Q3 2022 Visteon Corp Earnings Call
Good morning.
I think as Gerry director of capital markets and strategic planning.
Welcome to our earnings call for the third quarter of 2022.
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.
Okay.
Forward looking statements are not guarantees of future results and conditions.
A 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 were posted on the investors section of Visteon website. This morning.
Please visit investors Visteon dot com to download the material if you have not already done so.
Joining us today, our sauce in the one day, President and Chief Executive Officer.
Andrew I'm Okay.
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 limit your questions to one question and one follow up.
Thank you for joining us I will now turn over the call to fashion.
Thank you Ryan good morning, everyone and thank you for joining our third quarter 2022 earnings call.
To summarize our results for the third quarter.
The company performed very well despite the industry wide challenges that have impacted vehicle production and inflated costs.
Our third quarter sales were $1.026 billion, an increase of 63% year over year, making it the highest quarterly sales since I joined the company.
Adjusted EBITDA was $95 million or nine 3% of sales an increase of $53 million compared to prior year due to the higher sales and a strong commercial and operational discipline.
Adjusted free cash flow for the third quarter was an inflow of $59 million as strong EBITDA was partially offset by an increase of working capital.
The company delivered another quarter of strong sales growth compared to customer and global industry vehicle production, our 14th consecutive quarter of better than market performance.
Our robust product launch cadence is the major driver of our sales growth with sales of all our core products growing at double digit percentage levels in the third quarter.
Year to date, we have launched 32, new products, which will contribute to continued future sales growth.
We won about $2 billion of new business in the third quarter, bringing our year to date total to slightly over $5 billion and putting us on track to achieve our full year target of $6 billion.
We continue to build momentum in our display product line with the investments we have made over the past few years.
Since the start of 2021, we have $127 billion of displays business and mostly at the high end of the automotive market.
I will provide more details on our third quarter performance as well as our near term outlook on the subsequent pages before handing it over to Jerome to discuss the financials.
Turning to page three.
When excluding the favorable impact from recoveries and the unfavorable impact from foreign exchange Visteon sales in Q3 grew 49% year over year with strong double digit growth in all core product lines.
This compares to vehicle production growth of about 24% over the same period.
Our strong market outperformance was largely due to the ramp up of recently launched products as well as favorable vehicle mix, both of which reflect the alignment of our core products with key industry trends in automotive.
Clusters are the largest product line for the company and our cluster sales growth was primarily driven by the rapid growth of digital clusters.
<unk> nearly doubled from last year.
Digital clusters, now make up about half of our total cluster shipments.
Digital clusters did well globally, and particularly in North America due to the ramp up of recent launches with Ford and GM.
Our infotainment business benefited this quarter from higher supply of critical chips as compared to Q3 of last year. In addition to new product launches.
This was also the case with our display product line, which was impacted by shortage of Ics in the second half of last year.
Display panel supply has also recovered nicely this year, which has helped both our digital cluster and displays business.
Ongoing smartphone launches continue to drive strong growth in the cockpit domain controller product line.
Smart card shipments were up 50% year over year, resulting in sales more than doubling year over year.
Recently launched programs include the smart core system with Julie one of the fastest growing EV companies in China, and Mahindra and Tata in India.
Our sales were up in all regions year over year.
With the Americas growing the most on account of the ramp up of new products with Ford and GM that I mentioned earlier.
The strong dollar did however, create a currency headwind for us in the quarter of about 7% as compared to prior year.
Even with the strong demand from carmakers, the company's performance in Q3 would not be possible without the proactive efforts undertaken by the entire Visteon team.
We have launched over 20 redesigns of our products to work around semiconductor shortages and more are in progress.
The team also did a great job in securing supply through constant discussions with chip suppliers as well as finding and validating alternate chips from the open market to maximize shipments to customers.
Turning to page four.
New product launches are a key driver of Visteon sales performance and in Q3, we continued our strong launch cadence with the launch of five new programs.
This brings our new program launches to 32 for the year to date with additional launches planned for the fourth quarter.
About half of these new launches were for digital clusters, which will help continue the growth of this key product line for Visteon.
Also supporting the current industry trends about a quarter of the new launches what for electric vehicles.
Some of the key programs launched in Q3 are highlighted on this page.
We launched a 12 inch digital cluster on the Nissan Serena minivan in Japan at first in that region.
The Serena is one of the most popular family vehicles in Japan, and a core domestic model for Nissan.
This vehicle will also be sold in the Korean market.
This digital clusters supports multiple drive modes over the air software updates and display a phone and multimedia information from the infotainment system for improved user experience in the cockpit.
We also launched a multi display system with good earnings displace for cluster and infotainment on the top dream of care centers, which is an affordable mid sized SUV.
This product was launched in Korea, and in Australia with the U S to follow early next year.
Multi display systems are starting to crossover from luxury to mass market segments, and we expect this trend to gain momentum as we go forward.
The tubular segment is also seeing a similar trend of cockpit digitization.
In Q3, we launched a new digital cluster on Honda's all new C. B F motorcycle platform Honda is launching a series of motorcycles from this platform in a five inch digital cluster will be offered as standard equipment on higher trim models are 500 cc in a ball.
This cluster offers a choice of four different drive modes that are users electable as well as a fuel gauge year indicator and other bike related data.
The system works with helmet mounted headsets and connects were Bluetooth with both Android and iOS phones.
In addition to this new programs, where several follow on launches in Q3 of products that were previously launched in prior quarters, a couple of which are highlighted on this page.
We launched our digital cluster on Mercedes EQ U S Electric SUV following the launch on the electric Sudan earlier in the year.
In China, we launched our wireless BMS system on the Cadillac lyric the all electric crossover from G M, which follows the launch of this vehicle in the U S. In the first quarter of this year.
These follow on launches are great. Examples of cross platform products that go on multiple vehicle models, which is becoming a bigger part of our business and delivering a better return on our investment.
Turning to page five.
Q3 was another strong quarter for new business wins, with nearly $2 billion and Vince most of which were in emerging areas of automotive electronics.
This brings our total wins year to date to about $5 billion with good distribution across all our core products.
We also see a good pipeline of new opportunities in the fourth quarter, which should put us on track to achieve our target of $6 billion for the full year.
Our wins in the third quarter were led by incremental business on a previously announced wireless battery management system win besides large displays and digital cluster events.
The first win highlighted as to incremental business for our previously announced wins for wireless battery management system.
In addition, this win introduces a new configuration of the Oems battery module and pack for greater power density.
This change requires a BMS system to manage a greater number of cells and the battery pack, thereby increasing the content per vehicle is.
Award also highlights the flexibility of our wireless BMS design to support such changes in battery pack configuration to meet evolving needs of the Oems.
The second win highlighted is a combination of a 12 inch digital cluster and a separate 12 inch center information display for a north American Oems Electric vehicle line with the first production starting in 2024.
The third win highlighted is a multi display module for the center information display and the passenger display with the luxury German OEM.
This is our first multi display then with this German luxury OEM and follows the earlier multi display then in Q4 of last year with a different German luxury OEM.
Multi display systems with differentiating designs and features are emerging as a key part of the cockpit of next generation luxury vehicles.
This system offers a large center information display for the infotainment content and a second passenger side display with advanced active privacy feature for weaving content without distracting the driver.
Multi display systems are relatively new to the industry, but are quickly becoming key to cockpits of the future starting with the luxury end of the market.
I will discuss more about our multi displays business on the next page.
Turning to page six.
The luxury car segment is expected to be the fastest growing segment of automotive cockpit electronics.
Currently sales to luxury cars make a relatively small percentage of our total sales mostly for digital clusters.
The emergence of multi display systems that incorporate two or more displays under a single glass cover lens with value added features gives us another opportunity to grow our share in luxury vehicles segment.
Over the past few years Visteon has emerged as a technology leader and a trusted partner to Oems for large displays for the cockpit.
More recently, our investment in the development of new display related capabilities has resulted in us winning about $2 $7 billion of new displays business with.
With the majority of wins coming from multi display systems.
The trend of using multiple displays behind the single covered ends to offer pillar to pillar displays is just starting to gain momentum in the industry.
Luxury car Oems are looking to differentiate their cockpits for mass market vehicles that are increasingly offering large center information displays in the cockpit.
In addition to the large size of the display luxury car Oems that are interested in new capabilities that can further differentiate their vehicles.
This page shows some of the recent multi display wins and the key new technologies that is incorporated in them.
Ultra thin bezels and narrow gap between displays makes the entire system feel like a single seamless large display.
Curved displays make it easier for the driver to view the entire display area, while active privacy feature for the passenger side display enables weaving of content by the passenger without causing distraction to the driver.
All these new features are very challenging to implement especially considering the strict automotive requirements of quality safety and product lifespan.
Visteon was able to win this programs on account of the technology and manufacturing capabilities. We have developed to address these challenges.
Today, we believe we are in the leading position in the industry.
And we are focused on maintaining our lead in continuing to bring more innovation to cockpit displays.
In summary, the emergence of multi display systems and automotive cockpit led by the luxury market presents a new and growing opportunity for visteon.
I am pleased that we have made quick inroads and won significant business with Japanese and German Oems in the early days of this trend.
As this displays become more affordable I expect vehicles in the mass market segment of the market to also incorporate them.
Turning to page seven.
We anticipate the industry environment in Q4 to be similar to Q3 semiconductor shortages will remain the primary constraint for the industry, which will likely keep vehicle production close to the levels. We saw in Q3.
Demand from automakers for our products remains strong as Oems respond to industry trends and consumer expectations.
Visteon sales will be driven by the availability of semiconductors, both from suppliers as well as from the open market.
Due to product redesigns that enable us to use alternate chips and the anticipated modest improvement of supply from chip suppliers. We expect open market purchases in Q4 to be lower as compared to Q3.
Nonetheless semiconductor supply remains inherently unpredictable, but many critical chips, having no buffer in the supply chain.
Any quality or logistics issue can easily result in disruption to supply.
This situation combined with the increased concerns in Europe of disruption to vehicle production due to energy supply makes it more difficult than usual to forecast our sales in the quarter.
We have therefore opted to maintain a wider than normal range for sales guidance that Jerome will discuss in more detail later.
We expect many of these dynamics to continue into 2023.
Which will keep the situations fluid and challenging beyond Q4.
As a result, and consistent with our past practice, we'll be providing 2023 guidance on our Q4 earnings call in February .
Our focus remains on things that are more in our control and on mitigating the impact of these headwinds to the greatest extent possible.
This includes ensuring smooth launches of new products in Q4, while ramping production to address the demand we're seeing from customers.
Our ongoing product Redesigns will give us more options for critical chips in the future.
And of course, we will maintain the commercial and operational discipline that has served us well so far.
We believe these actions will put us in a good position to deliver strong results in Q4 and set a solid base to 2023.
Turning to page eight.
In summary, the company performed very well despite the ongoing semiconductor shortages.
We delivered record sales with strong growth relative to customers' vehicle production exploration the trend of recent quarters.
The team continued to execute on our commercial and operational plans, which resulted in a solid adjusted EBITDA margin of nine 3%.
We continue to build momentum in our foundation with launch of 32, new products and $5 billion in new business wins year to date.
And our product portfolio is well positioned to support the emerging needs of the industry.
Now I will turn the presentation over to Jerome to review the financial results.
Thank you Sachin and good morning, everyone.
<unk> third quarter financial results reflect another quarter of strong performance. Our teams continued to do a remarkable job both on the commercial and on the operational side of the business.
Q3 sales were $1 billion, and 26 million representing another record quarter for Visteon.
Our strong sales performance continues to be driven by ongoing high quality product launches from recent quarters.
While customer demand remains elevated we're still navigating through the semiconductor shortages focusing on improving supply through constant interactions with customers and suppliers as well as through engineering, Redesigns and open market purchases.
Adjusted EBITDA was 95 million, representing a margin of nine 3% for the quarter.
Adjusted EBITDA benefited from higher sales volumes as well as ongoing commercial and cost discipline.
Incremental costs from semiconductor shortages and supply chain constraints remained elevated this quarter.
We continue to actively mitigate inflation in our negotiations with customers remain on track.
Customer recoveries from open market purchases were approximately $19 million in the quarter diluting margins by approximately 90 basis points.
Adjusted free cash flow for the quarter was an inflow of $59 million, driven primarily by higher EBITDA and our ongoing activities to optimize capital expenditures.
Inventory levels increased as a result of the continued supply chain disruptions. We ended the quarter with a total cash of $365 million and 349 million of debt, resulting in a net cash position of $16 million turning to page 11.
Third quarter sales of $1.026 billion represent our highest level of sales since 2015, and an increase of 395 million compared to last year.
This year over year increase is primarily driven by higher customer production volumes strong growth of our market due to recent product launches and favorable pricing, partially offset by unfavorable exchange rates.
Excluding the year over year impact from pricing, which was positive 125 million sales would have been approximately 900 million, providing a proxy for sales levels, excluding the unusual pricing dynamics this year.
Q3 was the 14th consecutive quarter of market outperformance driven by our recent launch cadence and a robust customer demand for our digital cockpit products.
Pricing increased sales by approximately 20% compared to prior year, driven mostly by customer cost recoveries.
For the quarter approximately $19 million of customer recoveries related to open market purchases of semiconductors is included in pricing.
Adjusted EBITDA was 95 million, representing an increase of 53 million compared to prior year and a margin expansion of 260 basis points to nine 3%.
Adjusted EBITDA increased primarily due to higher sales.
Our continued commercial discipline allowed us to minimize the impact to adjusted EBITDA This quarter from high semiconductor and material cost, which is an improvement from prior year.
However, EBITDA margins remained diluted by the elevated open market purchase costs and the associated recoveries by approximately 90 basis points.
Compared to prior year net engineering in adjusted SG&A were modestly higher.
Finally, foreign exchange was also a headwind year over year as a result of the strength of the dollar.
Excluding customer recoveries and associated costs from open market purchases of $19 million EBITDA margins would have been closer to 10, 1%, reflecting a more normalized run rate for when the semiconductor constraints begin to abate turning to page 12.
We ended the quarter with a total cash position of 365 million and debt of $349 million, resulting in a net cash position of $16 million.
We continue to have one of the strongest balance sheets in the industry with more cash than debt.
As we discussed on our last call we refinanced our credit agreement in July and now have a $350 million term loan with a current interest rate of three 3% and an undrawn $400 million credit facility both maturing in 2027.
Adjusted free cash flow was an inflow of 59 million in the quarter, reducing the year to date net outflow to $40 million through the first three quarters.
Adjusted free cash flow in the quarter benefited from higher EBITDA and continued focus on optimizing capital expenditures.
Inventory levels increased in the quarter as supply chain shortages continued while the timing mismatch between customer collections and supplier payments remains.
We anticipate.
Paid inventory levels will decline in Q4 compared to the current levels, but to a lesser extent than we initially forecasted resulting in a higher outflow of working capital than previously anticipated for the full year.
Turning to page 13.
As a result of our strong performance throughout the first nine months of the year, we are increasing our full year guidance for sales and adjusted EBITDA. We are lowering adjusted free cash flow to reflect the higher working capital outflow that I mentioned on the prior slides.
We're increasing full year sales to a range of approximately three six to $3 7 billion to reflect higher full year growth of our market and customer recoveries as our open market purchases of semiconductors remain elevated.
Compared to Q3, we anticipate that customer production volumes and Visteon underlying sales will essentially be flat sequentially.
However, at the midpoint of the guidance. We're currently factoring a reduction of open market purchases of semiconductors and associated recoveries.
As Sachin mentioned, our range accounts for the uncertainty and production volumes in Q4, particularly in Europe , but it also reflects the difficulty in forecasting the level and pricing of open market purchases that may be required to support our customers in Q4.
We are raising our full year adjusted EBITDA to a range of $325 million to $345 million.
Adjusted EBITDA will benefit from higher underlying sales, while the increase in customer recoveries, which is largely offsetting material cost increases will have a minimal impact on adjusted EBITDA.
We do anticipate Q4, net engineering will be modestly higher compared to Q3, which is in line with our full year expectations for net engineering expense.
We now anticipate adjusted free cash flow will be between 30 and $70 million for the full year in Q4, we anticipate adjusted free cash flow will be approximately 70 to 110 million, reflecting our strong EBITDA ongoing capital expenditure discipline and an inflow from working capital in summary, our.
Updated guidance reflects our strong first nine months of the year, while our range is acknowledging that the environment in Q4 still remains very dynamic turning to page 14.
Okay.
Visteon remains a compelling long term investment opportunity, we have positioned the company well for top line growth margin expansion and free cash flow generation and our strong balance sheet continues to provide significant flexibility.
For your time today I will now 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.
That will star then the number one well pause just a moment to compile the Q&A roster.
Your first question comes from the line of free aspect tablet research.
Alright, Thanks, a lot thanks for taking my question.
Maybe wanted to just start with that with smart core so I didn't see it mentioned.
In the new business wins in the quarter.
But I'm curious at a high level, how are you working with Oems when it comes to embed itself.
Where you've talked a lot about.
Talked about in the previous previously about.
Right a high degree of <unk>.
As Dion code in these product lines.
Lines of code across three operate with three operating system. So quite complex, but we know the automakers are looking to get more involved in the cockpit and then also as you look further out we are seeing some Oems to help integrate the cockpit domain and toy until our multi domain controller. So just curious about it.
An area, where visteon might look to get into as well.
Okay. Thank you Jason that's a great question by the way so first of all as.
We have been saying for a couple of years this trend towards cockpit domain controllers is definitely starting to now its stride.
And we're seeing more and more Oems get interested in this integrated products now the issue is that these products.
You mentioned in your earlier created a fairly complex multiple operating systems.
Using some of the latest news.
Silicon chips from advanced technology providers now these chips and silicon and the software.
Comprise Ted.
In many of the applications across the different Oems are very similar.
So we have developed at Visteon.
Platform that we call Smartwater.
To provide an obstruction of the underlying capabilities of those devices.
Those applications to be built on top of it.
Now some of the applications are also going to be very.
Carmen.
Right, whether it is things like cloud play Android auto navigation multimedia et cetera.
Some would be very specific for their Oems.
And of course, the user interface, sometimes referred to as H M Y in this industry.
It would be very unique and specific to that OEM.
So our value proposition is that we would be able to provide.
Oh, yes, yes.
One system.
Starting point.
To try to do that all on their own.
And with the pace of change marketing rather than silicon.
And the underlying software.
Scale matters, we able to do this for multiple Oems.
We have already multiple Oems multiple programs that we have.
<unk> been developing and we have this assets.
We have explained before more than 10 billion that support that doesn't need to be rewritten by these Oems.
Yes.
So.
That's one point you asked the question about multi domain controllers.
See what we're seeing in the industry more so today is still.
Cockpit domain controllers.
Predominantly the.
Activity that we see currently however, it is clear that as we go forward with even more higher performance silicon becoming available.
Can envision more of the functionality from other domains, whether from the body side or safety.
Integrated into this multi domain controller.
Clearly want to be layer and that emerging area of business, which is why we have been investing in developing ddos software along with us.
The cockpit software.
One of the few in the industry to have digital clusters infotainment software and.
Now that.
That will allow us to be able to really address this emerging multi domain controller and a business that we see coming.
Not something that will happen in the next maybe.
Maybe even 18 months, but beyond that.
Yes, as I've mentioned with the silicon and improvements that we expect we do see this is that the interest is headed.
Okay, Great. That's really helpful. And then I appreciate that Joe you'll provide an update the guidance next year, but as we think about the pre.
Higher guidance.
So for two three or $4 billion and 12.
Percent EBIDTA margin, obviously weak in the end market volume expectations come down since.
Since you gave that guidance I think at the beginning of 2021.
So maybe at a high level.
You just talked about some of the some of the levers that Jean Paul.
Into next year that could still support.
That kind of that kind of expansion in <unk>.
Even if end market volumes are lower or there are additional cost actions you could take.
I'll get you towards that target at least on an EBITDA level.
Sure Good morning, Sharon.
So as you said, we will give more color.
And then final guidance in <unk>.
Calls, but.
Today, I would say that the way, we see 2023 developing still remains very much a supply base.
Our play and that's what we're watching so we still think that the semiconductor.
Challenges that we see this year will.
Continue into next year, especially the first half of next year.
We are seeing general improvement, but we still have got is critical parts that remain.
Strange and therefore, preventing us from us to the level, we would like to supply as we mentioned before.
Orders per quarter or close to $1 billion, but our sales.
Product sales are lower than that.
Because of our inability to supply 1% of the products. So I think that's one area.
We'll have to watch very carefully I would say our growth of our market has been strong in Q4, it's been strong in fact since the beginning of the year we expect.
Still a mid teens growth of the market going into next year.
And well, obviously refine that as we go into 2023.
We'll have to watch obviously currency as we go into next year, it's been a headwind so far this year.
No.
The assumptions will have to make as well for 'twenty three will be will be important.
And then maybe pricing is the final area that we've got to look at we have had very elevated spot buy levels.
In Q3 and in fact in Q2 as well.
We expect these to somehow reducing going into next year as supply will improve and that will obviously reduce our recoveries won't have an impact on the EBITDA dollars. It will have a positive effect on <unk>.
Our EBITDA margin so that's another.
Duration that will have to take into account as we go into next year or so.
A lot of moving pieces at this point and will last.
Various areas as we go into.
Q4 earnings.
Okay. Thanks.
Okay.
Your next question comes from the line of Mark Delaney with Goldman Sachs.
Yes. Good morning. Thank you very much for taking the questions. The first is hoping to better contextualize, how demand trends, maybe evolve and I understand generally its been pretty strong can you speak a bit more qualitatively on what <unk> seen both in terms of how some of the macroeconomic trends.
Perhaps impacting the types of.
Order levels Youre seeing from your customers.
But also how that's.
Being impacted by some of the.
For programming and content opportunities that you have.
Yeah, sure I'll take that first and Jeremy.
Feel free.
The main thing that I would like to reiterate here is we are still supply limited demand is extremely strong.
We have been saying that for the last three quarters and that continues.
Water as well.
Because if you look at the orders that our customers have those.
Very strong very robust and so we feel like we.
Yes.
Of the year and probably going into next year.
Still face supply constraints.
More limiting factor not demand now.
Now the reason for that is if you look at the product lines.
Offer these products.
To meet this need to be able to meet.
The competitive and their customers' expectations.
Clusters and the trend is going to continue for the next few years driven in large extent.
The success of technologies like Adas.
Roger displays.
Also a very strong trend that will continue.
No.
The launches that we've had.
Which by the way if I look at the last.
All quarters coming into Q3, we had over 50 launches.
As long as we continue to be.
We will have.
A lot of demand for the product.
Yes.
<unk> expect to necessarily see.
Now, yes, we are all watching the macro environment.
We'll see how that develop.
Yes.
Depending upon what happens here.
Okay.
Watching Europe carefully Europe was extremely strong in Q3 looks to be very strong in Q4 as well.
To watch.
Energy and other considerations in Europe might have.
And over here I mean, no one patient dose.
But for now we haven't seen any softness in the demand yes.
Yes, and a place orders on us.
That's helpful. And then maybe you could also help us better understand what kind of global RVP level may be needed for visteon to be at $4 billion of revenue next year, realizing youre not guiding at this point in.
The comments around the antibody concerning but you know at one point you talked about roughly $89 million of global production being needed to do that kind of revenue level. In 2023, you just hit four 4 billion in annualized this quarter with MVP at turning between <unk> $83 million to $84 million annualized and I know some of the revenue this quarter was pass throughs and probably not sustainable but at the same time. It seems like your you are.
Content per vehicle is growing maybe faster than you thought a year or so ago. So.
Any sort of range of Lv MVP in 2023 that may be necessary to.
<unk> to about 4 billion of revenue and then we can make our own assumptions around where we think <unk> will be given some of these macroeconomic inputs and antibody chain dynamics. Thanks.
Yes, sure a couple of things I would mentioned one the revenue this quarter, yes. The top line that is over $1 billion, but effectively when you look at some of the pass through it is maybe just a shade under $900 million as the organic revenue.
On the debt.
At this level of production, we feel comfortable that we could achieve that or maybe even slightly better if supply.
So we are bidding.
Sure.
Sight of where we need to be at a run rate level, so more than vehicle production, which clearly by now.
The growth of our market that we are experience, we all understand that we will not perhaps need 89 million units.
Vehicles.
At the time, when we talked about $4 billion.
As a target.
I think we could achieve that.
Lower level of vehicle production.
But what's important is.
That some critical semiconductors.
Phil holding our production back nuclear and coal next year for us to be able to achieve that 4 billion now when you look at our total semiconductor by portfolio.
Not all of the parts.
A small fraction of the parts that we buy.
Are those still kind of hold us back at the Golden screw so to speak so we need to get.
The uplift in the production of those.
Modest improvement and a combination of that plus the new designs that we have done.
So.
I would say that if you think about where we are at just shy of $900 million and 15% improvement overall.
And so most of it coming from the supply side and the vehicle production will obviously reflect that so.
It will be less than what we thought we need it.
<unk>.
And anywhere between five.
Five percentage points of improvements or thereabouts, I think should be good enough.
Thank you.
Your next question comes from the line of James Picariello with BP exam.
Hi, good morning, guys.
Good morning, good morning.
Can you.
The updated guidance can you just maybe confirm what.
What is baked in assumption for for your pass through revenue and based on.
They're very strong.
100, almost $130 million in the third quarter, what's what's kind of assumed for the fourth quarter here.
Yes so.
What we've assumed essentially is a Q4 sales level.
I would say base sales product sales level to be similar to what we've had in Q3. The major difference that we've baked in our Q4 assumption is the fact that we're assuming at this point that spot buy sales will be lower and it will be lower by approximately 40 $50 million. So that's kind of the.
The assumption that we have for now in our Q4 guidance.
Yes, no that's helpful. I mean, it sounds as though the third quarter came in from both from a recovery or a spot purchase.
Perspective came in heavier than you had anticipated I think youre.
Correct me, if im wrong, but just curious how dynamic is this.
Is the situation from.
With respect to the chip supply.
And how what's kind of the turnaround at.
Hal dynamic do you guys have too.
Realized maybe that Youre short what you need in that you have to go to the market I mean is this a weekly.
Kind of surprise or is it is there a better visibility to it.
Yes, that's a great question and so yes.
Answer that directly.
Just week by week, So every week.
Of course in sometimes day by day right, but it is extremely dynamic, but as I mentioned.
It's not that we have consensus across all of the semiconductors.
A smaller set of semiconductors, which have been very constrained and the issue with the constraint is that no offer.
Buffers and the whole supply chain.
So we could be affected by some logistics issues.
It's not just the production.
There are a host of things that can impact us.
No buffers and Thats, what we have had to deal with in Q3, and we expect that environment to largely be the same in Q4.
Now at.
At the same time.
Even when you look at Q3, the reason why our sales were better than even what we had anticipated that supply came in better than we had imagined at the beginning of the quarter.
And we expect those improvements to also happen in Q4, especially.
Softening of demand in other industries consumer industrial et cetera, some of the parts.
Use.
I'd also used in those other industries. So we expect some improvement from there which should reduce.
And on.
Open market purchases.
Dynamics things and hard to predict which is why that.
The range is wider than we would otherwise.
I would add as well.
The forecasting spot buy is extremely challenging.
The reasons Thats actually answered, but if you think about it.
You first need to see what kind of parts are going to be short us.
You need to understand what kind of availability with be it the brokers level.
Ics from brokers change every day every week.
And they vary massively and then you have finally, the Oems willingness to pay for these elevated prices. So it's a lot of parameters that I've got to be routine and all of these berries on.
80 basis, and therefore, it makes it a little bit hard to forecast just want advice and spotlight recoveries.
Okay.
Understood Super helpful.
Just real very quickly for your second wireless BMS customer are you supplying that customer with a digital cluster or any other.
Any other product besides besides.
Besides the wireless payments.
We are across there.
Bigger portfolio of vehicles were supplying displays and digital clusters.
More likely than not if you look at our portfolio of customers for clusters, we would launch.
Yes.
Mostly be supplier to virtually all of them. So let me have a few.
Yes.
All of our portfolio for clusters.
So yes.
Thanks.
Your next question comes from the line of Luke junk with Baird.
Hi, good morning, Thanks for taking the questions.
Hi, Chad question, but I wanted to ask it a little differently session. So you've been of course talking about demand being over $1 billion on a quarterly basis from your customers and what I just wanted to better understand is how much do you think you can control with the redesigns to close the gap versus sort of that 900.
Our base level this quarter versus <unk>.
Customers Ashley asking for and maybe to animate that if we could also just expand on the amount of redesign activity. As 2022 has progressed kind of how that has evolved.
Yes.
Good question look and I wont quantify exactly how much of the revenue is attributable to the redesigns, but I will say that without that would have been.
Meaningfully.
Sure.
We can to a great extent.
Our control that but it has been a little bit of a shifting sort of a target.
The constraints have not remained in the same.
And a set of chips, so we've had to choose.
Loss trends a little bit so we've talked about the numbers. We have launched in terms of new designs and we have multiples of that.
In progress.
In some shape of development.
Soon be launched its important to note.
The Redesigns, we actually even maintain the original design as well so that gives us that broader.
Broader.
Access to chips, rather than just a switch from one to the other so I think if we execute the once we have.
On the slate.
By the second half of next year, we should be in a position to control our own destiny with respect to supply that's the way to think about it.
Okay that is helpful. And then a follow up question just hoping if there's anything you can share to help us better understand that.
<unk> of the add on wireless BMS Award this quarter relative to your initial work with that customer either.
The scope of cross platform or even relative dollar terms either would be great. Thank you.
Yes no.
<unk>.
Okay very interesting topic because.
I want to take a step back here and we have three customers that we have talked about.
BMS solution.
<unk> is in production of the others will enter production and I think 2024 timeframe.
But.
Also happening.
Between when we first started to work on Vms systems and now is that we have seen the industry go through.
Transition towards more higher voltage.
<unk> to enable fast charging.
So this is really what.
We see as a change that has actually been accelerating.
And so our.
Wireless BMS first of all it's been designed to support it which is what you see are reflected in this win and just to kind of scope.
The magnitude of this we had.
About I think seven or eight vehicles into initial.
Our board that has more than doubled.
And the updated one and then the volumes have also gone up very nicely.
And it includes this higher configuration.
And anytime you have a higher voltage.
800 volt is not the only work, which by the way there are intermediate once as well, but as we go up to.
Above 400, you need more battery cells.
<unk> enables that increase and that means greater content or BMS. So we have talked about earlier that BMS range in terms of content being around $3 50 to 500.
These higher <unk>.
H battery packs.
Exceeding.
The upper end of that range.
Overall, it's a mix I would still say that it will be somewhere between 350 to 500, maybe.
Building upon the OEM and their mix of vehicles by push that average closer to the upper end of that range as an average selling price.
Okay.
All very interesting thanks for that I'll leave it there.
Alright, Thanks, a lot.
Your next question comes from the line of Emmanuel Rosner with Deutsche Bank.
Alright, Thank you very much maybe.
Maybe just following up on the <unk>.
Wireless BMS again I think your.
Partner.
All of these initial wins with <unk>.
Advanced devices.
And I think they have announced another in a wireless BMS win recently is there something that.
We're still quoting on in to become the tier one there.
So I wouldn't.
You mentioned anything specific to that particular announcement, but in general the way. It works is that the silicon choices made ahead of the tier one supplier of choice.
And so you can imagine we have been working as you said very closely with this particular partner for a long time and therefore, we are engaged with multiple Oems together with them.
That's where I would like to lead with that and as and when those decisions get made will certainly be bringing it to you and talking to you about it.
One thing I would say is since.
The beginning of this year as I mentioned just in my earlier remarks that.
This change to higher voltage is what has caused a lot of these discussions to be delayed because we have had to adjust and change the designs to meet these newer requirements, but those discussions I would expect to see come to a conclusion fairly soon and we should be.
April to talk more about some of the awards that we will hopefully Brent here.
Okay. That's helpful color.
I wanted to ask you about the.
Free cash flow guidance again can you. Please go back over the the drivers of that.
Timing on the working capital and to what extent.
This will get.
Sort of like Unbundle resolved in early 2023.
Yes sure.
So we've revised our cash flow guidance.
For the full year to be at the mid point at a level of 50, you may remember that in Q2, we have already indicated that we would be towards the low end of the previous guidance range, which at the time was 85. So most of the if not all of the change relates to working capital and there are two elements to it the first one is inventory.
With increased inventory in Q3.
We are planning to have a modest reduction in in Q4.
And the second item relates to the timing of collection of recoveries we have.
Some deals which are fairly.
Fairly late in the quarter and therefore, it makes the collection slipped into the following quarter.
So we are improving on that as we get a better cadence with our customers, but there is still some.
Good call leakage or timing differences. So we are improving on that in Q4, but it will be.
Not as good as we had originally anticipated and that's the reason why we've with lower our guidance with equally kept a fairly large range from 30 to 70.
Given the sensitivity of.
Some of these items.
Nine to 2023 would you expect.
Further improvement in clear Lake.
Should some of these items become a tailwind versus your normalized free cash flow profile next year.
Yes, we'll give obviously more guidance at the time, but we are clearly expecting to Gary.
Adjusted free cash flow in 2003.
We'll have to look at the dynamic of working capital, but what I would say is that.
Maybe just to think about inventory itself.
I think data collection will probably get more normalize over time.
But on the inventory side we've.
We have increased our safety levels just to be more protected towards a variability. So thats. One one reason as to why inventory have increased.
We have also.
Sure.
The fact that our volumes are higher so you would expect as well as volumes go up you have a little bit more inventory today, our inventories are slightly higher than 30 days, we probably would expect them to normalize slightly below the 30 days so slightly below the months.
So that's the opportunity that we are going to work with understanding again that volumes will be higher next year.
And if I can squeeze one more.
So you've given a lot of good color on puts and takes for.
Thanks for revenue development into next year could you do the same in terms of.
Margins, what would be sort of like those things you'd be watching in terms of.
What could get you.
Towards your margin targets in the west could constitute headwinds as we think.
Into next year, yes.
So no no major changes to what we've said in the past obviously volume is for US critical it's the it's what gives us the scale and we've seen that very much. So this quarter versus last.
One year ago, where volumes were much lower so volume is critical obviously for us to reach our targets.
We are thinking.
Thinking about as well on the positive side about some of the inefficiencies that we've seen.
This year around freight stop ongoing appliance.
We expect these to somehow reverse out next year. The one the two areas we'll have to look at are obviously inflation.
And the associated pricing. So that's the these are the two areas we will have to look at.
Spot buy as I mentioned earlier on would be.
We think we will.
Subsides, a little bit and the levels will reduce and thats ultimately good news because that means supply is improving but it was good news for our margin percentages. So.
These are kind of the moving pieces on the on the EBITDA side of it.
Thank you.
Thank you.
Your next question comes from the line of David Kelley with Jefferies.
Hey, good morning, guys. Thanks for taking my question, maybe a question on high level kind of Europe .
Or can you talk about product demand and how youre seeing mix tracking in the region and can you give us some color on customer schedule visibility in Europe , and how that's factoring into your year end outlook.
Yeah sure. So first of all I would say Europe was pretty strong in Q3.
<unk> was.
Q3 tends to be usually a softer.
Or.
Production in Europe .
We haven't seen any.
Softening in demand and it has been pretty.
Pretty hard so I would expect.
That to continue into Q4.
And we haven't seen in terms of.
All participants any change.
The country, so everything seems to be.
We have had in the third quarter. The mix is also very much.
Similar to what we have.
Elsewhere largely for us that means.
Clusters.
<unk> displays cockpit domain controllers.
No.
All of the talk about this.
Challenges that Europe business, we are not seeing that.
<unk>.
August six we see from customers as yet.
Seems pretty strong.
Okay.
Okay, Great. That's helpful. And then maybe one quick follow up just looking at the.
The new business wins slide I think 45%.
Wins, so far in 2022 of our four <unk>.
If we take a step back can you talk a bit about kind of the content per vehicle opportunity you're seeing in EV wins.
Today versus ice wins understanding, it's not exactly apples to apples, but any sort of color on.
That multiplier would be great.
Yes, so when we talk about first of all David.
45% just to be clear what this means is that these vince that we have the $5 billion.
45% of them have some content on Tvs that are vehicles to cut across the ice models. So therefore presented here.
And so for us Evs as I've said before.
Generally.
Positive net positive because typically they have larger displays and more electronics and software cockpit. So what we're seeing.
In the near term more display opportunities.
In addition to BMS.
CDC cockpit domain controllers. So those are the two.
I would highlight.
And what we had also seen in both cases.
Average sales prices of these displays in cockpit domain controllers growing up.
This multi display systems that we talked about earlier as well as more.
Higher performance.
Smart core systems. So it's.
A positive development.
We continue.
Continue to win.
Hopefully our share of the market in that area, that's going to help also lift.
Our growth over market.
And that mix.
Got it that's helpful. Thank you.
Thanks, David Thanks, David and Thanks, everyone. This does conclude our earnings call for the third quarter of 2020 tail. Thank you everyone for participating in today's call and your ongoing interest in Visteon. If you have any follow up questions. Please contact me, Chris Doyle <unk> directly thank you.
This does conclude Visteon third quarter 2022 results earnings call you may now disconnect.
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