Visteon Corporation (NASDAQ:VC) Q4 2023 Earnings Call Transcript

Visteon Corporation (NASDAQ:VC) Q4 2023 Earnings Call Transcript February 20, 2024

Visteon Corporation beats earnings expectations. Reported EPS is $13.01, expectations were $2.02. Visteon Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Ryan Wentling: Good morning. I’m Ryan Wentling, Vice President of Investor Relations and Treasurer. Welcome to our earnings call for the Fourth Quarter and Full Year 2023. Please note this call is being recorded and all lines have been placed on listen-only mode to prevent background noise. Before we begin this morning’s call, I’d like to remind you, this presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future results and conditions, but rather are subject to various factors, risks, and uncertainties that could cause our actual results to differ materially from those expressed in these statements. Please refer to the page entitled Forward-Looking Information for additional details.

Presentation materials for today’s call were posted on the Investors section of Visteon’s website this morning. Please visit investors.visteon.com to download the material if you have not already done so. Joining us today are Sachin Lawande, President and Chief Executive Officer; and Jerome Rouquet, Senior Vice President and Chief Financial Officer. We have scheduled the call for one hour and we’ll open the lines for your questions after Sachin and Jerome’s remarks. Please limit your questions to one question and one follow-up. Thank you for joining us. Now, I will turn the call over to Sachin.

Sachin Lawande: Thank you, Ryan, and good morning, everyone. Thank you for joining our fourth quarter and full year 2023 earnings call. I would like to start with a summary of our full year performance as outlined on Page 2. In 2023, our team demonstrated our commitment to excellence across customers, operations, and financials. We delivered a record performance across many of our metrics and further strengthened our foundation for long-term growth. We increased our base sales by about $400 million, or 12%, when removing the impact of supply chain recoveries. Our full year sales reached $3.95 billion. The demand for our products is strong as carmakers respond to the trends of digitalization and electrification, and the company delivered another year of strong product sales growth with digital clusters up more than 30%, smart core up by more than 20%, and BMS more than doubling compared to the prior year.

Adjusted EBITDA was $434 million at a margin of 11% of sales. We improved our margin by 170 basis points over the prior year, driven by strong growth as well as our excellent operational performance. Our adjusted EBITDA came in about the mid-point of our guidance issued last year, and at the beginning of the year. Adjusted free cash flow was $150 million in 2023. Our focus on cash flow conversion has yielded great results with a 35% conversion of adjusted EBITDA to adjusted free cash flow for the year. We also performed very well in strengthening our foundation for future growth. We launched a high number of products on vehicle models in 2023, which will drive our sales growth in the coming quarters. We also won over $7 billion of new business, a record performance for the company, which will help sustain our growth in the mid-term as these programs get into production.

We expanded both our product and customer portfolio in 2023 with the win of battery junction box business and the addition of three customer logos for digital corporate products. We repurchased $106 million of shares during the year, delivering on our balanced capital allocation strategy. I will provide more details on our strong 2023 performance as well as our outlook for sales for 2024 and 2026 on the subsequent pages before handing it over to Jerome to discuss the financials. Turning to Page 3. This slide shows our base sales growth since the recovery of the industry from the lows of COVID-19 and the subsequent semiconductor supply shortages. The company has done a great job of executing its strategic plan and growing its base sales by about $1 billion over the two years of 2022 and 2023, reflecting the high demand for our digital cockpit and electrification products.

In 2023, we continued our focus on executing the strategic objectives and delivered another year of strong base sales growth of 12% year-over-year. Our sales growth would have been higher without a couple of one timers in Q4 that combined with the negative customer mix in China, cost us a few points of growth. We were impacted by the timing of the roll-off of some older programs and the slower ramp up of follow-on and new programs that created a temporary air pocket in our quarterly sales growth and the UAW strike at our Detroit customers impacted our quarterly sales by about $20 million. We also experienced a more negative customer mix in China in Q4 than the rest of the year. I would also like to highlight some of our key accomplishments for 2023 that sets the stage for continued outperformance in 2024 and beyond.

Our additional cockpit products, including digital clusters, SmartCore and infotainment performed very well in 2023 as the trend of digitalization continues to gain momentum in the industry. Sales of digital clusters were strong as recently launched products ramped up in production and we solidified our position as the global market share leader in this product category. Just over half of our total cluster shipments were digital clusters, compared to about a third for the industry. We strengthened our position in cockpit domain controllers by launching our SmartCore system with two new customers, Harley-Davidson in the U.S. and JMC-Ford in China. This brings the current number of SmartCore customers to eight OEMs, which is probably the most for any Tier 1 supplier in this category, considering how challenging it is to launch this complex systems.

Sales of SmartCore had another year of robust growth and the new launches will help this product line to continue to grow in the coming quarters. We moved up in the value chain in our digital cockpit products with new vision and cloud software solutions that are unique amongst our peers. Our latest infotainment and SmartCore systems offer advanced camera-based driver monitoring and surround view features that are fully implemented in software, which avoids the need for separate and dedicated ECUs, as is the case today. This in-house developed software demonstrates the growing capabilities at Visteon in terms of developing automotive specific applications. Last month at CES, we displayed the first cockpit domain controller with integrated level one and level two ADAS features including driver monitoring, which is the next level of cockpit electronics integration that we believe will be a competitive advantage in the future.

We followed-up on our first AllGo App Store win from the third quarter with two additional connected services wins in the fourth quarter, one with the global OEM and the other on a two wheeler. Our app store technology continues to mature and we added several popular apps including Spotify, Amazon Music and Reliance Jio that makes it a compelling solution for connected cockpits. We launched our BMS product on multiple electric vehicle models with GM in 2023 and made good progress with two other OEMs that will go into production in 2024. We also won our first power electronics business for a smart battery junction box, extending our electrification product line beyond BMS. This is a very important milestone for Visteon and we believe electrification offers us the potential to expand our product portfolio and consolidate battery electronics similar to what we have done in the cockpit.

Lastly, as I mentioned already, we added three new customers in 2023, demonstrating the success of our go-to-market strategy. Over the past three years alone, we have added 18 customer logos. This is a testament to the work that the team has put in developing relationships with prospective customers and winning business with them. Turning to Page 4. We had a successful year of product launches in 2023 with 129 products launched on vehicle models across 24 different passenger, commercial, and two wheeler OEMs around the world. About 45% of the launches were for digital clusters, highlighting the continued growth of the largest product line at Visteon. With global market penetration at about 35%, there is still plenty of runway for growth for digital clusters.

Our other digital cockpit products such as SmartCore, infotainment and displays accounted for another 35% and the remainder were BMS and other products. From a regional perspective, about half of our launches were with customers in Asia, which saw higher new model launch activity in 2023 than other regions. About a third were in Europe and the rest were in North America. Our digital cockpit products are powertrain agnostic and digital clusters infotainment, SmartCore and displays are well suited for both ICE and electric vehicles. During 2023, approximately 15% of our launches were on electric vehicles, including multiple vehicle models with our BMS system with GM. These launches are the main driver of our BMS sales growth in 2024. Now, I would like to highlight several of our key fourth quarter launches.

In China, we launched a SmartCore cockpit domain controller and a 12-inch display with JMC-Ford for the Ranger, our first with this customer. There are additional vehicle models planned for launch with this product in the coming quarters and we expect this customer to represent a significant source of future growth. We also launched a SmartCore system and a dual 10-inch digital cluster and display system on the Mahindra XUV400, which is the first electric SUV launched by that OEM for the Indian market. This launch builds on the strong relationship we have with Mahindra and the continued inroads we have made with OEMs in the fast growing Indian market. Lastly, we launched a 12-inch digital cluster on the Nissan Rogue for the North American market.

This represents content on one of the bestselling SUVs in the market and reinforces our ability to deliver value as a key supply prior to Japanese OEMs, which continue to be amongst the top selling brands in North America. Turning to Page 5. Our product and technology portfolio is one of the best in the industry when it comes to addressing the trends of digitalization and electrification and is the key driver of our new business win performance. We won $1.4 billion in new business in the fourth quarter, bringing our total wins for the year to $7.2 billion, a record new business win total for the company. The product mix in our full year new business wins was well diversified across our product portfolio and powertrains. We had substantial new business wins for ICE, EV and cross powertrain platforms as well as several extensions of current ICE platforms.

SmartCore and infotainment made up almost 40% of the total, including a significant conquest win with a European luxury OEM and several platform wins with global OEMs. Our electrification wins were primarily extensions of BMS business with current customers, including the addition of new models and extension of production until 2030. It also includes the strategic win of our first power electronics product for a battery junction box with the European OEM. We further build on our leadership position in digital clusters with a high number of new business wins and one displaced business across several OEMS. And importantly, we have added three significant new OEM logos for our digital cockpit business in 2023 with significant potential to grow our business with them in the future.

On the right side of the page, we highlight a few key wins for the fourth quarter. We had two significant wins during the fourth quarter for our upgraded Android-based infotainment system. While cockpit domain controllers like SmartCore that use high performance silicon are great for mid and upper end of the market, mass market high volume vehicles need more cost effective solutions that also offer highly valued features such as camera-based rear and surround view system, natural language, voice assistant, smartphone projection with CarPlay and Android Auto, and with a choice of connected apps and over-the-air software updates. Our upgraded Android-based infotainment products offer a very attractive value proposition to carmakers, especially in the mass market segment of the industry.

Since it’s developed as a platform solution with a high degree of reuse, we can develop and launch this infotainment system with multiple customers faster than our peers. The first win is for this segment compact SUV platform with a global OEM that will launch on four SUV models in multiple Asian markets starting in early 2025. The second win is with an Indian OEM and will feature on multiple vehicle models that launch at the beginning of next year. Both these systems come with 10-inch display that’s also supplied by Visteon. The third win I would like to highlight is for a 12-inch digital cluster and a 13-inch center display on a luxury SUV platform with a German luxury OEM. This is a follow-on win for the electric version of a platform that we won the ICE version last year.

Turning to Page 6. On this page, I would like to share our outlook for 2024 for the industry and Visteon. We are anticipating another year of strong sales growth for the company in 2024 with a double-digit market outperformance. We are expecting 2024 global vehicle production to be largely in line with S&P Global’s January forecast of down slightly as compared to 2023. Our customers’ vehicle production is expected to be slightly more negative at about 1% down year-over-year. From a regional perspective, customer vehicle production is expected to be slightly higher in North America, largely due to non-recurrence of the UAW strike, while it’s expected to modestly decline in Europe and China. Forecasting electric vehicle production has become much more challenging over the past year.

In addition to the EV vehicles already launched with our BMS products with GM, we have several additional launches this year with GM, as well as new launches with two other OEMs that should drive higher sales for BMS in 2024. Nevertheless, our outlook considers a more conservative EV vehicle production than customer forecasts and is more in line with S&P Global. Turning to the supply chain, we expect a much improved environment for semiconductors this year. As a result, we forecast a lower need for open market purchases and resulting recoveries from our customers. Our growth over market expectations are based on the ramp up of the products we launched throughout 2023 and the additional launches planned in 2024. As these launches ramp up in production, we expect a modest rebound in Q1 from the lower growth over market in Q4 of last year and expect it to accelerate throughout 2024.

For the full year, we are anticipating a growth over market of low-double-digits in the 10% to 12% range. Turning to Page 7. Looking beyond 2024, we expect our market outperformance to continue as we execute our strategic growth plan. We have an attractive multi-year growth profile that is supported by an industry-leading product portfolio targeting two fast growing domains of automotive electronics, the cockpit and the electric powertrain. Visteon’s growing capabilities in automotive electronics and software is very well suited to take advantage of the opportunities created by the megatrends of digitalization and electrification, that’s changing the industry in a fundamental manner. And our proven operational and commercial excellence means that this growth comes with strong returns and cash flow generation.

We are targeting $5 billion in sales in 2026. That’s an increase of over $1.2 billion when removing the impact of supply chain recoveries and representing low-double-digit growth over market annually over the three-year period. The fundamentals of the business remain strong and have not changed substantially from early 2023 when we gave our mid-term outlook on our Investor Day. The main drivers of growth through 2026 remain our digital cockpit and BMS products. What has changed are some market dynamics that we have been highlighting for the past few quarters. As you can see on the bottom right of the page, there are three primary factors driving the reduction of sales compared to our original $5.5 billion target. First, the 2026 vehicle production forecast for our customers has been reduced by about 4% compared to the forecast from early 2023.

Second, lower EV demand throughout the forecasting period has affected both our BMS and digital cockpit product sales on EV platforms. Lastly, the growth of domestic Chinese OEM share of the China market at the expense of international brands, where we have stronger relationships is lowering our expectations in that region. Overall, we have a strong foundation for growth and are confident in achieving our product targets and we do not expect our growth to stop in 2026. The new business wins that we secured in 2023 are largely expected to launch in 2026 and beyond. This is our formula for consistent long-term growth. Turning to Page 8. In summary, the company performed very well and had a very successful 2023. We delivered strong base sales growth of 12%, driven by growth over market and higher industry production.

The team continued to execute on our commercial and operational plans which resulted in a strong adjusted EBITDA margin of 11%. We continue to build momentum for future growth by launching 129 new products and winning $7.2 billion in new business. Finally, we executed on our commitment to return capital to shareholders with $106 million of share repurchases. Now, I will turn the presentation over to Jerome.

Jerome Rouquet: Thank you, Sachin, and good morning, everyone. Visteon posted a solid set of results in the fourth quarter, demonstrating another quarter of robust commercial and operational execution. Q4 sales were $990 million. When excluding the impact of supply chain recoveries, base sales grew 1% against a difficult prior comparable. Our base sales performance was supported by the strong customer demand we continue to see for digital clusters, cockpit domain controllers, displays, and the ongoing ramp of our BMS program. Several factors impacted our fourth quarter sales. We experienced approximately $20 million in lost sales from the UAW strike. We were also impacted by the timing of roll-offs and the slower ramp up of new roll-ons as mentioned by Sachin earlier on.

We expect these headwinds to be largely transitory. Consistent with the first three quarters of the year, we continue to experience customer mix headwinds in China. We expect these to ease in 2024 as we continue to increase our exposure to domestic OEMs. The semiconductor supply situation has improved significantly compared to the fourth quarter of last year. Supply chain recoveries declined by roughly $85 million year-over-year. This has mostly been the result of our reduced reliance on open market purchases and related recoveries. Open market purchases were minimal in the second half of 2023 and we expect this trend to continue in 2024. As a reminder, recoveries, although bucketed as pricing are pass-through in nature, increasing sales neutral for adjusted EBITDA but diluting margin percentages.

Adjusted EBITDA was $117 million for the quarter, an improvement of $14 million versus the prior year. Adjusted EBITDA benefited from operational improvements and manufacturing efficiencies as well as lower engineering spending partially offset by a headwind from foreign exchange. Lower engineering in the quarter was mostly the result of good cost controls, the timing of project spending and customer recoveries combined with a non-recurrence of a one-time program expense from the prior year. Our adjusted EBITDA margin was 11.8%, but adjusting for a more normalized engineering spend and excluding the effect of foreign exchange, our run rate was roughly 11%. Adjusted free cash flow was $57 million in the quarter. Our strong adjusted free cash flow performance was the result of a higher adjusted EBITDA and neutral trade and other working capital.

We ended the fourth quarter with a net cash position of $182 million and total cash of $518 million. Share repurchases were $30 million in the quarter and $106 million for the full year. Turning to Page 11. I am proud of what the Visteon team was able to achieve in 2023. We delivered on our operational initiatives notably strong sales growth, meaningful margin expansion, and impressive cash flow generation. Sales were a record $3.95 billion base sales, which excludes customer recoveries were $3.66 million, an increase of 12% or $400 million compared to prior year. The increase in base sales was driven by strong growth of the market from robust product launches during the year and higher industry production. Customer recoveries, which are illustrated in the dotted boxes, totaled approximately $300 million.

The roughly $200 million year-over-year decline in recoveries reflects the significant improvement in the semiconductor supply chain and the reduction in associated recoveries. Adjusted EBITDA was $434 million for the year, an increase of $86 million or 25% year-over-year. The increase in adjusted EBITDA primarily reflects the impact of higher sales while leveraging an efficient cost base with modest increases in engineering and SG&A. Net engineering increased $14 million year-over-year as we continue to invest in technology to support future growth. As a percentage of sales, net engineering remained flat at 5.3%. Adjusted SG&A increased $17 million year-over-year and as a percentage of sales increased slightly to 4.5%. Adjusted EBITDA margin improved to 11% in 2023, a 170 basis point improvement year-over-year.

While not on the slide, I wanted to highlight our return on invested capital. Our ROIC, as calculated by tax effective adjusted EBIT over equity debt and leases was 16% in 2023. The improvement in our return in past years has largely been driven by substantial improvement in adjusted EBITDA and modest increases in our invested capital base. This metric supports our view that Visteon is an increasingly compelling investment opportunity. Turning to Page 12. Starting with a balance sheet, we ended the year with a total cash position of $518 million and a net cash position of $182 million. We have no material near-term debt maturities and an attractive current interest rate of approximately 3.5%. We repaid approximately $13 million in 2023 as a result of our quarterly amortization payments.

In conjunction with our March 2023 Investor Day, we announced a $300 million share repurchase authorization. In the fourth quarter, we repurchased shares for $30 million at an average price of $126.85 per share. This brought our full year repurchases to $106 million. We will continue to be opportunistic in our share repurchases in order to return capital to shareholders. Turning now to cash flow, we generated $150 million of adjusted free cash flow in 2023. This is a $49 million improvement compared to the prior year, primarily due to the higher adjusted EBITDA and lower working capital built partially offset by higher cash taxes and higher capital expenditures. The outflow related to trade and other working capital declined year-over-year, primarily as a result of the stabilization of our supply chain and improvement in our inventory balances.

Cash taxes were higher than prior year due to cash payments related to increasing profitability in some jurisdictions, both in the current year and in the prior year. Related to taxes, I would like to explain briefly the significant tax item in the fourth quarter that impacted our net income and EPS. Primarily as a result of our improved profitability in the U.S., we had non-cash benefit of $313 million related to a reduction in the valuation allowance against U.S. deferred tax assets. This change in our valuation allowance had no impact on cash, but increased our net income and earnings per share for the period. While a positive sign of the health of our business, we do not expect any change to our go-forward cash tax profile as a result of this valuation allowance reduction.

Interest payments remained low and were offset by higher interest income from increased rates. CapEx was $125 million or 3.2% of sales, reflecting our ongoing investments in manufacturing and electrification. We have steadily increased our free cash flow generation in recent years. Our conversion ratio was 35% in 2023 and is in line with our medium-term target. Our improved cash performance has been largely due to the increase in adjusted EBITDA and diligent management of other cash items like trade working capital, cash taxes, interest and CapEx. We have structural elements that support consistent cash flow generation, including limited capital intensity across both CapEx and working capital, a debt like capital structure and substantial tax attributes.

In just a few years, our team has successfully transformed Visteon into a robust cash flow generator and we expect this to continue for the years to come as our business grows. Turning to Page 13. For 2024, our guidance range for sales is $4 billion to $4.2 billion, which at the mid-point represents an 8% increase in base sales. Focusing on the mid-point, we have assumed this on customer production declines by approximately 1%, while growth of a market is anticipated to be in the range of 10% to 12%. On the pricing side, we’re assuming a year-over-year headwind from lower customer recoveries in addition to some level of standard customer price downs. Adjusted EBITDA is expected to be between $470 million and $500 million, representing adjusted EBITDA margin of 11.8% at the mid-point.

The year-over-year increase in adjusted EBITDA is primarily the result of higher base sales, continued strong commercial performance and further operating efficiencies partially offset by an increase in net engineering spend. As a percentage of 2024 sales, we anticipate net engineering to be in the mid 5% range and SG&A to be in the mid 4% range as we continue to invest in technology and in our teams to support future growth. Adjusted free cash flow is expected to be between $155 million to $185 million, which at the mid-point is a conversion of 35% of adjusted EBITDA into adjusted free cash flow. We expect working capital will be a modest outflow for the year as a result of our continued growth. CapEx is forecasted to be approximately $145 million as we invest for future growth.

Despite these investments, we expect CapEx as a percentage of sales to remain in the mid 3% range. And finally, even though we are not providing quarterly guidance, we expect the first quarter to be lower sequentially and represent our low point of 2024, followed by a progressive ramp up of our sales and EBITDA over the course of the year, similar to what we saw in 2023. Turning to Page 14. Looking at the long-term, as Sachin noted earlier, our sales targets for 2026 is $5 billion. This is an increase of over $1.2 billion in base sales between 2023 and 2026, with low-double-digit growth of market on an annual basis. Overall, this is an attractive growth profile and reflects our current expectations for our business and the market dynamics that Sachin outlined earlier.

Our adjusted EBITDA margin target is 13.5%, a 250 basis points increase from 2023. This increase in margin is expected to be driven by the growth of the business as well as the ongoing leveraging of our fixed cost across manufacturing, engineering and SG&A. In dollar terms, this represents approximately $675 million of adjusted EBITDA in 2026, which is a 16% CAGR over the period. We expect to convert 35% to 40% of adjusted EBITDA to adjusted free cash flow in 2026. I’m very proud of what the team has been able to accomplish over the past few years. We have increased our sales by $1 billion compared to 2019. We have grown profitably. Compared to 2019, our adjusted EBITDA has nearly doubled and we have been generating substantial cash flow in the same period.

We’re strengthening our foundation for future growth through record new business wins, high level of product launches, and continued investment in our people. When I look at the next few years, I’m excited to deliver on our plan for significant growth in sales, EBITDA and free cash flow. Turning to Page 15. Visteon remains a compelling long-term investment opportunity. We have positioned the company for top-line growth, margin expansion and free cash flow generation. We have an exciting growth profile and have demonstrated a strong focus on operational and commercial discipline to deliver this growth profitably. Thank you for your time today. I would like now to open the call for your questions.

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Q&A Session

Operator: Thank you. [Operator Instructions]. And we will take our first question from Joe Spak with UBS. Your line is open.

Joe Spak: Thanks. Good morning, everyone. Maybe just —

Sachin Lawande: Good morning.

Joe Spak: Maybe just to start a couple on the revised 2026, I think the prior commentary from you guys was that you weren’t necessarily taking management’s targets for some of the EV programs. You were sort of making your own assessment. Now, obviously sort of the world has drastically changed even since those comments, but maybe you could provide a little bit more color as to sort of what type of planning went into the revised 2026 top-line targets.

Sachin Lawande: I’ll take that, too. So first of all, it’s actually not all BMS or the EV production that is driving the reduction. There are really three factors. The first driver is actually the overall lower vehicle production outlook for our customers, and I would say that is contributing about half of the reduction. Then the second driver is lowered EV production again, and that affects both our digital cockpit products as well as BMS. And the last one is the customer mix in China, which has impacted us all through 2023 and more, I would say specifically in Q4 of 2023. We expect this mix to moderate a little bit, but still continue to be a headwind going forward into 2026. Now, if you look at just the specific BMS-related revenues, the volume projection for 2026 has not come down significantly from our lower expectations from earlier in 2023.

But we are being a little more conservative than the volume that has been shared with us by our customers. I would say that our expectations now are more in line with those vehicle models and their production outlooks, as per S&P Global, for example. So I would say really three factors, right, overall, a reduction in vehicle production. Number two, lowered EV production at our customers. That is digital cockpit [ph] BMS sales and then the customer mix that is affecting us more in China. Having said that, we’re expecting all of our product lines still to grow, and this new target that we have means that our base sales would grow for each one of those three years at a low-double-digit level as compared to 2023 sales.

Joe Spak: Okay. Sachin, thanks for that. Maybe just to follow-on to that and I’ll pass it on, but the low-double-digit growth over market, you’re sort of assuming, I guess, like a relatively fledged environment, some negative mixes, as you mentioned, but with growth over market, and we’re seeing this across the supply base like, you can’t control that part of that relative comparison. Now, obviously, some of that — it sounds like you’re sort of counting on some of that negative mix, but — and share loss at some of your customers is clearly still possible. But would you say that based on what you know now and the content you have for what you won, this sort of translates to like a high-single-digit, low-double digit organic growth rate and like understanding that if some of those customers or you don’t have exposure for grow faster, like your growth over market is going to look worse, even if your organic growth might still be a little bit relatively steadier.

Sachin Lawande: The first thing I would say, Joe is that we have already factored in, like you would expect, that some of the customers with whom we don’t have, not customers, but OEMs that we don’t have business with especially on EVs are going to grow faster in this time period than our customers as far as EVs are concerned. So our EV vehicle production assumptions are certainly already taking into account this dynamic that you talked about. Now, obviously, the market overall can grow even faster because we don’t control that and we don’t have necessarily full exposure to that, but we’ve been looking more specifically at our customers. Like for us, 2026 is not that far away in terms of being able to understand what vehicles we are on and what those production volumes are likely going to be at.

With the year that has passed since last year, beginning of last year, when we gave our 2026 guidance, what I can say is that a year in it has largely transpired the way we would have expected it to, except that the BMS sales has been more suppressed. So the ramp up has been slower in 2023 than we expected. It’s almost like a year delayed. And so we are expecting 2024 to look more like what we thought 2023 would look like in terms of BMS is in other words. Now 2025 and 2026, there is a certain level of ramp up of production that we have in our assumption, and that has to come to pass for us to be able to get to where we have set our targets. But I believe that those are a reasonable assumption in terms of what our customers would and should be able to accomplish.

Joe Spak: I guess maybe just to slightly rephrase the question. I appreciate that those comments, but when you say negative mix or faster growing with customers, you don’t have exposure for that that also factored into your expectation for the volume for the programs you are on. So like that, some of your customers may lose share.

Sachin Lawande: [indiscernible]

Joe Spak: Okay. Thank you.

Sachin Lawande: Absolutely, absolutely.

Joe Spak: Yes. Thank you.

Operator: And we will take our next question from Itay Michael — pardon me, Michaeli with Citi. Your line is open.

Justin Barell: Great. Thanks. This is Justin for Itay. So maybe a quick one on Slide 14. You’re providing the high-level overview, I guess, of the base and kind of giving the recovery bucket that’s in there. Can you maybe let us know what the implied recoveries are for 2024 and then maybe what you’re assuming in that 2026 guide as well?

Jerome Rouquet: Yes. Good morning. It’s Jerome. I’ll take that. Maybe let me step back a little bit on recoveries, generally, we have seen recoveries coming down over the last few quarters of 2023, and that’s largely because our open market purchases have declined and therefore the associated recoveries have declined as well. So we were as you recall — we recovered, including open market purchases close to $500 million in 2022. In 2023, we’ll have recovered close to $300 million of recoveries. So a fairly substantial reduction and most of it is driven by open market purchases. There is a second factor that is now impacting us in a positive way, which is the fact that we have some positive impact as we go into 2024, as it relates to surcharges, we see some programs rolling off that are more burdened than the programs rolling on, and therefore, we have that positive mix coming into play again as we go into 2024.

So the two lead us to a plan for 2024, which is going to contemplate a little bit less than $200 million of recoveries. And then we see that as well coming down, because also of cost reductions from suppliers into 2026. And we’ve kept our assumptions the same for 2026 as we had them back in March of 2023, and it is $100 million. So a slow reduction from the very high levels that we had in 2022, all the way down to $1 million in 2026.

Justin Barell: Perfect. Super helpful. And then maybe sticking to 2026, do you have the percentage of target already booked in terms of sales? Or if you can help us out, maybe —

Sachin Lawande: Yes. We can talk a little about it. So, typically, when we look at the targets of sales that need to be booked, we have a range between 75% to 80% of the sales three years out. And I would say that we are within that for 2026. And as you know, we had a pretty good robust level of new business wins in 2023 that exceeded our initial expectations, which is also helping and we also believe, on account of some of the changes that have happened with EVs, that we would see some program extensions which are going to be helpful in the near-term, as some of these ICE and hybrid vehicles will need to be extended by our customers as they rethink their EV model portfolio and go-to-market.

Operator: And we will take our next question from Dan Levy with Barclays. Your line is open.

Dan Levy: Hi, good morning. Thank you for taking the question. First, wanted to ask a question about the margin. So, fourth quarter you did 11.8%. That was weighed down by the strike. You’re guiding to an 11.8% mid-point for 2024. Perhaps you could give us basically a bridge. I recognize we shouldn’t extrapolate too much from one quarter, but a bridge from the 4Q run rate to 2024. What are maybe some of the offsets that make the 11.8% that you did in the fourth quarter not necessarily representative of the true run rate, which I think you said was closer to 11%.

Sachin Lawande: Yes. Thanks, Dan. So we always try to normalize EBITDA margin as we report our earnings, and I’ve done that now for the last few quarters, just because they are anomalies or exceptional items impacting EBITDA positively or negatively. So for Q4 specifically, we had 11.8%, as you mentioned. And most of that was or came from the fact that we had a pretty low engineering spend in Q4, and it’s fairly traditional, I would say, we were probably a little bit surprised by the amount of recoveries that we were able to book in Q4, but that essentially improved our EBITDA for Q4. So when you take that out and take out as well, some level of negative effect that we had in Q4, our normalized EBITDA is closer to 11%, maybe slightly higher.

So that’s kind of the run rate with as well a sales level slightly below $1 billion. So as we go into next year, we’ve got an 8 basis point improvement. Most of the improvement is going to come from the additional sales that we’ll get in 2024. We are growing at a level of 8% at face value and 10% if you exclude the recoveries. So that’s a fairly significant improvement that will flow through EBITDA. We are continuing to see a fairly good level of operational efficiencies, and I got to say that we’ve been seeing that now for the last few quarters. And then finally, we’ve got an offset by coming from engineering and as well as G&A, which are, let’s say, flattish in terms of percentage, but increasing in dollar terms. And that’s kind of the offset or partial offset to our EBITDA going into 2024.

I think generally, I would say that we’ve been running pretty well and ahead of the curve or ahead of our original guidance in 2023. We — you may remember that we had guided to 10.5% EBITDA the mid-point of our guidance, and we finished the year closer to 11%. So it kind of helps going into next year. And therefore, we feel pretty comfortable with the 10.8% that we put.

Dan Levy: Great. I’ll just kind of follow-up on that and then a second question, just the follow-up is maybe you could just comment on, within the decline of recoveries, what the net EBITDA impact is — if it’s neutral, it’s reduced recoveries on reduced cost. And then my second question is maybe you could just talk about the environment for uptake of the products, ex-BMS. We’ve heard about some extension of ICE platforms as automakers are delaying EVs. I think we know there’s generally the trend that EVs are adopting more of the premium content. So to what extent does your 2026 outlook contemplate, maybe some extension of the platform? To what extent are the other products like digital clusters or domain controllers still intact despite slower EV uptake? Thank you.