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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 Kris Doyle, Director of Investor Relations for Visteon. Welcome to our Earnings Call for the Third 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 would 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 one hour, and we will 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, Kris, and good morning, everyone. On Page 2 we provide an overview of our results for the third quarter. The Company reported sales of $681 million within adjusted EBITDA margin of 10.4%.
The third quarter is seasonally the weakest quarter for the Company due to customer plant shutdowns. However since the last time we talked, automotive sales and production deteriorated across all regions globally in the third quarter, resulting in a year-over-year reduction in Visteon’s sales. I will discuss the industry environment in more detail on the next page.
At the same time, our new products and technologies, continue to perform well in generating new business. At the end of the third quarter, our new business wins stand at $5.4 billion and are in-line with our goal of winning about $7 billion for the full-year. Our third quarter new business wins were noteworthy and that they included several key wins for next generation products and technologies.
These included the win for an integrated digital cluster and IVI display with the Japanese automaker, a significant display audio win with an European OEM and another win for our SmartCore cockpit domain controller with a leading Chinese vehicle manufacturer. And we will talk more about these wins a bit later.
On the capital allocation front we have now completed $250 million in share repurchases year-to-date. It should be noted that we have authorization for an additional 450 million for share repurchases. Our balance sheet remains strong with cash of $442 million and debt of $380 million.
Turning to Page 3. The automotive industry experienced several headwinds in the third quarter that resulted in lower vehicle sales and production with the top Visteon customers globally. Some of the signs of slowdown were already visible in the second quarter, but the rapid decline in China and the flooding in Japan worsened the overall market further. As a result, production volumes for the top Visteon customers were down 6% on a year-over-year basis.
In North America, although overall production volume was positive at 2% the production volume at top Visteon customers was down 2% year-over-year on a weighted average basis. The mix continue to shift away from sedans and toward trucks and SUVs which also impacted Visteon negatively.
In Europe, the industry has been impacted by the destruction caused by WLTP as well as concerns around diesel. Overall, production volumes for the third quarter decreased by 5% year-over-year whereas Visteon customers were down slightly more at 6% year-over-year.
Going forward, we expect WLTP to be less of an issue as most car manufacturers have completed the testing of their vehicles. However, diesel continues to face challenges due to concerns of environmental pollution and as most cities banned diesel cars from entering city centers. Diesel now accounts for approximately 30% of European new car sales, down from about 50% impacting some Visteon customers that have more diesel vehicles in their portfolio.
The biggest surprise in the quarter was a significant drop in sales and production in China. Consumer demand weakened due to multiple factors including the trade dispute with the U.S. and the clampdown on peer-to-peer financing. This led to a decline in sales of passenger cars for 8% and production by 7% year-over-year.
The drop in sales and production was more pronounced with the top Visteon customers and our top 10 customers had a production decline of approximately 15% weighted by revenue. I will discuss China in more detail later in the presentation.
And lastly the flooding in Japan in early July caused by unprecedented rainfall resulted in vehicle production being halted for several days at many OEMs in the western region of Japan. The broader automotive supply chain was also affected as several sub suppliers with manufacturing plants in the Western regions of Japan were impacted by the floods.
Overall, the industry environment in the third quarter was quite challenging as all regions in the world suffered a negative impact to vehicle sales and production. The top 10 customers of Visteon who represents over 90% of our total sales saw their production reduced by 6% year-over-year. Looking ahead, some of the issues faced by the industry are transitory and limited to the third quarter and we expect to see some level of rebound in vehicle production in the fourth quarter.
Moving to Page 4. On Page 4, we summarize our third quarter financial results. As mentioned earlier our sales was 681 million which is down 11% year-over-year. The main driver of this decline in sales is the lower production volume at Visteon customers which was down 6% as discussed on the previous page. This lower vehicle production combined with annual price reductions is approximately 9% of the total year-over-year decline in Visteon sales.
Currency was a headwind this quarter impacting about 1% and the remaining 1% is the impact of the roll off of products entering end of production which was largely offset by new product launches. The biggest contributor to the 6% vehicle volume reduction in the third quarter was the double-digit drop in vehicle production in China accounting for about 2.5 percentage points. I will discuss China in more detail on the next page.
The destruction due to the floods in Japan impacted us by another two percentage points in the quarter. Production is back on track and we expect operations to be normal for the rest of the year.
WLTP and diesel issues in Europe impacted us by approximately 1.5 percentage points in sales in the quarter. We expect WLTP to have significantly less impact going forward, as most of our customers vehicles are now WLTP compliant.
The impact of diesel will continue for longer before the market settles down and clean diesel finds its place in the mix. The estimated impact of diesel on our sales to be around 1% both in Q4 and 2019.
On the more positive note I'm pleased that revenue for new business one in 2015 and later is having a significant impact on our sales. In the third quarter the revenue contribution of new products launched from business that was run from 2015 onwards nearly offset the impact of the phase out of old products that have reached end our production.
This is was despite some acceleration in the phase out of older products such as analog clocks and wireless charging modules. We expect this trend to continue into the fourth quarter with conversion of backlog into revenue offsetting the phase out of our old products.
We generated $71 million in adjusted EBITDA at a 10.4% margin, down 40 points from the same quarter a year ago. This decline was mainly due to lower sales partially offset by cost efficiencies. In response to lower sales, we have initiated measures to reduce fixed costs across all functions of the business.
We have reduced headcount in manufacturing operations and are optimizing our engineering footprint. We remain focused on program execution and launch of the new business, investing in the development of new technologies and innovations, while changing our footprint and improving our processes to reduce fixed costs. Adjusted free cash flow year-to-date was $35 million down $53 million year-over-year. Cash flow was impacted by lower profits and the timing of working capital.
In summary, Visteon sales were lower in Q3 mainly driven by the lower vehicle production by our customers. In response, we are reducing our fixed cost to offset the impact of market headwinds while continuing to focus on program execution and new technology initiatives that will drive future revenue growth.
Turning to Page 5. On Page 5, I will discuss Visteon’s China domestic performance in more detail. The third quarter saw a significant decline in vehicle sales and production in China. The decline started in July and accelerated in the quarter with September sales and production dropping by double-digit levels compared with the prior year.
The sharp drop came as a surprise to the industry as previously China has been able to buck the global trends with respect to market stability. Moreover, September has traditionally been the strongest month for retail sales for the past several years.
There are several reasons for this drop in our - sales. The main ones are concerns arising from the U.S. China trade dispute, the stock market being at the multiyear low and the restrictions around peer-to-peer lending practices.
Sales of luxury vehicles at the top end and entry vehicles at the bottom performed better than at the middle of the market. Visteon has a strong customer base in China with our top five customers mainly GM, VW, Honda, Jaguar Land Rover and Dongfeng making up about 70% of our revenue in the region.
Due to the reduction in sales and production volume this year Ford now makes up a smaller share of Visteon’s revenue in China. Virtually all top Visteon customers experienced a double-digits reduction in vehicle sales and production in the third quarter. The only significant Visteon customer to grow in the third quarter was Geely and we have only recently started shipping products to them.
As shown on the left of this page, Visteon's top 10 customers in China had an approximately 15% drop in their vehicle production. Visteon sales in China were down 4% year-over-year in the quarter, much better than market with new product launches offsetting a significant portion of the vehicle volume drop. We have had 22 new product launches year-to-date which is the main driver behind our better than market performance.
I should also note that we had a one-time impact in the quarter with the customer in China that had a recall of vehicles due to an engine issue not related to Visteon which reduced our shipment of product to them. Excluding this one-time impact our revenue in the third quarter in China would have been flat or slightly up year-over-year.
On the other hand, the new business opportunity pipeline remains robust for Visteon in China. There is high interest in new and innovative cockpit electronics technologies as the market remains highly competitive and Chinese consumers demand state of the art technology.
Our SmartCore cockpit domain controller technology and integrated android base connected infotainment are generating a lot of interest with OEMs. We are also seeing significant interest in all digital clusters and large displays. Through the first three quarters of 2018 we have won $1.7 billion in new business in China up from $1.2 billion for the same period a year earlier.
Most performance came from the next-generation cockpit technologies. China is a large attractive market for Visteon and we have worked hard in the past three years to build a diverse base of customers with international joint ventures and domestic OEMs and to promote our new products and technologies.
In summary, the third quarter was a reminder that the automotive market in China is not immune to global pressures. However, despite the sharp reduction in vehicle production by our customers in the quarter I'm pleased that we were able to offset most of it with new product launches throughout the year.
Looking toward the fourth quarter, we expect vehicle production to rebound sequentially, but still be lower than last year. With four additional new product launches in the fourth quarter we expect to be able to offset the market impact and forced revenues that are at the same level or slightly better than last year.
Moving to Page 6. For the past two years, we have been very focused on evolving our product and technology roadmap to address new trends in the cockpit electronics market. We have upgraded our digital cluster and SmartCore technology platforms and introduced new solutions for infotainment. In the third quarter we did very well in winning business in the new and emerging areas of cockpit electronic technologies.
On this page, I would like to highlight three significant wins in the quarter, starting with the SmartCore wind controller win with the leading domestic OEM in China. This system will launch in 2020, initially on two vehicle models and is worth an estimated $160 million in lifetime value.
The Chinese auto market is evolving quickly with respect to connecting cars to the Internet and it is probably the most advanced in the world today in that regard. The SmartCore system integrates an all digital cluster with android-based connected infotainment system that drives up to six digital displays in the vehicle cockpit.
In addition, we are partnering with Tencent to integrate that AI in the car software on the system. Tencent is a leading cloud and AI technology company in China. This collaboration brings their CloudX including the Vcheck in QQ Music into the car with voice based interaction and control. There is additional opportunity to extend the SmartCore system on new car models with this OEM.
SmartCore continues to be the leading cockpit domain controller technology in the China market and this is the third OEM to use this solution in China. This win brings our total cockpit domain controller wins year-to-date to nearly $1 billion with about 70% of that in China.
The second win featured here is about an integrated all digital cluster and infotainment display system for a leading Japanese car maker. As Cluster and infotainment displays get larger automakers are looking to integrate this large displays into the panel of the dashboard in a more seamless manner.
This system uses two large 12-inch flat LCD displays with the curved S shaped glass cover lens that is optically bonded for best visual performance as well as look and feel. The larger displays and higher design and manufacturing complexity of these systems result in a higher average selling price.
This program has an estimated lifetime revenue of $410 million. As all digital clusters are migrating to mass market vehicles, we are seeing more interest from luxury vehicle OEMs for these types of complex display systems with different shapes and curves. This is good for Visteon as it drives innovation in digital clusters and displays which are two key product segments for the Company.
The last win featured here is for a display audio system with the leading European automaker with lifetime revenue of about $210 million. Display audio systems are rapidly replacing traditional AM/FM radio and entry infotainment systems. Consumer demand for use of smart phone-based navigation and media apps is very high, which is driving OEMs to equip even entry vehicles with display audio systems.
This is a second large display audio win for Visteon this after the win that we discussed on our second quarter call. We have been able to leverage our strong digital display capabilities together with best-in-class infotainment platforms to win significant share of this business. On a year-to-date infotainment new business wins already exceed our wins for the full-year of 2017.
Cockpit domain controllers, digital displays and clusters and infotainment technologies are evolving quickly as the vehicle cockpit is becoming a fully connected digital environment. This rapid pace of innovation is creating new opportunities for Visteon to leverage our technology platforms and engineering capabilities to win new business.
Turning to Page 7, the industry shift towards next generation digital products for the cockpit is not just a third quarter phenomenon. We have seen this shift occur throughout this year. As shown on this page, of the $5.4 billion in new business wins almost 70% has come from new digital products in clusters and infotainment.
As all-digital clusters migrate to more mass-market vehicles, new integrated cluster and infotainment displays systems like the product I discussed on the previous page are being introduced for luxury vehicles. Visteon’s market leading capability in automotive display design and manufacturing put us in the strong position to take advantage of this emerging trend.
The industry is also shifting rapidly to infotainment systems based on android, replacing traditional closed and proprietary solutions from Tier 1 suppliers. In the mass-market segment of the industry, display audio systems that leverage the Smartphone are becoming standard equipment on new vehicles and in China automakers are offering integrated access to Baidu Alibaba and Tencent’s cloud ecosystems in their vehicles.
Visteon's new infotainment platforms together with in-house Smartphone projection technology from the AllGo acquisition has helped us win significant new infotainment business this year. Our collaboration with China cloud ecosystem partners has strengthened our offering in that market and 34% of our infotainment wins have come from the region.
Infotainment now makes up 35% of our total year-to-date wins just under $2 billion in lifetime value with display audio, accounting for about two-thirds of the total wins. Our SmartCore technology continues to evolve with support for new silicon and software technologies.
As the industry shifts towards digital clusters, and display audio systems as standard equipment the SmartCore based integrated cockpit domain controller is a very effective solution for car manufacturers that want to bridge the technology gap while reducing total system cost. We are very pleased that SmartCore technology powers about 25% of the digital cluster and infotainment wins year-to-date.
In summary, we are pleased with the majority of our new business wins are coming from this next-generation digital products and technologies. It’s the testament to the transformation of the Company's technology portfolio, which is now very well aligned with the direction of the market.
Moving to Page 8. New business wins are the drivers of future revenue growth. In the third quarter, we continued our strong performance from the first half of the year to end the quarter with $5.4 billion in new business, up from $3.8 billion at the end of the second quarter. As shown on this page, our 2018 year-to-date new business wins are 17% higher than the same period last year.
We have also been focused on winning business for new digital products as discussed on the prior pages. These programs tend to be larger and cross-platform which has helped increase our average new business win size year-to-date by over 45% compared with last year. It’s also significant that over 70% of the wins in 2018 were conquest wins compared with about 50% for last year.
As mentioned previously, instrument clusters and infotainment made up the majority of the new business wins thus far in the year. And SmartCore powered cockpit domain controllers are approaching the billion-dollar mark in total new business wins.
In terms of customer diversification, we are pleased to report that we have added a global Top 3 OEM to our digital cluster customer portfolio this year with the addition of this customer Visteon is now the leading supplier of all digital clusters to three out of the top five global OEMs.
Our customer portfolio was further diversified with the addition of two new OEMs one for cars and the other in the motorcycle segment. The strong new business win performance in Q3 helped to increase our order backlog to a record $21.3 billion at the end of the third quarter.
It should be noted that this order backlog has been adjusted to account for the reduction in vehicle volume forecast as well as currency. The regional distribution of the order backlog remains balanced and more oriented toward the faster growing regions of the world.
Moving to Page 9. In addition to the evolution of cockpit electronic systems that I mentioned on prior pages, we have seen the emergence of artificial intelligence based solutions in automotive. AI and more specifically machine learning is not new to automotive as the industry has been developing autonomous driving systems using machine learning for camera based object detection and classification.
Visteon has been developing this machine algorithms for our drive core safety and autonomous driving platform for the past two years. However, as shown on this page, machine learning is now being applied to other applications in the cockpit.
In cockpit driver monitoring to detect the drivers distraction level is now a mandatory requirement for European five star safety rating for vehicles launched from 2020 onwards. The conventional approach to implementing driver head pose and eye gears tracking is based on classical computer vision techniques that require heavy engineering and tuning of models and are error-prone.
On the other hand, machine learning algorithms for image recognition have improved dramatically just in the past few years. Image recognition aero rates have gone down from approximately 30% in 2010 to less than 5% today which is better than human performance.
Speech recognition for hands-free operation has been around in cars for a long time, however, poor recognition accuracy and rigid dialogue structure of conventional speech solutions have caused a high level of user to satisfaction. Speech recognition has consistently been one of the top sources of complaints from car owners in JD Power initial quality surveys.
Recently there has been significant progress in speech recognition based on machine learning technology as demonstrated by the success of Alexa and other voice based smart assistance. Voice recognition accuracy of machine learning base systems have crossed the threshold of human performance. Moreover, the systems can handle noise better than conventional speech recognition technology, which is particularly important for in-car use.
Visteon has been developing machine learning based travel monitoring and speech recognition technology for automotive applications. Unlike existing consumer AI applications that are cloud-based Visteon’s approach is based on bringing machine learning technology to on-board systems in the car.
We expect that this AI powered applications will be integrated into next generation cluster and infotainment solutions. Early demos of these technologies to car manufacturers have been very positive and we will be demonstrating the solutions at the upcoming CES show in Las Vegas in January. We will keep you updated on our progress on this front in the coming quarters.
Moving to Page 10. On Page 10, I would like to summarize our performance for the third quarter. The industry faced significant headwinds in the third quarter that resulted in weak vehicle production across the globe. Despite the vehicle production softness and other challenges discussed earlier, we have delivered $680 million in sales and $71 million in adjusted EBITDA.
New product launches essentially offset the impact of the phase-out of all products and we performed better than market in China. Adjusted free cash flow was impacted by lower vehicle production volumes and the timing of working capital.
On the new business front, we won $5.4 billion in new business year-to-date, up 17% compared with the same period last year. New business in our core product area is strong with about 70% of the total new business wins year-to-date coming from newer digital products and clusters and infotainment. Almost $1 billion out of these digital systems are powered by SmartCore technology representing 25% of the new products.
Looking ahead to the fourth quarter, we expect the market environment to be similar to the third quarter. Vehicle production in North America appears to be stabilizing and is expected to be at a similar level as in the third quarter. Europe will continue to see some impact from WLTP and diesel and China continues to soften, but our significant new product launches are expected to drive higher Visteon sales.
With respect to new business wins, we expect technology trends to continue to favor Visteon and create more opportunities for our next-generation technologies and products and we are very excited about the potential of Artificial Intelligence as the next frontier in cockpit electronics technology. Overall, we are confident that our focus on operational excellence along with new technologies that address key market trends will position Visteon favorably for the long-term.
This concludes my overview comments. Now Christian will take you through the financial results.
Thank you, Sachin, and good morning everyone. On Page 12, we percent our key financial results for 2018 versus the comparable periods in 2017. sales of $681 million in the third quarter decreased $84 million due to lower customer production volumes in all regions. Impact of pricing net of design changes, partially offset by net new launches.
Adjusted EBITDA was $71 million, representing a $12 million decrease from third quarter 2017. Adjusted EBITDA was down by 14% compared to last year, resulting from the impact of production volumes and product mix, partially offset by continued operating efficiencies across our organization, as well as lower compensation expense.
To mitigate the impact of the industry weakness in our results. We are executing on restructuring program and recognized and $18 million charge in the quarter to aligned our manufacturing cost structure and optimize our engineering footprint. On a year-to-date basis, sales were $2.3 billion, representing a decrease of $96 million.
Adjusted EBITDA margins are flat year-over-year despite the decrease in top-line sales. Adjusted free cash flow was negative $42 million in Q3 and positive $35 million year-to-date. Q3 cash flows were impacted by lower adjusted EBITDA, as well as the adverse timing of trade working capital, I will provide more detail on the following pages.
Turning to Page 13, we provide sales and adjusted EBITDA for the third quarter and year-to-date for 2018 versus last year. Sales for the quarter were $681 million, 11% lower than 2017, our sales decreased in all regions. The third quarter is typically the seasonally weakest quarter of the year due to normal plant shutdowns in the Americas and Europe exacerbated this year by headwinds in all the regions.
In Asia, our domestic China sales were adversely impacted by a rapid and significant decrease in production volumes in the third quarter, particularly with our - market. In addition, the Company was impacted by a one-time customer issue not related to Visteon product. Excluding China, our Asia, sales were lower by $39 million. Sales were impacted by the severe flooding in Japan in the first months of the quarter, which reduced production at certain key customers.
European sales decreased year-over-year as well, production volumes in the region decreased from last year's levels resulting from the new WLTP standards as discussed in our second quarter earnings call. We also saw the continued decrease in demand for diesel vehicles for some of our key customers.
In the Americas Q3 sales continues to be impacted on a year-over-year basis relating to the shift towards trucks and SUVs and away from sedans. They are also impacted by the phasing out of programs reaching their end of production.
Our adjusted EBITDA for the quarter was $71 million and adjusted EBITDA margins were 10.4%. This represents a decrease of 40 basis points from last year and reflects the impact of lower volume, product mix and unfavorable currency, partially offset by lower fixed costs.
Page 14, provides our cash flow. Adjusted free cash flow for the quarter was negative $42 million, which was lower than last year, primarily related to lower adjusted EBITDA and adverse timing of trade working capital.
Inventory turns were 2.5 points worse than second quarter levels, the impact of the flooding in Japan and the rapid decline in production volumes resulted in higher than anticipated inventory levels. We are projecting an improvement in our inventory turns by the end of the year. Year-to-date adjusted free cash flow is $35 million, $53 million lower than the same period last year.
We continue to have a very strong balance sheet. Cash at the end of the quarter was 442 million and debt was 380 million which continues to put us in a net cash position and the debt to last 12 months EBITDA ratio of 1.1 times. Our strong capital structure enables us to compete effectively in a challenging market while investing in differentiating technologies and returning capital to our shareholders.
Turning to Page 15. I would like to give you an update of our capital return activities. At the beginning of the year, we had $700 million of Board authorization. Since then we have repurchased $250 million worth of stock in a combination of open market and accelerated share repurchase programs and bought back 2.1 million shares in that period.
Currently we have 29.1 million of diluted shares of common stock outstanding representing a reduction of roughly 7% from the beginning of the year. Even after this return of capital to our shareholders we still have $450 million remaining of Board authorization in our buyback program and we will announce our activities as they are implemented.
As you have seen in the past years, Visteon has always been committed to shareholder distributions. Going forward, as we continue to generate cash flow, we will deploy our excess cash to provide the highest returns for our shareholders.
Turning to Page 16. This page shows our updated guidance for sales, adjusted EBITDA and adjusted free cash flow to account for the current market environment. We are currently projecting sales of $2.95 billion to $3 billion, adjusted EBITDA of $315 million to $335 million and adjusted free cash flow of $80 million to $100 million.
Let me provide some comments on how we anticipate the rest of the year to progress. In the Americas, we expect sales to continue to be impacted on a year-over-year basis by the reduced demand for sedans and roll-off of end of production programs.
While in Europe, we expect the transition to WLTP to be less of an issue but the impact of lower demand for diesel vehicles to linger. And in China, we project Q4 market production volumes to be down on a year-over-year basis, but our domestic business to register slight year-over-year growth due to new product launches.
Overall, our fourth quarter typically rebounds from third quarter levels, and we expect this seasonality to continue this year. However, on a year-over-year comparison, we expect sales to be down as a result of the market headwinds we described.
As a result of the lower guidance for sales in 2018 we are also reducing our guidance for adjusted EBITDA and adjusted free cash flow. Although we are lowering our guidance for full-year 2018, we will continue to focus on ongoing profit and margin improvements, while continuing our investments to support our new programs, which will drive our long-term sales growth.
Turning to Page 17. In summary, despite facing challenging market headwinds, we continue to execute to execute on our long-term strategies. In the third quarter, we saw increased demand for our next generation products, including display audio, cockpit domain controllers, all digital clusters and complex displays.
This is evidence that the most significant automotive 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 comes from the line of Steven Fox with Cross Research.
Hi good morning. I guess first off on the near-term financials. Can you just sort of walk through the decline in the SG&A expense in the quarter and your expectations going forward given the new charges. And longer term, is it possible to talk a little bit about the tie up with Tencent and how that maybe influences your ability to win new programs or is that a little harder to discuss and then I had a quick follow-up.
Okay Steven, this is Christian. I will take the first part of your question and Sachin can talk about the Tencent tie up. It’s good that you asked about the SG&A, it give me the opportunity to provide more color on this.
In my prepared remarks I mentioned that our costs included lower compensation expense in the quarter besides some level of savings from our current restructuring program we also had a benefit from reversing the provision relating to our incentive compensation plans and the benefit is around 15 million in the quarter and therefore Q4 would not have that benefit.
Alright thank you Christian and regarding Tencent. Steven this is a phenomenon that we are observing in the Chinese market. As I have mentioned in my remarks, that market is more advanced with this type two connectivity than other parts of the world, and these large ecosystems from Baidu, Alibaba and Tencent are this move to provide access to this ecosystem from within the vehicle.
We are working already with Alibaba, this relationship with Tencent broadens our market appeal in China. In this particular case we are integrating Tencent's software on top of our infotainment system which has delivered on top of the SmartCore domain controller platform.
We expect that this would be applicable not only to this customer, this first customer that we have, but to be a broadly interesting solution to OEMs that are addressing China. So we are really excited about this collaboration and this relationship.
Great, that’s very helpful and then a quick follow-up. Is there any way to think about working capital serve on a smoothed out basis, whether it's Q3 over Q4 or thinking about what a normalized number looks like under reduced demand conditions?
Alright. So let me take that. So we anticipate that working capital will be a positive contributor for cash flow in the fourth quarter so our inventory turns improve, however we project that our inventory will still be about one turn higher than Q2 levels at the end of the year and one turns is about $15 million worth again this is timing and we should be back at our historical inventory trends by the first quarter of 2019.
Steven even if I may. I just want to complete the picture for our Q4 cash flow. Our EBITDA, full-year guidance indicate a decline in Q4 EBITDA levels from last year and together with a positive contribution from working capital as I mentioned, we should have our Q4 adjusted free cash flow to be about similar to Q4 of last year. So I hope that helps.
No that’s very helpful. Thank you.
And your next question is from Colin Langan with UBS.
Oh great. Thanks for taking my question. Can you talk a bit about the 4.7 billion 2021 target. I think in the past, you have indicated that if you do six billion and when since 2017 and 2018, you would be able to hit that target. It seems like you are ahead of that, but then you are indicating that some of your platforms are down, so next year is not as promise or expecting. I mean is there enough cushions still since you sort of over won that has - 4.7 how should we think about things there?
Hi Colin, yes. So, if you look at where we are at with new business wins of $5.4 billion year-to-date Q3, we are ahead of where we were at the same time last year. But I have to also remind everyone that last year the fourth quarter was a very strong quarter in terms of new business wins. and although from where we stand today the new business pipeline for the fourth quarter is strong and we are cautiously optimistic that we will achieve the $7 billion win target for this year as well.
We will have to wait and see how that turns out. As we have said before in the past that we would like to be at over 80% of this 4.7 billion in 2021 number by the end of this year. We will have to see where we are at, at the end of the year, what has happened here in Q3 with respect to the volumes coming down as well as what we expect which is a softer Q4, we will need to factor that into how the forecast would shape up.
So we will provide more details in January on that front, there will be some impact, but as we look ahead here and hopefully accomplish some of these goals we have for new business wins in the quarter, we will be able to tell you in a better detail in January where we stand with respect to the 4.7 billion. Anything you would like to add Christian.
No. I just want to reiterate that if we finish the year and our backlog provides us with 80% plus source revenue for 2021, then we should have some confidence around our long-term target.
Okay. Can you talk a bit about the android opportunity that you have on those infotainment systems. How does an android when compared to like a pure Phoenix win or Linux win?
Very good question. Android basically now offers us an alternative for the infotainment operating system and it reduces in some ways our effort and the engineering that we have to put into developing the systems. Android release be onwards have now built in some of this capabilities that were previously lacking in that operating system, that now makes it much more suitable for infotainment.
And that allows us to focus more on the value add on top of the operating system when it comes to things such as the user experience, the HMI, speech and smart assistant technologies and so on. So we think that that's a very good thing in terms of just being able to reduce our cost and bring this products to market sooner. A great example is the system that we discussed on the second quarter call where we would be launching the system in high volume in the beginning of 2020, that's a very short development time.
If you remember prior discussions in earlier years, infotainment used to take several years to develop and also take a lot of investment in terms of engineering. So we are very optimistic and very positive about this. There is one more thing I would like to add, with the introduction of android and our and our AllGo acquisition that we made in 2016, we are now competitively in a much better position at Visteon than we have ever been in this segment. It does open up as a result more opportunities for us to compete for infotainment business.
I mean, so only think about the margin profile though if you had just a pure - that would be higher margin right there is more of the content you are providing or am I think about that incorrectly.
No. If you look at the way we price these systems, they are not priced separately in terms of the software and the hardware line items, it's a aggregate value, we are not seeing any margin erosion as we go to Android, we are able to protect our margin quite well there.
Got it. And just lastly, any color on the voice recognition. It seems like there is a lot of competition on the tech side and I would say are you partnering with somebody there or is that all just in internally developed and how do you think you are going to be able to back up again some of the large technique.
So we are developing this voice recognition capability in-house, as I mentioned in my remarks the shift towards machine learning also has really opened up a totally different approach to accomplishing voice recognition that does not require the same level of heavy hand coding and engineering and all of that the earlier approach is required.
So we are at the same time focusing very closely on the in-car use of speech recognition, we are not going to be replacing systems like Alexa or Google Smart Assistant or Cortana which are more cloud based. This system will enable users to use it for in-car use and then punch through to these cloud system if they need to go to the cloud.
So it's a collaborative and co-operative approach with the cloud based smart systems and this is what our car OEMs, our customers have been asking us for. And we do not see yet any third-party solution out there, we think we can implement this capabilities internally, we have been demonstrating these already to some lead customers and the response has been very good.
Okay. Thank you very much.
And your next question is from David Leiker with Baird.
Hi this is Joe Vruwink for David. I wanted to follow-up on the backlog question and this $4.7 billion figure, if I just think about how things have changed, so obviously this year is going to run closer to $3 billion. You said on the last call that in the 2019 you hope to grow, but if you did grow it would maybe be a little bit of growth. So let's simplify it and say 2019 is looking like $3.0 billion. The original plan entailed getting to $3.5 billion in 2019, and so are you able to put just some parameter on the $4.7 billion in the context that it seems like the near-term numbers at least are running maybe $500 million below the original plan. So maybe it’s not $4.7 billion in 2021 but is it $4.2 billion is it $4.0 billion because either of those numbers still imply significant [Technical Difficulty] growth as we get a few years out and I think the market seems to have lost sight of that so any help there?
Yes, let me start and I will let Christian to perhaps expand on it later. First of all, I would say that we are not going to provide any guidance for 2019 on this call and anything specific will be provided on our January discussion.
But as we have said before, we expect 2019 to be the final year of transition as we start to see more meaningful growth in sales from the conversion of the backlog and as the old products this roll off starts to then dissipate and we get into a more normal cycle. So post 2019 we do expect to see more significant growth simply based on this new product launches from the backlog.
Now based on what has happened as I said before, there is in an impact on the backlog, which has been reflected in the updated backlog figure that were provided where we have marked down some of the backlog due to this reduction in volume forecast.
Now that hopefully or some of that at least would be offset by the new business wins that we are hoping to achieve in this quarter and it will also depend when we look at 2021, it will also depend on how we perform with new business wins in 2019.
So when we look at all of this, we will be in a better position to say is it $4.7 or is it somewhere around that. But you are absolutely right that we do expect significant growth in those years as the backlog starts to convert into revenue and as the older products that have been phasing out start to be flushed out of the system. Anything you would like to add more than that?
Not really Sachin, but yes just to reiterate, the business provides us with very good visibility on the phase-out of the end of production programs, and we know how that evolves overtime. So that's one point. The second point is that we have stronger than what we anticipated as new business wins. And the question is what volumes would we apply against those new business wins. So you are actually right Joe. We will see an inflection point in 2020 and 2021, whether or not it's $4.7 or something lower we will report back to everybody in January.
Great. And then if I can ask maybe more of a near-term focus question. One thing that definitely impacted revenues this year is your customers are losing share and through no fault of your own, but if they are in the wrong segment or they just have any effective product they are not performing with the industry. At the same time Sachin, I know when you joined Visteon there was a big emphasis to pivot away from some of the legacy programs and really get the business and segment of the market that could outperform longer-term. So as you think about where new business wins has been over the last year, is there a point on the horizon and it could be as soon as 2019 the way things sound where the new business that's launching is in the favorable segments and so this underperformance for your customers should start to improve.
Yes, Joe. If you look at what impacted us in Q3, it has largely been the reduction in volume with our largest customers and this is going to impact us as well in Q4. Now I have always said that in order for us to really grow, we need to build a pipeline this backlog of new business that separates our future from just what the market dynamics imply.
Now, we will be still impacted by the market dynamics in 2019 simply because we still have quite a bit of this older product. When I talk about older products these are analog clocks, analog clusters, Bluetooth modules et cetera that are no longer actually used in our new vehicles and these products are being phased out.
What is replacing them is product from our 2015 onwards this business that we have been winning and if you look at the $5.4 billion of new business that we won this year 70% of them are these new digital products. When you look at 2019, we will be offsetting with this new products, just impact of the roll-off of older products and that offset and that impact will be much more pronounced in 2020 and going onwards beyond 2020.
So to us, 2019 is a transition year, we are very happy with the new business that we are winning which is all in the more emerging areas of the digital cockpit, this is where we expect to see continuous growth.
So we are right at this point where we thought we would always be, this reduction in the volumes is something that we have to deal with, this is a result of where we stand with respect to product rolling off and the new product rolling on and we have always said that 2018 and 2019 would be these years that we would be subject more to the market than to what we can do on our own.
Beyond on 2019, we expect to be able to grow, is somewhat disconnected from what the market dynamics might imply.
Great. Thank you very much.
And with that, thank you Sachin. Thank you Christian, and thanks again to everyone for participating in today's call and for your ongoing interest in Visteon. If you have any follow-up questions please contact me directly. At this point we will end the call. Thank you.
This concludes Visteon's third quarter 2018 earnings call. You may now disconnect.