Q2 2021 Visteon Corp Earnings Call
Good morning, I'm, Kris Doyle, Vice President Investor Relations and Treasurer.
Welcome to our earnings call for the second quarter of 2021. Please note. This call is being recorded and all lines have been placed on listen only mode to prevent.
The ground noise.
Before we begin this morning's call I'd like to remind you of 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.
Prevent back of our actual results to differ materially from those expressed in these statements.
Please refer to the page entitled forward looking information for additional details.
Presentation materials for today's call were posted on the investors section of the sounds website. This morning.
Please visit investors that visteon dot com to download the material if you have not already done so.
Joining us today are Sachin Lewanda, President and Chief Executive Officer.
And Jerome <unk>, Senior Vice President and Chief Financial Officer, who.
We have scheduled the call for 1 hour and we'll open the lines for your questions after sanctions and Jerome remarks. Please.
Please limit your questions to 1 question and 1 follow up again, thank you for joining US now I'll turn the call.
Carsten.
Thank you Chris Good morning, everyone and thank you for joining our second quarter earnings call.
Page 2 summarizes our results for the second quarter of <unk>.
Sales were $610 million up 59% year over year, excluding currency.
While the global vehicle.
Production grew 49% in the same period.
While demand from automakers was strong in the second quarter.
Semiconductor supply was impacted by multiple factors, including the Texas Winter storm, the fire and the suppliers facility in Japan, and the outbreak of COVID-19 in Taiwan and Malaysia.
Despite the challenges the Visteon team did a great job in mitigating the impact of our customers, while keeping costs in check.
I am pleased that the company continued to outperform the market in a challenging environment due to supply chain disruptions and the COVID-19 pandemic of.
The discuss the sales performance.
<unk> more on the next page.
Adjusted EBITDA was $30 million or 4.9% of sales an increase of $33 million compared to prior year.
Compared to the COVID-19 impact of second quarter of 2020, adjusted EBITDA improved due to a combination of higher.
Your volume cost efficiency measures introduced in 2020 and engineering recoveries.
While our profitability improved significantly versus last year. It was below our initial estimate for the quarter.
This was due to the lower than expected sales driven by supply constraints and the slightly.
<unk> costs incurred due to open market purchases of critical semiconductor parts.
The company's liquidity remains strong and we ended the second quarter with $470 million of cash and debt of 355 million, representing a net cash position of $115 million.
Hi.
Our product portfolio for digital cockpit, and electrification continues to do well in winning new business.
I am pleased to report that we achieved $3.2 billion in new business wins in the first half returning to pre pandemic levels of performance.
We also launched 7.
The new products in the second quarter and remain on track to deliver about 50 digital cockpit in electrification products for the full year.
We believe that long term business success, and the creation of shareholder value of integrally dependent on building a more sustainable business.
Recently I assess Richard.
Weighted visteon in the top quartile in our peer group for our ESG performance.
While we are pleased with the progress we have made we have set more aggressive sustainability targets with the company to achieve by 2025.
Turning to page 3.
This page shows.
Bonds Q2 sales performance relative to global and Visteon customer vehicle production volumes.
On a year over year basis global vehicle production increased 49% as compared to the COVID-19 impacted second quarter of 2020.
Which was lower than many had expected.
Vista of the beginning of the quarter.
Automakers were forced to shut down plants of reduced shifts in response to widespread shortages of components caused by semiconductor supply shortages.
On a year over year basis, Visteon customers grew 55% of par.
Positive.
<unk> customer mix of 6% this quarter compared to a negative mix of 11% in the first quarter.
On the first half basis customer mix was a negative headwind to our results.
Our sales grew 59% year over year on a constant currency basis outperforming the market.
By 10 percentage points and our customers' production by 4 percentage points.
Our expectation for sales at the beginning of the quarter based on semiconductor supply outlook was a little higher at about $650 million, even though demand from Oems was in excess of $800 million.
Semiconductor supply was particularly constrained early in the second quarter due to the effects of the winter storm in Texas and the fire at the Supplier's facility in Japan in Q1.
We had to source some components on the open market to maintain supply continuity to our customers.
The.
Despite these constraints are core of digital cockpit products performed very well with cluster of sales growing 57% year over year.
Infotainment sales grew 80 plus percent and displays grew more than 75% as these products were less impacted by the semiconductor shortages is.
The 2 clusters.
The good news is that demand for our digital cockpit products remained strong.
And as semiconductor supply of recovered from the lows of the second quarter I expect of market outperformance to continue and return to mid to high single digit or better.
Turning to page 4.
As compared.
The company launched 7 new products into the second quarter 3 of which are highlighted on this page.
We launched our latest 3 D cluster technology on the completely redesigned third generation Basel III zero 8.
This cluster users.
As an innovative of dual display technology to generate that perception for 3 D graphics for improved user experience and to bring high priority information such as speed of alerts and warnings to the driver's attention.
This business represents approximately $175 million in lifetime program.
For revenue.
Our Android based infotainment system was launched on the new SCADA SUV.
Which is part of the W. Group's ambitious India 2 point of project.
The system offers a tenant that screen with localized connected infotainment.
<unk> content.
Through an embedded app store.
Bluetooth firewalls zero wireless currently Android auto and other state of the art infotainment features.
This program is worth about $135 million in lifetime revenue.
The third product highlighted on the speed.
Page is for Julie in China.
Julie is introducing our Android based infotainment system.
This newest high end flagship SUV.
This system uses latest Qualcomm snapdragon chip to deliver infotainment content on to displace.
On the central consoles and the passengers.
And also renders content on the augmented reality head of display.
The Whiting drivers with access to broad end navigation information without having to over decades.
The total lifetime program revenue was approximately $115 million.
These products.
The size the latest advances in hardware and software technologies to deliver an enhanced user experience that is key to the automakers brands.
It also illustrates very well visteon technology expertise and global product development capability.
Turning to page 5.
New business activity was strong in the second quarter. Despite the distraction caused by semiconductor shortages.
We ended the first half with $3.2 billion in new business wins.
Which puts us on track to achieve our full year target of $6 billion.
With $2.9.
Billions of dollars into second half of 2020, and $3.2 billion in the first half of this year a.
Our new business bookings are back at pre pandemic run rate.
In the second quarter from a product perspective.
Digital clusters did very well followed by displays.
We also made progress.
<unk> on opportunities that will be awarded in the second half of this year.
Our digital cockpit and electrification products are addressing the growth areas of the industry.
And the pipeline of opportunities for new business is robust.
For the first half digital clusters represents.
Almost half of the $3.2 billion of book business.
Android based infotainment accounts for over a third.
And displays make up the rest.
Interest in the integrated cockpit controller technologies Smart core continues to remain strong with 30% of the bookings for the first half power.
<unk> technology.
The timing of new business decisions tend to be lumpy and.
In the semiconductor supply situation may extend some of the upcoming decision timelines.
Nonetheless, I feel confident that we'll be able to achieve our goal of $6 billion in new business wins for the full year.
Turning to page 6.
This page highlights a couple of significant new business wins in the second quarter.
The company was able to extend its digital cluster business with the large European OEM for an 8 inch digital cluster on multiple vehicle models.
<unk>.
With this extension the total business for this program is now worth $1.5 billion.
With the product launching on 25 different vehicle models across 3 brands and in all regions of the World. This is probably the biggest digital cluster program in the industry.
Beyond.
The new associated with this program. It also gives us the benefits of scale that we can bring to other customers for similar products.
The second win highlighted on the speech is for the tubular market.
Where we were successful in making a breakthrough with the large OEM for a circular part.
The registry of cluster.
This is our first win the this OEM.
And the system will offer turn by turn navigation and for the integration where Bluetooth in addition to traditional cluster of features.
Our business in the tubular market has been steadily growing over the past 2 years and.
This win we now have business with 4 Oems.
And have our products in 35 different current and future models.
Turning to page 7.
Creating long term shareholder value requires that our business operations are sustainable.
This is part of our drive for greater system the ability.
We're committed to improving our emissions social and governance performance and practices across the company.
Starting with the products and technologies.
Enabling our customers to achieve debt environmental goals, good solutions that not only enable electrification.
<unk> of the powertrain, but also reduce debate and energy consumption of the electronics systems.
If you have already reduced scope, 1 and 2 greenhouse gas emissions in our operations by over 10% over the past 5 years and of set aggressive goal of reducing them further by 25.
5% per 2025.
Although our operations are not water intensive we will further reduce water consumption by 6% as well as reduce waste and energy usage.
Moreover, 50 per cent of our energy use per 2025 will come from renewable.
Sources.
The company participates in the carbon disclosure project to provide transparent reporting of its emissions data and carbon emissions reduction strategies.
The company employs approximately 10000 people from different backgrounds and experience.
Across 18 countries.
Diversity equity and inclusion are a key focus for the company.
Gender diversity is an important part of this effort and this year, we have launched of leadership development program to elevate morpheme of leaders in the company.
It's also important that we contribute to the societies in which we operate.
I am proud of our employees for responding to the many challenges the world is encountering, especially COVID-19, with various social outreach programs.
I am pleased to report that our efforts in building a sustainable business are being recognized.
<unk>.
ISS recently upgraded our rating in the latest report that puts us in the top quartile of our industry peers in the ESG performance.
Turning to page 8.
On this page I would like to discuss our outlook for global vehicle production for the rest of.
And the key drivers of Visteon sales.
Unlike any time in recent years the outlook for vehicle production for the rest of the year will depend almost entirely on semiconductor supply.
Demand remains strong as vehicle inventories globally had been depleted in the face of robust.
Consumer demand.
First half global vehicle production was 39 million units.
Representing a year over year increase of 29%.
Our customers production growth was lower representing.
The representing a negative customer mix of 6% for the first half mainly driven.
Of the year of Ford.
Visteon sales were up 34% of the first half, which after excluding the positive effect of currency that represents an outperformance of 7 percentage points versus our customers' production growth.
As we have noted earlier, our outperformance would have been higher if the.
The supply of semiconductors force greater especially for clusters.
Based on the discussions with automakers and semiconductor suppliers, our estimate for global vehicle production for the second half of the year is 41 million units of <unk>.
Decrease of 7% year over year.
Our estimate for full.
The year remains at the same level as before at approximately 80 million units.
The representing a year over year increase of 8%.
We expect our customer mix to improve in the second half, but remain a headwind for the full year based on the negative mix experienced in the first half.
Yeah.
Semiconductor supply is also expected to improve gradually starting midway in the third quarter and continuing into the fourth quarter.
There is some indication the demand for semiconductors from other sectors of the industry is starting to slow down.
Which should help secured more.
Half of for automotive.
Also our growth of our market in the second half is expected to be in the mid to high single digit per cent range driven by both the level of semiconductor supply.
And the new product launches.
Most of our new product launches this year are happening in the second half.
Based on these concentrations, we expect sales to come within our guidance range, but below the midpoint.
Turning to page 9.
In summary, the company performed well in the challenging environment that was impacted not only by COVID-19, but also of semiconductor supplier.
Fly constraints.
Our sales in second quarter grew 59% year over year outperforming our customers by 4 percentage points and the general market by 10 percentage points.
Our digital cockpit products, such as digital clusters, infotainment and large displays performed very well despite.
<unk> supply chain environment.
Our technology portfolio is strong and aligns well with the key industry trends of connectivity digitalization and electrification.
The pipeline of new business opportunities the strong and we won $3.2 billion in new business for the first half debt.
<unk> continued to drive better than market performance going forward.
Demand from automakers remained strong and semiconductor supply is expected to improve as we progress through the rest of the year.
Our sales for the full year I would expect it to come within the guidance range.
I will.
I'll now hand, it over the Jerome to review the financials.
Thank you Sachin and good morning, everyone.
As the industry rebounded from Q2 of last year, which represented the low point of industry production output during the COVID-19 pandemic Visteon increased sales.
That will kind of expanded margins and improved adjusted free cash flow compared to prior year.
Visteon grew sales, 59% year over year, when excluding the favorable impact of currency.
Performing customer production volumes.
Adjusted EBITDA improved to $30 million, representing a margin of 4.
The 9%.
Through the first half of the year adjusted free cash flow was negative $7 million.
However, Q2 of 2021 had its own set of challenges driven by constrained supply chain with semiconductor shortages impacting the overall industry and Visteon wasn't.
<unk> exception.
In Q2, we experienced a significant reduction in parts from key suppliers, including NXP as a result of damages incurred to their facility from the Texas Winter Storm and Renaissance following of plant fire at where Nat gas factory in Japan.
As previously discussed.
And the Wix established a cross functional global task force early in the year, which has been working around the clock to optimize supply and minimize the ongoing impact to our customer production schedules as well as to our operations.
The task force is in daily communication with our customers and suppliers.
With 2 of line of part availability and was able to provide additional products to our customers through open market semiconductor purchases.
This team has done an excellent job minimizing customer disruption while at the same time, reducing the impact of fluctuating schedules.
On our own operational performance.
This constraint environment, driven by supply muted sales growth in the quarter.
However, overall demand for vehicles as well as for Visteon. The products remained robust with initial OEM orders, representing an increase from Q1 sales.
Here's holds.
We anticipate that the second quarter represents the low point in supply availability and that supply will steadily increase throughout the remainder of here.
Adjusted EBITDA margins were negatively impacted by lower scale and the higher incremental costs associated with semiconductors and.
<unk>, 11th freight while benefiting from higher engineering recoveries from our customers and savings from previous restructuring programs.
Adjusted free cash flow was a slight outflow in the first half of the year, primarily driven by use of cash from working capital.
This was partially offset by the continued discipline.
And premium on capital expenditures.
We continue to have 1 of the best balance sheets in the industry with a total cash balance of 470 million of net cash position after debt of 115 million and of negative net debt leverage ratio.
For the full year our outlook.
<unk> within our guidance range, but below the midpoint of sales continued to be impacted by supply chain disruptions and the incremental costs associated with the semiconductor shortages slightly exceeding our initial estimates turning to page 12.
Sales.
In the second quarter of 2021 were $6.10 million of an increase of 239 million compared to prior year.
In comparison industrial production volumes were up 49% while production at our top customers was up 55% representing a favorable customer mix.
Remainder of year over year basis, primarily due to the uneven nature of OEM plant closures last year early in the COVID-19 pandemic.
Compared to our top customers Visteon sales outperformed by approximately 4%.
Adjusted EBITDA was $30 million represents.
Presenting a margin of 4.9% of an increase compared to prior year of $33 million or 570 basis points.
Compared to last year, adjusted EBITDA margins benefited from higher volumes higher engineering recoveries from our customers as well as from our cost reset in 'twenty.
2020.
This was partially offset by supply chain cost impacts and the non recurrence of temporary austerity measures that were implemented in 2020 and have since ended.
Net incremental costs associated with the semiconductor shortages were approximately 17 million.
In the quarter.
The majority of these costs the resulted from higher purchase prices of semiconductors on the open market through brokers and distributors.
In the second quarter open market purchases represented 2 thirds of our total incremental cost related to supply shortages.
The.
Going to utilize brokers and distributors was a proactive approach visteon took to ensure we optimize deliveries to our customers.
Compared to the first quarter, the quality of semiconductors purchased through brokers and distributors decreased as supply reduced however.
Driven by high demand.
The decision of incremental unit cost increased resulting in higher cost for the company in Q2 versus Q1.
Some of the incremental cost also included temporary surcharges from our tier 2 suppliers as well as higher freight and logistics costs.
We're actively negotiating with our customers.
To pass along incremental cost in our recovery rate as increased as the quarter progressed, while many Oems are passing along price increases to customers.
In total incremental semiconductor costs impacted margins by approximately 280 basis points.
While lower sales compared to our recent run rate of approximately $750 million per quarter reduced margins by a little more than 300 basis points. When normalizing for these 2 items and for the higher engineering recoveries, we estimate that margins would have been closer to 9.5% to 10%.
<unk>, which is consistent with our normalized margins over the last few quarters.
Turning to page 13.
Page 13 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 half of 2021.
Our balance sheet continues to be 1 of the best in the industry with the net cash position of $115 million and the net debt to last 12 month EBITDA ratio of negative <unk> 5 times with no material debt maturities until 2024.
Adjusted free cash flow for the first half was negative.
Of 7 million, an improvement of 15.9 million versus prior year.
Adjusted free cash flow benefited from higher adjusted EBITDA as well as from our continued discipline in capital expenditures cash.
Capital expenditures were down approximately 50% year over year as the actions we implemented early last.
Last year continue to drive optimized levels of Capex going forward.
Working capital was an outflow for the first half primarily driven by an increase in inventory levels.
We have been building inventory to manage the variability of OEM production schedules, which will allow us to ramp up output.
The semiconductor supply increases turning to page 14.
Based on the conversations with our suppliers and customers. We currently anticipate debt sales adjusted EBITDA and adjusted free cash flow will all be within our guidance range, but below the midpoint as.
Kinder our full year guidance is sales of $2 billion 875 million to $3 billion $25 million.
Adjusted EBITDA of $230 million to $270 million and adjusted free cash flow of $35 million to 65.
As of remain.
In this supply constrained environment, we expect production volumes to be down approximately 7% in the second half of 2021 compared to prior year.
Sachin mentioned the industry got of a slow start in July with multiple customers reducing production schedules to.
The ongoing supply chain shortages.
Rest of rated by the more recent COVID-19 outbreaks in Taiwan and Malaysia.
We currently anticipate activity will pick up in the second half of the third quarter and continue to increase throughout the fourth quarter in.
In addition, visteon is scheduled to launch a significant.
Just to a lot of new programs in the second half of the year.
Based on these factors, we expect Q3 sales to be higher than Q2 sales in the mid teens percentage range.
This would represent a reduction in sales for the third quarter compared to prior year when supply was not constrained we expect further.
Second of movement in Q4 sales, which we forecast to be slightly higher than sales in Q4.2020.
However, visibility continues to be limited with additional risk stemming from the ongoing COVID-19, pandemic, which is creating additional disruptions around the world.
On the cost side.
<unk>, we're currently expecting 2021 net incremental supply chain costs will be between 35 and $40 million for the full year, which compares to 3 to 4 million we incurred in 2020.
This is up slightly from our original expectations.
The cost pressures of increased as the shortages of lasted longer.
Than many had anticipated to mitigate these cost increases we have been actively negotiating with both our suppliers and customers as already stated we began to see increased success in the negotiation with our customers towards the end of the second quarter and anticipate that we'll have more success as we progress throughout the year.
Yeah.
Despite these near term challenges, we remain optimistic about the long term growth prospects for the business. We continue to win a significant amount of new business and launch of high number of new programs with 2021, representing another year of approximately 50 program launches in addition.
<unk> believed that there is a significant amount of pent up demand that will help accelerate industry production growth for years to come including the continued demand from retail customers. The return of fleet demand and historically low inventory levels in the U S and Europe.
In summary, the situation continues to be.
We both forecasts from both our suppliers and our customers changing on the weekly basis. However, we believe that the near term challenges are transitory and we remain optimistic about the future growth trajectory for Visteon.
Turning to page 15.
Visteon.
On the compelling investment thesis remains intact, we continue to see the acceleration in key industry trends, including digitalization connectivity and electrification visteon the product portfolio is well positioned to support whiskey trends. Thank you for your time today and your interest in Visteon I would like now to.
Fluid call for your questions.
At this time, if you would like to ask an audio question. Please press Star then the number 1 on your telephone keypad.
The star and the number 1 we will pause for just a moment to compile the Q&A roster.
Okay.
Your first question comes from Luke junk with Baird.
Good morning, Thanks for taking the question.
Wanted to ask about your outlook for the third quarter sequentially. Thanks for that color and when I'm wondering if the if you could expand on.
The visibility into your own supply chain in terms of semi cap semiconductor availability and the related components and specifically whether youre seeing any easing here in July at all as the <unk>.
Some of those Texas facilities come on back on line for example, and to what extent are your insights into your own supply chain of informing.
Your view on production as well thank you.
But we had a good look first of all of what I would say is in the second quarter, we had a.
A really challenging supply situation.
<unk>.
Supplies that impacted our operations and as well as our customers.
Bye.
Hundreds of unique semiconductor bars and all of it takes is 1 part for us not to be able to build a full of product. So we pay a lot of attention to on the supply plans from our key suppliers we have.
A good visibility I would say into of.
Of the third quarter.
And with at least with the larger suppliers also into the fourth quarter.
1 thing to note is that the.
And of the supply.
Issue that were faced with shortages has shifted in the nature.
Earlier on in 2.
The first of order and in the second.
It was more about having enough wafer starts.
That has now shifted and the some of the constraints are actually are now in the back end processing of of Assembly and test.
And late in the second quarter, there were some issues in terms of outbreak of COVID-19.
In places like Taiwan, and Malaysia impacted supply.
Now those issues of lingered and has it impacted us in July So July is going to be a slow start for us in the industry.
And we expect that to then recover from there.
So given given that we feel that.
We will continue to see improvements in supply in the third quarter, and then continue into the fourth quarter.
Okay, Great. That's really helpful color. Thanks. Thank you for that my follow up question is for trauma modeling question and just hoping to get your updated view on net.
Carrying costs for the full year, including how we should think about the engineering recoveries in the back half of the year given the uptick that you saw here in the second quarter I'm thinking.
Sure. Good morning, Luke So our net engineering of being as a percentage of sale has been a little bit lower than our run rate for the first half of the year, we've been running.
7.8% and we've always talked about being close to 8% for the year. So that means we'll see a little bit of an uptake in the second half of the year.
The benefits that we got in the first half were largely related in Q2 to a better engineering.
Airing recoveries that we've been focusing on.
So overall for the second half Youll see a percentage increasing slightly to be close to 8% for the full year, which means that in dollar terms will see an uptake.
Sequentially from 1 of <unk>.
And most of that engineering.
As well cost is going to be if I could add related to launch cost that will have.
The launch programs that will have as well as new business that we are winning which requires additional engineering.
So think about it for the full year of <unk>.
Close to 8%.
Okay. Thank you I'll leave it.
Thank you.
Your next question is from share is Patel with Wolfe research.
Hey, Thanks, a lot.
Yes.
On for Rod.
Just following up on that last question, so you've talked about 8%.
Engineering cost as a percentage of revenue.
But you know you are obviously launching more business as you get out to 'twenty, 2 and 'twenty 3.
And so there would be presumably launch costs associated with those programs or how should we still be thinking about that 8% target is as sustainable even as your new business activity accelerates.
Yes first of all of this is of Great question <unk>.
The answer is yes, because 1 of the things that we've done very successfully.
We have shifted more and more to a platform approach of developing this new products per.
We're able to leverage the platforms more effectively we have moved away from building products custom for each.
OEM like what we used to do in the past so we should be able to achieve that level of engineering spend even with.
Our new business wins, returning to the pre pandemic levels.
I would add is going into 'twenty, 2 again will have.
Hopefully a slight increase in dollar terms, but again our percentage.
Each of us are.
<unk> are expected to be below the 8% going into 'twenty, 2 and even into 'twenty 3.
Okay.
And then just also on.
You've talked about in the past it seems like Youre starting to.
Smart core youre, gaining some wins there.
<unk> is about 30% of your first half of new business wins.
Can you talk about what Youre seeing from the OEM perspective are they looking to.
Increasingly consolidate the cockpit.
Domain.
And.
What role are they looking to play in that as that domain.
The main is being consolidated.
Are they looking to go more more downstream towards middleware and.
And in App development or are they still kind of just.
Looking to basically.
Purchase back from the from the supply chain.
Alright, right as the car becomes more and more software driven.
Evan.
The move towards having more integrated more capable computers that are running of.
More software that is also capable of being.
Upgraded over the air is really where the industry is headed.
And smart Cor as we've talked about before.
Our.
Platform technology that enables you to integrate different.
The components, whether it is the cluster infotainment and eventually also aid us in a manner that preserves all of the requirements of automotive which of our pretty stringent in some of these specific applications now.
This lower level of capabilities are not something that you can hope to.
Develop of shortly.
We want to bring debt in house, that's not what we see the Oems.
Wanting to do that they will have a role to play in some of the applications and the user experience that they want to deliver.
Now inside the cockpit.
The how in terms of the technology as part of the suppliers.
<unk> suite of 2 to deliver.
So we believe that the shift and the transformation that is occurring.
The move towards more software driven approaches.
It's really what's going to continue to drive our smartphone.
The business here in terms of being a greater share of the new business wins going forward.
Okay. Thanks, a lot.
Your next question comes from Brian Johnson with Barclays.
Yes. Thank you can you hear me.
Yes, Brian go ahead, good morning, Brian.
River.
Wanted to drill in a bit on gross margins and obviously, there's lots of puts and takes with the chip shortage.
But if you add back the extra engineering expense.
And some of the 1 time things are still getting kind of number.
I think I get the kind of the 15 ish percent.
A little yes, we will get to the 16% needs to run 18% last year you were in the low twenties before it. So just want some way of thinking about gross margin on the kind of of normalized basis.
Yeah, no. It's a good question of in fact, it's pretty simple.
It's really all about scale.
And all about the semiconductor cost incremental cost that we're getting so we I think we've talked about the semiconductors 280 basis points for the quarter and we will probably we should go into all of a bit more detail. So I'll come back into that.
The scale is as well maybe a piece that we forget some time.
With $610 million in sales you are losing a lot of scale, we've got a structure, which is essentially set up 4.3 billion plus.
How we started up last year, when we spent a lot of time.
Reorganizing and restructuring the business so.
If you do simple math and add $140 million in.
Sales at essentially a low to mid <unk>.
The 20.
The margin rate you get.
More than 300 basis points extra in the quarter. So scale represented about 300 basis points as a minimum and then semiconductor of 280 basis points. So the 2 add.
Add up to almost 600 basis point that we've lost because of the semiconductor supply and as well of the semiconductor cost.
These comments are valid at EBITDA level. They are very similar at the margin level and at the margin level. Obviously, you don't have.
You don't have the SG&A, but you do have depreciation for example, which is backed out of the depreciation so it's fairly.
Simple, it's all about scale and semi conductor of costs.
Great and the more strategic question, we took a group around the Chicago Auto show of the first in person 1 in quite a while and we're just struck by the.
The perfusion of tools screen kind of smooth curve.
Per digital clusters.
Can you give us a sense of as you look at your backlog as you look of your quoting opportunities.
1 how big of an opportunity is that too is it better business than if you just do in the either individually the digital cluster or the center screen.
Fairly and 3.
Is that at all.
Can you make even if we don't get the smart core on those systems is that still of high margin opportunity set.
Yes, that's a very good question Bryan and if you think about what that implies the larger multi display integrator.
<unk> families that you are now seeing in cars.
It also means that the underlying electronics, that's driving those need to be separated from the display itself and the systems of the bus, including some of the digital clusters that we have talked about here on the calls.
Our integrated.
The electronics and the display attached to each other we.
We are seeing the separation of debt as the displays get larger.
And because of debt as the display resolution increases the number of displays also go up the complexity and therefore content in the electronics that's driving those.
It is also going higher.
It's actually an increase in content driven by complexity across the display itself, but also in the electronics now we have worked very hard at Visteon to position the company to take advantage of both of these trends. So we believe we have 1 of the better displays design.
The split and.
Engineering capabilities in the company and we've talked about some of the Vince that we've had recently, including in the last quarter.
And we see the sprint trends continue however.
There is a certain incremental costs associated with that debt.
All of the car.
Models.
And segments will be able to afford.
So we see a sort of a bifurcation of the business going forward, we will still see the stand alone integrated digital clusters, which was very.
Very well represented by the way this quarter in the wind debt, we talked about this as a very large win as an integrated 8 inch closer but the.
And the Knicks attached and this is going to last for a number of years.
But that will deliver.
The price point that is integrated largest systems will simply not be able to achieve for the foreseeable future. So we see the bifurcation I think this is really good for the company.
And it means certainly an increase.
Increase in Asp's, especially before the integrated larger displays and smart core type of products.
Just a quick follow on we did see the Grand Wagoneer that share program or not but include the extra touch screens for seat and body controls is that the trend youre seeing in that Visteon is participating in.
Exactly so the 1 of the wins that we've talked about.
That's actually the launched not even of the Julie actually has 3 displays plus an augmented reality head up display. The third display is exactly a control of display of the touch screen that replaces all of the hot buttons of the past.
That's powered by again of smart core type of a product more so than independent of the street electronics systems.
Okay. Thanks.
The next question is from Emmanuel Rosner with Deutsche Bank.
Okay.
Hi, good morning, everybody.
Hi, good morning.
Hi, good morning.
Wanted to drill down a little bit more on the.
What exactly is playing out a little bit worse than expected.
In your full year outlook in.
In particular on the top line too.
Are you still assuming 8% L. D P growth the growth of the market is still guidance.
The mid to high.
Single digits, and so I guess, what is exactly the hurting the revenue to a certain extent and then just a little bit more clarity also on the <unk>.
At the margin level, you know anything the.
Beyond the semiconductor costs.
Yeah Yeah.
So Emmanuel board overseas.
Nothing has fundamentally changed in our perspective on the industry other than that we are living in a semiconductor supply constrained environment.
So what we see here in the second half is that the supply of semiconductors.
Improved across.
Cross the board, but it may not be a very even improvement across all of the 1 hundreds of unique parts of February.
Now the reason for that as debt the various sub suppliers have different supply chains.
With.
Fab suppliers of the outsourced assembly and test supplier.
<unk> that are all impacted by the same things that you are hearing about whether it is excess capacity demand are.
The impact of Covid et cetera.
Nonetheless, what we expect to see a gradual improvement Q2 to Q3 of supplier of semiconductors, and we expect that double digit improvement to continue.
<unk> of into Q4 from Q3 levels.
Now depending upon exactly how of debt.
That will play out that will drive our market our performance in the second quarter some of our.
Clusters were impacted more than the other products.
And we.
We expect debt to improve but depending upon the level of improvement that's going to drive our market. Our performance. So our assumption for our sales force second half assumes that it's going to be an improvement over the first half.
In general for the industry at about 3% to 4% in terms of sequential second half of the.
First half volume.
Improvement.
But a more positive customer mix in the second half of Visteon as compared to the first half.
And that's going to drive our.
Overall sales within the range that debt we have discussed.
We are in our commentary between the midpoint and the low end of the range that we had already.
Provided so maybe yes on the margin side.
Elaborating on sections comment so sales will be.
For the second half higher than 1 <unk> slightly higher than $1.5 billion.
We are coming back to the scale of levels that we've had essentially in Q3 Q4 of last year and even in Q1 of each year and with this back to my previous comment we are back to 9.5% 10% margin.
Which is our run rate, which we've demonstrated on the normalized.
Spaces.
In the last few quarters.
And the only thing to.
Remove from that is essentially steal the leakage that will have on incremental supply chain costs and we're expecting these to be close to 60 basis points for the second half of the year. So that's to be removed from.
Our 9.5%, 10% run rate that we'll see for the second half.
Okay. That's helpful. When do you think that can be removed.
It will come.
Great.
Exactly yes.
Okay, Great and then I guess.
The same question.
But I guess looking forward.
Potentially past this.
This year.
When could when would you expect based on growth of our market to trend back towards your midterm framework of maybe in the low double digits.
And then on the.
Supply chain costs.
Do you foresee in the risk that some.
It could actually spill and continuing through next year, either in terms of availability to support.
Production there in terms of you know continuous.
Continued cost inflation of that could maybe make it into the the contract.
A copy of the costs of some of the components you buy.
So if you look at our market outperform.
1 loans growth over market, we had a very good year last year in terms of the number of new product launches and we have a similar level of new products that fit from the launch this year. So.
Thats working.
Sure.
Earlier.
Integrated plants and that sort of drive market our performance.
<unk> provided we are able to get enough semiconductors to meet the demand now the demand by the way even when you look ahead into 2022, although the initial information from our customers should be treated just that the initial data is very positive it's higher than what.
We would have initially expected there is no doubt that the trends, we're talking about digital clusters infotainment larger displays et cetera.
Our continuing.
In fact picking up momentum so if we.
We can get an improvement next year in supply over this year, which we fully.
And all of our discussions with.
Suppliers of <unk>.
To that of.
Being the case, we expect our growth over market to return to the high single digit level for next year and if it improves even more than what we currently believe then it might even go into double digits. So.
The X, but we are not going to be limited by demand, we will still be driven more by the level of supply we can get and as far as the supply is concerned I think it's really important to understand that 2021 from of semiconductor demand perspective was a confluence of a few factors that caused the year over year growth in the.
And to be significantly higher.
If you look at the historical performance of the semiconductor industry growth of somewhere around 5% CAGR. This year of 2021, that's going to be more than twice that.
Automotive semiconductor demand is going to be.
The 20% to 25% growth now.
Now next year many.
The demand to other industries growth expectations are moderating.
And even automotive of year over year is not going to have another 25% growth year next year.
So all of these things point to maybe some of these.
Constraints that we currently have perhaps lingering into the first half of.
The next year, but then dissipating as more supply comes on board I am sure you have read about more of.
Wafers being provided to the semiconductor industry of more capacity investments being made into the backend all of that is going to come into play.
And.
We expect debt by the second half to the industry to return to more of an equilibrium between.
Between demand and supply.
And with low cost.
On the cost side. It follows the essentially the same pattern the.
The cost increases that we see are largely driven by the imbalance between supply and demand. So we.
We still expect to see some level of leakage.
From a.
The cost standpoint in the first half of next year and as supply and demand gets rebalanced the issue.
Ease and if it doesn't we will.
We'll go back to our the drawing board, which is essentially look at our business equation.
Pricing to customers purchase price.
<unk> from our.
Our suppliers and as well.
The activities on the manufacturing side.
Great. Thanks for all the detail.
Welcome.
The next question is from Colin Langan with Wells Fargo.
Oh, great. Thanks for taking.
All my questions.
Just first of all more of a just a clarification the outlook has $35 million to $40 million in supply chain costs.
Thank you touched on a little bit of go but I mean can.
Can you remind us what it was I think it was like $14 million in Q1.
The 280 basis points is around $17 million in Q2 so.
It was just a small impact left and then maybe by Q4 of this all of these costs surpassed the size or the right way to think about it that is correct. So of $14 million in Q1.17 in the second quarter I think what's really important to understand is what is in the nature of these costs. So most of them. In fact, 2 third of these costs were related to spot.
That means that we had to make largely in at the end of Q1 and at the beginning of Q2 as we were essentially trying to bridge.
The supply that was impacted by the winter storm in Texas, but as the Renaissance fire. So a lot of these.
Costs were related to open market.
By the just is that we've made to bridge that supply we've seen a fairly significant decrease of these cost as we went into the later part of Q2.
And as we were getting a better supply it's still obviously constrained by Covid.
It breaks in Malaysia and Taiwan.
But the cost have gone a little bit better in June and we've seen debt as well in the in July at the same time, we've been more and more successful negotiating recoveries with our customers and 1 way to think about it for.
For Q2 is that about 85% of our costs in Q.
Q2 were incurred in April and May that means that June was much lower and we've seen some further improvement in July already as well. So we are very confident that we'll be able to reduce the net cost for the corporation as we go forward. So we've incurred so far $31 million in costs.
And we are planning to be at $35 million to $40 million net for the full year, which implies to your point of $9 million.
At the high end of the range for the rest of the rest of the year.
Got it and.
And just remind me about the BMS win.
Scott launching in the second half of the year and how should we think about that from a cost of margin perspective.
Should we anticipate some higher launch costs as that hits and then.
Cannot get to the 12% EBITDA margin, you're targeting long term given the I guess the first platforms, probably don't have the same scale.
Exactly so skin launch in the second half and as these launches tend to be as we've just mentioned the volumes initially are going to be low and will ramp up as we go forward.
The project the volumes in our ability to drive costs lower.
<unk>.
The initial launch costs, we believe that we will be able to drive this to a 12% margin business going forward yes.
Got it alright, thanks for taking my questions.
Thank you.
Your next question is from Michael <unk> with Brno repaired capital.
Okay.
Hi, guys. Thanks for taking my question I guess, just the harp on the the margin stuff a little bit more so just thinking about it your previous debt previously said, 2020% normalized incremental margins of the business.
And then let's say, we add on sort of that $35 million to $40 million of supply chain costs and.
Capital.
We take the the low end of the midpoint of your prior guidance and it seems to imply maybe roughly 8% EBITDA margins, maybe even a little bit lower does that sound right or is there some sort of upside to the normalized incremental margin from some of the cost saving initiatives you guys of have undertaken recently.
Hi, Michael.
That's the right thing right way to.
And then all of it another way to think about it is elaborating on what I was saying earlier. The fact that we are 4 H 2 back to more normalized levels from a sales 10 point and therefore more to a normalized level of EBITDA margin of 9 point.
5% to 10% to which the debt you deduct the 60 basis point.
Think of board.
For the supply chain cost that the 1 thing to note. It was highlighted earlier on in the call is the fact that engineering costs will be probes.
Probably slightly higher than the 8% 8.1 may be 8.2%. So it's not a huge change.
<unk>.
Versus the full year, but the dollar amount will obviously go up as sales go up.
Okay understood and then just around sort of the details of that the supply chain costs.
2 thirds of net spot buy I guess, what's the reason for the increase aside from purely just.
The extended disruptions.
The temporary surcharges, what visibility do you have to those going away.
Yes in the back half of the year.
So first of all in terms of the increase we actually had the number of parts in the second quarter decrease in terms of what was available in the market, but the prices were higher so we were.
The higher premium on the open market purchases in the second quarter as compared to the first.
And so that debt is in line with what Jerome just mentioned, we see debt diminishing as we go forward on the surcharges debt.
The temporary increases debt, we are discussing with some of the suppliers of.
Being that we do expect that we will recover most of debt from our customers as we go forward from here.
Got it yes.
Sorry go ahead.
The fact that so if you look at our 280 basis points incurred in Q2 about 200 basis points spot buy related.
<unk> is essentially.
The premium freight and surcharges, so and it's pretty evenly split between the 2 so I think once you remove the spot buys and we are probably a bit more impacted than other tier 1 just because of the nature of our business 80 basis point I think is is within the ballpark to what other tier ones have been.
The 8 showing out there.
Got it thank you very much.
Thank you.
Your final question comes from Jeff Osborne with Cowen and company.
Yes. Good morning, just a couple of questions on my end on the semiconductor side, which we've talked a lot about but I was curious on the smart.
<unk> core product, if you've been able to redesign if you had let's say of <unk> being Renaissance based if you've been able to design, an nvidia Qualcomm to mitigate some of the challenges.
Right, we actually have already 2 different suppliers for smartphone we have been assessed and Qualcomm the shipping on.
So we have the ability to switch between those 2 and we continue to look for additional suppliers such as Samsung.
To make sure that we not single sourced all limited by supply, having said that virtually all suppliers in the semiconductor space have supply constraints. So.
It is a ability for us to manage but fundamentally things have to get better in terms of supply for the industry to get into an equilibrium, which we do expect in the coming quarters here.
Got it and just very quickly I believe Jerome mentioned that there was the spot price and lower quality is there any risk to warranty reserves in the second half.
Because of that.
The lower quantity lower quantity quantity of hired kind of mistake.
Thank you.
Thank you great. Thanks. This concludes our earnings call for the second quarter of 2021. Thank you everyone for participating in today's call and your ongoing interest in Visteon do you have any follow.
Please contact me directly thank you.
This concludes visteon the second quarter 2021earnings call you may now disconnect.
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1 of them.