Q3 2021 Visteon Corp Earnings Call
Good morning, I'm, Kris Doyle, Vice President Investor Relations and Treasurer welcomed.
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 that this presentation contains forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095.
Forward looking statements are not guarantees of future results and conditions, but rather are subject to various factors risks and uncertainties that could cause our actual results to differ materially from those expressed in these statements. Please refer to the page entitled forward looking information for additional details.
Presentation materials for today's call for a posted on the investors section of <unk> website. This morning.
Please visit investors Douglas John Dot com to download the material if you have not already done so.
Joining us today, our sights on Luanda, President and Chief Executive Officer, and Jerome <unk>, Senior Vice President and Chief Financial Officer.
We have scheduled the call for one hour and we'll open the lines for your questions after <unk> and Jerome remarks. Please.
Please limit your questions to one question and one follow up again, thank you for joining US now I'll turn the call over to Sachin.
Thank you Chris Good morning, everyone and thank you for joining our third quarter earnings call Beach.
Page two summarizes our results for the third quarter.
<unk> was $631 million down 17% year over year, excluding currency.
Global automotive production was down significantly as a result of the semiconductor shortages, which are.
Persisted beyond initial expectations.
Adjusted EBITDA was 42 million or six 7% of sales a decrease of $45 million compared to prior year, mainly due to lower production volume.
Adjusted free cash flow for the first three quarters was a use of $37 million as disruptions and semiconductor supply resulted in an increase of working capital.
Despite the challenging semiconductor supply environment.
Cool digital products did very well with year over year growth in sales of digital clusters, Smart core domain controllers and 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 and the $2 8 billion in new business wins year to date positions the company well for continued growth in the future.
On the ESG front, we're pleased with the progress we have made on the previously announced environmental targets.
Going forward, we have committed to the use of science based target initiative for the setting and reporting of emissions reduction targets for the company.
The company's liquidity remains strong and we ended the third quarter with $401 million of cash and debt of $354 million.
Presenting a net cash position of $47 million with no material debt maturities until 2024.
Turning to page three.
Supply of semiconductors was significantly constrained throughout the third quarter.
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 fabs for high performance chips used in smartphones Pcs servers and base stations.
Automotive industry uses chips that are built on 200 millimeter wafers used.
Using mature process technologies.
Consumer Electronics also uses these 200 millimeter wafers for chips for digital cameras, Wi Fi Bluetooth television and variable devices.
However, unlike 300 millimeter wafer fabs that has been little investment going into 200 millimeter wafer fabs as these wafers are not used for the newer high performance chips.
Demand for semiconductors changed significantly during 2020 as a result of the pandemic.
Automotive demand dropped sharply in the first half of 2020 due to COVID-19 related shutdown.
At the same time demand for consumer electronics increased due to work from home and the proliferation of connected devices.
In the second half automotive production recovered faster than expected, resulting in demand for 200 millimeter wafers to exceed supply and setting the stage for a 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 our semiconductor supplier in Japan early in the second.
Further impacted semiconductor supply.
The industry lost an additional $2 5 million vehicles in the second quarter.
The impacted suppliers, who are back in operation by the end of the quarter, but not at full capacity and wafer supply remained a significant constraint.
In late second quarter, Covid outbreaks and southeast Asia forced several Bakken processing facilities that 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 were 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 Covid impacted facilities in Asia are now back in operation, but.
But not all are operating at pre Covid 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 the industry was impacted more in the third quarter by 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 were two or three semiconductor suppliers with the main problem in the third quarter, where it should be all semiconductor suppliers were short in supply.
Outbreak of Covid in Asia mid Bakken processing, the critical bottleneck for supply of chips in the quarter. In addition to wafer 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.
We're 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, when excluding the impact of currency.
So 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.
Our sales outperformed their customers' vehicle production by eight percentage points driven by strong sales of new digital products.
These two clusters smartcard and 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.
Were down significantly as these products were particularly affected by the chip shortages in the quarter.
In summary, the third quarter was impacted more than anticipated a semiconductor shortages that rippled across all chip suppliers.
Despite the challenging environment I'm pleased to report that Visteon was able to support our customers' vehicle production and grow over market.
And recover most of the extra ordinary semiconductor related costs.
Our outperformance relative to customer vehicle production is a testament to the strength of our product portfolio, especially our 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 has offered in three trim lines and 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 as the foundation for the compact many events that are sold under the <unk>, Brazil and Opal brands.
For 2021 stay Lantus is offering battery electric versions of these 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 cylinders.
The new compact SUV for Brazil.
This system offers a 10 inch display and supports currently entered auto USB 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 of these vehicles.
The final product highlighted is the launch of our 12 inch digital cluster with 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 <unk> digital clusters, and boost smart core cockpit domain controllers.
The company continues to perform very well and transitioning our business to this new digital products that have higher take rates as seen in the past few quarters.
We have a busy fourth quarter with more than 20, new products slated for launch.
We're expecting 2021 to be another strong year with approximately 50, new products launched which will position visteon very well when vehicle production rebounds from the current low levels.
Turning to page six.
We won over $600 million and new business in the third quarter lower than our normal run rate as the disruption caused by semiconductor shortages delayed sourcing decisions at carmakers.
Nonetheless, new business wins Q3 year to date totaled $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.
There 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 us 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 like experience in the cockpit is accelerating the shift towards integrated domain controllers.
Firstly on smartphone technology is evolving to meet new demands by leveraging the latest silicon and software technologies.
The next win highlighted on this page is for a smart core 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 rendering 360 degree view on the center information display.
It uses to high power Silicon system on chips, our associates to process. All this information with the latest version of Android operating system.
The last win highlighted on this page is for a 10 inch digital cluster as a mid cycle upgrade for an OEM in China.
Visteon is 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 is sourced as planned.
Turning to page seven.
This page shows the latest outlook for vehicle production from IHS and compares it 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 Q3 in terms of semiconductor supply.
Looking ahead to 2022 and beyond the forecast from IHS is 2022 vehicle production recovering to 80.
$2 7 million units.
And then continuing to 91 9 million units in 2023.
Our forecast there was created before the impact of semiconductors was fully appreciated.
As 2023 production at 89 million units.
Still 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 in the sales pipeline and emissions regulations driving the need to build more EV models.
On the other hand vehicle production will remain constrained in 2022 as the imbalance between supply and demand for semiconductors will take longer to be mitigated.
The investments in 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 are traditionally provided visibility into their demand outlook.
Often not extending beyond a couple of months.
On the other hand semiconductor manufacturing lead times of six months or even longer.
In 2021. This resulted in inefficient planning of manufacture and supply of the different chips required by the industry.
Semiconductor suppliers have excess inventory of some parts, while they are critically short on others.
It takes us one between chip to impact production of the entire vehicles.
We are working with our customers.
Get 12 months visibility for all parts that we supply, which in turn will help semiconductor suppliers to plan production more effectively.
2021 was an unusual year with natural disasters, and COVID-19 impacting semiconductor supply.
The combination of better long term planning.
The reduction of Covid related impact and the non recurrence of the natural disasters should result in better utilization of the existing semiconductor capacity in 2022 before additional capacity comes online later in the year.
Moving to page eight.
At Visteon, we have always been focused on reducing use of natural resources and reducing the emission of greenhouse gases.
Our previously announced calls include the reduction of energy and water by 6%.
<unk> by 5% and greenhouse gas emission 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 based target initiative to set new emissions reduction targets to meet the requirements of the Paris agreement on climate change.
Spi will assist with tier and setting targets in line with the strict criteria.
We will also assess our performance.
As <unk> is considered to be the most scientific and reliable framework for setting and reporting of emissions reduction and despite we recognized in the industry.
We will continue to reduce our emissions and are pleased to join the roughly 1000 or so companies that are working with spi to achieve the goals of the Paris agreement.
Turning to page nine.
In summary, the company delivered 8% growth over market relative to our customers in a challenging semiconductor supply environment.
We were 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, smart core and Android based infotainment experienced strong year over year growth.
Our technology portfolio is well aligned with the key industry trends of connectivity digitalization and electrification.
With $3 8 billion in new business wins by the end of the third quarter the.
The company is positioned well for continued growth.
I will now hand, it over to Jerome to review the financials.
Thank you Sachin and good morning, everyone Visteon continue 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 the first three quarters of the year adjusted free cash flow was negative $37 million.
Industry production volumes were down 20% year over year, while our customers production was down 25% in the quarter.
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 customers production volumes.
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 semi conductor cost incurred in the quarter. Despite an increase in the ongoing cost run rates.
We discussed on our last call as 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 $401 million in cash representing a net cash position after debt of $47 million and a negative net debt leverage ratio.
Adjusted free cash flow through the first three quarters of the year was a use of cash of $37 million negatively impacted by an increase in inventory levels, mostly driven by the supply chain disruptions and the constant changes in OEM schedules, which.
We continued to focus on capital expenditure discipline 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.
Each 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 on subsequent slides turning to page 12.
Sales in the third quarter of 2021 were $631 million, representing an increase of $21 million compared to Q2, adjusted EBITDA was $42 million, an improvement of $12 million compared to the second quarter, while adjusted EBITDA margin improved 180 basis.
Points to six 7%.
The margin increase versus prior quarter is primarily due to the reduced net impact of semi conductor 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 by the ongoing supply chain disruptions within the quarter monthly industry production peaked 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 improved throughout the quarter.
Visibility continues to be limited, 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 basis points due to the net impact of higher supply chain costs related to the semiconductor shortage, while 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.
As you May recall 2020 results benefited from temporary austerity measures, while this quarter adjusted EBITDA was impacted by lower scale 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 focus on fixed cost management will allow us to expand margins as volume eventually increase turning to page 13.
As previously highlighted the supply chain disruptions and 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 has been negatively impacted by $37 million related to the semiconductor supply chain shortages.
The majority of our incremental costs related to open market purchases as we continue to actively utilize brokers and distributors to increased parts availability and ensure 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 recovered approximately 17% of the higher cost while we recovered approximately 75% in the third quarter.
This situation is unprecedented in the industry, but 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 now 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 2020 one.
Our balance sheet continues to provide flexibility as we navigate the ongoing supply chain disruptions.
With total cash of $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 of $37 million compared to a source of cash of $37 million in 2020.
Adjusted free cash flow benefited in 2020 from a 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 in 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 OEM schedules.
Equally the increase in inventory will allow us to quickly ramp up output when the supply chain disruptions dissipate cash tax payments resumed in 2021, while cash flow benefited from a dividend from an unconsolidated JV.
Capex in 'twenty, one 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 industry production for the year. We now anticipate that sales will be between two six to $2 65 billion adjusted EBITDA will be between 165 and 170.
$5 million, representing a margin of approximately six 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.
Q4, adjusted free cash flow is expected to be an inflow of cash driven by a partial unwind of 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 long term investment thesis remains intact.
Despite the supply chain disruptions, we see an acceleration in secular trends with cars, becoming more digital connected and electric.
<unk> product portfolio is well positioned to support these key trends, we anticipate our performance will accelerate as the industry recovers from the near term supply disruptions and begins to embarked on a multiyear up cycle driven by increased content inventory restocking and a shift to electric vehicles.
Thank you for your time today and your interest in Visteon.
I'd now like to open the call for your questions.
At this time, if you would like to ask an audio question. Please press Star then the number one on your telephone keypad.
Again that is star and the number one.
We will pause just a moment from a pile the Q&A roster.
Your first question comes from the line of Joseph Spak with RBC.
Okay.
Two questions, one sort of more near term and then one strategic but.
Just on the incremental.
Semi costs, Youre, saying $40 million for the year, So that's like $3 million for the fourth quarter.
Are you expecting that 75% recovery rate still and in the fourth quarter and then.
How should we think about semi inflation now moving into 2022.
Good morning Joey.
<unk>.
Yes, generally speaking we are anticipating that our negotiations in Q4 will lead to similar results.
To what we've been able to achieve in the in Q3 so.
Roughly $40 million for the full year that means 75% to 80% cost recoveries.
Q4.
Talking about next year, it's still pretty early in fact, we want first to finalize our negotiations for Q4, and we are 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 are integrating these discussions more strategic elements, including supply, including visibility and as well the cost side of things. So we're still going through that and we will definitely update you.
In our 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 just Sachin.
Sort of the longer term here you've talked in the past you sort of talk about new business wins needed to be about 6 billion a year to hit your targets.
And it sounds like Youre impaired.
We're planning for a big fourth quarter to hit that.
This year and then showed this chart with shared.
IHS 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.
Ill. Thank those mid term targets are achievable, even if the path there is a little bit different given by everything that's been going on over the past year.
Desktops exactly Joe So if you think about when we talked about the midterm targets at the beginning of the year.
That was on an assumption of.
Vehicle production of 89 million units.
And if you look at.
Where we are at today although.
<unk> has been lowered with what has happened in this year.
We do believe that.
The path to 89 is at even higher is definitely achievable.
Based on the recovery 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 growth story, so the new business wins.
We expect to be.
On target or close to it this year there has been some delays in Q3 on account of all of the distraction that we are all faced and.
I would say that is made Q4.
Stronger than earlier, so, let's see how much of that is actually converted into.
Our decisions and awards, but these delays are.
Still relatively within I would say very normal levels and will not change the trajectory of the revenue of those programs and when you look at the midterm.
Targets.
Actually all of that revenue is already booked and its more about converting that through new product launches.
So we are maintaining a pretty good cadence of 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 the next couple of years for us.
Not a issue of demand, it's really one of our supply driven.
Driven environment for us 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 we get the supply that.
<unk> expect.
And I feel good about it as we go forward here, we should be in a pretty good position to hit our midterm targets.
Thank you very much.
Your next question comes from the line of.
Luke junk with Baird.
Yeah. Good morning, Thanks for taking my question.
First question to ask is.
Having made this progress to the 75% cost recovery on the 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. Jeremy you mentioned some of the more strategic elements in terms of better visibility into your customer.
By change and whatnot is there an evolution in terms of terms be it lower price downs better terms on new business or other similar things that could enter into those discussions as well.
Yeah, Hi, Luke I'll take it first and then we'll have Jerome Walter 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 are in that supply.
On account of the fact that demand visibility in this industry has not been very good in the past.
Most of the Oems 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.
Yes.
The difference between what we provide visibility to our suppliers in order lead times and has actually grown.
And that has caused a lot of inefficiency in the planning of certain semiconductor parts. So if you have a situation where now we have more of.
Some of the parts that we don't need and are critically short on some parts that is holding up vehicle production and as I mentioned in my prepared remarks. All it takes is one chip to stop the production of the entire vehicle.
So just getting that planning in a better shape. So that we provide our suppliers with clear 52 week at least visibility part by part it allows them to plan their production better itself will solve quite a bit of the challenges that we have encountered this year.
So that's the first discussion that next level that we are having with.
Customers and suppliers and by the way this isn't something that the industry is setup very well to do so we are bringing 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 discussion more efficient and effective with all of our customers and as part of that.
Rising in cost increases is also 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 a kind of the various inflationary pressures that the semiconductor supply chain is experiencing.
So I would say the discussions are.
Well advanced and we hope to conclude the majority of it by the end of this year you can imagine it 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 we're in.
Census, anything more to add the only thing maybe just to come back on Q3, we were.
Pretty successful in achieving 75%, it's really because we started pretty early so I think thats.
Thats.
Great point to had the fact that.
Given the challenges that we were seeing very early in the year, we embarked on these discussions with our customers and we're able to achieve 75% so kudos to the team with this achievement.
Thank you for that.
So some great things to think about going forward second wanted to ask.
Is your question now that it's been a year since you formally announced that first wireless BMS contract with GM on the LTM platform I'm wondering what you've learned about the sales cycle for this product GM clearly someone on the front foot in terms of their EV strategy. Some other Oems clearly, maybe playing a little bit of.
Catch up on that front, how does that dynamic plan and what we might expect in terms of.
Next bookings for wireless BMS beyond the first two that you've already announced.
Right.
Before I speak specifically about.
Once we are discussing that now I just want to remind everybody that besides GM, we had also announced another.
Large global OEM that we are working on.
Our solution for them.
Our pms so.
In addition to these two we are engaged with multiple Oems and those discussions are I would say at various stages of progress.
Our focus is on the larger Oems that have ambitious.
<unk> plans with different models, because we believe the solution that we have really scales.
Actively and we have developed.
Hardware and software solution that.
Can work.
Almost all of the Oems.
Platform approach, if you will and trying to take our learning.
From the engagements that we've 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.
Tree.
Is going through a tremendous amount of learning.
New learning on account of the catch up that some of the Oems.
Faced with.
And at the same time there is also a lot of evolution offering with the underlying technologies, whether the battery chemistry.
The semiconductor technology that is.
Ultra evolving at the same time in terms of being able to perform better with respect to the accuracy of the measurement or the speed.
And also <unk>.
Safety.
So these are all starting to come in and as you can imagine for the next maybe a couple of years given how relatively new this industry is we will see a huge amount of activity probably not.
As structured as some of the more mature products are in terms of the cadence in.
The.
Planning, but we do expect that 2022 would be a fair.
Busy year for us as everyone is trying to get going with it.
And but more importantly in terms of announcing that third customer I hope that we'll 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.
Alright, Thanks for taking my question I think typically suppliers enjoy counter cyclical working capital that's production declines given the nature of.
Customer pay.
Payables receivables, but.
And that can provide a nice.
Offset to the impact of lower FCC ethylene production is softer but.
On the other hand, we've heard from a few suppliers.
I didn't know if the customer call offs has led to.
Inventory build finished goods here than they were at times pursuing a conscious strategy to invest in raw materials are purchased components to ensure continuity of supply amidst supply chain uncertainty, so I thought a bit softer Fcs in the quarter and I wanted to ask.
The bigger drivers of that were and how youre thinking about managing working capital and the <unk>.
Current environment, and how we might expect cash flows to track going forward.
Yes, Thanks Ryan.
It is true that.
Working capital and specifically inventory has been challenging this year.
The main reason for the negative adjusted free cash flow in Q3 is the inventory build and.
A few things on that point. 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 the good management coming from our teams we were.
Maybe a little bit more exposed.
So we've looked at this.
During the year and given the critical situations, we've increased safety levels at the same time exactly attaching was highlighting and as you are highlighting as well.
Been suffering from uneven supply.
Schedules and as well from the fact that customers were changing their productions.
Our schedules on a regular basis. So the most of the inventory builds we've seen has been around the horn materials and thats as well as I said earlier, where we've been trying to be a little bit.
More safe and have 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 <unk>.
<unk> 2022.
So, we'll probably be coming a little bit down going into the end of 'twenty two but at this stage until 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 margin is not representative.
The potential of the business and of course youre going to earn.
<unk> on lower revenue for as long as the situation for SaaS, but just wanted to check in on what your latest thoughts were on.
<unk> EBITDA margin, just given that the high value add nature of the product that you produce it doesn't seem totally can grow with.
Where do you stack up in margin relative to some of your peers.
When you do get the higher.
Revenue when industry conditions do normalize.
What type of a margin do you think is reasonable to be able to target even a couple of years out.
Yes, no. Thanks.
Currently Q3, similar to Q2 has been impacted by I would say by scale.
A very large extent and to some extent by 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 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 at a nine 5%, 10%. So.
In the current environment with $750 million in sales per quarter.
That's kind of the run rate.
Have in mind, nine 510% and every quarter is kind of demonstrated that that debt level. So that the way we are thinking about it this year and nothing has fundamentally changed we are impacted by scale, we will be focusing as we.
I alluded earlier on on inflation recovery and that's the key going into next year, making sure that we are minimizing inflation going.
Going into 'twenty two.
Great very helpful. Thank you.
Your next question comes from the line of Brian Johnson with Barclays.
Good morning.
Just wanted to talk a little bit about the booking environment and the take rate environment. So maybe starting with the second take rate as you look at your outgrowth versus your customers' production schedules.
To what extent can you can attribute it to.
The factors between launch of new models with digital cockpits versus existing models were.
Take rate has run ahead of maybe initial when the program was set up expectations and kind of related to that.
We've heard sort of a channel check the things that some of the.
Electronic features.
That automakers know the customers want and customers really want actually had to be throttled back to the chip shortage, which actually it could be that depressing the take rates on some of those features.
Can 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 is a bit of a nuance to it as you alluded to it.
So the first thing that we see is that the <unk>.
The increase in take rates is quite.
I would say.
Dramatic in the case of digital clusters, and that's largely driven by our <unk>.
Two factors one is the.
Popularity of Adas.
When you have.
Adas features like blind spot detection vein.
Change assist et cetera.
You need to render that information on the cluster and the cluster has to be digital for that so anecdotally I can tell you for.
Ample and OEM.
In Europe.
Had initially.
Given us an indication of about 40% take rates, but our digital cluster on the vehicles. They are running at 80% take rates.
And so it's.
A significant shift as all of these factors are coming together plus on top of that.
EV models are also driving that takes it higher because <unk> have.
Digital.
Digital content.
And many of the vehicles.
Having different powertrains.
We are offering.
Versions as well as your eyes and Theyre.
Going with the same cluster just to make it easier for them. So thats.
Positive.
Tailwind in terms of improvement and increase in the take rate what is 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.
Both year over year and sequentially.
And you would have done better if we had.
Add more semiconductors.
So.
That hopefully gives you a perspective on what is happening with respect to the take rates and the puts and takes there but as we go forward there.
Start to see more semiconductor.
Available to us for parts.
Expect that this trend will continue.
We are not going to go backwards. So I think we are going to see it.
Exploration and the take rates of our digital products. We are seeing not just auto clusters. We are also seeing the same for Smartwater 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 <unk>.
Bookings were below typical rates due to OEM, just scrambling on securing chip supplies.
Does the pipeline look of quoting opportunities going into 'twenty, two and second is there anything that get us give investors comfort that even with a little bit softer pace of bookings that your win rate in March, particularly win rate on attractively priced business.
One that bodes well for the future.
Yes, so on the pipeline first.
We see if you were to look at the pipeline at the beginning of this year even.
Come back to the pre 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.
<unk> is evolving as we have talked about it before we are seeing more smart or opportunities, we are seeing more opportunities for larger displays.
And what's interesting is that as a general observation the asp's that also increasing because of the increase in content.
So I think that's all.
Well for the future.
In terms of win rates, we see nothing change our win rates are roughly around 30% or so that we've had historically for the last few years, we don't expect that could change fundamentally and the last point I would say is anything we're talking about next year, obviously is beyond the horizon.
The midterm guidance that we've given so there'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 Kelley with Jefferies.
Hey, good morning, and thanks for taking my questions, maybe just starting with the Q4.
Revenue guide kind of similar to Q3 levels can you walk us through.
How youre thinking about Q4 auto production it sounds like more cautious 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, but curious as to how youre thinking about mix impact also.
Yes.
So great question, and let me try to share with you how we're thinking about it so.
One thing to note is that the.
Impact of semiconductor shortages kind of changed their nature in 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 that were 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 and not able to provide visibility beyond a couple of weeks.
And so we ended up in a situation as I mentioned, where we had more parts.
Sometimes conductors.
Less of some critical parts.
As we look at Q4 that situation seems to.
Largely continue.
Although in aggregate, we may say that we will probably get more semiconductors more parts in Q4 than in Q3, there will still be what I call as this unevenness and supply.
And Thats, what is really causing us to be a bit.
Cautious in terms of the.
Provide our outlook for Q4.
So that's really the thinking behind what we have laid out here we are.
Certainly hoping that.
It improves.
More than what we currently have as visibility with some of these.
Suppliers that have been out of there.
The new.
Problem suppliers.
And.
Also certain that as we go further out.
A lot of what has happened has been on account of Covid and as those percentages come back online and get to full capacity things will improve but thats really where we are at in terms of <unk>.
For Q4.
Okay got it that's helpful. Thank you and then maybe a follow up on kind of the pricing discussion.
It was a net positive in <unk>.
Third quarter, and certainly not assuming that sustainable longer term, but.
Seem to be in strange times, but I think you also noted you're targeting another 75% to 80% recovery rate with.
With the elevated semi costs into next year. So.
Realize youre not guiding to 2022, but any thoughts on kind of the pricing.
Into next year, just given some of the pass through and pass along opportunities that are out there.
Sure David.
So youre right. These are exceptional times, so the positive pricing will it may not.
Sure.
Be something that is going to carry on.
There are a few buckets. The first one is the pricing that we traditionally give to our customers and thats generally offset I would say by.
Pricing that we get from our suppliers that is how we think about it that's how our business equation. So that's got to be neutral in the Grand scheme of things for 2022.
And then the other element is essentially making sure that any inflation.
That is either temporary or.
Will last longer gets as well recovered so we are off.
Two different buckets, but we are negotiating going into 'twenty two.
Overall <unk>.
Equation with our customers so a little bit early to say, where we'll land, 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 <unk> <unk> with Citi.
Great. Thank you good morning, everyone.
So just back on the fourth quarter and I do apologize if I missed it could be through them, but did you quantify the engineering.
The impact of that in the fourth quarter. Thank you mentioned it should be.
Go higher versus Q3.
We have not but it's probably $5 million to $6 million incremental versus what we've seen in Q3 and Thats a net engineering number.
Okay got it and then maybe a couple of questions on the bookings you.
You mentioned you are still confident 6 billion for the year. If you look at kind of what youre, hoping to win the fourth quarter is it.
A few kind of large programs in there or is it just a bunch of kind of smaller or medium sized programs that have been.
Delayed.
Into the fourth quarter.
Yes.
On account of the delays in the third quarter, our theaters now a mix of everything so theres a lot of.
Our to higher value as well as your usual.
Smaller programs.
Average typically is somewhere around $100 million.
Program lifetime value.
I don't expect that to change in Q4.
Got it and maybe just to sneak one last thing on kind of growth over market.
Longer term I think you mentioned <unk> earlier.
The quoting environment may actually improve next year, obviously, you're winning a lot of programs on evs.
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 the 8% to 12% you've 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 shared with you. Some of all of you would be thinking about it if you look at the.
The near term about 50% of our revenue comes from what we would call here as our new digital products that would be digital clusters smartphone.
And larger displays and as I've mentioned on the call earlier. These products are doing very well with take rates actually improving.
And we expect that to continue.
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 chips that go into these digital products.
Now as we start to get more chips.
We would expect that we would be able to drive this.
Our growth over market into double digit territory.
And I expect that to be.
Growth over market story for the next couple of years.
Along as we get.
If that debt.
Need for those products and.
And I fully see.
I talk to the suppliers that that situation is going to continue to improve.
Adding anything.
More natural disasters by quarter, we have gone through this year.
Okay. 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 Visteon do you have any follow up questions. Please contact me directly thank you.
This concludes visteon its third quarter 2021 earnings call you may now disconnect.
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