Visteon Corp (VC) 2017 Q1 法說會逐字稿

Good morning.

I'm Bill Robertson, Vice President of Finance for Visteon.

Welcome to our earnings call for the first quarter of 2017.

(Operator Instructions) Before we begin this morning's call, I'd like to remind you this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are not guarantees of future results and conditions, but rather are subject to various factors, risks and uncertainties that could cause our actual results to differ materially from those expressed in these statements.

Please refer to the slide entitled Forward-Looking Information for further details.

Presentation materials for today's call were posted on the Investors section of Visteon's website this morning.

Please visit www.visteon.com/earnings to download the material if you have not already done so.

Our Form 10-Q was filed earlier this morning with the news release.

Joining us today are Sachin Lawande, President and Chief Executive Officer; and Christian Garcia, Executive Vice President and Chief Financial Officer.

We have scheduled the call for 1 hour, and we'll open the lines for your questions after Sachin and Christian's remarks.

(Operator Instructions) Thank you for joining us on our call today.

Now, I will turn it over to Sachin.

Thanks, Bill, and hello, everyone.

We are very pleased to report that Visteon had a solid first quarter with significant improvements across all areas of our business that resulted in record levels of sales and profitability for the quarter.

On Page 2, let me briefly summarize our first quarter 2017 results for electronics.

In the first quarter, Visteon reported record sales, adjusted EBITDA and adjusted EBITDA as a percent of sales.

Sales were $810 million, $17 million higher than in Q1 2016.

Adjusted EBITDA was $101 million, $7 million higher than prior year.

And adjusted EBITDA margin was a 12.5%, an increase of 60 basis points compared with the same quarter a year ago.

We won $1.5 billion in new business in the first quarter, a 25% increase over new business won in Q1 2016.

Visteon executed very well in all areas in the first quarter.

I will provide more details on our operations in the next few pages before handing it over to Christian to discuss the financials.

Moving to Page 3. On Page 3, we highlight key accomplishments for the first quarter.

As we did at year-end, we are highlighting our progress in 3 key areas; sales, profitability and returns and other key operational areas of the business.

As noted on the previous page, we delivered $810 million in electronic sales in the quarter.

All regions showed positive growth, but domestic sales in China was the main driver, outpacing market growth and increasing 17% year-over-year, excluding the effects of currency.

We had another strong quarter of new business wins, securing $1.5 billion in new business.

Business awards are inherently lumpy, and we are pleased to start the year with a strong performance in the first quarter.

This increased our order backlog to a record $16.7 billion at quarter end, which I will discuss in more detail shortly.

With respect to profitability, as mentioned, we achieved record quarterly adjusted EBITDA for electronics of $101 million.

Our adjusted earnings per share were $1.73.

Also during the quarter, we entered into an accelerated stock repurchase with a third party to purchase shares of our common stock for $125 million, and we received 80% of the expected shares.

This ASR is expected to be completed in May 2017.

In terms of operational accomplishments, we are pleased to have secured our third customer win and our first in China for our industry-leading SmartCore domain controller technology.

We also made progress on our approach to autonomous driving technology and are on track to launch the new platform early next year.

We have had positive early engagements with customers on our approach for autonomous driving.

And we commenced development of our second-generation SmartCore solution, which offers higher levels of virtualization and feature integration and is expected to be largely ready by the end of this year.

I will provide more details on SmartCore later in this presentation.

In summary, a solid first quarter performance sets a strong foundation for the remainder of 2017.

Moving to Page 4. On this page, we compare key financial metrics for the first quarter over the past 2 years.

The company has made significant progress over the past 2 years in executing the strategy that we have shared with you previously.

Our focus on operational performance has resulted in significant improvements in profitability over this period.

Sales of $810 million in the first quarter benefited from key product launches at the end of 2016 and in early 2017.

It is the highest quarterly sales for electronics on record for Visteon.

Adjusted EBITDA was $101 million, up $7 million from Q1 2016, and this is also the highest adjusted EBITDA on record.

Our continued focus on operational improvements have drived adjusted EBITDA as a percent of sales to 12.5%.

Engineering cost as a percent of sales were 8.8%, down from each of the past 2 years.

Adjusted SG&A, which have been well over 6% in 2015 and 2016, was reduced to 5.8% of sales in the first quarter.

This is especially remarkable as we have won more new business than ever before, while also investing in new technology development in the areas of infotainment, domain controller and autonomous driving.

Although, we have made significant progress over the past 2 years, we believe there is still more opportunity to improve operational efficiency.

We will continue to focus on reducing fixed and operational costs in the business to improve profitability.

Moving to Page 5. In addition to driving profitability through reduction of fixed costs, a key part of our strategy is to accelerate new business wins in the near term, which will drive revenue growth in future quarters.

During the first quarter, we continued to build on the strong momentum created last year and won new business with expected lifetime revenue of approximately $1.5 billion.

This is $300 million more than first quarter last year and frankly, exceeded our expectations as we were able to accelerate certain awards stated for the second and third quarters.

As a result of this outstanding achievement, our total order backlog now stands at a record $16.7 billion.

We are doing particularly well in the instrument cluster, display, head-up display and infotainment product segments.

I'm pleased to report that infotainment made up the largest portion of the new business in the first quarter, accounting for 44% of the total.

As I've mentioned before, Visteon has a competitive entry infotainment offering, which has been further strengthened by our acquisition of AllGo last year.

We were pleased to win an extension of existing global business with new market-driven features and a second new customer win which was targeted for China market with both leveraging AllGo technology.

We also had several customer engagements in the quarter for our new Phoenix infotainment solution.

As we have discussed previously, Phoenix addresses mid-to-high infotainment market with industry-leading features for connected app development.

Infotainment business like SmartCore is a long lead time sales cycle, and we're pleased with the level of interest from our key customers.

And as you can see from the charts in the middle of the slide, Asia accounted for 78% of our new business wins in the quarter with customers in China representing 40%.

A highlight of our first quarter business win was our first SmartCore award in China with Dongfeng Motor Company Limited, the second largest vehicle manufacturer in China.

I will provide more detail on this important win later in the presentation.

We also had a very active quarter in terms of customer engagements on the heels of an extremely successful CES in January.

Across the world, we held 32 separate tech shows, either at customer locations or Visteon venues, to have deeper dialogue on our new technology solutions such as SmartCore, Phoenix infotainment and autonomous driving technologies.

We are very pleased with the level of interest at customers for the solutions, especially for SmartCore, which is starting to pick up as one of the most interesting trends in corporate electronics.

We are on track to deliver our full year target for new business wins and plan to continue the momentum in the coming quarters.

Now moving to Page 6. Here we highlight the continued growth in our new business backlog, which reinforces our competitive strength in corporate electronics.

As shown on the bar charts at the left, we have seen an increase in our order backlog for each of the past 7 quarters, and our backlog has grown 14% since the third quarter of 2015 when we started to track and report the backlog in this manner.

For the first time, Asia now represents the largest portion of our backlog at 39%, with Europe being the second largest at 35%.

It's important to note that 3/4 of our backlog is in the faster growing automotive regions of the world.

From a product standpoint, instrument clusters still represent the majority of our backlog, but it is worth noting that infotainment has risen to 12% of the backlog, which is 2 points higher than at the end of 2016.

We're also seeing growth in head-up displays, a fast-growing product segment.

In summary, we are pleased that our business is accelerating in both the faster-growing geographies as well as product segments.

Moving to Page 7. A highlight of our first quarter results was an exceptional performance in China, the world's largest automotive market.

Our sales and new business wins in China continue to expand at a rate exceeding vehicle production growth in the country.

In the first quarter, Visteon sales in China were up 17% year-over-year, excluding the effects of currency, while vehicle production grew at a rate of 7% as per IHS.

Sales to joint venture and international automakers represented 76% of our first quarter sales, with the remainder to domestic Chinese OEMs.

That said, we continue to make strong inroads in sales to domestic Chinese automakers who make up approximately 45% of the market and where we are clearly underrepresented today.

As you can see on the right of this page, of our first quarter new business wins in China, 41% came from domestic Chinese OEMs.

In fact, our sales to domestic Chinese automakers were up 137% in the first quarter compared with the same quarter a year ago.

This new business is coming from all of our core product lines with instrument clusters, infotainment and displays leading the way.

As noted earlier, one of the product areas where we have achieved a breakthrough in China is in our SmartCore domain controller technology, which I will now cover in more detail on Page 8.

I have mentioned on previous calls that the trend towards use of integrated cockpit domain controllers is starting to take off in the industry.

Visteon also has a strong position in China, which is not only the largest and fastest-growing market in the world, but also one that's quick to adopt new technology.

At the Shanghai Auto Show last week, we were very pleased to announce the first SmartCore win in China and our third, overall.

This win is with DongFeng Motors, the second largest car manufacturer in China and it's for a new DongFeng SUV for the China market.

This is the first ever cockpit domain controller award in China, and we're pleased to repeat our track record of being the first to win customer business in China in this very important and emerging segment of cockpit electronics.

We're also pleased that DongFeng has allowed us to talk about this award, of course, without providing too many details about their upcoming vehicle.

This award is for the top trim level for new high volume SUV, which will contain an all-digital cluster and infotainment features, including embedded navigation and smartphone integration.

Visteon will also supply stand-alone infotainment and hybrid instrument cluster solutions for other trim levels in this vehicle lineup.

At the start of production in 2018, the system will be the first digital cockpit controller to be launched in the China market.

This win also gives us the opportunity to expand into other DongFeng vehicles with minor adaptation and build a long-term relationship with this very important customer.

I should also mention that we have ongoing discussions with other OEMs in China, including SAIC, Great Wall, GE, Guangzhou Automotive and other OEMs regarding SmartCore for their future cockpit electronic solutions.

I'm optimistic that we will see more success in the near future in China for this technology as with other products and technologies from Visteon.

Nonetheless, it's critically important to gain the first foothold in a new market with a new technology, and this win with DongFeng represents a significant milestone for Visteon.

Moving to Page 9. Visteon is the industry leader in cockpit domain controller technology with our SmartCore solution and with 3 wins is way ahead of the competition.

However, we are not standing still with this technology and are leveraging our experience and knowledge of this space to drive the technology further.

This page shows the technology roadmap of our SmartCore platform.

SmartCore uses advanced virtualization technology to enable integration of different cockpit products into one electronic control unit or ECU.

As digital displays and ADAS functions proliferate in the cockpit, this approach offers the possibility to drive all of the displays using one powerful system-on-a-chip or SOC.

This is a revolutionary step for the automotive industry, which has historically used independent ECUs to implement each of this different products.

Visteon is unique in the industry and that we have developed our own cockpit computer virtualization technology that complements our instrument cluster, infotainment and head-up display software stacks.

We are the only Tier 1 supplier in the industry to offer a complete digital cockpit computer solution, including the virtualization technology and all the applications.

Using virtualization, the Visteon SmartCore solution enables the sharing of hardware resources such as CPU, memory and other system components in a typical system-on-a-chip across the different operating systems that are required to implement cockpit electronics products such as instrument cluster and infotainment.

The first generation of SmartCore, which was introduced in 2014, enabled sharing of CPU and memory resources and was really targeted at integrating 2 products, instrument cluster and infotainment.

This version of the technology is the basis of the industry-first cockpit domain controller that would be launched early next year.

With the valuable experience gained through the deployment of the first-generation solution and leveraging the new system-on-a-chip solutions from the silicon suppliers, we are now developing second generation of SmartCore technology that would be introduced later this year.

This version improves the virtualization of graphics processing unit or GPU, making it possible for all domains to drive high definition displays more effectively than before.

Gen 2 virtualization technology will also enable dynamic sharing of system resources, which means we can add more domains than just instrument cluster and infotainment.

This would enable us to integrate another display-oriented product such as head-up display and also integrate ADAS technologies such as V2X, driver monitoring and surround view.

We will also port our new infotainment solution, Phoenix, to our SmartCore platform to offer a mid-to-high infotainment capability, in addition to entry infotainment features from the first-generation solution.

Visteon was the first in the industry to offer a production-ready cockpit domain controller solution and with this technology leap with Gen 2, we are confident that we will be able to maintain our leadership position in the industry.

Moving to the next page.

On Page 10, I would like to provide our outlook on the market and to share with you how we're thinking about the rest of 2017.

In the first quarter, we saw strong vehicle production volume growth across all regions, as shown on the left of the page.

The main drivers of the strong performance of the higher-than-expected growth in vehicle production in China and Europe and North America was also reasonably strong at 3% growth year-over-year.

In its recent forecast, IHS continues to show a low single-digit global growth for the full year, which is shown on the right.

We expect China to continue to perform well and our current projections anticipate production volume growth in the mid-single digits, which is more optimistic than the IHS forecast.

Overall, for the full year, IHS current forecast for global growth remains in line with their prior estimates and for the most part, in line with our own expectations.

Given this forecast and on the strength of our performance in the first quarter, we are reaffirming our financial guidance for 2017.

We will continue to monitor the market and stay focused and disciplined in our execution with a goal of delivering on our financial commitments.

Moving to Page 11.

On this page, we recap the strategic priorities for Visteon for 2017 that will set the stage for our longer-term plans and report on the progress.

These priorities includes strengthening our core business, accelerating our business in China and developing an autonomous driving platform for level 3 and above applications.

As I have outlined during today's call, with 1 quarter under our belt, we're tracking very well in our performance against these priorities.

In terms of strengthening our core business, we are well on our way to achieving the metrics we have set by achieving record sales and delivering a margin of 12.5% in the first quarter.

We are also on pace to achieve a combined $12 billion new business win target for 2017 and 2018.

And we will continue to focus on operational excellence across our business.

We are accelerating growth in China, exceeding market growth in that country by achieving double-digit sales growth as well as new business wins.

We demonstrated success towards this objective in the first quarter by winning new SmartCore with DongFeng, and we have seen positive initial response in China to our new Phoenix infotainment platform.

To further drive adoption of our new technology, we intend to fully leverage the excellent relationships and joint ventures we have in China.

For our third priority, we have progressed well in the development of an autonomous driving platform, as I've mentioned earlier.

Our goal remains to launch a new autonomous driving platform at CES in 2018, targeting level 3-plus capabilities.

In summary, I'm pleased with our first quarter results and the progress we continue to make as the only Tier 1 supplier focused exclusively on cockpit electronics.

All of us at Visteon are energized with the keen interest our customers are showing in our technologies, which has driven our new business backlog to record levels.

We remain focused on operational excellence, while simultaneously driving new technology development and look forward to being a strong contributor as the industry moves towards the era of autonomous driving.

That concludes my overview comments, and now Christian will walk you through our financial results for the first quarter.

Thank you, Sachin, and good morning, everyone.

On Page 13, we present our key financial results for first quarter 2017 versus the comparable period in 2016.

As explained on prior calls, our financial results are impacted by a number of items that make year-over-year comparisons difficult.

The adjusted financial information presented on this slide, excludes these items and represents how we manage the business internally.

These are non-GAAP financial measures that are reconciled to U.S. GAAP financials in the attached appendix that starts on Page 20.

Also in 2016, Visteon had South American and South African operations associated with the former interiors and climate businesses.

These operations were exited by the end of last year.

As we have said previously, the majority of our climate and interiors businesses have been classified as discontinued operations on our financial statements.

Although, these businesses have all been exited, the company recorded an $8 million gain in discontinued operations in the first quarter of this year, primarily related to the repurchase of the India electronics operations related to the climate transaction in 2015.

Going forward, we do not expect to have any sales or adjusted EBITDA related to our other product group or discontinued operations.

The financials on this slide reflect our ongoing Electronics Product Group and exclude discontinued and other operations.

Electronic sales of $810 million in the first quarter increased by 2% compared with prior year.

Adjusted EBITDA for electronics was $101 million, representing a $7 million increase over first quarter 2016.

The year-over-year increase largely reflects higher volumes and strong cost performance, partially offset by customer pricing.

I'll provide more details on the following pages.

Adjusted EPS was $1.73 for the quarter, growth of about 30% from prior year and more than doubling since Q1 of 2015.

The year-over-year increase was driven by a double-digit growth in net income with a roughly 15% drop in average share count.

Looking ahead, we will seek to continue to deliver value to our shareholders in a combination of higher profitability and capital returns.

Adjusted free cash flow for electronics was an outflow of $30 million in the quarter.

Free cash flow is seasonal and is typically an outflow in the first quarter reflecting the timing of working capital movements.

Turning to Page 14.

We provide electronic sales for first quarter 2017 versus the same period last year.

Electronic sales for first quarter 2017 were $810 million, sales increased by $17 million, primarily driven by the benefit of higher production volumes and net new product launches, which represented a 6% growth from prior year.

Unfavorable currency and contractual pricing reductions partially offset this increase.

This is a new quarterly record for the company reflecting growth across all of our regions, but particularly in the China domestic market.

As Sachin mentioned, we saw double-digit growth in this country, driven by both strong production volumes and the impact of new product launches.

We believe that the momentum that we have seen in China in the first quarter will continue for the rest of 2017.

Moving on to the next page.

On Page 15, we highlight electronics adjusted EBITDA and adjusted EBITDA margins for first quarter of 2017 versus the same period last year.

Electronics adjusted EBITDA was $101 million.

As stated previously, this is a quarterly record and evidence of our ability to extract incremental efficiencies from our operations and fixed infrastructure.

This is also the first time that we had adjusted EBITDA of over $100 million, which is a milestone for the company.

Adjusted EBITDA increased $7 million in the first quarter versus 2016.

The increase reflected the impact of new business and favorable currency.

The currency impact was driven primarily by favorable moment in the Japanese yen and Mexican peso, partially offset by movements in the euro and China renminbi during the quarter.

We had material manufacturing and fixed cost savings, which were offset by contractual pricing arrangements with our customers and increased warranty costs.

Year-over-year, the company was impacted by the nonrecurrence of a $3 million warranty recovery received in the first quarter of 2016.

This impact was offset by a favorable settlement of $3 million, primarily related to the closure of our sales to new stacks audit in the first quarter of this year.

Our margins were positively impacted by reduced engineering and SG&A cost during the quarter.

Engineering declined by 4%, while adjusted SG&A decreased by 8% against prior year levels.

We are very pleased with this performance, especially as we continue to invest in new technology and support efforts to win new business.

Adjusted EBITDA margin was 12.5% in the quarter and represents an improvement of 60 basis points compared with first quarter 2016.

Since 2015, we've had consecutive year-over-year quarterly improvements on this metric.

Moving to Page 16.

In the quarter, we executed on 2 capital structure actions, which are outlined in Page 16.

First, we executed a $125 million accelerated stock repurchase program as part of the $400 million buyback authorized by our board at the beginning of the year.

This ASR is to repurchase roughly 1.3 million shares.

About $1 million of this was delivered in March, with the rest upon completion some time in May.

The purchase price at the time of execution was approximately $94.

As of April, our current diluted share count stands at around $32.3 million, which is about 6% lower than our count at the end of the second quarter of 2016.

After completion of this ASR, we still have $275 million remaining in our authorization, which we intend to complete by March of 2018.

In addition, we have completed a refinancing of our revolving credit facility and term debt to take advantage of the low interest rate environment.

We extended the maturity of these facilities by 3 years and took the opportunity to expand our revolver capacity by $100 million.

With this refinancing, we've reduced our interest costs by 50 basis points or roughly $1 million annually.

Page 17 shows our cash balance and leverage position.

Our cash balance is currently just under $700 million compared with about $880 million at the end of the year.

As I mentioned, we executed on a $125 million ASR this quarter and also spent $59 million related to legacy and restructuring actions.

A large portion of this legacy payment is the repurchase of the electronics business in India, as agreed at the time of [divesture] of our climate operations.

The only significant legacy activity remaining is a $32 million payment related to the sale of an interiors facility, which is expected to happen in the second quarter of this year.

With this payment, we will have completed all actions related to the transformation of Visteon into a pure-play electronics company.

Given our current cash level, we continue to be in a net cash position with gross debt-to-EBITDA at a healthy 1.1x ratio.

Because of the strength of our balance sheet, among other things, Visteon's credit rating was upgraded by Standard & Poor's in the first quarter.

This credit rating upgrade, together with our strong capital structure, will enable us to take advantage of market opportunities going forward.

Turning to Page 18.

We are reaffirming our full year 2017 financial guidance for sales, adjusted EBITDA and adjusted free cash flow.

For the full year, we are projecting sales of $3.1 billion to $3.2 billion, adjusted EBITDA of $355 million to $370 million and adjusted free cash flow of $165 million to $180 million.

As I mentioned, we do not expect to have any sales or adjusted EBITDA related to our other product group or discontinued operations in 2017.

Our first quarter performance gives us a strong start for the year.

However, as you know, our sales and adjusted EBITDA are seasonal with the first and fourth quarters being the strongest quarters.

The seasonality reflects the timing of planned shutdowns in the second and third quarters and the recognition of engineering recoveries, which tend to be highest in the fourth quarter.

This view is also consistent with the latest global production volume forecast from IHS, which is in line with earlier estimates.

Now let me turn it back to Sachin for some closing thoughts.

Thanks, Christian.

Moving to Page 19.

In closing, we are very pleased with Visteon's first quarter performance and with the value we delivered for our customers and shareholders.

2016 was a year in which we set the foundation for a much stronger Visteon, a technology-focused company poised to capitalize on emerging cockpit electronics trends.

In 2017, we have gotten off to a strong start both financially and new business wins that will drive future growth.

I'm very proud of the work that everyone at Visteon has done to put us in this strong position.

Thank you for joining us today.

Now I would like to open up the call for any questions.

(Operator Instructions) Your first question comes from the line of Tavis McCourt with Raymond James.

First one, just a housekeeping item.

If I think about your new business awards of $1.5 billion, about $700 million above current revenue recognition, but the backlog was only up $200 million.

So can you kind of run me through the math there?

That will be helpful.

And then, Sachin you seem to be a little more focused this quarter and recently on -- within China, the domestic OEM business.

And I'm wondering is there a historical context here on why Visteon was underweight the domestic OEMs and what you've done over the last year or 2 to accelerate wins there?

And then I guess, finally, would be on the SmartCore win.

Is this the first time that the SmartCore win has included both instrument cluster and infotainment?

Or is that something that you would expect on each SmartCore win?

All right.

Good morning, Travis.

So let me address the first question with respect to the new business wins.

As we have mentioned before, we update our backlog every quarter for things such as currency and volume movements.

In this particular case, we had 1 customer program that was short-cycled, which is largely the reason why we did not see the backlog grow to the extent that it would otherwise have.

However, being the incumbent in that particular business, we are very confident of winning the successive product and the successive program from that customer.

So I expect that lost backlog revenue to come back here shortly.

With respect to China, in the past the focus in China was largely on 2 product segments, instrument cluster and audio.

And as you also mentioned, we have been focusing on the domestic OEMs, primarily because over the last couple of years the domestic OEMs in China have done really well with respect to the fastest-growing segment within the vehicle models, which is the SUV segment.

And so we have invested last year in building up our sales and business development capabilities in China and have also made it a priority for the company to take all of our products and technologies, in addition to clusters and audio, into that market.

So that's one of the reasons why you see us do particularly well in that market.

But I should mention though that new business wins do tend to get lumpy.

We had a fantastic year last year in Europe, and the first quarter we have done very well here in China, but I do expect in the later quarters for us to do well in other regions of the world as well.

With respect to the SmartCore question.

No, in fact, we do expect every SmartCore win to include at least an entry infotainment capability in addition to the cluster as there are integrated domain controller for the digital cockpit these 2 products, infotainment and cluster, become somewhat essential capabilities.

There we see possibilities of extending beyond these 2 product segments are in integrating head-up displays and some ADAS functions such as driver monitoring and surround view.

Your next question comes from the line of David Leiker with Baird.

This is Joe Vruwink for David.

Good morning, Joe.

Just a few quick ones on new business.

Is the SmartCore award, since you disclosed it in April, is that included in the $1.5 billion?

And then on the infotainment, the success in infotainment wins this quarter, it sounds like there is engagements on Phoenix, but is Phoenix reflected in the $1.5 billion at all yet?

So the first question, so the SmartCore win is included in the $1.5 billion so far, the backlog of the new business wins that we reported.

And with respect to infotainment, as I've mentioned before, Visteon has a very competitive entry infotainment offering, which if you remember last year we acquired AllGo, which further strengthened our capabilities in entry infotainment.

The AllGo acquisition brought in-house expertise in media playback and smartphone integration capabilities.

And the business wins that we discussed or we talked about in this quarter are more entry infotainment business wins.

One was an extension of a business that we have had for some time.

And this is a global infotainment product where we now are adding more market-driven and market-important features.

And other infotainment win came out of China.

Okay.

That's great.

I want to dig into SmartCore a little bit, because automakers aren't aligned when thinking about 2 different purchasing teams, 1 does infotainment, 1 does clusters.

There's obviously different requirements from both clusters of ASIL certification.

So to get automakers to buy into the concept of both won ECU, is, in my mind, really tough.

You're beyond that hump.

Now you're winning business.

And I'm just wondering when these programs start to launch, so when you -- this goes from proof-of-concept to actually being in market, does this just drive a flush of interest or more business coming your way because at the end of the day if it performs well and it's a cheaper solution, it should get a bigger industry buy-in it would seem?

Absolutely.

As I have said before, Joe, we are starting to see this trend really pick up in the industry of all-digital cockpits.

Right.

So once you get to that point where your cluster is digital, of course, you have your infotainment and other displays that are digital displays including head-up display, the approach of using a cockpit domain controller makes a lot of sense.

And so we are now starting to see this trend really cut across almost all of the OEMs.

I would say that we are in discussions with at least half of our customer base with respect to SmartCore.

And we, as you know, are the only suppliers in the industry with all of the components that are required to build a complete product.

We have our own virtualization technology.

We have instrument cluster capabilities now, a complete set of infotainment, complete range of infotainment systems, head-up displays and ADAS.

So we are in a position to offer a complete system.

So if a customer wants a supplier that has the experience and all of the assets to build a cockpit domain controller, we would be at the top of the list and that's what we are now starting to see happen in this industry.

We have a very strong pipeline with SmartCore, and we hope to talk more about SmartCore in the coming quarters.

Your next question comes from the line of David Lim with Wells Fargo.

Just wanted to ask about the outlook geographically.

I know that you gave some bit of color, but can you sort of parse that out?

I mean, I think some suppliers are mentioning that there could be a little bump in the road in Q2 and maybe successive quarters in China, but wanted to get your take on China particularly and then any other color that you could provide in other geographies?

Hi, David.

We provided some information on, I think it was Slide 10 of the deck.

First of all, Q1 was a strong quarter in terms of our production in all regions.

And as I'm sure you are aware, IHS has been forecasting for the full year a growth in production that is more or less in line with their earlier estimates.

We tend to agree with those -- that forecast.

However, with one perhaps somewhat minor exception, which is that we are more optimistic in our expectations for China than what IHS has been reporting.

So that's the visibility that we have today.

We are in ongoing constant discussions with our OEM customers.

And the guidance that we have given, that we are essentially reaffirming takes into account all of the planned shutdowns and reductions that might be expected in the later periods of the year.

So we are comfortable with our financial guidance.

This -- our first quarter performance also gives us a good starting position in the year to have a pretty good finish for the full year.

Is your optimism in China or your outlook in China more from like a ground up analysis?

I think you mentioned that you're talking with your OEM customers, is that how you come up with a general industry forecast?

That is correct.

We have direct discussions with many of these OEMs as customers in China.

And our forecast is directly based on the production releases and the forecast that they provide to us.

Got you.

David, if I can just add to that.

That our forecast for China has not changed.

Since Q4 of last year, when there was a lot of discussions around what might happen to China because of the incentive program changes.

We have thought and we've always projected that China's production volume growth in 2017 would be in the mid-single-digit, so that's not a change in our view of China.

Got you, got you.

One follow-up on infotainment, Sachin, I know that it's a little early, but can you give us like the progress you guys are making related to Phoenix and the discussions that are going there?

And maybe if you could quantify like how many OEMs are really -- how many OEMs are interested in this new technology that you guys launched back in CES?

Yes, yes.

Sure, David.

So we had a very good showing of infotainment of, Phoenix infotainment I should say, at CES in January.

We have talked about that before.

And following up on CES, we had several engagements with OEM customers globally, including obviously for Phoenix.

At this stage, we are right in the middle of deep technical discussions with several OEMs, but I would say, realistically, given that infotainment tends to be a long sales cycle product segment that we would not expect to really be discussing any customer award-related activity until, I would say, in the second half of this year or perhaps even early next year.

So I would want to wait on that specific question for maybe a quarter or 2 more before I provide you with more quantitative data.

Your next question comes from the line of Matt Stover with SIG.

Most of my questions have been addressed.

I did have one.

There has -- I know you guys don't purchase a lot of raw materials, but there has been some concern about rising raw material costs and it's sort of percolating to the chain.

You folks had a pretty nice performance there in the first quarter.

I'm wondering as we look back to the sort of the final 3 quarters of the year, should we expect for that performance to sustain itself or dribble down as the year goes on?

Yes.

So -- hi, Matt.

So first of all, as we have been saying, we have put a lot of focus on driving operational excellence across all of our operations in the business.

And the materials is obviously a very big part of that.

So we have significantly improved our approach to sourcing.

And I do not expect to have any negative impact in the materials pricing for the remainder of the year.

We have done well in the first quarter, and I expect to see the benefits of that continue to flow through for the rest of the year.

Your next question comes from the line of Steven Fox with Cross Research.

I just had 1 question.

I was wondering, given the recent success in China if there is anything that you would highlight as differentiating yourself specifically in terms of, one, SmartCore features and functionality to that market; and then 2, any progress or any help from the JV relationships.

Because it seems like you reference companies not only that you have JVs with, but also that you don’t.

So any help there would be great.

Yes, sure.

As we have mentioned before, one of the strengths that we have in China, which is also perhaps a differentiator with many of our competitors, is that we have very strong joint ventures in China that give us a tremendous amount of access and reach with some specific OEMs.

But beyond that, as you have noted, we have started to make our inroads into essentially domestic Chinese OEMs that previously we may have not been as focused on.

So in terms of the product and technology differentiation, the fact that we have a very strong base in China, we have close to about a 1,000 engineers in China along with our JV partners, gives us a tremendous ability to bring new technologies quite rapidly into that market.

And SmartCore is a great example of that.

So within a year, we have been able to introduce this technology from here into China and there's a tremendous amount of demand and tremendous amount of interest across the board with almost all of the customers that we have good relationships with over there for these technologies.

So we are very optimistic about China, in general.

Beyond just the production volumes, we are very optimistic about their interest and desire to pick up new technologies and introduce new technologies, usually much faster than many other customers around the world.

So we hope to continue to focus on China and continue to win more than our share, our fair share I should say of the market, like we did in the first quarter.

Your next question comes from the line of Colin Langan with UBS.

This is Eddie Hsieh on behalf of Colin.

I had a couple of questions.

So one, it looked like customer mix worked against you in this quarter with Ford and Mazda down in an upmarket.

How did you manage to offset that?

Were you just on the right platforms with those OEMs?

I don't think that we had any negative impact of the customer mix, but I would say that the thing that really helped us in this quarter was China and the growth in China.

We saw positive improvements with our North American customers as well, so I'm not quite sure specifically what you may be alluding to there.

Okay.

I mean, we're just looking at their production in general for the quarter.

I see, I see.

Okay.

But my other...

(inaudible) were positive with our North American customers, despite the production data may suggest.

Okay.

That's fair.

I was also wondering, I mean it sounds like software engineers are in short supply across the industry.

Do you feel like you have the staff necessary to develop your next generation for SmartCore, Phoenix and your autonomous driving technology?

Would you possibly have to make any acquisitions to acquire the right personnel there?

Talent, especially in the space of software will always be in short supply and will always be a challenge.

But we have been doing quite well in terms of being able to recruit the talent that we need for, not just SmartCore, but also our autonomous driving platform initiative.

So, so far we have been able to get the talent that we need.

We probably will not look at an acquisition as a way to get talent.

We may look at specific acquisitions to get capabilities and intellectual property in specific areas.

But with respect to talent, given our fairly diversified footprint, we are, I would say, one of the more diversified companies in our space with presence in areas of the world where there is a bigger pool of talent that's available to us.

So we think we are in a pretty good position that kind of talent that we need, given our market-leading position, I think we will be able to attract that talent.

And so far that has not been a problem, but it's always a concern for anybody, especially in the tech space as the demands will continue to rise.

Your next question comes from the line of Brian Sponheimer with Gabelli.

I want to talk about M&A from a couple of different angles.

You mentioned the product platforms, et cetera.

Can you talk maybe about where maybe the SmartCore product allows you essentially platform to enter new areas where you could potentially be acquisitive?

So, in fact, let me first address the question about what does SmartCore enable us to do and then talk about the other part of the question.

So SmartCore essentially addresses a long-term trend of driving more of the cockpit functions using a single rich SOC, a system-on-a-chip and software.

And that fundamentally has several benefits.

One of the benefits is that it lowers total cost of implementation of the features, which we are done through discrete separate products.

The second benefit obviously is that it allows you to bring new user experiences, which are not possible when you're building discrete separate products.

Now when you look at it from where we stand and any M&A that might be a direct consequence of that.

First of all, we really like our position as a company that's exclusively focused on cockpit electronics.

And I think that's essential for us to be able to react to the market demands quickly, especially in the areas of technology as we transform ourselves into more of a technology company.

We will continue to look for any opportunities where an M&A could help us in executing our strategy.

But at the same time, as we have said before, we will stay extremely disciplined with how we look at such potential actions.

Beyond being a good fit from a strategic viewpoint, we will also be very focused on ensuring that we agree with the valuation before we think of any M&A.

As you can see from what we have been doing here for the last few quarters, we have been exercising that discipline and we do not, at this point, have anything to suggest that we will change our approach.

All right.

And I guess, my next question is for Christian.

Christian, with the ASR being just a $125 million and given the optimism for what lies ahead, why only that amount relative to the $400 million that you have authorized?

I would presume getting this done sooner rather than later would be beneficial?

Right, right.

So clearly we're not going to -- I'm not going to telegraph my actions, our actions on this call.

But we are balancing our buyback program with the other opportunities, the M&A opportunities being one of them.

And as Sachin mentioned, we have not found one that would satisfy our strategic and financial hurdles.

But what I can tell you is that the remaining buybacks that we're going to do after this ASR will be through a combination of another accelerated ASR program and/or open market, but we are still on track to complete the $400 million buyback authorized by the board by March of 2018.

Your final question will come from the line of Brian Johnson with Barclays.

It's actually Steven Hempel on for Brian.

Just wanted to drill down a little bit on your China business there.

It looks like China this week actually announced that it's planning allusions in JV ownership restrictions.

Just wondering if, I believe you guys have roughly 75% ownership in Yanfeng Visteon Electronics and then 60% or 65% in DongFeng.

Just how do you think about those ownership levels might that change moving forward?

And then kind of how we should think about those JVs moving forward?

Yes.

So we are very happy with the JVs that we have, and we do not expect to see or need any change in that direction.

Okay.

And then the -- if you look at the China profitability right now, can you just discuss what that is relative to the overall corporate average, is it higher, lower, similar?

And then also equity income looks like we're expecting to be negative here in fiscal year '17, so just wondering what your thoughts are on that business?

And why it's negative and kind of the outlook for that program moving forward?

Yes.

So what I would like to first say is that in terms of the product pricing and margins, China is on par with what we see in other parts of the world.

There's absolutely no difference.

And so fundamentally, profitability-wise we are looking at China, again the same way that we look at other regions of the world.

We have our own internal hurdles that we screen any new business opportunity before we accept it.

And so we do not see any, for sure, no negative impact out of our growth in China.

And we, in fact, are quite optimistic about our potential there.

And I would, at this point, ask Christian if he would like to add anything to that?

No, no.

I would just reiterate what Sachin said that we like, not only the sales growth that we're seeing from our China domestic market, but also the profitability that we're seeing from that country as well.

Okay.

And then just a quick question on equity income, why it's supposed to be negative?

Yes, we believe it's going to be positive.

Got you.

Okay.

And then just lastly SmartCore Gen 2 development initiated that here in this quarter or last quarter, I should say.

What are the kind of type of hurdles that you're looking at with that product?

Any hardware changes?

And then also the kind of the cost profile of that business relative to Gen 1?

And could that potentially be a higher margin product?

So the Gen 2 essentially is an evolution of the technology of Gen 1. As you can imagine, we -- when we started Gen 1, that was almost 3 years ago, when we did the market introduction, there was a certain expectation that these capabilities will continue to evolve.

As the silicon suppliers have launched products with more cores, it allows us the opportunity to integrate more domains.

So clearly, from a total system cost viewpoint, it offers the potential to lower the total cost of ownership for our OEM customers.

And so we think that it makes Gen 2 that much more interesting beyond what Gen 1 offered.

So we are very optimistic about it, and we think this is what will really make the cockpit domain controller as the sort of accepted approach to building next-generation all-digital cockpit.

We see more and more trends towards the cockpit themselves going away from analog solutions towards all-digital and this technology coming along really offers them now a solution to build those products out at a very cost competitive levels.

So we're very upbeat on SmartCore in general.

Okay.

And with that, thank you, Sachin.

Thank you, Christian, and thank you to all for participating in today's call.

I will be available later today for any follow-up calls.

So please feel free to contact me.

And at this point, we will end the Visteon call.

Thank you.

Thank you.

This concludes the Visteon first quarter 2017 financial results conference call.

You may now disconnect.