Q4 2022 Visteon Corp Earnings Call
Good morning, I'm, <unk> <unk> director of capital markets and strategic planning welcome to our earnings call for the fourth quarter and full year 2022. Please.
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 1995.
Forward looking statements are not guarantees of future results and conditions, but rather are subject to various factors risks and uncertainties that could cause our actual results to differ materially from those expressed 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 this Jones website. This morning.
Please visit investors Visteon dot com to download the material if you have not already done so.
Joining us today, our thoughts on the Wanda President and Chief Executive Officer Andrew.
And Jerome 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 drums remarks. Please limit your questions to one question and one follow up.
Thank you for joining US now I will turn over the call to fashion.
Thank you Ryan and thanks, everyone for joining us this morning.
<unk> 22 was an exceptional year for Visteon.
Industry, leading digital cockpit electronics products performed very well, resulting in full year sales of $3 billion $756 million, an increase of 35% over last year compared with the customer's vehicle production growth of approximately 5%.
We ended the year with the 15th consecutive quarter in which our sales outperformed our customers' wafer production.
Adjusted EBITDA was $348 million or nine 3% of sales an increase of $120 million over last year.
The company's cost efficient footprint combined with the shift to platform based productivity.
In operational and commercial discipline resulted in higher sales and drove margin expansion.
110 basis points.
Adjusted free cash flow for the year was $101 million in line with the midpoint of the original guidance range that we provided at this time last year.
Our liquidity remains strong with over $500 million in cash.
Visteon has and remains focused on sustainability and Im pleased to report that we are committed to reduce scope, one and two greenhouse gas emissions by at least 45% by 2030 compared to 2019 and scope three emissions by at least 25% compared to 2021.
These targets were formally submitted for validation to Spi in late December and the align well with our mission to make driving safer cleaner and more convenient.
We launched 45, new customer programs in 2022 and extended several existing programs on new vehicle models.
The company also achieved its goal of winning $6 billion in new business for the year reinforcing the strength of our product and technology portfolio.
We introduced several new products and services that extend our product offerings to address emerging trends in the industry.
These include a new cloud service for <unk> that complements our App store service and several products for electrification, including onboard charger AC to DC converter and smart junction box that will showcase to customers at CES earlier this year.
We also announced a collaboration with Qualcomm for our next generation Smart cool system Theyre, starting to do a software defined vehicles of the future.
Our high number of launches and new business wins, and strong product portfolio position us well for market our performance in 2023 and beyond.
I would like to thank the entire visteon team for their hard work and dedication in what has been a difficult year for the industry.
Our performance. This year is the result of the team's resiliency and dedication to each other and to our customers.
Turning to page three.
We saw robust demand for all core products throughout the year that exceeded the supply of semiconductor and other critical components.
While our customers' vehicle production grew by 5% year over year, our sales grew by plus 21%.
Excluding impact of customer recoveries of supply chain related costs.
Our market outperformance was driven by the recent launches of products that ramped up production in 2022.
The growth over market was higher than anticipated due in part to the rapid ramp up of a digital cluster program with the North American OEM.
We also benefitted from the product mix shifting to higher content products led to a close.
And from smaller legacy displays to larger displays.
The automotive industry's transition to digital clusters continued in 2022 with one out of four new cars being equipped with a digital cluster.
This trend benefited visteon and now digital cluster sales increased by 40% year over year.
Digital clusters now represent about half of all cases shipped by Visteon and was a significant driver of our sales growth in 2022.
Smart core sales grew approximately 75% year over year, driven by recent launches with carmakers in Asia.
The industry is shifting to high performance cockpit domain controllers to deliver user experiences that drive all mobile devices, which is helping drive higher smartphone sales.
2022 was a continued period of transition for Visteon from small legacy displays to larger displays both in terms of new launches as well as business wins.
The recently launched multi display systems with Maserati in Europe , and Nissan and Ford in Asia contributed to the growth of our displays business in 2022.
Offsetting the decline of smaller legacy displays.
We also experienced higher sales of audio infotainment products with the ramp up of Android based systems in South America, and Asia, and new launches of audio systems with an OEM in North America.
Overall, we benefited from strong demand of our digital corporate products.
The momentum from recent launch activity.
Turning to page four.
2022 was a busy year for new product launches for the company.
We successfully launched 45, new programs across 18 different Oems globally.
Digital clusters topped the list with 17 launches continuing the trend of the past few quarters.
Followed by displays with 11 launches, including multi display systems with Maserati and Kia.
Displays and expanding and exciting area of growth for Visteon and these launches will help drive higher sales for this product in the coming quarters.
Our digital cockpit products, our powertrain agnostic and about 25% of our new program launches in 2022 odd for vehicle platforms that have both electric and ice models.
We finished the year strong with 30, new program launches in the fourth quarter and have highlighted a few on the bottom half of the slide.
But forward, we launched a new audio system for several vehicle lines supporting <unk> latest zinc infotainment system.
The program was launched in North America, and Europe on Super duty trucks, the transit commercial vehicles, and Suvs for Ford and Lincoln brands.
In addition, we launched multiple digital cluster programs on the same vehicles.
In China, we launched our latest generation of our smart core cockpit domain controller and center infotainment displays on the Lotus Lambda on electric SUV in partnership with the cortex.
The launch of the first model will be followed by additional models in China as well as in other regions.
Additionally, we launched a digital cluster to lenders that we won in Q1 of 2021 less than two years from award to production.
The cluster comes in 10, and seven inch variants and the launch on multiple brands, including Jeep Fiat and Alfa Romeo.
Our new program launches in 2022 and ongoing vehicle model extensions of programs launched in prior years demonstrates the continued momentum <unk> been building for a near and midterm sales growth.
We are launching programs across all core product lines that will drive further growth in 2023 and beyond.
Turning to page five.
The one 6 billion in new business in 2020 to achieving the target we have set out at the beginning of the year. This.
This is particularly significant considering the disruption caused by supply chain shortages.
All of our core products did well, including over $1 5 billion and display awards. The first time. This product category has crossed the $1 billion Mark in a single year.
Smart core also did very well, adding two new Oems in Europe , representing three card brands and winning over $1 billion for the year.
We won over $1 billion of digital clusters business in 2022, including our first global wind with Toyota.
Asia represented more than half of all digital cluster Vince in the year as more Oems start to transition to digital cockpit in that region.
We anticipate that growth of electric vehicles will be a tailwind for visteon in the future and.
And in 2020 to about 45% of our total digital cockpit Vince for electric vehicles.
We also had several future vehicle models added towards awarded BMS business as customers updated plans for EV model launches in the coming years.
The first Q4 win highlighted on the right is a center infotainment display for a north American OEM.
The 12 inch center display uses a slim tablets like designed with an integrated driver facing camera and will be featured on electric version of our popular SUV vehicle line for the OEM.
We extended our smartcard program. That's currently in production with the customer in India to two new compact SUV models that were launched in 2024.
Our first launch of Smartwater, but this OEM has been very successful in this follow on launches will feature an updated smart core technology with additional features and functions.
Lastly, the third been highlighted on this slide is a follow on wind for an existing multi display system with the Japanese OEM.
This follow on wind is on our high volume mass market vehicle by the lead vehicle for their luxury brand.
It's a perfect example of how the multi display trend is starting to come with the mass market vehicles segment.
Our product portfolio is well aligned with the major trends in the automotive industry and 2022 was a great example of how we expect our sales mix will transform in the coming years.
Turning to page six.
The automotive industry lost about $4 5 million vehicles, two semiconductor shortages in 2022, and while semiconductor suppliers improving the outlook for 2023 is a loss of about 2 million vehicles.
However, the nature of the semiconductor shortages will be different in 2023.
In 2022 power analog chips were more constrained in microcontrollers.
'twenty three we expect gradual improvements in analog and power chips with investments made in production capacity by integrated device manufacturers like Texas instruments and on semi.
However, semiconductor suppliers to July on foundries for the front end capacity will continue to be constrained and wafer supply as these foundries have not invested in capacity for legacy nodes of 14 nanometer and higher that are used extensively in automotive.
Weaker macroeconomic environment and geopolitical concerns are also causing us to believe that the strong consumer demand the industry experienced in 2022 may start to soften, especially if this macro issues persist throughout the year.
As a result, we are forecasting global vehicle production in 2023 to be up modestly to 84 million units with visteon customers up 1% over last year.
Furthermore, we expect production to be lower in the first half due to tighter semiconductor supply.
Before improving in the second half of the year.
From a regional perspective, we expect our customers in North America to have modest production growth at mid single digit levels, driven by recent model launches and the low level of dealer inventories.
In Europe , our customers remain optimistic due to strong order books, but the ongoing economic and geopolitical uncertainties caused us to temper our outlook for the full year.
China has started slowly in January after COVID-19 impacted production in the fourth quarter of last year.
We anticipate vehicle production to slowly increase throughout the year as the country transitions from zero Covid zero Lockdowns, we expect vehicle production at our customers to be down in low single digits year over year, and especially pronounced with our global customers operating in China.
In summary, we're cautious about vehicle production growth in 2023 on account of the demand and supply dynamics that I just mentioned.
However, we also believe that the momentum we have built with our product portfolio combined with the operational capabilities of our team will support better than market growth in 2023 and beyond.
Turning to page seven.
In 2023, we're anticipating sales to be $4.050 billion at the midpoint of our guidance with a range from $3 95 to $4 5 billion.
On the right inside of the page, we provide a waterfall chart bridging 2022 base sales of $3 $6 billion, which excludes the positive impact from customer recoveries.
For 2023 based sales, which at the midpoint of guidance is approximately $3 $75 billion.
As stated on the previous slide we are expecting only a modest improvement of 1% in a customer's vehicle production in 2023.
However, we expect that our strong new product launch performance in the past two years plus additional launches in 2023, we'll continue to drive market outperformance with base sales, excluding customer recoveries growing in mid teens.
The combination of annual customer pricing and the impact of foreign exchange is expected to be a slight net headwind.
Like in 2022, we will need to mitigate the impact of semiconductor shortages to deliver another year of double digit base sales growth with.
With the expectation of improving chip supply, we anticipate fewer open market purchases of semiconductors as compared to last year.
As a result, we expect customer recoveries in 2023 to be lower than 2022 as shown in the dotted boxes on the waterfall chart.
Overall I am pleased with the mid teens growth forecasted in base sales, which reflects our multi year product transformation continued operational excellence and supply chain capability.
Turning to page eight.
In summary, the company executed very well in 2022, which helped drive record sales in what continued to be a challenging environment I would like to thank our customers suppliers employees and investors for their support in the challenging here.
We launched a high number of digital cockpit programs that will drive our market outperformance in the near to mid term.
<unk> continued to build a strong foundation for future growth bookings $6 billion in new business during the year.
As we look towards 2023 and beyond we anticipate further sales growth and market outperformance as we benefit from the alignment of our product portfolio with key automotive trends, that's driving high demand for digital cockpit in electrification products.
He will be sharing more information on our vision for the future and strategy for capitalizing on key automotive trends in a couple of weeks at our Investor Day on March seven in New York City.
Look forward to seeing all that are able to attend.
Now I will turn the presentation over to Jerome to review the financial results.
Thank you Sachin and good morning, everyone. Please stay on the fourth quarter financial results came in strong, reflecting another quarter of robust commercial and operational execution.
Q4 sales were $1 billion and $64 million a record quarter for Visteon.
We were able to outperform industry production volumes, thanks to the unprecedented cadence and size of our recent product launches in the last few quarters combined with a very proactive supply chain management.
Although semiconductor supply has improved since the first half of the year. We are still seeing a disconnect between supply and demand in the quarter. We benefited from our proactive product for designs. While also securing an important amount of components for brokers and distributors.
In partnership with our customers, we shared the elevated costs and recover cost increases through customer recoveries in the quarter.
Compared to prior year sales were up 35%, including the negative impact from foreign exchange, which reduced sales by approximately 8%.
While we stay on this customer production volumes were up 3% our growth of our markets, excluding net pricing was 26%.
Incremental customer recoveries, partially offset by annual price downs.
So increased sales by 14% for the quarter.
Finally, excluding customer recoveries our base sales were approximately 900 million a good indicator of how our underlying business is performing.
On a comparable basis, which is also a record level for visteon.
Adjusted EBITDA was $103 million up $11 million versus prior year, and representing a margin of nine 7%.
Compared to prior year, adjusted EBITDA benefited from higher base sales and year over year operational improvements.
The quarter also benefited from approximately $5 million of catch up in customer recoveries related to costs incurred earlier in the year.
Partially offsetting these benefits were the impact of currency headwinds the non recurrence of a onetime customer claim last year as well as an increase in both gross and generating in SG&A.
While we continue to invest in very strategic areas of engineering as mentioned by such in gross engineering costs were also impacted by one time program expanded this quarter, while higher SG&A, primarily related to incentive compensation increases.
Adjusted free cash flow for the quarter was an inflow of $141 million driven primarily by higher EBITDA and favorable working capital generated by an increased customer recovery collections.
We ended the quarter with total cash of $523 million and $349 million of debt, resulting in a net cash position of $174 million.
Turning to page 11.
For the full year sales came in at $3 75 billion eclipsing our previous record of $3 15 billion, which was achieved in 2017 when industry production volumes were at 95 million units.
Since 2020 industry production volumes have increased modestly as growth continued to be constrained by semiconductor availability.
Despite this challenging environment <unk> compounded annual sales growth was 21% benefiting from a robust set of product launches proactive supply chain management and customer recoveries.
Okay.
Compared to prior year sales in 2022 grew 35% growth over market extreme pricing was 21% while customer recoveries offset by annual price Downs was a positive contributor of 14%.
Customer production volumes provided an increase of 5% while foreign exchange was a 5% headwind.
Excluding customer recoveries based sales were approximately $3 26 billion in 2022, an increase of 28% compared to 2020, what production volumes increased 10% in the same periods.
Our adjusted EBITDA margin of nine 3% in 2022 was nearly two full percentage points higher than 2020.
With programs launched on higher volume platforms, relentless operational and efficiency improvements.
Combined with an improved best cost footprint as well as an engineering platform approach our incremental margins have been approximately 22% when excluding the dilutive nature of customer cost recoveries.
Cash flow conversions average approximately 30% over the last three years turning to page 12.
We ended the year with a total cash position of $523 million and maintain a debt balance of $349 million, resulting in a net cash position of $174 million.
This represents our highest net cash position in five years and demonstrates our commitment to maintaining a strong balance sheet.
In addition, we were proactive and refinance our debt earlier last year, extending our debt maturities to 2027 and locked in a low cost of debt with a current interest rate of approximately three 5% when including our cross currency swaps.
In short, we have ample flexibility to invest in strategic actions and drive shareholder value.
Adjusted free cash flow was an inflow of $141 million in the quarter.
The inflow of cash in the quarter was driven by continued improvements in profitability and our focus on optimizing capital expenditures.
In addition, working capital was an inflow for the quarter as we were able to better align the timing impact related to semi conductor spot purchases and the corresponding recoveries.
For the full year, we generated $101 million of adjusted free cash flow in line with our original guidance issued in February of last year.
The increase in adjusted free cash flow compared to prior year was primarily driven by the expansion of our adjusted EBITDA.
Trade working capital was an outflow for the year with supply disruption negatively impacting inventory levels.
<unk> expenditures came in at $81 million as we continue to focus on best cost industrialization practices as well as equipment reuse Capex was also lower than we originally anticipated for the year as we benefited from favorable timing on some programs spending.
Our cash flow for the year demonstrates the team's ongoing commitment to drive actions that are critical to generate cash for the company.
With nearly 30% of cash conversion for 2022, we continue to remain diligent about cash conversion improvements.
Turning to page 13.
On page 13, we present, our full year guidance for 2020 threes are.
Our guidance for sales is $3 95 to $4 15 billion, which at the midpoint of 4.05 billion represents an increase of 8% year over year.
Focusing on the mid point this assumes our customer production is up 1% compared to prior year, while growth of our market is anticipated to be in the low to mid teens.
On the pricing side, we are currently assuming that customer recoveries for 2023 are lower than 2042, primarily due to the lower spot purchases and associated recoveries. This will translate into negative pricing of approximately 200 million or 5% plus our normal annual price.
Downs to customers.
Excluding customer recoveries, we anticipate based sales will be approximately $3 75 billion in 2020 threes on a comparable basis. This equates to a 15% year over year increase in base sales.
Adjusted EBITDA is expected to be between 405 and $445 million, representing a 10, 5% adjusted EBITDA margin at the midpoint with a range of 10, three to 10, 7% compared to prior year. Adjusted EBITDA margin is expected to increase 120 basis points.
As a result of higher volumes and operating efficiencies, partially offset by an increase in net engineering spend.
We currently anticipate net engineering as a percentage of sales will be in the mid to high 5% range as we continue to invest in various strategic areas.
Compared to 2022, we also expect the net impact of supply chain disruptions cost net of recoveries will be similar.
Finally, we anticipate that margins will be diluted by approximately 80 basis points due to customer recoveries.
Adjusted free cash flow is expected to be between 115 and $165 million, which at the mid point of $140 million equates to a conversion of approximately one third of adjusted EBITDA into adjusted free cash flow.
We expect working capital will be an outflow for the year as a result of higher sales and the ongoing supply chain challenges.
Capex is forecasted at approximately $130 million as we invest for future growth expanding our manufacturing plant capacity in the Americas EMEA and in India. We.
We are also investing in critical capability and capacity for our industry, leading battery management systems as well as optical bonding preparing for our electrification and display growth.
Might we see investments and some unfavorable timing of spend capex as a percentage of sales will remain as a low 3% range.
And finally, even though we are not providing quarterly guidance, which is consistent with our existing practices. We do want to highlight some negative calendar relation in Q1 with industry production volumes forecasted to be down sequentially and the unfavorable timing of customer negotiations related to supply chain costs and recoveries.
As a result, we expect our earnings profile to follow a similar cadence to the one we had in 2022.
Turning to page 14.
2023 represents another year in which we anticipate sales growth margin expansion and cash flow generation.
This outlook has been years in the making as we embarked on numerous key initiatives starting as early as 2016.
These initiatives enabled us to benefit from the cockpit secular trends, while outperforming in a challenging environment.
Since 2015, we have transitioned our product portfolio from primarily analog clusters and am FM radios to industry, leading digital clusters centralized domain controllers advanced displays and smart battery management systems, we now have a product portfolio that aligns very well with the <unk>.
Similar trends in the industry and has led to a robust levels of new business wins every year.
In addition, we have been optimizing our cost base with our best in class engineering footprint and the introduction of product platforms that increase reuse and the implementation of our cost focused organization.
From 2020 industry production volumes are forecasted to grow modestly by 4% annually as growth has been constrained by the COVID-19 pandemic and associated supply chain challenges.
In this environment, we are forecasting sales growth with an annual rate of 17% margin expansion of 300 basis points and an increase in cash flow generation, representing strong financial performance as a result of the actions we have taken turning to page 15.
Visteon remains a compelling long term investment opportunity, we have positioned the company for top line growth margin expansion and free cash flow generation and our strong balance sheet provides ongoing flexibility.
I would like to close by again thanking the entire Visteon the organization for their hard work in 2022 to drive record performance and pave the way for future growth.
Sachin mentioned, we are <unk>, our Investor day in March and we look forward to sharing our ongoing growth story and capital allocation thoughts with you in a few weeks. Thank you for your time today I would like now to open the call for your questions.
Thank you.
As a reminder, if you would like to ask a question. Please press Star then one on your telephone keypad.
Our first question is from Emmanuel Rosner with Deutsche Bank. Your line is open.
Alright, thank you so much.
First question is I was hoping you can maybe put the.
2023 margin guidance or outlook I guess in the in the broader context of your sort of like.
Existing mid term margin outlook obviously.
As reported.
<unk> mid tens, but even if you add sort of like recoveries, which probably in the sort of like low to mid 11% maybe.
The environment is sort of that presented some challenges, but I guess what would it take.
Or I guess, what sort of.
Inputs are needed for you to sort of go towards the 12% that you saw in the past you'd be getting too.
Yes, sure, it's Jeff I'll take that.
Hi, Emmanuel good morning, So we are our guidance for 'twenty three shows sales at 4 billion euros $5 million.
ADT is in fact with recoveries and we've.
In our deck, we showed that the recoveries in 2023 will go down from what we had in 2022, but we will still have about $300 million of recoveries.
2023 with no margin so the right way to look at it is really to look at base sales, which are total sales minus recoveries and they are at $3 billion and 75.
For 2023, so essentially we are shy of the 4 billion target in sales by $250 million.
Q essentially at least $150 million.
In sales at.
A mid 20%.
Incremental margin you would get essentially to the 12% so.
And thats, not even including any of the leakage that we're still factoring in in our guidance for 2003. So bottom line. We are very much on track towards our 12% volumes are lower because industry volumes are not.
At 89, and we as we had originally anticipated when we first gave the 4 billion target.
And.
It is just a question of a few quarters before we get to the 2% to 12%.
Okay.
Very helpful and then second one.
I guess on the free cash flow and specifically on Capex I guess this is.
A pretty meaningful step up which seems to be driven by the investment in.
In gross.
How should we be thinking about it.
Specifically in terms of.
The needed investments for this year and then what that means.
In terms of your.
Capital allocation going forward.
Yes, so we had guided so we're going in fact from $81 million this year or in 'twenty two.
$130 million in 'twenty, three and it is to your point a.
Fairly significant step up I must say first that 81 was a little bit on the low end of what we were expecting a little bit of timing between 'twenty to 'twenty three so.
So we'll see some of that drifting into Q1.
This year in terms of the step up is really very much aligned with the growth profile that we have investing in dms, essentially an explication capacity and capability as well as on.
The display on the display side.
We do have a little bit of plant expansions going on nothing major but it's adding up as well to the to their capex for 2020 threes and then beyond manufacturing I would say, we are investing as well limit. It. So that's part of the step up in investment.
And I guess generally we are staying close to the 3%.
Range that we've been used to in the past.
Okay. Thank you very much.
Thank you Danielle.
The next question is from Luke junk with Baird. Your line is open.
Hi, good morning, Thanks for taking the questions.
First.
Question on the operating expense items, just hoping you could expand on the investments in engineering and SG&A that you said in the prepared remarks, and specifically I'm just trying to square it with the one time items in incentive comp impacts that we saw in the fourth quarter here in terms of run rate levels going forward for those items. Thank you yes.
So overall, our I'll start with engineering and ill, let such as well give some color in terms of the investments, but just in terms of numbers. We ended the year with engineering being fairly low in fact, we were close to $200 million in engineering.
Higher gross engineering because of the onetime that we incurred but essentially offset by higher recoveries as well. So overall, we were I think at five 2% for the full year in terms of engineering, which is slightly lower than what we had.
Guided to originally so.
A bit like similar to Capex, we're starting with a low base in terms of investments for next year.
Very much aligned with what we've been talking about electrification, such and talk to as well in his prepared remarks about online services, yes, maybe I can jump in here.
Sachin. Thanks. Thanks, So yes look so we are anticipating that.
Technology trends in automotive are going to accelerate.
On the corporate as well as in.
EV powertrain electronics.
And the trend towards.
Our software defined vehicle for the industry are going to go through this Google means initially and we are anticipating and preparing for that and we have really good assets today in those areas such as smart core Vms technology.
Looking at opportunities to extend our these.
These are assets and address even beyond the passenger vehicle market two wheelers commercial vehicles et cetera, and as Jerome mentioned add new features and functions, especially in the areas of cloud services and for BMS and for power electronics add new features and.
But it is.
Push towards.
Faster charging and higher levels of safety for <unk>.
<unk> power electronics.
We are really driving.
Cutting edge of that technology.
This is going to require some investments from our side as we go forward.
So in terms of engineering percentage for next year, we are anticipating a slight increase versus where we were so as I said five 2%. This year on 22 and will be probably between five five and 6% engineering cost as a percentage of sales for 2023 in <unk>.
Arms of SG&A.
Modest investment there inflation as well and investments in it.
We will essentially keep our percentage flat year over year versus what we had in 2022.
Okay, Great all very helpful detail. Thank you both for that and then session for my follow up hoping to ask you about the launch that you mentioned with Lotus in partnership with E car X, just hoping to better understand the mechanics of that relationship.
The two companies are working together.
Yes, great right. So when you talk about China.
The market is as you know different from the rest of the world in terms of the level of.
Cloud service integration, that's expected in vehicles in China for the cockpit.
So we provide a small core platform. So that's all of the hardware.
And all of this.
Features and functions to smartphone brands and <unk> has their services on top of it as well as the HMA and the cloud services. So.
This is something that we don't.
Expect visteon in China to be able to.
Offer to the extent that our partner scan and so this collaboration brings the best of breed of both sites are proven smart core technology that we have.
Now launched on more customers than virtually any other supplier emphasis really.
And well accepted in the marketplace.
And he codecs with Delta.
Capabilities and assets that they bring especially on the cloud services.
Smart voice using AI and other applications and also aid us by the way Thats getting more and more integrated with the cockpit in China. So that's.
The nature of our collaboration.
At 70 vehicles launched.
Already and so pretty excited about what that means for our future growth for smartphone in China.
Very helpful. Thank you for that question I'll leave it there.
Great. Thanks Lew.
The next question is from David Kelley with Jefferies. Your line is open.
Hi, Good morning, guys. Thanks for taking my questions as well I wanted to start with with recovery and I. Appreciate the color on the expected impact on 2023 sales I guess, how should we think about the visibility to those recoveries how much has been negotiate.
<unk> and.
Today versus.
Ongoing discussions with their customers.
Yes, that's a good question good morning, David.
So very pleased with the level of recoveries, we had in 2022.
Net leakage was close to $20 million slightly better in fact.
Versus our original targets.
As we go into 2023.
Mechanically I would said that most of the surcharge recoveries are kind of a reset thoughts at the same time, we have.
<unk> had discussions with our customer for the last few months.
Indicating that these cost increases would continue into 2023. So we are still in the middle of negotiations as far as recoveries are concerned.
There is definitely an expectation that 2022 cost increases will roll into 2023.
And we will add obviously some level of true ups for the 2023 cost increases or decreases that we'll have so right in the middle of that we have indicated as well I think like a lot of other suppliers that are earnings profile will be a little bit distorted.
Again this year by the level of success well have in Q1 versus the other quarters.
And Youll see probably a.
Our ramp up in terms of earnings profile.
Throughout the year as we are more and more successful too.
Close negotiations on recoveries.
Okay got it that's helpful. Thank you and then maybe just a follow up question on the mix impact from the ongoing supply chain disruption I guess, a where you held back on let's call. It higher dollar content shipments due to the supply shortages in 2022.
And does the change in the type of those shortages moving because you acknowledged micro controllers and away from some of the analog and digital issues of last year does that at all have an impact on mix in 2023.
Yes.
A good question and let me try to explain how that mix has.
It impacted us in 'twenty, two lenders shift that we expect in 'twenty three so as I've mentioned.
Primarily in 2022, the shortages in the area of power and analog chips and as such they cut across all products, but one of the things to kind of keep.
Keep in mind is every product that we acquired.
Requires just power chips to drive the rest of the circuitry and if there are disputes involve some analog chips that also come into the picture so virtually all of our products.
Impacted to some level in 2022 towards the end of 2022, we started to see the supply of these lots should start to improve and also on account of the work that we have done that.
I think as ahead of most in our industry in terms of working with the specific suppliers. So as we.
Start here in 2023, we see situations with respect to power and analog chips improve.
We're already seeing those improvements and we expect that to continue to improve.
But there are emerging shortages and.
Areas of Microcontrollers that is more driven by.
The lack of wafer supply from foundries to semiconductor suppliers that.
The visibility of that was not very great towards the end of last year and as we started to come to the end of the year.
Became more of a pattern that.
We will start with a short term situation does microcontrollers those microcontrollers in particular effect.
Digital clusters of product line more than say smart call or others.
We anticipate some impact there.
And we expect that to improve in the second half of the year as I also mentioned before at the same time.
We are continuing to redesign some of our products to give us more flexibility. So that we would be in a position to address more demand as we anticipate as we go forward, especially on the closeness with the launches that we've had that.
But we would be then in a position with the redesigns to work around some of the shortages and Thats what is factored in that forecast, especially the growth over market forecast that we have.
Forecasted for 'twenty three.
Okay.
Got it that's really really helpful. Thank you.
The next question is from James Picariello with BNP Paribas. Your line is open.
Hi, good morning.
Good morning Betsy.
Back to the supply chain.
If you are still making some choppiness.
From a semi supply standpoint to the FERC.
First half then assuming some demand weakness in the back half to get to your full year assumption of up just 1%, but again from a chip supply perspective, if demand were to prove more resilient in the second half.
To what extent do you think the industry can handle better production growth relative to your up 1%, what's the supply chain right limiting Max growth for production. This year as you see it.
Yes, so first of all I would like to clarify that demand as we see today is stronger than.
What we believe the supply chain given with the improvements Ken can address.
Having said that.
If the demand holds up especially.
In the second half and I expect that the vehicle production to improve beyond the 84 million units that we have outlined.
Far from up from 84 it might go.
That's hard for me to say.
And so my expectation would be that if you think about.
'twenty 'twenty.
One to 2022, the industry added about 5 million units of production.
That would be the kind of range that I would expect that the <unk>.
We would be able to do again.
The supply constraints were to be somewhat lifted.
Got it and if we do add again hypothetically, if we were to add 5 million units of production growth with that.
Would that force visteon to likely have to reenter the spot by the broker market for chips are okay. At this point your best assessment would be possibly that.
Your contracted supply could could support that how should we be thinking about that.
Right and in general we expect that it would be less even in the case that the demand is higher because of all the redesigns that we have done right. So there are two dynamics that will help us in 'twenty three one we do expect the supply levels themselves to go up on a kind of the work that.
It has been done by our suppliers and the specific area that we are now highlighting.
A bigger problem, which is the microcontrollers with the new designs that we are doing I expect that we would be able to work around it in the second half. So overall I expect that.
Supply increase.
Keeping up with the demand.
Okay Super helpful.
One quick one any chance to get a finer point on the cadence for the year I know its a sequential ramp similar to last year.
Maybe a marker on <unk> relative to <unk> or on a year over year basis, just to get a better feel for Friday youre starts off.
We won't give any any guidance for Q1, but it's really impacted by two things first.
The recoveries.
Recoveries in the cadence of <unk>.
The negotiation and then the second point is production.
IHS is already showing 5%.
Down four.
For Q1 so.
Essentially what they can drive.
The quarter's.
Throughout the year.
<unk> levels as well as the level of recoveries.
Thanks.
Thank you.
The next question is from Colin Langan with Wells Fargo. Your line is open.
Oh, great. Thanks for taking my questions.
Just wanted to ask about the new business wins, when I look at the mix of this year versus last year.
<unk> is just 17% I think it was like 41% last year that'd be about a million dollars swing.
Obviously offset by other areas is there a reclassification that's impacting that or is there something going on in that segment are timing. This year that would cause the big swing just kind of wondering if theres any color there no no. So.
Collyn. This is Hudson, so I don't think Theres anything.
Structural debt.
Just a timing issue.
Last year, we had a pretty good year for clusters, but some of the other sectors were not.
Our strong and there seems to be reversed in 'twenty to 'twenty. Two so I wouldn't say that we are expecting anything different.
Spoke to our go forward views on instruments.
Okay got it.
And if I look at the guidance it looks like something like a 16% incremental on the sales excluding the impact of our coverings I think you've mentioned interest on let's call. It low twenty's as normal we want to make sure I get all the offsets.
R&D as a headwind.
And then input costs and any color on that the size of these input costs that we're expecting.
And is there any yes, so we are.
Okay.
Sure sure Colin.
So youre right. So face value. We are I think we are 26% incremental but removing.
The recoveries, we are at 16% so volumes are converting at the.
The normal levels.
<unk> in the mid 20% range.
Offsets are as we said engineering and it's not just the increases that we are the absolute levels that we are.
Seeing in 'twenty, three it's as well the comp which is a little bit.
Harder given that engineering came in low in in 2022, largely because of recoveries, we have as well as a modest increase in SG&A and then all these fees offset by operational improvements in terms of.
I would say what I would call the leakage in terms of the supply chain disruptions, we're essentially assuming that the net leakage of $20 million that we had in 2022 will carry forward into 2023, so same amount of.
Leakage.
Geography, maybe a little bit different but the same amount <unk> forecasted for 2023.
And that's related to and this year is it the same as last because I thought last year was more semi conductor costs and the timing of getting those recoveries or is labor related because a lot of other suppliers of call that out it's more for us it's definitely more semi related absolutely yes.
Okay, alright, thanks for taking my questions.
Thank you.
The next question is from K Mccalley with Citi. Your line is open.
Great. Thanks, good morning, everyone.
Just maybe a bigger picture question on the sustainability.
Sustainability mid teens, you have obviously a strong how sustainable do you think that is beyond 2023, and what kind of booking.
Bookings should we are you targeting this year that can kind of support that sustainability in future years.
Yes, so let's talk about this year and we'll see how what happens in terms of the market.
Going into the future but.
We will be again targeting $6 billion of events this year.
We have done last year.
And with that level of when this should be able to continue.
Mid teens.
And at least.
Now as we go forward.
As our base sales of increases is going to be having some.
On the <unk> percentages.
Because of the increase of the base.
But we will talk more about the future on our Investor day here.
That's coming up on the seventh of March.
More color on how.
We see the.
Outer years.
Have a look.
Perfect. That's helpful thoughts and then maybe just a quick follow up back to the cadence of the settlements Destiny makes sure I have it clear is that just a timing issue from some kind of normal course price downs or are some of these recoveries just pumping to be more challenging early on here in the year.
It's very similar to what we had in 2022. So it takes some time to.
Negotiate with the OE the recovery. So the cadence we are anticipating in 'twenty three will be similar to the cadence of negotiation and successful closing of the negotiation that we had in 2022, so no no no.
<unk> differences between the two.
Perfect. That's very helpful. Thank you.
Thank you.
This does conclude our earnings call for the fourth quarter and full year 2022.
Everyone for participating in today's call and your ongoing interest in Visteon.
Do you have any follow up questions. Please contact me, Chris Doyle, our rang is area directly thank you.
This concludes <unk> fourth quarter and full year 2022 results earnings call. You may now disconnect. Thank you.
Okay.
Yes.
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Yes.
Yes.