Good morning. My name is Anna, and I will be your conference operator today. At this time, I would like to welcome everyone to the Visteon Third Quarter 2023 Earnings Call. After the speakers' remarks, there will be a question-and-answer session. Thank you for joining us. Now I will turn the call over to Sachin.

Good morning. I'm Ryan Wentling, Vice President of Investor Relations and Treasurer. Welcome to our earnings call for the third quarter of 2023. Please note this call is being recorded, and all lines have been placed on a 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 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.

Thank you, Ryan, and good morning, everyone. Thank you for joining our third quarter 2023 earnings call. The company performed very well, delivering strong results for the quarter and strengthening our foundation for long-term growth. Third quarter sales were $1.14 billion. Excluding the impact from supply chain-related pricing, our base sales grew 9% year-over-year, demonstrating the strong demand for our digital cockpit products. Adjusted EBITDA was $128 million, or 12.6% of sales, an increase of $33 million compared to last year, driven by strong growth in our underlying business and a few favorable commercial items. As a result of our strong performance year-to-date, we are increasing the midpoint of our adjusted EBITDA guidance for the full year. Adjusted free cash flow was a positive cash inflow of $98 million, bringing our year-to-date cash flow to $93 million. The company delivered another quarter of strong product sales growth despite some emerging headwinds in the industry. In North America, our sales remained solid, and the UAW strike had an immaterial impact on our sales as our Detroit customers continued to receive products throughout the quarter. In Europe, the strong order backlog at our customers has normalized due to weaker consumer demand, resulting in vehicle production at our customers coming in lower than we initially anticipated. In China, vehicle production, excluding exports, was lower as well due to weaker consumer demand. With the market shifting more to electric vehicles, domestic OEMs in China are gaining market share over global carmakers, which is resulting in a negative customer mix for Visteon in that region. Despite these headwinds, Visteon's product sales grew in the third quarter due to the ramp-up of recently launched products. We launched another 33 new products in the third quarter, bringing our year-to-date total to over 100 new products, which will continue to drive our sales in the coming quarters. Our product and technology portfolio for digitalization and electrification is one of the best in the industry, which is a major driver of our new business win performance. In the third quarter, we won $1.8 billion of new business, bringing our year-to-date total to $5.8 billion. I am also happy to report that we won our first customer for our automotive app store product that we highlighted at our Investor Day and during CES earlier this year. These new connected services enable us to offer end-to-end solutions for carmakers, which is unique amongst our peers. In the third quarter, we continued to deliver on the capital allocation commitment announced during our Investor Day, and we repurchased an additional $46 million of shares, bringing our total to $76 million through Q3. Global vehicle production in the third quarter grew 4% year-over-year, although Visteon customers' vehicle production was flat for the quarter. The fast growth of electric vehicles, mostly by new OEMs that tend to be vertically integrated, combined with the slow start of global OEMs in this segment is one of the main drivers of this negative customer mix. As we anticipated, semiconductor supply has gradually improved throughout the year. Excluding the unfavorable year-over-year impact from supply chain recoveries, Visteon's base product sales grew 9% year-over-year in the third quarter despite flat vehicle production at our customers, resulting in a robust growth over the market of 9%. From a sequential perspective, our base product sales have continued to grow sequentially from Q1 of this year, mainly driven by the ramp-up of recently launched products. Through the first three quarters, our base sales have grown a solid 17% versus the same period last year. Digitalization is one of the most significant trends in our industry, and in Q3, our digital products, including digital clusters, SmartCore, and infotainment, performed very well. Digital cluster sales grew more than 20% year-over-year, continuing the strong performance from prior quarters. Digital clusters now represent 60% of our total cluster shipments, and this share will grow further in the coming quarters. There's ample runway for future growth for digital clusters, especially in the mass market segment where this trend is just starting to make its impact. Displays are growing rapidly in automotive, both in size and in the number of displays used in cockpits. Despite this positive industry backdrop, we are impacted this year by the ramp-down of a large program with BMW, which is masking the overall performance of this product line. We are quickly approaching the end of production of that program; therefore, it will be less of a headwind going forward. As new display programs come online, we expect this product line to return to growth. SmartCore was our fastest-growing product in Q3, with sales growing 25% year-over-year. We benefited from new launches with Harley-Davidson and Volvo and from the ramp-up of programs launched earlier with Geely and Mahindra. This key product line now represents a mid-teens share of our total sales, up from the mid-single digits just a few years ago. We are also seeing rapid growth of our infotainment systems product line, especially Android-based infotainment. Standalone infotainment systems featuring Android and offering connected services are an attractive proposition for many markets, especially for competitively priced vehicles. Lastly, our electrification business continued to ramp up in Q3 with the launch of additional electric vehicles by our customers. While sales of BMS for the first three quarters have run lower than anticipated, we are pleased to see sequential growth in BMS sales, which we expect will continue in the coming quarters. In summary, Visteon continues to benefit from the digitalization trend, and sales of our digital cockpit products were very robust in Q3.

Thank you, Sachin, and good morning, everyone. Visteon posted a solid set of financial results in Q3, demonstrating another quarter of commercial and operational discipline. We continue to build momentum with our sales growth, margin expansion, and cash flow generation. Q3 sales were slightly over $1 billion, and when excluding the impact of supply chain recoveries, grew 9% compared to prior year. This strong performance was supported by the ongoing demand we see for our digital clusters, cockpit domain controllers, and BMS programs combined with the benefit of recently launched programs. While the UAW strike has added significant uncertainty to the automotive market in North America since mid-September, the impact was immaterial on our third quarter performance. Semiconductor supply has continued to improve, and as a result, our reliance on open market purchases has significantly reduced year-over-year. However, we continue to see elevated prices from our traditional Tier 2 suppliers. In the third quarter, we shared approximately $70 million of these higher costs with our customers. We are optimistic that the semiconductor market will continue to improve in the coming quarters and expect that the need to pass through these costs will decline over time. Adjusted EBITDA was $128 million for the quarter, an improvement of $33 million versus prior year. Adjusted EBITDA benefited from higher base sales, improved operational efficiencies, lower engineering spending, as well as the timing of several favorable commercial items. This was partially offset by an increase in SG&A expenses. Our adjusted EBITDA margin was 12.6%, but adjusting for some of the positive commercial items in the quarter and for a more normalized engineering spend, our run rate was closer to 11%. Adjusted free cash flow was $98 million in the quarter, benefiting from a strong EBITDA and a reduction in working capital. We ended the third quarter with a net cash position of $144 million while being able to execute $46 million of share repurchases in the quarter. Our total share repurchases have been $76 million since we launched the program earlier this year. Overall, we delivered a strong performance in the third quarter.

Now turning to page 11, sales were $1.14 billion, relatively flat compared to prior year. When excluding customer recoveries, base sales were $945 million, an increase of 9% compared to prior year. This increase in base sales was driven primarily by growth over market as Visteon customer production was fairly flat in the quarter. Our growth over market was largely driven by the ongoing demand for our digital cockpit products, recent product launches, and increased BMS demand. Customer recoveries, which are illustrated in the dotted boxes, declined year-over-year by 55% to approximately $70 million, driven mostly by a decrease in open market purchases and the corresponding recoveries from our customers. Open market purchases were minimal in the third quarter, and we expect this trend to continue in the fourth quarter. Recoveries related to higher costs from our traditional Tier 2 suppliers are expected to remain stable in the fourth quarter. As a reminder, recoveries, although bucketed as pricing, are passed through in nature, increasing sales, neutral for adjusted EBITDA, but diluting margin percentages. Adjusted EBITDA was $128 million for the quarter, versus $95 million compared to the prior year, an increase of 35% year-over-year. The primary improvement in adjusted EBITDA was due to higher base sales, improved operational efficiencies, and several favorable commercial items we negotiated in the quarter. Net engineering declined 4 million year-over-year due to the timing of specific projects. This was offset by adjusted SG&A, which increased $4 million year-over-year, primarily due to personnel costs related to investments in our team to support our future growth.

Turning to page 12, we maintain one of the strongest balance sheets in the industry. Our balance sheet supports our growth and provides the flexibility needed to pursue our capital allocation priorities. We ended the quarter with total cash of $485 million and a net cash position of $144 million. In the third quarter, we repurchased shares for $46 million at an average price of $137 per share. This brings our year-to-date share repurchases to $76 million. We will remain opportunistic in future share repurchases, which will depend on several factors, including our free cash flow generation and industry dynamics. We generated $93 million of adjusted free cash flow through the first nine months. This is a $133 million improvement compared to the first nine months of the prior year, primarily due to higher adjusted EBITDA and lower working capital build, partially offset by higher cash taxes and higher capital expenditures. As anticipated, the built-in trade and other working capital from the first half of 2023 was partially reversed in the third quarter. Cash taxes were higher than the prior year due to cash payments related to increasing profitability in some jurisdictions. Interest payments remained low and primarily relate to our term loan that matures in 2027. We have now repaid approximately $8 million year-to-date as a result of our quarterly amortization payments. These modest amortization payments will continue on a quarterly basis through the maturity of the facility. CapEx was $82 million in the first nine months. We expect CapEx to increase in the fourth quarter, reflecting seasonality and our ongoing investments in manufacturing and electrification. We continue to expect CapEx of around $130 million for the full year.

Turning to page 13, in light of our strong performance and the various factors impacting the industry, we are updating our guidance. For sales, we are tightening our guidance range to $3.950 billion to $4.025 billion. The midpoint of just under $4 billion represents a strong 14% year-over-year growth in base sales for the full year. Our underlying performance is expected to remain strong in the fourth quarter, with continued growth over the market driven by ongoing product launches and an increase in our BMS sales, although lower than originally anticipated. As Jerome mentioned earlier, there are several emerging headwinds that are expected to weigh on our fourth quarter sales, including the customer mix headwinds in China, weakening demand from our European customers, and the impact of the UAW strike. Our Detroit customers have only recently reduced their orders due to the UAW strike actions. In our guidance, we have assumed that the strike will continue at yesterday's levels through Thanksgiving, which has an estimated impact on our sales of approximately $6 million to $7 million per week. Our guidance ranges do not incorporate further escalation of the strike either in duration or in the number of OEM plants being impacted.

We are tightening our adjusted EBITDA range upward to $415 million to $445 million. This is primarily from the momentum of strong underlying operational performance. However, above average decrementals on lost sales as a result of the UAW strike are expected to be a headwind for the fourth quarter. For SG&A and net engineering, we continue to expect the second half of the year will be roughly flat with the first half in dollar terms. We're maintaining our adjusted free cash flow range of $115 million to $165 million, which considers our assumption of the current adjusted EBITDA range, a modest use of working capital, and higher CapEx spending in the fourth quarter.

Visteon remains a compelling long-term investment opportunity. We have positioned the company for top-line growth, margin expansion, and free cash flow generation. We will continue to return cash to shareholders while maintaining a strong balance sheet, which provides significant flexibility. We have an exciting growth profile and have demonstrated a strong focus on operational and commercial discipline to deliver this growth.

This concludes our earnings call for the third quarter 2023 results. Thank you everyone for participating in today's call and your ongoing interest in Visteon. Thank you.

Thank you for attending. You may now disconnect.

I guess I'll take the obvious topic to start with, just the UAW strike. I'm just curious beyond the impacts to sales and operations that are downside risks, do you see any silver linings to the strike in terms of reallocating chips, maybe building safety stock, continuing to drive down the open market purchases, things like that? That's the first question. Thanks.

Hi, Luke. Good morning. Yes, indeed. We are looking at all opportunities, not just the UAW strike to improve our performance in the supply chain. While semiconductor supplies have gradually improved throughout the year, we still have a few chips that are critical and we're watching them very carefully. In general, the investments in capacity and efficiency of fabs have delivered higher supply, but demand from automotive has not gone down much. So while we have taken some benefit from the lack of demand in other sectors, we still have few chips that we need to build a level of safety stock. Any reduction in demand, whether through the strike or any other factor, would help in terms of building up that safety buffer. So that's where we stand.

And then my second question, a bigger picture question, Sachin, would be in terms of the customer reaction to the first power electronics win that you announced last quarter. Just curious if you have a better understanding of Visteon's opportunity in power electronics and just general position in the market. I would think to go out there now with an actual award in hand that would be a pretty meaningful factor.

Your description of the market as being immature is very apt, and that is what I hear when I talk to customers about power electronics. The industry is going through the shift from 400-volt architectures to 800-volts, creating new requirements for power electronics. We are addressing these concerns, generating a lot of interest at OEMs in our solutions. This win has put us on the map and has made us a legitimate supplier, creating discussions and interest at OEMs. We feel optimistic but need a couple more quarters before we can fully understand the potential for us in this space.

I'm wondering first, Jerome, if you could maybe just give us a bit of a bridge from 3Q to 4Q. I appreciate that part of the decline is going to relate to the non-repeat of some of the commercial items. You also had some strike. But I'm wondering if you could also just sensitize for us given the strike just ended last night for your largest customer within the D3.

Sure, Dan. We're very pleased with how the quarter developed. Growth over market was 9%. Our sales grew as well by 9% in a flat customer production environment. Our EBITDA run rate when normalized for timing items was close to 11%. We will be closer to 11% overall in Q4 in terms of EBITDA.

Of the weekly revenue of $20 million to $25 million for the D3, what percentage of that is Ford? Presumably, the majority is Ford?

It's a little bit more tilted towards Ford, but GM also has a fairly large impact. We should take into account that we've had more than a month of strike impacting orders for October.

I wanted to ask about the slowdown or the reduced excitement about EVs that we're seeing in the market. How should we think about the BMS piece of your backlog in light of the slowdown? If OEMs are slowing down the pace of launches, how does that impact the uptake of your content?

High content is not just specific to EVs, but there is more higher content, especially digital content in EVs. Our cluster volume can absorb the impact of the slowdown from EVs. BMS sales continue to grow quarter-over-quarter, and the ramp up will continue into Q4 and subsequent quarters. Next year, we have additional BMS launches as well.

I guess just to follow-up on some of that commentary. Do you think we're closer now to what OEMs are saying? When you bid on the business, you assumed certain volumes to hit your return profiles. If those aren't met, what type of recourse do you have with the customers?

We believe the ramp-up will continue, and GM mentioned they are not demand-limited but supply constrained. We expect that improvements will come, and it really depends on additional launches and capacity alignment. It’s too early to discuss unabsorbed capacity, but we will have to assess developments next year.

Last quarter, you talked about the growth you're seeing in China and how you're becoming better positioned with faster-growing OEMs. How does a company like Visteon manage going after business in an environment that seems harder to underwrite?

The average customer age in China is under 35, which leads to very different system designs. We have successfully shifted to address domestic OEMs, increasing our revenue from those channels to about 40%. We have had to evolve our product offerings to meet the demands of this rapidly changing market.

Can you help us better understand the breadth of magnitude of the slower trends you may be seeing in Europe and how that's progressed?

When we entered this year, the market was supply constrained. In Q3, we started to see that the order intakes and consumer orders into the OEMs were lower than anticipated, causing the slowdown we expect to continue into Q4. We believe these factors are factored into our guidance.

Despite these headwinds, we are seeing our sales grow by about 14% to 15% for the full year, indicating healthy growth over market and year-over-year.

Just confirming there's no change to your 2026 targets for about $5.5 billion of revenue and about 13.5% adjusted EBITDA margin?

We believe we are on track with our targets. At the midpoint of our guidance, we have added approximately $450 million in new sales this year, which is what we need on an annual basis until 2026.

The run rate at the end of Q3 and what we're projecting for Q4 indicates we are on track and we'll be able to scale that up as we go with additional volumes.

Do you expect to keep a similarly strong pace in 2024 based on the discussions you've had over the past couple of months?

We've evolved our product portfolio over the last couple of years, which puts us in a good position to address the challenges OEMs face. We're optimistic about achieving our target of exceeding $7 billion in new wins this year, which we believe is sustainable.

Are you getting any sense from OEMs as to how digital content is changing on some of those product launches?

We're seeing an increase in display sizes and numbers, with passenger-side displays becoming common, and we're seeing growth in connected services, which positions us well for additional revenue and margin contribution.

Can you provide some sense of the impact of the strike so far for Visteon?

We've been impacted by the October orders. They represent about half of what we've assumed in our guidance, approximately $25 million to $30 million, with half already baked into October.

Can you quantify how much is assumed in terms of BMS revenues in your current guidance? And what could be at risk based on the latest volume progression?

The growth over the market includes many factors. We assume a high-single-digit to low-double-digit growth to achieve our mid-term guidance, with electrification revenues to be about $600 million. We'll assess the customer challenges more closely next year.

So how much growth of the market is assumed to be from BMS? And when are the next launches in BMS?

We'll be launching additional BMS products early next year.

Just on the favorable timing of recoveries in Q3 totaling $15 million, was this entirely attributable to a pull-forward from the fourth quarter, or was there any unexpected retroactive recovery achieved in the quarter?

There are two items in that $15 million recovery. About 100 basis points are related to commercial items settled in Q3, and the remaining relates to lower engineering spend in Q3, impacting Q4.

The strike affected volume and your guidance implies a near 30% decremental margin, is that right?

Yes, decrementals will be higher than our average, especially with some stop-and-go freight expenses as we ramp-up after the strike.

This concludes our earnings call for the third quarter 2023 results. Thank you everyone for participating in today's call and your ongoing interest in Visteon.

Thank you for attending. You may now disconnect.