Q4 2019 Earnings Call
Good morning.
Hi, Chris Doyle director of Investor Relations for this John welcome to our earnings call for the fourth quarter and full year 2019.
Please note. This call is being recorded an all lines have been placed on listen only know to prevent background noise.
Before we again 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 in conditions, but rather are subject to various factors risks and uncertainties that could cause our actual results to differ materially from those expressed when these statements.
Please refer to page entitled forward looking information for additional details.
[music] presentation materials for today's call.
Posted on the Investor section of this Yom's website. This morning, please know that investors dot dot.
Dotcom to dampen the material if you have not already done so.
Joining us today or special one day, President and Chief Executive Officer, No Robertson interim Chief Financial Officer, and Jerome Rouquet Senior Vice President Finance, we have scheduled call for one hour and walking a line for your questions. After sanctions build syndromes remarks.
Please limit your questions to one question and one follow up again, thank you for joining US now I'll turn the call Alberta Sachin.
[music], Thank you, Chris and good morning, everyone.
I will start by providing an overview of a fourth quarter and went to 19 Julio design.
On subsequent pages.
Yes, I'd operational performance and key achievements for the quarter and full year and provide more color on the performance of our digital corporate products.
As well as new business wins for the year.
Also discuss <unk> outlook for vehicle production for Twentytwenty and beyond and discuss our updated business plan.
I will then handed over to be Robertson Jerome Rouquet.
I will discuss the financial results before we open the lines for questions.
Well I'd like to welcome Jerome to Visteon as senior Vice President Finance.
We've discussed more about his role at the company going forward as a conclude my remarks.
[music] moving to the presentation on page two.
Our fourth quarter sales increased 2% $744 million.
Despite the 4% reduction in global vehicle production.
Then things seven percentage points growth over market.
Limiting the impact of currency.
Just a second because they could do quadrant.
It'll be your growth and go to market.
Reflecting the strength of our digital cockpit solutions.
Full year sales <unk> $2.945 billion.
Five percentage points over market.
Adjusted EBITDA was $85 million.
Oh, 11.4% those fees for the fourth quarter.
And $234 million or 7.9% of sales for the full year inline with expectations.
Adjusted free cash flow was $35 million for the quarter and $56 million for the full year.
Full year, new businessmen exceeded $6 billion, despite declining industry volumes.
Mainly on the strength of our do still cluster and display products.
We added two new customers in Europe, Gore portfolio and expanded our share of business in digital clusters with global Oems.
Turning to page three.
On the speech I will share some highlights off on operational performance for the quarter.
The food Quadruples, the third successive quarter go to market sales performance. Despite the headwinds we face in the quarter.
Excluding JV consolidation and currency impacts sales were up 2% Youre your seven percentage points over market in the fourth quarter, mainly driven by new product launches throughout the year.
In the fourth quarter, we had nine new product launches across multiple automakers in China and Europe.
[music] vehicle production for Visteon stop customers in the fourth quarter, given lower than expected. Despite the arent Bush by some color many factors, especially in China.
Vehicle production at Visteon stopped and customers, including forward Mazda G M and Renault Nissan.
Was lower than the industry and was down 7% year over year compared to a 4% production for the industry.
In China, we faced lower than expected volume with GM, which was partially offset by higher volumes, but to be W. And other customers in the region.
We will discuss our channel performance in more detail later in the presentation.
The previously discussed phase out off infotainment business.
As though.
The beacon launch delays it forward and to strike a G.M. put additional headwinds in the quarter.
Despite the weak vehicle production environment on new digital solutions performed very well into the quarter with sales of digital clusters growing double digits, followed by display audio systems and laws to displays.
I will discuss the performance all four core products in more detail later in the presentation.
As we had discussed previously.
Do you knitting recoveries in 29 team, but more backend loaded and we were able to achieve our target for the fourth quarter and full year.
We also won $1.5 billion, a new business into quarter, which is similar to the performance in the prior year.
In summary, despite several headwinds and generally weak market conditions.
Product and technology portfolio for digital cockpit solutions.
The word another strong quarter in sales as well as new business wins.
Moving onto page four.
Page four summarizes key accomplishments for the full year of trying to 19, which I will go through quickly.
We delivered above market performance in sales for the full year. Despite the slow start into first quarter.
Excluding the impact of currency and the JV consolidation in China sales were up five percentage points above market for the full year.
We added two new customers to our portfolio, both in Europe, and expanded our business with large global Oems, including G.M.B.W. at Hyundai.
This denton our position as the technology leader in the industry for new corporate solutions.
The introduction of new innovations such as the micros on display Android based display audio system.
An upgraded Smartcool system based on the new Qualcomm silicone and integrated with Tencent cloud services, and perhaps what China.
Just new technologies demonstrative, yes in Las Vegas, ingenuity, and the feedback from customers has been very good.
Visteon has been pioneering the use of technology platforms to deliver cockpit electronics products.
Unlike the custom bespoke brought a development approach of the industry.
In 2019, we weren't able to increase the number of customer programs under development, while investing in new technology initiatives, but only a modest increase in engineering cost.
Our focus on delivering innovative solutions, a competitive cost and quality has earned visteon recognition from several car makers in 2019.
We were very pleased to been supplier Excellence awards from Jim.
Under Jaguar land Rover, and Mahindra over the course of the year.
Continuing to page five.
Visteons digital cluster and display products grew significantly year over year in couldn't be 19, despite the reduction in global vehicle production.
Instrument clusters, which are of course rental the company grew 9% year over year.
These two clusters sales was even stronger nearly doubling from last year and a comping fodder for all close to sales.
Our share of digital cluster business. The global automakers continues to grow and in 29 team. We've won $2.9 billion inconclusive business approximately 30% of the market across a diverse group of Oems, including Ford GM and Hyundai.
The shift towards all digital clusters continues to be beneficial to visteon as many of the traditional suppliers of clusters are not able to meet the new requirements and softer in display technologies required for digital clusters.
Digital clusters are expected to continue to grow rapidly into future as new features such as it has and driver monitoring become more common across all segments of vehicles.
Our new display products also did very well in 2019 growing over 25% year over year, and helping offset the roll off of small legacy displays.
At CES last month, Nissan introduced a new electric has to be the audio that featured <unk> to 12.3 and display system from Visteon.
The trend towards multi display systems is growing in the industry and in 29 team we've won over $800 million of displays business.
Adding three new customers for multi display systems.
Displays is an activity up innovation, particularly into idiots, haptics and optically performance and good well positioned to take advantage of the opportunities emerging in the segment.
Turning to page six.
Our infotainment sales grew 13% year over year, excluding the master business, that's being phased out.
Our new display audio and Smartcool systems use Android as the operating system to enable the hosting of new apps.
Since our introduction of Android based systems in early 2018, we now have programs under development, but five different Oems.
What's systems the due to colleges the launch in Twentytwenty.
On Android based infotainment solution is unique in that we are able to run standard Android apps negatively in the in car infotainment system without requiring any changes to the apps to make them automotive grade.
This opens the possibility of more apps for infotainment than ever before.
In addition of new capabilities, such as voice smart assistant and sit on vision.
Currently in the final stages of development will make our infotainment solution, even more differentiated and competitive in the industry.
Our smart core technology for integrated digital cockpit systems gained further traction and went to 19 to customer launches the heavier issue the Tata motors and the eckroth trucks, but diameter.
There are two additional launches planned twentytwenty as well, but GAC motors in China and lanes in India.
We also added to customers in Europe in China for the upgrade their smart course solution based on the new silicone from Qualcomm.
That dragon generation, three and infotainment based on Android.
Smartcore it'd be the first cockpit domain controller solution you used to new Qualcomm chip ended the integration of new features such as driver monitoring surround view and why smart assistant that confident that it would remain the most advanced technology in the industry for the integrated cockpit.
Turning to page seven.
We achieved another successful year of new business wins, but $6.1 billion. This is comparable to our performance in the past couple of years as the reduction in vehicle volume forecast results in lower lifetime value of this wins compared to prior years.
As I mentioned previously we did very well with digital clusters, but another year of more than $2 billion of new business wins.
Just two clusters are starting to expand into mass market vehicles, including light trucks and the majority of our $2.9 billion of cost of bins were for digital clusters.
Our Android based infotainment solution in traction in 2019, and we added several customers for display audio and smart core based on Android.
Android is still relatively new for the automotive industry and with the multiple customer engagements visteon is quickly developing valuable expertise and scale in this new idea of technology for the industry.
Our capabilities in design and manufacturing of displays is one of the best in the industry, especially with the investments we've made in the past two years.
In 2019, we won a record level of new displays business.
Over $800 million of lifetime value.
The higher content of this new display systems.
<unk> increased the average selling price significantly over legacy displays.
I'm pleased that despite the slowdown in the industry Visteon has been able to achieve greater than $6 billion in new business wins.
Making it our third you're in a row of high level of new business wins.
Speaks to the strength of our product and technology portfolio as well as operational excellence.
Turning to page eight.
China was a bright spot for Visteon and 2019.
Full year sales growing 30% year over year, despite production volume being down 8%.
This growth was driven mainly by two factors new product launches hi decreased due to sales promotion activities by Oems.
And the consolidation of a previously unconsolidated joint venture.
In the fourth quarter Visteons, China domestic sales were up 25% year over year. Despite the steep decline in vehicle production the GM in China.
Which offset the increase in production that other customers.
New product launches and high degrees of digital products with multiple Oems have drives the sales growth in the fourth quarter.
Going forward, we expect the techniques to moderate to awarded levels as Oems and just feels promotion activities.
We launched 23, new products in China during the year, including four products launched in the fourth quarter.
VW is the largest auto OEM in China, the joint ventures in not as well as in South China.
In 2019, we strengthened our partnership with this customer by opening a new blonde intention to better serve the demand of EFI W. VW, the VW JV in China.
We won $1.2 billion of new business in China in 2019, driven mostly by digital cluster and smart core business wins.
Despite the slowdown China remains a very attractive market from a scale and technology adoption point of view.
And then optimistic about our long term prospects in that region.
Moving to page nine.
On this page I would like to discuss our outlook for vehicle volume production from 2020 to 2023, which is updated from the prior outlook communicated in Genuity of 2019.
Due to the rising uncertainty in the global automotive market. We feel are just prudent at this time to not extend the outlook beyond the previously communicated years.
It should also be noted that the outlook does not reflect the impact of the current nevada's as to situation is still very dynamic and uncertain.
From a regional perspective.
Spec Twentytwenty vehicle production in North America to remain flat over last year due to the relatively stable macroeconomic environment.
Expect Europe to be down again in Twentytwenty due to the impact of emissions regulations, Brexit and the general slowdown in the eurozone economies.
To the Corona lettuce, China was expected to have lower production and twentytwenty due to weak consumer demand, which will only get full distressed now with the outbreak of devices.
And the rest of Asia is expected to be down as well with lower production, mainly in Japan and India.
Our outlook for global vehicle production and Twentytwenty as a result is 3% lower than in 2019 to approximately 86 million units as shown on the chart on the left.
The latest I was just forecast for vehicle production volume shows growth of about 3% what each off 2020, 120 to 22 and 20 to 23.
The non accrual for 20 to 31 to 2023.
Assumed a similar 2% growth on the upper end.
But off a lower twentytwenty behaves.
And flat or no growth on the lower end of the range.
At this rate the global vehicle production in 2023 is expected to reach just under 94 million units on the upper end.
Almost 10% lower than in our prior forecast.
And lower than that 95 million units achieved in 2017.
Moving onto page 10.
This page shows the updated sales forecast for the period from Twentytwenty Krwtwenty 23.
Which reflects the lower vehicle production environment discussed on the previous speech.
For Twentytwenty, Vietnam, anticipating that sales will be between 3.2 and $2.1 billion.
At the midpoint. This represents a 4% growth on a year over year basis, and an approximate seven percentage points growth over market.
This range includes the following.
Global production volumes, reducing by about 2%.
Potentially of vehicle launches at Ford.
Introduction of infotainment decreased at a particular OEM in China, and the roll off of infotainment programs that monster.
Offsetting this factors is the cumulative benefit.
New product launches over the last several quarters.
The midpoint of our sales guidance does not assume a full year impact from the Corona virus, which I will discuss separately.
After three straight years of production declines, including our forecast for Twentytwenty better assuming the stabilization of production volumes starting in Twentytwenty one.
This assumption is consistent with previous downturns typically lost two to three years.
The lower end office sales forecast for 2021 to 20 to 23 assumes production volumes remain depressed at about 86 million units.
Why the upper end of what's his forecast assumes production volumes increase at approximately 2% annually.
Given the current market environment.
Expecting $6 billion in new business wins in Twentytwenty.
As the market rebounds, we would expect to return to high levels in future years.
Which would have more often impact on twentytwenty Ford and beyond.
Our sales targets have been adjusted lower than what our current backlog would indicate to reflect unforeseen OEM product divisions.
Over the past few years, we have experienced short cycling of older products.
Which has negatively impacted our sales results.
Although we expect the impact to decline overtime. We have included this assumption to also account for the uncertainty associated with program lives during the industry transition to electric vehicles.
As a result of the lower sales expectations.
Our 2023, adjusted EBITDA margin target is around 12%.
This is a result of the lowest sales expectations and reduced associated fixed cost leverage.
As we progress through Twentytwenty.
We're excited about a growth trajectory, which we expect will include absolute sales growth sustained growth over market.
EBITDA expansion.
Moving to page 11.
I would like to give you an update on the impact the CRO Nevada's is having on our business.
As I'm sure you can appreciate the situation is very fluid in the full extent of the impact is difficult to accurately forecast at this time.
Following the end new lunar brig quality, all industry production facilities in China or order to remain closed until the second week of February.
Our top priority is to ensure that our employees and partners a safe.
Fortunately no viston employee has been infected by the Leidos at this time and we have implemented various procedures to ensure the safety of our team in China and throughout the word.
As a result of this procedures as well as actions implemented by the government.
Only about 80% of Visteon employees in China have been able to return to work with approximately 50% of those employees working from home.
Customer facilities in China have remained closed while some artistry opening this week.
To illustrate the complexity.
Highlighted our topic customers, which combined have nearly 30 different assembly plants in multiple provinces around China.
We are in constant communication with our customers not currently anticipating that they would slowly increase production throughout the month of March barring any additional disruptions caused by the letters.
This John also partners with over 700 suppliers that have manufacturing facilities in China.
Most of the supplies currently at about 50% capacity in as expected to return to full production by April.
This will likely impact the global automotive supply chain through the first quarter and potentially into the second quarter, making it difficult to estimate the full year impact to Visteons Twentytwenty forecast.
I would like to provide some context as to the potential Q1, twentytwenty impact based on our current assumptions.
We would anticipate this sales would be reduced from our original expectations by approximately $60 million.
Including the impact to our operations in China as well as the rest of the word.
We also anticipate the decremental margins on the reduced level sales could be around 35%.
Two stranded manufacturing costs and increased logistical costs.
It is difficult to estimate the full year impact of the Corona wireless.
It would depend on the timing of recovery at customers and suppliers and consumer demand.
It's not clear as yet if car manufacturers will try to recover some portion of the lost production later than the year.
And to what extent you would be able to recover the extra costs incurred on account of this crisis.
As a result of the complexity and fluidity of the situation and our desire to provide transparency on our base business.
We have elected to exclude the potential full year impact from our guidance that Jerome will provide in subsequent slides.
Moving to page 12.
In summary for the quarter Visteon delivered $744 million since sales up 2% year over year with $85 million with adjusted EBITDA.
Despite the weak market environment, we delivered excellent sales numbers that outperformed the market both for the fourth quarter and full year.
The growth in sales was driven mainly by the performance of our new digital products, which grew significantly year over year.
Our new business wins was strong at $6.1 billion lifetime value, mainly driven by the continued success of digital clusters solutions.
Also made significant progress with displease, winning over $800 million of business with multiple car manufacturers.
And we delivered strong growth in China, Despite an 8% drop in vehicle production.
Looking ahead to Twentytwenty, we anticipate that global vehicle production will decline again by about 2%.
However, we expect to deliver another year of strong performance with year over year growth.
And we expect to continue to grow over market over the plan Peter of 20 to 22 2023.
It closely monitoring the impact of the Corona letters, which remains dynamic and uncertain.
We estimate the impact on the first quarter sales could be approximately $60 million. However, the full year impact is difficult to estimate at this point.
In summary, the company executed well in 2019, particularly in the second half of the year.
We expect to carried this momentum forward into Twentytwenty.
This concludes my overview comments.
Before I hand, it over over again like to take this opportunity to welcome Jerome Rouquet two visteon.
Jerome joined a senior leadership team as senior Vice President Finance and as of Tomorrow, Our Chief Financial Officer.
Jerome possesses a bunch of expedience, having held financial leadership positions in a variety of roles, including Chief Accounting Officer, and controller and Chief Financial Officer at Federal mogul.
Jerome we'll be taking over responsibilities from acting CFO Bill Robertson.
And I would like to thank both for the job. He has done as the interim lead during this period of transition.
Now I will turn the presentation over 2 billion Jerome to review the financial results.
Thank you fashion and good morning, everyone.
On page 14, we present, our key financial results for the fourth quarter of 2019 versus the previous year.
Despite a volatile market environment, all three financial metrics were within our previously communicated guidance range.
Sales of 744 million in the fourth quarter increased 13 million or 2% compared to last year due to new program launches and product changes, partially offset by lower vehicle production volumes program Rollouts in the impact from currency annual price Downs.
This revenue increase represents the second quarter in a row of absolute sales growth. Despite a challenging automotive vehicle production environment and illustrates visteons ability to continue to outgrow the underlying vehicle production market.
The sales outgrowth in the second half of 2019 represents the direct result of winning record levels of new business over the last few years.
Adjusted EBITDA for the quarter was 85 million, representing an 11 million dollar increase from 2018.
Adjusted EBITDA benefited from lower product development costs, and other cost savings, partially offset by lower vehicle production volumes in annual price Downs.
Adjusted free cash flow was positive 35 million contributing to a full year adjusted free cash flow positive 56 million.
I will provide more detail on the following pages.
On page 15, we provide sales and adjusted EBITDA for the fourth quarter 2019 versus 2018.
In the quarter industry production volumes declined by 4% compared to last year.
In addition to.
The company sales were impacted by launch delays at Ford.
The impact of the strike at GM.
Roll off of an infotainment business with monster.
And the impact of customer pricing and currency.
Despite these headwinds this year on sales increased 13 million, primarily as a result of net new business.
Pricing reduced sales by 19 million, representing 2.6% of last year's fails, which continues to be near the midpoint of our historical range.
Adjusted EBITDA was 85 million with an adjusted EBITDA margin of 11.4%.
The impact from volume mix efficiencies and design changes more than offset the impact from annual price reductions.
Net engineering decreased year over year 6 million as we continue to realize savings from a restructuring program announced in the second half from 2018 full year costs increased 5% year over year inline with our expectations.
The increase in costs represents a higher level of program activity, partially offset by cost savings in the realization of our technology platform strategy.
Fourth quarter engineering recoveries were 59 million, representing a 27 million increase sequentially, but in line with recoveries in the fourth quarter of 2018.
The seasonality is similar to recovery is recognized in prior years.
And is expected to look similar in 2020 as well.
Page 16 provides our cash flow.
Fourth quarter adjusted free cash flow was positive 35 million.
Contributing to a full year adjusted free cash flow of positive 56 million.
Near the high end of our previously communicated guidance.
Fourth quarter adjusted free cash flow benefited from favorable inflow in working capital compared to original expectations.
Cash at the end of the quarter was 469 million.
In debt was 385 million, which continued to put us in a net cash position.
We continue to have a strong capital structure, which enables us to compete effectively in a challenging market while investing in differentiating technologies.
In summary, our fourth quarter results were strong despite the continued volatility in vehicle production volumes.
I'll now hand, the call over to Jerome to discuss our financial outlook.
Thank you Bill and good morning, everyone on page 17, we present, our full year 2020 guidance, which excludes any potential impact from the corner virus as mentioned by Stashing, we're anticipating that global industry production volumes will decline again this year.
Despite these challenging market environment, we're projecting sales adjusted EBITDA and adjusted EBITDA margin to increase on a year over year basis.
Our guidance for sales is between $3 billion and $3.1 billion. This assumes a decrease in global industrial production volumes of approximately 3% more than offset by 7% growth over market at the midpoint of the ranch.
Adjusted EBITDA is forecasted to be between $250 million and $270 million, representing an adjusted EBITDA margin of 8.5% at the midpoint of the range or an expansion of 60 basis points versus 2019.
Adjusted free cash flow is forecasted to be between $40 million in $60 million. This range accounts for the non recurrence of the favorable inflow in working capital that benefited 2019 as the preference by deal and assumes capital spending in line with 2019 levels.
Turning to page 18, we provide an adjusted EBITDA bridge from our 2019 actual results to our forecast for 2020.
We're expecting adjusted EBIDA to increase in 2022 level of $250 million to $270 million, representing an adjusted EBITDA margin of approximately 8.5% at the midpoint of guidance. Let me provide some color on the main drivers for 2020.
Adjusted EBITDA will benefit from the non recurrence of the operational challenges experienced in 19, which include inefficiencies from a plan transfer in Mexico, and the launch challenges with the industry's first curved displays.
More than offsetting this benefit is a reduction of EBITDA will now based business as a result of lower industry production volumes similar to what we experienced in previous years.
Driving the year over year improvement is a combination of net roll loans as well as operational efficiencies net of pricing.
As we begin to demonstrate growth we are expecting to start leveraging our fixed cost base. In particular, we expect decrease our net engineering expense as a percentage of sales despite an increasing number of products under development.
This decrease will be driven by our continued effort to optimize our engineering footprint and the utilization of our technology platforms regime.
In addition, we're also expecting to generate additional operational savings through sourcing and manufacturing efficiencies.
In summary, we are incorporating our updated industry production assumptions, which will have a negative margin impact on these films base business.
However, we're anticipating that increased scale and the additional efficiencies with more than offset pricing as well as the mix impact related to launching new programs similar to previous communications.
Before moving on I would like to provide some additional color on the current virus and the potential financial impact to our guidance as she mentioned we have elected not to include the full your financial impact from the current iris into our full year guidance due to the complexity and the fluidity of the situation.
Based on our current assumptions.
We anticipate Q1 sales to be impacted negatively by approximately $60 million the decremental margin impact could be around 35% given the strength costs at our manufacturing facilities and the increased cost to she products.
The situation continues to evolve and it is uncertain if there will be additional plant or supply chain disruptions in the first quarter and beyond.
In addition, it is still unclear if and when production would be recovered or if additional strength cost can be recovered through our customer or supply base.
We will continue to update you as the situation evolves.
As we progress through 2020, we do not intend to provide quarterly guidance. However, given the complexity associated with the current Iris. Let me provide some factors that will impact our first quarter financial results first we anticipate that excluding the current a virus global industry production volumes will be down.
Alan on the year over year basis second results will benefit from the non recurrence of operational challenges that occurred in the first quarter of 2019, and third sales and adjusted EBITDA will be negatively impacted by the current Iris as previously described as a result, we anticipate but.
Both sales and adjusted EBITDA to be down on the year over year basis.
Turning to page 19.
I would like to highlight our key corporate strategy as we build the foundation for the future as the incoming Visteon CFO My top three priorities include supporting Visteons revenue growth while at the same time, placing a significant emphases on margin expansion and increasing free.
Cash flow generation.
Through my first 30 days at Visteon I have visited several of our locations, including multiple manufacturing plants and engineering centers as they built a deeper understanding of the detailed business I am excited about the opportunity to work with caching and the rest of the team at Visteon and I'm confident about our ability to expand margin.
And generate higher levels of free cash flow.
We will update you as we continue to make progress on this journey now.
Now I would like to open it up for questions.
At this time, if you would like to African audio question. Please press Star then the number one on your telephone keypad again that star and the number one we're extending the time of this call a few minutes past the hour to allow more time for your question and I'll pause for just a moment to compile the Q1 day roster.
Our first question comes more Joseph stack of RBC capital markets.
Thanks, Good morning, everyone.
Just to start.
And thanks for the color on the guidance by John.
On slide 18, but in I just want to understand in that volume bucket is that just short of industry volumes does that also sort of consider some of your legacy business rolling off like and and can you talk about.
Maybe the decremental margins on on sort of the down business versus sort of the the incremental margins on the business rolling on.
Sure Hi, Joe So yes, so to answer your first question about the volumes.
And it's clearly and fully the industry volumes, which have decreased in our plan period from when we first off or when we talked about this in the beginning of.
2019 by about 10% so that's what's reflected in our guidance.
Not the impact of some of the legacy products that are rolling off we do have those and the offset by some of the new products that are launching but the impact in this new forecast that as indicated as volume is the impact of the production environment that has deteriorated since.
The beginning of last year.
I would suspect to the question regarding the incremental margins.
This is also not changed when we talked about our land in January of 2019, you had.
Indicated that the are incremental margins would be between 20% to 25%, but the margins being low on the lower end of the range in the initial years.
Including Twentytwenty on account of.
The lower.
Launch margins with the products that are launched now for Twentytwenty of in our new guidance, yes, spill, assuming a 20% incremental margin.
And now the on the spoke to the Decrementals are normal decrementals are between 25% to 30%.
Now in events like the Corona letters of it it's going to be a little bit higher because we are not able to.
Take actions of especially with respect to some of the variable cost so that might be moat around 35%, but otherwise decrementals would be between 25% to 30%.
Okay. That's helpful. I guess and just just to build on top of that the the impact of the reduce take rates in China that you mentioned like is that does that show up in the volumes or is that netted against the roll on sand and can you can you quantify the impact.
And yes, I want to still sure. So so in 2019 as we have discussed I think several times, we benefited from the increase take rates in China, specifically with.
One OEM with infotainment product and that's about.
60 million dollar.
Positive impact in 2019.
Now this customer has since indicate it was that they are not going to run the sales promotion in twentytwenty and we have taken that.
Into concentration in other guidance.
Now that is largely a volume impact for us.
It's in some portion of that is also offsetting the roll offs.
Okay. Thank you very much I'll pass it on.
Your next question comes from the line of Dan Gallagher of Wolfe Research.
His line has disconnected. Our next question comes the line of David Leiker of Baird.
Good morning, Mr., Aaron welcome back on from David.
So I just wanted to follow up with a question more in the out years trying to understand are you seeing any of your legacy contract fall off more quickly in terms of take rates or the timing of than being discontinued.
Hi.
Good morning, No in fact, our legacy business or you know the stuff that we talked about that is rolling off that continues to roll off as we had expected.
But this the contracts that we have one in the last two to three years. They are continuing ahead as as planned you're not seeing an impact in terms of short cycling other than the volume impact there's clearly the impact of the production environment going down that is that is there.
Ed and we have quantified that and we have.
No I acknowledge that is not new forecast.
The only significant.
Sort of product roll off that that we still have.
Which is the Mazda infotainment system, we have had an impact of about $100 million off the roll off of that business. In 2019 that has some ongoing impact of that and Twentytwenty and 21.
2020, we assume an impact of the less than that about $75 million and as we go forward with Mazda our other business clusters and displays which is growing will offset the decline of the remaining infotainment business. So the decline will be.
Moderated a bit.
But in general.
Our new products that we have been launching the last two to three years are actually seeing a increased sort of take rates and it's not seeing a decline in the business.
Okay. That's helpful color. Thank you and then my second question is just related to be R&D people think wondering if you can outline and you obviously started implementing some restructuring any R&D finally second half Kennedy.
Expectation for continued savings there theres opportunity still on the back half here to continue to optimize that aren't footprint.
Yes, so we have been continuing to align our footprint to the needs of the industry as we see going forward.
It's a combination of making sure that we have the right resources could also the right resources in the right cost locations and so we have been rightsizing our footprint.
The in Europe, which is a bad we have the bulk of the higher cost resources and so we have been taking actions prudently. So that we do not impact ongoing business with customers or our ability to launch new products. So this has been going on we have executed some of the restructuring and.
Went to 19 and we're continuing to.
Implement some more in twentytwenty as well at the end of Twentytwenty expect to be done, but the bulk of the restructuring up beyond that it's going to be some minor ongoing adjustments.
We have assumed a cost of somewhere between that thing $18 million to $24 million for the engineering restructuring that we will be executing in 2020.
Given that most of our activities have been focused in Europe. It does take longer to execute but also to see the payback on that.
Wesman, but even with that our return on on that investment is typically of but then the payback as we didnt hear an off.
Great. Thanks for taking my question.
Your next question comes from the line of Dan Gal stuff Wolfe research.
Hey, good morning, and so sorry about that before.
I wanted to ask about margins.
In 2019, I'm, sorry in 2020, if we reverse kind of than the nonrecurring soda.
Of the curve display.
You kind of get to the low end at your guidance and so if you get to get to the mid point, it's like 10 million of of kind of incremental EBITDA on a 100 million of revenue growth. So the incremental margin is lower than you've talked about in the past.
And then if I look at kind of the out year 2023.
Your new outlook is 12%, which is a couple of hundred basis points, you know versus a year ago and again, it's not really explained by the fully by the revenue decline. So I guess my question is really is has anything changed about the margin profile that you're expecting on your new business going forward.
Dan Good morning, it so.
So.
In a nutshell the most of it changes that youre seeing here our volume related so not only for just for 2020, but as well in the out years.
Essentially the the margins that we were anticipating when we talked about.
The long term plan back in January 19, we're in the 2020, 5% range and they were largely coming if not essentially coming from the net new business combined with pricing and efficiencies at that time, we had no volume.
Decline, we were assuming that volume would be stable.
It's likely if not slightly growing so what has changed reading 2020 is the fact that we don't have that volume growth. In fact, we have volume going down on the industry side and that's really what's impacting 2020 similar story for 2023, where the volumes are much less lower than what we had.
Anticipated to the tune of about 10% as mentioned by a session earlier on so that's really what's bringing down our.
Margin to 12, assign but I'd like to highlight the fact that.
We're still going to grow our EBITDA margin by about 400 basis points between now and 2023, which is again similar to what we had anticipated intend to expansion backing 19.
Okay. Okay. Thank you and just maybe one follow up.
Could you help us with.
Little bit more detail on on 2020 in terms of.
No what you're expecting from a negative pricing impact and kind of what's your what's your ability to.
How much can you offset that.
With efficiencies.
That's that's a good question so the pricing levels that we've assumed for 2020 are very similar to what we've seen in 19. So we are operating between 2% to 3% midpoint being 2.5%.
So I'd say, it's a fairly large number in dollar terms and we are offsetting.
This with efficiencies.
In plants inefficiencies with sourcing.
As well to some extent with our engineering as mentioned by session. So my key focus in 2020 is really going to be around.
Cost efficiencies manufacturing sourcing sourcing and engineering and make sure that we are more than offsetting that pricing.
Okay. Thank you very much.
Your next question comes from the line of Brian Johnson of Barclays.
Yes, good morning, I want to continue the discussion.
2020, a little bit kind of 2019.
Yeah, we look at the business wins.
Page.
On the business and the page with the 2019 business went as you know a fair amount and digital clusters displays a smaller part.
BMS Pops up here, a little bit more about that.
How should we be thinking about margin profile of that and you make your way too.
The sad and as depending on the take rates in the various categories.
Their room for that margin to move.
Yeah.
So Brian.
First of all of what I would like to say is that.
Given the the environment fit in.
His $6 billion plus.
New business, then that you meant is quite significant.
And a significant portion of that has come from our cluster of product line.
Lets just continue to.
The walls and and the.
Transition towards all digital clusters is continuing to too.
But across the industry.
And we are really benefiting from this because we were.
No off the traditional suppliers can deliver kind of out.
Qualities and softer in displays that are required for digital clusters.
He has fees are going up and our margin profile with digital clusters is also better than the legacy products.
Displays, which is a real standout for us and our 2019 with over $800 billion in sales.
The reason why we have been able to performed significantly better than in prior years is the shift towards this multi display modules that is these are also significantly higher lot of content in them and therefore the margin is also very healthy.
Traditionally the smaller displays I have been very.
Conservative in my approach to the industry, but with this shift towards this larger displays multi display modules.
One we are in a great position without capabilities that we have built over the last couple of years than to experience. We have gained in launching high volume products our industry's category.
And also the fact that the margin as much better is certainly an awful lot of interest for us.
Now infotainment is as you can probably tell from the pictures not there.
We would have liked it to be considering our.
Performance in the last couple of years. This is a transition your photos with respect to infotainment, we made the switch to a Android based infotainment for both display audio as well as infotainment on smart core by the way our strategy for infotainment is display audio standalone.
Entry and for the high and integrated digital cockpit computer based on Smartboard technology, but.
In the latter half of 2018 and all of 19, we have been focused on building our customer base for Android based infotainment, both with display audio as well as for smart or they have done extremely well, but five Oems now on the Android platform.
I expect us to be able to grow from this base Android is still relatively new to the industry and Oems are not yet ready to commit a multi platform approach to Android as they are figuring out the technology.
We are getting really good experience and scale and we expect to be one of the leaders in this new technology for for the industry.
Coming to BMS of some very interesting development I would like to provide a little more context first on what the Pms battery management system, what that typically looks like the system itself consists of multiple electronic components and historic.
We would this OEM, we have had the legacy business for one of the components the vehicle interface.
Electronic.
See you, but not the cell monitoring systems and other components that make up.
Vms system.
With.
He is becoming a lot more significant for this OEM, we have been able to win virtually all of the business for this new generation of Vms system. What we have been discussing since the first quarter is all the expansion of the opportunity with this particular OEM, we will still be is.
Possible for providing the electronics hardware and from there and the Oems providing the application software.
In that sense of we have limited risk in the sense that we are really focusing on what we are good at.
This should hopefully give us the experience we are looking for that we can then take that other Oems. So overall I would say given the environment it pretty decent performance here that new business wins third you're in a row of greater than $6 billion of new business wins.
And the margins are up at least as good as what we have had in our in our order backlog.
Okay, and just a follow up around 2023 guide.
It looks like Capex for set themselves.
Pointing for said.
Last year, we held that ratio.
On your.
Free cash flow as percent of sales would double by 22 in the thing is that the right way to think about it or is there going to be a change in low capital intensity.
Yeah.
Or it one way or another.
Yeah, Brian So as you own.
So we are already for 2020, maintaining our capex levels. So 19 to 20, slashing capex terms, meaning that the capex percentage in relation to sales starting to decline we are definitely going to leverage that going forward and will have.
That percentage going down even further in the out years I'm not in a position yet to give you the exact percentage.
But yes at each stage you can definitely model a lower capex percentage as we are leveraging our our base and Brian. We've said earlier that we have planned capacity to go up to $5 billion in revenue. So that is still the case and service should be able to leverage the.
Investments we've made in the last couple of years and hopefully have a much better.
Capex performance as a result.
And just file I guess I'd just point out that Jerome I would it be fair to say that coming from a very capital intensive part of the auto industry, that's going to be one of your focus points, yes, I would say on the cash flow side Capex will be working capital as well and will be beyond obviously expanding on the EBIDA site.
Okay. Thank you. Thank you.
Your next question comes from the line of Emmanuel Rosner of Deutsche Bank.
Hi, good morning.
Good morning.
What's helping guide you on the.
The revenue trajectory on on on Slide 10, so when I look at sort of the out years 2021 2022.
The gross about markets remain solidly double digits.
2020, you know I understand the volume impact versus last year's trajectory, but I'm looking at gross above market. It feels like even on the gross above market basis, you may have dialed back a little bit to your expectations for 2020, So I was hoping to get a little bit more color and this was there some.
New business launches being pushed forward into leap 19, or if some of it being pushed out in 2020 2021.
And any any factors there in terms of you of course, a buffer for yes look at it Yeah. Let me give you some more color on what's happening that twentytwenty. So first of all we are continuing are better than market performance are that we really kind of started in the third quarter of this upgrade in 18.
And continued into the fourth quarter and that will continue into Twentytwenty now what we have oh adjusted out of our clinical into guidance for includes a few headwinds which are the lower take rates are that I. Just discussed earlier that we will not see the recurrence of that.
It's being higher in Twentytwenty in China as compared to 2019, we're also seeing some lower production with key customers are inparticular masa afford and Nissan So the customer mix is not very favorable in twentytwenty and that's the other.
Impact and also some vehicle launch delays, especially that Ford considering that we have a number of launches for them and the fact that.
We have had some experienced in 29.
19, and so we have also accounted for some potential delays that self without these headwinds we would have been a double digit growth compared to market. So the story in terms of the new product launches that is pretty intact, it's really an impact of the volumes at our key.
Customers, especially the ones that I just mentioned.
That that that's really great color, so just to be clear so.
There were some delays with the or issue the explore launch last year. So it's not you don't know for effect there will be some enforce launches this year, but you are basically incorporating some in your 2020 guidance.
Correct correct out of conservatism, Okay understood and then a follow up here is.
On the working capital could you. Please go back over.
I guess the drivers of sort of effect you saw year over year use of cash on the working capital what part is not recurring from 2019 can you just go back over the quantification of this and what we're working capital looked like this year, yes, so our exposure on.
The the 2020 free cash flow drivers are increased adjusted EBITDAC Capex flat and an increase in working capital we have essentially simply a increasing sales year over year, and that's going to attract a negative working capital combined with that as well is the fact that we had a pre.
Good performance in 19, and a fairly sizable inflow in working capital in 2019 as Bill mentioned in his in his presentation. So the combination of the two makes a limit of the more challenging a working capital story.
For the two 2020 cash flow.
And any number.
We can do you can do the math I mean, we've got a wondering more sales obviously the Q4.
It's a it's a few.
That's a few millions and negative.
There were says 2019, which is a big inflow of about $50 million.
Great. Thank you.
Your next question comes from the line of David Kelley of Jefferies.
Hi, Good morning, just a quick follow up on that working capital discussion are you seeing any change in OEM payment cadence or are they potentially pushing out payment terms, giving the choppy production environment. We're in.
No.
Bill expand a bit more on that but I went out and.
In fact, we actually had improvement and our.
2019 trade working capital in each of three components, our dsos improved year over year TCOS improved anyway.
Inventory turns improved as well.
So.
A lot of that was hard work on our side, we really haven't seen any.
Change enjoy our OEM came in terms.
Okay, great. Thank you appreciate the color there and maybe that quickly switch gear is a corona virus follow up I think you referenced the potential global impact I guess are you currently seeing any residual impact in the end markets outside of China.
China relative to your customer production schedules, yes, we are unfortunately as you can imagine this supply chain global supply chain is very deep.
And the products that we tend to make especially electronics have hundreds of components.
And enough of an hundreds of suppliers in China, not just supplying to visteon, but also other suppliers that supply to Oems. We are we are hearing about potential impact at several of our customers in Europe and North America of we are working very closely with them as it can imagine how.
Having joined calls that suppliers out of China trying to manage allocation. So that we can continue to keep our customers lines.
You know intact and not have an impact on them.
At this stage it is a day by day situation and we will need to get through the next two to three weeks before we can really see whether we are out of the words or not that our fuel suppliers in China that have only opened up blondes recently, meaning.
Earlier this week and so we will be.
Discussing and meeting with them on a daily business for a better while can understand when they can ramp production back to full capacity and that may take some number of weeks for them to to get there. So we will have to walk up watched this interim period very carefully and manage.
Our our supply chain not just us, but also collaboratively with other suppliers with the Oems.
Right got it perfect. Thank you.
Thank you and this concludes our earnings call for the fourth quarter and full year 2019, thank everyone for participating on today's call on your ongoing interest unless.
We have any follow up questions. Please contact me directly thank you.
This concludes this fourth quarter and full year 2019 earnings call you may now disconnect.
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