Q1 2021 Visteon Corp Earnings Call
Good morning, I'm Crystal Lail, Vice President Investor Relations and Treasurer.
Welcome to our earnings call for the first quarter of 2021. 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 1995.
Forward looking statements are not guarantees of future results and conditions, but rather are subject to various factors risks and uncertainties that could cause our actual results to differ materially from those expressed and these statements.
Refer to the page entitled forward looking information for additional details press.
Presentation materials for today's call were posted on the investors section of Visteon as web site. This morning.
Please visit investors diversity on dot com to download the material and you have not already done and south.
Joining us today are slots from a one day, President and Chief Executive Officer, and Jerome <unk>, Senior Vice President and Chief Financial Officer.
And we have scheduled the call for one hour and we'll open the lines for your questions. After sanctions and Jerome remarks. Please limit your questions to one question and one follow up.
Thank you for joining us now I'll turn the call over to Sachin.
Thank you Chris Good morning, everyone Beach, one summarizes our first quarter results.
Visteon and strong performance and the second half of 2020 continued in the first quarter of 2021.
Industry demand remains strong although supply shortages muted vehicle production growth and our customers.
Visteon was reported sales of $746 million represents a 14% year over year increase and excluding currency.
Adjusted EBITDA was $64 million or eight 6% of sales.
Incremental supply chain costs related to semiconductor shortages reduced adjusted EBITDA margin by about 190 basis points.
And adjusted free cash flow for the quarter was positive $9 million.
We ended the quarter with $486 million of total cash on our balance sheet.
This Jones, new business booking and the first quarter was strong with $1 $8 billion.
New business bookings included and first win for Michael Zune display technology.
Microsoft is a recent market introduction and offers automakers and attractive alternative to OLED displays for their premium vehicles.
We also won significant smart core business and the quarter.
Counting for nearly 50% of our total wins the.
And with approximately $850 million and lifetime value.
And will discuss and micro zone, and smart carbons and more detail later in my presentation.
Q1 incremental margins were approximately 30%.
And the fitting from the structural cost reductions we started to implement near the end of Q1 2020.
And our continued spending discipline.
Our balance sheet remains strong with $137 million and net cash at the end of the quarter.
Overall, the company performed well across all areas of the business and delivered a solid first quarter.
And we will discuss our operational performance and more detail on the following pages before handing it over to Jerome to discuss the financials.
Turning to page two.
This page shows Visteon Q1 sales performance relative to global and Visteon and customer vehicle production volumes.
Global industry production increased 12% and the first quarter of 2021 despite semiconductor and other supply chain constraints that impacted vehicle production and all regions.
Most of the gross awkward and China.
As you may recall production volumes in China during the first quarter of 2020 was significantly reduced.
And with production facilities being shut down for the majority of February and March of last year due to the pandemic.
Vehicle production in China, and the first quarter of this year was robust and just under pre pandemic levels.
Resulting in a 75% year over year growth.
And the rest of the world.
Nickel production was down and the Americas, and Europe, and modestly up and the rest of Asia, Excluding China.
If not for parts supply shortages.
First quarter vehicle production growth would have been positive for all regions continuing the strong performance seen during the second half of last year.
As a result first quarter industry production growth was heavily weighted towards China.
Which represents about 25 per cent of the global market.
While visteon has been growing this business and the China domestic market.
It still represents only about 16% of Visteon sales, creating a negative regional mix for the first quarter.
We anticipate this scenario will reverse itself and the second quarter and for the remainder of the year.
Primarily driven by this negative digital mix.
In contrast, Visteon sales grew 14% on a year over year basis, excluding the impact of currency.
Most of this our performance about two thirds was due to the contribution from new product launches over the prior four quarters.
The rest was due to the positive mix.
<unk> from the highest sales in China with some of our customers.
We estimate about one week of vehicle production was lost globally and the first quarter due to part shortages.
Equaling about 1.5 million vehicles.
And impacting visteon sales by approximately 6%.
Turning to page three.
We had a strong start to the year with $1.8 billion and new business and the quarter.
As noted previously about half of our first quarter, new business wins were for smart core cockpit domain controllers with two Oems one in North America, and the other and issue.
The transition to cockpit domain controllers with integrated Android based infotainment and digital clusters is accelerating across the industry.
With this Vince Visteon is in production, but or will soon deliver a smart core technology to 10 OEM customers globally.
Strengthening our position as the industry leaders and this emerging trend.
Similar to the Vince and 2020 about 20% of the total new business wins and for mid cycle updates and about half of the total Vince with launch within two years, which underscores the accelerating pace of digitalization and the industry.
Furthermore, one third of our total new business wins and for electric vehicles.
Selecting the prioritization of investment and new electric vehicle platforms by Oems.
On the right side of the page are some key first quarter events.
As mentioned earlier, we secured our first win for Microzoon display technology.
Microsoft is the new display solution for premium automotive cockpit displays.
It's designed to meet the demanding requirements of large high quality displays for premium and luxury vehicles.
And we'll discuss microzoon in more detail in a later page.
The second win highlighted here is for the smart core cockpit domain controller with a north American OEM.
This system offers integrated Android based infotainment and and all digital cluster.
But over the air software updates and connected applications.
This cockpit domain controller Vin extends our current business with this OEM beyond clusters and into Android based infotainment.
The system launches on multiple vehicle models, starting in 2020 three.
The third win on the speech is for the 10 inch digital cluster with a global OEM.
For two new vehicle models that are planned to launch and mid 2020 two.
Discipline extends our digital cluster business with this OEM and two additional vehicle brands that we do not currently have business today and are replacing their incumbent supplier.
Turning to page four.
The auto industry is quickly adopting larger displays with touch capability similar to consumer electronics.
Dias knobs, and buttons and feeding into history.
As mass market vehicles start to offer 12 inch and larger displays premium and luxury Oems are looking to differentiate their cockpits with more advanced display solutions.
Visteon develop microzoon to address the industry demand for our high quality display that delivers a premium experience while meeting stringent automotive specific requirements.
Automotive displays larger than 12 inches.
While a wider color gamut to render images without bending effect.
Displays also require higher brightness and contrast ratios to work well and bright ambient lighting conditions.
Unlike consumer devices cockpit displays amounted at a fixed wing position and angle.
Displays must also be very energy efficient.
So that heat dissipation can be managed effectively.
And finally displays must have a life span of 10 years or more to match vehicle less pens.
All it does today's state of the art homology for high and displays and consumer electronics.
However, it is true significant drawbacks and when it comes to automotive applications.
First as it is based on organic light emitting material.
All of its lifespan is not long enough for automotive applications.
Moreover, the brighter the display the quicker it deteriorates.
The second drawback is cost.
OLED is significantly more expensive to manufacture, especially for large size displays.
Visteon Microzoon display technology offers vehicle manufacturers are very good alternative to OLED.
It uses proprietary and patent pending technology to deliver exceptional optical performance, while meeting challenging automotive requirements at a cost that is less than honored.
We introduced Microsome at the consumer electronics show in 2019 and have since continued to evolve its capabilities.
Today, we're pleased to announce our first Microsoft win.
The award is with a North American OEM.
For a multi display system that will be featured and multiple premium and performance vehicle models.
At about $250 million.
This business within this very significant and will launch in 2020 four.
[noise] Microzoon is and innovation developed entirely in house at Visteon to address specific automotive challenges.
As a high and solution that delivers a premium experience.
Microsoft Kitties, a price premium over standard displays that use LCD technology.
Visteon will continue to offer display solutions based on LCD technology. However, with Microzoon, we can now address a broader section of the market and differentiate ourselves from the competition.
Turning to page five.
Along with the shift to larger displays car manufacturers are quickly adopting over the air software updates and Android based infotainment for their next generation cockpits.
Offering consumers a choice of connected services, along with over the air software updates and has become a critical requirement for new vehicles.
Visteon Smartcool solution uses advanced Silicon and software technologies to enable Oems to offer these kinds of advanced user experiences and the cockpit.
Our first quarter Smartcool win with a north American OEM.
As a second cockpit domain controller win in this region.
And reinforces visteon industry leadership and this technology.
The system will launch in 2020 three and.
And will support multiple ice and electric vehicle models.
It offers digital cluster and Android based infotainment.
Our first for this OEM.
With multiple connected services and applications.
The panel on the right of this page shows the evolution of our smart core business over the past few years.
Our customer portfolio has grown from passenger car Oems initially to now include commercial and tubular manufacturers as over the and updates and connected services has become equally important for these vehicle categories.
We launched our first generation Linux based Smartcool system in Europe with Daimler in 2018.
The emergence of Android as the operating system for infotainment led to the development of our second generation system, which we had launched with GAAP in China.
For the increasing acceptance of Android globally, we are seeing and exploration and the adoption of smart core technology by Oems and all regions.
Today, we have smart core business with 10 and OEM customers.
And of which are shown on the speech.
Smartphone is and will continue to be a key driver of Visteon and growth in the coming years as we launch the systems currently under development.
Turning to page six.
I would like to discuss our outlook for the rest of the year and several key drivers of our growth.
Retail demand remained strong and all regions and dealer inventories are lower than normal.
U S retail sales in March was strong with the Saar being close to 18 million units.
New vehicle registrations in Europe were also strong in March.
This has led to historically low inventory levels, particularly in the U S. As Oems cannot restock dealer lots and quickly enough.
As a result, we're seeing high order levels from our OEM customers.
And initial first quarter orders represented a sequential increase compared to the last quarter.
We're planning for another year of over 50, new product introductions.
First quarter launch highlights include a 12 inch digital cluster for Nissan and.
Multi display digital cluster for Jangling motors in China.
And the 10 inch digital display for Hyundai.
We anticipate our 2021 launch schedule and will enable visteon to continue to outpace industry production volumes for the near future.
Although demand remains strong we anticipate industry growth will continue to be muted and the second quarter, primarily due to supply chain shortages and especially semiconductors.
The already tight semiconductor supply was further negatively impacted by the winter storm in Texas and February.
And a fire at a silicon suppliers facility in Japan and March.
As a result, we believe semiconductor shortages could be more significant and the second quarter as compared to the first quarter before recovering and the second half of the year.
We expect Oems to shut down or reduce production amounting to about two to three weeks of production loss for the second quarter.
Representing a decrease and production levels compared to the first quarter.
We anticipate that the supply situation will improve sufficiently and the second half of the year to allow for a partial recovery of the lost production from the first half.
For these reasons, we feel confident and maintaining our full year guidance, which incorporates a view that industry production volumes will increase approximately 8%.
In addition, we anticipate that the negative regional and customer mix experience and the first quarter will reverse itself by the end of the year.
In fact current third party forecasts estimate a slight tailwind from customer mix.
Although we are not ready to factor this into our guidance until we see it materialize throughout the year.
We remain optimistic about the fundamentals of the industry and our position in it.
Visteon has the broadest portfolio of cockpit electronics and continues to benefit from the shift to digital clusters, Android based infotainment systems cockpit domain controllers and large displays.
We also expect the industry's accelerator and shipped to electric vehicles will continue as audience fully commit to evs.
This shift will also drive increased digitalization of the cockpit.
And provide more opportunities for our wireless battery management system.
Finally, as we discussed on our last call, we expect the trend of digitalization and commercial and two Wheeler cockpits to grow and lead to increased content opportunity for visteon and those important vehicle categories.
These secular growth drivers continue to give us confidence and being able to outperform the market in the coming years and achieving our 2023 targets.
Turning to page seven.
In summary, Visteon performed very well and the first quarter and a challenging environment.
We delivered solid results with 14% growth over market for sales and eight 6% adjusted EBITDA margin, including the impact of incremental supply chain costs.
The fundamentals of the industry and are pleased with and it remained strong.
Our core products such as digital clusters.
Infotainment and large displays performed very well despite the challenging supply chain environment.
Our technology portfolio is strong and aligns very well with the key industry trends of connectivity.
Digitalization and electrification.
The $1 $8 billion of new business booked during the quarter enables visteon to continue or faster than market growth.
We expect the supply chain constraints impacting vehicle production could dissipate and the second half of the year.
Allowing for the recovery that sets the stage for robust long term growth in 2020 two and beyond.
And we are maintaining our 2021 guidance as previously indicated.
Now I will turn the presentation over to Jerome to review the financial results.
Thank you Sachin and good morning, everyone Visteon started the year in a similar way in which it finished twenty-twenty posting strong financial results, despite a challenging industry dynamics.
<unk> grew sales, 14% year over year, when excluding the positive impact from currency.
Adjusted EBITDA improved to $64 million, representing a margin of eight 6% and the company generated $9 million of adjusted free cash flow for the quarter.
Production at Visteon <unk> top customers was flat year over year with Visteon sales improved 14% when excluding currency.
And its performance is a result of our recent launch activities in 2020.
And the ramp up of key programs as well as some favorable mix, resulting from the higher sales in China with some of our customers.
Adjusted EBITDA for the quarter was $64 million, representing an eight 6% margin, which is essentially in line with the midpoint of our full year guidance.
The impact of supply chain constraints lowered adjusted EBITDA by about 190 basis points.
And the year over year basis incremental margins were 30% or approximately 45% when excluding the incremental supply chain costs as we benefited from the structural cost measures we implemented throughout last year.
These savings will continue to benefit our results going forwards.
However, as most of these actions were initiated in the first half of 2020, we will start lapping these cost savings as early as the second quarter.
Adjusted free cash flow was positive 9 million in quarter. One the first time, we're generating positive adjusted free cash flow and the first quarter since 2018 comp.
Compared to last year cash flows benefited from higher adjusted EBITDA continued optimization of Capex, partially offset by a year over year working capital outflow.
We continue to have one of the best balance sheets in the industry with a total cash of 486 million and a net cash position after debt of 137 million, which drives and net leverage ratio that is less than zero.
As we look ahead, we still anticipate to be within the guidance range that we provided in mid February.
Although our Q1 sales came in slightly better than anticipated, we expect the supply chain to further tighten and quarter two before beginning to improve and a second half of the year.
As a result, we anticipate Q2 sales and adjusted EBITDA will be lowered and Q1 due to OEM shutdowns and the second quarter, while adjusted free cash flow for quarter. Two is expected to be an outflow turning to page 10.
Sales in the first quarter of 'twenty, 'twenty, one where 746 million and increase of one of more than 3 million compared to prior year.
OEM demand remained strong and quarter one with initial orders at the beginning of the quarter, indicating a modest increase from Q4, 2020 levels fueled by retail demand and lower dealer inventory levels.
However, as the quarter progressed Oems adjusted and reduced order levels as the global supply chain shortages intensified in which various inputs such as rubber foam resins, and semiconductors, where and short supply throughout the industry.
Ultimately compared to prior year, Visteon and organic sales grew 14% driven by a combination of recent launch activity ramp up of key programs and favorable mix.
To mitigate the semiconductor shortages coming from our tier two suppliers Visteon set up a cross functional task force.
And the team took numerous actions during the quarter that increased our ability to ship products to our customers.
These actions included the purchase of parts through brokers and distributors expedited logistics, some engineering redesign as well as the drawdown of inventory levels, while our suppliers. We're also able to improve some of their deliveries are daily engagement with suppliers and customers increased as well.
However, these actions did come at a price, which is reflected in the 190 basis points of EBITDA margin loss in the quarter due and categorized as supply chain costs.
Some of these actions will be harder to implement in the second quarter as a supply chain becomes more constrained.
Adjusted EBITDA was 64 million, representing a margin of eight 6% and increased compared to prior year of 31 million or 350 basis points and.
Adjusted EBITDA margins benefited from higher volumes as well as from a cost reset in 2020, partially offset by supply chain cost impacts.
We also benefited from lower launch costs and continued decreases in search and discretionary spend such as travel.
Overall gross engineering reduce in Q1 by approximately 20% year over year and adjusted SG&A by approximately 15%.
And cost related to the supply chain constraints, which impacted margins by approximately 190 basis points was primarily driven by higher input cost as we purchased a higher number of semiconductors from brokers and distributors as opposed to a normal tier two suppliers combined with higher freight and logistics costs.
Yes.
Overall, although we anticipate these costs to be transitory in nature, we are starting to see increased pricing pressures from our tier two suppliers, which were pushing back against as we want to limit the amount of price increases that we will have to pass along to our customers.
We continue to forecast a year over year semiconductor shortage impact of approximately $30 million, which will primarily be incurred and the first half of the year.
This impact includes higher purchase prices net of recoveries higher logistics costs, and some engineering redesign moving to slide 11.
Page 11 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 quarter.
Our balance sheet continues to be one of the best and the industry with a net cash position of 137 million and a net debt to last 12 month EBITDA ratio of negative 0.6 times with no material debt maturities until 2024.
Adjusted free cash flow for the quarter was positive 9 million and improvement of $23 million versus prior year adjust.
Adjusted free cash flow benefited from higher adjusted EBITDA, and our continued discipline and capital expenditures.
Capital expenditures were down more than 50% is the action. We implemented early last year will continue to drive optimized level of Capex going forward.
Working capital was an outflow in the first quarter as you may recall, we benefited from favorable working capital at the end of 'twenty, and 'twenty, which we anticipated would negatively impact the beginning of 2021 partially offsetting this negative impact was the unwind of working capital at the end of the quarter as activity.
Levels in the industry were lower than at the end of Q4, 2020.
Throughout the quarter inventory levels did increase approximately 17 million when excluding currency as a result of supply chain constraints. The cash outflow related to these builds will primarily be in the second quarter.
Turning to page 12.
In summary, we continued to execute on our growth strategy, while focusing on margin expansion and adjusted free cash flow in Q1.
And although we anticipate that the supply chain will continue to tighten in the second quarter and continued to impact the automotive production levels, we remain optimistic about the future due to strong underlying dynamics on the demand side as well as the continued shift to digital and connected and electric vehicles Visteon and product poor.
Folio is well positioned to accelerate these industry changes leading to continued growth for the company. Thank.
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 a question. Please press Star then the number one on your telephone keypad again that star and the number one we will pause for just a moment to compile the Q&A roster.
Your first question is from the line of David Kelley with Jefferies.
Hi, good morning, guys and not.
Thanks for taking my question really appreciate the commentary on the Q2 supply chain headwinds and the second half as well just curious as to how youre thinking about the growth over market ramps throughout the year in light of your 8% to 12% target and see how everything you mentioned all the regional mix shifted net and hopeful.
Lease more normalized production levels and the back half of the year.
Yeah, David this is such and I'll take that first and then I'll pass it onto Jerome Faure more commentary.
First of all.
Yes.
You saw our Q1 performance we had a.
Very good new business, then contribution to our revenues and Q1.
Driven by the high cadence of new product launches, we've had and the prior four quarters.
And that's.
And that's going to continue if you look at the rest of the year in total we have scheduled more than 50, new products that are going to launch this year.
And that has been the biggest driver of our better than market performance.
And not just in Q1, but also in the previous quarters and that's expected to continue now on top of that we have had some benefit all from the Oems in this environment.
Prioritizing higher content higher mixed vehicles.
And as our digital products typically go on the higher trim models, that's going to benefit us.
And that's partly also the reason why our Q1 performance came in as strong as it did and tons of growth over market Jerome and anything you would like to add that yes, very pleased with how Q1 developed a I think the from an EBITDA standpoint, the way maybe to think about it is the fact it is very consistent to what we've seen.
In Q3, and Q4 of last year excluding.
Excluding supply chain cost impacts were at 9.5, and 10% EBITDA margin and so it's a very well in line if not on the high end of our guidance and and it's a good thought the guaranteed.
Okay, Great. That's helpful. And then maybe one last follow up on that last point, Gerard and bad debt 190 basis points high supply chain cost impact in Q1, it sounded like from your commentary and the pressures Mount a bit and Q2 before normalizing in the back half of the year, but maybe if you could provide a bit more color on kind of how you are.
Thinking about the sequential trajectory of of that headwind and go forward.
Yeah sure let me maybe step back first so we had always talked about supply chain cost impacting our full year numbers. When we provided guidance in Q4, we talked about an incremental $30 million of cost and that's exactly what we're seeing and we highlighted at the time that it would be more Q1 and Q2.
So in terms of what we've got and these buckets. They are two very large items are the first one.
Ease and it's the smallest item relates to expect the tight expedited cost and logistics costs. We've seen some of that in Q4 as you may remember and we at the time talked about a 50 basis points impact to our numbers vis is continuing and that's what we've seen in the in.
In Q1.
And because of the COVID-19 impacts and the various supply chain tension that we've got including the semiconductor. So that's the smallest bucket about 50 basis points related to expedited freight the second category, which is now the largest and again, we had highlighted visa and our guidance back in Q4 relates to what.
We called spot buys the fact that we had to buy beyond our normal <unk>.
Flyers, we had to buy components semiconductor components from brokers and distributors and that is largely because the demand was so high in Q1, and obviously the supply chain and was constrained we had to go the.
The extra mile and by quite a lot of items, we put a specific task force to be able to.
And provide vs and find these parts and I think we were pretty successful so that cost was pretty large and overall between freight and these extra spot buys.
That's represented water and 90 basis points. So that's the bulk of what we've seen in Q1.
As we think about Q2 these costs will probably continue.
And.
Although we think that the given that the sales level will be a little bit lower we may see a little bit of a decrease in terms of absolute dollars and then we are expecting and most of east cost to disappear or to ease quite substantially in Q3 and Q4 as the supply chain tensions are getting resolved.
At the same time and I think you hit you alluded to that point, we're seeing material cost increases are free.
Our suppliers, we are getting pressure to accept cost increases from suppliers and you don't see much of that and our Q1 results. In fact, we've pushed back quite strongly on the site and it will continue to do so.
But if it continues and if we're not able will definitely pass that onto our customers and we'll try to keep that as neutral as possible on an ongoing basis.
Okay got it really helpful. Thank you.
Your next question is from the line of Michael <unk> with Baird and Barrick.
Alright, Thanks for taking my question I, just wanted to ask about new business wins, clearly looked like a really strong quarter for you guys and particularly and infotainment probably on the back of that smart core the smartphone wins, and then of course and display it looks pretty pretty strong as well, but clusters, maybe it looks a little slower than average historically, so I'm just kind of curious.
And how you think about new business wins going forward for the year. If you think you can sort of maintain the cadence and you are and you picked up here and the first quarter.
Sure sure and the first thing I would say debt is that the new business from an activity. This year has certainly.
Strengthened quite a bit as compared to last year.
And this is despite some of the.
Our supply chain and other I should say of distractions that are picking up a lot of time and energy of people and the industry.
Q1 was very good in terms of activity as well as bookings most of the bookings came from.
Sure.
North America region.
But we also saw good activity and other regions, which are all going to develop into opportunities for the remainder of the year.
As you noted.
Q1 was more weighted towards cockpit domain controllers, smart core and less.
In terms of clusters.
But as you look at the pipeline for the rest of the year, which is I would say quite robust.
And it balances out quite a bit we see a little more of clusters, lessor smart or and displays and also some BMS opportunities and the pipeline and given where we are at with the first quarter at $1 8 billion. I think we are on a pretty good track to achieve our 6 billion target for the full year.
<unk>.
One thing I should mention just to.
Make that point clear when we talk about smart core Smart board does integrate or does the traditional cluster functionality within it. So yes. It may appear debt cluster business wins are lesser than perhaps in the prior quarters and that's only because what we represent here on the <unk>.
And it is clusters is just the standalone cluster business that is more to it but the smartphone wins as well and so as we go forward.
And I do expect to see more and more even beyond 2021, more and more cockpit domain controller business as the key trends of utilization over the air software updates and <unk>.
Services are.
Really pushing or Oems to deliver those types of experiences to debt to their customers and smart core with our Android based infotainment is a really good platform for debt.
Understood. Thank you and just one follow up I was wondering if you could provide a little bit more color on your comment that the Micros and award and Microsoft and general sort of open up a broader market opportunity for you guys.
Right. So if you look at the displays technologies today, you have the standard display technology, which is to LCD display and most of the vehicles that you'll see on the roads are using some level of LCD technology.
Capability of LCD are pretty well known its a good display for automotive.
Since now we see more and more.
What I would term as mass market vehicles, offering larger displays 12 inch displays which used to be in the past just available and the premium and luxury vehicles, that's pushing Oems of those vehicles to look for alternatives now OLED has been the display technology of choice for consumer.
And electronics for higher optical quality, but it has its challenges when it comes to automotive.
And so now with Microsoft with Salt many of these challenges that OLED has.
Lifespan cost.
It really gives us the ability to address this opportunity at the luxury segment of premium segment as well and as you know that's typically the segment that is going to introduce the new larger displays first before they come down into the most more mass market segment so for us.
Microsoft truly represents as a demonstration of visteon display capabilities, let's say.
And innovative product and so unique in the industry and its really opening up all these engagements and discussions with Oems for larger displays, which we were frankly not part of in the past. So I'm very excited about what that represents.
Great. Thank you very much.
Yeah.
Your next question is from the line of Mark Delaney with Goldman Sachs.
Yes, thanks, very much for taking the call and my questions.
And he was able to maintain its full year guidance, despite the incremental semiconductor shortages and and they made some comments on this up and a better understand that and it will.
Perhaps there is some conservatism and the original guide or maybe the company is able to maintain its from your guidance because because of the.
And that higher mix to more premium vehicles, but any more context help us reconcile visteon and being able to maintain its full year outlook. Despite the and.
The incremental challenges with automotive production will be helpful.
Yeah.
Let me try to explain how we have come up with our guidance first of all our guidance had assumed a vehicle production growth as you noted, 8% for 2020 one not.
<unk> 13, or 16% of some of the market and this.
Had indicated.
And that was because we had anticipated.
Semiconductor supply, especially for the first half of 2021.
And then followed by a recovery and the second half.
And now for.
Perhaps debt aspect of the supply being limited was not fully appreciated by the rest of the industry at the time now.
No.
As we stand here today.
First quarter behind us.
What how does that look like so Q1 has come in better than we had expected certainly impacted by supply by about six foot central flow as we noted.
But on account of buffer stock and the whole supply chain, we were largely able to meet Oems and demand for product.
Now, that's not just visteon and alone and I'm talking about the whole industry.
Now that buffer stock is completely exhausted.
And we are effectively using as an industry every chip, we can get our hands on to build parts and deliver to the customers.
Now, what we had not anticipated debt.
And it happened in February and March was the impact to the supply chain of the Texas and into strong and then the fire that awkward and one of the production facilities of a large supplier to the industry Renaissance.
Which took out production for a few weeks I should say and impacting Q2 the most.
Now all the debt.
Suppliers that have been impacted by distinct have largely recovered the production, but that will still mean that when it comes to Q2 production as compared to Q1, we will see anywhere between two to three weeks of additional production volume loss on account of this the impact.
Now.
Having said that we are also seeing from our suppliers.
Better visibility into the second half than we did at the beginning of the year.
And the second half supply seems to be coming in better than we had anticipated.
Overall, when you look at all of these dynamics, we still believe that 80 million units roughly for the full year or 8% growth is the right number and the industry will likely come very close to debt level and.
And how we see between the first half and the second half the production outlook and.
And on top of debt.
We have our market outperformance that we have indicated we have seen that play out in Q1, as well and we expect that to continue into the rest of the year. So given all of that we are quite comfortable with our guidance range that we provided and we expect to come within that.
Sure.
That's really helpful context. Thank you for the additional details there from my second question I was hoping we could talk more on the BMS product, which has been going very well for the company and I Remember last earnings call you were able to announce a win and BMS at the second customer could you provide and update on how that's going both with the two question.
And you have so far.
How is that progressing absolute debt.
And then any any sort of timeline of when we may be able to cash.
And so you've got a third OEM. Thank you yes.
Yeah, No first of all there's a lot of activity happening at the company with respect to BMS.
One.
Executing the current business that we have on hand, which is quite substantial debt are few very significant launches happening this year or the very first launches on that technology. So you can imagine that is taking a lot of our attention and energy at this point and time.
But on top of debt. We are also busy engaging with other Oems, especially more so in Europe as of this announcement that we had previously and and the interest in Evs and in general is creating a lot of opportunities for us to showcase our technology.
Two of these Oems.
As it is the case with any new technology and the space.
And it does take some amount of time for them to get comfortable, especially the wireless nature of our solution.
And so we believe that and the course of the remainder of the year, we will be able to work with some of these and convert those into wins for us. So I would say, it's going very well, especially in terms of getting in front of new Oems given everything else that's going on all the.
Restrictions that we have with travel et cetera.
Say that we are and a very strong position and clearly emerging as one of the leaders in this space.
Thank you.
Yes.
Thank you.
Your next question is from the line of Aileen Smith with Bank of America.
Good morning, everyone, I'm, probably and good morning.
But I wanted to drill down a bit on the maintained 2021 outlook I think investors are a little fearful after one of your major customers and reported last night had a pretty big beat Similarly, and the first quarter, but got into a much weaker back half of the year and you think about your outlook now versus your outlook that was provided in February.
The implied weaker outlook for the remainder of the year off of a lanky beat is that isolated to the second quarter would you expect from lingering pressure and the third and fourth quarter as well and is there anything beyond the semiconductor shortage impact like commodity costs or otherwise.
Now incrementally more cautious on and then perhaps you are earlier in the year.
Yeah, and in terms of demand and daily and I would say that it is indeed.
Xactly debt, which as we speak.
You see a specific Q2 challenge and Thats driven largely by the two incidents debt had a <unk>.
Significant impact impacting the second quarter are we feel pretty good about the plans of the semiconductor suppliers to resume production at those facilities that were impacted.
In fact, the plants have already come back online and by the time, we finished Q2, there should be at or above.
The levels of production that they were at before the impact.
And now investments that were made by the semiconductor suppliers that go back towards the tail end of last year will also start to contribute more supply, which will appear and here in Q3 and Q4. So when we look at the supply levels for the second half versus the first half we feel that even though.
There will still be higher demand debt.
And supply it is still enough for us to make the levels that we need to make to be within our guidance. So I do not feel that that is at risk of this is still very much a supply driven and vitamin and photos for the remainder of the year.
Customer demand retail demand seems.
To be to be exceptionally strong. So we see no challenges with respect to debt and as long as we can produce enough vehicles, not just our parts, but ultimately at the Oems and we should be in a pretty good shape. So that's how we see Jerome and yes, I am. Thanks, Sachin I was about to add as well we were always a little bit.
More cautious for the site and the second half of the year about the ability of the Oems to recover so, whereas I think some communications, we're anticipating a full recovery we were far from that so I think that that helps us indeed.
With what's going on at the moment from an EBIT desktop and 0.8 and so it's really follows what Sachin was doing on the sales side, we did a little bit better and Q1 will have Q2, which will be definitely more challenging because of lower sales and therefore lower EBITDA and then the rest of the year will resume to a more normal run rate for us and.
Terms of at least EBITDA.
And we'll get back to the to the nine 5% range that we've been talking about so we are we still feel pretty good about our full year guidance sales wise and EBITDA was.
Great. That's very helpful commentary and second question I wanted to follow up around the the growth above market, specifically, the 14% and the first quarter versus 8% to 12% from full year and.
And you think about regional mix normalizing and automakers continuing to prioritize higher mix vehicles within those regions why wouldn't growth above market remain at similar levels from from the first quarter and is there something regional and product launches that lead you to believe that it would decelerate as North America and Europe.
On line and the back half of the year.
Or could we perhaps it seemed that you may be somewhat conservative or prudent and assuming that what had been very favorable price and mix for the value chain.
Certainly and the first quarter doesn't persist as we get into the back half of this year.
Yes, that's a great question and I think there is some detail here that needs to be probably discussed in terms of the 14% which will.
Ill put more light on how that might look like for the rest of the year. So if you look at how that 14% is made up about two thirds of debt as I mentioned comes from our new product launches.
And so there's somewhere between lets say nine to 10 per cent and we'd expect that to continue for the remainder of the year because of the strong cadence of new product launches.
Remainder actually came through some.
Is it regional mix within our large customers Q1 growth was all about China and.
And so we had some customers that had a stronger performance in China relative to the rest of the world, especially for vehicles that carried out a product now Martin do most of our product is the higher and digital content in the cockpit of these vehicles and China for many of our customers do.
Does represent more of a higher and more premium vehicle opportunity and the rest of the world.
And now as we go forward here that will reverse a little bit about China was a special case on account of the shutdowns the day went through.
Last year that did not recur this year. So as we go forward, you'll see some of that benefit and the rest of the world, but then for the second half that should not necessarily be a tailwind in terms of growth over market. So total normalized down to.
What I would say is our organic growth over market driven largely by new product launches.
Okay Fantastic that's very very helpful commentary, thanks for taking my question.
Welcome and thank you.
Your next.
Question is from the line of Emmanuel Rosner with Deutsche Bank.
Hi, good morning, Thanks for taking my questions.
We're hoping to put.
One additional final points on the potential impacts from industry production from some of this.
And as chip disruption, but focusing specifically on the and the second quarter because I understand your point around how you are more conservative around the second half recovery I guess, what was surprising from <unk>.
<unk> communication yesterday was this idea of their production globally being down 50% five zero year over year.
And in the second quarter, which is considerably worse than obviously.
IHS or it's probably most people would have expected and so as part of you being overly conservative on the year.
So this will be for our second quarter EPS sort of magnitude that you would have had already contemplated or that is being contemplated in your restated guidance and what kind of risk is there that other automakers VSAT four would have to would incur discounts disruption, losing almost half of production in the.
GAAP.
So men and let me take that first so as you might imagine where we stand at this point in the quarter.
We have fairly good visibility for the remainder of the quarter from the demand side from the Oems.
And also very importantly, and this environment from the supply constrained perspective.
And what we will be able to deliver as a result of debt.
So it's hard for me to comment on what Ford or any other OEM might be saying with respect to debt planned production, because we're not necessarily privy to all of debt.
Initial plans.
But having said that.
From our perspective, because mind U V also within a OEM like forward provide content that is typically the higher and content within the vehicles.
It's not that we have 100% content on 100% vehicles that Ford produces so there is some level of of mix debt.
Is helping us.
Is that.
We had.
Scene also and the first quarter that we expect to see continue into the second quarter and.
And so based on the knowledge of <unk>.
We saw the supply come in.
And knowing the demand was much much higher than what we could deliver from a supply perspective, we.
We feel quite comfortable with how we see Q2 and the rest of the Europe play out.
Okay, Thats very helpful perspective, and I guess.
And get to the financials.
So you are quite a few.
Sizable decline and.
Engineering gross spend and SG&A.
And how sustainable are these levels when sales recover further.
Yeah, Thanks, and good morning and venue so we've.
I would say that our run rate if you look at engineering levels as a percentage of sales for Q1 as well as our SG&A levels are in terms of percentage is sustainable debt that's really.
We're talking about 8% net engineering, we're talking about it and little bit more than 5% on the SG&A side, that's kind of the ballpark numbers, we've got in mind for the full year.
So if sales go up.
We'll have a little bit of increase as well on these categories, but generally I would say what we're able to demonstrate I think is the fact that all the restructuring actions all the cost discipline that we've put in place last year is sticking and it shows it's been showing in Q3 Q4 and.
And he chose and Q1 as well so.
And we'll continue to monitor that very very carefully, but that's kind of the levels. We are thinking about as we go forward.
Okay, that's great to hear thank you.
Thank you.
Your next question is from the line of James Picariello with Keybanc capital markets.
Hey, good morning, guys.
Good morning.
And just on your reiterated full year guide you obviously noted.
Second quarter is set up to be sequentially, lower which makes complete sense.
Given the industry production backdrop, but can you maybe just dimension.
And maybe a first half versus second half.
Split for the year within within the midpoint of your full year framework.
Yeah. So so if you think about I'll talk about it and the context of vehicle production.
A good way to look at it also when you look at the initial.
And.
Estimate or the guidance that we had given.
And that was based on the second half being kind of higher than the first half simply because of the impact of the supply that we had anticipated to be lower now.
Where we spend with with that does debt we expect.
And our supply to be lower than our estimate.
By about two to three weeks in the second quarter compared to the first right more probably closer to three the extent too and.
And we've already seen and impact of about a week in the first.
First quarter of this year, so that kind of gives you a sense of the Cal and resolution of the impact. So clearly we will be more weighted and the second half in terms of revenue.
But.
<unk> said that as I mentioned earlier.
And do see a stronger supply in the second half coming to us as compared to our initial estimate so hopefully that comes through we'll have to see how well the suppliers execute on their plan and if so there is some potential for I would say some modest upside but.
At this point it feels like we will be.
Well within our range that we have guided towards.
Got it and that's really helpful and then.
And clearly Incrementals were strong this quarter can you confirm maybe what was captured and restructuring savings during the quarter relative to the full year guide for $30 million and should those incremental savings for the share run on a pretty ratable basis.
Yeah, So you're maybe two to two things first one the incremental.
And that we so in in Q1. They are in fact, there are 30 per site. If you exclude supply chain costs. They are in fact, even at 45% and it's essentially because of exactly as you said the restructuring actions and cost controls that we've had.
So and if anybody was pointing debt earlier, we've reduced net engineering by 20% year over year and SG&A by.
15%, so that's really what join in India.
Incremental margins.
What we got to be careful is that we see is not the new run rates. We are as we are going into the year. The comps year over year are going to get tougher as we implemented these cost savings pretty early last year and fact, starting in Q2 of 2020.
In terms of restructuring we are very much in line with what we had announced we talked about and absolute restructuring number of savings of $16 million for 'twenty, one, which is incremental to 2020 by $30 million and what we see in Q1 is.
Coming through it's a there's about a $10 million restructuring saving year over year, the rest of our cost our cost savings and cost discipline.
Thanks Scott.
Thank you.
And final question is from the line of E time, Mccauley with Citi.
Great. Thanks, good morning, everybody.
And one more margin question on Q1, because the.
The sequential margin expansion was pretty robust excluding the engineering.
And of course, the semiconductor cost issues and I was curious if you could comment on what youre seeing in terms of product mix and margin and specifically just the margins youre seeing on new digital clusters, as well as new launches and just how that compares to the historical average margin for the company.
Yeah, So hi.
We are definitely benefiting a little bit in terms of the mix.
And kind of leaning more towards the higher end of the product.
And that we expect to see continuing and the constrained environment, but having said that we do believe that as we go forward debt is the general trend that the business is going to be based on and.
And this has also been by the way true in the fourth quarter of last year. So.
Too early to say whether that is the new norm. So let us see how it develops we are expecting to see some benefit of debt in the constrained environment as Oems have to prioritize what vehicles are built and they will orient more towards the higher end as well.
And we all know by now and so that should help but we'll we'll see we'll wait and see how exactly and.
And what we are.
It has an impact to our bottom line.
Alright, that's very helpful. Thank you just two quick follow ups.
The bookings first.
And one third of the Q1 wins were for EV is hoping you could maybe talk about roughly.
The mix of Evs, and what Youre seeing and our future pipeline and also I think last quarter and you mentioned.
The <unk> 25 per cent of your bookings were from mid cycle refresh us from clusters I was hoping to maybe get an update in terms of what youre seeing for cluster demand from your customers that can be done on a mid cycle refresh and as opposed to vehicle designs.
Yeah. So I think it's very similar to what we saw and the second half of last year. So we seem to be tracking somewhere around 20% of our.
New business wins for the full year now offer and mid cycle updates and debt we are expecting to see for the rest of the year as well with respect to Evs as you would imagine there's a lot of interest and movies across the board with all Oems and so we will see for those products debt.
For new vehicle models, I expect to see that we would be somewhere around 25% to 30% of our content going on evs and what's really beneficial here for us is that many of the products and smart card is a great example, that we won is the same product that cuts across ice and evs.
Same thing for our displays the display Microsoft win that we talked about is going to launch on ice and vehicles as well as evs and so we are largely platform agnostic for powertrain agnostic I should say in terms of our products and thats going to continue to be the case, which helps in and.
Making some of this vince significantly larger photos because now.
And a higher.
A number of models so that's beneficial.
Engineering content on those.
And the cost will certainly be amortize, better, which should translate into better margins going forward.
That's all very helpful. Thank you.
Thank you and this concludes our earnings call for the first quarter of 2021. Thank you everyone for participating in today's call and your ongoing interest and Visteon.
Any follow up questions. Please contact me directly thank you.
This concludes Visteon <unk> first quarter 2021 earnings call you may now disconnect.
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