Good morning. I'm Kris Doyle, Vice President, Investor Relations and Treasurer. Welcome to our earnings call for the third quarter of 2020. Please note this call is being recorded. [Operator Instructions]. 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. [Operator Instructions] Again, thank you for joining us. Now I'll turn the call over to Sachin.

Thank you, Kris. Good morning, everyone. Visteon's third quarter performance reflects the proactive actions we took to align our business operations with a certain impact to the industry caused by the coronavirus crisis. Our employees have proven to be resilient and resourceful in delivering to our customer commitments, while simultaneously reducing costs. Our sales grew 3% year-over-year on a constant currency basis to $747 million in the third quarter despite vehicle production being down 3% globally. Adjusted EBITDA was $87 million or 11.6% of sales, which is a record for the third quarter. This represents a 310 basis point improvement over last year, mainly due to cost reduction actions and our disciplined execution across all areas of our business. As a result, adjusted free cash flow was $103 million for the third quarter and $37 million for the first 9 months. This is higher than prior year, and the Q3 cash flow offset the negative adjusted free cash flow in the first half of the year. While sourcing activities at automakers has not returned to pre-COVID levels, our new business wins exceeded $1.5 billion in the third quarter. This performance underscores the strength of our product and technology portfolio. This is very well aligned with the key trends impacting the industry. We also launched 23 new products, a record for the company, bringing the total year-to-date number to 44. The company has been undergoing a transformation of its footprint and business processes over the past several quarters, including the move toward a platform-based approach of product development. We initiated the third and critical phase of this transformation in the quarter that will result in increased operational efficiency and reduced structural costs across our business. With the improvement in business environment and in our cash position, I'm pleased to report that…

Thank you, Sachin, and good morning, everyone. In addition to the increase in activity levels compared to Q2, the financial results in the third quarter also benefited from the proactive actions that we initiated very early on this year, some of which were implemented before the COVID-19 pandemic. These actions were focused on actively generating and preserving cash and aggressively adjusting our cost base. Net sales were $747 million in the quarter, representing a 3% year-over-year growth rate when excluding the impact of currency. Adjusted EBITDA for the quarter was $87 million, representing an adjusted EBITDA margin of 11.6%. Adjusted free cash flow was $37 million for the first 9 months of the year. Our focus on cost control is evidenced by the significant reductions in both engineering and adjusted SG&A that we are reporting. Gross engineering in the quarter is down 25%, and adjusted SG&A is down 19% compared to last year. Both areas benefited from a combination of short-term and longer term structural cost initiatives which will allow Visteon to support a growing business with an optimized structure. Our focus on cash continued in Q3, allowing us to maintain a strong balance sheet. To address the numerous supply chain challenges throughout the last few quarters, we created a global sales and supply chain task force early in the pandemic, which continues today to optimize our inventory levels while ensuring we service our customers timely. We ended the quarter with $164 million in inventory, a 15% reduction year-over-year, representing a cash inflow of $10 million from Q2 2020, and this, despite a significant increase in sales on a quarter-over-quarter basis. CapEx was down 24% on a year-to-date basis, and we continue to target a 20% reduction for the full year versus 2019. In aggregate, adjusted free cash flow for…

[Operator Instructions] Your first question is from the line of Brian Johnson with Barclays.

A couple of questions. First, I might have missed it, but in terms of, on Page 11, the $25 million year-over-year EBITDA increase. How much of the temporary measures can come back and how much is just permanent reduction in SG&A, operational improvement and so forth?

Yes. Brian, it's Jerome here. We, I've mentioned it in the script, indeed. We are estimating that close to 1.5, 2 percentage points of EBITDA is related to austerity measures that we took in Q2 and Q3 that will not be repeating again in Q4. So in a very simplified way, you could normalize our results in Q3 by just removing that, which would give you a 9.5%, 9.6% EBITDA to 10% to 10.1% EBITDA range for the quarter. I think the 1 point which is important to mention as well is that I think we benefited from reduced activity levels in Q3 like we did as well in Q2. And as we are getting into Q4, we do see a regain of activity level, especially on the engineering side. And that will probably as well continue going into 2021.

Second and sort of a follow-on question on margins. When we think, on Page 3, about those 3 big drivers of your growth, the digital clusters, the audio infotainment and the displays, another competitor at this piece emphasized that they are moving away from displays, not happy with the margins there. Could you maybe talk about the, and indeed, digital clusters are growing much faster than displays. Could you maybe talk about the margin implications of the rapid growth in digital clusters? And is that somehow more of a software and hence a, software-driven and hence a marginable opportunity than just simply display business?

Yes. Brian, so absolutely. Digital clusters have a fair amount of software content, which continues to grow. And the growth comes from the integration of ADAS and infotainment features in the cockpit into the cluster. And as you may have noted, we have been in-sourcing a lot of that software content by developing it in-house as compared to the earlier where we would be, like the rest of the industry, licensing those software components from third parties. So that makes digital clusters very good margin business for us. And we expect that to continue with all of the innovation coming in. Now when it comes to displays, and I have also noted the point that you made about some competitors. I want to be very clear about our strategy. There are 2 classes of displays in the industry. You have the small displays, flat, rectangular, essentially commodities. And then you have these displays that are getting larger, more different shapes curved and with integration of many features, including some that are more manufacturing-related challenges, such as integration of anti-reflectants, anti-glare capabilities on the display, optical bonding of the glass that gives a much higher user experience. These things -- and those displays are good margin business for us as well. And as we look forward to the cockpit, the cockpit is becoming a display-driven environment. We see the displays grow in size, eventually pillar to pillar, but the steps are being taken to get there. And that's where we believe it is essential for us to be in and to be part of that evolution because those displays are going to be what is going to drive the content in the electronics and software.

And then final question around BMS, which we're dimly aware, but frankly, snuck up on us in terms of your big role on the Ultium platform. Is there any way dimensionally to think about CPV and margin opportunity in wireless BMS?

Yes. Let me take a step back and talk about BMS because we haven't really been very vocal about it. And the reasons are, we have been waiting for the opportunity to talk about our first major win, which is with GM. But we have been providing BMS solutions to GM for a number of years and are on some of their older EV vehicles. But those are wired BMS solutions. And as we looked at how the technology, the battery technology itself was evolving, which is, by the way, evolving rapidly from cylindrical to prismatic to pouches and hence newer forms as well as chemistry, it became apparent that wired solutions have limitations. So we have been working on this wireless approach at which fundamentally does away with the low-voltage wiring harness makes the BMS and the battery pack a lot more modular and scalable. And so we are very happy to be working with GM. We are across their whole portfolio of products that are announced already and will be in the future on their new BEV platform, the battery electric platform. And so it gives us a great position to, one, get more experience, but also build scale, and we expect that we'll be able to bring that solution to other OEMs as we go forward. Now in terms of how to think about the content, it depends on the size of the battery. So a good way to think about it is that depending upon, let's say, 60 kilowatt hour battery all the way up to, let's say, just over 100, the range of the price would be between $350 to $500 per vehicle just for the BMS solution. So it's a pretty high-value component and a solution for us in that segment.

Your next question is from the line of Michael Filatov with Berenberg Capital Markets.

Good morning guys. Thanks for taking the question. So first one, one or more of your competitors have sort of talked about maybe more aggressive pricing pressure on their analog systems. And I was wondering whether or not you're having to make additional pricing concessions on those systems. Are you seeing pressure on that side of the business?

Michael, yes. No, what I would be very, I want to be very clear in saying is that we are not seeing any more pressure than normal. And the pressure, even in normal times, is pretty intense on pricing in this industry, as you know. So we have been able to offset that through various means. We have done that this quarter as well in Q3, and we expect to be able to continue going forward.

And then one more sort of around the software that you guys are doing in-house behind the displays and the clusters. Just wondering if you could just give me a bit more detail around that software and how that sort of differentiates you guys and helps you win new business?

Yes. No, absolutely. So if you think about clusters, and I'll come to displays later. In clusters, there are really two large components of software that the industry and until recently Visteon as well, would license from third parties. There's an operating system that is specifically needed for digital clusters for AUTOSAR. And AUTOSAR has been traditionally licensed in, from third parties. In the last 12 months, we have built that software. We have been building it over a longer period of time than that. But in the last 12 months, we've been able to introduce it into the new clusters that we are developing for our customers. So that's one component. The second component is that our 2D, 3D graphics software. As the displays are getting more capable, larger, rendering high-quality graphics is a very big part of the value proposition of the device. And this also used to be something that was licensed from third parties. We have introduced our own solution. We are unique in that sense, both on the AUTOSAR and on the 2D, 3D graphics. So 2 of the larger components that were third party, we now are doing it in-house. Now how does that help us competitively? One, very simply, is cost, right? Our competitors have a royalty that they have to pay to third parties. But even more importantly for us, the pace at which the technology is evolving in the cockpit. This gives us, the fact that we are doing it ourselves, gives us control on the innovation that's happening within the cockpit. And that, to me, is even more important than just the cost benefit.

And sorry, just one quick follow-up. I know visibility is probably limited. And your margins were clearly better-than-expected, even adjusting for those austerity measures. Is there any sort of update around that 12% margin target in the next two or three years?

Yes. Let me talk about that. I'm sure that's a question on many people's minds, so let me try to address it. Now if you go back to Q3, where we have a growth over market of 6 percentage points. Now that, by the way, also includes the nonrecurrence of some special sales promotion we had last year. So if you really look at our performance, it's really more like 8% to 9% market outperformance. So clearly, the sales side is coming through with respect to the growth driven by new product launches. Now if you think about our margin expansion, that's based on two factors: one, our ability to take cost out. And I'll talk about that in a minute. And the second is experiencing the growth in sales that we need for the margins to expand beyond this current level. Now on the cost front, as you have seen in the results in this quarter, both the short-term as well as, more importantly, the structural changes that we have made that are going to drive sustainable savings, those are progressing well. By the time, say this time next year, we should be substantially done with all of those actions. And so that's one piece. We feel good about that. That has lowered our cost base, which going into next year, is going to help in terms of our drive towards the 12%. And then with respect to the sales growth, clearly, it depends on the underlying production environment. We do expect production to grow more and also into 2021. Our expectations may be a little more conservative than IHS, but we expect growth. And combined with our growth over market, we think that we should be in a position, by 2023 time frame, as we have stated before, to achieve this 12% target. Our confidence now on account of the cost takeout is actually even higher than it was at the beginning of the year.

Your next question is from the line of Stephen Fox with Fox Advisors.

You mentioned a couple of wins related to mid-cycle updates. And I was curious if there's any takeaway now. You've been talking about the potential for that, and if there's any learnings from the recent wins that suggests maybe more business is coming along that front next year? And then I had a quick follow-up there for that.

Yes, sure. And we are seeing, as we have stated before, more interest in mid-cycle upgrades. If you look at our year-to-date performance of $3.2 billion, and if you just focus on the cockpit electronics wins excluding BMS, our mid-cycle update related wins account for almost 25%, a full forth of the total wins. And one of the benefits of that is also that those wins are going to launch, go into production, within roughly 18 to 20 months. So the revenue is also generated faster than on new vehicle models. Now this 25% is much higher than what has been the case historically. I think we are benefiting from 2 things. One, the fact that in this environment, especially with OEMs trying to extend the life of some of the vehicles, given the overall market environment, that is helping us. I'm not sure. It's too early to say whether 25% is the sustainable level to expect going forward. But it's a very welcomed development so far. And we do expect, at least in the near term, the next couple of quarters, that to continue.

That's helpful. And then just on Europe. You mentioned a lot of concerns, which definitely seem to be top of mind in the last couple of weeks. Are you seeing any evidence of some of the issues playing out yet? Or it's too early to tell?

Yes, it is too early to tell. We wanted to make sure that we are thoughtful about expectations for the future, given all of the things that we mentioned with respect to Europe. So as you are aware, there were several incentives put in place towards the end of the second quarter. And those incentives have been slowly being phased out. And at the end of this year, unless they decide to renew, this will finish. And now there's also the emissions, stricter requirements that are going to go into effect beginning of the year. And that might have an impact on the production mix, especially in the fourth quarter. So we wanted to call that out, especially in light of some of the forecasts that we saw, which, in our opinion, were running a little ahead of themselves. So at this point, I would say too early, but we are very carefully watching the development, discussing with our customers and making sure that we are on top of.

Your next question is from the line of Rod Lache with Wolfe Research.

Hey everybody. I had a few follow-ups. One is on the BMS contract Ultium alone is expected to grow to more than 1 million vehicles a year by the middle of the decade, and it sounds like you're targeting other OEMs. So are you thinking that, that part of the business for Visteon alone could be a $350 million to $500 million business? Or does the pricing that you're indicating here kind of reflect low volumes and that declines over time?

No, Rod. So the pricing clearly does not reflect the low volume. We believe that this pricing will continue to hold, and there's also more content that's coming in that will continue to make the BMS system stay within the range that I talked about. And yes, we're aware of the high-volume implications of this business. But at this point in time, we are only really reflecting what has been awarded and the models that have been planned for launch. As you know, as they add more models to it, volumes will increase, but that's for the future. And with this OEM, there are other opportunities as well. So I'm optimistic, and I feel like it can be of the level that you mentioned, $350 million or so annual business opportunity for Visteon.

Great. And just on that as well. A few companies have mentioned wireless BMS as an opportunity. Sensata is one that comes to mind. Can you just maybe give us a sense of what's the competitive landscape here? And what do you bring to the table that would be proprietary or differentiated versus the others?

Correct. So a lot of the attention is on the wireless technology itself from these third parties. Clearly, Visteon is not going to be the provider of the wireless silicon solutions. And at the same time, what we want to do is be agnostic to the evolution and the choices that might be available for us on the wireless side. So if you think about what we do, we provide the software, the hardware that is the basis of the solution. The algorithms come themselves from the OEM and their battery providers. It's something that we necessarily don't see value in doing, because that becomes very custom to each OEM. But what we want to offer as a platform that consists of the hardware, the software integrated so that the whole system works very well. There's a lot of learning involved in building a wireless solution, very different from a wired. And so what we really have at this point in time, more than a unique IP, is the advantage of time. We have a couple of years of lead over anybody else in developing this wireless solution. And I expect that this will continue, this technology, the system, will continue to evolve very rapidly as we learn more about the challenges overall in terms of coming up with the scalable, flexible BMS solution. That's what we are trying to address here, right? The ultimate goal is to make that investment once on part of the OEM and have them be able to source different batteries of different chemistry, different physical characteristics, and be able to manufacture a scalable set of battery packs for the various models. And our goal is to enable them to achieve that objective.

Right. Two other things. One is, I believe you have five contracts that you've won so far for the Android-based infotainment. Volkswagen is the one that you've referenced a number of times as being in launch right now. What's the timing of some of the others? Any high-level comments on expected growth? And then lastly, maybe just to clarify, your gross engineering spend being down $26 million, net engineering about 6% of revenue. Obviously, it's unusual to see those kinds of declines as organic growth accelerates, but maybe any thoughts on longer term over the next few years, how we should be thinking about engineering spending level?

Yes, it's Jerome, Rod. So we've taken a lot of cost on the engineering side. We were at $300 million net engineering last year. We are guiding close to $225 million for the full year of this year. A lot of that is essentially restructuring actions as well as cost save actions that we've embarked on early on this year. The activity levels will come back definitely in '21. So we expect this number to be higher next year. However, if you step back and look at our engineering percentage, we were at 10% last year, we'll be close to 9%. So we'll have taken 1 point this year, and we're expecting to continue to chip away in terms of percentage point going into next year, but definitely not at a level that we've been at this year in terms of absolute dollars.

And then on the infotainment side, Rod. So we expect all of the rest to go into production in 2021. Obviously, with some, we are further along than with others, but all of them will launch. And the other color that I would like to provide for you is that, of the rest, we have one other that is a North American OEM, the others are in Asia. And we are seeing, besides the activities related to launch, there's a lot of interest from OEMs that we have had since the launch of the system with VW, which we are hopeful will result in more business wins in the coming quarters. And the last point I would like to add is that we're also working on expanding our launches within VW. So there's a lot of activity going on with respect to this Android-based infotainment. Frankly, it has exceeded my expectations in terms of the market acceptance and the opportunities that we are seeing. Now we have to, as usual, make sure that we have a good launch performance, that's very critical in this area, as you know. And that's going to be the biggest sort of factor in continuing the success in infotainment that we are seeing now.

Your next question is from the line of Mark Delaney with Goldman Sachs.

Thanks for all the details, especially on the BMS program. It's very helpful. I had a few more on the financial side. Maybe starting on margins, the comment about there's some benefits from temporary cost actions of 1.5 to 2 points in the third quarter, and that would go away. But at the same time, the company announced the restructuring program earlier this month. So maybe talk about what this restructuring program could mean in terms of savings, timing, magnitude? Where will we see that between COGS and SG&A?

Sure. Mark, it's Jerome. So I'll start with the October restructuring program that we've just announced. We've announced $35 million to $40 million in terms of cost. And we're estimating at this stage that the payback will be close to 1.5 years. So overall, in terms of annual run rate savings, we're anticipating that we'll have close to $25 million of savings. And from a timing standpoint, we don't anticipate to have much, if anything, in Q4. We are, at this stage, expecting that we'll have a little bit more than 50% of the saving next year. So let's say, close to $15 million of saving going into 2021.

And then I just want to ask on the engineering recoveries. If I understood the guidance for the full year, down mid-20% range. I think it implies engineering recoveries are more like $20 million in the fourth quarter compared to the $30 million or so in this current quarter. So maybe there's a margin headwind next quarter. I just want to make sure I understood that properly.

Yes. So we've, we're guiding net engineering to be close to $225 million for the full year. So if you back into what it means for Q4, in fact, it's close to $60 million of net engineering recoveries. In fact, we are very happy in the way things have developed over the last few quarters. We've been very flat and very even in our recoveries, and we've been averaging around $30 million per quarter. And we're expecting to see similar levels in Q4, maybe between $30 million and $35 million. So it's important because that will obviously impact the decrementals year-over-year quite significantly. We had close to $60 million of recovery last year at the same time for Q4. And we're expecting something like $30 million to $35 million. So it will have a year-over-year impact, obviously, given that we had more recoveries earlier in the year.

It's really helpful. Just one last one for me, if I could. Just on your free cash flow conversion, any puts and takes you can share on free cash flow for 2021?

'21. It's obviously a little bit early to give guidance, especially on the free cash flow side. But we'll, we are very focused on cash flow since the beginning of the year. As you know, the 2 big drivers are going to be EBITDA and CapEx. So EBITDA, we're expecting to keep on growing our EBITDA percentage. And CapEx as well, we've done a lot of good work this year on the CapEx side. We started last year with 4.8% of sales. This year, despite the decline in sales, we'll be close to 4.8%, and we're expecting to continue to drive that percentage down as well, even though the dollar value will be slightly up versus what we are seeing this year. So more to come on the adjusted free cash flow versus EBITDA, but a lot of focus on this area.

Your next question is from the line of Joseph Spak with RBC Capital Markets.

I guess just want to sort of follow-up on, again, some of the actions you've taken similar to the last question. I mean, I get the part that is to offset some of the austerity measures you're taking and sort of dealing with lower volume, but it also seems like you're doing more than that and it seems like maybe a tightening up of the cost structure. Is that fair? And then if so, like how does that actually play into your longer-term 12% margin target? Because is that actually needed to still hit that target? Or if things break your way, volume comes back, you would say the margin opportunity is now greater?

Yes. So let me first start, Joe, and then I will pass it on to Jerome for additional color. Let me first share with you what we are doing and why that's important. So as you may know, our cost structure in the past was high cost country heavy, and we also had a few more sites than I would have liked, especially in Europe, in Japan. And over the past, I would say, 2 years or so, we have been steadily, gradually moving more and more of our footprint to lower cost places. We opened new technical centers in Bangalore, India; in Romania as well as in Mexico. And now that they've had a couple of years to get trained and participate in product development, they are now ready to take on whole system development. Now that will mean that our cost structure will fundamentally be much better going forward in a more sustainable manner. And that's also a competitive advantage for us. Now to answer your second question about whether is it needed and how does this impact as we go forward, our 12% target. I think it puts us, first of all, in a much better position than ever in terms of being able to achieve 12% even with a lower sales level than as compared to what we indicated at the beginning of the year, for 2023. Now clearly, if sales returns and the volumes hold up, our opportunity to expand beyond 12% certainly will be available to us. Anything you would like to add, Jerome?

Just that the -- and you summarized it very well, Sachin. The restructuring efforts are definitely driving the improvement in costs. We have as well a lot of focus on cost. And I think the discipline that we've put in place since the beginning of the year is paying off. And we see that in the Q3 results. I think on the other side, what we've got to be, just a touch careful, is that we'll have this activity coming back. And we'll see that, I think, in Q4 as well as in '21, and we're still trying to get our arms around what it means from a dollar standpoint. So we've got definitely some tailwinds coming from all the actions that we've taken, but activity will be, I'll call it, a headwind, and we'll be guiding a little bit more on that as we go into our February earnings call.

This does conclude our earnings call for the third quarter of 2020. Thank you, everyone, for participating in today's call and your ongoing interest in Visteon. If you have any follow-up questions, please contact me directly. Thank you.

This concludes Visteon's Third Quarter 2020 Earnings Call. You may now disconnect.