Visteon Corporation Q1 2023 Earnings Call

April 27, 2023

Sachin Lawande: Flagship full-sized SUVs and trucks. These additional vehicles are scheduled to go into production later in 2024 and in 2025 and across multiple brands in North America. The wins we have highlighted are a good example of the platform approach to sourcing that OEMs are increasingly taking for their electronic systems. The increased complexity and the shorter product introduction timelines make it more attractive to develop systems that can work across multiple vehicle models. On the following slide, I would like to spend a few minutes discussing the progress we have made in our electrification business and the momentum we're building in this area. Turning to page six.

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Speaker 1: full-sized SUVs and trucks.

Speaker 1: These additional vehicles are scheduled to go into production later in 2024 and 2025 and across multiple brands in North America.

Speaker 1: For example, of the platform approach to sourcing that OEMs are increasingly taking for their electronic systems.

Speaker 1: The increased complexity and the shorter product introduction timelines make it more attractive to develop systems that can work across multiple vehicle models.

Sachin Lawande: On the following slide, I would like to spend a few minutes discussing the progress we have made in our electrification business and the momentum we're building in this area. Turning to page six.

Speaker 1: On the following slide, I would like to spend a few minutes discussing the progress we have made in our electrification business and the momentum we are building in this area.

Sachin Lawande: The automotive industry has seen a rapid growth in sales of electric vehicles in the past 3 years, and in Q1 of this year, battery electric cars made up about 10% of all passenger vehicle sales for the first time. Car manufacturers are responding to this trend by rapidly launching new electric vehicle models. Visteon's strategy in electrification is to help carmakers build battery electric vehicles that offer superior range and charging performance through innovation in BMS and power electronics. This slide summarizes the progress we have made in building momentum in our electrification business over the past couple of years. We introduced the first wireless BMS system in the industry in 2020 and have continued to develop advanced features to improve measurement accuracy and safety while supporting the latest battery chemistries and cell configurations.

Speaker 1: Turning to page 6. The automotive industry has seen a rapid growth in sales of electric vehicles in the past three years, and in the first quarter of this year, battery electric cars made up about 10% of all passenger vehicle sales for the first time.

Speaker 1: Car manufacturers are responding to this trend by rapidly launching new electric vehicle models.

Speaker 1: VISTION's strategy in electrification is to help carmakers build battery electric vehicles that offer superior range in charging performance through innovation in BMS and power electronics.

Sachin Lawande: This slide summarizes the progress we have made in building momentum in our electrification business over the past couple of years. We introduced the first wireless BMS system in the industry in 2020 and have continued to develop advanced features to improve measurement accuracy and safety while supporting the latest battery chemistries and cell configurations.

Speaker 1: This slide summarizes the progress we have made in building momentum in our electrification business over the past couple of years. We introduced the first wireless BMS system in the industry in 2020 and have continued to develop advanced features to improve measurement accuracy and safety.

Sachin Lawande: In total, we have added 3 carmakers to our customer portfolio for this first generation of wireless BMS system and have won over $5 billion in business across 24 new vehicle models that are just starting to launch. These wins will keep our team busy with upcoming launches and will generate significant revenue for the company for the rest of the decade. While the first generation electric vehicles are using 400-volt battery systems, the past two years have seen an increased interest in the use of higher voltage battery systems to reduce charge time and for other benefits. In addition to upgrading our BMS technology to support 800-volt batteries, we have also added power electronics products to our portfolio, focusing on bidirectional grid-to-cell charging and power conversion for high voltage systems.

Speaker 1: while supporting the latest battery chemistries and cell configurations.

Speaker 1: In total, we have added three carmakers to our customer portfolio for this first generation of wireless PMS system and have won over $5 billion in business across 24 new vehicle models that are just starting to launch.

Speaker 1: These wins will keep our team busy with upcoming launches and will generate significant revenue for the company for the rest of the decade.

Sachin Lawande: While the first generation electric vehicles are using 400-volt battery systems, the past two years have seen an increased interest in the use of higher voltage battery systems to reduce charge time and for other benefits. In addition to upgrading our BMS technology to support 800-volt batteries, we have also added power electronics products to our portfolio, focusing on bidirectional grid-to-cell charging and power conversion for high voltage systems.

Speaker 1: While the first generation electric vehicles are using 400 volt battery systems, the past two years have seen an increased interest in the use of higher voltage battery systems to reduce charge time and for other benefits. In addition to upgrading our BMS technology to support 800 volt batteries, we have also added power electronics products to our portfolio.

Sachin Lawande: Our goal is to facilitate the shift of the industry to 800-volt and higher battery systems, which we believe will help accelerate the shift to electric vehicles with a broader set of consumers. Earlier this year, at the Consumer Electronics Show in Las Vegas, we showcased our latest BMS system and new power electronics technologies with support for both 400- and 800-volt configurations. Since then, we have signed a joint development agreement with a high volume carmaker in Asia to co-develop the next generation BMS solution that's targeted for launch in 2025. We have also signed an agreement with a luxury carmaker in Europe to develop a prototype of a highly integrated onboard charger and multiple DC to DC converters to power their next generation of electric vehicles.

Speaker 1: charging and power conversion for high voltage systems.

Speaker 1: Our goal is to facilitate the shift of the industry to 800 volt and higher battery systems, which we believe will help accelerate the shift to electric vehicles with a broader set of consumers.

Speaker 1: Earlier this year, at the Consumer Electronics Show in Las Vegas, we showcased our latest BMS system and new power electronics technologies with support for both 400 and 800 volt configurations. Since then, we have signed a joint development agreement.

Speaker 1: with a high volume car maker in Asia to co-develop the next generation BMS solution that's targeted for launch in 2025.

Sachin Lawande: We have also signed an agreement with a luxury carmaker in Europe to develop a prototype of a highly integrated onboard charger and multiple DC to DC converters to power their next generation of electric vehicles.

Speaker 1: We have also signed an agreement with a luxury car maker in Europe to develop a prototype of a highly integrated onboard charger and multiple DC to DC converters to power their next generation of electric vehicles.

Sachin Lawande: These joint development programs validate Visteon's technology capabilities in electrification and positions the company well to win future business. In addition to these advanced technology development initiatives, we are in discussions with multiple carmakers to develop 800-volt version of BMS systems for market introduction in the 2025, 2026 timeframe. I expect the company to announce additional customers and business for electrification through the rest of the year. I'm very pleased by what the team has been able to accomplish in electrification, and I'm excited for what is to come. Turning to page seven. The Q1 was busy for Visteon from an operational viewpoint. The company launched its products in 34 new vehicle models across the world in the Q1, which is an incredible achievement for the team.

Speaker 1: These joint development programs validate Visteon's technology capabilities in electrification and positions the company well to win future business. In addition to these advanced technology development initiatives, we are in discussions with multiple carmakers to develop 800-volt version of BMS systems for market introduction.

Sachin Lawande: Turning to page seven. The Q1 was busy for Visteon from an operational viewpoint. The company launched its products in 34 new vehicle models across the world in the Q1, which is an incredible achievement for the team.

Speaker 1: The first quarter was busy for Visteon from an operational viewpoint. The company launched its products in 34 new vehicle models across the world in the first quarter, which is an incredible achievement for the team.

Sachin Lawande: Every new launch requires customization of the product to fit the unique requirements of each vehicle and market, in addition to ensuring sufficient supply of critical components like semiconductors to support customers' dynamic production plans. As more of our business is becoming platform-based and across multiple vehicle models, we have decided to highlight the number of product launches across all vehicle models instead of just the initial launch, which provides a more complete correlation to revenue contribution from the program and demonstrates our operational execution in the delivery of the products. We have highlighted a few key product launches to demonstrate the extension of programs that contribute to the growth of our sales. We launched our twelve-inch digital clusters in heavy duty versions of Chevy Silverado and GMC Sierra trucks with GM. These vehicles follow the other SUVs and trucks that we have already launched our twelve-inch cluster in previously.

Speaker 1: Every new launch requires customization of the product to fit the unique requirements of each vehicle and market, in addition to ensuring sufficient supply of critical components like semiconductors to support customers' dynamic production plans.

Sachin Lawande: As more of our business is becoming platform-based and across multiple vehicle models, we have decided to highlight the number of product launches across all vehicle models instead of just the initial launch, which provides a more complete correlation to revenue contribution from the program and demonstrates our operational execution in the delivery of the products. We have highlighted a few key product launches to demonstrate the extension of programs that contribute to the growth of our sales.

Speaker 1: As more of our business is becoming platform-based and across multiple vehicle models, we have decided to highlight the number of product launches across all vehicle models instead of just the initial launch.

Speaker 1: which provides the more complete correlation to revenue contribution from the program and demonstrates our operational execution in the delivery of the products.

Speaker 1: We have highlighted a few key product launches to demonstrate the extension of programs that contribute to the growth of our sales. We launched our 12-inch digital clusters in heavy-duty versions of Chevy Silverado and GM Sierra trucks with GM.

Sachin Lawande: We launched our twelve-inch digital clusters in heavy duty versions of Chevy Silverado and GMC Sierra trucks with GM. These vehicles follow the other SUVs and trucks that we have already launched our twelve-inch cluster in previously.

Sachin Lawande: Our digital cluster business has grown rapidly over the past two years with GM, and these launches will continue this performance in 2023. We launched our digital cluster and audio system for the 2023 Ford Ranger for Latin America, which is a midsize truck that's popular in the region. In China, we launched our SmartCore™ cockpit domain controller on the Zeekr electric vehicle from Geely, in partnership with ECARX, and a digital cluster on the Honda e:NP1, also an electric vehicle. About 20% of our new launches were on electric vehicles, reflecting the increased focus on EV model launches at car makers. Turning to page eight. Our outlook for full year vehicle production at our customers remains unchanged, with production volumes growing at low single-digit level. We expect semiconductor supply will continue to improve, although some chips will remain tight throughout the year.

Speaker 1: These vehicles follow the other SUVs and trucks that we have already launched our 12 inch cluster in previously.

Speaker 1: Our digital cluster business has grown rapidly over the past two years with GM and these launches will continue this performance in 2023.

Speaker 1: We launched a digital cluster and audio system for the 2023 Ford Ranger for Latin America, which is a midsize truck that's popular in the region. In China, we launched a smart core cockpit domain controller on the Zieker electric vehicle from Geely in partnership with E-CarX.

Speaker 1: and a digital cluster on the Honda ENP1, also an electric vehicle. About 20% of our new launches were on electric vehicles, reflecting the increased focus on EV model launches at carmakers.

Sachin Lawande: Turning to page eight. Our outlook for full year vehicle production at our customers remains unchanged, with production volumes growing at low single-digit level. We expect semiconductor supply will continue to improve, although some chips will remain tight throughout the year.

Speaker 1: Turning to page 8.

Speaker 1: Our outlook for full year vehicle production at our customers remains unchanged with production volumes growing at low single digit level.

Sachin Lawande: As mentioned previously, our goal is to redesign and use alternate chips where necessary, and our objective is to not be limited by chip supply in H2 of the year. Consumer demand in US and Europe has been encouraging thus far, and we expect that this demand will remain strong in the near term. With the economy improving in China, we expect consumer demand to also improve in that region. At the same time, the potential risk to consumer demand arising from high financing rates, coupled with higher vehicle prices that we incorporated in our 2023 guidance remains. Our solid Q1 results and the robust near term demand we are seeing from customers gives us confidence in our outlook for the rest of the year, and we are reaffirming our full year 2023 guidance. Turning to page nine.

Speaker 1: We expect semiconductor supply will continue to improve, although some chips will remain tied throughout the year. As mentioned previously, our goal is to redesign and use alternate chips where necessary.

Speaker 1: And our objective is to not be limited by chip supply in the second half of the year. Consumer demand in the US and Europe has been encouraging thus far and we expect that this demand will remain strong in the near term.

Speaker 1: With the economy improving in China, we expect consumer demand to also improve in that region.

Speaker 1: At the same time, the potential risk to consumer demand arising from high financing rates coupled with higher vehicle prices that we incorporated in our 2023 guidance remains.

Sachin Lawande: Our solid Q1 results and the robust near term demand we are seeing from customers gives us confidence in our outlook for the rest of the year, and we are reaffirming our full year 2023 guidance. Turning to page nine.

Speaker 1: Our solid Q1 results and the robust near-term demand we are seeing from customers gives us confidence in our outlook for the rest of the year and we are reaffirming our full year 2023 guidance.

Sachin Lawande: In summary, the company executed well in Q1 to deliver our 16th consecutive quarter of sales growing faster than vehicle production. Our disciplined execution of the company's operational and commercial plans resulted in strong sales growth of 22% excluding currency and adjusted EBITDA margin of 10.2%. New product launches and new business wins in Q1 were in line with our expectations and puts us on track to achieve our goals for the full year. Lastly, we made good progress in our electrification business in Q1 by adding more vehicle models to existing programs and engaging with new customers for future business. Now I will turn the presentation over to Jerome to review the financial results.

Speaker 1: Turning to page 9.

Speaker 1: In summary, the company executed well in the first quarter to deliver our 16th consecutive quarter of sales growing faster than vehicle production.

Speaker 1: Our disciplined execution of the company's operational and commercial plans resulted in strong sales growth of 22% excluding currency and adjusted EBITDA margin of 10.2%.

Speaker 1: New product launches and new business wins in the first quarter were in line with our expectations and puts us on track to achieve our goals for the full year.

Sachin Lawande: Lastly, we made good progress in our electrification business in Q1 by adding more vehicle models to existing programs and engaging with new customers for future business. Now I will turn the presentation over to Jerome to review the financial results.

Speaker 1: And lastly, we made good progress in our electrification business in the first quarter by adding more vehicle models to existing programs and engaging with new customers for future business. Now I will turn the presentation over to Jerome to review the financial results.

Jerome Rouquet: Thank you, Sachin, and good morning, everyone. Visteon's Q1 financial results came in strong with our focus on commercial and operational discipline continuing to drive results. Excluding exchange, Q1 sales grew 22% versus prior year, benefiting from an increase in customer volumes, a double-digit market outperformance, and higher customer recoveries. Compared to customer vehicle production volumes, growth of a market net of pricing was 11%, representing our 16th consecutive quarter of growth over markets. Semiconductor supply continued to improve in the quarter, with a number of parts in critical shortage decreasing significantly from the Q4 of last year. As a result, the amount of semiconductors purchased through the broker and distributor spot market channels decreased. However, we continue to see elevated prices from our tier two suppliers, which we are sharing with our customers.

Speaker 2: Thank you, Sachin, and good morning, everyone. Vistion's first quarter financial results came in strong with our focus on commercial and operational discipline continuing to drive results.

Speaker 2: Excluding exchange, Q1 sales grew 22% versus prior year, benefiting from an increase in customer volumes, a double-digit market outperformance, and higher customer recoveries.

Speaker 2: Compared to customer vehicle production volumes, growth over market net of pricing was 11%, representing our 16th consecutive quarter of growth over market. Semiconductor supply continued to improve in the quarter, with a number of parts in critical shortage.

Jerome Rouquet: Semiconductor supply continued to improve in the quarter, with a number of parts in critical shortage decreasing significantly from the Q4 of last year. As a result, the amount of semiconductors purchased through the broker and distributor spot market channels decreased. However, we continue to see elevated prices from our tier two suppliers, which we are sharing with our customers.

Speaker 2: decreasing significantly from the fourth quarter of last year. As a result, the amount of semiconductors purchased through the broker and distributor sports market channels decreased.

Speaker 2: However, we continue to see elevated prices from our Tier 2 suppliers, which we are sharing with our customers. Compared to prior year, we were able to finalize more customer negotiations in Q1 this year, which increased sales, while reducing the impact to adjusted EBITDA.

Jerome Rouquet: Compared to prior year, we were able to finalize more customer negotiations in Q1 this year, which increased sales while reducing the impact to adjusted EBITDA. Although this was a large year-over-year improvement, the net leakage in the quarter still negatively impacted adjusted EBITDA by $ a few million. Adjusted EBITDA was $99 million, representing a 10.2% margin. Compared to prior year, EBITDA benefited from higher sales and the favorable timing of customer recoveries secured in Q1, partially offset by increases in net engineering and SG&A expenses supporting our growth. Adjusted free cash flow was -$37 million, in line with a cash outflow we've experienced in Q1 of last year, partially driven by the increased 2022 incentive compensation paid out in Q1, as well as the cash timing of customer recoveries negotiations that settled late in the quarter.

Speaker 2: Although this was a large year-over-year improvement, the net leakage in the quarter still negatively impacted adjusted EBITDA by a few million dollars.

Speaker 2: But Yossi Ibidar was 99 million, representing a 10.2% margin. Compared to prior year, Ibidar benefited from higher sales and a favorable timing of customer recovery secured in Q1, partially offset by increases in net engineering and SDNA expenses supporting our growth.

Jerome Rouquet: Adjusted free cash flow was -$37 million, in line with a cash outflow we've experienced in Q1 of last year, partially driven by the increased 2022 incentive compensation paid out in Q1, as well as the cash timing of customer recoveries negotiations that settled late in the quarter.

Speaker 2: Adjusted free cash flow was negative 37 million, in line with the cash outflow we've experienced in Q1 of last year, partially driven by the increased 2022 incentive compensation paid out in Q1, as well as the cash timing of customer recovery negotiations that settled late in the quarter. We ended Q1 with total cash of 487 million.

Jerome Rouquet: We ended Q1 with total cash of $487 million, representing a net cash position of $135 million and a net leverage ratio of -0.4x. In total, our Q1 results provide a strong foundation for the rest of the year and keep us on track to achieve our full year guidance of sales growth, margin expansion, and cash flow generation. Turning to page 12. Page 12 provides more detail on our sales increase and margin expansion for the quarter. Q1 sales were $967 million. When excluding the impact from customer recoveries, base sales came just under $900 million, representing an increase of $126 million year-over-year.

Speaker 2: and cash flow generation.

Speaker 2: Turning to page 12.

Speaker 2: Page 12 provides more detail on our sales increase and margin expansion for the quarter.

Jerome Rouquet: When excluding the impact from customer recoveries, base sales came just under $900 million, representing an increase of $126 million year-over-year.

Speaker 2: Q1 sales were 967 million. When excluding the impact from customer recoveries, base sales came just under 900 million, representing an increase of 126 million year over year.

Jerome Rouquet: Compared to prior year, customer vehicle production volumes increased 9%, driven by improved semiconductor supply as well as strong customer demand in both North America and Europe, which more than offset the slow start of the year in China. Foreign exchange was a modest headwind to sales of 4%. The remainder of the growth in base sales was driven by high demand for our digital cockpit products. Our strong new business wins in the past few years continue to convert into product launches, which will continue to drive increased sales. These programs are typically launched on OEM platforms across multiple vehicle lines and continue to grow our sales as follow-on model launches are brought into production on new vehicles and in additional markets. Customer recoveries, which are illustrated by the dotted boxes, increased on a year-over-year basis.

Speaker 2: Compared to prior year, customer vehicle production volumes increased 9%, driven by improved semiconductor supply, as well as strong customer demand in both North America and Europe , which more than offset the slow start of the year in China. Foreign exchange was a modest headwind to sales of 4%.

Speaker 2: was driven by high demand for our digital cockpit products.

Speaker 2: Our strong new business wins in the past few years continue to convert into product launches, which will continue to drive increased sales.

Jerome Rouquet: These programs are typically launched on OEM platforms across multiple vehicle lines and continue to grow our sales as follow-on model launches are brought into production on new vehicles and in additional markets. Customer recoveries, which are illustrated by the dotted boxes, increased on a year-over-year basis.

Speaker 2: model launches are brought into production on new vehicles and in additional markets.

Jerome Rouquet: Despite the improving supply dynamic, we're still confronted with increased costs from our tier two suppliers, impacting semiconductor and non-semiconductor purchases. We continue to actively work with our customers to share these higher costs, which are leading to higher recoveries on a year-over-year basis. In addition, we also benefited this year from favorable timing as we were able to close out more customer negotiations earlier in the year. Finally, spot purchase recoveries were essentially flat year-over-year at $25 million, but decreased approximately 75% on a sequential basis due to the improving supply from our Q2 suppliers. Adjusted EBITDA was $99 million or 10.2%, an improvement of 150 basis points versus prior year.

Speaker 2: Customer recoveries, which are illustrated by the dotted boxes, increase on a year-over-year basis.

Speaker 2: Despite the improving supply dynamic, we're still confronted with increased cost from our Tier 2 suppliers, impacting semiconductor and non-semiconductor purchases. We continue to actively work with our customers to share these higher costs which are leading to higher recoveries on a year-over-year basis.

Jerome Rouquet: Finally, spot purchase recoveries were essentially flat year-over-year at $25 million, but decreased approximately 75% on a sequential basis due to the improving supply from our Q2 suppliers. Adjusted EBITDA was $99 million or 10.2%, an improvement of 150 basis points versus prior year.

Jerome Rouquet: Adjusted EBITDA increased $28 million, driven by the flow-through on higher base sales and the favorable timing of customer recoveries in 2023, which decreased the net cost impact from elevated semiconductor and other inflationary costs. Net engineering was higher by $8 million compared to prior year, primarily driven by the timing of engineering recoveries. As a percentage of sales, net engineering was 5.8% in the quarter and tracking in line with our full year expectations. Adjusted SG&A was up $7 million, primarily due to personnel costs, investment in IT, and bad debt, partially offset by foreign exchange. As a percentage of sales, Q1 adjusted SG&A came in at 4.6%, flat compared to prior year. Our cost discipline and increasing scale continued to allow us to leverage our fixed costs while investing in the business.

Jerome Rouquet: Adjusted SG&A was up $7 million, primarily due to personnel costs, investment in IT, and bad debt, partially offset by foreign exchange. As a percentage of sales, Q1 adjusted SG&A came in at 4.6%, flat compared to prior year. Our cost discipline and increasing scale continued to allow us to leverage our fixed costs while investing in the business.

Jerome Rouquet: Compared to our expectations, Q1 came in slightly better than anticipated, primarily due to higher production volumes and the favorable timing of when we were able to finalize customer negotiations. In Q2, we currently anticipate that industry production volumes will be flat to modestly up compared to Q1, and therefore we expect Q2 financial results to look fairly similar to Q1. Turning to page 13. We maintain one of the strongest balance sheets in the industry, which positions us well to grow the business and provides flexibility on our capital allocation opportunities. We ended the quarter with total cash of $487 million, representing a net cash position of $135 million, with a net leverage ratio of -0.4x. At our recent Investor Day, we announced a $300 million share repurchase program that runs to the end of 2026.

Jerome Rouquet: We ended the quarter with total cash of $487 million, representing a net cash position of $135 million, with a net leverage ratio of -0.4x. At our recent Investor Day, we announced a $300 million share repurchase program that runs to the end of 2026.

Jerome Rouquet: The amount of repurchases will depend on several factors, including cash flow generation as well as other industry dynamics. In Q1, adjusted free cash flow was an outflow of $37 million, similar to the outflow we had in Q1 of last year and in line with our expectations for the quarter. Working capital was an outflow primarily driven by the timing of customer recovery negotiations. Since many of the negotiations were finalized late in the quarter, we saw an imbalance between AR and AP balances, which we anticipate will normalize throughout the remainder of the year. Inventory was a slight outflow of $5 million. Cash taxes were elevated in the quarter versus prior year due to the cash payments related to increasing profitability in some countries, which was contemplated in our original cash flow guidance.

Jerome Rouquet: Inventory was a slight outflow of $5 million. Cash taxes were elevated in the quarter versus prior year due to the cash payments related to increasing profitability in some countries, which was contemplated in our original cash flow guidance.

Jerome Rouquet: Interest payments remained low and primarily relate to our $350 million Term Loan A that matures in 2027. The outflow in other changes was primarily driven by the company's annual incentive payout, which occurred in March. This was partially offset by the favorable timing in VAT taxes and other changes in assets and liabilities. CapEx was $21 million in the quarter. We expect this number to increase throughout the year in line with our full year guidance, which reflects our ongoing investments in manufacturing and electrification. Turning to page 14. Visteon remains a compelling long-term investment opportunity. We have positioned the company for top line growth, margin expansion, and free cash flow generation, while our strong balance sheet continues to provide significant flexibility.

Jerome Rouquet: Turning to page 14. Visteon remains a compelling long-term investment opportunity. We have positioned the company for top line growth, margin expansion, and free cash flow generation, while our strong balance sheet continues to provide significant flexibility.

Jerome Rouquet: As Sachin mentioned, our solid start of the year gives us confidence in our 2023 guidance, and we are on track to achieve those targets. Thank you for your time today. I would like now to open the call for your questions.

Operator: At this time, if you would like to ask an audio question, please press star, then the number one on your telephone keypad. Again, that is star and the number one. We'll pause for just a moment to compile the Q&A roster. Your first question is from the line of Tom Narayan with RBC. Your line is open.

Tom Narayan: Hi, thanks for taking the question. Curious if you could just give us maybe a sense of the guidance. There's a range there. Given the performance in Q1, just wondering, should we consider the upper end of that range as kinda what you're looking for, or could we interpret the results as you know potentially signaling maybe a slight downshift perhaps for your expectations in the remainder of the year? Thanks.

Jerome Rouquet: Thanks, Tommy. It's a good question. Let me take that one. I would start by saying that we are very pleased with the way the quarter developed indeed, with EBITDA very close to $100 million. Industry volumes were slightly better than originally forecasted. I think more important is the fact that we were able to close much more deals with customers on recoveries that we had originally anticipated, and that helped the quarter. We had originally anticipated that a lot of these deals would drag into Q2, and that was not the case. We were early in the process this quarter and able to close a lot of these deals. It's important to state that nothing has fundamentally changed for the full year.

Jerome Rouquet: It's important to state that nothing has fundamentally changed for the full year.

Jerome Rouquet: We are still going to have the amount of recoveries that we had originally planned with a leakage of about $20 million for the full year. That, that's unchanged. It's just timing between quarters. On the production side, yes, a little bit better production in Q1. We are still cautious, I would say, about H2 of the year in terms of the demand. Therefore, we wouldn't change our guidance at this point. Then third, our costs. Costs are tracking close to the midpoint of our guidance. Again, I would reconfirm the guidance at the midpoint as it is for now.

Tom Narayan: Okay, thank you. Maybe you could give us kind of a sense of what you're seeing in China. We heard from a supplier earlier this morning some cautious tone on what's going on in the Chinese market.

Sachin Lawande: Yeah, let me take this. This is Sachin. Vehicle production in China started slow in Q1 with January coming lower than prior year, and we talked about why that was the case. There was a pull ahead of sales towards the end of Q4 on account of some of the incentives that were about to expire. Since January, in February and March, the sales and production did recover in China. Overall, as a result of that, production was still lower year over year. We also had a negative customer mix in Q1. Despite that, our sales in Q1, if you exclude the effects of currency, are essentially flat.

Sachin Lawande: As we look ahead at the rest of the year, we believe that our sales will grow despite the overall environment from our customers' vehicle production to be still negative for us. We are benefiting from ramp-up of new product launches that we have introduced in the market over the last couple of quarters, and that dynamic will continue through the rest of the year. We expect overall for us in China to still experience growth despite the production environment not being a positive.

Tom Narayan: Okay. If I might just sneak in a last one. You know, there's certainly a lot of commentary on autos about OEM pricing coming down in H2, or at least normalizing. Given the dynamics of your contracts that you guys have with your customers, you know, is there any kind of negative read-through if that should happen? Or are those contracts you know, already kind of fixed such that, you know, perhaps it's a positive, right? Because then it could mean higher volumes. Just curious as to your thoughts on how a weaker retail, you know, auto-OEM pricing environment affects your business. Thanks.

Sachin Lawande: Yeah, sure. This is by the way, not something that is happening for the first time. This has happened before. In automotive, as you know, our contracts tend to be long-term. We do not necessarily benefit when the OEMs experience positive pricing, and we expect it to remain the same when it turns around and the pricing turns to be more of a negative. The industry is very competitive. We continue to have the same pressures in a good or a more challenging environment, and I don't expect that to change this time, either. As you said, if the prices come down, if the volumes benefit from that, we would see a positive benefit from that effect, if that were to happen.

Sachin Lawande: As you said, if the prices come down, if the volumes benefit from that, we would see a positive benefit from that effect, if that were to happen.

Tom Narayan: Thank you. Turn it over.

Operator: Your next question comes from the line of Mark Delaney with Goldman Sachs. Your line is open.

Mark Delaney: Yes, good morning. Thank you for taking the questions. First one is a follow-up on the pricing discussion. You mentioned some good success getting recoveries in Q1. Maybe you can help us better understand how much success you still need to have for the balance of the year with passing on inflationary costs in order to meet your guidance.

Jerome Rouquet: Yeah. We've got a few deals that are open, as I indicated on the slide. Nothing major. It's just a few customers

Sachin Lawande: Essentially, we've recovered in Q1 close to $75 million recoveries, which is pretty much in line again with our full year outlook, which was $300 million. The dynamic going forward will be that you'll see some spot buys going down. We had already a lower amount of spot buys in Q1 versus Q4, $25 million versus more than $100 million in Q4. You're seeing that decline, and it will be partially offset by further surcharge recoveries or cost increase recoveries from customers. Overall, we're tracking pretty well. There is still a little bit more to collect.

Jerome Rouquet: Essentially, we've recovered in Q1 close to $75 million recoveries, which is pretty much in line again with our full year outlook, which was $300 million. The dynamic going forward will be that you'll see some spot buys going down. We had already a lower amount of spot buys in Q1 versus Q4, $25 million versus more than $100 million in Q4. You're seeing that decline, and it will be partially offset by further surcharge recoveries or cost increase recoveries from customers. Overall, we're tracking pretty well. There is still a little bit more to collect.

Sachin Lawande: I'd like to mention as well the fact that we had some level of catch-up in Q1 related to cost incurred in Q4, but it's no different from what we've seen in other quarters as well. That's kind of a shearing effect, if I can call it like that, as we go forward.

Jerome Rouquet: I'd like to mention as well the fact that we had some level of catch-up in Q1 related to cost incurred in Q4, but it's no different from what we've seen in other quarters as well. That's kind of a shearing effect, if I can call it like that, as we go forward.

Mark Delaney: That's helpful. Thanks. The other question was on power electronics and good to see the strong bookings momentum again there in Q1. You know, at CES and in your comments today, you guys were also highlighting the newer power electronics products and power conversion. Maybe remind us, if you could, the content step up when we sell, you know, that broader set of power electronics. You know, what does that look like relative to just selling BMS? You spoke about proof of concept moving forward, I believe, with one customer. Can you give us a sense now that you've been sampling and speaking to customers with that set of products?

Mark Delaney: Can you give us a sense now that you've been sampling and speaking to customers with that set of products?

Mark Delaney: You know, what kind of response you're seeing and you speak about the longer term opportunity that you see now evolving there? Thanks.

Sachin Lawande: Sure. Yes, with respect to BMS, I'll start there and then talk about power electronics. You know, we have previously said that the content ranges between $350 to $500, depending upon the number of cells that we have to manage, which obviously then impacts the size of the battery. When it comes to power electronics, I should again mention that our focus is really to focus on enabling the shift to 800-volt architectures for the battery, which requires higher power density as well as efficiency. We're focusing on three product areas within that, the onboard charger, DC/DC converters, and the high voltage junction box. Now, depending upon the features that they are required to contain, they come in the range of prices.

Sachin Lawande: We're focusing on three product areas within that, the onboard charger, DC/DC converters, and the high voltage junction box. Now, depending upon the features that they are required to contain, they come in the range of prices.

Sachin Lawande: All three together would typically amount to about $700 to 1,200 dollars in terms of content per vehicle. That gives you a little bit of a, you know, a comparison to how it would look versus BMS. The joint development agreement that we have with one customer that we talked about earlier is in Europe. This particular product will have multiple DC/DC converters in addition to an onboard charger, and also will require an ASIL level of safety because this DC/DC converters will need to provide power to ADAS systems.

Sachin Lawande: It's a very complex product, has very high power density, to support charging this higher capacity batteries and to reduce the charge time. That's the area that we want to focus with respect to power electronics. There's a lot of what I would consider as more commodity power electronic solutions out there, but with the industry shifting to 800 volts, we believe that it creates opportunities for us to bring some technology innovations in this area, especially leveraging new semiconductor solutions and our system design and understanding that we can bring in order to achieve the specific requirements of these products. Very exciting area for us.

Sachin Lawande: There's a lot of what I would consider as more commodity power electronic solutions out there, but with the industry shifting to 800 volts, we believe that it creates opportunities for us to bring some technology innovations in this area, especially leveraging new semiconductor solutions and our system design and understanding that we can bring in order to achieve the specific requirements of these products. Very exciting area for us.

Sachin Lawande: I should also mention that in terms of when we expect to see revenue contribution from this area, it's likely gonna be post 2025, so the second half of the decade. We believe that it can be a business that is as big as BMS has been for us or is shaping up to be for us. Very excited about it overall.

Mark Delaney: Thank you.

Operator: Your next question is from the line of Dan Levy with Barclays. Your line is open.

Dan Levy: Hi. Good morning. Thank you. Wanted to ask about the chip environment and your purchases specifically. On the last call, I think you noted that in 2022, the issue was more on power and analog. This year, the issue is a bit more on microcontrollers, if I recall correctly. Just wondering how the shift in those constraints is impacting your pace of recoveries, and if that's still broadly the case that it's MCUs that are more constrained than power and analog.

Sachin Lawande: Yeah. It's a great indication of the volatility that still exists when it comes to semiconductor supply. The specific microcontroller that I mentioned was not an issue last year, and there was, I would say, enough supply. Now, with our demand also increasing, the supplier was not able to keep up with demand and that is essentially what is the issue that we have here. As I mentioned, our action in terms of mitigating that impact is to redesign that micro to use an alternate option that is also from the same supplier but has higher supply, you know, availability.

Sachin Lawande: That's going to help us mitigate, especially in the H2, impact of any reduction in supply. I do not believe that is gonna have a material impact on our ability to recover any of the extraordinary costs from the customers. They understand the situation and appreciate us being nimble and come up with alternatives that minimize the impact to their vehicle production. I think it's gonna be more normal business like we have already done in 2022 as well with the redesigns that we have launched.

The impact of any.

I do not believe that that is going to have a material impact on our ability to recover all of the extraordinary costs from.

Customers.

They understand the situation and appreciate us being nimble and come up with alternatives that minimize the impact to their vehicle production. So I think it's going to be more.

Normal business like we have already done in 2022 as well as with the Redesigns that we have.

<unk>.

Dan Levy: Okay, great. The mix doesn't really impact the pace of recovery. Thank you. Second, when-

Second.

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