Visteon Corp (VC) 2018 Q1 法說會逐字稿

Good morning. I'm Bill Robertson, Vice President, Finance for Visteon. Welcome to our earnings call for the first quarter of 2018. Please note this call is being recorded. (Operator Instructions)

Before we begin this morning's call, I'd like to remind you this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future results and conditions but rather are subject to various factors, risks and uncertainties that could cause our actual results to differ materially from those expressed in these statements. Please refer to the page entitled Forward-Looking Information for 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)

Again, thank you for joining us. Now I will turn it over to Sachin.

Thank you, Bill, and good morning, everyone. On Page 2, we summarized our highlights for the first quarter of 2018. We delivered a solid quarter with $814 million in sales and a 12.8% adjusted EBITDA margin. Both sales and adjusted EBITDA were up from prior year. And we recorded our 13th straight quarter of year-over-year adjusted EBITDA margin growth.

The big story for Visteon this quarter has been our SmartCore business, where we have several significant achievements in the quarter. We launched the industry's first cockpit domain controller based on SmartCore technology in the latest Mercedes-Benz A-Class model, which is now available in the market. And SmartCore technology won the prestigious Automotive News PACE Award for innovation.

In addition, Geely, the fastest-growing automaker in China, has selected SmartCore technology to drive all cockpit electronics functions in their new all-electric vehicle platform, which will launch starting 2020. This is a sizable amount of new business as all Geely electric vehicles will be based on this new platform and where Visteon is the single supplier of all cockpit electronics.

Moving to other highlights in the quarter. Our performance in China was very strong with sales increasing 24% year-over-year. And we continued our strong performance with respect to new business wins by winning $1.6 billion of new business in the first quarter. Our order backlog now stands at over $20 billion, putting us in a good position to achieve our long-term sales targets for the business. Overall, it was a good start to 2018.

Moving to Page 3. On a year-over-year basis, vehicle production in Visteon's primary markets were down by about 3% with global vehicle production decreasing by about 1%. Despite the [lower] vehicle production levels, we generated solid financial results across several metrics in the quarter. As noted earlier, we achieved sales of $814 million in the quarter, up 1% from prior year.

Adjusted EBITDA was $104 million, a 3% increase year-over-year, with adjusted EBITDA margin of 12.8%, which is our best-ever performance for the first quarter. The focus on operational discipline continues to drive improvements in cost and profitability. With this performance, we now have 13 straight quarters with increased adjusted EBITDA margin year-over-year.

Adjusted free cash flow in the quarter was up significantly to $48 million, up $79 million from a year ago, driven largely by improvements in trade working capital. I'm pleased with how the entire team at Visteon continues to be disciplined and focused on execution, which is driving improved financial results and ultimately value for our shareholders.

Moving to Page 4. On past calls, I have discussed our leading SmartCore engagement with the European carmaker. Earlier this quarter, Daimler launched the new Mercedes-Benz A-Class model with an all-new digital cockpit user experience named MBUX, which is powered by Visteon's SmartCore technology. The highly integrated cockpit user experience is based on 2 digital displays and offers instrument cluster, vehicle controls, multimedia, Apple CarPlay and Android Auto features. The system offers multiple display modes that are user-selectable, offering high level of customization of the look and feel of the system.

This intelligent multimedia system, as Daimler calls it, has been received very well by the market and is one of the highlights of the new model. As I mentioned earlier, the SmartCore-based system is the first cockpit domain controller to be launched in the market. It uses a single silicon chip with multiple CPUs called System on Chip or SoC and software virtualization technology to concurrently run the instrument cluster, infotainment and other vehicle control software. This results in vastly improved user experience with seamless display of navigation, multimedia and other vehicle information on both screens. In addition, the integrated approach reduces system costs, weight and power consumption, which are all very important for carmakers in their effort to control the rising cost of electronics content in the vehicle.

This first launch on the A-Class will be followed with additional launches as Daimler brings the new MBUX user experience to more vehicle models. This is a breakthrough moment for Visteon as it showcases our capabilities as the technology innovation leader in cockpit electronics. The interest in cockpit domain controllers was already growing in the industry. And this and upcoming launches will give it additional momentum.

Industry recognition of SmartCore as a breakthrough innovation is growing rapidly. I'm proud to say that Visteon was recently honored with the prestigious Automotive News PACE Award for our SmartCore technology. The PACE Award is given for innovation in technology that has been successfully commercialized in the automotive industry by suppliers. This is our second such award for SmartCore after being named innovation award winner by the German Center of Automotive Management last year.

Turning to Page 5. Electronic control unit or ECU consolidation is one of the most significant trends in automotive. And with SmartCore technology, Visteon leads the industry in cockpit electronics consolidation. In the first quarter, we had 2 new business wins for SmartCore totaling more than $500 million in lifetime revenue. As mentioned earlier, we have multiple vehicle launches following the successful launch of SmartCore in the Mercedes-Benz A-Class. These launches will continue through the rest of this year and into 2020. These launches cover both passenger vehicles as well as commercial vehicles. In the first quarter, we were awarded an additional vehicle by Daimler, which will go into production in 2020.

I'm also happy to inform you that Geely Auto, the fastest-growing vehicle manufacturer in China, has selected SmartCore technology for all cockpit electronics functions for its new electric vehicle platform launching in 2020. In addition to driving all-digital cluster, multimedia and navigation and head-up display features, the SmartCore system will integrate Geely's connected services solution for advanced cloud-based services. Geely plans to launch multiple electric vehicle models based on this new platform. And all these vehicles will use the SmartCore-based solution for their cockpit electronics needs.

We are very pleased to have been selected as Geely's technology partner for cockpit electronics. With over 1.2 million cars sold in 2017, which represents growth of over 60% year-over-year, Geely is in a great position to emerge as a market share leader in new energy vehicles in China. The government of China has mandated that 20% of all new vehicles sold in 2025 must be new energy or nonfossil-fuel vehicles. SmartCore technology, with its ability to reduce weight and power consumption in addition to cost, is an ideal solution for these new energy vehicles of the future.

In addition to these 2 wins, we are seeing a significant increase in the number of new business opportunities for SmartCore and across a wide range of customers. The number of new business pursuits for SmartCore have more than doubled year-over-year. And the lifetime revenue of these pursuits now represents more than 20% of all Visteon pursuits in 2018, which indicates that the market shift toward ECU consolidation is accelerating. Due to the strong pipeline of new opportunities and the market-leading position in technology, I'm optimistic that Visteon will see continued success with SmartCore going forward.

Moving to Page 6. Visteon's domestic sales in China for the quarter increased 24% year-over-year to $98 million despite a 3% decrease in vehicle production. Our domestic sales in China have outperformed vehicle production significantly for the past several quarters, largely driven by increases in new product launches. In the first quarter, we had 10 new product launches in China compared with 3 in the same quarter a year earlier. This brings our number of new product launches in China to 28 over the past 12 months.

Although vehicle production in China was down in the first quarter, vehicle sales were robust, increasing by about 3% over prior year. With dealer inventory levels remaining under the threshold, we expect that vehicle production will recover and grow about 2% over prior year. The new product launches and improving vehicle production outlook for the rest of the year give us confidence that our sales in China will grow at double-digit level for the full year.

Our new business wins in China were also strong in the first quarter. We won $900 million of new business in China in the first quarter, up from $600 million for the same quarter a year ago. Importantly, well over half of these wins were in the fast-growing SUV market. We are also seeing strong interest for our digital cluster, SmartCore and DriveCore technologies in China as many Chinese automakers are upgrading their vehicle platforms to address new market and regulatory requirements. This week, we are showcasing our products and technologies at the Beijing Motor Show. And I'm confident that we will have another strong year for Visteon in China in 2018.

Turning to Page 7. On Page 7, we highlight our new business wins and growing order backlog, which underscore the strong foundation of our cockpit electronics business and also point to future revenue growth. We won $1.6 billion of new business in the first quarter, up 7% year-over-year, following a record fourth quarter, where we had won $2.4 billion of new business. Most of the wins were for all-digital instrument clusters and the SmartCore-based integrated cockpit solutions that were discussed earlier. We also won a significant telematics award for a Japanese OEM in China, where we are partnering with Alibaba to bring cloud services to the vehicle.

The first quarter performance puts us on track to achieve a $6-plus billion target for new business wins for the year. We are pleased that key metrics for new business development, such as the size of the opportunity pipeline and the average win size, continue to improve with each quarter. In the first quarter, our average win size was up 15% over last year.

Our order backlog at the end of first quarter exceeded $20 billion in lifetime revenue, up 20% from a year ago. Instrument cluster and infotainment, which are the faster-growing products in cockpit electronics, make up over 70% of the order backlog. And the backlog is also very well balanced across all the major markets for Visteon. The record $20 billion order backlog and the strong pipeline of new business opportunities position us well to achieve our long-term sales targets for the company.

Moving to Page 8. Finally, I would like to outline Visteon's 2018 strategic priorities. This is essentially our roadmap for the business for this year. And we plan to update you each quarter on our progress. The first priority is to deliver strong financial performance and achieve the targets for 2018 sales, adjusted EBITDA and adjusted free cash flow that we shared with you earlier. For long-term success, we have to grow our business in China to represent its fair share of our total sales. And we are committed to achieving double-digit sales growth this year in that region. In addition, we will continue to enhance shareholder returns through disciplined capital allocation.

Second, we will continue to accelerate new business wins. Our goal for 2018 is to achieve new business wins of more than $6 billion in support of our long-term sales targets. This includes doubling our new business wins in China from 2017 level, leveraging new technologies, such as SmartCore. Our third priority is to advance our technology innovations in autonomous and safety domains to drive new business opportunities. This year, we hope to expand customer engagements for Level 3 and Level 4 autonomous driving systems based on our DriveCore platform with new highway pilot capabilities. In addition, we are also developing our own driver monitoring technology to offer enhanced safety capability that's being mandated by Euro NCAP for introduction in the market by 2022.

So in summary, we got off to a solid start to 2018 with significant achievements across key areas of our business. We were able to grow our sales despite decreases in vehicle production in China and North America. Our adjusted EBITDA margin grew to 12.8%. And we launched the first cockpit domain controller solution in the industry. We also won a significant level of new business, including for SmartCore, and the pipeline of new business opportunities look stronger than ever.

That concludes my overview comments. And now Christian will take you through our financial results.

Thank you, Sachin, and good morning, everyone. On Page 10, we present our key financial results for the first quarter of 2018 versus the comparable period in 2017. Sales of $814 million in the first quarter increased slightly as favorable currency and net new business more than offset lower production volumes, specifically in North America.

Adjusted EBITDA was $104 million, representing a 3% increase from first quarter 2017. Adjusted EBITDA margin was 12.8%, 30 basis points higher than prior year levels and largely reflects operating efficiencies across our organization and favorable currency. Since 2015, we've had 13 consecutive year-over-year quarterly improvements on this metric. Adjusted free cash flow was $48 million in the quarter, $79 million higher than last year due to strong receivable performance. I will provide more detail on the first quarter figures on the following pages.

Turning to Page 11. We provide sales and adjusted EBITDA for the first quarter of 2018 versus last year. Sales for the quarter were $814 million, about 1% higher than 2017 despite lower overall global volumes. Regionally, the year-over-year changes were mixed. Sales increased in Asia, were flat in Europe and declined in the Americas.

In Asia, particularly in China, new product launches drove an increase in sales despite China production volumes decreasing by roughly 3% year-over-year. As Sachin pointed out, we continue to see our sales outpace the underlying production volume in that market and expect that our China domestic revenues will grow by double digits for the full year of 2018.

In the Americas, sales decreased from prior year levels, reflecting lower production volumes in North America, which declined by approximately 3%. Additionally, some of our key customers had declines in the 5% to 6% range in the quarter as they adjusted their production to manage their inventory levels. These production declines, together with the roll-off of some legacy products, translated to a revenue reduction of $20 million in the quarter.

Going forward, as the impact of the legacy product roll-offs dissipates and inventory levels stabilize, we anticipate that our revenue decreases in the Americas will moderate by the latter part of this year. For the company, we expect that higher-than-anticipated revenues in both Asia and Europe will offset the weakness in the Americas, keeping our overall sales for 2018 within our previous guidance.

Our adjusted EBITDA for the quarter was $104 million, reflecting favorable currency and a positive business equation, partially offset by lower volumes and product mix. We define business equation as cost performance in material, manufacturing, engineering and SG&A in excess of customer pricing. In fact, given the level of material savings we experienced in Q1, our gross margins for the quarter were 16%, equal to last year's levels.

Adjusted EBITDA margin was 12.8% for the quarter and represents an improvement of 30 basis points compared with last year. This margin level is the highest we have experienced in a first quarter and ties our highest-ever adjusted EBITDA margin for any quarter, which we recorded in Q4 of 2017. This reflects our continued ability to extract further cost efficiencies from our operations while investing in innovative technologies and executing on customer programs.

Moving to Page 12. Page 12 provides our cash flow. Adjusted free cash flow for the quarter was $48 million, substantially higher than prior year. We typically have cash outflows in the first quarter of every year, but good performance in trade working capital enabled us to generate positive free cash flow in Q1 of 2018. As we indicated in the last earnings call, our Q4 2017 adjusted free cash flow was adversely impacted by the timing of certain payments amounting to $20 million, which has now benefited first quarter's cash flow levels.

In addition, our days sales outstanding improved significantly from last year by 8 days, which enhanced our receivable performance. Even though we expect that our days sales outstanding may increase slightly in the second quarter, we anticipate that our first half adjusted free cash flow in 2018 will appreciably exceed that of the first half of last year as we continue to focus on cash generation.

Cash at the end of the first quarter was $526 million and debt was $382 million, which continues to put us in a net cash position and a debt-to-EBITDA ratio of 1x. We have a strong capital structure that enables us to compete effectively and invest in differentiating technologies while returning capital to our shareholders.

Turning to Page 13. In 2017, our board authorized $400 million of share buybacks to be completed by March of this year. In 2017, we completed $200 million by purchasing approximately 2 million shares at an average price of about $101. In the first quarter of 2018, we bought back $50 million in open market repurchases and entered into a $150 million accelerated share repurchase program for a combined total of $200 million. This completes all of our activities relating to the 2017 $400 million buyback program.

In January, our board supplemented last year's authorization with an additional $500 million to be executed through 2020. We plan to complete $200 million of this by the first quarter of 2019. This underscores the confidence we have in our long-term growth prospects and shows our commitment to delivering value to our shareholders. Shareholder distributions will continue to be part of our capital allocation approach going forward. And as the company continues to generate cash, we expect that there will be more opportunities to further return capital to our investors.

Turning to Page 14. For the full year, we are reaffirming our financial guidance for sales, adjusted EBITDA and adjusted free cash flow. We are projecting sales of $3,175,000,000 to $3,275,000,000; adjusted EBITDA of $370 million to $380 million; adjusted free cash flow of $160 million to $180 million. This guidance reflects lower volumes in the Americas, as discussed, offset by higher-than-anticipated revenues in both Asia and Europe for the year. Given the cadence of our product launches and scheduled plant shutdowns in the coming quarters, we anticipate that any revenue growth and EBITDA improvement will be more weighted toward the latter part of the year.

And finally, turning to Page 15. We have gotten off to a solid start in 2018. I would like to reiterate our investment themes. We continue to be focused on executing on our long-term strategies, winning new business that supports the achievement of our long-term sales target while capitalizing on the key trends impacting the cockpit electronics industry; delivering margin expansion and generating cash flow by registering strong EBITDA margins of 12.8% and positive adjusted free cash flow; and enhancing shareholder returns by our disciplined capital deployment approach.

Thank you for joining us today. Now we would like to open it up for questions.

(Operator Instructions) Your first question is from the line of David Leiker with Robert W. Baird.

This is Joe Vruwink for David. Clearly, a lot of traction on SmartCore, so I wanted to start there. Sachin, I think at the beginning of the year, you mentioned a $3.5 billion pipeline. Is that bigger today? And then what sort of win rate do you think is achievable of that pipeline?

Yes, the pipeline for SmartCore has improved since the beginning of the year. We feel that with SmartCore, we have really evolved from the technology development phase with the lead customer, in this case Daimler, to a broader market development phase. And this year, it seems to be coinciding with the broader industry shift towards cockpit domain controllers. So the pipeline, as we stand today, as I mentioned earlier, is about 20% of our total opportunity pipeline and it appears to be growing. And what's interesting is that this interest that we see in customers cuts across all regions as well as the vehicle segments, luxury all the way to mass market. So it's a very, very significant change since the last time we discussed. And the shift is more pronounced. As you know, we are the leaders in this technology. Not only have we now launched the very first cockpit domain controller solution in the industry, but we are also working with multiple customers on multiple programs. So we have a very good depth of understanding and expertise in this solution and technology, which I'm confident will translate into more wins with customers. So I'm very optimistic about this year in particular and as well going forward with respect to our opportunities with SmartCore.

And then stepping back a bit, and thinking about your win rates. So you're running ahead of what you assume would be needed to reach the $4.7 billion revenue target. What is contributing to that outperformance? So you've alluded to ECU consolidation is slower to start, but that seems to be picking up. Your penetration of Japanese automakers, another win there this quarter, that would seem to be an upside driver. Can you maybe just walk through some of the biggest variables that have allowed you to track ahead of your new business win targets?

Sure. As you may remember, Joe, about 2 years ago, we said that we are seeing a big sort of shift in terms of moving away from analog or hybrid clusters to all-digital, which is part of the overall digitization of the cockpit that we see as one of the bigger trends in the industry. So that, coupled with the ECU consolidation trend, are the main drivers, I would say, that have contributed to our success. I should also point out the shift in infotainment, right? We mentioned that earlier as well, where traditional infotainment systems, which had embedded applications, particularly navigation, are giving way to display audio systems. And in display audio on account of our strength in traditional audio products plus the acquisition of AllGo Systems, which brought in our own capabilities or internal in-house capabilities, I would say, in CarPlay and Android Auto are really positioning us well in all the key trends that we see [offered] in cockpit electronics. So in short, it is clusters moving to digital from analog and hybrid, infotainment shifting towards display audio, driven off of smartphones. And then now in a bigger way, there's a sort of movement towards integrated, consolidated cockpit domain controllers.

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

Quickly, who are you seeing from a bid standpoint when you guys are bidding for like SmartCore and Phoenix? I mean, is it the usual suspects? And then can you give us an update on like the Phoenix win situation? And then I have a follow-up.

Sure. David, yes, I think that the competitors that we see are still the traditional set of automotive suppliers that we have always seen in infotainment and in instrument clusters. As we may have mentioned sometime in the past, that set is not the same set of competitors. They are somewhat exclusive. We see a different set of competitors in infotainment opportunities versus clusters. As I have said this before, we at Visteon want to be one constant competitor that all of the others see. And that's on account of the breadth of product portfolio that we have, the capabilities that we bring from instrument clusters to infotainment, head-up displays, telematics and now integration of these into cockpit domain controllers. So that's the first answer to your question. When it comes to infotainment, we are continuing to see interest in stand-alone infotainment opportunities, display audio opportunities. And here, as you know, we have our Phoenix product. But we have also been investing in developing capabilities in Android-based display audio systems. We believe that the market will not go strictly one way or the other. Some OEMs will go for Android-based infotainment and others will want to stay away on account of several reasons, which we don't need to go into details here. But what we want to be as Visteon is to be agnostic to our OEM customers' preferences. So we want to be able to offer both a state-of-the-art connected infotainment experience, whether you go with HTML5 in Phoenix or with Android. And we are seeing a lot of opportunities in both those areas. The other thing I would say is that every SmartCore opportunity that we have also represents an infotainment opportunity. Because SmartCore integrates -- it's a bundle offering as you know. It integrates instrument cluster, infotainment besides other features in the cockpit. So that's also another opportunity for us to grow our market share in infotainment. And with a really good offering in Phoenix and now with our capabilities with Android, it really puts us in a great position to grow our market share. And I expect to be able to talk to you more about our infotainment business wins standalone as well as we go further in the rest of the year.

That's very helpful. And my final question is when it comes to the Geely electric vehicle, does that platform also include hybrid by any chance?

No. So the Geely platform, it's an all-digital cluster. It's a very high level of content in the cluster itself. But it's also embedded and connected infotainment, as one would understand it, cloud services that are very important in China, and integration of the head-up display. So it's one of the more, I would say, capable, more advanced cockpit domain controller that we will be working on. We're very excited about that win. We have talked about Geely here on the call. It's one of the fastest-growing OEMs in China. And I predict that on account of this win, as the rest of the market catches up with it, that will drive further interest in SmartCore in that region.

Your next question is from David Tamberrino with Goldman Sachs.

This is Tim O'Brien on for David. Just want to dig in more to your comments on the Geely SmartCore win. I guess, just how are you guys thinking about the eventual life cycle of that product, especially with OEMs going through electrical architecture redesigns that have more centralized compute. And just how does that fit with that particular win?

Yes, absolutely, Tim. So this win, again to reiterate, is for a new all-electric vehicle platform at Geely. It's called the PMA. This platform is the basis of Geely's electric vehicles. The first vehicle will launch in 2020. And there are several vehicles planned for launch after that time frame. As you may know, China has -- the government has mandated that by 2025, 20% of all new vehicles sold must be new energy vehicles. In practice, what that amounts to is that they are likely going to be battery electric vehicles. Now when you think about all-electric vehicles, it's extremely important that the platform, besides being all-electric from a powertrain viewpoint, also reduce weight and power consumption. And that's exactly what a technology like SmartCore is targeted to achieve. As an integration and a bundling architecture that brings instrument cluster, infotainment, head-up displays and other technologies into a single chip in a single ECU, it offers the best sort of value in terms of being able to drive weight and power consumption down while delivering very advanced capabilities. So we believe that this solution will be the mainstream and the mainstay of all new platforms that are targeted for the electric vehicle markets starting in China, but we expect that to also be the case in other regions as they start to pick up on the lead that China seems to currently have.

If I can just have one follow-up, too, do you guys have an update on the kind of customer interest you're seeing in DriveCore? And how are you guys thinking about monetizing the platform?

Absolutely. So first of all, DriveCore is our autonomous driving technology platform that is designed for the Level 3 and Level 4 capable autonomous solutions. And we've talked about this on the last call, we have a lead customer for DriveCore in GAC, or G-A-C, in China. GAC is very similar to Geely. It's a very fast-growing China domestic OEM. I believe, last year, their growth rate is in the 40% range. So we are very excited, first of all, to be partnering with an OEM that is very well established and fast-growing. There are 2 components to our engagement with GAC. The first phase involves developing Level 3 technology for the China market. And the time frame for that is mid-next year, we should be in a position to go into our field tests with that technology. Following that, we have plans to introduce that technology, that solution into vehicles from GAC, the first launch of which is planned in later half of 2020. And although these are still early days in the development of the technology, we are making good progress on account of the roughly 2 years of investment we have made into the DriveCore solution. And we expect by the end of this year to be more or less feature complete with respect to that first launch, which will be slated for 2020. So, so far, I would say we are on track. And we'll provide you with more updates throughout the rest of the year as we make further progress.

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

I was wondering if you could just expand a little bit, you mentioned on the Alibaba relationship. Can you talk about what capabilities you're bringing there and how maybe over time, you take that experience and broaden it out across the market? And then I had a quick follow-up.

Right. So with respect to Alibaba, as you may know, China has a very connected cloud ecosystem, where Alibaba, Baidu and Tencent offer multiple features or applications through the cloud, which are highly used by consumers across their various activities and lifestyles. So infotainment in China has really started to integrate these capabilities. This specific opportunity that we discussed, the win, it is for a Japanese OEM that had an existing infotainment system, an embedded infotainment system, that did not have this capability. We, in China, through our joint venture partners, have very good relations with all 3: Baidu, Alibaba and Tencent. And in this particular case, we are working with Alibaba to bring that cloud content into the car, in that existing infotainment system, from a competitor. This has a couple of advantages. We are able to recognize revenue earlier than would normally be the case. This is a current system. The vehicle is already launched in the market. And there is a lot of competitive pressure on the OEM to be able to offer such services to their consumers. It also means that we can, through integration of these capabilities into our infotainment systems as well as on top of SmartCore, offer a more integrated further cost reduce solution to this OEM and others. And that puts us in a very good position from a competitive viewpoint in the China market. The Geely solution that we talked about earlier will also integrate a similar cloud services solution that will bring all 3, Baidu, Alibaba and Tencent, through a single log-on ID and have access to all of that content in the vehicle. So this gives you a sense of where we are headed with cloud connectivity inside the vehicle in China. We expect that this will also be the case in other regions in the world. As Alibaba and Baidu and Tencent start to grow and offer their services outside of China, we expect to be able to carry our solution together with them in those regions.

Great, that's really helpful. And then just really quickly, any color you can provide on how the sort of inventory corrections in some of your key customers plays out relative to second quarter sales? Is it going to be a challenge for sales to be up versus Q1 or any description on that in terms of the back end-weighting for the year now?

Right. This is Christian. So let me give you a little bit of color around the inventory levels that we've seen. So if you look at the data, you would see the day supply for the entire industry went down by 4 days on a year-on-year basis to 68 days. However, if you look at the OEMs, there's a mix change depending on the vehicle manufacturer. There have been certain OEMs that dropped by 7 days, another that actually dropped their days supply by as much as 26 days. So we think this could have been a factor on why production volumes were down in North America in the first quarter. So if you look at the production volumes in the first quarter of minus 3% for North America, IHS is projecting a 2% increase over last year for the rest of the year, which would be supportive in painting a better picture compared to the first quarter for us.

Your next question is from the line of Joseph Spak with RBC Capital Markets.

This is Joe Heidt on for Joe Spak. Can you remind us of your Ford passenger car exposure as a percent of sales? And how does that recent announcement that they just made affect your backlog and maybe even more importantly your long-term targets?

Yes, sure. So Ford cars North America today represent about 3% of our revenue, so -- and as we look at our mix of customers and the growth that we are experiencing in our sales, which is mostly outside of North America, this will be even lesser by 2020 time frame. And the other point I would like to mention here is that we are also well represented in the trucks and in the SUVs and also in the cars that will continue with Ford. And as the content on trucks and SUVs tend to be higher in value than in cars, the mix shift towards trucks and SUVs will actually be beneficial to Visteon. So in short, as we see this play out over the next couple of years, I don't expect much of an impact. If anything, this might even be a positive in terms of the mix shift and the higher value content in trucks and SUVs. And so we think that we should be in a position to mitigate whatever impact might be the case from the announcements.

Okay, that's some good insight. And then moving more towards the margin, can you talk a little bit about what drove cost performance in light of some lighter sales? And I guess, specifically, can you talk a little bit about autonomous spend in the quarter and how we should think about cadence throughout the year?

Right. So let me go and talk about the cost performance. We're very happy that we were able to do a positive business equation, which is all the cost savings that we've gotten across our organization in excess of pricing. The opportunities that we continue to see is actually also in the material savings. So if you think about this that we're now fully leveraging the new business wins that we're getting to extract savings from our supply base by using better tools and methodologies. And we think that will continue going forward. Now on the other question that you had, could you repeat that?

Yes, sure. Can you talk a little bit about your autonomous R&D spend?

Okay, all right. Our autonomous spend on a year-on-year basis actually doubled. But you have to remember, we started this investment very early in 2017, so it's coming from a small base. And we still believe, at this point in time, given the projections that -- looking at them for the rest of the year, that we will hit the $14 million, $15 million that we said we will be spending for this year.

Your next question is from Colin Langan with UBS Securities.

This is Mike Fisher on for Colin. Just wanted to dig into the decision to offer Android-based infotainment. Is that something that you did in response to customer request? Just kind of any color you can give there?

Yes. So as you may be aware, with the Android release O, Google released several features that made Android a solution that could be integrated into infotainment. And it had the features and the capabilities that OEMs are typically requesting, such as the flexibility to redefine the user interface, make that very specific to the OEM and certain deeper features within the technology that is required for an infotainment system versus the smartphones. So that was the trigger that generated interest in the industry. The main benefit of using something like Android would be the ability to access apps that are already developed, the availability of engineering talent and resources that are already familiar with the technology, which were all very important considerations. So we did start to see interest from OEMs to go towards Android. And again, we were anticipating this. We have been having discussions for several quarters now with our customers. And one of the things that -- one of the reasons why we acquired AllGo was besides their expertise in CarPlay and Android Auto, they were also Google's partner as 1 of 3 in the world that they work with that validates Android implementations. So this was a reason why we acquired them, that brought in a lot of depth in Android capabilities that were important for us. Since then, we have continued to build our Android-based solution. At CES earlier this year in Las Vegas, we demonstrated our SmartCore solution with integrated Android. And that was one of the triggers also for our customers, the OEM customers, to want to talk to us about bringing Android-based infotainment for their future needs, in some cases, integrated with SmartCore.

Okay, great. So how does that affect the Phoenix strategy then? Are you going to try and implement similar competing features to make it more appealing to OEMs or...

Yes. So good question. So Phoenix is based on HTML5. And as I mentioned earlier, not all OEMs have indicated interest in going towards Android. And there are good reasons for them to do so. There are certain contractual requirements, let me put it that way, between Google and the OEMs that not all OEMs are willing to accept. So we need to have an ability to support the needs of these customers for Android in some cases and without Android because we don't want to miss out on those opportunities. So we have Phoenix for those that will not be willing to go towards an Android-based solution. And we have our Android-based system for those that will not care so much about those restrictions and will still want an Android-based infotainment. That puts us in a great position because we are not here to pick winners. We will be here to serve the needs of the market. And with these 2 solutions in our stable, it really makes us totally agnostic to it and puts us in a good position to address all customers.

Your next question is from Brian Johnson with Barclays.

This is Steven Hempel on for Brian. Just wanted to follow up on the question around Ford pass car exposure in North America. I get that it's a little bit light at 3%, which is good. But in terms of kind of the follow-on business that Ford is talking about replacing that capacity with, has Visteon secured the replacement business or similar business on those new trucks yet? Or are you still in the bidding phase?

Yes, the short answer, Steven, is yes, we have won the replacement business. So we are on the crossover that was mentioned. We are also on the electric vehicle that was mentioned in the [press]. So the short answer is yes, we continue to work very closely with Ford as part of their supplier base here. And we expect to continue to do well with them.

Good. Okay, that's good to hear. And then just in terms of kind of global architectures, Ford mentioned in their call yesterday that they're kind of talking about developing global architectures but then basically customizing certain vehicles for regions based on specific kind of consumer demands. I'd imagine, just given the SmartCore architecture and the Phoenix software kind of layer, it seems like that would be a ripe opportunity for OEMs to kind of customize based on regional-specific demands. Does that really apply here? And I guess, how do we kind of think about that for the broader market as well?

Yes. So we are seeing SmartCore decisions tend to become very core to the architecture of the vehicle. And the customization comes on top of that in terms of different HMIs, display sizes, et cetera. So it is very complementary. SmartCore-based electrical [architecture] for the cockpit complements the underlying vehicle network evolution that they have in mind as they move forward, especially for electric vehicles due to the reasons I mentioned earlier. So we think that SmartCore works very well with the global architecture [of the move]. As we discussed earlier, the Daimler engagement that we have is for a global cross-vehicle solution. So we're effectively developing one solution that cuts across multiple vehicle models, across multiple regions. As you can imagine, the user interfaces for all those different vehicles are different, both in terms of the vehicle model lineup as well as the regional requirements that are different. So that's a great illustration of how this technology is able to support the global platform evolution of the industry as a whole. And this is something that we think, from our [point of view], it really allows us to leverage our fixed cost better. Our value of wins on an average has gone up. The value of these new launches that we have, they have gone up very well as well in the last 2 to 3 years and we expect that to continue. This is extremely important for us as we go down the path here of increasing our margins. And this is right in line with what we were expecting.

Got it. Okay, that's helpful. And then just one quick follow-up if I could, maybe for Christian. In terms of the NOLs, that was fairly sizable kind of benefit to the cash tax rate historically. I guess, could you just remind us post the U.S. tax reform how we should be thinking about those NOL balances?

Yes. So the NOL balances, obviously, as you know, we had $1.8 billion, it got reduced to $1.5 billion because of the new tax rates. But the valuation adjustment that we had also had reduced. So there are no impact, net impact to the balance sheet. So we still have $1.5 billion of NOLs. And we could use up to $120 million every year for that.

Your next question is from Anthony Deem with Longbow Research.

On the ECU consolidation trends, circling back to it, I'm curious on your capabilities versus some of the emerging competition. And what I'm wondering is, is it the bundling of greater components that might be setting Visteon apart? And is there a component capacity limit on maybe what SmartCore can integrate, meaning can you integrate more than 3 components, mirror, displays, cluster, telematics, HVAC and more? Or is the capacity more limited based on today's generation of the product?

Right. So let me try to address this in 2 parts. So first, what sets Visteon apart from the competition set of today. As I may have mentioned in the past, we see competitors that have capabilities in specific areas of cockpit electronics. For example, we see a different set typically with instrument clusters from infotainment to HUD and so on. So as SmartCore or cockpit domain controller tends to be a bundling solution that bundles all these various capabilities, one needs to have a really good breadth and depth of product portfolio in the cockpit. So that narrows the set of competitors down for us quite a bit. So now in terms of what is the limiting factor here in terms of how many more features we can bundle with SmartCore, that question is a good one, but it's fairly related to the underlying capabilities of the silicon and software. And this is an evolving feature. So when we started out with this approach, say, 4 years ago, the silicon capabilities that were available to us could integrate a couple of these features or systems, instrument cluster and infotainment as an example. So what were the limiting things then? It was the graphics capability to be able to drive 2 displays simultaneously off of a single chip at the required level of performance. Now as we look at what's available to us today and in the 2019, 2020 time frame, that silicon capability has gone up by approximately 10 times. So that opens up a lot more capabilities. So now we are integrating head-up displays, which you can imagine is yet another display that needs to be driven on top of the cluster and infotainment. And as we look forward here, we anticipate more safety-related capabilities, ADAS capabilities, more within the cabin that would continue to be getting integrated. I mentioned on the call that Euro NCAP has mandated for 2022 for 5-star safety rating, the need for driver monitoring. Now that is an incremental cost to the OEMs that will not be passed easily down to the consumer. We see that as an opportunity to integrate into SmartCore, offer this capability without necessarily adding a whole lot of new cost. So that's the kind of evolution that we expect to see SmartCore continue with over the next couple of years. And I'm sure there will be more opportunities as we go forward.

Very good, that's helpful. So sorry, if I missed this earlier, how much was the currency benefit on EBITDA margins?

It's in the -- it's in our deck, it's $9 million.

And then the year has started off very solid in terms of EBITDA margins despite a challenging environment this quarter. And I'm just sort of wondering, what risk do you see for the remainder of the year? And maybe is some of the conservatism in your forecast related to some of the regional performance highlights that you mentioned, where the Americas might be weaker than expected? And are any regional differences in margins that you can highlight?

Right. So first of all, there is seasonality in the business, Q1 and Q4 are our highest both on the revenue side as well as EBITDA margins. And when you look at it, there are, as we pointed out, the regional mix changes. So as Asia and Europe are doing quite well, are going to be growing over and above the production volume growth for those regions, we see headwinds in North America. And how it all plays out, we'll provide you with updates every quarter.

Okay. Thank you, Sachin. Thank you, Christian. And thank you to all for joining us today. I will be available for phone calls later this afternoon and tomorrow, so please feel free to reach out. And with that, this concludes the Visteon First Quarter Earnings Call.

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