Good morning. My name is Anna and I will be your conference operator today. At this time, I would like to welcome everyone to the Visteon Third Quarter 2023 Earnings Call. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Ryan Wentling, you may begin your conference.

Good morning. I'm Ryan Wentling, Vice President of Investor Relations and Treasurer. Welcome to our earnings call for the third quarter 2023. Please note this call is being recorded and all lines have been placed on a 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 additional details. Presentation materials for today's call were posted on the Investors section of 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 Jerome Rouquet, Senior Vice President and Chief Financial Officer. We have scheduled the call for one hour and we'll open the lines for your questions after Sachin and Jerome's remarks. Please limit your questions to one question and one follow-up. Thank you for joining us. Now I will turn the call over to Sachin.

Thank you, Ryan, and good morning, everyone. Thank you for joining our third quarter 2023 earnings call. Page 2 provides a summary of our results for the third quarter. The company performed very well, delivering strong results for the quarter and strengthening our foundation for long-term growth. Third quarter sales were $1.14 billion. And excluding the impact from supply chain related pricing, our base sales grew 9% year-over-year, further demonstrating the strong demand for our digital cockpit products. Adjusted EBITDA was $128 million or 12.6% of sales, an increase of $33 million when compared to last year, driven by strong growth in our underlying business and a few favorable commercial items. As a result of our strong performance year-to-date, we are increasing the midpoint of our adjusted EBITDA guidance for the full year. Adjusted free cash flow was a positive cash inflow of $98 million bringing our year-to-date cash flow to $93 million. The company delivered another quarter of strong product sales growth despite some emerging headwinds in the industry. In North America, our sales remained solid and the UAW strike had an immaterial impact to our sales as our Detroit customers continued to receive products throughout the quarter. In Europe, the strong order backlog at our customers has normalized due to weaker consumer demand, resulting in vehicle production at our customers coming in lower than we had initially anticipated. In China, vehicle production excluding exports was lower as well due to weaker consumer demand. With the market shifting more to electric vehicles, domestic OEMs in China are gaining market share over global carmakers, which is resulting in a negative customer mix for Visteon in that region. Despite these headwinds, Visteon's product sales grew in the third quarter due to the ramp up of recently launched products. We launched another…

Thank you, Sachin, and good morning, everyone. Visteon posted a solid set of financial results in Q3, demonstrating another quarter of commercial and operational discipline. We continue to build momentum with our sales growth, margin expansion and cash flow generation. Q3 sales were slightly over $1 billion and when excluding the impact of supply chain recoveries, grew 9% compared to prior year. This strong performance was supported by the ongoing demand we see for our digital clusters, cockpit domain controllers and BMS programs combined with the benefit of recently launched programs. While the UAW strike has added significant uncertainty to the automotive market in North America since mid-September, the impact was immaterial on our third quarter performance. Semiconductor supply has continued to improve and as a result, our reliance on open market purchases has significantly reduced year-over-year. However, we continue to see elevated prices from our traditional Tier 2 suppliers. In the third quarter, we shared approximately $70 million of these higher costs with our customers. We are optimistic that the semiconductor market will continue to improve in the coming quarters and expect that the need to pass through these costs will decline over time. Adjusted EBITDA was $128 million for the quarter, an improvement of $33 million versus prior year. Adjusted EBITDA benefited from higher base sales, improved operational efficiencies, lower engineering spending, as well as the timing of several favorable commercial items. This was partially offset by an increase in SG&A expenses. Our adjusted EBITDA margin was 12.6%, but adjusting for some of the positive commercial items in the quarter, as well as for a more normalized engineering spend, our run rate was closer to 11%. Adjusted free cash flow was $98 million in the quarter, benefiting from a strong EBITDA and a reduction in working capital. We…

[Operator Instructions] Your first question comes from the line of Luke Junk with Baird.

I guess I'll take the obvious topic to start with, just the UAW strike in. I'm just curious beyond the impacts to sales and operations that are downside risks, do you see any silver linings to the strike in terms of, I guess, thinking in a tight supply chain environment, potentially reallocating chips, maybe building safety stock, continuing to drive down the open market purchases, things like that? That's the first question. Thanks.

Hi, Luke. Good morning. Yes, indeed. I mean we are looking at all opportunities, not just the UAW strike to improve our performance in the supply chain. Just maybe take a step back where we are at with semiconductor supplies. Although supply has gradually improved all throughout the year, which has been a good thing and that has lowered our dependence on spot buys. There are still a few chips that are critical and we're watching them very carefully. In general, I would say the investments in capacity and efficiency of fabs that we've discussed previously have delivered in terms of higher supply, but demand from automotive has not gone down much unlike some other sectors. So while we have maybe taken some benefit from the lack of demand on the other sectors, I would say that we still have a few chips that we need to work on, that we are trying to build a level of safety stock. And any reduction in demand whether through the strike or any other factor, would help in terms of building up that safety buffer. So that's where we stand.

And then my second question, a bigger picture question, Sachin, and that'd just be in terms of the customer reaction to the first power electronics win that you announced last quarter. Just curious if you have a better understanding of Visteon's opportunity in power electronics and just general position in the market. And I guess my impression is that, that part of the market is still somewhat immature, but I would think to go out there now with a actual award in hand that would be a pretty meaningful factor?

Yes. Your description of the market as being immature, I think is very apt. And that is what I hear when I go out and talk to customers about power electronics. Now just to set some context, the industry is going through the shift from 400-volt architectures to 800-volts and that's creating new requirements for power electronics, which are quite significant and have caused a lot of challenges for OEMs. Now, these challenges existed even with the 400-volt architectures in terms of power electronics. And specifically we're talking about products like high voltage junction box, DC to DC converters and onboard charges. But when you go up to 800-volts, the requirements get that much more difficult and especially in terms of efficiency, rate and volume and very importantly thermal management. And since we are addressing many of these concerns, there's a lot of interest at OEMs in our solutions. So the way I would characterize this is, yes, it has -- this win that we announced last quarter has put us on the map. It has made us a legitimate supplier of this in the systems in the industry that has generated a lot of discussions and interest at OEMs. But I feel like we will still need a couple of more quarters before we can fully understand the full potential for us in this particular space. We remain very optimistic.

Your next Question comes from the line of Dan Levy with Barclays.

I'm wondering first, Jerome, if you could maybe just give us a bit of a bridge from 3Q to 4Q. I appreciate that part of the decline is going to relate to the non-repeat of some of the commercial items. You also had some strike. But I'm wondering, if you could also just sensitize for us given the strike just ended last night for your largest customer within the D3 or should be any?

Sure, Dan. So maybe let's go back to Q3 for a moment. We're very pleased with how the quarter developed. Growth over market was 9%. Our sales grew as well by 9% in a flat customer environment to production for us. Our EBITDA run rate when you normalize for some of the timing items that we had was close to 11%. So it does two things: First, it confirms the good run rate that we had indicated we would have in Q3 at the end of Q2; and then it allows us to raise the midpoint of our EBITDA guidance while absorbing some level of strike. So talking about Q4 and looking at Q4 versus Q3. On the EBITDA side, we are still seeing some benefits from extra volumes, even though we've got some impact of strike baked into our midpoints. And we won't see obviously the onetime items that I've called out in my prepared remarks, which are impacting our Q3 results by about 100 basis points. And then what we'll have in Q4 is a little bit more engineering cost than we had in Q3. We had a fairly low level of cost in Q3 in engineering, largely because of again timing, and we'll see some ramp up of these costs in Q4. So overall still a very good quarter, we will be closer to 11% overall in Q4 in terms of EBITDA. As far as the strike is concerned, we've been watching obviously the news and the announcement from yesterday, may change the dynamic on the strike obviously. We still are exposed obviously to GM, not just to Ford, and we'll have as well to see how the ramp up of some of the Ford and GM or Ford plants materializes. We are a little bit unclear as to whether an office ramp up will be straightforward and without any hiccup. So this is something we're watching very closely and we'll take it from there from now.

Of the -- you said weekly revenue of $20 million to $25 million of that is for the D3, what percentage of that is Ford, presumably the majority is Ford?

It's a little bit more tilted towards Ford, but it's -- GM is still a fairly large impact for us. I think one other aspect to consider is the fact that we are already pretty much at the end of October, and we've had already more than a month of strike impacting orders for the month of October. So we should take that into account as well as we think about the strike. There's already some level of impact that has been going through our numbers.

And then as a follow-up, wanted to ask about obviously the slowdown or the reduced excitement about EVs that we're seeing probably in the market. Maybe you could just give us a sense of how we should think about the BMS piece of your backlog in light of the slowdown to be. I think we've generally seen OEMs reserve some of their best or more advanced content for EV platforms. I know you're really ICE-agnostic outside of BMS. If OEMs are slowing down the pace of some of these launches, how does that impact broader uptake of your content, which has generally been reserved for the more high profile launches?

Yes, let me take that. This is Sachin. So I would say that in general, the high content is not just specific to EVs. You are right, but there is more higher content, especially digital content in EVs across the board. What we have seen and this has happened in Q3 and we expect that to continue into Q4, as our customers have had some challenges in production and sales of EVs that has dampened our digital cluster sales by a little bit. Although, as I mentioned in my prepared remarks, digital clusters have grown still very well, 20% year-over-year. So that's still pretty strong. Our cluster volume is pretty large and we can absorb this impact of the slowdown coming from EVs. Now on the BMS front, again as I mentioned earlier, our BMS sales continue to grow quarter-over-quarter and the ramp up we expect to continue into Q4 and in the subsequent quarters. Now in next year, we have additional BMS launches as well. And at the same time in terms of our estimates, we don't necessarily take our customer data at face value. So we have had some level of conservativeness in our estimates. So we expect to continue to grow quarter-over-quarter. In terms of where we are at, I expect that our exit rate this year in Q4 to be where we thought we would be at the beginning of the year. So yes, it has taken a little bit longer for us to its stride. It has still grown pretty well from our estimation. And our earlier estimates of about 5% revenue contribution from BMS this year will be lower than that, but we expect to be able to catch up next here, but we'll need to wait until the end of the year to fully understand our customers' production plans and the BMS contribution next year.

Your next question comes from the line of Joe Spak with UBS.

I guess just to maybe follow-up on some of that comments -- the commentary. I know, Sachin, last quarter, you sort of really tried to calm some concerns about the longer term sort of Ultium and EV trajectory in saying that you didn't sort of bake in what your customers did. Do you think we're sort of a little bit closer now to what they're saying? And I guess what I want to understand from you is, clearly, when you bid on the business, you assumed certain volumes to be able to hit your return profiles. Like if those aren't met, what type of recourse do you have with the customers?

Right. And at this stage, Joe, what I would say is that, we believe that the ramp up that I talked about will continue and our customers as GM also in particular mentioned, they are not so much demand-limited themselves as they are supply constrained. And as they address some of the challenges they have in the module assembly and manufacturing of the cells, we expect that the demand to come up and the ramp up to really get into a level where we would be, I would say, pretty okay with it. So to me it really depends on some of the additional launches, not just what GM is doing, but some of the additional launches that we have next year. We always have in the business this challenge of matching capacity to demand and we go ahead and invest in capacity. Now we always also apply our own judgment in terms of believe that, that capacity would actually come online. So we'll have to see how next year develops. It's too early to say whether we have to have any other discussion related to unabsorbed capacity. I certainly don't hope that, that would be the case, but we'll have to see how it develops.

And then if I can, Sachin, one other sort of, I guess, big picture question. Like last quarter, you sort of talked about the growth you're seeing in China and how you're maybe a little bit underexposed to some of the faster growing OEMs and some of the efforts you are undertaking to sort of try to get better position there. One thing that's become clear though in China is, right, like the velocity of the models and sort of what in terms of coming to market and even sort of what's popular in the market is just much, much quicker. And it seems like it's not sort of this typical, what we're used to in the developed world or in the Western world of 7-year programs. Like, things are just coming up quicker and maybe burn bright, but then fall harder. And if that's true, I'm curious, like, how does a company like Visteon sort of manage going after that business? Because it seems like it's a little bit harder to underwrite.

That's a great question, Joe. And I think this is something that we all need to understand much better. But what you have described is effectively a result of a market like China that's large, it's also a very young market. The average age of the customer of our systems in China is under 35 years. In the more developed parts of the world, it's much more than that. And therefore the systems that are being designed by our customers in China look very different for China than they look for rest of the world. And just because they are more advanced in China, it doesn't mean that they would have the same appeal outside of China, where the demographics is very different. So, we have gone as an industry from designing products for the rest of the world, outside of China, the more developed markets first and then bringing them to China to where we have had to change our perspective and look at China as even a more advanced market for digitalization than the rest of the world. Now, how have we done in that context? So if you look at where we were at in 2018, when this trend really started to slowly increase and then picked up momentum, about 15% of our revenues in 2018 came from domestic China OEMs. Today, if you look at this year, we'll probably exit this year at about 40% of our revenues coming from that same channel domestic OEMs, not the global OEMs. And we've added customers like Geely and JMC and others that are some of the OEMs that are on the vanguard of that trend. So, we're doing exactly what we needed to do to make sure that we don't get trapped with older products that are not as attractive in that market, but that doesn't necessarily mean that the rest of the world will follow exactly their lead. So we have to have this approach, which really does challenge our product development capabilities, but our platform approach that we have been talking about now for several years is really helping us develop these somewhat different solutions, very differentiated, but at the end of the day, are still using fundamentally the same technologies, especially when it comes to software. So, I think we have done well in terms of addressing this changing dynamic and this has happened very quickly and that's where we are seeing the proof of in the numbers. China this year will continue to grow for us despite the lower domestic production that we talked about earlier in the prepared remarks and we expect to see continued growth going forward.

Your next question comes from the line of Mark Delaney with Goldman Sachs.

I just wanted to better understand your comments around some of the macroeconomic trends and in particular, in Europe. You talked 90 days ago about seeing some slowing there, and it sounds like that's continued or maybe even picked up a bit. Can you help us better understand the breadth of magnitude of the slower trends you may be seeing in Europe and how that's progressed?

Okay. So, yes. So let's talk about how we are seeing the market develop. Now, when we talk about Europe in particular, we entered this year with the market essentially being a supply constrained market and they had, on account of the pent up demand, very strong order book that supported high levels of production in Q1 and Q2 of this year. And we had anticipated that this change from fundamentally a supply constrained to being more demand constrained would happen during this year and we started to see that in Q3. So, if you look at the third quarter, vehicle production at our customers is reflecting that slowdown and we see that going forward into Q4 as well. So, the order intakes, the consumers' orders into the OEMs all through the year have been lower than what the industry had anticipated at the beginning of the year. So that's what is causing the slowdown, which we expect to have some effect, which is factored into our guidance for Q4 and we'll have to wait and see how next year develops from this perspective. That's what we're seeing with respect to Europe. We also talked about China and the domestic market there being a little bit weaker, we saw that in Q3 and we expect that to also continue into Q4. And then there is the other dynamic that we have broadly discussed here, which is the slowdown of our EV-related production and sales. So those are the factors that I would think as the macro factors that we need to consider both for Q4 and then for next year as we start to think about next year.

And I would add Mark, for this year, putting things into context, and despite these headwinds, we are seeing our sales grow by about 14% to 15% for the full year despite these headwinds. So still a very healthy growth over market and definitely growth year-over-year in terms of our absolute sales.

And following up on some of the prior questions related to the intermediate to longer term outlook and some of the OEMs are recalibrating their product launch in schedules and mix tied to EVs? Just confirming there's no change to your 2026 targets that you outlined at the Investor Day for about $5.5 billion of revenue and about 13.5% adjusted EBITDA margin?

Yes. At this stage, we believe we are where we needed to be. I mean, if you think about where we are at, at the midpoint of our guidance, in terms of base sales for this year, we would have added approximately $450 million in new sales this year. And that's pretty much what we need on an annual basis all the way out to 2026. So, although our sales has moderated a tad bit on account of the factors that we mentioned this year, we're still pretty much on track as to where we needed to be.

And I would add on the EBITDA side, again, the run rate that we have at the end of Q3 and what we're projecting for Q4 indicates as well that we are very much on strike and we'll be able to scale that up as we go with additional volumes.

Your next question comes from the line of John Babcock with Bank of America.

I guess just first of which, you've obviously done well in terms of business wins this year and seem to be on pace to at least achieve if not exceed your target. And recognizing business wins can be lumpy and uncertain, just generally, do you expect you can keep a similarly strong pace in 2024 based on the discussions you've had throughout the past couple of of months and quarters?

Yes. So that's actually a good question. And I would say that we've done really well to evolve and grow our product portfolio over the last couple of years, both on the digitalization front, but also for electrification. So that puts us in a good position to address some of the biggest challenges that the OEMs are facing. And as we have shown this year, this should translate into higher levels of new business wins, which we think should be sustainable, but we'll still have to see. Again, there are these dynamics of the lumpiness of some of the awards that can spread on the quarter. So it will be not appropriate to be too precise about what we think we can achieve, but we have previously indicated this year we would exceed $7 billion. We believe we should be in a position to do that. But more importantly, we believe this is a sustainable performance in terms of having a higher level of new business wins. Now, one thing I do want to mention, because this could be also the next question that people may have. Many of the wins this year are going to launch in either second half of 2025 or 2026. So the contribution to 2026, our target certainly will be there and that's of course factored into our assumptions for the midterm target. But more importantly, it puts us in a great position to continue to grow in the long-term.

And then just as a follow on, I was just wondering, I mean, based on the business wins that you've had, obviously, they generally tend to pertain to new models. And I was just wondering if you're getting any sense from OEMs as to how digital content is changing on some of those next product launches? That would actually be helpful.

Yes. So I think this is the good trend that we have been talking about for some time. So what we're seeing is that the displays in particular are really getting much bigger and also they are increasing in number. So, passenger side displays are becoming more and more the norm in mid to upper end of the market. And when it's at the mass market, the mid-market segment, we're still seeing the growth of displays from much smaller 7, 8 inch displays to 10 and 12 inch displays. Those displays getting larger is also pulling a lot of additional content, both embedded as well as connected content. So the shift towards a connected services approach at Visteon, I think is also very timely because we believe that that's going to generate a lot of opportunities for us, not only for incremental revenue and margin contribution directly from the connected services themselves, but also in terms of how they make our embedded in-vehicle products more competitive. We believe we will be one of the few suppliers with an end-to-end capability from the cloud all the way into the car with connected services and the in-vehicle content that I do not believe will be matched by too many other competitors.

And then just last question before I turn it over. Is it possible to get some sense as to the impact of the strike so far for Visteon recognizing it's relatively limited, 3Q and 4Q would be great, but anything you can provide there would be useful.

Yes. It's, Jerome. We've been impacted so far obviously with the -- with October orders coming down. And I would say that they represent about half of what we've assumed in our guidance. So the assumption in guidance is about $25 million to $30 million and half of that is already baked into October.

And that's 4Q alone, right?

Yes.

Your next question comes from the line of Emmanuel Rosner with Deutsche Bank.

I was hoping to follow-up on some of the potential implications from the slowdown in EV ramp up by some of your customers and then generally more broadly by multiple automakers. So, can you just try and quantify for us how much is assumed in terms of BMS revenues for this year in your current guidance? And then, what sort of like growth rates -- like if you assume, I think you have a $600 million guidance or outlook for 2026 in terms of revenues. What piece of it could be at risk-based some of the latest volume progression?

I think it would be too premature to really talk about mid-term guidance and what could be at risk. I think these challenges that our customers are facing specifically the one customer that I talked about the slower ramp of electric vehicles. We believe that's on account of some production challenges that we are quite confident they would be able to overcome. So, yes, it has resulted in a slowdown this year, which is factored into our guidance, but we are not reading into this anything beyond that. And as I mentioned, we've always been conservative in terms of how we have assumed the BMS volumes in particular. So we'll have to again look at it more closely. We are not at a point today to be able to give you that insight. We'll have to get more data from our customers about next year and the outer years. But we believe there is still sufficient headroom in what we had assumed that we should be in a better position than what might be implied by what you're hearing about the slowdown in EVs.

So, I guess just following up on this and just asking this a little bit differently. How much of your growth of the market over the next few years is assumed to be from BMS? And can you remind us the timing of your next launches in BMS?

Yes. So again, I think the growth over market that we look at is a combination of many things and we can't necessarily parse out exactly what is coming from each one. So I would like to just again put a context to this. We need a growth over market of about a high-single-digit to low-double-digit in terms of being able to achieve our mid-term guidance. And we have assumed in that mid-term guidance by 2026, electrification revenues to be about $600 million. So that's the first framework. Now, we believe with where we stand today and the electrification plans for all of our customers, we believe we still have a path to get to that on account of us being conservative in our estimates for the volumes that we had anticipated. If you go back to our Analyst Day earlier in the year, I will remind everyone that we were being challenged as to why we were being conservative at the time with our estimates for electrification and BMS in particular. This is the reason why. And therefore, I believe we are today in a better shape than what might appear at face value when you hear about this, messages coming from OEMs.

When are the next launches?

Early next year.

Your next question comes from the line of Jim Picariello with BNP Paribas.

Just on the favorable timing of recoveries in the third quarter, totaling $15 million, was this entirely attributable to a pull forward from the fourth quarter or was there any unexpected retroactive recovery achieved in the quarter?

Yes. So there are two items. In this 150 basis points, you have about 100 basis points, which is related to commercial items, which are essentially commercial items that were settled in Q3 when costs were incurred in prior periods. So it's really neutral on a year-to-date basis and as you do a walk from Q3 to Q4, we'll kind of reverse out. And then the 50 basis points remaining relates to the fact that our engineering spend was lower in Q3, largely because of project cost that had a different timing and that's going to impact Q4. So that's one of the reasons why we have increased our engineering spend in Q4, because there's a move of expenses between Q3 and Q4.

And then just to confirm, the strike affected volume and your guidance implies a near 30% decremental margin. Is that right, just given the weekly ranges for revenue and EBITDA that were provided? And then I apologize if I missed this, but based on the $20 million to $25 million per week strike impact embedded in the guide, what would Ford represent within that weekly revenue range? Thanks.

Yes. So maybe first on the decrementals. We think they'll be a little bit higher than our average decrementals. One of the reason is that there may be some stop-and-go freight expenses as everybody ramps up when the strike ends. So that's one of the reasons why decrementals will be higher. And then Ford is a little bit more heavy than GM, but GM is still a fairly large portion of our business here in the U.S.

Just within the weekly range or was that your answer or was the heavier weighting to Ford on the decrementals?

Yes, heavier to Ford indeed.

This concludes our earnings call for the third quarter 2023 results. Thank you everyone for participating in today's call and your ongoing interest in Visteon. Thank you.

Thank you for attending. You may now disconnect.