Q4 2020 Visteon Corp Earnings Call

Good morning, I'm, Kris Doyle, Vice President of Investor Relations on Treasurer, welcome to our earnings call for the fourth quarter and full year of 2020.

Please note. This call is being recorded and all lines have been placed on listen only mode to prevent background noise.

Before we begin this morning's call I'd like to remind you. This presentation contains forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095.

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 on 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 its Johns web site. This morning.

Please visit investors not Nancy on Dot com to download the material if you have not already done so.

Joining us today are thoughts on one day, President and Chief Executive Officer, and Jerome <unk> 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 <unk> 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 good morning, everyone.

Page, one summarizes our fourth quarter results and our full year highlights.

Visteon finished the year strong with sales of $787 million up 5% year over year, excluding currency on <unk>.

Strong performance was largely driven by the ramp up of new products launched during 2020.

Adjusted EBITDA was $75 million on nine 5% of sales in line with our expectations.

We also generated adjusted free cash flow of $59 million in the quarter.

Adjusted free cash flow for the full year was $96 million. Despite the unprecedented industry shut down in the second quarter, followed by a V shaped recovery in the second half.

On the operational front.

We continue to strengthen visteon as future growth in the fourth quarter of securing 22, New business awards from customers was $1 $4 billion in lifetime value.

This brings our full year, new business total to $4 6 billion.

The $3 billion one in the second half.

This is an outstanding achievement, considering the industry environment and.

It confirms that our strong pathology portfolio aligns well with key trends in the industry.

We also launched 11, new products in the fourth quarter, bringing the total for the full year to 55.

This makes 2021 of our best years ever for new product launches despite dependent.

Our products were launched on some high profile vehicles.

Appropriately received significant attention and scrutiny the team deserves great credit for delivering on our customer commitments. Despite the COVID-19 challenges.

The stringent cost control measures and restructuring actions, we took early in the year. It resulted in significant structural cost savings.

All functions, including engineering manufacturing and SG&A reduced their cost base.

Capital expenditures also decreased in line with our expectations for the year.

In addition to improving on adjusted EBITDA margin and adjusted free cash flow. These actions allowed the company to finish the year with strong liquidity and a net cash position higher than our pre COVID-19 level.

I will discuss our fourth quarter performance in more detail in the subsequent pages, followed by an outlook for 'twenty 'twenty, one before transitioning to Jerome to discuss the financials.

Turning to page two.

The global automotive industry continued its recovery in the fourth quarter, driven by robust consumer demand and the restocking of dealer inventories.

From a year over year perspective, while overall global vehicle production was up customers that represent almost 90% of our revenue saw a drop in vehicle production by approximately two percentage points led by double digit declines at Ford NGL on.

While vehicle production at our top customers declined our sales increased 5% year over year on a constant currency basis.

Our performance was mainly driven by the high number of product launches over the prior four quarters.

In the Americas.

Sales were up 2% driven by higher take rates on large displays and new product launches with VW and Ford for infotainment and digital clusters.

In Europe.

Our sales were up 15% year over year on the strength of our new product launches with PSC and Daimler and the ongoing ramp up of production of recently launched products.

In Asia, we continue to offset the decline of infotainment revenue at Mazda with new product launches with other Oems closing the gap in vehicle production to two percentage points.

The transition of the industry to digital clusters continues to be a key driver of our better than market performance in.

In the fourth quarter for example, our shipments of all digital clusters almost doubled from prior year.

Display audio and large display systems also grew well as we continue to benefit from industry demand for these products.

The growth of these digital products more than offset the decline in older products as well as lower customer production volumes.

Turning to page three.

As I said previously Visteon launched 11, new products during the fourth quarter, bringing the full year number to 55.

The left side of the page shows some of our fourth quarter highlights.

These two clusters have been steadily migrating into the lower end of the market in a and B class vehicles, and we launched two clusters for this section of the market in the fourth quarter.

The first entry level digital cluster is on the Reno Gate Z E and electric city car price below $10000.

The call will be introduced first in China, followed by upcoming launches in Europe.

The second cluster is for competitively priced vehicles on the VW MTB platform.

Which includes vehicle models, such as the Gulf and the polo.

As a cross platform product. This cluster is very high volume and provides us the scale to drive costs down further and bring digital clusters to mass market vehicles with other Oems.

We also launched high distal clusters in the fourth quarter, including 12 inch clusters on the Cadillac <unk> before.

And for Mercedes Benz AMG GT vehicles.

The cluster for the <unk> four is a mid cycle upgrade.

The vehicle previously offered in eight inch closer from a competitor.

We developed and launched the new 12 inch cluster for G. M. Within 18 months for this vehicle leveraging our digital cluster platform.

The cluster for the Mercedes AMG GT car line offers high end features such as Supersport mode with high quality graphics, and OTA software update capability.

As part of the continued digitization of the cockpit.

The industry is moving toward replacing traditional hard buttons knobs and switches with Martin control panels that you touch in haptics combined with displays for a more refined experience.

We launched the new control panel system vigil on based on touch input and haptic feedback that embedded color displays.

The geologic system will be launched in eight different vehicles models across the Jaguar and land Rover brands.

On our last earnings call I had mentioned that the tubular market is transitioning to the all digital cockpit similar to passenger cars.

We launched an innovative digital cockpit system for Honda premium motorcycles in the fourth quarter with the five inch DFT display Bluetooth low energy and support for turn by turn navigation music and phone calls via an app on the phone.

We expect the strength to continue to grow in the tubular market, which is high volume potential for our products in the future.

For the full year, we launched 55, new products with 22 Oems globally.

More than $5 billion in lifetime value.

Launches included some of the most advanced cockpit systems in the industry.

On a number of very high profile vehicles.

They included some key new technologies that will serve us well in the future such as on Android based infotainment platform Smartcool system based on new Qualcomm processor.

And digital cluster for the low and the market.

Turning to page four.

We won one $4 billion in new business in the fourth quarter, bringing the second half 'twenty 'twenty, new business totaled two $3 billion, which is in line with our performance in prior years. Despite the COVID-19 related industry slowdown.

Some of the Q4, new business win highlights include a second customer for our industry first wireless battery management solution.

This win is with a global OEM, we are not allowed to make them in public.

And the launch initially in 2023.

Similar to our first win with G. M. There will be additional follow on launches as the OEM adds more vehicle models to the electric platform.

We're very excited about this win and look forward to expanding on engagement with this OEM on their electric vehicle models as well as presenting this solution to other Oems.

The second win highlighted on the page is for a digital cockpit solution for a leading motorcycle manufacturer.

The Wynn Leverages, our smart core technology that Android based infotainment and digital cluster features.

This is a new customer for Visteon and we're pleased to expand our customer base in the tubular market.

As I have mentioned before the tubular market is undergoing a digital cockpit transformation similar to passenger vehicles.

The system will launch in 2024 and uses the 12 inch display that offers connected apps and over the air software download capabilities.

Similar to the earlier example, the work we did with the first Android infotainment system for VW was critical for us to win this business.

Large displays bigger than the traditional 10 and 12 inch displays are increasingly becoming a point of differentiation for vehicle manufacturers.

Beyond size, there is increasing interest in making the display matched the premium look and feel of consumer products, such as tablets with narrow borders and high optical performance.

The third win highlighted on this page is for a dual display system for a Japanese OEM that uses 214 inch displays under a single glass cover lens.

To create a seamless 28 inch display leaving area.

This display will have the Tennessee border in the industry and delivered the premium tablet like experience on <unk>.

We will seek in the vehicles.

Despite the industry challenges in 2020, our product and technology portfolio is enabling us to continue to win significant business.

We expanded our customer base with three additional Oems one each in the commercial vehicle bessinger car and tubular markets.

Our battery management business received a boost with the addition of a second customer and.

And we added a new commercial vehicle manufacturer to our list of customers for an Android based digital cockpit.

A third in this vehicle category.

Turning to page five.

This page shows our progress in transforming our product and technology portfolio despite dependent Nick.

Our recently launched digital clusters are doing very well in the market and in the fourth quarter represented half of our total cluster sales up from about a third a year ago.

We expect this growth to continue as digital clusters migrate into mass market vehicles from the more higher end vehicles today.

We launched our first Android based infotainment system and one business with three additional Oems in 2020.

Although Android is quickly becoming the operating system of choice for the digital cockpit.

Android is not sufficient.

Visteon has the necessary experience and extending Android with our software to meet automotive requirements.

On investment and display technologies is beginning to show results with multiple wins at Oems for advanced displays.

Our capabilities in design and manufacture of large complex displays is state of the art, especially in the design and manufacture of Corp lens and optical bonding of the different components.

The updated our smart core technology to support new and high performance processor from Qualcomm.

And launched the first system for an electric vehicles with the manufacturer in China.

We have multiple programs under development with other Oems based on this technology.

As mentioned, we added a second customer for our wireless spectrum management business, adding to our momentum in this emerging area of business for Visteon.

Lastly would drive Corp on Adas technology for integrated level, two plus systems, we made progress in evolving our vision algorithms to achieve the levels of lean car and pedestrian detection required for highway driving.

We also integrated our driver monitoring system into our platform to meet new regulatory requirements.

In summary.

Made good progress in evolving our products to address the three main trends in automotive electronics, the growing demand for digital cockpits.

The electrification of the powertrain.

On the evolution of Adas for more automated driving.

As the industry returns back to normal operation. We are confident that we can win business at the level of $6 billion or more with this product portfolio.

Turning to page six.

As we look ahead I would like to discuss some of the key considerations that influence our 2021 guidance.

First we anticipate the underlying market demand to remain strong in 2021.

The demand signals from Oems at the end of last year indicated a continuation of production from the levels in Q3 and Q4 into 2021.

In addition, we will continue to launch on average more than one product a week in 2021.

Coupled with the new products, we launched in 2020, we are well positioned to continue to outperform underlying vehicle production growth this year.

However, 'twenty 'twenty, one will not be without challenges.

I'm sure you are well aware that the industry is experiencing a significant shortage of semiconductors.

The shortage is expected to impact vehicle production and limit growth, particularly in the first half of the year.

Based on our discussions with suppliers, we anticipate the supply of semiconductors will improve in the second half.

Based on this assumption and on industry data for production.

We believe production growth for the full year will likely only reach high single digit levels versus the double digit growth the industry expected prior to the shortage.

The semiconductor shortage will also constrained visteon growth over market.

Our new digital products have higher use of silicon than the older products, they're replacing.

We also recognize that COVID-19 will continue to impact on industry.

Although visteon successfully navigated through the COVID-19 pandemic in 2020, we expect the pandemic will continue to create challenges and uncertainties throughout 'twenty 'twenty, one until the sufficient number of people have been vaccinated across the globe.

Finally, as Jerome will detail in his section we.

We anticipate margin expansion in 2021 compared to 2020, despite the added costs due to semiconductor shortages.

This was primarily driven by the structural changes we implemented in 2020 to reset our cost base, which will help offset the non recurrence of the austerity measures we implemented early independent Mick.

In addition, we expect sales flow through and fixed cost leverage to more than offset the increase in activity based costs.

Turning to page seven.

As I mentioned on the previous page with the consumer demand remaining strong the industry was forecasting 2021 production to reach 85 million units a growth of about 14% over 2020.

However, the semiconductor suppliers that supply various types of chips that go into automotive electronics components, such as brake controllers engine controllers body controllers and cockpit electronics cannot meet the higher industry demand.

The semiconductor shortage has been well publicized and several factors appear to have created the situation.

For example, semiconductor suppliers underestimated the pace of recovery from the lows of second quarter of last year.

At the same time demand for chips from the consumer electronics sector has gone up due to working from home and the increased use of semiconductors in newer consumer devices, such as five G phones.

These and other factors contributed to a tightening of the supply chain for semiconductors that is affecting all industries, including automotive.

Based on conversations, we're having with our customers and our suppliers, we anticipate a 10% to 15% GAAP between OEM demand in semiconductor supply in the first half of 2021.

The supply situation is expected to improve during the second half of the year as new capacity is being added with the lead time of about 26 weeks.

As a result, we're expecting that vehicle production will be impacted in the first half by about 10% to 15%, particularly in the second quarter before improving in the third and fourth quarters.

In total we anticipate that industry production volumes will increase approximately 8% in 2021 to 80 million units versus the initial expectation a 14% growth.

Nevertheless, it will be the first time since 2017 that the industry will see a year over year growth in vehicle production.

I would like to emphasize that the situation is very dynamic and it's still evolving.

Therefore, we may need to update our assumptions as the year progresses, depending on how vehicle production and semiconductor supplies evolve.

Turning to page eight.

Despite the muted growth of vehicle production in 2021 due to semiconductor shortages.

We have another year of high new product launches that we'll continue our market our performance in 2021 and beyond.

We have more than 50 products with over $7 billion in lifetime revenue that are scheduled to launch with over 20 different Oems in 'twenty or 'twenty one.

These launches are for a broad set of products, including the first launch of our battery management system.

Multi display systems.

And broad based infotainment and digital clusters.

With the launch of 55, new products in 2020, and an additional 50 plus this year.

We'll be setting the stage for faster than market sales growth not only for this year, but also for the next which will greatly help in achieving the 'twenty to 'twenty three targets that I will discuss next.

Moving to page nine.

Our three year business plan is based on the updated perspective on vehicle production over this period and the continued outperformance due to a high number of new product launches.

After three straight years of industry production declines, including an unprecedented dramatic production low of about 75 million units in 2020 that assuming a continuous increase in production levels to about 89 million units in 2023, representing a CAGR of about 6%.

In 2021, we anticipate sales will be between 2.875 and $3.0 billion to $5 billion.

The midpoint of $2 $95 billion.

Representing approximately 16% year over year growth driven by the rebound in industry production volumes.

Continued growth over market.

In 'twenty and 'twenty, one we currently forecast growth over market in the mid to high single digit range.

We anticipate this will accelerate over the next two years.

As we continue launching new programs.

We anticipate 2023 sales to be approximately $4 billion.

Of which more than 90% has already been sourced.

We expect to close the remaining GAAP through a combination of new business wins in 2021 as well as the typical program expansion and extensions that we have experienced in previous years.

However, even at 89 million units in 2023 the.

The industry will still be about 7% below the peak it achieved in 2017 with 95 million units.

Despite this decline we are anticipating visteon is 2023 sales will be about 25% higher than 2017 sales.

As we progress through 2021, we're excited about our growth trajectory, which we expect will include absolute sales growth sustained growth over market and adjusted EBITDA expansion.

Moving to page 10.

In summary, the company executed well in 2020, particularly during the second half of the year.

I would like to thank our customers suppliers employees and investors for their support and a challenging year.

We expect to carry this positive momentum into 2021.

And hope to recover from the headwinds in the first half created by the semiconductor shortage during the second half of the year.

The company built a strong foundation for future growth by launching 55, new products and booking for $6 billion in new business during the year.

We expanded our product portfolio to address the emerging shift towards electric vehicles and.

<unk> gained early momentum with Oems for our battery management systems.

The recovery, we experienced last year and the new business pipeline. We have created has set the stage for continued market outperformance it positions the company to achieve our 2023 targets that.

But we expect to surpass our 2017 sales and profitability performance.

Now I will turn the presentation over to Jerome to review the financial results.

Thank you Sachin and good morning, everyone. At this time last year, we could have never envisioned the challenge is the automotive industry was about to face with industry production coming to a stop at most locations at some point throughout the first half of 2020.

We are very proud of how the visteon team tackled the challenges and continued to deliver on our commitments.

Resetting our cost base and improving cash generation.

These actions will ensure we are well positioned for the future.

Visteon has continued to outperform industry production at our top customers driven by a high number of new product launched in 2000 2055 for the full year in 2020, Visteon sales were $2 billion 548 million, representing a decrease of 13% when.

Excluding the impact of currency in comparison overall industry production volumes decreased 16%, while production volumes at Visteon top customers decline approximately 20% cluster sales, which represent approximately half of our total sales increased compared to prior year.

Despite the industry production decline.

This performance was driven by the growth in all digital clusters, which increased approximately 60% compared to 2019.

Cost performance was another highlight for the year with a major reset of our cost base decremental margins for the full year were approximately 15% on a normalized basis, reflecting the significant cost initiatives undertaken very early in 2020.

Compared to 2019 net engineering was down approximately 30% and adjusted SG&A was down 15% cost were reduced as a result of lower activity levels strong cost controls as well as short term austerity measures, which primarily impacted Q2 and Q3.

Hi.

However, we do not rely on short term actions alone and also undertook a major structural reset of our cost base, including various restructuring programs.

For the full year adjusted free cash flow was 96 million and reflect the disciplined and prudent approach we took during the entire year Cabot.

Capital expenditures were reduced by approximately 25% due to structural changes we implemented to our capital expenditure process during Q1, while benefiting as well from lower activity levels during the year.

Adjusted free cash flow was also positively impacted by temporary negotiated payment terms extensions with some of our suppliers as well as from favorable timing from some customers collection.

With a strong balance sheet at the end of December 2019, we entered the pandemic with significant flexibility.

Despite a challenging year and with our focus on cost and cash generation our position is even stronger than at the end of December 2020, with Alpha $1 billion on cash on the balance sheet and a net cash position of $151 million.

We are entering 2021 with ample flexibility and our goal is to continue to maintain a strong balance sheet move.

Moving to page 13.

2000, Twenty's a tale of two halves with the first half impacted by the outbreak of the COVID-19 pandemic and plant closures, while the second half experienced a significant rebound in retail sales and industry production volumes.

Our results in the second half benefited from the industry rebounds, and the cost savings that we implemented in the first half of the year.

Sales in the second half of the year were $1 billion $534 million, representing an increase of $520 million from the first half of the year.

Adjusted EBITDA was $162 million, representing an adjusted EBITDA margin of 10, 6%.

Compared to the first half incremental margins were in the mid 20 percentage range as EBITDA benefited from structural cost savings increased fixed cost leverage and higher engineering recoveries, while being negatively impacted by higher incentive compensation freight and logistics.

Expenses.

Short term austerity measures increased EBITDA by approximately $15 million in both halves of the year.

In the second half of the year. This represents approximately 100 basis points of margin.

In total adjusted EBITDA margins were robust in both Q3 and Q4 as the result of the industry rebound.

Our growth of our markets as well as our cost discipline Q.

Q4 sales were $787 million in Q4, adjusted EBITDA was $75 million or nine 5% broadly in line with Q3 EBITDA margin percentage adjusted for austerity measures for.

For the full year adjusted EBITDA margin were seven 5% 40 basis points lower than 2019, despite a significant reduction in sales.

Page 14 provides an overview of our cash and net cash position at the end of the year as well as our adjusted free cash flow for the full year our.

Our balance sheet continues to be one of the best in the industry with a net cash position of 151 million and a net debt to last 12 months EBITDA ratio of negative <unk> eight times with no debt maturities until 2024.

Adjusted free cash flow for the year was $96 million, an improvement of $40 million versus 2019.

Adjusted free cash flow benefited from our disciplined approach during the year, including a 25% decline in capital expenditures.

Beyond the reduction in activity levels. This reduction was driven by the structural capital expenditure process changes, we implemented in Q1 2020, focusing on optimizing reuse cost and payment terms.

As previously discussed Visteon also negotiated temporary payment terms extensions with some suppliers early independent Mike as the depth and the duration of the crisis, we're still unknown.

Temporary payment terms extensions improved adjusted free cash flow for the year by 20 million, which will reverse in early 2021.

Lastly, we benefited in Q4 2020 from higher than anticipated collections from some of our customers, which were anticipated to be received in early 2021.

This increased adjusted free cash flow by more than $40 million for the full year.

In the fourth quarter Visteon contributed approximately $16 million to its legacy U S. Pension plan. The plan is closed and the last contribution was made in 2012, when visteon pre funding obligations through 2019 restructuring.

Restructuring payments, which are not included in our adjusted free cash flow was $32 million in 2020.

Turning to slide 15.

On page 15, we present, our full year guidance for 2021, our guidance for sales is between $2 billion $875 million and $3 billion $25 million, which at the midpoint $2.950 billion represents a 16 per.

<unk> increased compared to prior year visa.

This assumes an increase in global industry production volumes of approximately 8% while growth of our market is expected to be in the mid to high single digit range.

Given the uncertainty around the 2021 semiconductor shortages and its impact on industry production volumes for the year, we have elected to broaden our sales range. Each year, we anticipate the semi conductor shortage will lead to additional OEM plant closures in the first half of the year before the.

<unk> stabilizes in the second half of the year.

Adjusted EBITDA is forecasted to be between 230 and $217 million, representing an adjusted EBITDA of $215 million or eight 5% at the midpoint and expansion of 100 basis points versus prior year, despite higher cost due to semiconductor.

<unk>.

Adjusted free cash flow is anticipated to be between 35% and $65 million adjusted free cash flow will favorably be impacted by higher adjusted EBITDA. While also benefiting from our continued focus on optimizing capital expenditure.

For the full year, we anticipate capital expenditure will be approximately $115 million, representing a 20% decrease from 2019 levels working capital is expected to be a use of cash in 2021, partially driven by the favorable timing of working capital in 2020. In addition.

Visteon expects to make contributions to its U S defined benefit pension plans at levels similar to 2020 levels excluded from adjusted free cash flow, our restructuring payments, which we anticipate will be approximately $40 million and are related to previously announced restructuring programs.

As the environment continues to evolve due to the semiconductor shortage, creating some near term uncertainty we may need to revise our assumptions.

Turning to page 16, we provide an adjusted EBITDA bridge from our 2020 results to the midpoint of our 2021 guidance, we're expecting adjusted EBITDA to increase in 2021 to a range of $230 million to $270 million representing on adjusted EBITDA.

Margin of approximately eight 5%.

Yeah.

As we believe the semiconductor shortage costs related to higher purchase prices logistics and some product redesigns are transitory in nature. We have attempted to isolate the impact of these specific items and currently believe they will be in the range of 100 basis points in 2021.

Excluding the semi conductor impact, we would anticipate EBITDA margins to increase approximately 200 basis points at the midpoint.

This is primarily driven by scale and efficiencies.

Which more than offset the return on some costs related to the increasing activity levels. Additionally, the restructuring programs announced in 2020 are anticipated to improve adjusted EBITDA by approximately $60 million on an absolute basis or approximately 100 basis point on a year over.

Year bases as our 2020 results included restructuring savings of just over $30 million.

It's incremental structural savings helps offset the non recurrence of the short term austerity measures we implemented in 2020.

Although we're not providing targets for individual line items I do want to highlight that starting in 2021, the cost of our program management function will be moved from adjusted SG&A to gross engineering. This move is driven by our restructuring programs, which streamlined our organizational structure.

Program management is now fully integrated within the engineering function for your reference program management expense in 2020 was approximately $15 million.

Given that we believe the negative volume impact and higher cost for the semiconductor shortage are temporary we are reinstating our 2023 adjusted EBITDA margin targets of approximately 12% our confidence level in achieving this target is increasing based on the strong order book, we have combined with this.

Structural savings, we implemented in 2020, which has reset our cost base.

Although we anticipate a challenging start to 2021, we plan to execute on our strategy regardless of the market backdrop, just like we did in 2020.

Turning to page 16.

Visteon continues to be a compelling long term investment opportunity we have positioned the company for top line growth margin expansion and continued free cash flow generation, while our strong balance sheet provides significant flexibility. Thank you for your time today I would like now to open the call for you.

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 Q&A roster.

Our first question is on the line of Steven Fox with Fox Advisors.

Thanks, Good morning, everyone.

First question just since you guys are so volatile provide full year guidance and lookout. Further can you maybe sort of talk about the risks of the supply chain to meeting that second half's idea that things start to normalize how are you seeing.

Bottlenecks at the suppliers are there other OEM concerns that we should think of and then I had a follow up.

Sure Yeah. Good morning, Steven So first of all I would like to just maybe expand a little bit more on that.

Semiconductor shortage that we have currently.

An industry wide issue, that's affecting all suppliers and also all Oems.

And.

We are working at the same time very closely as you would imagine with the suppliers on Oems to mitigate the impact as best as we can.

Now, it's really important to understand all this shortage came about as I tried to explain in my prepared remarks, but the most important reasons seem to be.

Faster than expected or the V shaped recovery that automotive had in Q3 and Q4.

At the same time the increase in demand from consumer electronics.

Work is underway to increase capacity at the wafer fabs and other sub suppliers of semiconductor.

Semiconductor suppliers.

That activity takes anywhere.

Between 20 to 26 weeks of lead time before we can get extra semiconductor supply.

So at this stage, we are expecting that in the first half of this year, we will see an impact as an industry anywhere around up to I would say about three weeks of production.

And the supply should start to increase should start to appear in the third quarter and continue to improve from that going into the fourth quarter.

We expect that.

Increased supply will be able to make up for some of the <unk>.

Losses that we would have experienced in the first half, but not all of it.

Because the demand at the same time in the second half also appears to be quite robust.

So given where we stand with we see as a result of that.

About four to 5 million units.

Production can be impacted this year.

Great I appreciate that perspective, that's very helpful. Yes.

Yes, I guess just on the digital cluster growth, which is really.

Tremendous now can you talk about maybe a little bit under the covers in terms of how you envision sort of the mix improving.

With based on your order book towards not just the larger screen size, but embedded more into the dashboard as opposed to sort of some of the pop up.

Displays we are seeing right now.

Yeah, I think I'd say, it's a really interesting development that we are starting to see.

And automotive is really following the lead of consumer electronics in terms of look and feel of the displays while at the same time.

Also on very specific automotive challenges that we need to overcome so we are seeing the trend to go towards what we would call here as pillar to pillar displays.

But using multiple large displays behind a single glass cover lens.

And using very thin borders et cetera to make them on.

Look a lot more like what you see with tablets and other consumer products.

In addition to that we're starting to see specific requirements of automotive such as the.

The need, especially on the passenger side too.

Eliminate the distraction that could be cost with their drivers. So privacy solutions are required in automotive.

There is also interest in replacing more of the cartons that touch with haptic something that we're starting to see really emerged now.

And so in response Visteon has developed our own display technology called Microsoft as an alternative to OLED offers very specific automotive relevant features that even OLED does not offer.

And on top of that we are developing out on active privacy solution.

For passenger displays that I just mentioned.

And also dynamic image enhancement capabilities, which will make the graphics.

Really look very nice even in ambient light conditions.

That we have in automotive used cases that you won't have typically with consumer electronics.

Very very excited about this whole shift towards larger displays and we are starting to see that happen.

Now you've mentioned digital clusters, we're seeing really good growth and we expect that to continue now in 2021.

We're seeing some impact on that growth on account of the semiconductor shortage, but expect that to come right back as we get more semiconductors towards the second half this year and continuing into 'twenty, two and 'twenty three.

Great. That's all very helpful. Thank you very much.

Thank you next question is on the line of Luke junk with Baird.

Yes. Thank you for taking my question. This morning session wondering if first we could talk about industry acceptance of our interest in wireless BMS technology. Following your announcement with GM last quarter. Our understanding is that there was some hesitancy around the first on the Oems and the Gms.

<unk> taken our pledge has that changed the tone of your conversations with other Oems over the past few months and I think you also mentioned you were looking at showing your second wireless payments went into customers come forward as well.

Yes, no I think it's a very.

Important point Luke.

So anytime you.

It is a new technology, especially wireless and a mission critical situations like the powertrain you clearly have to overcome a lot of concerns that people ward right because we have.

And so we have done a lot of work in that area in terms of ensuring the reliability of the system as well as to make it.

<unk> robust and.

Dress security considerations as well.

And the win in the.

Discussion that we had on the last quarter of that.

GM certainly has made a huge.

Our impact and our ability to.

Talk with other Oems and force them to take this technology seriously now.

Really important to understand is how a vms solution.

The significance of that in the design and development of new EV platforms. One of the first decisions that on OEM has been weak.

They decided to build on EBIT platform as the design and architecture of the battery cells and modules and packs because that ultimately becomes a critical factor in how they can then deploy that into vehicle models. So that usually is one of the very first decision to make and the.

BMS solution is that it.

Tied to that architecture.

Now if you have a wired solution as you can imagine youre on.

Options right at the outset are limited in terms of how you can been configured the module performed effects and wireless solution gives them ultimate flexibility. So this technology that we have introduced has all of the right.

Benefits, especially on.

Our Oems that have AAV platform strategy, if all they really want us just to build.

One off vehicles on on say electric technology cannot be as important clearly for us.

That kind of a business is also not as interesting as a platform business, where we can design and develop that solution once and it can go into a.

A high number of vehicle models on that.

So this second thing that we talked about.

Here on this call as a similar than it is a platform that is being developed by this OEM and by the way. This is a new customer as well for Visteon, we do not have other business with them.

And so we're really excited about the potential of future growth.

Similar in terms of day engagement that we had the GM of couple of years ago, where we started work on.

On the platform and then now is the OEM started to add more vehicle models.

<unk> grew in terms of scope and we expect to see something similar in this case as well.

Oh really a great color. Thank you for that as my follow up Jerome I was hoping we could talk about the <unk>.

Incremental margin walk this year. So thank you for the EBITDA margin percentage walk on slide 16, I'm wondering if we could outline that on a similar basis just in terms of what kinds of things are incremental in 'twenty, one both on an underlying basis and adjusting for some of the moving pieces that we had last year and this year.

Yes, sure Luke good morning.

So overall, our incremental margins will be similar to what we have guided previously we are we've always talked about 20% to 25%.

We'll be at the midpoint for next year at 22% exactly I think what's important to mention is the fact that.

In 2020, we did reset our cost base, so even though the incremental margins for 'twenty one on not fundamentally different from what we've been guiding we do have a lower cost base and therefore, it's reflected in our EBITDA margins going forward.

So 12% to 2% I would say excluding the semiconductor impact is what youre looking at for 2021, maybe expanding into the future as well that's kind of the.

Roughly the incremental margins that we're expecting as well.

That will be.

Having.

Going into 'twenty, three and which will allow us to achieve our 12% EBITDA target.

Yes.

Okay. Thank you.

Your next question is on the line of Rod lift day with Wolfe Research.

Good morning, everybody.

First question is just to clarify is the second BMS when somewhat related to the first one is simply because <unk> is going to be used by more than one OEM and.

If you could just clarify if the.

The input that you have received feedback from other Oems have you gotten any indication about how you stand relative to some of the others that have also been working on developing a wireless BMS solution.

Sure sure so Rob just to be clear on the second win has no connection but on the first business, then with GM or the LTM batteries.

Different subject customer different development of which.

As ward frankly makes it even more exciting for us.

As you know there are other Oems, we've talked about Honda using the Altium batteries BMS.

With that engagement.

That's not in any shape related to what we disclosed here on this call on.

So.

To your other question are we certainly are getting the feedback that.

In terms of a wireless BMS approach.

We have a lead.

As compared to our competitors.

Thats simply on account of the work that we've done over the last.

Two to three years now on that technology.

Having said that I would expect that.

Other competitors would be working in trying to bridge that gap.

And.

We should not expect that it would be the ones.

On the ones with the solution of which is the case today, which we will.

Happily take and hopefully convert into more.

Vince like this second win that we have announced so we are trying to capitalize on this momentum and the need that we have but.

But at the same time expecting to see more competition to come up great. Thank you.

Was hoping maybe if you could if you can share any volume expectations from the second OEM and end, but my second question would be <unk>.

<unk> four talked about increased collaboration with Google.

And using utilizing Andrew.

Android.

Operating system and their infotainment systems, and obviously you have a lot of experience here and I was just hoping you might be able to just speak to what you see happening here at <unk>.

At Oems potential customers and whether this is Scott software that.

Dennis.

Disintermediation you or is this something that is actually enhancing your position.

Yes, yes, yes, just to go back to the question that you asked about the volumes what I can share with you is that this thing.

<unk> <unk>.

Similar to our initial engagement with GM.

Has volumes associated with the initial launch on.

<unk>.

<unk>.

EV on this platform and I believe it's about 150000 units per year.

And expect it to grow as the Oems add more vehicle models similar to what we faced with GM. So that should give you some color on the magnitude of that then.

On on those.

Ford Google announcement.

It's actually very positive.

Announcements from our perspective, because as you may know today.

We do not participate in any infotainment business at Ford and at the same time.

I believe Visteon has more experience in building and broad based digital cockpits with our smart core technology.

Talked about.

Smart core evolution that.

Integration of it.

Qualcomm's, new processor and multiple engagements that we have on that.

Type of solutions.

There are too many competitors who have as much.

Experience and capability and Android based digital cockpits like we do so I see that as a positive development and we hope to participate in some fashion.

That Ford as we go forward into the future great. Thank you very much.

Thank you.

Your next question on from the line of David Kelley with Jefferies.

Hey, good morning, everyone. Maybe just a question on gross margin and then I have a follow up on the wireless BMS discussion so.

Starting with the fourth quarter gross margin and I'm looking at slide 26 here. If we were the engineering impact it looks like cost of sales ticked up $5 to 600 basis points as a percentage of growing revenues could you just talk about or provide some color on some of the drivers of that increase.

Yes sure.

David So overall I would say.

Step back and maybe talk about EBITDA first so overall, our EBITDA margin was nine 5% and it is very similar to what.

What we had.

Don in Q3, when you exclude yesterday measure so versus Q3.

Our EBITDA margin.

A decrease because of the austerity measures not reoccurring again, we did had more did have more sales in Q4, but I think one of the most significant item. We had versus Q3 was the fact that we started to see.

On additional supply chain cost and Thats, probably the most relevant item.

Vs Q3 that is important to mention we've had approximately 80 basis points of additional supply chain costs related to logistics expenses related to spot buys with brokers.

And that's going to continue as we know.

Probably in Q1 and Q2 of this year. So that's really one of the key item. If you do as well the comparison versus prior year in terms of the gross margin prior year was very.

Elevated due to very high engineering recoveries, we had as well a pretty high level of claims last year at the time you have as well.

<unk> items this year impacting the gross margin versus prior year being warranty expenses being a little bit higher as well as incentive compensation.

That we've increased as we went into the year given that our performance increase so there are a lot of moving parts, but I think the relevant item is really the fact that overall our performance was in line with Q3.

And the way to look at our performance as well as really to combine on Howard presented.

The financials H, one versus <unk>, we do think that <unk> very relevance of our.

Performance with sales level being obviously at $1 5 billion for a second half.

Okay. Great. Thanks, that's very helpful. And then maybe following up on the BMS discussion.

Recall youre working with Abi on the old TM platform I believe they've separately also announced a second platform win as well.

Net disclosed OEM. So I was just hoping you could confirm.

They are not there your semi part and then maybe just taking a step back could you talk about the go to market strategy as we think about potential further BMS spilled out are you partnering or working with the semi suppliers such as on Adi to pitch to Oems, just wondering kind of how that semi relationship.

Works for you. Thank you.

Yes.

I can confirm that your understanding is correct. So Adi is our partner here in this engagement the second win as well as you can imagine we have a lot of.

Work that we have done together that we want to bring to.

<unk>.

All other.

Oems and <unk>.

Expect this.

Joint collaboration and go to market to continue together.

We are as we speak also in discussions with other Oems.

In most cases the way it works is that Visteon.

Tier one supplier, we have the relationships and the engagements.

Lead and.

The silicon supplier.

Is assisting in.

Specific areas of the.

The solution that they clearly have.

A strong role to play so.

This is the model that we are calling out.

Multiple Oems while.

We engaged in the day.

Development of the systems that we have won and we continue to invest in our capabilities in this area because the key thing that I would like you to take away from this is that the Pms technology is not a static fixed function fixed feature solution is evolving as the Oems.

Our understanding more about how to work with.

Batteries, and what more features and capabilities to add to it. So we see that as a ongoing areas of growth of our content first and of course that will drive growth in.

Price and Asp's.

Okay. Thank you that's very helpful. Thanks, Scott.

Your next question is on the line of <unk> with Citi.

Great. Thanks, everybody.

So maybe just on just to follow on on the last question on the year over year EBITDA walk in the fourth quarter ex the engineering and if it looks at the engineering did come in below your expectations.

Can you just talk about the incrementals year over year on some of the other puts and takes that to give you gave a sequential walk which was helpful, hoping which to a quick year over year walk as well on the EBITDA.

Yes.

Good morning.

Referring to Q4 of prior year 19 to Q4 of 2020, yes.

So as I mentioned, we had.

If you look at the gross margin that we had in Q4 up 19, it was pretty elevated and really not in line with.

The overall performance for the full year. So you had you have a lot of moving parts, but.

We had very high engineering recoveries in Q4 of 19 pretty high as well.

Or.

Recoveries on the commercial side, which we call customer claims.

And this did not reoccur again in.

In Q4 of 2020.

You have as well on the other side as I mentioned warranty expenses, which are a bit higher in Q4 of this year.

Can be a little bit lumpy and we do have as well on higher incentive compensation cost.

Tom.

Q4 at 920, so therefore, you've got.

Hi recoveries on one side in 19, and then some further expenses in Q4 of 2020, which makes that that variance pretty large in fact, when you look at it this way as I said earlier on it's really H, two which we believe is the right reflection of our performance for the company at a level off.

One 5 billion in sales.

Great Thats very helpful gentlemen, and then maybe a bigger picture question on on the sustainability of growth over market, maybe mid to high single digit rate of growth over market beyond.

23% I think you alluded to of course higher take rates and just higher EV penetration as a source of incremental growth beyond 2023, but can you share any.

Sort of bookings targets for 2021 that you would need to reach in order to feel confident about that sustainability of the growth over market beyond 2023.

Yes, sure I'd say and certainly I think we have been.

On on a path to.

Yes.

Achieve a $6 billion or more in terms of new business wins for the past few years 2020 was an exception and we know the reasons why but as we move forward.

<unk> trend of upgrading the uptick to digital continues to be strong reservoir, new vehicle models or for extending the life of order of models to recycle updates in fact are.

In Q4 of $1 4 billion and Vince about 25% of that was for mid cycle outage.

And so as we look at just the pipeline of new opportunities for this year, it's looking actually quite strong, particularly for smart core, especially Android based smartphone solutions for displays and <unk>.

Of course for digital clusters.

One thing I should mention is that this conversion of clusters into digital that trend that we have been discussing for the past few years.

Actually in full bore right now and yet about.

Bart on at 45% of what we ship.

Today four clusters are all digital so we still have a really good.

<unk>.

The path forward here, even beyond 'twenty, two 'twenty three as we start to see that conversion.

To continue which brings along with it higher sales prices of close clusters versus the other kind so now coming back to the targets for 2021, the pipeline that we have.

Trends that I talked about in terms of the digital cockpit together with the trend towards Evs, which is also positive for us because it is going to have either additional content plus BMS opportunities.

We believe it should be achieving $6 billion in new business wins in 2021.

That's all very helpful. Appreciate all the detail. Thank you.

Thank you.

Your final question is on the line of Joseph Spak with RBC capital markets.

Thanks, very much thanks, very much everyone.

Maybe.

Just one more on sort of the second wireless battery management system is that.

I know you sort of talked about size and I'm, assuming the <unk>.

Content is.

In the same range as you've talked about Pryor, but what about when is that expected to begin production. I mean does it is it is it is it in your.

Updated 2023.

Revenue target.

Yes, Joe so.

And it starts to ship in 2000 hereditary but at very low volume. So it's not material to our 2023.

Guidance Scott.

And it will ramp up from that point onwards.

Okay. So then if we look at 2023 now versus prior.

I know sort of relatively similar when you sort of adjust for FERC volume. That's how you guys look at it.

Correct correct, Okay. Okay, and then just on on the 30 million.

Supply chain.

Headwind next year I, just want to understand is that.

The volume impact you are talking about or are you also paying higher prices for some of the semi conductor content. Because we saw we saw some announcements that they were raising prices given the.

Lower shortage and how does that work with your customers are you able to pass that through or is that sort of its own separate negotiation when when you have to pay higher prices for.

For the trips.

So I will take that one Joe good morning.

So we've seen already some cost increasing in.

2020 in Q4, and as I said earlier, that's one of the reason as well the way our margin was a bit lower in Q4.

Because we started to see a few cost coming in the first one relates really to I would say the general.

Supply chain condition on the fact that we've got a higher cost of logistics. That's that's one pillar the second.

And that will continue we think into Q1 and Q2 at least of 2021 the second.

<unk> Big bucket that we are forecasting in our 3 million relates to essentially to spot buys that we've got to make at elevated prices.

On distributors for semiconductor.

Purchases. So this is another reason.

And the second.

Part of the Buckhead, the third bucket, which is probably a bit lower but it's included in there.

Fact that this well will be redesigning a few parts here.

Here on there too.

On the date for some of the changes so that's at a high level the $30 million.

There has been.

Indeed, as you said.

Comments on the price about suppliers raising prices in our case a lot of our prices are locked and we are negotiating in fact before the.

Prices started so.

We are covered on that side.

We don't have at this point in the 30 million on the assumption that we would recover that.

That from customers, but that's definitely something that will process on point.

Okay. So it's possible that there is an offset in certain some of the engineering recoveries that sort.

Tend to get over the course of the year.

Possibilities the ward I would use for now yes, okay. Okay. Thank.

Thank you very much.

Thank you. Thank you.

Thank you on this concludes our earnings call for the fourth quarter on full year of 2020.

Thank you everyone for participating on today's call on your ongoing interests on Visteon and do you have any follow up questions. Please contact me directly thank you.

Yeah.

This concludes visteon fourth quarter and full year 2020 earnings call you may now disconnect.

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