Q3 2020 Visteon Corp Earnings Call
[music].
Good morning, I'm, Chris Doyle, Vice President Investor Relations and Treasurer.
Welcome to <unk> earnings call for the third quarter of 2020. Please.
Please note. This call is being recorded and all lines have been placed on listen only mode to prevent background noise before.
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 90 95.
Forward looking statements are not guarantees of future results and conditions, but rather are subject to various factors risks and uncertainties that could cause our actual results to differ materially from those expressed in these statements. Please refer to the page entitled forward looking information for additional details.
Presentation materials for today's call were posted on the investors section of Visteons website. This morning. Please.
Please visit investors diversity on dot com to download the material if you have not already done so.
Joining us today, our thoughts on 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 will open the line for your questions. After Sachin Interims remarks.
Please limit your questions to one question and one follow up again. Thank you for joining US now I will turn the call over to Sachin.
Thank you Chris good morning, everyone.
Visteons third quarter performance reflects the proactive actions, we took a line of business operations to certain impact to the industry caused by the Corona light as prices.
Our employees have proven to be resilient and resourceful in delivering to our customer commitments, while simultaneously reducing costs.
Our sales grew 2% year over year on a constant currency basis to $747 million in the third quarter, despite vehicle production being down 2% globally.
Adjusted EBITDA was $87 million or.
11.6% of sales, which is a record for the third quarter.
This represents a 310 basis point improvement over last year, mainly due to cost reduction actions.
And disciplined execution across all areas of our business.
As it has done just that free cash flow was $103 million for the third quarter.
And $2 million to $7 million for the first nine months.
This is higher than prior year, and Q3 cash flow offset the negative adjusted free cash flow in the first half of the year.
What sourcing activities at automakers.
As not return to prequalified levels.
Our new business wins exceeded $1.5 billion in the third quarter.
This performance underscores the strength of our product and technology portfolio.
This is very well aligned with the key trends impacting the industry.
We also launched 23 new products.
Record for the company.
The total year to date number 244.
The company has been undergoing a transformation of its footprint and business processes over the past several quarters.
Including the move toward a platform based approach for product development.
However were up 3% year over year on a constant currency basis.
Due to strong demand for digital cockpit products as well as new product launches that more than offset the impact of volume and product roll offs.
Sales of digital clusters more than doubled from the prior year's level and now represent almost half of our total instrument cluster sales.
Digital cluster sales were particularly strong in Europe with customers, such as diameter Reno and PSC.
In audio and infotainment.
We continue the ramp up of recently launched programs with Ford and VW.
Which partly offset the nonrecurrence of last years sales promotion at as GM in China.
And the ongoing phase out of infotainment business with monster.
Sales of digital displays also grew double digit year over year due to launches of center information displays and multi module displays with Mazda and STM respectively.
Sales of displays to BMW also increased in the third quarter driven by the increased attach rates in China.
In summary, strong market demand for digital cockpit systems, and the high number of new product launches continued visteons better than market performance in the third quarter.
Turning to page four.
I'm very pleased to report that despite the restrictions caused by COVID-19, the company launched a record number of new products during the third quarter.
We launched 23, new products in Q3, including products on flagship vehicles, such as the New Ford F 150 in the Mercedes Benz S class.
The combined projected lifetime revenue of this 23 launches is more than $2.5 billion, which.
Which is the highest we have achieved for a single quarter.
And will help us continue our market our performance in the coming quarters.
This new product launches, we're also well distributed across the different regions with seven in China five in North America.
Northern Europe and the remaining in other parts of Asia.
Two thirds of the launches were for instrument clusters of which half for all digital.
In North America, we launched a 12 inch digital cluster plus audio and telematics on the all New Ford F 150, which is the best selling pickup in the region.
We also launched at 12 introduced to cluster for the Cadillac 65 as of mid cycle upgrade.
Replaces an analog digital cluster from a competitor.
In Europe, we launched a feature rich 12 inch digital cluster with the new Mercedes Benz S class distressed or offers for K graphics over the air software updates.
And integration with augmented reality hard.
We also launched a pennant digital cluster for the all new third generation Vizio, three or eight vehicle.
It's a good example of how digital clusters are migrating to mass market vehicles to support new functionality, especially integration with infotainment and Adas.
In China, we launched an eight inch hybrid cluster on the new Buick envision compact crossover.
And an eight inch all digital cluster for multiple models with VW.
And in Japan, we launched a tenant central information display as a mid cycle upgrade for the Mazda six five contract as you read.
The tubular segment has historically used analog or LSD gauges for reasons of cost.
It is now looking to introduce digital solutions as well.
In the third quarter, we launched an innovative digital cockpit system for all entered motorcycles, but support for turn by turn navigation full integration and software updates.
The 23, new products launched in the third quarter, bringing our year to date total to 44.
And continue our cadence of a high number of new launches.
They showed that the company can execute and launch complex systems human in this challenging environment, while keeping costs in check.
Turning to page five.
After the second quarter shutdown sourcing activity at Oems outside of China restarted in the third quarter, but did not quite reach recovered 19 levels.
Nonetheless, I'm pleased to report that our new business bookings improved to $1.5 billion in the third quarter, bringing the year to date total to $3.2 billion.
Cockpit electronics represented about 1 billion of the total.
Of that clusters led with about 50% of the share.
Audio infotainment at 20%.
Displays at 15% and the rest coming from other products, which is consistent with our recent performance.
And unlike the first two quarters, where most of the bookings came from Asia, China in particular third quarter bookings were more evenly spread across our regions.
Some key wins included a 12 inch cluster for the North American Oems new pickup for launch in 2023.
And the 12 inch cluster for Japanese OEM as a mid cycle upgrade for sports car that launches towards the end of 2021.
We also won a 12 inch cluster with a north American OEM for the vehicles in Europe, and North America as a mid cycle upgrade which will also launch in about 18 months.
Besides digital clusters other key wins included a large 12 inch central information display for an OEM in Japan.
Which will replace the current smaller display as a mid cycle update.
And an infotainment system in South America, that's based on our new Android based infotainment platform.
In addition to cockpit electronics, we also booked a significant amount of additional business for violence battery management system with GM as the OEM and his partner added vehicle models to the ERP platform.
We had one the initial business with GM early last year and the first launch will be make 2020 one.
I will discuss our wireless spectrum management system in more detail on the next page.
The pipeline for the fourth quarter is similar to the third quarter, but with a stronger mix of infotainment and displays.
As the industry continues to recover we expect sourcing activities to also increase in return to more normal level.
And our product and technology portfolio has never been stronger with the progress we have made in infotainment and now in Vienna solution.
Turning to page six.
Electric vehicles need enormous amount of power to operate and batteries for easy. These are made from hundreds or even thousands of battery sales to deliver the required power.
These battery cells need to be constantly monitored for the state of health.
And to maintain them within allowed operating ranges.
This monitoring and management of the sales is done by a system of electronic devices and software that has collectively referred to as the battery management system or BMS.
Today's battery management systems used wired connections between the different electronics components of the BNS.
A wide system has several limitations first surviving hardens itself adds extra cost rate and space to the battery and requires additional work in the manufacturing of the battery pack.
Second the limit design flexibility of the battery pack that limits us reuse across vehicle models.
And third the connectors and wires of the harness are prone to mechanical failures that our expenses to fix.
The violence Vms technology from Visteon replaces the wired connections with the highly secure and reliable wireless communication technology.
That eliminates this limitations with Biod payment solutions.
We are developing the three electronics components of this solution provides.
The violence sell monitoring units.
The wireless network control unit.
And the battery control and vehicle interface unit to enable the assembly of Tetra packs without the need for low voltage wiring harness.
The software algorithms that act on the information provided by the sell monitoring units are typically developed by the OEM in collaboration with the battery cells supplier.
We integrate diesel goal terms in our system as part of the design and manufacture of the Dms solution.
We are working with GM to introduce this solution on all planned E V models powered by debt LTM batteries.
The wireless Vms system will help ensure the scalability of LTM batteries across gem's future lineup.
Covering all brands and vehicle segments from heavy duty trucks to performance vehicles.
And we are in discussions with other Oems for this technology as well.
Turning to page seven.
Electric vehicles sold very well in the third quarter, especially in Europe due to government incentives and tightening emissions requirements and also in China, where sales of ease has started to pick up again.
The number of available models are also growing giving consumers a greater choice than before.
The growth in the market share of NVS is expected to continue and by 2030 East are expected to represent about a fourth of the quarter market.
Visteon is in a good position to leverage this trend.
Our cockpit electronics products, such as digital cluster infotainment and smart for our powertrain agnostic and can seamlessly work for NVS as well as traditional vehicles.
Our new micro is on display technology is ideal for high quality automotive displays, but without paying a price in higher power consumption.
And the wireless BMS provides a scalable solution for modular and reusable battery packs for Oems.
Our products are already on some of the best selling areas such as the Zoe from Reno, which was the best selling even in Europe. So far this year.
Starting next year, our products will launch on multiple models based on new electric vehicle platforms, such as the Bev three from GM there Pierre may perform from Julie in the new ERP platform from Nissan.
Turning to page eight.
While retail demand in the third quarter was stronger than initially expected.
Vehicle production volume was also helped by pent up consumer demand in the replenishing of dealer inventories depleted by shutdowns in the second quarter.
Government incentives, particularly in Europe also helped spur production volume.
Retail demand is expected to remain strong in the fourth quarter, particularly in the us and in China.
But much uncertainty remains in the market.
First there is the risk associated with the recent increase in COVID-19 cases, the so-called second wave.
In several countries already considering stricter restrictions to control the spread.
Second government incentives in several countries in Europe that were put in place toward the end of the second quarter are slowly being phased out and will expire at the end of this year.
Also the next level of European vehicle emissions requirements go into effect early next year, which may have an impact on the volume and mix of vehicles produced in the fourth quarter.
The third quarter's quick demand recovery has cost some market watchers to increased expectations for the fourth quarter with some forecasts, indicating our double digit sequential growth in vehicle production.
We believe this estimates are too optimistic and may not reflect underlying market conditions.
Given the about us and based on our discussions with Oems.
We believe the sequential growth will be more muted in terms of demand and production.
On the other hand, while it is difficult to forecast vehicle production in this environment.
We expect our outperformance to continue in the fourth quarter based on the same reasons that drove our results in the third quarter.
Corporate electronics trends.
And our new product launches will continue to be important factors that should drive our market outperformance to similar levels experienced in the third quarter.
Turning to page nine.
In summary, the company executed very well in the face of a challenging business environment delivering another quarter of sales growth over market and a robust 11.6 adjusted EBITDA margin.
The 44, new programs, we launched and the 3.2 billion in new business. We've won year to date build a solid foundation for continued growth in the future.
Our product and technology portfolio for the digital cockpit is stronger than ever before and together with the wireless Vms solution is very well positioned to leverage to growing interest in electric vehicles.
The proactive actions that we took to streamline our operations and restructured the organization has resulted in improved operational performance and optimized cost structure, while maintaining a strong balance sheet that is helping us emerge stronger from the crisis.
Now I would like to turn the call over to Jerome.
Thank you Sachin and good morning, everyone. In addition to the increase in activity levels compared to Q2, the financial results in the third quarter also benefited from the proactive actions that we initiated very early on this year some of which were implemented before the COVID-19 pandemic is.
These actions were focused on actively generating and preserving cash and aggressively adjusting our cost base.
Net sales were $747 million in the quarter, representing a 3% year over year growth rate when excluding the impact of currency.
Adjusted EBITDA for the quarter was 87 million, representing an adjusted EBITDA margin of 11.6% adjusted free cash flow was 37 million for the first nine months of the year.
Our focus on cost control is evidenced by the significant reductions in both engineering and adjusted EPS DNA at we are reporting gross.
Gross engineering in the quarter is down 25% and adjusted as DNA is down 19% compared to last year both.
Both areas benefited from a combination of short term and longer term structural cost initiatives, which will allow visteon to support a growing business with an optimized structure.
Our focus on cash continued in Q3, allowing us to maintain a strong balance sheets to address the numerous supply chain challenges throughout the last few quarters, we created a global sales and supply chain Task force early independent nature, which continues today to optimize our inventory levels, while ensuring we service our customers.
Timely we ended the quarter with 164 million inventory, a 15% reduction year over year with.
We're presenting a cash inflow of 10 million from Q2 2020, and this despite a significant increase in sales on a quarter over quarter basis.
Capex was down 24% on a year to date basis, and we continue to target a 20% reduction for the full year versus 2019.
In aggregate adjusted free cash flow for the quarter was $103 million and $37 million for the full year Q.
Q3, adjusted free cash flow also benefited from approximately $40 million of temporary supplier term extensions that we negotiated a list of the crises in Q2 half of which will reverse in Q4 of this year and the remainder early next year.
With cash generation coming in strong in Q3, combined with a strong balance sheet and improving activity levels were repaid at the end of September the entire 400 million revolver credit facility that we had access as a precaution at the end of Q1.
We also repaid our short term debt as a result, our total debt was reduced to 348 million at the end of the quarter combined with a total cash position of 435 million, our net cash position after debt stands at $87 million.
To put this in context. It is essentially the net cash position that we had at the end of 2019, which was 84 million.
Turning to page 11.
On page 11, we provide a summary of our sales and adjusted EBITDA for Q3 2020 versus 2019.
Sales of $747 million in the third quarter increased 16 million year over year, representing a 3% improvement when excluding the impact of currency in.
In comparison industry production volumes declined 3% in the same period, while production volumes at Visteon stop customers declined by approximately 6%.
Pricing represented 2.3% of prior sales and continues to be within our historical ranges. The combination of ongoing new business wins and the robust launch schedule has enabled visteon to continue to outperform the market.
Adjusted EBITDA was $87 million or 11.6%, representing an increase of $25 million versus prior year.
Strong cost performance in manufacturing engineering, and SGN, a more than offset the negative impacts from mix and annual pricing.
We estimate that short term measures implemented earlier, this year, including temporary salary reductions and curtailed spending benefited margins in Q3 by approximately 1.5% to 2%. These measures will not carry into Q4.
Adjusted EBITDA benefited from permanent savings related to the restructuring programs announced earlier in the year and which are coming to completion.
The most recently announced restructuring program will not have a material impact in the fourth quarter.
Before moving to cash flow I would like to provide some context on our continued decision to not provide guidance for the remainder of the year.
Although we are optimistic coming out of the third quarter the rate of change in production forecast as not stabilized for instance, Hs forecast for Q3 improved nearly eight percentage points in the last three months with a two percentage point improvement in just the last month. In addition, the fourth quarter.
As the typical uncertainty related to holiday shutdowns and year end OEM inventory management with the added complexity of Cobiz 90 this year.
However, we do expect that.
We will continue to outgrow the market.
In the mid to high single digits.
Adjusted EBITDA will continue to benefit from the structural savings that we benefited from in the third quarter, while we do expect cost increase.
Due to the exploration of short term salary reductions and the gradual increase in discretionary spending.
Engineering recoveries will not have the same seasonality in the fourth quarter as they had in prior year, we expect full year net engineering to be down in the mid 20% French compared to prior year.
In total we are now anticipating that decremental margins will be in the mid teens for the full year moving.
Moving to cash flow.
Page 12 provides an overview of our cash and net cash position at the end of the quarter as well as our adjusted free cash flow for the first three quarters of the year.
Our balance sheet continues to be one of the best in the industry with a net cash position of $87 million and a net debt to last 12 month EBITDA ratio of negative 0.4 times with no near term debt maturity before 2024.
Adjusted free cash flow year to date was 37 million in Q3 adjusted free cash flow was 103 million work.
Working capital was a source of cash benefiting from our focus on optimizing inventory levels and negotiating temporary extended payment terms with our suppliers.
Capital expenditures decreased by more than 20% on a year to date basis, putting us on track to reduce capex by 20% and span $115 million for the full year.
In the fourth quarter, we anticipate approximately a $20 million reversal from temporary supplier payment term extensions and we'll plan to contribute approximately 17 million to the Visteon us pension plan.
Despite these expected cash outflows in the fourth quarter, we are anticipating adjusted free cash flow for the full year to be slightly above breakeven levels.
Turning to page 13.
Visteon continues to be a compelling long term investment opportunity.
We have positioned the company for topline growth margin expansion and increased free cash flow generation, while our strong balance sheet provides maximum flexibility. Thank you for your time today I would now like to open the call for your questions.
At this time, if you would like to ask an audio question. Please press Star then the number one on your telephone keypad again that star and the number one we.
We will pause for just a moment to compile the Kennedy roster.
Okay.
Your first question is from the line of Brian Johnson with Barclays.
Yes Hello.
The chart speaker.
A couple of questions first I might have missed that but in terms of on page 11 that 25 million year over year increase how much of the temporary.
Measures can come back and how much is yes.
That just permanent reduction and SGN, a operational improvement and so forth.
Yeah. Good morning, Brian It's our people here on here.
We I.
I mentioned it in his script and eight we are estimating that close to 1.52 percentage point of EBITDA is related to austerity measures that we took in Q2 and Q3 that will not be repeating again in in Q4. So in a very simplified way you could normalize our.
Results in Q3 by just removing that which.
Which would give you a 9.59, 0.6% EBITDA to 10 to 10 point on EBITDA branch for the quarter.
I think the the one point, which is important to mention as well is that I think we benefited from reduced activity levels in Q3, like we did as well in Q2 and as we are getting into Q4, we do see a regain of activity level, especially on the engineering side.
And.
That well, probably as well continue going into 2021.
Okay. Second then sort of follow on question on my.
Margins.
When we think on page three about those three big drivers.
Correct, which is our customers data.
Infotainment and that displays.
Another competitor at this.
Teams emphasize that they're moving away from display is not happy with the margins. There could you maybe talk about the market and this and then the digital clusters are growing much faster than the Spice could you maybe talk about the margin implications of the rapid growth in digital clusters and as that somehow more of a.
Software and hence of March software, driven and hence Marciano Paul.
Opportunity than just simply display pets.
Yes, hi, Brian So absolutely digital clusters have a fair amount of software content.
Which continues to grow and the growth come from the integration of Adas and infotainment features.
In the cockpit and to the cluster.
And as you.
You May have noted we have been installed.
Insourcing, a lot of that software content by developing it.
In house as compared to the earlier and that we will be like the rest of the industry licensing for software component from third parties. So that that mix digital clusters very good margin business for us of and we expect that to continue with all of the innovation coming in.
Now when it comes to our displays and I have also noted the point that you made about some competitors.
I want to be very clear about our strategy at our two classes of displays in the industry you have the small displays flat angular.
Essentially from RFS and then you have since displays that are getting larger and more differentiates firmed up.
And with integration of March 20 features including.
Including some that are more manufacturing related challenges such as.
Integration of anti reflectance and declare.
Capabilities on the display optical bonding of the Clos that gets a much higher.
Our user experience.
Listings and both those displays are good margin business for us as well and as we look forward to the cockpit accommodations, becoming a display driven environment. We see the displays of grow in size eventually pillar twoa pillar upper steps are being taken.
To get there.
And Thats, where we believe it is essential for us to be in and to be part of that that evolution. Because those displays are going to be bottles on the drive of content in the electronics and software.
And then final question around BMS, which you know what.
We're keenly aware, but frankly snuck up on us in terms of your big role on the ALLTM platform.
Is there any way and dimensional to think about CPB and margin opportunity and wireless.
Wireless BMS.
Yeah, Let me take a step back and talk about BMS, because we havent really been very vocal about it.
And the reasons are are we have been waiting for the opportunity to talk about our first major then which has but you have all but we have been providing vms solutions for GM of for a number of years and add on some of that order.
Avi vehicles are but those are wired rpms solutions and as we looked at how the technology. The battery technology yourself was evolving which is by the way evolving rapidly from cylindrical prismatic to pouches and enter.
Newer forms as Vettest chemistry, it became apparent that wired solutions have limitations, so, but we have been working on this wireless approach at which fundamentally does away with the low voltage wiring harness makes the BMS and the battery pack a lot more modular and scalable.
And so we are very happy to be working with the GM. We are across they are they're all our portfolio of products that are announced already and we'll be in the future on their new.
We have a platform.
The battery electric platform.
And so it gives us a great.
Our position to one.
Get more experience, but also build scale and we expect that we'll be able to bring that solution to other Oems as we go forward.
Now in terms of how to think about the content.
It depends on the size of the battery also a good way to think about it is that depending upon let's say 60 kilo of what our bad battery all the way up to that's a discrete or 130.
The range of the price would be between 350 to $500 per vehicle just for the Vms solution. So it's a pretty high value component our end.
Submission at partner for Us and that segment.
Okay. Thank you.
Your next question is from the line of Michael Philadelphia, Peeling back capital market.
Hi, Good morning, guys. Thanks for taking my question.
It is the 22 D graphics software.
As the displays or getting more capable larger.
Rendering high quality graphics is a very big part of the value proposition of the device and this also used to be something that was lessons from third parties, we have introduced our own solution.
Unique in that fence, both on the other side and on the two D. Three D graphics. So two of the larger components that were third party you know odd.
Doing it in house now how does that help us competitively won but it's simply is cost.
Right competitors have a royalty did they have to pay to third parties, but even more importantly for us.
Oh that the peace at visit technology is evolving in the cockpit.
This gives us the fact that we're doing it ourselves gives us control.
Innovation, that's happening within the cockpit and that to me is even more important than just the cost benefit.
Got it and I'm, sorry, I just one quick follow up you know I I know it would be the ability probably eliminated and you know your margins where claim they better than expected even adjusting to the austerity measures is there any sort of update around at 12% margin target in the next two or three years yeah.
Yeah, Let me talk about that I'm sure. There's a question on many People's minds. So let me try to address it now if you go back to Q3 thought where we have brought over.
Margaret of.
Six six percentage points.
Now that by the way also includes the nonrecurring.
Some special since promotion, we had last year. So if you really look at our performance.
It's really more like 8% to 9% market our performance so clearly the.
Sales side is is coming through with respect to the.
The growth driven by new product launches now if you'd think about our margin expansion.
Based on two factors one.
Our ability to pay cost out and.
And I'll talk about that in a minute and the second is.
Experiencing the growth in sales that we need for the margins to expand beyond this current levels.
The cost front.
As you have seen in the results in this quarter.
Short term as well as more importantly, the structural changes that we've made.
Go to drive sustainable savings those are progressing well bye.
By the time so at this time next year, which would be substantially done with all of those those those actions and so that's one piece we feel good about that that is lowered.
Cost base, which going into next year is gonna help in terms of.
Towards the 12% and then with respect to the sales growth clearly it depends on the underlying production environment, we do expect production to grow.
And also into 2021 odd expectations may be a little more conservative than IHS would we expect a broad and Ah combined with or go to the market. We think that we should be in a position by 2023 time frame as we have stated before to achieve this 12%.
Target confidence now on account of the cost kick out is actually even higher than it was at the beginning of the year.
Great. Thank you very much.
Your next question is from the line of Stephen with Tiger.
Thanks. Good morning, you mentioned a couple of friends related to mid cycle updates and I was curious if there's any takeaway now you've been talking about the potential for that and if there's any learnings from the recent wins that suggests maybe more business is coming along that front next year and then I had a quick follow up after that.
Yeah sure.
And we are seeing as we have stated before more interest in mid cycle.
Dates if you look at our ear to date performance.
3.2 billion and if you just focus on the cockpit electronics Vince excluding BMS are are mid cycle update related Vince are calling for almost 25% of full fourth of the total events.
And one of the benefits of that there's also that those Vince I'd want to launch.
Go into production of it didn't roughly it can do to Ah 20 months. So the revenue is also generated faster than on new vehicle models now.
The 25% is much higher than what has been the case historically I think we are benefiting from two things one the fact that this environment.
Especially with Oems trying to extend the life of some of the vehicles given the overall market environment that is helping us I'm not sure. It's too early to say, whether 25% is the system that will protect going forward, but it's.
It's a very welcome development, so far it and.
We do expect at least in the near term. The next couple of quarters that to to continue.
That's helpful. And then just on your you mentioned a lot of concerns which.
Really seem to be top of mind in the last couple of weeks are you seeing any any evidence of some of the issues playing out yet or it's too early to tell you.
Yeah. It is too early hotel, we wanted to make sure that we Ah potful.
Expectations for the future given all of the things that we mentioned with respect to Europe. So as as you are aware there were several incentives put in place towards the end of the second quarter and those incentives have been slowly being phased out and.
See here unless they decided to renew.
Finish and now there's also the the emissions.
Stricter requirements are going to go into effect, the beginning of the year and that kind of have an impact on the production mix, especially in the fourth quarter. So we wanted to call it out, especially in light of some of the forecast if you saw.
Which.
And we're running a little ahead of themselves. So at this point I would say too early but we have very carefully watching the development discussing with our customers and making sure that we are on top of it.
Great. Thank you very much.
Your next question is from the line of profit sharing with the world.
Everybody I had a few follow ups one is on the B M S contract.
Yeah, I'll I'll see him alone is expected to grow to more than a million vehicles a year by the middle of the decade and it sounds like you are targeting other Oems so.
Are you thinking that that part of the business for Visteon alone could be 350 to 500 million dollar business or does the pricing that you're indicating here kind of.
Reflect low volumes and that declines over time.
No and also on the pricing clearly does not.
Reflect on low volume, we believe that this pricing bill.
Continue to hold and there's also a more content that that's coming in that will continue to make the BMS system stay within the range that I talked about.
And yes.
The the high volume implications off of this business, but at this point in time.
Only really reflecting what has been awarded and the models that have been.
Planned for launch as you know as they add more modeled steward volumes, but increase but that's for the future and with this with this.
There are other opportunities as well, so I'm optimistic and I feel like it can be.
The level that you had mentioned $250 million of sort of annual business opportunity for this town.
Great. Thanks, Sachin and I'm, just on that as well a few companies have mentioned.
Wireless B M. S's isn't opportunities insider is one that comes to mind can you just maybe give us a sense of you know what's the competitive landscape here and.
What what do you bring that the table that would be proprietary or or or differentiated versus the others.
So a lot of the attention is on the wireless technology.
Technology itself from the start part is clearly visteon is not going to be the provider of the wireless silicon solutions.
And at.
At the same time, what we want to do is be agnostic to the evolution and the choices that might be available for us on the wireless side. So if you think about what we do we provide the software.
The hardware that is the basis of the solution.
Go to them scum themselves from the OEM and they had battery providers.
Something that we'd necessarily don't see value in doing because that becomes accustomed to each OEM, but what if you wander off the platform.
It consists of the hardware software integrated so that the whole system works very well, there's a lot of learning involved in building a wireless solution.
But a different form of wired and so what we really have at this point in time more than a unique IP has the advantage of time for.
We have a couple of years of lead over anybody else in developing this this wireless solution and I expect that this will continue.
Technology the system will continue to evolve rapidly.
As we learn more about.
The challenges overall in terms of coming up that the scalable flexible BMS solution. That's what we are trying to address it.
The ultimate goal is to make that investment one's on part of the E M and have them be able to source different batteries of different.
Chemistry different physical characteristics and be able to manufacturers scalable set of battery packs for the various models and and alcohol is to enable them to achieve that.
Jacob.
Thanks for for explaining that the two other things one is I believe you have five contracts that you've won so far for the entrance based infotainment Volkswagen is the one that you've referenced the number of times as being in lunch right now what's the timing of some of the others any high level comments on the unexpected growth and then.
Sleek.
Maybe maybe just to clarify your gross engineering spend being down $26 million.
Net engineering about 6% of revenue I'll be safe unusual to see those those kinds of the clines's organic growth accelerated maybe any thoughts on longer term over the next few years, how we should be thinking about engineering spending level.
Yes. It says you're on the road. So we've taken a little off cost on the engineering side, we were at 300 million net engineering last year.
Guiding.
Close to 225 for the full year this year.
A lot of that he's essentially restructuring actions as well as cost.
Cost save actions that we've embarked on early on this year.
Activity levels will.
Will come back definitely in 21 to expect these number to be higher next year. However, if you step back and look at our our engineering percentage.
We were at 10% last year will be close to nine percents, who will have taken one point.
This year and we're expecting to continue.
Keep away in terms of.
Sandage points going into next year, but definitely not at the level that we've been at this.
Sure in terms of absolute dollars and then on the infotainment site rugs. So we expect all of the rest are.
To go into production.
2021.
Some weird further along than with others.
Others, but.
All of them the launch and the other color that I would like to provide.
For you is that.
After rest we have one other that as a.
American OEM the others in Asia.
And we are seeing besides the activities.
To launch there's a lot of interest from.
Oh, yes.
We have had since the launch of the system with BW.
We had hopefully will result in more businessmen and the coming quarters.
And the last point over like the head is dead, but also working on expanding.
Launches that didn't VW. So there's a lot of activity going on with respect to this Android based infotainment frankly, it has exceeded my expectations in terms of.
The market acceptance and the opportunities that guessing now we have to.
As usual make sure that we have a good launch performance that's very critical in this.
Areas, you know and that's going to be the biggest.
Sort of a factor in continuing to success and.
Guessing now.
Terrific. Thank you.
Thank you.
Your next question or something the line of Marc Delany with Goldman Sachs.
You said good morning, and thank you very much for taking the questions and thanks for all the details, especially on the B M. S program. It's it's it's very helpful. I had a few of them up more on the on the financial side, maybe starting on on margins and it's a comment about that there's some some.
Some benefits from temporary kosh actions of one and a half to two points.
And the third quarter and in that will go away, but but at the same time the company announced the restructuring program.
Earlier this month, so maybe talk about what what this restructuring program could could mean in terms of of savings you know their timing of that magnitude, where where would you say that between Cogs in SG&A. Thank you.
Sure Good morning market, so as your home so I'll start with the October.
Restructuring program that we've just announced we.
We've announced 35 to 40 million in terms of cost and we're estimating at this stage that the payback will be close to 1.5 years. So.
All in terms of annual run rate savings, we're anticipating that will have close to $25 million savings and from the timing standpoint, we don't anticipate to have.
March if anything in queue for we are at this stage expecting that we'll have a bit more than 50% of the saving next year, So, let's say close to $15 million.
Of saving.
Going into 2021.
Got it that that's helpful. And then I just want to ask on the engineering recoveries, if if I understood. The guidance for the full year down may 20 per cent range I think it implies engineering recovery or more like $20 million in the fourth quarter compared to the 39 or so and his current quarters.
Imagine had one next quarter I I, just Wanna make sure I understood that that properly.
So we've we've with guiding net.
Net engineering to be close to 225 for the full year.
So a few back into what it means for Q4 in fact, it's close to $60 million of net engineering recoveries in fact, we're very happy.
In the way things have developed over the last few quarters, we've been very flat.
And very even in our recoveries and we've been averaging around $30 million per quarter, and we're expecting to see similar levels in queue for maybe.
Between 30 and $35 million, so it's important because that.
That will obviously impact decrementals year over year.
Quite significantly we had close to $60 million of recoveries last year at the same time for Q4 and we're expecting.
Something like 30% to 35 million, so whatever you're you're impact obviously, given that we had more recoveries earlier in the year.
Really helpful. Thanks, you play right you just one last one for me if if I could just set you free cashflow conversion any puts it takes you can share on on for cash flow for 2021 21.
Obviously, it'll be early to give guidance, especially on the free cash flow side, but.
We will we are very focused on cash flow since.
Since the beginning of the year is you know the two big drivers are going to be EBITDA in capex. So EBITDA, we're expecting to keep on growing our EBITDA percentage.
And Ah Capex as well we've.
Done a lot of good work this year on the Capex side, we started last year with four 8% of sales. This year. Despite the declining sales will be close to four 8% and we're expecting to continue to drive the percentage down as well, even though the dollar value will be a psyche up versus what we are seeing this year so more to come.
On the adjustments free cash flow versus EBITDA, but a lot of some this this area.
Thank you.
Your next question is from the line of Joseph This back with RBC capital markets.
Thank you very much.
I guess just want us to follow up on on again some of the accident were taken so much for the last question I mean I.
I get the part that is to offset some of the I started measures taken and sort of dealing with lower volume. It also seems like you're doing more than that and it seems like maybe a tightening up of the cost structure is that is that fair uhm and then if so like how does that actually play into your longer term, 12% margin target.
Because.
Is that actually needed to still hit that target or if things break your way volume comes back you would say the margin opportunities now greater yeah. So let me first start Joe and then I will pass it on to Jerome or additional color.
Sure with your work they are doing and why that's important so as you might know cost structure in the past was.
High cost country heavy.
And we also had a few more sites and I would have liked especially in Europe and Japan.
And over the past I would say two years. So so they have been steadily visually moving more and more of our footprint.
Footprint to lower cost basis, we opened new technical centers in Bangalore, India in Romania, as well as in Mexico, and now that I've had a couple of years too.
Get trained and participate in productivity.
They're not ready to take on a whole system development.
That will.
In that our cost structure fundamentally be much better.
Going forward and there's more sustainable manner, and that's also a competitive advantage Florida's now.
To answer your second question about leather.
Is it needed and how does this impact as we go forward or 12% target.
Think it puts us first of all in a much.
Better position than ever in terms of being able to chew, 12% even bit a rover sales level, then as compared to what we indicated at the beginning of the year for 2023.
Clearly if sales returns and the volumes hold up an opportunity to expand beyond 12% certainly will be available to us and so you would like to agile just at the end you summarize it very well such indeed, the restructuring efforts are definitely driving.
The improvement and cost we have as well a lot of focused on cost and I think the discipline that we've put in place since the day of the year each paying off and we see that in the queue. Three results I think on the other side, which we've got to be just a touch careful is that we'll have this activity coming back and we will see that I think in queue for as well as.
21, and we're still trying to get our arms around what it means from one dollar standpoint, so we've got definitely some.
Tailwind is coming from all the actions that we've taken but activity will be alcoholic headwinds and we'll we'll be guiding a little bit more on that as we go into alpha.
February earning school.
Okay. Thank you I know I know, we're at the the hours so I'll I'll pop into their questions offline. Thanks. Thank.
Thank you alright. Thanks, Jeff. This does conclude our earnings call for the third quarter of 2020. Thank you everyone for participating in today's call and your ongoing interest in Visteon do you have any follow up questions. Please contact me directly thank you.
650.
50 on third quarter of 2020 earnings call you may now disconnect.
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