Q1 2020 Earnings Call
[music].
Good morning, and Chris Doyle director of Investor Relations for Visteon.
Welcome to earnings call for the first quarter of 2020.
Please note. This call is being recorded and all lines have been placed on listen only know 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 Investor section Visteons website. This morning.
Please visit investors that visteon back on to download the material. If you have not already done so.
Joining us today are sectional one day, 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 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 over to Sachin.
Thank you, Chris and good morning, everyone.
Before I start the presentation I would like to acknowledge the hard work and commitment well for employees during this unprecedented times.
Despite the disruption caused by the global all good banking.
[noise] Jones first quarter sales were $643 million.
12% year over year, excluding the effect of currency.
Global production volumes declined 23%.
You were able to maximize our seems <unk> success will be mitigating the supply chain disruptions in China, we keep a global customers up and running.
And secondly by launching 13, new products across multiple Oems in the quarter.
Adjusted EBITDA was $33 million on pipelines, what percentage of sales compared to $41 billion or 5.6% last year.
Our profitability was impacted by Louis sales, which were partially offset but the numbers. We couldn't so if clinton 19 operational challenges cost performance in government engineering, which was down 13% year over year excluding currency.
The one $800 million in new business into quarter.
Which is an exceptional performance given the circumstances.
Most of the new business was with new digital products, including digital clusters, Smartcore and displays which reflects the success. We feel that we have made towards next generation digital corporate technologies.
These are uncertain times for the industry and we are taking several measures to ensure that we have sufficient liquidity to withstand the crisis.
The road on the revolver, we now have $825 million some cash.
And the net debt to last 12 month it'd be done issue of negative zero point too.
The reducing all expenses in the near term, we're looking at ways to emerge stronger from the crisis two structural improvements.
We plan to reduce our capital expenditures for 20%.
And have temporarily reduced compensation across the board.
I'm proud of the discipline and dedication demonstrated by the Visteon team in focusing on execution, despite the challenging in London.
I will elaborate further on the operational performance before handing it over to Jerome for discussion on our financials.
Turning to page three.
In most regions Visteon Q1, Twentytwenty sales outperformed the global industry production volumes compared to the same period last year.
As additional products continue to do well in the market.
On this slide I will discuss our performance in regions outside of China.
And have recovered China separately on the next page.
In the Americas, Visteon outperformed industry production volumes, but 12 percentage points.
The main drivers with the ramp up of recently launched products at food GM and monster in higher take rates of large displays and digital clusters BMW unfold.
In Europe as well, we have several product launches at the end of last year as well as three launches into first quarter with PSC JLL and folks Reagan.
The total sales outperformed industry production by 16 percentage points.
In Japan. Unlike in other regions via in the product transition phase with the roll off of infotainment that monster, which continued into the first quarter.
We were able to partially offset this roll off through the launch of digital clusters and displays at Mazda Hyundai and Nissan.
Our business with Hyundai in particular is growing with multiple launches scheduled for this year.
In North America in Europe, Oems Headwear, Berkeley shut down their plans in the middle of March due to Corona light us, but visteon was able to continue our shipment of products almost until the end of the month, which benefited our Q1 sales.
Turning to page four.
Visteon has done very well in China for the past couple of years and has consistently outperformed the market, mainly driven by new product launches.
That was also the case into first quarter, even under the very difficult circumstances due to covert 19.
Our sales in China in the first quarter were down 47% compared to 4% to 6% for the market.
In addition to lower volume, we were impacted by the non recurrence of the special sales promotion SCM last year.
Excluding the non recurrence of the sales promotion.
While sales in China were better than market by about 10 percentage points, mainly driven by new product launches over the past several quarters.
Our launch cadence continued in the first quarter with several new products.
And we were able to work around the shutdown in February.
We have several additional launches this year in China, which will help us greatly as the region returns to be covered 19 level of production.
Despite covered 19 restrictions disrupting travel and face to face meetings for most of the quarter.
We managed to win over $200 million in new business in China.
Most of this Vince will for our new digital products, including Smartcore and digital clusters.
Turning to page five.
While responding to the crisis has consumed much of our attention and energy.
The company continues to execute on its good strategy in the first quarter.
We launched 30, new products with nine different Oems in the quarter.
And made significant progress developing a first Android based infotainment system, which we expect to launch shortly after production restarts.
We've made significant progress in reducing high cost engineering resources in Western Europe by moving to work through lower cost sites in eastern Europe.
Almost 80% of our engineering footprint now resides in best cost countries.
Despite the high number of new product launches.
Net engineering cost in the quarter was down 13% excluding currency.
Lower gross spend and higher recoveries from customers.
As I mentioned earlier, we have one $800 million with new business in the quarter, which is a very good performance in light of the disruption that was caused across the globe.
Over 500 million of this was for digital clusters.
Which underscores our strong position in this growing segment of the cockpit.
We also won a significant smart core business in China in collaboration with Tencent.
The other notable than was the extension of our battery management systems business within OEM in North America.
The discipline, we will be the exclusive supplier of all components of the Vms system, what this OEM.
The certain an unexpected impact of the rolling Corona, let us our brick across the different regions.
Quick cost adjustment a top priority.
At Visteon, we were able to flexed, our manufacturing costs down quickly to align with production volume declines.
We've also successful in managing our supply chain and inventory.
And cash conversion cycle was improved by about nine days versus last year.
The company has also proactively taken additional cost reduction measures in anticipation of further production decline in the second quarter.
These actions include eliminating contract resources listening strict controls on all expenses.
Implementing temporary sell good reductions.
And postponing projects that are not critical in the near term.
These steps will partially offset the impact of the drop in sales expected in the second quarter.
Turning to page six.
This page illustrates our disciplined approach to safeguarding the health and safety of our employees protect the company financially and serve our customers in an uncertain covered 19 environment.
Our first priority is to protect our 11000 global employees.
The company has developed comprehensive safety protocols and procedures for appliance and technical centers to safeguard our employees.
We have deployed in effective work from home infrastructure with audio video conferencing and virtual desktop for our engineers to work on customer programs remotely.
That also able to bring smaller teams of people to our labs for work that cannot be done remotely.
Following strict safety protocols.
As I mentioned earlier, we have taken several measures to preserve our cash including the drawdown of the revolver and strict controls on all expenditures.
We have implemented temporary salary reduction starting with my celery been reduced the 40%.
The Companys Executive committee by 30%.
And non employee directors cash compensation by 30%.
Subject to local laws and regulations, all other employee salaries will be reduced by 20%.
We've also reduced the amount of raw materials, we buy in renegotiated supplier contracts for improved payment terms.
And we are reducing capital expenditures and working to ensure we receive payments on time from our customers.
Car manufacturers outside of China are not planning the restart of the manufacturing operations.
With some Oems starting during the first week of me.
We have been working closely with our customers and local authorities at our manufacturing sites to prepare for resumption of activities.
We expect to be fully prepared with implementation of safety procedures and supply of raw materials to be up and running ahead of our customers.
That all painfully aware of the shortage of personal protective equipment for frontline medical caregivers in the battle against covered 19th.
Visteon has plastic injection molding capabilities at many of our plans.
And we are using some of these facilities to manufacture and donate up to 50000 protective phase twos various hospitals in our communities.
About 30000 of this space shoes have already been manufactured and donated to medical stuff of several hospitals.
Turning to page seven.
The rolling impact of corporate banking and the global nature of the industry supply chain has made it difficult to plan restart of operations outside of China.
In China, we exited the first quarter with our manufacturing plants fully up and running.
OEM production facilities are also back online, although many Oems are operating on one shift bases in sort of the normal two ships in the production level in March was at about 50% of recovered 19 level.
We expect demand to continue to improve in China.
Production levels to slowly rise throughout the second quarter.
Outside of China covered 19 has essentially broad industry production to halt since the second half of March and the shutdown has continued to all of April.
There's a lot of discussion about timing of the restart of production and Visteon is in regular dialogue with our customers and suppliers to determine a return to work timetable.
We expect our customers in Europe to start a little earlier than in North America, mostly in the first week of me.
By mid May we expect most customers to be starting production in Europe as well as in North America, but at one shift for the initially.
As most Oems to shut down abruptly in March we believed that has some parts inventory adept brands already which will allow us to restart appliance concurrently.
Beyond the first couple of weeks of low production based on our experience in China, We expect production volume to slowly increase to about 50% of three covered 19 levels towards the end of the second quarter.
There was some stocking of inventory that occurred in the first quarter.
Which would likely reverse in Q2.
And dealer inventories are also high which will keep production levels relatively low in the near term.
As a result of this uncertain and highly fluid situation, we expect production volumes to decline by 50% or more in the second quarter.
Beyond the second quarter and for the rest of the year production volumes will be determined more by the level of consumer demand, which is very unclear at this time.
A lot will depend on how that able to control the spread of Corona letters and if there are additional waves of outbreak.
Due to the lack of sufficient visibility into highly dynamic nature of the situation that withdrawn our twentytwenty and long term guidance for the company.
Turning to page eight.
While we are responding to the crisis caused by Corona letters that also thinking about the post covered 19 scenario for the digital cockpit market.
We believe the secular trends prior to defend them that were the main drivers of growth of cockpit electronics, we largely remain intact and continue to drive growth for the industry.
The transition of the cluster from analog to digital is already in advanced stages.
Expected to continue post crisis.
The flexibility offered by digital clusters in rendering evolving features such as Adas features is a key driver of this trend.
Additionally, digital clusters, but smaller displays are starting to become an important product for more affordable mass market vehicles.
Traditional OEM infotainment systems are usually expensive to develop and our yet limited in their ability to offer downloadable apps or new market driven features.
On the other hand, Android based infotainment systems offer a much broader atico system and can be more easily upgraded for new capabilities, such as voice assistance.
With respect to displays we expect the market to focus on value and avoid the expensive pillar two pillars dashboard filling this place like those we have seen at recency issues.
Mainstream displays will continue to go in size and features.
But with more focus on cost and before which will likely result in further delays in introduction of OLED displays.
Corporate domain controllers, thus far have demonstrated the ability to consolidate easy use but have often being too complex and difficult to develop especially in terms of software.
We expect the industry to develop new and unified software architecture for the cockpit.
That together with new Silicon solutions offer in good cost in future benefits to the Oems.
And lastly, this prices will likely push upon this driving further out in time, while aid US, we'll continue to evolve as new and cost effective silicone and camera solutions become available.
At Visteon, well position with our product and technology portfolio to address these trends.
In addition, our strategy of vertical integration and in house development of new technology reduce cost.
It is even more appropriate and relevant in the post covered 91.
Turning to page nine.
In summary, our focus on execution resulted in better than market sales and lower costs compared to prior year, despite the challenging environment.
The company continue to build a foundation for future growth by launching 13, new products and billing $800 million in new business in the quarter.
We are clear action plans to address the classes with focus on three main topics health and safety or for employees.
Reservation of cash and preparing for restart of operations.
In anticipation of further decline of production volume in the second quarter. We are proactively taken several measures to reduce the use of cash.
And lastly, we are confident that we will emerge from this crisis as a stronger company that continues to be aligned with the wasnt product and technology trends and more efficient than before.
Now I will turn the presentation over to Jerome to review the financial results.
Thank you Sachin and good morning, everyone. Our top priorities the safety of our employees followed closely by our constant focus on ensuring that visteon weathered the storm and emerges from the crises as a stronger company.
On page 11, we provide an overview of some key balance sheet items as well as the proactive measures. We are taking to actively preserve cash and aggressively adjust our cost base.
Visteon as uncertainties crises with one of the strongest balance sheets in the industry.
Cash at the end of the quarter was 825 million, which translates into a 41 million net cash position and a net debt to trailing 12 month EBITDA of negative 0.2 times.
In addition, the majority of our debt, including our term loan and the revolving credit facility does not mature until 2024.
To protect our strong balance sheet, we are proactively taking actions to preserve cash as such we're targeting a minimum 20% reduction in capital expenditures for the full year compared to 29 team.
A large portion of our Capex is related to new programs as such we're striking a balance between reducing their terms investments.
While ensuring we continue to support future program launches and therefore visteons future growth.
Working capital management as also being at the center of our activities very early in the crisis and our performance was solid at the end of Q1 with working capital balances below 5.5% when annualized as a percentage of Visteon sales.
As could be 19 began to impact businesses in China, We immediately set up a global task force to manage inventory levels.
First focused on ensuring supply continuing to outside of China.
Then quickly pivoting to reduce inbound orders throughout the rest of world as customers were progressively shutting down.
We have also been working in parallel with our suppliers to renegotiate payment terms.
Finally payments from our customers remained on track throughout the first quarter and we will continue to monitor very closely.
We are actively pursuing local governments supported cash default programs, which include in some jurisdictions partial deferral of payroll taxes indirect taxes for income taxes as well as pension contribution deferrals.
In anticipation of steel volume reductions in Q2 and potentially beyond Q2.
We have taken strong measures to reduce cost actively reducing personnel expense and discretionary spending.
As previously announced we have implemented a temporary reduction in wages and certain benefits for salary personnel, which includes a 20% reduction of salary for all employees, while the leadership team and the board of directors have taken larger reductions.
Non personnel expanding deals also being curtailed through strict cost controls and renegotiations, including reducing contractor and consultants patterns throughout the organization.
In our commercial pursuits, we continue to focus on pricing discipline during our negotiations with customers.
All of these cost actions are also complemented by further structural actions.
We have announced restructuring plans, which were being developed before could be 19, but have become even more important to ensure we emerge stronger from these crises and with a more streamlined organization.
The restructuring programs announced in Q1 will impact at counting manufacturing.
Engineering and administration and are expected to be completed by the middle of 2021 and have approximately a one year payback on average.
We are anticipating cash restructuring payments of approximately 40 to 45 million for the full year for all programs that have been announced to date.
Turning to page 12.
On page 12, we present, our key financial results for the first quarter of 2020 versus the prior year.
Sales of 643 million in the first quarter decreased 94 million or 13% compared to prior year.
In comparison global industry production volumes were down 23% as the spread of proving 19 significantly disrupted operations throughout the automotive industry.
Adjusted EBITDA was 33 million, representing an 8 million decreased from 2019, primarily due to the impact from lower sales and unfavorable mix, which were partially offset by improved manufacturing performance lower net engineering and the non recurrence of 2019 operational Chuck.
Plunges.
Excluding the 2019 operational challenges decremental margins were approximately 20% for the quarter.
Adjusted free cash flow was negative 14 million, representing an improvement of 16 million compared to the prior year and benefited from the improved year over year working capital levels and performance.
On page 13, we provide more detail on the year over year changes in sales and adjusted EBITDA.
Sales of 643 million were negatively impacted by approximately 100 million as result of coding 19.
This impact is present in all categories showing in our sales variances at the bottom of the page as lower activity decreased the level of volumes mix net new business, partially reduced the level of annual pricing and created additional volatility in foreign exchange.
Adjusted EBITDA was 33 million with adjusted EBITDA margin of 5.1%.
The impact from volume and favorable mix reduced sales, but it was essentially offset by positive manufacturing performance and the non recurrence of the 2019 operational challenges of approximately 10 million.
And your pricing reduced adjusted EBITDA by 15 million, representing about 2% of prior year sales, which is on the lower end of our historical range.
Excluding the impact of currency net engineering expense decreased 11 million or approximately 13% compared to last year, primarily related to the benefits of previously announced restructuring actions lower activity levels in China, and the timing of program expenses and recoveries.
Adjusted as Gen expense excluding currency.
Decreased 1 million compared to prior year, while currency reduced adjusted EBITDA by 3 million.
Excluding the non recurrence of operational challenges decremental margins were approximately 20% and included the cost reductions, we initiated as well as favorable timing of engineering recoveries and program expenses.
The outlook for Q2 is uncertain at this time and as such in highlighted production volumes could be down 50% or more compared to prior year, we're presenting a much more significant decline that experience in Q1 as such we expect decremental margins to be the high 20% range for the quarter, which incur.
Operates the cost initiatives, we have implemented while also taking into account the severe declining production volumes.
Moving to slide 14.
Page 14 provides our adjusted free cash flow as well as an overview of our net cash position for the first quarter.
First quarter adjusted free cash flow was negative 14 million, representing a 16 million improvement compared to prior year, mainly due to the improved working capital metrics on a year over year basis combined with lower volumes.
This was partially offset by higher capital spending in Q1 2020, supporting a larger number of launches in 2020 versus 2019.
Other assets and liabilities were also impacted by negative year over year cash outflows related to the annual incentive compensation plan highlighting different payouts between 2018 and 29 team.
We are actively monitoring daily receipts from our customers, which have remained on track throughout the first quarter.
We're expecting that the level of collections will significantly decreased towards the end of the second quarter as payments are due for activity performed in late Q1, and earlier Q2, which were either significantly reduced or stopped all together as we previously discussed.
In parallel we're also working diligently with our supply base by entering into negotiations to extend payment terms.
We ended the quarter with 180 million of inventory and are actively monitoring the situation to ensure we can support our customers plans to restart operations, while ensuring we control the level of inventory within our operations.
Finally, visteon completed $16 million of share repurchases in the first quarter before the impact of Koby 19 spread outside of China.
Versus spending our share repurchase activity in the near term until the industry begins to show signs of sustainable recovery at which time, we will assess our future plans.
As previously mentioned, we had one of the strongest balance sheets in the industry with a net cash position and no material near term debt maturities. We will continue to monitor our cash position daily while taking actions to actively preserve cash and aggressively reduce costs.
Turning to page 15.
Despite the near term uncertainty and challenges that industry faces Visteon remains a compelling long term investment opportunity.
As a pure play cockpit electronics company, we're able to combine a deep understanding of the automobile industry with outerwear and software now.
As a result, we're able to quickly adapt to changing environment and we have created a product portfolio well aligned with the secular trends in the industry.
Our continued focus on maintaining a strong balance sheet as put us in a great position to weather the storm and were taking proactive measures to reduce near term cost while focusing on building an organizational structure that will emerge stronger once the near term challenges dissipate. Thank you for your time today I would like.
Now to open the call for your questions.
Thank you and at this time, if you'd like asking audio questions. Please press Star then the number one on your telephone keypad again, that's star then the number one.
The first question is from David Leiker with Baird. Your line is open.
Good morning near enough.
Good morning, David go ahead, I can hear you Lauren.
Yeah, I was trying to figure out how to do all this stuff that.
I our focus on one thing from a couple of different angles and labor like a cure probably keep your out morning, but we look at the new business number I'm clearly below trend clearly some disruptions in the process of engineering a contract award Barrington. Thanks.
Can you characterize at all how much.
New business wins, you might have lost in the quarter because of some of these disruptions.
I think people are going to focus on that number versus a run rate that you've been out. Obviously this is a lot lower but if it can help bridge that.
Okay great.
Absolutely. So first of all David I would say that $800 million of new business wins under the circumstances, there was a pretty decent performance.
And as you know new business wins tend to be lumpy as our quarterly pursuits vary and the very quite widely from quarter to quarter.
Usually we see anywhere between two and a half two $5 billion of opportunities in a quarter.
And our win rates tend to be somewhere between 30% to 40%.
Even before the crisis.
Q1 was expected to be the lightest quarter in Twentytwenty in every successive quarter has more opportunities and the third and fourth quarters, where we see most of the decisions for awards to be made now keep in mind. This is before any of the crisis related impact.
Now in Q1 on account of all of the restrictions that we had to work around.
We saw roughly I would say about $300 million of impact to our new business when number.
Now on top of that perhaps not as well appreciated is the impact of lowered volume expectations into outer years.
And that's about 10%.
Okay, and so if you look at all of these impacts.
I would have expected us to be somewhere between 1.32 $1.5 billion in new but new business wins in Q1, if covered was not to happen.
Now that's still in line with what we have done in previous quarters. This time of the year, but.
So certainly not.
Go too far off and we would expect the later quarters of the year to be the larger quarters from new business wins, we point.
Fundamentally we don't see any change given now even as we talk to our customers are despite all of the restrictions work from home et cetera, There's still a lot of attention on.
The same technologies and trends that we've been talking about for the digital cockpit. So we don't see a fundamental shift.
Yet.
Q2, we do expect to see some delays.
Simply because the attention right now is on restart and a lot of energy is going into that but we expect to be able to catch up in Q3 in Q4, maybe not to the full extent, but there is opportunities I don't believe all going anywhere as the industry has a need to upgrade their technology.
In the cockpit and the days of analog pages are done.
It's about multi screen multi modal touch.
Wise interaction the user experience.
I'll just give you a quick anecdote we are in the final stages off.
[noise] developing a system the smartpost system for a customer in China.
And we were surprised to find out that they were doing all of their testing exclusively we are weiss, even though the system has a touch interface.
That's where the industry is headed so we don't believe that we will see a certain change in direction from the larger displays Weiss modalities.
Connected in applications coming into the cars. So we think the suit continue.
Okay, and then just one follow up on that the other piece of this equation as it seems like every day every other day.
Other announcements about new products program launches something we've been through multiple cycles here in times like this everybody's trying to conserve cash and one of those as a push out new launches can you characterize I know I know its earlier I know, it's hard but is there any way to characterize the impact on the backlog converting to revenue and how much of that.
Might be pushed out or how we should look at that.
Yeah, Yeah, yeah. So so this year Consequently was also.
Fear of the highest number of new launches over the past two to four years. If you look at our prior performance on an average we have been launching about 50 new products. This year. This year. When we started the year beard 64 launches in Twentytwenty.
Now and 13 of them in Q1, Q1, we were able to.
Work around the restrictions in China. It was really felt only in China, and we were able to work around the stoppages and still launch all of the products and then the Q2 and three and four have higher number of new launches. We are expecting delays on account of covered anywhere between two to three months, but most.
Of these will be still contained within the year, what we have an informed so far out of the six before was that Ford launches, which were at the tail end of the year or towards the end of Q3, and then Q4 those four launches are being pushed out to our 2021, but we still have 60 launches that.
At this point in time on track to be launched yet this year.
So we don't believe that there will be a significant delays simply because this program taught at a point, where it doesn't make sense for the OEM to delay the manufacturer a lot of investment than effort has gone into them and they need this fresh product out in a highly competitive environment as and when they start to come back.
So don't really expect to see us huge amount of change what we do expect is some product that was expected to launch say 21 and 22.
There might be some level off.
Adjustments being made some portfolio pruning on the the vehicle models that we might see but those are still in early discussions we expect Oems to be going through those discussions internally now and we will only know in a few weeks time here as to how that might look like.
Okay got that awesome, that's perfect exactly I was looking for thank you.
Thank you.
The next question is from the Dan Galves with Wolfe Research Your line is open.
Hey, good morning. Thanks.
So your your revenue in Q1 was 13% below Q4 levels.
Can you talk to us about how much lower your headcount headcount was in Q1.
And looking forward, how do you think about actions to re size, but the cost structure to what you anticipate might be production rates and demand.
Got it wrong industry restarts.
Sorry, Yes, OLED Jerome addressed this question, Greg Good morning, Don fashion.
So a 13% down versus Q4, it's very similar to what we have as well versus prior year. So I.
I think Q1 was a fairly solid quarter in terms of ex accretion we were able.
Pretty early in the crises to adjust our costs.
We had as well previews Lee or prior to the Covidien 19, we had as well taken actions like restructuring actions to reduce our cost base. So the good decremental margin percentage that we have 20% is it's a combination of both what we had done before.
Koby 19, and as well the quick actions we took.
After a coffee 19.
Going into Q2, obviously volumes will be much more severe in terms of decline. That's what we've seen in Q1. So we are expecting decremental margins to be in the high Twentys and we are integrating obviously the higher volume declines the impact it has got on the fixed costs, but as we.
Well all the actions that we are taking headcount.
But as well our salary reductions, which are short term with our actions as well as the longer term actions that we're taking in terms of restructuring.
Okay, Great and can you just.
Give us a sense of you know over the last couple of quarters of launch is on the profitability side is there anything you can tell us on how the launches are performing.
From an incremental margin standpoint and launch costs.
Right Excellence right. If you if you go back to last year's performance.
Remember the first quarter, where we had this launch our challenges with a display product of which we had to work through pretty much in the first half of the year. Since then our performance has been on track we have not seen any issues with launches.
Having said that I think you understand that the launch margins tend to be lower than the margins of more more mature product, but that's very normal and we expected. So we have not seen any issues and the same goes for the launches that we've had in the beginning of.
This year as well.
Great. Thank you.
Thank you. Thank you.
The next question is from Joseph Spak with RBC capital markets. Your line is open.
Hi, Thanks, good morning, everyone of our everyone's okay.
I guess just to start maybe a couple things on China I thought you mentioned that you thought there was a little bit of an impact on.
On the her growth are outgrowing from from an inventory build was wondering if you could quantify that impact in the first quarter, because obviously that should reverse in the second and then last year as as we all know you.
Ah you benefited from some higher take rates in China, which I think was that a promotional efforts helps that move units do you think theres a possibility such programs could return in 2020.
Yes, let let me address that and let me go back a little but in terms of.
Our market our performance and what have you seen this quarter. So as you know our market our performance actually started in the second quarter of last year and continued into Q3 in Q4 last year and we were expecting at the beginning of this year to continue that end to twentytwenty.
And January started.
On track as we were expecting with a double digit growth.
That month.
And in February we had to react to the shutdown that happened in China and one of our focused at the time was too as we were shutting down in China secure enough supply of raw materials to keep our customers are outside of China up and running.
And then just as quickly as that was starting to get to some level of control we had to face another change and favor to slowing down on the receiving of the raw material inventory as the rest of the world started to go into a shutdown.
So.
What we did towards the end of March because most of the OEM started to shut down some sometime middle of March.
And our through the rest of the the month of we were still able to ship.
Approximately eight weeks worth of product, even though are the Oems were shut down.
And that is the inventory, we expect to be sitting at our customers plans as and when they come back and restart that they would be able to use that so we would not necessarily be required to ship product ahead of them starting the appliance.
And we are starting to see some of that activity happened in Europe.
As they are ramping up the engine plans and then are there plans to start their assembly plants, we expect to see some inventory that's already sitting there that would impact us in this quarter, but it's roughly about I would say three to four days worth of production from our side out.
Out of China that is expected to.
Rolled back.
So hopefully Joe I think Thats that was your question now with respect to the.
The specific promotion in China with SGN as you have had a couple of vehicle models that.
Needed the promotion and we saw the benefit of that in 19.
This year they have discontinued one model and the second model that is still.
In production has I would say more normal levels of take rate of that specifics product under cope with the customer. However, I should say that even in the first quarter. We are seeing an increase in take rates with a broader set of customers.
In China, especially digital clusters that we expect.
Larger.
There is a drive towards more safe.
Two features level two level, two plus gravel monitoring.
But the overall team that we are now starting to hear is of course cost and more than ever the.
Development cost not just the product is price cost so the big shift I think is that.
The amount of money thats going to be spent on building technologies and products is the one that's going to come under more scrutiny.
And so suppliers will require two to figure out of the way that you can develop this products without spread.
Okay.
As an industry, which went far too much money in the custom development of whether its infotainment or clusters or displays and not making use sufficiently enough off.
Okay platform approach and Thats, the big shift that we see we also see the drive growers integration of what many of this district.
The products such as driver monitoring Great example, where there is a push towards introducing that feature but that's an incremental cost in this times there is going to be a very difficult proposition.
So.
That's that's one thing now with respect to our infotainment I believe that there was going to be a bigger shift towards more open platforms like.
Great and the days of custom infotainment might finally be now offer that the impact of covered.
So those are the general teams. This is still early days, Joe and I think we will learn a whole lot more but that's what we feel at this point in time.
Thanks.
Thank you.
The next question, it's Ron Paul Johnson with Barclays.
Hi.
Yes, Thank you and good morning, good afternoon, right in wireline here for the fifth and team.
Hi, good questions got answered before are usually like to be the more strategic one so I'll get some of the financial one so if we kind of pick about us I know you want to give guidance, but I'm just trying to think through a second half where maybe China sales.
Closer to normal.
Scott that 15%.
Europe is off significantly call, 30% to 40% and North America, which as we pointed out on that supply side is just as uncertain demand side is down so for kind of looking at.
Let's call it global production environment.
Down 25, 30%, how do you think about year margins in that sort of re sizing to global.
Production base with that feels more like 2011 2012 than like 2017 2018.
Right, Brian Let me start in the know US Jerome to also step in here, but we're looking at it in two different.
Perspectives first of all our internal planning is exactly assuming a scenario where production can be down by about 30% for the full year.
So in in some sense, we are a little more color.
So relative to convert I adjusters today.
And so we are looking at our costs.
We have several actions that we have already taken and some underway to drive our cost structure down but at the same time, we want to make sure that we protect our future growth.
So thats balance that we are trying to strike between how do we protect our growth and we actually see this as an opportunity as we are I believe much more nimble than many of our competitors I believe we are in a much better position with respect to the technology.
As well as the cost associated with it that we should be looking at this.
As an opportunity to take market share and not a not just focus on the very near term. So it's that balance that we are trying to strike. So if you look at all costs.
Besides the the costs of the raw materials or go into the product, we have manufacturing and engineering as the two big cost elements. So there's a tremendous amount of focus right now.
On aligning manufacturing because that's the one that will be impacted most in the near term.
We have a lot of different strategies to reduce our manufacturing costs fixed costs to align with the new production levels. Then when we look at engineering, we have very strong focus internally on a couple of.
For directions number one to move our cost structure to lower cost places.
And the second is to use a platform approach and I can't emphasize the platform approach enough and what it means is that we should be in a position to offer to Oems.
Ready to.
Deploy product at a much much lower cost than what they are accustomed quickly.
Now to be able to do that they would have to also except to certain restrictions and not be are demanding.
Specific and unique features to them as much as they used to do in the past, but even that we should be in a position to support with certain extent. So thats. The general direction third we are getting organized to two settled the company in and out.
Jerome to jump in here, but maybe more of the yes. Thanks, sorry, if I can maybe add two points. The first one is that very early we took some actions on the restructuring side.
So in fact before Koby 19 started in January we announced one plan and we then announces second one in March. So the idea was ready to adjust its cost structure that session was talking about and get already some benefits in.
In in this year adequately largely Q3, and Q4 and will help us mitigate some of the volume decline, which now which in our some of our scenarios are pretty pretty steep as much as Seth mentioned the second thing I just would like to conduct an engineering, we we were able to reduce engineering year over year Farah by about 13%.
Sales in Q1, and we see.
Continuing as well with again all the actions, we're taking long term and short term, we should be able to get.
Great.
FX from a cost standpoint on the engineering side, if you just look at.
Okay and just back.
Sanctions comments about platforms, because certainly I remember that great work again and Harman.
Last decade on moving the platforms I think how far along as the software and hardware.
Formalization EFI will add investee on what's left to do and is a more question.
Getting the Oems onboard or do you have additional work to do to get a yep.
As to buy about platform out yes, we're in a very good position with infotainment.
And the reason for that is that we didn't really have a a big legacy of infotainment that I had to work through after I came here so by the way.
The first product just got launched yesterday using the platform with VW August actually.
Now.
Available all in terms of the public.
Launch information. So just went live in Brazil with VW very very proud of the achievement of the team. There. So very good position with infotainment and we're making a lot of progress with our instrument clusters Digital's instrument clusters now the challenge here was.
Because we have a very broad set of customers are we have many many programs and the implementations vary widely from OEM to OEM. So we have put together a team and the goal is we will launch our first platform of based cluster program. A majority of the work would be done this.
Here and then every successive.
Cluster of that we build.
We'll be built off of that platform and that is going to represent a significant cost savings that we will pass onto the.
To the Oems, So that's where we had AD and by the way we're taking the same strategy with Dr. Paul.
We are focused on level, two plus and here again I think our our initial views on the viability of the more advanced levels of.
Bonomy have been proven to be more correct and focuses on 2.5.
And with the goal of developing most of the technology in house. So that we can offer very cost competitive solution made a lot of progress with the vision processing algorithms developing them in house also on the hardware and late summer, we expect to be in a position that the technology will be mature enough, where we can then.
Take it to other customers beyond GAC, who is our lead customer that we're working with on that front. So the three main product platforms infotainment. That's ready to go we are actively using it with the one that dysport lost and some other Oems.
A lot of progress being made on clusters, and then drive quarters. The one that there's going to come third.
But still this year.
Okay, great. Thank you.
Thanks.
The next question is from a Michaels Citi. Your line is open.
Great. Thanks, Doug Good morning, everyone.
Good day.
Thanks, just want to go back such into to the new business discussion. So what was a 300 million you mentioned before just the delay in Q1 and can how should we think about.
There you see the opportunities.
For the remainder of the year did you think you still have an opportunity to your book over $1 billion, a quarter of new business and kind of.
How about that.
Right and it truly is a delay that we expect to be working on either in Q2 Q3, depending upon how.
This does deliver.
This cascade in the quarters, but fundamentally what you're seeing is more or less a similar situation as last year spirit.
Most of the opportunities coming from the transition of clusters from analog to digital.
And within that we're seeing a lot of interest in.
What we call now as the mixed digital clusters, so close to settle.
Lower end of the.
The market.
Eight inches of display size with some other ltd in other capabilities to really drive the product into the.
To be segments of the of the market. So lot of opportunity. There, we're seeing a lot of opportunity based on the infotainment platform that I just mentioned earlier. So we've talked about this before where we are seeing the market collapse from the three segments that we used to have in infotainment effectively too.
Display audio and the high end infotainment and at Visteon, We're really not focused on the high end infotainment, we're focused on the display audio.
And the platform that we have that just got launched puts us in a great position to where few opportunities based off of that and then the third segment, which is relatively new to us, but we did see that last year as well our displays and within displays we have very clear focus we are not focusing on.
The commodity flat screen 810 inches walk through displays or more the multiscreen products that I mentioned earlier as well. So these are multi displays that are being.
Hi, Andrew.
But what has happened here, we expect to see less interest in technologies like OLED more interest in the traditional.
Display technologies.
At the same time more focus on value. So our strategy of again vertically integrating as much of the displays as possible in our plans will also serve us well.
That's helpful Thats going on that point, given your view that all it could be delayed I guess, starting to see incremental interest and the Microsoft product you introduced at CES. So just still.
Really.
So absolutely we are and what it has done is.
It has really given visteon the credibility that we necessarily didn't have inter segment of the market rate visteons business with displays prior to last year was almost exclusively focused on forward and we will not really a supplier to the other Oems so getting onto supplier panels our strategy.
Here to land first and then expand we need always when we'll do that it technology innovation.
The becomes the calling card why we should be considered for that opportunity and microphones.
So that performs extremely well now we still want to position it as a premium product. It is not a replacement for the current commodity LCD technologies, and we will still.
Continue to see more business with the strip additional taken LCD technologies, but fewer on on the Microsoft, but I'd say a product that we believe will also albeit interesting to those Oems that don't want to pay for something like all that but wont be better experience in there.
Carpets.
That's helpful. Just lastly for Jerome kind of back too.
Balance sheet and liquidity I apologize if I missed this but.
Here, where cash is expected to end the month of April and just how to think about.
Cash.
Ill pre and post working capital to the extent that some of the production.
Assumptions are delayed.
Yes, or will it will not give detail.
Regarding our cash balance for April nor will we gave.
The amount of cash outflow will have for Q2, but let me help you maybe frame.
What we are looking at for Q2, so we talked about sales.
Cline being pretty dramatic anxious showing close to 50% decremental margins off in the high Twentys, So thats for EBITDA on.
Cash flow.
Stable.
In terms of working capital and then on the inventory side, we are expecting.
Inventory to be fairly stable, we are obviously, making sure that we are ramping up with our customers and being able to supply our goods at the same time will be monitoring these very carefully but I think at assumption of flat inventory between Q1 in Q2 is reasonable assumption they'll probably as well with our sand.
Cash taxes reduction so that gives you.
Kind of a frame to be able to think about Q2, EBITDA, but as well as cash flow.
Great. That's all that's very helpful. Thank you.
Your next question is for annual was nearly two inch bank feelings.
Hi, good morning, everybody.
Good morning, good morning.
Cash and I was hoping to as you.
About the competitive environments for your technology and products.
At the beginning of the queuing asking you were talking about.
System.
35% to 40% win rate going on the available.
Fortunately.
Have you seen any changes in this.
Army.
Recently, even sort of like before before Covis.
And in particular any changes any willingness or units of automakers to in source.
Software or are those parts so.
Some of the things that you could supply and I'm asking because I'm also wondering about your thoughts on the other side of it.
Is there no for change the funny, maybe as automakers I'll save a little bit more mindful of what they want to spend on is there an opportunity for you to supply more than.
Well, yes, yes. It was available sure. So let me address that first from the three forward perspective, and then we can talk about what Mike was covered environment look like a competitively. So as you know we are laser focused on the digital cockpit for now what that means says.
Our digital clusters.
Splays infotainment and as we get forward here level, two plus autonomous.
Now if you think about where we were at that digital clusters in.
Addressing the top OEM customers. If you look at the top 15 Oems.
Prior to about two years three years ago, we had only two out of the top 15 as visteon customers for digital clusters today.
The only two Oems in that list there or not.
Visteon customers today.
Now we have a lot of opportunity to grow within many of them.
So.
In in some ways, we can say that we have landed but there's a lot of opportunity to non expand within those Oems for digital clusters now, let's take a look at infotainment and I came.
Theater, we had one customer effectively for infotainment outside of China.
And there was Mazda today, we have five.
Now we have launched with only the second and that to happen just yesterday, but we have other customers that we are working with and we are in that land.
Our phase of the land and expand strategy on infotainment.
Yes.
The best the situation now with covered what is likely to happen here the will be a tremendous focused on engineering costs in engineering spend off.
Digital cockpit, because if you look at the past four or five years trend for Oems. This has been one area of cost that has kept increasing and that increasing at a pace faster than they can offset to other savings or pass onto the consumer.
Now this pace of change is not want to reduce.
The amount of technology that is going to come into the cockpit will not slowdown so they have to figure out a way to offset that in sourcing at this point in time mix, where should ignore sense absolutely for any of the OEM. They don't have the capability, we cannot build it fast enough with the exception of very very few.
So we believe that going forward the in sourcing attempts will be either entirely cancelled or slow down substantially.
And our focus here is not to try to do everything ourselves. We are building platforms were more than happy to work with the Oems where they can bring in what truly makes them different from the others. They don't have reinvent everything it doesnt pay to reinvent everything so our focus is the platform strategy, which I believe concur.
Typically we are ahead of almost all of our comp competitors and so this should serve well, especially in an environment, where there's a lot of focus on cost.
Okay. That's.
Great color just one quick follow ups.
On the financial side.
So the Capex reduction out you manage this.
In the context of still a lot of the launches not really being pushed out too much more than like two or three months I guess, what part of the Capex is getting yes, yes, let me start and then I'll have to roam jump in here as well. So if you think about the launches and the capex associated with them. The Capex is usually spend any.
Between nine months to a year before the launches so lot of the launches. This year. The Capex was already spent most of it last year now the capex that we would spend this year is in.
The service of the programs that will be launched saying 21 or 22.
These are typically things that we need to install in our plans for the final assembly or testing or some special capability that the new product requires so depending upon the level of new business wins, we would be looking at that as a way to make sure that with dial the capex into the right level number two.
I mentioned this earlier, we started an initiative to look at how we reduced the cost of building the equipment.
As required to do this final assembly or testing and doing more effective efficiently and cost effectively.
These were things that in the.
Hustle of the daily business will not necessarily the focus of the company. We have put a lot more emphasis on it and we believe we have a lot of opportunity to take cost out.
And again, the platform position and the streamlining of our product portfolio, where.
Not really need different types of testers, if you're building a lot of different.
Digital clusters per sizes, maybe different but fundamentally is the same product.
So as our products converge as our focus on cost reduction of those equipment starts to take effect I believe we have definitely an opportunity to save at least 20% if not more on the capex.
Yes, so just to add a few comments so Q1 was.
Higher than prior year exactly assessing said we had.
Anticipated in 2019, the the higher launches that we would have in 2020, so whether there's a lag between what we're spending and the volume so.
Going forward the volumes are obviously going to be lower and Thats, why we'll be able to reduce a portion of our capex. If you think about it so.
70, 80% of our Capex related to new business and and we are able to adjust for that I think another big driver as well is negotiation.
Cost reductions that we are entering with suppliers.
As well as terms negotiation. So these are kind of the overall actions that we're taking too.
We do significantly capex.
In the next three quarters.
Perfect. Thank you. Thank you.
Great. Thanks, and this concludes our earnings call for the first quarter of 2020, thank everybody for participating in today's call on your ongoing interest understand you have any follow up questions. Please contact me directly thank you.
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