Q3 2021 Visteon Corp Earnings Call
Good morning, I'm, Chris Doyle, Vice President's Investor Relations and Treasurer welcome.
Welcome to our earnings call for the third 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 a future is also in conditions, but rather are subject to various factors risks and uncertainties that could cause our actual results to differ materially from those expressed in these statements. Please.
Please refer to the page entitled forward looking information for additional details.
Presentation materials for days cause we're close down the investors section of S. Youns website. This morning.
Please visit investors status, John Dot com to download the material if you have not already done so.
Joining us today are aside from the Honda President and Chief Executive Officer, and Jerome, Okay, Senior Vice President and Chief Financial Officer.
We have scheduled a call for one hour and will open the lines for your questions after sanctions and drums remarks.
Please limit your questions to one question and one follow up again, thank you for joining US now I'll turn the call over to such.
Thank you goes good morning, everyone and thank you for joining a third quarter earnings call Beach.
Page two summarizes a reserves for the third quarter.
<unk> was $631 million down some Indian person do to where you're excluding currency.
Global automotive production was down significantly as a result of the semiconductor shortages, which have persisted beyond initial expectations.
Adjusted EBITDA was 42 million or 6.7% of sales the decrease of 45 million compared to cloudier, mainly due to lower production volume.
Adjusted free cash flow for the first three quarters was the use of $37 million.
Cause disruptions in semiconductor supply resulted in an increase of working capital.
Despite the challenging semiconductor supply environment.
Call digital products did very well that year over year growth in sales of digital clusters, Smartcore domain controllers Android based infotainment.
We launched 13 products in the third quarter.
And are on track to launch approximately 50 products for the full year.
These new product launches into.
And the 2.8 billion in new businessmen year to date positions. The company Bell for continued growth in the future.
On the ESG front, we are pleased with the progress we have made on the previously announced environmental targets.
Going forward, we have committed to the use of science based targets initiative for the setting and reporting of emissions reduction targets for the company.
The companies liquidity remains strong and we ended the third quarter with 401 million of cash and debt of 354 million.
Resenting net cash position of 47 million with no material Maturity's until 2024.
Turning to page three.
Supply of semiconductors was significantly constrained throughout the third quarter going against earlier expectations of recovery from the second quarter.
Most of the recent investment in the semiconductor supply chain has been going into 300 millimeter wafer fab.
For high performance chips used in smartphones P C's servers and base stations.
Automotive industry uses chips built on 200 millimeters wafers.
Using mature process technologies.
Consumer Electronics also uses these 200 millimeters wafers for chips for digital cameras, Wi Fi Bluetooth television and variable devices.
However, unlike 300 millimeter refer perhaps that has been little investment going into 200 millimeter refer fabs as these wafers are not used for the newer high performance chips.
Demand for semiconductors changed significantly during 2020 as a result of depend demick.
Automotive demand dropped sharply in the first half of 2020 due to corporate related shutdown.
At the same time demand for consumer electronics increased due to work from home and the proliferation of connected devices.
And the second half automotive production recovered faster than expected.
Something in demand for 200 millimeter refers to exceed supply and setting the stage for the challenging 2021.
In the first quarter of 221 automotive industry lost approximately 1.5 million vehicles due to semiconductor shortages.
The winter storm in Texas towards the end of the first quarter.
And the fire at the facilities of the semiconductor supplier in Japan early in the second four.
Further impacted semiconductor supply.
The industry lost an additional 2.5 million vehicles in the second quarter.
The impacted suppliers were back in operation, but the end of the quarter, but not at full capacity and refer supply remained significant constraint.
In late second quarter Colbert outbreaks in southeast Asia forced several beckoned processing facilities to perform assembly and test of chips to be negatively impacted.
The impact lasted longer than the industry had anticipated.
And caused widespread interruption to supply throughout the third quarter.
Virtually all semiconductor suppliers would impacted as the industry is heavily concentrated in Asia for assembly and test facilities.
Another 2.5 million vehicles were lost in the third quarter as a result.
Most of the covered impacted facilities in Asia and now back in operation.
But not all are operating at three COVID-19 levels.
Supply of chips will remain uneven across the different suppliers.
Limiting the industry's ability to build complete products.
Therefore, we expect automotive production in the fourth quarter to be impacted similarly, like in the third quarter.
And will likely be lower than the current IHS forecast.
Turning to page four.
This page shows Visteon Q3 sales performance relative to global and Visteon customer vehicle production volumes.
As I mentioned on the previous page to industry was impacted more than the third quarter, but semiconductor shortages than in the first half of the year and outcome not anticipated by the industry at the beginning of Q3.
Unlike in the first half their two or three semiconductor supplier to the main problem in the third quarter, where it should be all semiconductor suppliers was shortened supply.
The outbreak of covered in Asia mid back in processing, the critical bottleneck for supply of chips into a quarter. In addition to refer shortages.
In Q3 global vehicle production was down about 20% compared to prior year and was also down sequentially compared to the second quarter.
<unk> customers were impacted more than the market.
And were down 25% year over year with customers in Europe, and Japan experiencing greater reduction in vehicle production.
Visteon sales were down 17% from prior year, then excluding the impact of currency.
It was up sequentially from the second quarter.
The Visteon team did a great job in recovering most of the extra ordinary semiconductor costs from customers in the third quarter.
As a result pricing, which is usually a headwind was a net positive for the quarter.
Jerome will provide more details on this part of our performance later in this section.
Ah sales outperformed our customers vehicle production by eight percentage points driven by strong sales of new digital products.
These two clusters smartcore, an Android based infotainment experienced double digit growth despite the general shortage of chips.
On the other hand hybrid clusters and infotainment displays.
Which together represent about 40% of our revenues.
For down significantly as these products were particularly affected but the tip shortages in the quarter.
In summary, the third quarter was impacted more than anticipated by semiconductor shortages that rippled across all chip suppliers.
Despite the challenging environment and pleased to report that Visteon was able to support our customers vehicle production and grew over market.
And recover most of the extra ordinaries semiconductor related costs.
Our outperformance relative to customer vehicle production is a testament to the strength of our product portfolio, especially a new digital cockpit products.
Turning to page five.
The company launched 13, new products in the third quarter four of which are highlighted on the left of this page.
We launched an eight inch infotainment display on the all new Ford Maverick compact pickup truck.
This vehicle is offered and three cream lines in a display is standard on all three.
This is our first eight inch display with forward.
And there are additional launches planned in the future.
The second product highlighted on this page is a 10 inch digital cluster launched on the canine platform Atlantis.
The canine platform is the foundation for the compact many events that have sold under the centroid visual and Opal brands.
Four 2021 to lenders is offering battery electric versions of this vehicles in addition to gasoline and diesel models.
And these new models all come with a 10 inch digital cluster is standard.
We also launched our first infotainment system for some lenders.
The new compact SUV for Brazil.
This system offers a 10 inch display and supports Carplay Android auto USP multimedia and Bluetooth connectivity features.
There are two more vehicle models that will follow this first launch.
And these vehicles will also be offered in India. In addition to South America.
Our infotainment system will be offered a standard on all these vehicles.
The final product highlighted is the launch of a 12 inch digital cluster Dongfeng motors in China for an all new vehicle that comes in gasoline and electric versions.
China domestic Oems continued to perform very well in the market and we're building our business with customers such as Dongfeng and Julie.
Year to date, we have launched 26, new products, including 14 digital clusters, and booze Smartcore cockpit domain controllers.
The company continues to perform very well and transitioning our business to this new digital products that have high tech rates as seen in the past few quarters.
We have a busy fourthquarter with more than 20, new products slated for launch.
That expecting 2021 to be another strong year with approximately 50 new products launched.
It will position Visteon very well when vehicle production rebounds from the current low levels.
Turning to page six.
The one over 600 million and new business in the third quarter lower than a normal run rate as the disruption caused by semiconductor shortages delayed sourcing decisions at carmakers.
Nonetheless, new businessman's Q3 year to date total $3.8 billion compared to $2.2 billion at the same time last year.
Some of the key new business wins in the quarter include a 15 inch OLED display for infotainment.
That is increasing interest in the industry for large high quality displays or premium luxury vehicles.
This is our first win for an OLED display, which together with microzoon positions as well to address the needs of luxury car makers.
The need for high compute power as well as over the air software updates to deliver smartphone lake experience in the cockpit is accelerating the shift towards integrated domain controllers.
Visteon Smartcore technology is evolving to meet his new demands by leveraging the latest silicon and software technologies.
The next one highlighted on this page is photo smartcore system that drives up to six displays in the cockpit and integrates infotainment and digital cluster features.
In addition, it processes data from several cameras around the vehicle for entering 360 degree view on the center information display.
It uses to high powered silicon system on chips are soc's to process. All this information with the latest version of Android operating system.
The last min highlighted on this page is for a 10 inch digital cluster as of mid cycle upgrade for an OEM in China.
Visteon as the current provider of a hybrid analog digital cluster for this customer.
This upgrade will extend the life of the vehicle model and keep it competitive in the marketplace.
The outlook for the fourth quarter looks promising with a strong pipeline of new business opportunities.
We should be able to reach our target of 6 billion for the full year, assuming most of the business so as planned.
Turning to page seven.
This page shows the latest outlook for vehicle production from IHS in comparison with Visteon forecast presented at the beginning of this year.
IHS has gradually reduced its forecast throughout the year in response to the semiconductor shortages.
And it's 2021 forecast is now at 74.8 million units.
Our internal outlook is lower as we believe that Q4 will look more like two three in terms of semiconductor supply.
Looking ahead to 2022 and beyond the forecast from IHS has 2022 vehicle production recovering 282.7 million units.
And then continuing to 91.9 million units in 2023.
Our forecast that was created before the impact of semiconductors was fully appreciated has 2023 production at 89 million units.
Lower than IHS this latest forecast.
We are here to conclude our discussions with customers and suppliers regarding 2022, Nevertheless, I would like to share our thoughts regarding the imbalance in semiconductor demand and supply and its impact on vehicle production.
On one hand, the industry is entering a strong demand cycle based on underlying demand from consumers.
The low levels of inventory into sales pipeline and emissions regulations driving the need to build more EV models.
On the other hand.
Production will remain constrained in 2022 is the imbalance between supply and demand for semiconductors will take longer to be mitigated.
The investments and capacity increase for automotive chips made by semiconductor suppliers and foundries will yield higher supply of chips only towards the end of 2022.
Until sufficient capacity comes online the.
The industry will need to do more we use the current installed capacity more effectively.
Carmakers have traditionally provided low visibility into their demand outlook.
Often not extending beyond a couple of months.
On the other hand semiconductor manufacturing lead times Ah six months or even longer.
In 2021, this resulted and inefficient planning of manufactured in supply of the different chips required but the industry.
Semiconductor suppliers have excess inventory of some parts.
They are critically short on others.
All it takes is one missing chip to impact production of the entire vehicle.
We are working with our customers.
12 months visibility for all parts that we supply, which in turn will help semiconductor suppliers to plan production more effectively.
2021 wasn't unusual lear with natural disasters, and COVID-19 impacting semiconductor supply.
The combination of better long term planning.
Production of forward related impact and the Nonrecurrence of the natural disasters should result in better utilization of the existing semiconductor capacity in 2022.
For additional capacity comes online later in the year.
<unk> two page eight.
At Visteon, we have always been focused on reducing use of natural resources and reducing the emission of greenhouse gases.
Or previously announced calls include the reduction of energy and water by 6% based.
Based by 5% and greenhouse gas emissions by 25%.
These 2025 goals are set against 2019 levels and we're making good progress in achieving them.
In addition, we have joined the science base target initiative to set new emissions reduction targets to meet the requirements of the Paris agreement on climate change.
Spi will assist visteon and setting targets in line with the strict criteria.
It will also assess our performance.
As BTA is considered to be the most scientific and reliable framework for setting and reporting of emissions reduction and despite with recognized in the industry.
We will continue to reduce our emissions and are pleased to join the roughly thousand or so companies that are working with spi to achieve the goals of the pet is agreement.
Turning to page nine.
In summary, the company delivered 8% growth over market relative to our customers in a <unk>.
Challenging semiconductor supply environment.
We would also able to recover most of the incremental costs for chips from customers.
We expect semiconductor supply to remain challenging in the fourth quarter.
And as a result industry vehicle production will be similar to the third quarter level.
Despite shortages of semiconductors are digital products, such as digital clusters, Smartcore Android based infotainment experience strong year over year growth.
Our technology portfolio as well aligned with the key industry trends of connectivity is realization and electrification with.
The 3.8 billion in new business wins by the end of the third quarter.
The company is positioned well for continued growth.
I will now hand, it over to Jerome the review the financials.
Thank you it's actually in in good morning, everyone. Visteon continued to focus on execution throughout the third quarter, while industry production volumes were negatively impacted by the ongoing supply chain disruptions and the worldwide semiconductor shortages.
Our focus continues to be on controlling the variables, we can influence, including proactively negotiating cost recoveries from our customers.
And ensuring we are well positioned for the industry's future rebounds.
Third quarter sales were 631 million, representing a slight increase compared to prior quarter.
Customer mix improved sequentially and we were successful in recovering a large portion of the increased semiconductor cost from our customers as a result annual pricing, which is typically negative was a positive for the quarter.
Adjusted EBITDA was $42 million, representing a margin of six 7% through.
Through the first three quarters of the year adjusted free cash flow was negative 37 million.
Industrial production volumes were down 20% year over year, while our customer's production was down 25% in the quarter as some of our European and Japanese customers were more impacted than the overall industry.
Excluding the favorable impact from currency Visteon sales declined 17%, representing a positive performance versus both the industry and our customer's production volumes.
This a solid performance was driven by the robust number of launches in recent quarters combined with customer recoveries.
Semiconductor cost recoveries have been a major focus in the quarter.
We were able to recover 75% of incremental semiconductor costs incurred in the quarter. Despite an increase in the ongoing costs run rates.
We discussed on our last call that recoveries had improved late in the second quarter a trend that continued into Q3.
As a result, the net impact of incremental supply chain costs related to semiconductor for Q3 was 6 million an improvement of 11 million compared to the second quarter.
We ended the quarter with the $401 million in cash representing a net cash position after that Ah $47 million in a negative net debt leverage ratio.
Adjusted free cash flow through the first three quarters of the year was a use of cash or 37 million negatively impacted by an increase in inventory levels, mostly driven by the supply chain disruptions and the constant changes in Oems schedules with.
We continue to focus on capital expenditure disciplined and the optimization activities, we put in place last year continue to work well.
Full year guidance is being adjusted to reflect the continuation of the supply chain shortages, which impacted industry production volumes more significantly than anticipated in Q3, and which we anticipate will have a larger impact on Q4 and previously discussed I will provide more information and subsequent <unk>.
Lights, turning to page 12.
Sales in the third quarter of 2021, where $631 million, representing an increase of $21 million compared to queue to adjusted EBITDA was 42 million an improvement of 12 million compared to the second quarter, while adjusted EBITDA margin improved 180 basis.
Since 267% the.
The margin increase versus prior quarter is primarily due to the reduced net impact of semiconductor costs, which were achieved with higher customer recoveries combined with slightly higher sales and partially offset by higher net engineering.
Q3 financial results continued to be impacted.
Ongoing supply chain disruptions.
Within the quarter monthly industrial production takes in July at 5.8 million units, while exiting the quarter at $5 6 million units in the month of September.
This is in contrast, with our previous expectations as we had anticipated production with steadily improve throughout the quarter.
Visibility continues to be limited to making forecasting in this environment challenging as illustrated by the recent Q3 industry forecast revisions.
The supply chain disruptions also continues to negatively impact margins in the quarter margins decreased approximately 100 Acs points due to the net impact of higher supply chain costs related to the semiconductor shortage why lower scale due to production disruptions reduced margin by <unk>.
Several percentage points.
When compared to prior year sales for the quarter were lower by 116 million, while adjusted EBITDA was reduced by $45 million.
As you May recall 2020 results benefited from temporary austerity measures, while this quarter adjusted EBITDA was impacted by lower scaled and higher net semiconductor costs.
In total Visteon Q3 sales and adjusted EBITDA were negatively impacted by the supply chain disruptions and ongoing semiconductor shortages. However, the fundamentals of the business remain intact. We continue to benefit from the actions, we implemented last year, which significantly reduced our fixed cost structure.
Our continued focused on six cost management will allow us to expand margins as volume eventually increase turning to page 13.
As previously highlighted the supply chain disruption in the worldwide semiconductor shortages continued in the third quarter. However, we were able to significantly reduce the net impact to our financial results through ongoing negotiations with customers.
For the first three quarters of the year adjusted EBITDA as been negatively impacted by 37 million related to the semiconductor supply chain shortages.
The majority of our incremental costs relate to open market purchases as we continue to actively utilize brokers and distributors to increase parts availability.
And and sure we can optimize deliveries to our customers.
In the third quarter, we also experienced an increase in semiconductor costs directly from our tier two suppliers, while continuing to experience elevated freight and logistics costs.
Our approach to proactively addressing the semiconductor shortage as evolved as the supply chain disruption extends beyond initial estimates while we continue to work around the clock support our customers. We have also increased our negotiations with them to pass along the elevated costs.
During the first half of the year, we have recovered approximately 17% of the higher cost while we recovered approximately 75% in the third quarter.
This situation is unprecedented in the industry.
We have been successful in our negotiations and we expect to maintain this momentum into the fourth quarter and beyond.
For the full year, we know anticipate the net impact to adjusted EBITDA will be around 40 million for Q4, we expect costs to remain elevated while we negotiate cost recoveries from our customers turning to page 14.
Page 14 provides an overview of our cash and net cash position at the end of the quarter as well as our adjusted free cash flow for the first three quarters of 2021.
Our balance sheet continues to provide flexibility as we navigate the ongoing supply chain disruptions.
With total cash a $401 million and net cash position of 47 and net negative leverage we have one of the strongest balance sheets in the industry.
Adjusted free cash flow for the first three quarters of 2021 was a use of cash or $37 million compared to a source of cash or 37 million in 2020.
Adjusted free cash flow benefited in 2020 from the working capital unwind as sales decreased during the pandemic as well as from lower cash taxes, while interest payments were elevated due to the revolving credit facility drawdown.
Capex, which was elevated in Q1 of 2020 began to benefit last year from the optimization activities, we implemented to drive better capital utilization and costs.
Moving to 2021 working capital was an outflow of 100 million, primarily driven by an increase of 82 million inventory since the beginning of the year inventory has been building, mostly as a result of the supply chain disruptions and the constant changes in Oems schedules equally.
Equally the increase in inventory will allow us to quickly ramp up output when the supply chain disruption dissipate cash tax payments resumed in 2021, while cash flow benefited from a dividend from the Nonconsolidated JV.
Capex in 21 continues to benefit from our optimization focus and we now expect full year capex to be close to 85 million turning to page 15.
We are adjusting our full year outlook to align with our current expectations of industrial production for the year. We know anticipated that sales will be between 262 2.65 billion adjusted EBITDA will be between 165 and 175.
5 million, representing a margin of approximately 6.5% at the midpoint and we are targeting breakeven adjusted free cash flow.
At the midpoint of our guidance Q4 sales will look fairly similar to Q3 levels, while adjusted EBITDA will be modestly impacted by higher net engineering cost in the fourth quarter compared to Q3 Q.
Q4, adjusted free cash flow is expected to be an inflow of cash driven by a partial unwind up working capital turning to page 16.
This year is turning out to be more challenging than anyone could have anticipated with disruptions occurring throughout the supply chain at varying times. However, we remained focused on controlling what we can influence while ensuring our longterm investment theses remains intact.
Despite the supply chain disruptions, we see an acceleration in secular trends with cars, becoming more digital connected and electric <unk>.
<unk> product portfolio is well positioned to support whiskey trends, we anticipate outperformance will accelerate as the industry recovers from the near term supply disruptions and begins to embarked on a multiyear upcycle driven by increased content inventory restocking and a shift to electric vehicles.
Thank you for your time today and your interest in Visteon I would now I'd like to open the call for your questions.
At this time, if you would like to ask an audio question. Please press Star then the number one on your telephone keypad again that is star and then number one we will pause just a moment to my pile that Q&A roster.
Your first question comes from the line of just that spot let's RBC.
Oh.
Two questions one one sort of more near term and then one strategic but.
Just on the incremental.
Semi costs, you are saying $40 million for the year, So that's like $3 million for the fourth quarter.
Are you expecting that 75% recovery rate still in in the fourth quarter and then.
How should we think about semi inflation now moving into 2022.
Good morning, Ah Joey So is your home.
Yes.
Really speaking we are anticipating that are in negotiations in queue for will lead to similar results too.
To what we've been able to achieving in Q3 so.
Roughly $40 million for the full year that means 75% to 80% cost recoveries.
Four Q4.
Talking about next year, it's still pretty early in fact, we want first to finalize our negotiations for Q4, and we're right in the middle of that.
But what we are.
Today embarking on is.
Our larger discussions with our customers not only to include cost recoveries, but to make sure as well that we integrate in these discussions mall, strategique elements, including supply, including visibility and as well the cost side of things. So we are still going through that and we'll definitely update you.
R Q4 calls later on next year.
One thing I can say is that we are definitely targeting for at least 75% if not 80% recovery going into next year.
Okay. Thank you that's helpful and then.
Such an on on sort of a longer term Harry.
In the past you sort of talk about.
Business lines needed to be about 6 billion a year to hit your targets.
And it sounds like you're appeared.
Planning for a big fourth quarter to hit that that this year and any strict showed this chart which showed.
Address is actually.
Above 23, now versus what you had for volume versus what you had considered it doesn't sound like you are really sort of changing your view so.
Is the message here.
You still think those mid term targets are achievable, even if a path there is a little bit different given by everything that's been going on over the past year.
Desktops executive Joe. So if you think about when we talked about the midterm target at the beginning of the year.
Was on an assumption of.
The vehicle production of 89 million new notes.
And if you look at <unk>.
<unk> today, although.
<unk> has been lowered with what has happened in this year of we do believe that.
The path to 89 is at even higher is definitely achievable.
Based on the covenant that we expect to see in terms of supply next year and then continuing.
And so nothing changes structurally from our other elements of the story so the new businessmen.
That we expect to be.
On target or close to it this year that has been some delays in Q3.
On account of all of the distraction that we have all faced and.
I would say that is made Q4.
Even stronger than earlier, so, let's see how much of that.
Actually converted into.
Decisions and awards, but these delays.
Still relatively within.
I would say that it normal levels and will not change the trajectory of the revenue of those programs.
And when you look at the midterm.
Targets.
Virtually all of that revenue is already booked and it's more about converting that through new product launches.
So we are maintaining a pretty good.
[noise] himself of a new product launches will be at about 50. This year, we have another strong year next year as well.
And so the way to think about that the next couple of years for US is it's not a issue of demand, it's really one of our supply driven.
Driven environment photos and the growth over market is starting to shape up in the direction that we have always been talking about so all of the other factors are aligned so as long as the.
We get the supply that that we expect and I feel good about it as we go forward here, we should be in a critical position to hit that mid.
Mid term targets.
Thank you very much.
Your next question comes from the line of Luke Chocolate Bird.
Good morning, Thank you for taking the question first.
Question to ask is having made this progress to the 75% cost recovery.
A higher semi costs, just wondering if we could talk a little bit more about what the next layer of those discussions with customers look like going into next year.
You mentioned some of the more strategic elements in terms of better visibility into your customer supply chains and whatnot is there an evolution in terms of terms be at a lower price sounds better terms on new business or other similar things that could enter into those discussions as well.
Yeah, Hi, look I'll take it first and then we'll.
Have general Matzo comment on it the first thing I would say is that if you look at.
Part of the reason why we are in the situation we get in but supply is on account of the fact that demand visibility in this industry has not been very good in the past.
Most of the OEM.
Have provided visibility that is much shorter than the lead times typical lead times for semiconductors, which by the way have only increased so that.
The difference between what we provide visibility to our suppliers and orderly and saw it as actually grown and that has caused a lot of inefficiency in the planning of certain semiconductor bars. So you have a situation where now we have more.
Some of the parts that we don't need and are critically sharp on some parts that is holding up vehicle production and as I mentioned in my prepared remarks, all it takes is one tip.
Stop the production of the vehicle.
So just getting that planning in a better shape. So that we provide our suppliers, but clear 52 week at least visibility odd bipod. It allows them to plan their production better itself and solve quite a bit of the challenges that we have encountered this year.
So that's the first discussion the next level that they are having but.
Customers and suppliers and by the way this isn't something that the industry is setup very well to do so we had to bring some best practices. Some of our customers are doing a job better than others.
Bringing our own insights into the.
Semiconductor supply chain to help make that a discussion or efficient and effective at all of our customers and as part of that.
Rising in cost increases is also a integral part of those discussions and we will all have to come to that realization that the industry will have to contribute more as the costs have gone up on account of the various inflationary pressures that the semi conductor supply chain is experiencing.
So I would say the discussions are.
Uhm.
Fairly advanced and we hope to conclude the majority of it by the end of this year you can imagine takes a huge amount of effort to go.
And item by item across all of the various Oems and then map it out for the full year. So that's exactly what is going on and it's going as well as you can imagine that word and the circumstances anything more to add the only thing maybe just to come back on Q3, we were.
Pretty successful in achieving 75% of its really because we started pretty early so I think that's.
That's.
Great 0.22 had the fact that.
Given the challenges that we were seeing very early in the year. We embark on these discussions with our customers and we were able to achieve 75%. So.
To the team with this achievement.
Thank you for that semi yeah. So some great things to think about going forward a second wanted to ask.
Here's your question now that it's been a year since you formally announced that first wireless BMS contract with G. M. On the Altium platform I'm wondering what you've learned about the sales cycle for this product G. M. Clearly someone on the front foot in terms of their evie strategy. Some other oem's clearly may be playing a little bit of.
Catch up on that front, how does that dynamic plants and what we might expect in terms of.
Next bookings for Awhile Sbmm's beyond the first thing that you have already announced.
Right.
Before us speak specifically about.
Once we are discussing that now I just want to remind everybody that besides gn, we had also announced another.
Large global OEM that we are working on.
A solution for them.
Or BMS so.
In addition to these two we are engaged with.
Multiple Oems and those discussions.
I would say at various stages of progress our focus is on the larger Oems that have ambitious.
EV plans with different models, because we believe the solution that we have really.
Scales very effectively.
<unk>.
We have developed a hardware and software solution that.
Can work for.
Almost all of the Oems. So it's a platform approach if you visit and trying to take on learning.
The engagements that they have had so far and developing a solution that addresses most of the.
Different Oems needs.
Now.
I would say we are at is that the industry.
Is going through a tremendous amount of learning.
New learning on account of the catch up that some of the Oems.
Faced with it and at the same time that is also a lot of evolution opening with the underlying technologies, whether the battery chemistry.
Are the semiconductor technology that is.
Also evolving at the same time in terms of being able to perform better with respect to the accuracy of the measurement of the speed and also 50.
So these are all starting to come in and and as you can imagine for the next maybe a couple of years given all relatively new this industry is we will see a huge amount of activity probably not.
As structured as some of the more mature prototypes in terms of the cadence and.
The.
Planning, but we do expect that 2022 would be.
A fairly busy year for us as everyone is trying to get going with it and.
And but more importantly in terms of announcing that third customer I hope that will be in a position to do so yet this fourth quarter.
Thank you for that I'll go ahead and leave it there.
Your next question comes from the line of Ryan Brinkman with J P. Morgan.
Hi, Thanks for taking my question I think typically suppliers in July counter cyclical working capital S production declines given the nature of.
Customer.
Also the same halls, but.
And that can provide a nice.
Offset to the impact.
L. R F C F. One production of software but.
On the other hand, we parked from a few suppliers that the suddenness of customer call offs has led to.
<unk> finished goods are you then that there at times pursuing a conscious strategy to invest in raw materials are purchased components to ensure a continuity of supply amidst supply chain uncertainty, so I thought that bit softer Fcs in the quarter and I wanted to ask what a bigger drivers of that word.
Hi, you're thinking about managing working capital in the current environment and how we might expect cash flows to track going forward.
Yes, Thanks, Ryan It is true that.
Working capital.
Inventory has been challenging.
Here.
The <unk>.
Main reason for the negative adjusted free cash flow in Q3 is the inventory build and a few things on that point to the first one is that we started the year with a fairly low level of inventory, we had close to 25 days going in this year and therefore due to.
A good management coming from our teams we were made.
Maybe a little bit more exposed so.
So we've looked at her face during the year and given the critical situations we have.
Increased safety levels at the same time exactly as touching was highlighting as you are highlighting as well.
We have been suffering from uneven supply.
Schedule and as well from the fact that customers were changing their productions.
Schedules on a regular basis. So the most of the inventory bills, we've seen as being around the whole materials and that's as well as I said earlier, where we've been trying to be a little bit.
More safe and I've increased our safety levels. So going into Q4. We are we are not planning to have any major reductions we want to be on the safe side, especially when we think that production will be ramping up in.
Two 2022.
So, we'll probably be coming a little bit down going into the end of 22, but at this stage and teal visa.
A better supply we want to be careful and will hold.
A little bit higher inventory levels.
Okay. That's very helpful. Thank you and then I know obviously the current run rate of large and is not representative.
The potential for business and of course, you're going to earn a detriment to lie on lower revenue for as long as the situation process, but I just wanted to check in on what your latest thoughts where I ordinary.
Mark had just given that the high value at nature of the product that you produce and it does not seem totally kangaroo S with.
Right, you stack up and marching relative to some of your peers. So yeah, when when you to get the higher.
Revenue when when industry conditions to normalize.
What what type of a margin do you think is reasonable to be able to target and you had a couple of years out.
Yeah no. Thanks.
<unk> Q3, similar to Q2 has been impacted by I would say by scale.
A very large extent and to select standby semiconductor costs, we think that scale is impacted us by about 300 basis points, when we normalize our sales level.
At the level of $750 million.
The best way to look at it in fact is to is to look at Q3 and Q4 of last year, where we were out running at these kind of levels and we were able to achieve in a normalized way we had austerity measures last year, but we were able to run out of nine 510%. So.
In the current environment with $750 million in sales per quarter.
That's kind of the run rate, we we have a 99.5 and 10% and every quarter is kind of demonstrated that that that level. So that the way we are thinking about it this year nothing has fundamentally changed.
We are impacted by scale, we will be focusing as we.
Elimidate earlier on on inflation recovery and that's the key going into next year, making sure that we are at minimizing inflation going.
Pulling into 22.
Great very helpful. Thank you.
Your next question comes from the line of Brian Johnson, what Barclays.
Good morning.
Just wanted to talk a little bit about booking environment and the take great environment. So maybe starting with the second tank right. As you look at your outgrowth versus your customers production schedules.
To what extent it communique attributed to kind of think that the factors between launch of new models with digital cockpit some versus existing models where.
Okay. Great has run ahead of maybe initial when the program was set up expectations and kind of related to that.
We've heard certainly channel check things that some of the.
Electronic features.
That automakers know the customers wanted customers really want actually had to be throttled back to the chip shortage, which actually it could be that depressing that take right on some of those pictures. So could you just maybe talk about digital cockpit and yet environment.
Sure sure, Brian and that's a great question actually and.
I will try to.
Put some light on it but that a bit of a nuance split as you're allergic to it. So the first thing that we see is that the.
Increased intakes age is quite.
I would say.
Dramatic in the case of digital clusters, and that's largely driven by.
Two factors one is the.
Popularity of eight S.
Then you have.
<unk> features like blind spot detection vein.
Change assist et cetera.
You need to render that information on the cluster and the closer has from the digital for that so anecdotally I can tell you.
And <unk>.
In Europe.
Had initially given.
Given us an indication of about 40% taken it for a digital cluster on their vehicles they are running at 80% decades.
And so.
A significant.
Sift as all of these factors coming together plus on top of that.
The EV models are also.
Driving that takes it either because eevees have digital.
The digital content.
And many of the vehicles.
Aw.
Having different all the trains but they are they are offering E V versions as well as your eyes and they are going with the same cluster just to make it easier for them. So that's.
A positive.
Tailwind in terms of improvement in in fees and detected what us the challenge of course on the other side is obviously availability of semiconductors to meet that demand, but if you look at our performance even in the third quarter in spite of all of the shortages.
We have gone through.
Our sales unit sales of digital clusters actually increased.
What year over year and sequentially.
And you would have done are better if we had more semiconductors.
So that.
That hopefully gives you a perspective on what is happening with respect to the big dates in the puts and takes dead, but as we go forward.
You start to see more semiconductor.
Available to us or parts.
I expect that this trend will continue.
I'm not going to go backwards. So I think we are going to see a exploration and depicted of our digital products.
<unk> not just our clusters, we had also seeing the same smartcore and we're seeing the same for larger displays.
Okay and in terms of the quoting pipeline, even though the hit as you pointed out the book.
Bookings were below typical rates due to yeah. Okay, I'm just scrambling on securing chip supplies, yeah. How does the pipeline look of quoting opportunities going into 22 and second is there anything you know to get us give investors comfort that even with a little bit softer pace.
Bookings that you're when right and mark, particularly when right on attractively priced business is one that bodes well for the future.
Yeah, so on the pipeline first.
See if you were to look at the pipeline at the beginning of this year even.
Come back to the the pandemic levels.
And as I look at the pipeline for next year, it's actually even a bit stronger than this year. So the pipeline seems to be pretty.
Strong.
Product mix.
Is it wallowing as we've talked about it before we are seeing more smartcore opportunities, we're seeing more opportunity for larger displays.
And what's interesting is that as a general observation Asp's I'd also introducing because of the increase in content. So I think that's all.
Well for the future.
In terms of venerates, you see nothing changed our when rates are roughly around the 30% or so that we've had historically for the last few years, we don't expect that the change fundamentally and the last point I would say is anything they are talking about next year, obviously is beyond the horizon.
After the midterm guidance that we have given so it's going to continue the growth of the business going forward, even beyond where we currently have.
<unk> outlook.
Okay. Thank you.
Your next question comes from the line of David Kelly with Jeffrey.
Hey, good morning, and thanks for taking my question, maybe just just starting with the queue for revenue guide similar to Q3 levels can you walk us through.
You're thinking about Q for auto production, it sounds like more cautious than than IHS, but just want a little bit more color there and then specifically mix.
Your customers exposure has been a little bit of a headwind as well as the curious as to how you're thinking about mix impact also.
Yeah.
Great question, and let me try to shoot.
With your help we're thinking about it so.
One thing to note is that the impact of semiconductor shortages kind of changed their nature and Q3 versus in the first half and I've mentioned that in my prepared remarks, and so what we saw in the third quarter.
There were many more semiconductor suppliers different impacted by the shortages.
And the shortages, but also less.
Predictable in the sense that many of the suppliers.
Late changes to the supply plan not able to provide visibility beyond a couple of weeks.
And so we ended up in the situation as I mentioned that we had more parts of some type of conductors in.
Less of some critical thoughts.
As the look at two for that situation seems too.
Largely continue.
Although in aggregate they may say that we will probably get more semiconductors more parts in queue. For then in Q3, there will still be what I call as this unevenness and supply and that's what is really causing us to be a bit.
Russia's in terms of of the.
Provide output 424.
So that's really the thinking behind what we have that out here.
Certainly hoping that.
It improves.
More than what we currently have is visibility that some of these.
Suppliers that have been out of the new.
Problem suppliers.
And.
I'm also certain that as we go further out a lot of what has happened has been on account of covered in as those percentages come back on line and get to full capacity things will will improve but that's really where we're at in terms of.
Four Q4.
Okay got it that's helpful. Thank you and and then maybe a follow up on kind of the pricing discussion.
It was a net positive in the third quarter, and certainly not assuming not sustainable longer term, but it seemed to be in strange times, but I think he also noted you're targeting another 75% to 80% recovery rate with.
With the elevated to me caught into next year. So.
Realize you're not guiding my 22, but any thoughts on kind of the pricing.
Into next year, just giving some of the pass through and pass along offer can make that are out there.
Sure David.
So you're right. These are exceptional times, so the positive pricing will may not.
Be something that is going to carry on.
There are a few buckets. The first one is the pricing that we try surely give to our customers and that's generally upset I would say bye.
Pricing that we get from our suppliers. That's how we think about it that's how business equation. So that's got to be neutral in the Grand scheme of things for 2022.
And then the other elements, he's essentially making sure that any inflation.
That is either temporary or.
Will last longer gets as well as the cover it so we are.
Two different buckets, but we are negotiating going into 22 the.
Overall equation with our customers so a little bit early to say where will line, but that's that's how we're looking at it.
Okay perfect. Thank you.
Thank you.
Your next question comes from the line of 8-K, Mac Aleve with city.
Oh, great. Thank you good morning, everyone just back on the fourth floor and I do apologize if I missed it I read through them, but that you've qualified engineering.
Back to that in the fourth quarter. Thank you mentioned it should be higher versus Q3.
We have not but it's it's probably $5 million to $6 million incremental versus what we've seen in Q3, and that's a net engineering number.
Got it and then maybe a couple of questions on the bookings.
You mentioned you still confident 6 billion for the year. If you look at that kind of what you're hoping to win the fourth quarter is it.
A few kind of large programs in there or is it just a bunch of smaller or medium sized programs that have been.
Delayed into.
Into the fourth quarter.
Yeah, I hate that so on account of the delays in the third quarter I would say it is now it mixed up everything so there's a lot of.
Over to higher value is Phyllis.
The usual.
Smaller programs.
Average typically is somewhere around $100 million program lifetime value and I don't expect that to change in queue for.
Got it and it was just one last thing I'm kind of growth of our market.
Kind of longer term I think I might've, such an earlier at that that does the according environment may actually improve next year, obviously, you you're winning a lot of programs on <unk>.
Is there any kind of high level thoughts about how to think about growth over market for the company even beyond 2023.
In terms of the pace of I think 8% to 12% you previously highlighted.
Right, Yeah, I don't want to give you a specific number just yet and we'll talk more about it early next but let me just share with you. Some of all of you would be thinking about it if you look at.
The near term about 50% of our revenue comes from what we would call here as new digital products that would be digital clusters smartcore.
And larger displays and as I've mentioned on the call earlier. This products are doing very well would take rates actually improving.
And we expect that to continue.
So if you look at even Q3, one of the reasons why we had a.
Good growth over market. Despite general shortages of semiconductors is that we were able to source.
More of the tips that go into these digital products.
Now as we start to get more chips.
Would expect that we would be able to drive this.
Both of our market into double digit territory.
And I expect that to be.
Both of our market story for the next couple of years as long as we get off the.
Gifts that we'd need photos products.
And I fully C. As I as I talk to the suppliers that that situation is going to continue to improve.
Adding any.
More natural disasters like what we have gone through this year.
That's all very very helpful. Thank you.
Great. This concludes our earnings call for the third quarter of 2021. Thank you everyone for participating in today's call and your ongoing interest in this job. If you have any follow up questions. Please contact me directly thank you.
This concludes Visteon third quarter of 2021 earnings call you may now disconnect.
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