Visteon - Earnings Call - Q3 2020
October 29, 2020
Transcript
Speaker 0
Good morning. I'm Chris Doyle, Vice President, Investor Relations and Treasurer. Welcome to our earnings call for the 2020. Please note this call is being recorded and all lines have been placed on listen only mode to prevent background noise. Before we begin this morning's call, I'd like to remind you this presentation contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward looking statements are not guarantees of future results and conditions, but rather are subject to various factors, risks and uncertainties that could cause our actual results to differ materially from those expressed in these statements. Please refer to the page entitled Forward Looking Information for 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 already so. Joining us today are Sachin Alwande, President and Chief Executive Officer and Jerome Mruquet, Senior Vice President and Chief Financial Officer.
We have scheduled the call for one hour and we'll open the lines for your questions after Sachin's and Jerome's remarks. Please limit your questions to one question and one follow-up. Again, thank you for joining us. Now I'll turn the call over to Sachin.
Speaker 1
Thank you, Chris. Good morning, everyone. Visteon's third quarter performance reflects the proactive actions we took to align our business operations with the sudden impact to the industry caused by the coronavirus crisis. Our employees have proven to be resilient and resourceful in delivering to our customer commitments while simultaneously reducing costs. Our sales grew 3% year over year on a constant currency basis to $747,000,000 in the third quarter despite vehicle production being down 3% globally.
Adjusted EBITDA was $87,000,000 or 11.6% of sales, which is a record for the third quarter. This represents a three ten basis point improvement over last year, mainly due to cost reduction actions and our disciplined execution across all areas of our business. As a result, adjusted free cash flow was $103,000,000 for the third quarter and $37,000,000 for the first nine months. This is higher than prior year and the Q3 cash flow offset the negative adjusted free cash flow in the first half of the year. While sourcing activities at automakers has not returned to pre COVID levels, our new business wins exceeded $1,500,000,000 in the third quarter.
This performance underscores the strength of our product and technology portfolio, which is very well aligned with the key trends impacting the industry. We also launched 23 new products, a record for the company, bringing the total year to date number to 44. The company has been undergoing a transformation of its footprint and business processes over the past several quarters, including the move toward a platform based approach of product development. We initiated the third and critical phase of this transformation in the quarter that will result in increased operational efficiency and reduced structural costs across our business. With the improvement in business environment and in our cash position, I'm pleased to report that the company repaid the revolving credit facility it accessed at the end of Q1 and ended the quarter with a net cash position of $87,000,000 With that, we are now back to pre COVID levels in terms of net cash.
I'm also pleased to report that the Visteon Board and I have agreed to extend my contract for a period of five years. From a technology perspective, these are exciting times for the industry and I look forward to leading the company in its next phase of evolution. Turning to Page three, vehicle production improved in the third quarter with global production recovering to within 3% of prior year level. Retail demand was higher than expected, partly due to pent up demand coming out of the Q2 lockdown as well as government incentives in some European countries. In addition, the restocking of depleted vehicle inventories at retail dealerships provided an added boost to the industry.
While the overall market was down 3%, Visteon's top customers were down more at 6% decline year over year. Visteon sales however were up 3% year over year on a constant currency basis due to strong demand for digital cockpit products as well as new product launches that more than offset the impact of volume and product roll offs. Sales of digital clusters more than doubled from the prior year's level and now represent almost half of our total instrument cluster sales. Digital cluster sales were particularly strong in Europe with customers such as Daimler, Renault and PSA. In audio and infotainment, we continued the ramp up of recently launched programs with Ford and VW, which partly offset the non recurrence of last year's sales promotion at SCM in China and the ongoing phase out of infotainment business with Mazda.
Sales of digital displays also grew double digit year over year due to launches of center information displays and multimodule displays with Mazda and SGM respectively. Sales of displays to BMW also increased in the third quarter driven by the increased attach rates in China. In summary, strong market demand for digital cockpit systems and the high number of new product launches continued Visteon's better than market performance in the third quarter. Turning to Page four, I'm very pleased to report that despite the restrictions caused by COVID-nineteen, the company launched a record number of new products during the third quarter. We launched 23 new products in Q3, including products on flagship vehicles such as the new Ford F-one 150 and the Mercedes Benz S Class.
The combined projected lifetime revenue of these 23 launches is more than $2,500,000,000 which is the highest we have achieved for a single quarter and will help us continue our market outperformance in the coming quarters. These new product launches were also well distributed across the different regions with seven in China, five in North America, four in Europe and the remaining in other parts of Asia. Two thirds of the launches were for instrument clusters of which half were all digital. In North America, we launched a 12 inches digital cluster plus audio and telematics on the all new Ford F-one 150, which is the best selling pickup in the region. We also launched a 12 inches digital cluster for the Cadillac CT5 as a mid cycle upgrade, which replaces an analog digital cluster from a competitor.
In Europe, we launched a feature rich 12 inches digital cluster with the new Mercedes Benz S Class. This cluster offers four ks graphics, over the air software updates and integration with augmented reality HUD. We also launched a 10 inches digital cluster for the all new third generation Peugeot three zero eight vehicle. It's a good example of how digital clusters are migrating to mass market vehicles to support new functionality, especially integration with infotainment and ADAS. In China, we launched an eight inches hybrid cluster on the new Buick Envision compact crossover and an eight inches all digital cluster for multiple models with VW.
And in Japan, we launched a 10 inches center information display as a mid cycle upgrade for the Mazda CX-five compact SUV. The two wheeler segment has historically used analog or LED gauges for reasons of cost, but is now looking to introduce digital solutions as well. In the third quarter, we launched an innovative digital cockpit system for Royal Enfield Motorcycles with support for turn by turn navigation, phone integration and software updates. The 23 new products launched in the third quarter bring our year to date total to 44 and continue our cadence of a high number of new launches. They show that the company can execute and launch complex systems even in this challenging environment while keeping costs in check.
Turning to Page five, after the second quarter shutdown, sourcing activity at OEMs outside of China restarted in the third quarter, but did not quite reach pre COVID-nineteen levels. Nonetheless, I'm pleased to report that our new business bookings improved to $1,500,000,000 in the third quarter bringing the year to date total to $3,200,000,000 Cockpit Electronics represented about $1,000,000,000 of the total. Of that, clusters led with about 50% of the share, audio infotainment at 20%, displays at 15% and the rest coming from other products, which is consistent with our recent performance. And unlike the first two quarters where most of the bookings came from Asia, China in particular, third quarter bookings were more evenly spread across all regions. Some key wins included a 12 inches cluster for a North American OEM's new pickup that will launch in 2023 and a 12 inches cluster for Japanese OEM as a mid cycle upgrade for the sports car that launches towards the 2021.
We also won a 12 inches cluster with a North American OEM for the vehicles in Europe and North America as a mid cycle upgrade, which will also launch in about eighteen months. Besides digital clusters, other key wins included a large 12 inches center information display for an OEM in Japan, which will replace the current smaller display as a mid cycle update and an infotainment system in South America that's based on our new Android based infotainment platform. In addition to cockpit electronics, we also booked a significant amount of additional business for our wireless battery management system with GM as the OEM and its partner added vehicle models to the EV platform. We had won the initial business with GM early last year and the first launch will be mid-twenty twenty one. I will discuss our wireless battery management system in more detail on the next page.
The pipeline for the fourth quarter is similar to the third quarter, but with a stronger mix of infotainment and displays. As the industry continues to recover, we expect sourcing activity to also increase and return to more normal level. And our product and technology portfolio has never been stronger with the progress we have made in infotainment and now in BMS solution. Turning to Page six, electric vehicles need enormous amount of power to operate and batteries for EVs are made from hundreds or even thousands of battery cells to deliver the required power. These battery cells need to be constantly monitored for the state of health and to maintain them within allowed operating ranges.
This monitoring and management of the cells is done by a system of electronic devices and software that is collectively referred to as the battery management system or BMS. Today's battery management systems use wired connections between the different electronics components of the BMS. A wired system has several limitations. First, the wiring harness itself adds extra cost, weight and space to the battery and requires additional work in manufacturing of the battery pack. Second, the limit design flexibility of the battery pack that limits its reuse across vehicle models.
And third, the connectors and wires of the harness are prone to mechanical failures that are expensive to fix. The wireless BMS technology from Visteon replaces the wired connections with a highly secure and reliable wireless communication technology that eliminates these limitations with wired BMS solutions. We are developing the three electronics components of this solution, the wireless cell monitoring units, the wireless network control unit and the battery control and vehicle interface unit to enable the assembly of battery packs without the need for low voltage wiring harness. The software algorithms that act on the information provided by the cell monitoring units are typically developed by the OEM in collaboration with the battery cell supplier. We integrate these algorithms in our system as part of the design and manufacture of the BMS solution.
We are working with GM to introduce this solution on all planned EV models powered by their Altium batteries. The wireless BMS system will help ensure the scalability of Altium batteries across GM's future lineup covering all brands and vehicle segments from heavy duty trucks to performance vehicles. And we are in discussions with other OEMs for this technology as well. Turning to Page seven, electric vehicles sold very well in the third quarter, especially in Europe due to government incentives and tightening emissions requirements and also in China where sales of EVs have started to pick up again. The number of available models are also growing giving consumers a greater choice than before.
The growth in the market share of EVs is expected to continue and by 2030 EVs are expected to represent about a fourth of the total market. Visteon is in a good position to leverage this trend. Our cockpit electronics products such as digital cluster, infotainment and SmartCore are powertrain agnostic and can seamlessly work for EVs as well as traditional vehicles. Our new MicroZone display technology is ideal for high quality automotive displays, but without paying a price in higher power consumption. And the wireless BMS provides a scalable solution for modular and reusable battery packs for OEMs.
Our products are already on some of the best selling EVs such as the ZOE from Renault, which was the best selling EV in Europe so far this year. Starting next year, our products will launch on multiple models based on new electric vehicle platforms such as the BEV3 from GM, the PMA platform from Geely and the new EV platform from Nissan. Turning to Page eight. While retail demand in the third quarter was stronger than initially expected, vehicle production volume was also helped by pent up consumer demand and the replenishing of dealer inventories depleted by shutdowns in the second quarter. Government incentives, particularly in Europe, also helped spur production volume.
Retail demand is expected to remain strong in the fourth quarter, particularly in The U. S. And in China, but much uncertainty remains in the market. First, there is the risk associated with the recent increase in COVID-nineteen cases, the so called second wave and several countries are already considering stricter restrictions to control the spread. Second, government incentives in several countries in Europe that were put in place toward the end of the second quarter are slowly being phased out and will expire by the end of this year.
Also the next level of European vehicle emissions requirements go into effect early next year, which may have an impact on the volume and mix of vehicles produced in the fourth quarter. The third quarter's quick demand recovery has caused some market watchers to increase expectations for the fourth quarter with some forecasts indicating a double digit sequential growth in vehicle production. We believe these estimates are too optimistic and may not reflect underlying market conditions. Given the above risks and based on our discussions with OEMs, we believe the sequential growth will be more muted in terms of demand and production. On the other hand, while it is difficult to forecast vehicle production in this environment, we expect our outperformance to continue in the fourth quarter based on the same reasons that drove our results in the third quarter.
Corporate electronics trends and our new product launches will continue to be important factors that should drive our market outperformance to similar levels experienced in the third quarter. Turning to Page nine. In summary, the company executed very well in the face of a challenging business environment delivering another quarter of sales growth over market and at a robust 11.6% adjusted EBITDA margin. The 44 new programs we launched and the $3,200,000,000 in new business we won year to date build a solid foundation for continued growth in the future. Our product and technology portfolio for the digital cockpit is stronger than ever before and together with the Wilder's BMS solution is very well positioned to leverage the growing interest in electric vehicles.
The proactive actions that we took to streamline our operations and restructure the organization have resulted in improved operational performance and an optimized cost structure while maintaining a strong balance sheet that's helping us emerge stronger from the crisis. Now I would like to turn the call over to Jerome.
Speaker 2
Thank you, Sachin, good morning, everyone. In addition to the increase in activity levels compared to Q2, the financial results in the third quarter also benefited from the proactive actions that we initiated very early on this year, some of which were implemented before the COVID-nineteen pandemic. These actions were focused on actively generating and preserving cash and aggressively adjusting our cost base. Net sales were $747,000,000 in the quarter, representing a 3% year over year growth rate when excluding the impact of currency. Adjusted EBITDA for the quarter was $87,000,000 representing an adjusted EBITDA margin of 11.6%.
Adjusted free cash flow was $37,000,000 for the first nine months of the year. Our focus on cost control is evident by the significant reductions in both engineering and adjusted SG and A that we are reporting. Gross engineering in the quarter is down 25% and adjusted SG and A is down 19% compared to last year. Both areas benefited from a combination of short term and longer term structural cost initiatives, which will allow Visteon to support a growing business with an optimized structure. Our focus on cash continued in Q3, allowing us to maintain a strong balance sheet.
To address the numerous supply chain challenges throughout the last few quarters, we created a global sales and supply chain task force early in the pandemic, which continues today to optimize our inventory levels, while ensuring we service our customers timely. We ended the quarter with $164,000,000 inventory, a 15% reduction year over year, representing a cash inflow of $10,000,000 from Q2 twenty twenty and this despite a significant increase in sales on a quarter over quarter basis. CapEx was down 24% on a year to date basis and we continue to target a 20% reduction for the full year versus 2019. In aggregate, adjusted free cash flow for the quarter was $103,000,000 and $37,000,000 for the full year. Q3 adjusted free cash flow also benefited from approximately $40,000,000 of temporary supplier term extensions that we negotiated in the midst of the crisis in Q2, half of which will reverse in Q4 of this year and the remainder early next year.
With cash generation coming in strong in Q3, combined with a strong balance sheet and improving activity levels, we repaid at the September the entire $400,000,000 revolver credit facility that we had access as a precaution at the end of Q1. We also repaid our short term debt. As a result, our total debt was reduced to $348,000,000 at the end of the quarter. Combined with a total cash position of $435,000,000 our net cash position after debt stands at $87,000,000 To put this in context, it is essentially the net cash position that we had at the 2019, which was $84,000,000 Turning to Page 11. On Page 11, we provide a summary of our sales and adjusted EBITDA for Q3 twenty twenty versus 2019.
Sales of $747,000,000 in the third quarter increased $16,000,000 year over year, representing a 3% improvement when excluding the impact of currency. In comparison, industry production volumes declined 3% in the same period, while production volumes at Visteon's top customers declined by approximately 6%. Pricing represented 2.3% of prior year sales and continues to be within our historical ranges. The combination of ongoing new business wins and the robust launch schedule has enabled Visteon to continue to outperform the market. Adjusted EBITDA was $87,000,000 or 11.6%, representing an increase of $25,000,000 versus prior year.
Strong cost performance in manufacturing, engineering and SG and A more than offset the negative impacts from mix and annual pricing. We estimate that short term measures implemented earlier this year, including temporary salary reductions and curtailed spending, benefited margins in Q3 by approximately 1.5% to 2%. These measures will not carry into Q4. Adjusted EBITDA benefited from permanent savings related to programs announced earlier in the year and which are coming to completion. The most recently announced restructuring program will not have a material impact in the fourth quarter.
Before moving to cash flow, I would like to provide some context on our continued decision to not provide guidance for the remainder of the year. Although we are optimistic coming out of the third quarter, the rate of change in production forecast has not stabilized. For instance, IHS forecast for Q3 improved nearly eight percentage points in the last three months with a two percentage point improvement in just the last month. In addition, the fourth quarter has the typical uncertainty related to holiday shutdowns and year end OEM inventory managements with the added complexity of COVID-nineteen this year. However, we do expect that we will continue to outgrow the market in the mid to high single digits.
Adjusted EBITDA will continue to benefit from the structural savings that we benefited from in the third quarter, while we do expect cost increase due to the expiration of short term salary reductions and a gradual increase in discretionary spending. Engineering recoveries will not have the same seasonality in the fourth quarter as they had in prior year. We expect full year net engineering to be down in the mid-twenty percent range compared to prior year. In total, we are now anticipating that decremental margins will be in the mid teens for the full year. Moving to cash flow.
Page 12 provides an overview of our cash and net cash position at the end of the quarter as well as our adjusted free cash flow for the first three quarters of the year. Our balance sheet continues to be one of the best in the industry with a net cash position of $87,000,000 and a net debt to last twelve month EBITDA ratio of negative 0.4 times with no near term debt maturity before 2024. Adjusted free cash flow year to date was $37,000,000 and Q3 adjusted free cash flow was $103,000,000 Working capital was a source of cash, benefiting from our focus on optimizing inventory levels and negotiating temporary extended payment terms with our suppliers. Capital expenditures decreased by more than 20% on a year to date basis, putting us on track to reduce CapEx by 20% and spend $115,000,000 for the full year. In the fourth quarter, we anticipate approximately a $20,000,000 reversal from temporary supplier payment term expansions and we'll plan to contribute approximately $17,000,000 to the Visteon U.
S. Pension plan. Despite these expected cash outflows in the fourth quarter, we are anticipating adjusted free cash flow for the full year to be slightly above breakeven levels. Turning to Page 13. Visteon continues to be a compelling long term investment opportunity.
We have positioned the company for top line growth, margin expansion and increased free cash flow generation, while our strong balance sheet provides maximum flexibility. Thank you for your time today. I would now like to open the call for your questions.
Speaker 3
Your first question is from the line of Brian Johnson with Barclays.
Speaker 4
Yes, hello. Let me get you off the speaker. A couple of questions. First, I might have missed it, but in terms of on Page 11, the $25,000,000 year over year EBITDA increase, how much of the temporary measures can come back? And how much is just permanent reduction in SG and A operational improvement and so forth?
Speaker 2
Good morning, Brian. It's Jerome here. We I've mentioned this in the script indeed. We are estimating that close to 1.5, two percentage point of EBITDA is related to austerity measures that we took in Q2 and Q3 that will not be repeating again in Q4. So in a very simplified way, you could normalize our results in Q3 by just removing that, which would give you a 9.5%, 9.6% EBITDA to 10% to 10.1 EBITDA range for the quarter.
I think the one point which is important to mention as well is that I think we benefited from reduced activity levels in Q3 like we did as well in Q2. And as we are getting into Q4, we do see a regain of activity level, especially on the engineering side. And that will probably as well continue going into 2021.
Speaker 4
Okay. Second and sort of a follow on question on margins. When we think on Page three about those three big drivers of your growth, the digital clusters, the audio infotainment and the displays, Another competitor, Aptiv, continues to emphasize that they are moving away from displays, not happy with the margins there. Could you maybe talk about the and indeed digital clusters are growing much faster than displays. Could you maybe talk about the margin implications of the rapid growth in digital clusters?
And is that somehow more of a software and hence a software driven and hence marginable opportunity than just simply display business?
Speaker 1
Yes. Hi, Brian. So absolutely, digital clusters have a fair amount of software content, which continues to grow. And the growth comes from the integration of ADAS and infotainment features in the cockpit into the cluster. And as you may have noted, we have been in sourcing a lot of that software content by developing it in house as compared to the earlier where we would be, like the rest of the industry, licensing those software components from third parties.
So that makes digital clusters very good margin business for us and we expect that to continue with all of the innovation coming in. Now when it comes to displays and I have also noted the point that you made about some competitors, I want to be very clear about our strategy. There are two classes of displays in the industry. You have the small displays, flat, rectangular, essentially commodities. And then you have these displays that are getting larger, more different shapes, curved and with integration of many features including some that are more manufacturing related challenges such as integration of anti reflectance, anti glare capabilities on the display, optical bonding of the glass that gives a much higher user experience.
These things and those those displays are good margin business for us as well. And as we look forward to the cockpit, the cockpit is becoming a display driven environment. We see the displays grow in size eventually pillar to pillar, but the steps are being taken to get there And and that's where we believe it is essential for us to to be in and to be part of that that evolution because those displays are gonna be what is gonna drive the content in the electronics and software.
Speaker 5
Mhmm.
Speaker 4
And then final question around BMS, which we're dimly aware, but frankly snuck up on us in terms of your big role on the Altium platform. Is there any way dimensionally to think about CTV and margin opportunity in wireless BMS?
Speaker 1
Yes, let me take a step back and talk about BMS because we haven't really been very vocal about it. And the reasons are, we have been waiting for the opportunity to talk about our first major win, which is with GM. But we have been providing BMS solutions, to GM for a number of years and are on some of their older EV vehicles, but those are wired BMS solutions. And as we looked at how the technology, the battery technology itself was evolving, which is by the way evolving rapidly from cylindrical to prismatic to pouches and newer forms as well as chemistry, it became apparent that wired solutions have limitations. So we have been working on this wireless approach at which fundamentally does away with the low voltage wiring harness, makes the BMS and the battery pack a lot more modular and scalable.
And so we are very happy to be working with GM. We are across their whole portfolio of products that are announced already and will be in the future on their new PEV platform, the battery electric platform. And so it gives us a great position to one, get more experience, but also build scale and we expect that we'll be able to bring that solution to other OEMs as we go forward. Now in terms of how to think about the content, it depends on the size of the battery. So a good way to think about it is that depending upon, let's say, kilowatt hour battery all the way up to, let's say, just over 100, the range of the price would be between $350 to $500 per vehicle just for the BMS solution.
So it's a pretty high value component and a solution for us in that segment.
Speaker 4
Okay. Thank you.
Speaker 3
Your next question is from the line of Michael Filippo with Berenberg Capital Markets.
Speaker 6
Hi, good morning guys. Thanks for taking my question. So first one, one or more of your competitors has sort of talked about maybe more aggressive pricing pressure on their analog systems. And I was wondering whether or not you're having to make additional pricing concessions on those systems. You're seeing pressure on that side of the business?
Speaker 1
Hi, Michael. Yes. No, what I would be very I want to be very clear in saying is that we are not seeing any more pressure than normal. And the pressure even in normal times is pretty intense on pricing in this industry as you know. So we have been able to offset that through various means.
We have done that this quarter as well in Q3 and we expect to be able to continue going forward.
Speaker 6
Okay. Got it. And then one more sort of around the software that you guys are doing in house behind the displays and the clusters. Just wondering if could just give me a bit more detail around that software and how that sort of differentiates you guys and helps you win new business?
Speaker 1
Yeah, no, absolutely. So if you think about clusters, and I'll come to this place later, in clusters, they're really two large components of software that the industry and until recently Visteon as well, would license from third parties. There's an operating system that is specifically needed for digital clusters called AutoSAR. And AutoSAR has been traditionally licensed in from third parties. In the last twelve months, we have built that software.
We have been building it over a longer period of time than that. But in the last twelve months, we have been able to introduce it into the new clusters that we are developing for our customers. So that's one component. The second component is that our two d three d graphics software. As the displays are getting more capable, larger, rendering high quality graphics is a very big part of the value proposition of the device and this also used to be something that was licensed from third parties.
We have introduced our own solution. We are unique in that sense both on the AUTOSAR and on the two d, three d graphics. So two of the larger components that were third party we now are doing it in house. Now how does that help us competitively? One, very simply is cost, right?
Our competitors have a royalty that they have to pay to third parties. But even more importantly for us, with the pace at which the technology is evolving in the cockpit, this gives us the fact that we are doing it ourselves gives us control on the innovation that's happening within the cockpit And that to me is even more important than just the cost benefit.
Speaker 6
Got it. And sorry, just one quick follow-up. I know visibility is probably limited and your margins were clearly better than expected even adjusting for those austerity measures. Is there any sort of update around that 12% margin target in the next two or three years?
Speaker 1
Yes, let me talk about that. I'm sure that's a question on many people's mind. So let me try to address it. Now if you go back to Q3, where we have a growth over market of six percentage points, now that by the way also includes the non recurrence of some special sales promotion we had last year. So if you really look at our performance, it's really more like 8% to 9% market outperformance.
So clearly the sales side is coming through with respect to the growth driven by new product launches. Now if you think about our margin expansion, that's based on two factors. One, our ability to take cost out, and I'll talk about that in a minute. And the second is experiencing the growth in sales that we need for the margins to expand beyond this current level. Now on the cost front, as you have seen in the results in this quarter, both the short term as well as more importantly, the structural changes that we have made that are going to drive sustainable savings, those are progressing well.
By the time, so this time next year, we should be substantially done with all of those actions. And so that's one piece. We feel good about that. That has lowered our cost base, which going into next year is going to help in terms of our drive towards the 12%. And then with respect to the sales growth, clearly depends on the underlying production environment.
We do expect production to grow more and also into 2021. Our expectations may be a little more conservative than IHS, but we expect growth. And combined with growth over market, we think that we should be in a position by 2023 timeframe as we have stated before to achieve this 12% target. Our confidence now on account of the cost takeout is actually even higher than it was at the beginning of the year.
Speaker 6
Great. Thank you very much.
Speaker 3
Your next question is from the line of Steven Fox with Fox Advisors.
Speaker 7
Thanks. Good morning. You mentioned a couple of wins related to mid cycle updates and I was curious if there's any takeaway now. You've been talking about the potential for that and if there's any learnings from the recent wins that suggest maybe more businesses coming along that front next year? And then I had a quick follow-up after that.
Speaker 1
Yes, sure. And we are seeing as we have stated before more interest in mid cycle updates. If you look at our year to date performance of 3,200,000,000.0 and if you just focus on the cockpit electronics wins excluding BMS, our mid cycle update related wins account for almost 25%, the full fourth of the total wins. And one of the benefits of that is also that those wins are going to launch, go into production within roughly eighteen to twenty months. So the revenue is also generated faster than on new vehicle models.
Now this 25% is much higher than what has been the case historically. I think we are benefiting from two things. One, the fact that in this environment, especially with OEMs trying to extend the life of some of the vehicles given the overall market environment that is helping us. I'm not sure, it's too early to say whether 25 is the system that we would expect going forward, but it's a very welcome development so far and we do expect at least in the near term, the next couple of quarters that to continue.
Speaker 7
That's helpful. And then just on Europe, you mentioned a lot of concerns, which definitely seem to be top of mind in the last couple of weeks. Are you seeing any evidence of some of the issues playing out yet or it's too early to tell? Thanks.
Speaker 1
Yeah, it is too early to tell. We wanted to make sure that we are thoughtful about expectations for the future given all of the things that we mentioned with respect to Europe. So as you are aware, there were several incentives put in place towards the end of the second quarter and those incentives have been slowly being phased out. And at the end of this year, unless they decide to renew, this will finish and end. Now there's also the emissions stricter requirements that are going to go into effect beginning of the year.
And that might have an impact on the production mix, especially in the fourth quarter. So we wanted to call that out, especially in light of some of the forecast that we saw, which in our opinion were running a little ahead of themselves. So at this point, I would say too early, but we are very carefully watching the development, discussing with our customers and making sure that we are on top of it.
Speaker 7
Great. Thank you very much.
Speaker 3
Your next question is from the line of Rob Lache with Wolfe Research.
Speaker 8
Everybody, I had a few follow ups. One is on the BMS contract. You know, Altium alone is expected to grow to more than 1,000,000 vehicles a year by the middle of the decade. And it sounds like you're targeting other OEMs. So are you thinking that that part of the business for Visteon alone could be a $350,000,000 to $500,000,000 business?
Or does the pricing that you're indicating here kind of reflect low volumes and that declines over time?
Speaker 1
No, Rod. So the pricing clearly does not reflect the low volume. We believe that this pricing will continue to hold and there's also more content that's coming in that will continue to make the PMS system stay within the range that I talked about. And yes, we are aware of the high volume implications of this business. But at this point in time, we are only really reflecting what has been awarded and the models that have been planned for launch.
As you know, as they add more models to it, volumes will increase, but that's for the future. And with this OEM, there are other opportunities as well. So I'm optimistic and I feel like it can be of the level that you mentioned, $350,000,000 or so annual business opportunity for Visteon.
Speaker 8
Great. Thanks, Sachin. And just on that as well, a few companies have mentioned wireless BMS as an opportunity. Sensata is one that comes to mind. Can you just maybe give us a sense of, you know, what's the competitive landscape here?
And what do you bring to
Speaker 6
the
Speaker 8
table that would be proprietary or differentiated versus the others?
Speaker 1
Correct. So a lot of the attention is on the wireless technology itself from the third parties. Clearly Visteon is not going to be the provider of the wireless silicon solutions. And at the same time, what we want to do is be agnostic to the evolution and the choices that might be available for us on the wireless side. So if you think about what we do, we provide the software, the hardware that is the basis of the solution.
The algorithms come themselves from the OEM and their battery providers. It's something that we necessarily don't see value in doing because that becomes very custom to each OEM. But what we want to offer is a platform that consists of the hardware, the software integrated so that the whole system works very well. There's a lot of learning involved in building a wireless solution, very different from a wired. And so what we really have at this point in time more than a unique IP is the advantage of time.
We have a couple of years of lead over anybody else in developing this wireless solution and I expect that this will continue, this technology, the system will continue to evolve very rapidly as we learn more about the challenges overall in terms of coming up with the scalable flexible BMS solution. That's what we are trying to address here. The ultimate goal is to make that investment once on part of the OEM and have them be able to source different batteries of different chemistry, different physical characteristics and be able to manufacture a scalable set of battery packs for the various models. And our goal is to enable them to achieve that objective.
Speaker 8
Thanks for explaining that. Two other things. One is I believe you have five contracts that you've won so far for the Android based infotainment. Volkswagen is the one that you've referenced a number of times is being in launch right now. What's the timing of some of the others?
Any high level comments on expected And then lastly, maybe just to clarify, your gross engineering spend being down $26,000,000 net engineering about 6% of revenue. Obviously, it's unusual to see those kinds of declines as organic growth accelerates. Maybe any thoughts on longer term over the next few years how we should be thinking about engineering spending level?
Speaker 2
Yes. It's Jerome, Rod. So we've taken a lot of cost on the engineering side. We were at €300,000,000 net engineering last year. We are guiding close to $225,000,000 for the full year of this year.
A lot of that is essentially restructuring actions as well as cost save actions that we've embarked on early on this year. The activity levels will come back definitely in 2021. So we expect this number to be higher next year. However, if you step back and look at our engineering percentage, we were at 10% last year, we'll be close to 9%. So we'll have taken one point this year, and we're expecting to continue to chip away in terms of percentage points going into next year, but definitely not at the level that we've been at this year in terms of
Speaker 1
absolute dollars. And then on the infotainment side, Rod, so we expect all of the rest to go into production in 2021. Obviously, with some, we are further along than with others, but all of them will launch. And the other color that I would like to provide for you is that of the rest, we have one other that is North American OEM, the others are in Asia. And we are seeing besides the activities related to launch, there's a lot of interest from OEMs that we have had since the launch of the system with VW, which we are hopeful will result in more business wins in the coming quarters.
And the last point I would like to add is that we are also working on expanding our launches within VW. So there's a lot of activity going on with respect to this Android based infotainment. Frankly, it has exceeded my expectations in terms of the market acceptance and the opportunities that we are seeing. Now we have to, as usual, make sure that we have a good launch performance that's very critical in this area, as you know. And that's going to be our biggest sort of factor in continuing the success we are seeing now.
Speaker 8
Terrific. Thank you.
Speaker 2
Thank you.
Speaker 3
Your next question is from the line of Mark Delaney with Goldman Sachs.
Speaker 9
Yes. Good morning. Thanks very much for taking the questions and thanks for all the details, especially on the BMS program. It's very helpful. I had a few more on financial side.
Maybe starting on margins, the comment about that there's some benefits from temporary cost actions of 1.5 to two points in the third quarter and that would go away. But at the same time, the company announced the restructuring program earlier this month. So maybe talk about what restructuring program could mean in terms of savings, timing, magnitude, where we see that between COGS and SG and A? Sure.
Speaker 2
Mark, it's Jerome. So I'll start with the October restructuring program that we've just announced. We've announced 35,000,000 to $40,000,000 in terms of cost. And we're estimating at this stage that the payback will be close to one point five years. So overall, in terms of annual run rate savings, we're anticipating that we'll have close to 25,000,000 of savings.
And from a timing standpoint, we don't anticipate to have much, if anything, in Q4. We are at this stage expecting that we'll have a little bit more than 50% of the saving next year. So let's say close to $15,000,000 of saving going into 2021.
Speaker 9
Got it. That's helpful. And then I just want to ask on the engineering recoveries. If I understood the guidance for the full year, down mid-twenty percent range, I think it implies engineering recoveries are more like $20,000,000 in the fourth quarter compared to the $30,000,000 or so in this current quarter. So maybe there's a margin headwind next quarter.
I just want to make sure I understood that properly.
Speaker 2
Yes. So we're guiding net engineering to be close to $225,000,000 for the full year. So if you back into what it means for Q4, in fact, it's close to $60,000,000 of net engineering recoveries. In fact, we are very happy in the way things have developed over the last few quarters. We've been very flat and very even in our recoveries, and we've been averaging around $30,000,000 per quarter.
And we're expecting to see similar levels in Q4, maybe between 30,000,000 and $35,000,000 So it's important because that will obviously impact the decrementals year over year quite significantly. We had close to $60,000,000 of recoveries last year at the same for Q4, and we're expecting something like 30,000,000 to $35,000,000 So it will have a year over year impact, obviously, given that we had more recoveries earlier in the year.
Speaker 9
Yes. It's really helpful. Just one last one for me, if I could. Just on your free cash flow conversion, any puts and takes you can share on free cash flow for 2021? Thank you.
Speaker 2
2021. It's obviously a little bit early to give guidance, especially on the free cash flow side. But we'll we are very focused on cash flow since the beginning of the year, as you know. The two big drivers are going to be EBITDA and CapEx. So EBITDA, we're expecting to keep on growing our EBITDA percentage.
And CapEx as well, we've done a lot of good work this year on the CapEx side. We started last year with 4.8% of sales. This year, despite the decline in sales, we'll be close to 4.8%, and we're expecting to continue to drive that percentage down as well, even though the dollar value will be slightly up versus what we are seeing this year. So more to come on the adjusted free cash flow versus EBITDA, but a lot of focus on this
Speaker 4
area. Thank you.
Speaker 3
Your next question is from the line of Joseph Spak with RBC Capital Markets.
Speaker 5
Thank you very much. I guess just want to sort of follow-up on again some of the actions you've taken so much of the last question. I mean, get the part that is to offset some of the austerity measures you've taken in dealing with lower volume. But it also seems like you're doing more than that and it seems like maybe a tightening up of the cost structure. Is that fair?
And then if so, like how does that actually play into your longer term 12% margin target? Because is that actually needed to still hit that target? Or if things break your way, volume comes back, you would say the margin opportunity is now greater?
Speaker 1
Yes. So let me first start, Joe, and then I will pass it on to Jerome for additional color. Let me first share with you what we are doing and why that's important. So as you may know, our cost structure in the past was high cost country heavy and we also had a few more sites than I would have liked, especially in Europe and Japan. And over the past, I would say, two years or so, we have been steadily, gradually moving more and more of our footprint to lower cost places.
We opened new technical centers in Bangalore, India, in Romania, as well as in Mexico. And now that they've had a couple of years to get trained and participate in product development, They are now ready to take on for full system development. Now that that will mean that our cost structure will fundamentally be much better going forward in a more sustainable manner and that's also a competitive advantage for us. Now to answer your second question about whether, you know, is it needed and how does this impact as we go forward our 12% target, I think it puts us first of all in a much better position than ever in terms of being able to achieve 12% even with a lower sales level than as compared to what we indicated at the beginning of the year for 2023. Clearly, sales returns and the volumes hold up, our opportunity to expand beyond 12% certainly will be available to us.
Anything you would like to add, Jerome?
Speaker 2
Yes. Just that the and you summarized it very well, Sachin. The restructuring efforts are definitely driving the improvement in cost. We have as well a lot of focus on cost. And I think the discipline that we've put in place since the beginning of the year is paying off, and we see that in the Q3 results.
I think on the other side, what we've got to be just a touch careful is that we'll have this activity coming back. And we'll see that, I think, in Q4 as well as in 2021. And we're still trying to get our arms around what it means from a dollar standpoint. So we've got definitely some tailwinds coming from all the actions that we've taken, but activity will be, I'll call it, a headwind, and we'll be guiding a little bit more on that as we go into our February earnings call.
Speaker 5
Okay. Thank you. I know we're at the hour, so I'll follow-up with other questions offline. Thanks.
Speaker 1
Thank you.
Speaker 0
All right. Thanks, Joe. This does conclude our earnings call for the 2020. 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.
Speaker 3
This concludes Visteon's third quarter twenty twenty earnings call. You may now disconnect.