Good morning. I'm Kris Doyle, Vice President of Investor Relations and Treasurer. Welcome to our earnings call for the second quarter of 2022. Please note, this call is being recorded ad 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’ll turn the call over to Sachin.

Thank you, Kris. Good morning, everyone, and thank you for joining our second quarter 2022 earnings call. Page two summarizes our results for the second quarter. The company did very well in navigating semiconductor shortages and the COVID-19-related lockdowns in Shanghai that impacted the global automotive industry in the quarter. Our second quarter sales were $848 million, an increase of 42% year-over-year when excluding the impact of currency. This is the highest quarterly sales achieved by the company since 2015. Adjusted EBITDA was $79 million or 9.3% of sales, an increase of $49 million compared to prior year due to higher production volumes and a strong commercial and operational discipline. Adjusted free cash flow for the second quarter was a use of $62 million as disruptions in semiconductor supply drove an increase of working capital. The company delivered another quarter of higher-than-market growth for sales, continuing our performance from the past quarters. We launched 11 new products in the quarter and 27 in the first half across multiple OEMs and on high-profile vehicle models. These new product launches put us in a good position to continue our sales outperformance in the coming quarters. We won over $2 billion of new business in the second quarter, bringing our year-to-date total to approximately $3.1 billion. This performance puts us on track for achieving our full year target of approximately $6 billion. We continue to lead the transformation of the industry to integrated cockpit domain controllers and added two new customer logos in the second quarter. We're excited for the transformation underway in the industry, and our SmartCore technology is one of the many innovations that Visteon is providing to enable the transformation. I will provide more details on our second quarter performance as well as our second half outlook on the subsequent…

Thank you, Sachin, and good morning, everyone. The Visteon team has continued to navigate the near-term industry challenges with resiliency, highlighting the agility of our supply chain while continuing to focus on commercial and cost discipline. Q2 sales were $848 million, coming in higher than our original expectations at the beginning of the quarter and representing an increase both year-over-year and sequentially. Our strong sales performance was driven by a combination of new product launches, higher customer demand and proactive actions Visteon took to mitigate the impact of semiconductor shortages. Compared to our initial expectations, sales benefited from higher semiconductor open market purchases as well as quicker-than-expected rebound in China in the month of June. Adjusted EBITDA was $79 million, representing a margin of 9.3% for the quarter. Adjusted EBITDA benefited from higher sales volumes as well as ongoing commercial and cost discipline. We're still seeing elevated costs related to the global semiconductor and supply chain shortages and continue to partner with our customers to minimize these disruptions while also ensuring these costs are passed through the supply chain. Adjusted free cash flow for the quarter was negative $62 million or negative $99 million through the first half of the year driven by an outflow in working capital due to higher inventory and the timing of customer recoveries. We ended the quarter with total cash of $325 million, representing a modest net debt position of $24 million. Our net leverage remained very low at 0.1 times. Turning to page 12. Second quarter sales of $848 million represented an increase of $238 million compared to last year. This increase was primarily from higher customer production volumes, recent product launches and favorable pricing, partially offset by the impact of the COVID-19 lockdowns in Shanghai. Q2 was the 13th consecutive quarter of market…

[Operator Instructions] We will now take our first question from Itay Michaeli from Citi.

Great thanks, good morning everyone. Just hoping we can go back and talk a bit more about what you're expecting for second half costs as well as recoveries. I just want to confirm whether you're seeing -- and I think you did mention additional increases in semiconductor pricing in Q3 and whether you have to go back to automakers to negotiate for those recoveries for the cost increase.

Yes. Sure. Good morning. It's Jerome. We've -- so we've had a pretty good quarter in terms of recoveries. And maybe just to step back a little bit on -- in terms of what we're recovering. We are recovering supplier cost increases that we've essentially had since the beginning of the year. And then we are recovering as well something which is more transitory, which are spot buys that we make on the open market and that we are pushing back to our customers in terms of recovery. So it's important to understand the dynamic between these two. The first category will continue with pretty strong recoveries in the second half of the year. We are -- we've negotiated quite a lot of deals with customers, especially at the end of Q2. And we anticipate that we'll be successful in Q3 and Q4 with the remainder of the cost increases that we got to pass on with customers. As it relates to open market purchases, we had really a spike in Q2, which shows into our numbers. And we're expecting that the open market purchases will probably be lower for two reasons. The first one is that China -- the lockdowns in China were the key reasons for the spike in prices and as well the reduction in supply. So we're expecting that will improve in the second half of the year. And therefore, our recoveries will be lower as a result of that just because we'll have less cost and the open -- coming from the open market purchases.

That's very helpful. And then just one other question. As we think about the incremental margin bridge perspective into 2023, I heard you mention that maybe first half is sort of a good starting point kind of on a go forward -- just want to clarify that comment. Is the first half, the 9% margin the way to think about kind of the bridge beyond 2022? Or should we kind of use that the full year or even in the second half? I just want to go back to that comment.

Yes. So that comment was more to try to neutralize some of the recoveries that we've had in Q2, which included some level of catch-ups that we had from Q1. So my comment was more related to H1 being a good proxy for our general run rate in terms of absolute performance, which is 9% when you combine Q1 and Q2 for EBITDA. And then given the elevated nature of our recoveries related to spot buys, it's probably worth as well mentioning that if you exclude recoveries from spot buys, our EBITDA would have been closer to 9.7%, 9.8%, which gives you really maybe more the true nature of our performance on a go-forward basis. And in fact, it's very similar to what we are indicating for the second half of the year in terms of EBITDA margin percentages.

Next, we have Mark Delaney with Goldman Sachs.

Good morning, thank you very much for taking my question. First one is on the revenue outlook in the second half of the year, and thanks for already talking through some of the dynamics around cost recoveries. But given that the second half is relatively flattish, I'm hoping to better understand, is any of that perhaps related to OEMs being more cautious on build plans given the macroeconomic backdrop? Or is -- are customer orders and both forecasts staying very strong?

Yes. So I'll take that one. So you're correct, we are expecting a modest growth in terms of sales versus H1. So H2 versus H1 close to 1%. And there are a few points that are worth mentioning. The first one is that we do expect production to improve, although, maybe to your comment, we are a little bit less optimistic than IHS, especially for Q4. They are planning on the 22 million-unit production level, and we are closer to 21 million. So that's the positive for the second half of the year. On the negative side, as I was just mentioning, we anticipate recoveries to be lower with open market semiconductor purchases as supply will improve. So that will reduce our revenue. And we do have as well, finally, some negative impacts coming from FX. We saw that in Q2, and we are modeling a continuation of that negative impact as we go towards the end of the year. So these are kind of the high-level dynamics that we see for the second half of the year.

Got it. And I guess in terms of the 4Q production assumption being a little bit lower than IHS, I mean, is that given some of the considerations around what the supply chain can support and perhaps some of the macroeconomic challenges related to COVID policies and energy supply? Or is there anything demand related that caused that?

Mark, this is Sachin. No, it's not demand-related. In fact, our demand remains fairly elevated and as strong as -- similar to prior quarters, but it is really driven by supply. So this is the estimate that we have at this point in time, although that can change. The supply is still pretty dynamic, and there are many factors that are driving it. At this point, we believe that we would be a little more modest in terms of our outlook for Q4 production than where IHS is at today.

Next, we have Rod Lache with Wolfe Research.

Good morning everybody. First of all, wanted to ask if there was a retroactive out-of-period benefit on pricing just related to some of the settlements in the quarter. And then secondly, just -- we continue to hear about chip inventory starting to build in some areas maybe excluding power ICs and transceivers. But -- and then as you said, you won't have to buy as much from wholesalers going forward. Maybe you could just give us a little bit of color on how that affects you financially into the back half and into next year. As that starts to repair, do you see a point at which this actually starts to reverse? And how we should be thinking about the financial impact on Visteon?

Let me take the second part of the question first, Rod, and then Jerome can talk about the recoveries and the timing. So you are correct, we are seeing the same dynamic, which is that some parts of the semiconductor industry, the supply situation is improving. Effectively anything that is 14 nanometers and lower in terms of the process node, we are starting to see supply improve and outpace the deliveries of power and analog chips, which tend to be older process node technologies.. Even in those areas, with the exception of maybe a few parts in general, we are in a better shape today than we were last year, especially in the second half of last year. So overall, there is an improvement. But as you know, it just takes one chip to really impact production. So we still have to be concerned about that. Now as we look into 2023, we are seeing at this point early information, which we will have more time later this year to clarify with suppliers. We are seeing gradual improvements even with the analog and power chips. That should help our ability to produce more product. In addition, and this is a very important point, we have been very active in redesigning some of our higher runner products to use fewer of those most critical power and analog chips and finding alternatives for it. That means we are effectively keeping multiple part numbers for the same product, active, to be able to switch between the different chips from different suppliers. So the combination of an improved supply and this redesign that I just mentioned, our plan is that we would be completely out of the semiconductor shortage environment for us by second half of next year. Jerome?

Yes. So on the first question, we do have some level of catch-ups on recoveries coming from Q1, but nothing really coming from prior year. I think the way to think about our recoveries as well, we have guided at the beginning of the year, and we're confirming this guidance. We're guiding to a net cost for the full year of $20 million. And the way to think about it as well is that most of that $20 million was incurred in the first half of the year. So that means that going forward, we're expecting pricing net of cost to be fairly neutral.

Okay. Just to clarify also, Jerome, can you remind me what the net price versus cost was last year on this in addition to $20 million?

So last year, we had a negative $40 million, and we had guided to an improvement of $20 million, resulting in a net negative $20 million for this year. So it's an improvement versus where we were last year.

Our next question comes from James Picariello with BNP Paribas.

Hi, good morning guys. I think just to clarify and just provide some really helpful context on the second half ramp relative to the second quarter, what was the -- can you confirm what was the open market pass-through revenue stream that was captured in the second quarter? This way, we could parse that out from your real -- your true recovery net price. So within the $122 million, what was pass-through?

So $75 million came from -- strictly from open market purchases that we essentially recovered fully in the second quarter. I'll give you a little bit more color as well on Q1. Q1 open market purchases were close to $25 million. So essentially, we are talking just for the first half of the year about $100 million of open market purchases that we transferred back to our customers in terms of pricing.

It should also be mentioned that it did not necessarily mean we've got three times the number of parts, but it was the price and the spike that caused this expense to spike up.

Especially in Q2.

Correct. Yes. Thank you.

Right. Okay. That's super helpful. And then the expectation for the second half is that open market purchases trend close towards 0 or something close to the first quarter. How should we think about the second half open market?

Yes. So it will go down. We will not give a number, but it's really expected to be much lower given the improvement of supply and as well the fact that some of this spike was really caused by the China lockdown.

It all depends really, James, on how the supply and the timing, most importantly supply, plays out in the coming weeks. The industry is recovering from the shutdown in Shanghai, but we still are expecting some level of impact of timing of supplies, and that may drive some level of open market purchases, but still much lower than Q2.

Got it. Okay. And then just as we start to think about next year for your contract buys related to semis, are you seeing suppliers put through any additional price increases in the second half or.

Yes.

Yes, you are.

Yes. Yes. There are a few, not many, there are a few suppliers that are coming to us with additional price requests based on inflation in some of their underlying costs. We are in negotiations with them, and we'll see how that plays out. And we expect, as a result of that, for us to also benefit in terms of higher supply. And if that's the case, then yes, we would see a price increase with the suppliers, but we should see a reduction in cost from the open market purchases, which is a trade that I think would be net favorable to us and to our customers.

Right. Okay. And this -- I imagine this is also inciting some redesign activity?

Yes. Exactly. Not to necessarily move away from just the price increases, but really supply availability, right? So what we are trying to do here, first and foremost, is to solve the problem of being able to deliver to the full demand of our OEM customers, right? What we are seeing is a consistently high demand for our digital products as the OEMs are featuring more digital content in their cockpits. That's a trend that we don't believe will reverse as we go forward. And so that demand being consistently higher, we have to figure out a way to deliver to that. And we do not believe that even with the recovery of supply at least well into next year, without redesigns, we will be in a position to necessarily meet all of the demand, right? It's a great growth story that we have if we are seeing an attach rate that's higher than we had anticipated on account of this trend, but now we have to reduce these actions that we mentioned to respond to that higher demand. And I'm really happy with the team in terms of how nimble that we have been in securing, first of all, the alternate chip suppliers, which in this environment on short lead time is extremely challenging, but we have been successful in doing so, and then introducing the redesigns with all of the testing and everything else that we have to do before it is put in vehicles. So I think we should be in a good position next year to not have the shortages as big a topic for us as it has been the last two quarters.

Our next question comes from Emmanuel Rosner with Deutsche Bank.

Thank you very much. I was hoping if you could help me a little bit with the walk between first half and second half in terms of margin. I think, Jerome, you mentioned that excluding recoveries from spot buys, basically, you're guiding to the second half similar to the first half, but I would have expected maybe a little bit of operating leverage going into the back half of the year because of higher industry volume. So can you maybe talk about that? And then within that also, how much growth of the market should we expect in the second half?

Yes. Sure. Good morning Emmanuel. So our EBITDA for the first half was $150 million. And for the full year, we're guiding towards the midpoint at $315 million. So there is a slight improvement going into the second half. A few drivers. The first one is improved supply, and therefore, volumes will generate more EBITDA. We're expecting as well the net impact of semiconductors to be neutral after the $20 million leakage that we had in the first half. And then on the negative side, we'll have some ramp-up of engineering. We had a pretty low level of engineering cost in Q2 largely driven by the China lockdown and the fact that our activity was lower. So that will reverse out going into Q3 and Q4. And we do have as well a continuation of investment in electrification as well as some additional costs because of the redesigns that we are pretty active to put in place. So this is kind of the dynamic, better volume, neutral net impact from semiconductors and then negative on the engineering side, although engineering will remain at a pretty -- in a pretty good place from a net engineering standpoint for the full year. We've been spending a lot of time, as you remember, in 2020, restructuring, making sure that we've got a good footprint, and the same applies as well to SG&A.

In terms of growth-over-market for the rest of the year, how should we think about it?

So we are anticipating a -- the underlying -- what we call the underlying growth-over-market before pricing to be fairly stable compared to what we've seen in Q1 and Q2, and we were in both quarters at 16%. So no changes really on that side. I think the caveat is going to be the pricing side, which is going to be a little bit more nuanced on that one. We obviously anticipate that we'll have less open market purchases, as I mentioned. And then on a year-over-year basis, we start lapping customer recoveries from the second half of the year. You remember that we started to be pretty active late in Q2 last year and had some good successes in recovery. So that will start lapping. And we could have a Q4, which could be even neutral from a pricing standpoint year-over-year.

Great. And then now is sort of -- is -- this 9.7% to 9.8%, it sounds like a pretty good base, both in terms of the underlying in the first half and then sort of what you're guiding for the second half. Does that leave you on track for your 12% target?.

Yes. So guiding to, in fact, 9.8%, if you do the math to the midpoint of EBITDA and to the high point of sales for the second half. Obviously, having a strong first half of the year and confident about the second gives us as well a lot of confidence going into next year. We've -- I think on the sales side, we always start with the demand, and our demand has been strong this year. We've had customer orders in excess of $1 billion per quarter. We see that still for next year. And it will be really a function of supply, which we think will improve. EBITDA, nothing has changed on that side. We are still very confident about our 12%. I don;t know, Sachin, if you.

Yes. And if you remember, Emmanuel, we said that the 12% is predicated on achieving a sales of about $4 billion, and based on where we are today with the supply outlook for next year plus the redesigns, we see a path for us to get to that $4 billion next year, which should help us achieve our objective for EBITDA for next year.

Next question is Luke Junk with Baird.

Good morning, thanks for taking my questions. First, just hoping we could expand on the practical implications of spot buys declining into the back half, especially with respect to supply chain constraints on growth. And maybe, if possible, if you could comment on what you've actually seen so far in June and July as the lockdowns have eased.

Yes. So we certainly have seen a reduction in the need to go into the open market as much as we had to in Q2, but there are still several chips, as I mentioned earlier, that are in critically short supply. And timing of resumption of supply for those chips is causing us to going into the open market for purchases of those chips. So it's going to reduce, as Jerome also mentioned, but we cannot necessarily say exactly to what level sitting here. And what that would mean is it would also depend on how the supply of the underlying chips from our direct suppliers, how does that develop. So that's all we can say on that one, Luke, for today, but we certainly expect a reduction in the need to open market purchases.

Okay. Yes. Understand there's only so much you can say on that front. And then follow-up question on modeling. Just more of a finer point here. Jerome, you helped us -- give us some help on the gross engineering costs and what the drivers are going to be into the back half of the year. What I'm wondering is on the engineering costs, specifically the engineering recoveries that were higher in the front half of the year, how should we view those? Should we view the higher recoveries as timing-related primarily? Or is there some effect here of customers compensating you for higher costs in those numbers as well?

It's more timing, Luke. And it's -- obviously, we've got a large set of recoveries coming from various customers. So it's really just more timing. So I wouldn't read more than that. It's been choppy. We've been trying over time to be pretty active on that side. So it's -- but it tends to be still a little bit lumpy.

It's milestone-driven mostly. And as we accomplish those objectives that we have currently agreed with the customers, the recovery follows. So it's difficult to smooth it out as much as we try to. And so that's really where it's at.

Our next question is from Joseph Spak with RBC Capital.

Thank you. Jerome, I wanted to go back to, I guess, slide 12. You had this comment about the margin dilution on recoveries. And you even sort of alluded to, right, in the first half, if you back out the pricing and sort of the related flow-throughs, it would have been more like 10% versus 9%, which I agree with, but that's on like an annualized first half number of $3 billion, again, if you take out the pricing. And if we think about your 12% margin target on $4 billion of sales, you need sort of like a, call it, about an 18% incremental margin to get there. And in the past, you talked about a 20% to 22% embedded. So I know there's a lot of noise going on in the industry and some volatility, but like it does seem like underlying, you're tracking ahead. Is that fair? Or is there something else that I should consider?

Yes. I would maybe go as far as saying we're tracking ahead. I don't want to create false expectations. But we are tracking towards the 12%. And your math is absolutely correct. That's how we look at it as well. So it's -- when you remove the spot buy, yes, we're in the 20% range, which is, to your point, a little bit at the low end of the range in terms of incremental margins.

Yes. Okay. And again, I guess, just on, again, that 2023 target. I know, Sachin, good to hear you're sort of on track. But like are you -- is -- that's with an expectation that you sort of returned to sort of more normalcy on sort of pricing and recoveries?

Yes. We would expect that. So we certainly would think that next year would look a lot more normal in terms of how things used to operate in terms of pricing and although there may still be some flow-through from this year into next year that we'll have to adjust. But supply, as we've talked about, will largely not be an issue. And therefore, the pricing would tend to go back to where it used to be.

Okay. Maybe just one quick one on the big bookings quarter. I know you mentioned some of that was sort of -- some of the sourcing was still constrained, but was there like a release of programs that were, like, tied up earlier? Or is that just, like, a lot of share gains? Or what's going on?

Yes. Let me explain what happens. So if you look at the last, I would say, two or three quarters prior to Q2, the sourcing activity was certainly below par, okay? And so there were delays on account of all of the disruptions caused due to semiconductors. So Q2 was a little bit of a catch-up quarter in that sense. So we saw a lot of decisions finally being made. And having said that, we still had to win all of that business, right? So it wasn't a layup. But we're very pleased to see that we were able to convert some of the most important pursuits that we were going after. We talked about this display. This is the first win with an OEM that we have never had a central information display business with before, and it's very good margin. It will be a good contributor to our business going forward. And then the SmartCore win, we factored two. We highlighted one, which is the one that is also representative of where we see the industry go. A lot of the awards are sort of timing-wise coming up now this year because the launches are happening in 2025 or '26. So they got delayed. Now they have to be finally decided, otherwise people risk Achieving their program milestones, and that's what really happened here in Q2.

Our next question comes from David Kelley with Jefferies.

Maybe two quick follow-ups from my end. First, the 16% ex-pricing outgrowth that you expect to sustain here, I was hoping you could talk a bit more about the impact of launches and mix and how do you see those two specifically playing out through in the year.

Yes. So first of all, most of that outgrowth is on account of the new product launches, okay? And if you look at the last 12 months, we have launched approximately 60 new products, right? It has really been a very active launch period for us, which is kind of interesting because you would think that given the supply constraints, it would be the opposite. And so what it really points to is the fact that many of the products that we are building are key for the OEMs' products to be competitive in the marketplace, okay? So that's really what's driving it. Now we had 27 new launches just in the first half, which will also contribute to our growth-over-market as we go forward, but it will really depend on how many chips we can get to really be able to take full advantage of it. So there's a bit of an offsetting influence there. And so we expect given the supply situation that the growth-over-market should more or less continue into second half as what we have seen in the first half. The underlying business is pretty steady. That's a term I would use. And the demand side, we are seeing pretty much stay consistent over the last couple of quarters.

Okay. Got it. That's helpful. And then to the earlier point of you're kind of constantly striving to deliver to customer demand, assumed these ongoing supply chain constraints have created a market share opportunity for you at least relative to some of the suppliers that haven't been as successful in sourcing components. So maybe if you could give us a sense of the conversations you've been having with customers as it relates to procuring parts relative to your competitors, that would be great.

Yes. It's really hard to speak into what others are able to do or not do. So it's may not be appropriate to comment on that. But I'll just give you an anecdotal piece of information. So I was reviewing our Q1 and Q2 deliveries with an OEM, and this is their information. They basically said that we would -- everything that they were expecting from us in Q2, this is an European OEM, which, frankly, if you were to ask me, I was positively surprised with that performance. So -- and that was also, by the way, not just a factor of the supply improving, but also on account of the redesigns. So this kind of gives you an indication of where things are at. It won't be easy also in the second half. We are still facing the critical shortages. We'll have to fight through that. And I'm hoping as a result of this that we do gain some share, but I wouldn't be able to really comment on exactly how much or what that might translate into just yet.

Thanks, David, and thanks, everyone. So this concludes our earnings call for the second quarter of 2022. 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 second quarter 2022 results earning call. You may now disconnect.