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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 Ryan Ghazaeri, Director of Capital Markets and Strategic Planning. Welcome to our earnings call for the third quarter of 2022.
[Operator Instructions]
Before we begin this morning's call, I'd like to remind you this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future results and conditions, but rather, are subject to various factors, risks and uncertainties that could cause our actual results to differ materially from those expressed in these statements. Please refer to the page entitled forward-looking information for additional details. Presentation materials for today's call were posted on the Investors section of Visteon's website this morning. Please visit investors.visteon.com to download the material if you have not already done so.
Joining us today are Sachin Lawande, President and Chief Executive Officer; and Jerome Rouquet, Senior Vice President and Chief Financial Officer. We have scheduled the call for 1 hour, and we'll open the lines for your questions after Sachin and Jerome's remarks.
Please limit your questions to 1 question and 1 follow-up. Thank you for joining us. I will now turn over the call to Sachin.
Thank you, Brian. Good morning, everyone, and thank you for joining our third quarter 2022 earnings call. Page 2 summarizes our results for the third quarter. The company performed very well despite the industry-wide challenges that have impacted vehicle production and inflated costs. Our third quarter sales were $1.26 billion, an increase of 63% year-over-year, making it the highest quarterly sales since I joined the company.
Adjusted EBITDA was $95 million or 9.3% of sales, an increase of $53 million compared to prior year due to the higher sales and our strong commercial and operational discipline. Adjusted free cash flow for the third quarter was an inflow of $59 million as strong EBITDA was partially offset by an increase of working capital. The company delivered another quarter of strong sales growth compared to customer and global industry vehicle production, our 14th consecutive quarter of better than market performance. Our robust product launch cadence is the major driver of our sales growth with sales of all our core products growing at double-digit percentage levels in the third quarter.
Year-to-date, we have launched 32 new products, which will contribute to continued future sales growth. We won about $2 billion of new business in the third quarter, bringing our year-to-date total to slightly over $5 billion and putting us on track to achieve our full year target of $6 billion. We continue to build momentum in our display product line with the investments we have made over the past few years.
Since the start of 2021, we have won $2.7 billion of displaced business and mostly at the high end of the automotive market. I will provide more details on our third quarter performance as well as our near-term outlook on the subsequent pages before handing it over to Jerome to discuss the financials.
Turning to Page 3. When excluding the favorable impact from recoveries and the unfavorable impact from foreign exchange, Visteon sales in Q3 grew 49% year-over-year, with strong double-digit growth in all core product lines. This compares to vehicle production growth of about 24% over the same period. Our strong market outperformance was largely due to the ramp-up of recently launched products as well as favorable vehicle mix both of which reflect the alignment of our core products with key industry trends in automotive.
Clusters are the largest product line for the company, and our cluster sales growth was primarily driven by the rapid growth of digital clusters, which nearly doubled from last year. Digital clusters now make up about half of our total cluster shipments. Digital clusters did well globally and particularly in North America due to the ramp-up of recent launches with Ford and GM.
Our infotainment business benefited this quarter from higher supply of critical chips as compared to Q3 of last year in addition to new product launches. This was also the case with our display product line, which was impacted by shortage of ICs in the second half of last year. Display panel supply has also recovered nicely this year, which has helped both our digital cluster and displays business. Ongoing SmartCore launches continue to drive strong growth in the cockpit domain controller product line. SmartCore shipments were up 50% year-over-year, resulting in sales more than doubling year-over-year. Recently launched programs include the SmartCore system with Geely, one of the fastest-growing EV companies in China and Mahindra and Tata in India.
Our sales were up in all regions year-over-year, with Americas growing the most on account of the ramp-up of new products with Ford and GM that I mentioned earlier. The strong dollar did, however, create a currency headwind for us in the quarter of about 7% as compared to prior year. Even with the strong demand from carmakers, the company's performance in Q3 would not be possible without the proactive efforts undertaken by the entire Visteon team.
We have launched over 20 redesigns of our products to work around semiconductor shortages and more are in progress. The team also did a great job in securing supply through constant discussions with chip suppliers as well as finding and validating alternate chips from the open market to maximize shipments to customers.
Turning to Page 4. New product launches are a key driver of Visteon's sales performance. And in Q3, we continued our strong launch cadence with the launch of 5 new programs. This brings our new program launches to 32 for the year-to-date with additional launches planned for the fourth quarter. About half of these new launches were for digital clusters, which will help continue the growth of this key product line for Visteon. Also supporting the current industry trends, about 1/4 of the new launches were for electric vehicles. Some of the key programs launched in Q3 are highlighted on this page. We launched a 12-inch digital cluster on the Nissan Serena Minivan in Japan, our first in that region. The Serena is one of the most popular family vehicles in Japan and a core domestic model for Nissan. This vehicle will also be sold in the Korean market.
This digital cluster supports multiple drive modes over-the-air software updates and display of phone and multimedia information from the infotainment system for improved user experience in the cockpit. We also launched a multi-display system with 2 10-inch displays for cluster and infotainment on the top trim of Kia Seltos, which is an affordable midsized SUV. This product was launched in Korea and in Australia with U.S. to follow early next year. Multi display systems are starting to cross over from luxury to mass market segments, and we expect this trend to gain momentum as we go forward. The 2-wheeler segment is also seeing a similar trend of cockpit digitization.
In Q3, we launched a new digital cluster on Honda's all-new CBF motorcycle platform. Honda is launching a series of motorcycles on this platform, and our 5-inch digital cluster will be offered as standard equipment on higher-trim models of 500 cc and above. This cluster offers a choice of 4 different drive modes that are user selectable as well as a fuel gauge, gear indicator and other bike-related data. The system works with helmet-mounted headsets and connects via Bluetooth with both Android and iOS phones. In addition to these new programs, where several follow-on launches in Q3 of products that were previously launched in prior quarters, a couple of which are highlighted on this page. We launched our digital cluster on Mercedes EQS electric SUV following the launch on the electric sedan earlier in the year. In China, we launched our wireless BMS system on the Cadillac Lyriq, the all-electric crossover from GM, which follows the launch of this vehicle in the U.S. in the first quarter of this year. These follow-on launches are great examples of cross-platform products that go on multiple vehicle models which is becoming a bigger part of our business and delivering a better return on our investment.
Turning to Page 5. Q3 was another strong quarter for new business wins with nearly $2 billion in wins, most of which were in emerging areas of automotive electronics. This brings our total wins year-to-date to about $5 billion with a good distribution across all our core products. We also see a good pipeline of new opportunities in the fourth quarter, which should put us on track to achieve our target of $6 billion for the full year. Our wins in the third quarter were led by incremental business on a previously announced wireless battery management system win besides large display and digital cluster wins.
On the right side of the page, we highlight several key wins in the quarter. The first win highlighted is the incremental business for our previously announced win for wireless battery management system. This win represents incremental business through an extension of both vehicle models and volume compared to the previous booking.
In addition, this win introduces a new configuration of the OEM's battery module and pack for greater power density. This change requires our BMS system to manage a greater number of cells in the battery pack, thereby increasing the content per vehicle.
This award also highlights the flexibility of our wireless BMS design to support such changes in battery pack configuration to meet evolving needs of the OEMs. The second win highlighted is a combination of a 12-inch digital cluster and a separate 12-inch center information display for a North American OEM's electric vehicle line with the first production starting in 2024.
The third win highlighted is a multi-display module for the center information display and a passenger display with the luxury German OEM. This is our first multi-display win with this German luxury OEM and follows the earlier multi-display win in Q4 of last year with a different German luxury OEM. Multi-display systems with differentiating designs and features are emerging as a key part of the cockpit of next-generation luxury vehicles. This system offers a large center information display for infotainment content and the second passenger side display with advanced active privacy feature for weaving content without distracting the driver. Multi-display systems are relatively new to the industry, but are quickly becoming key to cockpits of the future, starting with the luxury end of the market. I will discuss more about our multi-displays business on the next page.
Turning to Page 6. The luxury car segment is expected to be the fastest-growing segment of automotive cockpit electronics. Currently, sales to luxury cars make a relatively small percentage of our total sales, mostly for digital clusters. The emergence of multi-display systems that incorporate 2 or more displays under a single glass cover lens with value-added features gives us another opportunity to grow our share in luxury vehicle segment.
Over the past few years, Visteon has emerged as a technology leader and a trusted partner to OEMs and for large displays for the cockpit. More recently, our investment in the development of new display-related capabilities has resulted in us winning about $2.7 billion of new display business, with the majority of wins coming from multi-display systems.
The trend of using multiple displays behind a single cover lens to offer pillar to pillar displays is just starting to gain momentum in the industry. Luxury car OEMs are looking to differentiate their cockpits from mass market vehicles that are increasingly offering large center information displays in the cockpit. In addition to the large size of the display, luxury car OEMs are interested in new capabilities that can further differentiate their vehicles.
This page shows some of the recent multi-display wins and the key new technologies that is incorporated in them. Ultra-thin bezels and narrow gap between displays makes the entire system feel like a single seamless large display. Curve displays make it easier for the driver to view the entire display area while active privacy feature for the passenger side display enables weaving of content by the passenger without causing distraction to the driver.
All these new features are very challenging to implement especially considering the strict automotive requirements of quality, safety and product lifespan. Visteon was able to win these programs on account of the technology and manufacturing capabilities we have developed to address these challenges.
Today, we believe we are in the leading position in the industry, and we are focused on maintaining our lead and continuing to bring more innovations to cockpit displays. In summary, the emergence of multi-display systems in automotive cockpits, led by the luxury market presents a new and growing opportunity for Visteon. I'm pleased that we have made quick inroads and won significant business with Japanese and German OEMs in the early days of this trend. As these displays become more affordable, I expect vehicles in the mass market segment of the market to also incorporate them.
Turning to Page 7. We anticipate the industry environment in Q4 to be similar to Q3. Semiconductor shortages will remain the primary constraint for the industry, which will likely keep vehicle production close to the levels we saw in Q3. Demand from automakers for our products remain strong as OEMs respond to industry trends and consumer expectations. Visteon sales will be driven by the availability of semiconductors, both from suppliers as well as from the open market. Due to product redesigns that enable us to use alternate chips and the anticipated modest improvement of supply from chip suppliers, we expect open market purchases in Q4 to be lower as compared to Q3.
Nonetheless, semiconductor supply remains inherently unpredictable with many critical chips having no buffer in the supply chain. Any quality or logistics issue can easily result in disruption to supply. This situation, combined with the increased concerns in Europe of disruption to vehicle production due to energy supply makes it more difficult than usual to forecast our sales in the quarter. We have therefore opted to maintain a wider-than-normal range for sales guidance that Jerome will discuss in more detail later. We expect many of these dynamics to continue into 2023, which will keep the situation fluid and challenging beyond Q4.
As a result and consistent with our past practice, we'll be providing 2023 guidance on our Q4 earnings call in February. Our focus remains on things that are more in our control and on mitigating the impact of these headwinds to the greatest extent possible. This includes ensuring smooth launches of new products in Q4 while ramping production to address the demand we are seeing from customers. Our ongoing product redesigns will give us more options for critical chips in the future. And of course, we will maintain the commercial and operational discipline that has served us well so far. We believe these actions will put us in a good position to deliver strong results in Q4 and set a solid base to 2023.
Turning to Page 8. In summary, the company performed very well despite the ongoing semiconductor shortages. We delivered record sales with strong growth relative to customers' vehicle production, accelerating the trend of recent quarters. The team continued to execute on our commercial and operational plans, which resulted in a solid adjusted EBITDA margin of 9.3%.
We continue to build momentum in our foundation with launch of 32 new products and $5 billion in new business wins year-to-date, and our product portfolio is well positioned to support the emerging needs of the industry. Now I will turn the presentation over to Jerome to review the financial results.
Thank you, Sachin, and good morning, everyone. Visteon's third quarter financial results reflect another quarter of strong performance. Our teams continue to do a remarkable job, both on the commercial and on the operational side of the business. Q3 sales were $1.26 billion, representing another record quarter for Visteon. Our strong sales performance continues to be driven by ongoing high-quality product launches from recent quarters.
While customer demand remains elevated, we are still navigating through the semiconductor shortages focusing on improving supply through constant interactions with customers and suppliers as well as through engineering redesigns and open market purchases.
Adjusted EBITDA was $95 million, representing a margin of 9.3% for the quarter. Adjusted EBITDA benefited from higher sales volumes as well as ongoing commercial and cost discipline. Incremental costs from semiconductor shortages and supply chain constraints remained elevated this quarter. We continue to actively mitigate inflation, and our negotiations with customers remain on track.
Customer recoveries from open market purchases were approximately $90 million in the quarter, diluting margins by approximately 90 basis points. Adjusted free cash flow for the quarter was an inflow of $59 million, driven primarily by higher EBITDA and our ongoing activities to optimize capital expenditures. Inventory levels increased as a result of the continued supply chain disruptions.
We ended the quarter with a total cash of $365 million and $349 million of debt. resulting in a net cash position of $16 million.
Turning to Page 11. Third quarter sales of $1.26 billion represents our highest level of sales since 2015 and an increase of $395 million compared to last year. This year-over-year increase is primarily driven by higher customer production volumes, strong growth of the market due to recent product launches and favorable pricing, partially offset by unfavorable exchange rates. Excluding the year-over-year impact from pricing, which was positive $125 million, sales would have been approximately $900 million, providing a proxy for sales levels, excluding the unusual pricing dynamics this year.
Q3 was the 14th consecutive quarter of market outperformance driven by our recent launch cadence and the robust customer demand for our digital cockpit products. Pricing increased sales by approximately 20% compared to prior year driven mostly by customer cost recoveries.
For the quarter, approximately $90 million of customer recoveries related to open market purchases of semiconductors is included in pricing. Adjusted EBITDA was $95 million, representing an increase of $53 million compared to prior year and a margin expansion of 260 basis points to 9.3%. Adjusted EBITDA increased primarily due to higher sales. Our continued commercial discipline allowed us to minimize the impact to adjusted EBITDA this quarter from high semiconductor and material cost, which is an improvement from prior year.
However, EBITDA margins remain diluted by the elevated open market purchase costs and the associated recoveries by approximately 90 basis points. Compared to prior year, net engineering and adjusted SG&A were modestly higher. Finally, foreign exchange was also a headwind year-over-year as a result of the strength of the dollar. Excluding customer recoveries and associated costs from open market purchases of $90 million, EBITDA margins would have been closer to 10.1% reflecting a more normalized run rate for when the semiconductor constraints begin to abate.
Turning to Page 12. We ended the quarter with a total cash position of $365 million and debt of $349 million, resulting in a net cash position of $16 million. We continue to have one of the strongest balance sheets in the industry with more cash than debt. As we discussed on our last call, we refinanced our credit agreement in July and now have a $350 million term loan with a current interest rate of 3.3% and an undrawn $400 million credit facility, both maturing in 2027.
Adjusted free cash flow was an inflow of $59 million in the quarter, reducing the year-to-date net outflow to $40 million through the first 3 quarters. Adjusted free cash flow in the quarter benefited from higher EBITDA and continued focus on optimizing capital expenditures. Inventory levels increased in the quarter as supply chain shortages continued while the timing mismatch between customer collections and supply payments remains.
We anticipate inventory levels will decline in Q4 compared to the current levels, but to a lesser extent than we initially forecasted, resulting in a higher outflow of working capital than previously anticipated for the full year.
Turning to Page 13. As a result of our strong performance throughout the first 9 months of the year, we are increasing our full year guidance for sales and adjusted EBITDA. We are lowering adjusted free cash flow to reflect the higher working capital outflow that I mentioned on the prior slide. We're increasing full year sales to a range of approximately $3.6 billion to $3.7 billion to reflect higher full year growth of our market and customer recoveries as our open market purchases of semiconductors remain elevated.
Compared to Q3, we anticipate that customer production volumes and Visteon's underlying sales will essentially be flat sequentially. However, at the midpoint of the guidance, we're currently factoring a reduction of open market purchases of semiconductors and associated recoveries.
As Sachin mentioned, our range accounts for the uncertainty in production volumes in Q4 particularly in Europe, but it also reflects the difficulty in forecasting the level and pricing of open market purchases that may be required to support our customers in Q4. We are raising our full year adjusted EBITDA to a range of $325 million to $345 million. Adjusted EBITDA will benefit from higher underlying sales, while the increase in customer recoveries, which is largely offsetting material cost increases will have a minimal impact on adjusted EBITDA. We do anticipate Q4 net engineering will be modestly higher compared to Q3, which is in line with our full year expectations for net engineering expense.
We now anticipate adjusted free cash flow will be between $30 million and $70 million for the full year. In Q4, we anticipate adjusted free cash flow will be approximately $70 million to $110 million, reflecting a strong EBITDA, ongoing capital expenditure discipline and an inflow from working capital.
In summary, our updated guidance reflects a strong first 9 months of the year, while our range is acknowledging that the environment in Q4 still remains very dynamic.
Turning to Page 14. Visteon remains a compelling long-term investment opportunity. We have positioned the company well for top line growth margin expansion and free cash flow generation and our strong balance sheet continues to provide significant flexibility. Thank you for your time today. I will now open the call for your questions.
[Operator Instructions]
Your first question comes from the line of Shreyas Patil with Wolfe Research.
Maybe I wanted to just start with SmartCore. So I didn't see it mentioned in the new business wins in the quarter. But I've been curious at a high level, how are you working with OEMs when it comes to embedded software. You've talked a lot about -- you talked about previously about quite a high degree of Visteon code in these products. I think it's 10 million lines of code across 3 operating systems, so quite complex. But we know the automakers are looking to get more involved in the cockpit and then also, as you look further out, we are seeing some OEMs look to integrate the cockpit domain into a multi-domain controller. So just curious about if that is an area where Visteon might look to get into as well.
Thank you, Shreyas. And that's a great question, by the way. So first of all, as we have been saying for now a couple of years, this trend towards cockpit domain controllers is definitely starting to now hit stride. And we are seeing more and more OEMs get interested in these integrated products. Now the issue is that these products, as I mentioned and you reiterated are fairly complex, have multiple operating systems and are using some of the latest silicon chips from advanced technology providers. Now these chips and the silicon and the software that comprised at in many of the applications across the different OEMs are very similar. And so we have developed at Visteon, this platform that we call SmartCore that is able to provide an attraction of the underlying capabilities of those devices that allows applications to be then built on top of it.
Now some of the applications are also going to be very common, right? Whether it is things like CarPlay, Android Auto, navigation, multimedia, et cetera. But some would be very specific to that OEM. And of course, the user interface sometimes referred to as HMI in this industry would be very unique and specific to that OEM.
So our value proposition is that we would be able to provide OEMs that want to build their own system, a better starting point than if they were to try to do that all on their own. And with the pace of change, they're [indiscernible], whether in silicon or in the underlying software, scale matters. We are going to do this for multiple OEMs. We have already multiple OEMs, multiple programs that we have been developing. And we have these assets that we have explained before, more than 10 million lines of code, that doesn't need to be rewritten by these OEMs that want to build this. So that's one point.
You asked a question about multi-domain controllers. I would say what we are seeing in the industry, more so today is still cockpit domain controllers that are predominantly the activity that we see currently. However, it is clear that as we go forward with even more higher performance silicon becoming available, that we can envision more of the functionality from other domains, whether from the [ product ] side or safety get integrated into this multi-domain controller. We clearly want to be a layer in that emerging area of business, which is why we have been investing in developing ADAS software along with the cockpit software. So we are one of the few in the industry to have digital clusters, infotainment software and are now ADAS that will allow us to be able to really address this merging multi-domain controller in a business that we see coming.
It's not something that will happen in the next maybe 12 to maybe even 18 months. But beyond that, as I've mentioned with the silicon improvements that we expect, we do see that this is where this industry is headed.
Okay. Great. That's really helpful. And then, Jerome -- I appreciate that you'll provide an update to guidance next year. But as we think about the prior guidance for 2023, $4 billion and 12% EBITDA margin. Obviously, we've seen the end market volume expectations come down since you gave that guidance, I think at the beginning of 2021. So maybe at a high level, can you just talk about some of the levers that you can pull into next year that could still support that kind of expansion. And even if end market volumes are lower, are there additional cost actions you could take to still get you towards that target, at least on an EBITDA level?
Sure. So as you said, we will give more color and the final guidance in our Q4 call. But today, I would say that the way we see 2023 developing still remains very much a supply-based play and that's what we're watching. So we still think that the semiconductor challenges that we see this year will continue into next year, especially the first half of next year. We are seeing general improvements, but we still have got these critical parts that remain constrained and therefore, preventing us from supplying to the level we would like to supply as we mentioned before, our orders per quarter are close to $1 billion, but our sales -- product sales are lower than that because of our inability to supply 100% of the products. So I think that's 1 area that we'll have to watch very carefully. I would say our growth of the market has been strong in Q4. It's been strong, in fact, since the beginning of the year. We expect still mid-teens growth of the market going into next year. And we'll obviously refine that as we go into 2023. We'll have to watch, obviously, currency as we go into next year. It's been a headwind so far this year. So the assumptions we'll have to make as well for '23 will be important.
And then maybe pricing is the final area that we've got to look at. We have had very elevated spot buy levels in Q3 and in fact, in Q2 as well. We expect this to somehow reduce going into next year as supply will improve. And that will obviously reduce our recoveries, won't have an impact on EBITDA dollars. It will have a positive effect on our EBITDA margin. So that's another consideration that we'll have to take into account as we go into next year. So there's a lot of moving pieces at this point and we'll firm up these various areas as we go into Q4 earnings.
Your next question comes from the line of Mark Delaney with Goldman Sachs.
The first is hoping to better contextualize how demand trends may be evolving and understand generally it's been pretty strong. Can you see a bit more qualitatively on what Visteon has seen both in terms of how some of the macroeconomic trends are perhaps impacting the types of order levels you're seeing from your customers, but also how being impacted by some of the program and the content opportunities that you have?
Yes, sure. I'll take that first. And Jerome, if you would like to add anything to it, feel free. The main thing that I would like to reiterate here is we are still supply limited. Demand is extremely strong we have been saying that for the last 3 quarters, and that continues as we look into the quarter as well. And that's because if you look at the orders that our customers have, those are very strong, very robust. And so we feel like we got this the rest of the year and probably going into next year, will still face supply constraints as the more limiting factor, not demand.
Now the reason for that is if you look at the product lines that we offer these are the lines, these are the products that the carmakers need to be able to meet the competitive and their customers' expectations. Digital clusters at the trend is going to continue for the next few years driven in a large extent by the success of technologies like ADAS. Larger displays are also a very strong trend that will continue. So with the launches that we've have had, which, by the way, if I look at the last 4 quarters coming into Q3, we had over 50 launches. And as long as we continue to be on that path, we will have a lot of demand for the product and that I do not expect to necessarily see it reduce. Now yes, we are all watching the macro environment, and we will see how that develops. Depending upon what happens here, we are watching Europe carefully. Europe was extremely strong in Q3. It looks to be very strong in Q4 as well. We'll have to watch what impact energy and other considerations in Europe might have on demand. And over here, we know what inflation does to the demand. But for now, we haven't seen any softness in the demand as our OEMs place orders on this.
That's helpful. And maybe you could also help us please better understand what kind of global LVP level may be needed for Visteon to be at $4 billion of revenue next year, realizing you're not guiding at this point and understand the comments around being supply constraint. But at one point, you talked about roughly $89 million of global production being needed to do that kind of revenue level in 2023. You just hit $4 billion annualized this quarter with LVP at something between $83 million to $84 million annualized. And I know some of the revenue this quarter was pass-through and probably not sustainable. But at the same time, it seems like your content per vehicle is growing maybe faster than you thought a year or so ago. So any sort of range of LVP in 2023 that may be necessary to equate to about $4 billion of revenue and then we can make our own assumptions around where we think LVP will be given some of these macroeconomic inputs and supply chain dynamics.
Yes, sure. A couple of things I would mention. One, the revenue this quarter, yes, at the top line, it is over $1 billion. But effectively, when you look at some of the pass-through, it is maybe just a shade under $900 million as the organic revenue, if I would call it that. So at this levels of production we feel comfortable that we could achieve that or maybe even slightly better if supply improves. So we are within sight of where we need to be at a run rate level. So more than vehicle production, which clearly, by now, with the growth of our market that we have experienced we all understand that we will not perhaps need 89 million units of vehicles that we thought at the time when we talked about $4 billion as a target. We think we could achieve that with a lower level of vehicle production, but what's important is that some critical semiconductors that are still holding our production back need to improve next year for us to be able to achieve that $4 billion.
Now when you look at our total semiconductor buy portfolio, these are not all of the parts. These are only a small fraction of the parts that we buy but those still can hold us back. These are the golden screws, so to speak. So we need to get an uplift in the production of those or a modest improvement and a combination of that plus the redesigns that we have done. So I would say that if you think about where we are at just shy of $900 million, 10%, 15% improvement overall, and so most of it coming from the supply side and the vehicle production will obviously reflect that. So I would say it will be less than what we thought we needed in the past and anywhere between 5 percentage points of improvements or thereabouts, I think, should be good enough.
Your next question comes from the line of James Picariello with BNP Exane.
Can you -- within the updated guidance, can you just maybe confirm what is the baked-in assumption for your pass-through revenue based on another very strong recovery, almost $130 million in the third quarter. What's kind of assumed for the fourth quarter here?
Yes. So what we've assumed essentially is a Q4 sales level, I would say, base sales, product sales level to be similar to what we've had in Q3. The major difference that we've baked in our Q4 assumption is the fact that we're assuming at this point that spot by sales will be lower and it will be lower by approximately $40 million, $50 million. So that's kind of the assumption that we have for now in our Q4 guidance.
No, that's helpful. And I mean it sounds as though the third quarter came in from a recovery or a stock purchase perspective, came in heavier than you had anticipated, like I think, correct me if I'm wrong. But just curious how dynamic is this is the situation from -- with respect to the chip supply and how -- what's kind of the turnaround or how dynamic do you guys have to realize maybe that you're short what you need and that you have to go to the market. I mean, is this a weekly kind of surprise? Or is it -- is there better visibility to it?
Yes. That's a great question. And so yes, to answer that directly. It is week by week. So every week, would be by the -- and sometimes day by day, right? But it is extremely dynamic. But as I mentioned earlier, it's not that we have concerns across all of the semiconductors. It's a smaller set of semiconductors, which have been very constrained. And the issue with the constraint is that there are no buffers in the whole supply chain. So we could be affected by some logistics issues somewhere. It's not just the production. So there are a host of things that can impact, as you know, when there are no buffers, and that's what we have had to deal with in Q3, and we expect that environment to largely be the same in Q4.
Now at the same time, even when you look at Q3, the reason why our sales were better than even what we had anticipated was that supply came in better than we had imagined at the beginning of the quarter. and we expect those improvements to also happen in Q4, especially with a softening of demand in other industries, consumer, industrial, et cetera. Some of the parts that we use are also used in those other industries. So we expect some improvement from there, which should reduce the demand on open market purchases but these are very dynamic things and hard to predict, which is why the range is a little bit wider than you would otherwise have given.
I would add as well that the forecasting spot buy is extremely challenging for the reasons that's Sachin said. But if you think about it, you first need to see what kind of parts are going to be short [ off ]. You need to understand what kind of availability would be at the broker's level. prices from brokers change every day, every week, and they're very massively. And then you have finally the OEM willingness to pay for these elevated prices. So it's a lot of parameters that have got to be put in and all this varies on a daily basis. And therefore, makes it a little bit hard for us forecast just what price and spot by recoveries.
Understood. Super helpful. Just real very quickly. For your second wireless BMS customer, are you supplying that customer with a digital cluster or any other product besides the wireless BMS?
We are across their bigger portfolio of vehicles. We are supplying displays and digital clusters are more likely than not, if you look at our portfolio of customers for clusters, we would mostly be a supplier to virtually all of them, right? So we only have a few of OEMs that are not part of our portfolio for clusters. So yes.
Your next question comes from the line of Luke Junk with Baird.
Another supply chain question, but I want to ask it a little differently. Sachin, so you've been, of course, talking about demand being over $1 billion on a quarterly basis from your customers? And what I just want to better understand is -- how much you think you can control with the redesigns to close the gap versus sort of that $900 million base level this quarter versus what customers are actually asking for. And maybe to animate that, if we could also just expand on the amount of redesign activity as 2022 has progressed kind of how that has evolved.
Yes. Good question, Luke. And I won't quantify exactly how much of the revenue is attributable to the redesigns. But I'll say that without that, we would have been meaningfully lower. And we can, to a great extent, control that. But it has been a little bit of a shifting sort of a target. The constraints have not remained in the same set of chips. So we have had to chase the constraints a little bit. So we've talked about the numbers we have launched in terms of redesigns, and we have a multiple of that are in progress in some shape of development that will soon be launched.
It's important to note that when we do the redesigns, we actually even maintain the original design as well. So that gives us that broader access to chips rather than just to switch from one to the other. So I think if we execute the ones we have on the slate. By the second half of next year, we should be in a position to control our own destiny with respect to supply. That's the way to think about it.
Okay. That is helpful. And then a follow-up question, just if there's anything you can share to help us better understand the scope of the add-on wireless BMS award this quarter relative to your initial work with that customer either scope across platform or even relative to value terms, either would be great.
Yes. No, that is a very interesting topic because if we were to take a step back here, right? We have 3 customers that we have talked about for our BMS solution. One of them is in production and the others will enter production in, I think, 2024 timeframe. But what's also happening between when we first started to work on BMS systems and now is that we are seeing the industry go through a transition towards more higher voltage battery packs to enable fast charging.
So this is really what we see as a change that has actually been accelerating. And so our wireless BMS, first of all, has been designed to support that, which is what you see are reflected in this win. And just to kind of scope the magnitude of this, we had about, I think, 7 or 8 vehicles in the initial board that has more than doubled in the updated one, and then the volumes have also gone up very nicely, and it includes this higher configuration.
And anytime you have a higher voltage, 800 volts is not the only voltage by the way, there are intermediate ones as well. But as we go up to above 400, you need more battery cells to enable that increase, and that means there's greater content for BMS. So we have talked about earlier the BMS range in terms of content being around 350 to 500. With these higher voltage battery packs, it's actually exceeding the upper end of that range. But overall, as a mix. I would still say that it will be somewhere between 350 to 500 maybe depending upon the OEM and their mix of vehicles, might push that average closer to the upper end of that range as an average selling price.
Your next question comes from the line of Emmanuel Rosner with Deutsche Bank.
Maybe just following up on the wireless BMS again. I think your partner for all these initial wins with advanced devices. And I think they've announced another wireless BMS win recently. Is this something that we're still quoting into become the Tier 1 there?
So I wouldn't mention anything specific to that particular announcement. But in general, the way it works is that the silicon choice is made ahead of the Tier 1 supplier choice. And so you can imagine, we have been working, as you said, very closely with this particular partner for a long time. And therefore, we are engaged with multiple OEMs together with them. And that's where I would like to leave it at. And as and when these decisions get made, we'll certainly be bringing it to you and talking to you about it.
One thing I would say is since the beginning of this year, as I mentioned just in my earlier remarks that this change to higher voltage is what has caused a lot of these discussions to be delayed because we have had to adjust and change the designs to meet these newer requirements. But those discussions, I would expect to see come to a conclusion fairly soon, and we should be able to talk more about some of the awards that we will hopefully win here.
Okay. That's helpful color. Then I wanted to ask you about the free cash flow guidance again. Could you please go back over the drivers of sort of the timing on working capital and to what extent this will get sort of back [ on done ] or resolved in the early 2020 guide.
Yes, sure, Emmanuel. So we've revised our cash flow guidance for the full year to be at the midpoint at the level of 50. You may remember that in Q2, we have already indicated that we would be towards the low end of the previous guidance range, which at the time was 85%. So most of the, if not all of the change relates to working capital, and there are 2 elements to it. The first one is inventory, we've increased inventory in Q3. We are planning to have a modest reduction in Q4.
And the second item relates to the timing of collection of recoveries, we have some deals, which are fairly late in the quarter and therefore, it makes the collection slip into the following quarter. So we are improving on that as we get a better cadence with our customers. But there is still some, I would call, leakage or timing differences. So we are improving on that in Q4, but it will be not as good as we had originally anticipated, and that's the reason why we've lowered our guidance. We've equally kept a fairly large range from 30 to 70, given the sensitivity of some of these items.
Into 2023, would you expect further improvement there? Like should some of these items become a tailwind versus your normalized free cash flow profile next year?
Yes, I will give obviously more guidance at that time, but we are clearly expecting to generate adjusted free cash flow in '23. And we'll have to look at the dynamic of working capital. But what I would say is that maybe just to think about inventory itself, I think the collection will probably get more normalized over time. But on the inventory side, we have increased our safety levels just to be more protected towards variability.
So that's one reason as to why inventory have increased. We have also integrated the fact that our volumes are higher. So you would expect as well as volumes go up to have a little bit more inventory. Today, our inventories are slightly higher than 30 days. We probably would expect them to be normalized slightly below the 30 days, so slightly below the month. So that's the opportunity that we are going to work with, understanding again that volumes will be higher next year.
And if I just can squeeze one more. The -- so you've given a lot of good color on puts and takes for potential revenue development into next year. Could you do the same in terms of margin. What would be sort of like the things you'd be watching in terms of what could get you towards your margin target? And what could constitute headwinds as we think into next year?
Sure. So no major changes to what we've said in the past. Obviously, volume is, for us, critical. It's what gives us the scale. And we've seen that very much so this quarter versus last one year ago, where volumes were much lower. So volume is critical, obviously, for us to achieve our targets. We are thinking about as well on the positive side about some of the inefficiencies that we've seen this year around freight, [ stop and going ] of plants. We expect these to somehow reverse out next year. The 1 -- the 2 areas we'll have to look at are obviously inflation and the associated pricing. So that's the -- these are the 2 areas we'll have to look at.
Spot buy, as I mentioned earlier on, would be we think will subside a little bit and the levels will reduce. And that's ultimately good news because that means supply is improving, but this is all good news for margin percentages. So these are kind of the moving pieces on the EBITDA side, if it helps.
Your next question comes from the line of David Kelley with Jefferies.
Maybe a question on high-level kind of Europe exposure. Can you talk about product demand and how you're seeing mix tracking in the region? And can you give us some color on customer schedule visibility in Europe and how that's factoring into your year-end outlook?
Yes, sure. So first of all, I would say Europe was pretty strong in Q3. The demand was -- I mean Q3 tends to be usually a softer quarter for production in Europe. But we haven't seen any softening in demand and it has been pretty hot. So I would expect that to continue into Q4. And we haven't seen in terms of their order placements, any change to the contrary.
So everything seems to be like what we have had in the third quarter. The mix is also very much similar to what we have elsewhere. Largely for us, that means digital clusters are primarily displays, cockpit domain controllers. So with all of the talk about the challenges that Europe faces, we are not seeing that in our orders that we see from customers as yet. It still seems pretty strong.
Okay. Great. That's helpful. And then maybe one quick follow-up. Just looking at the new business wins slide, I think 45% of business wins so far in 2022 were for EVs. If we take a step back, can you talk a bit about kind of the content per vehicle opportunity you're seeing in EV wins today versus ICE wins, understanding it's not exactly apples-to-apples, but any sort of color on that multiplier would be great.
Yes. So when we talk about, first of all, David, 45%, just to be clear, what this means is that these wins that we have, the $5 billion, out of the 45% of them have some content on EVs, right? There are vehicles that cut across EV and ICE [indiscernible]. So they're also represented here. And so for us, EVs as I've said before, are generally positive, net positive because typically, they have larger displays and more electronics and software content. So what we're seeing is in the near term, more display opportunities for EVs in addition to BMS; and CDC, cockpit domain controllers. So those are the 2 that I would highlight.
And what we are also seeing in both cases that the average sales prices of these displays and cockpit domain controllers are going up with this multi-display systems that we talked about earlier as well as more higher performance SmartCore systems. So it's a positive development. And as we continue to win our -- hopefully, our share of the market in that area, that's going to help also lift our growth of our market on account of these dynamics.
Thanks, David, and thanks, everyone. This does conclude our earnings call for the third quarter of 2022. Thank you, everyone, for participating in today's call and your ongoing interest in Visteon. If you have any follow-up questions, please contact me, Kris Doyle or Ryan Ghazaeri directly. Thank you.
This concludes Visteon's Third Quarter 2022 Results Earnings Call. You may now disconnect.