive $28 million roughly flat with last year. Lower year-over-year profitability was offset by a higher contribution from trade working capital. I will provide more detail on the following pages. On Page 13, we provide sales and adjusted EBITDA for the second quarter 2019 versus 2018. Sales were negatively impacted by a challenging production environment and then favorable mix from lower volumes of mature products in North America and Europe. Offsetting these factors our product launches in higher take rates, particularly for a next generation infotainment system for an OEM in China. Pricing reduced sales by $17 million representing 2.2% of last year sales of the lower end over historical rate. So far we've been able to mitigate pricing pressures, but we expect the second half to revert back towards the midpoint of historical levels between 2% and 3%. Adjusted EBITDA was negatively impacted by lower production volumes and unfavorable mix away from older higher margin products. The negative impact of these items was offset by material cost savings and other efficiencies. Annual price reductions lowered profitability…

[Operator Instructions] Your first question comes from Brian Johnson of Barclays.

Yes. Good morning, Visteon team.

Hey, Brian.

Congratulations on that amazing growth in China. I want to talk a bit about the second half profit guide. A couple of questions, as you kind of think about, especially the 4Q, is there any way to dimension how much of the profit improvement is due to overcoming the display launch challenges? And then how does that roll into 2020 and how much is dependent on engineering recoveries and other pricing actions with your OEM customers?

Right. Thank you for the question, Brian. So the way we are projecting our fourth quarter, the components that drive the significant growth and profitability from Q3 levels to Q4 are the following. Half of the increase in the profitability is driven by engineering. This is from the restructuring benefits that we've been discussing in higher recoveries. Let's say about 25% to 30% from volume increase. We're anticipating sales to get to go up by mid-to-high single digits from Q3 to Q4, better margins from product launches, and the display product that we've been talking about, the incremental costs of about $3 million we pick up in Q4. Going forward in 2020, we do not anticipate any issues associated with the display product.

And in terms of engineering credits, is there a rough cut dollar amount for that or percent margin impact?

If you think about the levels that we saw in Q4 of last year is pretty much what we're expecting in the fourth quarter as well.

Which gets to my second question, investors after Lear's warning about its e-systems business where it flagged a strategic agreement with the customer, many of us think it might be mid-cycle price down are worried about pricing in electronics and engineering recoveries, especially in electronics. Can you maybe talk about pricing in the quarter, which seem relatively benign, but your level of comfort in actually getting those recoveries, given the pressures on OEMs?

Yes, sure. Brian. But as you know, as complexity and capability of cockpit electronic systems is been increasing very quickly. It's also increasing the price that OEMs have to pay for the system. So there's a lot of pressure on suppliers to reduce price as a result. I wouldn't say that this pressure is anything extraordinary than what we've seen in the past. But at the same time, there's even more pressure on OEMs to offer competitive solutions, and there's a lot of value for suppliers that can deliver this complex systems safely without putting vehicles launches at risk. So suppliers that have the capability that can deliver this complex systems on schedule at costs are in a much better position to handle this pricing pressure. So as you have seen, our last few quarters, we have been able to address these pressures and pricing is more or less in line with what we have seen and we expect that to continue going forward at least for the next couple of quarters here.

Yes. In terms of the engineering recoveries, Brian, I think in my prepared remarks, we said that one of the favorability that we saw in engineering for the second quarter is that timing of recoveries, and therefore, we are seeing again, we've mitigated some of these issues around that with our OEMs with customers.

Okay, great. Thank you very much.

Your next question comes from Itay Michaeli of Citi.

Great. Thanks. Good morning, everyone.

Good morning, Itay.

Maybe first question just on revenue, given the production pressures you talked about, you did keep the guidance flat, just hoping you can talk a little bit about some of the offsets on take rates globally as well as the impact that you mentioned on product mix from mature programs both on revenue and profitability for the full-year?

Yes, sure. So Itay, I would say the main components of our guidance, the main drivers have been the market environment which has weakened, especially in China are the lower production outlook for the second half is the main driver for lowering the guidance. Now in addition, we are seeing a incremental impact from product mix. In the past, we have said that about 10% of our revenue comes from these old legacy products, and these are products such as clocks, key fobs, small displays, et cetera. And much of the decline was expected, and we have factored that into our earlier guidance as well. But what we have seen are that started to appear in this second quarter and we believe that's going to continue for the rest of the year is a steeper decline in sales of some of these legacy products, in particular, the small displays and that is one of our contributors, the small one, but a meaningful contributor to our lower guidance. And then, that's also in addition, we have this, the ramp up costs, the lingering costs that Christian talked about in his remarks that will impact us mostly in the third quarter.

So Itay, the only thing I would add to that is that you've noticed that we haven't really changed the revenue guidance because previously, in terms of our range, we were a little bit up on the upper end of the midpoint and now we're solidly in the midpoint of the guidance. So it moved, but it is still within the range.

Got it. That's very helpful. And then just secondly on the engineering expense going back, it sounds like you still expect mid single-digit for the full-year, but based on the third quarter guidance, it implies a pretty significant drop in the fourth quarter. Just curious how you know, what the risk might be around that? Or are you kind of depending on any customer negotiations or engineering recoveries or do you have a pretty good line of sight on that fourth quarter engineering expenses?

That's a good point, Itay. So if you look at last year and you look at the amount of recoveries that moved from Q3 to Q4, we have the similar move this year and it's about in the upper $20 million range, $26 million, $27 million. The rest is actually the restructuring benefits that we're seeing, right. And that is under our control. So to give you kind of how we think our engineering will move between the third quarter and the fourth quarter.

Very helpful. And just lastly on the new business wins, it looks like based on the second half pursuits of about $12 billion that I guess to hit your $6.5 billion a full-year target, you need to maybe get about a 30% win rate. And if that's true, can you maybe just talk about what Visteon’s win rates have been in the last six months or a year or two just if you can kind of make that comparison?

Yes, sure. Our win rates have actually been higher than that. If you look at the last, I would say, if you go back almost a year, our win rates are around 50%. So we have a much bigger pipeline of opportunities, but as you know, these opportunities can shift in terms of the timing of the award. So yes, we are seeing $12 billion, mainly in the instrument clusters, displays, SmartCore and infotainment opportunities are in front of us. So it's a very healthy pipeline. In fact, I think at this point in time for the rest of the year, it's healthier than I've seen in awhile. So that's good. I expect some of this to move out. And nonetheless, on account of our expectation of a higher win rate, we should be in a good position to achieve our full-year target.

That's very helpful. Thank you very much.

We'll go to our next question from Emmanuel Rosner of Deutsche Bank.

Hey, it's Edison. Thanks for the question. Two things, first, is there any update on the supplier pricing that was discussed last quarter in terms of the – from the Tier 2 perspective on the electronic components? And then second question, and this is probably been kind of asked before, but just trying to get an idea in terms of the EBITDA guide down, can you just I mentioned what were the various drivers? Was it basically all the production?

Sure. I'll take the first part and last Christian to add to the second. So if you go back what we were discussing on the first quarter with respect to a material pricing, especially the passive electronics components. We were experiencing an inflationary pressure on those components, which actually started to our show itself towards middle of last year 2018. That pressure did continue, however in the second quarter as we had indicated, we are seeing some relief on this material pricing, especially for this passage. As more capacities starting to come online. We will still, we expect for the full-year to be in that half a point range or of a negative impact. But as we go further out to 2020. We expect this to largely dissipate. So it's a story that we will be living with for the rest of this year, hopefully next year this is not going to be an issue.

In terms of the guide down between our prior guidance and our updated guidance. If you look at the midpoint of the prior guidance versus the new guidance. There's a difference of about $17 million in adjusted EBITDA. So the drivers for the change, just about two-thirds of that change. Is due to the headwinds that we have been seeing. Particularly in China, the rest of it is evenly split between the incremental costs to clear the backlog for a display product in the third quarter and the unfavorable mix that we discussed in our prepared remarks.

Your next question comes from Colin Langan of UBS.

Hey, guys. Gene Vladimirov on for Colin.

Good morning.

ADAS looks to be a relatively small part of the pursuit pipeline. Can you talk about kind sort of the competitive environment that you're being in that segment?

Yes. Sure. It's a very quickly evolving landscape, I would say, so if you were to look at the opportunities that were being discussed or let's see about a year-ago. A lot of the tension was on Level 3 and higher capabilities. So one of the biggest changes that has occurred in the last, I would say three to four quarters has been the realization that Level 3 in particular, but even Level 4 are the challenges that we face from a technology viewpoint are now much better appreciated. And so – as the industry is starting to think about the timing of the rollout of this capabilities. These are times are now proceeding further out into the future. In the meantime, there has been a lot more in evolving the capabilities of these Level 2 systems. If you look at the Level 2 systems today, most of them have limitations in terms of the features that they enable or offer at certain speeds. Typically the speeds that they work at are – that lower urban driving speeds. So there's interest in offering Level 2 capabilities in particular Highway Co-Pilot as well as driver assisted lane change to operate at highway speeds. Now when you move to this level of speeds and these types of features and functions, you need to also move away from the very sensor specific and fusion less approach of the current Level 2 systems, and you have to move into a more centralized computing, sensor fusion processing for these types of features. So here DriveCore is a very good solution, because the DriverCore offers a very scalable hardware, offers this higher level of performance that's required for sensor fusion. It also offers open software platform, which enables us to integrate existing software that might have been done by the OEM or some of their other partners and run it on our platform. So we're starting to see more opportunities to offer DriveCore as an extension of an existing Level 2 system versus what we were discussing earlier of a fully centralized integrated Level 3+ solution. So we expect to see more opportunities like this. I'm very happy that we are now on the supplier panel and we'll be receiving RFQs a year-ago. I wouldn't have been able to say this given our lack of prior experience and credibility in the space. So we have made a lot of progress and hopefully this is going to result in new business for us.

That's great. Thanks. And then can you just – a little housekeeping, can you give us color on the kind of the sales lift embedded from the consolidation of the JV and was that included in the original $2.9 billion to $3 billion sales?

Yes, it is. So if you look at the JV consolidation impact, it was about $14 million, $15 million in the core. And it is included – it has always been included in our sales range.

Okay. Thank you very much for taking the question.

Your next question comes from Dan Galves of Wolfe Research.

Hey, good morning and thanks for taking my questions. I know it's already been asked, but regarding the revenue guidance and your ability to hold it. If I look at the adjusted production expectations of one point in North America, one point in Europe and going from four to minus 10. In China, like maybe that's a 2% hit to your customer volumes, which would be about $60 million on kind of last year's revenue. Is that kind of the right way to think about it and if so like there must have been some sort of positive offset to allow you to kind of stay within the range of the guidance if you could comment on that?

Yes. Yes, so you are generally in the right direction there with your assumptions. The only difference that I would say is we talked about the take rates being higher in China for us, which mitigates some of the volume reduction. So if you are just for the take rate increase, you would be very much in line with how we look at it.

Right.

And so Dan, I've mentioned this in previous question that we were above our – close to the high-end of the range and now we're in the mid point that that actually brings you to where – pretty much where you are.

Okay, great. That's really helpful. And the second question is, understanding you're already launching a lot of new business, but based on your longer-term targets, it looks like new business starts to ramp more significantly in 2020. How should we think about the direction of net engineering costs and launch costs as the new business ramps start to accelerate?

Right, and so again, thinking ahead to 2020, we will obviously update you on our margin outlook earlier next year as we always do. But let me share with you some of the things that that we see – that have happened to the business this year and how that's expected to play out going forward. So if you look at what has happened since the last time we provided our guidance, earlier this year, the long-term guidance, there are several factors that have impacted our margin that in fact four in particular, so the biggest one has been the lower production volume. Second, we have had this unfavorable product mix, right. This legacy products that have been rolling off replaced by the newer products, which have lower margin. Third, we talked about the higher material costs, mainly due to the passive electronics components, capacitors resistors and some chips as well. And then these are unexpected costs in the ramp up of the display product. So these four things have impacted our margins this year as we look forward to 2020. We expect two out of this four this cost associated with the ramp up of the display system as well as the increased material costs to dissipate. At the same time, we also believe that our volumes, our sales I should say not volumes. Our sales are going to be higher in 2020. Almost I would say there's back – the underlying production environment on account of new product launches, which are significantly more than number in 2020 then any of the year. So these factors together with some internal initiatives that we have to drive higher margins will result in over the next couple of years a very healthy margin expansion. That's all we see it and obviously we will be updating you beginning of next year in terms of exactly how that's going to play out.

Okay, great. Appreciate the answers. Thanks.

Your next question comes from David Leiker of Baird.

Hi, good morning. This is Erin Welcenbach on for David. My first question for you is related to your commentary on the better margins on products launching in Q4. So can you just talk a little bit about sort of the puts and takes to some of those mix issues given, you're still seeing headwinds from those legacy product roll-offs and maybe if you could even frame? How we should be thinking about the margins of things rolling on from the backlog in 2020 kind of versus these mix issues?

Right. So and what's happening here is that we have a few products or products that are launching, actually launching in Q3 as well as in Q4. That are higher margin than some of the products that that we have in our backlog. So this second half of this year there's a very active period for us in terms of new product launches and this is going to contribute to an improvement in the margin sequentially going from the third quarter to the fourth quarter. We expect that improvement to continue into next year. Now on top of that based on what I just said about some of these things that are issues that we’ve face more this year, this ramp up costs and the material costs that that are going to dissipate. We expect that to further contribute to the margin improvement next year.

Okay, great. And then a question for me on SmartCore. Can you just maybe dig a little bit deeper into the when you announced there with the Chinese OEM and whether there's potential to expand that business beyond the six vehicle models and the lineup that you had originally announced?

Yes, absolutely. So let me give you a little more color on what that system is and how to think about it. So, but before I talk about that, very happy that we've had now two wins in the quarter for SmartCore. We have now a total of six OEM customers in over 10 programs with SmartCore technology. So this is really something that we believe we have made a big step forward. And I think we are separating ourselves from many of our competitors in this regard. But coming to this particular opportunity, it's for a cross platform solution, not just for our internal combustion engine vehicles, but also for their electric vehicles. So it's a fairly large investment on part of this OEM and it's going to be a SmartCore system that run on a very advanced SoC till deliver a substantially higher level of processing power. It has a instrument cluster functionality that we provide. In addition to that, it has an Android-based infotainment system, but on the Android-based system, does our OEM and their other partners, one of the larger ecosystem providers out of China are bringing in AI and cloud services. And so this is expected to be a very sort of ground breaking approach to cockpit electronics probably will set the standard in terms of what new cockpit electronic systems based on this domain controller concept are supposed to look like. So we're very optimistic about it. We have six vehicles that are planned or taking this technology, India cycle plants, but as they develop their cycle plants further and forward, we expect to see more vehicles get added to it.

Great. Thanks for taking my question.

Your final question comes from Steven Fox of Cross Research.

Thanks for squeezing me in. Just one big picture question. It sounds like you're definitely not seeing any kind of deep contenting trends as production slows. You're actually seeing the opposite. So I was curious as a competition heats up in a slow production environment, especially in China, like how far do you think the OEMs can take sort of content higher and how much it could benefit you relative to just the overall economic environment? Thanks.

Right. That's a fairly complex question, but let me try to answer it. The way to think about it is where we have products that are more higher digital in nature and content. We are the beneficiary of this long-term trend that we see for equipping the vehicles with more content. That's certainly the case for those in China. And as we have been talking about, our launch velocity of new products in China has been really high over the last little while, you can expect to see us being at the – receiving of the benefiting end of this more in China. What we are also starting to see is that with 2020 and starting in 2020 I should say, is that we are starting see us benefit from this take rate improvements in these regions as well. A lot of the downside effect that we have experienced in the last couple of years has been on account of us having the lower content products in the regions outside of China, mainly North America and Europe. But the last three years, we've worked very hard to change the profile of our product mix in these regions. So as we get into 2020, we should start to see the product mix look good or better, I should say in regions outside of China as well.

Great. That's very helpful. Thank you.

This concludes our earnings call for the second quarter of 2019. Thank you everyone for participating in today's call and your ongoing interest in Visteon. If you have any follow-up questions, please contact me directly. Thank you.

This concludes Visteon's second quarter 2019 earnings call. You may now disconnect.