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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 Fourth Quarter and Full Year 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 new 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 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, Chris, and good morning, everyone. I will start by providing an overview of our 2018 full year results on page two. On subsequent pages, I will discuss our key achievements in the year and provide our perspective on the outlook for vehicle production for 2019. Christian will then take you through our 2018 financial results in more detail.
2018 was a challenging year due to a weak market, especially in the second half, which reduced vehicle production volume at our customers. Besides the sharp drop in vehicle sales and production in China, our key customers in North America and Europe were impacted by the move away from sedans in the U.S. and the troubles with diesel and WLTP in Europe.
Despite the challenging market environment, we delivered sales, profitability and free cash flow at the upper end of our latest guidance. Our technology leadership in the cockpit was reinforced with the launch of the first cockpit domain controller in the industry with Daimler in early 2018. We extended our technology portfolio with the introduction of an android based infotainment system and the scalable autonomous driving controller designed for level two in higher systems.
The strength of our technology portfolio for the cockpit resulted in $6.9 billion of new business awards for the year, almost equal to prior year. Nearly three-fourth of these awards are for digital cluster and infotainment systems, which together with displays are becoming core products in our more streamlined product portfolio.
We are continuing to diversify our customer base, and in 2018 I’m pleased to report that we added five new customers to our portfolio. China continues to be a bright spot for the company with sales outperforming the market by 10 percentage points. We launched 34 new products in China in 2018, which will help maintain our growth in that market in the coming quarters. We also won record $2 billion in new business awards compared with $1.1 billion in 2017.
Returning capital back to shareholders is a key part of our capital deployment strategy. In 2018, we repurchased $300 million of shares with authorization to repurchase another $400 million still remaining. The company now has returned over $4 billion to shareholders since 2012. Our balance sheet remained strong with cash of $467 million and debt of $405 million.
In summary, we made significant strides in the transformation of the business in 2018. And while the near-term market environment is soft, the long-term fundamentals for the business remain intact.
Turning to page three, on page three, we summarized our full year 2018 financial results. Our full year 2018 sales were $2,984 million, which is down 5% year-over-year. The main driver of this decline is the lower production volume at Visteon customers, which was partially offset by new product launches. Revenue from new product launches increased in 2018 and offset the phase out of older products.
Adjusted EBITDA for the full year came in at $330 million at an 11.1% margin, down 70 basis points year-over-year. This decline was mainly due to lower sales and pricing, partially offset by cost efficiencies. We reduced our fixed cost in 2018 in response to the near-term market headwinds, while maintaining our focus on customer programs, which increased in number by 24% over the prior year, pointing to future revenue growth. Adjusted free cash flow was $107 million for the full year, down $39 million year-over-year due to lower profits.
In summary, Visteon sales in 2018 were lower than the prior year largely due to lower vehicle production at customers. On a positive note, the conversion of order backlog to revenue is increasing each year, and in 2018, it was able to offset the phase out of older products. And our focus on operations and cost control is enabling us to execute more customer programs, while limiting the impact on near-term profitability.
Moving to page four, the vehicle cockpit is evolving at a rapid pace from a technology perspective as consumers are expecting similar digital capabilities and experiences from cockpit electronics as with the smartphones and tablets. Large displays with rich graphics, over-the-air software update capability and cloud-enabled apps are the new competitive battleground for car manufacturers. This trend is not impacted by the market slowdown, as car manufacturers are forced to upgrade the cockpit to compete with rapidly evolving consumer devices.
The more immediate impact of this trend has been the conversion of the cockpit into a multi-display digital and connected environment. The instrument cluster is evolving from gauges and LEDs to a digital display-based system, infotainment systems, which used to be closed-end proprietary are now connected app platforms even at the entry level.
Digital displays in the cockpit are growing, both in number as well as in size and the form factor is evolving into curved and non-rectangular shapes to fit with the design of the interior of the vehicles. These trends are impacting the industry now and car manufacturers are looking to suppliers to provide these advance solutions.
Looking ahead, the emergence of artificial intelligence base smart assistance coupled with higher levels of automated driving will enable the cockpit to effectively become a smart assistant on wheels. Early implementations of AI in the cockpit in China are already launched in the market and are indicative of the future of the cockpit. Visteon has been evolving our technology portfolio over the past three years to address this cockpit electronics trends. Our digital cluster, displays and infotainment solutions are already performing well in the market.
In 2018, we’ve made further progress on our technology vision for the company. We introduced the first cockpit domain controller solution in the industry with Daimler. We also introduced an android based infotainment system and an autonomous driving controller for level two plus systems. And at the CES Show in Las Vegas last month, we introduced two AI based solutions for conversational voice assistant and driver monitoring applications as well as advanced multi-display system with sensor integration.
Our technology portfolio has never been stronger with innovative technology platforms for rapid development of integrated digital cockpit systems. We are confident that our technology portfolio will continue to position Visteon as a leader in cockpit electronics technology, and help drive new business wins in the future.
Turning to page five, as I mentioned on the previous page, our strategy has been to address the key trends impacting the automotive cockpit with innovative technology solutions. This has resulted in significant growth in new business wins in recent years, and 2018 was another strong year as well. We won $6.9 billion in new business similar to our performance in 2017. Our wins in the digital cluster and infotainment segments have grown each successive year and in 2018, these two products represented about three-fourth of the total new business.
With $2.8 billion in new business awards in digital clusters, which was up 18% over the prior and almost double the value of wins in 2016, Visteon is the clear market leader in this segment.
In audio infotainment, we won $2.3 billion in new business in 2018, an increase of 55% year-over-year. Our recently launched android based infotainment system, together with the Linux and HTML5 based solution enables us to address more customers for display audio systems.
About $1 billion of the digital cluster and infotainment business in 2018 was for cockpit domain controllers powered by a SmartCore technology. Six car manufacturers now use barcode technology, which makes it the leading cockpit domain controller solution in the industry.
The majority of the new business awards in 2018 were conquest wins and mostly at large auto OEMs as indicated on the chart at the right of the page.
I should note that many of these OEMs were historically not large customers for Visteon, such as VW, GM, Glee [ph] and Hyundai. We also added five new OEMs to our customer portfolio in the year, further diversifying our customer base and offering potential for future expansion of business with this new customers. Our order backlog at the end of 2018 is much more balanced across OEMs and regions as a result.
I'm pleased that we were able to repeat our performance in new business wins in 2018, following up on a strong 2017. The strength and competitiveness of our technology portfolio is enabling us to expand our business, achieve more balance across car manufacturers and regions.
Moving to page six, in the fourth quarter, we won approximately $1.5 billion in new business. On this page, I would like to highlight three of the more significant wins in the quarter. In North America, our cluster business has historically been concentrated with the few OEMs such as Ford and Honda. We have been working on diversifying our customer base in North America with more emphasis on SUVs and trucks.
We are pleased to report that in the fourth quarter, we won digital cluster business with another leading OEM in North America for their SUV and truck models with initial launch in 2021. This is a large award with further potential for growth through increased installation rates.
The second win featured here is also for a digital cluster system for a leading Japanese car maker. This system is planned for launch in 2020 on multiple vehicles including EVs. This is the first cockpit electronics business we have won with this OEM. And we are very excited about this breakthrough as a potential for future growth is significant with this customer. These wins highlight the competitiveness of our digital cluster technology and our platform-based approach for rapid product development.
The third win on this page is for a SmartCore based cockpit domain controller system for an automaker in India. India is a 3.5 million unit market for passenger vehicles and is one of the fastest growing emerging market for cars. Cockpit electronics in that market are evolving rapidly in line with global trends that we discussed earlier. We are seeing similar developments in other emerging markets with respect to cockpit trends, most notably in Brazil.
The SmartCore based system will integrate digital cluster and Android-based infotainment in a single ECU and will drive two separate displays, a 10-inch cluster display and a separate 10-inch center information display. It offers built in connectivity to the internet for over-the-air software updates and apps. The system will initially launch on two vehicles staring in 2020 and on additional vehicles thereafter. This is our second SmartCore business in India with the first system launching with another OEM this year.
Turning to page seven, 2018 was the first time in many years that the auto market in China contracted after several years of growth. The drop in sales and production was also steep with the fourth quarter down by mid-teen percentage levels for both. For the full year, vehicle production in China was down about 4% for passenger vehicles. The one bright spot was the performance of electric vehicles, which grew 80% year-over-year and crossed the $1 million mark in production for the first time.
Despite the significant weakness in the market, Visteon sales grew 6% for the full year, outperforming the market by 10 percentage points. The main driver of this outperformance was the high number of new product launches. We launched 34 new products in China in 2018. And together with the new products launched towards the end of 2017, they were able to offset the drop in vehicle production. We also won a record $2 billion in new business, almost double compared with the prior year.
Three-fourth of the wins were for digital clusters and infotainment in line with the rest of the world. Digital clusters are replacing traditional clusters even faster in China than elsewhere in the world. And traditional infotainment systems with embedded native apps are out, replaced by connected systems that are integrated with the internet ecosystems that are unique to China such as Alibaba and Tencent. We have built strong partnerships with both these companies and have integrated their software solutions on our platforms.
The chart on the right of the page provides a breakdown of 2018 new business wins by customer. Our wins were very well balanced across domestic and international OEMs. And I'm particularly pleased to note that we added four new customers in China, including Toyota, Great Wall, and GAC. Almost half of the business awards are for electric vehicles, which positions us well in this fast growing segment.
In addition to digital clusters and infotainment, our SmartCore technology also did very well in China, winning about $600 million of new business in the year. Overall, I'm very pleased that we continue to outperform the market in China in sales, and we finished the year with the strong book of business to drive continued growth in that market.
Moving to page eight. On this page, I would like to discuss our outlook for vehicle production for 2019. The numbers shown on this page for vehicle production forecast are for Visteon customers in the regions and are revenue weighted to adjust for our business with these customers.
Starting with North America, vehicle sales in the U.S. appear to have plateaued and 2019 sales are expected to be below last year's level. Vehicle production at our customers is expected to be down by about 3% compared with 2018. The first quarter will be more challenging in terms of year-over-year comparison due to the end of production of sedans at Ford last year.
In Western Europe, the slowdown in sales have started toward the end of 2018 is expected to continue into 2019. The shift away from diesel will continue to impact sales at some key Visteon customers this year. In addition, the second phase of WLTP is expected to impact some European automakers in 2019 as well, although lower than that in 2018. We expect production volume at Visteon customers in Europe to be down by about 3% as a result. This forecast excludes any impact from Brexit, which may introduce additional downside risk.
Now turning to China, we expect the first quarter to be down similar to fourth quarter of 2018 in terms of sales and vehicle production, where both were down by mid-teen percentage points. Consumer sentiment continues to be weak due to the macro environment, and inventory remains at higher than ideal level. For the full year, we expect vehicle production in China to be down by about 4% over last year.
In summary, we expect that 2019 will be weaker than 2018 in terms of both sales and production with the first quarter being impacted more significantly than the rest of the year. We expect vehicle production at Visteon customers to be down in high-single digits for the first quarter, and about 3% for the full year.
Moving to page nine. In summary, 2018 was a challenging year as vehicle production dropped significant impacting sales and profitability. Even though 2018 was a transitional year for Visteon, revenue from new product launches, exceeded product roll offs, but not enough to override the production volume decline.
On the operational front, we made significant progress toward our long-term goals. We strengthened our technology portfolio, with the introduction of new solutions for the cockpit of the future. We won almost $7 billion in new business, expanding our order book with existing customers, while adding new customers to the portfolio, and we launched 58 new products in 2018 setting the stage for future revenue growth.
As we look ahead, 2019 appears to be another challenging year in terms of the macro environment. While this will impact us in the near-term, the long-term fundamentals for the business remains strong. We are looking though the cycle and managing the company for long-term growth.
This concludes my overview comments. Now Christian will take you through the financial details.
Thank you, Sachin and good morning, everyone. On page 11, we present our key financial results for 2018 versus the comparable periods in 2017. Sales of approximately $2.98 billion for the full year 2018 decreased $162 million compared to last year due to lower customer production volumes, impact of pricing net of design changes, partially offset by net new launches and favorable impact of currency.
Adjusted EBITDA was $330 million, representing a $40 million decrease from 2017 due to the impact of production volumes and product mix, partially offset by continued operating efficiencies across our organization and the impact of currency. Adjusted free cash flow was positive $107 million in 2018 and positive $72 million for the fourth quarter. Q4 cash flows benefited from favorable timing of trade working capital and higher engineering recoveries. I will provide more detail on the following pages.
Turning to page 12, we provide sales and adjusted EBITDA for the full year 2018 versus 2017. Sales were negatively impacted by the challenging production environment with several key customers underperforming the global market average. However, for the full year of 2018, I am happy to share that our product launches exceeded program roll-offs.
Besides the 34 product launches in China as Sachin mentioned, our 2018 new product launches include the industry's first cockpit domain controller with Daimler in select markets, which is scheduled to expand over the next several years. We also launched a new display offering with BMW rolling out in the North America market and an infotainment program with smartphone integration with Volkswagen, to name just a few.
Offsetting revenues from new business, our roll-offs which come from two areas, programs that have naturally come to the end of their production schedule and specific actions made by certain OEMs. As an example, as we communicated in the first quarter of 2018, we saw reduced revenues as Ford announced exiting the sedan business in North America starting in the second quarter.
In addition, Mazda entered into a tie-up with Toyota and we started to see the roll-off of our Mazda infotainment program for specific vehicle models. This program will be phased out over a number of years and will be partially offset by our new Mazda business in clusters and displays. We've incorporated the impact of these roll-offs into our 2019 guidance. Our new product launches were able to fully offset program roll-offs for the full year 2018, a trend we expect to continue in 2019 and beyond on an annual basis.
Pricing, reduced sales by $80 million, representing 2.5% of last year sales lower than the 3% rate that we have seen historically. In 2019, we expect pricing to revert back to historical levels of about 3%. Our adjusted EBITDA for the year was $330 million and had positive contributions from efficiencies despite the volume reductions, lower fixed costs and favorable impact from currency movements, partially offsetting the flow through from annual price reductions.
Page 13 provides our cash flow. Full year adjusted free cash flow was $107 million, representing another strong year of free cash flow generation despite a challenging market backdrop in 2018. Adjusted free cash flow for the quarter was positive $72 million, which was higher than last year. Despite lower adjusted EBITDA, free cash flow was increased primarily as a result of favorable timing of trade working capital.
In our third quarter call, we mentioned that our inventory levels were elevated due to the declining production environment. I'm happy to say that we were able to reduce inventory levels to be in line with our historical inventory turn rate. The increase in other changes primarily relates to higher recoveries from our engineering activities. Cash at the end of the quarter was $467 million, and that was $405 million, which continues to put us in a net cash position and a gross debt to last 12 months EBITDA ratio of 1.2 times.
We continue to have one of the strongest capital structures in the industry, which enables us to compete effectively in a challenging market, while investing in differentiating technologies and returning capital to our shareholders.
Turning to page 14, 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, during 2018 we have repurchased 2.8 million shares of stock for $300 million in a combination of open market and accelerated share repurchase programs. Currently we have $28.4 million of diluted shares of common stock outstanding, representing a reduction of roughly 10% from the beginning of the year.
Even after this return of capital to our shareholders, we still have $400 million remaining of board authorization and we will announce our activities as they are implemented. Since 2012 Visteon has returned over $4 billion of cash to shareholders and our actions in 2018 demonstrate our continued commitment to shareholder distributions. I will not be providing details on the progression of our future repurchase actions in this call, but our buyback cadence will be dependent on the visibility we have on the markets we serve.
Turning to page 15, we discussed last month at the Detroit Auto Show Conferences how we are leveraging our technology leadership in the cockpit of the future. At these conferences we provided our 2019 guidance, which we are reaffirming today. We are currently projecting sales of $2.9 billion to $3 billion, adjusted EBITDA of $280 million to $310 million, representing an adjusted EBITDA margin of approximately 10%, adjusted free cash flow of $80 million to $100 million.
Let me provide some comments on how we anticipate the year to progress. Overall, we are expecting production volumes of our customers to be down approximately 3% for the full year. In China, we expect a decline of 4% for the industry, but expect to see high-single digit increase in our domestic business, driven by product launches. The first quarter though is expected to be very challenging for the industry.
We expect that production volumes for our top customers will be down in the high-single digits on a year-over-year basis for the first quarter, with China declining in the mid-teens. Together with a typical pricing impact, we are estimating that our year-over-year sales decline will be in the low-double digits for Q1.
For adjusted EBITDA in addition to the impact of the reduced revenues our engineering expenses are expected to increase by double-digits on a year-over-year basis in Q1. We anticipate that the growth of our engineering spend will moderate throughout the rest of 2019. This is due to the timing of recoveries, as well as the benefit from our restructuring efforts announced last year, both of which will be significant toward the second half.
For total year 2019, our engineering expense will be up by about 5% to support an increase in the number of customer programs and continued investments in new technologies. We expect to see our revenues, profitability and cash flows improve in the second half of the year as industry challenges abate. We will also see the contribution from our new product launches and increased engineering recoveries as the year progresses.
In summary, despite facing challenging market headwinds we continue to execute on our long-term strategies. In 2018, we saw increased demand for our next generation products including display audio, cockpit domain controllers, all-digital clusters and complex displays. This is evident that the most significant automotive trends are strengthening Visteon’s market position over the long-term. Visteon’s technology platforms, which are enabling the cockpit of the future will be the catalyst for our long-term growth and provide continued returns to our shareholders.
Thank you for joining us today. Now we’d like to open it up for questions.
[Operator Instructions] Your first question comes from Anthony Deem of Longbow.
Hi, good morning.
Good morning.
So a question, do you see Visteon as a true outlier in the industry? When it comes to the human machine interface, your products are really interacting with the driver most. I know you're working with GAC launching level two system late next year and level four actively in China with some of your partners. But I'm wondering ultimately where does Visteon want to fit drive core in this market in terms of partial or full automation?
And just wondering if you see your products are having an advantage in any particular level, because there just seems to be a growing emphasis in level two plus reduced on level four. And clearly there are some systems expertise or product differentiation here that this can be probably exploit. And ultimately help deliver greater results for the backlog maybe as soon as next year. So just kind of wondering if I can get some thoughts there?
Absolutely. So the way we look at the more automated driving is that if you look at what has happened in the industry in 2018, there is a better realization of when level four plus -- by that I mean four and five solutions from a technology viewpoint might be ready for deployment. And that timeline has been pushed out on account of a better understanding of some of the technical challenges.
At the same time, there has been more interest in the industry for what you can call as level two plus systems, which effectively bring the benefits of ADAS from not just at the lower speeds at which they are mostly effective today to even highway speeds. So our strategy has been to really focus our drive core solution on the highway level speeds, bringing the benefits of advanced safety to that application. Now that means that we would also be implement all of the lower speed suburban ADAS capabilities as well.
Now the way we see this interact with the HMI is that there is a very close interaction that needs to happen between the more automated driving system and the HMI. The HMI of the past really had focused on enabling the driver to understand the vehicle health and the driving dynamics. But now as you bring more of this ADAS and more automated driving capabilities, that HMI has to extend itself and also bring in the outside perspective like what was happening outside of the vehicle.
So we think with our HMI competence and now getting into this level two plus solutions, we are in a great position to offer a completely integrated experience to the drivers. So we're very positive, very optimistic about what we think would be our opportunities in this more automated driving business over and beyond our traditional HMI business.
Very good, thank you. And just my one follow up for Christian. I apologize if I missed this, but could you talk about any discrete tax items in the quarter effective fourth quarter?
I'm sorry, Anthony. Could you repeat that question?
Yes, any discrete tax items in the fourth quarter that you can call out?
Yes, we had obviously if you look at our EPR for the quarter it's about 4%. We had favorable audit outcomes particularly in Asia if you back that out it would have in the 20% to 25% as we've guided. And so in 2019, the way we're modeling the business is say an ETR, an effective tax rate in the mid-20s.
Very good. Thank you.
Your next question comes from Ryan Brinkman of J.P. Morgan.
Great. Thanks for taking my question. Can you remind us of your underlying revenue exposure to demand in China? As I think you saw before the highlight that a portion of your reported revenue in China is actually exported out of that market. And then your new launches allowed you to actually grow pretty nicely in China in 2018. What is the pace of launches look like in 2019 there? Or I guess said differently, how would you rate your ability to outgrow the China market in 2019 versus in 2018?
Right. So Ryan in terms of our exposure in China, there are really two things happening there. Our total China is about 24%, but that has two components to it, one is the domestic business that we serve the China market that's about 13% and the rest are products that we actually manufacture in China, but export it out of China.
Yes, with respect to Ryan your second part of the question. As we mentioned, we had a very good year in terms of new business wins in China. We had total wins of about $2 billion are significantly higher than the prior year. And these will -- some of these we’ll be launching in 2019. So we have a fairly healthy number of new product launches, I would say in the mid-20s in number in China for 2019. So we feel pretty good about how that should impact our revenue and market outperformance.
Okay, thanks. And then just last question, have you given any thought yet as to how Visteon might be impacted by section 232 tariffs, if they are extending from steel and aluminum to also include autos and auto parts? How helpful have the automakers been in helping you offset the impact of section 301? And how completely would you expect them to compensate the supply base for any sort of further inflation in your supply chain from any incremental tariffs?
Yes. When you look at 232 from what has been discussed so far. Clearly, we are still waiting for the details just like everyone else. But from what has been kind of talked about in the media. We believe that our exposure to the vehicles that are imported from Europe to be around about 10% of our production in Europe. So overall that amounts to between, I would say $50 million to $80 million of exposure to us on an annual basis.
It's too early to say how this thing will play out and what that impact exactly might be and how the recovery discussions with the OEMs would progress. We'll keep you all informed as to how that goes in the subsequent quarters. Any additional tariffs are disruptive, we are hoping that it doesn't come through, but we'll see.
Okay, thanks.
Your next question comes from Joseph Spak of RBC Capital Markets.
Thanks for taking my question. Just maybe to follow up on tariffs. Just to be clear what is embedded in terms of 301 for China. Do you have that sort of going back to -- do you have that sort of holiday being extended or sort of going back to the higher rate?
Yes, so our forecast maybe assumes no further escalation nor a solution in terms of the trade disputes. So if it is the current state of the business, so to speak. And Joe, we are not really impacted that much by the tariffs on account of how and where we manufacture our products. We do not do any sort of cross shipments across the regions. So, so far, we are in a pretty okay shape, and if nothing changes there, we shouldn't be impacted by much.
Okay. And then just sticking in China, so Ford is obviously a key customer for you there and the -- has obviously been a difficult situation over the past year and probably in sort of the first half of this year. Well, how are you seeing that sort of play out I guess in the back half? Do you anticipate some sort of recovery to that customer? Or are you sort of straight lining the headwinds that you've experienced recently?
Right, right, and so Ford, as you pointed out was a much larger customer for us in China, in 2018, on account of the reduction that they experienced in their volumes, I would say that they are no longer probably even in the top five. So thinking about 2019 and how that might impact us, we are not necessarily assuming any recovery on their business in China, we're essentially flat lining what happened in 2018 into 2019. So if there is any recovery, that would be a good upside, but we're not counting on it.
Okay, that's helpful. Last one, I apologize if I missed this, but how are you thinking about R&D spend in 2019, verses 2018? And then, even if you could sort of maybe break that down a little bit further, like what is really sort of engineering for programs that are launching versus actual sort of true, I guess research. Because I think like if I go back to sort of CES, you talked about some initiatives in voice and ASIC. And I was wondering if some of those dollar -- spending dollars start to kick in, in 2019?
Yes, so Joe, the first thing I would say is that our engineering costs tend to be a bit lumpy based on the timing of the recoveries. And so from a quarter-over-quarter comparison viewpoint, those tend to shift around a bit. The second point is that our engineering has gone up largely on account of the higher number of customer programs that we are executing. So if you look at when we ended 2017, we had roughly about 160 customer programs in active development. We ended 2018 with that number approximating I think 200.
So significant increase, and this is good because that drives our future revenue. That's the predominant portion of our engineering expense. R&D, pure R&D stuff that we talked about at CES for example, I would say is about approximately a point in terms of total revenues, it's not a significant contributor.
The third thing I would mention is that, as we are undertaking a higher number of customer programs, we’re also continuously balancing our global footprint of engineering to be more efficient. And these things do take some time in terms of being able to execute and see the impact to our financials. So the actions that we have taken in 2018 and are also taking in early 2019 will have that impact appear in the second half of 2019.
So, Joe, if I can add to that, as we pointed out in the auto conferences, North America auto conferences, that our engineering spend is going to go up on a year-on-year basis, but only 5% to 6%, including all of the things that Sachin has mentioned. However, in Q1, it's probably going to be the double digit kind of growth rate against on a year-on-year basis.
Okay, thanks for all the color.
Your next question comes from Colin Langan of UBS.
Great, thanks for taking my question. It looks like your guidance is for China down or some other spires are indicating that maybe they're seeing closer to down 8 or 10. Could you give us any like sensitivity if it is coming in down double digit how we should think about that a downside risk?
Yes Colin and again I think what that reflects is really all the uncertainty that we are seeing in China, so you see this forecasts are a little bit all over the place. So our assumptions for China are a double digit decline in the first quarter, especially as the comps are challenging. First quarter last year was a significantly higher quarter. Our expectation is that from the first quarter onwards largely on account of more favorable comps the declines reduces in Q2 and then effectively flat for the second half.
If you look at that structure that amounts to a decline of somewhere around say 3% to 5% in that range. Now we will have to see what transpires, this has been our expectation. But the thing I would like to mention is that our performance in China is less dependent on the underlying production volume, it is more dependent on our new product launches. So we still continue to expect a better than market performance by a double digit margin in 2019 as well.
Got it. I mean, should we think if the market comes in modest then obviously if you have a big backlog it won't matter like a 20% decremental is that typical for weakening underlying market or is that too high?
And just wanted to make sure that you are asking for China in specific or just total?
China specific.
China. So it should be in the 20% to 25% range that much like what we've experienced last year for the total company.
Okay. And in looking at slide five you have $2.3 billion in audio infotainment backlog. Is there any color on what's the net breakout? How much is sort of traditional audio, how much is advanced display in particular, how much is the Phoenix part of the business?
Right, right. So it’s virtually all of it is display audio, there's not much of audio in that if any. So the real reason why we did very well and you see the jump from the prior year is on account of the success that we've seen with android based display audio infotainment. We won several programs both standalone infotainment and also infotainment that is integrated on our smart core platform.
So it's been a good year for us and I think the combination of this Linux and HTML5 in our Phoenix platform as well as this android based infotainment really gives us that breadth of offering and display audio continues to be a big sort of pool on for infotainment right now that we're seeing.
So where would Phoenix fit in within that bar -- within that bucket? Or is that in another…
Within the same bucket. So what we're seeing is some OEMs are asking for a non-android based solution. Okay. And that's where the Phoenix HTML5 is being offered. And then there are others that are more comfortable with android and so we have now the ability to offer both options.
Okay. But the majority are coming in with android?
That's correct.
Okay, got it. All right, thanks for taking my questions.
[Operator Instructions] Your next question comes from Emanuel Rosner of Deutsche Bank.
Good morning everybody.
Good morning.
So my apologies. I joined the call late. So I apologize if this has been asked before. I'm curious about how you're thinking about the cadence for revenue and margins in 2019. And more specifically, if you're expecting any sort of major differences between the back half and the first half.
So on the revenue side specifically, obviously you have a lot of new business launches next year. Curious if that will also benefit revenue growth in the back half of this year. And then on the margin side, whether there's any higher exit rate towards the end of the year that would position you well for margin expansion next year?
Right, Emanuel, let me start and maybe Sachin would have additional comments. But there are really two drivers for the improved sales picture in the second half. One is the improved volumes on a year-on-year basis. As we provided that are prepared remarks, we estimate that the production volume for our key customers will be down about 3% for the year.
However, as we pointed out, there is a marked difference between the two halves. We estimate that the production volumes will decline in the mid-single digits in the first half, while the second half production volumes will probably register a slight growth. Again, that's a mirror image of what we saw in 2018.
The second component of the improved sales picture is the cadence of our product launches. We have the lowest number of launches in the first quarter, and then a steady number for the rest of the year. As such, the contribution from this new products would become more substantive as the year progresses.
On the EBITDA side, so again the EBITDA would actually move the same way as our sales picture. Because of, again, the booth volumes as well as a product launches. In addition, the improved recoveries from engineering. So we always have the recoveries being much more weighted towards the second half of the year.
And the only thing I would add Christian is that some of the efficiency actions that we’re taking will also see more impact in the second half.
That's great bridge to I guess my follow up. So when you sort of look at your bridge between in 2017 and 2018 it is actually impressive the amount of efficiencies that were sort of unlocked, because obviously your volume mix was a negative contributor and yet on the EBITDA bridge, it's obviously positive net of efficiencies.
So how should we think about that as we move into this year? What kind of contribution can you expect? How much room is there still for, efficiencies or is the margin story from here on just really moves to revenue growth and the operational leverage that comes with it?
Right, operational leverage is clearly a huge component of our business model. And so, in 2019, when you think about where -- how the sales will be impacted, as we pointed out in our prepared remarks, pricing will be down about 3%, as we talked about. We think the customer volumes will be essentially down about 3% as we said, currency would also be a little bit of a headwind, not too much. And so the net new business wins will be a huge driver for the rest of the sales picture.
And as such, when you do the flow through of that, really it's going to be quite steady and the big difference as we pointed out in the North America auto show that we have an increase amount of engineering of 5% to 6%. And that's how we bridge the guidance for 2019.
Perfect, that's very helpful. And then just very finally, and again, apologies if that has been asked. But any update in terms of customer interest or activity on DriveCore?
Yes. There has been quite a bit of engagement that we've had on DriveCore. But the way, we are looking at this part of the market is that we are focused right now on developing DriveCore to offer this highway pilot capabilities. This level two plus capabilities that we are working on together with our lead customer. We expect to be in a position to have most of the technology implemented by the end of this 2019 calendar year.
And we are seeing more interest in these types of level two solutions, as I mentioned earlier. And so this is something that we are very optimistic about, but in reality, I believe most of the opportunities will start to appear more in 2020 timeframe as we are able to demonstrate this functionality that we are currently developing.
Thank you very much.
This concludes our earnings call for the fourth quarter and full year 2018. Thank you everyone for participating in today's call and your ongoing interest in Visteon. If you have any follow-up questions, please contact me directly. Thank you.
This concludes Visteon's fourth quarter and full year 2018 earnings call. You may now disconnect.