Yahoo Finance Visteon Corporation (NASDAQ:VC) Q1 2024 Earnings Call Transcript
Visteon Corporation (NASDAQ:VC) Q1 2024 Earnings Call Transcript April 27, 2024
Visteon Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Ryan Wentling: Good morning. I'm Ryan Wentling, Vice President of Investor Relations and Treasurer. Welcome to our Earnings Call for the First Quarter of 2024. Please note this call is being recorded, and all lines have been placed on listen-only mode to prevent background noise. Before we begin this morning's call, I'd like to remind you this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees 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 Visteon's website this morning. Please visit investors.visteon.com to download the material if you have not already done so. Joining us today are Sachin Lawande, President and Chief Executive Officer; and Jerome Rouquet, 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 Sachin's and Jerome's remarks. Please limit your questions to one question and one follow up. Thank you for joining us. Now I will turn the call over to Sachin.
Sachin Lawande: Thank you, Ryan, and good morning, everyone. Thank you for joining our first quarter 2024 earnings call. I would like to start with a summary of our first quarter performance as outlined on Page 2. The team delivered another quarter of strong execution in a mixed customer vehicle production environment. Sales were $933 million, driven by strong demand for digital clusters and cockpit domain controllers. Both of these key digital cockpit products grew 20% year over year. We also saw strong demand for our BMS product, with sales more than doubling compared to prior year. As a result of the strong product performances, our growth-over-market inflected in the first quarter, returning to a positive at 2% after a negative performance in Q4 of last year.
As anticipated, the impact of the timing of roll-offs and roll-ons that we discussed in the Q4 2023 earnings call also impacted Q1 sales, although to a lesser extent than last quarter. Our Q1 growth-over-market was also muted by some customer vehicle launch delays and a negative customer mix in China. We continued to demonstrate strong operational execution during the first quarter. Our adjusted EBITDA increased to $102 million, representing a margin of 10.9%. This is a 70 basis point improvement over last year. Adjusted free cash flow was $34 million in the quarter, representing a conversion ratio of 33%. We deployed $20 million of this cash flow towards share repurchases during the quarter. We also continued to strengthen our foundation for future growth.
We launched 26 new products in the quarter and won $1.4 billion of new business across 14 OEMs. We previously discussed our strategy of diversification into two-wheeler and light and heavy commercial vehicle markets. We launched our first SmartCore product for commercial trucks and won significant business with commercial vehicle and two-wheeler OEMs in the quarter. Overall, I'm pleased with our first quarter performance, which was in line with our expectations. It's a solid start to what we believe will be another year of sales growth, margin expansion, and cash generation in 2024. Turning to Page 3. Vehicle production at Visteon customers in the first quarter was down year over year and was marginally lower than industry vehicle production.
In North America, customer vehicle production was up in the first quarter and demand for Visteon products, in particular for our digital cluster and BMS products was also robust. This was offset somewhat by customer vehicle launch delays that muted some of our growth. Overall, Visteon delivered a strong market outperformance in the region. In Europe, industry vehicle production was down year over year due to soft consumer demand and the withdrawal of incentives for EVs. Our customers' vehicle production was down more than market in the region. The timing of product roll-offs and roll-ons, as well as some customer-driven launch delays with a couple of OEMs resulted in a flat sales growth-over-market for us in the region. We anticipate returning to high single-digit growth-over-market for this region as product launches ramp up in volume in subsequent quarters.
Lastly, in Asia, we saw different market dynamics in China than in rest of Asia. In China, while overall vehicle production was up, global OEMs saw continued loss of market share to domestic OEMs. Most of the growth in vehicle production was due to higher exports by Chinese OEMs as domestic demand has slowed down. The negative customer mix resulted in our sales in China to be down year over year and reduced our overall growth-over-market. On the other hand, Visteon performed very well in other Asian markets, including Japan, Korea, and India. We have been actively targeting these other Asian markets in recent years and winning substantial business with customers like Toyota, Hyundai, Tata, Mahindra, and others. Our sales outperformed customer vehicle production, resulting in a positive growth-over-market in the first quarter for this region.
In summary, we returned to positive growth-over-market in the first quarter. Our diversification across both products and geographies positions us well to navigate the rapidly changing market dynamics in the industry. Turning to Page 4. Demand for our digital products was strong in the quarter, particularly for digital clusters and SmartCore. We are the global leader in digital clusters with a broadly diversified set of customers. The ramp up of recently launched digital clusters at multiple customers helped this product line grow by about 20% even in a down market. It should be noted that there is still significant opportunity to further penetrate the market as only a third of the vehicles being produced today are equipped with digital clusters.
Our momentum in SmartCore also continued during the first quarter, driven mainly by the ramp up of programs with Harley Davidson and Mahindra. We continue to see traction with customers for our SmartCore products as our customers launch new vehicle models with the product. As the industry transitions to software-defined vehicles, SmartCore puts us in an excellent position to drive this trend in partnership with our customers. In displays, the end of life of a large display program with BMW in the prior year created a challenging comparable in the first quarter. Sales from that program ramped down in the first half of 2023, and the ramp up of recently launched display programs with other customers should improve the year-over-year comparison for the remainder of the year.
In Audio/Infotainment, our sales were down due to the roll off of infotainment business at Mazda, which was partially offset by ramp up at Stellantis. We have several launches of infotainment planned for the rest of this year that will help this product line return to growth. Lastly, our sales of BMS products more than doubled compared to the first quarter of last year. As noted last quarter, we expect BMS to be a substantial contributor to our growth-over-market for the year as our customers ramp up battery production ahead of upcoming electric vehicle launches. Turning to Page 5. We continued our strong launch cadence with 26 products launched on vehicle models across 14 different passenger and commercial vehicle OEMs around the world. Our launches were well diversified across regions, with about half of the launches in Asian markets and the rest distributed evenly in Europe and North America.
Most of the launches were for digital cockpit products, reflecting the ongoing digitalization of the broader transportation industry, including commercial vehicles. These products were launched on vehicles with different powertrains, ICE, hybrid, and battery electric, demonstrating the powertrain agnostic nature of our digital cockpit products. I would like to highlight some of the key launches during the quarter. In Europe, we launched multiple products on the Ford Puma, which is one of the top-selling vehicles in the region. The products include a digital cluster, center display, and an audio system across all train models on ICE and hybrid powertrains. We also launched a dual 10-inch display system on the Hyundai Creta, which is a high-volume compact SUV for emerging markets.
We have seen significant growth with Hyundai over the past several years with launches on key vehicles in their lineup. We launched a 10-inch digital cluster on the all new e:NS2 electric crossover vehicle from Honda for China, Japan, and Thailand markets. We are expanding our business with Japanese OEMs as they go through their digitalization journey. Lastly, we'd like to spotlight the SmartCore launch on Scania's heavy-duty trucks. Scania is one of the leading manufacturers of commercial heavy-duty trucks and are well known for their focus on customer experience. Visteon SmartCore is the technology behind Scania's newly-announced Smart Dash digital dashboard, which delivers an advanced in-cabin digital experience for their drivers. It's the most advanced digital cockpit system for commercial vehicles in the market and sets the benchmark in the industry.
I am pleased with the progress we have made in our strategy of diversification into adjacent transportation markets. Together with the two-wheeler market, the commercial vehicle market represents a significant potential growth driver for Visteon. With the launch of the Scania program this quarter, Visteon adds another nameplate to our commercial vehicle customer portfolio that includes Daimler, Volvo, and Renault trucks. These OEMs are leading the digital cockpit transformation in commercial trucks, and we are very pleased to have them as our customers. Turning to Page 6. We had a strong start to the year with new business wins, with $1.4 billion secured in the first quarter. Our new business wins were well balanced across our digital cockpit products as well as regions.
SmartCore and Infotainment represented almost 40% of the total. We had multiple wins with domestic Chinese OEMs, and we also won a significant infotainment program with a European OEM for their vehicles for the Indian market. Displays also represented a large portion of our wins in Q1 with multiple wins for both passenger and commercial vehicles. We have been targeting the two-wheeler and commercial vehicle markets as a key source of growth and diversification for Visteon. This quarter, we had more than $300 million of wins for these markets, including a display program with a European commercial truck manufacturer and cluster and Bluetooth module wins with two-wheeler OEMs. The two-wheeler industry is rapidly transitioning to display based clusters and smartphone connectivity, which is creating new opportunities for Visteon in this market.
On the right side of the page, we highlight a few key wins in the first quarter. The first win is for a 12-inch digital cluster for multiple vehicle models with a Japanese OEM, our second significant win with this recently added customer. This digital cluster is expected to launch on multiple vehicle models in North America and Europe starting in mid-2026. Growing our business with Japanese OEMs is a key priority for Visteon, and this win is a significant step forward in this regard. The second win is for a SmartCore system on an electric vehicle model for a domestic Chinese OEM for their premium vehicle brand. We continue to diversify our business with more exposure to domestic China OEMs, reflecting the changing market dynamics in that region.
Lastly, we would like to also highlight the robust wins for display products during the first quarter. We won 6 display programs with 4 OEMs, highlighting the progress we have made in emerging as a top supplier to the industry for this dynamic and evolving product. Our display wins were across powertrains and included passenger vehicles, light commercial vans, and heavy commercial vehicles. Turning to Page 7. Visteon has emerged as a technology leader and a trusted partner to OEMs for displays for the cockpit. This is the result of more than six years of focused investment in building top class engineering and manufacturing capability in displays for automotive. Automotive displays face different technical challenges compared to displays used in consumer electronics.
Our strategy, which is unique in the industry, is based on bringing in house all the key expertise required for design and manufacture of the increasingly complex automotive displays, complemented by a regional manufacturing footprint that is close to our customers to support their localization and decarbonization goals. I'll now highlight a few of our $400 million of display wins this quarter. We won our first OLED display program for a rear seat monitor for an electric vehicle with a German luxury OEM. Despite its higher cost, OLED is gaining traction with some premium and luxury vehicle brands due to its superior graphics quality and design flexibility compared to LCD displays. We also won a 10-inch LCD display business for electric vehicles with an European OEM, which will be used on several passenger and light commercial vehicles beginning in 2027.
The last win highlighted is for a 12-inch driver and center display for a European commercial vehicle OEM. The trend of multi-display systems is also starting to impact heavy-duty commercial vehicles, which offers additional growth opportunity for us. Our in-house engineering and manufacturing capabilities allows us to be highly cost competitive without sacrificing quality and features. Large and curved displays are difficult to transport across long distances, and manufacturing these products in the region saves logistics cost and reduces carbon footprint for us and for our customers. Overall, displays are expected to be a meaningful driver of our growth over the medium term. We have a leading position in displays and are focused on maintaining our lead and continuing to bring more automotive focused innovations to these products.
Turning to Page 8, Europe is an important market for Visteon with a large base of customers and is also an early adopter of new digital technologies, particularly for the cockpit. Earlier this month, we opened our newest manufacturing plant in Tunisia in Northern Africa to serve our customers in Europe. This plant is equipped with state-of-the-art equipment to produce next-generation digital cockpit and electrification products. This plant will also manufacture displays for our customers in Europe that were discussed on the previous page. We have been operating in Tunisia for more than a decade and have been very impressed by the dedication and capabilities of our Tunisian team. I'm proud to invest in the long-term future of Visteon in that country.
We are very optimistic about our future in Europe. The investment in this plant, as well as other investments we are making in Europe will provide us with the resources to drive the growth that we anticipate in this region. Turning to Page 9. I would now like to share our views on 2024. We had a solid start to the year with results that were largely in line with our expectations. Looking at the remainder of the year, we see several factors that have changed in the market since our Q4 2023 earnings call in February. First S&P Global has slightly increased their forecast for vehicle production for 2024. However, we expect Visteon customer production to deteriorate slightly compared to our previous expectations, mainly driven by the weakness in China.
We now expect customer production to decline by about 2% for the full year compared to our earlier expectation of a 1% reduction. Any incentives that might be enacted in China, which has been reported in the media recently, would represent an upside to our customer production forecast. Second, BMS sales were slightly above our internal expectations for the first quarter. We expect demand for BMS to remain strong as our customers build their pipeline for vehicle launches through the rest of the year. Lastly, we expect ramp up of recent and upcoming product launches to help drive sequential improvements in our growth-over-market performance. These launches should accelerate our growth-over-market over the remainder of the year and drive higher sales.
Overall, based on our current expectations, we are maintaining our sales guidance and look forward to delivering another year of sales growth in 2024. Turning to Page 10. In summary, the company performed well in the first quarter. Our technology profile is aligned with key trends, including the connected car, digitalization, and electrification that will drive future growth for years to come. We delivered growth-over-market of 2% in the quarter, and we expect growth-over-market to accelerate through the rest of the year. The team continued to execute on our commercial and operational plans, which resulted in a strong adjusted EBITDA margin of 10.9%. We continue to build our foundation for the future by launching 26 new products and winning $1.4 billion in new business.
Now I will turn the presentation over to Jerome.
Jerome Rouquet: Thank you, Sachin, and good morning, everyone. The first quarter was a solid start of the year with results generally in line with the expectations we outlined in February. We delivered another strong quarter of operational execution and commercial discipline. We also strengthened the foundation for future growth with a high number of product launches and significant new business wins, paving the way for continued sales growth in the coming years. Turning now to our first quarter financials. Sales were $933 million. As we expected, growth-over-market rebounded to a positive 2%, and we returned to market outperformance after the negative 2% from the fourth quarter. We saw strong demand from our customers for our next-generation products, including digital clusters, cockpit domain controllers, and wireless BMS.
Our sales performance was partially offset by a modest headwind from currency and a 1% reduction in customer production, with lower customer production in Europe and Asia, partially offset by an increase in the Americas. Our supply chain maintained the much improved levels that we saw in the second half of 2023. Recoveries were $22 million lower year-over-year with minimal open market purchases and related recoveries in the first quarter of 2024. Now that we have moved past the need for open market purchases, recoveries should be more consistent from quarter-to-quarter and therefore we will no longer separately disclose supply chain recoveries. Adjusted EBITDA for the quarter was $102 million. Compared to the prior year, adjusted EBITDA benefited from operational improvements and manufacturing efficiencies, partially offset by reduced sales, an increase in net engineering, and a modest headwind from foreign exchange.
EBITDA margin in the quarter was 10.9%. This level of margin is consistent with the run rate of approximately 11% we had exiting the fourth quarter of 2023, and this despite sequentially lower sales. Our first quarter margin performance positions us well to deliver on our targeted margin improvement in 2024. Adjusted free cash flow was $34 million, a strong performance for the first quarter, which is traditionally an outflow. The improvement versus the prior year was driven primarily by reduced working capital outflow. We repurchased $20 million of shares during the first quarter at an average price of approximately $117 per share. This brings our repurchases under our existing plan to $126 million as of the end of the first quarter. We ended Q1 with total cash of $507 million and a net cash position of $175 million.
We remain on track to deliver strong sales growth and margin expansion in 2024, thanks to the acceleration throughout the year of recent and new product launches that Sachin highlighted earlier. Our strong commercial and operational execution continues to support incrementals in the high teens and free cash flow conversion of approximately 33%. Turning to Page 12. Sales in the first quarter of $933 million were a slight decline compared to prior year. The lower sales resulted primarily from lower pricing related to semiconductor recoveries and annual customer price reductions, slightly negative year-over-year customer production, and a modest headwind from currency, partially offset by higher volumes driven by a positive growth-over-market.
Visteon customer vehicle production declined 1% from the prior year. Lower customer production was driven by weaker production in Europe and in Asia, partially offset by strong performance in North America as the Detroit 3 production rebounded after the UAW strike in the fourth quarter. Compared to our customers' production, we delivered a positive 2% growth-over-market in the first quarter, primarily driven by strong demand for digital clusters and BMS. On a regional basis, market outperformance was highest in Asia when excluding China, as well as in the Americas, supported by both launches and strong demand for new products. Europe was essentially in line with the market, with sales muted due to the timing of roll-offs and roll-ons mentioned last quarter as well as some customer launch delays.
China underperformed the market due to the roll-offs of programs with international OEMs and negative vehicle mix with domestic OEMs. We continue to be focused on commercial discipline, combining our discussions with customers on both recoveries and annual pricing. We made significant progress on recoveries and pricing negotiation with customers in the first quarter, and we will remain disciplined on a go-forward basis. Adjusted EBITDA was $102 million, an increase of $3 million compared to the prior year. Higher adjusted EBITDA was driven by strong operating and cost performance across the company. Net engineering increased $4 million year-over-year, which was primarily due to the timing of recoveries. As a percentage of sales, net engineering was 6.4% in the quarter, and we continue to expect it to be in the mid-5% range for the full year.
Adjusted SG&A increased $1 million year-over-year to $45 million or 4.8% of sales. We continue to expect SG&A to be in the mid-4% range for the full year. Adjusted EBITDA margin improved to 10.9% in the first quarter of 2024, a 70 basis point improvement year over year. Q1 results were largely in line with our expectations as the weaker-than-expected top line from Europe and Asia was largely offset by the strength in the Americas. Through continuous focus on execution, we were able to maintain our 2023 margin run rate and this despite lower sales in the first quarter. Our Q1 EBITDA performance sets us up nicely for further margin expansion. Looking forward, we anticipate maintaining our momentum from recent quarters, with sales and EBITDA expected to grow sequentially throughout the year, thanks to the acceleration of our growth-over-market.
In the second quarter, we currently expect sales to increase sequentially to slightly more than $1 billion as we benefit from the continued ramp up of recent and new product launches across our digital cockpit and electrification products. Turning to Page 13. Starting with the balance sheet, we ended the quarter with a total cash position of $507 million and a net cash position of $175 million. Our strong balance sheet continues to provide us with significant flexibility to allocate capital. Turning to cash flow, we generated strong adjusted free cash flow of $34 million in the first quarter of 2024. This is a $71 million improvement compared to the prior year, primarily due to the lower outflow from working capital, partially offset by higher capital expenditures.
The outflow related to trade and other working capital declined substantially year-over-year, with a strong improvement in the first quarter of 2024. We're still expecting a working capital outflow for the remainder of 2024 as we build additional working capital to support growth. During the first quarter of 2024, our inventory levels increased as we were able to rebuild adequate safety stock of critical components following the stabilization of the semiconductor supply chain. Cash taxes were lower in the quarter versus prior year due to the timing of discrete tax payments in Q1 of last year. Interest payments remained low and primarily relate to our term loan. These were more than offset by interest income on our invested cash. CapEx was $37 million in the quarter and remains on track for $145 million for the full year.
These investments will allow our operations to deliver on future growth. Examples of CapEx spending this quarter included our new plant in Tunisia, mentioned by Sachin earlier, as well as continued investment in BMS and display capacity, as well as capability that will support our growth for the years to come. We'll continue to look for ways to deploy capital to support organic growth initiatives at attractive returns. Our success in allocating capital to high-return projects is illustrated by our return on invested capital of 16%, which is at the top of the peer group. Turning to Page 14. Visteon remains a compelling long-term investment opportunity. We benefit from the higher demand for more digital content in the cockpit, regardless of powertrain, and the growth of electric and hybrid vehicles.
Visteon is uniquely positioned for multiyear top line growth, margin expansion, and free cash flow generation, while our strong balance sheet provides us with significant flexibility to execute on our plan. Thank you for your time today. I would like now to open the call for your questions.
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