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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning. I’m Bill Robertson, Vice President of Finance for Visteon. Welcome to our Earnings Call for the Second Quarter of 2018. 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 further details.
Presentation materials for today’s call were posted on the Investors section of Visteon’s website this morning. Please visit www.visteon.com/earnings to download the material if you have not already done so. Our Form 10-Q was filed earlier this morning with the news release.
Joining us today are Sachin Lawande, President and Chief Executive Officer; and Christian Garcia, Executive Vice President and Chief Financial Officer. We have scheduled the call for 1 hour, and we’ll open the lines for your questions after Sachin and Christian’s remarks. Please limit your questions to one question and one follow-up.
Again, thank you for joining us. Now I will turn it over to Sachin.
Thank you, Bill, and good morning, everyone. On Page 2, we summarize our highlights for the second quarter of 2018. The company reported sales of $758 million and adjusted EBITDA of $81 million. Compared to prior year, some key Visteon customers had lower vehicle production in the second quarter. This impacted us, particularly in North America, where the decline in production was greater than expected and to a lesser extent in Europe, where concerns around diesel and the impact of new emissions testing muted our growth in the region.
China continued to be a strong region for us, helping offset some of the decline. We continued the strong momentum in new business wins into the second quarter. Our focus infotainment is generating results, and we won the largest infotainment award in the company’s history with projected lifetime revenue of $640 million.
The industry trend of moving to all-digital clusters is continuing to benefit us as the market leader. We won our largest instrument cluster award also in the second quarter, with projected lifetime revenue of $585 million. These and other awards resulted in the company winning $2.2 billion in new business, up 38% from prior year. In addition to this new business wins, our performance in China is a highlight for the quarter. Sales in China were up 18% year-over-year, while new business wins for the first half more than doubled compared to the same period a year earlier.
Moving to Page 3. In the second quarter, the auto industry had a mix performance with respect to vehicle production across the key regions. In North America, production volume was down 3% year-over-year. However, volumes for Visteon’s top five customers declined more significantly and were down 9%, which impacted our total sales by about 3% in the quarter. We expect North America production volumes in the second half to be similar to the first half and up slightly year-over-year.
In Europe, overall production volume was up 4% despite some headwinds, due to concerns around diesel and the new emissions test procedure referred to as WLTP. Visteon sales grew 5% year-over-year, primarily from favorable currency, as these headwinds reduced our sales by about 1.5%. We expect diesel and WLTP to impact our third quarter sales as well before production volumes start to recover in the fourth quarter.
The environment in China was more positive with production volumes growing 9% year-over-year in the quarter. Our sales in China grew even faster at 18% due to a high number of product launches, partially offsetting the lower sales in other regions. Vehicle production in China is expected to continue to grow in the second half of the year, although at low single-digit levels. In summary, we’re seeing softness in North America, and to some extent in Europe, while the China market is likely to grow at a low single-digit level for the full year.
Moving to Page 4. The broader auto industry trends continue to be very positive for Visteon. The concerns around the future of diesel in Europe have given an additional boost to electric vehicles on top of the China government mandate. Almost all OEMs have announced plans for new electric vehicles as a result. The shift towards electric vehicles is a catalyst for the upgrade of the cockpit to fully digital. EVs, or connected cars, almost by definition, and weight and power efficiency is a top priority for these vehicles.
Visteon’s technology portfolio of all digital clusters, connected infotainment and SmartCore cockpit domain controller are ideally suited for electric vehicles. We are seeing significant interest from OEMs in our products as a result. With respect to safety in autonomous driving technology, the industry is evolving to Level 3 safety features for consumer vehicles, while investing in the development of more autonomous driving capabilities for Robo-Taxi applications. It’s also becoming clear that Level 4 and Level 5 self-driving technology will take longer to bring to market than earlier expected.
Visteon’s DriveCore system was designed from the start for centralized computing of sensor data, which is a requirement for Level 3 and higher solutions. The ongoing commoditization of sensors is also reinforcing our strategy of investing in higher value system and software solutions for the next generation of safety systems. In summary, the industry shifts towards EV and AV are very positive for Visteon. Our product and technology portfolio is uniquely positioned to benefit from these trends.
Moving to Page 5. I’m very pleased to announce that in the second quarter, we were able to win the largest infotainment business award in Visteon’s history, worth approximately $640 million in lifetime revenue. This win is for a discrete display audio system for a leading European automaker and features a 10-inch touchscreen display and is based on the Android operating system.
Besides AM/FM radio, multimedia and CarPlay and Android Auto features, this system will also offer downloadable apps from the OEMs app store. This system will launch in early 2020 with annual volume of over 400,000 units. This win confirms that Visteon can now successfully compete against any infotainment supplier in the industry. It’s important to note that this business has further potential to expand across car models of the automaker.
As shown on the right side of the page, our wins in infotainment in the first half of this year already exceed our wins for the full year of 2017. Our strategy of building infotainment competence with Phoenix and Android technology is generating results. With industry-leading solutions, for both HTML5 and Android-based infotainment systems, Visteon is in a great position to continue to gain market share in infotainment.
As the industry transitions to cockpit domain controllers, it is critical to have strong capabilities in both infotainment and instrument clusters to fully exploit the opportunities. And lastly, it’s important to note that our wins in the display audio segment of infotainment are growing rapidly. Display audio systems have replaced basic radio as the standard equipment on cars, especially in mass-market passenger vehicles.
Turning to Page 6. Success of CarPlay and Android Auto, which allow users to project phone-based maps and other applications to the car dashboard has made display audio systems the standard equipment for all new cars. This is the case in developed as well as in emerging markets. Android has already become the most popular smartphone operating system with a large ecosystem of apps and software developers.
Recent versions of Android now come with support for vehicle infotainment systems and offer an interesting alternative to Linux and HTML5 as the operating system for connected infotainment systems. In China, which has a large pool of Android software developers and apps, Android has already become the preferred infotainment operating system.
Visteon’s acquisition AllGo has put the company in the unique position of having in-house expertise in all this critical areas of technology. AllGo is the leading provider of CarPlay and Android auto software solutions to Tier 1 suppliers in the auto industry and is the third-party lab for Google to certify Android Auto systems. They also have deep expertise in customizing Android for infotainment, having worked on multiple systems for different OEMs in the past 7 years.
Together with Visteon’s Phoenix Infotainment system platform, which is based on Linux and HTML5, we are in a strong position to competitively address the full range of needs of OEMs for infotainment solutions. We are already developing a Phoenix-based infotainment system for a European OEM that will launch later this year. And now with the display audio win on the previous page, we will be offering Android-based systems as well.
Turning to Page 7. In addition to the largest infotainment win in Visteon’s history, I’m pleased to share that we have also won the largest instrument cluster award in the company’s history in the second quarter. This win is also with a leading European vehicle manufacturer and is for an all-digital cluster worth $585 million in lifetime value. The first launch of this system is in late 2020 on a high-volume compact C segment vehicle. It will be followed with launches on other models with the OEM following the initial launch.
In the last three years, Visteon has been leading the transformation of the instrument cluster from analog to digital. As shown on the chart at the right, digital clusters have continued to grow as a percentage of our overall cluster wins since the beginning of 2016. While early digital cluster wins were for luxury or D segment and above vehicles, we are now offering digital clusters for mass-market vehicles.
We are the primary supplier of digital clusters to three of the top five global OEMs today. With our best-in-class capabilities and functional safety, automotive displays and other technologies that are critical for digital clusters, I’m confident that we can continue to grow our market share further in this growing segment of the corporate electronics market.
Turning to Page 8. All digital clusters first started in luxury vehicles and are now moving into mass-market vehicles. This move into mass market is significantly expanding the available market opportunity for all-digital clusters. Even by 2023, only 15% of all vehicles are expected to have all-digital clusters with lots of room for future growth. In addition, the sizes of the displays in both instrument clusters and infotainment are steadily growing with each new car model. A few luxury vehicles already offer large 12-inch cluster and infotainment displays in the dashboard.
As the display size just keep getting larger, this flat rectangular displays do not work very well for the driver’s field of view, not for the interior design of the dashboard. We are now seeing a new trend emerge of large curved and shaped displays, like the image on the right of the page. This complex displays use curved LCD panels and covered glass to improve the viewing angle and the look and feel of the dashboard. This approach allows for much larger displays beyond 12-inches in vehicles.
This trend plays well to Visteon’s strength on account of strong capabilities in automotive displays. In addition, large cluster and infotainment displays drive demand for greater computing power, which benefits our SmartCore technology. This complex displays will initially launch in luxury vehicles before starting to make inroads in the high-volume segment of the market. This new development is another catalyst to our cockpit electronics business, and I expect to provide you with further updates in the coming quarters.
Moving to Page 9. As I mentioned earlier, the second quarter was another strong quarter for Visteon in China. Our sales in China grew 18% year-over-year, significantly outpacing production volume growth. Our sales growth in China is largely driven by new product launches, which totaled 18 in the first half of 2018, more than double the number last year. We expect our full year sales to also grow double-digit, despite expected slowdown in production volume in the second half.
Our new business wins were $1.2 billion in the first half of 2018, a 150% increase compared with the first half of 2017. We are pleased to report that about 40% of this wins were for electric vehicles and almost all of the wins are for infotainment and digital cluster products. SmartCore is gaining traction in China as the value proposition of high computing performance at lower weight and power consumption is a great fit for electric vehicles. In all, we are very pleased that Visteon is building strong momentum in China and increasing our share in this very important market.
Turning to Page 10. Our track record of winning new business continued into the second quarter. With over $2.2 billion of new business wins in the second quarter, our first half wins totaled $3.8 billion, which is 23% higher than the first half of last year. Our core products, digital clusters, infotainment and SmartCore continue to perform well in terms of winning new business. I have already discussed the key wins in this product segments earlier.
It’s important to note that almost all of the new business won this year launches by the end of 2021, which helps us achieve our long-term sales and profitability targets. The pipeline of new opportunities for the rest of the year is robust, and we are in a good position to meet or exceed last year’s levels of new business wins. Our order backlog has grown to over $21 billion, and the high level of new business wins is offsetting softness in vehicle production volumes. The order backlog is also well balanced from a regional perspective, with Asia and Europe each representing 38% and Americas at 24% of the total.
Turning to Page 11. On Page 11, I would like to summarize our performance for the second quarter. Despite the vehicle production softness and other headwinds that I discussed earlier, we generated $758 million in sales and $81 million in adjusted EBITDA. China was the bright spot in the quarter, with an 18% increase in sales year-over-year. We also generated adjusted free cash flow of $77 million through the first two quarters.
Our core business is in excellent shape with a product and technology portfolio that is more competitive than ever before. Our new business win performance remains stellar. We achieved $2.2 billion in new business wins in the second quarter, which was a 38% increase over our new business wins for the same period a year earlier. And order backlog now stands at over $21 billion, up 22% year-over-year.
As we look ahead to the rest of the year, the second half appears at this point to be a lot like the first half in terms of vehicle production. However, there are headwinds that exist that we will monitor closely, including the continued softening of production in North America, diesel and WLTP in Europe and the potential tariffs on trade that can affect the final outcome. Overall, the key technology trends in automotive continue to favor Visteon’s position in the long term.
This concludes my overview comments. And now Christian will take you through our financial results.
Thank you, Sachin, and good morning, everyone. On Page 13, we present our key financial results for 2018 versus the comparable periods in 2017. Sales of $758 million in the second quarter decreased $16 million due to lower vehicle production volumes in the Americas, customer pricing net of design changes and product mix, partially offset by net new business and favorable currency.
Adjusted EBITDA was $81 million, representing a $3 million decrease from second quarter 2017. Adjusted EBITDA margin was 10.7%, 20 basis points lower than last year’s levels and was impacted by lower volumes in the Americas and product mix, partially offset by favorable currency and continued operating efficiencies across our organization.
On a year-to-date basis, sales and adjusted EBITDA are essentially flat against last year. If you exclude the increased investment associated with DriveCore, our year-to-date margins would have increased 20 basis points from continued operating efficiencies. Adjusted free cash flow grew about 38%, primarily as a result of strong working capital performance.
I will provide more detail on the following pages. Turning to Page 14. We provide sales and adjusted EBITDA for the second quarter and year-to-date for 2018 versus last year. Sales for the quarter were $758 million, about 2% lower than 2017. Our sales increased in Asia and Europe and declined in the Americas. In Asia, particularly in China, new product launches and positive currency drove an increase in sales. We continue to see our sales outpaced on underlying production volume in that market.
In the second quarter, China domestic sales grew by 18%, and we expect that our China domestic revenues will grow by double digits for the full year of 2018. European sales grew year-over-year as well, reflecting favorable currency and the impact of new business. Sales growth was dampened in the region due to slowing demand for diesel vehicles for some of our key customers. In addition, new emission regulations are projected to have an impact on some OEMs in the third quarter.
In the Americas, Q2 sales continued to be affected by the same factors we discussed on the Q1 earnings call. Overall, production volumes declined for the second straight quarter by approximately 3%. Volumes for some of our key customers declined approximately 9% in the quarter, as they adjusted their production to manage their inventory levels and adjust their product offerings. In addition, we saw the continued phasing out of our legacy products that impacted sales this quarter.
Our adjusted EBITDA for the quarter was $81 million. This represents a decrease of $3 million from last year and reflects the impact of lower volume and product mix, partially offset by favorable currency and a positive business equation. We define business equation as the ability to offset customer pricing with positive cost performance. In the second quarter, results reflected strong cost performance, driven by material and manufacturing cost efficiencies, more than offsetting increased R&D spend, as we support new customer programs and invest in new technologies.
Moving to Page 15. Page 15 provides our cash flow. Adjusted free cash flow for the quarter was $29 million, which was lower than last year, primarily related to the timing of trade working capital and increased capital expenditures. Year-to-date adjusted free cash flow is $77 million, $21 million higher than the same period last year.
As we indicated in our Q1 earnings call, first quarter free cash flow was favorably impacted by the timing of certain payments. We continue to see good working capital metrics in the second quarter, which are offsetting higher capital expenditures and increased accruals for engineering reimbursements. We continue to guide CapEx to be approximately 3.5% of revenue for the year.
Cash at the end of the quarter was $528 million and debt was $378 million, which continues to put us in a net cash position in a gross debt-to-EBITDA ratio of 1.0 times. We have a strong capital structure that enables us to compete effectively and invest in different shading technologies, while returning capital to our shareholders.
Turning to Page 16. In July, we received a final delivery of shares associated with our accelerated share repurchase program we announced last quarter. Since 2017, we have repurchased $400 million worth of stock in a combination of open market and accelerated share repurchase programs and brought back 3.6 million shares in that period at an average price of about $110.
Beyond this return of capital to our shareholders, we have $500 million remaining board authorization in our buyback program, and we are currently finalizing our plans for deployment. We will announce our activities as they are implemented throughout the year. As you’ve seen in the past years, Visteon has always been committed to shareholder distributions. Going forward, as we continue to have strong cash flow generation, we will deploy our excess cash to provide the highest returns for our shareholders.
Turning to Page 17. This page shows our updated guidance for sales, adjusted EBITDA and adjusted free cash flow. We are updating our guidance to account for lower volumes in North America for certain customers, the impact of lower diesel vehicle sales in Europe, and to a lesser extent, unfavorable currency in the second half of the year.
Previously, we expected that growth in Europe and Asia would offset the weakness that we are now experiencing in North America. However, softening demand for diesel vehicles in Europe is dampening the growth that we expected for this region. We are currently projecting sales of $3,100,000,000 to $3,150,000,000 adjusted EBITDA of $350 million to $360 million, adjusted free cash flow of $160 million to $170 million.
Let me provide some comments on how we anticipate the second half to progress. The third quarter has always been the seasonally weakest quarter of the year due to scheduled OEM plant shutdowns. This year, the weakness in the third quarter is expected to be exacerbated by the impact of new emission testing standards if this regulations are implemented. This will make comparisons of our third quarter sales and profitability against last year slightly more difficult.
We currently expect the transitory effects from the new regulations to be resolved by the end of the third quarter and production volumes to start to recover in Q4. Additionally, we believe that we will have higher growth in China as we approach the end of the year, providing us with a more constructive view for our fourth quarter performance.
As a result of the lower guidance for sales in 2018, we are also reducing our guidance for adjusted EBITDA. This profitability level includes our ongoing investment in DriveCore, while incorporating cost savings from our current restructuring efforts. Although we are lowering our guidance for the full year 2018, we will continue to focus on ongoing profit and margin improvements, while continuing to invest to support our new programs, which will drive our long-term sales growth.
Turning to Page 18. In summary, despite facing challenging market headwinds, we continue to execute on our long-term strategies. In the second quarter, we have been awarded our largest wins ever in both infotainment and clusters. They are not only record wins for the company but they represent two of the largest, if not the largest wins, in the industry’s infotainment and cluster segments of cockpit electronics. This is evidenced that the most significant automotive technology trends are strengthening Visteon’s market position over the long term, which will increase our value to our shareholders.
Thank you for joining us today. Now we would like to open it up for questions.
[Operator Instructions] Your first question is from the line of David Leiker with Robert W. Baird.
Hi, good morning. This is Joe Vruwink for David.
Good morning, Joe.
I’m just trying to go through some of the puts and takes for the second half of guidance and just using some of the commentary on the call if I annualize how your North American customers are underperforming. So there was a nine point headwind. Or if I analyze the WLTP impact, I can pretty easily get to a $100 million revenue reduction relative to where you might have been at the beginning of the year, which is what essentially you’re now guiding too. But are there things that are going better for you in terms of your China performance or new business activity? I’m just trying to figure out if maybe this guidance does represent, let’s say, the final cut, and if industry conditions just hold until the second half, there might be some opportunities to actually outperform?
Joe, this is Christian. Let me take a stab at this and then give it to Sachin for further comments. But you are absolutely right. If you think about the headwinds that we’re experiencing for the year, whether it’s North America volumes, the transitory effects of WLTP and softening demand, they are much more impactful in Q3. And then the other portion of it is that we continue to spend on R&D for the programs that we’ve won as well as the investments that we have for DriveCore. It’s a little bit more back-end weighted. We think about Q3, it is going to show a very difficult comparisons, but we still believe that it’s going to recover in Q4. And as you pointed out, China is a good story. It will continue to be a good story, and it’s going to show a much better or much healthier growth in Q4. So we would see a very weak Q3 and then recover some in Q4.
Yes, thank you, Christian. And Joe, if you think about what we are experiencing here, it’s really a story of, I would say, two parts. On one side, you have the volume and the impact that we have discussed here on the call. And on the other side, the key trends in corporate electronics are continuing to help Visteon. So we talked about the digital clusters, which are migrating or moving into the mass-market volume vehicles. That’s a very big thing for us, and by the way, that’s not just happening in the Western world, it’s also happening in China. The move towards display audio in terms of the infotainment systems, which is becoming standard equipment across almost new vehicles, which is creating significant opportunities there, that’s continuing.
And we have mentioned that SmartCore, our cockpit domain controllers, this is an inflection point. This year represents that major shift that more and more of the OEMs are moving into cockpit domain controllers, and we are very well positioned with our technology portfolio. In fact, I would say that it has never been a better time from a technology portfolio and how it addresses these needs in the industry. And again, so it’s a competitive environment out there, but we are doing pretty well and that is something that will continue to benefit us – and the hope is that it can offset some of the reduction in the production volumes that we are experiencing right now.
So on that point, thank you for that. I’d imagine, you are not in position yet to raise your 2021 revenue target, although given how much new business you’re winning. You’re 30% above the new business assumption, you embedded in the outlook. So I’d imagine maybe you’ll get there eventually. So I’ll ask a slightly different question. Sachin, when you joined Visteon and you talked about programs you’re winning in the backlog, there was a lot of programs, but they were small in magnitude, $25 million, $50 million, $100 million programs. Now that you’re winning individual programs that are $500 million, $600 million, what does that mean to the business model longer term, greater revenue stickiness, more consistency with incrementally EBITDA? Just how does this change kind of the outlook for Visteon going forward?
Yes, absolutely. So just to characterize what you said further. If you look at our new product launches going, say, two years back, the average size of a new product launch was somewhere around $50 million. What we have managed to accomplish in the last two years is to more than double the average size of new product launches. And if you look at the recent wins, that’s – that trend is going to continue. Now that trend is very important for us. It’s a requirement for us to be able to execute on our long-term targets of especially EBITDA margin expansion. So with respect to the 2021 targets, we will provide you with more updates later when we do the full update at the beginning of the year.
But I think it’s appropriate to say that we have been winning higher than what we had said last – earlier last year, in terms of the two-year targets, in terms of new business wins. We are running ahead of that, but since the volumes have come down, it is an expectation that we will need to win higher than the $12 billion that we had talked about at the beginning of last year. But what I see in terms of the new opportunities pipeline and what we have been able to win in the first half of this year, I would expect us to be on track to win the level that’s required for our long-term target achievement.
Joe, if I can add to that, so Sachin mentioned the quantities there, but what is even more interesting is the type of wins that we have. It’s much more heavy on the software side. And as you can tell that as we move the company to much more software orientation, in terms of the technologies that we are commercializing, it has a lot of implications on the business model. It might be not as impactful in 2021 but certainly beyond 2021.
Great. Thank you very much.
And your next question is from the line of Itay Michaeli with Citi Research.
This is Justin on for Itay. How you guys are doing?
Hi, Justin.
So a quick question on the Q2 front. You guys mentioned product mix with respect to being a headwind in the quarter. Just kind of hoping you can elaborate a bit more on that? Is that effectively more hardware specific content at the expense of less software specific content? And then I guess how that relates to customers adjusting their product offerings, which I believe you mentioned as well? Were you more referring to that relative to segment-related strategies or is that also kind of like content-related technological offerings on the vehicle?
Yes, Justin, in the quarter, we really did not see much of a shift from what we were expecting in terms of the product mix, except that in Europe where we had a – where, I should say, the industry as a whole is going through a mix shift with respect to diesel versus gasoline, that has impacted some of our customers disproportionately, and that has impacted us in the sense that our sales to those customers have been reduced.
Now there are a couple of things going on in Europe as you know. One is diesel, the other is WLTP. There are two different things the way we see them. And the WLTP impact would be probably felt here in the third quarter as well, but should be then recovered as we enter into the fourth quarter. But when it comes to the diesel versus gasoline mix, this does seem to be a somewhat longer-term trend, and then we will have to see how our OEM customers manage the mix change and its impact on us.
Great. Very helpful there. And then I guess from my follow-up, on Slide 4, you mentioned that you’re seeing increased interest at the OEM level from the evolution of, call it, ADAS and to the Robo-Taxi/Level 4, Level 5 maybe being a bit delayed in favor of Level 3, which kind of plays into the DriveCore tech. Can you provide some color in terms of the regions that you’re seeing that increased interest? Maybe any color there would be helpful.
Yes, absolutely. And just to maybe elaborate on that a little bit more, so as you might have seen, the impact of Level 1 and Level 2 ADAS in terms of reducing accidents and fatalities has actually been quite significant. I would say, impact has been greater than 25% across the board in terms of reducing those accidents. Now the technology that is available to the industry is able to make that impact at what I would term as lower speeds.
When it comes to higher speeds, in other words, highway driving and making highway driving safer, this technology needs to evolve to a – more of a centralized processing system that performs sensor fusion from the data that it collects from multiple sensors. That requires a completely different kind of architecture and scalability in terms of the computing resources that we need to put into the system.
Now that’s what DriveCore was designed to do. And by the way, that same approach is what is required as you move up from Level 3 to eventually Level 4 and Level 5, although I have to say at this point in time and the industry has also realized that it might take longer than expected to put Level 4 and Level 5 systems out on the road.
So our focus on a couple of things: one, the trends of sensors continuing to commoditize that seems to be proven right. The focus on centralized computing of sensor data with sensor fusion that seems to be the right approach as well. And therefore, the interest from OEMs has been really high in this DriveCore solution. It’s been the highest in China, as we would expect it to be, considering how quickly that market is moving towards more safer and eventually autonomous driving.
And by the way, we also believe that EVs, electric vehicles, are almost a precursor to more automated driving. And again, as you know, China is leading the market from their perspective. So we continue to see a lot of interest from China for DriveCore. But also, in Europe, which is where there’s a lot of activity in terms of technology development, we are engaged in predevelopment activities with multiple customers. Hopefully, we’ll be able to announce more in the coming quarters outside of China our engagement with other OEMs.
Perfect. Very helpful. Thank you so much.
And your next question is from the line of Emmanuel Rosner with Guggenheim Securities.
Hi, good morning, everybody.
Good morning.
Good morning.
Just wanted to ask you just a little more color on your revised 2018 guidance. In particular, I’m curious about the factors behind the cut in the EBITDA margin guidance because, obviously, the first half margin seemed to be pretty much in line. Is this mostly sort of the lower volumes and the headwinds you’ve spoken about? Or are there any specific margin headwinds as well?
No, no, you hit it head on, Emmanuel. If you – like I said, if we think about the headwinds that we’re seeing this year, the North America volumes and the softening of diesel demand and the transitory effects of WLTP, those are much more impactful in the second half, particularly in Q3. And so that’s one aspect of it. The second aspect is our engineering spend continues, and in fact, our DriveCore investments are actually back-end weighted, right? So as such, second half margins will be lower than the first half.
Okay. That’s helpful. And just to clarify, the – your multiple comments on diesel, I mean, obviously you’re not exposed to, I mean, your technology don’t apply to specific powertrain, right? So you’re just saying that because of the diesel you chose in Europe, overall production is coming down? Or are you partly really overexposed to diesel for some reason?
No. You are absolutely right, that we are powertrain-agnostic in that sense, right? So it doesn’t – our technology does not depend on the powertrain. However, we have customers who have higher portfolio diesel vehicles versus the other kind in their mix, and it’s impacting them and that’s the reference that we make to diesel here, right?
So to give you – so Emmanuel, so just to give you kind of a little bit more data, diesel – when you look at the diesel car market in Europe, it is down about 16%. But if you look at – it’s different for different countries. And some countries have a drop of about 35%. I mean so it is depending on where your exposure is. Again, as Sachin mentioned, what happens to that demand, will that move to gasoline and which ones will pick up the demand for vehicles in total.
Okay. That’s helpful. And I guess, sort of, just finally, would you be able to share some initial thoughts and sort of like the direction of your revenue walk through the, sort of, like, 2021 target? I mean I understand that you’re winning – your business wins are exceeding sort of expectations, but that some of the volumes are under some pressure. I’m just in particular interested in initial thoughts you have on next year, directionally?
Yes, and you can appreciate that we are not able to provide any specific guidance for next year, but I think what we should discuss here are the conditions or the factors that will drive our next year’s results. And they are not going to be that different than what is impacting us here in the second half. So mainly, it would be how North America performs with respect to production. In Europe, what happens with no diesel WLTP that we discussed earlier, and of course, currency. So that’s more specific to 2019.
Having said all of that, we still expect on account of the new product launches for our 2019 revenues to be slightly higher than 2018. Now as we look forward beyond 2019, it’s a story of new product launches, and that’s driven by our new business wins starting 2016. If you remember, our new product wins that our chart looks like this, we won in 2015 $4.3 billion, $5.4 billion in 2016 and the $7 billion in 2017. And in this industry, it takes about three years for new business wins to convert into revenue. So you would expect the majority of the benefit of new product launches to occur in 2020. And we still expect that to be the case.
Now some of that will depend on how production volumes look like in that period of time, which is difficult to say in the current environment. Nonetheless, our plan here is to find offsets for any the negative impact through increased new business wins in 2018 and 2019. So we would like to be as much as possible not impacted by what happens to production at the same time, the nearer the term, the greater will be the impact of what happens to production.
Great. Thank you very much.
And your next question is from David Tamberrino with Goldman Sachs.
Maybe just following up on that right now and kind of reading through some of the comments. Is 2019 kind of expected to be more of a flatter growth year from 2018 with where all the new business wins are launching? Or is there some incremental growth that we’re not thinking about for approximating?
Yes, the way I would like to think about 2019 is, again, based on what I’ve said, depends on how production volume shape up in North America, right? We have a huge exposure to the North American customers in terms of what they do with their production. And so you have seen that the latest results from some of them, and so it depends on how they perform next year. Given where we stand, we do expect next year to be slightly better than this year, in terms of production, but there is uncertainty there given what has just happened.
And with respect to Europe, which I would not discount that either, that clarity in terms of what happens to diesel and WLTP, we will be in a much better position, I think, by the end of the third quarter to say much more on 2019 than what we can say today. But as I’ve said, on account of the new product launches going back to the wins that we had in 2016 will still benefit us in 2019. And as a result, I’m pretty confident that we will be up than 2018, the question is the magnitude of that change in 2019 revenues versus 2018.
That’s fair. Can you maybe just help us or remind us your mix of, call it, passenger car versus light truck in the North America region with the progress that you are on?
Yes, I think it’s difficult. We do not provide that mix information. And at this point, I don’t think I would be in a position to share that. But the way I would look at it is, our volumes are pretty linearly tied to the manufacturing volumes of our top five OEMs and our customers in North America. I would not say that it is that heavily mix oriented.
Okay. And then just lastly on the business equation for the quarter, looks like price-downs improved sequentially, I think, during the calculus maybe 3% versus the first quarter was about 4%. Is that 3% level the right go-forward metric? What was going on in 1Q from a one-time perspective? And is that potentially going to repeat? Or does it get better and go back down to the low to mid-twos?
You are absolutely right. It’s much more impactful in Q4 as we were negotiating the contract renewals for this year. It has floated down to about 3% in Q2, and we expect it to be around 3% for the year, right. So I think, that will hold, and that is our view at this point in time.
Okay. I appreciate it. Thank you very much.
Your last question is from the line of Steven Fox with Cross Research.
Good morning. I guess, first off, I was wondering if there was one or two areas of differentiation that you think drove the two big wins during the quarter? And then secondly, as you think about sort of – and you touched on this a little bit, the bigger size of the wins which seem to keep scaling and then more software intensity. Is that changing your thoughts at all in terms of how your global production will look going forward, especially as maybe China becomes a bigger piece of the customer base?
Yes, sure. So if you think about display audio, which is where the infotainment industry is – are trending towards, as I said earlier, they are starting to become the standard equipment in all vehicles. What was interesting about this win is that it is for a mass-market C segment vehicle, which normally would not have a 10-inch display audio product as the default, as the standard equipment. So that’s really significant. And because of the very high volume that it represents, this is very clearly what will drive the trend in that direction for everybody else. And I should say, that we are in discussions with other OEMs for similar systems. So it’s not a one-off. This seems to be where the industry is headed.
Now in order to be really well positioned to win in display audio, you need to have a few things that you can truly differentiate yourself on. These are: core capabilities in CarPlay and Android Auto; expertise in Linux, HTML5 and now Android, and then, a hardware system that leverages the latest innovations in silicon. And hopefully, you have all of these things ahead of when these customers are asking you for. The new requirement that has popped up on account of the display size is getting bigger is that you also need to have best-in-class display, and I should say automotive display, manufacturing design capabilities in-house. Now when you look at Visteon, we are almost unique today in the industry with all of these capabilities in-house and at a very high level.
Now this was not the case always. We have been working at this for the last three years. We have made several changes in terms of our design capabilities, our ability to understand also the sub-supplier’s cost and able to drive that out. So we have a tremendous amount of, I would say, competitive advantage that we now have as a result of all of these things that have happened. So this is a very good thing for us. I should also mention, we have not come across in the presentation that the system will support downloadable apps from a custom app store that will also be provided by Visteon.
Now the reason why this is important is, although the system will not launch initially in China, it will be taken into China, and in China, all infotainment systems are now becoming connected by default. And we’re working very closely with the China ecosystems, the Internet ecosystems, Baidu, Alibaba and Tencent and are integrating their technologies into our cloud solution, which will continue to put us in a strong position in China. So I think, this trend will point to us becoming much more stronger than infotainment, similar to our market position in digital clusters, which in turn benefits us with our SmartCore cockpit domain controller strategy.
So all these three things are now coming together, and I think this is what I mean when I say our technology portfolio has never been more appropriate to address the requirements of this trends, and these are global trends. These are not specific to any region. So the industry is transitioning in a very significant manner, that’s the key takeaway. We have managed to position Visteon in a very good way to win this large awards, and I would expect that this trend would continue despite the general competitiveness of the market.
Great. Thanks. And just in terms of production outlook, is there anything changing in your plans? Obviously, you mentioned what you’re doing to build up in-house capabilities, but is there any other color you can provide? Thank you.
Yes, so I think in terms of the production environment what we are seeing here is more or less in line with what I just has been projecting, except that we have been consistently a little more optimistic about production environment in China. Just one piece of color there, with respect to China, we do see, however,that the second half growth will not be as good as the first half, but it will still be in the 2% to 3% range, which, given the size of the market, is still very significant and very beneficial to Visteon.
And we have no further questions, Sir.
Okay. And with that, thank you, Sachin; thank you, Christian; and thank you to all for joining today’s call. I will be available later this afternoon and tomorrow for phone calls. So please feel free to reach out and contact me. Thank you, again.
This concludes Visteon’s second quarter 2018 earnings call. You may now disconnect.